September 25, 2006

"THE ELEMENTS OF COST/BENEFIT ANALYSIS"

I recently met with some college students who asked me about "PRIDE" Information Resource Management, and, specifically about Project Management. They were all somewhat familiar with concepts relating to Work Breakdown Structures, estimating and scheduling, but all were at a loss when I started to talk about the preparation of a Cost/Benefit Analysis. Evidently, this was not part of their curriculum. I described to them the importance of Cost/Benefit Analysis and how it was a critical part of Project Management in terms of determining whether to proceed with a systems development project or not. Perhaps it is time for a refresher course on the subject.

First, a Cost/Benefit Analysis is an analysis of the costs or expenses incurred by a project in comparison to the benefits derived from implementing the project. Its preparation begins with an estimate for an overall project.

Based on this, consideration is given to the one-time costs associated with the project (those costs incurred by the project). It is also customary to include the following items:

• Determine on-going staffing costs - an analysis of the operating costs (actual versus proposed). This is based on the rough design of the planned system and its anticipated impact on the company.

• Estimated savings and expenses by user department areas (e.g., Manufacturing, Marketing, etc.). This describes the on-going costs associated with the system, as well as the anticipated savings.

• Itemized benefits - both tangible and intangible. In the systems world, the biggest benefits are typically intangible in nature. A benefit is typically written beginning with a transitive verb, such as "improve," "maximize," "minimize," etc. Substantiate your claim; do not simply say "Improved cash flow"; instead, say something like, "Improved cash flow through tighter control over inventory and faster response from Production."

• Break Even Point - the calculated point in time where cost savings match accumulated development expenses. It is normally calculated as:

  Break Even Point = Investment / Average Annual Savings

  For example, where the project Investment was $49,215 and the Average Annual Savings was $22,861, the Break Even Point is 2.15 years (26 months)

• Calculate Return On Investment (ROI) - the ratio of projected cost savings versus amount invested. It is typically calculated as:

  ROI = (Average Annual Savings / Investment) X 100

  Using the figures from above, the ROI is 46.4%

For Break Even Points and ROI, some organizations may have in-house standards for developing these figures and include considerations for inflation, interest, depreciation, amortization, etc.

Other than the project estimate and schedule, the Cost/Benefit Analysis becomes the focal point from which management will make a decision to proceed with a project. I have also seen companies establish standards in this regard. For example, some companies will not touch a project if it doesn't show a minimum of 200% ROI or a break even point of five years or more (after all, they might have better things to do with their money than wait for a system to reap dividends).

To assist in the preparation of a Cost/Analysis, we offer the following worksheet.

For a sample of a completed worksheet, click HERE.

CONCLUSION

Performing a Cost/Benefit Analysis is critical to the continuation of a development product. Superficial attention to its development may result in erroneous conclusions which will lead a company down a path to disaster. It is important that both costs and benefits be thoroughly defined and scrutinized. After all, there is little point in throwing good money after bad. I have seen too many system development projects turn into mega-disasters simply because companies didn't take the time to study the basics as herein described. Because of this, the preparation of a Cost/Benefit Analysis requires someone who can accurately calculate figures, writes effectively, pays attention to detail, and possesses a sense of "salesmanship." The type of person performing this work is typically a senior project manager or senior analyst, and not a software engineer or programmer.

The worksheet mentioned above is helpful for recording calculations and benefits, but the final Cost/Benefit Analysis should be carefully packaged and explained, both as an executive summary, and in detail.

Bottom-line, the purpose for the preparation of a Cost/Benefit Analysis is to allow a company to "Look before you leap."

For additional information on "PRIDE" Project Management, click HERE.

OUR BRYCE'S LAW OF THE WEEK therefore is...
"It is important that both costs and benefits be thoroughly defined and scrutinized. After all, there is little point in throwing good money after bad."

"BRYCE MANAGEMENT ANALYSIS" SERVICE INTRODUCED

We've just introduced a new free service for managers to perform a self-analysis of their style of management, including leadership and corporate culture. Check it out at:

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MBA DAILY PRODUCTIVITY ANALYZER INTRODUCED

Also be sure to check out our new "MBA Daily Productivity Analyzer" which is a free calculator to evaluate a person's personal productivity during the day. It is also available at our corporate web site.

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IN OUR "DOWN THE ROAD" SECTION

Verify 2006, the International Software Test Conference, will be held October 10th-11th in Washington, DC at the Crown Plaza Hotel Crystal City. For information, call 703/725-3051.

The Association of Records Managers and Administrators (ARMA) will be holding their 2006 International Conference and Expo in San Antonio, Texas, at the Henry B. Gonzalez Convention Center on October 22nd-25th. For information, contact ARMA's headquarters at 913/341-3808 or 800/422-2762 or visit their web page at https://www.arma.org/

The International Institute of Business Analysis will be holding their World Congress for Business Analysts (in conjunction with ProjectWorld 2006) on November 6th-9th at the Caribe Royale Hotel in Orlando, FL. For information, call 212/661-3500 x 3702 or visit their web site at: www.iirusa.com/baw

The Association of Management Consulting Firms will be holding their 60th Annual Meeting on December 6th-8th at the Harvard Club in New York City. For information, contact AMCF headquarters in New York at 212/551-7887 or visit their web page at: http://www.amcf.org/

If you have got an upcoming IRM related event you want mentioned, please e-mail the date, time and location of the event to timb001@phmainstreet.com

NEW eBOOK: THE BRYCE IS RIGHT!

Folks, we've just released a new book on management entitled, "The Bryce is Right! Empowering Managers in today's Corporate Culture." This is a frank and candid description of the state of the art in management and includes essays on the problems in management today, along with some pragmatic advice on how to deal with them. Basically, this is a condensed course in management. As such, it is suited for managers, either those aspiring to become a manager or for those who need a refresher course. It will also be of interest to young people entering the work force, and is excellent for college curriculums.

Charles Cole of Lyndhurst, OH, said it is a "Very interesting book. Good work! It reminds me of some of the early works I read by W. Edwards Deming. Too bad the American corporate gurus of his day didn't pay him heed."

And Wolf Hager of Fort Myers, FL, says it is "A very impressive publication which requires careful reading and reminds me somewhat of Peter Drucker."

The price is just $20 plus tax. For more information on our book or to order on-line, see:

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We have also just produced a new one-day training program of the same name. For more information on both the eBook and course, please visit our web site at:

http://www.phmainstreet.com/mba/bryce1.htm

While there, look for our new MS PowerPoint presentation describing both the book and the training program.

MY "PET PEEVE OF THE WEEK" IS "THE NEWS MEDIA"

I was a loyal reader of "Newsweek" magazine for at least thirty years, but I noticed the reporting was getting watered down and consequently I canceled my subscription. I haven't looked at a copy of it in quite some time, but I recently flipped through an issue at a doctor's office. I found it interesting that it took me about 40 pages until I finally got to the lead story. This was prefaced by a series of small fluff pieces aimed at celebrities in the media, cartoons and quotes, the latest technological devices, and, oh yea, some letters to the editor. Aside from the letters, everything else tried to convey a "hip" image, nothing truly journalistic, just something cute and meaningless. I guess this is one of the reasons why I drifted away from "Newsweek," their ability to report and analyze news has deteriorated considerably over the last few years. But frankly, I don't think "Newsweek" is alone in this regards. "Time" magazine, and television network news have also watered their reporting down. Accurate news reporting is sacrificed for what is considered "hip" or politically fashionable for the moment. I think Huntley/Brinkley would turn over in their graves if they knew what was going on at NBC news. But, in defense of today's news reporting, I think it says a lot about ourselves. For example, news is now reported in smaller, easier to digest, chunks. I guess Americans have the attention span of a gnat. I also question our set of priorities; since when has Brad Pitt's and Angelina Jole's baby been more important than the problems in the Middle East? Is Apples iPod more important than the problems in Detroit? Either the media is distorting our sense of priorities or, God forbid, they understand us too well. I hope it is the former and not the latter.

Such is my Pet Peeve of the Week.

FRAPPER MAP

Friends, I don't know if you've seen it yet, but we've added a Frapper map to the "Management Visions" web site. Frapper is a free mapping service offered by the folks at Rising Concepts, LLC, and allows you to plot yourself on a worldwide map. This is a great way to keep track of our listeners and I encourage you to try it out through our web page or by clicking HERE.

AND FINALLY...

I received an e-mail from an AC Kemper in Athens, Ohio who wrote me regarding last week's essay entitled, "Uncommon Sense."

AC writes:

"Try to get by in corporate America by trusting common sense, and down you'll go. Always watch out for the realities that plague even the most prestigious organizations. I found your piece to be humorous as well as honest."

Thanks AC for your note,

Yea, the absence of commonsense in the corporate workplace is very discouraging. I can only chalk it up to greed, ego, or some other human frailty. As much as we take pride in our ability to make logical decisions, most are based on emotions. Thank God we can laugh at ourselves through such things as Dibert and NBC's "The Office," otherwise I think we would go stark raving mad.

Again, Thanks for your e-mail. Keep those cards and letters coming.

MBA is an international management consulting firm specializing in Information Resource Management. We offer training, consulting, and writing services in the areas of Enterprise Engineering, Systems Engineering, Data Base Engineering, Project Management, Methodologies and Repositories. For information, call us at 727/786-4567. For a complete listing of my essays, see the "PRIDE" Special Subject Bulletins section of our corporate web site.

Our corporate web page is at:

http://phmainstreet.com/mba/

Management Visions is a presentation of M. Bryce & Associates, a division of M&JB Investment Company of Palm Harbor, Florida, USA. The program is produced on a weekly basis and updated on Sundays. It is available in versions for RealPlayer, Microsoft Media Player, and MP3 suitable for Podcasting. See our web site for details. You'll find our broadcast listed in several Podcast and Internet Search engines, as well as Apples' iTunes.

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Copyright © 2006 by M&JB Investment Company of Palm Harbor, Florida, USA. All rights reserved. "PRIDE" is the registered trademark of M&JB Investment Company.

This is Tim Bryce reporting.

Since 1971: "Software for the finest computer - the Mind."

END