Cutting corners can lead to catastrophe

Companies that won't pay the "known costs" of protecting their interests are putting themselves at risk if their mistakes result in phenomenally high and unpredictable "unknown costs."

That's a mouthful, but the translation is this. Cutting corners on the fundamentals to save a few dollars may end up costing you big time.

Case in point: Pharmaceutical company Baxter International recently got themselves into an ethical, financial, and legal nightmare when they failed to inspect the quality of ingredients going into their Heparin products. Heparin is a anti-coagulant. It is commonly used in bypass surgeries and in situations such as deep-vein thrombosis and heart attacks.

Dozens of deaths and hundreds of illnesses and adverse reactions have been attributed to the contaminated Heparin.

Baxter, which produces more than half the Heparin used in the US, had to pull all of its Heparin off the market. The costs of such an action are staggering - not only in the recall itself, but in their legal liabilities and the damage to their public image.

Is Baxter totally to blame? No. The Food and Drug Administration failed to inspect the Chinese company that produced the contaminated ingredients. All in all, a series of seemingly small mis-steps in several organizations lined up to create a cascading tragedy that needlessly took human lives.

Neglecting the known expenses of ensuring the product was safe resulted in unexpected and high "unknown" costs. In fact, when it's all said and done, these costs will be astronomically high.

The public relations machines in these organizations will tell us that these mistakes were all simply "oversights." But I'm just jaded enough to question that standard line. How many people were turning a blind eye, or perhaps even saying, "don't worry about it – everything will be fine."

Cutting corners is nothing new, but some organizations are unwittingly putting themselves on the road to catastrophe.

One example is minimizing staffing in an attempt to maintain profitability. An unintended consequence of this is people taking on additional responsibilities for which they were not trained. Another is people who start omitting tasks they perceive as non-urgent just to keep up with their overburdened workload.

According to research from the Olin School of Business at Washington University in St. Louis, the emerging culture in the United States is that people feel like they have to work 24/7. And as companies keep revising their goals to increase profitability, workers start looking for the most expedient way to get their work done – which is not always honest, ethical, or safe.

Safety and environmental concerns seem to be brushed off the most. Training people adequately is another omission. When managers and leaders don't know how to calculate the return on their training dollars, it's easy for them to slash training as a cost-saving measure.

Again, neglecting known expenses to save money with the hope that "everything will be okay" is a very risky proposition.

As one executive recently told me, "I'd rather budget for and pay a known cost than risk facing an unknown cost that could wipe us out."

It's not hard to calculate the cost of training. Facilitator fees, course materials, facilities rental, production downtime, administrative costs. All known costs.

What many fail to do is calculate the return on those investments. Fewer errors. Better customer retention. More equipment uptime. Better revenue collection. Better employee retention. Less loss time due to grievances from ineffective supervision. More efficient production.

Try to save money by not investing in training, and the possibility of expensive unknowns increases. What's the cost when a health care worker is unaware of how to enter lab results correctly into a patient's record, and the doctor's subsequent decisions for treatment are actually harmful to the patient?

What's the cost of lost business when people aren't adequately equipped to handle customer complaints? Or the cost of lower levels of production when people don't know how to perform proper maintenance on their equipment? What's the cost when a worker takes a short cut and severs his arm in a piece of machinery?

When Baxter failed to verify the quality of their ingredients, it's possible somebody thought they were saving money. Hopefully that wasn't the case. Nevertheless, the loss of human lives and the number of families suffering as a result cannot have a price tag.

The bottom line is nix the short cuts. Budget the necessary time, money, manpower, and other resources and cover the costs of doing things correctly. Otherwise, an unknown expense might exponentially negate everything you thought you were saving.