Note: This is an updated version of the second of a series of Michael Moffa articles reporting, analyzing and creating “opportunity-cost”-related concepts. The first, available here at Recruiter.com is “You Think You Understand Your Opportunity Costs?”
Bottom Lines vs. Bottom Plane
“Bottom line”…”double bottom line”….”triple bottom line”—net income; net income with a social conscience; net income with a social and ecological conscience, respectively. Besides net income, what the latter two have in common is a lofty and admirable goal of allocating some of that income or of other resources to worthwhile purposes, such as poverty programs or environmental protection.
What none of the bottom-line concepts does is to factor in some additional costs that may have been overlooked or incurred in calculating the bottom line in any of its three versions. All three—single, double and triple bottom lines—are based on net income, measured in monetized units such as dollars, even though they differ as to how and to what degree additional resources are allocated.
From an accounting standpoint, that’s as it should be, since ledgers are about the money that’s left after all money-denominated costs. But for a recruiter or a job seeker, there’s another kind of ledger that includes costs and benefits that are not always dollar or yen-denominated—including and especially certain opportunity costs of using multiple, other resources one way rather than another and the opportunity costs of a decision, which may be incalculable in dollar terms, e.g., the opportunity cost of deciding not to visit an ailing grandmother in intensive care in order to make it to a job interview.
Money Isn’t Everything
To address these opportunity costs—and not just the readily monetized ones calculated in terms of a single resource, e.g., cash, energy, or time—the introduction of the concept of a “bottom plane” seems useful. [My Google search for “bottom plane” turned up nothing like it, so it may be described as an “introduction” of the concept.]
Just as two points define a line, two lines define a plane. The “bottom plane” as I conceive it comprises all the net costs and benefits—including opportunity costs—of a decision and of the allocation of resources, be these cash, time, energy, or any other resource. What makes it a plane rather than a dollar-denominated bottom line is that it maps out the full opportunity costs of all germane resource allocations and decisions, not just the costs and benefits associated with only one resource (e.g., dollars).
If the bottom line is measured only in dollars, then what about net “income” or gains in time, energy, prestige, intellectual capital, etc.? As mentioned, there are opportunity costs that cannot be monetized. In factoring these in, a “bottom plane” can be a useful metaphorical, heuristic device—a teaching or conceptualizing tool.
A precondition of applying that tool is that all germane resources used, not just one, be included in the calculation of net gains, a.k.a., “income”, but in a broader sense than dollar-denominated income. Accordingly, if all “germane resources” and their allocations figure into the final “bottom plane” calculation, then all germane opportunity costs—for each resource—should be included as well. If the bottom line represents only one resource, money, the other—especially non-monetized resources—will need at least one more dimension for their representation. Hence, the “bottom plane”, which in no way has any invidious, discriminatory connotation, e.g., has no pejorative connotation such as “bottom feeder” or “bottom of the barrel”.
“Bottom plane” is merely a 2-dimensional extension of “bottom line”—an extension that requires careful reflection on all relevant, “full” opportunity costs across all resources that “matter” in a given decision.
Just as the “bottom line” is only a geometrical metaphor that encapsulates the 1-dimensional priority of “net income”, the “bottom plane” suggestively captures the importance of calculations that factor in the additional dimension of full opportunity costs, defined in terms of a net accounting of those costs associated with all germane resources.
A Brief Review
To full grasp the contrast between “bottom line” and “bottom plane”, a review of “opportunity cost” is in order: Everybody knows the upfront cost of what they’ve bought or decided not to buy. $X to buy Y or Z. You buy a BMW and pay cash. The interest on the auto loan, gas, insurance, parking, etc. are add-on costs—“costs of an opportunity”, but they are not “opportunity costs”, except in the imprecise sense of, “What a great opportunity! I got a great deal on the Beamer, but, of course, that opportunity is going to cost me!” In hiring it’s the same: “Ok. Hiring this guy gives us a great opportunity to tap his skills. But now we’ve got to pay him.
This opportunity is going to cost us a bundle!” That may be some intuitive—but misleading—notion of “the cost of an opportunity”, but it is not “opportunity cost”, in the strict sense and various applications I’ll explain shortly and previously analyzed, contrary to characterizations that suggest it is “explicit cost + implicit cost”, does not include your upfront resource costs.
Resource vs. Decision Opportunity Costs
There are two distinctly different measures of opportunity cost that are likely to cause trouble if the differences between them are not considered when trying to understand and estimate these costs. The big divide is between what I have called “resource opportunity cost” and “decision opportunity cost”. Often these will be the same, but sometimes not.
Example: if, as I argued in the aforementioned article, you are given a free ticket to anything, e.g., massage parlor services, the “resource opportunity cost” measured in dollars, as opposed to time, energy, or—in this instance—reputation, will be $0, since the ticket is free. That’s because with the $0 in hand you could not have bought anything else. So, having sacrificed no opportunity, you have, from this resource standpoint, no opportunity cost.
However, the “decision opportunity cost” could be much greater. Here’s how: Let’s say you use the massage parlor ticket because the only cost factor that matters to you is the dollar-denominated cost. You have lots of free time, energy and little regard for your public image. Further imagine that the ticket has to be used tonight—the same night a recruiter colleague’s company birthday party is being held. For logistical reasons, you can’t go to both venues. You also know that everybody at your colleague’s birthday party will get a door prize, including you, were you to go.
This means that your “decision opportunity cost”, also measured as dollar-denominated cost, will be precisely equal to the cash value of the door prize, assuming you walked to the massage parlor and would have walked to your colleague’s party, and a birthday gift was not required, thereby incurring no cash expense.
Hence your “decision opportunity cost”, being non-zero, i.e., the cost of the prize you would have gotten, will be greater than your “resource opportunity cost”, which was zero.
To see how this logic applies to hiring, see or review my example in “You Think You Understand Your Opportunity Costs?” of choosing between having an intern do a job free of charge and having a very good outside contractor do it, given certain pay parameters.
Full vs. Partial Opportunity Costs
Implicit in the massage parlor vs. birthday party door-prize example is another extremely important distinction and the core subject of this discussion: the distinction between what can be called “full opportunity costs” and “partial opportunity costs”.
That example illustrated calculation of “partial opportunity costs”, in that the only cost parameter taken into account or considered relevant was dollar cost. All the other conceptually germane opportunity-cost measures were ignored: expended time, energy, reputation, foregone pleasure, possibly lower stress levels, lost discovery or innovation opportunities, organizational synergy (enhanced, had you gone to the party), etc.
Any decision that is based on only one of these measures, e.g., dollars, and that is intended to minimize the associated explicitly dollar-denominated opportunity cost needs to be scrutinized to see whether it inadvertently and simultaneously increases opportunity costs defined by alternative measures, e.g., time or reputation. For example, this would happen if you minimized your dollar resource-opportunity cost by going to the massage parlor, at the expense of your reputation opportunity cost—the chance to enhance your in-house corporate esteem or not diminish it, by going to the party instead.
As a job applicant, candidate or a recruiter, you should—ideally—consider and estimate your “full opportunity costs”—in the sense of all immediately or imminently “relevant” opportunity cost categories, not your “partial opportunity costs” in terms of fewer cost categories.
To choose job X over job Y, or candidate W over candidate Z purely on the basis of the resource or decision dollar-denominated costs and benefits will tempt you to limit your estimate of the associated opportunity costs to dollar-denominated ones as well.
Moreover, the dollar-based yardstick will distort your cost-benefit comprehension of the choice you in fact made. Suppose you take a job you hate, except for the money. Your “full cost-benefit” evaluation of that job would include the fact that you hate it. In omitting that parameter and category of cost—the emotional (dis)satisfaction, a.k.a. stress level, you will be at risk of making one of two mistakes:
1. You will, for the sake of “accounting” consistency, evaluate the alternative jobs entirely and exclusively in dollar-denominated terms, thereby omitting from consideration how those jobs compare with respect to emotional satisfaction and other parameters that normally should, do or might matter to you. You’ll choose the job that pays the most, and ignore everything else that you shouldn’t.
2. You will indeed consider the other opportunity-cost factors such as emotional satisfaction levels of the alternative jobs—and only those, but will, being human and determined to maximize you dollar-denominated benefits, emphasize the emotional negatives in the alternative jobs, in order to rationalize your purely dollar-driven choice. That’s basic human nature—and “cognitive dissonance reduction”.
In effect, you would be comparing the net benefit of the job you took (the difference in salaries between the job you took and the best one you didn’t) with only the emotional costs of the job you didn’t take, instead of the net costs of the job you did take, i.e., the difference in costs between the two jobs.
A “full opportunity cost” analysis would comprise an estimation of the “net benefits” and “net costs” across all the currently/imminently germane categories, not across all their possible concrete instances, which are infinite.
A fair partial analysis would comprise an estimation of the net benefits measured in terms of fewer (weighted/unweighted) benefit parameters and net costs measured in the same number of (weighted/unweighted) cost parameters.
A recruiter, in virtue of being on the supply-side of the job equation and having a job—the job of recruiting, is at a somewhat reduced risk of having so narrow a criterion of cost as that adopted by the desperate job-seeker who needs the kind of income the recruiter already has.
Still, if he is representing a client who sole concern is dollar-cost, that preoccupation will tinge his solicitation, selection, referral and/or hiring of candidates. As a result, he or she may be tempted or under pressure to measure the opportunity cost of hiring a given candidate through a limited partial opportunity cost reckoning.
Protect Your “Bottom Plane”
Bottom line: Protect your 1-dimensional dollar-denominated bottom line by making it a 2-dimensional “bottom plane” that encompasses as many of your relevant measures of opportunity cost as possible, including possibly non-monetized measures such as time, energy, good will, prestige, innovation and ethics.