The Strategy Tax

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The Daily

Scene: the board room. You’re presenting a new idea for investment. Your CFO is concerned. How much will it cost? How many FTEs will you need?

It’s predictable, but not unreasonable.

What is unreasonable is the asymmetry of continuing with business as usual. Doing the same thing as last year requires no preparation and little effort. But it represents the largest hidden cost of all big companies.

The cost of status quo
This hidden cost is the tax you are paying for your current strategy. It’s the cost of not taking a new opportunity, or passing on an acquisition. Since it can’t be immediately quantified, it gets ignored.

Identifying your strategy tax is hard. It poses the question how to account for things that have not yet happened. That sounds impossible, but a budget is supposed to be just that too. Except of course it isn’t. It’s cognitive dissonance stemming from the finance department. Budgets and forecasts are, at best, partially wrong. But a map which is half wrong becomes all wrong if you don’t know what part of it can be trusted.

You know that part where you just extend whatever you did last year into the following budget year? It’s wrong (and lazy). Your 10% growth multiplier is enough to not cause your CFO to choke on their morning coffee, but small enough to not matter if you miss it. Nobody ever got fired for buying IBM. Nobody ever got fired for projecting 10% revenue growth either.

Budgets have no answers
What to do? Stop looking to your budget for answers about the future. It’s not in there. Instead, file a strategy tax form to your CFO annually. It should state what it is going to cost if you do not change what you’re currently doing. You’ll need to guess, but you’re doing that in your budget anyway.

Things like meeting calculators are crude, but serve the purpose of illustrating an otherwise hidden cost. The absence of action has a cost that must be shown. Compare that cost to the investment cost and the board can favor the bold. Today they favor the ones who play it safe. And without knowing it, they pay a hefty strategy tax while doing so.

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4 Comments

  1. In my experience, the whole process of making big strategic changes is extremely challenging, even outside of budgetary arguments. There almost always needs to be a dire sense of crisis that nearly forecloses the current path, before the organization collectively is willing to consider other options. This is (ironically) easy to do when the business is obviously on fire. But much harder to do when the core business is doing fine, and the argument for change is based upon an estimated “opportunity cost/strategy tax”. What makes the entire discussion difficult is also that unlike larger firms, smaller firms can’t make lots of small bets to see what works. Typically, smaller firms can make 1~2 side bets, at most. This increases the chance & cost of these strategic failures, making these discussions even more challenging…

  2. Pingback: Two Types of Strategy Tax – Björn Jeffery

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