A study into why investing in automation is important, and why it's even more important to know what you're investing in

Disclaimer: I might (and probably will) use some terminology out of context. The point I'm going to make is abstract, and hence not dependent on the correct usage of individual words.

By automation, I mean all kinds of tools and technology that allow us to perform a task effectively, thus generating value. To express it concisely: automation allows us to generate more value with less resources.

Let us start by considering a basic company, which survives by generating value. Not money, not products, but the more abstract concept of value. To be able to generate value, the company needs resources.

basic_company

As long as the company generates enough value with the resources available to it, the company has a working business model. I will call the difference between generated value and used resources "net value". "Net value" is in this context once again a purely abstract concept.

basic_net_value

Let's consider a point in time when the company makes an investment. The company could, for example, invest in computer software, which allows it to perform daily tasks in a more effective way. The investment requires resources:

investment_value_resources

The net value generated by the company will temporarily see a sharp decline as a consequence of the investment. Let us consider the investment to be proper. The net value generated after the investment will surpass the net value that would have been generated without the investment at some point in time.

investment_net_value

A proper investment in automation will continuously generate more value as compared to the original cost in resources. Perhaps, as in the example earlier, the company has invested in computer software, which needs to be updated once in a while. These updates are considered to be important; they allow for the company to generate even more value:

investment_good_value

Now let us, for a moment, consider that the company has made the decision to invest without having proper knowledge of all the things that should be considered before making the investment. Let us, for example, assume that the company has invested in poor computer software. The decision has been made purely from the point of view of the cost of the initial investment. The computer software doesn't communicate well with other software and as such doesn't generate value as effectively as was hoped for. The software requires constant updates not in order to generate value more effectively, but in order to generate any value at all (as compared to not having made the investment at all).

investment_poor_value

At this point, the original cost of the investment makes little difference; the value lost is not from the value lost in the original investment. The value is lost as compared to the potentially good investment, which would have generated considerably more value.

By generating more value, the company might have been able to:

  • offer the same services for a lower price
  • offer better quality services
  • make greater profits
  • utilize the gained value in some other way

The "real world" situations might vary, but the general point is the same. Investments in automation and technology are made so more value can be generated. The decision cannot be made on financial grounds alone; value is measured on the basis of what we are investing in. As such, deep knowledge about the long term effects of the investment is crucial, and people with this knowledge should always be part of the investment decision process.

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