(From Aidan Directors Blog, 1 May 2009)
One of my biggest pet peeves is the tendency to misuse the word “leverage”. I feel like smacking people upside down when I hear people use it wrongly. So please pay attention, I am going to tell you when to use and when not to use “leverage”.
Correct Use of “Leverage”: Physics
Remember the simple lever? We learned about simple lever in high school. A lever is a simple machine that is formed by a bar, a weight, and a fulcrum. A force is applied somewhere on the bar to move the weight. There are three types of levers, depending on the position of the fulcrum, the weight, and the applied force.
First type of lever: fulcrum between weight and applied force.
Second type of lever: applied force between fulcrum and weight.
Third type of lever: weight between fulcrum and applied force.
The most common is the first type of lever, for the simple reason that it allows us to lift heavy object without much effort. This is possible because the lever creates a “mechanical advantage”, called leverage. We use the first type of lever in scissors, crowbar, and seesaw.
There is a mathematical formula relating the distances between the fulcrum, the weight, and the applied force with the magnitude of the forces acting on them. If you have a long bar, you can move a large weight at the other end of the bar with less effort, by placing the fulcrum near the weight. The same principle is at work when fat kids are made to sit nearer to the middle of a seesaw.
“Leverage” is a scientific term with a precise meaning.
Correct Use of “Leverage”: Finance
According to Investopedia, there are two definitions of leverage in finance:
1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
2. The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.
Let me explain leverage in plain words. Suppose you have $100. You can buy a pack of marijuana and sell it at the black market for $120. For each pack you will get a $20 profit. To increase your profit, you use leverage. How? First, borrow $900 from your friend. Now you have $1,000. You can buy ten packs of Mary Jane (or more, if you negotiate well with the pusher), and sell them for $1,200. You then pay back your friend his $900, plus maybe an interest of $100. You clear $200. This is better than the $20 profit you would have made without leverage.
Thus, in finance, “leverage” has a specific meaning.
Correct Use of “Leverage”: Others
I scoured online dictionaries to find other definitions for leverage, and found these:
- n. the ability to influence people or events, “information gives leverage” (HarperCollins)
- n. power, effectiveness, “trying to gain more political leverage” (Merriam-Webster)
- v. to improve or enhance, “It makes more sense to be able to leverage what we [public radio stations] do in a more effective way to our listeners” (American Heritage Dictionary)
Incorrect Use of “Leverage”
Leverage does not mean “use”. This is a blatant abuse of an English word by corporate bullshitters. In corporate bullshitese, you never use X, but you “utilize” X, or you “leverage” X. Using “utilize” is sloppy writing; using “leverage” is simply wrong.
Using Google, I found the following samples of real-life corporate writing where the word “leverage” is misused:
- We remain committed to these values and continue to challenge ourselves to improve the ways in which we embrace and leverage differences among people, whether they are our Associates, customers, vendors or the community at large.
- I think we the customers need to leverage the vendors to make better security software.
- At XXX Inc. we leverage our core competencies within structure-based drug discovery and development to create a versatile, rich and sustainable pipeline of novel drugs.
- We leverage our unique assets to create experiences — for users and developers — that haven’t been possible to date.
- We leverage GAITS Standardized Information Assurance Model (SIAM) to manage the migration of security architectures with automated inventory and asset control tools such as CA’s Unicenter, NetEISS and vulnerability assessment tools such as Foundstone and eEye Retina.
Once again, “leverage” does not mean “use”, people. If it is used as a verb, the common meaning is “improve” or “enhance”. Or it can be used as a verb to mean using leverage (in the context of finance or physics). REMEMBER, “LEVERAGE” DOES NOT MEAN “USE”.
Please don’t use “leverage” wrongly. Otherwise I will leverage my foot to kick your ass.