Helping Clients Understand Opportunity Costs and "Opportunity Value"

As professional service providers, we often guide clients through complex decisions. Whether you're an attorney, consultant, accountant, or business coach, one of the most valuable skills we can develop is the ability to help our clients see what’s "around the corner"—to identify the alternatives and opportunities they might be missing or foregoing based on their current decisions or those they've postponed.

Understanding Opportunity Cost

Opportunity cost is a fundamental concept in economics that refers to the value of the next best alternative that must be forgone as a result of making a decision. In simpler terms, it's the cost of what you give up when you choose one option over another. For our clients, understanding these costs is crucial because it helps them make more informed choices and avoid potential pitfalls.

Bad decisions on opportunity costs can not only prove to be costly but can also put a company out of business.

In the 1970s, Kodak invented the first digital camera, yet it chose to focus on its profitable film business rather than harvesting digital technology.

One of the unfortunate ironies of that decision is that the patented technology Kodak engineered was the source of billions in revenue, as the company licensed the technology to others. The patent on the original digital camera expired in 2007. Eastman Kodak declared bankruptcy in 2012.

Their seemingly impregnable position in the 1970s blinded Kodak to exploring fully the many questions that should come from any strategic evaluation of opportunity cost. At that time, they dominated the photography business and made money from every step of the process, from the cameras, film, and flashes used to the film processing, the chemicals used in that processing, and the prints themselves, which came on Kodak paper.

"Opportunity Value"

The use of the term "opportunity cost" often, in the minds of our clients, narrows their consideration to a negative, as a cost implies a sacrifice. The value that comes from what gets sacrificed, however, would, from an economist's point of view, be considered in any evaluation of opportunity cost. The problem comes not only with misunderstood terminology, but also with the mismatch of timing: the short-run costs of the sacrifice appear so much larger than the long-term value of what's gained.

While grammatically dubious, the term "opportunity value" is one we as advisors probably ought to start employing occasionally, simply to shake up our clients' thinking. If we've been working with a client for an extended time, our own thinking might need a jolt, too.

It's impossible to know, of course, what might have happened with Kodak if their considerations of digital technology were focused with clear-eyed honesty around opportunity value instead of disruption to the sacred cow, the film business, that they worshipped at the time.

Identifying Sacred Cows to Get to Opportunity Value

Sacred cows—those entrenched beliefs, practices, or assumptions that are rarely questioned—can significantly hinder clear evaluation of opportunity costs. These sacred cows often remain unchallenged because they have been part of the company's culture or strategy for so long that their value is no longer scrutinized. As advisors, it is our responsibility to help clients identify and reassess these sacred cows and determine which of them might be roadblocks to significant long-term value creation.

Here are some key questions that can help uncover and identify the sacred cows that hold our clients back.

What's "Untouchable"?

--What are the practices or processes that are rarely, if ever, questioned?

--What are the lines of business and key client relationships that are taken for granted?

--What in the business, when it gets questioned, provokes "we've always done it this way" in the response?

--[Especially in family businesses] What are we still doing simply because [fill in the blank: Granddad, Dad, the founder, etc.] insisted it was core to the business?

--What of our "core values" that served us well in the past need to be re-evaluated and possibly modified or even discarded?

Assumptions

--What assumptions are we making that are becoming increasingly invalid?

--Where are we stretching the assumptions?

--Are our assumptions based on current reality or rooted in our past experiences?

--How are we rewarding employees for challenging assumptions?

Change Resistance

--What areas of the company are most resistant to change, and why?

--As the leader/owner of the company, what personal management attributes do you have that create change resistance?

--What are the missed opportunities we can identify caused by change resistance? What "oppotunity value" was lost in those forgone opportunities?

--What opportunities have we dismissed outright with no further discussion?

--When we're honest with ourselves, what's our risk tolerance?

--Do we have enough different points of view, perspectives, and differing experiences around the table when we evaluate opportunities?

Opportunity Costs of Feeding the Sacred Cows

--Where decisions are we postponing and what are the costs of inaction, particularly in foregone opportunities?

--How is what we have with the business in front of us today obscuring our vision of where the business is headed?

--Are we minimizing or explaining away the costs of feeding our sacred cows?

--What would happen if the beliefs and practices we hold most dear disappeared tomorrow?

--Are we overestimating the risk of pursuing new opportunities?

--Is our evaluation of new opportunities consistently too conservative?

--Do we have the right people around the table to answer these questions honestly?

--Do we have the right people to pursue, with vigor, new directions?

--Are we too focused on short-term results vs. long-term sustainability and value creation?

Conclusion

As consultants, fractional executives, or advisors, we aren't just employed to leverage our client's current stores of time and resources. Our job is to identify barriers to long-term value creation and empower our clients to make more informed decisions. Our ability to do that is one characteristic that makes us indispensable and, therefore, highly valuable.

It not only takes foresight to ask some of these questions, but courage as well. That could be the question we most need to ask ourselves as we think about our engagements: do I have the courage to say what needs to be said, to ask vital questions, and to risk the engagement itself, if necessary, to do what's right for the client?

#opportunitycosts #management #leadership #professionalservices #pricevaluejourney

________________________________

Business consultant and coach, author, and podcaster John Ray advises solopreneurs and small professional services firms who sell their expertise on their two most frustrating problems: pricing and business development. John is passionate about how changes in mindset, positioning, and pricing change the trajectory of a business and the lifestyle choices of a business owner. His clients are professionals such as consultants, coaches, attorneys, CPAs, accountants and bookkeepers, marketing professionals, and other professional services practitioners.

John is the author of the national bestselling book, The Generosity Mindset: A Journey to Business Success by Raising Your Confidence, Value, and Prices . The book covers topics like value and adopting a mindset of value, pricing your services more effectively, proposals, and essential elements of growing your business. The book is available at all major physical and online book retailers .