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The hidden costs of focussing on costs

January 11, 2015

We all think it’s a good part of management to look after costs and budgets – looking for savings and beating our budget. There should be no hidden costs – every pound needs to be accounted for. It’s usual for a manager to have an annual performance target to beat or achieve their financial budget.  So it’s no wonder that managers would take satisfaction at finding savings.

Here is a real-life example of a small business focussing on cost but actually increasing costs – what I call hidden costs. The bigger the business the greater the risk of increasing those hidden costs.

Focussing on cost

The professional services business has an office manager who is tasked with organising all office support services includes document printing and copying.  The manager has a budget to pay for maintenance of the photocopiers and printers.  To save money the contract is a fixed price regardless of the number of call outs to maintenance engineers.  So from  the office manager’s point of view it doesn’t matter how many call outs there are.  As long as the maintenance provider meets their service level agreement the office manager is doing a good job.  Or are they?

Missing the hidden costs

Unfortunately from the users’ point of view the equipment is getting old and breaks down too many times. And every time a copier or printer isn’t working means that users can’t send out letters, print reports and service the paying clients.  As you may have experienced when a copier breaks down there is usually a lot of wasted time resending print jobs and checking everything is correctly printed.

In a professional services firm wasted time means lower chargeable time and that means money and profit. Plus there is the frustration and negative emotion when the printers fail.

Take an end-to-end view

The solution to this unforeseen consequence was to:

  • show the office manager the role of the copiers and printers in the delivery of service to clients;
  • renegotiate the maintenance contract  to incentivise  the supplier to optimise machine availability – including an investment programme to replace older machines.

What would you do in this situation?