What's It Worth?

Aug. 7, 2003
Money is a very excellent servant, but a terrible master.

--P. T. Barnum

"Do you realize how much time you've spent fixing that broken tape cassette? The upside is you've succeeded in creating the world's most expensive blank tape." said N'omi, my wife, as I strained my eyes and my limited manual dexterity to repair something I could have replaced for less than a dollar. "I've almost got it," I said, without looking up. She walked away, shaking her head.

I dropped the tiny screw I'd been trying to get back in--for the tenth or eleventh time. I took a deep breath, rubbed my eyes, and sat quietly for a minute. Then I gathered the mostly assembled cassette parts and tossed them in the garbage, feeling both foolish--and liberated.

That was over twenty years ago. I wish I could say I've never spent my time foolishly since then, but I can say I've done so far less frequently than before.

A few years later, a large civil engineering firm asked me to help make their professionals more productive, especially in their use of CAD. Their engineers and drafters all complained about how slow their systems were. "How much RAM do you buy with each of your PCs?" I asked. "16 megabytes," responded the engineer who was showing me around.

"You don't need a consultant," I told him. "You just need to double or quadruple the RAM on each of the workstations! That will eliminate the CAD bottleneck."

When I repeated the suggestion to the owners a few minutes later, one of them said, "We can't afford that; it's out of the question."

I asked what the average hourly billing rate of the system users was. When he told me, I pointed out that if the additional RAM yielded only a 25% productivity increase (and I thought it would actually be much greater), it would pay for itself on the 50 workstations in a month or less.

The man just continued to shake his head, repeating that they simply couldn't afford it. I gave up trying to convince him after about 15 minutes. My engineer guide, who walked me to the door, said quietly, "It's not you; he's always been this way."

N'omi is editing a neat book by Willie Crawford (www.profitautomation.com), in which he tells how he finally succeeded --after a long series of tries--in doing business on the Internet. At one point, he had been making a reasonable stream of income reselling a full-service "shopping cart" for a 20% commission on the $69/month fee. One day, he noticed on the cart company's site that he could "private-label" the service and earn a 50% commission on the $69/month fees. But it would cost him $10,000 to get into that arena. He recounts:

"...that $10,000 price tag really stops most people in their tracks. However, I simply did the math. The $69 monthly fee paid you $13.80 per month per customer, if you weren't private-labeled. But private labeling paid $34.50 per month. The difference was $20.70 per month. That meant that for every customer I got by offering the privately labeled product, I would earn an extra $20.70 every month over what I would have gotten the old way.

"So the main question I had to ask myself was, "How long will it take me to recover my $10,000 investment at that rate?" I simply divided the $10,000 fee by $20.70 (the difference between the private-label 50% commission and the standard 20% commission) to get 483. That meant that I needed only 483 customers to sign up for the service for only one month in order to recoup my initial investment--in one month.

"And I would still have the $13.80 per customer for other expenses: A total of 483 customers times $13.80, or $6,565.40 for that month!...

"And after the $10,000 was recouped, I would have $16,663.50 per month coming in on just those 483 customers! Given that I was certain I could build up a customer base much higher than that, it became a non-decision. It was a "no-brainer.""

Simple math, you say? How many such opportunities have you missed--this year? Although I no longer fix tape cassettes, it wasn't so long ago that I realized I was willing to make a 25-minute round-trip drive to the nearest FedEx box, to avoid the $3 pick-up fee.

Being technically inclined, I have a fancy term for this affliction: Local optimization. "Penny-wise and pound-foolish, is what I call it," says N'omi.

I'm getting better. I haven't mowed the lawn in years, gladly paying a landscaping service to keep the yard tidy. Unless I feel like I really would enjoy the workout, I don't wash my car; I take it to my friendly detailer, and make calls or read while vigorous young people clean it inside and out.

We stopped buying 20-pound paper for our printers and copiers. 24-pound costs a bit more, but it feels much better, and doesn't curl and jam the machinery.

And my desktop computer has a gig of RAM, even though I don't do CAD on it.

Sit down and brainstorm with a colleague or two: How are you and your organization being penny-wise and pound-foolish? How can you improve things?

Dr. Joel N. Orr is an author, consultant, and public speaker. He consults to Fortune 500 companies, high-tech startups, and government agencies on CAE issues. He is the founder of the League for Engineering Automation Productivity (LEAP) and has been an Autodesk Distinguished Fellow and the Bentley Engineering Laureate. A long-time Computer-Aided Engineering columnist, in the CAD/CAM monthly e-mail newsletter, Dr. Orr will continue with his reflections on all aspects of engineering. Contact him at [email protected] or visit his Web site: www.joelorr.com

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