Last night I met up with a friend who I call Boulder Buffet because he lives in Boulder and has built his wealth from nothing to $100 million in 15 years through Buffet-like investing. He asked me an interesting question that has now come up in three conversations in the past month…
How do I make business decisions on whether to go ahead with projects, or continue or discontinue existing ones?
My answer: When I perceive a high level of probability (through lots of questions and research) that it can return at least $2 for every $1 that I spend on it, then I start or continue the project.
Seems dumb simple, right? Well Boulder Buffet confirmed, something that I have noticed in most leaders as well, that 90% of the 100’s of public company executives he has questioned over the years surprisingly do NOT use this thought process. In my opinion, it is the most important thing that a leader can do for their organization… determine ROI for projects within their organization and shift resources based on what will generate the greatest ROI for the organization.
For example, at RegOnline we’ve dabbled in the membership management software space for years. We have had so many internal debates on whether to put more or less resources towards it that I cringe every time I hear “membership management”. We’ve dedicated sales, support, marketing, and development time to a project that has yet to account for more than 1% of RegOnline’s revenue after 4 years of working on it. It has detracted resources away from a much greater ROI that we get from every additional dollar that we invest in our core business. Especially since we continue to be on the steep part of our growth curve in that business. That’s not to say Membership Management couldn’t be a great business – but not at the cost of detracting from amazing ROI in our core business.
I recently asked the leaders of two companies, who are raising more capital to fund their growth, what projects will the $’s go towards and what is the ROI of those projects and in what time frame? What I got was the usual vague answer that we need to hire more sales, more support, and fund general operations. What is the ROI of each additional salesperson? How long does it take before they are break even? When do you know whether to cut or keep them? For each new position I added at RegOnline, I asked myself these questions. And as brutal as it sounds, I shared this with the people I hired so they could tell me what their personal ROI was at their 3 month and annual reviews.
Warren Buffet has said that capital/resource allocation is what he is best at and what has made him so successful. Where are you allocating YOUR organization’s resources to create $100 million… or $50 billion of value?