Opportunity Risks and Costs of Delay
We’re taught as managers that rigorous analysis and due diligence are a critical part of our jobs. There’s certainly comfort in spending the time to deeply analyze decisions before we make them. I don’t mean to question that received wisdom, just to point out that there’s a trade-off. Good managers need to do “the right amount” of analysis to support a decision—no more and no less—and there are factors that argue for less analysis as well as factors that justify more.
Cost of Delay and Opportunity Costs
If an action you’re considering will generate business value, then every day you put off that action has a cost or an opportunity cost, which destroys business value. Let’s say that investment A will save the company $100 million per year. Of course, you don’t know in advance exactly how much A will save, but say your preliminary estimate is $100 million. That means that for each day you take to finalize your decision on whether to take action A, the company is likely to be spending $270,000 that it shouldn’t be spending. Every day that you take to analyze your decision had better be worth $270,000! Similarly, if you’re considering building a new product that you estimate is worth $100 million in revenue per year, every day of analyzing the decision costs $270,000 in foregone opportunity. These opportunity costs or real cash outflows affect shareholder value.
I bring this up because I often see companies that are thinking about moving to the cloud spending a lot of time trying to juggle spreadsheets of instance costs to “finalize” their analysis. The likelihood that the additional precision they gain will affect their decision is low, since there’s so much uncertainty in how exactly they’ll wind up using the cloud, and because the main benefits they’re expecting from the cloud simply aren’t on those spreadsheets—things like agility, resilience, innovation, and speed to market. It’s hard to argue that planning and due diligence are bad—they aren’t. They’re a duty. But the amount of time spent on it has a tradeoff and can be value-destroying…and the duty of the executives is to maximize value delivered, right?
I’m not sure if anyone else uses this term. What I mean by it, in analogy with opportunity costs, is risks that the company is bearing when it doesn’t need to. If you’re contemplating an activity that will reduce business risk, then every day you spend contemplating that activity is a day when the company carries more risk than it needs to. While opportunity cost and cost of delay refer to activities that have concrete and identifiable ROIs, opportunity risks are equally important but tied to probabilities, options, and unknowns. But for opportunity risks as well as costs of delay, there’s a tradeoff on the time that should be spent analyzing a decision. Bearing risks longer than necessary destroys business value, even if the effect is less evident.
This is sometimes an even bigger factor for enterprises considering a move to the cloud and DevOps. Many companies are considering moving to the cloud and DevOps because they’ve realized that they may be too slow to keep up with disruptive competitors; this is very often the case in financial services, for example. Their strategic imperative is to reduce the risk of disruptive competition—so every day they put off moving to the cloud, they continue to be at risk. There should be urgency here! This particular risk is existential; the spreadsheet juggling to analyze a few pennies or even dollars one way or another is probably not worth the risk. And that’s just one of the many opportunity risks the enterprise faces—in the cloud they’ll be able to reduce their risks around security, compliance, resilience, and even the risk that their infrastructure will not meet their needs as their market changes.
It’s not just the spreadsheet juggling that imposes opportunity risks, opportunity costs, and costs of delay. It’s often the need to build consensus across the leadership team, the delays in getting time on executive schedules for discussions, and the time spent in trying to create multi-year migration plans when a short-term plan with further planning downstream would lead to faster value delivery.
Again, I’m not suggesting that rigorous analysis, due diligence, and planning are bad things, merely that the tradeoff on time spent in these activities implies that there is a “right” amount of time. At the highest level, if there will be a positive value to moving to the cloud, then there is a cost of delay for every day of analysis and any lethargy in implementation.
I’ll just throw in one more factor, a sort of hidden cost of delay. That’s the cultural impact of delay, or the message that’s sent when leadership is slow to make important decisions. Since one of the most important advantages enterprises hope to gain by moving to the cloud is speed, executives may be undermining their messages to employees that speed is important. To gain the full value from the cloud, the company’s culture must adjust to value speed and a sense of urgency. The costs of delay are not only opportunity costs and risks but a cost in the company’s cultural ability to execute at the speed of the digital world.