When I worked at a USA defense contractor, a legal requirement was that in much of the organization, revenue and costs had to be matched up at a rather fine-grained level—every hour that an engineer worked needed to be matched to a particular revenue stream, likewise every product ordered etc. So if Person X was in charge of a government-funded Project Y to create Widget Z, they would know how much revenue they had and would watch it being spent down via weekly reports delivered to each project manager (and often those were divided further into subprojects with similar tracking). So if there was a big meeting, Person X might well look at the attendees and mentally tally up their various salaries and say “This meeting is costing the project (insert startlingly large number) dollars per minute, so let’s keep it quick, and people can leave early if their part of the agenda is done.” People talked like that all the time. Likewise, if Person X saw that somebody was charging lots of hours to the project and not getting a corresponding amount done, that issue would be noticed by Person X and they would make sure it got resolved, even by revoking permission to charge the project. This kind of thing was really on everyone’s minds.
You could say that the projects were kinda like a bunch of independent tiny firms, and middle managers were like mini-CEOs who could thus be held accountable.
This wasn’t true everywhere in the firm. The firm charged overhead (a fixed percentage “tax”) on all revenue, to spend on janitors and infrastructure and security and upper management salary etc. Those categories thus didn’t have the revenues-matched-to-costs discipline going on. People often complained that the overhead was too high and that this “tax” revenue was not being well spent in various ways. I was too low-level to have any visibility into whether those complaints were justified; it might have just been normal office griping, and not appreciating that APT-proof computer security is a giant money-sucking black hole, etc.
(The particular defense contractor I worked at had ≈2000 employees, but the matching-revenues-to-costs legal requirement applies to every defense contractor including much much larger ones. I don’t know how it plays out in other places.)
Incidentally, I have a family connection to this firm—see this book for the philosophy behind it—which (as I understand it) basically tries to do something vaguely like that for any company in any industry. (COI note—I’m not involved in that firm but do have a financial interest in it.) They’ll take a company’s books, and just match revenues and costs at a fine-grained level. If a couch is taking up 4m² of the 4000m² floor space at the warehouse, then that couch is matched up with 0.1% of the real estate and other costs of that warehouse, and likewise the couch is matched to the costs of however many minutes of salesperson salary were spent selling it, and however many minutes of truck-driver salary and dollars of gasoline were spent shipping it, etc. Then this database will spit out whether selling the couch was net profitable or not, and why. And then the firm sells a bunch of products and services based on using this database to make the company better, or something like that. The biggest surprise to me was that every company was not already doing this—isn’t it the obvious thing to do? WTF do they teach in business school? But I guess not. ¯\_(ツ)_/¯ Anyway, either the above book or its follow-up (I forget which, or maybe both) had extensive discussion of how to make good use of middle-managers in the context of this kind of system. But I don’t remember the details, sorry.
The biggest surprise to me was that every company was not already doing this—isn’t it the obvious thing to do? WTF do they teach in business school?
I wonder how this system would perform if charged with all the overhead costs for implementing such fine-grained tracking? Seems pretty tricky to answer I guess. It requires the counterfactual of not using the system at all.
Companies actually do this and (if done competently) the implementation costs are an infinitesimal fraction of the benefits. Big companies generally already have all the info in various databases, they just need to do the right spreadsheet calculation. A tiny 1-person company could practically do it with pen and paper, I think. You can ballpark things; it doesn’t have to be perfect to be wildly better than the status quo. One competent person can do it pretty well even for a giant firm with hundreds or thousands of employees (but they should hire my late father’s company instead, it’ll get done much better and faster!)
If there’s some activity that the company does that sucks up tons of money, like as in a substantial fraction of the company’s total annual operating costs, with no tracking of how that money is actually being spent, like it’s just a black hole, and poof the money is gone … then the wrong way to relate to that situation is “gee it would take a lot of work to figure out where all this money is going”, and the right way is “wtf we obviously need to figure out where all this money is going ASAP”. :) I don’t think that situation comes up. Companies already break down how money gets spent in their major cost centers.
Or if it’s a tiny fraction of the company’s total costs, then you can just come up with some ballpark heuristic and it will probably be fine. Like I asked my dad how they divvy up the CEO salary in this kind of system, and he immediately answered with an extremely simple-to-implement heuristic that made a ton of sense. (I won’t share what it is, I think it might be a trade secret.) And no it does not involve tracking exactly how the CEO spends their time.
When I worked at a USA defense contractor, a legal requirement was that in much of the organization, revenue and costs had to be matched up at a rather fine-grained level—every hour that an engineer worked needed to be matched to a particular revenue stream, likewise every product ordered etc. So if Person X was in charge of a government-funded Project Y to create Widget Z, they would know how much revenue they had and would watch it being spent down via weekly reports delivered to each project manager (and often those were divided further into subprojects with similar tracking). So if there was a big meeting, Person X might well look at the attendees and mentally tally up their various salaries and say “This meeting is costing the project (insert startlingly large number) dollars per minute, so let’s keep it quick, and people can leave early if their part of the agenda is done.” People talked like that all the time. Likewise, if Person X saw that somebody was charging lots of hours to the project and not getting a corresponding amount done, that issue would be noticed by Person X and they would make sure it got resolved, even by revoking permission to charge the project. This kind of thing was really on everyone’s minds.
You could say that the projects were kinda like a bunch of independent tiny firms, and middle managers were like mini-CEOs who could thus be held accountable.
This wasn’t true everywhere in the firm. The firm charged overhead (a fixed percentage “tax”) on all revenue, to spend on janitors and infrastructure and security and upper management salary etc. Those categories thus didn’t have the revenues-matched-to-costs discipline going on. People often complained that the overhead was too high and that this “tax” revenue was not being well spent in various ways. I was too low-level to have any visibility into whether those complaints were justified; it might have just been normal office griping, and not appreciating that APT-proof computer security is a giant money-sucking black hole, etc.
(The particular defense contractor I worked at had ≈2000 employees, but the matching-revenues-to-costs legal requirement applies to every defense contractor including much much larger ones. I don’t know how it plays out in other places.)
Incidentally, I have a family connection to this firm—see this book for the philosophy behind it—which (as I understand it) basically tries to do something vaguely like that for any company in any industry. (COI note—I’m not involved in that firm but do have a financial interest in it.) They’ll take a company’s books, and just match revenues and costs at a fine-grained level. If a couch is taking up 4m² of the 4000m² floor space at the warehouse, then that couch is matched up with 0.1% of the real estate and other costs of that warehouse, and likewise the couch is matched to the costs of however many minutes of salesperson salary were spent selling it, and however many minutes of truck-driver salary and dollars of gasoline were spent shipping it, etc. Then this database will spit out whether selling the couch was net profitable or not, and why. And then the firm sells a bunch of products and services based on using this database to make the company better, or something like that. The biggest surprise to me was that every company was not already doing this—isn’t it the obvious thing to do? WTF do they teach in business school? But I guess not. ¯\_(ツ)_/¯ Anyway, either the above book or its follow-up (I forget which, or maybe both) had extensive discussion of how to make good use of middle-managers in the context of this kind of system. But I don’t remember the details, sorry.
I wonder how this system would perform if charged with all the overhead costs for implementing such fine-grained tracking? Seems pretty tricky to answer I guess. It requires the counterfactual of not using the system at all.
Companies actually do this and (if done competently) the implementation costs are an infinitesimal fraction of the benefits. Big companies generally already have all the info in various databases, they just need to do the right spreadsheet calculation. A tiny 1-person company could practically do it with pen and paper, I think. You can ballpark things; it doesn’t have to be perfect to be wildly better than the status quo. One competent person can do it pretty well even for a giant firm with hundreds or thousands of employees (but they should hire my late father’s company instead, it’ll get done much better and faster!)
If there’s some activity that the company does that sucks up tons of money, like as in a substantial fraction of the company’s total annual operating costs, with no tracking of how that money is actually being spent, like it’s just a black hole, and poof the money is gone … then the wrong way to relate to that situation is “gee it would take a lot of work to figure out where all this money is going”, and the right way is “wtf we obviously need to figure out where all this money is going ASAP”. :) I don’t think that situation comes up. Companies already break down how money gets spent in their major cost centers.
Or if it’s a tiny fraction of the company’s total costs, then you can just come up with some ballpark heuristic and it will probably be fine. Like I asked my dad how they divvy up the CEO salary in this kind of system, and he immediately answered with an extremely simple-to-implement heuristic that made a ton of sense. (I won’t share what it is, I think it might be a trade secret.) And no it does not involve tracking exactly how the CEO spends their time.