One of today’s most tiresome catchphrases is “total cost of ownership.” Obviously, no one is interested in knowing the partial cost of ownership. The idea of the net cost of ownership is nothing but a recycling of the old idea of cost-benefit analysis, comparing total costs with total benefits—a concept that has been around for 50 years or more.
The cost side of the cost-benefit equation is usually pretty straightforward. A new system has specific costs related to its purchase (e.g., licenses and maintenance). That system or any new process may also require changes to personnel, either added or eliminated, with more or less salary expense. There may be ancillary service or support costs. All of these can be quantified fairly easily. Addressing the benefit side of the equation, however, can be a little more complex.
Benefits can be classified and analyzed in several different ways:
• Hard dollars vs. soft dollars: If you can stop writing a check for something, you’re saving hard dollars. Soft dollars are often difficult to quantify. However, if you are aggressive, you can turn soft dollars into hard dollars. If a process change is going to eliminate 20 hours of work for an employee, there is a soft-dollar benefit in that he or she is now free to take on additional work. That can be turned into hard dollars only if you can identify another 20 hours of work that can be eliminated. Combining the two savings can indeed create the opportunity for elimination of a full-time position. It takes aggressive thinking and planning to achieve these savings, but they are real and attainable.
• One-time vs. ongoing benefits: Again, it is easy to identify one-time benefits. I can replace an outdated machine with a state-of-the art one, or I can cut out a planned expenditure. Ongoing benefits would include reductions in employee costs (including benefits), production costs, outside services and productivity improvements.
• Tangible vs. intangible benefits: How can you measure intangible benefits? First, you have to identify them. Then you consider their impact on things like growth in market share or customer retention. For instance, a change designed to improve quality should result in improved customer satisfaction (an intangible). This should lead to higher rates of customer retention. Goals can be set and progress can be measured, turning the intangible benefit into a tangible one. Similarly, changes that improve employee morale can lead to reduced turnover, which can be measured.
In many ways, cost-benefit analysis, as its name implies, is just a straightforward math problem. Total cost minus total net benefit over some period tells you if the investment is worthwhile.
Another useful tool is a staffing model. A staffing model should be composed of three factors: volume drivers, transaction times, and allowances (training time, absenteeism, turnover, etc.). An effective cost-benefit analysis considers potential increases in work volume resulting from the change in process or system, and it can determine the impact of shortened transaction times. Improvements in turnover rates or other allowances can also be factored into the equation. A good staffing model pulls all of these elements into one place to evaluate the long-term effects of future changes.
Grinding out a meaningful cost-benefit analysis is nothing new, but it is the only way to be certain that the varied benefits to your organization outweigh the costs.
Eugene Reagan is a senior consultant for the Robert E. Nolan Co., a management consulting firm specializing in the insurance industry.
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