Monday Mornings with Madison

Penny Wise and Pound Foolish in Business

Word Count: 1,551
Estimated Read Time: 6 min.

The Search for Spending Balance

Most companies – not including big tech companies like Google, Apple and Netflix — watch their expenses carefully to ensure that they aren’t leaking profits, like a boat with a hole.   After all, business owners should always be looking for ways to maximize revenue while minimizing expenses to ensure the business makes a profit.  That is obvious.  But, deciding how much money a company spends on a myriad of expenses is often an exercise similar to walking a tightrope.  A company that spends freely and lavishly can result in a culture of excess that leads to employee waste and carelessness, while a company that is excessively vigilant and tight with the purse strings can create a culture that is demoralized and discouraged, and ultimately unwilling to go the extra mile or contribute big ideas.  The goal, then, should be to spend adequately… enough to keep morale and motivation high while keeping turnover and frivolousness low.   That is great, in theory, but what does that look like in practice?  How money is allocated is a proxy or indicator for what the leadership values.   It sends a message.  The only question then is what message a company wants to send to its people through money.  There are various options, from one end of the generosity spectrum to the other.

Big Spenders

On one end of the spectrum is the Big Spender. This type of company is exceedingly generous with expenses big and small.  For businesses that adopt this approach to managing costs, employees receive top salaries, lavish benefits packages and a creative approach to miscellaneous expenses such as leave, travel, and perks.   When it comes to generosity, the benefits are in the detail.  Using money, these organizations want employees to know they are valued by keeping them happy, healthy and satisfied.  This management style is popular not just with Big Tech companies.  There are a myriad of businesses in a mix of sectors that have opted to spend big on perks and benefits.  At a time when unemployment is at a historic low and the battle for highly-trained talent is fierce, just keeping employees is a challenge.  So keeping them happy goes a long way toward hanging on to employees who are increasingly inclined to change jobs regularly.  Here are some examples of companies that would be deemed generous with employees:

Mongo DB, a software company with offices around the country, offers its employees unlimited vacation, catered lunch twice a week, kitchens fully-stocked with snacks, free yoga classes, generous maternity/paternity leave and health coverage that employees rave about.

Rubicon, a global provider of sustainable, cloud-based waste and recycling solutions, offers employees health insurance with the company paying 100% of premiums, performance bonuses, work-from-home flexibility, and the ability to take an unpaid 6-month sabbatical after just three years with the company.

Lose It!, a weight loss company, offers employees a 401(k) plan and health insurance as well as gym membership stipends, transportation passes, flexible paid time off and a take-what-you-need parental leave plan.  Employees also get a four-day-work-week during the summer and handwritten cards and a gift certificate after challenging projects.

Miserly Spendthrifts

On the other end of the spectrum, this type of company keeps an especially tight grip on expenses.  It makes sense that bootstrapping Startups will control costs carefully.  But, there are also highly successful companies known for keeping a keen eye on revenue and expenses while generating huge profits and employing thousands of people around the globe.  Here are some examples of companies that adopted some stingy spending or cost-cutting measures:

Microsoft, in its heyday when it was enjoying explosive growth, took pride in a culture of tight cost controls. Bill Gates flew economy class on commercial airlines.  The parking lot had no assigned spaces, with space available on a first come, first serve basis.  Microsoft employees were encouraged to work long hours.  It was seen as a badge of honor to be parked closest to the entrance and still be there at the end of the day.  That is a markedly different approach from the spending attitude at Microsoft today, where they offer a robust benefits package.

BuildOnline, a construction collaboration technology business founded by Mark Suster, raised $16MM in its first round of Venture Capital.  Although a startup, initially the leadership demonstrated a lavish attitude toward spending.  As Suster described in a blog post, “When I attended the Fortune CEO conference in Paris I stayed at the George V (The Four Seasons) hotel without much thought.  I took business class on the Eurostar and justified it because I could get more work done on my computer at bigger tables. It was probably true, but I created the wrong mindset – the wrong culture.”[1] But, a change happened when when the market shifted in 2001 after the tech bubble burst.  BuildOnline had to lay off 70% of its workforce and the company went to opposite extreme.

According to Suster, “I started flying RyanAir or EasyJet (the European equivalents of Southwest Airlines) anywhere I went. If I did have to catch a British Airways flight, I was in the back of the plane near the toilets.  I frequently traveled to Frankfurt, Germany but found it much cheaper to stay 20 minutes south of the city in Neu Isenberg.”[2] He added, “It wasn’t enough to just stay in Neu Isenberg but I found a pizzeria that had rooms to rent above the restaurant for just 35 Euros / Night. They were clean and since, when I travel, I’m normally in my hotel at 11pm and out by 7am wasting money on hotels seemed wasteful.  Our company developed a cost-conscious mentality. We switched offices to a cheap 1-year sublet of a company that had too much space during the dot-com boom. After a year, we played hardball and said we’d move out unless they gave us 20% off of our already low price. They had no options and the truth was that I was willing to move in order to drive the costs down further.”[3] Suster goes on to describe such extreme ‘scrappiness’ that he pushed employees to share rooms on business trips and even booked himself and his partner once in a hotel where the bathroom was shared with other guests.  Even Suster humorously admitted he had reached the bottom and pushed frugality too far.

Ryanair, a low-cost Irish airline known for its strange cost-cutting methods, has implemented a host of cost cutting measures that demonstrate a deep commitment to penny-pinching.  For example they began printing their in-flight magazine on narrower A5 paper, and the magazine will also double as a menu.  This will save about $650,000 a year.  They also have also encouraged their flight attendants to lose weight in order to reduce the cost of fuel per flight, and incentivized them by offering a chance to appear in their annual Girls of Ryanair calendar.  Another effort to reduce in-flight weight was to serve less ice on-board, ultimately reducing the fuel bill by hundreds of thousands of pounds.  And Ryanair is an active supporter of the controversial tax that would charge overweight passengers for adding extra mass to the airplane.  And, they have suggested implementing coin-operated restrooms and the removal of arm-rests in the plane.

Wise Spenders

Somewhere in the middle of the super spenders and the cheapskates are the companies that find a happy balance between frivolous and frugal expenses.  Smart businesses adopt this management approach.  Here is an example of a company that adopted a creative approach to identify and implement cost control measures:

Indiana University Health Goshen Hospital developed an initiative in 1998 called The Uncommon Leader.  It encouraged employees to submit to the leadership any cost-cutting idea they might have.  What was really innovative is that they offered to share with employees a portion of the savings generated by a good cost-saving idea.  From the start, the hospital began implementing adjustments based on employee suggestions big and small, such as changing the type of napkins on patient trays, swapping disposable gowns with cloth gowns, and ordering bulk generic drugs in place of some brand name drugs.  By 2013, 15 years later, the program had generated almost $35 million in savings. This approach for controlling costs by asking employees to engage in the exercise, not only empowers them to find reasonable solutions but also communicated to employees that the company valued being careful with expenses.

As organizations look to create programs that appeal to customers and employees while also considering ways to control costs, the key is balance.  Savvy business owners pay attention to costs as it relates to the value of an item.  If an item costs a considerable amount of money but it brings value to business, brand, staff or customers, then it is likely a good spend.  If it doesn’t add any real value, then it is an expense that is not worthwhile.   Also, smart business owners make financial decisions that don’t infringe on the well-being of others.  Last but not least, truly smart business owners will consider how an expenditure will affect the company now and in the future. They realize they might have to make short-term sacrifices to realize long-term gains.

Quote of the Week

“Beware of little expenses.  A small leak will sink a great ship.” Benjamin Franklin

 


[1] November 30, 2010, Suster, Mark, Both Sides of the Table, Business Insider Magazine, https://www.businessinsider.com/be-careful-not-to-be-penny-wise-pound-foolish-2010-11

[2] Ibid

[3] Ibid

 

© 2019, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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