The power of freedom

Chapter 5. The Distribution of Resources

My approach to business has changed significantly over the past eight years. The main reason for this change is my growth as a manager and the deep understanding of laws of my company’s development. When you experience certain cycles, you begin to notice them and learn how to face challenges. For example, consider the flooding in Russia in 2024. Such events occur on average every 10 to 15 years. Those who haven’t experienced such disasters will struggle to prepare for them in the future.

Management cycles typically last around 5 to 8 years. As you go through these cycles, you gain experience in resolving various situations, misunderstandings, and conflicts. Our business also has a "long tail" of rare but significant events that occur every 3 to 4 years or even less frequently. It's essential to experience these events to fully understand their impact on us and learn how to navigate them effectively.

When I first encountered certain issues, whether it was dealing with government agencies or unexpected risks, it felt like a nightmare. My heart would race, and I felt uncertain. However, with experience came the understanding that these challenges are an essential part of the system and that facing them is inevitable. Over time, I learned to approach these challenges with more calmness. Each new trial brought me greater confidence, and I found myself almost always in a state of tranquility.

I realized the importance of a resource-based approach. This approach is rooted in the understanding that everything we possess is a resource that should be used efficiently and beneficially for all parties involved. After all, in the end, we are managing resources.

Effective management is the ability to configure a system so that resources are utilized in the best possible way. There are many starting points in management: you can begin with resources, clients, stakeholders, business processes, or performance metrics. For me, management has always been primarily about the efficient use of resources.

I identified a flaw in my own working algorithm – funneling efforts in the wrong direction and inefficient resource allocation. Then I realized that this isn't just my individual case; many leaders make the same mistakes.

A good example of effective resource allocation can be seen in a well-organized construction project. Some builders may take three years to complete a 16-story building, while other companies can finish the same project in just eight months. As a result, the latter not only completes the project faster but often does it at a lower cost and with better quality, thanks to their efficient organization.

Every morning, I walk past a construction site and see the same scene. At 7:30, the workers are already lined up and receiving instructions to be fully prepared and ready to start work by 8:00. The equipment is well-maintained, everything is new, and there are no delays.

The same applies to business. Resources operate on similar principles. Sometimes, the resources themselves indicate that they are being used inefficiently. For example, when we talk about human resources, high employee turnover is a sign that we are not utilizing our staff's potential effectively. Similarly, when it comes to financial resources, a lack of profitability or high operational costs are also indicators of inefficiency.

There still aren’t many books about resource management, but it has a promising future. It's essential to consider both the core and resource business models, as they always intersect. The more dimensions you analyze, the better you'll understand your company and see its potential.

To avoid mistakes in resource management, it's important to understand the three key aspects that influence a manager when making decisions about resource allocation.

Earlier, I mentioned that companies operating in the same industry often copy each other, including their resource allocation methods. We tend to stick to traditional ways of doing things, which can hinder our ability to make the right decisions. This is how the human brain works: if you ask it to imagine a non-existent animal, it will combine parts from real ones, like drawing an elephant's head and a tiger's body. The same applies to resource distribution; there may be a temptation to adopt the strategies of other companies or the industry as a whole. However, if we rely on old methods to solve new challenges, we risk falling behind. This is one of the most challenging management traps, and finding a way out is nearly impossible. This is the fear of loss and the instinct for self-preservation that don’t let you make a decision. So how do we tackle this and create a powerful system? The answer lies in effective resource management.

As an example, I’d like to share my experience during an audit visit to one of the company's branches. We started looking into the staffing levels, and I found that they had four finance specialists and only one HR professional. In our industry, it should be the other way around. Only when I asked the branch manager why this was the case did he realize it was a poor management decision. I can speculate that this imbalance might be because the manager’s got on well with the finance team, or perhaps he has a personal interest in finance. Besides, HR is often seen as a complex and unclear area for professionals in our field, which requires bringing in people with different skill sets. The manager simply doesn't understand the criteria for selecting such individuals, how to train them, or what metrics to set, which ultimately leads to this distortion. This is a typical example of ineffective resource management.

Different types of resources yield results within varying timeframes, and it’s not always possible to predict their long-term effects. A deep understanding of the structure and potential of each resource is essential to avoid making decisions based solely on short-term gains.

Overall, effective resource management requires not only an understanding of the current needs of the business but also the ability to anticipate future trends and adapt to them. This is the foundation for building a sustainable and dynamic business.

Types of resources:

• financial;

• material;

• human;

• intellectual;

• technological (figure 1).

Figure 1

Resource Characteristics and their Contribution to Company Development

Financial resources are utilized according to the needs of the company and are often directed towards generating profit, although they are not always directly linked to it. Finances can be employed in various forms to support three main types of resources: human, material, and technological. In this context, it's crucial to understand how to effectively manage financial resources; it may even be beneficial to establish a dedicated department for this purpose.

Finance plays a dual role in business. On one hand, money allows for the acquisition of resources; on the other hand, it is itself a valuable resource. While having funds in accounts is always important, I have never seen it as the primary goal of management. I believe that making it the main objective is a misguided focus that can often lead one astray. I have always viewed the company independently of its financials. I am convinced that profit is simply a byproduct of effectively managing the underlying processes that drive the company's operations.

If we draw an analogy with a football match, financial resources are like the score on the scoreboard; the real action happens on the pitch. If you focus too much on that number, you might lose sight of what really matters. It's important to concentrate on effectively utilizing all types of resources to achieve the desired result on the scoreboard.

In our business, we place a high value on human resources, as they account for 70% of all our assets. This means that people are our top priority, and we design all our systems around this resource. We often discuss where to direct our attention and resources, and we conclude that we need to invest more in partners and entrepreneurs, as well as in the funds that support them.

Salaries are worth mentioning as well. Currently, they are not very high in Russia, but I’m positive that this situation will change soon. I would even venture to predict that by 2030–2035, the value of human resources will significantly increase. I hope this book highlights an important aspect – the necessity of sharing success with employees and creating new business models. This way, businesses will transform, and competition will naturally elevate the entire system to a new level.

The value of human resources is significant and will continue to grow, so it's crucial to keep the focus on people, especially if this type of resource is primary for your business. On the other hand, it's perfectly acceptable to seek external financing for specific goals. For example, construction companies often take out loans that are 100 to 150 times greater than their own capital, and they successfully execute projects. They are not afraid to take risks because they know exactly where the value lies and how to leverage it.

Material Resources. I would rate their importance as three out of five. I don’t deal with the administrative and operational aspects, nor do I hold meetings about it. At one point, I delegated the management of this area to a truly reliable and talented person, and I haven’t revisited the issue ever since, as I don’t see the point. Instead, I focus on the technological aspects, which are extremely important in our field and deserve a five out of five rating in terms of significance.

Every industry has its own system for resource allocation, and it’s crucial to understand where to direct efforts to realize potential. I've seen leaders who take part in choosing office furniture or purchasing computers. I believe that’s inefficient. A leader should be where they can provide the most value to the business, regardless of company size. Every entrepreneur subconsciously understands the profitability of different resources. Take our real estate business, for example. We have an overall structure of income and expenses, and the simplest method for evaluation is analyzing return on investment (ROI).

But honestly, it’s hard to imagine that investments in material resources could be highly profitable if other resources remain unchanged. I like a method I call “taking the situation to absurdity.” Let’s say we only invest in material resources and start by buying new desks. We won’t hire new agents or invest in their training and development; instead, we’ll buy desks made of gold. Will this help our business grow? No. The desks will be there, and their utility will be zero unless we sell them later. Now let’s consider another scenario: if we actively invest in developing our staff, nurturing professionals in their fields, while changing nothing else, our profitability could immediately increase by 20%.

Or think about investing in a strong brand. What would change if we created a powerful brand but kept our technological processes the same? It’s unlikely that this would yield significant results. This is one of the simplest ways to understand the real effectiveness of various investments. Of course, there are more complex methods that involve mathematical and financial calculations

Human Resources. Even when a business is just starting to grow, it’s important to invest resources where they will yield the greatest results. For instance, when real estate agents join us, we ask them what they’re aimed at. Often, they say they want to close deals and earn money, but it quickly becomes clear that they don’t always realize that it’s much more important to develop the qualities that will lead to those deals. I point out that while the knowledge provided by the company is important, what matters even more is quickly building a client base and finding properties.

Intellectual resources, such as licenses, technologies, and the collective knowledge of employees, fall into a separate category. Although they may seem inexpensive, monetizing these resources requires time and effort. It’s a complex process, but with the right approach, it can yield significant benefits. Intellectual resources often turn out to be more valuable than they appear at first and play a crucial role in the long-term success of a company.

Technological resources include various interaction technologies. They’re not only physical resources but also IT processes, software, and an understanding of all business processes. Technology plays a key role in ensuring the efficiency of a company’s operations.

We might develop powerful technological frameworks that we establish. Eventually, every company contemplates how to effectively utilize its resources.

Different companies manage their resources in different ways. For example, in the real estate business, important resources include the number of agents, the size of the client base, and brand recognition. We assess the efficiency of resource use and accumulation, which is like debits and credits at any time. In other industries, such as hospitality, resources are invested in material assets, service quality, and brand reputation. In service sectors, there’s a greater emphasis on the human factor, while in banking, financial resources take precedence. However, there is always some method for managing these resources effectively.

Let's break down the essence of this concept. An investment mindset is closely tied to understanding value, which is fundamental for a lasting business. When an entrepreneur makes decisions that are beneficial, their business becomes profitable. However, it's crucial to understand who benefits from these decisions. This is where the challenge lies.

A business can only exist and thrive when it provides value not just to investors, but also to employees, customers, and society as a whole. Balancing the interests of all these stakeholders is often quite challenging. Creating systems that are simultaneously beneficial for all four market participants requires significant effort.

Let me give you a simple example. We spent a long time discussing the cost of investing in the training of a single employee. Training is often undervalued in Russia because the focus tends to shift towards tangible assets. For instance, if an employee needs a computer costing 250,000 rubles, no one would object; everyone sees that as reasonable.

But what about employee training? Essentially, it’s about focusing on the customer. Few people realize this because training is usually categorized under employee budgets, when in fact, it should be considered a customer budget. Once we understood this, we increased our investments in our staff. Our strategies became long-term. Training one employee can cost up to 500,000 rubles, but the return on such investments is enormous. This kind of investment yields significant returns: the better trained an employee is, the higher the quality of the products or services they provide. Therefore, such investments are more than justified and highly profitable.

Two years after implementing this strategy, we noticed that our company's average customer satisfaction rating increased from 4.3 to 4.8. Between 2018 and 2021, we actively invested in development, which yielded tangible results: conversion rates improved, performance metrics enhanced, and profitability increased. We launched a comprehensive development program for employees and realtors, investing around 1.5% of our total revenue into their training. These are substantial sums, but the results we achieved in 2021–2022 were impressive.

To achieve these results, the company had to sacrifice short-term profits for two years. Those who don’t recognize the importance of this balance often cut back on development. However, a successful business relies on maintaining a sense of balance. We shifted our focus from short-term gains to long-term employee development, which led to positive outcomes: employee turnover decreased, job satisfaction improved, and customer loyalty increased.

This invisible balance is crucial for business success and plays a key role in achieving positive outcomes for the company. In the early stages of a business career, there’s always a temptation to pursue immediate gains, but that can be a trap. Trust me, when profit comes instantly, it often resembles cheese in a mousetrap. No matter how tempting it seems, it's not worth taking. Your decisions carry significant weight. If a leader makes a strategic decision that yields immediate profit, it could turn out to be a trap for the entire company – potentially even for all thirty thousand partners and employees who share the same vision.

This is why many businesses walk a fine line and ultimately fail. Each year in Russia, up to 450,000 companies close their doors. These figures highlight not only the high level of dynamism in the business environment but also the serious challenges entrepreneurs face. Observing these numbers makes it clear that the market demands constant adaptation and innovation for a company to survive and thrive.

Some leaders focus all their efforts on employee well-being; others prioritize meeting customer needs until funds run out; some extract every possible profit for themselves while neglecting others; and some dedicate everything to the benefit of society, leaving nothing for themselves.

When it comes to the work of "Etagi," we didn’t manage to find that balance right away. In the early stages of my career, I didn’t always pay enough attention to clients. This is a topic worth discussing openly. I didn’t fully realize how important it was. My work felt like a daily routine, and I didn’t think about the bigger picture.

If I could go back to the year 2000, I would have advised myself to start looking for and analyzing patterns back then. Running business is like doing an equation in mathematics. Learning to see and take into account the multiple aspects is like solving a system of equations with several unknowns. It’s challenging but possible, and the right tools help find that balance. Now I have several such tools that allow me to effectively manage all aspects of the business while satisfying stakeholder needs.

The first tool is understanding global flows: customer, financial, human, and others. Over the last 20–25 years, I've realized that the biggest mistake is trying to analyze something in isolation without understanding the overall direction.

For example, when someone is swimming in a river, they don’t think about which way it’s flowing. They only start to realize this when they're swept away by the current or overwhelmed by waves. Not until a situation directly affects them, can they grasp the big picture. Hiring weak employees is like rearranging blocks in a poorly assembled Rubik's cube. No matter how hard you try, you won’t be able to solve it; there simply won’t be a chance. Solving such problems can be costly because weak employees won’t achieve the desired results, and no amount of money can fix that.

In the early days of my career, I didn’t understand this and tried to address issues on a case-by-case basis. Now I realize that solutions need to be sought at a different level. I used to enjoy watching the show "Your own game" (Russian version of Jeopardy game). You never know what will happen next. The key isn’t just being the smartest; it’s knowing when you can’t solve a problem and looking for answers at a different level. I always say, “Let’s look higher.” I even have a catchphrase: “Let’s look upstream and downstream.”

At one of our branches, I requested a list of 50 newly hired employees. I personally interviewed each one and discovered that 35 of them were not suitable for their positions. I told the HR specialists, “Guys, this isn’t working; we need to change everything.” I appointed a supervisor to oversee their work. As a result, candidates began to be selected more carefully; this now took more time and significant effort. Five months later, many things had changed in the branch. By simply hiring higher-quality employees, we improved the process chain. Competition increased, conversion rates rose, and we were able to reduce development costs.

We could have endlessly tried to solve problems at a superficial level, but real change came when we looked deeper. I can confidently say that this is the most important tool in business that one needs to master. I learned it late, I admit. It took me 18–20 years of practice to understand how it works. Minor problems can be very distracting, and it takes effort to see the big picture.

The second tool is planning. On the one hand, it can seem like a necessary evil, but on the other hand, it helps assess situations more accurately. It depends on the degree of planning. I've seen cases where everything is planned down to the smallest detail, including furniture and budgets for it. This approach is bottom-up: first, they count the number of tables and computers, then they form an overall budget.

I'm a proponent of top-down planning. I believe in setting goals and identifying major resources. I enjoy discussing the big picture with people without getting bogged down in details. We say, "Here’s our goal, and here are the necessary resources." Some might ask, "How can we achieve our goals without a detailed plan?" But that's how we all live. We don’t always know how the gearbox in a car works, but that doesn’t stop us from driving. The key is to understand the fundamental principles and keep moving forward. However, when necessary, one should be ready to dive into the details and figure things out. Regularly engaging in detailed analysis isn’t practical; people need to be given autonomy.

The same applies to management: focus on your level, and the details will become clear as you progress. The main thing is to find the boundary of how far to plan. This boundary isn’t as extensive as people think. There’s no need to spend hours on Excel spreadsheets; it’s enough to discuss the task and goals in broad terms, agree on concepts, coordinate resources, and identify the interests of the system before getting to work.

That’s how I’ve built my company. We don’t have extensive developments or documents. Our largest presentations don’t include more than 10 slides. Yet, we produce high-quality products and are the largest company in Europe in our field. Of course, this requires thorough preparation and high intelligence from all employees, but that’s a different issue.

The third tool is the non-optimistic model. A common problem for many managers and entrepreneurs is that they are too optimistic. It’s good to be optimistic, but it’s also essential to acknowledge the possibility of failure. I advise everyone to accept this as a given and not to suffer if things don’t go as planned. Most people, especially managers, can’t handle unexpected situations and can crumble under setbacks. When everything goes according to a plan, there are no problems, and everyone enjoys the process. But true management talent shines when difficulties arise.