Rule #3 Weigh the Opportunity Cost

Joseph Schumpeter

Joseph Schumpeter, economist and Master of opportunity cost

During my freshman year’s eight o’clock microeconomics class one of the few things that made absolute sense to me was the concept of Opportunity Cost, a theory by Friedrich Von Weiser.  It was an “aha” moment of epic proportions where I could finally explain the best way to determine the true cost of making one choice over another.

Simply put, if you have finite resources, when you choose one path of action, you will be using some of those resources up, and they will no longer be available for other activities. If you plan a course of change that will require 400 hours of IT time, without additional overtime or staffing, you would be making those resources unavailable to other departments or projects.

Opportunity Cost forces you to run the overall value of any planned activity or change against the resources it will use up. Is it worth 400 hours of IT time to update a website?  Maybe.  Is it worth 400 hours of IT time to update the website if it will slow customer service response time for your internet customers? What other projects will need to be put on the backburner in order to pull the IT team for 400 hours?

This is why you will need to be able to absolutely quantify the net savings or revenue that will result from your plan of action. You must show that the resources you require are the highest and best use of those finite resources.

P.S. Unfortunately about the only other thing I recall from my very early class was of Von Weiser’s fellow Austrian, Joseph Schumpeter, not his economic theories, but his desire to be known for three things; “To be the world’s greatest economist, the finest horseman in all of Austria, and the greatest lover in Vienna.”  He claimed to have achieved two of the three. Clearly he weighed his opportunity costs.

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