When making business investment decisions, there are usually soft costs involved, right? Costs that may increase or decrease, but will not appear on the income statement (at least, not directly). These could include the cost of taking an employee away from regular duties for new responsibilities, or passing up an opportunity because of a lack of resources. How should these costs be considered? Do they ever really show up on the income statement? IT investments are a great example of where soft costs come into play, and this is what we frequently discuss with business owners.
An IT investment is definitely an up-front cost that will lead to payoffs in the future. But many business owners and decision-makers think too short-term. Why spend additional dollars on IT when you have the employee capacity to take on the extra manual work? Why should they add real costs today for intangible benefits the business may never see?
What Are the Intangible Costs of Avoiding IT?
When a business grows and expands, it may decide to handle the additional workload by hiring more staff. However, they could also choose to use new technology to automate business processes, which can make the existing staff more productive and allow them to handle the new work. Some business owners might look at this choice and conclude that they already have team members who can take on extra work, viewing them as “free labor” because they’re already paying this team’s salary. This short-term point of view sees new technology as costing more than “free” and, therefore, not worth it.
However, if six months later the business has to hire someone else to handle the extra work because the existing staff becomes overwhelmed, the business is taking on extra costs because it decided not to automate. From a business perspective, it’s critical to approach this kind of decision with the long-term view in mind. You may need to invest in technology today so that in the coming months or years, the business can scale without having to add staff at the same rate.
How the Intangible Becomes Tangible
As we’ve emphasized before, IT is a long-term strategic necessity, and it should be thought of as an investment in the business, not a cost to be minimized. Investment in IT today will resonate on the income statement for many periods in the future as your investments reduce expenditures in other areas or help you avoid other costlier investments altogether.
Take automation, for example. Automating manual tasks will impact your business by lowering expenses, reducing errors, and eliminating rework. Automation may even be effective enough to offset a full-time employee, allowing that person to be allocated to other responsibilities that generate more revenue. Or, you may find an automation measure that saves just 30 minutes a day for a team of five people. That still equates to 2.5 hours a day, or 12.5 hours per week. This could mean that the team’s workload is reduced by that amount of time and hourly payroll costs go down, but it’s more likely that these resources will be free to take on other projects and have the capacity for more responsibilities. This is an intangible benefit financially because you are getting more productivity from your team without needing to spend more on payroll. The cost savings here become especially real when you take on a new client and do not have to add staff because of the time saved by automation!
Let’s look at another example involving reducing IT support calls. We’ll say that in one month, your help desk receives an average of two calls per person. That adds up to an average of probably two hours per month spent on unproductive IT support for every person in your organization, and it means your help desk is staffed to take on this level of work. But what if you were able to implement a new solution that reduced the average to .75 calls per month per person? Now the time spent on unproductive IT support calls is 45 minutes per person per month. The same math can be applied for system downtime when you consider adding a redundant Internet connection, for example. If all 50 people in your organization experience on average four hours of downtime in a year, isn’t it worth it to invest in better technology and not lose that productivity?
The Return on Your IT Investment
Just like with automation, the intangible benefits of IT become real when your capabilities allow you to scale without adding staff. They become real when you add a new client after they hear about the reliable and high quality work coming from your company. These benefits build on one another as well. More efficiency and productivity lead to improved workplace culture, higher morale, and less employee turnover, which results in even higher productivity! This is what the ROI of IT investment looks like.
So, when looking at IT costs, always consider the intangible benefits. Always consider the long-term. They may not hit your income statement today, but they will show up one way or another, and they might as well be in the net profit row at the bottom.