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.

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