There is an 80’s business guru named Bob Fifer who consulted with some of the well known investors of the time. In his book, much of which is outdated, both literally (“computers are a waste of money”) and culturally (see below) he mentions a really valuable concept – Strategic vs non Strategic costs.
Strategic costs are those costs that “clearly bring in business and improve the bottom line. Typical items in this category are the costs of salespeople, advertising (if it’s working!) and commercialisable R&D”.
Non strategic costs are all other costs.
Fifer used to split his whole P&L costs into those two buckets and his insistence at all times was:
“We will outspend our competition for strategic costs, and spend this money in good times as well as bad”; and
“We will ruthlessly cut non-strategic costs to the bone”.
While at Fordhouse we don’t believe the second is a feasible strategy at the extremes these days like it might have been back in the 80s (a decade of corporate excess), clearly an improving ratio between the two sets of costs indicates an improving picture, particularly vs competitors.
Fifer recommends zero based budgeting as a base requirement but goes on to mention a need to be ‘suspicious of every single non-strategic cost’ such that the burden of proof is always on the continuing existence of the cost, rather than its removal.
Another way to look at this is, with a fixed profit margin, every penny spent on non strategic cost has the opportunity cost of a penny not being spent strategically (which penny will result in more than a penny in future revenue). On that basis that penny of unnecessary cost can be very expensive indeed.
As you can imagine, particularly in the domains of sales and marketing, it can be hard to know what is actually working and what isn’t. So an unwavering commitment to measuring ROI at the granular level is required in order to ensure strategic costs really is strategic.
Our view at Fordhouse is that this cost distinction can be better understood by UK SMEs and, accordingly, a continual process of improving the ratio between the two can build an enduring competitive advantage against your competition, who are unlikely to have their eye on the ball.
And ultimately, what gets measured gets managed.