We’ve written a lot in these blog posts about the power of leadership economics and how important it is to be spiky—to concentrate all your resources on a few critical battles to overwhelm your competition. We’ve also noted that most incumbent companies have a lot of trouble with this. Instead of constantly trying to free up resources from activity X so they can redeploy them to build leadership in activity Y, they spread internal investments around more or less democratically, budgeting an annual 2% to 3% bump for everybody.
The problem with this is that by trying to be good at everything, it is difficult to be great at anything. Yet leaders of large, complex companies continue to budget this way because the internal battles for resources can be fierce and leaders are reluctant to penalize teams that are working hard, even if their businesses show less promise than others. Eventually, of course, the cuts must come as mediocre parts of the business wither. And when they do, the effect can be brutal. Managers who are used to getting a regular 2% bump each year inevitably feel like losers when leadership shifts resources to others. The bigger your budget, after all, the more important your business must be, right?
As my Bain colleague Fred Reichheld pointed out in a recent blog post on LinkedIn, it doesn’t have to be this way. “What if a company considered a team’s sacrifices just as important to its mission as a team’s achievements?” he wrote. “In that scenario, hard-working employees and managers would be heroes for doing more with less. What if having a smaller budget was as much a sign of professional success as a large one?”
Reichheld, who is widely considered a lion in the field of loyalty economics, notes that insurgent companies with a strong founder’s mentality tend to take this approach, affording them powerful advantages when it comes to customer loyalty. They earn deep devotion from customers because their leaders constantly shift cash to the initiatives that meet their customers’ most pressing needs, rather than hoarding it or returning it to investors. And because they reward employees who find ways to help simplify to redeploy, they focus the whole organization on delighting customers, which also adds up to higher loyalty scores.
Founders of insurgent companies understand this implicitly. The challenge is to resist the urge to democratize the budget and flatten out the spikes as they grow.