If I own a business and I do everything myself, I should expect to act in my own best interest. As soon as I start delegating, I introduce agents. People are doing work on my behalf. They do not always have or act in my best interests. The difference between those two results is called Agency Loss. It is the difference between the best result for the owner (principal) and the actual result due to the actions of the employee (agent).
It is unavoidable when owning a business. Here is an easy example:
You get your AC maintained every 3 months. ACME AC has been providing this service for multiple years. The owner of ACME AC, Gary Acme, remembers to bring a box of cookies in for the accounting department when he does the service. A new provider solicits your business and offers a more competitive price for the same comprehensive service. Anne in accounting decides to stick with Gary. The price difference is not that much, and she likes Gary. Gary is so thoughtful, and always brings in cookies. Agency Loss.
Now multiply this over a myriad of possibilities in your business and you can see how this can add up. This is why Sam Walton of Walmart had a strict policy of no gifts in the purchasing department. He knew this could lead to agency loss. I believe it is also why so many owners/operators have a difficult time delegating. These little mistakes drive them nuts. No one will look out for their best interests like they will, so they hold tight to all the decision-making capabilities. But not delegating is also a death sentence for growth. You cannot grow without learning to delegate. You cannot delegate without risking Agency Loss. What to do?
Accept it - As soon as you delegate, you give up control of the result. Accept that things will not be done how you would have done them. It helps to keep the big picture in mind, the growth you are trying to achieve.
Processes - Implement processes in the areas of your business where Agency Loss are most likely to occur. Limit the maximum discount a salesperson can give without approval or receiving gifts in procurement for example.
Provider Refresh – Periodically refresh your providers. Have your accounting department procure multiple quotes for the different services and expenses you incur, then submit them for review. This will keep everyone honest and efficient.
Zero Cost Budgeting – This is a major undertaking. I do not recommend doing it every year. Zero Cost Budgeting is starting from scratch. When building next year’s budget, rather than starting from the previous year, set everything to 0. Make each department justify every expense. Question everything and look for efficiency. This is a very valuable tool and very exhaustive.
With delegation comes a loss of control and the introduction of the principal agent problem. Delegation is necessary to grow. Therefore, learning to live and manage agency loss is inevitable.