What single characteristic do successful companies share? The ability to allocate resources effectively.

Effective resource allocation maximizes return and minimizes waste. Yet allocating resources effectively is harder than it looks. There are a lot of motivations to overspend in certain areas and underspend in others. Here are five areas in which companies overspend, and five areas in which companies often underspend.

Overspend

Hosting. Lots of companies purchase more hosting than they need based on the expectation that they’ll need it. This is justified as planning to scale. Unfortunately, having a plan in place to scale is different than paying for scale you don’t have.

Office space. Having a nice place to work is important for a business and its employees, but a swanky, oversize office usually comes at a painful expense.

Technology. Technology is crucial to companies today, especially if yours is active on the internet. But that doesn’t mean that technology isn’t a big source of overspending. From software licenses to hardware/gadgets, companies often buy what they don’t need, in many cases because they overestimate the return technology can provide.

Marketing. If you build it they will probably not come. Which is why most businesses need to invest in marketing. But many businesses waste lots of money on ineffective campaigns because they don’t focus on monitoring performance and scaling the campaigns that deliver.
 
Business consultants. Is there a place for business consultants? Absolutely. Yet a lot of companies hire them before they’re really needed, and with all the wrong expectations about what they can realistically deliver.

Underspend

Copywriting. Bad copy can literally kill a business. But how many businesses spend the money to hire a good copywriter? In my experience, the number is often very small when dealing with small to mid-sized companies.

Legal. Nobody likes lawyers (except maybe lawyers) but the reality is that many businesses do business without the guidance of competent legal counsel. This is penny wise, pound foolish. The costs of resolving a business dispute in which there is no legal agreement (or a poorly-written legal agreement) are exponentially higher than the costs of retaining a lawyer to look out for your interests before disaster strikes.

Marketing.
Some companies spend too much on marketing, but an equal number are under the illusion that their products and services will sell themselves and consequently don’t budget to spend enough.

Design and development. If there’s one place many businesses try save money, it’s on design and development work. Thanks to low barriers to entry, outsourcing and fierce competition due to the economy, it’s relatively easy to find someone who will agree to design a website or develop a web application at a price that seems too good to be true. But that’s usually because it is.

Customer service.
Providing customer service isn’t always cheap. Despite the fact that many businesses would boost sales and customer satisfaction by offering telephone customer service, for instance, many businesses shy away from making the investment.

Photo credit: Don Hankins via Flickr.