Lean Thinking

12 June 2018

The Cost Trap

Written by  Published in Agile
Rate this item
(0 votes)

Time to close out our series on common traps with a look at probably the most common trap organisations fall into. I don't think I have ever worked for an organisation that wasn't caught to some extent in this trap. What I'm talking about today is the cost trap. You get into this trap by having the wrong sort of conversations - conversations about cost. "How much will this cost?" That question has lead most organisations astray. Why is that? Surely how much it costs is an important question. And indeed it is. The problem occurs when that's the only question you ask. Cost is important, but there is something else you need in order to make a good decision. There is half the information missing. That other half is value. "What will I get in return?"

Let me put it this way, if I were to ask you "would you rather I took $10 from you or $50?" I suspect most of you would chose $10 (and for those who wouldn't, you are very generous, please leave your name in the comments below...). If, on the other hand, I asked "Would you rather I took $10 and gave you back $50 or took $50 and gave you back $500?" I'm guessing most of you would pick the $50. Just focusing on the cost would drastically lower your return. But this is what most organisations do. To be fair, most organisations do consider value, particularly at the top levels of the organisation. Every idea starts with a cost/value decision. ROI is a key consideration. But as work moves down the organisation, the discussion starts to become less and less about value and more and more about cost. The point at which the organisation falls into the cost trap is the point where the value part of the discussion vanishes and the discussion becomes entirely about cost. Often, this is where an idea becomes a project and is handed over for delivery.

 Most of the time "delivery" is essentially asked to provide a fixed price quote for the work. You may call it an Impact Assessment, a Budget Estimate or a straight out Delivery Quote but essentially it's a fixed price quote for a fixed set of defined outputs. Value has disappeared from the conversation.

That fixed set of outputs is not the same as having a value conversation. What if those outputs don't deliver the business value you thought they would? What if there is an additional opportunity you could capture for some additional spend? What if we deliver the fixed outputs but in a way that make maintenance or upgrades really hard? Fixed outputs do not equal value.

As soon as a conversation becomes entirely about cost, the conversation immediately becomes about minimising cost. "How cheaply can you deliver this?" "How can we get this done cheaper?" "We need you to shave 20% off the budget."

This is when a lot of bad things happen. Usually, the delivery folks will find a way to deliver the outputs for a low cost but the value of those outputs will suffer. Quality may be poor. Technical debt may be high. The outputs may be as specified but fail to bring the benefits because no one has the freedom to change the outputs. You may have been able to get the outcomes for a much lower cost if only the outputs could have been changed, but they were locked in. There may be a huge opportunity that could be captured at the same time, if only we could spend a little extra. Worst of all, there may be no outputs at all because the project failed.

Cost-only discussions lead to poor outcomes. The further up the organisation cost-only discussions start happening, the worse the outcomes become because more of the organisation is missing the value information.

So what do we do about it?

I think we need to change the conversation completely. Stop talking about cost/benefit. Eventually that becomes a cost discussion rather than a cost/benefit discussion. We need a completely new conversation. I think that new conversation should be an opportunity/investment conversation.

How does that work? Well, rather than asking "What is the benefit and how much will it cost to get that?" instead ask "What is the size of the opportunity, and how much should we invest to capture it?". It's a simple change of words but a big change in outlook. This is now an investment discussion not a cost discussion. Investment discussions come from a whole other mental space. Cost discussions are always about minimising costs, investment discussions are always about maximising returns. That's a much better discussion to have.

"How do we maximise return for a given investment threshold?" triggers a very different thought process to "How cheaply can we deliver some outputs?". In an investment context, quality is important because return on investment is generally long term. Cost is a short term discussion. In an investment context, cutting quality and delivering something that is hard to maintain and upgrade makes no sense at all.

In an investment context, if the return can be achieved through a different set of outputs at a lower cost, that's a no-brainer. We are signed up for outcomes, not outputs, so let's do it.

Do we think the outputs we have decided on might not bring the benefits we first thought? No problem, pivot and change to some outputs that will.

That adjacent opportunity we discovered? Does that change the size of the opportunity we are chasing? Should that trigger another investment decision? Yes it should.

Investment discussions are much healthier discussions to have. It is also very hard to turn them into unhealthy cost discussions - we never look at just cost. Cost is a factor in deciding an investment threshold but it is always in the context of value, never on its own.

So, get yourself out of the cost trap and start having investment discussions.

Leave a comment

We reserve the right to modify or remove comments that we deem to be offensive.

Make sure you enter the (*) required information where indicated. HTML code is not allowed.

You need to complete the Captcha in order to submit, but sometimes it doesn't load properly. You will need to refresh the page until it does and unfortunately that will clear anything that you have already entered. If you've already written a comment, please copy it first, then paste it into the comment field when the Captcha has loaded correctly.

Calendar

« December 2018 »
Mon Tue Wed Thu Fri Sat Sun
          1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30
31