False Economies

post # 50 — April 14, 2006 — a Strategy post

For many years, I have watched as businesses try to achieve profitability by drastically eliminating support staff positions, thereby achieving significant cost savings in overhead expenditures.

These savings have come at a significant strategic price. If there is no-one to whom you can delegate familiar tasks, then you just end up doing it all yourself. There is nothing ‘economic’ about having high-priced professionals doing their own photocopying, database updates, billing, banking or any other kind of administrative work.

In their rush to be sure that economic resources are well-managed, companies try to judge the need for support people by how well utilized and how busy the support people are. This is a bad measure.

I actually do not care how busy my administrative support is. What I care about is how much of MY time they save.

Do a hypothetical. If an admin assistant costs $40,000 and I can bill $200 an hour, then how many of my hours would the admin assistant have to save me for it to be worthwhile. It’s 200 hours, right?

And what’s the probability that, if I had a dedicated person available to me, full-time, that that person could save me 200 hours of admin time that I could otherwise spend on building my business? A cast-iron certainty, right?

And yet that 200 hours would only be at 10 percent of that person’s 2000-hour year. If they helped more than that, we’re really going somewhere!

The two key strategic rules of cost management are these –

First, if something can be delegated, it must be

And

Second, you always want to have excess capacity of your cheapest resource, so that your expensive resources don’t end up doing low-value tasks.