It seems that we are forever in cost chase programs, looking to do more for less, keeping our budgets flat whilst consistently delivering more.
I’m a firm believer that there is too much waste in what we do, we are either paying more than we need to, or we have purchased more than we need, and that there is always some cost that can be squeezed out.
But there is a limit to how much we can cut costs, for sure their is always some fat or excess we can trim, but at some point we get down to the meat or bone, and any further cuts start to impact quality.
This is the balance that we need to strike, we need to get the best cost, not the lowest cost, we need to get the price to the point where we are getting the best value for money.
In one company I have worked for, lets call them ‘company x’ , people looked to push this to he limit, to the point where it really impacted the quality of work that we did.
Company x made it a policy to hire people, their permanent staff, from the lower quartile, so the bottom 25%, as this kept their staffing costs down.
On the surface this might look like a good idea; and it might keep the accountants and controllers happy; but what about their output?
There is often a reason why some people are paid less than others, and I am not talking here about geographical differences or labour arbitrage differences, this is because of their capability, the quality of their work.
There is a reason why Lionel Messi is paid more money than second division footballers in England and it’s not because he works in Spain and they just pay more in Spain.
No, it’s about his output, his quality and the impact he has on Barcelona’s results.
At company x, whilst we had low staffing costs, coincidently, we also had a problem with our project on-time delivery.
It never occurred to the Senior Management that these two were linked. I would sit in meetings where they would boast about low staff costs, and yet be perplexed about late projects and what the cause might be.
When it was suggested that low staff quality might be the issue, I was told that this was absolutely not the case, it was was probably more a management issue.
True, it was, but a Senior Management issue 🙂
My mentors favourite quotes was “don’t be the person who knows price of everything and the value of nothing”.
He always told me cost are important, but its even more important that we get value for money, or that we get the value we need for the lowest price.
If we start to compromise on value, then we are always paying too much.
Poor quality is too expensive even if it only costs us one Euro.
At the company x they never seemed to have enough money to do a project right, but they always seemed to find enough money to do it again.
Company x knew the price of everything and the value of nothing.
Their low costs policy was the direct cause of their own poor performance, which actually drove up costs in the long run.
It’s much cheaper to get things right first time. But their focus was on cost not value, and they ended up paying to a high price, more than they actually should have.
It was a false economy!
Gordon Tredgold
Gordon, interesting post, I couldn’t agree more that the lowest cost is not always the best cost. I’d maybe even take it a stage further – what then really is the _best_ cost?
To me, the answer is that it is the lowest cost that comes from a supplier that has demonstrated sufficient thoroughness in anticipating and quantifying risk. When assessing proposals this is the most important of all factors to me. When cost is the sole focus, bidders tend to be overoptimistic and make unsafe assumptions that everything will go just according to plan. In a competitive bid they are reluctant to share risks in case they’re seen as potential weaknesses. But this concealment actually increases the risk, since we can’t mitigate risks that we’re not aware of.
At the end of the day, as a leader I want to keep my promises to my stakeholders. I want to deliver what I said I would do, within the budget I agreed. If that means selecting a supplier with a slightly higher cost but who I can trust to work with me to openly share and manage risk, they will get my business every time.
Dave, great points. I would also say I don’t want my suppliers to over estimate their capability and end up losing their shirt on the deal. Whilst it might feel that we have negotiated a great price and tough on them, a supplier who is losing money also loses flexibility and thats not a great position to be in. You might also find yourself in a ryan air situation where the sticker price seemed great but everything else comes at a price that you might not have budgeted yourself. I have experienced both sides of that fence and on each occasion the relationship deteriorated pretty quickly, which is not what we were looking when we started out with partnership in mind.
This is an intresting post, and very nicely written.
I would say lowest cost is not always the best cost. If we think, we are getting the same thing at lower price from somewhere else, we need to relook, it’s not the same it tought it looks like. If something is cheaper there must be resons behind it.
I would prefer to compromise of quantity instead of quality. While looking for the match of our requirements, we should always consider other factors like; flexibility, credibility etc..
Because you never know the future, if you choose a vendor for cost savin. And tommorow your requirement changes or you need a bit of cutomization or say you need to increase/decrease quantity, how flexibile your vendor is there? You might incur more loses, than what you save in such scenarios…..
Empower suppliers to increase value, and cost will go down.