📬 When blanket cuts destroy value

Global growth sounds good in an investor presentation. Just don’t mention the operational mess. (I mentioned it once, but I think I got away with it)

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Here’s what’s on the menu today:

Now, let’s get into it.

CopperFollowUpQuestion from USA

The recent question related to the bronze surcharging hit home directly. While generally agreed with the overall answer, I think it is important to flag that: 

(i) Index-linked surcharge mechanisms can fail when supplier/PO pricing changes relative the underlying metal index, or when the supply mix shifts from a domestic vendor base to an international one with the additional cost of tariff, etc;

(ii) Passing through a material surcharge in raw $s can have a dilutive effect on margin % (increasing Sales and COGS but not necessarily getting margin on that surcharge). PE owners are more likely to see/notice the drop in margin % even if the surcharge mechanism is technically working. 

Have you had experience being able to structure the surcharge so you can also add margin into the surcharge amount? Very much still trying to rebuild the airplane as we fly on this topic. Thank you for all the good work you do.

And here we go.

Even further into the costing wormhole.

I am not complaining.

For anyone who missed it, this follows a series of questions on managing material costing when one volatile commodity input is driving huge swings through standard cost, margin, and pricing.

And you are absolutely right with your two notes of caution.

First, the index can stop matching your real delivered cost.

That happens when your total delivered price moves differently from the underlying commodity index. That could be caused by any combination of freight changes, tariffs, duties, FX, vendor premiums, or shifts in supply mix. And as supply chains move around during these moments, that kind of impact becomes more likely.

So the surcharge model needs to capture fully delivered cost, not just a clean published commodity index. To truly protect margin, the surcharge needs to capture price, premium, freight, duty, tariff, and FX.

A few things to think about:

Second, you are also dead right on margin percentage.

If you pass through a raw dollar surcharge, revenue goes up, and COGS goes up in proportion, creating a mathematical dilutive effect on gross margin and ultimately operating margin, even though gross profit dollars are stable.

That can look ugly. But this is where you need to be careful not to let the reporting tail wag the economic dog.

You do not pay bills with percentages.

If the surcharge protects gross profit dollars per unit or gross profit per kilo of throughput, then the business has been defended from the volatility risk. The margin percentage may be diluted because the top line has been inflated by a commodity cost you do not control.

That is not necessarily value destruction. It may just be bad presentation of the economics.

All that being said, if you are able to pass through the surcharge in a way that protects gross margin percentage, and therefore grows gross profit and operating income dollars on the inflated sales line, wonderful.

But often these kinds of businesses are too competitive for things to be quite that, well… easy.

And don’t forget, a transparent surcharge works two ways. If the underlying commodity falls back to its previous home in 12 months, you can bet your customers will be looking to kill that surcharge. And by then, has your board already counted on that extra profit in next year’s budget?

So I am not saying don’t take it if it is there. Take it. Smile politely. Bank the money.

But it is fragile profit in most markets, so treat it as such. And crucially, report it that way.

Help the board understand that job number one is protecting gross profit per throughput kg. That is the economic job. If you can grow that by protecting gross margin percentage too, great. But do not build your whole performance story on profit that may disappear the moment the commodity cycle turns.

The key, whichever path your market dynamics allow, is to use great FP&A to tell the story clearly. Your PE sponsor will bake that extra profit into the plan in a heartbeat unless you make it painfully clear what created it, how fragile it is, and what could take it away again.

Fabulous follow-up questions. Thank you for raising it.

TLDR: Protect gross profit first. Grab windfall profits if you can, but use good FP&A to illustrate their fragility.

SelfController from São Paulo, Brazil

I am a Regional Controller at a multinational corporation. My region is the company’s strongest in profitability and growth, yet Corporate continues to impose cost-cutting measures because of poor performance elsewhere.

This is now creating negative side effects in our region: hiring freezes, higher turnover, declining morale, increased workload, and reduced capacity to sustain growth.

How should I manage this situation? Specifically, how can I demonstrate to Corporate that indiscriminate cost-cutting in a high-performing region can ultimately destroy value, quantify the financial impact of these measures, and advocate for targeted rather than across-the-board cost reductions—without appearing resistant to corporate cost discipline?

A tale as old as time.

A good business trapped inside an underperforming group gets damaged by lazy corporate leadership.

I’m going to take this from a slightly different angle, which is the perspective of the group CFO overseeing this kind of strategy.

You are sitting in a boardroom looking at a consolidated P&L. The group is missing budget. Overheads as a percentage of sales have grown, cash conversion has weakened, and margins are under pressure. So, out of the board meeting comes a “cost challenge.”

Before you know it, every business gets a hiring freeze, a travel ban, and a 10% headcount reduction target, regardless of whether it is a 25% EBIT business or a negative 25% EBIT business.

This is common. Hell, I’ve been responsible for this sort of thing enough times. It is usually stupid and a sign of desperation and lack of ideas.

Horizontal cost action across a diverse corporate group is often value destructive. Especially when the group contains different geographies, growth profiles, customer dynamics, capability gaps, and margin structures.

A hiring freeze in a weak, bloated, low-growth business may be sensible. A hiring freeze in the strongest, fastest-growing, most profitable region may be tantamount to corporate vandalism.

And this kind of thing comes in many forms, not just headcount freezes: CapEx rationing, travel restrictions, ‘benchmarking exercises’, procurement mandates, shared service migrations. Across-the-board “efficiency” targets.

Sometimes these things are necessary and the right move. More often, it’s become the only move because of poor strategic thinking in the past. And let me repeat myself… I say this not because I’m above it, but because I have made this mistake too many times in the past.

And the more I have seen, the more convinced I am that most of these exercises are value destructive in the long run. Often, they do not deliver much in the short run either, once you adjust for lost growth, lower morale, higher attrition, weaker execution, and all the hidden workarounds that follow.

The better model is decentralized and context-specific. The job of corporate is to create the conditions for the portfolio to succeed.

That means making sure each unit has the right leader, the right incentives, the right plan, and the right resources for its specific situation. Agree the local plan. Fund it properly. Hold the team accountable. Then get out of the way.

The way I snapped myself and the board out of this kind of mistake was to change the value equation. To move the boardroom value creation discussion beyond headline group EBITDA and group multiple, and look much harder at the sum of the parts.

Each operating unit had its own economic story. Different growth, margins, capital needs, risk, and therefore, value creation path. And getting more of that picture into the boardroom was critical.

And it frequently surfaced an important (and difficult) question: are we the right owner for this specific part of the portfolio?

So, back to your position as Regional Controller.

You are probably not going to change the direction of the wind on your own. The forces are too great. If corporate has decided it needs cost action, you likely will not stop the machine.

But you can arm your local CEO and CFO with the facts they need to fight a better fight. That means helping them translate “this feels unfair” into “this destroys value.”

Most regional and business unit teams are poor at making that argument. They default to noise, emotion, and catastrophizing, which makes it easier for corporate to dismiss them as parochial.

Do not do that. Instead, try building two long-range scenarios.

One shows the constrained case: hiring freezes, delayed investment, higher attrition, slower growth, weaker service levels, and the knock-on impact on revenue, margin, and cash.

The other shows the value-maximizing case: targeted cost discipline where it makes sense, but continued investment behind the region’s growth engine.

Then translate the difference into enterprise value over time.

You need to show that the proposed saving creates a larger value leakage elsewhere. Maybe not as a one-time hit, but as a sustained drag on growth, margin, retention, execution, and ultimately valuation.

TLDR: Show where blunt cuts destroy value, then offer the value-maximizing alternative.

The Caribbean CFO from Santo Domingo, Dominican Republic

First, congrats on the amazing work and effort you put into sharing your experience with the Finance community around the world.

I am CFO of a mid-sized business in one of the Caribbean Islands. As part of a regional expansion, we’re considering the acquisition of a similar but much smaller business (let’s say a 1/8) in one of the neighboring countries in Central America.

Whilst this always raises the question on country/market risks, I am focused on designing the structure of the Finance function under this new operating context.

What are your thoughts on which functions should be centralized, and which functions should remain local? Thank you for your time! Looking forward to hearing from you.

First up, congrats on living in the best part of the world.

I love the Caribbean. I got married there and visit regularly.

I’m afraid this is not the kind of question that can be answered properly from a distance. So I hate to be the “it depends” guy, but...

That said, I would start with a simple principle: you get control through relationships before you get it through org charts.

In the first phase after acquisition, the most important thing is not the perfect finance org design. It is getting control of the finance function, which is much more about trust than it is about formal reporting lines.

Spend more time than you think is necessary with the local finance team. If you think you need to speak to them twice a week, speak to them every day at the start. Visit in person. Understand how the business actually works, who knows where the bodies are buried, and who the local business really listens to.

If you get that relationship right, people start giving you control without you having to take it. They bring you into the real conversations. That is a much better form of control than forcing everything through the center before you understand the business.

And once you have that, you can make much better decisions about what should be centralized and what should stay local.

Is this the first of many acquisitions, or a one-off? If it is the first step in a regional roll-up, you probably need to build a more scalable regional finance model. If it is a single small bolt-on, a lighter-touch structure may be enough.

How strong is the acquired finance team? If there is real capability locally, keep it and wrap group control around it. If the team is weak, fragmented, or overly dependent on one person, you may need to move faster.

How much local knowledge matters? In another country, statutory accounting, tax, payroll, banking, customers, suppliers, regulation, and informal business practices may all need local execution. Be careful about stripping that out too quickly.

And then there is ERP.

So much of this comes down to systems. If you are on different platforms, different charts of accounts, different close processes, and different reporting logic, centralization becomes much harder. A common platform may be the right long-term answer.

Too many businesses leap to centralization and common systems as the answer, then underinvest in the implementation and make everyone miserable. 

So my default model would be: relationship-led control, central standards, local execution.

That said… there are some things you do need to get control of early in almost any situation:

But don’t rush to centralize the local activities that require proximity: statutory filings, local tax mechanics, payroll, nuances of customer collections, supplier relationships, and day-to-day business partnering.

Then reassess after you have lived with the business for a few close cycles.

The ability and willingness of the local team to adapt to common reporting, cash discipline, and group controls will tell you a lot. If they engage well, you can move gradually. If they resist basic visibility and control, that tells you something too.

And as you’ve got me closing my eyes thinking about a rum punch and Caribbean sunset, here is the greatest opening to any album of all time:

TLDR: Build trust first. That is how you get control without having to take it. Then centralize only what needs centralizing, once you are sure you are right.

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Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need