Digital White Papers

27 WWW.ILTANET.ORG | ILTA WHITE PAPER FINANCIAL MANAGEMENT The Cost-Benefit Analysis Process: Making an Educated Decision » Calculate the net present value of project options and apply an appropriate discount rate » Perform a sensitivity analysis A cost-benefit analysis should not be confused with the return on investment (ROI) methodology. CBAs seek to measure the relative sum gain of any project investment whereas ROI measures investment effectiveness for the generation of profit and is expressed as net profit divided by total assets. As macroeconomist Olivier Blanchard points out, a key difference between the two is that whereas CBA should be undertaken beforehand and confirmed aerwards, "ROI can only be calculated AFTER the investment has yielded a return." There are two key reasons to conduct a CBA: » As a fundamental aspect of any project, especially a large IT project, to help determine whether it is worth undertaking (although a CBA should not be the sole criterion for a decision to proceed) » As a tool for comparing the financial benefits of different IT investment opportunities, especially as part of a detailed IT strategy Before beginning the analysis, document what to analyze and compare. For each measurable opportunity, define the scope of the system and determine what high-level requirements it needs to provide, which systems it will replace, and with which other current or planned systems it will need to integrate. It is also helpful to consider who will use the new system. Next, get a good handle on the costs. CBAs oen have a bad reputation because economic reality rarely lives up to expectations, largely because costs are woefully underestimated and benefits are similarly overestimated. Now is the time to address the first of those potential problems by defining all costs at a realistic level, bearing contingencies in mind. Costs To identify all likely true costs, first identify the categories of expenditures and take a practical view of what will fall under those categories. Apart from the headline costs of hardware and soware, there is a wide range of other obvious and less obvious costs. These could include preselection costs, such as relevant procurement costs of selecting the preferred soware and vendor, and other relevant consultancy expenditures, which could be ongoing. There might also be installation and commissioning costs associated with hardware and soware. Aer the system is installed, there will be annual soware (and maybe hardware) maintenance, or as is increasingly common, annual soware licence payments instead of a one-off soware licence. In complex systems, there could be a combination of both one-off and annual payments for different modules. Throughout the implementation, there could be expenditures on project or program planning and management (internal or external), change management, vendor implementation consulting and a wide range of other one-off or ongoing items, such as: Economic reality rarely lives up to expectations, largely because costs are woefully underestimated and benefits are similarly overestimated.

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