Cost Benefit Analysis

As part of problem solving approach, you will end up with multiple solution options, how would you evaluate each of these and pick the optimum solution?

Cost Benefit Analysis (CBA) is one of the evaluation techniques to identify the right solution; it is a widely used technique to analyze solution options and decide on an approach to remedy a problem or implement a solution for an opportunity. CBA provides a means for systematically comparing the value of outcomes with the value of resources required to achieve the outcome.

Generally feasibility studies analyze viability of projects and solutions; technical feasibility looks at factors like architecture and scalability primarily from a technical perspective. CBA focuses on economical feasibility and determines if a solution is cost effective and economically sound.

Best practices:

(1) CBA must document all assumptions

(2) CBA must contains at least 3 solution options, one of the options would be “no change” or “as is” condition, to highlight cost of avoidance.

(3) Customers /Stakeholder must be the ones to identify and determine how to measure and evaluate the benefits.

(4) Customers/Stakeholder must be interviewed to identify the potential impacts of new or modified systems.

(5) CBA must have data for 3-5 year time frame to paint a better picture of one time and ongoing costs and benefits.

Be mindful of the fact that both costs and benefits are made up of one time and ongoing elements.

Costs are made of the following elements:

Labor /Services- labor costs include the salaries and benefits of employees and contractors/consultants assigned to the project. Sometimes this may also be referred to as services costs.

Software – All applications or software which has to be purchased or programmed. This may include not only price of procurement but also cost of licenses over the maintenance time frame.

Hardware- Equipment required to implement solutions for e.g. CPU, storage, RAM, servers, laptops, desktops, workstations etc.

Training – costs related to training project team members, stakeholders, super users and the larger user community. This could include monies spent on training material, instructors, software, training delivery and workshops/conferences.

Depending upon the project type, you might need to look into additional cost items like materials, supplies, facilities, travel, lodging and telecommunications related costs. There might be projects or software implementations which would involve additional headcount requirements which may involve additional costs related to recruitment and so on.

A good place to start the documentation of costs would be the current setup Review activities and resources engaged in the current process this indicates the labor/service costs. Review current system architecture and identify all software applications, this will lead you to software costs, resources costs for administration and license/maintenance costs, hardware used and then to hardware’s cost, depreciation, maintenance.

Benefits are the services, capabilities, and qualities of each alternative system, and can be viewed as the return from an investment. To estimate benefits, first identify the benefits for both the customers and the organization that provides the service(s) to the customers. Start by analyzing a number of factors to thoroughly review all potential benefits like: Accuracy, Availability, Performance, Compatibility, Efficiency, Maintainability, Modularity, Reliability and Security. Some might refer to benefits as return on investment (ROI).

At a simplistic level, if you compare the costs and benefits of each of the solution options then you are doing cost benefit analysis. In later posts, I will discuss how this type of analysis can be combined with other techniques to evaluate all solution options for e.g. maturity of solutions, impact to business process, technical feasibility etc.

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