Financial metrics is an area that separates amateurs from real top performers: your ideal candidate is one who steers clear from blunt metrics and would have spent their career customizing and refining their own financial dashboard with a focus on pre-performance indicators, not post-performance indicators.
Here are a few questions that allow you to cut to the quick in your executive search, and tell which candidate is the right fit for your organization:
- Which customer account has the highest costs associated with it?
A well-attuned CEO will know exactly which of their customers has the highest cost, so ask them which customer incurs the highest cost, and ask them to give an example of a time when they led a customer portfolio rationalization program where they worked to remove unprofitable customers from their portfolio to invest more heavily in their most profitable customers. Follow that up by checking what are their most profitable product, service, and region?
- Can you describe a time when you removed certain types of clients from your portfolio because you were losing money on them?
Often, companies invest plenty of their resources in clients who are actually incurring a loss. Boards and CEOs make the common mistake of taking their best talent and pushing them to be virtually exclusively dedicated to their biggest problem when in reality your best talent should be put on your biggest opportunity. Great CEOs will utilize their balance sheets to create value and will work tirelessly to devise financial strategies that create a competitive advantage.
When a company knows it has a winner in its product or service portfolio, it should optimize its growth curve by investing as much as it can in the winning business unit. On the other hand, a company’s portfolio can include customers who may look like they are generating high revenue but when different metrics are applied, such as travel costs being considered, it can reveal that they are actually generating lower profit than smaller clients. Your candidate should be able to apply the right metrics to identify loss-incurring customers and take the right steps to maximize the performance.
- What is the breakdown of your net profit per business unit, per product line, per sector, and per geography? Which one has the highest net profit, the lowest net profit, the highest growth rate, and which has the lowest growth rate?
Some of the products in your portfolio may have 60% of the revenue, but the long-term projection may reveal that they will be declining over the next 5 years, while your highest growth product that only produces 10% of the revenue but may be expected to outperform your legacy product in the next 5 years. Check closely how the candidate’s prediction of the revenue mix over time is, and what their prediction is of where that revenue mix is going.
- How much revenue is 1% of the market share?
If your CEO is aiming to take market share, they should know how much that market share is worth. If they want to double sales does that mean taking 1% of the market share or 80% of the market share? Ask them “If you were to take 1% market share, how much money would that equal?” The CEO must know the value of the market and how much each percentage of market share is worth. Otherwise, all their predictions are off, and their marketing spend is not rooted in empirical data.
- What is the average annual value of your customer? And what is the lifetime value of your customer?
Many CEOs will not know the answer to this question, which is what makes it is a separator question, allowing the top 10% of candidates to shine – those who will link the cost of customer acquisition to the annual and lifetime value of the customer and can leverage these data points to create a competitive advantage. In an automotive business, a customer will probably not buy more than 1 car per year, but when the business is looking at the lifetime value of their customers, many of them will buy up to 10 cars in their lifetime. Suddenly that skinny 21-year-old walking into the dealership is not valued just at the compact economy car they are buying but rather should be seen as half a million dollars in sales over the next 40 years. They are actually worth up to 500,000 USD to the dealership, which puts matters into perspective.
Many CEOs manage their marketing budgets by gut feeling, whereas empirical CEOs use metrics to identify which customer segments are the most profitable and based on the annual and lifetime value of the customer, will open or contract their marketing spend accordingly.
- For the coming year, what will be your monthly recurring revenue versus your expected net-net new revenue?
You are inviting the candidate to break down the revenue from existing customers and compare it to net-net new revenue from new customers. CEOs realize that, depending on where you are in the lifecycle of your business and which industry you are in the mix of, a legacy to new customers will change, but for most industries, the lion’s share of sales should be repeat business. If your percentage of net-net new customers is too high, it can be indicative of poor customer experience and if your percentage of legacy customers is too high it can be indicative of poor marketing and sales efforts. Great CEOs will watch the revenue mix and adjust their approach accordingly.
At the end of your executive selection, when you find a candidate who possesses the right financial skills, you ensure that you have found a financially astute CEO who will have optimized interactions with your CFO and is able to use financial data to increase the financial performance of the team.
Looking for more questions to ask a CEO? Read “CEO Assessment and Selection” to learn more about the 7 universal success factors for the Chief Executive Officer and unlock over 450 fail-safe questions that allow you to recruit top performers.
Get more free CEO Assessment tips at https://tpgleadership.com/ceo-assessment-selection-book/
If you like this essay, you can see our video here