Timothy Burke has a nice post on the problems of trying to make small budget changes in order to finesse a revenue contraction--the famed "wasteful spending" that politicians and CEOs are always promising to cut. These small changes are, in some ways, harder to implement than simply slashing a few big line items. There are free rider problems, and difficulties establishing a cost-benefit ratio.
Burke talks a lot about transparency, but he doesn't make quite explicit the related problem of monitoring costs. If you cut a department, it's easy to monitor--you no longer have that department. But if everyone's supposed to spend 1% less on everything, it requires a phenomenal amount of administrative overhead to design those changes, and then keep track of them. Transparency can help by effectively outsourcing some of the monitoring to the community. But you still need someone to, say, formulate a lightbulb policy, hear complaints about the lightbulb policy, and ensure that the lightbulb policy is being enforced.
An extreme example of this is a temp job I once worked where the company, which seemed to be on a fairly rapid downward spiral, had cut costs by rationing office supplies. The office manager had decreed that everyone got only one pen at a time. In order to get another pen from supplies, you had to bring her the empty one in trade.
You can imagine the results: the office rapidly developed a new collective hobby, pen theft. Once one person in the company had misplaced their pen, the entire system broke down. By the time I arrived, at any given time one or two people were on the prowl for a pen they could appropriate, and the rest were seeking ever-more-elaborate ways to permanently stamp their ownership on a Bic. (As I recall, this included the purchase of a fairly expensive gold paint marker to do the labelling). I'm sure the budget showed an annual savings of several hundred dollars a year, but I can't imagine this outweighed the man-hours that were wasted on their new pasttime.
Most companies aren't this stupid. But they certainly do make other little cuts that cost as much to monitor as they save. It's probably particularly tempting for government and universities, because output is hard to directly measure, and the central administration is weak in the face of powerful constituencies. But anyone who's worked in corporate IT will be happy to tell you about the brilliant ideas that corporate managers come up with to "save money" on IT when budget troubles hit--my favorite was the chap who wanted a fairly well-paid help desk tech to walk around at night, turning off all the computers. Since this was a financial firm whose traders went home late, this would have involved adding a full time night staff person. But he just couldn't imagine that it wouldn't work--the arithmetic was so neat in the spreadsheet.
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"But if everyone's supposed to spend 1% less on everything, it requires a phenomenal amount of administrative overhead to design those changes, and then keep track of them."
Why not freeze COLAs on government pensions temporarily? If that's not legally possible to do during a deflationary recession than the law ought to be changed to make that possible in the future.
Many many years ago, when I got my first job out of college, my father gave me a small piece of advice about corporate life: "When they start keeping careful watch on the telephone bills, that is a sign that it's time to look for a new job".
That thing with the pens is totally awesome though even though it's stupid. Presumably you could get a pretty good supply of dead Bics from somewhere after all for basically free. Bring them to work and you could then sell them to people looking to trade a dead Bic for a live one. "Markets in eveything."
I briefly worked at a state government office forty years ago.
It was in a large office building and roughly half of the floor was unoccupied. Since there was ample room the better offices were all occupied and the less desirable smaller ones were empty.
Then funding was cut. We were ordered to vacate the better offices and use the smaller ones. And some office furniture was stored in the basement.
For about two years before I left the larger offices were empty and the furniture remained in the basement.
The agency was charged for the space it occupied and the furniture it used. So the move made sense for the agency.
But total state spend was unchanged. The state, not the agency, leased the building and furniture. And they paid whether it was used or not.
Pension COLAs are tied to the Consumer Price Index (CPI). If we are in a deflationary recession, then the change in the CPI is naturally going to be zero or low, therefore the COLA will be commensurately meager. Of course, this argument fails if the government implements policies that jack up consumer costs on such things as say energy.
Yes, Megan, yes they are.
MM writes: "I can't imagine this outweighed the man-hours that were wasted on their new pasttime."
Megan, you're really showing how out of touch you are with the modern business world. We now call them person-hours.
Many years ago, I worked at a software startup that was still in the capital-raising stage (we were running on the founder's money). We had modest offices and maybe 8-10 people total, mostly engineers (plus our beloved office manager/den mother). We (the engineers) were working long hours (including weekends) on the software; in addition, I did a fair amount of traveling with the founders to Sand Hill Road and other prime VC areas in our quest to raise, well, capital.
The founders brought in an acting CEO, a former VP from a large IT manufacturer back east, to help get the company ready for its first round of venture capital. He actually did a good job of getting the finances in order . . . but then started the nibbling-ducks-type economizing that you cite above.
The low point was one day when the CEO's wife (who had followed him out west and was helping out around the office) handed me a large jumbled stack of used (but blank) PostIt note slips that had previously been used to mark locations in source code printouts that had since been discarded (the printouts). She gently chided me and the other engineers for not having pulled these off before throwing out the listings.
I remember thinking, "You've got to be kidding me" or words to that effect. I was working 70+ hours/week, I was chief software architect and at this time still the project manager as well, and she's chiding me over less than a dollar's worth of used PostIt notes.
Fortunately, the VCs who eventually funded us decided not to make the acting CEO into the permanent CEO. ..bruce..
On my brother's first day of work at Bear Stearns, they handed him a pen, a pencil, a writing pad, a single paperclip and a rubber band. "If you need more", they explained, "buy it yourself". That was the mantra of a firm that hadn't had a losing quarter since the 1920s....that is of course until 2007.
Cost cutting is a scam played by government and private industry alike. When I was at Citi, in the early 90s, they instituted a hiring freeze. Know what happened? The number of paid consultants skyrocketed. When the hiring freeze was lifted, many of the consultants received full time job offers. In those days, Citi very much resembled a government office. There were plenty of lifers there (people who would never get fired for any reason short of slugging their boss). The corporate cafeteria was full all day. Even when meals weren't being served, you could find people hanging out down there playing chess, checkers or even cards.
When you really want to cut costs, its quite simple, but in huge organizations, its very easy for waste to get lost in the shuffle. This isn't a government thing. Its a human thing.
Hmm. Didn't Hilzoy make practically the same point regarding the difficulties of fine-grained means testing for government assistance programs? And you said she was full of shit, if I recall correctly...
Most companies aren't this stupid. But they certainly do make other little cuts that cost as much to monitor as they save.
True. However, companies that monitor small costs like that are less likely to let an expense get out of hand. It's kind of silly to be that picky about pens, but if nothing else it sets the tone for larger purchases.
It doesn't always make sense to means test. But when you're giving grants of $50K or so, it does.
Your forgetting that once the focus on cuts shifts, the small cutbacks bloom like a spring flower.
Also, in government and sometimes in corporate, it depends on the pot of money. Back when I was a Fed, we supported ships that collected data. One big issue was data management with the hodgepodge system failing at least once a year, losing a couple of weeks of data and the ship down for a week or so for repairs. My group came up with a system to correct this and got the go ahead since special funding was available. The procedural changes never got implemented even though everybody was "on board." The technology, however worked like a charm. The ships had no data management downtime or lost data. All for a measly million dollar investment. Not bad since shiptime was about $30k a day for one ship so saving 3 weeks on one platform pretty much paid for the systems in the first year. Move forward a couple of years and upgrade time is here. But there is no money to invest in capital equipment to save a million dollars of lost operating time.
I'm sure by now, the operating budget is paying for lost data and ship downtime instead of data collection.
Agreed, moreover means testing if done correctly (as a criteria to determine eligibility) is more analogous to eliminating a department or program rather than tightening the budget in every area. If you set up a certain standard for eligibility, than every person you exclude from receiving funding is a cost saving so long as the costs of excluding them is less than the amount in benefits that they’d receive. On the other hand if you concoct some ridiculous system wherein instead of excluding wealthier retirees from Medicare, they remain eligible but have to pay slightly higher premiums for certain services, you’re not going to save that much relative to the cost of the system.
A decade ago I worked as a temp (contract worker through an employment agency) for 3 years for a utility. The utility had stopped hiring regular workers to "save" money but paid more to the agency for its fees and the temp's wages than an employee would cost. Over a period of time the utility had a brain drain as employees retired and "temps" left for permanent employment.
A short term solution (hire temps instead of employees) actually cost more and hurt the company. Brilliant.
Wes
You remember Dorothy Parker's great line when the editor of the New Yorker chided her for being late with a review:
"Somebody was using the pencil."
At a company I worked for, the office manager (the founder's wife) passed around the phone bill every month. We were supposed to put job numbers on all job related calls, and pay for our personal calls.
This company had an ESOP. One day, the associates figured out that they owned 51% of the company. The founder and his wife were fired very soon after that. Especially his wife.
When I worked for the Navy in the 1980s, we had a similar policy as ANTHONY's office. This was complicated by the fact that not only did each office share a bloc of numbers, but the phones overlapped in the numbers they served (example: I might have extensions 1111, 1112, and 2111 on my desk: the next guy might have 1111, 2111, and 2112).
So each and every month, the middle managers had to scrutinize the phone bills and identify the non-business related calls, and then make the miscreants who had used a business phone for personal use pay up. We used to count up the value of the hours we were wasting.
And then there was the time we had an $0.23 call that no one could either identify or would fess up to. I got into a screaming match with the department head (it was on one of "my" numbers), and finally took a quarter out of my pocket, flung it on his desk, yelled "Keep the change!" and stormed out.
This sort of thing makes you crazy.
I'm always looking for ways to trim my household budget. My house has lots of porches, and we've had lots of snow. We discussed the idea of forgoing having the snow shoveled off the porches.
But the water damage likely to ensue would cost more to repair.
And when I look around at public infrastructure, I see the same issues; pinch pennies on road maintenance until the roads fall apart.
The best savings come from wise, long-term management that maintains infrastructure repair, invests in employee skills, and plans for rainy days. Pie-in-the-sky plans (like Madoff's promise of 48% returns, Iraq's being able to pay for the war, and profits on derivative trades, and male enhancement) inevitably prove to be a scam.
For real cost-savings measures, any company or office would be best off asking their folks who work there for suggestions, looking for savings in both materials and man-hours. Start with the lowest folks on the totem pole, the cleaning staff, secretaries, and clerks. They often see the waste higher-up take for granted. And offer them a reward and public respect if their suggestions pan out, for they'll have earned it.
This and similar patterns are known collectively as the "Dead Sea effect", i.e., all your best people leave and you're stuck with the residue.
Well, at least, that's what I call it.
That's the best story I've heard today. :-) ..bruce..
At my first job, more than twenty years ago, the company started losing money at one point and there was a wave of cost-cutting. The guy in charge of ordering office supplies decided his contribution would be to delay ordering stuff for a week or two longer than usual, so we sometimes ran out of things.
Part of my job was to print and mail out the company's checks every week. The addresses printed out on the checks, so it was just a matter of stuffing them into window envelopes. Until one week, thanks to this guy, there weren't any window envelopes.
I couldn't wait until they arrived. The bills had to be paid on time. So I, who made a fairly decent hourly rate, had to hand-address 200 non-window envelopes. I did ask the guy, later, how much he though he was saving when that kind of thing happened.
Yes, sometimes they are that stupid.
"It doesn't always make sense to means test. But when you're giving grants of $50K or so, it does."
That amounts to subsidizing need, doesn't it Megan?
When you subsidize something, do you get more of it or less of it?
The best savings come from wise, long-term management that maintains infrastructure repair, invests in employee skills, and plans for rainy days.
Sure, but that implies you identified infrastructure and goals that don't change. When I worked with the Navy they ordered the Cadillac version of everything they bought. An oscilloscope can be had used for a couple hundred bucks, but they'd go out and spend $15k on a really fancy one on the theory it would be used for decades. Then in the next fiscal year the group that bought it would be cut and the fancy scope left to gather dust in a warehouse.
It may indeed be penny-wise and pound-foolish for you to stop clearing your porches. But imagine if you didn't know, from year to year, whether or not you were going to bulldoze the house and build a school on the lot. Or a park. Every Congress is a new Congress and not obligated by law to fund anything the last Congress funded. Priorities change, and changing priorities create inefficiency.
Also, on government projects when you get the money is really important. The long-term best purchase may come up at a time when there isn't any money. Or you might get tons of money at a time when you can't spend it efficiently.
Despite the stereotype, there are a lot of genuinely honest and diligent people working in government. This is not an easy problem.
I speak from the other side of the table - I was the one forced to find the painfree cuts. These make a lot of sense and don't require much effort to enforce:
1. Put flat/fixed rates on your per diem expense reimbursement form:
a. $X as the maximum hotel reimbursement per night.
b. Lower your mileage reimbursement rate - the IRS maximum rate (before qualifying as income) is actually quite generous and not a required rate of reimbursement.
c. Discourage expensive meals and overly generous tipping by capping dinners at $x, lunches at $y, etc.
2. Monitoring copier usage is a total waste of time. Just get rid of color copiers and color printers altogether. And, centralize supply purchasing so that you can easily halt the buying of ink cartridges for desktop printers.
3. Executives who sit at their computers/desks all day do not need $500/yr blackberries. Especially considering how many executives struggle with basic technology.
4. Give employees who suggest a good savings measure a share of that savings.
5. Overnight shipping is so common (yet so often needless) because employees don't care either way. So make it a burden to use it - require 4 signatures or something.
When I worked at a law firm, we were supposed to keep track of all our telephone calls to our clients so our records could be matched up with the actual call and the cost added to the client's bill. I'm billing a minimum of .25 hours per telephone call anyways according to our billing policy so I'm billing the client for my time (.25 x $200 = $50) AND I'm supposed to keep track of the call (date, time, number called, duration of call) so accounting can recoup the $0.73 the call actually cost?
I simply didn't bother, and no one said a thing.
Megan,
I have two questions:
1. Some cuts are simple and require almost no monitoring. Say no business class travel (for your company example). Any domestic travel expense that's above $500, you raise a flag and it has to be reviewed by the management. People can steal pens but they'd be scared to break a policy they can easily get tracked for.
2. In the government example, just give the dept less money. How can they spend 100 bucks if you give them 99 (assuming these departments can't raise their own debt).
I would think the big line item cut is more expensive in the long run. You usually end up losing good people who happen to be in the wrong place (think: you). Better run companies I've seen usually make small cuts across the board. If they had completely useless large business units, they wouldn't be successful in the first place.
"It's probably particularly tempting for government and universities, because output is hard to directly measure, and the central administration is weak in the face of powerful constituencies."
Not to mention the fact that these employees are often dumb as hell.
I'm experiencing this at my current workplace slightly. They have had a hiring freeze for a year now, and thus hired me and several others as temps. I think it costs the company nearly the same amount (along with all the "retirees" they immediately hire back as consultants) and the loyalty issue is considerable, between a temp versus a full-time employee.
I would have bought a 200-pack of pens, locked them in my desk drawer, and sold them for fifty cents apiece to supplement my income. Surely nobody would mind parting with fifty cents to not deal with this problem.
Markets in everything.
Anyone in a large organisation who wants to save money, and has the discretion to do so, usually can save worthwhile amounts without doing any damage to the organisation. I did it in government for seven years and saved many times my career salary bill. What he or she cannot do is save money sensibly in response to sudden requests for cuts. Sudden cuts always impose costs that those who ask for the cuts do not see coming.
To make sensible savings, you have to, as Warren Buffet put it, "think like an owner". That means act as though you are in the business forever (as in the old adage saying "farm as if you are going to farm forever").
How do you save? On a fairly large scale, by challenging budget items which have lost what rationale they may have had, questionong norms which look extravant, or eliminating stupidities like a hiring freeze. But occasionally you hit lucky. The largest single saving I managed was through carefully neglecting to authorise inflation-matching increases in some standard costs for contracts for a couple of years. No-one even noticed until afterwards.
You save on small scales by shifting the culture so that most people are looking for the easy, waste free ways to run the place. If you then take care that contributions to that tend to get recognised one way or another, the process will manage itself.
Should work in any type of sizeable organisation.
If you tighten the supply of pens, window envelopes, or whatever to the point that people anticipate shortages, people will horde. It's human nature. Then you have to police the hording.
When you have enough of everything in central storage, people don't have to maintain their own personal supplies. The total amount of stuff sitting around unused goes down.
My husband's company has just decided to save money... by cutting out janitorial services.
How much money are you really saving when your very expensive and perennially overworked development staff, who are the core of your business, spend time vacuuming and cleaning bathrooms?
Emma B: circumstances vary and your janitorial comment may be completely valid.
But you might ask yourself if the janitors were employees of your husband's company. Or were they contracted?
Your husband's company may have cut a contracted expense in order to pay and retain employees who would otherwise be laid off.
A lot depends on just how many employees the company needs just now. Maybe business is slow.
If you tighten the supply of pens, window envelopes, or whatever to the point that people anticipate shortages, people will horde.
Well, if that means they'll go on rampages like the Mongol horde, that might have a salutary effect.....:-)
Far better to cut out people then cut on the edges - you destroy morale and productivity. People who are this insanely penny pinching tend to screw up the big picture - you can get FAR more out of a few star people with decent expense allowances than you can out of 4x as many mediocre people with rigorous expense control.
The star person will work 80-100 hour weeks, outperform 4x as many people, and handle business globally every day. For this, they need a few nice meals, color copies, and a seat on an airplane where they can work and arrive refreshed. The mediocre person working 40 hours a week can't do anything, and is going to be a management headache (as in requiring it, rather than just delivering).
I'm expensive in salary and costs, but I deliver like crazy. When I've had to work with/manage the c-players that expense controls are designed to handle, it's far better to just do the work myself or let it lapse instead of getting dragged in to meeting hell. The thing is that the star person only costs 2 or 3 times the salary of a mediocre person, while delivering 4+x the value. Benefits cost is for 1 person and expenses for 2 or 3... far better to just hire stars, fire mediocre, and not worry about stupid crap.
Yes, Infidel, that's exactly what I meant. Rampaging office workers armed with staplers and letter openers SHOULD take out the purchasing departments in a lot of organizations. Half the time you'd do better sending someone's kid to Staples, if you don't mind filling out forms in glitter pen. I think that would be fun.
Of course I meant "hoard," but my homonym processor is broken.