Book Review: Islands of Profit in a Sea of Red Ink


Islands of Profit in a Sea of Red Ink, by Jonathan L.S. Byrnes.

This book’s fundamental premise is quite simple, and very true:

Nearly 40 percent of every company’s business is unprofitable by any measure, and 20 to 30 percent is so profitable that it is providing all the reported earnings and cross-subsidizing the losses. The rest of the company is only marginal.

The underlying problem cannot be properly diagnosed—let along fixed—because most of our management processes and control information were developed in the Industrial Era and are no longer relevant to what the author calls the “Age of Precision Markets” (as opposed to the “Age of Mass Markets”).

The Chapters in the book, and there are 36 of them, are organized around four topics:

  1. Thinking for Profit
  2. Selling for Profit
  3. Operating for Profit
  4. Leading for Profit

The author says that these improvements will not cost you money, but I’m skeptical. After all, any real competitive advantage is rarely free, otherwise it’s too easy for competitors to duplicate. And since some of those advantages are adding value, customer service, and innovation, how can these be free?

Though perhaps the author means the mindset of these four topics are free. He also uses Dell as an example; but given Dell’s financial and profitability issues perhaps he regrets that choice?

The author later lays out three key elements to implementation of the above, which are central to the theme of the book:

  1. Profit mapping—which is where you look at the profit of each customer, product, etc., at 70 percent accuracy, which is close enough.
  2. Profit levers—turning bad accounts into good accounts
  3. Profit management process

I particularly liked the advice about seventy percent accuracy in cost accounting.

The author points out that arguments over cost allocations will not change action and the measurement itself ends up becoming the project. How true. Cost accounting is not an exact science, nor does it need to be. It needs to be close enough, and seventy percent seems generous.

And this is particularly true in professional firms, where most costs are fixed, like rent and salaries, and do not occur with every passing hour. That’s an assumption, not a fact. It’s cost allocation, not actual costs.

Where I depart from the author is his insistence that you tie out all costs to match the income statement, so you get a real “cost to serve.”

That’s right for cost accounting, but not for pricing. Most pricing decisions should be based on marginal costs, not total costs.

Moreover, if you match the income statement, and then add one customer, your costs are over-allocated to all prior customers.

This can become a ridiculous game, and no matter how you slice the cost pie, it’s still full of arbitrary assumptions.

Again, the goal is to be close enough. In a professional firm, you don’t have to worry about allocating every single cost, just get it close enough. You should focus your time and energy on creating value, then capturing it with better pricing.

10 Business Myths

Chapter 2 contains 10 business myths that I found to be very true, though not all of them apply to professional firms. Here are the myths (in bold) that do, along with some commentary:

  • Revenues are good, costs are bad.
  • We should give our customers what they want—this is usually different than giving them what they need, which may be a new business model.
  • All customers should get the same great service—this is a major problem in most firms, since they do, in reality, discriminate in customer service, but they don’t make it transparent, neglecting to manage customer expectations.
  • If everyone does his or her job well, the company will prosper—there’s no way to execute well a poor strategy. The goal is profit for the entire enterprise, not it’s individual components. This is very true in professional firms, which is the problem of trying to run a profit and loss on every 6- minute unit of time.
  • Big changes can’t be made without a crisis—it shouldn’t take a burning platform to implement significant change, since fear rarely produces clear thinking.

Three Core Principles of Strategy

I also enjoyed Chapter 4, and the three core principles of strategy:

  1. It’s all about customer value.
  2. Strategy is defined by what you say no to.
  3. You have to be best at something.

My colleague Tim William’s book—Positioning for Professionals—does a much better job explaining these points.

Overall Review

I was hoping the author would discuss how to rid a business of unprofitable customers, but his advice seemed to be try to make them better customers first, and/or raise their prices.

Fair enough, but in professional firms, those customers that firms can’t add value to should be let go, not just increased in price. An “F” customer does not become an “A” customer just because they are paying four times more, since that’s the ethic of the world’s oldest profession, not true professionals.

Maybe the author thinks strategy (what not to do) will handle this issue, but most firms have bad customers they should shed immediately, and this book provides no guidance on how to do so.

But after Chapter 5, this book becomes repetitive, and then degrades to boredom. The author assaults the reader with what needs to be done, a typical Mommy checklist. Each chapter is short, but contains a “What’s Next” section that just grates, and is completely useless.

The book didn’t get better until the end, where the author talks about paradigmatic change—that is, significant change, which is the most rewarding.

Think of your resume, detailing a job description. Do you want it to read: “Did a good job of doing what always was done.”

I also liked this line: “Continuous improvement beats postponed perfection.”

Overall, the book is too long (unless you need to dive into supply chain management), but if you read just the first section, along with the last, it has some worthwhile lessons, though I’ve read better.


  1. Hi Ron,

    I was surprised to see that you agreed with the concept of measuring profitability by customer. I thought you advocated doing so only in the aggregate at PKFs. With costs in PKFs being primarily salaries and rent as you noted, how can you allocate costs without time tracking? If I have an outsourcing contract with a client that pays me $150K/year and requires 2 FTEs to deliver, and another that pays me $200K/year but requires 3 FTEs to deliver, how am I going to assess the relative profitability of each contract/customer without understanding the resources allocated to each???

    In the “10 business myths” section, you wrote (not sure if this is your opinion and/or directly from the book): “The goal is profit for the entire enterprise, not it?s individual components.” How does this reconcile to the premise of the book stated in the first paragraph, that there is such a chasm of disparity between a business’s profitable segments and the rest of it??

    Jim Caruso

  2. Hi Jim,

    Correct me if I’m wrong, but didn’t you give me the costs with your 2 and 3 FTE examples? The important thing is to know your costs upfront, before you do the work, not after.

    You don’t need timesheets to allocate costs. There are other ways. You could simply allocate weighted on revenue. The point is, it doesn’t have to be 100% accurate.

    The far more important question to ask yourself is not whether the work requires 2 or or 1.8, or 2.3 FTEs; the more important question is how do you know you couldn’t have priced the job at $200K, or $225K? How much money have you left on the table? Cost accounting can’t answer that.

    To your second question, that was the author’s point, but I agree with it. Except I’d add that lifetime value of customer is critical, not just every 6 minute unit. You know who your unprofitable customers are without looking at financial data! I can tell from the price.

    But here’s a blog post that explains the answer to both your questions even better:

    I hope that helps. Again, your cost accounting has to be known upfront, before you price, otherwise it’s useless information.

  3. Ron,

    I like your point about costs.

    >> Revenues are good, costs are bad.

    In 2008, Microsoft had $663,956 revenue per employee, and $194,297 profit per employee (29%). That gives us $469,659 cost per employee.

    In contrast, Hewlett Packard had $368,735 revenue per employee, and $25,947 profit per employee (7%). That gives us $342,788 cost per employee.

    In terms of costs HP is better, but is it really?

    Miscrosoft’s 37% higher cost than HP’s created over 300% higher profit than HPs.

    The comparison may be a tad crude, but it shows that costs are good if they lead to profits. For MS, 29% of the costs go to profits. That’s pretty good, so I think the cost is justified..



  4. Tom,

    Great example. Ed and I constructed this spreadsheet once that looked at revenue and profit per employee for Intel, Microsoft, Apple, IBM, etc. Craigslist kicked everyone’s ass! But we should have done cost per employee, too.

    Too many businesses mistake cost-cutting and investment. And this is even trickier in a knowledge economy. I like to think how long it takes to get a drug out of R&D;to market, all investment, but we accountants treat it as an expense.

  5. Ron,

    I’ve just found another point to pick a bone with in this book…

    Jonathan talks about a Chief Profitability Officer.

    But profitability is an effect caused by value created in the firm, captured in pricing and delivered to clients.

    So, Chief Value Officers monitor the cause, making sure the cause is happening during the whole value-create, value-capture and value-deliver process.

    By contrast, Chief Profitability Officers merely check whether or not there is a profit at the end of the process. If there is none, all they can say: “Sh*t, we blew it again!”

    But by the remedial nature of their work, they can’t correct the value process.

    The Chief Profitability Officer is the equivalent of the scales you talk about in the context of weight loss. It measures the end result.

    The Chief Value Officer is the equivalent of the personal trainer who monitors the client and makes certain that both the exercise and the nutrition regimens are followed.

    So, my thought is that the Chief Profitability Officer is still a form of cost accounting, although a glorified one because it’s called profit.

    Am I totally off base here?

  6. Tom,

    You’re not off base at all. In fact, the CPO role is about “results” where the CVO role is about “means.” The difference between means and results is the difference between keeping score in golf vs. having a coach to help with your swing.

    This is the major thesis of another fantastic book that is on my top Dozen best business books of all time: Profit Beyond Measure, by H. Thomas Johnson. He believes it’s the means that need to be managed, since the results cannot be. It’s a profound work, even though embryonic.

    It explains how Toyota can operate without standard cost accounting, since that, too, deals with results, not means. What makes this book even profound it Johnson is an accounting professor!

    The CVO role needs to replace the Chief Pricing Officer role as well, for the same reason: Price is driven by value, which is determined by the customer, not looking inward at costs, etc.

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