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Making Money
(January 15, 2003) - Money is many different things. Cash, the form we all know most about, dribbles through the fingers like sand unless stringent measures are imposed to prevent leakage. Cash is the form of money that people in "cost centers" are most likely to understand. Dribble prevention, while critical for a healthy firm, is an uninteresting piece of the larger puzzle.

After years of watching the market and coming to believe that the core problem with all HCM functions is the cash mentality, we decided that a short primer on the creation of money was a necessary step in the evolution of the market. (For a very interesting take on the short-sightedness of our professional colleagues, see this remarkable new blog.)

First of all, a cost savings is not money. No matter how much money you avoid spending, frugality does not make money. Often, in spite of really good intentions, cost savings measures cost money. So, when a vendor suggests that using his or her system will save you "One Billion Dollars per Year" (shades of Doctor Evil), they don't really mean that you'll have any extra dollars to spend. Rather, the suggested savings are usually a part of the (extremely fuzzy) "Return On Investment" that comes from spending a lot of money on their system.

If you want to poke directly through the BS, when presented with the opportunity to invest in a cost-savings approach, simply ask a vendor if they will guarantee the savings by placing that sum in an escrow account. If cost-savings were actually spend-able, there would be no problem with this model. What you will get, however, is flushed faces and stammering. When the day is done, no one is able to find the money you "saved." In every other universe, savings are in an account—not so with cost savings.

Similarly, any CFO worth his or her salt will ask, "Which employees do you plan to eliminate so that we can ensure the cost savings?" Anyone, who has survived the past couple of years, knows all too well that "cost savings" really means "staff reductions." We've reached the point of diminishing returns (HR expenses are less than 1% of corporate budgets, so a savings is really pretty meaningless in the overall picture).

Again, while efficiency (saving time and reducing waste) is important, effectiveness (doing the right thing and making money) is what business is all about. Now that we've given the "cost savings" view more space than it deserves, we'll turn to the fundamentals of making money in tomorrow's column.


- John Sumser

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