What do we mean by a Profitability Vise?
Of course Profit is what is left from revenue after all the expenses are deducted.
A Vise is a piece of equipment with 2 jaws used to grip or hold items by moving the jaws together slowly tightening it around the item.
The Profitability Vise refers to economic conditions that are squeezing the profit percentages for companies. The two jaws of the Profitability Vise are revenue and costs.
Over the past 25-30 years there has been significant pressure to keep prices of all products low. We see prices for products go down significantly as they become more commoditized. Some of this is the result of lowered manufacturing costs, the rest due to customer demand and competition as more and more companies move into the market. In recent years pricing for services of all types including professional services have also come on under pressure. This is primarily due to increased competition. As a result of the current economic conditions pricing of many products and services have been pushed even lower.
Over the years companies have focused on lowering labor costs by finding lower cost labor in and out of the US. It is becoming more difficult to lower labor costs as costs outside of the US have begun to rise as the economies become stronger. Also companies have experienced some issues with use of overseas labor.
Energy costs have been like a yoyo, up and down over the years. While they are down now there are indications that energy prices will be rising especially with potential cap and trade legislation.
The biggest threat of increasing costs today is taxes and healthcare. The majority of states and the federal government either have or will be raising taxes on business in the next year. In addition payroll taxes are being increased which include the business portion of payroll taxes. Healthcare costs have been rising every year and with the healthcare legislation they are predicited to continue to rise.
With the current unemployment rates labor costs will probably not rise immediately but as taxes are increased on employees, and unemployment is reduced there will be pressure to increase salaries.
The first approach is to reduce costs and there are many firms that help companies renegotiate contracts with vendors to accomplish that goal
The next reaction to is lay off employees and/or outsource functions. This has its benefits but often does not accomplish the desired results.
A key way to to loosen the grip on the Profitability Vise is to improve productivity. This enables the business to provide better customer service, process business transactions more effectively and accurately and keep labor costs under control.
Read Lynda's blog post about the Profitability Vise here
LJR Consulting Services focuses on identifying opportunities for you to reduce cost through improved productivity. Call us for an assessment at 818-227-5025.