Freakonomics: How to lose money by saving

saving.jpgI am never going to understand why some people don't value their time properly. If you work for yourself, or if you plan to do so in the future, one of the first things you need to learn is to charge yourself an hourly rate—the higher the better. Why? Because affording yourself the maximum rate will prevent you from wasting your precious time on things that are not worth it.

Let me give you a recent example. My top developer, Harold, was hired by a big local telecom here in the Dominican Republic for a freelance programming gig. While working for another company as a consultant he had created a piece of code and now that code needed maintenance. He quoted them a few thousand dollars for the whole project and they went back and forth for several months trying to get the lowest possible price. In the end, their relentless penny pinching saved them the astonishing amount of $800.

I have to say that saving is good and I like to save as much as possible, but read the rest of the story to learn when you lose by saving.

Time is money

Harold finished the project, and the telecom happily paid the final amount. Later on, it came to Harold’s ears that the fix he had provided is saving the company something to the tune of 500,000 Dominican pesos per month (US$14,700). The company had wasted at least three months trying to get the lowest price out of him. In the end, they saved $800—but they lost $44,100 by not getting the fix sooner.

It is important that you value both your time—and your timing. During the day I try to spend more time on the things that will give me the most results. I don't neglect other duties and projects, but I prefer to let others take care of them as much as possible. Opportunities are hard to find and you need to be ready to take them when they arrive.

Ask yourself this: Do you spend more money on gas going around the whole city looking for the cheapest price than you would if you stopped at the first gas station?

14 replies
  1. Jez
    Jez says:

    Reminds me of a time when I recommended £20k be spent on facilities at a company I worked for. This £20k would have saved £250k over two years.
    The money was never spent as the £20k would have come out of an individual cost centers tightly controlled budget, whereas the £250k was un-measured waste….

    I believe the correct term to describe things like this is "sub optimization", i.e. one department (purchasing in your example) optimizes to the detriment of the wider organization.
    It is extremely common in large organizations.

    Reply
  2. Hamlet Batista
    Hamlet Batista says:

    I believe the correct term to describe things like this is “sub optimization”, i.e. one department (purchasing in your example) optimizes to the detriment of the wider organization.
    It is extremely common in large organizations.

    Jez – thanks for the correct term. It is sad to know that it is so common though.

    Reply
    • Jez
      Jez says:

      It is common and in sucessful companies too. In terms of avoiding things like that, a "no blame" culture where people can be honest about failings helps a lot, as does encouraging participation / suggestions at all levels in the company (something the Japanese became very good at)…. sure it wont happen in your company ;-)

      Reply
  3. Jason Pearson
    Jason Pearson says:

    This is so true! My sister will drive to a store all the way across town because they have a sale on one or two items that she needs. Think of all she could have gotten done in that time, nevermind the extra she spent on gas. It's cliche, but time is money!

    Reply
  4. Mutiny Design
    Mutiny Design says:

    If you are refering to clients trying to get you to drop your price – I don't think it is just a Dominican problem. Here in the UK I have heard average cost of a website is £400 (800 USD) and a full-blow bespoke ecomerce is expected to be under £2,000 by most out there.

    I agree with Hamlet that it is best to just charge anhourly rate, but most clients will not accept it. Most clients either ain't bothered how much it costs as long as it works or are like the one mentioned above where they want it as cheap as they can get it.

    Reply
  5. Jez
    Jez says:

    But that is organizational culture, not Dominican culture… as I mention in my comment below the phenomenon Hamlet describes (sub optimization) is well understood and documented outside the Dominican Republic.

    Reply

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