Whenever I’m asked about the value I received from my MBA (Masters in Business), I always say the same thing – a true understanding of opportunity cost.
Before I completed my program I understood opportunity cost in theory. Typically defined similarly as below:
The potential benefits a business misses out on when choosing one alternative over another.
However, I didn’t truly understand the implications because I had yet to see enough examples in the real world with this perspective. Once I did, it changed everything.
One large automation project I built while working at The Vanguard Group was consuming 2 FTE (full-time equivalent) resources 100% of the time before I got involved. Stay with me here as I walk you through the math.
This translated to roughly 2,000 hours per year per person for a total of 4,000 hours spent on this project every year. I assume 2,000 hours from 40 hours per week x 50 weeks leaving 2 for vacation. To turn this into dollars I used my own (seemingly similar) salary (I was in the same group) including benefits and came to a basis of $100/hr.
After finalizing the calculations, I had a basis of $400K per year (4,000 hours x $100/hr).
This project was costing our organization almost half a million dollars each year!
In the end, I had fully automated the project. This saved the organization almost half a million dollars each year. It took me about a month worth of work to fully automate it which cost less than $20K.
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Automating this project meant we’d save over $30K per month. As such, we received a positive ROI (return on investment) in less than one month. Then every month, month after month each year moving forward.
However, even more value was received because of the opportunity cost that was saved. Not only were we saving almost half a million dollars each year, but now we had 2 FTEs available to redeploy 4,000 hours per year on work that was more important.
Opportunity cost is real and it’s likely costing your business BIG. Where is your cost the biggest and most expensive?
Save your firm BIG through automation.
PS. Here’s a definition of opportunity cost from Investopedia.
Talk soon,
Sean