The REAL Financial Position
Before the hidden costs we said that the project had delivered a £12,650 profit in the first year, which equated to a 230% ROI. Let's re-run those sums with the two hidden costs included:
Revenue = £6,600 + £11,550 = £18,150
Costs = £5,500 + £11,550 + £5775 = £22,825
Profit = Revenue - Costs = £18,150 - £22,825 = -£4675
ROI = (Profit / Costs) * 100%
= (-£4,675 / £22,825) * 100% = -20%
Case Study Implication
Including the hidden costs has transformed the project from being highly profitable to being loss making. Obviously this example is contrived and over simplified. However, it still demonstrates the significance of accounting for all the costs associated with a project, both during and after project completion.
On the surface, it looked like this project delivered a great return. However, when we looked more closely we saw that the project was delivered at the expense of a high performing employee, and a real financial cost was incurred. Bob withdrew his high level of effort and became a lot less productive over the next eleven months. No doubt that this would have likely impacted whatever projects he went to work on next.
All projects should deliver a positive return on investment. If it becomes evident that they are not going to do that they should be stopped so that resources can be redirected towards profitable activities. Hence, the key message here is this. Projects should correctly account for all their costs - both visible and hidden. Failure to do so results in poor project management that costs money.
I believe this kind of financial picture should be shared in the same way as we now expect companies to be transparent with consumers about whether their manufacturing processes exploit vulnerable people.