Do some businesses quantify the cost of a conversation?

Question

I'm moving into day three of a conversation at work about whether to solve a problem by purchasing a $100 piece of equipment. It's a serious problem: our finance group lost of week's worth of time recently because of it. Five or six people are involved in the decision at this point, from several levels of our organizational hierarchy.

We're a non-profit, so I expect some inefficiency. But this seems like a huge waste of time for a very small purchase. All of the people in the conversation are college-educated; many of us have advanced degrees. I don't know all our hourly rates, but we've surely spent more than $100 just talking about it.

In a “for-profit” business, how would this be handled? Would they have a policy like, “If you can solve a problem for less than $X without having to start a conversation, do it”?

Answer 1

Would they have a policy like, “If you can solve a problem for less than $X without having to start a conversation, do it”?

Other than a "petty cash" policy, no business I know of has a formal, written policy quite like that.

Every business I know of has a purchasing process. That process requires a justification for each purchase - and the justification must be more formal and get approved at higher levels of management as the cost of the purchase increases.

For a $100 purchase, very little justification would be required, and a lower-level approval would likely be permitted.

As you suggest, $100 is not worth spending much time on. It's unfortunate your non-profit does. Perhaps that's an indication of serious inefficiency, or maybe they just don't have enough more important work to do.

Answer 2

I've encountered similar situations in for-profit organizations, even though it is more common in the non-private sector.

It does not seem to be linked to what the hourly rate is - but rather whether people value their time; i.e. "are busy" or not. In addition, in organizations that tend to value 'correctness' over financial reality (like government or auditing) this situation is very often the norm and not an aberration.

So - it's probably a cultural issue as opposed to a rational/financial one - and changing cultural issues often requires "rebellion" or a least some sort of "civil disobedience". And you cannot change it alone and must therefore find support. Someone has to start, though - and that could be you.

In this case, one could mention the disparity between time spent and actual cost. That will probably at best be ignored and perhaps even create animosity. After that - unless your presence is required - withdraw from the discussion, stating you have other more pressing matters. Perhaps this will trigger a similar response in others. If it does not, you'll probably just have to accept it.

Having said that - I personally would not bother unless this situation is so frequent that it actually is a real pain and not merely a quirky office anecdote.

Answer 3

You're running into several problems here, starting with Parkinson's Law of triviality https://en.wikipedia.org/wiki/Law_of_triviality. There is going to be more time discussed on a small item BECAUSE it is small.

In a proper business, they'd have similar problems, but the way to avoid it is with more clear processes defining how many hands need to be involved. Minor purchases should be discretionary, with two people signing off. Moderate purchases should be up for some small review, and major purchases should be run through a committee.

A minimum of two signatures should be required for all purchases, however. It keeps people honest.

By keeping to procedures like that (and clearly defining what minor, moderate, and major are) you can limit the cost to the company (or non-profit).

Companies are also very cognizant of the return on investment (ROI). If you spend more time debating the purchase of the item vs what benefit that item will bring, you've got a negative ROI. As it stands, you've already spent more debating it than the purchase price. Do bring this up as a way to justify putting procedures in place to prevent future problems, THAT will be a good ROI.

You may also want to purchase and distribute copies of the dilbert principle, because it looks like there are a few people who need to read it.

Answer 4

I think normally in a "proper" business (by which I mean an organisation that can get things done, whether for profit or otherwise), someone would have the authority to decide how to solve the problem. The discussion how to solve it would only go on as long as they tolerated it, and it would be their responsibility to judge the cost of the discussion itself against the cost of making the "wrong" decision.

I'm not so sure how many people in that position would literally quantify the cost of the discussion ("X people at Y per hour, discussion could take anything from A-B hours") rather than just going by a rough estimate: "definitely more than $100, so let's try the $100 solution and if that doesn't work we'll have the discussion").

Consensus decision-making, or for that matter "involving all stakeholders", has its advantages, but certainly it can be extremely expensive. In a smoothly-running organisation, whether private or public, a trivial decision doesn't require a large consensus.

However, you have to count the cost of the conversation against the actual cost of making the "wrong" decision, which is unlikely to just be the retail price of the proposed solution. If there are people arguing against the $100 solution then presumably they see some potential pitfall in it, or they see some other larger gain if a different solution is used. Just for example, suppose the $100 solution is arguably rather unethical within the stated purpose of your non-profit organisation. Then clearly it should not be allowed to pass on a policy of "it's cheap, and that's all that matters, just get on with it".

If nobody is actually opposing the $100 solution, but you're all sitting there all day talking about it anyway, then whoever is chairing this meeting should have wrapped it up about 1.95 days earlier than the beginning of day 3.

Answer 5

It's not uncommon to spend more time talking about a purchase then the actual purchase. There are two very common, good reasons to do this.

• Item X is $100 and would work
• Item Y is $500 and would work better.

Some time needs to be spent to figure out if item Y is worth the $400. This is specially true if a policy or rule says you can only get Item X or Y once in it's lifetime.

Take a office printer. Lets say policy says you can only buy one office printer.

You find one for $1,000, it seems to do most of what everyone wants. It prints, has decent queue management, etc.

I find one for $5,000, it does what the $1,000 one does but has lower cost of ink, and faster PPM. In addition is allows email to print functions, and has a better supported network driver.

There will be some time spent in figuring out if this is the proper device. This can be even more true if, say your clients prefer one brand, or sales thinks the "prestige" of having one brand is worth it.

A lot of intangible things go into a purchase. It's not always just cost.

In a “proper” business, how would this be handled? Would they have a policy like, “If you can solve a problem for less than $X without having to start a conversation, do it”?

"If you can solve a problem for less than $X without having to start a conversation, do it?" Absolutely 100% no. Remember money may not even be the primary concern. I have never seen a business where someone could just buy something flat out without some level of conversation, outside two exceptions.

• Petty Cash - A lot of business have a petty cash fund. This fund is designated to cover odd ball expenses that have a short time frame. Even purchases from this category get reviewed though. It just happens after the fact.

• Consumables - Businesses try to reduce these, but there are a bunch of purchases that happen, typically without review, for replaceable, or consumable items. Someone broke their chair and a new chair is needed. Then from the furniture fund go buy the replacement chair. No need for a conversation. These purchases are also reviewed, but ahead of time. Everyone needs chair A, make sure to have 2 spare Chairs on hand. When you use a chair, just go buy a new chair A.

Other then that, every purchase, small or large gets some kind of approval. Yes that means you spend $500 deciding if a $2 pen is better then a $1 pen.

Typically there is a (single) decision maker. Everyone states their case about why X is better then Y then the decision maker makes a decision. Letting everyone make their case is important though, and that takes time.

Answer 6

You need to look into how your non-profit operates their budget. When money is earmarked for salaries and the equipment budget is very low, you don't really have much of a choice. Donors can be put-off if you're spending their money in ways they're not expecting.

Paying people by the hour can add up especially if these conversations take you into over-time. Salaried employees that could be doing other work to bring in money would be considered a waste as well.

I've worked at many companies that don't think twice about asking people to do extra work, but wouldn't let you buy a pencil with company money. Doing paperwork for reimbursement is a huge waste of time, but I don't see a company credit card in my future.

Answer 7

Some do. Most employees do as well. If it takes me 3 long meetings and multiple days to get something done, I try to stay away from doing anything related to purchasing for that company in the future.

A workaround for this process I've used in the past is to just buy the darn thing (not having it kept me from my work for days already) and eat the cost if they were unwilling to reimburse. So far they've all always reimbursed, but yes, it's a risky move. Reimbursement rules are often different than purchasing rules for some reason.

Using this information is at your own risk.

Answer 8

Professionals do

Consultancy firms would be eager to sit with you and invoice three days worth of fees. If you do want to point out how much of the valuable time they spend on discussion, you can propose either including paid outsiders or just logging it as a new project on your time sheet (which is quantification of costs on its own right).
If you are not a punk like me you can go the other waay: businesses usually have treasury policies that define how much one can spend at once/on a monthly basis and who needs to countersign expenditures above certain limits.
If $100 is not a big deal in your organization then you probably should prepare this document.

Answer 9

For-Profit and Non-Profit companies often function identically at the lower levels. This isn't an issue due to your company's nonprofit status.

Basic economics tells us that everything carries an opportunity cost. In this case, the opportunity cost of a meeting is the value that would have been otherwise added by said meeting's attendees. However, successfully arguing against meetings on this basis requires that management accept a couple of caveats:

1. That the attendees of this meeting would otherwise be adding value to the company.

2. That sunk costs (ie, the salary of the people in the room) carry the same weight as future costs (the money to be spent on our new widget).

In reality, I've found that management often doesn't buy into one or both of the above. I've never met anyone who would admit to believing #1 (though I've certainly seen evidence to suggest it). More likely, Management sees salary as a cost that has already been paid, whereas new spending represents an opportunity to save money (ie, it actually "costs money", opposed to workers who get paid anyways).

Answer 10

The existing answers already point out that this can happen in for-profit businesses as well. However I will share my experience on how this could be dealt with in a reasonable way. This is something that I have seen in practice everywhere that I have worked:

Give people a discretionary budget

By giving people some leeway for small expenses, you avoid wasting time and decision effort on trivial spendings. In addition you can speed up the decision process, and give people the feeling that they are trusted to (know how to) act in the best interest of the company.

Examples

• Any regular employee can buy things under 30 bucks without permission, and declare the expenses. If he takes advantage of this, this privilige gets withdrawn.
• A manager has a discretionary budget of 500 bucks per month, with some general but broad guidelines of what it could be used for. (Yes for a team drink, no for wifes earrings).
• A department head has a budget of 500k per year, but needs to get approval for any costs that exceed 10k. (So below 10k is the discretionary part).

Answer 11

Salary and discretionary costs are normally not interchangeable easily. If they were, your question makes 100% perfect sense. Why spend $150 of salary instead of $100 of widget?

You are fundamentally missing a significant influence which causes this problem: budgets.

Salaries are fixed and planned for a fairly lengthy duration of time. Over the course of an entire year, a team might have a fixed budget for salary. There are a variety of planning reasons that go into this but suffice to say most organizations have some level of budgeting process. Salary is included in this.

However, the $100 piece you are talking about is very likely not part of a specific budget item. This might be because of a variety of reasons. Regardless, appropriating that $100 to purchase a widget is considerably more organizationally difficult than spending $1000 or even $10000 in salary costs.

Answer 12

The biggest problem that you're facing is that, whether or not it is in the business' overall interest to have this conversation, it's almost certainly in the interest of each contributor to have the conversation.

It's very rare that any individual gets to weigh in on a "decision" in front of their boss, in a way that can flatter them. By asking "tough" and "important" questions about this purchase, an employee can seem very conscientious about the needs of the business (whether or not they are actually accomplishing anything). Lots of bosses love this sort of thing, because it smacks of action, and this applies to people at all levels of the hierarchy.

Ultimately, this sort of nonsense will only stop if/when the people at the top recognize it for the waste of time that it likely is. Maybe your pointing that out will resonate with someone with the pull to stop the train, and maybe not. Regardless, this is an emotional and personal issue, not a mathematical/financial one.