Today, I received a message from one of my Twitter followers. He had read one of my articles and had a follow up question. It was an excellent question and relevant to so many people that I decided to write it up and share it.
The reader writes: “I always try to consider TCO when making decisions, but it always seems that others don't consider the soft dollar costs for employees already on salary. I find this especially difficult at my nonprofit organization. Any suggestions for how to help others recognize this important cost center?”
This is a really common scenario and I’ve seen it a whole lot. The thinking goes like this: Since the organization is already committed to the costs of the employee – salary, benefits and other overhead – then any calculations involving that employee don’t actually save the organization any real money. For example, if you’re working on implementing a new purchase order system that will cut by one half the amount of time that the purchasing person spends on the process, you can’t use that “soft” salary savings as a part of the justification for moving to a new purchase order system. The reason: The employee will still be there even after the new system goes into place.
Personally, I see failing to capture these soft savings in some way as short sighted and for you to want to see them reflected somehow is commendable. What we have here is the difference between hard costs – i.e. cold, hard cash that will come right off the expense column – vs. what is an “opportunity savings”. For organizations that do take into consideration these soft costs, there is the potential to reallocate the time savings into more fruitful endeavors. In such instances, you may find that the person that used to spend all of their time on purchasing can now assist with another function in the finance office, thereby eliminating the need to hire an additional person.
That’s where the argument really lies. By implementing whatever it is you’re trying to implement, you’re creating an opportunity for future cost avoidance. While the result may not yield hard cash savings today, it can be beneficial down the road.
In a non-profit organization, it’s easy to link these soft costs directly to the mission of the organization. Bear in mind that in a non-profit, while money matters, money is the enabler, not the motive. The organization has a mission to fulfill through its charter and the money that is spent directly advances those efforts. So, rather than making your argument based solely on dollars in and dollars out, link the savings to the mission of the organization.
Example: When I was a CIO in higher education, when we considered a process improvement effort that would yield a reasonable savings of employee time, I always made sure to reinforce that the time savings that would be achieved would be a “mission return” to the organization in the form of additional outreach to students. Given the focus on student success at most institutions, this was an easy concept for people to grasp… much easier than attempting to explain the TCO and ROI in terms of dollars and cents alone. Even if your argument still doesn’t result in an approval for the project.
On a related note, there was a recent discussion on a CIO list to which I subscribe about the perception that IT is a "black hole" to many people, including senior leadership. One person rightly pointed out that the IT Director needs to find out who feels this way and then try to understand where this perception comes from and, in the process, build relationships. This TCO/ROI discussion is a great place to start such relationship building.
Action Item: CIOs need to help their organizations understand both the soft and hard costs that go into every project so that they can help their organizations make the best possible decisions. It is this key difference that can make or break a project proposal. Through this method, the organization can look to uncover potential time savings that can result in solutions that are better thought out and that bring with them clarity of alignment between IT and business priorities.