How Cost-Benefit Analysis can inform IT management

How Cost-Benefit Analysis can inform IT management

Cost-benefit analysis is a frequently utilized technique in any successfully managed business.  It allows for logical decisions to be made when making business decisions on making changes.  This process generally breaks down into three main steps:

  1. Identifying costs & benefits

To conduct a cost-benefit analysis on a particular change, you will need to know exactly what the costs and benefits of this change are.  The best way to start is by making two lists.  A list of all the costs associated with this change and a list of all the prospective benefits.

Besides short term costs such as the purchase price and installation fees, you need to dig deeper.  Will there be any downtime associated with this change?  Will there be significant training required?  These are some of the questions that need to be asked to fully fledge out an exhaustive list of costs associated with the proposed change.

A similar approach needs to be taken with benefits.  Besides the short term positive effects of the change, what long term or trickle down benefits are being overlooked? What emotional benefits could stem from this change?

  1. Ascribing a value to costs & benefits

Once you have created an exhaustive list of both costs and benefits, it is necessary to quantify them.  To properly compare costs and benefits, you need to compare apples to apples.  Ascribing a monetary value to each cost and benefit is the best way to do this.  While it is straightforward to record costs such as purchase price and installation, ascribing a monetary value to intangibles such as employee morale and job satisfaction requires a bit more effort and collaboration.

  1. Compare costs & benefits

Once you have ascribed a value to each cost and benefit, all that is left to do is compare them.  Add up costs to get a value for the total cost then do the same for benefits.  Once you have the two totals, you can determine whether the benefits outweigh the costs of the change.

To properly do this, time needs to be considered.  Which costs are one time and which costs are recurring?  Which benefits are one-time and which benefits are recurring?  A proper cost-benefit analysis asks these questions to create a model that shows the results over time, usually per year.  Deciding how much time you are willing to wait until the benefits have repaid the costs is essential in deciding to invest in change.

Now that you get the gist of it, let’s see how it can be applied to a real-world IT management scenario.

Real World Example

The company you work for in Sacramento has crossed the 100+ employee threshold.  You have been a one-man army managing IT thus far, but you have stretched resources way past their breaking point and need more help.  You are stuck in-between hiring another employee and paying for a new asset management system so you decide to conduct a cost-benefit analysis.

Step 1: Identifying costs & benefits

New Employee Asset Management System
Costs Benefits Costs Benefits
Salary More accurate documentation Monthly fee More accurate documentation
Training Time Less stressful workload Implementation Time Less stressful workload
Supervision Time More time Productivity loss More time
Productivity loss

 

Step 2:  Ascribing values to costs & benefits

The table below assumes that the current employee makes $30/hr, works 40hrs/week and 50wks/year.

New Employee Asset Management System
Costs Benefits Costs Benefits
Salary ($40,000) More accurate documentation ($1000) Yearly fee ($2400) More accurate documentation ($2000)
Training Time ($1000) 1 time. Less stressful workload ($5000) Implementation Time ($1800) Less stressful workload ($1800)
Supervision Time ($3750) More time ($30,000) Productivity loss ($2000) More time ($18000)

 

Step 3:  Compare costs & benefits

New Employee Asset Management System
Costs Benefits Costs Benefits
Salary ($40,000) More accurate documentation ($1000) Yearly fee ($2400) More accurate documentation ($2000)
Training Time ($1000) 1 time. Less stressful workload ($5000) Implementation Time ($1800) Less stressful workload ($1800)
Supervision Time ($3750) More time ($30,000) Productivity loss ($2000) More time ($18000)
Year 1 Total = 44750 Year 1 Total = 36000 Year 1 Total = 6200 Year 1 Total = 21800
Year 2 Total = 43750 Year 2 Total = 36000 Year 2 Total = $2400 Year 2 Total = 21800
Result of change -$7750 Result of change $19400

 

For simplicity’s sake, the table above only shows the cost and benefits for the first year and the recurring costs in year 2.  A more complex model could include a much larger table and include an algorithm that accounts for dynamic values such as company growth.

Based on this cost-benefit analysis, a new Asset management system would be a much smarter investment than bringing on a second employee.  With the money your company is able to save and the increased productivity post implementation, your next raise could be around the corner! ?