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Alternative Selection Best Practice 3 – Reality Check
Just because the numbers look good doesn’t mean you should move forward with the initiative.
Leaders often face the dilemma of having numerous attractive initiative options to pursue when developing their strategic plans. Many of these options are provided by an eager and engaged workforce; individuals who diligently examine the proposed opportunity, associated costs, and make the strong case for pursuing these cost saving and/or profitable efforts. However, it is the responsibility of the leadership team to perform a reality check on these proposals in two ways. First, is a critical questioning of the numbers to ensure the real-world appropriateness of the assumptions used and the numbers presented. Second, is the assessment of whether the proposal can be executed considering the organization’s resources and capabilities.
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All business operations consume a portion of the organization’s limited resources and each presents its own value proposition. However, the strategic planning process often only considers newly presented initiatives and available resources in excess of those consumed by core business processes and previously approved ongoing initiatives. Such practices prevent organization leaders from considering the return on investment of emerging opportunities relative to those established functions; returns on investment that could be far more significant at equal or lesser risk. In order to recognize and be positioned to act on these truly game changing opportunities an organization’s leaders must evaluate all business operations and initiatives during its alternative selection process.
Alternative selection requires choices to be made between competing initiatives. Such choices necessitate a common comparative basis on which the value of each initiative is judged. Key to achieving this state is the application of common market and organizational assumptions and variables from which each initiative’s value is calculated. Without this commonality, initiative owners would likely apply assumptions favoring their initiative’s value calculation and thus diminish the leadership team’s ability to compare individual initiative values.
All too often, executives and planners focus on the cost of implementing a project and omit recognition of the other associated costs accompanying the resulting outputs once the project is completed. Even if those costs are accounted for, other hidden costs, such as the reduction of future operational flexibility and options, can be overlooked. Overlooking these costs can significantly impact an initiative’s return on investment; inappropriately inflating the investment’s value to a point where an otherwise unacceptable pursuit appears to be worthwhile. Therefore, when selecting from among the myriad of business operations and initiative opportunities it is important to fully examine the total cost of ownership.
Estimating any initiative’s return on investment is extremely challenging and often suspect. This article addresses the frequently forgotten and unanticipated factors diminishing the return on process reengineering projects.
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