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Project Cost Benefit Analysis

A project’s cost benefit analysis is important in any organization, especially in the banking sector. It always comes down to costs and benefits. The perceived value of a project and the prognosis for approval heavily depend on the ability of the project manager and sponsor to show how it benefits the organization. The tool most often used to justify projects is the Cost Benefit Analysis.  Cost Benefit Analysis Main Pagecost benefit analysis

Now a cost benefit analysis or CBA is meant to be an objective tool, using numbers and math to determine the true potential of a project. However, there is an issue with its total objectivity. The three basic components of every CBA are:

  • assumptions
  • a mathematical analysis of the assumptions with inputs like numbers and volumes
  • the time series.

The last two components are objective. But the selection of assumptions is a mainly subjective process and it leaves plenty of room for creativity.

In organizations that rigorously use CBA’s, one of the tricks project managers often use is to include assumptions on benefits that are hard to measure. Examples are intangible benefits, avoided costs, avoided investment, stronger customer loyalty, stronger brand, etc. Although there is nothing wrong with trying your best to justify a project, I believe there is an issue with basing a case on difficult to measure benefits.

These assumptions often produce estimates that are difficult to prove. They look good on paper, but are easily challenged in a board room. Cost Benefit Analysis with fat numbers based on intangible benefits can be deflated and cause the board of directors to distrust the project manager. These assumptions become weak when faced with simple questions like, “Will these numbers be visible in the P&L?” And when you answer with, “No but….,” the executives most probably stop listening.

Some companies do follow-ups after projects are closed to verify the assumed benefits were realized. If a project with bloated numbers is actually approved, the project manager has a tough time proving the existence of the promised benefits.

For a current example, we can look at what is happening in the IT industry where the disconnect between promised and actual results is often large. There are many suppliers that meet with executives and promise huge savings in implementing IT best practices, such as ITIL or COBIT.

The company ITSMF, for example, makes several outrageously unsubstantiated claims in its An Introductory Overview of ITIL [version 2] . *”Over 70% reduction in service downtime, ROI up by over 1000%, Savings of £100 million per annum, New product cycles reduced by 50%.”*

However, looking at it from the other side, we see different results. *”In a survey carried out by Bruton of 400 sites, about half of the 125 organizations which were found to have adopted ITIL made no measured improvement in terms of their service performance…”*

Finally, I do not really trust nor like an “outsmart them”approach when writing a CBA. My advice: be pragmatic and state strong, measurable and clear assumptions in your figures. If the project is strategic but difficult to argue on paper, then build the case on the strategic part and state that the benefits are difficult to quantify. If there is only a 50% chance that the expected benefits will materialize, this fact should be clearly stated. By being truthful, accurate and straightforward, you can build the trust of your executive team and establish yourself as a trustworthy and effective professional.