Ted Hull Consulting FYI

The Difference Between Cost and Worth

April 25th, 2016

TWO SIDES OF THE VALUE COIN

Imagine you are living in a condo where at a recent owner’s meeting the idea of installing an outdoor swimming pool has been floated (no pun intended). Obviously if this goes forward there will be an increase to your condo fees. Typically the first question you pose will relate to the additional monthly condo costs fees. But we aren’t looking at cost, but rather at worth. So I want you to ask yourself, what’s it worth to have an outdoor swimming pool in your condo complex. Some of the factors in determining what it’s worth to you include how much you or family members or guests, such as grandchildren enjoy swimming. You want to think about how many months of the year you can use it and how far will it be from your condo unit.

Now I want you to write down a dollar amount that reflects what it would be worth to you, or at least lock that number in your mind.

Notice that we haven’t begun to look at the cost. What the pool will cost is irrelevant to what it’s worth to you, except to the extent to which the cost is greater or smaller as the number you have identified. 

Now that you have locked in the worth amount, you are ready to hear what the monthly cost will be. When you hear that number you find that the cost is significantly higher than the number you wrote down. But that’s what pools cost. At the end of the meeting you vote against it.

Not long after, you receive an invitation to another pool meeting. A philanthropist has come forward. Because your condo is comprised of seniors and war veterans, this generous contributor has agreed to donate an amount equal to one third of the cost of installing the pool and maintaining it for the next ten years. Now the cost of the pool is significantly lower than the market price. This is a deal! However it is still higher than that number you wrote down earlier.

The issue is not whether the price is fair, but whether the cost exceeds what the pool is worth to you[1].

One of the common challenges for a board using Policy Governance®[2] is determining the at what cost component in developing Ends policies. A board will land on what the intended results are and who are the intended recipients of those results; but nailing down that third cost/worth part seems to be illusive.

Cost and worth are two sides of the same value coin. But like a coin it’s virtually impossible to see both sides at the same time. So let’s take the value coin and look at the worth side.  

When a board is considering the at what cost piece of its Ends, it is critical that it has heard from its owners to know whether the end is worth what it will cost to have it accomplished. Don’t start by asking what will it cost, but rather what is it worth.

I’m not a swimmer. I enjoy sitting by a pool and staying warm and dry, so this analogy has been somewhat coloured by my personal preference. But suppose that generous donation has pushed the cost down to an amount that is in line with what a pool would be worth to you? Now you can vote in favour of the pool.

I’m sorry, but I forgot to mention one small detail earlier, so I’ll add it in now. You know that pool that you want to have access to and can be installed and maintained at a great price? The space required for that pool is going to come at the expense of fifty visitor parking spaces. So now you want to add in the cost of losing those parking spaces. If they are valuable to you, then the worth of the pool has been inversely reduced.

So there are at least two considerations for a board when it looks at the value coin.

It is important to compare apples to apples. I serve on the board of a mission organization that is dedicated to the facilitation of church planting in parts of the world where there are virtually no churches. I happen to know that management is spending significantly more per church planted than many other organizations. But while the results are more costly, many of the areas where the missionaries serve have a very high cost of living. To see the results achieved for recipients in those parts of the world is just plain expensive. However the owners believe it’s worthwhile because those results can’t be seen unless a huge price is paid. Like the cost of an ambulance ride, open heart surgery or a funeral, it may seem exorbitant, but considering the options, it’s worthwhile. The decision as to whether something is worth the cost is based on what we value. But it still means that given the options for each of these services, we would consider the one which will achieve the intended results while costing the least.   

Like our lost parking lot spaces, a board needs to consider what results will not be realized (fifty parking lot spaces for visitors) if other results (a pool for condo owners) are achieved. This is sometimes referred to as opportunity costs or other results foregone. If a board does this, what is it not going to do?

Every organization needs to bring value to its owners. To do so a board must first know what its owners want and how much it’s worth to achieve what they want. After that it’s relatively easy to decide whether the cost can be justified.

 

[1] My assumption in using this analogy is that you aren’t looking to flip your condo or considering its resale value.

[2] Policy Governance® is an internationally registered service mark of John Carver. Registration is only to ensure accurate description of the model rather than for financial gain. The model is available free to all with no royalties or licence fees for its use. The authoritative website for Policy Governance is www.carvergovernance.com.

  • Is Your Mission Worthwhile and How Would You Know?
September 21st, 2017
When a board develops its ends as it implements the Policy Governance® model, it considers three components. These components include: (1) how will people be better off, (2) which people will be better off and .....
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Ted Hull Consulting FYI

The Difference Between Cost and Worth

April 25th, 2016

Imagine you are living in a condo where at a recent owner’s meeting the idea of installing an outdoor swimming pool has been floated (no pun intended). Obviously if this goes forward there will be an increase to your condo fees. Typically the first question you pose will relate to the additional monthly condo costs fees. But we aren’t looking at cost, but rather at worth. So I want you to ask yourself, what’s it worth to have an outdoor swimming pool in your condo complex. Some of the factors in determining what it’s worth to you include how much you or family members or guests, such as grandchildren enjoy swimming. You want to think about how many months of the year you can use it and how far will it be from your condo unit.

Now I want you to write down a dollar amount that reflects what it would be worth to you, or at least lock that number in your mind.

Notice that we haven’t begun to look at the cost. What the pool will cost is irrelevant to what it’s worth to you, except to the extent to which the cost is greater or smaller as the number you have identified. 

Now that you have locked in the worth amount, you are ready to hear what the monthly cost will be. When you hear that number you find that the cost is significantly higher than the number you wrote down. But that’s what pools cost. At the end of the meeting you vote against it.

Not long after, you receive an invitation to another pool meeting. A philanthropist has come forward. Because your condo is comprised of seniors and war veterans, this generous contributor has agreed to donate an amount equal to one third of the cost of installing the pool and maintaining it for the next ten years. Now the cost of the pool is significantly lower than the market price. This is a deal! However it is still higher than that number you wrote down earlier.

The issue is not whether the price is fair, but whether the cost exceeds what the pool is worth to you[1].

One of the common challenges for a board using Policy Governance®[2] is determining the at what cost component in developing Ends policies. A board will land on what the intended results are and who are the intended recipients of those results; but nailing down that third cost/worth part seems to be illusive.

Cost and worth are two sides of the same value coin. But like a coin it’s virtually impossible to see both sides at the same time. So let’s take the value coin and look at the worth side.  

When a board is considering the at what cost piece of its Ends, it is critical that it has heard from its owners to know whether the end is worth what it will cost to have it accomplished. Don’t start by asking what will it cost, but rather what is it worth.

I’m not a swimmer. I enjoy sitting by a pool and staying warm and dry, so this analogy has been somewhat coloured by my personal preference. But suppose that generous donation has pushed the cost down to an amount that is in line with what a pool would be worth to you? Now you can vote in favour of the pool.

I’m sorry, but I forgot to mention one small detail earlier, so I’ll add it in now. You know that pool that you want to have access to and can be installed and maintained at a great price? The space required for that pool is going to come at the expense of fifty visitor parking spaces. So now you want to add in the cost of losing those parking spaces. If they are valuable to you, then the worth of the pool has been inversely reduced.

So there are at least two considerations for a board when it looks at the value coin.

It is important to compare apples to apples. I serve on the board of a mission organization that is dedicated to the facilitation of church planting in parts of the world where there are virtually no churches. I happen to know that management is spending significantly more per church planted than many other organizations. But while the results are more costly, many of the areas where the missionaries serve have a very high cost of living. To see the results achieved for recipients in those parts of the world is just plain expensive. However the owners believe it’s worthwhile because those results can’t be seen unless a huge price is paid. Like the cost of an ambulance ride, open heart surgery or a funeral, it may seem exorbitant, but considering the options, it’s worthwhile. The decision as to whether something is worth the cost is based on what we value. But it still means that given the options for each of these services, we would consider the one which will achieve the intended results while costing the least.   

Like our lost parking lot spaces, a board needs to consider what results will not be realized (fifty parking lot spaces for visitors) if other results (a pool for condo owners) are achieved. This is sometimes referred to as opportunity costs or other results foregone. If a board does this, what is it not going to do?

Every organization needs to bring value to its owners. To do so a board must first know what its owners want and how much it’s worth to achieve what they want. After that it’s relatively easy to decide whether the cost can be justified.

 

[1] My assumption in using this analogy is that you aren’t looking to flip your condo or considering its resale value.

[2] Policy Governance® is an internationally registered service mark of John Carver. Registration is only to ensure accurate description of the model rather than for financial gain. The model is available free to all with no royalties or licence fees for its use. The authoritative website for Policy Governance is www.carvergovernance.com.

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204.898.6740
  • Is Your Mission Worthwhile and How Would You Know?
September 21st, 2017
When a board develops its ends as it implements the Policy Governance® model, it considers three components. These components include: (1) how will people be better off, (2) which people will be better off and (3) what is it worth to produce these results. One of the challenges that the boards of not-for profits face in establishing ends is articulating what it is worth or what is often referred to as "at what cost"......

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