Cost

Definitions

Cost savings
Reduction in costs or expenses.
Cost avoidance
Preventing/avoiding future costs/expenses that would have been incurred if no action was taken.
Technical Debt
Like financial debt, it’s the cost of choosing an easy solution now instead of a better approach that would take longer. If you don't pay off the 'interest' (refactoring), the debt compounds until you can no longer add new features.
Cost savings vs. Cost avoidance
Cost savings reduces current or existing costs, while cost avoidance prevents future costs from occurring in the first place.
Total addressable market (TAM)
Total revenue opportunity available to a product or service with 100% market share, i.e., max market demand and revenue potential.
Capital Expenditure (CAPEX)
Funds used by a company to acquire, upgrade, or maintain fixed assets such as buildings, equipment, machinery, or land. These are major investments that are capitalized on the balance sheet and depreciated over their useful life.
Operating Expenditure (OPEX)
Ongoing costs incurred by a company for its day-to-day operations and maintaining its existing facilities and equipment. These expenses are recorded on the income statement and are fully tax-deductible for the period in which they are incurred. Examples of OPEX include rent, utilities, salaries, and supplies.

Goals

Optimize spending for maximum value
Every dollar must deliver measurable ROI
Invest in solving real problems, not imagined ones

Questions to Ask

What is the TAM and is this a $40M or a $400k problem?

Understand the scale of the problem and ensure resource allocation matches the actual impact. Problem sizing dictates appropriate investment.

What are the trade-offs across cost, value, performance, security?

Optimum decision-making involves balancing these dimensions, which are often in conflict.

More costs to mitigate what additional risks?

Increased investment should always be tied to clear risk reduction or value creation. Every dollar spent must contribute meaningfully to risk management or business value.

Why would it take X man months?

Resource estimation needs rigorous justification, not gut feeling. Challenge timelines to prevent bloated estimates and cost overruns.

How much cost savings, cost avoidance, manpower savings, manpower productivity are we going to achieve? How will we measure it?

Quantifying and measuring benefits is essential to justify any product investment. Measurable benefits provide accountability and demonstrate real impact.

What are the CAPEX and OPEX for this?

CAPEX reflects upfront investment, OPEX reflects ongoing running costs. This distinction impacts budgeting, financial modeling, and pricing strategies.

How much of the cost is attributed to compliance, admin, overheads?

Cost transparency is vital. Understanding this breakdown reveals hidden costs and inefficiencies, allowing us to optimize spending.

Why are we satisfied with X times savings/productivity gains?

Benchmarking and continuous improvement are key. Simply achieving some savings isn't enough.

Why do we need a project management or admin wrapper fee that contributes nothing to the product?

Every cost component must be justified, especially non-value-add overheads.

Alarm Bells

<insert party> assesses this effort is reasonable, it'll take XX man days.

Vendors overestimate with buffers. No incentive to downsize even when effort is smaller.

We need X business analysts, project managers, senior developers, developers, designers, xxx, yyy, etc

We're bringing tons of people to the team, based on a vendor's hyper specialization and billable rates.

It's not even $100,000, why are we quibbling over a small sum?

Every unnecessary dollar is unacceptable. Calculate per unit/transaction costs to see excessive spending.

We've no choice because the team already decided X years ago to buy this

If something doesn't work or doesn't work well, then consider if stopping it gives you future savings + a chance at getting something that solves your problem, versus abortive costs and switching costs.

The previous system was approved at $900K. With inflation, we assess it's reasonable to pitch the new one at $1.5M.

This is 'Anchoring Bias'. Costs should be justified by the current value and market rates of the solution, not by simply adding a markup to historical bad spending. You might be able to solve it today for $50k.

Sounds about right for the cost and full-time engineers needed.

Budgeting should be data-driven and rigorously justified, not based on gut feelings.

$100M is ok because the previous project was $90M and after factoring in inflation it sounds about right.

Justification should be based on the problem and value delivered, not historical spend.

This project has funding, so let's add our requirements to it too.

Scope creep driven by funding opportunism leads to unfocused and bloated projects.

We need to build it ourselves because we have unique requirements

'Unique requirements' is a common but often incorrect diagnosis of your needs.

We must develop our own product because we need to continue to serve past requirements.

Focus on solving the actual problem now, not continuing what you have been doing.

We get the ultimate versions of licenses because we might need it in future.

Wasteful. Scale up only when there is actual demand.

A lot of cost is needed to almost completely mitigate X cyber security risk, but nevermind it was a theoretical risk in the first place.

Resource allocation should be risk-based and proportional.

We need to find a new justification to get funding for our tech refresh.

This suggests a lack of initial clear objectives or achieved outcomes. Projects should be driven by clear value propositions, not by constantly inventing justifications.

Business owners of systems are asked to give waivers for things they don't understand, but are told the waivers must be given (fait accompli).

Forcing approvals on complex issues that stakeholders don't understand undermines accountability and sound decision-making.

Dealbreakers

Red Flag
The TAM is negligible and users are sticking around because of compliance reasons.
Why

Tiny market + forced adoption = unsustainable.

Red Flag
We spend $10M over several years to reduce 1 headcount (might as well spend $150K on that headcount and save $9.5M).
Why

Digitalization and tech are the means to an end, not the end in itself.

Red Flag
Might as well spend it since the FY is closing.
Why

Fiscally irresponsible and prioritizes spending over value creation.

Apptitude / Curated by Zixian Chen

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