Why it’s difficult to calculate Soft Cost?
Most companies classify soft costs as those expenses that simply can’t be immediately identified or included on a company’s balance sheet. For instance, there’s no space on a company’s balance sheet to track the costs of business risks, productivity, the time needed for approvals or the day to day costs of poor efficiency and redundant processes. List of items should be considered for Hard and Soft Cost
Importance of Soft Cost
The first hurdle is to understand that soft costs are real. Being inefficient and unproductive has a cost. Sometimes it’s the result of the employee not having the capabilities to perform the job, but in a large number of cases it’s because the company’s operations, business approach, management and work flow are outdated and antiquated. It’s how the company conducts business that raises its soft costs.
Items to consider for soft cost.
Capital Costs: Any organization wide project or technology enhancement cost required for changing business strategy other than operational process. It’s usually, adding new office, new compliance, fail over site etc. As business strategy and requirement change to take on new initiatives, capital cost in technology is usually required to accommodate new business requirements.
Employee Productivity: This is cost for an amount of time employees spent on dealing with any technology related items rather than generating revenue for business such as training issues, technology related issues, follow-ups, coordinating & waiting periods, process issues, turn-overs and lack of documentation, procurement process etc
Business Risks: A potential cost of a business loss for technology related process and/or cost of not achieving business goals because of the potential risk. Risks surround everything that a business big or small does i.e Security vulnerabilities, infrastructure risks, Compliance violations, data breach, resource risk, strategy risk and vendor risk etc
Functionality: A cost of missing technology related process/function that results in not achieving business goals and objectives. This is usually because of the lack of technology system or function that cause low productivity or impacts revenue generating items i.e locations connectivity, new systems and integrations etc.
Opportunity Cost: An opportunity cost, in the general sense, is a route which is given up when a decision is made, allowing a company to go in a different direction. Analyzing the exact opportunity costs associated with any enterprise’s existing Information Technology assets requires complex calculations and a thorough review of all IT cost centers, revenue generators, and profit centers in the company but not understanding opportunity cost results in low profit margins.
Business Downtime: A cost of any time spent on an on-ging technology related support, maintenance and improvements and not on revenue generating items. This can also be calculated by following items, support incident created by staff, maintenance incidents, infrastructure Incidents, systems improvements/upgrades etc.
Compliance: Over the last few years, most industries have seen an uptick in regulatory requirements. While these additional regulations are well-intentioned, they ultimately result in higher compliance costs for many organizations. Companies are spending an average of $1.34 million on compliance-related technologies in 2017, up from an average of $92,000 in 2011 (True Cost of Compliance with Data Regulations). In fact, this recent report finds that the cost of non-compliance is 2.71 times higher than the cost of compliance. https://www.globalscape.com/resources/whitepapers/data-protection-regulations-study
Companies that actively try to reduce their soft costs are able to improve efficiencies and productivity. It helps to free up valuable time, conserve company resources and streamline operations so that employees can do what they do best. When looking to reduce your company’s costs, start first with the mindset of tackling those soft costs.
How to control and reduce Soft Cost?
- Understand and Measure: Measure your current technology related soft cost to understand your risks and starting point.
- IT Strategy and Process: Develop IT Strategy to align your technology with your business goals. And develop and deploy ongoing process to achieve desired business results.
- On-going benchmark: Measure your soft cost as on-going basis, review risks and align IT Strategy for any new findings.
Need help? Take action
Partner with Encompass – contact our team
Also review – Impact on Revenue blog
Understanding cost – access cost calculator