Pim Poppe: Is time too cheap or is money too expensive?
This column was originally written in Dutch. This is an English translation.
By Pim Poppe, Managing Partner, Probability & Partners
Allow me to share with you some reflections on inflation. Experiences and thoughts, as a consumer, entrepreneur, economist and investor. What do statistics tell and what does the real world tell? How can we tie that together and what conclusions could you draw?
As a consumer, I purchase many services. I don't do much myself, because I am in the unfortunate situation of being less handy than the average plumber, gardener, or painter. On the other hand, I am in the fortunate situation that I earn enough as a consultant and entrepreneur to be able to purchase the services of these professionals.
I used to have more time and less money. Back then I was a part-time do-it-yourselfer. But over the last ten years I have had less and less time and have therefore mainly become a purchaser of services. What I have increasingly noticed over the last few years is not only that prices are rising, but above all that the quality of services is decreasing.
For example, we have suppliers who do not call back when you ask them for a quote. Suppliers who promise to provide a service, but cancel at the last minute and sometimes you can't even find a supplier who wants to work for you. Sometimes they leave some of the work for you.
Sometimes the restaurant turns out to be closed due to staff shortages on the day you want to eat. The service is actually no longer for sale. Sometimes the service providers do deliver, but you as a customer have to pull and drag to ensure progress. You actually do the supplier's internal planning.
The reason for the service disruptions almost always lies in the lack of staff, staff who have become ill, staff who are overworked, or misunderstandings due to language. Very generalized: there is more demand than supply and supply is limited by staff shortages.
As a company we also purchase services. Our guiding principle is that we outsource and therefore purchase activities that do not belong to our core competence. Think of legal advice, financial administration, accounting and reporting, remuneration, automation, accommodation, printing, marketing, website, making incoming invoices affordable, etc. With these services too, we not only see rising costs, but also, and that is worse, faltering services. For example, sub-tasks that you suddenly have to do yourself, late delivery, delivery uncertainty, errors that need to be corrected internally and so on.
Our business service providers are also busy. They also have too few staff and too many customers. The problem is solved by sometimes deliberately, but usually unintentionally, cutting back on the quality of service. This leads to higher internal costs for the customer and that is inflation that you do not see in figures from Statistics Netherlands and the EU.
As a statistician you can also look at the inflation figures from Statistics Netherlands and the EU. You can indicate this and peel it down to sub-components such as food, energy and services. We often hear statements, for example from the chief economist of CBS, Peter Hein van Mulligen, about the energy component and how it is calculated and about the errors and improvements in the calculations. In contrast, we hear much less about the quality aspect of services. Services determine a significant part of the inflation rate. Correcting for quality is not easy, but it is relevant.
In my opinion, the quality of a service can decrease because:
- the number of errors and imperfections is higher is normal
- services are delivered later than desirable or contractually agreed
- services are no longer available or are not provided
- the customer (unexpectedly) has to perform partial tasks that were performed by the service provider in the past
As a private and business purchaser of services, I feel that the inflation rate does not sufficiently reflect the fact that the quality of services has declined. In my opinion, quality-adjusted inflation is higher than reported. In other words, I would be willing to pay more for services if I could get back the quality I had a few years ago.
Sometimes we have a conversation with a supplier, sometimes there are public data or articles in the media. So I now know a bit about what their options are:
- deliver lower quality due to lack of qualified personnel
- pay higher wages and accept lower profit margins
- pay higher wages and charge higher customer prices
- potential new customers immediately say no
- coming up with creative solutions on the personnel side
As an investor, I would ask myself what scenarios are conceivable for inflation at a macro level. Take for example the CPB inflation scenarios of June 2022 as inspiration, or create your own scenarios. Then I would wonder what the boards of companies with a large wage component in costs will do in those scenarios. Which of the above alternatives can and will they apply and what does that mean for their profit-generating capacity? The question then remains what it means for the stock portfolio. A valuable exercise.
Probability & Partners is a Risk Advisory Firm that provides integrated risk management and quantitative modeling solutions to the financial sector and data-driven enterprises.