Money in Weighting
- Published: Saturday, 06 April 2019 11:33
You’re building a case to invest and you use points to prioritise the results we want to see and the extent to which each option will deliver them.
It’s a good way to add some rationality to the business case but it might not paint the whole picture of how important your project is in relation to everything else you have to do.
Money is tokens of relative value. It is the middle-man in a barter system. I swap the stuff I do / make for money that I then swap for stuff you do / make. So, if money is just tokens then it’s basically no different from gold stars, Brownie Points or whatever currency we use for quantifying the intangible things we seek.
In my imaginary Bureau de Change I can convert any currency to another once I know the market rate. Sadly, we work in imperfect markets that make it difficult to convert between these currencies. I can ask what you would be willing to pay but willingness to pay is subjective. It is limited by the players involved, the context in which they operate, even the time and place where they make their decisions. It’s too hard and costly to do so people don’t use it in their options appraisals.
However, willingness to pay in £s really isn’t much different from assigning point values to options. The points will also depend on people and circumstances. We just feel more at ease with points because they are not real money.
Maybe it’s because we’re not playing with real money and can’t be held to account for the points we ‘spend’ that we inflate the importance of the quality options. When we pick up to 100 points on our options, we are only ranking them against each other. Nowhere does it say that the best option is only worth 50 points in the whole scheme of things.
An alternative is to use money. Instead of 100 notional points, allocate the actual discretionary spend budget. How much free money do you have to splash out on something new? If you have £50k to spend then decide how much out of the £50k each option is worth.
You are now starting with a sense of proportion. It’s now real money, not imaginary tokens. If you’ve got £millions to play with then it’s serious. If you’ve only got a couple of hundred then stop sweating blood over trivia.
Once you are comfortable with the sense of proportion then there’s another piece of reality to bring into the mix. That’s the matter of comparing what you can spend on this project against what you are spending on everything else that you could do. Determine your total discretionary spend. Think about all the new stuff you want to do as well as this particular project. If you’ve got a formal costed list, all well and good. If not, just go with your gut feel.
Take your total discretionary spend figure and split it between this project and everything else. Say you have £1M and this project isn’t so big or important, so you split it £50k for this and £950k for everything else. Write at the top of all your options appraisal workings (put it in the document header if you must): “This project £50k, everything else £950k”
Use this as a reminder of your project’s relative worth before you even start appraising the options within it.
When you’ve done all this and quantified your options in terms of £s, remember that it isn’t real money and it can’t be put against your costs. At the end of the day, it’s all still a comparison of relative value using tokens. This time though, the tokens are more realistic and the final decision made with closer acquaintance to real life.
If you want to do that then you have to do the full SRoI, focus group, willingness to pay exercise to make a fair comparison between costs and benefits.