Understanding Opportunity Cost
What is opportunity cost?
There are plenty of stuffy microeconomic definitions of opportunity cost. Put simply; it is a value of something that must be given up to achieve something else.
So, the opportunity cost of having cake instead of salad might be and extra hour at the gym. But the opportunity cost of having salad instead cake is unbridled misery. Which is worse?
Opportunity cost and the team
If your current team are over stretched or you have had a team member leave and haven’t replaced them, are you getting the best from your employees? If they can’t focus on their job because they are picking up someone else’s slack this is going to have a detrimental effect on productivity and sales.
The cost of a new hire can be daunting; salary, new computer, training and recruitment costs. However, if that hire has the potential to generate over £100,000 to the bottom line – suddenly the opportunity cost is a no brainer. When you think of it like this, it makes the decision to hire much easier.
If you’re struggling to release budget for a new hire, or stakeholders need persuading, opportunity cost can be a good weapon in your armoury. Work the figures. Presenting any business owner or manager with quantifiable evidence about the value of a hire is a very powerful tool. (Beringer Tame have an opportunity cost calculator - get in touch for more details.)
If you can’t get hard figures, then try with theory. It sounds ridiculous to say that for the sake of a few thousand pounds the business won’t hire someone who could contribute ten times more.
Opportunity cost and the hiring process
If you do have budget sign off and are hiring, ask yourself this: is it a good use of your time to be going through a mountain of irrelevant applications to find the one or two who could be worth meeting? What is the opportunity cost of you focusing on recruitment rather than everything else you have to do?
Paying a specialist recruitment agency – Beringer Tame if your hire has a digital focus (apologies, shameless plug!) – will take this out of your hands. On a daily basis they are sifting through CVs so when you come calling they can quickly send you a handful of relevant CVs for you to meet.
There are lots of things to consider when hiring, and lots of stakeholders to balance. Obviously we have a vested interest in telling you to hire. However, we would recommend using opportunity cost to work out what sort of recruiter to use, if you use one at all. If a role is important, will generate revenue and not having it is damaging the company, then a specialist recruiter should be used. The opportunity cost is too high. Similarly, if your time is too valuable to be spent looking at CVs, then the opportunity cost again is too high to not use a recruiter. However, if you think the opportunity cost of having an empty vacancy is low, then fill the role yourself, or don’t hire at all. Understanding opportunity cost is vital to making the best decision.
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