The Doorman’s Fallacy: When You Cut What You Can’t Measure

I’m watching a merger right now that is a complete and utter clusterfuck. The acquiring company has no clue that they're destroying the amount of value that they're destroying, and this isn't uncommon, unfortunately. A friend of mine sold his company—it’s a 15-year-old company, a really solid business, good team—and the acquirer came in and clearly bought it because they saw some degree of value.

But this is the part that blows my mind: the acquirer comes in, basically kicks him and his leadership team to the side, and they start making decisions without understanding what anything actually does. You know that when you look at a business and you look at the functions of it, you go, "Okay, there's always more below the surface," and they're not asking questions. They won't take the time; they won't bring the leadership team into conversations; they won't bring the guy that started the company into conversations. Maybe it's a time thing, maybe it's egos—they don't want to feel like they've got to ask somebody for help—I don't know, but they're cutting shit left and right because they can't measure it on a spreadsheet.

I've worked in private equity for a while, so I've seen this in mergers and acquisitions and all of that before. What really sucks is, if you look at his team—an incredible team—morale sucks. You've got good people that are either leaving or they're basically halfway checked out already. What was a really good company is now just getting destroyed in real-time, and virtually everybody that understands this company knows it.

By the way, if this kind of breakdown interests you, I actually go deeper on stuff like this in the weekly newsletter that I have; you can hop in at razemail.com. But there's actually a name for what this company is doing in coming in and destroying the value that they are, and it's called the Doorman's Fallacy.

The Doorman's Fallacy is basically the mistake of eliminating something because you can't quantify its value, only to discover later, "Uh-oh, that's what that did". Later on, you kind of determine or figure out the problems that that thing was either solving or the value that that particular thing added. When you don't fully know, you just take it at face value; you just look at the utility of that specific function.

They call it Doorman's Fallacy because a classic example would be: you've got a building that cuts the doorman, who was opening the door for people, to save 50 grand a year. Now you realize, oh, now there's packages that are gone missing, and we've got random people now that are walking into the building and sitting in the lobby, and the tenants don't feel nearly as safe, and you don't have the same nice premium building feeling. That kind of disappears, so you realize afterwards the doorman wasn't just opening doors. He was opening the doors, yes, but he was handling packages, he was keeping all the randos out, he was making the place feel like it was worth paying for, and the perception that people had when they walked in the door and somebody was opening the door for them—they felt like their status was increased. You had all of these other miscellaneous things that are very difficult to quantify on their own, but collectively added into more value than was perceived to say, "Oh, we can just get like an electric door opener".

I'll show you what the opposite of this looks like. I was at the Four Seasons in Vegas last week for an event that I was speaking at. And yes, they have doormen, but what got me was, I left for lunch and I come back to my room and my sunglasses, which I hadn't brought with me, are sitting on the counter on a Four Seasons lens cloth to clean your glasses. They had cleaned my glasses and then left it on the lens cloth. I was like, "That's kind of cool." Then I walk into the bedroom and all my charging cords for my computer and my laptop—my phone and all that shit—are all wrapped up in this little Four Seasons cord tie. There's this little column in the living room that's lit up too, and it's got this sculpture on it.

All of these little things add up to value because from an experience standpoint, when I first walk in the door and I see the piece of art, I'm like, "Hey, that's pretty cool," and then I leave and I come back from lunch and I'm like, "Oh, that's really sweet, you put my glasses on a lens cloth and you tied up my cords". I mean, nothing that's going to shatter the earth, right? But if somebody wanted to come in and cut a bunch of money—if they wanted to gut the Four Seasons—you could look at those things, those small things, like the lens cloth or the zip tie thing, or even the practice of making sure that people are accountable to actually doing it, and you could just take all that away. You'd probably save a lot of money; you'd save some time. It'd be pretty easy to justify: "We could probably save 100 grand this year by simply never buying lens cloths again," and no one would probably know the difference because if you haven't stayed at the Four Seasons and that hasn't happened to you, then you don't have that expectation.

So on paper, they'd save a pretty reasonable amount of money. But those things collectively are the Four Seasons experience. Just because it's difficult to quantify the value doesn't mean the value's not there.

That's what's happening in this merger. The acquiring company is only looking at things in terms of utility; they're looking at the client events and they're looking at other things that the company does and they're thinking, "Well, do we really need those? Is that basically a lens cloth? Let's throw that one out, let's throw that one out". They're looking at certain support roles and they're saying, "Well, that seems like overkill, we can scale that back," because they don't understand why you'd have that level of support for that particular function in that group. Even the culture of this company, which was pretty epic—it was a big part of the employee makeup, the retention, the productivity, and definitely part of the client experience—because they can't quantify it, it has no value to them.

So they've basically destroyed the culture for all intents and purposes, and what you're left with is this company that's on its way to being destroyed. You're watching it in real-time and it kind of sucks. It's like a dumpster fire that could have been phenomenal—the acquisition made a lot of sense, but the way that it's been implemented has been shit.

While I was at the Four Seasons, I was talking to a friend that has done 62 M&A transactions in his career, and I asked him, "So what percentage of those end up great, and what percentage are dumpster fires, and then what's everything in between?". He said 10% are great and 40% are fucking dumpster fires.

I think the Doorman's Fallacy is a big part of why. Because if you only see the value that's on spreadsheets, and if you only value the things that you can specifically measure, you're going to miss the invisible shit that actually creates value in an organization: the institutional knowledge, the relationships, the trust, the culture, the small things that make your brand what it is if you've done it deliberately. By the time you realize what you lost, it's kind of too late to go back.

If you're in M&A, whether you're buying or selling, I would really pay attention to this. The things that you can't measure are very often the things that matter most, and absence of that doesn't mean there's not ROI. The best operators I know know how to identify that and then protect those invisible value creators in the business. I hope it helps as you think about creating value in your business for your customers and if you make any deals this year. Adios.