The Evolution of Controllable and Uncontrollable Costs in an Uncertain World

According to financial strategists, controllable costs are those expenses that can be regulated, at least in part, by the actions and decisions of a manager. A manager's costs are deemed controllable if they influence and have the authority to authorize them. However, if the costs incurred by a specific cost center cannot be controlled by the manager involved, they are labeled as uncontrollable costs. Uncontrollable costs typically extend beyond the manager's sphere of influence due to limited authority.

Uncontrollable Costs in the Wake of Pandemics

As Mr. Craig correctly points out, the advent of the recent COVID-19 pandemic has introduced new challenges that were not previously in the management canon. This situation is exemplified, for instance, by the reliance on electronic subassemblies, which heavily utilize integrated circuits requiring ultra-pure silicon and rare semiconductors. Many of these sources are in third-world countries with limited vaccination resources, leading to the closure of mining and processing facilities to prevent unvaccinated workers from working together.

Before the pandemic, the labor supply and demand curves were regulated without difficulty. However, now many industries are at a standstill, which creates a ripple effect on all their downstream customers, thus generating additional uncontrollable costs. It is important to note that even after an effective solution to the pandemic, many problems do not disappear overnight. Workers would leave to find work elsewhere, fuel and other resources would be reallocated, and the infrastructure that supports industries would change fundamentally. Making a quick fix to these new issues is highly improbable due to the longstanding nature of the previous order.

The Long-Term Perspective on Controllable Costs

All costs are inherently controllable, albeit to varying extents, over a period of time. For instance, a more controllable cost is one that you can directly influence with immediate effect, such as a catering, entertainment, or advertising budget. These are costs that can be managed based on immediate decisions and actions. However, consider a scenario where a manager feels that such costs are becoming too high because they are purchasing large quantities of supplies, events, or promotions without obtaining volume discounts. In such a case, the manager might outsource the provision of catering, entertainment, or marketing to an agency on a monthly fee plus direct costs. While the fee component of the contract becomes 'uncontrollable' for the duration of the agreement as you are committed to paying it regardless of the actual level of activity, the introduction of volume discounts can contribute to a more cost-effective overall provision.

This indicates that over time, even previously uncontrollable costs can become controllable through strategic planning, negotiation, and the right partnerships. By understanding the long-term perspective, managers can better anticipate and manage these costs, ensuring financial stability and operational efficiency.

Additionally, businesses can leverage technology and data analytics to continuously monitor and adjust their cost structures, reducing the likelihood of unexpected uncontrollable costs. By fostering a culture of cost management and proactive planning, organizations can better navigate the uncertainties of the modern business environment.

In conclusion, the distinction between controllable and uncontrollable costs is not absolute. While the pandemic has introduced unprecedented challenges to the management of costs, there are strategies and actions that can be taken to mitigate these impacts and restore control. By adopting a long-term perspective and leveraging resources such as technology and partnerships, managers can effectively manage both controllable and uncontrollable costs.