Point Lookout: a free weekly publication of Chaco Canyon Consulting
Volume 21, Issue 4;   January 27, 2021:

Cost Concerns: Comparisons

by

When we assess the costs of different options for solving a problem, we must take care not to commit a variety of errors in approach. These errors can lead to flawed decisions. One activity at risk for error is comparing the costs of two options.
stacks of gold coins

Problem solving in organizations is usually a collaborative exercise. It begins with assembling a group of people representing what we believe will be the necessary fields of knowledge and areas of responsibility. That group then follows one of the many available problem-solving frameworks, possibly flipping between two or three of them. And they employ any of the various problem-solving tools that fit for them and that might apply to the problem at hand.

Cost is one attribute of any solution that problem-solving groups must consider. Although cost concerns are real, and although we must consider cost, my own experience observing groups solving problems suggests that cost concerns often arise too early. Indeed, cost concerns can arise so early that they stifle the problem-solving process. Premature concern with costs might even lead groups to abandon their problem solving effort prematurely.

But even when we can defer cost considerations until after we develop several potential problem solutions, our approach to cost comparison can lead to biased assessments of the relative desirability of our solution options.

In this post and the next, I examine a collection of ways our treatment of cost concerns can bias our search for solutions to problems. I begin with an examination of how using cost comparisons can introduce bias in our choice of solution options.

In pursuit of that objective, it's useful to begin by assuming that the problem solving team has successfully deferred cost considerations, and it has developed several possible solutions. As part of their deliberations, they now want to compare the costs of the various options. They believe, in my view correctly, that comparing the costs of the available options can provide information useful for selecting one of them, or for guiding further investigation.

Still, comparing the costs of different solutions can yield biased and misleading results. Here are four traps that await problem-solving teams as they compare costs of options for solving their problem.

Failing to assess the cost of the status quo
One source of bias is the failure to assess the true cost of the status quo. The status quo — that is, the current situation without a solution to the problem — is always an option. When we don't recognize the true costs of deferring solving the problem, the effect is similar to the effect of assuming that doing nothing is free. Because Zero is almost always lower than the cost of any of the actual problem solution options, the assumption that doing nothing is free causes the status quo to seem to be the lowest-cost option. In this way, failure to assess the true cost of the status quo is one means of excluding all potential problem solutions.
If your organization has a problem of long standing that the organization seems to lack the will to solve, it's possible that people are failing to recognize the true cost of doing nothing.
Emphasizing direct costs over indirect costs
A second source of bias in cost estimation is excessive emphasis on direct costs to the exclusion of indirect costs. For example, suppose we estimate the cost of deploying Solution A as including only its direct costs — the cost of creating Solution A. If we take this approach, we might be ignoring the costs of disruptions of operations that occur when we actually deploy Solution A. If those disruptions depress revenue, for example, the amount of that lost revenue must be included as a cost of Solution A. A second class of indirect costs, often overlooked, is the net value of the opportunities that we could have exploited if we had applied elsewhere the resources that we used to create and deploy Solution A. Fair comparisons of the various options must include both direct and indirect costs.
Insufficient Comparing the costs of the available options
can be useful for selecting one of them, or
for guiding further investigation. But
comparing costs can yield biased
and misleading results
attention to indirect costs can lead to a pattern of choosing what seem to be lower-cost solutions that ultimately lead to lost opportunities or messy situations. Poorly chosen solutions eventually consume significant portions of organizational resources. If this is a familiar pattern, investigate past proposals to determine how well they accounted for indirect costs.
Comparing total costs while ignoring recognition dates
A very common and perhaps the simplest way to compare the respective costs of available options is to compare total cost. But perhaps as important as total costs are recognition dates of various cost components. For example, an option whose total costs are higher, but whose costs are recognized in Tax Year A might have far less impact on the organization than an option that has lower total costs recognized in Tax Year B.
Other factors can be even more important. For example, the timing of the need for certain kinds of resources can make a more costly option more desirable, because of scheduling issues for necessary resources.
Basing decisions on comparisons of total costs can be very misleading. Comparisons that account for the timing of cost recognition and resource availability can become very complex and counter-intuitive. Specialized expertise is required.
Being misled by the hyperbolic discounting cognitive bias
As I've noted in a previous post, a cognitive bias called hyperbolic discounting causes us to undervalue future benefits relative to present costs [Laibson 1997]. It can also affect how we compare benefits of different solutions, when those benefits become available at different times. But the more insidious effect of this cognitive bias in this context is how it affects cost comparisons.
Assume for a moment that we actually succeed in avoiding the trap of comparing total costs while ignoring cost recognition dates. That is, we actually try to account for the recognition dates of the cost elements when comparing problem solutions. The hyperbolic discounting cognitive bias might then cause us to overvalue (that is, to perceive as more undesirable) cost components that are recognized closer to the present, as compared to cost components that are recognized at more distant points in the future. Said differently, we tend to be overly attracted to cost profiles in which the costs occur later. This preference is stronger than could be justified by rational discounting. The result is that because of hyperbolic discounting, outside our awareness, we push off into the distant future issues that would be less costly to address in the present or nearer future.
Another mechanism also contributes to this organizational bias in favor of cost deferment. Some decision makers are so ruthless that they're willing to make or support decisions that greatly expand the organization's technical debt, because they know that the harm caused will become evident only long after they've departed for their next position. I call this "surfing the debt tsunami." Sadly, the behavior isn't restricted to issues related to technical debt. Ruthless decision makers can employ this tactic in the context of any problem solution that produces long-term costs significantly greater than its near-term costs.

Cost comparison is one part of the problem-solving activity that is vulnerable to risk of error. Next time, I examine why problems that require large-scale solutions are especially vulnerable to the risk of premature concern with cost.  Next in this series Go to top Top  Next issue: Cost Concerns: Scale  Next Issue

52 Tips for Leaders of Project-Oriented OrganizationsAre your projects always (or almost always) late and over budget? Are your project teams plagued by turnover, burnout, and high defect rates? Turn your culture around. Read 52 Tips for Leaders of Project-Oriented Organizations, filled with tips and techniques for organizational leaders. Order Now!

Footnotes

[Laibson 1997]
David Laibson. "Golden eggs and hyperbolic discounting," Quarterly Journal of Economics 112:2 (1997), 443-477. Available: here; Retrieved: October 25, 2018. Back

Your comments are welcome

Would you like to see your comments posted here? rbrenXEiRBfuFHUtjHrqUner@ChacpYPvvSVhUNIOeXHKoCanyon.comSend me your comments by email, or by Web form.

About Point Lookout

Thank you for reading this article. I hope you enjoyed it and found it useful, and that you'll consider recommending it to a friend.

Point Lookout is a free weekly email newsletter. Browse the archive of past issues. Subscribe for free.

Support Point Lookout by joining the Friends of Point Lookout, as an individual or as an organization.

Do you face a complex interpersonal situation? Send it in, anonymously if you like, and I'll give you my two cents.

Related articles

More articles on Project Management:

Stuffed bearsStart a Project Nursery
In a Project Nursery, professionals from across the entire organization collaborate to conceive of new projects. When all organizational elements help decide which projects to investigate, the menu they develop best suits organizational needs and capabilities.
Chocolate chip cookiesNine Project Management Fallacies: III
Some of what we "know" about managing projects just isn't so. Identifying the fallacies of project management reduces risk and enhances your ability to complete projects successfully.
Boeing 747-409LCF Dreamlifter at Edinburgh AirportUnresponsive Suppliers: I
If we depend on suppliers for some tasks in a project, or for necessary materials, their performance can affect our ability to meet deadlines. What can we do when a supplier's performance is problematic, and the supplier doesn't respond to our increasingly urgent pleas for attention?
Assembling an IKEA chairSeven More Planning Pitfalls: III
Planning teams, like all teams, are vulnerable to several patterns of interaction that can lead to counter-productive results. Two of these relevant to planners are a cognitive bias called the IKEA Effect, and a systemic bias against realistic estimates of cost and schedule.
An empty officeAnticipating Absence: Why
Knowledge workers are scientists, engineers, physicians, attorneys, and any other professionals who "think for a living." When they suddenly become unavailable because of the Coronavirus Pandemic, substituting someone else to carry on for them can be problematic, because skills and experience are not enough.

See also Project Management and Problem Solving and Creativity for more related articles.

Forthcoming issues of Point Lookout

Adolf Hitler greets Neville Chamberlain at the beginning of the Bad Godesberg meeting on 24 September 1938Coming October 20: On Ineffectual Leaders
When the leader of an important business unit is ineffectual, we need to make a change to protect the organization. Because termination can seem daunting, people often turn to one or more of a variety of other options. Those options have risks. Available here and by RSS on October 20.
Browsing books in a library. So many books, we must make choicesAnd on October 27: Five Guidelines for Choices
Each day we make dozens or hundreds of choices — maybe more. We make many of those choices outside our awareness. But we can make better choices if we can recognize choice patterns that often lead to trouble. Here are five guidelines for making choices. Available here and by RSS on October 27.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrenXEiRBfuFHUtjHrqUner@ChacpYPvvSVhUNIOeXHKoCanyon.com or (650) 787-6475, or toll-free in the continental US at (866) 378-5470.

Get the ebook!

Past issues of Point Lookout are available in six ebooks:

Reprinting this article

Are you a writer, editor or publisher on deadline? Are you looking for an article that will get people talking and get compliments flying your way? You can have 500-1000 words in your inbox in one hour. License any article from this Web site. More info

Public seminars

The Power Affect: How We Express Our Personal Power

Many The Power Affect: How We Express Personal Powerpeople who possess real organizational power have a characteristic demeanor. It's the way they project their presence. I call this the power affect. Some people — call them power pretenders — adopt the power affect well before they attain significant organizational power. Unfortunately for their colleagues, and for their organizations, power pretenders can attain organizational power out of proportion to their merit or abilities. Understanding the power affect is therefore important for anyone who aims to attain power, or anyone who works with power pretenders. Read more about this program.

Bullet Points: Mastery or Madness?

DecisBullet Point Madnession makers in modern organizations commonly demand briefings in the form of bullet points or a series of series of bullet points. But this form of presentation has limited value for complex decisions. We need something more. We actually need to think. Briefers who combine the bullet-point format with a variety of persuasion techniques can mislead decision makers, guiding them into making poor decisions. Read more about this program.

Follow Rick

Send email or subscribe to one of my newsletters Follow me at LinkedIn Follow me at Twitter, or share a tweet Subscribe to RSS feeds Subscribe to RSS feeds
The message of Point Lookout is unique. Help get the message out. Please donate to help keep Point Lookout available for free to everyone.
Technical Debt for Policymakers BlogMy blog, Technical Debt for Policymakers, offers resources, insights, and conversations of interest to policymakers who are concerned with managing technical debt within their organizations. Get the millstone of technical debt off the neck of your organization!
Go For It: Sometimes It's Easier If You RunBad boss, long commute, troubling ethical questions, hateful colleague? Learn what we can do when we love the work but not the job.
303 Tips for Virtual and Global TeamsLearn how to make your virtual global team sing.
101 Tips for Managing ChangeAre you managing a change effort that faces rampant cynicism, passive non-cooperation, or maybe even outright revolt?
101 Tips for Effective MeetingsLearn how to make meetings more productive — and more rare.
Exchange your "personal trade secrets" — the tips, tricks and techniques that make you an ace — with other aces, anonymously. Visit the Library of Personal Trade Secrets.
If your teams don't yet consistently achieve state-of-the-art teamwork, check out this catalog. Help is just a few clicks/taps away!
Ebooks, booklets and tip books on project management, conflict, writing email, effective meetings and more.