If there is a magic ingredient to success, it is captured in two words: ‘Leverage’ and ‘Compounding’.
We all understand the concept of leverage, using a small amount of force to generate a larger outcome.
Compounding is a little more difficult to understand, although if you currently have a mortgage, you are suffering the compounding results of higher interest rates eating away at your growth in equity as you pay the monthly piper.
Question is, how do you find and build on them to generate a sustainable level of profitability?
Our commercial entities are built on the correct assumption that you need leverage to scale. As you build scale, it becomes necessary to add management layers to leverage the capabilities of those the next level down. That is why our organisation structures are always pictured as pyramids, because they are, for the leverage they generate.
Leverage leads to compounding, and compounding leads to greater leverage: a self-sustaining cycle, until the system becomes gummed up with friction.
Friction in management terms ends up being hidden in the layers of authority necessary to act. The transaction costs, which are almost always hidden from easy view, can be commercially fatal.
Leverage also delivers power to those in a position to exercise it, and as we know, power is a drug with many side effects, some of them not so good.
Technology has changed the ratios between leverage and compounding, but not the basic arithmetic. They remain mutually reinforcing, but their management has become significantly more complex.
