It’s counter intuitive, but in business placing yourself in the mindset of not spending money can actually be costing you money.
How does that work?
A very simple economic notion which is well understood in theory, but yet is often neglected in practice, is costing businesses money and could be slowing business growth significantly.
I am talking about opportunity cost.
Most businesses have core skills or specialisation areas, yet nevertheless, when it comes to a standard business model there are several aspects that have to be operated in tandem for the business to function, which are outside the specialisations of the business.
You often come across managers that have their staff multitasking all sorts of tasks inefficiently, under the mentality that this is great for the business because by doing so they are saving themselves money as they are not outsourcing tasks or activities.
To make a point - If you can attain let’s say $200 per hour out of a core activity of an employee and you are using 4 hours of these resources to juggle with marketing, that you could be outsourcing at $95 ph. and getting the job done in 3 hours, then you have actually forgone $515 by miss-allocating resources.
$200 X 4 hrs. = $800 $95 X 3 hrs. = $285
1 unit of marketing output 1 unit of marketing output
Opportunity forgone $515
Interestingly enough, you often bump into a cost focused mentality which perceives the strategy as a cost savings win of $285 on marketing for the week.
Because time is money and also a precious resource, before you postpone resorting to a specialist for let’s say 6 months, you should factor in that this decision could mean forgoing a $12,000 opportunity due to miss-allocation of resources.
Another situation worth highlighting is where internal staff with no immediate know-how pursue to accomplish infrequent or temporary, non-core business activities.
This could involve allocating significant hours to research time, where there might be an opportunity cost without ever even getting to accomplish the required task. In addition, if the activity is infrequent the knowledge is likely to be forgotten and vanish before the task is again required.
In my experience, the more senior the managers or directors, the better understanding they will have in terms of the opportunity costs associated with human capital and resources.
Bottom line productivity should sit at the core and opportunity cost can’t be neglected when it comes to resource allocation decisions.
When it comes to outsourcing you often hear the question: “What will be my return on investment?” Quite frankly, while you can’t generalise, in some instances a decision can be undertaken based on opportunity costs.
One of the questions you will need to know is what your opportunity costs is: How much is your time really worth? From there ROI will be easier to asses.
Would you like to find out whether you are making optimal use of your resources and when outsourcing could be a key strategic move for your business to maximize value? We can help you determine that.
Strategic View Point by Carlos Mauleon Senior Manager of Strategic Business Initiatives at BIZNEX Consulting www.biznexconsulting.com.au
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