Business Math – Drivers and Levers

28 04 2009

I once listened to the VP of a services business unit describe the levers available to him to drive the business.  Here is his formula.  While I agree with him about the formula, it was clear that we need to understand the difference between levers and drivers.  

old-formula

If these were all just levers, would we not be justified in pulling the levers as quickly and as hard as we can?  If we make a small adjustment to the formula, we can take the argument another step farther.

revised-formula

If we breakdown Average Deal Size into its components of hours and rate, we identify the one item that can probably be used as a short term lever – Rate.  We can lower or raise our rates much easier than the other items.  The other items require longer term programs.  We need to train our sales force on new ways to improve winning percentages and shorten sales cycles.  We need to create marketing programs to find new opportunities.

It is one thing to understand the drivers of the business, but we usually need to build programs around the levers to understand how they impact the business and how/when they should be used.  If we are not actively managing the levers, they are really just mathmatical drivers.

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