MANAGEMENT SPEAK: We have to
leverage our resources
TRANSLATION: You're working weekends
My first involvement with financial modelling 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 say 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 more than 10 per cent to less than 0.5 per cent and also produced one of the best lines ever heard from a production manager. When asked to explain what caused the remaining half per cent variance (which was favourable), this gentleman quietly answered: "Good management." With this model, we demonstrated that hiring another 30 people would save the company nearly $US200,000 per year. I don't care what my PC cost the company - the return on investment was awesome.
The model was so successful that I ended up doing more financial modelling. One of the things I learned was when to include only marginal costs and when to use fully loaded costs.
It adds up
That points out one of the basic flaws with current Total Cost of Ownership (TCO) models.
It's time for a further tirade on the subject of how much it really costs to put a PC in front of an employee. Just about everyone I've talked to agrees that only an act of God or a US military procurement order could drive expenses anywhere near the $US10,000 to $US12,000 now reported as annual costs. 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. By contrast, when you fully load costs, you include everything, including costs you'd already experienced but that also apply to the new item you're analysing.
From what I can tell, TCO models use full-cost loading; they're including money spent before PCs came in the door. That's wrong: any money spent before the PC 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 1: The cost of futzing. Futzing allegedly extracts a high toll - hours are spent installing screen savers, changing Windows wallpaper, and so on. If it's an hour per week, that would be about 50 weeks multiplied by $US50 per hour, which equals $US2500 per year in costs.
I take the futz factor personally, because readers tell me they sometimes post my columns on their cubicle walls. Putting Dilbert, Cathy, pictures by your kids, and my column on the wall amounts to futzing, too.
So here's a magic question: does management in your com-pany worry about the time and resources spent in nontechnical 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, no matter how 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 also 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, forgetting everything they know about how real people behave in real offices. Including the futz factor in the TCO is an example.