What is the Cost of Inaction?

Businesses suffocating from internal systems they’ve grown out of should have a close look at what it’s costing them to delay improving things

The Pain of Same vs. The Pain of Change

It’s common for organizations to simply cope with their current solutions and avoid or delay required technology upgrades. This delay is typically rooted in a fear of the effort and disruption the change may cause – the easy route is to hesitate and avoid the pain of change. The cost of inaction is the business and opportunity costs associated with organizations not deploying necessary technology and other business-innovation improvements to match the complexity of their business.

To be clear, these are businesses that have recognized that they’re struggling with their current solution, and they’re aware that they need to do something, but they nevertheless postpone it for one reason or another. At some point, of course, any growing business will be forced to make a switch. All too often, that tipping point comes long after the pain of same has outweighed the pain of change.

It’s about Money

The thing is, it’s not just about pain. It’s also about money. And it’s about opportunity. You have to ask yourself, what are you leaving on the table by not taking action? What is it costing you to hesitate? If you were to take the plunge and upgrade your software and underlying processes to something that was built to match the complexity of your business, what would that cost you, and when would you see a return on that investment?

To help you get an answer to that, we’ll need to first quantify your situation by using a few key metrics. To give you a visual on how you can begin that, have a look at the image to the right (click on it to expand it to full size).  Most engineering and construction organizations struggle with a massive proliferation of spreadsheets to manage projects: spreadsheets that they manually stitch together and share using emails and re-keying of data. I’ve heard people refer to this as the Microsoft Office solution to construction project management, project cost controls and procurement management software. I’ve also been in rooms full of people who are close to losing their minds with frustration at their homegrown solution that looks a lot like this.

What is the Cost of Inaction?

But that’s just the pain part. It’s hard to quantify pain. As frustrating as it is, the people suffering the most pain are not always the ones signing the checks. To get the ear of those folks, the conversation needs to go well beyond pain to expose the problem in terms of: money, lost opportunity, reputation and efficiency. So, let’s talk about that.

Key Metrics for the Cost of Inaction

Owners and contractors will view this calculation differently, so I’ll divide out the categories so that you can look at the areas that most affect you. Contractors and EPCM will also tackle this differently depending on whether they bill their clients on a cost reimbursable or fixed price contract. The metrics I’ve included are:

  • Cost Reduction
  • Cost Avoidance
  • Cost of Quality
  • Opportunity Lost
  • Missed Revenue
  • Cost of Frustration

Cost reduction and cost avoidance are the first two items to consider and are both relevant to all types of project organizations. For more on the difference between these, have a look at this article.

Cost reduction: these are the “hard” costs that can be quantified by:

  1. Real and measurable efficiency gains
  2. Asset reductions through consolidating systems
  3. Reduction in cost overruns

Cost Avoidance: These are the “soft” costs that are a bit trickier to quantify but nevertheless are very real and can’t be discounted as not worth including in an ROI calculation. They can be measured by:

  1. Avoiding errors when re-entering data from one place to another
  2. Avoiding costs introduced by a lack of visibility
  3. Avoiding costs introduced by teams working in silos. In other words: a lack of collaboration; the inability for staff to share workflows, documents and data introduces numerous productivity and quality issues

Cost of Quality: Quality issues are prevalent when using the Office solution illustrated in the image above. Consider the following:

  1. Quality and consistency of your reporting
  2. Quality of the data being used to make key decisions
  3. Quality of the information received from vendors, and your ability to substantiate that information
  4. Cheap, fast or good. Your ability to deliver your product or service on time, on budget and at a high degree of quality is dependent on more than just the capability of your staff. Your staff need the right tools and processes to perform at the level of quality you expect.
  5. The cost of what gets missed. You don’t know what you don’t know. If you’re relying on a cobbled together solution to get answers, you and your staff are going to miss things. A lack of transparency and visibility can lead to key deliverables flying under the radar and lead to quality-related costs.

Opportunity Lost: If your staff are spending significant chunks of time fighting with spreadsheets, searching for documents in emails, and manually building reports; they’re not available to be deployed on new opportunities. Your staff productivity is vital for capitalizing on new opportunities.

Missed Revenue. It’s very common for contractors and EPCM to not be capturing all their revenue. Whether it’s cost-reimbursable or fixed, an inefficient system almost always leads to missed items, transactions or progress draws that don’t get billed. Our implementation team, for example, regularly uncovers tens of thousands of dollars in unrecovered revenue when first launching with a new EPCM or contractor. It’s the very nature of moving from a disconnected solution to a highly connected solution. When you have software that continuously reconciles all the pieces of your organization together, it’s near impossible for things like revenue to get missed.

Frustration Cost. When you have highly-trained engineers, project managers, procurement experts, etc. spending a disproportionate amount of their time doing tedious manual work that brings no value to them or the business; you have a frustrated staff. If you’re not providing the right tools for them to do their job, their sense of job satisfaction, career development and worth to the company is very low. You may face a high turnover in staff and that leads to significant HR and training costs.

Calculating the Cost of Inaction

To give you a start with calculating your own cost of inaction, I’ve attached a downloadable Cost of Inaction calculator for you to play around with. Put in your own numbers to quantify your own situation and see how it plays out. This spreadsheet only includes hard or semi-hard costs that can be readily quantified. Feel free to add sections for: Cost Avoidance, Quality Costs, Frustration Costs, Opportunities Lost and Missed Revenue factors.

To calculate the ROI, you’ll need to extend this to enter the monthly or annual costs of the software platform(s) you’re considering.

I’d love to hear from you. Feel free to drop me a line in the comment below and I’ll get back to you.

Share this post