The Rebel Allocator

by Jacob Taylor

What we focus on is what differentiates us. Every morning, ask yourself this question: ‘What’s the one thing I could work on today that if I did a good job, it would make everything else easier, or maybe even unnecessary?’

Revenue minus expenses equals profits. Sounds sensible, right?” He paused for the group of nodding heads. “Well, it’s not! It is completely backwards. It should be taught: Revenue minus PROFITS equal expenses.”

“Not a bad guess, but you’re wrong,” Mr. X said. Swing and a miss. “Here’s the filter we use: Will this expense go toward delighting our customer? If the answer is no, then we’re ruthless about cutting it. We call these non-strategic expenses because they don’t advance our strategy of making the customer happy. We’ve found these expenses to be like fingernails; they always need trimming.”

“We also have something we call strategic expenses. These expenses advance our strategy of delighting the customer. For strategic expenses, we seek to outspend the competition by a long shot. Strategic expenses build a moat around our castle so the customer only wants to do business with us.

“In general,” Mr. X continued, “there are three ways to make the brand triangle bigger. Be the cheapest. Be the most convenient. Or be the best. Good companies aim for at least one of those objectives. Great companies find a way to achieve two. Doing all three is a rarity.”

Unfortunately for accounting, that which is important, can’t always be measured.”

“That’s right,” he said. “In this analogy, your return on invested capital is your form. It shows you how well your product or service fits with what consumers want. Only after you have proper form as demonstrated through sufficient returns should you attempt to add the extra plates of growth and scale up.”

“At every juncture, he’s looking at his various investment options and trying to pick the smartest one. Even if the answer is to wait for a better menu. How can you make too many plans if you don’t know what opportunities the future holds? You’re limiting yourself by pre-deciding today what the best option is ten years from now.”

“Here’s a good one,” he said. “Never trust pitch books put together by investment bankers. It’s funny--they can give you precise numbers for what a business will earn ten years into the future, but they can’t tell you what their own business will earn next month. That reminds me of a story.”

Writedowns, restructurings, and layoffs represent failures of past decisions, of bad capital allocation.”