Overview: The process of quantifying cost and benefit is more complex than simply listing them. Validation of assumptions, separation of real benefit from soft benefit becomes even more important than in the previous task.
A common mistake is to “double-dip” the benefits with other concurrent initiatives. Ideally, each cost and each benefit have an associated level of confidence related to them.
Reduced workload (efficiency) is the most commonly misused benefit justification. Except in instances with rapid growth, efficiencies gained and illustrated as a hard benefit are misleading. Unless there is a clear commitment to reduce headcount because of gained efficiencies, then it is likely not a hard-benefit.
To illustrate the difference between a hard and soft benefit, the examples below pertain to benefits an individual might personally realize.
Examples of hard benefits include: getting a raise or reducing the overall electric bill at your home. These clearly increase income and decrease cost.
Examples of soft benefits include: gaining more personal time to organize a compact disk collection, or having the option of receiving a traditional paper bill or an electronic utility bill. These are nice to have, but do not directly impact household income or cost.
Considerations: Look for ways to quantify top-line increases in revenue, increased margin, eliminated waste (of material), reduced contract liabilities through re-negotiation, and reduced head-count. For cost, include the additional time, effort, and money required to ramp-up the new processes. Which group handles the most costly part of the process? What groups might impact the cost, but they are only indirectly part of the process? From a customer’s perspective, what is the most valuable part of the process?
- Use more than one method of estimating cost and more than one method of estimating benefit.
- Use at least one top-down approach to make each estimate. The starting point numbers ideally begin with budgets and projections from the financial statements.
- Use at least one bottom-up approach to make each estimate. Document the assumptions made, and the relationships between the assumptions along with the confidence level in each assumption.
- Identify weaknesses in each estimating technique and recalculate those using bands-of-probability (high, medium, and low). The bottom-up and top-down estimates will only rarely come out within a reasonable range on the first attempt.
- Identify a third method of estimating the values. If possible, use data from outside the organization, available in the public domain, or from a third-party vendor.
- Rationalize the three estimates – rounding the values to one or two decimal points. The best way to present this information to a Business Farmer is by using a range of values. Having the high-level numbers is important.
- Avoid displaying the detail or the mechanics of how a figure is derived, unless asked. Have the detail readily available, but a Business Farmer typically only wants to see that detail exists, not to test the calculations.