My first involvement with financial modeling was the result of procrastination.
The guy on the other end of the phone was the budget manager, asking me why I hadn’t filed the production budgets. Not wanting to tell him I’d forgotten all about it, I thought fast and responded, “How can I give you the production budgets when we don’t have any volume projections from Sales?”
This generated a good-news/bad-news situation: I bought myself a week, but I had to build a really nasty financial model of production. It reduced our unaccounted budget variance from over 10% to under .5%, and also produced one of the best lines ever heard from a production manager. When asked to explain what caused the remaining half-percent variance (which was favorable) this gentleman quietly answered, “Good management.”
With this model, we demonstrated that hiring another thirty union workers would save the company nearly $200,000 per year. I don’t care what that PC cost the company – the ROI was awesome.
The model was so successful that I ended up doing a bunch more financial modeling. One of the things I learned: When to include only marginal costs, and when to use fully loaded costs.
Which points out one of the basic flaws with current Total Cost of Ownership (TCO) models.
Yes, it’s time for more of my continuing tirade on the subject of how much it really costs to put a personal computer in front of an employee. My last column generated quite a bit of correspondence. With one exception, the letters I received unanimously agreed that it would take an act of Congress or military procurement to drive expenses anywhere near the $10,000 to $12,000 now reported as annual costs. The exception found himself rebooting several times a day, and clearly anyone who drives a lemon experiences a high cost of ownership.
What does the difference between marginal costing and full cost loading have to do with the cost of a PC? If you’re unacquainted with the jargon, “marginal” in this context means “incremental”. Marginal cost accounting only takes new costs into account. When you fully load costs, you include everything, including costs you’d already experienced but which also apply to the new item you’re analyzing.
From what I can tell, TCO models use full cost loading. They ought to use marginal costing, because otherwise they’re including money spent before PCs came in the door. That’s wrong: any money spent before PCs showed up isn’t a cost of the PC at all. Seems obvious, doesn’t it?
So let’s start listing what we should leave out of our cost model. Item one: the cost of futzing.
Futzing allegedly extracts a high toll – potentially hours per week goofing around installing screen savers, changing Windows wallpaper and so on. If it’s an hour per week, that would be about 50 weeks X $50/hour = $2,500 per year in costs.
As it happens, I take the futz factor personally, because readers tell me they sometimes post copies of my columns on their cubicle walls. What’s the connection? Putting Dilbert, Cathy, pictures drawn by your kids, and my column on the wall amounts to futzing, too. So here’s a magic question: Does management in your company worry about the time and resources spent in non-technical futzing?
There are only two answers: yes and no. If the answer is yes, then the futz factor shouldn’t be included in the cost of the PC – it’s the cost of futzing, however it’s expressed, and it isn’t different just because it’s on the PC.
If, in contrast, the answer is no, then the futz factor shouldn’t be included in the cost of the PC. Management doesn’t worry about time spent futzing anywhere else, so why should it suddenly matter when it’s on the PC. Going back to our cost accounting jargon, futzing isn’t a marginal cost, so it shouldn’t be included.
There’s a bizarre mentality that comes into play when people put financial models together. They acquire selective amnesia, suddenly forgetting everything they know about how real people behave in real offices. Including the futz factor in the True Cost of Ownership is an example.