Lost Opportunity Cost

Lost_Opportunity_CostStaying the same never is. We exist in a constant state of decision making. Not making a decision, is making a decision. Not taking action is making a decision.

Healthcare reform is a good example. Not making a decision in 2009 will cost.

In 2008 the U.S. is expected to have spent $2.4 trillion on healthcare, that’s 16.6% of GDP (Gross Domestic Product).

By not making a decision for reform (i.e., the system works now and doesn’t need fixing) healthcare costs are expected to reach $4.4 trillion annually, or $20.3% of U.S. GDP by 2018.

That’s a Lost Opportunity Cost (LOC) of $2,000,000,000,000 over 10 years.

In the service contract world, as in healthcare reform, there are no guarantees the selected solution will avoid all of those costs.

It is certain there is a cost for keeping the status quo.

The Largest Invisible Elephant

LOC is the largest unspoken element in sales conversations with customers.

Salespeople rarely get to the LOC because they’re too busy spouting about their competitive advantages (see “Crossing the Line“)

Intelligent salespeople get distracted in their search for ROI from services as operating expenses. That’s a dog chasing its tail (see “ROI: Facility Services’ Holy Grail“) .

LOC is Everywhere, All the Time

LOCs are incurred when the current situation continues without change, a result of no decision.

Nature abhors a vacuum, and when a challenge or threat is seen, not deciding doesn’t prevent nature from continuing on its merry way. Non decisions get flattened by the momentum of the steamroller anyway.

Using LOC to Sell Services

LOC is a persuasive tool for sales proposals and presentations.

One that needs some sensitivity as you’re presenting a painful reality (lost money) to customers.

Additionally, you have to make some best guesses. At best LOC is a ballpark number. As you’re guesstimating about future costs, you’ll need to shape your language that way, e.g.

“…based on our understanding, your current situation can be estimated to lose more than $$$,$$$ over the next year…”

Always include your formula and cost assumptions used. They don’t need to be placed next to the LOC estimate, but can be referenced in a footnote, or endnote.

Calculating LOC

To calculate LOC, deep dive into customers’ issues during your sales due diligence.

Identify how NOT fixing those issues costs customers money. For example, seek LOC estimates in:

  • Work that could have been avoided

[the current state] – [your solution] = LOC, or

[(labor $/hr + payroll burden) x (# of wasted hours)] – [your way] = LOC

  • Vendor management time that could have been avoided (same formula as above)
  • Product, supply, or equipment purchases that could have been avoided

[current purchases] – [your solution] = LOC

How are you presenting Lost Opportunity Costs?

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Chris Arlen
President, Revenue-IQ

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