🔺A Businesses’ Greatest Costs are Intangible in Nature

When I think about the title “A Businesses’ Greatest Costs are Intangible in Nature,” I also think about Albert Einstein’s saying, “Not Everything that Counts can be Counted and Not Everything that can be Counted Counts.”

Those things that cannot be counted are the intangibles. Hence, it is difficult to quantify intangible costs as many intangibles are qualitative in nature. Yet, intangible costs can actually be quantified via opportunity costs. Here is an example I sent to a consultant who specifically works with intangible costs:

Everyone seems to focus on explicit costs which are easily identifiable. However, the most important costs are intangible costs which everyone avoids. Moreover, intangible costs drive opportunity costs/path dependency which impact all aspects of an organization.

For example, consider the intangible costs and importance of creating and maintaining relationships/connections or enhancing your reputation. This can translate into either an increase/decrease in both revenue/costs.

Let’s say a company goes to conferences 5 times a year (at $100 a piece) and comparable industry or historical company data indicates, if possible, that establishing a connection/enhancing reputation can increase revenue by $100. If a company plans to attend a conference 5 times next year that is an outlay $500 dollars. Let’s say establishing 10 connections is the target. The intangible cost of 1. not attending and 2. attending without establishing contacts is $1,000 (factoring in sunk costs) or $1,500 (all in costs).

If you could account for every single cost and performance metric in your business would that make your business very successful? Not necessarily. Almost all businesses know their costs and that doesn’t make them successful. Additionally, when businesses massively reduce their costs to a bare minimum you find that they experience a short-term increase in profits, but they actually massively increase their intangible costs.

For example, think of massively reducing costs as a round board attached with 100 pegs holding up another round board. Similar to Jenga, you remove as many pegs as possible while making sure the pegs still support the boards without collapsing.

Eventually what happens is companies get to the point where they have reduced costs to such a degree that there is not any margin for error. This is very similar to increasing the workload on employees but the intangible costs are a 1) Loss in morale; 2) Increases in stress; 3) Exhaustion; 4) Decreases in motivation; 5) An increase in errors; 6) Decreases in personal time; 7) Decreases in productivity and 8) Increases in turnover. As you can see, qualitative factors lead to an increase in intangible costs resulting in an increase in opportunity costs vis-a-vis increased turnover which can be quantified. In other words, the quantitative factors merely explain that which is, acting more as the symptom, rather than the cause.

The above example makes me think of the Solow residual where output is a function of TFP which is driven by changes in Labor, Capital, and Technology. If you push Labor and Capital to its max, the residual output presumes its technological. The only way to shift the productivity curve is through technological advances. Yet, the technological aspect is inherently intangible in nature and driven by human’s creativity, imagination, and ingenuity which is fostered by the proper culture and incentive structure. “The wheel was merely the manifestation of an idea, in other words, technological thought.”

Please refer to the report on Catch-22 Situations: Why Of Course! However, there is a Catch……..22 https://internationalcapitalmarkets.org/2019/09/16/why-of-course-however-there-is-a-catch-22/

Published by Diamond1

I have an extensive background throughout the financial spectrum with high-level experience on the sell-side, high-net worth private banking, portfolio management, international finance, public pensions, VC, PE, and economics. I enjoy working and collaborating with people that I admire and trust.

"Fit Models to Problems, Not Problems to Models"

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: