Is It Possible To Spend Too Little?

I recently conducted a report out on a benchmark commissioned by a company in the airline industry.  Most report outs are predictable.  We throw up some slides showing how a company performs relative to its peers and to world-class companies.  Almost always, companies are in the 3rd or 4th quartile for expense ratios.  In other words, they spend too much to perform the same activities that world-class companies perform for much less.

In this particular company, however, their expense ratios were practically all 1st quartile.  So that’s good, right?

Not necessarily.  In one particular function, Planning and Performance Management, they appeared to be spending too little.  Yes, they were efficient, but stakeholder feedback indicated they were far less effective than they needed to be.  Put simply, the operations group wasn’t getting the support they wanted from the Finance department. This company, like many in the airline industry, was having a rough go of it.  It would be too simplistic to say that they needed to start spending more money in this area. 

The key point here is that a benchmark only tells a company how they compare with others in a particular process.  It doesn’t necessarily tell the company if they’re spending too much or too little.  That’s a decision for management based on their short-term and long-term objectives.  Benchmarks are useful tools, but they are only tools to aid in intelligent decision making.