Many managers are very good at working out the cost of implementing an idea. But they often completely fail to calculate the cost of NOT implementing it. This may sometimes be far more expensive than implementing it, especially over the long term, warns Jeffrey Baumgartner.
Imagine a great idea pops up in your company’s idea management system, in a brainstorm or over a beer after work. The first thing a manager will typically do is calculate the cost of implementing it. This cost will then be balanced against the value potential of the idea – usually additional income from increased sales or reduced operational costs. However, the more creative an idea is (and hence potentially innovative), the harder it can be to determine the value, especially in monetary terms. As a result, many potentially very exciting ideas are not implemented simply because a manager has decided that to do so would be to costly.
While such managers can be very good at working out the cost of implementing an idea, they often fail completely to calculate the cost of NOT implementing an idea – and this can sometimes be far more expensive than implementing it, especially over the long term.
How much does it cost not to implement an idea?
Sometimes it is relatively easy to calculate the cost of not implementing an idea, particularly when the idea is expected to result in cost savings. Let us imagine you are reviewing an idea that promises to improve the efficiency of your production line. There would be a one time cost of €500,000 to implement the idea, but once this is done, it will reduce your manufacturing costs by €5 per unit. Let us further imagine you are now making 100,000 units per year.
The cost of not implementing this idea would be zero in the first year (cost savings equal the implementation cost) and then €500,000 in the next year. If you are expecting an increase in sales of 10% per year and a five year manufacturing life, the cost of not implementing this idea would come to more than €2.5 million. That is a far sight more than the half a million Euro it would cost to implement. In this light, not implementing the idea is an expensive mistake.
Not always a straightforward calculation
In other cases, it can be a lot harder to calculate the cost of not implementing an idea. Let us imagine, for example, that you run a company that is a global leader in cutting-edge high-technology writing pens. Now imagine that one of your technicians comes up with a new technology that will allow a pen to read the user’s mind and write or draw whatever she is thinking. Such a technology would be expensive to implement and it would be hard to predict the sales potential. Worse, any significant market research, you may perform in order to get insight into sales potential would give away to competitors your plans – and might allow them to beat you to market.
So, let’s continue to imagine that the cost of implementing the idea will be €50 million. The revenue potential is unpredictable. It could be incredible or it could be minimal. After all, the technology is unproven outside the laboratory, it requires the user to wear a cap (to read the mind) and for all you know, mind-reading pens may scare customers off.
With all that uncertainty involved in turning this idea into a reality, you might decide there is too much risk and opt not to implement the idea. But what about the cost of not implementing this idea? Sure, you save €50 million. But what might the costs be?
They are, of course, unpredictable. However, it is important to bear in mind that ideas seldom occur in isolation. If someone in your company has come up with a fantastic idea, sooner or later a bright spark employed by one of your competitors will dream up a similar idea. What happens when that happens and the competitor decides to implement the idea?
Well, their implementation of mind-reading pens might fail and cost them a fortune. But what happens if their product is an incredible success? They will earn hundreds of millions, if not billions of Euro. And those sales will come at your company’s expense. You lose sales, you lose market share and your reputation falls from being a leader to a follower in your industry as you desperately try to bring your own mind-reading pens to market.
In other words, the cost of not implementing the intelligent pen idea might well be permanent damage to your business and reputation!
A real-life example: Polaroid
If you think this is an exaggeration, consider Polaroid Corporation. A generation ago, they were the cutting edge innovator in instant picture technology. If you wanted to be able to take a picture and see it within seconds, your only real choice was Polaroid. Indeed, “a polaroid” became a generic term for an instant picture.
Today, of course, virtually every camera can produce an instant picture and Polaroid, although they dabbled in digital imagery in the late 1990s, failed to exploit the technology. The company filed for bankruptcy protection in 2001. Today, the company is a shadow of its former self.
History is, of course, littered with companies which failed because they failed to implement and exploit innovative new ideas which either their competitors or nimble start-ups more successfully exploited to great profit.
The lesson to learn here, of course, is that you when you calculate the cost of implementing a creative idea that has potential to become an innovation, be sure also to calculate the cost of NOT implementing the idea. Sometimes that cost can be far, far greater than doing nothing.
By Jeffrey Baumgartner
About the author
Jeffrey Baumgartner is the author of the book, The Way of the Innovation Master; the author/editor of Report 103, a popular newsletter on creativity and innovation in business. He is currently developing and running workshops around the world on Anticonventional Thinking, a new approach to achieving goals through creativity.