Monday, February 8, 2010

Cutting Costs and Creating Benefits

The value equation is simple: Benefits - Costs = Value.

Great business people deal with both sides of the equation, and MBA programs do their best to develop skills to manage with both costs and benefits. However, people generally have a bias. They're either cost controllers or benefit creators.

Costs are relatively easy to measure. We can count them: how many hours did that task require? How much did the company spend on that tool? After everything is counted, we can analyze the costs and find definite ways to become more profitable. The process is rigorous and empirical.

Benefits are more amorphous. I might be willing to pay more for a computer than my friend would because I value it more. On the other hand, my friend might be willing to pay more for cable TV than I would. Quantifying benefits is difficult, and when the numbers are lacking, benefits are tough to analyze.

The problem is that most highly analytical people (think professors) are biased toward dealing with costs, exactly because they can be rigorously analyzed. As a result, the MBA education is biased towards cost-based thinking.

That's an unfortunate situation, because cost savings have a lower limit (you can't produce anything for less than $0). On the contrary, benefits are essentially limitless.