“Victory belongs to the most persevering”

- Napoleon Bonaparte

Thought Pieces

“Size is the enemy of performance to a significant degree.”

This was Warren Buffett speaking (perhaps ruefully) at the Berkshire Hathaway shareholders’ meeting a few days ago in Nebraska.

We face many challenges as we increasingly become a knowledge economy with the need for more brains and less brawn. Our world is less certain owing to a number of factors.

Like price deflation. In 1980 a GE fridge cost the consumer in the States $1200, by 2000 it was down to $700 and today it’s around $500. Our world is being transformed by falling prices, increased competition and the difficulties of scaling businesses.

Like the challenges of sheer size. Just consider the headcount of some of the UK’s biggest companies and institutions: HSBC 266k; Tesco 476k; NHS (England) 1.4 million. Imagine trying to get your head around managing any of those.

Like big culture issues. Especially imagine managing the NHS where a negative culture has been embedded for a long time. Matthew Syed reflects on the challenges it faces in his book “Black Box Thinking” and compares it with the aviation industry where the safety records continue to improve. The legendary black box (actually it’s orange) has helped the industry scrutinise everything that goes wrong – jet hull loss rate has improved to one accident per 8.3 million flights in 2014. At the NHS in contrast there’s a history of cover up, denial and blame on bad luck rather than an admission of human error when things go wrong. Put it in tabloid terms – pilots admit fallibility; doctors claim infallibility.

Like the urge to cut cost (often with blunt tools). Huge businesses that don’t have “black boxes” often get to a certain giant size and then seem to get stuck into a spiral of cost cutting. Over the past 12 months cuts at HSBC, IBM, Ford, BA, British Gas and now BHS have hit the headlines.

Open warfare has been declared on cost with cost cutting strategies including:

  • Rewriting employee contracts
  • Outsourcing whole functions like HR and Finance
  • Offshoring to cheaper economies
  • Inshoring to Wales and the North East when offshoring gets too expensive
  • Zero based Budgeting – making every function justify every penny they want to spend on the basis they start with nothing
  • Arbitrary top down cutting
  • Using procurement to renegotiate all supplier terms (there’s a wonderful comment on procurement from the astronaut John Glenn: “As I hurtled through space, one thought kept crossing my mind: every part of this rocket was supplied by the lowest bidder”).

But isn’t the real role of business about growth and success and, if you can’t do that yourself, get someone else to do it? That’s what Warren Buffet thinks anyway… hence his alliance with 3G. When Berkshire Hathaway and 3G took over Heinz for $23 billion and then took over Kraft, putting the two together and creating the world’s 5th biggest food company, they embraced sheer scale.

But the concrete overcoats of cost will come home to make even them groan it as it always does to all big companies. Always. Because size is the enemy of performance and there are only two ways out of the fix – acquire or cut. Because by the time they’ve got really big the innovation flame seems to have gone out in big companies. And the trouble with cutting is you can only fire someone once.

The Goliath businesses of the past are struggling to cope as they’re currently structured. Because when you are looking for quiet conversations exploring possible solutions and flexing creative muscles the last thing you need is scale. Accenture, for instance, is in the brain business but with over 370k employees we don’t hear people calling it creative or subtle. It just gets things done. Specifically in the areas of discreet advice the need for profound experience and wisdom is a prized asset but even more valuable is the nimbleness and “turn-on-a-sixpenceness” that comes with a smaller, focused operator.

Creativity and guerrilla smartness tend not to be found in crowds. And that’s why adroit and nimble turns out to be the friend of performance to a significant degree when you need to move quickly and quietly.

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