CXO

Costs and benefits of projects: Looking beyond the dollar signs

You need to consider the costs and benefits of any proposal or business case in a broader sense than simply dollars and cents. The ability to identify and demonstrate them is a skill that fuels innovation and positions one as a thought leader.

Innovation has long been is a subject of business books and academic research, and continues to be a coveted organizational trait. Put a few executives in a room, get them talking about business issues and the subject of innovation will come up in no time.

Creating an innovative organization may seem like a vague, boundless, and, hence, overwhelming, undertaking, but in reality, you can achieve it through a number of concrete steps.

One essential step is learning to understand and demonstrate benefits and costs of a proposal or business case beyond the dollar signs. What does that have to do with innovation? Here's is how it works.

No organization has unlimited resources. The typical manager will hear about the need to watch spending at least once a week (or even once an hour nowadays, when everyone seems to know about the credit crunch).

After a few iterations of the "watch the spending" sermon, a manager will find that every innovation his group generates is now first examined in regard to its ability to generate revenue or reduce spend. If it happens that the proposal will actually cost money to implement, it's often scrapped right on the spot, however valuable it may be in other respects. Such self-censoring kills innovation.

It's essential to know that benefits (and, conversely, costs) exists, that cannot (or, shouldn't) be expressed in purely economic terms. In this blog, I discuss a few of them. This list is in no way exhaustive but should provide a good food for thought.

Strategic value

Good companies don't simply rely on ocean currents and winds, but chart their own course. They know where they want to be (vision) and how to get there (strategy). While on this journey, each and every initiative that aligns nicely with the company's strategy is valuable (some more and some less). The strategic value of a proposal lies in its ability to generate additional thrust to propel the organization forward along its intended course. This is a big deal.

Optionality

The ability to defer decisions and have choices in the future carries a lot of value. This has been long recognized in financial markets where put or call options can be purchased today, effectively allowing deferral of decision making related to investment or divestment of equities in one's portfolio (options are useful for all sorts of things, but this is not the point). If you're considering a proposal and see that it offers the organization a variety of options to choose from down the road, this is very valuable. Business environments change all the time, which often makes long-term planning inefficient. The ability to defer decisions for as long as possible and make them in accordance with the most current reading of the business climate is highly valuable to any organization.

For example, imagine that your organization has come up with a product that is taking the market by storm in Somewherestan, a country of 200 million. You need to set up a distribution center there, but there's a catch: Somewherestan's Highest Safety Commission has voiced some concerns over the product's safety and there's a chance that they will ban it. So, on the one hand, you need to move on this before the competition catches up and, on the other, you don't need the distribution center there if the product gets banned. You have received almost identical quotes from two reputable local companies to set up one of their distribution centers to your specification. One of them is slightly more expensive but gives you an option to pull out at any time, for a nominal fee. The slightly more expensive one turns out to be the better value because it offers you the ability to defer your decision. It's certainly worth the slightly higher expense.

Goodwill

Relationships can fix anything. Sometimes, a proposal or an initiative delivers fantastic value to your organization's partners, employees, or the community. It's often worth the cost to create goodwill and further a relationship because there might come a time when your organization may need something in return.

Morale

High morale within an organization provides for improved productivity and leads to better business results. Is this valuable? Absolutely!

Image

Any proposal that supports or improves the company's image is valuable. For instance, consider a small company with about 60 employees that specializes in energy conservation solutions. Currently, it rents office space in a regular building but the lease is up within 18 months. The CFO is approached by the VP of Engineering who proposes that the next office they occupy come outfitted with the very best of the company's energy conservation solutions, essentially serving as a showcase. It's likely to cost more than a simple rent arrangement, but it will also demonstrate that the organization practices what it preaches—a great value to the business.

Best practices

Initiatives leading to adoption of best practices are valuable in three respects. First, best practices should lead to improved quality or efficiencies. Second, adoption of best practices reaffirms the organization's position as an industry leader, thus supporting or improving its image. Third, it often makes the organization more competitive as prospective customers may demand that a vendor follows a particular practice or standard.

Creating capacity

Often, initiatives free up or create resources that can't always be reliably expressed in financial terms but are clearly beneficial. Examples include freeing up of physical office space, creation of available production capacity, or freeing up somebody's time. All of these are great benefits but sometimes they get misinterpreted.

I recently audited a business case, which, if adopted, would free up approximately 20 minutes a day for each of the 2,000 nurses in the organization. The authors asserted that given the current average hourly rate of $30 per hour, this would result in a saving of almost $5 million per year. In the same breath, they asserted that there will be no layoffs or reduction in worked hours.

This is incorrect, of course, because the nurses will still get paid for these 20 minutes, and the $5 million "saved" is just fiction. Nevertheless, there is value in these saved minutes, which can be spent on patient care or self-development. Even the latter will work to improve staff morale, relieve stress and reduce incidence of medical errors, but trying to measure this kind of impact and being serious about it is just insane.

As you can see, you need to consider the costs and benefits of any proposal or business case in a broader sense than simply dollars and cents. The ability to identify and demonstrate them is a skill that fuels innovation and positions one as a thought leader.

Ilya Bogorad is the Principal of Bizvortex Consulting Group Inc, a management consulting company located in Toronto, Canada. Ilya can be reached at ibogorad@bizvortex.com or (905) 278 4753

About Ilya Bogorad

Ilya Bogorad is the Principal of Bizvortex Consulting Group Inc, a management consulting company located in Toronto, Canada. Ilya specializes in building better IT organizations.

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