Opportunity cost

One of the objections to investing professionals’ time in KM activities is this idea of “opportunity cost”. Well, I heard this verbatim to my face two times ~20 years apart, but it’s clear the same thinking is far more commonly pervasive than that.

Now, I don’t mean to denigrate this idea because it’s worth considering. It is also a conflict between an ingrained, linear thought pattern and the new way of looking at things which is more about circular economy, renewal, regeneration and sustainability. It’s a case in point of that big gamble that humanity persists in playing with the survival of life on Earth – we just keep on squeezing a bit more out without putting back or protecting.

The idea behind the ‘opportunity cost’ objection is this: It says “I’d rather squeeze a bit more short-term benefit out than think about the long-term”. It’s the belief that you shouldn’t turn down a dollar you can earn today, even if investing that dollar today instead (which puts you $2 down, of course) has a bigger longer-term return.

Of course, this could well be correct. I myself argued against an IT system investment which, by my calculations, would take longer and cost more to deliver than it would ever return. Sure, it would save some people some time – but a lot more of what they were earning would be spent in making that saving than it was costing in terms of their time at the present.

So the problem isn’t that it’s not a good call to look at the full picture of costs and benefits. The problem is that it’s pretty hard to do the mental math and, most times I think, it’s more likely a case of the fast brain answering the wrong question (“Would you like to have $1 or spend $2?”) instead of the slow brain really thinking about it. The slow brain would have to think about issues such as the displacement of work, costs and benefits as in my IT example – and that’s way more subtle.

There’s another problem here which is a bit to do with the explore/exploit dilemma (to what extent should you invest in looking for new sources of income/value vs sweating the assets a bit more to do what you’re already doing) and a bit to do with the orthodoxy of linearity.

Well, where should the balance lie between cutting more cookies just like you do now and making a better cookie-cutting process? Of course you have to cut today at a rate that meets today’s business plan for cookies. But if that rate is causing the cutters’ arms to ache, or threatens to break the cutting tools, or if it seems there might be a better way to do this that you could soon develop, then maybe you need to put at least some effort into that? But that’s just one element of the problem. The other element is more about mindset.

If you’re locked in the orthodoxy of linear thinking then everything is a plane ticket: You can sell it any time (and at all sorts of rates at different stages) up to when the plane takes off – at which time it’s worthless if you didn’t sell it. Lots of things seem like this. Hotel rooms, food that’s going out of date. And, for some, the working day. Yes, it seems linear too. Once that day is gone, then if you didn’t exploit it for revenue-earning activity that same day you can’t use it tomorrow. It’s just like an empty seat on a plane, an empty bed in a hotel, food you didn’t sell before you had to throw it out. You missed your opportunity – and there’s a clear cost to that. But is it really so?

If you see it that way, yes it is. But, unlike an unsold plane seat or hotel bed, a day you didn’t bill for at the time should still make a return many times its value in the longer term. Because it can be spent on capability enhancement which adds productivity for everyone and creates tangible knowledge capital for the firm.

You might really be able to capitalise all of that time investment. And that time investment could make possible efficiencies and new business opportunities.

The truth is that we in KM should join with the sustainability movement. In a profound sense I feel we’re about renewing and reuse in a regenerative, sustainable and circular economy. We’re shaped to fit this new world view. We know that knowledge grows through practice and use, nor merely by study. We know that if we just proceed in an exploitative direction the result is more and more duplication of effort, over-production of knowledge assets (cf the rapid growth of documents and data), delays, frustration and waste.

The KM situation is exactly this. Without co-ordination, with all effort focused on executing the way we always have done, the each iteration of a task, each project, proceeds under its own steam. It only addresses its own problems, with no learning, feedback or improvement. If a hundred workers or a hundred projects all have the same problems, they each have to devise a solution. So the problem is solved a hundred times but actually it’s never solved. Conversely, with a KM learning from experience approach far more in value terms (not all) of the duplicated effort can be saved than that saving costs to make – but the people doing the central co-ordination have to come out of that pool of a hundred workers and that’s your opportunity cost.

And we know now for sure some of the routinely-occurring knowledge-related wastes that organisations are footing the bill for: wasted time and effort searching for and ultimately re-doing work, or seeking expert input; not having the right people involved because the value they could add wasn’t identified; not using the best approaches and methods to the best effect because their existence is invisible, and so on.

So it’s a question of which you prefer – paying for the solution a hundred times, or paying maybe half that cost by devoting a small amount of effort to solving it once for a good number of the cases?

Sure, there’s an opportunity cost – but perhaps the opportunity you’re missing isn’t where you might have thought it was. The bigger opportunity might be to go circular, regenerative, renewable and sustainable – unlock the long-term, infinite value-creating capability of knowledge in a balanced way alongside the linear iteration of ‘today’s business today’.