The Opportunity Cost of Optimization

If everything was fully optimized so there was no paying for unused capacity, things would be ridiculously expensive.

Take employees. To really optimize for efficient resource use, you’d negotiate pay with them by the hour every hour. Or by the outcome every outcome. This would ensure each unit of labor was allocated with maximum efficiency.

The problem is it’s too expensive to do this. Not because you’d end up paying more for labor. You’d almost assuredly end up paying less. But because each renegotiation takes time to prepare for and conduct. The price shopping and info gathering to test the market, the back and forth. All the resources used to optimally allocate resources mean you aren’t using that time for something else that could be more lucrative. Adding 10 hours a week of employee negotiations removes 10 hours a week of fundraising or selling or product development.

So people buy in chunks to reduce the transaction costs. This is why you see people hired and fired in lumpy ways. An under-performer almost never gets a pay cut. They get fired. Because you’ve got to get your employee negotiations down to a reasonable transaction cost. Constant renegotiation is costly.

This applies everywhere. Especially in a world of limitless apps, life-hacks, and software tools. There are now SaaS products just to help you measure your use of other SaaS products, and others to compare the SaaS measurement products.

Can be great, but just remember that information and optimization aren’t free.