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Understanding the True Cost of Opportunity Cost in IT Service Management

Understanding the True Cost of Opportunity Cost in IT Service Management

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Understanding the True Cost of Opportunity Cost in IT Service Management
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Understanding the True Cost of Opportunity Cost in IT Service Management

Introduction

The formal definition of opportunity cost is ‘the loss of other alternatives when one alternative is chosen’. When calculating ROI, opportunity cost is often discounted as being a ‘soft cost’ and not included in the ROI Valuations. However, as many companies are realising, opportunity cost is a very real and underestimated cost to the business and business progression. This article shall discuss where opportunity costs are hidden in IT Service Management and how to calculate their true impact.

For this exercise, we shall introduce six characters:

Saoirse: Senior Manager, costs €100 per hour
Finn: Senior Engineer, costs €85 per hour
Sophie: Junior Engineer, costs €50 per hour
Ronan: Junior Engineer, costs €50 per hour
Rian: Junior Engineer, costs €50 per hour
Joe: Average business user, costs €70 per hour

We shall use these six characters, over four examples to describe daily scenarios that are costing organisations a significant amount that they may not even realise.

Example 1: Utilising experienced engineers to perform repeat tasks

Every day Finn comes into the office, gets his cup of coffee and spends 30 minutes reviewing the event logs (Availability, Performance, Capacity). We assume that any availability issues will have been converted into incidents and are being addressed, so Finn is focusing on warnings relating to Capacity and Performance. Finn spots that a ‘disk space’ alert has been triggered on a server so he investigates and clears the logs. Sometimes this takes an hour, sometimes it takes more, but for the purposes of this example lets say an hour.

  • Daily cost: 1 hour * €85 = €85
  • Weekly cost: €425
  • Annuall cost: €22,100

However, the REAL cost to the business here is the opportunity cost. While Finn is focusing on BAU tasks (business as usual), he is not readily available to work on projects. Projects that require his technical and business knowledge to progress. So they are delayed.

Project A: Introducing a new system to reduce the sales processing time from 1.5 hours to 1 hour, impacting 500 Sales people.

  • Daily savings: 250 hours *€70 = €17,500
  • Weekly savings: €87,500
  • Annuall savings: €4,550,000

So a project that could potentially save the company €87,500 a week is delayed a week because Finn is not available to the project.

  • Weekly cost of fulfilling BAU task: €425
  • Alternative project benefits requiring resource: €87,500
  • Weekly opportunity cost to the organisation: €87,075

Example 2: On-boarding a new hire

Hiring individuals can be an expensive and time consuming process across any business department, but especially in IT. We have already identified the opportunity cost to the organisation when key resources are not allocated in an efficient manner and the potential impact to progressive projects. In this example we shall look at the costs of hiring and on-boarding individuals.

Lets say that Saoirse spends 10 hours interviewing candidates for a junior position.

  • Interview cost: €100*10 = €1,000
  • Saoirse’s opportunity cost (lost alternative): €100*10 = €1,000
  • Total hiring cost (ignoring recruiters cost etc): €2,000

Once we have decided to hire Sophie, Finn has to train her in. Let’s say in total Sophie needs 20 hours of training.

  • Training cost of new hire (Sophie): 20*€50 = €1,000
  • Training cost of new hire (Finn): 20*€85=€1,700
  • Opportunity cost (Finn): 20*€85=€1,700
  • Total training cost: €4,400
  • Total hiring cost: €6,400

The figure of €6,400 is actually pretty conservative as we have not included the cost of recruiters etc, and obviously the volume of times we will need to recruit is dependent on the size of the team.
In addition, the productivity of the existing resource who is training in the new hire is not factored into the equation either. This a hidden cost that appears obvious once pointed out but one that is frequently under estimated.

Example 3: Repeatedly fixing the same issue

Let’s say that on Monday, Sophie comes in and notices that the logs on server A are filling up and eating into the disk space, so she cleans them down, on Tuesday her colleague, Ronan notices the same thing and fixes it and on Wednesday, Rian notices this and fixes it etc ..

As different engineers are fixing the same issue on different days, it may take a while before a pattern is noticed. Let’s say that this continues for three weeks and takes an hour a day to fix.

  • Cost to resolve repeat incidents: 5*€50*3 = €750

Let’s say that this had been identified in week 1 via ticket analysis, a problem created and Finn assigned to resolve the problem and it took him two hours. 

  • Cost to resolve repeat incidents in week 1: 5*€50 = €250
  • Cost to resolve problem: 2*€85 = €170
  • Total costs to resolve issue in week 1: €420
  • Opportunity cost / savings: €330

€330 may not seem like a significant saving, however this is a 44% saving on ONE issue. Extrapolate this out over multiple issues and teams and the opportunity cost / savings are significant. This has not even taken into account any potential opportunity costs associated with having resources working on projects vs focusing on incident management or even factoring in the cost of down time to your business.

Example 4: End user downtime

No one can argue the fact that end user down time has a cost impact on the business, but even this real cost has hidden opportunity cost. Imagine that Joe our average business user has an issue with Office 365 and calls the service desk. Joe spends an hour working with the Level 1 on resolving the issue.

  • Cost of issue: one hour with junior engineer and one hour of Joes time: €70+€50 = €120

However, factor in the opportunity cost to the business - the hour that Joe has lost working on an ICT issue, instead of focusing on the role that he is supposed to be working on, and the costs go up.

  • The True cost to the business is €70+€70+€50 = €190

 This is just one example, expand this out to all users and all incidents and the cost of downtime to the business is realistically a lot higher than was initially thought. 

Summary

These illustrations are examples, but in IT service delivery they are common everyday occurrences. All organisations recognise the cost of these occurrences, but few organisations realise the additional real cost to their organisation by factoring in opportunity cost.

Outsourcing IT services is obviously one way of transferring these costs to a service provider. Otherwise, ensuring that you have service management processes focused on continuous improvement and identifying efficiencies, should help mitigate and reduce these costs. What is key is understanding the full cost, of all costs before you decide on how to address them.

Contact Ergo today to find out more about our Managed Service offerings.

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