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 Effective Engineering e-Newsletter – 7/03/2008

This is your monthly e-Newsletter from
Effective Engineering Consulting Services (www.effectiveeng.com).  If you would like to receive Effective Engineering e-newsletters as they are published, please send an email to e-newsletter@effectiveeng.com, and we will add you to our distribution list.  Comments and suggestions are welcome and encouraged


eN-080703:


The Costs of Being “Free”

  By Tom Dennis – President, Effective Engineering [tdennis@effectiveeng.com]


You’ve just finished a long project and released a product that is getting a great reception in the market.  It’s time to be congratulated, or to relax for a moment, or to start in on a new and challenging project when your boss walks in and asks what it would take to add just one small feature that someone at a trade show asked about.  You think about it quickly and determine that adding just that one small feature would likely be a small effort for you to implement, a day or two of work.  You tell your boss, and he says, “That’s virtually free!” Do it!” He comes back the next day and asks what would be involved in adding just two or three other small features, also mentioned by one potential customer at the recent trade show.  Since these also look to be small efforts for you to implement, your boss considers them “free” as well and tells you to add them.  And so it continues.  With little thought or appreciation of what’s really involved and what this means won’t be able to be done, you (and many others) get caught up in efforts to add “free” features to an already great product.  No analysis of the real costs and benefits of these features is done.  This means no analysis of the direct costs and benefits, which should clearly be done.  However, likely more critically, it means no analysis of the indirect costs and benefits; that is what are the costs and benefits of doing something else – the opportunity costs.  There is no appreciation of the costs of being “free”!

OK, so what’s the big deal about adding a “few” small features to a product?  What can it hurt?  Well, it can hurt a lot.  In fact, some companies have gone out of business by not paying attention to what will not be done because of adding those “few” small features.  It must be recognized that no feature is really “free”.  It may be a small effort for an engineer to write the code or add the circuitry, or whatever else may be needed, but that is not all that’s needed to add this feature.  It may take a short time to implement the feature, but it must also be tested, documented, marketed, manufactured, sold, supported, accounted for, etc.  That means work for virtually every department in the company to add this one small feature, not just for the engineer to implement it.  And when a problem arises in any of these other areas, it’s back to the engineer to make adjustments and start the process all over again.

Before any feature gets added, whether small or large, a detailed costs/benefits analysis should be undertaken to look at the costs and benefits associated with this feature.  Too often such analysis is ignored entirely because the additional feature(s) is viewed as “free”.  This analysis is essential and must look not only at the direct costs and benefits, but also at the indirect costs and benefits.  What does this mean?

First, understand the direct costs of this feature in detail.  This goes well beyond the effort it will take for the engineer to incorporate and unit test this feature (his loaded salary and other costs to add the feature).  It must also include the loaded salaries and other costs for testing this feature, not just in isolation but fully integrated with the product as a whole, and devising tests to break the feature or other capabilities of the product that the addition of this feature may impact.  What are the loaded salaries and other costs to document this feature in all of the many documents which may be associated with the product (e.g. user manuals, installation manuals, quick-start manuals, repair manuals, troubleshooting manuals, etc.)?  What are the loaded salaries and other costs to properly market and sell this additional feature (e.g. sales and marketing materials, ads, presentations, etc.)?  What are the loaded salaries and other costs to manufacture this additional feature (e.g. ramp down old product while ramping up new product, upgrading old product in the field, handling more product codes in MRP/ERP system, documenting changes to production processes, etc.)?  How about to support this feature (e.g. customer support, sales support, technical support, etc.)?  How about to account for this feature (e.g. added accounting codes, SKU’s, revised spreadsheets or MRP/ERP system changes, etc.)?  Etc.  The reach of a change to or addition of even a simple feature is broad and deep, and should not be underestimated.

Second, understand the direct benefits of this feature in detail.  What are the incremental sales that will result from this specific feature?  This means how many additional incremental units will be sold and how much incremental revenue will be generated due solely to these specific features.

Third, understand the direct impact of this added feature to company’s bottom line, including incremental impact to gross margin (contribution to the business after paying for direct-fixed and direct-variable unit costs), incremental impact to contribution margin (the amount each unit sale adds to profit), and incremental impact to net income or profit (what the company actually adds to the bottom line for each sale).  If the addition of this feature doesn’t make significant money for the company, why do it? (see also eN-030522 – Keep your Eyes on THE GOAL!)

Fourth, once the direct costs and benefits of adding this feature are thoroughly analyzed and understood, if it is determined that you should otherwise move forward with adding the feature(s), then the more difficult and critical work of examining the intangible or opportunity costs/benefits must be analyzed.  That is, a careful look at what else could be done instead of adding these “free” features, and whether these alternatives would make more sense.  This is very often overlooked entirely, but can make the difference between the success and failure of a business.

To look at the opportunity costs/benefits, first think about other things your customers are interested in, perhaps totally unrelated to the product these “free” features would be associated with.  Is there another product or service that customers have expressed strong interest in that could now be pursued if the resources that would be working on the “free” features were put on this instead?  There may be low-hanging fruit that could bring in substantial revenue and profit that you haven’t considered because of all of the resources that were tied up in developing the newly released product.  With some of those resources now available, can that low-hanging fruit be picked (along with the revenues and profit it can generate)?  Or are there entirely new directions with much higher potential that can be pursued that could open up entirely new directions for the company with much greater long-term, mid-term, or even short-term impact to company success?  In an ideal world, such opportunity analysis would have been done in advance and allocation of resources after completion of a project would be pre-determined.  But the thought of adding “free” features often intervenes and prevents these pre-selected opportunities from going forward. 


Don’t put yourself in the position of looking back at some point in the future thinking about what might have been.  Missing golden opportunities because of being blinded by near-term easy or “free” actions can happen all too easily.  Proper planning for the future coupled with thoroughly understanding both the tangible and intangible costs and benefits of what you are considering can prevent pursuing near-term small gains at the expense of longer-term large gains.  It is critical to truly recognize the costs of being “free”.


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