Cost - Benefit analysis essential to IT projects

The cost-benefit analysis provides a third advantage-its detailed documentation of the project’s scope via the statements of cost and benefit. When developing the cost-benefit analysis you are required to be razor sharp in your logic surrounding the project. Which benefits are you striving for? Exactly how will the project deliver those benefits? Have you budgeted adequately to achieve those benefits? Committing numbers to paper forces you to actively address these issues. Once you have completed your mental model of the project, all decisions regarding the project are easier to make. You now have a guiding framework that can be used daily throughout the project’s execution. When challenged with a tough decision you can immediately ask yourself how your decision will influence the cost-benefit performance of the project. For example, will the addition of an extra training class and its associated schedule and budget impact have a positive impact to the project’s benefits? Do the benefits outweigh the costs? If yes, then do the training. If not, save your precious dollars for something that is already in your plan.

Information technology has tremendous potential to effect positive change in an organization. Business processes, which may have been static for years, can be radically transformed with the advent of IT. The cost-benefit framework will assist the company in documenting the promised transformations. After all, the project’s benefits rely on effective transformation. Therefore it is essential to thoroughly document the benefits to prove the credibility of the project. Stakeholders will continually reference a quality benefits analysis throughout the project, adopting it as their mental model for business transformation success.

The benefits portion of your analysis should be communicated to your project team, vendor partners, end users, and everyone else involved in the project. The project team’s understanding of the benefits targets will align their goals just as it aligned yours. George S. Patton, the famous military general, attributes his success not to his own military prowess but instead to the execution of his plan by the troops. Patton maintained that effectively communicating the plan to his troops was the single most important component to the Allied victory in Europe. IT can effect change only when the strategy is shared with stakeholders.

Finally, the cost-benefit analysis can be used as a measuring device once the IT project begins to deliver its promised functionality. The type of analysis performed before the project is known as ex-ante. Ex-ante is your prediction of how the project will progress from a cost-benefit standpoint. When the project progresses toward completion, you can implement an auditing scheme to check the actual costs and the actual attainment of benefits. The ex-ante analysis becomes the baseline for your audit. When the project is complete, users have been trained, and new processes are in place you then measure actual performance against the ex-ante analysis. Once the new systems are in place you cannot go back and measure the how the company previously performed. Here, the ex-ante cost benefit is invaluable for the auditing function because you invested the time to study the “business-as-usual” case before implementation.

Cost - Benefit Methodology
You have accepted the advantages of cost-benefit analysis and are committed to conducting an analysis for one of your current or planned projects, but where do you begin? This section discusses the major activities, as follows:

Determine your audience and its requirements.
Determine the project scope.
Determine baseline or “do nothing” cost of business.
Estimate comprehensive lifecycle project costs.
Determine benefits.
Schedule the investment and benefits.
Analyze the cash streams.
Communicate the results of your analysis with your audience and gain acceptance.
• Assign responsibility for benefits attainment using the A-R-C-I methodology (which stands for Accountable, Responsible, Contributing, and Informed).

Understand the audience
In the authors’ experience, determining your audience and understanding their expectations is one of the cornerstones that will ensure the ultimate success and acceptance of your cost-benefit analysis. Who will be the recipient of your study? What format are they seeking? What level of detail are they expecting?

Your audience will help you determine the level of detail needed in your analysis. This can range anywhere from simple lists of costs and benefits to a detailed time-phased, cash-stream analysis. The level of effort required to produce the different levels of detail varies considerably, so understand the requirements before you produce overkill.

Write the scope
Establish an understanding of the business problem you are trying to solve with the information technology. Companies do not implement technology for its own sake; they implement technology to solve a particular problem, improve a certain process, make a task more efficient, etc. Document these business drivers. Then list your project’s deliverables and how they support the business drivers. Also list what the project will not deliver. Setting the scope will require quite a bit of effort and socialization of your results with the company. The scope must balance the needs of the users with the constraints established by your management. Establish the baseline cost of business

One component of a detailed cost-benefit analysis is the baseline cost of business. Baseline means what the company spends today in the domain under which the project’s information technology will operate. Recalling the business drivers mentioned above, how much does the company spend today on those business processes, materials, equipment, old information systems, etc.? Anything that your information technology project will ultimately affect belongs in the baseline. By establishing the baseline you will know the size of the domain of your project and, once you have calculated the benefits, what the benefits are in that domain. The baseline is important because you can use it to effectively communicate the magnitude of the business domain and today’s expenditures in that domain.