Things Cost More Than Money
Why cost/benefit analysis should factor in more than just the financials
When considering a purchase, a business will do a cost/benefit analysis. If you don't know what this is, it's really simple. We ask what the return on the spend will be. It's hard to understand this if you haven't run a business yourself, as money just seems to appear from nowhere in a large business.
The problem with sloppiness in a large business is that it can scale and cause a lot of damage without anyone noticing. That's why seemingly small amounts seem to be subject to scrutiny. Today I'm going to write about something that is often not factored into business decisions and that's a time cost/benefit analysis, and why that should matter to small businesses.
When I was in Third Party Relations at PlayStation, long before I understood any of this, I was asked to write a report on the return on investment on a trip to GDC. I wrote a lengthy report, I arranged a bunch of meetings fully expecting to be able to go, but I was turned down and I was furious. "Don't these idiots know how useful GDC is?" I thought. Well, I was the idiot for not understanding that Third Party Relations was an operational department, and in fact, the benefits I claimed were entirely soft, with no guaranteed monetary return on what would have been a costly trip. A well-run department shouldn’t be setting precedents for vague justifications for expenditure either.
Years later, when I had just been moved to Nainan Shah's more entrepreneurial department, which was focussed on business development and platform planning, I asked Nainan if I could go to GDC to meed developers. There was no pitch, I offered no cost/benefit analysis, I just asked as he was walking purposefully across the department floor between meetings. He stopped, paused and said "Yes. Go."
That was it. I was dumbfounded. Years earlier, I had written a report to justify a trip that ran to over 20 pages and been turned down. Now I just asked and I got told I could go. It's not that I particularly enjoyed travelling. I have never considered a business trip to be a "jolly", I don't drink for starters, I like the comfort of home and family, I don't enjoy the routine two hour inquisition at the US Border for the crime of having a Muslim name and I'm an introvert, so I don't like parties.
Here's what I didn't understand, or even consider at the time. In the two seconds when Nainan stopped and paused before replying, he had run the cost/benefit analysis both on spend and time in his head. In that time he had worked out that I'd be able to talk to a bunch of developers about the PlayStation Mobile platform I'd been tasked to find content for, and he had mentally cross-referenced the global meetings I could attend and contribute to, towards the end of building the platform. It takes many years of experience at the highest level to be able to do that, and it took me years to realise that was what he had done, and how stupid I had been to think that I had been hard done by under my former boss in Third Party Relations.
So what do I mean when we talk about the cost/benefit analysis of time?
Let's apply this to a purchase for the home, and let's start with a household appliance like an electric kettle. Some of my British readers might be surprised to learn that an electric kettle isn't ubiquitous in the US. Why? Well, their mains voltage is a lot less than ours, so kettles take a lot longer to boil. Believe it or not, many still use a stove-top kettle for tea, if they drink tea in the first place, which is not nearly as common a beverage in the US compared to the UK, where tea-drinking is practically the national sport.
It's not time that an American purchaser of an electric kettle would save, it's just a convenience, because it turns itself off when boiled. A time cost/benefit analysis for a kettle purchase in the UK yields significantly more benefit than in the US. So given they don't drink as much tea, how much time would an electric kettle save in the long run? Not much, just another useless electric gadget. In the UK? You'd probably save half an hour a day. Definitely a good time benefit.
Let's now go further. What's the time cost/benefit analysis for say, a laptop computer? Not so easy now, is it? Unless your laptop is broken, or won't run the software you need without freezing, the time benefit is low. This is why corporations don't upgrade laptops willy-nilly. There are other reasons. A new laptop costs setup time too.
What other factors should we consider for purchases that will affect our time?
The time required to learn how to use the thing
The time cost of maintaining the thing
If you become dependent on the thing, or the service, and it no longer serves its purpose, the monetary and time cost of switching to another thing
The cognitive cost of the thing being in your business or life. Just by being in your line of sight, it's one more distraction, or reminder, or guilt pang of yet another thing, which consumes your attention, and therefore your time
Then the opportunity cost of time. Could the time you're spending with the thing have been put to better use elsewhere?
Another thing to think about is that if you bought something that previously delivered benefits, but is now not doing so, get rid of it! And this reminds me to get rid of my Amazon Echo Show, which used to connect to my smart devices in the shed, and no longer does, but still flickers with pointless information updates in the periphery of my vision. It's not about the time lost to a cursory glance either, it's the disruption of flow and the fracturing of attention which is a killer in this case. What about the money I spent on it? That’s a sunk cost. We write it off.
Am I good at doing a time cost/benefit analysis? Not yet, but I'm working on it.
Great post. On that last point, Seth Godin also recommends ignoring sunk costs.