The Fallacy Of Cost Cutting

Cost cutting policies usually become the shifting of real costs to opportunity costs. True savings don't actually happen.

Most of the time, "there ain't no such thing as a free lunch"; the only free lunch comes when we see an inefficiency we can eliminate, for example, spending $1 for a piece of equipment that saves you $2 of work. (http://en.wikipedia.org/wiki/Free_lunch)

The usual cost cutting policy is: don't spend the 1 real dollar, even if it saves you 2 opportunity dollars. (The rationale, I guess, is that the $1 is a concrete, accurate number while the $2 is a biased guess which is probably wrong. In that case, the better corrective policy should be to hire employees smart enough to make good guesses which are probably right.)

If your company has a cash flow crisis, fallacious cost cutting may be a valid strategy for surviving a battle. However, do it with the full knowledge that the efficiency hit it created could well cost you the war. Don't be fooled into thinking that the cost cutting has elevated the company to a new level of leanness which you can maintain.

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The reality on the ground is that cost cutting is a devaluation of the opportunity dollar vs the real dollar. This creeps into other calculations - Q: Do I make that extra effort because time is at a premium? A: No, my time is almost worthless - at becomes afixed part of the culture.