Testing the Top Line

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

Its new revenue discipline starts with a look at year-over-year growth in the five categories for each business unit. While estimates of market growth and churn rates are readily available for some units, the figures for others require a combination of internal and outside research. Feder says the statements are generated by a team made up of marketing and finance personnel working at the business-unit level, and that some unit managers now use the information on a quarterly basis.

However, Alcoa’s approach doesn’t end there, as the company is applying its SRS not only to revenue but also to margins. “It’s not enough to simply grow revenue organically — we want to grow where we are most profitable,” says Feder.

To do that, the company leverages the work it has done in activity-based costing, which enables it to allocate costs and revenues to different market and customer types.

Slywotsky says linking costs and revenues in this way is critical. “Trying to run cost and revenue management independently can be very risky,” he warns. Companies that do so, he says, may not know whether they are cutting costs the customer doesn’t care about or cutting into the ability to create growth.

Linking the two efforts requires some tricky data-integration attempts. Alcoa is tying its SRS program into the rollout of its new enterprise-resource-planning system based on the Oracle platform. The system will help make complex determinations of where markets overlap and customers are common to multiple units. “It requires a lot of data manipulation,” concedes Feder, but, he insists, the results will be “very powerful.”

Although Alcoa’s program is still in its infancy, Feder says the company already has a better idea of its true sources of growth, and business managers can make better decisions about where to allocate resources. The company hasn’t yet decided to tie the model to compensation, which would be the logical next step. For example, Treacy says, salespeople could be compensated more for growing market share than for market growth. “It could also be used to encourage customer retention,” he says.

Alcoa isn’t the only company delving deeper into revenue growth. First Data Corp. has been analyzing it since 1998, and credits its analysis with helping drive the company’s growth at an average double-digit rate for the past five years. “We needed to understand the components of growth to decide where to devote resources,” says CFO Kim Patmore. The company uses a similar breakdown to Alcoa’s, although it includes revenue growth from acquisitions.

One thing the company has learned from its analysis is that in some cases, it can derive more top-line growth by focusing on current customers than by chasing new ones. “We spend a lot of time studying customer-retention rates,” says Patmore. “Sometimes it’s better to polish the apple you have than to reach for the shiny one on the tree.”

Accurate estimates of market growth and customer churn rates aren’t always easy to obtain, as First Data and Alcoa have found. While some of the necessary data is available through Nielsen market reports, First Data relies on its corporate-research group for the rest. For some units, the group creates daily reports on trends in the market and information on customers.


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