|





 









M.Mariappan
j  
ë What is a cost benefit analysis; how can it
make you more effective professional?
ë Why and how would you conduct a cost
benefit analysis?
ë This chapter answers these questions and
provides an introduction to this strategic
management tool.
½ 




ë Management professionals must be proficient in

all aspects of business management as
organizations seek to cut costs, improve
productivity, and justify every aspect of their
operations.
ë Conducting a cost benefit analysis is the most
strategic way to support these business decisions.
ë It is a process that should be aggressively
employed, and if done correctly makes its case on
its own.









ë a Cost Benefit analysis (CBa is the analysis of an opportunity

to demonstrate the benefits in cost saving in order to receive
management commitment and support to implement.
ë This has affected business decision making, requiring CBa to be
utilized for all major purchases, expansions, organizational
changes, etc.
ë The types of CBa opportunities can include:
? adding staff / ? Introducing technologies / ? Purchasing
equipment / ? Upgrading existing software and/or hardware ?
Outsourcing or bringing service(s in-house / ? Changing
vendors / ? Modifying workflow / ? Implementing (new
procedures / ? Remodeling facilities / ? Relocating offices or
a function
| 

 

CBa justification can be organized into hard and soft dollar savings and
cost avoidance.
ë Hard Money savings are quantitative and easy to calculate. They
represent actual savings that the opportunity will realize. Hard Money
savings include reductions or elimination of existing expenses such as
for staff or supplies. Example: ? CBa Opportunity: Outsourcing an in-
house operation.
ë ? Opportunity Background: a company has currently four Clerks and
few engineering staff. all of the equipment is over the years old and
requires regular repair.
ë x Hard Money Savings: Elimination of staff and supplies.
ë Hard money savings are easy to quantify and are broadly accepted. If
they positively support a CBa opportunity, they provide the strongest
case for justification.
| 

 

ë Soft money savings are 2

and loss tangible to

calculate. They represent savings that cannot be recouped. Soft
money savings include saving management time, or freeing up
records center space, both result in a benefit, but the expense still
continues. Example:
ë ? CBa Opportunity: automating a records management operation
ë ? Opportunity Background: The Records Department is currently
a manual operation.
ë The Records Manager spends approximately ten hours per month
tracking and calculating operational statistics and preparing
records management reports.
ë ? Soft Dollar Savings: Reduction in management hours in support
of management reports.
 | 

 

ë In the above example, the reduction is in

management time (soft savings not in
management staff (hard savings . This soft
money saving will gain back time which can
now be applied to other management tasks.
ë Soft money savings are valid savings, however,
it is important to note that some organizations
do not readily accept them as justifiable
savings.
| 

 

ë |ost avoidance addresses reduction or elimination of a

future cost. The types of expense items that could be
considered a cost avoidance are numerous from overtime
and temporary staff to additional file equipment and leased
space. Example:
ë ? CBa Opportunity: Upgrading the Records Center with high
density (efficient open shelving
ë ? Opportunity Background: The Records Center currently
uses (inefficient file cabinets. The Center is running out of
space and the organization has no additional space in its
leased facility.
ë ? Cost avoidance: Reduction in the future costs of
(inefficient file cabinets and new leased space to
accommodate the growing Center.
|  


ë It is recommended that CBa be approached as

a multiple step process, beginning with a
Preliminary Survey which is followed by a
Feasibility Study.
ë Together the steps provide the necessary
information to execute a CBa Report.
ë as a CBa can involve an investment in time,
these two surveys are pre-steps with each
requiring information that justifies if the next
step is warranted.
|  


ë a Œreliminary Survey is conducted as an initial evaluation

of an opportunity.
ë Its purpose is information gathering on the existing situation
as compared to the CBa opportunity.
ë as part of the Preliminary Survey, a variety of techniques
can be employed.
ë Theses techniques include focus group input, customer
surveys, observations, statistical tracking, cost examination,
and workflow.
ë Based on the data, and assessment is made regarding the
potential of the CBa opportunity.
ë If this survey¶s assessment is supportive of a moving forward
with the process, the next step is taken.
|  


ë a  easibility Study finalizes any outstanding data

gathering, assesses the data in detail, and completes the
analysis process.
ë It provides final confirmation if the CBa opportunity offers
the benefits initially projected.
ë The analysis of the data should address the short and
long range impact of the opportunity.
ë The impact could involve its effect (positive or negative
on the organization, customers, staff operations, service
levels, and budget.
ë If the result of the feasibility study determines cost
effectiveness, the data is used to support development of
the CBa Report.
|
 


º ortunities
ë One of the most popular CBa opportunities is the introduction
of technology. a technology opportunity requires an involved
study phase.
ë Incase of electronic and software requirements outline
software needs; functionality: inventory, tracking, request
processing mixed-media, retention maintenance, box to
document level, etc.; capabilities: reporting, search, bar-
coding, labels, retention scheduling, etc. ; ease of use:
amount of training required, help screens, user manual, global
changes, etc. ; operating: memory requirements, operating
system, networkable, security, etc. ; maintenance support:
onsite, dial in, turn around time, etc.
 |
 


ë outline hardware components ë customer satisfaction surveys

needs ë manual tasks to be automated
ë personal computer (s , network ë involve individuals with experience and
card, barcode equipment knowledge in automated systems
ë tape back up unit, outline existing ë address risks of the opportunity
system(s aspects that would ë resistance of system by staff and customers,
support/affect the opportunity start up effect on operation, system and
ë operating system, procedures service issues
ë file server capacity, information ë identify all costs, start-up and follow-up
management process training
ë identify to what extent inhouse ë labor (full-time, part-time, temporary ,
and/or external resources will be conversion to system
required ë installation and maintenance, materials and
ë gather qualitative and supplies
quantitative data - focus group, ë equipment, hardware, and software
ë productivity history ? any service ë customer orientation
backlog periods ë data entry of information, etc
 | ½ 

a well-packaged Report should include:

ë Executive Summary
ë Introduction
ë Scope and Purpose
ë Methodology of the Study
ë Recommendation
ë Justification
ë Implementation
ë Summary
ë appendix
 
½ 

D ecutive Summary
ë The Executive Summary provides a brief overview to
the CBa Report.
ë It states the report¶s purpose, the nature of the
opportunity , summarizes the recommendations, and
outlines the benefits.
ë This section is the first to be reviewed by the decision
maker(s .
ë In addition to being clearly and concisely
communicated, it must be able to grab their interest
enough that they will uant to read further. Example:
next page
D


 


ë he RIM department has been successful in
supporting proactive measures to ensure efficient
records and information management. At the
request of the Finance Group, RIM uas invited to
analyze Accounts Payable to improve processing.
he RIM recommendation is to implement an XYZ
imaging system. he cost of the system is
$25,000. uith a payback in 14 months. he
benefits of this system include improved
processing time, decreased recordkeeping, and a
reduction in labor hours.
j 
ë This section presents background aspects
regarding the CBa, including who
authorized it, the names and titles of the
participants, and the date the CBa was
begun. Example:
 j 
ë he systems study uas authorized by Mavis
Eppes, President of ABC Company. he study
began on May 1. he study Project Leader uas
Juanita Skillman, Director, Corporate Records;
primary study Coordinators uere Cathleen
Calice, MIS Administrator, Karen Sanjurjo,
Human Resources Assistant, Pat Leuis, Finance
Coordinator, and Ken Cotter, Office Support
Analyst.
[ 

ë The Scope and Purpose section details the

objectives of the CBa. This is important as it
is imperative that the decision maker reading
the report completely understands why the
CBa was conducted. Example:
 



ë he study uas conducted on the Human

Resources Department. he purpose of the
study uas to:
1. determine the feasibility of automation
2. eliminate a 10 ueek backlog of
processing
3. improve the ongoing uorkload
management
4. decrease temporary services costs

 
[
ë This section outlines the techniques used to
gather the data. Explaining the methodology
aids in validating that the study was thorough
in its approach and accurate in its finding.
Example:




ë he Management Revieu Committee approved a
six ueek study on March 1 of the office support
activities. he study took place from May 1 to June
15 in tuo departments: Central Active Files, and the
echnical Library. It included all personnel,
including tuo managers, three supervisors and 23
support staff. Methods employed to gather data
uere: (intervieus, surveys, timesheets, uork
history, observations, etc.).
½

ë The Recommendation is the heart of the

report. It should present in clear terms the
actual recommendation, its benefits, and any
supporting detail key to the recommendation.
Example:
½




ë his report provides data and cost

justification totaling $65,000. in annual
savings in support staff and processing
activities in the Central Files operation. o
achieve these savings, ue recommend the
operation be converted to an automated
records tracking system. he conversion uill
require: (staffing, organization chart,
uorkflou, training, harduare, softuare,
supplies, floor plan, etc).
 è

ë Justification is where the hard dollar savings,

soft dollar savings, and/or cost avoidance
information are outlined. When it comes to
selling upper management on a financial
investment, no matter how cost effective, they
expect to see this information in financial terms.
When presenting justification information,
therefore, it is better to do so in an outline table
or spreadsheet format. Example:
 è
 
ë Hard Dollar Savings ± Reduction of staff 2 staff
@$15,000/yr. = $30,000.00
ë Soft Dollar Savings ± Improved productivity 2,000
hrs./yr. @ $30/hr = $60,000.00
ë Cost Avoidance-Elimination of temporary help2100
hrs./yr. @ $6/hr. = $12,600.00
ë Overall Annual Savings $102,600.00
ë Less first year Equipment Cost <$50,000.00>
ë   

 
 
j 
ë This section presents the projected project
plan for implementing the recommendation.
Timeline or milestone charts (discussed later
under Charts and Graphs should be used to
enhance this section Example:
j 



ë he conversion process uill require approximately sixs
months. We recommend the follouing approach:
ë Month 1 = Pre-conversion requirements
ë Week 1 = Staff orientation and order equipment
ë Week 2 = Procedure development
ë Week 3 = Equipment installation
ë Week, 4 = Staff training
ë Months 2-5 = Conversion of information
ë Month 6 = Conversion audit
[ 

ë The summary is the executive wrap-up.

ë It provides one concluding opportunity to review the key
points.
ë It is also an opportunity to compliment management.
ë This section should be dynamic and compelling.
D


ë he recommendation uill result in financial savings of
$92,000. annually. It uill provide improved employee
productivity and morale, elimination of lost files, faster
access to information, and overall improved customer
service. We compliment the management of Acton
Associates for their open minded approach to change
and progress in support of the customer.


ë The appendix should be used as a reference section for the
supporting detail of the report. When building this section,
think about what information upper management may need
to understand the points of the CBa fully; be careful not to
clutter this with nonessential information. Example:
a
 
ë x Glossary of terms
ë x Recommended training agendas
ë x Calculation formulas used
ë x Proposed job description
ë x Harduare and softuare specifications
ë x Guidelines for uork measurements
 |  
ë Charts and graphs are useful tools in data and presentation
evaluation. There are many advantages to enhancing a CBa Report
with charts and graphs. The advantages of charts and graphs are
that they:
ë ? quickly illustrate , ? strengths and weaknesses
ë ? advantages and disadvantages, ? trends for comparisons
ë ? existing vs. proposed, ? workflow processes
ë ? offer great flexibility to conduct ³what if´ analysis
ë ? incline the reader to review/interpret more so than when presented
with wordy documentation.
|  
ë The other way of presenting is charts/graphs, such as
organization charts, workflow plan, floor plan, layouts,
statistics, information using bar, line, and pie charts, project
sequence diagrams, and timelines/milestone charts.
ë Charts and graphs presentation is effective, makes quick and
faster understanding in the faster world.
 M

When conducting a CBa, keep the following in mind:
ë Be concise, objective and factual
ë Don¶t overanalyze
ë Know your target group¶s orientation
ë Set reasonable goals
ë Complete within scheduled timeframe
ë Ensure all quantifiable aspects are included ± even if they don¶t
support the desired plan
ë Limit assumptions
ë Be conservative rather than liberal in estimating
ë Quality is the essential, not quantity
ë Be prepared
ë Have Fun !