PRJ566: Project Planning and Management

Cost Benefit Analysis

Note:

Cost Benefit Analysis is one of the most useful things you will ever learn!

Agenda

What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example

What is cost benefit analysis?

Shows the benefit or return the project (or item) will bring to the business.

Helps you decide which projects (or items) are most important to the business

Helps you prove how important your project (or item) is

What is cost benefit analysis?

“Item” can include equipment, software, resources, etc.

When do you do it?

You use cost benefit analyses all across the project life cycle:

• When deciding which project to do• Sometimes at the start of a project—

with Project Overview Statement• To help decide between two solutions or

items• To justify extra expenditure

The Project Life Cycle

Scope Plan Execute

Control

Concept:•Preliminary scope•Preliminary costs•Cost benefit analysis

Planning:•Scope•Plan (WBS)•Iterative!!

Execution & Control:•Deliverables•Management & control•Iterative!!

Close-out:•Completed work•Customer acceptance•Lessons learned

The secrets

Effective estimates Measures that reflect business value Good organization

How does it work?

• Determine costs, both one-time and on-going, of all solutions being investigated

• Determine and quantify all benefits of all solutions being investigated

• Investigate risks of all solutions being investigated

How does it work?

• To compare 2 solutions, use ROI and Payback analyses (and risks) to compare costs and benefits.

• If you are doing a cost benefit for one scenario you might want to compare against the cost of of doing nothing.

Agenda

What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example

The process

Benefits of each proposed solution? Costs of each proposed solution? Compare solutions--Payback and ROI

Analyses and risks Make recommendation

Example

Purchase & Install Remote Control Software

Currently:

• 20% calls (=200/mo) involve visit to client’s office

• Visit averages 15 min, with average 2 hour client wait time

Example

Purchase & Install Remote Control Software

Currently:

• Use $60/hr client time

• Wait time costs 200 x 2hrs x $60/hr

• Wait time costs $24,000 per month

Example

Purchase & Install Remote Control Software

Proposed Solution:

• $90,000 remote control software

• To install--$10,000 labour and training

• Maintenance of $8,400 per year ($700/mo)

Benefits-can come from

• Cost savings• $, time, equipment, mistakes

• New services to clients• Mandatory changes• Strategic advantage

• Make more money!

• Technical reasons

Example--benefits

• Come from savings!

• Can save $24,000 per month!

Costs--one time

• Development costs – wages, contract fees

• Initial Training costs• Initial equipment costs – hardware,

software

Example--one time costs

• Software = $90,000

• Labour & Training = $10,000

Costs--ongoing

Overhead - facilities, office space, etc. Web site costs--domain name renewal,

Web hosting Communication costs--phone, Internet,

and so on Maintenance of software and hardware “Maintenance” of staff (ongoing training,

and so on)

Example--ongoing costs

• Software Maintenance Contract = $8,400 per year ($700/mo)

Agenda

What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example

Payback Analysis

• Payback period = time required to recoup costs of project

• Payback occurs when accumulated benefits > accumulated costs (the sooner the better!)

• Typically - there is a ceiling

PaybackOption 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200

Benefits

Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000

Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800

Recommendation

Buy the remote control software!

Agenda

What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example

Return on Investment Analysis

• You invested a certain amount of $ (costs)

• What did you earn on this money?(Benefits) What was your return in a certain amount of time?

Return On Investment Analysis

ROI =Accum. Benefits - Accum. Costs

Accum. Costs

X 100

PaybackOption 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200

Benefits

Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000

Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800

ROI Example

ROI =$16,500

$103,500

X 100 = 16%

Over 5 months

ROI Example

ROI =

$39,800

$104,200

X 100 = 38%

Over 6 months

Recommendation

Buy the remote control software!

Agenda

What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example

When Comparisons are DifficultWhat do you do when the best option

does not come out on top in terms of $?• Look at risks• Look at intangible costs and benefits

Agenda

What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example

Example

• GMS--Great Marketing Services asks the IT Project Manager to research improvements to its outdated flyer development system.

• GMS develops marketing fliers for various organizations.

Example

• GMS collects photos, diskettes from client.

• GMS scans photos, lays out flyer using old flyer software

• GMS prints flyer, courier to client.• Client reviews, corrects, courier back. • GMS prints final copy, sends to printer. • GMS arranges for flyer distribution

Example

Situation:• Flyer development takes too long and is

too manual. Automation of the process is necessary.

• Manual systems are causing lengthy delays, high errors.

• Competitors are going to automation, to the Internet.

Example

One time Costs:• Software $90k, Installation $120k • Internet infrastructure (labour, hardware,

software) $190K• PM Salary $100K• Upgrade PCs/monitors $120k• Train layout staff $20k• Marketing to clients $80k

Example

Ongoing Costs:• Maintenance of internet infrastructure

$15k/yr then $17k/yr after 1 year• New Software maintenance $10k/yr• Hardware upgrade costs $15k/yr then

$20k/yr after 2 years

Example

Benefits:• Save $70k/yr wages in review/correct

process • Save $40k/yr (1 employee) in layout

process (cut from 2 to 1 weeks)• Estimate $50k/yr increase in business

for 4 years, then stay level

Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5

BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New business 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000

Example

Analysis• Payback• ROI

Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5CostsNew Software 90,000Software Ins tallation 120,000Project m anager 100,000Internet Infras tructure 190,000Hardware Purchase 120,000Training for s taff 20,000Marketing to clients 80,000Internet Maintenance 15,000 17,000 17,000 17,000 17,000Software Maintenance 10,000 10,000 10,000 10,000 10,000Hardware Maintenance 15,000 15,000 20,000 20,000 20,000Cumulative Costs 720,000 760,000 802,000 849,000 896,000 943,000

BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New bus iness 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000Cumulative Benefits - Cumulative Costs -720,000 -600,000 -432,000 -219,000 44,000 307,000ROI 5% 33%

Example

Analysis• Payback in Year 4• ROI = $44k/$896k = 5% at 4 years• ROI = $307k/$943k = 33% at 5 years

Example

Recommendation?• Is this ROI acceptable to management?

• Payback takes a LONG time!

• What are other factors?• Competition--is there a choice?• Risks--can clients handle new system?• Risks--can employees handle new system?