Death spiral | Hacker News Reader

Death spiral

sethgodin.typepad.com

96 pointsbearwithclaws36 comments

Why do costs get created in a company? Generally it seems that we create a cost because we think it will result in revenue greater than that cost or because we think that cost will prevent some other larger cost (such as fines from the gov't).

I'm all for efficiency and maximizing the revenue we gain from each expense but we've still gotta realize that when we cut costs, we're losing something that was intended to generate revenue.

I've seen this happen in a large company where they cut a ton of expenses thinking they are going to be profitable (and they are in the very short term) but all those expenses were there for a reason. A few months later, revenue drops like a brick.

Evolution anyone? Who has heard of an organism adapting to change by cutting their limbs off?

People like stability. In fact, we are predisposed (through evolution) to think that the world is inherently stable. They think that if something has been working for 10, 20, 30 years there is no reason that it should not keep working; thus, a downturn in their business is a temporary abnormality that will correct itself. Sometimes this is true, usually, it is not.

Often, with new technology (internet) and markets (china), costs get demolished. A business that relied on the previous cost-price ratio simply cannot compete.

Things change - usually for the better - and companies who fail to adapt, die. Their failure to recognize genuine change is their own failure and no amount of cost cutting will change an organization for the better.

Seth Godin has dropped the ball recently (imho), but talking about evolutionary angle there is one his book I highly recommend: "Survival is not enough". Somehow I get an impression that this book is undervalued. Or maybe it just me reading to much into it.

Are you saying you still have a tail? ;-)

"Who has heard of an organism adapting to change by cutting their limbs off?"

Like this?

http://www.sciencedaily.com/releases/2009/03/090325170604.ht...

Snakes are another good example (albeit they lost their legs over a much longer time scale).

Also, grasses, which try to maintain a constant shoot-to-root ratio; if they get cut down or eaten, they drop some of their root.

I think it's important to look at costs as investments in the business. And if that investment will not yield a good return, why make it?

Buffett famously did this over at Berkshire, where he realized that there would be no future for domestic textile mills. He took the cash flow the company was throwing off and invested it in other companies.

So I think that Godin makes a huge overgeneralization, especially when he mentions newspapers. The economics of that business have drastically changed and allocating capital to keep things the way they are is probably a recipe for failure. They'd be better off using the newspaper's cash flow by cutting current costs and allocating that cash elsewhere (new lines of business)

So I think that Godin makes a huge overgeneralization

You have basically just summed up Seth's entire blogging history.

Its actually impossible to make a good point on the internet without giving someone, somewhere the ability to call it an over generalization. It turns out though, that pointing out exceptions to generalizations is the lamest comment one can make on the internet, because of course, any statement to a wide audience will have exceptions that someone, somewhere on the internet can point out. Pointing out over generalizations is like pointing out spelling errors, albeit less constructive.

You can't get any traffic to your blog if you don't make generalizations, because you won't appeal to a broad, general audience.

Of course, thats all just a generalization ;)

Try irc. :)

Its actually impossible to make a good point on the internet without giving someone, somewhere the ability to call it an over generalization.

No, it's really not. The Internet gives you the ability to publish as much data and detail as you choose. It allows you to target a selected audience and provide information and discussion topics that relate to a specific audience that would not have been cost effective to reach in the past.

However, if you're more trying to promote yourself or your own "brand" vs. trying to provide actionable valuable data, then yes, you must generalize heavily.

Every writer wants to reach more than 5 people in the tiniest sub-segment of any given topic of interest, which is about where you're at if you write generalization-free.

Which is to say that what you wrote is a terrible generalization! Its not always true - its only true for writers that are writing for groups of people numbering less than five.

My own writing has adapted to this. I now ONLY make brief generalisations, because I've learned that argument or reasoning or evidence is a waste of effort. People either already agree with you, or as far as they're concerned, you're wrong and always will be wrong. And furthermore you're a fat stupid troll and so is your momma.

The question isn't whether someone has the ability to call his point an overgeneralization (i.e. wrong, misleading, actively harmful, worse than useless); the question is whether it actually is or not. When faced with overgeneralizations, the most useful thing you can possibly do is to point out examples where those generalizations don't hold:

- It helps you by preventing you from accepting the false statement — you learn where it's true and where it's false.

- It helps other readers by preventing them from accepting the false statement, and in blatant cases, pointing out that the person who's writing is just trying to get traffic to their blog rather than writing something of value.

- It helps more careful writers by diminishing the reputations of the ones who are just bullshitting, which counters the audience-getting effect of boldly stating bullshit to some extent.

It's probably true that you can get traffic to your blog by making bold generalizations without any concern for whether they are true or not. The question is, what can we do to fix that, so as to reduce the temptation to jettison intellectual honesty in the quest for attention?

"I think it's important to look at costs as investments in the business. And if that investment will not yield a good return, why make it?"

Can't agree more. This was my point.

Look at those costs as investments and not just something you can get rid of to save money. More than likely, it's there for a reason, so please evaluate this expense as something that is likely producing revenue in some form or another.

In other words, you should expect your revenue to fall if you're getting rid of some expense unless you are able to successfully reinvest that expense into something with a higher return.

I don't how you read the article and understood that he recommends to "keep things the way they are" as you say.

Godin stated the exact thing that you say: "Instead of squandering it in a long, slow, death spiral, do something else. Buy a new platform. Move...."

What I understand Godin says is that if you cut costs you shouldn't do that just to keep the company afloat but to invest the money you "saved" in something new.

Cost cutting can be an effective strategy when all your competitors are struggling as well. The game becomes one of survival, not of growth. Survivors in a market receive a large discrete boost when their competitors fail.

I would agree if all things were otherwise static, but instead, one of your smart competitors are going to actually change (improve) how they conduct business and make your sliderule shop obsolete. Just because the economy is sluggish doesn't mean ideas are.

"Desperation is the mother of all invention" - somebody profound.

Yeah but if you're a local newspaper (which is what this post makes me think of), your competition isn't the other local papers (if there are any). It's Craigslist, Google, etc. You aren't going to beat them because they aren't playing the same game as you. Being the last local paper standing isn't going to win you anything.

There are two false assumptions in his analogies:

1) That corporations don't already know this: I think most do, and cut their costs on infrastructure, overhead, and process, not on areas that impact quality and customers. 2) That the recession is permanent: Accepting a slow downward spiral temporarily while waiting for a recovery probably could make sense to the risk analysts in some corporations. The trick comes in predicting what the company's losses will be vs. recovery time for the economy, and then the company.

In short, smart companies look at all options. Their long-term cost to keep quality up and maintain customers might actually be more than shrinking for a year or two, then recovering.

Professing that one approach is always the right one is incorrect. It depends on too many factors to generalize.

Infrastructure and overhead DO impact customers, just not immediately. Overhead actually impacts more customers than any other single item or department, since it is the total of support costs for all departments.

To summarize, if your business is in a positive-feedback loop make sure it's one that's going up and not down: http://en.wikipedia.org/wiki/Positive_feedback

This also occurs with semi-public services (at least in the US). For example, the MBTA ("T") in Boston serves largely those without cars: college students, tourists, people with low income. Unfortunately, due to extreme mismanagement, the T regularly decides to cut services and increase fares... and things just get worse from there.

If you're a private business, you have to find a way to escape the spiral. If you're a government service, you need a government that isn't incompetent, corrupt, and myopic.

Pubic transport is one of the prime examples of this. We need to save money:

OK we will cut routes, put up fares, reduce number of trains/buses.

So there are now fewer people wanting to use the more expensive overcrowded unreliable service, OK we will have to make more cuts.

Eventualy you aren't actually running any trains but are still paying for all the fixed cost infrastructure.

Here in Denver, the public transportation is heavily subsidized by sales taxes. Depending on whose statistics you listen to, 20-40% of the cost of running RTD comes from farebox revenue (the rest comes from mostly a sales tax levy and some from federal grants). City route buses get about 4mpg, and they use so much fuel that every 1/10 of a cent rise in diesel comes out to $100,000 annually.

The worst waste is required by ADA. AccessiRide (those short buses for the severly handicapped) cost RTD about $45 per trip.

Subsidizing public transport isn't necessarily bad - if there were no buses how much sales tax would it cost to build enough bridges/freeways/parking-lots etc so that everybody could drive into downtown. What about in Manhattan?

The point was that it is one of those areas were making cuts to save money gets counter productive very fast.

I wonder what prompted this.

His clients cutting back on their marketing budget? (or perhaps slashing the funds for the annual corporate party and doing without the motivational speaker; Tears for Fears were cheaper, plus their songs are catchy.)

Given it's basically one paragraph of advice stretched over 5 I'd guess it had something to do with the need to write something every day.

When you create artificial deadlines like that for yourself (as he does) I'd imagine most of your writing is done more out of obligation than inspiration.

Oh, I know that latter well enough. I used to blog for AOL (Weblogs Inc), and it's the reason I left.

extending your cash flow runway does not have to mean degrading your product

After reading the article I felt myself thinking "meditation is far easier than field leadership, Mr. Godin", but he does have a point. To his defense, I would say that the first indicator of growth is found in your own mind. If you think you're headed for better things, none of these difficult times will matter; you would still run your business, frugaly of course, but you would also have that life-giving spark, the hope necessary to see far into the future. I would say take his positive energy and run with it!

Heh, listen to me, meditating.

When a company is struggling, reversing the trend through sales growth is usually not the answer. That's certainly an important component after the emergency turnaround stage, but you have to get the business on a stable cash flow footing before doing that, and that means intelligently cutting costs.

There are many, many businesspeople who think "selling more" is the best way out of a turnaround situation. Most of them fail.

Newspapers should never have disbanded their R & D Departments...

Not all of them have:

(old-ish article, but I think it's still around)

http://www.niemanlab.org/2009/05/at-the-new-york-times-prepa...

but not nearly enough kept them alive, or ever had them in the first place.

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