Cost of Modernization vs Cost of Inaction 

Every decision has its repercussions and the outcome can be good or bad, depending on the choice. For managers or entrepreneurs, one of the major decisions to make is what strategy to adopt or what direction to take. Some choices are easier than others, but one of the hardest decisions to make is to step out of your comfort zone. 

Many SMEs are entrenched in the comfort of their old management methods, inefficient work processes or outdated manufacturing processes. However, staying in their comfort zone is often what hinders their success and slows their growth. 

While the status quo may seem comfortable and harmless, it is far more dangerous and costly to a business than one might think. The cost of inaction represents the sum of the costs generated by not addressing a situation or problem. For example, if a problem persists that requires three full-time employees (40 hours/week) who are paid $20 per hour instead of one full-time person at the same salary, not fixing the problem costs the company two extra salaries per year for a total of $83,200. To calculate the cost of doing nothing in this case, we use the number of employees needed to perform the task, the number of hours spent per employee and their hourly wage. If we wanted to automate the task requiring three full-time employees and the software or system required cost $10,000, then intervening to solve the problem would result in a savings of $73,200. 

This example alone demonstrates the detrimental impact that the strategy of inaction can have. In most cases, as in this example, the solution to the problems frequently encountered by SMEs is modernization. Contrary to the perceptions of many managers and entrepreneurs, modernization does not necessarily involve exorbitant costs and does not require extensive knowledge of technology. Nowadays, there are accessible solutions adapted to all sizes of businesses and budgets. What many people don’t realize is that doing nothing is often more expensive and harmful than modernizing.  

According to the data we collected from 34 Atlantic SMEs operating in different industries, we can see that no matter the industry or company, doing nothing is always more harmful than modernizing. In this table, the investments to solve the problem are determined based on an in-depth analysis of the companies and the proposed solutions are all adapted to the company, its size, its financial resources and its capabilities. In the last column of the table, we see the difference between the cost of inaction and the cost of modernization and the difference is always in favour of modernization. Obviously, for some initiatives, they will not be profitable directly in the first year, but in most cases, the results are noticeable within 12 months. 

Industry Total Investment to fix the problem Total Yearly Cost of Inaction Total Savings 
Accommodation and food services  136 400 $   184 600 $   48 200 $  
Agriculture, forestry, fishing and hunting  195 560 $   619 407 $   423 847 $  
Building Inspection Service  141 040 $   280 800 $   139 760 $  
Consulting  31 000 $   214 500 $   183 500 $  
Manufacturing  2 564 710 $   5 497 950 $   2 933 240 $  
Real Estate  265 700 $   453 700 $   188 000 $  
Retail Trade  284 000 $   499 200 $   247 539 $  
Software Supplier  170 000 $   280 800 $   215 200 $  
Tourism, Recreation and Leisure Services  195 111 $   442 650 $   110 800 $  
Total  3 983 521 $   8 473 607 $   4 490 086 $  

Another interesting metric to look at when determining the best decision to make is the return on investment (ROI). This measure is often expressed as a percentage and represents the profitability of a project or strategy. It is calculated as follows:  

= (Potential gains from the investment – costs of the investment) / cost of the investment. 

To interpret the ROI, you need to know that a negative result means a loss and a positive result means a gain on investment. The following table shows the average ROI of the same SMEs in the sample for the same proposed solutions. As in the previous table, the results are all in favour of modernization since the average ROI of the modernization solutions presented is 258%. 

Industry Average ROI 
Accommodation and food services 351% 
Agriculture, forestry, fishing and hunting 177% 
Building Inspection Service 170% 
Consulting 606% 
Manufacturing 260% 
Real Estate 315% 
Retail Trade 105% 
Software Supplier 165% 
Tourism, Recreation and Leisure Services 277% 
Total average 258% 

With these two methods of calculating the profitability of an investment, it is easy to see that a modernization strategy has more benefits, in both the long and short term, for an SME. It is obvious that change can seem scary, but we must not forget that growth and success are achieved by leaving our comfort zone. 

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