Somewhere along the line I picked up a keen appreciation of cost control and the notion that a penny saved is worth even more than a penny made. My view has always been that cost saving should be the start of any effort to grow a balance sheet and that a penny saved can compound over time and support a company’s expansion to the moon. It can add key percentage points onto your margin and allow a firm to drive volume and the resulting top line profit.
Having worked for and with a dozen businesses over the last twenty years it has become clearer and clearer that the firms that can successfully manage their cost lines are dramatically more successful in the long run. These firms tend to spend a huge amount of time on cost control; developing key structures and strategies to deliver equivalent (or superior) products and services at a significantly lower cost than the competition.
Brian Conlon’s First Derivatives was always exceptional at cost management and buying a dollar’s worth of services for 50 cents. Wombat too, was a tightly run ship made from the same stuff. Buying effectively was in our DNA, as was having a key focus on building a team where the average fixed salary was at least 20% less, per FTE, than comparable firms in the industry (interestingly, the benchmark was often First Derivatives). More recently, I’ve had the pleasure of working with one of the leanest (substitute cheapest!) entrepreneurs I’ve ever met in the form of Adam Ewart over at SendmyBag.
These though are the exception as many organisations I’ve encountered simply don’t appreciate cost control and are what I would term “spenders”. A number of the legacy components of the NYSE restructuring, including SIAC and AEMS, provided excellent examples; the latter boasting some of the most expensive office space on the planet at the time – though that’s for another post and another day.
In my mind these “spenders” possess a corporate DNA that gets a kick out of spending money. It can take many forms; lavish office space, a penchant for hiring expensive staff when a graduate with the right attitude would be a better medium term fit, building empires where status is based on the number of people reporting to a manager rather than the profitability on the business line, spiralling executive pay alongside plummeting profitability, or very often just draining any profits out of the business and suffocating growth by leaving huge holes in the balance sheet.
In aggregate, this type of DNA destroys great businesses and can be difficult to control. As we’ve discussed on here previously, spending “Other People’s Money” (i.e. the company’s money) can be a lot of fun and highly addictive.
Below is a memo I sent to the NYSE Technologies management team in April 2009 while we were in the midst of restructuring that business. The backdrop of course is the crippling credit crunch of 2008 and one of the most extreme recessions we’ll see in a generation.
I appreciate that many people will see some of the views in the memo as extreme but I thought it was worth sharing:
From: Danny Moore
Date: 27 April 2009 10:48:27 BST
To: NYSE Technologies Management
Subject: MEMO: Management Checkpoint – “Numbers” & “Delivering more with less”
All,
A quick briefing note on the management checkpoint presentations next week.
The first point is that the NYSE Technology management team, Garry, Mark and Roland will all be in attendance; so this will very much be an open forum and we need to project the image of a tightly managed and coordinated group. We are going to make a change in that people will only attend specified sessions (rather than have everyone at every session); but we should anticipate that Garry, Steve, etc, could sit in any particular session.
There needs to be a very heavy focus on Q1 numbers and milestones in the presentation (as per the format of Ben’s first sheet).
We will be applying the universal rules of any well run business;
- Costs should be under budget… and in the current climate, ideally well under budget.
- We need visibility into the top 2-3 cost drivers for each group; with the plan for the year and indicators on where performance is against budget.
- Revenue needs to be above budget… and ideally well above budget.
- The key milestones identified back in Feb should have been delivered.
If we can manage our division within these guidelines we’ll be in a happy place – we assume that there was sufficient contingency in your plans to ensure this is the case.
Problems will arise where the numbers fall outside the boundaries – there are two general situations;
- Revenue shortfall… which we expect on a few lines given the unusually nasty business conditions.
- Cost overrun… which quite simply should never occur in a well-managed business.
If there is a revenue shortfall, the onus is on us to demonstrate an equivalent reduction in costs for the quarter to maintain operating margins. Profit or EBIDTA is the goal, so we need to manage to deliver the target even if revenue slips a bit. We need to see each manager doing this within their operations, and Ben & I will also strive to manage the margin across the portfolio of revenue lines. Mike Geltzeiler provided us with a very clear directive; we must hit the target margin, even if there is a revenue shortfall. We achieve this by overcompensating or reducing operating costs.
In short, if your business has missed on revenue, or you think it might miss on revenue, you need to outline the measures you’re taking to maintain margin by reducing costs.
Straight cost overruns are actually much more problematic; it is easy to argue that aspects of revenue are outside management control, especially given the climate (I’m not sure if I buy this personally). However, cost and major cost drivers are measurable, trackable, and tend to fall within the management domain of control, and cost over-runs tend to stem from an accumulation of management decisions and actions. In short, if you were over budget in Q1, or think there is a danger of being over budget in Q2… a) we need a detailed explanation of what happened, b) a detailed plan of action to get things back on track within one quarter, and c) an outline of the measures we’re taking to ensure we don’t find ourselves in that position again.
As I mentioned in my note over the weekend, in 09 we’re not only expected to operate within budget, we’re expected to come in significantly under budget and significantly reduce the run rate. We need to take serious corrective action anywhere we are over budget today.
Finally, “delivering more with less” needs to be the new religion.
We challenge each of you (or ideally groups of you) to bring proposals that will allow us to significantly move the needle on the business by (over)delivering key objectives at a fraction of the budgeted cost. Ideally we’d like to see two to three proposals from each group.
I’ve left my diary open through Friday and will be working this weekend, so can take time to review presentations in advance, talk through any issues, etc.
Cheers,
Danny