The tiny difference that sold 50 million records, and what it means for your business

Business is a tough gig. Fine margins separate the winners and losers.

In two broadly equally-matched companies, success is often the result of something small which gives one party a slight “edge” at first. This compounds over time until one business is top of industry awards lists and the other so far behind, it’ll never catch up.

Here’s three quick examples. Then we’ll get to the 50 million records…

Facebook is currently one of the world’s most valuable companies. But when they started out a dozen years or so ago, was their service vastly better than MySpace, social media’s early market leader?

It was not. Yet today, Facebook is everywhere (perhaps in too many places, if you value your data privacy) while MySpace languishes in some almost-forgotten corner of the internet.

At first, the difference was tiny…and the smart money would have been on MySpace to win. You can read more about it here… Why Facebook beat MySpace.

Then we’ve got General Motors. In the early years of their century-long tussle with Ford over who could claim bragging rights as the US’s biggest-selling automaker, their tiny difference was to offer easy credit terms to people wanting to buy cars, which Ford was reluctant to do. That tiny change to make it easier for people to buy a GM car boosted sales volumes without GM having to solve a single extra engineering problem or make their cars any better.

And VHS beat Betamax, even though Betamax was generally agreed to have been technically better. The tiny difference was that VHS worked out how to put more recording time on a single tape, until movie studios could fit a whole movie on a single VHS tape. By the time Betamax got round to copying this feature, pretty much everyone who was going to buy a video recorder had already bought a VHS-format one and it was “game over” for Betamax.

Tiny differences are talked about more often in the business world nowadays, in no small part due to Dave Brailsford’s approach to leveraging 1% improvements for the British Cycling Team. With his strategies, a team of also-ran’s become world-beaters in pretty short order.

If you’ve made it this far, you might be wondering what all this has to do with selling 50 million records…

Well, those 50 million records (and counting…) were sold by Aussie rockers, AC/DC…

The one tiny thing AC/DC do differently from their industry which has given them a 40-year career at the very top of the music business. AC/DC’s 1980 “Back In Black” album remains one of the best selling albums of all time, outselling arguably more famous collections like Fleetwood Mac’s “Rumours”, The Beatles “Sgt Pepper” and Pink Floyd’s “Dark Side Of The Moon”.

While you might feel that examples from social media companies, the car industry, video-tape recorders and competitive cycling don’t have much relevance for your business, anyone can adapt AC/DC’s “secret technique” to make their business more successful.

And here it is…

When AC/DC make a record, they record it “live” with everyone in the same room at the same time. Many bands record their individual parts separately…sometimes on entirely different continents, not even in the same studio.

You can make perfectly acceptable music by recording each musician individually and stitching the results together in the studio. Most music you hear on the radio today has been recorded exactly that way.

But AC/DC, whose energy-filled live performances made their reputation long before they sold millions of records, recognised the energy they generated when they played off one another in the recording studio, just like they did when they were on a concert stage, gave their music an energy and an immediacy most other acts lacked.

This tiny difference in how AC/DC worked together in the recording studio resulted in “Back In Black” selling somewhere north of 50 million copies, more than just about any other record in history (Michael Jackson’s “Thriller” and The Eagles “Greatest Hits” are about the only albums most published rankings put ahead of “Back In Black”.)

So what’s the business application for all this?

The term “teamwork” is over-used, and often wrongly used, in the business world today.

I’ve only rarely felt part of a team during my working life. “Team” has just become an easier way to refer to a particular group of people – the Sales Team, the Production Team, the Senior Executive Team, and so on.

But in practice, there’s very little true teamwork going on. Most businesses run in a succession of silos with senior executives coming together for monthly meetings where they argue about whose fault it was when things go against them, and scrap for a share of the credit when things are going well, whether or not they had anything to do with making it happen.

Between meetings, however, those senior executives and their respective teams spend very little time with one another.

Some would say it’s more efficient that way. Tasks have been assigned and allocated. KPIs have been set. Bonuses have been tied to meeting objectives. People are often just expected to put their blinkers on and hurtle as quickly as possible towards hitting the criteria that triggers their bonus.

Which, in my view, leaves a major opportunity untapped.

You can’t truly operate as a team with people you never see and only deal with via reports and emails, with only the occasional formal meeting adding a touch of theatre to inter-departmental rivalries.

You get an energy from being together, and feeding off one another that the members of AC/DC, and their ace production team, understood.

When teams get out of their silos, my experience is that not only do you tend to get better solutions, you also find them a lot faster than wading through three or four formal monthly meeting cycles in order to get one department’s pet solution signed off.

And in the Darwinian world of business, as MySpace, Ford and Sony, the inventors of Betamax, discovered, it’s often the fastest to a solution, not necessarily the biggest or the strongest, that wins the battle.

So if you want to get to a solution faster, follow the example set by those best-selling Aussie rockers…make sure everyone is in the same room at the same time. Nobody leaves until you’ve made something you’re proud of.

That’s teamwork.

(Photo by ActionVance on Unsplash )

Are billionaires paying their “fair share” of tax?

Most people, if they’re asked whether billionaires pay their fair share of tax, answer with an emphatic “no!” But whatever your views of billionaires might be, it’s fair to say that some pay a lot more tax than others.

It can’t be because they lack access to top-notch financial advice. Your average billionaire has almost instant access to the finest legal and accounting minds on the planet any time they want to find a way to pay less tax.

Some just choose to work the system to their own personal advantage as much as they can, while others take the view that they should be paying tax in the same way as any of the employees in their business would.

I’m not expressing a moral judgement on that decision, one way or the other. It’s just an observation.

However, this debate has been ignited in the UK recently by the publication of the Sunday Times Tax List 2019, which aims to identify the UK’s top tax payers.

A couple of caveats though.

Firstly, I do understand the position might be different in other tax jurisdictions. All I can offer is a UK perspective on this as that’s where I work as a Finance Director and Chief Financial Officer (or CFO).

Secondly, as the Sunday Times itself acknowledges, their analysis is prepared from publicly available documents so this may well be less than the complete picture of any one individual’s tax affairs.

However their analysis recognises one important aspect…again, under UK tax law…which is that once someone is paid a salary or dividends in those legal forms, the same tax rules pretty much apply to everyone.

Unlike the US, for example, where there are multiple write-offs and exemptions which could significantly reduce someone’s pay for tax purposes, relative to their “headline” pay packet, things are pretty clear in the UK and, nowadays at least, there are very few ways to massage the salary appearing in your publicly available accounts into a much lower number to share with the tax office.

The Sunday Times has also added in the Corporation Tax paid by those companies run by high earners and a few other things as well.

Again, this is a pretty reasonable approach. If you’re running your a business, even a very large one, which you own personally, or perhaps close family members, it’s your own efforts which create the business profits which the Treasury assesses for Corporation Tax.

If your business didn’t exist, it wouldn’t make the profits that get paid in Corporation Tax, nor would it generate the salary payments that will be accounted for under the same PAYE arrangements as every other UK taxpayer.

So, the Sunday Times’ methodology is probably good enough for a “sighting shot” of the top-earners’ tax payments, as long as you accept that, again in the UK at least, every taxpayers’ tax affairs are strictly confidential. The only people who really know the true picture are your local friendly billionaires and HMRC themselves.

Reading the Sunday Times’ article, and a lot of the subsequent comment pieces on it, however, it’s clear that most people don’t understand how the UK’s tax system works.

For better or worse (more on that in a moment), the UK tax system over the years has become much more highly dependent on catching money-flows and removing a slice of those money flows as they pass through the system.

Again, for better or worse, VAT is a good example of that. Most things you buy in a shop in the UK have a 20% VAT uplift applied to them which the shop-owner sends on to HMRC after deducting any VAT they’ve had to pay on the things they bought to sell to you. The “added value” (the clue is in the title) is taxed at the point the money flows through the retailer’s till.

Last year, £125 billion was collected by HMRC for VAT in this way.

PAYE is another good example. If you’re paid a salary, however large, your employer has to account for the tax due direct with HMRC and pay it across on a monthly basis. The tax arises when the money flows from the employer’s bank account to the employees’ bank account so it’s easy to see and track, and there’s no dispute about the value paid across.

Systems like this, which work for many other taxes as well in the UK, use the exchange of money to capture the value that has been created and raise whatever tax charge Parliament, in their infinite wisdom, has chosen to apply.

But it comes as a big surprise to many people that wealth isn’t really taxed at all in the UK. There are some exceptions, but they are relatively minor for your average billionaire, so we’ll leave them on one side for the moment.

And there’s a good reason for that. Just because you’re wealthy, that doesn’t mean you’ve got any money.

I know…sounds crazy, doesn’t it, but it’s true.

Let’s consider a tech founder whose start up has just taken in some early stage funding from a VC or angel investor for a relatively small percentage of their business. If the founder gets £1 million of funding for a 10% stake in their tech startup to find the development of an idea (ie the business itself isn’t selling anything to customers yet), that means the business is “worth” £10 million in total. £9 million of that belongs to the founder, £1 million of it to their investor.

By most measures, someone who owns a £9 million share in a business would be considered rich. But people I know personally in that situation are earning nothing at all or are getting along on something like an average UK wage, currently around £25,000 per annum (on which they, too, pay tax of course) because any cash that comes in, whether from investors, customers or elsewhere, is used to build their business. Most founders don’t get paid unless everyone else is paid first.

So, how would you tax someone who owns a share in their business worth £9 million, but who has to live on, say, £1500 per month, after tax?

If you taxed their wealth at even a measly-sounding 1%, that would be £90,000 a year, or more than three times the income they have to live on each year.

And that assumes the business really is worth £10 million…the truth is that the business might turn out to be worthless, or it might turn into a billion-dollar business. At the time an investor puts their development funding in, there’s no way of knowing which the business will turn out to be.

The rate of tax on a business worth nothing is clearly zero. But how do you tax a business that might be worth billions, but on any look at the entrepreneurial odds is probably, on average, worth even less than its £10 million theoretical valuation, if it’s worth anything at all.

And, on a much smaller scale…in economic terms at least…taxing people on assets rather than income was the thinking behind the Poll Tax (properly called the Community Charge) which doomed Margaret Thatcher’s Prime Ministership and brought the career of one of the UK’s most transformational politicians of the last century to an end.

(Whether or not you supported her, I’m sure we can agree she transformed a lot of things in the UK during her time in office.)

So taxing wealth rather than income is a tricky business. You have no way of knowing what an asset is worth, really, until someone buys it or sells it and money changes hands.

And even if you do assess its value somehow, which was the idea behind the Poll Tax, to make people pay a tax based on the value of their property (an asset) irrespective of how much they earned, that’s not without its own problems.

Some 90 year-old lady living on her own, eking out a state pension in a house happens to be worth £1 million just because she and her husband bought a derelict wreck after the war, did it up, and 60 years later the “in crowd” decide that part of London is a desireable place to live for some reason…how would you tax her?

She’s got no money, but she’s a millionaire on paper.

Some people might say she should sell up, live somewhere cheaper and hand over some tax, but I think most of us would agree that’s no way to treat a 90 year old widow, whether she’s worth £1 million or not. Destroying an old lady’s life memories in the home she’s lived in for 60 years just so you can shake her down for some cash is no part of the values of any civilised society.

And that’s the problem with taxing wealth. If you start putting in too many exceptions and exemptions…even perfectly plausible and reasonable-sounding ones…you’ll end up with such a minefield of complexity that people who are minded to do so will work with their lawyers and accountants to find a way around that. (In a nutshell, that’s how the US tax system works.)

Billionaires the world over would be signing over their fancy London homes to their 90 year-old grandmothers because we don’t make those people pay tax on the value of their home. Designing a tax system which discriminated correctly between 90 year-old widows living in fancy houses would likely be outwith the skills of even HM Treasury’s most gifted parliamentary bill-writers.

So, if you read the Sunday Times article…or perhaps one of the many other articles that followed on from it to say “why isn’t this billionaire or that multi-millionaire on the top tax payers’ list?”, just remember that wealth and income are not the same thing, even though a lot of people think they are.

90 year-old grandmothers, tech founders and the like might have plenty of wealth, but very little income. And, at the end of the day, people can only pay tax out of the cash they’ve got.

The UK tax system isn’t perfect…far from it…but at its heart is the pretty sensible realisation, especially after the Poll Tax debacle, that the most unambiguously fair way to collect tax is to focus most of HMRC’s attention on picking up the money flows in the economy and leveraging a percentage of whatever cash is changing hands into HM Treasury’s coffers.

Of course, some people abuse the system…all the way from tradespeople who work for cash and don’t report their earning for tax purposes right up to billionaires who use offshore trusts and complex tax planning to sneakily move their wealth out of the reaches of their home country’s tax authorities.

But once you accept that people can be wealthy and not have any money because they don’t get much of an income, the UK tax system starts to make a lot more sense.

And it’s also good to see that some of the highest earners in the UK declare their income from salaries and dividends, just like you and I do, when it wouldn’t be the hardest thing for their accountants and advisers to put everything through complex tax minimisation arrangements.

Here, if you being paid a salary or dividends, as declared in your business’s end of year accounts which the team at the Sunday Times dug out for their Tax List 2019, HMRC will be automatically picking up the proper amount of tax as laid down by Parliament. There’s little or nothing those billionaires can do about it.

So I take my hat off to the ladies and gentlemen of the Sunday Times Tax List 2019 for not taking advantage of the tax system the way some others might.

Billionaires aren’t perfect, I’m sure, but at least this lot are playing fairer than most with the tax system. And in a country currently mired in Brexit gloom, I’m looking for positives everywhere I can find them at the moment.

Accountancy…the second oldest profession

We accountants like to joke that accounting is the second oldest profession…which might give you some idea why we’re accountants, rather than stand-up comics.

But ever since commerce became more complicated than agreeing how many chickens I’d need to swap at the market so I could take a goat home with me instead, accountants have been an important part of the economic system across cultures and continents.

From ancient Mesopotamia, through the lives of ancient Egyptians and Babylonians, there were people whose job it was to track what people spent and how much they owed to one another. Some of the oldest documents to survive from antiquity are tax records.

Accountants might not be quite the second oldest profession, but we’ve certainly been around for some time.

Any profession which has been around for some time, though, is in danger of becoming a little stuck in its ways. Which might not matter quite so much if the world hadn’t got a lot more complex in recent years.

So how do you know if your accountant isn’t just trundling along in a way that might have worked perfectly well 20 years ago, but doesn’t quite cut the mustard anymore as we travel deeper into the 21st century?

As the 2010s give way to the 2020s, I believe there are three areas where the “old rules” of the accounting profession need to change and modern accountants, especially Finance Directors and CFOs, need develop a different way of thinking in the face of a new economic reality.

Cost v. Bottom Line

Accountants are used to tracking costs and budgets. It’s often the first thing people think of when you say the world “accountant”. But that’s not enough any more. The key question now is how much of a positive impact an accountant, Finance Director or CFO makes to the bottom line.

Imagine you currently spend £100,000 a year on something. While you want to make sure you’re getting good value for your business’s expenditure, the maximum impact anyone can make on the bottom line with “cost-based thinking” is £100,000.

That is, if you stop the activity completely, you’ll save the entire budget of £100,000 a year. It can never be any more than that, no matter how much time and effort you put in because you can’t reduce any cost below zero, no matter what you do.

But what if your accountant concentrated their efforts making the biggest positive impact on the bottom line…what difference might that make?

For starters, a bottom line-focused accountant might recommend you don’t reduce your £100,000 budget at all, and perhaps even think about increasing it.

Let’s imagine the £100,000 was your business’s budget for customer loyalty initiatives. Everyone knows that it’s much cheaper to retain a customer you’ve already got than go out and find a new customer you haven’t dealt with before.

Slashing the customer loyalty budget (a cost-focused approach) could result in customers becoming less loyal to the business over time, which could in turn both reduce customers’ total lifetime value and increase the sales and marketing costs as the business would need to invest more money to attract new customers to replace the shortfall in sales from existing customers.

Admittedly, if you were only thinking about the short-term, you could probably slash the customer loyalty budget and for six months to a year you might just about get away with it. The loyalty built up in times gone my would probably see you through for a while.

But gradually, for reasons nobody could quite put their finger when it eventually happens, the numbers would start going the wrong way. Customer loyalty would decrease, previously loyal customers would scale back their purchasing and the business’s income would reduce.

By then, nobody would remember that the customer loyalty budget was slashed in half six months or a year earlier. Scapegoats would be found elsewhere when the business bumped up hard against its next crisis. But I guarantee you, the root cause of the next crisis will be the short-term move you made in response to the last crisis.

An accountant who focuses on the bottom line, instead of purely on cost makes a big difference. That’s where your Finance Director or CFO can have the maximum positive impact on the value to your business.

Tangibles v. Intangibles

Traditionally, we accountants have preferred things we can see, touch, feel and count, rather than the “fluffy stuff” like intangibles.

But the world has moved on.

Currently, the bulk of the market capitalisation of the S&P 500 is based , not on the value of tangible assets like factories, trucks and offices, but on their intangible assets. The precise number varies with the stock market fluctuations, but at the time of writing solidly over 80% of the stock market valuation of the S&P 500 companies is not derived from the tangible assets on their balance sheet.

For example, Coca-Cola’s market capitalisation is around $200bn today. But their latest balance sheet showed a little under $10bn in tangible fixed assets – the accounting term for their factories, machinery, trucks, and so on.

As you can see, the value of Coca-Cola is many times the value of its “hard” assets.

Which creates a dilemma for accountants.

Traditionally accountants would focus on things they can see, feel and touch. But if that’s all you do nowadays, you’re not spending any time looking after the assets which account for the majority of the company’s value. Surely that can’t be right.

I tell people that, if 80%-plus of the value of the S&P 500 is made up of the value of intangible assets, a good accountant should be spending at least as much time thinking about those things as they do about the more traditional definitions of the word “asset”.

Whether they’re quoted on a stock market or privately-held, for most businesses, their intellectual property (IP), customer loyalty, brand, marketing assets, track record of innovation and a host of other intangible factors will account for more of the business’s total value to a shareholder or potential purchaser than its traditional fixed assets.

If you want to make your business as valuable as possible, make sure your accountant spends at least as much time focusing on the intangible assets that account for 80%-plus of your business’s overall value as they spend on the tangible fixed assets which nowadays accounts for a tiny proportion of the business value, but which are admittedly a lot easier to count.

Yesterday v. Tomorrow

As a friend of mine puts it, how much time does your accountant spend looking in the rear-view mirror instead of keeping their eyes on the road?

Traditionally accountants focus on events that have already happened…last month’s management accounts, last year’s statutory accounts, the last VAT quarter, and so on.

Now, of course, there is a need to examine what happened last month, last quarter or last year and report on how well the business did compared to expectations. But you’re unlikely to create substantial value for many businesses from purely concentrating on yesterday.

It’s like being a CSI who comes along after the bullets have stopped flying and tries to work out who did what to who. Of course that’s important, but isn’t it better to work in such a way that nobody gets killed in the first place?

In a business sense, that means looking into the future and anticipating problems before they arise, making sure the business’s operating model is well-honed and understood by all, and that the business takes profitable opportunities to grow as they come along.

All those activities build value which is, after all, what anyone with an interest in the business wants.

So next time you’re wondering whether your accountant is adding value to your business, ask yourself how well they are performing against these three tests.

The commercial world has moved on rapidly in the last 20 years. It’s vital for the success of your business that your accountant has too.

(Photo by Patrick Hendry on Unsplash )

The Abominable No-Man

Factories are great places for imaginative nicknames…I used to work with someone who was known as “The Abominable No-Man”.

That probably tells you all you need to know about his positive attitude to life and his communications skills.

And to be fair, that’s a nickname many businesses could probably pinch for their Finance Director or CFO as that’s the reputation that tends to precede us. People think we’re just there to crush their pet projects, moan about people overspending their budgets and rat them out to their boss when they miss their KPIs.

When I started out in the accounting profession, that was pretty much the brief for the Finance Department. But I was really lucky early in my career to work for the finest Finance Directors I’ve ever come across.

He was amazingly successful and, for a relatively young guy, was the Group Finance Director for one of the UK’s largest quoted companies. He’d got there by doing things very differently and he was a great mentor to me.

One of the things I learned from him was that it wasn’t the Finance Director’s job to say “no” to things. It was the job of a Finance Director or CFO to think through “if this is good for the business, how do we make this happen, even though we didn’t plan for it or set aside a budget for it?”

James – my old boss – had a great way of conceiving his budgets and strategic plans which is pretty much summed up by Stanford University Professor Paul Saffo’s “strong opinions, weakly held” mantra.

James was sceptical about anyone’s ability to write a strategic plan or a budget six months before the start of a financial year which would, with any great accuracy, predict the likely year-end out-turn 18 months later.

Which isn’t to say James didn’t do a strategic plan. He did.

What set him apart, especially at the time, was his willingness to change that strategic plan in light of new information, new evidence or new opportunities. He had to hit a margin target and a “cash at bank” target, but as long as he did that, neither the Group Chief Executive nor the City analysts cared much how he did it.

At the time he wrote the plan and set the budgets, James had a strong opinion that he had devised the best plan he could with the information available to him at the time. But if something better came along, those strong views were weakly held, and he devised a better plan instead without being overly precious about the plan he’d prepared a few months earlier.

This was James’s “X Factor” – the skill that, more than any other, set him apart. His nimble approach to running the finances of a large quoted company would set finance teams in many much smaller businesses into meltdown, even today when buzzwords like pivoting and re-imagining have seeped into the business vocabulary.

Even though it’s nearly 20 years since I last worked for James, I still use the approach he modelled for me every day as a Finance Director and CFO. And yet, it’s still a rare approach for a Finance Director to take.

I still see plans which are kept inflexible, unchanging and inviolable long after they’ve lost touch with reality. And, I’ve got to say, for businesses like that, usually the bankruptcy courts aren’t all that far away. Those businesses don’t seek help until it’s too late because they think that “staying strong” and “holding people’s feet to the fire” for their original plan shows the sort of strong leadership people are supposed to admire.

Maybe next time, by all means start out with complete and utter conviction to the plan you’ve just prepared. After all, you’ve done your research, you’ve done an options appraisal or two, carried out some sensitivity analysis and reviewed the risks. At that moment in time, it’s the best plan you know how to write.

But if something changes in your business, or the sector you operate in, make sure those strong opinions are loosely held.

It’s not a sign of weakness to change your plan in the light of new evidence…but it is a sign of monumental stupidity not to change the plan when it’s clear the plan you wrote a few months ago is never going to come close to the new reality facing your business.

Although he never used the term, and may well not even have been aware of it, the greatest Finance Director I’ve ever seen taught me 20 years ago that you ran your business plan and your budgets with “strong opinions, loosely held”.

And, for your business, that’s a darn sight better than being nicknamed “The Abominable No-Man”.

10 business lessons from one of the world’s greatest drummers

Former drummer for The Police, Stewart Copeland, fronted a great BBC 4 documentary the other evening. (At the time of writing, still on iPlayer for another month…don’t miss it!)

I’ve long taken the view that music can teach us everything we need to know about business…but to give myself an extra challenge, I thought I’d forget the rest of the band for a change and today focus solely on the drummer.

Here’s 10 fundamental business truths courtesy of the legendary Stewart Copeland (plus a bonus at the end)…

  1. Even in a short-ish programme, there were a couple of times Stewart Copeland grated on me a little…apparently this was pretty much Sting’s experience too, back in the day. But, even as a big music fan, I learned so much I didn’t know before from watching his programme. (Moral of the story: don’t discount what people you don’t like are telling you. They always know things you don’t.)
  2. Stewart Copeland has an irrepressible enthusiasm for his craft. He’s taken the time to study it, to find out the history of it, to seek out other practitioners of it. (Moral of the story: even if you’re world-famous in your area of expertise, there’s always more to know and more to learn. The greatest drummers, and business leaders, never stop learning.)
  3. Stewart Copeland works really hard. If you watch him on a drum kit, he never stops. His drumming defined the sound of The Police, one of the biggest bands in the world. He had to work twice as hard as most drummers to fill out the sound because The Police were a three-piece band, rather than the more usual four or more members. (Moral of the story: if you want to be successful, hard work isn’t optional.)
  4. The greatest people at any task are those who think differently about the job in hand. Buddy Rich, Keith Moon, John Bonham…and indeed Stewart Copeland himself…all had a very distinctive, instantly-identifiable style. (Moral of the story: the greatest successes come from doing things very differently from everyone else, not just doing what everyone else does 5 or 10% better.)
  5. There’s always a place in the market for something different. In the early years of rock and roll, drummers sat at the back of the band with their heads down, doing their best to be invisible. Then Keith Moon came along and the whole country knew the name The Who’s drummer, even if they weren’t a fan of the band itself. How many other drummers do you know the names of? I’m guessing not many. (Moral of the story: never think “everything has been done already”. It never has been.)
  6. It surprised me to learn that modern drumming started out in the distinctly un-modern world of the Deep South just after the end of the American Civil War. (Moral of the story: there’s always a deeper reason, and a longer history, for whatever you’re grappling with than you think. Problems, and opportunities for that matter, don’t just pop up from nowhere…they started out years ago, barely noticed at the time, and snowballed into the problem or opportunity you’re grappling with today. Pay attention to the little things that cross your path…sooner or later, they’ll become the big things.)
  7. One little invention – the foot pedal for the bass drum – seemingly inconsequential at the time, made the modern drum kit possible. Before that, there was no way a drummer could simultaneously play several different shapes, sizes and tones of drum to engage better with a tune and drive the song the way modern drummers do. (Moral of the story: don’t wait forever for a “big idea” to come along. Continual innovation, and trying to improve even a tiny amount every day is the best way to succeed. A simple lever was all it took to change the world of drumming for ever.)
  8. The segment with Sheila E. (Prince’s drummer and musical director) alone was worth watching the whole programme for. She made her own way as a woman in a man’s world and, I’m sure, wasn’t always met with the support her talent deserved as she climbed the ranks of professional drummers. (Moral of the story: never let anyone tell you that you can’t achieve your ambitions. Give full rein to your talents, and work hard. You can achieve anything as long as you don’t give up.)
  9. Also from Sheila E…what you do between the beat is as important as what you do on the beat. A 1-2-3-4 rhythm quickly gets boring and mundane. Great drummers add light and shade to help tell the story of the song. But she also said it was important not to overdo the “between the notes” playing or you’ll lose your audience too. (Moral of the story: more is not always better. And it’s a matter of art, not science, as to what the optimum balance is, even in something that seems as mathematically-governed as playing 4 beats to the bar.)
  10. Stewart Copeland played with a huge variety of amateur and professional drummers on his programme…from people on the streets of New Orleans to superstars in their own right like Sheila E, Chad Smith of the Red Hot Chilli Peppers, Taylor Hawkins of the Foo Fighters and John Densmore of The Doors. No matter what he was doing with another drummer Stewart Copeland had a smile on his face the size of a barn door. (Moral of the story: if you can find just one activity that makes your spirit soar, do it as much as you can for the rest of your life. Stewart Copeland won’t be going to meet St Peter grumbling to himself about spending too much time on his drum kit…it’s what he was born to do. Find out what you were born to do, then pray for one-tenth of the joy drumming gives Stewart Copeland. You’ll spend the rest of your life with the biggest smile imaginable on your face.)

Final bonus lesson…I got all this (and more, I could probably have written 50 points if I put my mind to it) from watching a TV documentary about very much a minority interest subject on a channel that is itself a distinct minority interest for the British television-viewing public. There’s always something you can learn, even in the unlikeliest places, if you keep yourself open to the learning opportunities that come your way.

If you’re a music nerd like me…or even (gasp!) someone who has no idea what this article is all about, you can see Stewart Copeland “on duty” in this great live performance…

You see, learning opportunities are everywhere if you pay attention to what’s going on around you…and yes, even drummers can give you a lesson or ten about what really matters in your business.

(Photo by Oscar Ivan Esquivel Arteaga on Unsplash)

Commendable ambition or carefree folly…which do your goals sound like?

No sooner have we hung up the new year’s calendar on our office walls than all those magazine articles and social media posts come out exhorting us to set ambitious goals so that we “crush it” (ugh) during the course of the coming year.

Henry Ford famously said “Whether you think you can do it, or whether you think you can’t, you’re right.”

And he’s right. If you don’t think you can do something, odds are you never will.

Less often taken into account, though, is the flipside of Henry Ford’s famous quote – just thinking you can do it doesn’t mean you will.

That’s important for your business because you need to know the difference between ambition and delusion. One makes your business into a worldwide success, the other takes it to the bankruptcy courts.

That’s not to say ambition is a bad thing. Quite the contrary.

I’ve long been a big fan of setting what Jim Collins and Jerry Porras called Big Hairy Audacious Goals (or BHAGs) in their book “Built To Last”. Their idea was that businesses should break out of the year-by-year planning cycle and set a long term direction.

Maybe you want to be the biggest company by sales turnover in your industry. Maybe you want to get 100% 5-star ratings on TripAdvisor. Maybe you want to join the Fortune 500.

Unless you’re already there, or pretty close, these achievements are likely to be Big Hairy Audacious Goals which will take several years to play out, and when you start on your journey, whilst you’ve got the ambition, you don’t know every single step that will take you from where you are, all the way to your destination. (And if you do, it’s not a BHAG, it’s just a business plan for what you’re already capable of delivering. By definition, for it to be a BHAG, you can’t know exactly how to achieve it in advance.)

The system can work well. I spent several happy years as a non-executive director at a business which used BHAGs very effectively to grow their sales income over a number of years.

What this business did well was to have a set of more detailed plans underneath the Big Hairy Audacious Goal…even though they couldn’t map out everything in detail. But if they had a pretty good view of how the next 18 months would play out in the context of a 10 year goal, they had a detailed plan for that and didn’t worry too much about the eight-and-a-half years to follow.

But I also worked for a business which talked about BHAGs and the importance of ambitious goals, but didn’t think things through properly.

One ambitious goal they had was to grow thousands of new customers in a market they had no experience of, and where entirely new channels to market would need to be developed from a standing start.

This wasn’t the world’s craziest idea with a 3-5 year planning horizon. But to the general astonishment of everyone else in the business, the CEO set a 1 year target for this to be achieved.

The rationale was often stated as “we’ve always set ambitious goals around here, and we’re always achieved them, even when people said we couldn’t”.

This wasn’t completely untrue. Company folklore had many examples of “taking on the world and winning” in the past as a result of the CEO’s decision-making.

The Chief Executive had every ounce of the self-belief Henry Ford thought was important, but by remaining completely convinced their vision would unfailingly manifest itself into reality, all they were doing is what financial advertisements say you should never do (“past experience is no guide to the future”).

It won’t surprise you to know that this plan didn’t go well at all. Within 12 months, the Chief Executive abruptly disappeared after missing sales targets for the year by around 80%. Income dried up and, as a result of hiking the cost base on the back of the “certainty” all this new business would turn up, the business quickly got into trouble.

The CEO’s Achilles heel was believing their own publicity. They’d been, in the words of Nassim Nicholas Taleb, “Fooled By Randomness” (the title of one of his earlier books, inexplicably less well-known than his later mega-bestseller “The Black Swan”).

Just because things always had worked, doesn’t mean they always will.

Sometimes, due to random effects…such as sheer good luck in stumbling across a key customer at the right time, a news story that changes people’s perceptions overnight or a key competitor shutting down…even pretty audacious goals can be achieved without much in the way of planning or insight.

Enjoy those moments when they happen, because they can, and do, happen to us all.

But never make the mistake of thinking that just because you set an ambitious goal or a BHAG and it was miraculously achieved in pretty short order that there was a huge amount of causation between you wishing it to happen and it actually happening.

And certainly don’t build your entire business on the assumption that because you benefited from massive good luck in the past, largely outside your control or influence, that you’ll unfailingly benefit from it in the future every time you dream up a new ambitious goal you’d like to achieve.

If you want to make substantial inroads into a completely new market in 12 months or less, involving several hundred thousand marketing touch-points, leading to tens of thousands of sales conversations, leading to a few thousand billable new customers without a specific plan to make that happen…together with suitably qualified, experienced and aligned staffing and resources…sooner or later your luck will run out.

As it did for this business. From headlining in the trade press one day, it ended up an economic basket case the next.

The tragedy was, this was all avoidable. The objective as a three to five year plan was probably achievable, as a one year plan it was suicidal.

If there had been some test marketing, perhaps some idea of how the metrics might work in this new marketplace, the business would have been able to model the resources it needed, and the marketing approach to deliver the ambition. (They still didn’t have enough cash to do it in 12 months, but at least they’d have realised why, on the basis of some reasonably sound information.)

If, rather than increasing the cost base to deal with the “certain” influx of new activity, the business had waited until significant inroads were being made in the customer sign-up process, that might have given the business some breathing room to realise their approach wasn’t working and regroup to start again before the ran out of cash.

In the end, the jacked-up cost base and the non-existent revenue increase was what did for the business…as it does for just about every business which tries this. It’s akin to putting everything the business has on a single spin of a roulette wheel, and there aren’t many people who think that’s much of a strategy for building value.

That said, don’t shy away from Big, Hairy, Audacious Goals, or BHAGs. I’ve seen them work really well.

But the bigger the goal, and the shorter timescale you’re trying to accomplish it in, the greater the risk it won’t happen. Just believing it will happen is no guarantee.

A BHAG for 10 years hence can afford to be a bit sketchy. You’ve got time to fine tune the details in light of experience. An ambitious target to be delivered in 12 months or less isn’t going to happen without a detailed plan, and the right resources in place.

The key for business leaders is to know the difference between commendable ambition and carefree folly. Get those mixed up and you may well not be around long enough to regret it.

(Picture credit: Heidi Sandstrom. on Unsplash )

We should fire him for not hitting his targets…or should we?

Being a Finance Director or CFO means you spend a lot of your time working out what people’s targets should be, tracking their performance against those targets, and reporting any under-performance.

While there are some intellectual challenges to the target setting process, those are generally within the control of the Finance Director or CFO as they are working on a model they built themselves.

What’s much harder to assess is what…if anything…it means when people don’t hit their targets and what…if anything…the business should do about it.

But wait, I hear you say, if someone doesn’t hit their targets, shouldn’t we send them on their way and find someone else who can deliver what we need instead?

If only life was that simple.

Firstly, there’s an underlying assumption here that the person you’ll bring in instead will do a better job than the person you get rid of. I’ve seen this hundreds, perhaps thousands, of times and all I can say is that in a significant number of those cases that assumption turns out to be wildly over-optimistic.

There’s also an assumption that the reason for under-performance is the fault of the individual. This is often overly simplistic. Yes, maybe you have other people who can hit their targets, which in your mind means it isn’t impossible for everyone to do so. But perhaps there are other factors which mean that in practice not everybody can.

In a surprising number of cases, a thorough investigation into the reasons for an apparent under-performance throws up some systems or process issues outside the control of the staff member which means they were never going to achieve the targets which had been set.

Of course, statistics cuts both ways, so just as there are people who vastly under-perform against some sort of average, there will be people who vastly out-perform. That, after all, is how calculating an average works – there will always be some people above the line as well as some people below the line.

So just not hitting a target (which is nearly always calculated as an average of some sort) doesn’t necessarily mean anything at all. I once heard a speaker say that at school he was in the 10% of the class that made the top 90% possible.

It was a matter of fact that he was below the class average, but statistics says that any time you measure the performance of a group of people, somewhere around 50% of them will probably be below the average of the group as a whole, and a broadly similar proportion will be above it.

The degree of variation is the key here.

W. Edwards Deming’s work on statistical control is the definitive manual on acceptable degrees of variation in work performance. I won’t go into the maths in detail here, but in Deming’s book “Out Of The Crisis” he shows how to calculate the level of acceptable variance in a stable system that’s operating under statistical process.

In our modern world full of “knowledge work” this is less obvious than when people are watching over car parts hurtling down a high-speed factory production line. But exactly the same principles apply.

In Deming’s world, the acceptable degree of performance around an average, or arithmetic mean if we’re being statistical about it, was +/- 3 times the square root of the average actual performance. (Please note that whatever you had set as a target isn’t relevant for this purpose as there may be factors affecting the group as a whole, either positively or negatively, which could make any target either too easy or too difficult to achieve.)

When you work through the maths, you’ll realise that the boundaries for acceptable performance are much wider than businesses typically allow in their performance management systems where amounts somewhere between 0% and 5% tend to be arbitrarily used to determine an acceptable degree of shortfall, if any, in meeting targets.

Deming’s view, as one of the foremost management thinkers of all time, is that the responsibility for under-performance is more often down to management’s poor understanding of the laws of statistics and unwillingness to improve the systems and processes used in the business which would raise the standards of everyone working in it.

And if you don’t think that’s possible, have a chat with your front line staff and your customers. I can guarantee they’ve got a long list of things that would help the business run more smoothly, even if you can’t immediately think of anything.

That’s not your fault. If you’re not working on the front line you’ve no way of knowing what that experience is like.

But it is your fault if you never ask the people who do work there how to make things better for them, and, in the long run, for the business too.

So next time someone isn’t meeting their targets what should you do?

Apply a bit of Deming’s thinking, even if just in concept without getting too deep into the statistical modelling, to work out whether the problem is really with the member of staff or with the systems and processes instead, even if other people are somehow able to achieve the targets.

Perhaps without realising it you just got lucky in the employee lottery and ended up hiring a bunch of people who happened to be unusually good performers who somehow managed to get the results you were hoping for in your initial planning assumptions.

More often than not firing people is a very expensive way of trying to solve a problem. Studies have shown that the cost of recruiting and training a new person to replace someone who’s left can equate to between six and twelve months’ salary.

And if all you end up with is someone the same or only slightly better…which statistically is a likely outcome…all you’re doing is loading cost into the business for no meaningful return.

So next time you’re wondering whether to fire someone who isn’t meeting their target, pause for breath. It’s probably not going to help solve whatever you think the problem is.

For sure, it’s harder work getting stuck into the issues and unpicking whatever is getting in the way of people hitting their targets. But it’s the only way to fix the problem for good.

Maybe a few exceptional performers can hit the targets anyway, even with less-than-perfect systems and processes to support them, Building your business model on the basis that every person you hire will turn out to be an exceptional performer is an assumption I’ve seen many business make, explicitly or implicitly. Although I’ve yet to see one where that superficially reasonable-sounding objective was ever their experience in reality.

Mostly those businesses were on a perpetual “hire ’em and fire ’em” cycle which led to enormous hidden costs within the business…bloated HR departments to handle all the hiring and firing, costs for advertising vacancies, reductions in customer loyalty and lifetime value as a result of putting rafts of under-trained, less-experienced new hires on the customer service front line and many other costs that dragged the business down, although they never appeared explicitly on anyone’s budget report. (If they had, someone would have done something about it long before now.)

Don’t be that business. Next time someone appears to be performing poorly, break out a calculator and see how the numbers stack up first. The staff member may well be doing their best in a difficult situation…the problem may, in reality, be something else.

I can’t claim statistics is always fun. But, done properly, I can claim that it helps prevent making the same mistake over and over again without realising it…which has got to be a good move for your business.

(Photo by Annie Spratt on Unsplash )

How not to screw things up like a politician

Grouch Marx once said “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies”.

At the moment, there’s no finer example of this phenomenon than the UK’s Transport Secretary, Chris Grayling. .

On top of a less-than-impressive few months in this role, yesterday he blamed the wage demands by rail unions for this year’s annual price rise in train tickets (BBC News report here).

Yet what the UK rail industry calls “regulated fares”, such as the season tickets which were at the heart of many of yesterday’s protests, are set according to a government formula agreed back in 2003 which has no connection whatsoever to wage rises in the railway industry (more details on the rail fare formula here).

This is important because once you’ve diagnosed the problem, rail unions in this case, that tends to be the problem you’ll set out to “fix”.

That’s not to say rail unions are blameless, or that they are tireless champions of anything other than their own members’ interests…it’s just to recognise that the Department of Transport’s ticket price formula can be in no way related to the wage rates of people working in the railway industry, as it’s not even part of the publicly-available formula for calculating ticket prices.

It’s hard to imagine that the interests of the UK’s long-suffering rail travellers would be improved by the Transport Secretary picking a fight with rail unions due to his lack of understanding of the pricing mechanism put in place by his own department.

Unless Chris Grayling was just playing politics to enhance his own standing within the Conservative Party, of course, which is probably several orders of magnitude worse than just being ignorant about pricing mechanisms for which he is the responsible cabinet minister.

By now, even if you weren’t sure before, I think we can probably agree that if you want something screwing up far more comprehensively than any mere mortal could hope for, the thing to do is to get a politician involved.

The question is how can business people like you and me you avoid screwing things up quite as badly as the average politician?

Groucho Marx was right – the diagnosis of a problem is key. Once you’ve decided what the problem is, that’s probably what you’ll do your best to solve. Get that wrong and the likelihood is that not only won’t you solve your original problem, you’ll probably have created another problem you didn’t have before in the process.

Albert Einstein said that if he was given an hour to save the plant, he’d spend 59 minutes defining the problem and one minute resolving it.

That may be a little extreme, but you can’t hope to find a good solution unless you’re solving the right problem. That’s where most politicians get it wrong – they’re taken in by their own political philosophies and see everything through those distorting lenses.

And, I’m sorry to say, business leaders, including myself, have distorting lenses of our own. Having a preferred view of the world distort our own perception of reality is a natural human characteristic. Everybody has it to at least some extent.

But there are things you can do to find better solutions. And that starts by how well you define the problem, as Albert Einstein said.

That depends in turn on how good you are at asking questions, and that’s a skill you can work on and improve, however good or bad you are at it now.

Research published in the Harvard Business Review set out a four-stage process for learning to ask better questions. In summary, this involves:

  • Establish the problem in as simple terms as possible – “We are looking for X in order to achieve Z as measured by W” is the format the article uses.
  • Secondly, you need to be clear how solving the problem contributes towards achieving a strategic organisational objective. You might think this was self-evident, but I’ve sat in plenty of meeting rooms where people thrashed out how to “solve” problems that, even if they were solved, would be unlikely to have any major impact on the organisation one way or the other.
  • Next, take a look at what your organisation has tried in the past and, if relevant, how other people in your industry have attempted to solve the same, or a similar, problem.
  • Finally, write a problem statement which defines the problem, its proposed solution and the requirements you’re trying to achieve, taking account of everything you’ve learned through the earlier stages in the process.

For the UK rail industry, it seems we haven’t even got past the first stage of defining the problem terribly well yet, but you can do better within your own business quite easily.

The HBR article has some great questions to ask during each stage of the process, but the key to solving any problem is always to cast your net as widely as possible when looking for answers.

If all important decisions are only made by senior executives in a conference room, I can guarantee a substantial proportion of those decisions will turn out to be wrong, or at least sub-optimal.

That’s not the executives’ fault – generally they come up with the best solutions that make sense to them, based on their qualifications and experience.

But usually they don’t have current experience of being a front-line sales person trying to sell whatever the company’s new business model is to a potential customer, or someone in the factory trying to produce against a revised product spec with tools that haven’t been properly designed for the purpose, or a call centre operator who handles the irate customers that call in when the revised product or service doesn’t work properly.

Of course, if it’s a strategic decision involving a large financial investment, senior executives have to make the final decision. To do otherwise would be to abdicate their responsibilities to the business.

But during the problem solving process, and especially the question-asking parts of it, involving as many people as possible, especially from the front-line can make a huge difference to the quality of the eventual solution and the cost-effectiveness with which it’s implemented.

If you want to screw things up like a politician, by all means sit in your conference room and make all the decisions amongst the senior executive team.

But I can guarantee that if your business learns to ask better questions, and involves a wider cross-section of staff than just your senior management team in solving them, even quite big issues for your business can be solved quickly and cost-effectively.

Let’s just hope that one day this might be the way we run our railways too.

The difference between a good accountant and a great Finance Director / CFO

In his play ‘Lady Windermere’s Fan’, Oscar Wilde described a cynic as someone who knows the price of everything, but the value of nothing.

That’s pretty much the difference between a good accountant and a great Finance Director or CFO….a good accountant can tell you what you’ve spent, a great Finance Director or CFO should be building value for your business.

Let me give you an example.

Some years ago I worked for a business which gave all its employees, after a qualifying period of, I think, a year or two, one day’s paid time every month to volunteer for a local community project of their choice.

Out of approximately 20 working days in a month, you might say this initiative “cost” the business around 5% of the salary bill for eligible employees.

The volunteering initiative was in place before I arrived at the business, so I can’t take any credit for it, but in reality it didn’t cost the business a penny. It made much more money than it cost…alongside doing a lot of sterling service for our local community. Here’s just a few of the more obvious benefits…

  • People who volunteer for community projects tend to be naturally enthusiastic, high-energy people who are dedicated to making the world a better place. Their presence lifted our whole business and their continued enthusiasm in the face of adversity brought incalculable benefits when our backs were against the wall.
  • They did their jobs, on average, much better than the rest of the workforce – typically by 10-20%. Nearly all of our high performers were also community volunteers, so they covered the cost of the scheme just through their own natural positive energy and their desire to do a great job for a company that let them volunteer on company time to support their passions.
  • You might be wondering whether those naturally enthusiastic people would have done a better-than-average job anyway, even without the volunteering scheme, and at some level they probably would. But even then, there’s a difference between doing a pretty good job and striving to do the best job humanly possible. The difference between those two levels of contribution is easily worth 5-10% on productivity, output and quality in my experience. By offering a volunteering scheme, we unlocked the “striving” level of commitment.
  • Not only that, but when skills were scarce our very best employees tended to stay with us, even when there was more money on offer from another local business, because they couldn’t get their volunteering time paid anywhere else. Were people occasionally tempted by a few grand a year extra in their pay packet…sometimes yes, but they tended not to last in their new job and often came back because they missed the opportunity to volunteer in their local community.
  • The cost of recruiting and training a new member of staff is somewhere between £20-30,000 a time, according to ACAS statistics. So every person who stayed with us saved the business that amount of money. This easily covered the cost of the volunteering scheme on its own in a high-turnover industry. It also mitigated against the risk that when we recruited a replacement for a top performer, we didn’t get an average (or worse) performer in their place which would have diluted the quality of our workforce as a whole.
  • Without us having to put on an expensive training and development programme, many of our volunteers ended up in management roles with the business a few years down the line. They were, without exception, great managers. The skills they learned while volunteering – how to deal with people, managing tight-to-non-existent budgets, developing their creative thinking and many skills they picked up along the way – made them first-rate managers who we “recruited” without an executive search fee and without the risk that someone who was “good on paper”, or a seasoned interview performer, but not that good in practice, would manage to sneak through our hiring processes and cause more problems than they solved.

I could go on, but you get the idea. The community volunteering scheme wasn’t a cost at all. It generated significant value for the business which more than covered any costs it incurred.

A good accountant could tell you this scheme cost approximately 5% of the salary for eligible employees.

A great Finance Director or CFO could tell you that the community volunteering scheme generated so much value for the business, in both obvious and less-obvious ways, that spending whatever it cost with a smile on our faces was by far the most sensible, and economically valuable, option.

At the very least, any costs were covered by the greater productivity our community volunteers tended to display in their “day jobs”. More likely there was a significant upside to the business as a result of having unwittingly developed one of the smartest staff retention, productivity enhancement and management training schemes we could ever have hoped for.

We learned the value of the volunteering scheme, and didn’t obsess about its cost. Oscar Wilde would have been proud.

Why I hate meetings…and why you should too…

Although I’m an accountant, contrary to popular belief I’m not anti-social. I have no objection to spending time with other people. But because I’m an accountant, I always wonder if it’s possible to do something better, or more efficiently.

Which brings me to meetings…generally a poor way to communicate anything at all…and usually a really expensive way of not communicating it into the bargain.

Despite the superficial benefits of “getting everyone together”, the way most meetings are run in practice makes them an extraordinarily ineffective way of communicating just about anything.

Here I’m not referring just to the proportion of information that people can recall at the end of the meeting…although that tends to be pretty poor, but also the meeting dynamics.

We all recognise the common mistakes made in running business meetings because we’ve seen them so often – the poorly-constructed agendas, the way you know in advance several people are going to deploy an imaginative excuse for not carrying out their actions from last time, the way later items on the agenda are rarely discussed, if at all, and many others.

So many, if not all, meetings don’t score well in the effective communication stakes. But what about cost…and perhaps more importantly the opportunity cost…of holding a meeting?

We’ve probably all done that thing in the middle of a long and particularly boring meeting, where we estimate the hourly rate of everyone sat round the table and note frustratingly that it’s costing £2,000 per hour, or whatever, just for the privilege of being bored out of our skulls.

That’s significant, but usually the straight salary cost is by far the smallest part of the total cost of holding a meeting. The opportunity cost tends to be much more significant.

In case you’ve not come across the term before, opportunity cost is how we Finance Directors and CFOs refer to the “lost” benefits you miss out on by doing something less productive or less revenue-enhancing than you could have been doing instead.

Think of it like this – if you’re currently doing a task that earns £50 per hour, but you could be doing a task that would have earned £100 per hour instead, you’re not making £50 per hour…although that’s what your accounting records will tell you.

You’re actually “losing” £50 per hour (the £100 you could be earning instead, less the £50 you do, in fact, earn). The “lost” £50 is your opportunity cost from carrying out the less-valuable activity.

With very rare exceptions, meetings aren’t about earning anything so just about all of them represent a cost to the business. So straight away almost anything else you could be doing, even if it only earned £1 for the business, would be a better use of your time…at least in strictly financial terms.

Now, there are some meetings required by law. Just like paying your taxes or complying with minimum wage legislation, for example, they’re costs the business just needs to take on the chin.

Under Company Law in the UK, for example, businesses are required to have an annual shareholder meeting to approve the accounts and conduct a number of other statutory tasks. Many other jurisdictions have similar provisions.

So, irrespective of the cost of those meetings, you are legally required to have one in return for the benefits that limited liability status confers. Just accept the cost and don’t worry about it too much if having limited liability is important to you.

And I recognise that a monthly review meeting where key managers, or team members, get together to go over what happened in the last month and what’s in the plan for next month is probably a good idea. It keeps people on track and fully informed about activities they might not come across in the normal course of their day-to-day roles.

Spending a couple of hours once a month to do that is probably advisable, and just a cost of doing business that any reputable organisation will see some benefits from doing.

With that in mind, take a look through your diary for the last month. Quickly tot up the number of meetings you had which fitted into either of those two categories – the legally-required or the monthly review categories.

If you’re like most people, those will be a tiny proportion of your month’s diary hours. But your diary will be full of all sorts of other things, many of them questionable, at best, in terms of making a positive impact on your business.

And this is where the biggest element of opportunity cost comes.

Let me illustrate with an example.

I used to work at a university. Universities are fabulous places in many ways, but they chase reasons to have meetings with all the dogged determination of a drug addict doing whatever it takes to score the next high. There was a never-ending clamour to hold another meeting about some topic or another.

My whole diary, Monday to Friday 9 to 5, was filled with this sort of activity. Culturally you had to attend, but progress on any topic was slow to non-existent Only rarely did anything which happened in one of those meetings have a positive impact on my ability to achieve my personal objectives.

Now, in practice I put in the hours outside the 9-5 to make at least some progress on my personal objectives. Most days I worked at least a 10-hour day, of which 8 hours were taken up with meetings which were largely non-value-adding in terms of my own objectives…or, to the best of my knowledge, anybody else’s.

Put another way, I spent only about 20% of my time doing the value-adding things I was in theory paid to do…almost none of it within the confines of the theoretical 40-hour week I was contracted to work.

This is where the opportunity cost really kicks in.

You see, an hour spent in a meeting instead of doing some value-adding activity wasn’t just worth an hour of my time based on a straight proportion of my salary.

For most of my working week, the only thing I’d have been doing was sitting in another non-value adding meeting instead because that was the culture of the organisation. The opportunity cost of the difference between two similarly non-value adding meetings is effectively zero.

Whereas some of the things I could have been doing instead could have brought in 100x or more my hourly salary to the university.

Even bringing in one extra student paying my university’s standard fees represented an income to the institution of around 540x my hourly salary. If I could bring in 5, or 10, or 20 students in that hour instead, the hourly return on investment goes straight off the chart.

That’s why the “cost” of the meeting, that is the total of the hourly rates of the people sat round the table, is a small fraction of its total cost.

Unless the meeting is attended solely by people who have no other value-adding activity they could be doing instead…which, if true, might suggest it’s time for a review of your organisational effectiveness…odds are the real cost of any meeting is some multiple of everyone’s salary cost.

Sometimes, people will just be covering their hourly salary cost…by no means a bad outcome. Sometimes they might earn a multiple of 2-3x the salary cost. And, in most businesses, if you take the sales team off the road for the day to hold a meeting, that’s easily 100x the mathematical hourly rate of the attendees given the sales meetings with clients the attendees could be having instead.

That’s why, with a limited number of exceptions noted above, I don’t like meetings.

If we started reckoning the cost, and opportunity cost, of our meetings and factor that into our decisions about whether or not to have a meeting, most businesses would have a lot fewer meetings.

Businesses should always ask themselves, once they understand the calculations, whether the activity they’re trying to carry out within the confines of the meeting stands a reasonable chance of covering at least the salary costs of those attending, and ideally the opportunity costs too.

Once you start to think like this, you’ll quickly work out that it’s rarely a good idea to incur a lot of cost to fix a minor problem…especially when you remember that meetings only rarely “solve” anything anyway. Find another way to deal with those.

I highly recommend hiring good people and giving them the discretion to make sensible decisions – even if they make a mistake now and again, that will still cost less than having dozens of people sat around a meeting room table for a couple of hours to “thrash this problem out”.

So think carefully next time someone says “let’s have a meeting to discuss x”.

Unless fixing “x” is worth at least the hourly salary rate of the meeting attendees, and ideally some multiple of that to cover the opportunity cost of whatever attendees might have been doing with their time instead, the economically correct answer is to find a better way of spending your time than having yet another meeting.