The Cost of Not Acting
In 2005, the partner leading the sale of a project invited me to my first proper grown-ups meeting. Our client was an industrial manufacturing company that wished to enter a new, rapidly growing market. And although the opportunity looked very attractive on paper, it was strongly opposed by two of the company’s most senior and respected unit heads.
So, on a rainy October day, I wore my best suit, ironed my shirt twice and extra-polished my shoes. When I arrived, the partner said ‘listen, keep quiet and take notes’. As we sat around the table, making small talk, I noticed a guy on our side of the table I did not recognise.
I asked the partner, ‘Is he on our team?’.
He said ‘yes, that’s Marcus and he is a senior manager’.
‘A senior manager? But he looks 15!’ I responded. ‘
The partner had previously told me that the majority of the company’s unit heads wanted to pursue this opportunity; however, that Robert, the most influential of them all, had yet to express his opinion.
The presentation and discussion went smoothly but it was clear that most of the unit heads were reserved, glancing sideways, watching for Robert’s reaction.
Finally, Robert said: ‘Thank you. The case to invest is compelling and in other circumstances, I would support it. However, our core business is under a lot of pressure and entering a new market would divert vital resources from sales, immediately impacting revenue. I’d love to simultaneously protect the core and enter a new market, but protecting revenue is my top priority’.
The silence that ensued was a signal that the meeting had ended. And as I was about to close my notebook, Marcus said: ‘And what would be the revenue cost of not entering this market?’ Robert nodded for Marcus to continue. ‘Every decision has a cost. By choosing to play only defence - as you have done for the past three years - you are likely to lose 3-4% of your revenue next year, and 4-5% the following year. Is this incorrect?’
‘No. That is a reasonable scenario’ - responded Robert.
Marcus went on - ‘And by not entering the market now, you are giving up on an option to catch a wave of growth that is currently growing at 20% per year and will likely do so for the next five to seven years. In essence:
The cost of doing the project is equal to the investment plus an additional drop in sales of 1-2%
While the cost of not doing the project is foregoing the opportunity to create a growth engine and a 3-4% revenue per year’.
And while Robert did not agree with some Marcus’s assumptions, he did agree that the cost of opportunity should be quantified. The meeting finished with the client thanking Marcus for his question and a promise to study his proposal. Hearing this, I thought to myself: ‘I want to be this guy’.
Five weeks later, the project began.
