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value vs cost based decision making

Cost vs. Value Based Decisions

At Total Cloud IT, we spend a lot of time defining the value we generate for our clients. In fact, our business model is built around delivering widely and deeply within our clients so the maximum value can be derived from technology and consulting investments. But the justification based on value is not focused on costs (the biggest distinction between the two is based on the outcome the client is trying to achieve). By focusing on derived value, the organization can identify critical decisions that need to be made that produce the greatest benefit across the organization as a whole. Without focusing on value, the organization risks deciding in favor of something that does not generate business value or deciding against something that does. The challenge becomes: what method of decision making is your organization utilizing while attempting to evolve the organization.

What is Value?

Value based decision making provides a clear advantage over cost-based decision making. Value includes a number of factors beyond just a cost and benefit analysis. For example, if an organization is defining value as the significance they want to deliver to the marketplace, then their execution would make the organization more competitive, agile, and better aligned to industry fluctuations.

There are challenges organizations will face when trying to focus on value. It generally is more expensive upfront as it requires a deeper and more intimate knowledge of the organization and its’ competitors. As value is assessed wide and deep within an organization, tracking a defined return may take longer than some companies are willing to accept. Conversely, cost-based decision making will reap an instant impact but is usually focused on a replacement strategy and not one that includes achieving the future outcomes of the organization.

The Shift from Cost to Value

The shift from cost to value-based decision making requires a fundamental shift within the organization. Value is defined by what the organization derives from a decision, but that decision needs to align with a goal. Better decision making comes out of conversations, not numbers. Although, once the organization establishes its’ goal, then a cost benefit analysis of different ways to achieve its’ goals lead to more rigorously tested and targeted decisions.

The following are some steps that can be followed to help identify and implement value-based decision making:

      • Evaluate and identify the critical business decisions your organization needs to make and require additional analysis in order achieve the desired results. Select those that outweigh the costs incurred to reach your outcome.
      • Determine the timing of those decisions. Usually there are two factors organizations need to consider: either the market will determine the optimal timing, or the cost associated with delaying a decision outweighs the value that can be derived.
      • Determine what information is needed and define what you want to achieve, considerations that need to be considered, and the cost / benefit of the decision, both short and long term.
      • When you have gathered all of the necessary information, or when the time to decide arrives, make the decision based on optimal value delivery to the marketplace.
      • Implement the decision as effectively and efficiently as possible.
      • Repeat the decision-making process regularly, especially when conditions change.

Why Value Based Decision Making Matters

Why is this important? Generating value is one of the most misunderstood tools of innovation. But it’s also one of the most important. After all, value is what causes organizations to trade and deliver new and innovative services. Since defining value is a required element of innovation, it isn’t fixed or tangible; it rests in perceived benefit. In other words, value is in the mind of the beholder. This is a key point. Innovators work hard to understand exactly what value means to their customers so they can generate and provide it.

This is why we aim to help our clients focus on defining and deriving value, as it provides another lens to envision the possibilities.

 

Best, 

 

 

  

George Phipps

President | COO