Spending Money to Save Money: The Limits and Potential of Cost Justification

Article excerpt

Our understanding of what cost justification is determines the use we make of it, and how effective we are in presenting it. Special terms can help us visualize our project: levels and layers of savings, skill enhancement, and windows. Other variables that affect the size of the saving include procurement and people factors. How the financial side of the organization views our proposal will determine whether we secure a budget for implementation.

When we request new equipment, or propose a change in procedures that involves an expenditure, we anticipate being asked, "What is the cost justification?" Like many terms we hear, this one frequently tends to be used in a broad sense, to cover a multitude of evils (and benefits). By discussing the implications of cost justification we will better understand what it is we are really doing when we prepare a proposal. The insights we gain will help us to explain our case, to define more alternatives and benefits, and to ask better questions. In short, the analysis of the concept should help us get better results from the cost justifications that we prepare, as well as help us evaluate those that others present.

COST

When we undertake a cost justification project we must first look at the cost. The word "cost" is related to the Latin constare meaning to stand firm, to come to an agreement[1]. Cost therefore represents an agreed upon value, which in our society is usually expressed as a dollar amount. Cost commonly refers to money except in the figurative expression: "that act cost him his reputation," and the figurative usage is usually in the negative sense, a loss.

It is interesting that "cost" originally referred to an interchangeable value, and still does in its sense of loss. We will be looking to see if there is a valid trade-off between a known expense and its advantages, many of which may be considered intangibles. An "intangible" in reference to cost is not merely something that is not a physical object, but anything to which a specific cost cannot be attributed. So a labor cost is tangible because it has a specific cost. The effect of an improved corporate image may be intangible because we don't know how much goodwill it generates or what the dollar value of that goodwill is, in terms of sales of stockholder investment.

Negotiation is the process of coming to agreement where there is more than one person's interest at stake. When we negotiate we exchange values, we trade. If the price, the dollar amount, is too high, we can attempt to find some common ground. This does not always mean that we will secure a lower price. It may mean that we will consider delivery time, or services that may be critical to us. Quality may come into question. The salesman asks, "You don't want to spend that much for this? How about this other one made by a different manufacturer?" It may turn out that we in fact want the higher quality, not the lowest price.

The cost is what we are willing to spend to receive a certain value. When we refer to the cost of a system we will continue to mean the traditional sense of applying a dollar value to all the parts, and then summing them. We will also have to take a broader view and look at advantages in terms of values, and how these values fit the company's priorities. In a cost justification, the dollar amounts may insufficiently show the relative weight of advantages. Where these advantages can be given a dollar value our job will be easier, even if these values are approximate. Where they cannot, they will nevertheless need to be clearly stated, or else the comparison will not be complete.

JUSTIFICATION

Justification is often used in the sense of a defense. Even the person who is innocent must justify himself. "He justified himself in the face of the law." In fact, the word is from Jus, meaning right or law, and the verb meaning to make.

A justification is a proof or demonstration that something is desirable or useful. …