Testing the Top Line

Analyzing a company's sources of revenue can bring insights into growth.

Most companies don’t really manage top-line growth. They allocate resources to businesses they think will be most productive and hope the economy cooperates. But a growing number are taking a less passive approach, and studying revenue growth more carefully. They argue that quantifying the sources of revenue can yield a wealth of information, which results in more-targeted and more-effective decision-making. With the right discipline and analysis, they say, growing revenues can be as straightforward as cutting costs. Some companies go so far as to link the two efforts.

“The idea is to bring the same systematic analysis to growing revenue that we have brought to cost cutting,” says Franklin Feder, vice president of analysis and planning at aluminum giant Alcoa Inc.

To that end, Alcoa uses a sources-of-revenue statement (SRS) that was developed by Michael Treacy, author of Double-Digit Growth and co-founder of consulting firm GEN3 Partners, in Boston. The information on revenue captured by traditional financial statements is woefully inadequate, argues Treacy. True, he says, sorting revenues by geographic market, business unit, or product line tells you the source of sales. But it does not explain the underlying reason for those sales. “If you look at what most companies have on revenue reporting, it’s pathetic,” he says.

Treacy’s model breaks revenue into five categories:

  1. Continuing sales to established customers (known as base retention).
  2. Sales won from the competition (share gain).
  3. New sales from expanding markets.
  4. Moves into adjacent markets where core capabilities can be leveraged.
  5. Entirely new lines of business unrelated to the core.

The basic method of compiling the SRS is fairly straightforward (see “How to Create an SRS,” at the end of this article); most of the information needed is readily available. But the effort does require two estimates: an accurate measure of how fast the market is growing, and customer churn rates. Treacy says the extra work involved in producing these estimates is worth it. When companies look at the amount of revenue coming from each source, and the changes in each, they can spot opportunities or weaknesses and allocate resources more effectively. “It really becomes powerful when you get down to the business-unit level,” he says.

The basic problem with the traditional way of viewing revenue is that it doesn’t carve out how much is produced by growth in the overall market. “You should know how much revenue is coming just for showing up,” says Adrian Slywotsky, vice president at Mercer Management Consulting Inc. and co-author of How to Grow When Markets Don’t.

He explains that companies that don’t understand that their revenue growth is coming only from market expansion can be lulled into complacency. And once their market matures and growth slows, they’re left unprepared. “Companies in general could do a better job of measuring revenue,” he says.

As Go Costs

Alcoa is deploying Treacy’s model within all of its 30 business units. The move is the latest in a program started in 2001 to focus on profitable organic growth. “We have always been obsessed with cutting costs,” says Feder. “Now we are trying to bring that same discipline to growing revenue.” (Alcoa is also in the middle of a $1 billion cost-cutting plan.)

Discuss

Your email address will not be published. Required fields are marked *