Volume 8, Issue 2        March/April 2006


C u s t o m e r  S e r v i c e                
tips for quality service


Penny-Wise, Profit-Foolish

by Carl Tompkins

There should be no doubt in anyone’s mind about the importance of running a “lean and mean” business in order to remain profitable. This means that any unjustified expenditure of resources is unacceptable. A justified expenditure, on the other hand, is a wise one in that the return is greater than the investment. 

I find it interesting how, in so many business environments and situations, management fails in proper stewardship by pulling down so hard on the purse strings that no money ever leaks out, and, worst of all, no money can find its way back into the purse! Business consultant Peter Drucker refers to it as “saving yourself into prosperity.”

Employee training looms large in this type of investment error. How many times have people, having little or no training, serviced you? How do you feel about such situations? Most importantly, how much money is lost by those companies not providing adequate training? “We don’t have the money or staff to train people,” is the most fascinating answer I get from companies. 

I recently completed some photocopies at a local copy center and was attempting to pay when the young woman behind the counter stated, “I’m new and trying to pick my way through running the cash register.” Long story short, the process was frustrating, irritating, and did not leave me with any good reason to come back. The lesson to the copy company is that, yes, it did save a dozen hours and a thousand bucks worth of related training costs, but just how many dollars in lost business are accruing that far outweigh the investment in training?

According to Crosby and Associates, training will earn a minimum of a 5 to 1 return on investment within 12 months. Employees receiving training have improved morale and, above all, deliver profitable results. Effective training must include written documents of performance requirements and instruction on how to meet those requirements. Every job function of an employee must be accountable and be supported through regular feedback from management.

Another interesting area of being penny-wise and profit-foolish relates to the subject of attaining valuable employees. During a recent visit, the dean of a nationally-ranked business college reported that her school was in the market to hire an assistant dean who would focus on business development. The success of this position would be built around linking the college and graduating students with corporations throughout the country. The outcome would be improved corporate support and increased numbers of highly qualified students, each of whom would add tremendous revenue opportunity. The on-going problem is that the salary and benefits package the board has approved is about half of what it will take to attract the right person to this position. Applications have been received from a number of people but not of the caliber who will deliver the quantity and quality of results required. This scenario matches a phrase taught by business consultant Bob Ayers, “Pay peanuts and you’ll hire monkeys!” I advised the dean to either raise the package in order to achieve the far more valuable return or not hire anyone. Applying this advice on a larger scale, don’t be intimidated to pay a good salary knowing that great people create a minimum return of a 10 to 1 ratio for their employer. 

Spend to Get

Considering another area of opportunity to become more profit-wise, if I were to ask for $100,000 dollars and promise to give you back $1,000,000 in 12 months, would you loan me the money? Before you answer, let me put another spin on this question. If I said you were going to lose $400,000 in sales, at a gross margin of $240,000, by not providing $100,000 cost support for a region, would you provide the $100,000 investment? You probably would not have trouble making the investment in either case knowing what is at stake. Yet, this error is made daily by most companies. The example of the loss of $400,000 happened to a company this past year when it refused to fill a sales position in an existing territory that resulted in the loss of $240,000 in profit. The far worse situation is that the elevator down button has been pressed, meaning that the losses will continue to compound annually. The loss of revenue is a loss in profit that results in the reduction of expense that results in the loss of people that results in the loss of the business. As you might imagine, there is no happy conclusion to this type of story. This approach of downsizing should only be used if a business wants to exit its industry. The lesson here is to understand that a shrinking capital base will only support a shrinking revenue and profit outcome. 

Companies must create and leverage their value in order to differentiate themselves from competitors, resulting in higher margins of return. If capital investments fail to create this result, commodity trading results and only the lowest price wins. 

One final recommendation in order to avoid being penny-wise and profit-foolish is to remember to re-incorporate the social fiber into your business. Here I refer to the environment in which your staff operates. The prevailing attitude in business today is that there just is not any time to have fun in the workplace anymore because of the risks or time and money required. Then these same companies wonder why they have such terrible employee relations, turnover, rework and human resource problems. 

One glass shop owner in Connecticut reports that all his employee-related problems went away once he started having a monthly personal visit with each of his staff. This evolved into a consistent lunch appointment each month with each person that included an uninterrupted hour to learn how things were going for each team member and what he could do, as owner, to make things even better. His quote is, “My monthly lunches with my crew have become the most important thing I do as owner.”

Never before has there been a need for business to create an environment of belonging. For companies to succeed, they must create an attraction to employees that goes well beyond the paycheck. Effective employers make sure to take into consideration the personal needs of each employee that often leads to the role of mentoring. So much within the element of basic work ethics needs to be taught since a high percentage of young people enter the workplace with little to no knowledge or experience in this area.

Make the investment of time and money to ensure a proper social fiber and then watch how employees will take care of the dollars.

Carl Tompkins is the Western states area manager for Sika Corp., Madison Heights, Mich. He is based in Spokane, Wash.

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