The Power of Productive Spending: Spending Smarter, Not Harder
There is seldom an operational review that I do that doesn’t yield findings that there is too much spending in certain areas and not enough spending in others.
Not enough?!
Not enough.
After countless reviews of small, medium and large professional practices (accounting and legal), a topic I consistently discuss with owners and leaders is productive spending.
The term ‘productive spending’ comes from the public sector, although I loved the functionality of the phrase that I started using it in the context of for-profit privately-held business.
I define productive spending as expenditures that yield an appropriate return in the context of the business’ current and future needs.
While most businesses focus on current needs, many essentially cannibalize their future needs by not considering them in how they spend today.
I will illustrate using a couple of scenarios based on various real client experiences.
The first is an amalgamation of a few similar engagements into a ‘type of firm’, and the second is a common case for ambitious, high-growth firms.
1. “We have record profits – what’s the problem?”
This firm was very proud of achieving record profitability over the last few years. They were very confident operations were in great shape and I didn’t have to spend a lot of time on the review.
It turned out they miscalculated.
After stumbling on an issue here, and another issue there, it became clear that I needed to dig deeper.
And with their support, I did.
Upon a full review of their finances and operations, it was clear that the record profits they experienced were not fundamentally driven by increased outputs, new services, a pricing strategy or really anything intentionally strategic but rather it was on the back of significant underspending in a number of key areas plus strong sector-wide performance.
Key unproductive spends translated into adverse impacts across a number of areas:
Technology: Their environment was a barely operational patchwork held together by essentially popsicle sticks and tape. Every time a new need arose, the answer was the lowest cost option. Employees were not actively speaking up about usability challenges because there was no track record of feedback being actioned, and the lack of feedback from employees was interpreted by leadership that the IT environment is, more likely than not, functionally ok.
Key personnel: There were functional and structural gaps across departments which were deliberately not filled as a cost containment measure; this was straining the firm’s infrastructure and undercutting culture. Key employees were plugging the gaps and not speaking up.
Skill gaps: Key positions in charge of the firm’s operations were held by personnel who did not keep up with developments and modernizations in their functional areas of expertise (including new processes, technologies, thought leadership). As a result, they were not contributing at the level that the business and its key stakeholders needed.
Risk management: the skill gaps and key personnel gaps noted above translated into a less-than-ideal risk management function, meaning there were gaps that were leaving the business exposed.
Silos: There were low levels of collaboration across management; everyone did their job but they did not take into account the impact their work had on other departments. It was resulting in inefficiencies, productivity loss, and outputs/service levels which were mostly adequate as opposed to high-quality.
Succession planning and documentation: There was a very cursory focus on succession planning of tenured management roles which left the business very vulnerable. There was little to no documentation of key processes (and where it did exist it was outdated) so the dependency on some key personnel was entirely unproductive.
Internal program spending: It was low to non-existent and it didn’t help help workgroups and departments to build relationships which were necessary to create a sense of connection, belonging, and a level of ‘stickiness’ for employees in an otherwise hot market for talent.
Now, these were some areas where underspending was hurting the business. The flip-side is that there was excess spending in other areas, including:
Personnel costs: due to underspending in technology (above), the default for remedying process or performance issues was hiring more people. This, combined with skill gaps (above) in existing key roles as well as the presence of organizational silos (above), resulted in significant overtime and additional pay as employees tried their best to plug the gaps and smooth ineffective processes.
Recruiting costs: given the lack of internal program spending (above) and key personnel gaps (above) - among various other issues - there was excessive turnover, which was resulting in extraordinarily high costs of recruiting, onboarding and training.
Remedial costs: with a risk management function (above) that was allowing things to fall through the cracks and a virtually non-existent succession plan (above), the firm was incurring excess costs to remediate issues which were, in many cases, preventable or at minimum, foreseeable or mitigable.
It was all connected in a cycle of unproductive spending.
The leadership was shocked at the findings. How could they have missed all of that?
On the surface, they saw the business humming along. They had not connected the dots that the drivers of performance were either not sustainable, or not adequately attributable to a sustainable competitive advantage.
As the saying goes, ‘a rising tide lifts all boats’ but a receding tide reveals more.
If the tide were to recede, it would reveal all these issues and likely more. Leaving these risks unaddressed was putting the firm in a precarious position.
The good news is that with a sober second set of eyes, the firm’s leadership was able to connect the dots that the various challenges they were seeing across the firm - which originally appeared to be isolated and not connected - were in fact associated with their ‘unproductive’ spending mindset.
The solution wasn’t to spend more, but rather to understand the drivers of performance, identify which spends were productive and which were unproductive, and align them with the firm’s goals and objectives to ensure they continue to be a sustainable enterprise and can continue to serve clients for decades to come.
How did we help?
Performed an operational review that correctly and succinctly highlighted the key issues and their impact on the firm in the short and medium term.
Encouraged leadership to recognize the implications of the current state and prioritized areas that needed attention most critically.
Presented a comprehensive overview of how decisions in one functional area were having an impact in another – essentially connecting the dots across the business.
Created a restructuring plan which included the redrafting of some positions, realigning responsibilities of others, elevating those in the current org structure who were under-utilized while adding key talent to supplement what was missing - all while keeping the overall personnel spend materially consistent.
Performed deep-dive on their revenue stream and identified opportunities for top-line growth; after all, if they were going to make investments for the future wellbeing of the business we needed to understand where there was untapped potential in the firm’s revenue generating capability.
Created and implemented risk management processes and procedures to manage existing issues, as well as detect future ones with enough runway to mitigate or resolve as appropriate.
Created and implemented key controls and reporting mechanisms that allowed leadership to shift their thinking towards what’s best for their firm of the future - aligning where they are today with where they wanted to go tomorrow.
2. “We are spending to our needs”
Another firm for which I did an operational review was confident that their operations were solid and they had very specific areas that they needed me to address.
After all things were working, the firm was growing and people were happy and productive.
As the review proceeded, it became clear that even though they were not penny-pinching, their operating expenditures did not align with their ambitious growth vision.
Because they were moving so quickly, they needed to consider how a given spend will scale to the next phase of growth and expansion.
By focusing only on today’s needs, they were finding themselves re-doing, re-selecting, re-configuring, and re-hiring in an endless loop as the requirements kept changing and the firm kept growing. This strained and destabilized operations while taking precious resources away from their most important objectives.
How did we help?
Worked with the leadership team to get clarity on exactly where they wanted to take the firm and structured their roles and efforts toward these objectives.
Reviewed the firm’s financial position and overall spend for return-on-investment and alignment with their goals and objectives.
Designed a restructuring plan for their team, which included streamlining roles and elevating high-potential and high-skill team members to more value-added positions.
Implemented processes and controls to reduce friction that existed in the firm while managing control risk.
Applied project management processes and discipline to the firm’s upcoming suite of projects, and structured plans to execute on them including prioritizing highest impact to lowest impact.
Created and implemented a control and reporting mechanism that allowed leadership to monitor how the firm’s operations were aligning with their goals and objectives.
Like most things, a one-size-fits-all approach to financial and operational management doesn’t exist.
And if someone tells you there is, it’s likely not a good idea.
While these two illustrations are somewhat extreme in the number of underlying issues discovered, they are not unique.
This is why our clients experienced tangible value in having access to an experienced, multi-disciplinary and unbiased expert to help identify the root causes of seemingly disparate symptoms, and then craft and help implement solutions to address immediate issues, as well as to position them for the future.
To discuss how we could help you or your clients make sure spending is productive to the firm’s needs and goals, contact us.