What French cabbies know that you don’t.

Last night, I was walking down the street in Paris with a friend who was visiting from the States.  We only had 5 minutes to get across town and we hailed a taxi.  In a situation all to familiar to Parisians, a cab stopped, and when the cabbie learned where we were going, he refused to go; his shift was over in 10 minutes, and we were going 5 minutes in the opposite direction.  He would not take us, it would make him late getting home. 

Living in Paris, this seems as inevitable as dog poop in the 16th.  It’s not pleasant, but after  a while you don’t really notice it.  But my friend was shocked.  How could the cab driver not take us?!  It would maximize his earnings for the evening!

At that moment, I realized a truth I had already known; the cabbies do not maximize their earnings—they maximize their time.  This is a genius idea.  Most of us spend  a lot of time trying to increase the output of a system, but little time on making the system more efficient by decreasing the input to the system.

We are all trying to save time,  we have Blackberries, email, and overnight letters.  We pay a lot to save time.  But most of us use money as a proxy for time (not the French), and it’s a terrible proxy.  Time is the limited commodity of life, not money.  French cabbies have figured this out.

Money is not actually valuable

What’s the only thing in life that cannot be truly replaced: time.  So why do we pay attention to how much we earn in cash?

Have you ever lost 100 bucks? I am sure you have, but you probably can’t remember the exact circumstances.  But, I bet you can remember standing in a 40 minute line.  Can you remember exactly how much cash you saved on your last low-cost flight?  I bet, you certainly remember how late the flight was and how long it took with your extra layover.  The lesson is: we can always make more money, but we cannot make more time. 

This is true in business as well as personal life.  I was talking with my business partner earlier today about possibly raising more money before we launch our company.  Neither of us wanted to, not because it would be difficult, but because we didn’t want to loose the time required to raise more money. Raising money takes months, and we want to launch NOW.  

Money is easy, time is hard. 

Maximizing earnings is all the rage in business schools and corporate boards. I  went to a very expensive business school. There, I paid to learn about the time-value of money; or, money made today is more valuable than money made in the future.  The professor illustrated this by telling us about some Nobel prize winner who proved it with a very fancy calculation. 

But I am struck that it’s much more interesting to think about time in the way we think about money.  That is, time today is more valuable than time tomorrow.  If I make a bad decision today that costs me money, I can just make (or raise) more.  But time lost today, cannot be replaced tomorrow.

In school (see Annoying MBA Section), we focused a lot of time learning about how to calculate the net present value of an investment.  In a nutshell, this calculation tells us  how much our future investment is worth today, after we pay back that investment and its associated costs. This allows us to only make investments that make money (if it were only that easy).  And while being profitable is good (another advanced business school concept), it not a long-term advantage—many cash-rich companies go broke.   But knowing how to use time more efficiently, that’s a competitive advantage you can bank on. 

Rather than focusing how much money an investment creates or saves, we should focus on  the amount of time a project creates or saves.  We should only take on projects that create time. 

Because with time you can make money, but money can’t buy you time. Just ask any old rich dude.

ANNOYING MBA  SECTION: NPT is the new black

Net Present Value is very a la mode in business schools right now. NPV is calculated by taking the discounted future value of an investment (a dollar today is worth more to us than a dollar tomorrow), subtracting the initial investment, the cost of the money (ie interest or dividends), and the remainder is the net present value of the investment.  Quite simply: it’s how much the investment made or lost. So, if our investments have a positive NPV (i.e.,  they make money), that is good.  And, if our investments have a negative NPV (they are loose money), that is bad.  Amazing MBA stuff, right?  

Calculating NPV is a little complicated.  We need to know both how much the investment is worth in today’s dollars (discounted cash flow) and how much our money costs (money doesn’t grow on trees you know, we have to pay for investors or the bank for it).  We measure the cost of money as the Weighted Average Cost of Capital, or WACC.  This is how much the money costs us to just have, regardless of what we do with it.  After all, we could put it in a bank and make interest, buy a different stock, or drink more champagne. There is a cost to the money we invest.

While the true cost of capital is interesting (finance folks get really excited by this), I think the more interesting question is: “What’s the true cost of time?” I propose we calculate the Weighted Average Cost of Time; if time is a precious resource, we should know exactly how much it costs when we invest our or someone else’s time (think about that next time you send someone an email). And with WACT, we could calculate the Net Present Time of an investment. 

NPT will allow us to determine whether our investment saves time or destroys time.  Only investments that make time should be undertaken.  We can use this time to create more innovative solutions, more products, more efficient companies.  We can create more value (or if we are French cabbies, we can get home to our kids five minutes earlier) than our competitors.

NPT creates a true competitive advantage.