prj566: project planning and management cost benefit analysis
TRANSCRIPT
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PRJ566: Project Planning and Management
Cost Benefit Analysis
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Note:
Cost Benefit Analysis is one of the most useful things you will ever learn!
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Agenda
What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example
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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
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What is cost benefit analysis?
“Item” can include equipment, software, resources, etc.
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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
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The Project Life Cycle
Scope Plan 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
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The secrets
Effective estimates Measures that reflect business value Good organization
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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
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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.
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Agenda
What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example
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The process
Benefits of each proposed solution? Costs of each proposed solution? Compare solutions--Payback and ROI
Analyses and risks Make recommendation
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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
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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
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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)
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Benefits-can come from
• Cost savings• $, time, equipment, mistakes
• New services to clients• Mandatory changes• Strategic advantage
• Make more money!
• Technical reasons
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Example--benefits
• Come from savings!
• Can save $24,000 per month!
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Costs--one time
• Development costs – wages, contract fees
• Initial Training costs• Initial equipment costs – hardware,
software
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Example--one time costs
• Software = $90,000
• Labour & Training = $10,000
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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)
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Example--ongoing costs
• Software Maintenance Contract = $8,400 per year ($700/mo)
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Agenda
What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example
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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
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PaybackOption 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200
Benefits
Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000
Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800
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Recommendation
Buy the remote control software!
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Agenda
What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example
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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?
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Return On Investment Analysis
ROI =Accum. Benefits - Accum. Costs
Accum. Costs
X 100
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PaybackOption 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200
Benefits
Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000
Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800
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ROI Example
ROI =$16,500
$103,500
X 100 = 16%
Over 5 months
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ROI Example
ROI =
$39,800
$104,200
X 100 = 38%
Over 6 months
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Recommendation
Buy the remote control software!
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Agenda
What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example
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When Comparisons are DifficultWhat 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
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Agenda
What is a cost benefit analysis? The process Payback Analysis Return on Investment When comparisons are difficult Example
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Example
• 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.
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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
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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.
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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
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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
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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
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Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5
BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New business 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000
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Example
Analysis• Payback• ROI
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Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5CostsNew Software 90,000Software Ins tallation 120,000Project m anager 100,000Internet Infras tructure 190,000Hardware Purchase 120,000Training for s taff 20,000Marketing to clients 80,000Internet Maintenance 15,000 17,000 17,000 17,000 17,000Software Maintenance 10,000 10,000 10,000 10,000 10,000Hardware Maintenance 15,000 15,000 20,000 20,000 20,000Cumulative Costs 720,000 760,000 802,000 849,000 896,000 943,000
BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New bus iness 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000Cumulative Benefits - Cumulative Costs -720,000 -600,000 -432,000 -219,000 44,000 307,000ROI 5% 33%
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Example
Analysis• Payback in Year 4• ROI = $44k/$896k = 5% at 4 years• ROI = $307k/$943k = 33% at 5 years
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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?