Timothy Burke has a nice post on the problems of trying to make small budget changes in order to finesse a revenue contraction--the famed "wasteful spending" that politicians and CEOs are always promising to cut.  These small changes are, in some ways, harder to implement than simply slashing a few big line items.  There are free rider problems, and difficulties establishing a cost-benefit ratio.

Burke talks a lot about transparency, but he doesn't make quite explicit the related problem of monitoring costs.  If you cut a department, it's easy to monitor--you no longer have that department.  But if everyone's supposed to spend 1% less on everything, it requires a phenomenal amount of administrative overhead to design those changes, and then keep track of them.  Transparency can help by effectively outsourcing some of the monitoring to the community.  But you still need someone to, say, formulate a lightbulb policy, hear complaints about the lightbulb policy, and ensure that the lightbulb policy is being enforced.

An extreme example of this is a temp job I once worked where the company, which seemed to be on a fairly rapid downward spiral, had cut costs by rationing office supplies.  The office manager had decreed that everyone got only one pen at a time.  In order to get another pen from supplies, you had to bring her the empty one in trade.

You can imagine the results:  the office rapidly developed a new collective hobby, pen theft.  Once one person in the company had misplaced their pen, the entire system broke down.  By the time I arrived, at any given time one or two people were on the prowl for a pen they could appropriate, and the rest were seeking ever-more-elaborate ways to permanently stamp their ownership on a Bic.  (As I recall, this included the purchase of a fairly expensive gold paint marker to do the labelling).  I'm sure the budget showed an annual savings of several hundred dollars a year, but I can't imagine this outweighed the man-hours that were wasted on their new pasttime.

Most companies aren't this stupid.  But they certainly do make other little cuts that cost as much to monitor as they save.   It's probably particularly tempting for government and universities, because output is hard to directly measure, and the central administration is weak in the face of powerful constituencies.  But anyone who's worked in corporate IT will be happy to tell you about the brilliant ideas that corporate managers come up with to "save money" on IT when budget troubles hit--my favorite was the chap who wanted a fairly well-paid help desk tech to walk around at night, turning off all the computers.  Since this was a financial firm whose traders went home late, this would have involved adding a full time night staff person.  But he just couldn't imagine that it wouldn't work--the arithmetic was so neat in the spreadsheet.

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