Opportunity Cost

Cost of opportunity = the resources required to pursue a selected opportunity.

Opportunity cost = the foregone value of the opportunities you did not select.

When innovation projects are funded, they are still often neglected in favor of other projects or diminished by overly-conservative financial analysis.  The actual project is wounded – starved for the resources necessary for success – and neglected – starved of the management attention needed for success.  When innovation projects are wounded and neglected, the organization incurs an opportunity cost of the value that the project could have realized but now will not.

This calculator will help you estimate the opportunity cost in one of your innovation projects, identify the hidden value you’ve overlooked, and inform better investment choices.

    How healthy is your project?

    Think of the total resources (money and personnel) required to reasonably overcome the innovation obstacles.

    Compare the full requirement to the actual level of resources deployed. What percentage of the full requirement does the project actually have?

    (0% is severely wounded; 100% is fully resourced)

    Think about the level of critical, strategic and creative thinking this project requires. How much of this required attention is available?

    (0% is no attention to project; 100% is full attention)

    What is your upside level?

    Assume this project overcomes its obstacles and starts delivering returns. Think of several reasons that would drive this project toward its upside, that would cause it to generate greater returns than you initially projected. List these here.

    Taking all these factors together, how much bigger could the returns be than the current business case assumes? Be optimistic.

    Upside Level (1 - 40; 1 means no upside, 40 means 100% upside)

    Upside level = possible multiple of current project value

    Opportunity Factor

    The Opportunity Factor (a function of Focus Level and Upside Level) is an estimate of the multiplier of your project's value from making different portfolio choices. The larger the Opportunity Factor, the more greater the opportunity cost you are currently incurring from missing out on the potential value of your project.

    Your Opportunity Factor:

    Opportunity factor model: Innovation Screen graphic, Difficulty vs Size

    The Upside Factor reflects that financial analysis and operational processes are inherently conservative and are usually geared to delivering on a reliable promise. Consequently the business cases for innovation rarely consider upside systematically or in adequate detail. The commitment to deliver on a conservative promise becomes a self-fulfilling prophecy of low aspirations and mediocre returns.

    The Focus Factor reflects that the clutter of too many projects in the Innovation portfolio means that many of them suffer wounding and neglect.  The Focus Factor is a measure of how much a project’s returns could improve if it got the proper focus – that is, if the project’s wounds were healed with adequate resources and if the organization gave the project the proper attention to remedy their neglect of the project.

    The Opportunity Factor shows how increasing visibility to the upside and improving focus can transform the value of an innovation project.  Improved focus increases the ability to overcome obstacles and improves the probability of success (moving the project up the Difficulty access toward Easy).  Improved visibility to the upside increases the potential to drive the project’s returns above the base business case (moving the project on the Size axis toward Big).  Taken together, the Focus and Upside factors determine the Opportunity Factor, or how many times bigger the project’s value could be with the proper focus and visibility to the upside.  To take advantage of the Opportunity Factor, the organization has to make decisions at the portfolio level to uncover hidden upsides and eliminate projects that consume resources but only offer mediocre returns.