April 25, 2006
Relevant Cost for Law Firm Decisions
Relevant cost is an accounting concept that separates the costs that have a bearing on decisions from the costs that should not. In layperson terms, we often refer to irrelevant cost as sunk cost.
The idea is that what has occurred (what is below the waterline) is not important to the decision-making process. It is SUNK COST. The original cost of a ship under water is not relevant. The cost of raising and reconditioning the boat versus the cost of new construction is the only relevant issue.
Unfortunately, in the real world emotional issues often cloud the issue. I have heard more than a few partners explain, “We have too much invested to change now.” They may be talking about software that is failing to achieve the intended objective, or worse, that is unreliable and disruptive to the normal operation of the firm. They could be talking about an unprofitable branch office or a telephone system that generates nothing but complaints from the firm’s clients.
“We have too much invested” should send up the red flags. That is never the issue. The issue is: “How much will it take to fix the situation?” and, “How much is it costing the firm (including lost opportunities) to continue living with the situation?” compared to the cost of replacement. Granted, you don’t want to replace one problem with another one, so you always have to be concerned with the risks associated with any replacement. But those are normal purchasing and partner selection considerations.
Living with prior bad decisions can never be justified on the basis of “We have too much invested.”
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
Related posts
Filed under Blog by Tom Collins