Let’s say an organization needs a resource on a short-term basis. Paying an exhorbitant cost for a short-term solution is more practical and economical than paying an acceptable cost for a long-term commitment. However, as the years go by it becomes increasingly apparent that the short-term solution is costing more than if they had just made the long-term investment to begin with. Nobody wants to be the one to pony up the money for a long-term investment, so the organization continues to maintain the status quo and pay the exhorbitant costs of the short-term solution.
An (admittedly simplified) Example: Bob plans to spend a year doing business in Elbonia. The Elbonians offer to sell him a car for $3000, or he can rent a similar car for $100 a month. $1200 for a year is less than $3000, so Bob decides to rent. Five years later, Bob is still in Elbonia, still paying $1200 a year. By this point he has spent $6000, which is twice what he would have paid to have just bought a car to begin with. (Obviously, this examples assumes Elbonia is a very poor place and does not include insurance, maintenance agreements, etc) Still, Bob refuses to budget more than $1200 a year for vehicle expenses in the belief that he will leave Elbonia at some point in the future.
Is there a word for Bob’s poor planning? Or his continued insistence on maintaining a more costly status quo?
I don’t know of a formal name for it, but I’d call it something like ‘unrealistic planning horizon’.
Thing is, sometimes, it’s just unavoidable - a short term solution seems right at the outset, based on all the available information - but later on, volatility of the future means there’s still no good reason to invest in a longer-term solution. If Elbonia is continually teetering on the brink of war with Kneevonia, investing a big chunk of cash in an asset you may need to abandon may be folly.
And in some cases, it can actually net out cheaper to implement the apparently-shortsighted solution. In your hypothetical example, renting the car might mean you still have $2,900 cash in hand at the end of month 1 - which might be money that could be put to highly profitable use elsewhere.
I’ve heard “budget slip”, but that’s more in a context of a project which keeps getting bigger and longer, or which was simply misbudgeted from the start (a too-frequent sales technique); I don’t know whether it would be used for something such as hiring a temp to replace someone whose “short leave” ends up lasting so much it would have been cheaper to hire a permanent replacement from the start.
I guess it could be ‘scope creep’, but usually, that’s about the demand for new things not originally planned for, rather than just over-running a plan.
And you can have scope creep without budget creep; in fact, a well-managed project will take into account expectable amounts of scope creep (such as reports the client swears to God they don’t need, when the team is absolutely sure they do and they will eventually run in yelling for it) and include it in the budget.
I’ve heard that kind of situation being referred to as “being penny-wise but pound-foolish” if the interpretation is that some penny-pincher in the finance department is preventing the large initial outlay for the more cost-effective solution. But as Mangetout points out, you can achieve this situation without making any short-sighted decisions at any point if the future is sufficiently unknown.
The big question for management is “why is Bob in Elbonia five years later when he was originally planned to be only there for one year?”. The other failings are just consequences of that one.
A company I worked for wanted to store some goods in the open, and I was asked to source some tarpaulins to cover them. I don’t recall the actual costs, but rental was per month, about one sixth of the purchase cost. I suggested that purchase would be cheaper, but was told to rent because they were only needed for three months.
Two years later, they were still there, still being rented; simply because no one would bite the bullet and spend the money.
Later in my career I organised the removal of a hospital into a new building. We rented hundreds of those plastic packing boxes to put stuff in. The contract was for one month - two weeks either side of moving day. Three months later I had to ‘buy’ over 100 boxes, that had mysteriously disappeared. The monthly rental was small and the purchase cost much greater. It would have been easy to just let it run on.
Penny wise, pound foolish. It applies to anything where you try to save a few bucks but end up spending more.
However, it’s not really a bad thing in all cases. In the example in the OP the over-riding concern may be reducing fixed costs, so even if it costs more in the long run the company has avoided tying up money for an up front cost. Had they invested more in the beginning they may have not been able to make good decisions about future costs that would more significantly impact the business.
Bob could easily have made the correct decision initially and be making the correct decision now. You should rule that out before trying to come up for a word with his poor planning.
Businesses don’t make decisions with certainty. If it was more likely he’d leave than stay, then on an expected value basis, renting was cheaper. It’s not reasonable to criticize his decision making simply because in actuality he stayed. He may have been entirely correct in evaluating the likelihood of leaving, even though the less likely outcome actually happened.
More importantly, that decision is over with. It’s what economists call a “sunk cost”. The rent are already spent and can’t be recouped, so it’s irrational to consider those costs in making future decisions.
The rational decision would be to evaluate the options as of 2014 and make the decision that’s most likely to be correct today. It’s possible the experience in Elbonia has shown that they’re not leaving any time soon, in which case the more capital intensive option would be correct. But it’s also possible they’re no more likely to stay another year today than they were 5 years ago. In any case, they should make their decision based on the best available information they have today, not worrying about whether they made the right decision years ago.
Bob’s employer could have gone back and re-negotiated the contract on what is now a pretty old car. Many leases drop to a nominal figure after (say) five years.
An extremely common example is, or at least used to be, people who chose checking account plans by whatever was cheapest: no fee and ten cents a check, or $2 and ten free checks a month… and then (as was common before ATMs) wrote so many checks a month that their fees were three to four times the flat-rate account ($5 or so for unlimited checkwriting).
And then it was the greedy bank’s fault, of course.
What may look like a bad idea might not be, when you know all the facts. In the car-rental example, buying the car would entail a capital expense, which could not be deducted. But rental expenses can. In addition, his company may have all sorts of hoops which must be jumped through to purchase a multi-year asset, which don’t apply to a rented asset. This often happens on government contracts. So, on an after-tax, big-picture basis, it might be the wisest move they could make.
If, however, the apparently foolish move really IS foolish in the long run, I would just call it “short-sighted planning.”
Business planners are not omnipotent. I think the car rental situation is probably the right thing to do in most cases. You can’t look at a single case (Bob goes to Elbonia and stays longer). You have to look at all the similar situations. Perhaps the company sends reps all over the world and most jobs end on time. Overall, it may make sense to rent the cars even though sometimes the rental ends up being more than purchase. If they were instead purchasing cars all the time, it could end up costing more because of jobs where the rep left early. Plus, Bob can easily be moved to another country without losing time trying to sell purchased assets.
Another possibility could be that Bob’s contract is being paid by the client on a quarterly basis. Bob’s company may not want to sink their own funds at the start of the contract to buy the car. Instead, they pay for Bob’s expenses as he accrues them from the client’s payment.
Getting contractors to work on-site is similar. The company knows they are working on a multi-year project, but there’s a chance the project may be cancelled or that layoffs are coming. If instead it turns out that the company doesn’t need to cut back, they may end up paying the temp workers for several years. In hindsight they should have hired workers instead, but at the beginning they didn’t know what the future held. Plus, the temp workers gained valuable skills that meant they would have been hard to replace in the middle of the project.
I think in most of these cases, the better choice only becomes clear in hindsight. If that’s the case, then just make the best decision you can given the current situation.
If it’s a genuine rental, it’s probably not the same car. Every time Bob signed a new rental agreement, he probably got a new car, so something Bob gained from the use of rental rather than purchase was a new car every year-- better reliability, newest safety features, etc.
Don’t say “It’s Elbonia.” Bob is probably able to rent a much better car than one an Elbonian citizen could get. If there are Americans doing business there, there is a market for things Americans want.
I think there are a lot of reasons to argue that price is not the only consideration, and rental may have been the way to go even if Bob knew he’d be there for five years.
However, I know that’s missing the point.
Something that comes into play here is “regression to the mean.” Even someone who generally makes good decisions is going to make some bone-headed choices occasionally. No one is completely consistent, but everyone tends toward a mean. If Bob, or his company, is good enough to stay in business, this is a less-than stellar decision balanced out by a really superb choice, and averaged with many just good ones, that produces the company’s mean, so this is a poor, but inevitable choice, that a good company plans for. Therefore, it probably ends up being covered. If the extra car money put the company in the hole, it would probably not be the result of a single decision not to buy, but a lot of bad decisions that led to Bob staying in Elbonia for so long.