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A number of operating cost issues have emerged since WEB handed over operating responsibilities to Greg and Ajit.

Gen Re was the first – remember Ajit’s leaked memo that operating costs must be brought down? Now has followed similar issues with Geico. And with BNSF versus UNP.

These were all formerly run by managers that Buffett praised. And when questions arose at a past annual meeting, Munger supported Buffett in saying that they thought BRK ran pretty efficient operations. This all suggests that these wasn’t much cost control efforts coming down from the top.

I’m NOT suggesting that Buffett should have spent more time on operating issues. We shareholders were far better served by him devoting his time primarily to putting BRK’s cash flow to work. But I do suggest that the move to elevating Greg and Ajit to operating managers, a move that I believe Munger had influence on, was a very good move by Buffett. We don’t see highlights but some specifics plus scuttlebutt say that they’re focusing a lot on defining and addressing operating costs. This will become more and more important as reinvestment opportunities for BRK cash continue to be difficult.

From experience with my prior employer, I can witness that operating cost controls can lose focus even within successful corporations. XOM had a reputation of being well managed, so it was a shock to operating managers when new CEO Lee Raymond directed operating costs be reduced by 20%. There was a lot of initial kickback when this happened. Managers protested that there wasn’t 20% room to cut costs. He replied that if they couldn’t he would find managers that could. And costs came down more than the 20% targets. When focus changed, mangers found more opportunities than the target. It just took a different mental model.

And, of course, there were backlash and resentment among the employees impacted. But well qualified people found other job opportunities, there were good separation payments and benefits, and normal attrition (reduced hiring) permitted very significant benefits to shareholders. Billions of dollars. And BRK has a lot more operating costs than did XOM.

I don’t think Greg and Ajit are being this severe. But I do think their efforts are helping improve BRK’s cash flows. And I suspect Greg is being diplomatic with people used to reporting directly to Buffett and generally being left alone. Change takes time.

Now, back to the post title. What happens after Buffett moves on from an organization standpoint?

I don’t think Greg should retain direct operating management responsibilities ex. insurance.. But I do think he should develop an organization of managers to oversee operations. The heads of BNSF, BHE, Ajit, and a new group of managers to oversee MSR operation subdivisions. He must free up time to focus on asset allocation decisions and future strategy for BRK. And play the Raymond role of setting performance targets. He has these capabilities, and BRK will need them going forward.

Put another way, Berkshire should move even further along past the “delegation to the point of abdication” era when Buffett was younger and Berkshire was smaller. Very few people have the capabilities to keep up with the amount of data he could process mentally. He did keep his finger on the pulses of the operating businesses via very frequent written reports. But he rarely seemed to intervene. Frankly, he didn’t like conflict unless it was really necessary. Controlling costs generates conflicts.

Change does bring conflicts. And these could well happen when Buffett moves on. I suspect many already very rich managers will have to decide whether they wish to become more tightly managed. And the Buffett family will have to decide if such changes will fit within the “Berkshire culture.” We could see a significant number of management moves.

I think BRK will need to take such steps as the operating businesses beyond insurance become more important to BRK’s future.

What do you think?

Agree BRK business model large and complex. Agree too, Greg is brilliant but tough for anyone to get into the weeds to help manage each biz. IMHO-High performance CEO’s use 4-5 Key Performance Indicators to manage businesses.

Wouldn’t doubt Greg Abel is one who manages his mgrs using Scorecards which simplify…

GLTA,
Silverlinin

"What do you think?"

Managers can certainly make costly mistakes, but so can CEOs. We've all seen spectacular examples of both. From what we've seen of Greg Abel so far, I think that he will be much less hands off than Warren when it comes to cost control. I even think that Todd Combs, as good as he is, could face more scrutiny. Ajit has commented more than once about sub-par growth and combined ratio at GEICO.

My biggest worry, though, is not operating expenses. It's dumb acquisitions, both at the subsidiary level and the corporate level, such as Lubrizol's purchase of Weatherford International's oilfield chemicals business and BHE's purchase of PacifiCorp. It's very hard not to buy when you're flush with cash.

"Todd Combs, as good as he is, could face more scrutiny."

what tangible evidence do we have that he is good? Geico is still a mess. He was enamored with Snowflake

unsure on his investment record since it is not disclosed.

“But I do think he should develop an organization of managers to oversee operations. The heads of BNSF, BHE, Ajit, and a new group of managers to oversee MSR operation subdivisions. He must free up time to focus on asset allocation decisions and future strategy for BRK.”

I totally agree. Part of WEB & CTM’s success was consciously creating a Lot of free time to read, think Big picture, long-term and view things from 30,000 feet. I know Greg is brilliant & a workaholic who wants to demonstrate his many talents. However, I truly hope he will create that same priority of creating “free” quiet time as the enormous challenge of constantly and wisely allocating hundreds of billions will be above all else.

Let’s hope the conflict that may arise from these changes will be manageable. As my spouse says “it’s not what you say but how you say it.” I’d like to think our managers can and will accept valid constructive criticism delivered positively and professionally and from a perspective that we are all on the same team. We all want a leaner BRK but without micromanaging our managers.

Coach K & Coach Saban did not tell their players what they wanted to hear, but always challenged them and told them the Truth, how and why it impacted the team, and knew the art of choosing what strategy to use to maximize the improvement & response of their unique and talented players.

I think Greg is/will be excellent. He and Ajit are already so skilled and intricately involved in business operations and must have had hundreds of in-depth discussions with WEB & CTM over the decades. Let’s be glad there will not be a sudden enormous transition when the time comes as these greater roles and responsibilities have been happening before our eyes in recent years.

Operating costs become much more of a focus when revenue growth is harder to see.

In a lot of BRK's legacy businesses, growth is hard to come by.

Interesting, though BHE utilities went from high cost operating environment to a growth environment in a year with the AI boom.

What do you think?

I think the number of people who started a business or ran it successfully for long periods of time - decades at least - had a better handle on success than latter day CEO’s who come in and demand cost cuts in an effort to save themselves rich.

Nardelli came in to Home Depot and cut costs left and right: less inventory, cheaper help in the aisles, and so on - almost wrecked the joint before he was cashiered. A couple of Welch devotees have crippled Boeing by trying to do the same thing in so many ways. (Luckily Nardelli landed at Chrysler, which now makes, uh, a minivan. Yep, that’s the entire product line. Probably doesn’t cost much to run it, tho, so that’s good, right?)

I am long retired from broadcasting, most of my time was spent in radio, with a little bit in television. Radio was, at one time, run by entrepreneurs who did wild and nutty things. Expensive jocks, crazy contests, and behind the scenes music research and costly programming. When the FCC deregulated and said corporations could own as much as they wanted the owners got out and the mezzanine guys came in and tried to “economize” and cratered the industry. We built Westinghouse/CBS Radio, and later HGTV (I was a bit player there) into gigantic businesses; they’re now being penny pinched into submission.

I’m not at all against watching costs, even watching them carefully. Sam Walton did it and was legendary for it, yet after he left they started squeezing the pennies dry until the company had multiple bad years in a row, with the excuse “We can’t get the product on the shelves.” Save a bunch of minimum wage box openers, though. (Luckily WalMart had such momentum that it could ride over that hump. Some businesses aren’t so lucky.)

There are exceptions both ways, of course, and maybe I’m giving a bad rap to Nardelli and company (no, I’m really not) but 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.

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.

“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.”

I wonder. Warren has made a lot of handshake agreements with dozens of owners of a lot of our businesses that Berkshire will be their permanent home. Some of these businesses honestly may have been more interesting and vital contributors to Berkshire in yesteryear. However, many now may be focused in less relevant industries, may be less productive, relatively stagnant and not really contribute much to moving the BRK needle. I wonder whether Greg will be more inclined to consider selling some of these businesses to interested PE types or whether he would rather honor Warren’s approach to strive to keep them within the BRK family, as long as they are not costing us money year after year.

What do you shrewds think? How do you see it playing out? Thanks

That is an excellent point and who knows how it will play out.
I'm also more than curious about Todd Combs in regard to him being the CEO of Geico. As time goes on this seems like it might be a permanent position.... unless I missed it, I'm surprised that no one has asked at the AGM if Todd's appointment is temporary or permanent?

If it's permanent then I guess the Geico CEO gig is no longer considered a full-time job? Lol
But how can you really run Geico, be one of three (will be 2 at some point) money managers running the massive Berkshire portfolio, sit on two or three BOD's including JPM and have to do all that plus have a life. I know Buffett seems to enjoy saying that we manage to the point of abdication but seriously?

I know Buffett seems to enjoy saying that we manage to the point of abdication but seriously?

Indeed. Remember that Mr Buffett won't buy a company without management in place. For any given subsidiary he succeeds with the abdication solely because there is a full time CEO in place who isn't at head office.

Fun corollary: Dispense with the endowment effect. By extension of the above reasoning, would Berkshire buy Geico today at a fair price if it were not already owned? The usual requirement for an acquisition is that there be management already in place that is deemed smart, hard working (read: full time) and trustworthy. As the witty saying goes, if you don't have the third one you don't actually want the first two...no applicability here, I just enjoy the quip.

Precis: yeah, Geico probably needs a good full time boss.

Jim

The usual requirement for an acquisition is that there be management already in place that is deemed smart, hard working (read: full time) and trustworthy. As the witty saying goes, if you don't have the third one you don't actually want the first two...no applicability here, I just enjoy the quip.


This is certainly part of Berkshire lore, as it has often been said by Buffett. For example:


"Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence and energy. And if they don’t have the first, the other two will kill you.

You think about it, it’s true. If you hire somebody without the first, you really want them dumb and lazy."


This quote appeared in the Omaha World Herald, after a talk Buffett gave in 1994 to students at the Business School of Columbia University. Apparently Buffett has said he did not invent the aphorism, but didn't say where he got it from. https://quoteinvestigator.com/2023/05/13/three-qua...

And here's another similar version, that he said a year later to another group of students:

"We look for three things when we hire people. We look for intelligence, we look for initiative or energy, and we look for integrity. And if they don't have the latter, the first two will kill you, because if you're going to get someone without integrity, you want them lazy and dumb."
https://www.inc.com/marcel-schwantes/warren-buffet...


DTB

Cutting cost, especially by amputation is optically no good.Buffett adores Tom Murphy for “not acquiring costs in the first place“. But surely there are very few Murphys running around the subs.

The better approach is to build a culture of continuous improvement but that requires a runway. What we’re witnessing at Geico, BNSF and elsewhere are classic signs of its absence. I’ve heard through anecdotes that there are some subs where this is firmly rooted, Clayton McLane and Forest River come to mind.

This would be a great question at the annual meeting; With Abel and Jain answering.

<<. I wonder whether Greg will be more inclined to consider selling some of these businesses to interested PE types or whether he would rather honor Warren’s approach to strive to keep them within the BRK family, as long as they are not costing us money year after year.

What do you shrewds think? How do you see it playing out? Thanks>>

Tex, I concur with your analysis. Berkshire’s STRUCTURE we hope and presume will remain intact: the powerful engine of Insurance driving all that cost free leverage via Float, redistribution of cash flows to the most preferred sources, the large collection of operating companies, and of course the investees.

But..to your point… the eclectic collection of smaller subsidiaries? Not sure all will be retained. I could see several being sold off to private equity or whomever. Buffett promised not to do this. He’s stood by his word. For his entire life. Not playing gin rummy. Future Berkshire under new management and enormously larger, probably doesn’t need to waste all that time managing/overseeing these businesses.

I also believe, as Berkshire is pressured post Buffett by activists, it will make modest concessions and spin off a couple large—possibly very large operating companies. But most importantly, the STRUCTURE will remain intact. For me, that’s what’s most important. And you have a Board of Directors committed to making that happen.

<<I am long retired from broadcasting, most of my time was spent in radio, with a little bit in television. Radio was, at one time, run by entrepreneurs who did wild and nutty thin<<

I worked in media, both TV and radio, too. I agree it was fun back then..and no longer.
But the landscape— with the internet, social media, etc—changed the economics of both industries radically. I hate the IHearts of the world as much as you probably do, but this is a chicken and egg thing…did the conglomerates cause the problem..or did the economics of the problem create the conglomerates. I infer you think the former—I think the latter.

When WE were there—our employers sold ads to businesses that paid for “reach” well beyond any reasonable targeted customers. Extraordinarily inefficient—but there was no alternative. Now advertisers don’t need to waste all that money—they can reach their targets DIRECTLY and far less costly via social media & other targeted methods.

In our era, if you were selling acne cream you had to pay to reach seniors and others. Today, for a fraction you can hit every teenager in targeted towns/counties. Soon you’ll be able to reach every 15-19 year who has paid to visit a dermatologist!

If you’re in the bridal business, you had to pay to reach happily long time married adults.Today you can easily target every single 21-38 year old at a small fraction.

And the heart and soul of radio sales—mom and pop local businesses are getting crushed by Amazon. Amazon trucks roll up and down my street every hour it seems. That’s business that would have gone to our local media.

The world has changed, I like you, miss the old days. But life goes on

If you’re in the bridal business, you had to pay to reach happily long time married adults.Today you can easily target every single 21-38 year old at a small fraction.

Yes, but at least there is a partially offsetting factor: the CPM is different.
Decently targeted ads might cost you (say) 35 times as much per impression as untargeted, and much more for certain things like "people searching for mesothelioma". A lot of the market for mostly untargeted advertising is still there, it's just not doing very well. And of course, even a modest fall in revenues is enough to kill a lot of business models.

Jim

(made my money starting a company to do internet ad targeting...)

<<Decently targeted ads might cost you (say) 35 times as much per impression as untargeted,<<

That’s really interesting, Jim. But that targeted ad, which as you say may cost 35 times more per impression is still much CHEAPER than the untargeted mass audience ad, right? I.e. The minuscule cost per impression of a wide swath of certain non customers—is cumulatively very large.

(Am I underestimating that there could be a divorced-in-2 years, untargeted 44 year old later recalling that previously untargeted bridal biz ad?)

I wonder if there isn't another factor at play, which is a death knell.

People using the internet have become so annoyed at intrusive ads and clickbait that they:
1) don't even see the ads, as if they were in their visual blindspot
2) purposely refuse to visit or click on ANY ad, even for a product that is accurately targetted to them.

Up until 2 weeks ago, browser adblockers did a great job of blocking ads on Youtube. Both ads that were fed inline with the video and thumbnail ads. I literally did not know what my wife was complaining about on her tablet, since I was not seeing ANY ads on my desktop computer. I didn't know what people were complaining about when they talked about 2 minute unskippable ads showing up in the middle of a concert video, intruding in the flow of the music or play.

Then Youtube changed something and now nothing blocks ads.

Several years ago I vowed to never click on an ad, even if it was for something that I was interested in. If I was interested in the product I opened a new window and went directly to the company's site.

But that targeted ad, which as you say may cost 35 times more per impression is still much CHEAPER than the untargeted mass audience ad, right?

It depends on the circumstance. If your targeting is more than 35 times as accurate than the 35x increase in cost per impression, it's worth it. If your targeting is less than 35 times as accurate, it's worse. For example, maybe you're targeting those teenagers because you're convinced that they're the only ones for your pimple product, but have forgotten about expectant mothers with acne. Or you're getting too many teenagers with clear skin and a different targeting method would have worked better. (a fondness for Magic the Gathering, perhaps?)

Segment targeting has fallen out of fashion somewhat, and adaptive closed-loop measured targeting have pulled to the foreground. Targeting more of what has actually been working so far, letting the algorithm figure out what the "segment" is.

I worked on this stuff in the very early days, so everything was new. Among other things we were looking at pages visited, and their predictive power of the segment you're in, since ad buyers were targeting only segments at the time. The most predictive page for being female, for example, was something like brides.com/planning/hairdos. The most predictive page for being male was something to do with northeast US real time doppler weather maps. It's almost sad to think that stereotypes can be so easily confirmed.

Jim

Then Youtube changed something and now nothing blocks ads.

Other than paying for the premium subscription, which of course means they know your true name and address and can target you elsewhere all that more perfectly.
Or, for some reason, hanging out in Monaco. I see no or almost no ads on Youtube when I'm physically there...honestly I have no idea why.

For ordinary web page ads, does anybody use Pihole?

Jim

For ordinary web page ads, does anybody use Pihole?

I installed Pihole several years ago in my house. You would be amazed at how much a Roku TV reports back to the mothership.

In the last few days, 8057 queries have been blocked out of 60588 total queries. 13.3% blocked

I installed Pihole several years ago in my house.

I've wanted to install something like this for a few years now. What are you running it on? A Raspberry Pi? Can it keep up with the traffic? We have 50+ devices connected at our house at any given time.

"I installed Pihole several years ago in my house."

I've wanted to install something like this for a few years now. What are you running it on? A Raspberry Pi? Can it keep up with the traffic? We have 50+ devices connected at our house at any given time.

I am running it on a Raspberry Pi Zero W I bought on Pi Day 3/14/2017 right after they came out, bought several for $3.14 each.
Nowdays you would want the Zero 2W, for $15. $15.47 from Aliexpress with case, free shipping.
No case, just a short USB power cord. It is plugged in to the USB port on the router for power.
It only has WIFI, which was faster than wired Ethernet via a USB dongle. Kinda weird, using WIFI for a distance of 6 inches.

Router & DSL modem & VOIP adapter are plugged in to a low-end $15 (on sale at Sam's Club) UPS, which will run them all for more than 24 hours.

It works fine, we've got probably 2 dozen or more devices. Our toaster over even has wifi. As does the dishwasher.

DNS on each device caches the lookups after the first lookup to the DNS server (the PiHole device), so you will not see any slowdown.

I just did some tests. On an initial lookup the Pihole was about as fast as going directly to 8.8.8.8 (dns.google) -- 0.13 seconds. On subsequent lookups it was lightning fast. 0.06 seconds.

Follow the Pihole setup instructions and you can have it set up in a hour. The hardest part is configuring your router to tell your devices to go to the Pihole.

People talk about also using "unbound". I have never seen any reason to use unbound, it just adds complexity.

There is also a way to have a 2 Pihole setup with automatic failover. Easy to set up if you want to add that complexity. In all the years my Pihole has been running, I have never had a problem with just the one Pihole, so I never bothered.

Pihole sometimes blocks a site that you don't want to block. My bank's login server happens to be one. It is very easy to whitelist those.

My son doesn't have Pihole at his house, and I am always amazed at the extra garbage I get when I'm over there.

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