False economy in business: when the cheap option costs more

Key takeaways

A false economy in business is a saving that leads to a larger cost later. The cheapest quote, the delayed repair and the task kept in-house to avoid a fee are the usual forms. The test is whole-life cost: the price, plus the time it takes you, plus what it costs when it goes wrong. Compare that, not the invoice.

• False economy: a saving now that causes a bigger cost later.
• Whole-life cost: price plus your time plus the cost of failure.
• The cheapest hourly rate rarely gives the lowest cost per task.
• Cheap is fine when failure is cheap too.

What is a false economy?

A false economy is an action that saves money in the short term and costs more in the long term. The initial saving is visible and immediate. The later cost is spread out, delayed or falls on someone else's budget, which is why it is so often missed.

• How BPO can help businesses reduce operational costs
• The hidden costs of doing everything in-house

What are the common examples?

The common examples in small businesses involve underpaying for something that then needs doing twice, or doing something yourself that someone else would do faster and better.

• Choosing the lowest quote without checking what it includes.
• Having senior staff do admin to avoid a support cost.
• Skipping documentation or training to save time.
• Delaying maintenance or software updates.
• Buying a cheaper tool that needs manual workarounds.
• Under-staffing customer service.

• Cost-cutting mistakes that end up costing a business more
• The cost of manual processes, and what to fix first

How do you test for one?

Test with whole-life cost. Add the purchase price, the time you and your team will spend making it work, and the expected cost of failure, which is the chance of something going wrong multiplied by what it would cost. The option with the lowest total is the economical one.

The UK government's Green Book applies the same principle to public spending, asking appraisers to consider costs and benefits over the whole life of an option, not just the initial outlay.

• 1. Price: what you pay.
• 2. Effort: your hours to manage, check and correct.
• 3. Failure: likelihood times consequence.
• 4. Add the three for each option and compare.

• Cost-effective or just cheap? How to judge outsourcing value
• Cost baseline: measure today's cost before you change it

What does the test show in numbers?

Take two illustrative quotes for 40 hours a week of admin. Provider A charges £9 an hour and Provider B £13. On price, A is £18,720 a year and B is £27,040. But A's work needs 6 hours a week of checking and correction by a £23.20-an-hour employee, and B's needs 1.5.

Checking adds about £7,240 a year to A and £1,810 to B. A now costs £25,960 and B £28,850. If A's higher error rate also loses one £3,000 customer a year, A is the more expensive option.

• Provider A: £18,720 plus £7,240 checking, £25,960.
• Provider B: £27,040 plus £1,810 checking, £28,850.
• One lost £3,000 customer makes A the dearer choice.

• How to compare outsourcing quotes like for like
• BPO cost per hour in the UK

When is the cheap option the right one?

The cheap option is right when failure is cheap and easily reversed: a low-risk internal task, a short trial, something you can redo in minutes. It is also right when the dearer option offers quality you do not need. Not every job warrants the premium version. Match the spend to the consequence of getting it wrong.

• Right first time rate: the quality number that cuts cost
• When is in-house cheaper than outsourcing?

How does this apply to outsourcing?

In outsourcing, the false economy is the lowest hourly rate. A rate that looks 30% cheaper can hide weaker supervision, higher staff turnover and no cover. Ask what the rate includes, how quality is checked and how staff are paid relative to their local market. Then compare cost per completed task.

• Labour arbitrage: how much of the BPO saving is wage rates?
• The hidden costs of outsourcing
• Quality assurance for outsourced teams

What does this look like in practice?

A pattern we see repeatedly: a firm chooses a provider on rate, spends a year correcting the output, concludes that outsourcing does not work and brings everything back in-house. The decision that failed was the buying decision. Outsourcing was never given a fair test.

• See client work
• BPO Solutions for UK businesses

False economy checklist

Ask these before choosing the cheaper option.

• What does the price exclude?
• How many of my hours will this take?
• What happens if it goes wrong?
• How likely is that, honestly?
• Who pays when it does?
• Is the dearer option's quality something I need?

• How to negotiate an outsourcing price without cutting quality
• Operational cost reduction checklist: 20 checks

Next step

Send us the options you are comparing, with prices and what each includes. We will run the whole-life cost with you and say which is the real economy.