Wednesday, October 6, 2010

Mismanagement of Funds

Spend to Save

We laugh at governments because they have the tendency of spending a quarter in order to save a penny and we all know enough examples from our own personal lives that I don't need to present any more here. Businesses are almost as bad because they have the tendency of spending a dime in order to save a nickel, just find the comic Dilbert to see examples of that.... again we have witnessed this mismanagement in business either directly or indirectly so I don't need to bring out more examples. What I would like to propose is that we spend a loonie in order to save a twonie (Canadian money: loonie is 1$ and twonie is 2$).

Of course the difference between a business and a government is that the government money is guaranteed to come in while the business has to look really nice to receive someone's money.... but both will waste their money needlessly. Both will refuse to spend necessary money because they fear the consequence of wasteful spending but will continue to waste money because they are trying to save money. Its ironic, but its true, they are afraid to go out and plant the seed in the garden because they will lose the seed and they spend all their time trying to increase the nutritious content of the seed that they refuse to plant, in the end they spend more energy and receive little to no return on the seed compared to having planted the seed and receiving a decent harvest after a period of rest while the plant grows all on its own.

How do we do this? Well I will use a fictitious example which could be applied with almost every conceivable product out there including cleaning products to clean the floors of your business. Lets look at computers, now governments look at reducing the deficit while corporations look at maximizing profits but the logic is the same; if they are offered a choice between a PC computer costing $1000 a unit and a MAC computer costing $2000 a unit, then they will both go for the cheaper $1000 PC. Why? Because the government is trying to save $1000 to pay for the deficit and the corporation is trying to get $1000 more in profit.

So lets look at the hypothetical results of such thinking:

Year 1

Government George and Corporate Charlie are happy because they saved their employer $1000 while Spend-smart Sam has spent $1000 more than his competitors because he bought the MAC. Time goes by and we discover that the PC has to have constant maintenance which costs about $100 per day per unit wile the MAC has to have about $100 per week in maintenance per unit. PC constantly needs to be upgraded because they released the product before it was truly ready to have the jump on its competitors and each upgrade takes about an hour per week. The MAC needs to be upgraded as well because the need to improve an already decent product is part of their philosophy but they require an hour per month to upgrade.

At the end of the year, Government George and Corporate Charlie have spent a total of $37 500 per unit and lost 52 productive hours per unit. Meanwhile Spend-smart Sam has spent a total of $7200 per unit and lost 12 productive hours per unit (but in reality Spend-smart Sam bought double the number of computers needed than his competitors and scheduled the maintenance in such a way that he only lost an average of 6 productive hours per unit).

Government George then had to spend a $10 000 study to understand the cost impact of computers and why it was necessary. The recommendations done to Government George included the acquisition of MAC computers but he had no money in his budget to spend on that recommendation so he ignored the best advice and took the cheapest advice, only use half the computers available to schedule the maintenance around it to reduce the average loss of productive hours by half, but unlike Spend-smart Sam, he had one computer per worker so that while half the computers were off-line, the workload did not decrease and the employees had nothing to do and in the end they lost an average of 104 productive hours per unit. Government George ignored the rest of the recommendations because he thought it was foolishness and the next year another $10 000 study confirmed that workers who did not have computers to use could not be productive.

Corporate Charlie decided to divide the computers into two categories, spare parts and actual computers. So 50% of the computers would be the spare parts of the other 50% and they could try to average out a loss of 50 productive hours instead of 52 hours per unit and since they no longer had computers for each employee, they laid off 50% of their workforce and encouraged the remaining ones to produce the same output. When Government George saw that this worked much better than his solution, he was going to try to imitate it on his own end.

Year 2

On year 2, MAC and PC both had a new and better product available. Well Government George had already spent so much on the computer budget and was going to eventually use less computers, he decided to keep the current computers, after all he had to worry about the deficit and couldn't afford to buy new computers. Corporate Charlie decided to buy a few PCs to replace 10% of its currently used computers and continually upgrade each year so that they could be completely upgraded in 10 years. Spend-smart Sam decided to replace his entire network and he donated his previous year's computers to a local school. The MAC and PC cost the same as last year's model. So again, Spend-smart Sam spent more than his competitors on purchasing new computers.

Government George had to spend more for upkeep because the computers would break down more often and the parts were no longer being made so Government George would spend 3 times more per unit than the previous year but the upgrades became less frequent so that they didn't lose as much in lost hours of productivity.....

Corporate Charlie had to spend $3000 to integrate old technology with new and managed to use older software with new machines so that they also avoided the lost productive hours in upgrades, and their spare parts from unused computers helped in reducing costs. Since they didn't use the latest software, their newer computers could cost less than the usual $1000 because they weren't up to date with the latest software.

Spend-smart Sam increased the speed of his entire production by 20% in direct comparison with his competitors because he had the latest software with the latest hardware, he was getting a reputation so people were ready to buy his product because it was such high quality and done quicker.

After 10 years

Fast-forward 10 years and you can see how much money was truly spent in the long run.... Government George still has his old computers, he keeps buying outdated computers at $100 per unit but he spends 1000 times more on upkeep and can't afford the $30 000 to overhaul his system to the newest technology. Corporate Charlie has managed to offset his complete loss by having 10% of the original workforce and having the technology of 3 years ago, he keeps losing customers to Spend-smart Sam but he is still making a profit because he is buying less computers and reducing more staff and still managing to produce the same amount.... the products fall apart in the customer's hands because they are so cheap but the cost of production has been reduced while the price has been maintained lower than his competitors.

Spend-smart Sam is now successful and has been bought out by Take-over Tom and he wants to make a profit with his new acquisition because he sees the success of this business..... The first thing Take-over Tom does is to buy PCs for the next year so that he gets his quick-fix profit, later he will sell it to Corporate Charlie or file for bankruptcy to get Government George to bail out such a successful company from disintegrating.

So what now?

This fictional story pretends that MAC is so much better than PC, I will let genuine users argue amongst themselves as to the accuracy of this (or the inaccuracy).... the point I wanted to make was that spending more will save you more in the long run as long as you spend smart and that if you spend less today, you will have to spend more tomorrow. Using the deficit as an excuse to avoid spending money is like wanting to build a house around a plant to protect it from strong winds while blocking out the sunlight when the better solution would be to plant hundreds of trees nearby which will eventually grow into a natural barrier and protect the same plant while the trees produce an added benefit.

Also, using profit as a motive is also foolishness because if you avoid spending smart you will make less profit than your competitor who has decided to spend. Starving yourself will mean that you have more food than your neighbor but you will also be unable to produce in comparison to your neighbor? Why is Europe outproducing North America? Well they work less, have more vacation time and worry about happiness instead of money while we work more, reduce our vacation time and worry about money instead of happiness. We are starving ourselves to have more food and we are unable to farm our land because we have no energy while the Europeans don't worry about farming or food and play while they farm and they eat very well without pressure.

So I propose the solution of spending more because we can't afford not to, but I want our spending to be smart-spending not blind-spending. Paying a quarter to save a penny is wasteful (like Government George) and paying a dime to save a nickel is almost as wasteful (like Corporate Charlie), but spending the loonie to save a twonie is brilliant (like Spend-smart Sam).