We talked a little bit about risk in the last post.
In highly risk and change averse cultures, you want to make sure you have a solid argument for why you want to make the changes you wish to make.
For executive-types, they want to see numbers.
Return on Investment.
Whether what you are proposing and the resources it will require will be worth it.
Some basics on opportunity cost can be found in the movie and links below.
Calculating Opportunity Costs
Study.com: How to Calculate Opportunity Costs
In this example, I am going to calculate the Opportunity Cost for eliminating one of our LMSs.
Note: This is NOT a reflection of my reality. This is just an intellectual exercise.
To do this, I need the following:
- Current contract for the LMS I wish to eliminate
- Current contract for the LMS I wish to merge into – I am looking for service gaps
- Vendor information for the LMS I wish to merge into
- Proposed cost for filling in the service gaps
- General average of the labor costs involved in maintaining the LMS I wish to eliminate
- General average of the labor costs that will be involved in the merger.
The general formula is
(what you are sacrificing) / (what you are gaining) = opportunity cost
What I am sacrificing includes:
– The proposed cost for filling
in the service gaps – as provided by the vendor (ex. $10,000 / yr to
add the features and licenses currently missing)
– The labor cost involved in the transition (ex. $50,000 – one time cost during length of time of transition)
– How long I expect this transition to take (1 year)
What I am gaining would include
– The cost of the current contract for the LMS I wish to eliminate (ex. $50,000 / yr – off the books)
– General average of the labor costs involved in maintaining the LMS (ex. $50,000 / yr – off the books)
– Number of years I expect this solution to be in place (3 years)
So for the first year – I am looking at an opportunity cost ratio of
Implementation year – (10,000 + 50,000) / (50,000 + 50,000) = 60,000 / 100,000 = 0.6.
Subsequent years – (10,000) / (100,000) = 10,000 / 100,000 = 0.1
From this, I see 2 things.
1) I am gaining more than I am losing (Opportunity cost ratio is less than 1)
2) After the implementation year, I stand to gain even more
I can also take a look at how much I stand to gain or lose.
Implementation year – I am sacrificing $60,000 (the annual cost of the contract(10K) + labor cost for implementation(50K)) and stand to gain $100,000 in savings (the annual cost of the old contract (50K) + the FTE to maintain (50K). So the total gain is $40,000
Subsequent years, since I don’t have the labor costs of implementation (50K), I’m gaining $90,000 per year!
Notice that these are financial costs and not necessarily the emotional costs of change management.
You may run the numbers and find that the aggravation still isn’t worth it.