The free coffee test, or Lefkowitz’s Law of Corporate Financial Health

Posted on May 22, 2013

This is a story I’ve told many times over the years, but this morning I shared it on Hacker News and it got a big response, with one HN reader even emailing me saying I should write it up as a blog post to make it easier for others to find. So here is that blog post.

The context is a question that comes up pretty frequently, especially in discussions of tech companies: why is it that removing small perks for employees like free soda tends to lead to an exodus of talent? After all, a can of soda costs what, fifty cents? Maybe a dollar? And yet when management decides to stop bearing that small expense, people have a habit of packing up and leaving, which seems like a big move to make over the price of a can of soda.

Based on my own work experiences, I have my own theory about why this is so. To understand the theory you need to understand the experiences, so let me (briefly, I promise) tell you about them.

Backstory

Back in the original dot-com boom, I worked at a company that had, in our office, an absolutely amazing coffee machine. It was like the Monolith from 2001: A Space Odyssey; a giant slab of technology the size of a Coke machine that could dispense a perfectly brewed cup of what seemed like thousands of varieties of coffee at the press of a button. It was a glorious thing, and all of us who worked there used it often.

Then the market started to tumble, and lo and behold, one day there comes into our office a guy with a hand cart. Said guy rolls the cart over to the amazing coffee machine, loads it up on it, and rolls it away, never to be seen again. We all sort of shook our heads and said “huh, that’s too bad.”

Then, not long afterwards, the layoffs started. Absolutely brutal, down-to-the-bone layoffs. I survived five rounds of them before I finally decided I had pushed my luck too far and took a job elsewhere.

What I learned

That was not a fun experience. But it did teach me something important, which I offer to you as Lefkowitz’s Law of Corporate Financial Health:

The financial health of a company can be inferred from the quality, variety and cost to the employee of the snacks and beverages it offers its employees.

In other words, if you want to know how well a company is doing business-wise, go look in its employee break rooms.

Why? It’s because beverages and snacks are among the cheapest employee perks a company can offer. When business is good, managers look for ways to keep their people on board and happy, and improving the beverages and snacks is a cheap way to boost employee morale; certainly adding a new type of soda to the company fridge is cheaper than handing out bonuses to everybody. In most companies cheap things are easier to get approved than expensive things, so managers tend to reach for cheap things first when they can. Which means that increases in the quality and variety of beverages in the breakroom is a signal that management is confident about the future.

Conversely, when business is bad, management starts looking around for ways to tighten the corporate belt. And because beverages and snacks are cheap, they are very, very easy to cut back on — much easier than cutting salaries, or having to lay people off. Again, managers tend to reach for the easy options first, so when business starts to sour the first response is usually to start cutting the little perks, like free sodas or fancy coffee.

But here’s the thing — the cheapness of snacks and beverages makes them easy to cut back on, but it also means that cutting them tends to do relatively little to arrest the downward slide. Very frequently these small cuts are followed by medium-size cuts, which are then followed by big cuts if the medium-size ones didn’t stop the bleeding. And so forth.

(From a good-management perspective, the best strategy in these situations is actually to jump to the big cuts immediately — figure out what you need to cut, cut it all at once, and make it a one-time thing rather than a constant drip-drip-drip of cuts. That way the people who remain at least know they’re safe. But making that one big cut is hard for people to do; no well-adjusted person likes to look someone in the eye and tell them they’re out of a job. So even though they know intellectually they shouldn’t start small, managers frequently talk themselves into believing that things are better than they really are and do it anyway.)

All of which means that you could get a pretty good sense of how well a business is doing just by putting a camera in its break room and observing how the snacks and beverages ebb and flow.

Which is why small cuts in these perks tend to lead to employees racing for the exits: they are the proverbial canary in the company coal mine. If you’re an employee, and you see management pulling back on cheap perks like snacks and beverages, you’ve just gotten a very clear signal that management believes the future doesn’t look particularly bright. And your brightest and best don’t want to sit around waiting until they are laid off — they want to get out the door and into a new gig before the train wrecks. So they observe omens like this and start dusting off their résumés.

In practice

So that’s some interesting theory, but what does it mean in practice? How do you put it to use?

If you’re an employee of a company that gives out free sodas and snacks, the answer is probably obvious. But it can be useful to others, too. Here’s one way: if you’re in a client-services business, when you visit your clients, make sure to go with them to grab a beverage from their break room before your meeting. Don’t grab it from Starbucks on the way; have the same experience your clients do. If the snack and beverage options are better and more varied than they were on your last visit, you know that your client’s management is feeling bullish. If they’re the same, you know that the status quo is still in place.

And if they have gotten noticeably worse? Consider yourself notified that you may very well in the near future have to push hard to keep your services or products from being axed too.