2018: Does Berkshire use zero-based budgeting?

BECKY QUICK: This question comes from Angus Hanton (PH), who — he and his wife are based in London, and he says they’ve been shareholders in Berkshire Hathaway for over 30 years.

He says, “We have all read about the zero-based budgeting that has been so effective with Kraft Heinz and other investments that you’ve done with 3G Partners. Can we expect these cost-reduction techniques to be used by your managers in other parts of the Berkshire Hathaway enterprise?”

WARREN BUFFETT: Well, in general, we do not expect the managers, generally, to get in the position where there would be a lot of change in terms of zero-based budgeting. In other words, why in the world aren’t you thinking that way all of the time?

The 3G people have gone into certain situations where there were — probably primarily in personnel, but in other expenses as well — a lot of expenses that were not delivering a dollar of value per dollar expended.

And so, they made changes very fast that — to a situation that probably shouldn’t have existed in the first place.

Whereas, we hope that our managers — take a GEICO. GEICO’s gone from, I think, 8,000 to 39,000 people since we bought control. But they’re all very productive. I mean, you would not find a way for a 3G operation to take thousands of people out of there.

On the other hand, I can think of some organizations where you could take a whole lot of people out, where it isn’t being done because the businesses are very profitable to start with.

That’s what happened with the tobacco companies, actually. They were so profitable that they had all kinds of people around that didn’t — weren’t really needed. But they — the money just flowed in.

So I — our managers have different techniques of keeping track of — or of — trying to maximize customer satisfaction at the same time that they don’t incur other than necessary costs.

And I think, probably, some of our managers may well use something that’s either zero-based budgeting or something akin to it. They do not submit budgets — never have — to me. I mean, they’ve never been required to. We’ve never had a budget at Berkshire.

We don’t consolidate our figures monthly. I mean, I get individual reports on every company. But there’s no reason to have some extra time spent, for example, by having consolidated figures at the end of April, or consolidated figures at the end of May.

We know where we stand. And — you know, I’m sure we’re the only company that — probably in the whole Fortune 500 — that doesn’t do it. But we don’t do unnecessary things around Berkshire. And a lot of stuff that’s done at big companies is unnecessary. And that’s why a 3G finds opportunities from time to time.

Charlie?

CHARLIE MUNGER: Well, if you’ve got 30 people at headquarters and half of those are internal auditors, that is not the normal way of running a big company in America.

And what’s interesting about it is, obviously, we lose some advantages from big size. But we also lose certain disadvantages from having a big bureaucracy with endless meeting after meeting after meeting around headquarters.

And net, I think we’ve been way ahead with our low overhead, diversified method. And also, it makes our company attractive to very able, honorable people who have companies.

So generally speaking, the existing system has worked wonderfully for us. I don’t think we have the employment that could be cut effectively that a lot of other places have. And I think our methods have worked so well that we’d be very unlikely to change them.

WARREN BUFFETT: Yeah. I think if some — at headquarters, you could say we have kind of subzero-based budgeting. (Laughter)

And we hope that the example of headquarters is, to a great extent, emulated by our —

CHARLIE MUNGER: But it isn’t just the cost reduction. I think the decisions get made better if you eliminate the bureaucracy.

WARREN BUFFETT: Oh yeah.

CHARLIE MUNGER: I think a bureaucracy is sort of like a cancer. And it functions sort of like a cancer. (Applause)

And so, we’re very anti-bureaucracy. And I think it’s done us a lot of good. In that case, we’re quite different from, say, Anheuser-Busch at its peak.