Cost Optimization .. continues

Cost Optimization .. continues

I had an interesting discussion with my colleague about Cost Optimization from different points of view:

  • Why does it feel Cost Optimization is an everlasting issue?
  • Is there ever a time when there’s no need for Cost Optimization?
  • Who decides the Gross Margin to strive for?

To make a very long and fruitful discussion short, let’s begin with some basic conceptions. It always surprises me how many people there are with almost zero understanding about the concept of entrepreneurship.

What I’m going to do is I will make a well over-simplifying and a clear-cut categorization of organizations. Basically companies and organizations can be categorized into four main categories.

  1. Publicly funded Organizations, no matter who owns them.
  2. Organizations funded by charity collection, no matter who owns them.
  3. Corporations listed onto a stock exchange, owned by stockholders.
  4. Privately owned Organizations, funded by consumers and customers.

I start with the category 4) Privately owned Organizations. There are for example privately owned companies. They can rule their own money as they wish. If they feel like offering an annual sunny vacation for their employees in Bora Bora and they can afford it – go for it! People can of course have arguments and opinions about how to spend the money, but at the end of the day Organizations in category 4) distinguish their purchases themselves.

There are for example privately owned companies. They can rule their own money as they wish.

Now, for the rest of the categories (1-3) it’s different.

Category 1) Publicly funded Organizations. Usually these Organizations get their money from taxpayers’ wallets in a way or another. These Organizations should never ever behave like the money was theirs, because it’s not. It’s taxpayers’ money. These Organizations should take particularly close look into their spending and pursue (very) good governance!

donate-654328_640Pretty much the same message goes to the category 2) Organizations funded by charity collection. These are for example Organizations like WWF, UNCHR, Red Cross.. You name it. The money they spend doesn’t necessarily come from taxpayers’ wallets – at least not directly. But it comes from a number of individuals who want to believe that by donating money i.e. monthly basis they can make world a better place, piece by piece.

These Organizations should – just like in Category 1) – never behave like the money was theirs, because it’s not. It’s their donators’ money and it’s aimed to be used to the sole purpose the Organization has announced it will be used. These Organizations should take particularly close look into their spending and pursue (very) good governance!

These Organizations should – just like in Category 1) – never behave like the money was theirs, because it’s not.

Unfortunately that’s not too often the case. Rather on the contrary. There are too many cases where politicians, public servants and the management of publicly funded Organization have convicted a misdemeanor and took personal advance on other people’s money. Yet there are sad and bad examples of Organizations who claim to be healing the world – or parts of it – and they spend more than 80% of their income (donators’ money) on administration while less than 20% of the money goes to the original purpose.

Category 3) Corporations listed onto a stock exchange, owned by stockholders is its’ own case. Corporations have a board of directors who support the Managing Director, who orchestrates the management of the company.

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Corporations listed onto a stock exchange have one primary task and duty to carry out: make profit to the owners (that is, the shareholders). Period. Plain and simple. If such an Organization wants to offer annual sunny vacation for their employees in Bora Bora and they can afford it that might be done. Or might not, depending on a number of things:

If the Organization has made profit and the stockowners are happy, it might be that this kind of nice trip could be arranged. On the other hand if the Organization spends their money on that kind of trips while making loss, the Board of Directors might quickly change Managing Director to a new Managing Director who makes some swift adjustments in the name of Cost Optimization.

Corporations listed onto a stock exchange have one primary task and duty to carry out: make profit to the owners (that is, the shareholders).

The most important thing that separates Organizations in category 3 from Organizations in categories 1 and 2 is the pure simple fact that a listed company is unlikely to spend taxpayers’ money. And like I stated earlier on, Organizations in category 4 are free to spend all the money they want (and have).

To summarize: taxpayers’ money should absolutely never be wasted but they should be harbored from misdemeanor by disciplined pursue of good excellent governance.

Let’s go back to where we started and review the questions again:

–       Why does it feel that Cost Optimization is an everlasting issue?

–       Is there ever a time when there’s no need for Cost Optimization?

–       Who decides the Gross Margin to strive for?

I believe I somewhat indirectly answered to the questions or to say the least gave a few guidelines, and an intelligent reader can easily jump to his/her own conclusions.

I still want to say something about Cost Optimization: Cost Optimization should not be received as a totally negative thing. I emphasize the word Optimization. It means making certain adjustments to optimize the costs to correspond with the business. If optimizing means that the personnel of an Organization is capable of working 25% more efficiently after enjoying a week in Bora Bora, that might be done – at least in Organizations belonging to categories 3 and 4 – 1 and 2 are much more questionable and there should be rock hard justifications behind the decision-making.

Cost Optimization should not be received as a totally negative thing. I emphasize the word Optimization. It means making certain adjustments to optimize the costs to correspond with the business.

In other words, optimizing something doesn’t always need to mean cutting down something, since optimizing and cutting down are not synonyms.

Pictures are from Pixabay.

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