Cost Benefit AnalysisPDF
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Transcript of Cost Benefit AnalysisPDF
COST BENEFIT ANALYSIS
Creating Estimates in the face of unknowns!
MAY 21, 2016
PRINCIPLES OF BUSINESS ANALYSIS UNIVERSITY OF CALIFORNIA, SANTA CRUZ
CROSS BENEFIT ANALYSIS
➤ Cost Benefit Analysis is a tool to measure Cost Effectiveness of the proposed Project over its intended lifespan.
➤ It’s a key decision factor that influences the “go” and “no-go” decision for a project.
➤ Cost Benefit Analysis is the technique that is used to create the Cost Benefit Ratio of the potential Project.
➤ This activity is completed during the Business Case creation at the Enterprise Analysis or Strategic Analysis phase.
➤ Activity is conducted by the Business Analyst during the development of the Business Case.
ORIGINS OF COST BENEFIT ANALYSIS
➤ Jules Dupuit, a French Engineer & Economist introduced the concept in 1840.
➤ Since then, its been used as a simple way to evaluate project costs to long term benefits for Executive approval.
➤ It’s not a robust solution but is pretty handy for Business Case creation.
➤ This activity is completed during the Business Case creation at the Enterprise Analysis or Strategic Analysis phase.
➤ Activity is conducted by the Business Analyst during the development of the Business Case.
WHY “DO” COST BENEFIT ANALYSIS?
➤ Businesses are interested in increasing the bottom line, dollars.
➤ Therefore as an Business Analyst you are concerned in helping with this Business need, namely - making money.
➤ Projects translate into Money - Development & Operational-Maintenance Costs. It’s an Investment!
➤ This activity will result in the Cost Benefit Ratio that will give Sponsors & Executives an justification of the Project Investment Cost.
➤ It’s critical decision factor to approve existence of a project.
ASSUMPTIONS & CONSTRAINTS
➤ Based on Analytical Modeling & Empirical Data predictions.
➤ Estimates are collected over the period of a Lifespan.
➤ Planning Phase has an element of unknown.
➤ Modified & Revised over time.
➤ Cost will appreciate over time.
➤ System will depreciate over time.
➤ Systematic yet organic Process
“ If you don’t know where you want to go, any road you take will lead you there.
-Alice in Wonderland
STEPS FOR COST BENEFIT ANALYSIS
1. Brainstorm, Identify & List the Stakeholders 2. Identify Life Span of the System Solution created by Project, 3. Identify Cost Factors & assign Monetary value
➤ Development Cost ➤ Maintenance/Operations Cost
4. Brainstorm Cost Benefits & Perform Risk Analysis 5. Brainstorm Depreciation & Appreciation Factors 6. Select Appropriate Appraisal Technique to showcase data 7. Calculate the Cost Benefit Ratio
DEVELOPMENT COST TYPES
➤ Resources Recruitment Costs Salary Costs Orientation & Training
➤ Project Costs Fixed (Don’t Change) Variable (Change in time) Direct (Budget), Indirect
(Shared across Projects) Sunk (Rework, Loss, Defect)
➤ Cost of Quality External/Internal Failure Inspection & Prevention Code & Test Rework
OPS-MAINTENANCE COST’S
➤ Infrastructure Lease Work Stations Software Licenses
➤ Maintenance Annual Maintenance
Contract Support Resources Upgrades & Customization Downtime
➤ Administrative Legal Supplies Taxes
COST BENEFITS
➤ Tangible Benefits Immediate & Tangible
➤ Eg; Decommission Legacy Long-Term & Tangible
➤ Eg: Automation Benefits
➤ In-Tangible Benefits Immediate & In-Tangible
➤ Eg: Employee Satisfaction Long-Term & In-Tangible
➤ Eg;Customer Service
TANGIBLE COSTS
➤ Development Staff Time ➤ User Staff Costs ➤ Purchase of Hardware, Software, OS, Infrastructure ➤ Relocation Expenses, Staff Training, Re-Training ➤ Ongoing Hardware / Software Maintenance & Support ➤ Vendor & Partner Engagement Costs
TANGIBLE BENEFITS
➤ Staff Savings Eg: Headcount Savings ➤ Reduced Effort Eg: Automation ➤ Reduced Inventory ➤ Customer Response Time Benefits ➤ Reduced Efforts ➤ Improved Employee Efficiency
INTANGIBLE COSTS
➤ Transistion Costs ➤ Disruption during Implementation ➤ Short Term loss of Productivity ➤ Recruitment of new Talent pool ➤ Loss of Corporate Memory ➤ Re-Skilling ➤ Managing Staff Turnover
INTANGIBLE BENEFITS
➤ Increased Job Satisfaction ➤ Improved Customer Satisfaction ➤ Greater Organization flexibility to meet Business Needs
Innovative Problem Solving ➤ Improved Communications ➤ Improved Staff Morale ➤ Improved Market Image or Branding ➤ Sales Efficiency ➤ Improved Staff Morale
TYPES OF RISK
1. PROJECT RISK Schedule Slippage Cost Slippage In-Complete Requirements In-Complete Stakeholder’s Register Hardware / Software Risk Partner / Vendor Risk
2. BUSINESS RISK Loss of Prospective Business Knowledge / Skill Gap Customer Retention Employee Retention Technology Trends Market Trends
ELEMENTS OF PRINCIPLE RISK’S
1. DESCRIPTION 2. IMPACT 3. SCALE OF IMPACT 4. PROBABILITY OF OCCURANCE 5. AVOIDANCE ACTIONS 6. MITIGATION ACTIONS 7. OWNER
OTHER APPRAISAL TOOLS
➤ Discounted Cash Flow (DCF)
➤ Internal Rate of Return (IRR)
➤ Net Present Value (NPV)
BENEFIT COST RATIO (BCR)
➤ Benefit Cost Ratio is used to compare the benefits of a Project/Program to Costs
➤ Formula BCR = Project Benefits/ Project Costs
BCR = Program Benefits/ Program Costs
INTERPRETING RETURN ON INVESTMENT (ROI) AND BENEFIT COST RATIO (BCR)
ROI = Program Benefits - Program Costs)/Program Costs BCR = Project Benefits/Project Costs OR BCR = Program Benefits/Program Costs BCR of 2:1 means for every $1 Invested $2 in Benefits generated ROI is translated at 100% where says for every $1 invested, $1 is returned after Costs are covered (Investment recovered plus $1 extra).
RECAP
➤ Business Analysts use Cost-Benefits Analysis (CBA) to compare Project Cost and Benefits over the Lifetime of a System.
➤ Systematic, Logical Process oriented technique ➤ It helps Executive Stakeholders and Sponsors make decisions
regarding the initiation of a Project. ➤ Generates the Benefits Cost Ratio = Project Benefits / Project Costs ROI or BCR are not to be taken as stand alone measures for critical high cost projects. To be meaningful it should be coupled with other measures.