Tuesday, November 01, 2005

Costs that are difficult to quantify

Today I had a good discussion with a fellow employee whom I was explaining the hidden costs in organizations that are extremely difficult to quantify. I call these costs "soft costs". Soft costs are costs that are difficult to put an amount on but that are real. Here is an example:

There are two divisions in a company, each division run by a different manager. Division A has 50 employees while division B has 100. Both departments utilize the human resource department which is a cost center to the company. The HR department handles all employee relations such as hiring, firing, handling complaints, etc. for all the departments in the company. One way to distribute the cost of the HR department is to equally distribute it among each employee, if the HR costs $150k to run and there are 150 employees, which would amount to $1,000 per employee. So division A would expense $50,000 toward HR and division B would expense $100,000 toward HR.

Here is where things become hard to quantify. The manager of division A has a high turn-over rate which requires HR to spend a considerable time in hiring new employees. HR has determined that they spend about 50% of the time on division A because of this. So division A actually has $75k of expense, they are not realizing the extra $25k expense and division B is expensing $25k too much. This fact makes us realize that division A is painting a picture that they are more profitable than they really are and division b is not getting credit for being even more profitable.

WHAT IS THE COST OF A BAD MANAGER? It is hard to quantify but definitely has long ranging implications.


Costs involve much more than raw materials, shipping, taxes, etc. Costs involve the actions of managers and the company, attitude in the organization. Managers need to take a deeper look at the cost of organizational behavior and its impact to the bottom line.