People who do not know the price of a thing tend to use it differently than those who do know the price. Who pays matters, but not as much as you would think.
A recent National Post story pointed out that surgeons who know the price of disposable supplies use them differently. Big Savings Toronto Western Hospital neurosurgeons reduced their medical supplies budget 30% in four months. About $750,000.
Information drives decisions in all facets of life. Hiding costs from the people who use the item is a losing technique for institutions, businesses, and families. People make better decisions when they know and understand the trade-off.
For example, children make better decisions when they know how money works. If they know that Mom has to work next Saturday to make money to buy the coolest running shoes, they may choose something different. Super channels on cable or summer camp? Designer jeans instead of less cool jeans and a bigger allowance? Trade-offs are necessary because there are limited resources.
All money decisions involve a choice between the money and the item. If the price information is left out, you cannot expect good choices.
Medicare, schools, airports, most government departments and many businesses disguise the price of their services and their methods of delivering them. If a professor knew that a certain text book costs $400 would they assign it? Would patients always require the best possible soft services? Would employees be wasteful?
Few people are spendthrifts. Once a surgeon knows that a certain convenient scalpel costs $200 and could be replaced by a “65 cent scalpel blade” not many would continue to use the expensive instrument.
Suppliers who understand that the users do not know prices can be quite aggressive on pricing. It is about unbalanced knowledge in the decision. Purchasing knows the price and the surgeon knows how the instrument is used. Neither can make a good decision based solely on what they know.
There is a difference between managing the work and managing the work plus its economics. Managing the work is about efficiency. Managing the money in isolation is near impossible because people must guess the value in use. If you need to fill out a form to get a ballpoint pen purchasing has too little awareness of what people do with ballpoint pens. You cannot manage the numbers unless you know what the numbers mean.
Managing the work is about efficiency and the economics of work is about effectiveness. Super efficiency cannot compensate for sloppy effectiveness.
Sharing cost information with operators is a superb way to improve effectiveness. You will be surprised what you will discover.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.