1. PRJ566: Project Planning and Management Cost Benefit Analysis

2. Note: Cost Benefit Analysis is one of the most useful things you will ever learn!

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

4. 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

5. What is cost benefit analysis? “Item” can include equipment, software, resources, etc.

6. 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

7. The Project Life Cycle ScopePlan 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

8. The secrets Effective estimates Measures that reflect business value Good organization

9. 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

10. 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.

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

12. The process Benefits of each proposed solution? Costs of each proposed solution? Compare solutions--Payback and ROI Analyses and risks Make recommendation

13. 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

14. 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

15. 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)

16. Benefits-can come from Cost savings $, time, equipment, mistakes New services to clients Mandatory changes Strategic advantage Make more money! Technical reasons

17. Example--benefits Come from savings! Can save $24,000 per month!

18. Costs--one time Development costs – wages, contract fees Initial Training costs Initial equipment costs – hardware, software

19. Example--one time costs Software = $90,000 Labour & Training = $10,000

20. 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)

21. Example--ongoing costs Software Maintenance Contract = $8,400 per year ($700/mo)

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

23. 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

24. Payback

25. Recommendation Buy the remote control software!

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

27. 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?

28. Return On Investment Analysis ROI = Accum. Benefits - Accum. Costs Accum. Costs X 100

29. Payback

30. ROI Example ROI = $16,500 $103,500 X 100= 16% Over 5 months

31. ROI Example ROI = $39,800 $104,200 X 100= 38% Over 6 months

32. Recommendation Buy the remote control software!

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

34. When Comparisons are Difficult What 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

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

36. 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.

37. 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

38. 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.

39. 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

40. 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

42. 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

44. Example Analysis Payback ROI

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

47. 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?