April 30, 2019 6 min read
The opinions expressed by the entrepreneur’s contributors are their own.
The following excerpt is from Benjamin Gilad and Mark Chussil’s book The New Employee Manual: An Unconstrained Look at Corporate Life. Buy it now on Amazon | Barnes & Noble | Apple books | IndieBound or click here to buy it direct from us and SAVE 60% in this book if you use code CAREER2021 by 04/17/21.
What is Obesity in Business? When companies consolidate, grow and prosper, they accumulate “fat” in various forms: large cash reserves, surpluses in departmental budgets at the end of the year or a bureaucratic maze of business areas, product lines, partners and subsidiaries. What began as a lean and mean organization is now a fattened calf of a company.
Of course, nobody talks about gaining weight. Instead, executives use Corporate-Speak to talk about “increasingly in …”, “securing our future with additional vital …”, “offering a wide range of solutions”, “meeting the needs of new customers” and the keystone, “Maintaining our leadership position in a wide variety of industries.” In human terms, we say, “This company has money to burn.”
Related: How Not To Measure Your Way Down
There is no clear financial measure of corporate fat that can be taught in a business school. Some small reserves of fat become evident towards the end of the annual budget cycle, when departments and functions rush to spend the remainder of their budget so that their budget is not cut in the next year. They know these expenses aren’t strictly necessary because if they were, they would have already spent them. But these expenses are just peanuts.
We call silly, unnecessary, or outrageous spending or investment “free flow of fat (along the lines of free cash flow, a finance concept)”. The free flow of fat is clearly evident in investments and expenses that defy competitive logic or economic principles, but CEOs are publicly welcomed as essential for “positioning the company for the future”.
Free flow of fat is the classic warning signal that a company is approaching a heart attack or crisis. And the classic home remedy after the crisis is to lose weight significantly by laying off a third or more of the workforce.
Today Apple, Microsoft, Cisco, Alphabet (Google’s parent company) and other giants have hidden enormous reserves of cash in tax havens outside the US. There is absolutely nothing illegal about it. But here’s a prediction: when you have that much free fat, you’ll be spending like the proverbial sailor on shore leave or like an unlucky lottery winner.
However, having plenty of cash is not necessarily evidence of free fat. Using cash to make strategic acquisitions at a reasonable price, experimenting with companies with good competitive strategies (not just wishful thinking), or even paying dividends to shareholders, isn’t wasteful. Holding profits as cash in low-tax countries to save taxes can continue to serve the interests of interest groups.
Also, inventory size is not necessarily an indicator of potential waste, depending on the size of the industry. For example, pharmaceutical giants Amgen and Gilead Sciences together held around $ 60 billion in June 2017, but since buying the rights to just one wonder drug can cost a fortune, that money isn’t necessarily a sign of sloppy competitiveness.
So we conclude: corporate fat would be a good predictor of decline … if only we could measure it.
Peter Drucker is said to have said: “If you can’t measure it, you can’t do it.” What he actually said was make sure you were measuring the right things. Measuring the wrong things because they can be measured is an example of wasteful activity – and a small, clot-sized portion of free fat flow. Another reason is to bring a famous basketball coach or former president to an annual sales meeting for a motivational speech at $ 10,000 per motivated second. Bring a less famous person; You are motivated!
Related: Does Your Company Have Positivism Disease?
We cannot directly measure corporate fat and related wasteful spending, but we can describe how it has evolved. In the entrepreneurial phase, companies have very little “fat”. There’s just enough to have coffee in the morning and rent a bike for the founders to ride from their garages to the nearest Kinko office. Kinko itself couldn’t afford a lot of fat as it served entrepreneurs with little free fat flow. FedEx bought Kinko’s and renamed it FedEx Office. FedEx is relatively fat free as its founder is still the boss. This is a great stage to work for a company as outsiders have real influence, see real action, and make real impact.
When the company grows quickly and, in particular, expands globally, “fat” grows with it. Our carefully controlled double-blind studies suggest that the BMI at this point in time represents around 10 percent of the total budget and is mainly spent on more elaborate business trips and dubious customer entertainment. Some of that fat is converted into free coffee or free snacks for all employees, or even the chance to see an A-list movie star at a launch party. But don’t let the fun fool you: this fat could better be used to keep the company competitive, fund your projects, or plan for the long term.
If the industry consolidates, the big player, one of the few remaining, has considerably more “fat” – around 17 percent on average. By the time the convergence is complete, with the big established companies looking alike and chasing each other’s tails, corporate fat will be the highest, peaking at around 31 percent.
In business school case discussions, teachers often point to a company’s inability to adapt to change as the reason for its decline. But this explanation does not go far enough. Why can’t the incumbents adapt? Because they got too fat to move quickly. You see the change; They’re just stuck in the door frame. Don’t let this grow your business.
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