The Secret Sauce of Improved Decision Making

Most companies struggle to justify new technology investments. This is especially true in tough economic times, when popular wisdom suggests that major it investments be deferred or cancelled. This could be a serious mistake, and even fatal, for some organizations.

Why is that?

When companies consider investing in new technology, they typically focus on the cost of the project. How much will it cost? What are the upfront costs, recurring costs? In a down economy, any incremental investment can be daunting, and often kills a project before it gets to the starting gate - even if the projected benefits are substantial.

Understanding the costs and expected benefits is critical to informed technology decision-making, but it doesn’t tell the whole story. Even with a solid business case for a new systems project, there is still a critical missing piece - the cost of the status quo. The “do nothing” alternative prevails quite often, especially in challenging economic climates. Not understanding the true cost of ‘doing nothing’ can result in a false sense of comfort, or even a radically incorrect outcome.

The Illusive Cost of the Status Quo

“The Cost of the Status Quo (COSQ) is one of the most important inputs to informed it decision-making. COSQ has four key components that should be quantified as part of the business case for any technology decision: direct costs, indirect costs, hidden costs, and opportunity costs.”

Direct Costs. The cost of ownership for keeping the current system or technology running comprises its direct costs. These costs can include recurring costs for hardware, operating system software, database software, support staff, network communications, hosting fees, maintenance/support fees, or any other cost directly attributable to the existing system. In addition, future costs, that will be incurred if the system or technology remains in place, also need to be estimated and included in calculating the direct costs. This could include costs for upgrades, additional hardware, maintenance fee increases, and any other known changes that must be made for regulatory or other business requirements, etc.

Indirect Costs. in addition to direct costs that are easily identified and required to keep the current environment running, often there are other costs to the company that occur exclusively because of the current state. these indirect costs can include costs for extra staff that are a by product of the current environment (e.g. specialized staff to write reports for end users when their data is trapped in legacy systems that cannot support end user reporting), specific skills that are often non-transferrable and at a premium (e.g. the need for personnel that know a legacy programming language), required outside consulting fees or costly manual workarounds.

Hidden Costs. Typically, when a system or technology is at the end of its useful life, organizations make up for its deficiencies and shortcomings in ingenuous, and often costly, ways. Proliferation of spreadsheets and personal databases are the most common responses, as are shadow it resources buried in functional departments. Hidden costs can even include lost profits from unexpected system outages or frequent system downtime for preventive maintenance or batch processing. These hidden costs and associated risks are commonly overlooked in technology justification exercises.

Opportunity Costs. Perhaps the most significant cost of the status quo results from lost opportunities. This can range from lost revenue from products that are not feasible with the limitations in the current system… to services that cannot be automated in the legacy environment… to the bottom line impact of lost customers that defect due to poor service, poor quality, or poor customer experience due to deficiencies in current systems.

True Costs. Should be identified for each of the four COSQ categories as part of developing the business case for any technology initiative. Less easy to quantify, but often even more illuminating, are the inherent risks of the do nothing scenario. Sometimes, these risks are so onerous that they threaten the actual viability of the business. For example, a public company that runs systems that are not Sarbanes Oxley compliant incurs huge business risk and/or large indirect and hidden costs to compensate for the lack of compliant automation capabilities.

Armed with good data on both the cost and risks of the status quo, companies have a much more realistic understanding of the do nothing option, and may even discover that the new initiative can be less costly over time than the status quo.

A Real World Example

Let’s consider an example from a manufacturing company that had outgrown its existing ERP system, the core system that it used to run the business. The company identified its future requirements and key goals for a new system, and was evaluating systems from several ERP vendors. The project team diligently estimated the one-time and recurring cost of implementing the new ERP system, and sought management approval and funding for their recommendation. Unfortunately, they missed two critical steps: the quantification of the expected benefits and the calculation of the cost of the status quo.

Sent back to the drawing board, the team was able to identify potential hard-dollar benefits that produced a payback for the new system in less than one year. At the same time, they were able to identify indirect, hidden, and opportunity costs that were nearly equal to the estimated implementation costs. Indirect costs included a costly upgrade that was required to keep their legacy system running. Hidden costs included key man dependencies in it for legacy technology skills, as well as outside consulting fees for creating reports for users. in the functional departments, several positions were authorized to create and maintain spreadsheets to track information and trends.

Conclusion

Building a business case that incorporates quantifiable bottom-line benefits, as well as the ‘cost of maintaining the status quo’, is a critical guidepost for effective technology decision making. Understanding the direct, indirect, hidden, and opportunity costs of maintaining the status quo can serve as a compass for any organization in examining whether its existing systems and technology investments are pulling their weight or pulling it down. it’s especially relevant in tough economic times, when most companies are reluctant to fund new it projects and get lulled into thinking they are making prudent decisions. Incorporating COSQ analysis into annual planning, as well as project justification, makes good sense. it’s not just good business practice, but an essential step in ensuring that it investments are aligned with business goals.

About the Author

Diane Smigel has over 25 years of experience in information technology leadership in industry and consulting. Her background includes senior technology executive roles in the financial services industry and management responsibility in several global consulting firms, including industry leaders mss technologies, Tatum partners, John Hancock financial services and Cambridge technology partners. Diane specializes in advising executive teams and it leaders on their information technology challenges and plans.