The top line of any organisation is like the air we breathe, and the bottom line is like the oxygen we need, but what is also important is the middle line which is like nitrogen, writes Satish Khanna in The Future Manager, second edition (www.tatamcgrawhill.com). He frets that the ‘middle line' – in the form of costs incurred in the different departments and functions within the company – can often suffer from split thinking.
Drawing the analogy of ‘six blind men and the elephant,' Khanna notes that companies may end up having their own blind men who look at the company in terms of their particular function, declaring, for instance, that production, sales, marketing, research or finance are all-important. As a result, “In budgets and meetings, each function or department tries to get the maximum share, without looking at the needs of the company as a whole.”
More dangerously the culture that ensues is one of ‘us versus them,' with the production people, for example, thinking that sales and marketing always need the product that they have the least of, while the sales people are impatient with their counterparts in production, saying that the customers may not need what they have in stock, and that the customers cannot be kept waiting. And, as the author describes, the finance people in the company tend to think that everybody spends too much without understanding the importance of cash-flows.
Balance sheet, brick by brick
Khanna cautions that in such a ‘political and competitive approach' the functions that bring in direct revenue dismiss the others as being only cost centres, while in reality each decision – whether in the technical or in the commercial function – is a profit centre by itself. “Each decision is like a brick that builds the annual balance sheet. Every person, whatever his function or level or hierarchy, must understand this and ensure micro-level excellence to maximise profits, which should be the ultimate objective.”
Achieving turnover without profits is like breathing air without oxygen, because it means eventual suffocation and certain death, warns the author. “Controlling the middle line will cut the cost of production and provide the necessary power to price the product aggressively and grab market share from competitors.”
Batting, bowling, and fielding
If you wonder ‘how,' the advice in the book is that you begin by making employees aware of the contribution of each area to the company's performance; for, they then become accountable for controlling the middle lines. A cricketing parallel to drive home the point is that the top line is like superior batting that leads to runs being scored, whereas the middle lines are equivalent to the runs yielded, which reflect the quality of bowling and fielding. “A positive difference between the two amounts to winning. In business, this difference is equivalent to profits,” explains Khanna.
There is increased focus on controlling costs – the middle line – more so after the recent global meltdown when survival was the first goal of many companies, the author observes. He reminds that being efficient is no more optional if one has to sustain in this competitive world where China is redefining the pricing approach.