Everyone knows there are soft costs associated with running a business. However, many people overlook the fact that soft costs can have just as big an impact on the bottom line of a business as the hard costs—sometimes even more.
Many companies find themselves running their business on items associated with hard dollar costs. They understand raw materials cost as so much per unit and labor costs as so much per hour. They manage budgets that are tied to these hard dollar costs and judge their progress to profitability based solely on these items.
However, hard costs cannot take into account costs associated with turnover, lost productivity, low morale, lost sales or any combination of these items. It is these soft costs that can have a big impact on the bottom line, driving up costs and reducing profits. Until a company accepts this fact and takes the time to quantify the soft costs they will never understand the true potential of their business.
The problem with soft cost quantification lies in the fact that most are subjective in nature. You know an issue is leading to a loss in productivity and you know this is affecting your business in a negative way. But without quantifying it, you don’t know the amount of resources that should be allocated to correcting the issue. Many times, you find yourself trying to justify a project to the Finance Department and they point to a lack “hard dollars” saved based on their ROI calculations.
You must have a way of quantifying these soft costs that makes sense, is fluid in nature, and based on pre-established parameters that can be updated given the situation that is presented. Without this supporting means of quantification, you most likely will not get the support you need and the underlying issues will continue to eat away at your company’s bottom line.
Most people put into this position of getting support to address a soft cost-related issue are left with no option but to submit a soft cost static report-out that outlines the issue as accurately as possible with a summary of costs associated. However, without proper quantification, this is nothing more than a rough guess. Then they squirm as their estimates are accosted and scrutinized. If the independent metrics that make up the estimates are unclear or missing, the overall estimate gets thrown out and the request for resources denied.
There is a desperate need for dynamic soft cost quantification methods with independent metric justification. One method is a series of soft cost calculators, which provide a sound way to help understand and quantify soft costs. These calculators are Excel-based and driven by unique, quantifiable metrics that are supported (and validated) by a series of sub-metrics. These calculators also include written logic to support the sub-metric approach. Soft costs that can be quantified by these calculators include the cost of turnover, lost productivity, low morale, lost sales, and missed opportunities.
The true power of these soft cost calculators lies not only in their ability to quantify soft costs, but to do so dynamically. This means that with the input of a few variables, you can see the immediate impact to the bottom line. If, for example, your estimated labor hours associated for the month are half of the original estimate, just change one variable (in this case, labor hours) and immediately see the impact to the bottom line. There are also opportunities for side-by-side analysis of variables. This allows you to see the immediate impact of, let’s say, a 50 percent reduction in a particular variable.
Soft cost calculators have been used over and over in many different situations and settings. Direct net savings to the bottom line have been recognized in direct proportion to the calculated values. Once again, keep in mind the avoidance of lost soft dollars has the same net affect as the addition of hard dollars. There is no business situation that is not directly affected by the soft costs of doing business and these tools can be applied to many of them.
In summary, we all have struggled with the means for quantifying soft costs. Knowing they are impacting the bottom line of our company and not being able to quantify them can be extremely frustrating. Oftentimes, these costs are completely overlooked, ignored or not addressed as they should be. Projects will be incorrectly assigned priority based on their proposed impact to the bottom line. If the soft costs associated with an opportunity are not taken into consideration, a company’s valuable resources will be wasted. By analyzing your soft costs in conjunction with hard costs, you will see the most accurate picture of what is happening to the bottom line.
Content contributed by NouvEON, a management consulting firm. For more information, contact NouvEON Process Excellence Knowledge Domain Leader Patrick Sullivan at firstname.lastname@example.org or 704-944-3155, or download a complimentary copy of this white paper at www.nouveon.com/insights.