No doubt you’ve seen the news that Intel has parted ways with Pat Gelsinger. There is a lot of info to unpack on that particular story but we did a good job of covering it on the Rundown this week. What I really wanted to talk about was a quote that I brought up in the episode that I heard from my friend Michael Bushong a couple of months ago:

No one cuts their way back into relevance.

It’s been rattling around in my head for a while and I wanted to talk about why he’s absolutely right.

Outcomes Need Incomes

Do you remember the coupon clipping craze of ten years ago? I think it started from some show on TLC about people that were ultra crazy couponers. They would do the math and they could buy like 100 lbs of rice for $2. They would stock up on a year’s worth of toothpaste at a time because you could pay next to nothing for it. However, the trend died out after a year or so. In part, that was because the show wasn’t very exciting after the shock of buying two years of hand soap wore off. The other reason is because people realized that a lot of those deals required you to make some investments first. Sure, you could buy all the dental floss you wanted for $3. But you had to buy it at full price and send away for a rebate. Or you had to hope that someone at the register would triple your coupon first.

I bring this up because it illustrates an issue with company finances too. There are two ways to increase profit. You can sell more things or you can cut costs. Most companies do the former because it’s the fastest way to make money. You sell more goods and you take in more money. Sounds easy, right? Once you make those sales you have to take away your expenses, like labor and overhead before you arrive at net profit. While you do need to keep an eye on those costs some people take it to the extreme, much like the ultra couponers above.

I usually see this expressed when a CEO is let go and their immediate successor is the Chief Financial Officer, or CFO. On the org chart the CFO is almost always considered to be the second in command after the CEO. Why? Because they deal with the money. They figure out how to make the most money and reduce costs as much as possible to make the most net profit possible. On paper that sounds like a wonderful idea. If this person is in charge of the money why not put them in the charge of the business?

My issue comes when the newly-minted CEO is only concerned about costs. You see this with decisions like cutting workers or selling off pieces of the company to reduce overhead. It is often expressed by seeing a company “tightening the belt” so to speak in order to make more money. Again, a great theory on paper. Companies do need to control expenses and it can be a great way to reverse your fortunes if you’re struggling. But what happens when you run out of expenses to cut?

Ninety-Day Executives

The real reason why you can’t cut your way back into relevance is because cost cutting puts your company on the back foot from the start. If you’re only worried about how much something costs you’re not going to want to invest in anything that could bring long term gain. You’re only looking at the immediate horizon. Why spend money to make money?

Of course, we all know the companies must invest if they want long-term success. Intel is a great example. The current plan of investment into chip foundries is going to pay off in the future for sure. But that future is years away. Intel has to forgo immediate profits in favor of future success. That’s literally how investment works. If I want to make money in a savings account I have to put my money in there and not touch it until it makes money. That’s how opportunity costs works and it spares no one.

However, opportunity cost has a darker counterpart, namely the quarterly cycle. See, companies don’t operate on a five-year timeline. Or a fiscal year. They really operate on a three-month rolling timeline. Everything that happens needs to impact the current quarter. Every decision must make money by the end of the quarter. Why? Because every quarter a publicly traded company must release a report to investors detailing how much money they made. If the investors don’t like the report they lose confidence and the value of your company could drop if they choose to sell off stock in your company.

So CEOs, especially the cost-conscious ones, are driven more by the need to succeed and be profitable every quarter rather than run into the issues of not making enough money for the past three months. They would rather recognize immediate gains rather than invest for the future. And how do they accomplish that if there isn’t more profit to gain from selling things? By cutting costs even more. Hence the Bushong quote above. CEOs that have no vision will make things look great for investors for a quarter or maybe two until the easy costs are cut. Then it’s time to produce. However, you’ve stifled your workforce and your research teams because they weren’t making immediate profit. So your company is now in trouble because there isn’t a way to produce more income and costs are at a minimum.

And the investors? They only care about how much money you’re going to make the end of the quarter. They don’t care about last quarter or next quarter. Just now. They want their $2, as in the paperboy from Better Off Dead. Which leads to a feedback loop that can destroy a company. Pat Gelsinger was facing that feedback loop at Intel. Investors wanted their profits at the end of this quarter and Pat and the rest of the industry could see it was going to take longer than that to succeed. Who won? Well, the board didn’t retire.

Tom’s Take

I know it sounds a little harsh, but I’m tired of investors driving companies into untenable positions because they can’t imagine investing for the future of a quarter from now. As much as we make fun of day traders for not having vision some quarterly investors are no better. They just have a little more patience. If we started building companies that are in it for the long haul and make investment decision based on calendar years and not quarterly cycles I think we would have more robust companies overall and less reliance on cost cutting as an emergency profit making button. And we wouldn’t have to worry about whether or not we were cutting our way to a profit or cutting off our nose to spite our faceless investors.