Often we make decisions based on the cost price of a service or asset ignoring the benefits that will arise and the hidden costs of not proceeding. This approach may result in a false economy whereby the apparent savings, the acquisition price, is in fact less than the cost of not proceeding! Hardly a good business decision. Let me give you an example.
Continuing to use a vehicle after its optimum service life may appear to be good business, as you are not expending money to make lease payments or a capital outlay. However, the financial impact of continuing to use the vehicle beyond it’s useful life may be significant.
It may include direct, indirect and opportunity costs.
Direct costs may include costs such as frequent maintenance costs, major repairs eg gear boxes, new motor etc.
Indirect costs may include costs such as loss of productivity, due to the vehicle being off road for significant periods of time, continuing to pay wages to the driver, management time required to deal with breakdowns and repairs, which means other important matters are not attended to, the loss of income from cancelled sales/appointments, and the continuous negative experience may reduce staff engagement and commitment which further impacts work output/productivity.
Opportunity cost, which represents a foregone alternative gain may include the loss of new and existing customers, the impact on staff turnover and your attractiveness to potential staff when recruiting. The impact of staff turnover is higher costs and disruption to service. Highly skilled and in demand candidates may not consider you an option reducing the quality of your recruits which may affect customer service, require more rework and supervision time. The opportunity costs may also have a significant impact on the top line. Potential and existing customers may be lost as they hear about unreliable and poor customer service. In a driving school potential learners and their parents may percieve an old vehicle as unsafe or “uncool” and choose an alternative option for driving lessons.
Therefore, the direct cost of acquiring a new vehicle may well be exceeded by the benefits to the business represented by direct and indirect cost savings, opportunity costs, increased productivity and new customers.
The above example is of a physical asset, but the same principles apply when considering acquisition of intangible assets such as business software. The cost/benefit analysis must take into account more than the actual outlay. Summarized below is a list of considerations.
In conclusion, a good business decision must necessarily consider all costs and benefits related to the acquisition. The hidden costs and opportunity costs may be significant.