Subject: Re: BRK Organization After Buffett? An Opinion
I am always skeptical when people who don’t know how a business runs decide it can do with 20% less just because. Maybe they’re right, but iff’n you want to bet I’d give even money that more often than not, they’re not.

Goofyhoofy,

I respect your reply. And I think, in too many cases - esp. PE type managers - that you're right. Kraft-Heinz is an excellent example. You've got to know your business.

Still, in the words from one of my favorite operas - Porgy and Bess - "It ain't necessarily so." You've got to know what you're doing.

There's a natural tendency among managers to add personnel and costs when things are going good. And a natural tendency to resist cutting back when things go bad. That causes conflict. So costs have a tendency to grow over time because of human nature. Particularly when your bosses aren't focused on cost control. In the words of the old "Gambler" song, you've got to know when to hold them and when to fold them.

There are basically three ways to cut costs intelligently. The first is to eliminate duplicate functions by consolidation. The second is to stop doing things that don't really need doing. The third is to understand the natural tendency to grow costs in good times, and not reduce them in bad times - and to control this. (There's a whole separate discussion on experience curves in commodities that I won't get into.)

I recognize the BRK is very different than the corporation where I spent my career. BRK has multitudes of businesses, each individually managed by people with little or no direction from top management. XOM is the exact opposite. That makes it much easier for XOM to control operating costs.

Take some recent examples. XOM, at least in the chemicals business in my day, cut operating cost by 20+% but mostly by eliminating the cost creep that had occurred - plus some consolidation of support functions. After they acquired Mobil, they worked on all three areas. The result was that the new ExxonMobil corporation ran better with fewer people and much lower costs than it did when the two were first combined. Part of this was disposing of many good - but small - businesses that needed to run on different support functions than a commodity business - i.e. combined accounting, purchasing, HR, etc. functions. So they were sold or JV'ed to others where they fit better. I participated in this. That refocus on core businesses permitted streamlining of HQ type costs by consolidation.

Even after the foregoing, the third example is what new CEO Darren Woods has done over the past several years. He has further consolidated support functions into one - no longer upstream, downstream, or chemicals. Ditto for the research functions - not they're all combined - with very significant new sharing of capabilities. Ditto for project management - now one function manages all projects, also with significant learnings from each other. As a result, they're on a timetable to further cut expenses since 2018 by $15 billion a year by 2027 - with $9 billion already achieved and the remainder $6 billion identified. It has also organized it's downstream activities along market lines - with management responsible for all aspects of the business back to supply. There are no longer refining and chemicals organizations.

Berkshire isn't organized along the same lines as XOM - serving many, many disparate businesses. So I don't, or would not expect, such extensive steps. But it is a far larger organization than XOM in terms of people and activities. I would be very surprised if some support functions could not be consolidated - at least in part. Even Buffett wondered if health care should not consider a HQ function. And I feel pretty sure that cost creep has occurred in many of the businesses. Some have already been identified. I doubt this is unique.

So I think - just my opinion - that there are billions of dollars in cost reductions that could be achieved within BRK. I also think that cost creep is where Greg and Ajit are now concentrating. And I further believe that some consolidation of support functions could benefit both the businesses and BRK shareholders.

I also believe that such changes will take time as BRK adjusts to a different competitive world. There will be lots to be sorted out with the Board of Directions about BRK's future directions.