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Is it a cost or an investment?

by Stephen Hawley Martin
for Virginia Business
March 7, 2006

Business executives hear proposals almost daily on terrific ways to spend the company's money. But the question for people controlling the purse strings must always be: Is it a cost or an investment?

The key to effective cost control is determining if the money spent would be a cost (for something that would be nice to have) or an investment (for something with an expected return that is critical to success to business). In a turnaround situation, or in a very competitive market, it is crucial that costs be cut to the bone. No "nice to have" spending can be allowed. ROI (Return on investment) must rule the day or your competitors will pass you by.

For example, does entertaining ourselves create a return on investment? Of course not. How about limousines and private jets? Or flying first class? Or, for example, you might ask why the company uses a bunch of different marketing companies? How does that approach help the company sell more products? Just because a marketing executive likes a particular ad firm does not justify having to duplicate efforts and pay twice for the same service. By consolidating, you might be able to get better deals.

William T. Monahan gives an example in his book "Billion Dollar Turnaround: The 3M Spinoff that Became Imation" about a "nice to have" company perk. When he took over the Austin, Texas, group for 3M, it had corporate jet service between St. Paul, Minn., and Austin three times a week. The jets provided a convenient way to get to meetings at 3M headquarters in St. Paul and saved time for the 12 people on the plane each day. But the jet service was a luxury Monahan felt the company could not afford if it was to turn around the Austin operation. The jets also encouraged people to take unnecessary trips to the headquarters. The challenges the group faced were not in St. Paul. They were at the Texas location, around the country, and around the world.

Monahan says scuttling the shuttle was one of the most unpopular decisions he ever made but also one of the easiest. In the very next quarter after the decision, trips to St. Paul went down by 40 percent. So not only were costs reduced, but productivity was increased. Monahan became known as "the Grinch who stole the shuttle," but it was the right thing to do.

While we are on the subject, let's talk about corporate jets. They are an executive perk that insulates executives from the real world. It seems to me that executives need to travel with their salespeople, to see the market firsthand and to stay in touch with reality. Private aircraft and limos set executives apart and reduce effectiveness and hands-on time. They remove executives from their team and place them far from their customers, their field people, and an understanding of their needs.

Your constituencies don't always have to agree with the rationale or like the actions you take. That's goes with the territory of being the boss. Monahan writes about an announced a change in medical coverage, for example. His HR people took the medical programs of the 10 top companies in Minnesota, including 3M, Medtronic and others, and pegged his company's program right in the middle at No. 5. The problem was 3M had a generous positive program that was far ahead of the No. 2 plan. Employees saw there was a significant gap in the medical program that the company had offered as part of 3M and the new program it provided as an independent company, Imation. Employees didn't care if the Imation medical program was better than Medtronic, Honeywell or whomever.

If people are strongly opposed to what a company is doing, they leave (if they are employees) or sell the stock (if they are investors). However, they at least have the information they need to make this decision. Experience shows that if you really tell people the "why" behind a particular decision, these stakeholders tend to give the new strategy a chance and usually end up buying into the idea. But if you dictate to people and don't explain, you end up in a painful situation. You often suffer a loss of credibility and may wind up with a large number of uncertain and indecisive employees whose productivity is going to plummet.

You need to ask, "Is it an expense or is it an investment?" And you also need to be open and honest with your information and rationale for decisions. Then let the chips fall where they may. This approach is the simplest and most effective way to get the organization moving in a positive direction.

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Stephen Hawley Martin is a former principal of The Martin Agency in Richmond and the author of more than half a dozen books including his newest, Lean Enterprise Leader: How to Get Things Done Without Doing It All Yourself. He is editor and publisher of The Oaklea Press, a book publishing business dedicated primarily to helping business executives increase productivity.