MOST of us are familiar with the term “return on investment,” or ROI, a metric that helps us understand the profitability of an investment. ROI is the ratio of net income (over a period) to investment (costs of investing a resource at a certain point in time). A high ROI means the investment has made significant gains compared to its cost.
In a recent vlog, Australian-based Futurist Gihan Perera introduced the concept of “cost of inaction,” or COI. “When creating a plan, you calculate the ROI for taking action but, unless you also calculate the COI, your plan lacks context,” Gihan says. “ROI answers the question, ‘What are the benefits of this change?’ while COI answers the question, ‘What is the cost of not changing?’ Unless you ask both questions, you are making the decision with only half the information.”
In general, COI not only relates to financial or economic matters, but also includes impacts on health, education, social and other factors needed to make a good decision. Gihan makes this point: “If you’re driving on a highway and meet heavy traffic, you can calculate the ROI of taking a slower but less congested side road. But if the highway is taking you directly into the path of a bushfire, the COI is so high that the ROI becomes irrelevant.”
It is important to note that COI is often higher than you think and can hurt your and your organization’s performance in different ways. Consider these questions:
1. Friction and Leakage. What inefficiencies are you tolerating and how much do these inefficiencies end up costing you in the short, medium and long term?
2. Quality Overheads. What preventable errors and mistakes are you making and how much does it cost to inspect, detect, review and rework because of these errors?
3. Opportunity Lost. What opportunities are you missing because you spend too much time, money and other resources battling your current systems?
4. Sunk Costs. What are you doing poorly because you have invested so much in your existing systems which might no longer be the best options for the future?
5. Emotional Toll. What is the emotional cost to people who have to work with slow, cumbersome, complex and flaky systems, especially when they know that better solutions exist?
6. Competitive Weakness. Where are you losing ground with branding, positioning, market share and growth because your competitors are investing in better systems?
ROI is a valuable indicator but don’t stop here. Always ask questions about your COI so you can fairly assess the decision although this is not easy to do. Most of us have never been taught to count the cost of doing nothing, so it doesn’t come naturally. At first, you will have to consciously force yourself to calculate COI for every important decision. To help assess your COI, ask yourself and your team: (a) What is the cost of not changing?; (b) What is the cost of not doing anything?; and, (c) What is the cost of keeping things the same?
Octavio Peralta is currently the executive director of the Global Compact Network Philippines and founder and volunteer CEO of the Philippine Council of Associations and Association Executives, the “association of associations.” E-mail: bobby@pcaae.org.