Opportunity Cost

How often do we ask the question, "what does this cost?" when we should be asking, "what am I giving up?"

In the face of a decision, we tend to be overly preoccupied with backward-looking scorecards (accounting costs, historical costs, average costs, i.e. sunk costs) when what matters is an understanding of our risk-adjusted alternatives looking forward. (In other words, good economic and critical thinking.)

One example: if you are a manager, I'll make a wild guess that some of the people who work for you are very good, some are solid peformers, and some are not. What is the cost of those poor performers? It's the opportunity cost of dealing with their behaviors and mistakes... Poor performers tend produce unacceptable results that require much rework, and through other negative behaviors they often distract the good performers.

Those managers who proactively deal with poor performers (improving them or removing them) tend to see increases in productivity. All the mental and physical energy your good performers tied up in coping with the poor performers is now applied to productive efforts.

If I had a dime for every time I've heard a manager say, "after dealing with the poor performers, our quality, productivity and morale went way up..." Well... I'd still need a job, but I'd have a lot of dimes.

Shlomo Maital has said:

"Managers need two kinds of wisdom. They need the perceptiveness to take into account the hidden costs when they exist [... and they] need the courage and honesty to write off visible sunk costs, and henceforth totally ignore them, [... and] they need the common sense to know the difference."

There are hidden costs all around, all the time. They come in the form of alternatives foregone, of things we give up - that we don't do - when we take an action. Are you developing the ability to see them?

Comments

[Larry P.]

Labor Unions have a great deal to do with keeping - shall we say - "marginal" employees.

This is part of the socialist nature of these labor organizations. There is no incentive to be better and no penalty for being worse. Just as long as you show up to work and have a pulse (and of course pay your union dues) you can have a long career.

Managers at times have their hands tied by these conditions.

[Mark Showalter]

As managers we may need a third kind of wisdom. A wisdom that allows us to look inward at our own negative behaviors and
the hidden cost they bring to bear on everything. I wonder how much "distraction"
and "re-working" I make for the "good or bad performers" I manage.