Monday, October 13, 2008

Culture of Thrift

One of my mantras as a business unit manager and as a CEO was the importance of creating an organizational culture of thrift.  A lot of CEOs pay lip service to cost control, but don't really run their organizations with thrift as a fundamental value.  I think that is a terrible mistake.
In organizations that are succeeding, there is the tendency toward carelessness in spending. It's not outright, intentional waste; rather, it is just a willingness to let things slide and an assumption that it's not worth the pain to micro-manage everything. And so, the myriad of little expenditures run together into a flood of budget-busting costs. Conversely, running a thrifty organization means actually looking at every dollar that is being spent and thinking about the value that dollar of spending is generating in return.
Thrift is not simply cost-cutting. Many times, cutting costs is just not wise. It constrains the organization and prevents growth. But anyone who has managed a medium to large organization will attest to the fact that a lot of money gets spent on things that don't really matter to the success of the company. 
When I was younger, and dumber, I used to think you could create simple bonus incentives for managers to cut spending. But that didn't work -- managers would just say no to any project, regardless of how vital, in the interest of bonus maximization. That's where the culture of thrift came in. Instead of making the dialog about cutting, you shift the dialog to "how can we derive the most benefit from the smallest expenditure." 
Here's a great example: in the summer of 2006, Nanea Reeves and I assumed responsibility for the online platforms at Electronic Arts. I won't go into the details, but trust me -- at the time we took over, it was a mess.  We had to make a very sharp break with the past. Unfortunately, there was already a large team in place, a lot of spending in the pipeline, and a lot of risk aversion to going a radically different direction. Yet, everyone acknowledged that the platforms were broken and EA's future competitiveness would be compromised if we carried on with the existing plans.  Stalemate.
The typical way things go at EA (a company that doesn't have a trace of the culture of thrift in its DNA), you would figure out the product features and then bargain with your boss about budget. Nanea and I didn't do this -- we applied our culture of thrift thinking to the problem. We looked at the current budget and said, "How do we get what we need without any additional spending -- just by using the earmarked dollars in the budget?" We could do it, but it required firing a large number of people who were not useful to our strategy -- perhaps up to 75% of the employees in the group. It required outsourcing. And we explicitly put on the table the end of our department at the end of our project: when we finish, we go away. No empire building. No busy work. No inertial spending.
We got resistance at every level -- while nobody wanted to expand the budget to cover our new strategy, at the same time the EA culture fought us to retain unnecessary employees, continue funding quixotic projects, and not rock the boat. I kid you not: the then-CEO of EA actually interceded to question the wisdom of firing one of the low-level producers, because "he heard she was good." That's how unpopular a culture of thrift can be in an organization that is used to wanton spending. Ultimately, we prevailed, and on a recent earnings call, the now-CEO of EA actually spoke about our new "Nucleus" platform as a bedrock competitive advantage of the new, improved EA.
That's the essence of the culture of thrift. Do more with less. In this environment, it is the skill set that will separate the winners from the losers.


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