The universe itself has a trade-off in thermodynamics called entropy.

I have this friend who owns a successful consulting company. To man his operations he tries to pay as little as possible. With the economy the way it is, it is becoming easier for him to negotiate when he needs engineers or other employees. He ends up paying very little… at face value

Now, his price for this way of doing business is clearly higher than it looks. There is no long-term commitment from his employees. They will leave as soon as they could get a little more. He looses know how, looses continuity and is becoming less competitive in the long term. He is even getting a reputation in the industry as a guy who pays little.

It is a business model destined to fail.

But it got me thinking. How do you evaluate the cost of a decision? The basic idea would be to add up the values associated with the other options. Here I would suggest thinking as pessimistic as possible.

Cost of opportunity: Ask yourself if by doing this you will not be able to do something else. Ballpark the other option and write it down. If more than one thing will be compromised and are not exclusive with each other, write them all out. If they are exclusive, write down the more expensive one.

Brand cost: difficult to evaluate but if your decision could impact the brand in a negative way, assume it goes in the most horrible way possible and write it down.

Networking impact: If your decision could impact your networking capabilities in the future, assume that it does. How much of an impact? Think of the worst case.

Think of other options not included here. Be negative and pessimistic.

Add those numbers up.

Now compare with the possibility of not doing anything. The differential is the cost of this decision.

Now I settle with the difference between the decision and not doing anything because you have already that baseline. It might need you to project it to the future but chances are you can do a good job at maintaining the status quo.

I’ve done a similar analysis on several occasions and it seems like a good way to do it but I have no illusions. I know there are better ways to do it out there. Would you care to comment?

Let me have your thoughts on this matter. Shall we?