Classic: Corporate Inefficiency, Failing to act as Owners

Originally published August 19, 2011

I used to think I did a fairly good job avoiding this fallacy -- until I became a small business owner.  My roots in large corporations and my more recent experience in a small business convinces me that almost everyone in the big firms is guilty of this particular sin to a greater or lesser degree.

As a business owner, I tend focus on the basics.  Selling, producing, invoicing, collecting, and a little bit of accounting to keep score – these actions are the things that make the business successful.  Things like elaborate strategies (and their associated presentations,) multi-year marketing plans, detailed job descriptions and performance reviews, IT recovery plans -- take a back seat to day-to-day blocking and tackling.

As an owner, I look for bargains.  A thirty year old Bridgeport mill sounds a lot better to me than a new one.  My office is decorated in old, cast-off furniture.  I make that old computer work for as long as possible.

Getting it (mostly) right

All large companies suffer inefficiency when employees act for the own benefit and not the owners.  The degree of inefficiency, however is all over the map.

At one of my large employers there was an urban legend surrounding the company’s success in getting employees (mostly management) to act like owners.  The story goes that a senior executive came to the CEO and proposed that if he were allowed to hire ten new resources, he could deliver ten million dollars in new sales next year (I’m making the numbers up as I don’t remember the exact ones in the legend).  The CEO asked, “What could you deliver if I said yes to only five new heads?”  The executive thought about this and said, “Eight million.”  “And if you could have only three?”  “Five million,” came the reply.

In the legend, the CEO and the executive settle on two resources with a “stretch” goal of five million in incremental sales.

If that were reality, then I’d say the CEO was, indeed, acting like an owner.

 Inspirational photo for the Empowered cover.

Inspirational photo for the Empowered cover.

Unfortunately, this legend – even if it is true – doesn’t come close to explaining the way the company was run.  For example, this same company forced their divisional executives to literally expend man-years of effort every year putting together elaborate presentations to explain five year projections for their business (which, generally were no longer valid 3 months later.)  Then those plans were torn apart sentence by sentence during a day long gumscraping chaired by the CEO.

We never do anything like that in our small company.  It would be seen for what it was -- a colossal waste of time and effort.

But it wasn’t all bad.  This same large company, ran in a decentralized fashion, granting significant decision making authority to those close to the day-to-day action – which is what happens in small companies.  For their size, they did have a relatively small corporate staff.  And I did learn one of my favorite owner sayings while working there – “without the short term, there is no long term.”

Despite their good points, however, it was clear that just like other large corporations, the business lost considerable traction due to the inefficiency of non-owner focused actions.  Executives manipulated results to maximize their bonus payouts.  People stole from the firm when they thought they could get away with it.  Even the CEO was squirreling away money during good time to take fliers on high risk projects, hoarding earnings to sustain performance through economic downturns.  These and many other actions were still very much oriented toward their own interests – let the owners be damned.

 Another Inspirational photo.

Another Inspirational photo.

A real mess

Another one of my employers had substantially larger problems with non-owner-oriented actions.

This firm, the largest one I ever worked for, had a huge bureaucracy that, to a large extent, appeared to exist primarily to server internal interests.  Requirements were invented in one staff area (one not related to the business basics of selling, producing, invoicing, collecting, and a little accounting) and then imposed on other departments.  The connection to the interests of the shareholders ranged from remote to non-existent.

Decision making at this employer focused more on how things impacted one’s career than how they impacted the bottom line.  Owners (shareholders) rarely entered into the picture.  That’s not to say the people were bad, they just didn’t see how they were connected to the ultimate success and failure of the enterprise, and as a result their decisions tended to default to their own parochial interests.

Not surprisingly, this company was eventually assailed on all sides by smaller, more nimble competitors.  Ultimately, after years of bleeding cash and market share the company sought bankruptcy protection.  It continues to live on, but a shadow of its former self.

While there were a number of factors that led to the company’s ultimate demise, the inefficiency caused by employee’s failure to act as owners was a major contributor.

Why smaller is better

As an owner, I can’t let things drift -- at least not important things.  If that means putting in extra effort today -- we do it.  In a small firm it isn’t difficult to decide to work on that bill collection today, and let the website project wait for a while.  And I can make the right decision for the company without having to worry about how I'm being judged by anyone else.

I can also easily see the impact of any effort on the short term and long term bottom line.  As a result, the basics are attended to, while anything beyond them is continually subject to a “go/no-go” evaluation.

When I worked for big firms I was hardly extravagant when it came to spending other people's money.  But still, I spent a lot more than I do now.  At all of my employers, we earned high salaries, rarely tried to travel inexpensively, thought nothing of purchasing costly office appointments, went on lavish retreats, and the list goes on and on.  All of this was justified in the name of teamwork/looking like a serious company/attracting top talent, or whatever other excuse we could come up with to rationalize the expenditures.

Destroying value

At one point (before my time), one of my employers decided to purchase and run a number of their distributors.  Distribution companies looked like nice little businesses to the company – each of which was independently owned and operated by a small business owner.  The thinking by the big company was that through economies of scale, the firm could further boost distributor profitability.

 Inspirational photo #3

Inspirational photo #3

What actually happened was the exact opposite – spending spiraled out of control.  The managers running the distributors hired too many people, bought brand new vehicles, carried too much inventory, and took too many credit risks.  The businesses actually performed significantly worse for the company than they did when independent.  Eventually the company sold off the distributors -- many to the managers who were running them.  Not surprisingly, many of the expenditures they "needed" when part of the big corporation quickly became unnecessary luxuries.

The businesses thrived as small companies serving the interests of their owners exclusively, but languished under corporate ownership.  And after they were sold off, they generally returned to their former state of excellent performance.

Summary

Failure to act as an owner is a major source of inefficiency in large corporations, one that is rarely present in smaller competitors.  The presence of this wastefulness helps small business owners to level the playing field when competing against their larger rivals.

Posts in the “Corporate Inefficiency” Series (Chronological Order)

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If you are intrigued by the ideas presented in my blog posts, check out some of my other writing.

Novels:  LEVERAGE, INCENTIVIZE, DELIVERABLES, HEIR APPARENT, PURSUING OTHER OPPORTUNITIES, and EMPOWERED.

Non-Fiction:  NAVIGATING CORPORATE POLITICS

Here is the cover for my latest novel, EMPOWERED, which was released in ebook and paperback versions on October 12, 2014.  EMPOWERED is the story of newly hired division president Colin Jensen, and his investigation into unexplained performance problems in the shipping department of TruePhase Chemicals division.  The story is set in Indianapolis during a blizzard, and takes its inspiration from the television series Undercover Boss.  As always, there are a few plot twists that I hope will surprise and entertain the reader.

My novels are based on extensions of 27 years of personal experience as a senior manager in public corporations.