Have a quick look at yesterday’s post: Wedbush: Cheap as a Fox.
There was a robust discussion in comments — and the general take that resonated with me was summed up thusly: Being judicious about expenses is one thing, but being ultra cheap can be counter-productive and myopic when you figure in the opportunity costs.
The truth of that statement made me recall an incident from earlier in my career, where I worked in the research department of a Sell Side firm. I was employed for a perfectly fine shop with a few billion under management and about 1,000 employees. The CEO was a nice guy, but a cheap sunuvabitch. He was formerly of Bear Stearns (from decades prior), where he must have caught that cheapness bug.
It manifested itself in all manners of counter-productive ways. There were lots of little monetary annoyances, and it affected their recruitment and retention of talent. Bonuses were insultingly punk — that’s why I ultimately left. Mind you, this was during a relative boom period, and not during a recession or crisis.
But here’s what I recall most about where being notoriously cheap hurt them: Like many Wall Street firms, they had an override system in place for recruiting. I brought in a new department — a sharp group of distressed asset buyers. They were wildly profitable for many years (though they did get hurt in the 2008 collapse).
Getting paid on it was always a headache — constantly a day late and a dollar short. “They aren’t profitible yet, the start up costs are big” was the common cry. All the other excuses were similarly annoying, but when senior execs were taking home millions, it was utterly unacceptable. I asked around the more senior guys, and the most common answer was SOP: Standard Operating Procedure.
The cheapness was almost a running gag — but it had a pernicious impact. When employees sense that the firm is not a two way street, that “favors” only run one way, it leaves an impression. The takeaway message was don’t bother recruiting, ’cause you won’t get paid on it.
Mind you, all of this was early in my ramp up in the media. Soon after this event occurred, I was getting lots of inquiries from many people who were either seeing me on Kudlow or hearing me on Bloomberg radio or reading quotes in the WSJ. Big institutional sales traders and RIA/Brokers — nice books, lots of AUM, large trailing 12s. (That’s street speak for big producers).
Whenever I got one of these inquiries, I could not have been nicer. I was nothing if not honest to a fault with the inquiries:
“Hey these are really nice guys but truth be told, they are super cheap motherfuckers. Terrific guys to have a beer with, but tight-assed as all shit. Money isn’t everything, and if you want a great home with nice guys, this is a great place. But I would be lying if I did not tell you the bonuses suck. I am happy to introduce you to them, but you can do much better comp-wise elsewhere. Do you know Joe XXXX at XXX ?“
I kept a running total of how many of them I simply sent elsewhere. Following the lack of payment on the departmental recruitment, I tracked about $25M in gross annual revenues that had reached out to me. We would never have signed all of them, but even a fraction of that was a lot of revenue. I got no money for steering this cash flow to other firms that paid nice bonuses. I’m sure the new hire and his boss must have thought ‘I was swell,’ but that was not my motivation. I was going to be damned if I was going to generate one excess dollar in revenue for the owners and not get compensated for it.
The crap bonus during our biggest year ever was the last straw. Truth be told, that was the beginning of the end — and I couldn’t bring new guys in if in my mind I knew had a foot out the door. I left the first day in January, and never looked back.
This one comment summed it up:
“Being in the tech industry, I am of the view that the "cheap as a fox" approach to running a company is ultimately inferior to providing your workers with the proper tools and resources they need to perform at a high level. I've found that people/companies who have a cheap approach towards infrastructure/operating expenses also tend to be cheap when it comes to acquiring the best people, which in technology (and I suspect in other fields), is ultimately a losing game.”
Its hard to find fault in that analysis.
But I wonder: How many employees behave similarly? How much money is management leaving on the table because of how cheap they are with their employees? Not just new talent, but new ideas, costs savings, innovations, new business lines? I am an unusually vindictive prick, or is that pretty normal human response?
I wonder how many start ups have been formed because people said “Up yours” to their former employers?
~~~
UPDATE November 20, 2010 4:52pm
Postscript: One of the people who traded with this division as a counter-party emails me:
Hey B
Do you recall the conversation we had at Bobby Vans about XXXXXX and his group back in 2006? You laid out for me why they were going to blow up — too much leverage, too much RMBS exposure too much structured junk. You scared me out of some of my positions, and for a few months, I cursed you for it (then I had the best P&L on the desk for a year).
I asked you if you were going to warn XXXXX about the group’s exposure, and I recall your exact words: “I never got paid one dollar on this group or any of their transactions, so my ex-firm and I have no fiduciary relationship about this. That is lawyer speak for ‘They can go fuck themselves.’ ”
I still trade with them occasionally. In case you don’t know, the group left the firm some time ago, after racking up 100s of millions in losses. I would wager they gave back the past decade’s profits and then some.
It cost them a whole lot more than mere missed commissions and assets. It definitely left a mark.
-snip-
Heh heh — that quote does sound like me
A little Karma goes a long way . . .
In the software industry, where I work, cheapness is death.
Our processes are elaborate systems of collaboration that rely on efficiency and speed to get things done. If you go cheap, you’re clogging up that system, and the effects can be pernicious.
Same thing with the hiring process. If you hire an idiot for cheap, you are doomed. His mistakes will ruin you.
“…it affected their recruitment and retention of talent…”
‘retention’, is, equally, as huge of an issue..
and, BR, with this: “But I wonder: How many employees behave similarly? How much money is management leaving on the table because of how cheap they are with their employees? Not just new talent, but new ideas, costs savings, innovations, new business lines?
I wonder how many start ups have been formed because people said "Up yours" to their former employers?”
you are, definitely, right to wonder..
because, even, before ‘retention’ becomes an issue, ‘productivity’ (as you begin to delineate) suffer..
that lost enthusiam, those shelved efforts, are, easily, ‘straight to the Bottom Line’ (forgone) Marginal Profits..
Companies tend to take on the personalities of the guy(s) in charge. That is no surprise when the structure is usually a paternalistic hierarchy. It’s often not about what you did – it’s about what you did for your immediate supervisor (who will then take the credit for your work).
Most CEO’s are highly-paid baby-sitters with a large staff of wet-nurses under them. Their focus is to get fat sucking on the company’s teet by working the existing pump system. In some cases, you just have to be sitting in the chair and the pre-established machinery will make you fat.
The entrepreneur is different. He/she doesn’t fit that mold. Assuming he/she is positively productive (not throwing off negative externalities) without cheating/thieving, that is the person who deserves the big payoff.
But I don’t think success that way makes you different. It’s like booze – just makes you more of what you already are. If you are an a-hole, you just get to be a rich a-hole until they dump 6 feet of dirt on you.
The pattern I see in tech is that budgets will be cut, problems will be ignored, and when a system/organizational failure occurs an official scapegoat will be identified and shown the door or be made miserable enough to leave of their own volition. Then a new body will be promoted or brought in, and they will meet the same set of restrictions, and most likely the same end.
On the third go round, when the new sacrificial lamb starts bleating the same tune, management will be forced to pay attention because the paper trail has become so thick that they can’t deny the underlying problem. Since a third failure would likely mean the firing of someone up the food chain, the problem will be fixed by axing someone else’s department or budget.
Wash, rinse, repeat.
I’ve worked with smart people who knew how to stretch a buck and idiots with money who ran their company into the ground. This kind of correlation isn’t as simplistic as the premise of the main post. And yes, I’ve also worked for idiots who only screwed themselves when they thought they screwed me over. At one company my time was billable and a couple of times I was shortchanged out of a bonus for by being assigned to non-billable work by management. After that, I only exceeded the bonus minimum hours by accident since I got paid the same whether or not I hit that hour limit. The company lost over 100 hours a year for a couple of years by dicking me out of a tiny bonus.
I was at a luncheon for my company this week and sat at a table with a bunch of our sales people. One of their big gripes was that there was a cap placed on the amount of commissions they could earn in a given year. I was completely dumbfounded. What kind of moron in upper management would place this kind of sales disincentive in the name of cost cutting? BTW, our sales are “unexpectedly” down for the year.
~~~
BR: Wasn’t that this week’s episode of The Office?
The consistent thing I’ve seen over time that has killed more businesses is over-expansion during a period of optimism and plenty. By being tighter with a buck, they would have had different futures when the downturn arrived. Fixed costs will kill you if you don’t watch out.
I’ve worked for too many companies that are “penny wise and pound foolish”. They kill employee moral by micro-managing the pennies.
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