Cost-Benefit Analysis

Skill level: Intermediate

Description

A cost-benefit analysis is a study to determine the relationship between the benefits and the costs of changes to processes, policies, and/or procedures. The costs should be stated in financial units (e.g., Dollars, Pesos, Euros, etc.).  Cost-benefit analyses are typically performed when there is a change that is pending to ensure the benefits from the changes outweigh the costs.

Benefits

  • Easy to calculate once the information is available
  • Grounds the change management process in knowledge-based management and financial discipline

How to Use

  • Step 1.  Determine all costs associated with the processes affected by a proposed change.
  • Step 2.  Have these costs validated by accounting staff or by the appropriate financial group.
  • Step 3.  Identify the changes to the processes and calculate the costs to execute the new process going forward (also known as the operational state).
  • Step 4.  Determine the costs of implementing the changes to the process. In addition to hard costs related to hardware and equipment, ensure that you capture costs related to information technology and operations, training, documentation, running processes in parallel during transition, office lease cancellation, and severance costs related to dismissed employees. There may be other costs related to implementing the change.
  • Step 5.  Calculate the benefits projected from making these changes.
  • Step 6.  Determine the cost-benefit ratio: divide the total of the projected benefits by the total costs. A higher the ratio of benefits to costs indicates a positive change.
    • *Tip: It is wise to have accounting and/or finance staff confirm the assumptions and analysis.
  • Step 7.  Communicate to management to obtain approval and implement the changes.
  • Step 8.  Periodically assess and calculate whether the benefits and costs forecasted were realized and recalculate the cost-benefit analysis. Use this information for future cost-benefit analyses of future projects.

Relevant Definitions

Not Applicable

Example

A proposed change would reduce the number of reviews required before approving an application. The finance department provided a cost-benefit analysis template and guidance for using the template to the project team.

Calculating the costs required determining the entire costs stream associated with the end-to-end processing of an application by the underwriting and compliance areas. The team presented this analysis to the accounting department for validation.

The improvement team redesigned the process and modeled the benefits:

  • Bottom-line benefits consisted of increased sales and cost savings from reductions in staff and reductions in office space.
  • Costs resulting from the change included communicating changes, documenting changes, designing and printing new forms, and training staff on the changes. Costs would also include severance for affected employees.

After the accounting and finance areas approved the financial analyses and projections, the team delivered a presentation to senior management. Management approved the changes, the project team planned the implementation, and the changes were executed.

Six months after implementation, the project team and stakeholders revisited the initial cost-benefit analysis and determined that actual results were consistent with forecasted expectations.

The cost-benefit analysis is maintained in a document repository and can be leveraged by project teams performing similar projects in the future.

 

« Back to Glossary Index