A Personal Note from Nelson

Last month, I watched a regional manager get criticized for "poor margin performance" - despite actually outperforming the market.

The problem? Traditional P&L reviews can't separate what teams control from external market forces.

This creates a fundamental unfairness that demotivates your best people while missing opportunities to recognize genuine performance breakthroughs.

Today, I'm sharing how Gross Margin Dollar Variance Analysis solves this problem by isolating true team performance from uncontrollable factors.

The Performance Review Problem Every Leader Faces

The Challenge: Your teams get blamed for margin declines they can't control - or credited for improvements they didn't drive.

When margins drop, everyone looks for someone to blame. When they rise, credit goes to whoever speaks loudest. The real drivers remain hidden, leading to:

• Top performers feeling unfairly criticized
• Resources allocated to the wrong areas
• Training focused on symptoms, not root causes
• Bonus plans that reward luck over skill

The Hidden Truth: Many "performance problems" actually come from a mix of factors: some you can't control, like market shifts, rising vendor costs, or changes in customer buying habits. Others you can control, like pricing or inventory decisions. The real challenge is figuring out the root cause of these problems and then finding the right solutions.

Customer Spotlight: Regional Distributor

A multi-location distributor was struggling with team morale after margin declines led to difficult performance conversations.

The Surface Problem: Margins dropped 2.8% year-over-year across regions, suggesting widespread performance issues.

What Variance Analysis Revealed:

• External factors: Supplier cost increases drove -4.2% margin impact
• Team performance: Non-contract pricing improvements led to a +3.4% margin recovery. However, contract pricing brought the overall margin down.
• Reality check: The sales team achieved an exceptional 85% adoption rate for Intuilize's non-contract pricing. Despite tough market conditions, they performed very well, successfully deploying pricing increases. The main issue arose from the distributor's poor management of contract pricing, leading them to absorb a significant portion of tariff-driven cost increases.

"The Gross Margin Variance tells us what happened, and we weren't able to reflect cost increases in our contract pricing. That's painful, but knowing where the problem is, is a good thing," their operations executive noted after seeing the breakdown.

The Business Impact:

• Reversed unfair performance evaluations
• Identified best practices from top-performing teams
• Boosted morale by recognizing real contributions

How Variance Analysis Works: Fair Performance Measurement

Step 1: Separate Controllable from Uncontrollable Factors - Identify six distinct factors that drive margins: changes in sales volume, customer retention and acquisition, optimizing the product mix, product lifecycle (new and dormant items), effects of pricing policies, and shifts in supplier costs.

Step 2: Measure Teams on What They Can Influence - Focus performance reviews on volume variance (customer engagement), customer variance (retention), pricing execution, and mix variance (cross-selling) - the factors teams actually control.

Step 3: Provide Context for External Factors - Acknowledge product lifecycle  and cost variance impacts due to shifts in supplier costs while recognizing teams for performing well despite challenging conditions.

Why This Transforms Leadership Effectiveness

"We could pinpoint whether the change was due to volume, customer loss, or associated costs," a distribution operations executive explained.

Fair Assessment Benefits:

• Improved retention - Top performers stay when recognized correctly
• Optimized resource allocation - Training goes where actually needed
• Accelerated performance - Teams focus on controllable factors
• Stronger culture - Trust builds through fair evaluation

Bottom Line: One client discovered their "underperforming" region had actually contributed over $150K in controllable margin improvements despite adverse market conditions.

Take Action: Transform Your Performance Reviews

Ready to stop penalizing good performers for uncontrollable market forces?

Schedule a Variance Analysis Demo - See how your teams actually perform when external factors are properly isolated.

Looking forward to helping you build fairer, more effective performance measurement systems.

Thank you for your continued partnership with Intuilize. We're committed to delivering value that goes far beyond what meets the eye.

Best regards,

Nelson Valderrama
CEO, Intuilize

Coming Next Month

• Strategic Compensation Design: How a specialty distributor built bulletproof bonus plans using variance analysis
• Resource Allocation Strategy: Data-driven approaches to operational investment decisions

Looking Ahead

Schedule Your Q4 Review to helping you build fairer, more effective performance measurement systems. 

Contact us at support@intuilize.com or (469) 844-5505 for any questions. Let’s uncover the full potential of your business together!

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