Gregory Milano is founder and CEO of Fortuna Advisors LLCand author of Curing Corporate Short-Termism, Future Growth vs. Current Earnings.
“Would you do that if it was your money?” This is a question I hope you ask yourself and your colleagues regularly, as spending company money as if it were your own is a sign of good stewardship on behalf of the owners of the company.
Many of us have seen waste and inefficiency that would never have happened if the people spending the money had behaved more like dedicated long-term owners. For leaders looking to drive strong business performance, it can drive people to embrace an ownership mindset, which can lead to benefits beyond spending less.
The first advantage is agility. In my experience as a founder and CEO of a consulting firm, I have found that most large and medium-sized companies strive to control spending and minimize waste by establishing spending budgets and allowing people to spend only what is within their budget. budget state. While this approach can help reduce bad spending, I’ve found it can also stifle good spending. For example, when desirable new ideas crop up mid-year and don’t fit in with the approved budget, they’re often shelved until it’s time to discuss the budget for the next year at the end of the year. This makes companies slow rather than agile, which is not ideal in today’s fast-paced business world.
The second advantage is balance. People who manage a profit center must make tradeoffs between revenue growth and the cost of achieving that growth in order to achieve higher profits. Again, it helps to think more like an owner, but in a different way.
Consider choosing between two marketing options: The first option is to spend an additional amount on promotion, such as discounts, coupons, and accessible shelf space, which will yield an estimated 2% revenue growth. If we repeat this three years in a row, we expect about 6% cumulative revenue growth.
If, on the other hand, we invest the same amount in highly effective brand-building activities such as advertising, what would be different? With the absence of sales-boosting discounts and the like, it’s entirely possible that in the first year the advertising option won’t be as effective as promotion, so let’s say the first year sales only grow by 1%. Any executive who chooses to advertise and get a bonus based on profit versus budget would earn less revenue that year because they would have less revenue growth at the same cost. So most managers prefer to spend money on promotion, and indeed, they are paid to make such a decision.
But if it was your money, would you? The key consideration is that for the most part, promotion spending is designed to drive current sales, with minimal lasting effect. The consumers attracted by the promotion are likely to pick a competitor next week if that competitor offers a better discount. But advertising aims to create a positive image in the consumer that goes beyond just awareness by making an emotional connection, and that often sticks. So in year two, with repeated effective ads, sales could grow more — maybe 3%.
And then, by year three, the cumulative effect could be so strong and distinctive that sales could grow by 4% or 5%. The cumulative growth over the three years can be much higher than with the promotion option. In such cases, an owner thinks very differently from a manager trying to beat an annual profit budget.
To dive deeper into this behavioral dichotomy, take a look at how a manager who doesn’t think or get paid as an owner and choose the ad path would be treated in years two and three. We already established that they would earn less in the first year. But the increased growth rate expected in years two and three would be baked into budgets for those years, raising the standard needed to earn a satisfying bonus. The performance would be higher in those years, but so would the budgets, so they are never paid for the success.
I’ve found this to be a common problem for most businesses as all multi-year investments have the payoff for the business in year two and beyond normalized in the budgeting process. Why bother if you just get the same thing in years two and three and have the wage gap in year one?
The third advantage is the culture shift. Getting managers and employees to act like the money is theirs takes a cultural shift that starts with treating them more like owners or partners. I think they should personally earn more if they create more value for the owners, whether they intended to or not. And vice versa, they have to earn less if they destroy value, even if they bog down their budgets with understated sales and profit forecasts.
Business performance reviews should also change in my opinion. Even if we pay people the right way, we won’t get the behavior we’re looking for unless they see non-monetary cues that align with the ownership mindset.
For example, if a business unit expects a return of 30% on an investment, well above the business threshold of 10% return, and then delivers actual performance of 25%, they should be commended. Consider saying, “Well done with this investment – it’s met two and a half times our threshold. Let’s find more of this kind!” The fact that it earns less than projected should be explored to learn more for next time, but it’s important not to stress in a negative way that the actual results are worse than the forecasts or we might hear next time not about such good ideas.
So while the idea of ”pretending the company’s money is yours” makes us spend less, it actually makes us spend differently, and sometimes even more. Getting an entire organization to act this way can be challenging, but it can lead to strong competitive advantages that are difficult to replicate.