Pounds Per Square Inch: Interview with MIT Professor and Profit Isle Founder Jonathan Byrnes

I recently went one on one with Jonathan Byrnes. Jonathan is a Senior Lecturer at MIT and the Chairman and Founder of Profit Isle, a SaaS profit metrics and analytics company that has produced 10-30% sustained year-on-year profit increases for over $100 billion in client revenues. Jonathan has advised over 100 companies, governments, and institutions, and has written over 200 books, articles, and notes, including the upcoming book Choose Your Customer: How to Compete with the Digital Giants and Thrive.

Adam: Thanks again for taking the time to share your advice. First things first, though, I am sure readers would love to learn more about you. How did you get here? What experiences, failures, setbacks or challenges have been most instrumental to your growth?

Jonathan: I have taught supply chain management and account management at MIT for over 30 years, and I am the chairman and founder of Profit Isle, a SaaS profit analytics company that has produced 10-30% sustainable profit increases on tens of billions of dollars of client revenues. I’m also co-author of the forthcoming book: Choose Your Customer: How to Compete Against the Digital Giants and Thrive. 

However, I’m most happy that my wife, Marsha, and I have been together for 46 wonderful years, and that we have two terrific sons and three grandsons. This is the most important accomplishment in my life. Teaching and staying close to a generation of MIT graduate and executive students has been the privilege of my life. 

I went to business school to study supply chain management and strategy. It turned out that my interests were much broader, I really enjoyed academic business, and I did very well at it. I turned down the usual Wall Street and consulting job offers, and decided to get a doctorate. While at Harvard, I had a very interesting consulting assignment advising a top minister in the government of Indonesia, and wound up living there for about two years. 

After graduating, I built a consulting business. My consulting business did very well, and I happened to have lunch with the head of MIT’s Center for Transportation and Logistics. He said that MIT didn’t have a supply chain course, and asked if I would come and teach there. The rest is history. 

I developed the transaction-based profit metrics and analytics offered by Profit Isle as I needed to understand better precisely where a company was making money and where it was losing it. The problem that this solved is that the traditional accounting metrics like revenue, cost, and gross margin are too broad. They show managers whether they are making money, but not where they are making money.

The transaction (invoice line) is the financial atom of the company, so I developed a way to assign costs with a high degree of accuracy (based on a company’s general ledger) to every transaction (every time a company sold a product to a customer). This links each and every increment of revenue to the all-in cost of providing it. We have very sophisticated data structures that can calculate the all-in profitability of literally every nook and cranny of a company. 

After several years of perfecting the methodology and the related change management techniques, I decided to turn it into SaaS software. I was very fortunate that a former student, John Wass, was interested in becoming CEO and growing the company. John is a former SVP of Staples, and a key member of the management team that built the company from three stores to over 1,000; he also was co-founder and CEO of an RFID company that he sold to Cardinal Health.

Adam: What are the key takeaways from your new book? How can anyone compete against the digital giants and thrive?

Jonathan: The digital giants are vacuuming up huge market share with a laser-focused, narrow strategy: providing arm’s length services to small customers in an information-rich environment with strong network effects. This leaves a wide-open playing field for incumbent firms. Unfortunately, most companies have had broad-market strategies, in which all revenues were desirable (e.g. think about their sales compensation systems that value all revenues equally). 

The core problem is that the markets are fragmenting, and instead of targeting specific defensible market segments, all too many managers are wasting their resources trying to defend all their revenues, including the small customer business that the digital giants are targeting. Most of these broad-market firms either are going out of business or declining rapidly. 

Instead, the successful companies need to (1) identify the market segments that are (and will be) defensible against the digital giants; (2) shift their resources to win in their target defensible segments; and (3) organize their companies to flawlessly execute their winning strategies. 

In a nutshell, the three keys to success are (1) choose your customer; (2) align your resources; and (3) manage your organization. This is the theme of our forthcoming book. Transaction-based profit metrics are essential to this process. 

Adam: What are the keys to running a truly customer-centric business?

Jonathan: The key to running a truly successful customer-centric business is first and foremost to identify a defensible market segment, and say no to the customers that don’t fit. You can have a truly customer-centric business that competes head-on with Amazon, Google, or Apple, but it won’t get you very far because the digital giants can produce their customer centricity with enormous efficiency, effectiveness, and scale. 

Once you target a defensible segment, you need to do what is right for each of your profit segments. In our experience (covering over $100 billion of client revenues across multiple industries), virtually all companies have a similar internal profit pattern. About 20% of the customers are “profit peaks”, and they produce 150-200% of the company’s reported profits; about 30% are “profit drains” that erode about 50% of these profits; and the remaining 50% of the customers are “profit deserts” that produce little or no profits, but consume about 50% of the company’s resources. 

This profit segmentation provides the key to effective customer centricity. The objective of selling to profit peak customers is to focus on growing your relationship, generally through semi-integrated processes like vendor-managed inventory or product rationalization. This requires sets of dedicated multi-capability teams (e.g. sales, product management, supply chain management) that report to decentralized management specialized in this segment. This is by far the highest priority of the company.

The profit drains are large, money-losing customers. In our experience, the most common problem with these customers is a high cost to serve (e.g. ordering too frequently), not below-market pricing. The key objective is to work with these customers to eliminate the problems causing the excess costs. Fortunately, this also lowers the customers’ cost, so it is a win-win. This requires a parallel, but very different, set of multi-capability teams specialized in cost reduction.

Profit deserts are small-volume customers. This is Amazon’s target market. The key here is to reduce the cost to serve to match their profit potential through digital transformation, automation, portals, menus, and other measures. It is critical to be willing to let these customers go to the digital giants, rather than price-cutting in a futile attempt to cling to revenues that are destined to evaporate.

Adam: What are your best tips on the topic of customer service?

Jonathan: The most important imperative is to align your customer service with a customer’s profit segment. Customer service means keeping your promises all the time, not making the same promises to all customers. 

A profit peak customer should expect to have a dedicated multi-capability team that knows it well, where every supplier team member has a close relationship with his or her customer counterparts. A good supplier provides what the customer wants, but a great suppler partners with the customer to figure out what the customer really needs to advance its business, even if the customer doesn’t immediately see the emerging need – this makes the supplier an irreplaceable strategic partner.

Profit drain customers should expect close coordination in lowering the supplier’s cost to serve, while also lowering the customer’s cost of operations. This is a win-win. But unless the customer is willing to cooperate, it deserves only a baseline level of service.

Profit desert customers should get flawless basic service, but no more, unless they are able to grow their volume or purchases. (Remember that the digital giants have made a science of serving these customers, and unless you can match them, it is best to focus on minimizing your losses or making a small profit.)

Adam: What are your best tips on the topics of sales, marketing and branding?

Jonathan: Understand your objectives by profit segment. Each of the three segments has a fundamentally different objective. Profit peak customers should perceive the company as a proactive, innovative partner in making them more profitable. Profit drain customers should perceive the company as expert in reducing their operating cost; if they are not willing to cooperate, the company should not try to attract them, but rather charge a compensatory price and let them go if they will not pay it. Profit desert customers should perceive the company as very efficient and reliable, but not too flexible.

Overall, the company should compete on high customer service, and not on price.

Adam: What is your best advice on building, leading and managing teams?

Jonathan: The overriding advice is to manage at the right level. Top managers should focus the company on identifying its upcoming defensible segments, and making sure that the lower-level managers are committed to managing the company’s profit segmentation. Top managers are responsible for defining the company’s role 3-5 years in the future and building a pathway to that point.

Middle/upper managers (VPs and directors) are responsible for managing the day-to-day organization in order to meet each profit segment’s objectives. This is half of their job; the other half is supervising the grassroots managers below them. One of the biggest problems is that most of these managers have a strong functional background, and tend to manage a level too low (tuning up their subordinate managers’ performance).

The operating/sales managers drive the company on a day-to-day basis, often working in teams dedicated to the respective profit segments. 

Adam: What do you believe are the defining qualities of an effective leader? How can leaders and aspiring leaders take their leadership skills to the next level?

Jonathan: The defining qualities of effective leaders are changing dramatically. In the previous mass-market era, virtually all managers rose through the ranks of a functional division like sales or supply chain management. Companies were managed in a top-down command-and-control manner, and strategy was developed at the top of the company. From time to time, high-potential managers were rotated from department to department, but this was the exception.

Today, effective leaders have to be able to work with their counterparts in tight, coordinated, multi-capability teams dedicated to particular profit segments (profit peaks, profit drains, and profit deserts). They have to have a deep understanding of all the functional areas, and they have to be expert and experienced at change management within their customers. They must be able to work and manage in a decentralized organization in which they are responsible for creating flexible packages of products and services to meet the needs of micro-segments of the market or even individual customers.

This means that the traditional business education of “majoring” in a functional field has to be replaced by a broader understanding of business functions, change management, and strategy. Even grass-roots, front-line managers need this capability, and as they rise in the organization, they have to be adept at training their subordinates to operate in this manner. 

Adam: What are your three best tips applicable to entrepreneurs, executives and civic leaders?

Jonathan: 1.  Take a walk by the river – Think carefully about what the real, long-term problem is and how to permanently solve it, rather than tuning up tactics.

2.  Pounds per square inch – Do fewer things better. The essence of business greatness is aiming at a defensible, high-growth, high-profit segment, and aligning all your resources and management processes to win it.

3.  Don’t invest in yesterday – Most companies’ objectives and activities are appropriate for the way the business was 5-7 years ago. The prime need is to understand the future competitive positioning, and build it before a competitor does.

Adam: What is the single best piece of advice you have ever received?

Jonathan: The same advice I give to my MIT graduate students. Ask yourself: If you inherited $20 million dollars, what would you do (after you get back from 2 months on vacation)? You would do what is in your heart – what you would really love to do. My advice is to do this now – you will make more money because you like what you are doing, and if you make less, you will still have enough, and after all, at the end of your days, it is more important to be happy than rich.

And always be completely ethical!

Adam: Is there anything else you would like to share?

Jonathan: We’re in a period of historical change. If you try to go back to the way things were, or focus doing old things more efficiently, you are doomed – no matter how efficient or digital you try to get.


Adam Mendler is the CEO of The Veloz Group, where he co-founded and oversees ventures across a wide variety of industries. Adam is also the creator and host of the business and leadership podcast Thirty Minute Mentors, where he goes one on one with America's most successful people - Fortune 500 CEOs, founders of household name companies, Hall of Fame and Olympic gold medal winning athletes, political and military leaders - for intimate half-hour conversations each week. Adam has written extensively on leadership, management, entrepreneurship, marketing and sales, having authored over 70 articles published in major media outlets including Forbes, Inc. and HuffPost, and has conducted more than 500 one on one interviews with America’s top leaders through his collective media projects. A top leadership speaker, Adam draws upon his insights building and leading businesses and interviewing hundreds of America's top leaders as a top keynote speaker to businesses, universities and non-profit organizations.

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