Cost efficiency is a simple and popular mean to assess a process efficiency. However, its over simplification limits analytical usage, and its internal logic promotes guilt free exploitation. Let’s take a deeper look.

 

Definition of cost efficiency

Cost efficiency is a type of economic efficiency. Unlike output based efficiency (you can refer to Clit Eastwood Achieves), cost efficiency is an input based concept, which focus on inputs (resources) measured in cash. A cost efficient process is a process that either:

• optimizes outputs for a given amount of cost (increase kwH per 1 dollar of costs), or
• minimizes the cost of input for a stable output (reduce dollar per 1 kwH in energy).

It is slightly different than cost effectiveness, and you can refer to Daily Writing Tips for the semantic debate.

Cost efficiency is an important tool to assess the efficiency of a subject, because it narrows down the complexity of efficiency into two variables: inputs (in currency unit) & outputs (in a given unit). This simplification makes it very easy to communicate to larger population (employees, markets, citizens and so on). As a result, cost efficiency is very popular as a tool of communication, more than a tool of analysis.

It is a weapon of negotiation, that negotiators use to argue on price evolution (other negotiation techniques can be found in Tioli episode). The indicator that politician use to defend or attack policies. The Trojan Horse that management communicates, to back-up investments (often expensive ones), or drastic cost strategies (generally costs reduction ones).

 

Limits of the concept

Facing such popularity, cost accounting has evolved to provide such indicative simplification on demand. That being said, from a cost audit perspective, backing database and allocation hypothesis are generally far more informative. They can light up the process structure and inefficiencies more than the resulting indicator itself could. So cost efficiency isn’t without analytical merit, at least because it requires a rather accurate cost calculation, which is meaningful.

However, drawbacks of such popularity is that the logic becomes a dogma (more about that in Firing Effy). As such, it diffuses and promotes misconceptions that are distorting non finance people.

1. Every output can be simplified into a unit of output. This overlooks harmful outputs of a process, that indicators generally exclude or minimize. This is sometimes on purpose, sometimes not (refer to Humanitis).
2. Every input can be simplified into a unit of cash. Debate about valuation aside (refer to Potentialism), inputs are always more than just a unit of currency. This is even more so when we deal with human resource (refer to scrap vs. waste).

The second point is the rationale behind guilt free exploitation.

 

Exploitation as ultimate objective

As defined in The Free Dictionary, exploitation is “the act of employing to the greatest possible advantage”. In economic terms, it is the exact culmination of an optimized cost efficiency as we define above. Ideally, zero costs, abundant outputs… In term of human resource, most cost efficient solutions the world have witnessed were slavery or forced labor of prisoners. Not so far behind are jobs with a very low pay and redundant tasks, in which exhausted yawns amount next to nothing in terms of cash. Robots are slowly replacing human resources for these jobs. This improves cost efficiency, but alternative jobs are now becoming a challenge.

All this is not new, but it is always important to keep it in mind when acting based on cost efficiency index alone for process heavy on human resource, and ponder your decision with moral to find a balance. Oh, and by the way, price / hour is a cost efficiency indicator.

G.M.