Beware of false profits

In these times of austerity, there’s a greater focus than ever on how much things cost. I’m working with several of my public sector clients, for example, to help them to work out the cost of the services they provide and to use this information to make better decisions. The same is true across the commercial sector, where lower costs equal higher profits. Except that they don’t always. Not in the big scheme of things.

When we think about the cost of something, we count up what the organisation has to pay in order to buy or produce it. This includes things like raw materials, staff salaries, production facilities, office space, fuel, mobile phone bills, and so on. It takes a bit of effort and a methodical approach, yet it’s just about do-able. But that’s only the costs to the organisation. We don’t usually consider the costs to other people, other organisations and the planet as a while. And I think we should.

Economists refer to these ‘outside’ costs as negative externalities, which are defined as costs that result from an activity or transaction and that affect an otherwise uninvolved party who did not choose to incur that cost. And we are, in general, really bad about even recognising these externalities, let along factoring them into our costing calculations. An example is air pollution, where the damage done to forests through acid rain is rarely seen as a ‘cost’ to the polluter. Rather it is a cost borne by society – and the environment – as a whole.

One difficulty with externalities is that they are often difficult, indeed sometimes impossible, to put a figure on. Sure, we can come up with a calculation that puts a value on a tree, for example, and work out the number of trees lost through pollution, but it’s always going to be a fairly spurious figure and it’s unlikely to be taken seriously. So instead, we tend to just gloss over such things or claim that they have a negligible impact.

Interestingly, we’re a lot more forthright with positive externalities, which relate to the benefits that an activity has for others. In these cases, we’re actually quite adept at rooting out the benefits, putting large values to them and explaining how they help to justify whatever it is we want to do. Anyone who has read any of the business cases for the HS2 rail line (or, indeed, any business case for anything in the history of mankind), will know what I’m talking about here.

So this reluctance to identify and respond to the consequences of our actions outside of our own organisations cannot be attributed to lack of ability. Which leads me to the conclusion that it must be down to lack of will. We recognise that these things happen, but we just don’t do anything about them. I’d like to think that it isn’t because we don’t care, but rather because our current approach to costing things is so ingrained that we don’t think to look up from our spreadsheets and glance outside at what is happening in the real world.

Things are changing, though. The Accounting for Sustainability project, for example, is doing some great work to help organisations to embed longer term thinking into their decision making processes. But it’s all happening very slowly. And far too many organisations – many of them, sadly, in the public sector – are just plowing on regardless. This means that, while they may be cutting their own costs, too often these costs are just passed on to someone else. False profits abound. Beware.

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