Reference no: EM132798012

Resource acquisition is something I have worked on during my career as a financial analyst. Our text makes it sound easy. Figure out if the marginal benefit exceeds marginal cost of acquiring the resource whether it is incremental labor or investments in plant and Equipment. If it were so easy. Estimating unknown incremental costs and benefits can be exceedingly hard to do.

For example, I have been involved in determining if investments in bringing a well-known physician into our hospital would tremendously benefit our patients for the type of medicine practiced and benefit our hospital system. The ask can be big in terms of costs for additional support staff and state-of-art equipment to the tune of millions of dollars. For the most part, financial analysts can work with staff to come up with costs accurately. Estimating incremental patient volume and reimbursements from numerous commercial insurance payers, state Medicaid programs, and other government provided health care insurance plans can be troublesome at best. We made the investment. Patient outcomes have been very good and beneficial practice changes have been implemented. However, the incremental patient volume promised has not materialized.

My example brings out an important consideration. Sometimes additional resources are brought in for other reasons than marginal revenue product. Resources and people are needed for regulatory compliance or customer / patient safety. Additional personnel and resources are also brought into an organization for political reasons, which may or may not be apparent at first, when weighing economic costs and benefits. Therefore, some decisions are made regardless if marginal benefits exceed marginal costs.

I have witnessed a situation where a new and very expensive product was hoped to revolutionize an industry. However, from the customer point of view, marginal costs exceeded marginal benefits, and was not clearly understood during product development. Only customers subsidized by government entities could make long-term commitments. Perceived product benefits were not worth the higher cost to many potential customers.

Unfortunately, many companies do poor job of understanding customer needs, and consequences can be devastating. Hundreds of millions of dollars in new production line plant and equipment had to be written down in value on the balance sheet. Eleven percent of the manufacturing labor force had to be laid off permanently. Internal analysis of costs and benefits wasn't good enough. Perhaps, executives were too exuberant with their new ideas and fell victim to group think. Fortunately, this company was large enough to absorb the losses and move onto other opportunities. Smaller companies may not get a second chance. One bad decision can be enough to force a firm out of business.

As a final thought, how has the coronavirus pandemic impacted resource acquisition for Companies or organizations?