1. EXTENDING THE CLOTHESLINE:
Too many decisions at most companies are made based on what has been done in the past. As
more volume comes on board (whether it is revenue generated or non-revenue generated) the
added workload will force a change in processes. If decision makers are slow to react or have no
idea why a change in processes is necessary, the increased volume (especially the non-revenue
generated) will require a non-proportional increase in administrative resources to manage the
increase. Just as important (and in some cases more important), decreased revenues that do not
translate into decreased work volume will have just as much of a negative financial impact as
increased non-revenue generating volume. “Extending the Clothesline” is a metaphor of
management’s decision to cling to old systems, policies, and procedures in the period of rising or
decreasing revenue-generated volume. Decision making is based on the incremental cost analysis
of extending the clothesline instead of analyzing the whole clothesline to see which elements of
the line positively impact the customer and the people that service the customer.
Let us first envision the clothesline in a literal sense. You have a line that extends from one tree
to another, perhaps 10 feet in length. You set the wash basin near the line. Let’s add that it takes
approximately two minutes to wash, rinse, and place each piece of clothing on the line. Now
imagine that your family grows with the birth of a child. The washing and drying volume is
increased due to the need to clean and dry the baby’s clothing and diapers. With this added
volume is a decision to extend the clothesline. When making the decision, only the incremental
costs of the additional rope, the larger wash basin, the additional labor to possibly plant or re-
locate a tree so that an additional 2 -3 feet of line can be secured, is contemplated when
additional washing volume is encountered. The incremental cost is determined to be small. An
element of the decision-making process that is rarely contemplated on a pro-active basis is the
value to the family of the extended clothesline. The family will value the washed and dried
clothing and linens, but they tend not to care what caused the items to be washed and dried. What
value is there to the family for the additional rope, larger wash basin and added labor? Also, if
there is no value for the additional components, then how is there any value to the original
clothesline? Therefore, the decision to extend the clothesline should compare the cost of the
entire clothesline (including the extended portion) with the cost of a new method or equipment to
wash and dry the clothes and linens so that the people responsible for administering to the line
can have additional quality time with their family. Conversely, what if the volume of washed
clothing decreases due to death? Also, what if the death was the person that was in charge of
washing the clothes? These same questions need to be applied to administrative costs in a
business. What is the value to the customer for a hand-written, hand-filed time off request by an
employee? What is the value to the customer for a hand-typed, manually maintained advance
deposit listing? What is the value to the customer for a manually maintained banquet
spreadsheet? What is the value to the customer for a manually processed purchase order? What is
the value to the customer for a manually prepared financial statement? What is the value to the
customer for a manually maintained daily cash balance report? The list goes on and on. We need
to understand a few things:
1. If costs are directly driven by some sort of volume, the costs must be included in an
entity’s margin analysis.

2. 2. If the duties directly related to the volume have no value in the eyes of the customer, then
the costs associated with those duties have no value. These costs are administrative costs.
3. If the volume is non-revenue generating but can be linked to a particular revenue stream,
the duties associated with the volume could exist whether the company has 1,000 people
or 100,000 people walking through the doors. In other words, as soon as a minimal
amount of revenue generated volume exists, ALL non-revenue generating volume exists.
Added sales increase revenues, but administrative minimization increases profit.
If administrative costs are not minimized, revenues must pay for these costs first before covering
the costs of the direct labor and direct operating expenses. Otherwise, the direct labor and direct
operating expenses are minimized or ownership capital is infused in an effort to continue to feed
the administrative pig. The pig needs to be slaughtered.
“Difference between administrative costs and production costs”
Administrative duties, costs, and resources are not valued by the customer. Production duties,
costs and resources are valued by the customer. We need to identify which is which. Based on
the questions posed in the previous section, we incur a tremendous amount of administrative
costs; none of which is valued. However, there are some costs that are thought of as production
costs but on closer examination, they are truly administrative. In reviewing the literal illustration
of the clothesline analogy, one might consider the hand washing and drying of the clothes and
linens as production. If the family values the cleaned linens and clothes, but not what caused the
items to be cleaned and dried, then the duties associated with the washing and drying are
administrative and not productive. Therefore, a washer and dryer should replace the bloodied
knuckles and rope burned hands. In our industry, the vacuum replaced the broom and dust pan;
the Point Of Sale system replaced the hand written guest check; the Property Management
System replaced the manually maintained front desk log; the rationale ovens replaced the hot
box. The customer cares that their room is cleaned; they receive a bill at the end of their hotel
stay; their food is served at the appropriate temp. They do not care what causes these events to
happen. The customer values the employee’s ability to provide these items, therefore they value
the continued training on the equipment necessary to produce the final result. By implementing
the systems and continuous training, the associates that service the customer are set up for
success. Setting the associate up for success is just as critical as setting the customer up for
success. To set both groups up for success, the decision making should be based on “what should
be”, not “what is”.
Many companies excel at the front of the house issues because the decisions that lead to what the
customer sees, smells, tastes and touches are based on “what should be” for the customer.
However, many of these same companies fail on the administrative (back of the house) issues
because the decisions are based on “what is”. If companies are to continue to grow, they have to
reduce the bottlenecks that have existed because of such decision making. They cannot continue
to cling to the existing systems, concepts and procedures with a death grip and expect the
revenue generating volume to cover for their ignorance. As decision makers, we must be as
proactive on the back of the house issues as we are on the front of the house issues.

3. Every dollar spent could be separated into two buckets regardless of how they are illustrated on
the financial statements. One bucket holds all the production dollars spent, and the other bucket
holds all the administrative dollars spent. Every dollar spent should be analyzed to determine if
the dollars spent are administrative or productive. The key to determining which bucket a spent
dollar belongs should be whether the dollar spent has any direct, positive impact on the ultimate
consumer of the business’s products or services which is reflected in the product’s or service’s
pricing. This does not mean the calculation of a sales price is to add up all costs associated with
a product and then apply a markup percentage. The consumer will always dictate what the
market will bear for a product or service. If the dollars spent do not have a direct, positive
impact on the ultimate consumer which is reflected in the product’s sales price, the dollars spent
are administrative. For example, dollars spent on accounting and tax services do not have any
direct, positive impact on the ultimate consumer which is reflected in the product’s sales price.
This does not mean that all accounting personnel are useless and a financial drain on the
company. However, if their output does not have any value in the eyes of the customer, the
procedures used to achieve their output needs to be re-evaluated to determine the most efficient
methods to produce the same output. If the change creates a cavity of time for the personnel to
be backfilled with value-added duties, the consumer will be the beneficiary. If the change does
not create a cavity of time, the administrative position could be downsized via attrition.
There are administrative dollars spent in production departments. The best managers have the
ability to minimize the administrative time and dollars spent in an effort not to dilute the product
or service. The worst managers have no clue, or choose to have no clue. Those that benefit
financially or optically from chaos will be the ones who least change the chaos. The worst
managers will want to retain status quo because the chaos associated with status quo is
sometimes a shield that protects the bad manager.
Decision makers, or those that influence decision makers, have a responsibility of self-reflection
to determine if they are part of the problem or part of the solution. Decision makers have a
tendency to request many ad-hoc reports that become part of the standard operating procedures
of a company. There is a cost of creating and maintaining repetitive ad-hoc reports. I contend
ad-hoc reports should be created if they increase revenue-generated volume. They should not be
created if it takes 2-3 rationalizations to justify the report.
“Trickle-down Economics”
Whoever coined the phrase and definition for Trickle-Down Economics should have tried to
apply the essence of the definition to illustrate the impact of administrative costs on a business
entity. “Definition: Trickle-down economics does exactly what it says -- the benefits of
economic policies that help the wealthy trickle down to everyone else. For the most part, these
policies mean tax cuts. Trickle-down economics assumes that the real drivers of economic
growth are those who are successful in society -- business owners, investors, and savers. The
extra cash they get from tax cuts is used to expand companies directly, investing in business, or
adding savings (liquidity) that can be used for business lending. (Per an article written by
Kimberly Amadeo)” There are more administrative costs in a company that are not related to
income taxes. If the administrative costs are not minimized, the savings from corporate income

4. tax cuts would be applied to retain the other “justified” administrative costs, and will not flow to
the product or employee.
In my opinion, Trickle-Down Economics is the core of most governmental agencies and
departments. Taxes, tariffs, and other fees exist primarily because government decision makers
are too ignorant to know their rationalizations and justifications for status quo ultimately result in
costs that do not result in a direct, positive impact on the citizenry. Only a small portion of the
cash inflows is received by the citizen as a service, product, or cash outlay. Therefore, taxes,
tariffs, and other fees need to continue to increase per person to pay for the administrative layer
that exists, and maybe a little more will be left over for the citizens. If taxes, tariffs, and other
fees are not increased per person, or are negatively impacted by a recession, the departmental
product or service will have to be diluted to continue to pay the justified administrative costs.
The best example of the Extending the Clothesline analogy within government is the Income Tax
Code.
Trickle-down Economics is pervasive in all types of entities other than governmental. After
analyzing which costs are administrative or productive, one must try to drill down to a granular
level to determine which policy or procedure creates the administrative costs. One way I found
to do so is ask as many employees as possible the following question. Which recurring duties do
you perform that you would never brag about on a resume? Have the employee analyze all of
their movements when describing their duties; they should not describe their outputs. You
might be surprised at how many of these duties are performed on a daily or weekly basis. Also,
you might be surprised at how much time is devoted to these recurring duties. Even worse are
the rationalizations by decision makers to justify the duties. As I stated before, those that benefit
financially or optically from chaos will be the ones to least change the chaos. In the end, as
many duties as possible should be geared toward increasing revenue-generated output.
Corporate entities do not have the luxury of continuously taxing its customers without the
customer ultimately voting with their feet by finding the same, or better, product and service
elsewhere for a lower price.

5. “Debt - Administration Cost or Production Cost?”
Earlier, I discussed a method of determining whether specific cash outlays are administrative
costs or production costs. The key to determining which bucket a spent dollar belongs should be
whether the dollar spent has any direct, positive impact on the ultimate consumer of the
business’s products or services which is reflected in the product’s or service’s pricing. The
consumer will always dictate what the market will bear for a product or service.
Debt should be segregated between the principal and interest. I believe all interest is an
administrative cost. A consumer will remark about the product or service, and perhaps the
environment in which the product or service is offered, but I have yet to hear a customer remark
about how much they value the interest incurred in the production of the goods or services. I
have yet to see a comment card which asks the customer how much he/she likes the interest.
Interest is not a cash outlay the customer places any value when purchasing an item. Therefore,
interest is administrative in nature and needs to be minimized.
The cash outlay for the principal component of debt is a little more complex. When facing a new
venture, or expansion of an existing venture, decision makers should receive feedback from
potential customers and as much independent, specific data regarding the geographic region’s
ability to absorb additional supply of the product or service, unless the owner of the business is
extremely flush with cash and is willing to subsidize business cash shortfalls caused by not
performing due diligence. The feedback should include pricing at various volume levels in order
to quantify the ability of a new venture or expansion to cover operational costs plus debt. If the
feedback produces quantifiable financial justification to undertake the new venture or expansion,
the cash outlay for principal on the debt could be considered productive. If the feedback does
not produce quantifiable financial justification, the principal on the debt could be partially or
fully administrative because the consumer did not value the necessary price point of the product
to fully subsidize operations and debt service. Therefore, the owner better have deep pockets.
Be wary of any person or organization that has a “build it and they will come” mentality, unless
they are the one paying for 100% of all development costs and operating losses. There are too
many “visionaries” in the world that want to use Other People’s Money (OPM) to build their
resume. Daydreaming garbage into reality is not the definition of vision. Recognizing the
responsibility associated with OPM makes for a good steward to oversee any project. The best
analogy is the Warner Brothers cartoon with the bum and the singing frog. The bum finds a
singing frog and thinks he will become a rich man by charging people to see the singing frog
perform. However, the bum finds out the hard way that the singing frog only sings for him. It
would be tragic to invest OPM on an idea that only “sings” to a select few people because
nobody did their due diligence to find out if the “frog” can actually sing for the public.
Feasibility studies are needed to determine if enough of the public will pay a price point for a
product or service (the frog) that will cover operations and debt service, otherwise the
“visionary” will find out the hard way they were wrong.

6. “Needs vs. Wants”
If debt is necessary to maintain the physical plant, the cash outlay for the principal could be
administrative or productive in nature based on the previous section. If the maintenance needs
have been delayed due to cash being siphoned for other administrative needs or on capital
“wants”, the principal on the debt could have both administrative and productive characteristics.
If the cash used for other administrative needs or capital “wants” had been retained and used for
capital maintenance needs, the administrative cost component of principal on the debt incurred at
a later date to maintain the physical plant could be calculated by determining the cost of the
capital improvement had the maintenance been performed in a timely fashion and the cost of the
capital improvement when the maintenance was finally performed. The variance between the
two costs will be the administrative component of the final principal cost.
(Cost of delayed Capital Maintenance-Cost of timely Capital Maintenance = Administrative Cost
of Capital Maintenance)
“The Bugatti”
The Bugatti is a hand-made car. The lead time for delivery after ordering is up to one year. The
price tag starts around $500,000. Customers value this car because of the special way it is
manufactured. They will pay the price and accept the waiting period because of the unique
features that are associated with the hand-crafted vehicle. When reviewing back of the house
administrative duties such as financial statement preparation, human resource maintenance,
banquet revenue processing, inventory management, etc… one must determine which system is
on par with the Bugatti. If none of your systems are on par, those systems need to be changed
because all of the duties directly related to the current systems have zero value to the customer
and are part of your margins.
“Ignorance, Stupidity, and Utter Stupidity”
Ignorance is when one simply does not know something. We are all ignorant about multiple
things. No one person on earth can know everything about everything. If there is someone this
intelligent, let me know so I can genuflect to them instead of the tabernacle every Sunday.
Stupidity is when one chooses not to know something. Again, there is a level of acceptable
stupidity. I do not know how to change the oil in my car, and I choose to not know how to
change the oil in my car. Therefore, I am stupid when it comes to changing the oil in my car.
This is why Uncle Ed’s Oil Change is in existence. Utter stupidity is when one chooses to
remain ignorant about something that is a core part of their life. If I decided to gain employment
at an auto service center and still chose not to know how to change the oil in a car, then I would
be utterly stupid. My goal in life is to minimize those situations where I recognize I am utterly
stupid without forcing others to dumb themselves down to live in my world.
We must start to work harder at working smarter. A quote attributed to Cardinal John Henry
Newman was: “To be human is to change; to be perfect is to have changed often.” The first step
in making the change is acknowledging our imperfections and having compassion for those who
are as imperfect as us. We all have made decisions based more on what we do not know than

7. what we do know. We must recognize these imperfections in ourselves in order to change. We
must have fortitude and temperance to implement change. We must implement change as a
team. Not like a construction crew from the Road Commission in which one person in a hard hat
is working the back-hoe and three other people in hard hats are nodding in approval.
“What are you riding and where are you going?”
There are many roads to get to downtown Detroit such as the expressway, Gratiot Avenue,
Woodward, Jefferson, etc.; and many modes of transportation to reach downtown such as car,
train, motorcycle, jogging, walking, pogo stick, etc. Also, there are many times of day one could
travel to the destination such as rush hour or non-rush hour. If you gave a person a choice of
road, mode of transportation, and time to get to downtown Detroit, they would probably tell you
they choose the expressway in a car during non-rush hour. Many employees and decision
makers will say they want the ability to do their work quicker, better, and more effective. But if
you listen to their rationalizations and justifications for any type if status quo, you realize they do
not. In other words, they would choose to travel to downtown Detroit via side-streets, during
rush hour, on a pogo stick. The worst thing about a pogo stick is the user has their head looking
at the ground instead of looking forward because they are too afraid of falling off the pogo stick.
I would be happy if they ditched the pogo stick and started walking even if it is during rush hour
and via side-streets because at least their head is up and they can see where they are going.
Administrative changes can be explained with this analogy.
As companies start to implement change where it is necessary, I suspect those that insist on
retaining the pogo stick may leave. Reduction in staffing and other administrative costs can
eventually be achieved through attrition. However, if substantive change is not implemented,
attrition will never occur.