A False Economy

Introduction

In economics, a false economy is an action that saves money at the beginning but which, over a longer period of time, results in more money being spent or wasted than being saved.

In today’s world, we live in a false economy where economic prosperity is touted but only a few actually benefit from it.  It is, in many ways, like the Emperor’s New Clothes, an illusion fed only by the gullibility of naive souls.

Many businesses within this false economy, themselves practice false economies.  They make decisions to cut costs where those cuts end up harming the company. 

Three Examples of False Economies

Example 1 – An analogy

You need a wrench to tighten a bolt so you go out searching for one.  All the wrenches you find are priced equally at around $10 but you find one that is on sale for $1 so you buy it.  Fantastic; you’ve just saved $9.  But then you get back to your workshop and realize that you bought a 1” wrench and have a 1/4” bolt to tighten.  Not only have you wasted all the time you spent searching for the wrench but now you have to do it all over again and, this time, buy the right sized wrench for $10 which has, now, actually cost you $11.  That’s a good example of a false economy. 

We might also call it ‘cutting off your nose to spite your face’.

Example 2 – Your Health

Let’s say, for example, that you are having chest pains and need to consult with a cardiologist but the most highly regarded, and respected, one in your area charges $500 for a consultation.  However, there is a new cardiologist in town who only charges $25.  Who are you going to go and see?  Now, it could be that the new guy is every bit as good as the one who charges 20 times more but can you take that chance?  Do you put your life at risk for the sake of a few dollars?  I don’t think so.  I think you think about it but, ultimately, you grit your teeth and pay the $500.  The logic, here being, is that the more expensive cardiologist has earned his reputation and, corresponding, price tag.  Of course, you could go cheap and get what you pay for; you’ve saved money but didn’t get the right diagnosis and dropped dead.  That’s another false economy with devastating consequences.

We call that kind of false economy “the immortality syndrome”.

Example 3 – Hiring (Three examples of false economies within the workspace)

False Economy #1 – Pay the least you can

Companies will hire people just because they will work for less and not because they are the best fit for the job in question.

False Economy #2 – Only hire young people

Older people are eliminated from contention just because they are old and not because they don’t have the skills necessary to do the job itself; another false economy, especially when you consider that older people have a much stronger work ethic than many of the younger workers of today.  They also are much less likely to go out partying and come to work, exhausted (due to lack of sleep) and hungover.  How much value does somebody provide when they are not in a fit state to work?  Older people also have a tendency, and the skill, to get along with everybody whereas huge egos, and other personal characteristics, get in the way of that. 

All of the above are not necessarily, or always, true but neither are they untrue.

False Economy #3 – Top Producers are Irreplaceable

Many, many years ago I ran a large art gallery in Las Vegas.  We had a saleswoman named Gigi who was an incredible revenue producer.  She outsold every other salesperson by a huge margin because she was a shark, constantly moving in on prey.  After two months, I came in to work and fired her, much to the annoyance of the Gallery owner who told me to hire her back.  I refused point blank, telling him that we actually couldn’t afford to have her working for us.  Well, you can imagine how that was received but the truth is that she de-motivated everybody else who was working; she was so aggressive that nobody else got a look in.  After she was gone, everybody else’s sales started to increase and, within a very short period, the total sales were much higher than before plus everybody was happy and motivated because they were making money.  Keeping her would have been yet another false economy.

Example 4 – If you needed a plumber, would you hire an electrician?

Unrealistic Expectations

There is a huge market for freelancers; hired guns who are paid to do a job, whether that be designing a brochure, building a web site or developing a database.  Many of these jobs are getting bids that are so low that the chances of them being done well are incredibly, even astronomically, low.  I saw one recently where the client, a Japanese company, was looking to pay $2,700 for somebody to convert a FileMaker™ Pro database program to Oracle.  Commonsense, a very rare commodity indeed, should have told them that it couldn’t possibly be done for that amount and that the cost of maintaining an Oracle system, with a full time Oracle DBA, would likely bankrupt them.

If the option is to hire a freelancer for, let’s say $20 per hour or one for $100 per hour, the $20 per hour guy looks like a good bet but what if that $20 an hour guy, really isn’t an expert; but a novice learning on your dime.  Are you going to get value out of it or have you just thrown that money away.  They might be good but might well not (and I’ve seen plenty of examples of that).  So you could end up with something that you either can’t use or doesn’t work properly and that person, who you paid $20 per hour, took 5 times longer to do the same job as somebody else charging $100 per hour.  Have you saved money?  No, you haven’t; it was yet another false economy.

Going back to my analogy of the cardiologists, what I see, is a tendency to take a chance on the unknown just because it’s cheaper.

The Business World

Businesses are run by executives (managers) who, hopefully, know their business; they know what they are doing and they know how to make the company as profitable as it can be.  Those executives, however, are, more often than not, answerable to a Board of Directors who may well not know the specific business at all.  Sure, they may be high-powered, successful businessmen but from completely different industries and backgrounds.  Are the decisions they make, which the executives then have to follow, right for the business?  Or are they false economies?

Adding to the problem is that many executives are actually afraid to make any decision that could, possibly, backfire and which could put them at risk.  So, rather than making a decision which they know, with a fair degree of certainty, to be right, they make no decision at all.  They also sit in meetings and never raise their hand, unless they are absolutely sure that what they say isn’t going to get them criticized or attacked.  They maintain the lowest of profiles and seek promotion through not having caused waves and not by actually being an agent of change.  By doing this, are they acting in the interests of the company or in their own self interests and, yes, that is a rhetorical question.

Most, if not all, businesses are in a constant state of change as they adapt to a changing market.  What was in is, suddenly, no longer in; competitors spring up and siphon off clients; manufacturing requirements change as new equipment is developed.  People are hired or fired in response to knee jerk reactions and costs are cut as a matter of course.  Again, these are often false economies.

Shareholders

Boards of Directors and Executives are answerable to the shareholders who are only concerned with dividends and, those shareholders, especially the big shareholders who can get Board Members removed, may, and often do, insist on actions being taken that are detrimental to the company as a whole but which will result in short term gains, but not necessarily in longevity of both the company and the people who work there. 

We call this greed and it is, in my opinion, the single most destructive factor in the world we live in.  There’s nothing wrong with making money, lots of it but when it is the only thing that is important and all you can see is dollar bills, then there is something wrong with you.  In that need to get more and more, you lose all humanity.  The worse part of it is that happiness will always elude you because you will never have enough.

A Better Way

In Germany, the Board of Directors of every company, has to have an equal number of people on it from within the business and, who often, work at the lower levels of the company; i.e., on the factory floor.  This ensures that the people in charge of making decisions but who have no experience are balanced by those who do.  Not only is this a good idea but it works brilliantly. 

Why is this not done in the USA?  I venture to suggest that it is due to ego and the unwillingness to listen to, or consider, others point of view, especially when those others are deemed to be less successful than those in positions of power. 

We call this contempt.  Being smarter than somebody does not make you better than them; it just means that you have benefited from genetics.  In fact, they may be smarter than you in some ways but the arrogance of knowing you are smarter will prevent you seeing what they have to offer.  Being richer and/or more successful does not make you a better human being than somebody who struggles on a daily basis and hasn’t achieved much; at least, in your eyes.   But, what do you actually know?

Polarization

Nowhere is this more true than in the political spectrum where both Democrats & Republicans have become so polarized that they are absolutely unwilling to listen to the others point of view.  But, it is precisely that reason why nothing ever gets settled.  If you have a civil conversation, and by that I mean, a conversation where you actually listen to the other person, then both sides get to hear opposing viewpoints.  Now it may well be that the conversation ends with both parties as entrenched in their views as before, but how much better would the world be if both found some common ground to agree on?

The Outsider’s Viewpoint

As somebody who has worked for 30 years as a software developer, developing database solutions, I’ve seen and worked with all types of businesses and executives.  The smartest ones, i.e., those who have gained the most; have understood the old saying “You have to speculate to accumulate” and they’ve been willing to make, sometimes major, changes to gain a competitive advantage.  Sometimes those changes cost a lot of money.  Ultimately though, the cost of doing anything, can be measured as can the value of doing it.  Unfortunately, it is much harder to measure the cost of not doing anything but it is easier (and safer); although it can lead to stagnation and decay which are deadly to the businesses that never do anything original or, potentially, risky.

Let’s say, and this is a real example, a company spends $100K on a database system and that system is directly responsible for tripling the sales of the company and thus tripling its value.  Was that $100K a good investment?  If the increase in sales meant that the company was doing $9K a month in sales, instead of $3K, then it would not, under normal terms, be considered a smart way of spending $100K but if, as was the case, sales increased from $100K a month to $300K a month, then it would, and was, be considered a very smart thing to do.

But how do you measure it?  A simple way is to divide the cost by the additional revenue gained and thus you have the number of months that it takes to get your ROI (Return on Investment).  In the example above, it took less than 5 months for the system to pay for itself.  However, and this is often not understood, the true ROI comes in after the cost has been recouped.  The extra revenue flows in every month and there is, almost, zero cost to be offset against it.  That extra revenue may, however, be used to expand the business or invest in other areas, all of which have potential rewards and, yes, risks.

Conclusion

I suspect that one of the main reasons that businesses, in general, practice false economies is that their marketplace is rapidly shrinking and being swallowed by the huge multi-national businesses like Amazon who can operate on economies of scale that the small guys can’t even consider.  The only way that these minnows, in a world of sharks, think they can survive is to cut costs; to become leaner and meaner, with ‘mean’ often being the operative word. 

Those who run the businesses will rarely cut their own salaries but will happily pay their people less but, in doing so, they are further shrinking the market because ‘their consumers’, who are often the same people who work for them, simply don’t have any spare money to spend on the unnecessary.  I have a friend who is a voracious reader and who used to buy books all the time.  Now the only books he gets are the Kindle ones that are being offered free by Amazon.  It’s not that he’s broke; it’s just that buying books has become a very low priority.  We call this practicality.

When a recession hits, businesses, typically, cut back on advertising and marketing instead of spending more money on those things.  Somehow, you have to drive business to you and if you aren’t promoting your products or services, how are new, potential, customers going to find you?  Hire the best people, not the worst, and pay them accordingly so that they are motivated to give you their very best.  In fact, I would suggest that if you have somebody who is really top of their game, you can’t afford to lose them.  Paying them, considerably, more money than your competition is willing to pay will ensure that they don’t jump ship.  Invest in systems that will make your business more productive and more efficient.  It is an immutable law of business that a more efficient business can only be a more profitable one.

The Other Side of the Argument

Of course, there are many factors in play now that were not in play until recently.  Automation, for one, has replaced many workers and those jobs are never coming back.  The workers who did those jobs are now no longer employable in that field so they have to get re-trained (which, in itself, is no guarantee of getting a job) or they simply join the ranks of the permanently unemployed, or they go work at companies like Walmart or fast food chains like McDonalds, where they are neither valued or appreciated, and are working for minimum wage which is not enough to keep food on the table.

Companies like Amazon are both highly automated and use lots of people but they can afford to hire the best of the best, for the really important work, and those people are compensated accordingly.  Ultimately though, such companies will replace humans with machines as soon as they can and, as AI (Artificial Intelligence) improves, even high level decision making will start to be done by intelligent machines, creating even less of a need for human workers, with all of the costs and problems that are a part of hiring them.

Society as a whole has bifurcated.  Depending on which branch you end up on, determines whether you succeed or fail but the sad truth is that one branch is much larger than the other and that branch is today’s workforce.  The smaller branch is where all the millionaires and billionaires have ended up and as time goes on, the division is ever becoming larger.

The Brave New World that Aldous Huxley, wrote of in 1931, is a world of AD 2540, more than a half century in the future.  That dystopian world is already here and there is nothing brave about it.  Suicide rates are rising. Every year, 864,950 people attempt suicide, which means 1 person attempts suicide every 38 seconds.  I suspect that those numbers are going to increase dramatically in the next decade and I’m not sure if there is any way to change or stop it but false economies are, definitely, no way to start.

Michael Rocharde

The following comment was made by a very old and astute friend, Mark Lewis.

One of the unintended consequences of the great crash has been an increasing concentration of wealth. But there is a strange disconnect going on right now because automation is about to increase exponentially as corporations replace people with machines, robots and soon AI as well but the vast majority of the customers of corporations are consumers, the very people whose jobs are being automated away, so corporations will suffer the most when these people can no longer afford their goods and services. Its a very peculiar situation to be in. Just as the world hits ever higher populations, people are needed less than ever to produce the goods and services we all rely on for our survival. Once upon a time farming employed about 70% of us, now it is about 7% and that number will fall dramatically as sensors and robotic implements take over, the same sort of thing is happening in manufacturing and many white collar services will be automated via AI. One of the reasons government is so big everywhere is because it’s the only way left to provide enormous numbers of jobs to voters.

One can almost imagine tomorrows Elon Musk owning fully automated factories churning out huge quantities of the goods and services we need and running the whole thing all by himself with the help of endless robots and AI, it sounds crazy but is it and how will underemployed people pay for these goods.

Efficiency is a good thing in business, you want your team to be productive, but do we want a world where the team is completely replaced. That is the sort of dilemma we will face in the future.

P.S.  I urge you to take 5 minutes and read this article:

https://www.linkedin.com/pulse/social-change-how-great-recession-has-accelerated-dan-feldman

by my good friend, Dan Feldman; who has contributed many ideas and thoughts to this post

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