Are We Being ‘Penny Wise and Pound Foolish’?

Posted on December 25, 2017

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Story 1:

Year 1998 – Mr Alok Sharma had borrowed Rs. 4 Lakhs from Mr. Dinesh Patnayak. He promised to return it in 2 years and also promised to pay 12% interest p.a. on the same.

However, Mr Sharma refused to pay after 2 years and after negotiating for 2 more years, Mr Patnayak decided to approach a lawyer to file a civil case against Mr Sharma.

Year 2002 – Mr. Patnayak approached Adv. Khatri who asked for a base fee of Rs. 5,000 and a success fee equal to 10% of the total amount in case of winning. He also assured Mr Patnayak that he will try his best to recover this success fee from Mr Sharma in the court proceeding.

Mr Patnayak found this fees pretty hefty. He approached another lawyer, Adv. Deshmukh who agreed to fight this case for Rs. 1500. Mr Patnayak found this deal attractive. He hired Adv Deshmukh for fighting this case.

Year 2017 – The Case is still in court. Adv. Deshmukh thinks he has delivered enough service by fighting a case for 15 years for a meagre Rs. 1500. Thus, he is not putting lot of time in this case. He more than often sends his assistant to be present on the hearing date and prolong the case.

The ultimate loser in this story is Mr Patnayak who is retired now. He is regretting that if he had agreed to Adv. Khatri’s success fee style, he would have had brighter chances of winning the case long back (because the advocate would be actively involved in it). He would have grown his money into more than Rs. 21 Lakhs by doing good investments. He doesn’t know whether he will get this money in his lifetime. And his sons are too busy to fight this case.

To save Rs. 3500 as upfront fees and Rs. 40,000 – Rs. 50,000 as success fee (which was anyways not to be paid from his pocket), he is losing almost Rs. 16-17 Lakhs.

 

Story 2:

Year 2012 – Mr Vivek Dasgupta (A 65 Years old retired individual) has a 5 Acre land in the outskirts of a tier 2 City. He is expecting a price of Rs. 60 Lakhs per acre. He approaches a real estate broker Mr Shah who came to see this land. Mr Shah has a big NRI client Mr Parekh who has full trust on Mr Shah, so much so that he is ready to buy the land only on Mr Shah’s words.

Mr Shah quotes a price of Rs. 65 Lakh per acre to Mr Parekh on phone, to which Mr Parekh agreed happily. Unfortunately, this phone call discussion happened in presence of Mr. Dasgupta.

Mr Dasgupta was unhappy about the price quoted by Mr Shah. He said that Mr Shah should have quoted only Rs. 60 Lakhs per acre and should be happy with his brokerage of 1-2%. According to Mr Dasgupta, Mr Shah has not done anything so great that he deserves to get Rs 5 Lakh per acre in the deal.

As a result, Mr Dasgupta said that he doesn’t want to deal with Mr Shah for this property. He decided to approach other real estate brokers for his property.

Mr Shah was hurt with this behaviour. He shared this story with his real estate brokers network and requested them not to entertain Mr Dasgupta.

Year 2017 – Mr Dasgupta is still not able to sell the property. Forget about getting price appreciation, he is not even able to find a buyer. He has turned 70 years old now. He has exhausted all his energy and almost all other liquid investments. If he is not able to sell this property now, he will be in a tough situation to even run his household.

Had he agreed to sell the property at Rs. 3 Crores in 2012 (Rs. 60 Lakhs x 5 Acre = Rs. 3 Crore), even a safety oriented product would have grown this amount to around Rs. 4.40 Crores. This could have easily generated a monthly cashflow of more than Rs. 2-2.25 Lakhs.

Only to prevent Mr Shah from making Rs. 25 Lakhs (which was not really going from his pocket as he was getting his full expected price), he not only made a loss of Rs. 1.4 Crores to himself, but he has risked his remaining life on the mercy of others.

Price is What You PayValue is What you Get.- Warren Buffet

Learnings:

In Both the stories above, we have some lessons to be learnt. Most of us only focus on the price and not on the value.

As Warren Buffet Says, “Price is What you Pay and Value is What you Get”

When we focus too much on price, we miss out on the value we are getting. We are more concerned about, what the other person is making, than looking at what is our benefit in availing his / her services.

We need to accept that we are not Super-humans who can do everything on our own. When we accept this, we will automatically acknowledge the professional expertise of others. We are definitely good at something, but not good at everything.

So whatever WE are good at, should be OUR business / profession ; And for other things, we need to be willing to hire the professional expertise which proves to be a better deal as we get more value than the price we pay.

To save the professional cost, if we hire a lower expertise professional, it can prove to be a costly affair as we might lose out big time on “value”.

Best example would be to look at your own business / profession and ask yourself these 3 questions,

“Am I doing something valuable for my client?”

“Am I doing something which the client wont be able to do with as much expertise as I am doing?”

“Do I deserve this much fees / compensation for the services I am providing?”

If the answer to all 3 questions is Yes, then lets understand that for fields outside our expertise, we would also need the help of experts. And thus, we need to be willing to pay for the same.

If we look at it, Global Giants like Google, Microsoft, MasterCard are headed by Indian CEOs. But we have not been able to produce a Google, Microsoft or MasterCard in India. The reason being, the promoters of these companies have been able to hire people who are smarter than them. When it comes to us, we hate to admit that someone else is smarter than us. Thus, we would only like to pay a mediocre compensation and mediocre talent stays with us.

If we want to make it big, we need to have smarter guys in our team.

Lets not be penny wise and pound foolish and learn to respect expertise.

We look forward to your feedback and comments on the above article.

The Author Prof. Saurabh Bajaj (BE, MBA, FRM, CFGP) is CEO with Nidhi Investments, Mumbai. His articles have a readership from 78 Countries across the Globe. He may be contacted on CEO@nidhiinvestments.com if you have any questions.

(The views mentioned in the article are personal opinion of the author. The characters used in the article are real with names changed).

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