Make Business Variability Your Friend

Life, nature and business are variable. They rarely travel in straight lines. They are organic. They move up, down, and sideways often on timeframes that you cannot predict or control. Trying to control, manipulate and insulate yourself from these movements can be frustrating and usually unsuccessful. This makes me think of the mutual deception among public companies and Wall Street analysts that public company growth rates and earnings can be smooth and predictable. How stressful to try and predict it all and inevitably be wrong, particularly when your personal credibility and reputation are on the line as the public company CEO and CFO.

On the other hand, I have found that being at peace with variability in your business provides freedom and a healthy perspective on it all. Rather than energy spent trying to control the variability, one’s mindset shifts to one of recognizing that variability is something natural. This recognition helps build a business that not only can handle the variability with grace, but it helps a business use variability to its advantage for the long-term. Keeping a healthly cash reserve on hand to make investments during a downturn or avoiding sudden swerves in company strategy come naturally to the management recognizing that variability comes with the territory.

This idea hit home for me at a Berkshire Hathaway Annual Meeting around 2005 or 2006 where Warren Buffett put up an overhead comparing the headcount to premiums written at Berkshire’s National Indemnity insurance subsidiary. The overhead demonstrated a steady headcount while the dollar volume of premiums written varied dramatically from insurance cycle to insurance cycle. His point was one that he did not compensate the National Indemnity management on the volume of premiums written nor did he hire and fire people along with the swings in the volume of premiums written. He wanted them to only write policies when the price was right and did not want his management writing premium volume to keep their jobs or compensation.

In an Harvard Business Review article titled “How the Growth Outliers Do It” by Rita Gunther McGrath in the January-February 2012 issue, Ms. McGrath conducted a study of 4,793 publicly traded companies of at least $1 billion in market capitalization. She found that only 8% of these companies grew their revenues by at least 5% year after year for five years ending in 2009 and only 4% achieved a net income growth of at least 5% in each of the five years.

To me, it seems better to prepare for the variability and use it to your advantage rather than to waste energy and resources trying to control it.