Today’s Cost Cutters are Tomorrows Spendthrifts: The Hemline Index Redux

April 16, 2009 at 7:07 am | Posted in business case, Recession | Leave a comment

I’m putting the final touches on a research document called “Thriving with Slashed Budgets: A Framework for Saving Costs While Meeting Needs” and my thoughts have turned to hemlines.  Yes, there is a connection.  Have you ever seen the 1960’s sci-fi classic “The Time Machine”, based on the book by H.G. Wells?  There’s a famous bit of special effects where the time traveler watches the hemlines of models in a store window rise and fall as time speeds by. It’s an anachronism to a certain extent since this 1800’s person is noticing something that wasn’t brought to the public consciousness until 1926 when economist George Taylor published his “hemline index” theory, which showed a correlation between the state of the economy and women’s hemlines.

The connection here is that the hemline index is a good analogy for how fads in loose spending give way to fiscal conservatism in an endless boom-and-bust cycle. Perhaps a telling measure today is the acceptable location on a cost justification continuum that measures the “hardness” of the justification (see below). In good economic times, projects requiring cost justification get by with lower levels of “hard” proof of their value. However, in tight economic conditions CFOs demand more cost justification and push the degree of hardness further to the right. Those projects that breezed through reviews in better times with soft justification are running into a difficult challenge now that budgets are tighter.  Being asked to retroactively prove the value of a system with large sunk costs is a difficult position to be in.

cost justification continuum

Note: It seems I also referred to “The Time Machine” in a recent blog posting. I described an underclass of workers that toils in oppressive conditions to enable a seemingly perfect technology future for the beautiful people as “information morlocks”. To clarify, time machines are not part of my coverage area and I don’t expect to be writing more about “The Time Machine” anytime soon.

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