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Article
putting "benefit" back in cost-benefit analysis
By
Eugene Reagan
Senior Consultant
One of today’s most tiresome
catchphrases is “total cost of ownership.” Obviously, no one is
interested in knowing the partial cost of ownership. The idea of the
net cost of ownership is nothing but a recycling of the old idea of
cost-benefit analysis, comparing total costs with total benefits—a
concept that has been around for 50 years or more.
The cost side
of the cost-benefit equation is usually pretty straightforward. A
new system has specific costs related to its purchase (e.g.,
licenses and maintenance). That system or any new process may also
require changes to personnel, either added or eliminated, with more
or less salary expense. There may be ancillary service or support
costs. All of these can be quantified fairly easily. Addressing the
benefit side of the equation, however, can be a little more complex.
Benefits can be
classified and analyzed in several different ways:
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Hard dollars vs. soft dollars:
If you can stop writing a check for something, you’re saving
hard dollars. Soft dollars are often difficult to quantify.
However, if you are aggressive, you can turn soft dollars into
hard dollars. If a process change is going to eliminate 20 hours
of work for an employee, there is a soft-dollar benefit in that
he or she is now free to take on additional work. That can be
turned into hard dollars only if you can identify another 20
hours of work that can be eliminated. Combining the two savings
can indeed create the opportunity for elimination of a full-time
position. It takes aggressive thinking and planning to achieve
these savings, but they are real and attainable. |
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One-time vs. ongoing benefits:
Again, it is easy to identify one-time benefits. I can replace
an outdated machine with a state-of-the art one, or I can cut
out a planned expenditure. Ongoing benefits would include
reductions in employee costs (including benefits), production
costs, outside services, and productivity improvements. |
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Tangible vs. intangible benefits:
How can you measure intangible benefits? First, you have to
identify them. Then you consider their impact on things like
growth in market share or customer retention. For instance, a
change designed to improve quality should result in improved
customer satisfaction (an intangible). This should lead to
higher rates of customer retention. Goals can be set and
progress can be measured, turning the intangible benefit into a
tangible one. Similarly, changes that improve employee morale
can lead to reduced turnover, which can be measured.
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In many ways,
cost-benefit analysis, as its name implies, is just a
straightforward math problem. Total cost minus total net benefit
over some period tells you if the investment is worthwhile.
Another useful
tool is a staffing model. A staffing model should be composed of
three factors: volume drivers, transaction times, and allowances
(training time, absenteeism, turnover, etc.). An effective
cost-benefit analysis considers potential increases in work volume
resulting from the change in process or system, and it can determine
the impact of shortened transaction times. Improvements in turnover
rates or other allowances can also be factored into the equation. A
good staffing model pulls all of these elements into one place to
evaluate the long-term effects of future changes.
Grinding out a
meaningful cost-benefit analysis is nothing new, but it is the only
way to be certain that the varied benefits to your organization
outweigh the costs. |
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