Daily Archives: January 4, 2009

Every Check Has A Cost (So Streamline Your Workflows)

Paul Graham wrote a great article last November on PaulGraham.com on how Artists Ship. In the article, which starts off by noting that one of the big differences between big companies and startups is that big companies tend to have developed procedures to protect themselves against mistakes while a startup walks like a toddler, bashing into things and falling over all the time explains that the gradual accumulation of checks in an organization is a kind of learning that is based on responses to disasters that have happened to it or other companies in similar situations. For example, after giving a contract to a supplier who goes bankrupt and fails to deliver, a company might require all suppliers to prove they’re solvent before submitting bids.

As companies continue to grow, they invariably accumulate more checks, either as responses to disasters or as a result of hiring people from bigger companies who bring more checks with them for protecting against disasters which have not yet happened (and which may never happened).

But not all checks are good. The reality is that every check has a cost, and sometimes the cost can outweigh the benefit. For example, it might be prudent to make a supplier verify it’s solvency, but the cost to you could be substantial. For example, the best supplier might be the one that can’t spare the effort to get “verified” or who falls just short of a solvency bar that’s set too high. After all, do they really need to have one year of operating capital in the bank for a six month contract?

Before a check is instituted, it’s cost should be well understood. For example, consider the example given by Joel Spolsky of Joel on Software on arbitrary approval thresholds. In many companies, software costing up to some nominal amount, such as $1,000, can be bought by individual managers without any additional approvals, but software that exceeds the nominal threshold has to be approved by a committee. This process, which has to be babysat by the prospective vendor, is quite expensive and the net result is that software that you might have sold for $5,000 now has to be sold for $50,000 to recover the costs associated with having to sell to a committee. Thus, although the purpose of the committee was to ensure the company doesn’t waste money, it could end up causing the company to pay 10 times as much for basic software.

Checks on purchases will always be expensive, because the harder it is to sell something to you, the more it has to cost. If you’re too hard to sell too, the only people who will sell to you are those companies that specialize in selling to you — and they are not likely to be the companies making the goods and services you need the most. This creates a whole new level of inefficiency where you pay exponentially more for inefficient products.

Thus, although checks are important before you make any purchase, it’s important that the checks be balanced … the cost of the check should not exceed the benefit the organization experiences as a result. So continue to do your solvency checks before handing out those million dollar contracts, but when it comes to office supply spot buys, lose the check. Worst case scenario, you go across the street.