What is Comparative Advantage in Business? The Key to Delegation...
A CEO and an assistant illustrate why you should delegate based on comparative advantage, not just who's fastest. The person with absolute advantage at a task isn't always the right person to do it.
When it comes to growing a business or doing anything, the idea of taking what you do and packaging it into bite sized units and getting somebody else to do those things for you is kind of the key to it all. This kind of delegation is what many of us know is important and required in order for our businesses or organizations to grow. But at the same time, we struggle with it. One of the reasons why Even here at ProcessDriven, my own team members have struggled with either giving or receiving delegation and is because there's this misunderstanding out there around advantage. This whole idea of an advantage is kind of rooted in the fact that one person can do something in a better way than another. However, most of us think about advantage from what you'd call an absolute perspective. Having one person who is better at doing something than another is not that foreign of a concept. That's kind of how all competition sports are done, right? We've got the person who's the best and everyone else just kind of, you know, in their respective spot because we're focusing on this one activity and one person just shines the brightest. This way of thinking about advantage in absolute terms of one person is better than another person across the board is the idea of absolute advantage. Absolute advantage assumes in a very rosy picture that two people are faced with the same exact challenge and they have to do that same challenge. Who does that challenge better? Is it one or is it two? Whichever one it is has the absolute advantage in that activity. Now let me just clean this up a little bit and let's just go through a quick example of this. Let's pretend that in this race of absolute advantage, we are talking about email. Okay, so we've got to answer emails in your company. Woohoo. So fun, right? We have 20 emails that we are racing to finish. And in this imaginary email world, let's say person number one is the CEO and the person number two is the assistant. Okay, these are our two figures that are competing head to head to answer these 20 emails. These particular emails aren't the easiest ones to come in. Maybe they are pre sales emails where people are asking a lot of deep questions around the product, around the expertise about whether or not a given business can help them. In this imaginary world, it takes the CEO 15 minutes to answer that email because they've been there, done that, bought the T shirt. They're used to these kinds of objections. In that case, with 20 emails to handle, it would take them five hours to answer these 20 emails. Sounds pretty good. By comparison, the assistant's a little Bit newer. They maybe don't know the content inside and out. They haven't seen some of these objections before. And so for them to answer those same number of emails, it might take them 10 hours. Comparing the 5 hours to the 10 hours, it might be a no brainer. You might think, oh my gosh, the CEO is so much faster at doing this. There's no way we should ever have an assistant in answer these emails. It's just not worth it. But what this fails to consider, even, you know, setting aside hourly rates and all that stuff, what this fails to consider is comparative advantage. So let's go over that. So what the heck is a comparative advantage? Well, a comparative advantage is what happens when we take into account the other things a person can be doing. In some ways, yes, you can kind of get to comparative advantage by taking into account hourly rates because it's kind of factored in. But even without having hourly rates, comparative advantage is just considering the other things that are pulling on or requiring someone's time. When we think of absolute advantage, the other example we went through, we're always thinking about there's one race we're going from here to here, who can get there fastest. But the fact is, that's not how our world works. How many times have you had a CEO that had nothing better to do than answer emails? Yeah, the thing is absolute advantage, the stuff we were talking about before assumes we are racing to get something done. And we are only racing to get one thing done. We're trying to get from point A to point B as fast as possible. Who can do it? Who can accomplish that? But the reality is that's almost never the case in business. It's not like we are racing with our assistant to answer the emails. No, we are racing this race and we're also racing the race to finish our budget for the year. And we're racing the race to have our meetings finished for the day and to get this done and to get that done. The reality is we are racing multiple races all at once, which turns it more into a relay race than an actual sprint. And as we keep going and going and going and going and going and going, we have so many races we're in at once that the more energy we put into one race, the less energy we can put into other races. Now, let me get rid of the race metaphor and let's take this directly to the question of emails that we were competing on before. So let's just say once again, we are racing to finish 20 emails. Okay? We know already that the CEO can finish those emails in 15 minutes an email and the assistant is 30 minutes an email. Time wise, it seems like the CEO is the clear victor here. There's no way it would make sense for anyone else to do it. But let's assume at the same time, rather than just 20 emails, there's also one budget we need to create for the company. Okay, one budget. Let's just assume there are no other tasks on the plate, right? Just. Just one budget and 20 emails to take care of that day. All of a sudden, our whole equation changes. Now we need to ask ourselves about the other races, in this case the budget. How fast can each person run that race? How much can each person produce of a budget? How long would it take them? Well, the CEO, let's just say it takes them five hours to complete a budget. And the Assistant, it takes 100 hours to complete a budget because they've never touched a budget in their whole life. So to be clear, we've got emails here at 15 and 30 minutes and we've got the budget at 5 and 100 hours. Now that we know we need to get both of these things done in the same day, in the same lifetime, in the same business cycle, all of a sudden our math, our equation, our decision making on who should answer those emails changes drastically. Even though in this hypothetical world, this assistant is not faster at answering emails, maybe it takes them longer to get a comparable quality, it still makes more sense in this scenario for the assistant to answer the emails than the CEO because of that opportunity cost, because of the other races, the other things that are demanding the time. Because imagine if we do it the opposite, we have five hours, right? So let's just say we don't have the assistant do the emails because the CEO is better at it. So instead the CEO does the emails. So at the end of five hours, we have all the emails taken care of. And because the assistant wasn't able to finish the budget in that time, we end up with no budget. Well, that's not good. Yet. If we flip the script and we let the assistant answer the emails, even though it's slightly less efficient, and instead we have the CEO write the budget at the end of five hours to do both of those activities, we will have half of the emails answered and we will have all of the budget complete half. And all is better than all and none in this particular situation. This comparison here is just an illustration and with some extreme numbers in here, but it's attempting to get you to start thinking about the other uses of someone's time. And because oftentimes comparative advantage, as I said at the beginning, is something that roughly translates or correlates with hourly rates, it can be a really good tool for thinking about should the junior employee do that or should the senior employee do that by themselves? You might think, oh, my gosh, the senior employee should always answer the emails. But when you think about the other things and the difference in the absolute advantage of those other things people have to do, all of a sudden it becomes easier and clearer to say, hey, I know, Susie, that you're not the best at answering emails. I know it takes you longer than it might take me or the senior employee, but it's important that you do this because that senior employee needs to go do X, Y and Z that you're not quite able to do. Hell, in this example right here, the only time we would want to have the CEO answering emails is if it would take the assistant in this time 20 times longer. Because of this ratio right here, 100 to 5, we've got a 1 to 20 ratio of efficiency there for the CEO doing the budget and less. The emails are that far off, we shouldn't have the CEO doing emails. What's 15 times 20? 300. 300, yeah. So it would take this person taking 300 minutes to answer these emails until this made sense for the roles to be reversed. 300 minutes. And at that point, I think we need a new assistant, because 300 minutes, aka five hours to answer one email, one unit of production here. That is ridiculous. And that probably constitutes us needing to get a new assistant. So, in summary, comparative advantage is considering what you need to do in comparison to the other things you could be spending your time on. In other words, how we actually work, because we all have finite time. Absolute advantage is more like a traditional sports competition. You've got nothing else you need to do except get to that finish line. Who can get there fastest. So often I see folks here at ProcessDriven, or even people out there in the YouTube community talking about things and delegation, and I should just do it myself. Coming from this place of absolute advantage, when really we live in a comparative world, you've got other things competing for your time that we need to take into account. Would it be awesome if the person you're delegating to also has an absolute advantage, meaning they can do what you're trying to get them to do better, faster, stronger, whatever than you can? Absolutely. That's only going to help your business more. But if you're looking to delegate that's not the requirement. All you need is comparative advantage to make it worth delegating, and you can keep building on that from there. As you increase skills on both sides, maybe your assistant becomes more efficient, or maybe you swap out people in that role who do have an absolute advantage in addition to a comparative one. Now, if you'd like to dig a little bit deeper into this whole idea of delegation, comparative advantage, and how to work with other people to get your processes moving a little bit faster without you involved in every step, then check out this video over here where I go through the steps of how to delegate your email inbox to somebody else in case you relate to that CEO stick figure I was showing earlier. Thanks so much for watching, and until next time, enjoy the process.
