Book review - Double your profits in 6 months or less

It is getting quite tiresome to do one post a day, 4 posts done and 86 to go. Better done than perfect will be the motto.

Double your profits in 6 months or less

The founders of 3G Capital sure has an interesting story. 

Starting with a small brewery in Brazil they managed  through a series of mergers to take control of the largest brewery in the world, Anheuser-Busch InBev. With backing from Berkshire they went on to take control of giants such as Burger King and the now merged Heinz-Kraft. 

How did they do it?

They have taken cost cutting to a whole new level, and as Munger puts it "are probably the best in the world at making companies functioning better at a lower cost"

The book "Double your profits in 6 months or less" is a required readings for all managers at firms controlled by 3G capital and therefore a must read to understand how you undertake effective cost cutting. 

Here are my key learnings from the methods evangelized in the book:

1. Strategic and non strategic costs

The book has very simple categorization of costs as follows:

• Strategic Costs
• Things that clearly bring in business and improve the bottom line such as sales people, advertising and commerciable R&D
• Non-strategic cost 
• Necessary to run the business but do not clearly bring in more business 

Rules:

• We will outspend our competitors on strategic costs in good times as in bad
• We will ruthlessly cut all non strategic costs to the bone

2. A very strong bias to saying "No"

In order to succeed in cutting the non strategic cost to the bone the author prescript an unwavering suspicion of every non strategic cost. It is very important to start with the belief that all non strategic costs are unnecessary, the burden of proof should be in justifying the cost. There are no sacred cows and you as a manager needs to assume that all costs can be eliminated unless proven otherwise. 

The first mistake that managers make is being too cautious in cutting costs. Cut first ask second - the comforting thing about cutting cost is that if you make a mistake, someone will always tell you. 

I believe a strong bias for "No" is a quite sound policy as we have the following natural tendencies in an organization:

1. Man with the hammer syndrome - For a man with a hammer, every problem looks like a nail. 
• For instance if you are a e.g. an HR manager you are naturally biased on the importance of HR. You of course see huge value in e.g. improved HR-systems to enable better workforce tracking and planning.
2.  Deprival superreaction syndrome -  A clear natural tendency towards cost cutting
• The Mungers once owned a tame and good-natured dog that displayed the canine version of Deprival Super Reaction Syndrome tendency. There was only one way to get bitten by the dog. And that was to try and take some food away from him after he already had it in his mouth.

3. Extreme Organizational Focus 

A management that adapts this philosophy will have an unmatched organizational attention on increasing profits, cutting costs and eliminate wasted time. 

• Every ounce, every fiber, every dollar, every minute of our organization we focus on realizing or potential and making a profit
• Every other dollar and minute will be ruthlessly stamped out
• When you eliminate costs or bring in a new customer you are helping to make a great company, when you sit in a meeting or fiddle with technology that no one will buy you are helping to sink the company

4. Create scarcity

Always keep resources very scarce because that is the only way for people to soul search on what is value creating or not. Always set deadlines in the very near term, by this people eliminate the non value adding tasks from the activity.

5. Meritocratic system, incentivize heavily on profits

Rewards & promotions will be based on performance, not seniority, likability or anything else. There will be a very wide spread of rewards, as wide as the difference in performance. 

You need to pay well so people will feel that they share in the benefits of creating a highly profitable business. Need to be tied to performance or the whole system will come tumbling down.

6. Cost cutting tactics

He lays out several cost cutting tactics in the book, such as:

• Employee 
• New hires - Say no until they are screaming, this drive inefficiency out of the system
• Reductions - About one third of white collar employees can be made redundant in an average company. Be most ruthless with your own internal staff and support functions
• Categories for "low hanging fruit" purchasing costs
• Computers, software, capacity utilization of computer systems
• R&D - Scrutinize each spending category 
• Every day expenses (Travel, Furniture, Office supplies, Maintenance contracts, Subscriptions, Phones etc.)

• Set arbitrary non-negotiable stretch budgets (e.g. office supplies etc.)
• Make them come ask the boss
• Anyone who wants to spend money in this area needs to contact you first and ask permission.
• Focus on small costs
• Sends a strong message. CEO should let go of his own office to send a strong message. 
• You be surprised of how big savings you can make
• Streamline your meetings and reporting
• Eliminate as much as possible of internal reporting
• Make decisions with as few people as possible
• Make your meetings very short - 5 min can be sufficient for a decision. 30 min almost always is
• Never call a meeting to discuss, only call meetings to decide
• Stop off sites meetings

Overall it is a good book and well worth a read. However, the author goes too far in some instances, for instance proposing to not pay your suppliers (many will not notice) or underpay what you have agreed since they might have no choice than continuing working for you. That is in my view border line stealing and such lack of integrity and honesty is certainly not something to model.

Does the system work and does context matter?

I think the success of 3G capital makes it quite clear - it works. 

However, I got the sense that the author was seeing this as a universal approach. I am very suspicious to a one size fits all in most business matters. Also here I believe context matters:

Looking at 3G capital they have focused on quite simple consumer goods businesses (such as Heinz Ketchup), which I believe is optimal for implementing this kind of methodology. Although many points here are valuable for all businesses I think the feasibility and ease of implementation differs a lot. 

Some quick and high level thinking on the key parameters for this?

• Complexity off the business
• The more complexity you have the more risk for errors and difficulty discerning the essentials from the waste. 
• Easiness / risk of screwing up - if it is very difficult to screw up in the business you can move forward milk the approach very boldly 
• How would you screw up the ketchup-making by cutting white collar staff at Heinz?
• The bargaining power of the employees
• It must not be fun for an organization to undergo this medicine. If the competition for talent is high in the industry and many employees are difficult to replace they can vote with their feet or stop the initiatives by threatening to leave
• Of course much easier to do in US than in France or Japan, where the Union could basically put a stop for any headcount reductions. 
• You need the right persons in charge
• Not to empathetic people pleasers

BR / RQ