by Duane Deason, founder and President of The Efficacy Group and author of “Operationally Svelte: Manage Costs to Increase Profit and Enhance Performance“
I’ve seen it time and time again: a C-suite that desires growth and innovation adopts a strategy of appeasement. These executives believe that if they provide the organization with whatever departments or teams request, it will ensure strong results. The requests are almost always pricey and time-consuming in the form of more personnel, major projects, and new technologies.
The outcome of such appeasement is an organization that is not optimized for success. Instead, it leads to an accumulation of costly bloat that only serves to degrade performance. The long-term result is higher costs accompanied by declining revenue growth and innovation. Worse, once bloat takes hold, it is difficult to lose. It is an unfortunate truth that growth and innovation can seemingly be lost overnight, but the harmful elements of bloat, waste, and inefficiency are incredibly sticky.
Consider why startups and small companies consistently innovate and grow faster than their behemoth competitors, despite the behemoths hiring a bevy of great talent and flooding research and development with capital. Ironically, it’s the very flood of resources and capital that diminishes their competitive advantage. If you took the same personnel from a successful startup and dropped them into a megacorporation environment, their effectiveness would plummet. A lean environment is a much more consistent producer of results. To repurpose the phrasing of the famous quote about greed from the movie Wall Street: Lean is good. Lean is right. Lean works. Lean clarifies, cuts through, and captures the essence of the evolutionary spirit.
Perhaps costs are not your concern, and you’re not buying my argument that managing costs better will enhance performance. A strong economy, rising revenue, or ample capital gives you the impression that managing spending isn’t a priority. That’s great, and perhaps for some period of time, you will outrun or outspend your problems. I would argue that you need to position your company for all types of weather, and it’s not unusual to need a storm to realize that your roof leaks. My word of caution is that reactionary cost reductions differ substantially from effective cost-management strategies developed and implemented over time. Reactionary cost reductions can cripple an organization, whereas effective cost management can position a company to best weather the ebbs and flows of the economy, revenue fluctuations, liquidity variations, and competitive threats.
Somewhere around the $100 million revenue mark, waste and inefficiency typically gain a foothold. Prior to that, companies tend to better manage how they spend their money. They have a culture of cost awareness and an efficiency that is intrinsic in smaller teams. These companies generally have good alignment in objectives and strong communications. Most of all, they simply have fewer costs to watch. But again, around that $100 million revenue point, most companies start allowing cost inefficiency to creep in. It may not be sudden, or even noticeable, but it’s happening. Over time, departments build silos, an abundance of technologies becomes difficult to manage, and administrative bloat gains traction. Among the many problems this brings to the company are elevated spending and waste.
Business books warn about this cycle and say to avoid it by staying nimble, focused, and efficient. I’m all for it. While effective management can delay and lessen the onset of bloat, the issue becomes inevitable as a company grows. It is akin to human aging: you can delay it, but eventually, you’re going to show the signs. Simply put, it’s hard to avoid the persistent expansion of cost inefficiencies as your company grows. I’ve made my living based on that reality, as have many others in my field.
After a series of incredible accomplishments and the accumulation of unprecedented wealth, Elon Musk became an increasingly polarizing figure. However, before his foray into politics in 2024, he did something that caught the attention of many executives, whether they admired him or despised him. After purchasing Twitter in 2022, he claims to have reduced the headcount by 80 percent and the costs in general by 67 percent. When he started down that track, most business leaders were sure the company would collapse under a deluge of outages and operating failures from such drastic and sudden cost reductions. After all, what company could survive such severe cuts? We waited and waited, but the company didn’t operationally collapse as anticipated. You can question all sorts of other aspects of Musk’s judgment, including his clumsy approach to politics, lack of impulse control on social media, and alienation of advertisers and customers, but it’s difficult to deny that he was able to dramatically reduce costs at Twitter by levels not thought possible while maintaining operations. This woke up a lot of corporate leaders, who realized their own operating structures might be far from optimal—and they were likely correct.
Private equity firms have been successful, to some degree, because of the inherent inefficiency within companies that I described. I don’t hold out the private equity industry as perfecting cost management and streamlining operations, but I do respect that it is committed to building value in organizations as quickly as possible. This value can come through accelerating revenue growth, consolidating companies, or reducing costs. If a private equity firm can’t accomplish at least a couple of those elements, then it won’t make much of a return when exiting the investment. When it comes to reducing costs, it instills an expectation and mandate for improved efficiency. A private equity firm outlines a strategy for improvement before it even buys a company, and this strategy includes creating an environment of fewer administrative hurdles and reduced layers of management. It also instills a robust and comprehensive process for weighing the risks and rewards of new initiatives. You can see why, despite being in an oversaturated and highly competitive business segment, private equity firms still produce strong returns. In some ways, it’s an industry built on the idea that most larger companies are not operating efficiently or reaching their full potential.
*excerpted from “Operationally Svelte: Manage Costs to Increase Profit and Enhance Performance“
Duane Deason is the founder and President of The Efficacy Group. His early career was with PwC followed by starting his first business that provided financial support for companies undergoing transactions. After selling the business, he assumed the role of CFO at one of his former clients that was doing the typical titanic after the dot.com bust in the early 2000s. It was during that time as CFO that Duane fell in love with cost management. The feeling of saving a company from certain bankruptcy felt more rewarding than the prior acquisitions and initial public offerings that he had supported.
