In February 2006 telecoms company Cable & Wireless announced that it was to cut off 90% of its corporate customers.

Why ? Because they were unprofitable,and C&W wanted to concentrate on the 10% of customers who did make money.

As part of its bid to regain profitability it also planned to shed 50% of its UK workforce. Did these radical steps convince observers ? Hardly. One newspaper commented sarcastically "It's amazing that noone else has thought of targetting profitable customers. No wait, they have. The entire telecoms industry is doing it, and several (such as Thus and Colt) have better networks to do it with."

Let me make it clear here that I have never advised Cable & Wireless, and doubt that I would if they asked. However it is interesting to speculate about how they went so wrong. We can often learn something from other people's mistakes.

Were they chasing after volume, regardless of profit ? This is not unusual. I think of one case I saw in magazine publishing where advertising sales were incentivised on volume rather than profitability, and the end result was space being sold at only 20% of the rate per page obtained by competing publications.

Were they reporting the wrong things ? If you report revenue by country, or by type such as voice/data/internet you can easily miss the fact that many customers lose you money. In one consultancy company I know, developing the right reporting and reporting by customer rather than product line enabled us to raise profitability by 25% over 9 months.

Did they have a pricing model which actually made sense ? Or were people happily closing deals and winning bonuses when in fact those contracts were going to lose money ? In a logistics company I worked with, they had been negotitating deals for years without a proper pricing model. When they developed one and reviewed their portfolio they found some contracts losing up to 20% of revenue.

Cable & Wireless's problems didn't arise from unique bad luck or incompetence. They came about because of an unlucky combination of quite common problems. C&W are in such desperate straits because of what has happened in the telecoms industry in the last 10 years: rapid change, an expectation of rapid growth, and the perceived attractiveness of the industry leading to a flood of new competitors.

It is unlikely that your business will suffer the disaster that C&W suffered, but how sure are you that some of the same problems are not lurking beneath the surface, imperceptibly pulling your profitability down and waiting for the moment circumstances change so that they can do some serious damage ?

If you would like to be sure that your business is not about to hit an iceberg, this is what you could do:

Be very sure you have the right metrics for profitability;

Be very sure you have the right incentives for sales staff,and the right controls over the sales process;

Be very sure you understand the profitability of your customers.