There is a long simmering debate in the product management community revolving around product managers and P&L statements. Do product managers really need access to product P&L statement? Does each product line need its own P&L statement? Should product managers “own” the P&L and be the CEO of their product?
This post will explore several aspects of this debate and concludes with a survey of the degree to which product managers have access to P&L information today. Please share this post so we can gather more responses and provide the community with some fact-based insight into this topic.
Neil McElroy was an executive with Procter & Gamble. As a junior executive managing the advertising campaign for P&G’s Camay brand of soap, McElroy wrote a famous 3-page company memo that laid out the principles of modern brand management. In the memo, McElroy argued that companies should assign a separate marketing team to each individual product brand, as if it were a separate business. This innovative system of brand management would eventually be adopted by consumer product companies all throughout the U.S.
McElroy became Secretary of Defense in 1957 under Eisenhower. He also advised Stanford University where he had a significant impact on two entrepreneurs – Bill Hewlett and David Packard. “They interpreted the Brand Man ethos as putting decision making as close as possible to the customer, and making the product manager the voice of the customer internally. In the seminal book The Hewlett-Packard Way this policy is credited with sustaining Hewlett-Packard’s 50 year record of unbroken 20% year-on-year growth between 1943 and 1993.”[i] This approach became the foundation of tech product management.
“A good product manager is the CEO of the product. A good product manager takes full responsibility and measures themselves in terms of the success of the product. They are responsible for right product/right time and all that entails. A good product manager knows the context going in (the company, our revenue funding, competition, etc.), and they take responsibility for devising and executing a winning plan (no excuses).”
Ben’s post was a re-launching pad for the belief that contemporary product managers should have access to their product’s P&L.
While Ben’s comments make a lot of sense, there was an inevitable backlash against the idea. Google “Product managers are not the CEO of their products” and you will only find about 1.8 billion possible posts that explain why. Ale Carlos’ piece Stop saying Product Management is like being the CEO of your own product sums it up nicely”
“We have all heard this analogy about Product Management. Either on meet-ups or General Assembly, Lean Startup, Design Thinking or whatever your latest thing is, there is someone who will mention the awesomeness of being a product manager and how you get all this ownership and it’s like being a mini CEO. (Queue: young “product” guy with *** all over his eyes) To be true, yes product management is amazing, but please for the love of whoever you believe in, don’t say the CEO crap again. ( Actually I’m on a crusade to ban this.) There is something shameful for me on this line, maybe it’s the bragging maybe it’s the cynic in me (which coincidentally has increased since I got into Product Management).
In any case my objective is to clarify and dispel the notions of why Product Management is seen as a role where you, millennial, can be “the CEO”. At its best, this statement transmits in an extremely simplistic manner this very ambiguous and amorphous role and at worst it sets incorrect expectations to people who have never done the role and/or attracts the wrong people.”
The Ben versus the world debate boiled down to authority and control. CEO’s have the authority and control to set spending levels, establish strategy, hire and fire employees, etc. Product Managers may influence these decisions, but they cannot make and execute the decisions themselves. As noted by a long time product management executive ”Product managers inherit constraints that are set by the CEO or other executives in the company. A core challenge for product managers is to use their influence to optimize how all parts of the organization work together to achieve the product and company’s goals.”
Leading and influential product management methodologies like Pragmatic Marketing, the 280 Group Optimal Product Process, and even Wikipedia all tend to support this notion that product managers need to be aware of their product’s P&L, but generally product managers do not have the authority to manage a P&L.
One way to settle this debate is to do a little field research. Anytime there is a gathering of Product Managers, such as at any of the Product Camp events around the country, ask a room full of product managers a simple question: “Pull out your smartphones and bring up the latest P&L for your product/service line.” History shows that out of 100 product managers maybe 1 or 2 will have access to pro forma product line P&L information. Ask the same group of people to bring up a copy of the latest Sprint burndown chart for their team, and over half of them will be able to do so. If you ask them to bring up a summary of the latest sales pipeline for their product, at least a quarter will be able to whip out their Salesforce.com mobile app and show you something like a product line sales pipeline.
Product Managers should have basic financial literacy. They need the ability to read and interpret basic financial statements like Income Statements, Balance Sheets, and Cash Flow Statements to understand how their product contributes to the overall success, or struggles, that their company faces.
Product Managers do not need to have a Masters level understanding of finance, but they do need to understand basic concepts like revenue, revenue recognition, deferred revenue, cost of revenue, operating expenses, amortization, and EBITDA. Product Managers need to be able to speak the language of financial statements, especially with senior executives. Financial statements are the lingua franca of executives – they might not understand the nuances of story points or planning poker, but they always can understand the impact a program or strategy has on the company’s financial condition.
An example of contemporary financial literacy product managers should be aware of is ASC 606. ASC 606 Revenue from Contracts with Customers became the new standard for revenue and expense recognition for all companies at the end of 2018. ASC 606 fundamentally changes how companies recognize revenue and expenses, especially for SaaS companies. ASC 606 started to be implemented in 2016 and came into full effect for all companies in December 2018. Generally, revenue is now recognized over the expected lifetime of a customer. Expenses, like sales commissions, are also recognized over the expected lifetime of a customer. The net effect is that reported revenues are lower, but operating profits are higher. To learn more check out 4 Changes in Revenue Recognition for Software Companies Under ASC 606
Concepts like goodwill and goodwill impairment are relevant for product managers. Recently I spoke with a director of product management who used to work for me. He had moved onto a product management leadership role in a major Internet infrastructure software provider. He recently took a buyout package because his employer was selling off his legacy product line since its’ gross margins had dropped below the company’s target of 60% for six consecutive quarters. He understood the impact of financial literacy on his job. For more information about how goodwill is important for product managers to understand check out Why Product Managers Should Care About Goodwill.
Product Managers should also be able to read and interpret standard SEC filings like 10-K Annual Reports, 10-Q Quarterly Reports, Def 14A Proxy statements. If their company is a public company, such reports provide tremendous insight into the relative health and success of the company, plus a detailed explanation of its strategies, risks, and constraints.
Public filings can also be used to better understand customers and competitors. For example a company I worked for had a long standing relationship with a customer where they provided a value added outsourced solution that generated over $1.5 million/year in revenues. After a change in management, the customer decided to re-examine their investment in the outsourced solution. A new executive wanted to bring the solution in house. To do so, this company would need to invest over $750,000 in equipment and software, plus set up a group of employees to do the processing/value added services the service provider had been doing. If they brought the business in house they believed they could save $500K a year.
The sales person on this deal was petrified that the customer was going to take the solution in house. As a result he thought of offering to cut the monthly fees by 50% so that the customer would not even consider taking the solution in house. This company had a history of ‘writing down’ existing business in a bid to preserve revenue.
Fortunately a product manager on the deal pricing committee did a little research on the customer. Even though it was a large company with greater than $200 million in revenues, it had some serious financial challenges. At the time they were ‘considering’ in-sourcing the solution the company only had $5 million in cash on their balance sheet and a limited revolving credit facility. The product manager learned this fact by reviewing the customer’s 10-Qs and 10-Ks. The customer also had certain minimum EBITDA and cash flow targets they had to meet to be in compliance with the covenants of their loan agreements. Once the sales team realized that the company would have to invest about 20% of their existing cash balance to make the project work, they came to the conclusion that they were not serious about in-sourcing. Instead they were really looking to get a massive price reduction. Armed with this knowledge they were able to structure a win-win deal for all parties that did not result in a 50% revenue reduction. In this case, the product manager was able to save the company hundreds of thousands of dollars in lost revenue.
To learn more about Product Manager financial literacy check out Why Product Managers Need to be Able to Read 10-K Reports
We are conducting a survey of active product managers and
management of product management teams to determine the degree to which
product/service line profit & loss information is shared with them. Please complete the following five question
survey. All responses will be kept
confidential and a summary will be posted after completion of the survey. If you choose to provide your contact
information, it will only be used for purposes of this survey and not for any
marketing or sales purposes.