HBR.org

The Curious Downside of an Owner’s Mindset

One of the great innovations in business is the idea that professional managers should have an owner’s mindset—that is, they should treat their company’s money as if it were their own. But there is a problem with this leadership behavior.

Par James Allen

First published on juin 06, 2016
min


This article originally appeared on HBR.org (subscription may be required). One of the great innovations in business, which has held sway since 1976, is the idea that professional managers should have an owner’s mindset—that is, they should treat their company’s money as if it were their own. The idea, outlined by Jensen and Meckling in the Theory of the Firm, worked like rocket fuel in the private equity industry and, with somewhat more mixed success, spawned many efforts to align management compensation of public companies with shareholder returns. It was, in essence, a way to make managers behave the same way you would expect a company founder to behave: Watching every dollar that came in or out, reinvesting cash to build the business, refusing to allow fat or waste to accumulate. But there is a problem with the owner’s mindset. Under the guise of acting like owners, many leaders operate as bureaucrats or, far worse, in some cases as personal-wealth maximizers. Bureaucrats agree in theory with the notion of an owner’s mindset, but apply it only to their tiny patch of the company. The owner’s mindset for them is a means to maximize the resources under their control in order to achieve personal objectives. Wealth maximizers also agree in theory with the owner’s mindset, but they conveniently shorten the time frame of the business to one that maximizes their compensation, not the value of the firm. Though there are many drivers of short-term thinking in business today, wealth maximization motives of leaders is certainly one of them. Learn More Founder's Mentality Fast-growing companies can become global leaders without losing the values that helped them succeed. Bain’s research explores how large incumbents can also reignite their growth by recapturing their Founder’s Mentality®. Clearly, an owner’s mindset alone can lead to unintended and potentially value-destroying behaviors. In our research, my colleague Chris Zook and I found that an owner’s mind-set is only one of three critical traits required for companies to grow sustainably. Another key element is what we call “insurgency”—a bold mission, or a sense of being at war with the industry on behalf of underserved customers. And the third is a “frontline obsession”—a compulsive interest in every detail about how those customers are served. Our research shows that two-thirds of companies that managed to sustain profitable growth for a decade or more are strong in all three of these traits. In fact, companies that are in the top 20% of performers are four or five times more likely than the bottom 20% to exhibit these three attributes. Because the combination of these three traits is so powerful, and because it is most typically embodied by a bold, ambitious founder, we’ve given it a name—the founder’s mentality—and have written an entire book on how companies of all kinds, not just founder-led companies, can instill and leverage a founder’s mentality throughout their organization to find lasting, profitable growth. Without the complementary traits of insurgency and frontline obsession, we often see managers behave in ways no company founder or long-term owner ever would. Without a sense of insurgency propelling them to always seek the next best way to serve their customers, they hunker down and try to extract maximum value from the existing business, promoting incumbency over innovation. Worse, they allow a misguided sense of cost consciousness to harm existing customer relationships—something no founder would tolerate. They pursue what our colleague and loyalty expert Fred Reichheld calls “bad profits”: efforts to extract more money from customers without offering them additional value, making them feel coerced, deceived or misled (think airline baggage fees or excessive banking penalties). Without the frontline obsession, they often undervalue the front line, allowing indiscriminate cost-cutting to damage customer service levels or product offerings. Founders and long-term owners would never jeopardize customer relationships for short-term revenue or cost-cutting gains, nor would they complacently allow those relationships to stagnate. Companies with a strong founder’s mentality focus relentlessly on freeing up cash from their operations, but not so that they can hoard it or return it to creditors or shareholders. Instead, their goal is to constantly redeploy funds to meet the most pressing customer needs. They don’t democratically add a percentage to each department’s previous year’s budget (nor do they make indiscriminate, across-the-board cuts). Instead, they try to simplify and reduce costs in any area that isn’t critical to their mission, and concentrate every resource on those few areas where they can overwhelm competitors and serve customers better. At smaller companies, founders and their employees engage in this sort of reallocation constantly and instinctively. They have a bias to act, because they know speed is an advantage when competing with larger companies. They loathe bureaucracy that traps resources and slows decision making. But those instincts tend to fade as companies grow into large, complex incumbents. As the layers beneath them accumulate, leaders grow increasingly removed from the front line. Stories about a customer’s experiences are replaced with data about the nonexistent “average customer.” Bureaucracy sets in, and bureaucrats don’t feel the insurgent mission. If they did, they would view themselves as owners of the entire business. Instead, they focus only on their small piece of it. They are likely to view their department budget as the main indicator of their power and influence. What sort of conversation would ensue at your company if you said to a top manager, “Bob, I’d like you to cut your budget by 25% and reallocate those resources to Sally’s department to help fund her team’s new service because it’s a hit with our customers”? Would Bob feel this was an opportunity to be a hero—as he should—if he can do more with less to help Sally’s team improve on the company’s promise to its customers? We suspect the answer in many companies would be a resounding “no”. But imagine if you could change that culture. In our work with companies, we have found that by helping executives ask only a few questions, we can begin to see change in people’s behavior: If this were your business, and you were free to truly pursue its insurgent mission, what would you do? Suddenly, new ideas for resource deployment emerge simply because the managers have been asked to wear an owner’s hat for the first time. They have been liberated to act on behalf of the customer. If they view general and administrative expenses not as a tax to be borne, but as currency that could be made available to help them win competitive battles and fund new growth opportunities, cost-cutting quickly becomes more appealing. If we could start over, would we do it this way? Asking this question can seem threatening, but if a company is constantly looking for ways to do everything smarter, it can move its people to more difficult and interesting problems. It keeps everyone stretched. If we had unlimited resources, where would we allocate them? Asking this question, of course, means that people like Bob need to be rewarded. Leaders must celebrate those who stop or simplify processes instead of allowing rewards to flow to those who make internal processes bigger and more complex. Someone who willingly gives up resources risks being the butt of water-cooler jokes. But if Bob works at a company where the insurgent mission is alive, he knows he will be a hero if he helps fund Sally. His budget reduction isn’t an insult, it’s a career-building opportunity. Real growth demands that companies constantly reallocate costs from overhead to the front line, and that managers pursue the insurgent mission, not defend the status quo. Everyone in the company must view costs as resources waiting to be redeployed toward customers—and ultimately toward growth. This is why we believe the owner’s mind-set is so important—yet not enough. Bureaucrats will hoard resources, while wealth maximizers won’t hesitate to cut the heart out of the company. For a genuine owner’s mind-set to truly take hold, everyone must share in your company’s insurgency. They must be able to define immediately why your company exists and what it takes to serve your customers better than anyone in the industry. It also means that everyone believe that those who deliver value to customers—from call-center reps to the highest-level product engineer—are the front line and that if they’re not on the front line, their job is to support those who are. James Allen is a partner in Bain & Company’s London office and a co-head of the firm’s global strategy practice. He also leads Bain’s Developing Market 100 initiative. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of Growth (Harvard Business Review Press, June 2016).

This article originally appeared on HBR.org (subscription may be required).

One of the great innovations in business, which has held sway since 1976, is the idea that professional managers should have an owner’s mindset—that is, they should treat their company’s money as if it were their own. The idea, outlined by Jensen and Meckling in the Theory of the Firm, worked like rocket fuel in the private equity industry and, with somewhat more mixed success, spawned many efforts to align management compensation of public companies with shareholder returns. It was, in essence, a way to make managers behave the same way you would expect a company founder to behave: Watching every dollar that came in or out, reinvesting cash to build the business, refusing to allow fat or waste to accumulate.

But there is a problem with the owner’s mindset. Under the guise of acting like owners, many leaders operate as bureaucrats or, far worse, in some cases as personal-wealth maximizers. Bureaucrats agree in theory with the notion of an owner’s mindset, but apply it only to their tiny patch of the company. The owner’s mindset for them is a means to maximize the resources under their control in order to achieve personal objectives. Wealth maximizers also agree in theory with the owner’s mindset, but they conveniently shorten the time frame of the business to one that maximizes their compensation, not the value of the firm. Though there are many drivers of short-term thinking in business today, wealth maximization motives of leaders is certainly one of them.

Learn More

Founder's Mentality

Fast-growing companies can become global leaders without losing the values that helped them succeed. Bain’s research explores how large incumbents can also reignite their growth by recapturing their Founder’s Mentality®.

Clearly, an owner’s mindset alone can lead to unintended and potentially value-destroying behaviors. In our research, my colleague Chris Zook and I found that an owner’s mind-set is only one of three critical traits required for companies to grow sustainably. Another key element is what we call “insurgency”—a bold mission, or a sense of being at war with the industry on behalf of underserved customers. And the third is a “frontline obsession”—a compulsive interest in every detail about how those customers are served. Our research shows that two-thirds of companies that managed to sustain profitable growth for a decade or more are strong in all three of these traits. In fact, companies that are in the top 20% of performers are four or five times more likely than the bottom 20% to exhibit these three attributes.

Because the combination of these three traits is so powerful, and because it is most typically embodied by a bold, ambitious founder, we’ve given it a name—the founder’s mentality—and have written an entire book on how companies of all kinds, not just founder-led companies, can instill and leverage a founder’s mentality throughout their organization to find lasting, profitable growth.

Without the complementary traits of insurgency and frontline obsession, we often see managers behave in ways no company founder or long-term owner ever would. Without a sense of insurgency propelling them to always seek the next best way to serve their customers, they hunker down and try to extract maximum value from the existing business, promoting incumbency over innovation. Worse, they allow a misguided sense of cost consciousness to harm existing customer relationships—something no founder would tolerate. They pursue what our colleague and loyalty expert Fred Reichheld calls “bad profits”: efforts to extract more money from customers without offering them additional value, making them feel coerced, deceived or misled (think airline baggage fees or excessive banking penalties). Without the frontline obsession, they often undervalue the front line, allowing indiscriminate cost-cutting to damage customer service levels or product offerings. Founders and long-term owners would never jeopardize customer relationships for short-term revenue or cost-cutting gains, nor would they complacently allow those relationships to stagnate.

Companies with a strong founder’s mentality focus relentlessly on freeing up cash from their operations, but not so that they can hoard it or return it to creditors or shareholders. Instead, their goal is to constantly redeploy funds to meet the most pressing customer needs. They don’t democratically add a percentage to each department’s previous year’s budget (nor do they make indiscriminate, across-the-board cuts). Instead, they try to simplify and reduce costs in any area that isn’t critical to their mission, and concentrate every resource on those few areas where they can overwhelm competitors and serve customers better.

At smaller companies, founders and their employees engage in this sort of reallocation constantly and instinctively. They have a bias to act, because they know speed is an advantage when competing with larger companies. They loathe bureaucracy that traps resources and slows decision making.

But those instincts tend to fade as companies grow into large, complex incumbents. As the layers beneath them accumulate, leaders grow increasingly removed from the front line. Stories about a customer’s experiences are replaced with data about the nonexistent “average customer.” Bureaucracy sets in, and bureaucrats don’t feel the insurgent mission. If they did, they would view themselves as owners of the entire business. Instead, they focus only on their small piece of it. They are likely to view their department budget as the main indicator of their power and influence.

What sort of conversation would ensue at your company if you said to a top manager, “Bob, I’d like you to cut your budget by 25% and reallocate those resources to Sally’s department to help fund her team’s new service because it’s a hit with our customers”? Would Bob feel this was an opportunity to be a hero—as he should—if he can do more with less to help Sally’s team improve on the company’s promise to its customers? We suspect the answer in many companies would be a resounding “no”.

But imagine if you could change that culture. In our work with companies, we have found that by helping executives ask only a few questions, we can begin to see change in people’s behavior:

If this were your business, and you were free to truly pursue its insurgent mission, what would you do? Suddenly, new ideas for resource deployment emerge simply because the managers have been asked to wear an owner’s hat for the first time. They have been liberated to act on behalf of the customer. If they view general and administrative expenses not as a tax to be borne, but as currency that could be made available to help them win competitive battles and fund new growth opportunities, cost-cutting quickly becomes more appealing.

If we could start over, would we do it this way? Asking this question can seem threatening, but if a company is constantly looking for ways to do everything smarter, it can move its people to more difficult and interesting problems. It keeps everyone stretched.

If we had unlimited resources, where would we allocate them? Asking this question, of course, means that people like Bob need to be rewarded. Leaders must celebrate those who stop or simplify processes instead of allowing rewards to flow to those who make internal processes bigger and more complex. Someone who willingly gives up resources risks being the butt of water-cooler jokes. But if Bob works at a company where the insurgent mission is alive, he knows he will be a hero if he helps fund Sally. His budget reduction isn’t an insult, it’s a career-building opportunity.

Real growth demands that companies constantly reallocate costs from overhead to the front line, and that managers pursue the insurgent mission, not defend the status quo. Everyone in the company must view costs as resources waiting to be redeployed toward customers—and ultimately toward growth.

This is why we believe the owner’s mind-set is so important—yet not enough. Bureaucrats will hoard resources, while wealth maximizers won’t hesitate to cut the heart out of the company. For a genuine owner’s mind-set to truly take hold, everyone must share in your company’s insurgency. They must be able to define immediately why your company exists and what it takes to serve your customers better than anyone in the industry. It also means that everyone believe that those who deliver value to customers—from call-center reps to the highest-level product engineer—are the front line and that if they’re not on the front line, their job is to support those who are.

James Allen is a partner in Bain & Company’s London office and a co-head of the firm’s global strategy practice. He also leads Bain’s Developing Market 100 initiative. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of Growth (Harvard Business Review Press, June 2016).