Why You Should Reframe Cost in Tangible Terms

Transformation initiatives and technology platform licensing often carry large explicit costs that seem expensive without proper context. Adjusting these into tangible terms breaks down hesitation and objections to the nominal cost.

As humans, our brains are great at flagging exceptions like large expense lines, although this can be detrimental if we're not seeing the "bigger picture". Contextualizing these exceptional figures is an appropriate step to mitigate initial reactions and validate our own assumptions.

Here are three powerful ways to contextualize costs:

• Align to objectives

• Break down into ratios

• Compare to alternatives

Let's see this in practice with a 60-person firm that is embarking on an 18 month digital transformation initiative to modernize their business processes and technology, which positions them to achieve 15% per growth per year for the next 5 years with their current staff.

The firm currently makes $10,000,000 in revenue per year with 30% net margins, an average order value of $25,000, and they anticipate net new ongoing costs to be $600,000 per year.

Aligning to objectives, they would need to grow revenue by $2,000,000 to achieve the same bottom line free cash flow ($600,000 ÷ 30%). This is nearly what the the firm expects to achieve in revenue growth after 1 year (15% growth × $10,000,000).

Breaking down into ratios, here are a few different ways to consider the cost:

• Per transaction: initially, this is $1,500 based on current state order volumes ($600,000 ÷ 400) and is cut in half based on their growth plan if order volumes double and average order value remains the same

• Per dollar of growth: they will spend $0.40 for each dollar of growth in the first year ($600,000 ÷ $1,500,000), which also drops over time as the expense remains flat and revenue growth nominally grows

• Per employee hour: this is essentially a small latte from Starbucks ($600,000 ÷ the amount of hours worked per year, which is 60 people × 40 hours × 48 working weeks)

Comparing to alternatives, to achieve the same 15% annual growth target with the current state processes and technology, they would need to grow their staff by 10-15% per year, which is significantly more expensive.

TLDR: Contextualize costs by aligning to objectives, breaking down into ratios, and comparing to alternatives.