the hidden cost of cost-cutting

For a business, cost-cutting simply feels like common sense, but it's actually a philosophy — and an increasingly uncontested one.

Broadly speaking, there are two major schools of thought about where value comes from. The Chicago School, associated with Milton Friedman, holds that people's preferences are fixed and rational. They already know what they want and what they'll pay for it, so the only sensible thing a business can do is give it to them as cheaply as possible.

The Austrian School, represented by economists such as Friedrich Hayek, argues the opposite. Value isn't a property of the product — it lives in the customer's mind. To someone walking through a desert, a bottle of water is suddenly worth a fortune. Which means a marketer who makes you want something has created value just as surely as the factory that produced it. Marketing is equal to manufacturing.

Broadly speaking, one treats business as logistics, the other as psychology.

In organisations today, the Chicago School dominates — not because it's right, but because it's measurable. What can be measured can be managed, and what can't be measured gets ignored, even when it's the most valuable thing in the room. Trust, delight, loyalty — all invisible to a spreadsheet. All enormous in reality.

Imagine running a restaurant on the extremist Chicago view. The product is nutrition, so you serve an engineered, grey paste — cheaper, faster, nutritionally perfect, zero waste. On every measurable axis, you win. And yet nobody comes back. Because dinner at a restaurant was never about ingesting nutrition. It's about the taste, the texture, the ambience, the person across the table from you. Most organisations today are run by people who are pitching the paste.

PHASE ONE: CHEAPER, BUT WORSE

A blade in the hand of a murderer kills. In the hand of a surgeon, it cures. How AI is wielded will determine its impact — and right now, it's being wielded by the paste-pitchers.

Rory Sutherland predicts a multi-phase progression of how AI will move through our organisations, and we're currently deep in Phase One: a race toward the cheapest, leanest, most efficient operation possible. AI as a cost-cutting weapon, used for reducing headcount. A way to make running the business cheaper, while quietly making the product and the experience worse for the customer.

The most obvious example is the customer service chatbot replacing the real human on the other end of a phone line. Sutherland cites a travel company whose website converts browsers at 0.5% and whose phone line converts callers at 30%. Sixty times the conversion the moment a human enters the equation. And yet almost every business you can think of is busy hiding its phone number.

There's another cost to Phase One that almost nobody's talking about, and I've watched it play out in my own industry. Years ago, a company invented a tool that could automate a big chunk of what assistant editors do manually — the kind of tool that would let one assistant do the work of ten. They pitched it around and a few companies bought into it, but the biggest post-production house in Australia turned it down. Not because the tool didn't work, but because they recognised that their assistant editors were the editors of five years from now. Take away the first few rungs of the ladder, and how will anyone new climb up?

This is the part of the AI-efficiency story that the spreadsheet can't see at all. Every junior job that gets automated away is a senior employee who doesn't exist a decade later. You can fire the juniors today and book the savings this quarter, but eventually you'll run out of seniors — and you can't buy them back later, because nobody trained them.

Sutherland believes that eventually, the saturation of this fanatical efficiency will become so total that businesses will wake up and realise that the sin of indiscriminate cost-cutting is costing them the thing that actually matters most and that’s when we enter Phase Two.

PHASE TWO: DIFFERENT IS BETTER THAN BETTER

Phase Two is a change in perspective about what AI is actually for. Not a tool for stripping humans out of the business, but a tool for giving the humans who remain the time, information and support to be brilliant at their jobs. The question stops being "how cheaply can we run this?" and becomes "how good can we make this feel?"

And here's the opportunity hiding inside it. If every company is using AI to strip out humans, then the company that keeps them — and uses AI to make its human moments even better — becomes the rare, different, memorable one. As Sutherland puts it: different is better than better. In a market drowning in grey paste, someone is going to open a fine-dining restaurant.

So here's the prediction. The next decade won't be won by the companies that used AI to remove humans. It'll be won by the ones that remembered what the humans were for.