Foolish Savings, Smarts Savings

Foolish Savings, Smart Savings
Gerardo Herrero Morales
International Negotiation Instructor | Entrepreneur | Director of Strategic Training and Consulting.

When I was in my first semester of engineering, I happened to have a roommate who was in the same program, but he was in his final semester. Somehow, he found the time to kindly share some advice with me for the five years ahead.

“When you think about saving money, think carefully whether it’s a foolish saving or a smart saving. Don’t save on books, don’t save on food, don’t save on a good mattress, and don’t save time by skipping the gym. Those would be foolish savings. Save on parties, save on alcohol, save time by not watching TV. Those would be smart savings.”
Foolish savings are popular—you want to eat tasty junk food or spend time having fun. Smart savings require a degree of discipline, and therefore, they aren't very popular.

In accounting classes, they explain that there are multiple types of costs: production costs, direct and indirect costs, sunk costs, ABC costs, etc.
What they don’t explain is that there are also foolish costs and smart costs. When we talk about costs, we are not only referring to money, but also to time, energy, motivation, reputation, etc.

By not knowing this distinction, we make many mistakes in our professional and personal lives.
Examples of this include aggressively haggling with a supplier, only for the supplier to downgrade us to the bottom of their client priority list. When we receive merchandise with little production time left, we might have to pay overtime to meet our own deadlines—and that could end up costing more than if we had paid the supplier’s original price.
Another example would be bargaining with a supplier only to later discover that they manufactured our parts with second-rate materials.
In theory, a supplier might accept a negotiation where the client wins and the supplier loses. In reality, the supplier doesn’t lose. Instead, they quietly downgrade our client status, either by delaying delivery, reducing quality, or diminishing service. Those would be foolish savings.
Of course, it sounds attractive to go to your boss and boast that you "saved costs" by haggling with the supplier—and the boss will probably applaud. But every time you pay less, you lose leverage to demand that the supplier deliver a product on time and with the agreed quality.
A better strategy is to negotiate a win-win deal, where you offer the supplier larger or more frequent orders in exchange for better pricing (smart savings).

Another example: when HR, trying to "save 50%," hires a $3,000-dollars-per-month worker who ends up ruining the production and damaging the machine, instead of paying $3,500 dollars for a worker who would have produced flawless work. In other words, there’s a cost associated with incompetence.
There are four different scenarios: a good $3,500 worker, a bad $3,500 worker (the worst case), a bad $3,000 worker, and a good $3,000 worker (which might seem like the best case).
However, what will likely happen is that such a good and cheap $3,000 dollars worker will leave at the first opportunity, leaving the machine abandoned—or that coworkers will "bully" him to avoid being exposed for their lower performance and to protect their own interests.
You have to consider all scenarios and plan what to do if the worker turns out to be a bad hire, simply because you tried to "save" money.

The point here is: when making decisions, you need to check whether a saving is real or false.
For a saving to be real, it must be a win-win situation, with all associated costs fully accounted for without omitting any.
Omitting even a single cost can be devastating, especially intangible costs.
Making popular decisions might be applauded in the short term, but the future consequences, often severe, will inevitably arise because reality is always relentless.