THE BUSINESS WE MEANT TO BUILD

How good businesses lose their way

Chapter 16 – When Clever Becomes Too Clever

Over more than forty years in accounting, I have sat through enough meetings involving tax structures, financing proposals and business strategies to recognise a particular moment. It usually arrives somewhere between the third diagram on the whiteboard and the second explanation of why Company A needs to lend money to Trust B so that Entity C can do something with an asset that, once upon a time, was simply owned by the bloke sitting across the table. Everyone around the table appears to understand it, or at least nobody wants to be the first person to admit they no longer do. I have occasionally been tempted to ask the most dangerous question available in such circumstances: Why are we doing this?

Sometimes there is an excellent answer. There may be asset protection considerations, legitimate taxation consequences, succession planning, financing requirements or genuine commercial reasons for what has been proposed. Complexity is not automatically bad, and simplicity is not automatically clever. A complicated business may require a complicated solution, but that is very different from creating a complicated solution and then looking around for a business problem worthy of it.

That distinction has always interested me because one of the original pillars of Banks Consultancy was that we would reduce your tax liability legally. I remain entirely comfortable with those words, because I have never regarded paying more tax than the law requires as some unusual demonstration of civic virtue. If the law provides a legitimate deduction, concession, structure or opportunity that properly fits the circumstances, then I see no reason why it should not be considered. The difficulty begins when reducing tax ceases to be one consideration within a business decision and quietly becomes the reason for the decision itself.

I have watched people spend a dollar principally because somebody told them it would save tax, apparently forgetting that a deduction does not magically return the whole dollar to their pocket. I have seen structures considered because they appeared clever from a taxation perspective even though they introduced additional accounting costs, administration, finance complications and obligations that continued long after the original enthusiasm disappeared. There is nothing particularly clever about saving one amount while creating a larger cost somewhere else. Yet the attraction of the clever answer can be extraordinarily powerful, particularly when the simple answer seems almost disappointingly ordinary.

Perhaps that is because cleverness sells well. A complicated strategy can sound like expertise in a way that “keep the money in the bank for the moment” rarely does, while a diagram containing five entities can appear far more impressive than one containing two. The business world has become increasingly good at packaging sophistication, whether it arrives from accountants, lawyers, financiers, consultants, software developers, business coaches or the latest technology platform. Sometimes that sophistication is enormously valuable, but sometimes the wrapping is doing considerably more work than the contents.

Taxation is simply one place where the distinction between can and should becomes visible. The same thing happens with borrowings, where a lender may be prepared to advance the money and the business may technically have the capacity to service it, yet neither fact answers whether borrowing it advances the owner’s purpose. It happens with staffing structures, incentive schemes, acquisitions, software systems, franchising arrangements and expansion plans. The fact that something can be engineered does not automatically establish that it deserves to be.

Technology has probably given us the newest version of the same old problem. We can automate communications, produce reports almost instantly, integrate systems, analyse enormous quantities of information and allow artificial intelligence to perform tasks that would once have absorbed hours of somebody’s week. Much of that is genuinely exciting, and I have little interest in arguing that businesses should reject useful technology merely because the old way was familiar. What concerns me is the possibility that we automate something before asking whether it needs to be done at all.

I have seen systems introduced to improve processes that nobody had properly examined. The existing process was inefficient, so technology was placed over the top of it and allowed to perform the inefficiency considerably faster. The result could then be described as digital transformation, which sounds far more impressive than admitting we had successfully automated a bad idea. Perhaps the better question before buying the software is not what it can do, but what problem in this particular business we are asking it to solve.

The same test applies to management theories. There is never any shortage of somebody explaining the latest method by which staff should be measured, customers segmented, meetings conducted, incentives calculated, departments structured or businesses scaled. Some of those ideas are excellent, and CANEI — Constant and Never-Ending Improvement — demands that we remain prepared to learn rather than defend yesterday simply because it is familiar. But before adopting any of them, there is a question that should probably sit above the method itself: why does this business need it, and how does it help us build the business we originally set out to create?

That question is easily lost because management ideas are usually presented in terms of what they can achieve rather than why those achievements matter to the particular business considering them. We can measure another performance indicator, introduce another meeting, divide customers into another six categories or create another layer of reporting, but capability does not establish purpose. If the overall plan was to build a profitable, manageable business that provides its owners with time, security and a degree of independence, then a strategy that increases turnover while adding another twenty hours a week to the owner’s workload may be performing brilliantly against one measure while quietly defeating the reason the business existed in the first place.

I have increasingly come to believe that the why should act almost as a filter through which cleverness has to pass. Before asking whether the latest strategy works, perhaps we should first ask what we are trying to make work and why it matters. Growth may be entirely appropriate if growth serves the destination, while increased efficiency may be valuable if it releases cash, time or capacity that the owner actually wants. Even greater profitability, which sounds difficult to argue against, deserves context if achieving it requires the owner to sacrifice every part of the life the profit was supposedly intended to improve.

This is where improvement and complication can easily become confused. CANEI does not require a business to continually add things, and innovation should not become a competition to see how many new ideas can be incorporated before anybody asks whether the original problem still exists. Sometimes the most valuable improvement is the removal of a report nobody reads, a meeting nobody needs, a performance measure encouraging the wrong behaviour or a process designed around circumstances that disappeared years ago. Progress can occasionally involve doing less, provided the things being removed no longer contribute to the purpose sitting behind the plan.

That can be difficult because clever solutions develop constituencies. Someone designed them, somebody recommended them, somebody implemented them and somebody may now earn money maintaining them, while others may have built routines, positions or even a degree of personal importance around their continued existence. Before long the question “Why are we still doing this?” can sound almost personal, despite being exactly the question the business should occasionally ask. A strategy should not acquire immortality simply because considerable intelligence went into creating it, particularly when nobody can now explain how it contributes to where the business is supposed to be going.

Perhaps that is the distinction worth preserving. The cleverness belongs underneath the plan rather than above it, because the strategy, structure or management theory is only ever a means of getting somewhere. If we can still explain where we are going, why we want to get there and how the clever idea improves that journey, then the sophistication may be entirely justified. If the only remaining defence is that the system is clever, modern or technically impressive, it may be time to ask whether we are still managing the business or merely managing the machinery we accumulated along the way.

There is a further difficulty because complexity tends to hide its own cost. An additional company does not merely exist on an organisation chart; it may have accounts, tax obligations, banking arrangements, record-keeping, fees and decisions attached to it. Another loan facility creates another repayment, another condition and another moving part within cash flow. Another piece of software brings licences, integrations, training and dependence, while another management procedure consumes somebody’s time every time it is followed. None of those things necessarily makes the decision wrong, but they are part of its price and deserve to be counted.

This is where I return to something far less exciting that I have come to call the Discipline of Boring. Before adding another layer, it may be worth making sure the existing business invoices properly, collects its debts, understands its margins, provides for tax, reconciles its accounts, trains its people and does what it has promised its customers. None of those activities will make for a particularly exciting seminar presentation. They do, however, have the annoying habit of continuing to matter regardless of how sophisticated everything around them becomes.

There is an odd contradiction in business where we sometimes search for complexity because the ordinary answer demands discipline. It is considerably more entertaining to investigate a new structure than to admit the business needs to improve its debtor collection, while changing software can feel more progressive than fixing the information being entered into the old system. A financing restructure can temporarily move pressure around without addressing why the business keeps consuming cash. Cleverness becomes dangerous when it allows us to avoid the less glamorous problem sitting underneath it.

That is also where the distinction between tax planning and tax obsession becomes important to me. Tax should unquestionably be considered before decisions are made, because advice sought after the transaction has occurred can become little more than an explanation of consequences that can no longer be changed. That thinking sits beneath much of 20 Days Too Late: options have a habit of disappearing while we postpone decisions. Yet early advice should increase the owner’s choices, not lure them towards arrangements they would never have contemplated if there were no tax advantage attached.

One question I have often asked in one form or another is remarkably simple: Would you still want to do this if there were no tax benefit? The answer does not automatically determine the decision, because taxation may legitimately alter the economics of a transaction. It does, however, expose something useful. If the entire commercial justification disappears the moment the tax outcome is removed, perhaps we should spend a little more time understanding what we are really buying.

The same question can be adapted to almost every supposedly clever business idea. Would we still introduce this management system if it were not currently fashionable, would we borrow this money if the lender had not told us it was available, and would we acquire this business if nobody had told us acquisitions were a pathway to growth? Would we install this technology if we first had to explain, in ordinary English, exactly what measurable problem it was intended to solve? The questions are not designed to prevent action; they are designed to make sure the action still belongs to us.

That is where the first Banks Consultancy pillar quietly joins the second one. We promised to speak in the client’s language because I have never believed somebody should consent to a business arrangement merely because the professional explaining it has exhausted their vocabulary. If you cannot explain your own structure, financing arrangement or management strategy in reasonably ordinary language, that does not necessarily mean it is wrong. It may, however, mean you have surrendered more understanding than you realise, and ownership without understanding is an uncomfortable place from which to make decisions.

A genuine “silent” partner should be particularly wary of that. Their role is not to demonstrate how sophisticated a solution they can construct, nor to win an intellectual competition against the client’s previous adviser. Their job is to understand what the owner is trying to achieve and then ask whether each additional layer improves the chances of getting there. Sometimes the best advice may indeed be technically complicated, but the objective behind it should remain remarkably easy to identify.

I think What the Accountant Saw belongs somewhere beneath this discussion because accounts have a wonderful ability to strip away some of the romance. The business may describe itself as innovative, strategically leveraged, digitally transformed and aggressively positioned for growth, while the figures quietly mention that margins have deteriorated and the bank account is empty. Neither description necessarily tells the whole story, but the numbers have no particular interest in how clever the strategy sounded at the conference where it was conceived. Eventually they record what happened after the language had finished.

This is not an argument for timid businesses, and it certainly is not an argument against sophisticated advice. Some of the best strategies I have seen required considerable technical knowledge to design, while some of the worst decisions I have seen were breathtakingly simple. The issue is not complexity itself but whether complexity remains answerable to purpose. Once the structure becomes more important than the objective, something has quietly changed.

Perhaps every business occasionally needs to place its clever ideas back on the table and ask them to justify their continued existence. What problem was this originally designed to solve, does that problem still exist, what does this arrangement cost us to maintain and what would happen if we removed it? Most importantly, does it still take us towards the business and life we intended to create, or have we simply become very good at maintaining something whose purpose nobody remembers?

There is considerable satisfaction in finding an elegant answer to a difficult problem, and I would never want business owners to stop looking for better ways to do things. CANEI requires exactly that curiosity, but constant improvement should occasionally include the courage to simplify. The cleverest solution may sometimes be the sophisticated structure, advanced technology or carefully engineered financial arrangement sitting in front of us. At other times, the cleverest thing we can do is recognise that we have become clever enough already.

The distinction belongs ultimately to the owner because nobody else can decide what complexity is justified by their particular dream. Advisers can explain what is possible, accountants can explain the taxation consequences, lenders can explain what they are prepared to finance and technology providers can demonstrate what their systems can accomplish. The question left behind is much quieter and probably much more important: does what we can do still serve what we should be doing? If we continue asking that question, cleverness remains a tool in the business rather than becoming the business itself.