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Purchasing Mistakes and Their Financial Impact; hiring Mistakes are Purchasing Mistakes and Directly Effect Your Bottom Line

Since the economy crashed in 2008 we’ve all heard about the struggles faced by homeowners attempting to get rate adjustments. Call me cynical, but I believe the reason so many mortgage holders have refused to negotiate with mortgagees is because they want to foreclose so they can write properties off as losses. I mean, what other reason could mortgage holders possibly have not to negotiate terms that people can pay? The only benefit to the mortgage holder is the tax benefit and it’s a big one.

Similarly, when companies realize they’ve made a bad purchase, whether it is technology or an employee, they eventually dump it and write it off. The problem with this type of dumping is that they can’t actually write a bad hire off their taxes and if they’ve made a bad software purchase, they may have to accelerate depreciation and make a new purchase. So what’s the benefit of a purchasing loss? Surely, one of the most important line items companies look when considering expenditures is ROI. But upon further investigation I’m not so sure about a company’s commitment to that. It appears that many companies don’t seem to consider the negative financial impact on expenses they can neither recoup nor write off. This makes no sense to me. Are companies so flush that financial losses of this type are not an issue? I’d like to offer some examples of what I mean.

Why do companies keep “products” that don’t work?

I had a conversation with a sales professional I’ve known for many years. Our relationship goes back to the mid 90s and we were discussing a technology company that sells a SaaS product that is hot, hot, hot. He told me that the company’s product doesn’t work well. In the spirit of full disclosure I will say that he works for a competitor, but given our relationship he has no reason to trash them to me in a confidential conversation. I asked why companies would buy a product that doesn’t work. His response, “When it doesn’t work, they just retire it and buy something else”. The other thing to mention is that SaaS has a low barrier to entry so a company may not lose as much as with a capital expense. However, you can’t depreciate SaaS like you can with a capital expense and now the company has to make another purchase. Do they want or need a write off? Just because a product may look like the best thing since sliced bread doesn’t mean that it’s right for your company’s needs.

The second example is a F50 company. One of their in house recruiters spent 60K on a tool that would be used in the interview process. I know this tool and would never recommend it because it’s too costly for what it does and is really nothing more than a gimmick. This recruiter clearly doesn’t know how to evaluate products and do his due diligence. The company could have used another tool and gotten the same or better results for a fraction of the cost. I asked why this person was still employed after such a costly mistake and who signed off on the purchase. The answer I received was, “It’s X Company. Their budget is so big they won’t even miss 60K.” I get that 60K may not be a lot of money to a multi billion dollar company with a budget well into the millions, but doesn’t all that lost money add up to lower profits, hence lower dividends to stockholders? Plus if it’s happening in that department you can probably assume this type of thing is also happening elsewhere in the company. You’d think companies would be more careful when they make purchases or get rid of the people wasting money in this way.

Let me take a closer look at my last comment about getting rid of incompetent employees. Another individual I know told me a story about one of his clients that made a multimillion-dollar capital purchase. Over a 10-year period they incurred 20 million dollars in professional services expenses trying to get the product to work properly. It actually took 10 years to fire the guy who made this costly mistake. What’s up with that? This employee literally cost over $20MM. That’s a pretty hefty turnover expense. How does something like this go on for 10 years? Maybe because the company felt they’d made the purchase so they wanted to make it work? Perhaps the decision makers figured it would take more time and money to retire and buy something else. In the long run this was a large, costly mistake.

You can fix hiring/purchasing mistakes

I periodically run into companies that say they want to make changes, but when they look at the time commitment necessary to get it done they often bail and take their chances. Sometimes the lack of commitment is nothing more than fear of looking at how much mistakes regarding hiring and turnover truly cost. This can cause many executives to bury their head in the sand. I’d analogize this to a person who knows they need therapy but don’t want to do the work. They can still get through life, but not in the same way they would if they made the time to do the work necessary.

To centralize or not to centralize?

There’s a question some of you may be thinking. Can we centralize these types of expenses without overwhelming that department? In larger companies this may be labor prohibitive. Companies want to entrust and empower employees to make decisions, but how will you determine if the individual is truly competent to make decisions that won’t end up draining your company of dollars? That leads me right back to optimizing your recruiting process by having talent, the one thing in common with all my examples, aligned with business strategy. If you have a process that works, this issue can be dramatically reduced.

Please share your thoughts and ideas about this issue.

Creator and Host,

Carol Schultz

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