Advantages of Cost Benefit Analysis

My son, like all 3 year olds is an avid chocolate and Candy lover. Today his attention at the supermarket was transfixed on a huge chocolate Mousse cake. I did not have the heart to blurt out an outright 'NO', so i put on my health conscious hat and tried to explain him, how chocolate is more harmful for him (as compared to momentary sweet savory pleasure gained after eating a piece of the yummy treat). A single serving has atleast 500 calories plus bad cholesterol, fats, Carbs, sodium etc - he looked at me like i was speaking Martian. This was followed by loud bawling and hands flailing.

I reminded him of my last dentist's visit where i had my tooth extracted and he had to see me in pain.

Cutting to the chase, end result of all this, i ended up buying the Cake + a Vanilla chocolate ice cream cone...go figure...

 

This was my version of a failed Cost Benefit Analysis discussion with a 3 year old.

Now on a serious note,

What is Cost Benefit Analysis?

Cost Benefit analysis is a technique we make use of in our professional life as well as personal life.

Learning to perform a proper CBA is a very important skillset that will benefit any and every project manager in his lifetime career.

 

Technically Cost Benefit analysis is a financial process of analyzing a particular product or activity (Let's call this a 'change') where all the factors impacting the anticipated costs incurred and the expected benefits to produce the end result are expressed and evaluated as a common monetary denominator.

One thing to bear in mind is, all the possible cost and benefit factors, external and internal that go on to produce or complete the project (or 'change') has to be laid out in Monetary terms, so that we compare apples to apples.

These factors are then presented before the executive board or the decision making committee so they can decide whether to go ahead with the venture or project or simply scrap the deal.

Thus CBA as is the popular acronym, is a widely accepted technique where the costs incurred in doing a change are substracted from the benefits associated.

 

There are several factors that have to be considered when coming up with a CBA on a change

1> Tangible vs Intangible factors

All factors have to be analyzed - tangible as well as intangible ones.

Costs and Benefits that are measurable can be easily used in the analysis, but measuring costs and benefits associated with intangible factors forms the biggest challenge in these type of activities and it is to be performed subjectively. Mainly it is you, the project manager (along with the other stakeholders) who has to live with that costs and benefits decision for the duration of the project and you should be convinced about it yourself before trying to convince the stakeholders committee.

e.g. In a new Vendor Procurement project, the intangible cost and benefit examples are - ramp up time of the new vendor resources, leading to productivity loss and advantages of more efficient business functioning due to employing a new vendor agency.

 

2> Time

Some benefits and costs are incurred over time.

For e.g. Consider the CBA performed for buying new computers for an entire Customer service department for an Insurance Organization. This will include Cost of buying, service and maintenance costs that occur over time. Similarly benefits can also occur over time. In the same example say. Initial few months of computer usage will be seen as training and onboarding with no productivity and as the use, acceptance and familiarity with the tool increases the productivity (or benefits) will also increase over time

 

Steps to perform a Cost Benefit Analysis

1> First the user should have an extremely well rounded or a 360 degree view of the change to be implemented.

  

2> Lay down all the tangible costs that will be incurred or expected to be incurred now or over a period of time if we go ahead with the change.

e.g. Fixed costs like equipment cost, Software and License fees, Training costs, Maintenance fees, Travel costs, Employee Salaries, supplier and vendor expenses etc

 

3> Lay down all the intable costs that will be incurred or expected to be incurred now or over a period of time. Subjectively analyze these and assign a monetary value

e.g. Production Downtime when implementing a system change, employee productivity loss when transitioning to a new software tool etc

 

 4> Similarly lay down all the tangible and intangible benefits as we did for the costs by coming up with a financial number for it.

5> Substract the potential costs from the anticipated benefits and complete your CBA.
Performing a Cost benefit analysis gives you a well rounded view of implementing the change. It gives a good perspective as to does it make sense to implement the change or not.

So in all, this process is very similar to the Pros or Cons analysis that we normally do in our personal life as well when we want to take any important decision and this analysis definitely helps clear the picture about the process.

Hope this article covers the important aspects of the topic. If you have any view or comments that are different than above or want to add any points to it do feel free to write your comments.

 

e.g of a Cost Benefit analysis

 

An Insurance Organization wants their claims department to interface to ISO ClaimSearch. So the Project Sponsoring committee has asked the department Business Lead to perform a complete Cost Benefit analysis, so they can decide does it make sense to go ahead with the project or not

 

Duration of Project - 3 Months

Costs

Tangibles

• 2 Full Time BA Cost

• 2 Full Time Developer Cost
• 1 Full Time Tester Cost - (say) 50%
• 1 Business SME involved - (say) 30%
• 1 Training Lead - (say) 30%
• ISO Account setup/Reporting Licensing costs

Intangibles

• Total loss of Productivity in training resources

 

Benefits

Tangible

• Costs to manually use ISO Site

 

Intangible

• Claim operator time saved due to automatic reporting
• 3 Operators - 30% time savings

Final decision - Benefits - Costs