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Cost Vs Price

Oscar Wilde once said, “A cynic is a man who knows the price of everything and the value of nothing.” I don’t think that only applies to a cynic. It rings true more often than not during my consulting engagements as well as in everyday conversations. Let’s use a very simple example that most of us can relate to.

There is a two-hour networking event with no attendance fee. Sounds like a good deal, right? You can go there, mingle and maybe get some business prospects. What is there to lose? The devil is in the details, so let’s use some very conservative numbers to figure out the cost of this FREE event:

  • Preparation time (getting dressed, etc): 30 min.
  • Commute: 30 min. each way (total 1 hr)
  • Meeting: 2 hours
  • Commuting cost (parking, mileage, public transportation, etc.): $10

So it takes 3.5 hours of your time plus commuting costs. If we use a very modest rate of $50/hr, this meeting now costs 3.5*$50+$10=$185! Definitely not free. Is it worth attending? Well, it depends on what you get for your $185, i.e., your return on investment (ROI). Mind you, I do not know any consultant who charges just $50/hour.

This concept applies to business operations as well as our everyday life choices. More often than not, I come across situations in which an organization is sticking to the status quo because it is not aware of the true cost of doing business as usual. Everyone is (or pretends to be) comfortable. “Why fix it if it is not broken?” Yes, the person who prints a report from one system and manually enters it in another can do the job in her sleep after having done it for many years. For argument’s sake, let’s assume it takes Mary 30 min./day to print that report. In fact nobody else in the organization, and no consultant for that matter, can do it any faster. It could cost, say $1,000 to buy a tool to integrate the two systems. Why spend the money?

Well, again, check the ROI. The time she spends on this task is:

30 min./day or 2.5 hrs./week, i.e., 80 hours./year

So if Mary makes $20/hour, this simple task costs $1,600/year. Compare it with the one-time investment of $1,000 and you have your answer. And we did not even look at Mary’s benefits nor costs such as real estate, paper, etc.

I have built business cases for many organizations (public and private). The approach is the same but it takes some time to do a comprehensive cost-benefit analysis (CBA) of the status quo vs. potential alternatives to consider. The size and maturity of the organization, as well as the skills and experience of the person(s) conducting the study, are paramount.

During an assessment, I suggested the implementation of a Customer Relationship Management (CRM) tool. The client could not even name 3 CRM tools but insisted on doing the research to find the best application for their organization themselves to save on consulting fees. Needless to say that everyone was already swamped and behind the schedule on their projects.

A key factor often missed in CBA is non-monetary benefits such as employee and customer satisfaction. I was working with the director of business transformation in a telecommunications company on a business case. We were discussing customer satisfaction during the study. He said, “My boss [VP] knows the value of customer satisfaction, so we don’t have to worry about coming up with a dollar value for that benefit.” Wisely said, and that was what I expected from a large, mature corporation.

I welcome your feedback. Please post them here or contact me by email.

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