Focus, simplicity and managerial control.
Physicists hold on to a number of ‘universal constants’. They are fixed and reliable – things that you can build on. Our ‘Home Truths’ provide a similar sound platform for businesses and the world of work. First derived in the late 1980s and building on our direct observations of how companies are run and how managers behave, they attempt to capture some dependable thinking on management, profit, costs and people.
Profit should always be the first charge against sales. This determines the costs that the business can afford.
Any business that does not constantly emphasise profit will ultimately make a loss.
Any organisation, system, procedure or individual left undisturbed for three years will become inefficient.
Managers should treat all overhead costs as variable. If volumes fall, overheads should be cut: if volumes rise, overheads should be held.
People tend to elaborate rather than simplify their work.
Human resources functions (tend to) cluster on tasks that have a minimal impact on profitability.
Any activity managed only on technical criteria will be unprofitable.
The optional extras demanded by people can double the costs and timescale for any development.
Home truths are neither universal nor exhaustive. They were used in early managerial briefings for senior executives at Hanson.
There are many ways to skin a cat. One of our earliest clients, a successful entrepreneur in the United States and UK, cited four similar managerial ‘tenets’ in his memoirs. We have found these to be useful also:
- ‘decentralisation’ – empower managers by pushing responsibility down to the line level, that is, the profit centre
- ‘return on investment’ – apply this measure almost to the exclusion of other metrics or ratios
- ‘systems and procedures’ – with a decentralised model ensure there are formal policies and operating procedures, accompanied by regular internal audits
- ‘profit sharing’ – profit centre managers should share in the profits realised after they have paid an investment charge to the owner of the assets they are managing. And then have the discretion to further distribute profit to other workers in the business.