How the Hidden Costs of Running a Business Are Damaging Your Company

Picture this: It's a crisp autumn morning, and you're sitting in your eighth-grade science class. The teacher, Mr. Johnson, stands at the front of the room with a large glass jar and a mischievous glint in his eye. He fills the jar with rocks and asks, by show of hands, "Is the jar full?" Hands shoot up across the room. But Mr. Johnson isn't done. He adds pebbles, then sand, and finally, to everyone's amazement, he pours in water. The jar we all thought was full still had room for more.

This memory from my childhood has stuck with me throughout my career because it perfectly illustrates a critical flaw in how most of us make decisions: we often work with incomplete information, leaving room for hidden costs to sabotage our decisions and plans.

The hidden cost conundrum in business

As business leaders, we're trained to focus on tangible costs, those neat but commonly understood lines on our balance sheets and P&L statements. It is comforting, isn't it? To have hard numbers to point to when justifying our decisions. But here's the kicker: some of the most impactful costs don't show up in these traditional financial documents. They're the intangible, hidden costs that can make or break our businesses and our employees without us even realizing it.

These hidden costs are like termites in the foundation of your business. You might not see them, but they are there, slowly eating away at your productivity, your profits, and your potential. They arise from inefficiencies and problems within your organization that you might not even be aware of.

Where hidden business costs love to hide

In my years of consulting with businesses across various industries, I've identified six key areas where these hidden costs love to lurk:

1. Working conditions: The physical, mental, and emotional environment of your organization. Have you ever worked in an office with uncomfortable chairs or poor lighting? That's a hidden cost, sapping your team's energy and focus.

2. Work organization: How well (or poorly) work is structured for completion. Think about that convoluted approval process that takes weeks instead of days, or the hand offs and dependencies between teams. That's a hidden cost eating away at your efficiency.

3. Time management: How well time is managed within the organization. Those back-to-back meetings that leave no time for actual work, not to mention endless interruptions? Yep, hidden costs.

4. Communication, coordination, and cooperation: How well your organization works with itself. The left hand not knowing what the right is doing? You guessed it – hidden costs.

5. Integrated training: The development of employees to create a sustainable, innovative, and competitive organization. Skimping on training and professional development might save money upfront, but it's a hidden cost that will bite you later.

6. Strategic implementation: How well the organization sets, monitors, and delivers its strategy. A brilliant strategy that is poorly executed has a massive hidden cost.

The high price of ignoring hidden costs

Let me share a real-world example that still makes me cringe. A client of mine, a mid-sized tech company, had a painfully long process for reviewing changes to their statements of work (SOW). It involved three people and took three weeks. Sounds thorough, right? Well, it cost them a $150,000 contract.

Here's what happened: A potential client needed a quick change to the SOW, but they were losing their budget at the end of the month. My client's lengthy review process meant they couldn't respond in time. The kicker? The requested change represented only $5,000 in cost, and the review process itself cost about $1,200 in employee time.

They paid $1,200 to review a $5,000 change and lost a $150,000 contract in the process. Talk about penny-wise and pound-foolish!

Seeing the invisible

Every organization has hidden costs. Your goal is to keep yours less than your competitor’s. But to reduce them, you must first discover them. How do we shine a light on these pests so we can exterminate them or at least minimize their damage? It's simpler than you might think.

First, you must listen to your team and employees. Your frontline workers know what's not working. Hidden costs impact them every day. Ask them often. In the spirit of Kaizen, perform a Gemba walk, a workplace walkthrough, so you can empathize with the issues they encounter. If your staff is in a remote setting, schedule 30 minutes a day with an employee to gather feedback and issues.

Secondly, quantify the cost. This part is crucial. Assign a dollar value to these inefficiencies. Here's a quick formula: (Company Operating Cost ÷ Number of Employees ÷ Annual Working Hours) = Hourly Cost Per Employee. For example, a company with a $50 million operating cost and 250 employees has an hourly cost of $96 per employee. That innocent two-hour meeting with 10 people? It just cost your company $1,920, or 20 hours of missed productivity.

Finally, make identifying hidden costs a regular part of your business rhythm. Hidden costs are dynamic beasts, and you must always be on safari hunting for them. Each of the hidden costs discovered can serve as a metric for improvement by revisiting them later. For example, are those 10-person, two-hour meetings still occurring six months later? Probably so, but perhaps not as frequently.

The hidden cost impact across industries

Hidden costs don't discriminate; they affect businesses across all sectors. Let's look at some industry-specific examples:

• Manufacturing: A factory floor layout that requires unnecessary movement of materials can result in thousands of wasted hours annually.
• Healthcare: Inefficient patient scheduling systems can lead to increased wait times, reduced patient satisfaction, and lost revenue.
• Retail: Poor inventory management can result in overstocking, leading to increased storage costs and product obsolescence.
• Technology: Dependencies between development teams can lead to integration issues and delayed product launches.

How leaders can address the hidden costs of running a business

As a leader, your role in reducing hidden costs is crucial. Much of the hidden cost reduction involves interdepartmental partnering and relationships. Leadership plays a vital role in aligning the organization. Here are some steps you can take to address hidden costs in your organization or on your team:

1. Foster a culture of continuous improvement

Encourage your team to question processes and suggest improvements.

2. Invest in technology

The right tools can help identify and mitigate hidden costs. For example, requiring employees to utilize more than one system to do the same thing wastes time and money and leads to decreased morale.

3. Prioritize employee development

Well-trained employees are less likely to make costly mistakes and more likely to identify inefficiencies. Furthermore, consider identifying future skills. Where would you be if you had prioritized AI skills two years ago?

4. Lead by example

Show your commitment to efficiency and effectiveness by critically examining your practices and being open to feedback.

Measuring the impact: Key performance indicators (KPIs)

To truly understand the impact of hidden costs—and your efforts to mitigate them—you need to track the right metrics. Consider these KPIs:

• Process cycle time—Measure how long key processes take from start to finish
• Dependencies reduced—Measure the number of dependencies removed between teams. This is a leading indicator of organizational agility.
• Error rates—Monitor the amount of rework required, particularly after release to customers (escaped defects).
• Employee satisfaction—Happy employees are typically more productive and less likely to leave, thereby reducing voluntary attrition costs.
• Customer satisfaction—Inefficiencies often trickle down to affect customer experience.

Filling the jar: Making better decisions

Remember our science class jar? Understanding hidden costs is like adding water to the jar. It fills in all the gaps in your decision-making process. It completes the picture.

This week, sit down with your team. Ask them what's not working as well as it could. Quantify those inefficiencies by asking how long something takes and how many people are involved, each of which factors into the equation. You might be surprised at what you find. My work routinely identifies annual hidden costs averaging over $65,000 per employee. Conservatively, if you have a one-hundred-person department, that is $6.5 million annually.

But here's the exciting part: every hidden cost you uncover is an opportunity. An opportunity to streamline, to improve, to innovate. It's your chance to reshape your organization, drive better decisions, and unlock new potential.

What managers need to know: Key takeaways

Hidden costs are pervasive and can significantly impact your bottom line. They reside in six key areas: working conditions, work organization, time management, communication, training, and strategy implementation. Identifying hidden costs requires active listening, quantification, and regular check-ins. Address hidden costs through technology investment, employee development, and personal leadership. Track relevant KPIs to measure the impact of your efforts in reducing hidden costs.

Ready to fill your jar? Your future self (and your bottom line) will thank you, not to mention your employees and team members. In business, what you don't see can hurt you. But once you see it, you can’t unsee it, and you have the power to change it. Let's make those hidden costs visible and turn them into visible savings and improvement.

FAQs about hidden costs in business

About the Author

Post by: Brian Irwin

Brian Irwin is an author, speaker, and visionary business transformation leader with extensive experience translating strategic initiatives into successful operational outcomes. He has a proven track record in leading management teams through complex transformations and operational enhancements while fostering a culture of innovation and continuous improvement. His new book, Liberating the Overworked Manager, provides managers with proven tools to reclaim time, align the organization, and boost human potential.

Company: Brian Irwin Group, LLC
Website: www.brianirwingroup.com
Connect with me on LinkedIn.