When Cutting Costs… Adds Them: Evaluating Decisions for Value & Complexity (Part 1)
Recently, I’ve had the chance to experience several cases where well-intentioned managers made decisions to “cut costs” – actions which in immediate near-term ways lowered incremental spending – and created unintended consequences that over time actually RAISED costs. Over the coming weeks, we’ll explore these in some detail. Is your organization making some of these sorts of questionable decisions – imagining that it is saving money? Here’s case number one:
On a recent flight – a mechanical engineer from a sophisticated international equipment company – one of the Fortune Global “50” – told me that according to “new policy”, he and his peers must elect to “save money” by no longer flying direct to their business destinations. Instead, they must fly via connecting destinations – adding sometimes 2x or more of inflight and travel time from their home base to broader destinations. In the short run: this company “saves” travel dollars – lets estimate that very optimistically the savings is 50% of a domestic ticket. The average domestic ticket price approximates $250 (1). This company flies dozens of key employees on business trips – many at least twice per month.
What are the consequences for the engineer – and his dozens of colleagues? They spend dramatically more “unproductive” time on the airplane – time when they cannot be working, contributing, or meeting with customers. Perhaps this travel time is SO unproductive that they will choose to travel less (THIS would certainly reduce travel costs…).
However, if meeting customers, vetting suppliers, evaluating new equipment (etc.) for this growing business remains important… then these employees will incur these “losses” to productivity. The company will “save” out-of-pocket travel expenses – likely booked as SG&A. This engineer and his peers will also understand viscerally a core message from the company about the “value” of their time and contribution – and business urgency.
- What is the net value of this decision?
- In light of that contribution (and the losses associated with the travel policy), have the financial managers at this company made a wise decision?
- What are the gains to the business – and what are the “real” costs?