When Something is Cheap, but Really Expensive

My day job has me thinking a lot about costs lately. That probably isn’t a shock to anyone. But I’m not talking about cost of goods sold or the price of tea in China. I’m talking about transaction costs. These are the costs of conducting an exchange.Wikipedia says there are three main ones:

  • Search Cost – The effort required to find and validate the good or service is available on the market and at a price.
  • Negotiation Cost – The effort required to agree to terms of a deal or contract.
  • Agreement Enforcement Cost – The effort required to ensure the parameters established in the contract are adhered to.

In my day job, I’m pushing a solution that on one side is going to increase operating costs, particularly in one time changes. To over come the reluctance to initiate this work, I have to show a reduction in cost, particularly for the other side. Unfortunately, the other side’s costs are very low as well, except for the risk they are taking on. What I realized is there are two forces that are making what should be highly costly activities cheaper. Those forces are Habitualization and Institutionalization.

  • Habitualization is the ability to make parts of a difficult task and decision routine. It’s a means of cutting corners to save energy for the part of the work that is taxing. But often times the corner cutting invades the difficult parts too.
  • Institutionalization is the known concepts, norms, values, and modes of behavior that develop within organizations. Parts of institutionalization make it hard for people to identify habitualization because everyone does it and it appears to be normal.It isn’t a purposeful action, just the way things are.

For me to do my job I have to call out these factors and show how when they are combined a very wasteful system for doing things sets in. I’m going to measure the Search costs in terms of time, but I’m not going to measure Negotiation or Agreement Enforcement. The reason is because they currently don’t explicitly happen. So simply having them increases costs. In the long run these agreements will lead to better offerings, but in the short run they don’t.

Ultimately, I’m going to illustrate the relationships between these factors. Its valuable to show how when one goes down it dramatically affects another area and forces it up. But until I thought this through, none of these impacts were considered. We just knew it was not a good way of doing things.


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