Hidden Profit Part 2: Bureaucratic Profit

One form of hidden profit is bureaucratic profit, which is what keeps bureaucracies going.

The familiar example is a government bureaucracy that survives on taxes. But, bureaucracies can crop up wherever there is a flow of cash to sustain it like businesses, charities, churches, trade organizations, governing bodies and so on.

A bureaucracy is a group of folks that don’t necessarily add value to the organization, even though they are expert at making it look like they do.

When you scratch past the surface, what they contribute to the success of the business is elusive. But, they are masters are filling their calendars to look important and busy, being engaged in meetings and claiming credit for successes that “couldn’t have happened without their input.”

I can’t tell you how many times I’ve seen such folks leave organizations and the organization didn’t miss a beat without them.

It kind of reminds me of that moment in a musical, just after a big song and dance, where the characters go on to the next scene and act as if the big song and dance never really happened, like it took place in someone’s head.

The organization keeps chugging. Sometimes, the remaining bureaucrats reminisce about a departed bureaucrat’s big song and dance, that’s the main mark they left — stories of their song and dance.

When I’m feeling a mischievous, I like to interrupt these remembrances with something like, “Yes, he was a character, but do you have any examples of what he did to move the business forward? The revenue trajectory seemed to remain on course during his career here and has remained so since he left.”

Bureaucrat jobs exists more for the bureaucrat than for the organization. They might be interested in the steady income the job brings, the title it gives or the way the job can help them build their resume so they can get to the next rung on their career ladder.

Over years and decades, these bureaucracies become entrenched and tough to spot because the value they bring is assumed and there’s nothing to disrupt or put into question that assumption. It’s just assumed the company needs a VP of such-and-such, because it has had one for the last twenty years. Nobody has had to do a true cost-benefit analysis on the position, so it keeps going.

Bureaucracies are only threatened when there’s a massive disruption to the flow of cash that sustains. I can’t say for sure, but I assume Eastman Kodak had a massive bureaucracy before smartphones made the film and photo paper industry nearly go poof and the cash flow that sustained it also went poof. I would also venture a guess that many of the folks that were part of that bureaucracy, found other bureaucratic profits elsewhere to survive on.

The key point of this post is to introduce the concept of bureaucratic profit so you can recognize it.

There is a big spotlight on bottom line profits in our society while hidden profit, like bureaucratic profit, avoids detection.

Put another way, we often hear how bad it is for investors and founders to earn profits, but don’t hear much about all the folks that skim the bureaucratic profit before what’s left makes it to the owners, with the notable exception of CEOs.

CEOs aren’t the only bureaucrats that deserve attention. SVPs, VPs, and Directors in company management are common positions for bureaucrats, as well as boards of directors.

If innovation isn’t easy, you’re doing it wrong

After some time working in mature companies it occurred to me how difficult companies make their innovation.

There is more action in just getting ideas through the political and operational hurdles. Ideas compete for executive approval and company resources. Ideas that win executive buy-in are then treated as if success is a fore drawn conclusion.

That’s how it worked at one of my former employers. My group went to the executives each year during planning with a list of 10 ideas to have them pick the 2-3 they wanted to try.

One year, we had a new CEO from a company with a healthier innovation culture (though he didn’t know it and neither did I, at the time).

We presented our 10 ideas and sat there with an awkward silence. He broke the silence after a bit, “So, what do you want from me?”

“Which 2 or 3 should we try?”

He responded, “Is there a reason you can’t try them all? I don’t know which one is going to work. Figure out ways to try them, even if on small scales, to find out.”

That completely changed how we approached our work. While he was there over the next three years we tried lots of stuff and found a lot of success. We spent zero time on the politics of trying to get buy in and almost all of time trying to figure out how to market research, proof of concepts, pilots and tests to figure out what would work for customers.

I now call this the ‘discovery innovation culture.’ It has some basic underlying principles, like the chances of success of any one thing is low, so try lots. Also, an ounce of customer reaction is worth 5 pounds of executive politics.

Sadly, I don’t think he knew the impact his innovation culture had on the business. He also did the typical CEO, top down ‘5 point plan’ like his predecessors and when that failed to make an impact, as most of such plans do, the board soured on him.

Ironically, the month after he left, the board approved rolling out one of the projects we discovered under his discovery innovation culture. It had a major impact on the business. He didn’t get a lick of credit for it.

It wasn’t his idea. It was a crazy idea that wouldn’t have seen the light of day in the political innovation culture. But, he didn’t stand in its way when one of the field leaders wanted to test it, like his predecessors would have.

Thinking back, I think he could have bought himself more time as CEO if he recognized what was happening and told the Board, Look, when I got here the innovation pipeline was bureaucratic and anemic. Innovation is the way to grow, but you have to be extremely lucky to grow if your pipeline only has 1 or 2 projects in it at a time. No wonder you have been struggling. I’m going to change that, but it’s going to take 3-5 years to see scalable projects coming out the other end of the pipelin. This is how we did it at the company I’m from and it works. Be patient.

After he left, his replacements brought back the political innovation culture.

In the 3 years under him my group alone rolled out about a half a dozen things that has stuck with the business.

Since he left about 10 years ago, the business has been going sideways and they’ve just been tweaking the stuff we rolled out. The energy has gone back to the politics of getting executive buy-in rather than just trying stuff and nothing new has come of it.

When I see organizations that are struggling to stay relevant, I tend to see the political innovation cultures that result in anemic innovation pipelines that usually do not produce enough successes to keep the business ahead of its evolving competition, which is innovating at faster rates in more discovery innovation cultures.

Hidden Profit: Expenses are profits for someone

We usually bucket profit as what’s left over after paying all expenses. We neglect that those expenses are also profits for somebody.

Huh?

Consider an organization that doesn’t operate for profit, like REI Outdoor. It’s organized as a co-op, which is owned by customers who have signed up to be members (which is a lot like a rewards program at other businesses).

Since REI doesn’t earn a profit, you’d think it’d charge less.

It doesn’t.

Why? Because it has the same costs as any sporting goods retailer like costs of goods sold, real estate, labor, marketing, shipping, distribution, executive compensation and utilities.

Not being for-profit doesn’t change any of that.

While we don’t usually think of salary as a profit for the employee, it is. It may not be exorbitant profit, but it’s enough to keep them showing up.

What about the CEO? Google says he make $3 million a year. Pretty good for a guy who runs a co-op. Would you consider that he profits from REI?

In my view, profit is something that you would be reluctant to give up. Most of us would be reluctant to give up our pay, even if we don’t make $3 million, so we are profiting from what ever pays us.

The point of the post isn’t that REI may not be all it’s cracked up to be.

The point is to consider that more than just owners of for-profit companies earn profit. We all do.

With that lens, the world looks different as you will see profits in more places than you did before and places that we don’t typically associate with profit-seeking. For example, you will see it in charities, government, churches, schools, trade organizations, sports leagues, awards shows and all sorts of governing organizations like US Soccer or USA Gymnastics and even in mountain bike trail building.

Certainly, there could be more than monetary reasons for being involved such things. You might be an outdoor enthusiast and you really dig working at REI because of that. That’s cool. But, my guess is a lot fewer folks would show up to work for REI if they paid half or a third of competing retailers.