woodwing

Recent events have convinced me that:

a) opportunity cost is the largest component of Total Cost of Ownership
b) "vaporware" (= delay in delivery of claimed functionality) is the biggest source of of opportunity cost
c) the opportunity cost can swamp other cost components

The formal definition of opportunity cost  is more than a little opaque, so let's be specfic: In content publshing, the opportunity cost of selecting one vendor is the difference in your economics between what you experience with one vendor and what would have happend with the vendor you didn't select.

Case study:  the effect of delay in delivery

A textbook publisher chooses between an established Solution A and a forthcoming Solution B. After a corporate review, B is selected on the basis of prototypes of forthcoming technology that show special functionality. These prototypes mask the true state of readiness.  Delays follow, and the Solution B rollout comes much later than planned.

Now, our experience with textbook companies is that going from traditional editorial workflow to a fully digital workflow means savings of 15% in editorial costs the first year,  25% the second year and at least 30% per year from then on.

Let's do the numbers for a big textbook company, one with, say, an editorial staff of 200 people and total editorial payroll of about $10 million per year. Let's suppose System B is only one year late.

Each year the opportunity cost is the savings that you didn't get from from System A less the savings you did get from System B, and the calcualtion goes like this

• Year 1  This is the year of delay, System A delivers 15% savings, System B delivers 0%. The opportunity cost is $10,000,000 x (15% - 0%) = $1,500,000
• Year 2  System A is in second year and System B is in the first year, and the opportunity cost is  $10,000,000 x (25% - 15%) = $1,000,000  
• Year 3   System A  is in third year, System B in second, opportunity cost is  $ 10,000,000 x (30% - 25%) = $500,000

From Year 4 on, the two are the same.
Total opportunity cost of delay:  1.5m + 1m + 0.5m = $2,000,000  
$2,000,000 is several times the acquisition cost of the editorial solution.

See what I mean?