How much business can we expect in this new company if we are successful? And how much front-end investment is then justified?
To grow a business one has to put in front-end money. That money is invested in tomorrow’s profit makers, so those front-end investments will only be costs and no returns, and sometimes for a long time. How does one manage those to maintain cost control? The first thing is to budget these activities separately. I call it the opportunities budget. The second rule, therefore, is to think through what results we expect from these investments in the future and within what time period.
The best example I know is how Citibank became the world’s only successful transnational bank in the heady 1970s and 1980s. The reason was that Citi first thought through how much front-end investment in a new branch could be justified. It thought through what the minimum results in the new territory could and should be. Citibank asked: “How much business can we expect in this new country if we are successful and become a market leader? And how much front-end investment is then justified assuming that the front-end investment must not exceed a certain percentage of the potential results?” And then Citi knew from its own experience how long it should take before this new branch should reach break-even, that is, before it should begin to produce profits.
ACTION POINT: Budget development projects separately. Develop most likely estimates of expected results. Monitor results and adjust expectations accordingly.
Permanent Cost Control (Corpedia Online Program)
Innovation and Entrepreneurship
* Source: The Daily Drucker by Peter F. Drucker