by Ian S. Hayes

The needs, style and policies of your company or organization will dictate the formality and comprehensiveness of your justification. While an entrepreneurial company may put more faith in its intuition and accept an informal justification, other companies will rely on formal processes to make their investment decisions. Proposed projects are subject to a series of hurdles and must offer acceptable returns on investment (ROI) and payback periods. Regardless of your company's stance on formal cost/benefit analyses, you will find it valuable to perform the justification exercise simply to gain a fuller understanding of your solution and to determine the appropriate level of funding, backing and priority for your project. This knowledge will also help set boundaries for future "go / no go" decisions should the project run into difficulties.

People often perceive cost benefit analyses as arduous undertakings but their difficulty greatly depends on the type and complexity of the proposed wireless solution. If the project involves the installation of a wireless versus a wired LAN in a new office complex, for example, then the justification is relatively straightforward. You can easily determine the cost of each option and, based on historical data, readily calculate the hard dollar benefit of avoiding future re-wiring. A brief analysis comparing the short and long-term ownership costs will likely suffice.

In contrast, if you are considering a wireless CRM solution for a dispersed, national sales team, then the analysis is more complicated. With complex hardware, software and network components, the need for integration with back-end IT systems, and extensive training requirements, this solution defies simple analysis. Calculating costs alone is a laborious effort. Quantifying benefits is equally difficult even though they are intuitively substantial. Can you put a price tag on being better prepared for a client visit or on being more responsive to questions? Even tangible benefits such as increased revenues are slippery to ascertain. They do not accrue instantly after deploying the solution, and are affected by many other factors separate from the solution.

This article proposes a four-part justification process, depicted above. The first part -- quantifying benefits -- helps determine if your proposed solution makes sense and sets financial thresholds for later cost calculations. If it looks like the solution will produce a few million dollars of quantifiable benefits, then a $200,000 investment is a good deal. On the other hand, if the potential benefits of the solution are low, then it is foolhardy to make an investment exceeding those benefits. The second part -- calculating costs -- quantifies the short and long-term expenses of the solution. Costs may include direct outlays for network services, software and hardware, deployment expenses for training and installation, and ongoing monies for support and services. You can simultaneously perform these first two parts -- quantifying benefits and calculating costs -- to shorten the analysis time. The third part -- producing the analysis -- uses the benefit and cost numbers derived in the first two steps to compute ROI, payback period, cash flow and other analyses. These are the objective business justifications for the solution. The last part -- selling the solution -- brings the process full circle. By selling the solution internally, you build support for the proposed solution and demonstrate that its benefits are attainable and justifiable.

In this installment of the article, we will look at part one, quantifying the benefits of your solution.

The core of every project justification lies in the benefits. Achieving these benefits is the entire reason for pursuing the project. Benefits vary widely in type and value from one solution to another. A single solution will have primary, secondary and even tertiary benefits, all of which serve to increase the overall value of the solution. This section offers guidelines to identify, choose and quantify (where feasible) the direct and indirect benefits associated with your solution.

Thinking creatively, you will be able to envision many benefits for your project, some plausible and some questionable. Benefits may be extremely tangible -- reducing the cost of service delivery by 40% -- to very intangible -- increasing customer satisfaction.

In quantifying benefits, you can adopt an aggressive approach and include every potential benefit or a more conservative approach that relies strictly on objective, measurable benefits. An aggressive approach maximizes the overall value of the project and can help justify larger efforts. The higher the benefits, however, the higher the expectations which can cause disappointment if the project fails to realize its expected benefits.

A conservative approach, in contrast, uses only unquestionable and non-controversial benefits. As a result, it produces much lower expected benefits. On the plus side, if you can justify a project using conservative numbers, it has a strong chance of exceeding expectations. On the minus side, conservative approaches may do a disservice to highly valuable solutions that, unfortunately, lack easily estimable benefits. Too narrow a view of benefits will arbitrarily favor small-scale, safe solutions with targeted, straightforward objectives and reject out-of-hand the more riskier, breakthrough opportunities. Perhaps your company has a preferred approach to justifications, but if not, consider using a combination of the two approaches. Aggressively identify the full range of benefits, but conservatively estimate the potential level or amount of each benefit.

At a high level, the primary benefits of your solution are easy to identify -- they correspond to the stated goals of your solution. Your company may want to reduce delivery costs, increase responsiveness to customers or boost the effectiveness of its sales force. In performing a cost justification, the challenge is to translate these more amorphous objectives into a set of concrete benefits that can be valued.

Start by asking yourself what benefits comprise the larger objectives of the solution. For example, improving the effectiveness of the sales team may equate to reducing time devoted to paperwork, having better information available during sales visits, and being able to communicate with customers while traveling. Primary benefits often lead to secondary and perhaps tertiary benefits. Spending less time on paperwork may allow sales people to visit more customers. More time with customers may result in a higher volume of sales. Eliminating paperwork and replacing it with more immediate, electronic data may give sales management greater insight into the pipeline.

Try to identify as many benefits as you can, including any "hard" and "soft" benefits. You can hone the list later when you prepare the cost justification. Interview the individuals affected by the project, since they are uniquely positioned to point out potential benefits and rate the feasibility of a particular one.

The ideal benefit has measurable and unquestionable value. In reality, some of the more important benefits are difficult or impossible to quantify, and many others fall somewhere between the two camps. You can expect your project to have a mix of both types of benefits.

At a high level, three categories of benefits will appear in a cost justification. A particular benefit may fall cleanly into one category or may straddle more than one, depending on the situation.

• Tangible benefits

Benefits are tangible if you can apply "hard" dollar estimates to them. Although their actual size may remain open to question, their economic value is indisputable. Cost reductions for labor or materials, comparisons between alternatives (such as a wired versus wireless LAN), lower shipping losses, new revenue sources and tax savings are some examples.

• Intangible benefits

Intangible or "soft" benefits encompass things like higher employee morale, gaining technology experience, heightened responsiveness, greater customer satisfaction, and enhanced corporate image, for example. These benefits are valuable, but you'll find it difficult or impossible to ascribe a dollar figure to them. Rather than discard them, you can include them in the justification at least as backup for the tangible benefits. Depending on your corporate culture, the perceived value of intangible benefits may be enough to justify the project. You can also use techniques, such as extrapolating from industry statistics, to derive a ballpark estimate, but restrain yourself. Executives generally disfavor this approach and you might end up tarnishing the credibility of your entire justification.

• Semi-tangible benefits

Somewhere between hard and soft benefits lie semi-tangible ones. Their economic benefits are intuitive, but a lack of historical data or measurement techniques prevents rigorous estimation. In the 1990s, as companies weighed developing a web presence or offering online account access, they struggled with quantifying benefits for a project with no historical data and no obvious counterpart. Other examples of semi-tangible benefits include improved safety, fewer errors, more efficient operations or faster access to test results. We intuit that faster access to medical test results will improve decision-making and patient care and ultimately lower insurance costs, but still cannot estimate the real financial impact of this benefit. As semi-tangible benefits become quantifiable, they move into the tangible category. A typical semi-tangible benefit is a cost avoidance one. Cost avoidance refers to the reduction or elimination of a cost that would otherwise occur if not for your project. The $1300 savings that occurs by avoiding the need to purchase $2000 laptop computers and outfitting salespeople with $700 PDAs is a semi-tangible benefit unless you can prove that the laptop costs would definitely be incurred.

When deciding whether to include a benefit in a cost justification, its category is important. If your company accepts only "hard" dollar justifications, then you are limited to tangible benefits. Less conservative companies may permit ballpark estimates for semi-tangible benefits. More aggressive or entrepreneurial companies will likely consider all three categories.

One characteristic of a benefit, as described above, is its "tangibility." But other factors affect the usefulness of a benefit in a cost justification, including the overall size of the benefit, its timing and the ultimate beneficiary, as well as its ability to be quantified and attributed. Using the characteristics below, refine the set of benefits for your cost justification.

• Size

The size of the benefit is obviously important, and perhaps the most influential characteristic. If your primary benefit is quantifiable, directly attributable to the solution, and big enough to justify the cost of the project, then you may have a winner on your hands.

• Timing

When is the benefit incurred or received? Does it recur, or is it a one-time benefit? How long is it expected to last? Timing issues are relevant when calculating items like cash flow and payback periods.

• Beneficiary

Identify who will reap the benefits of the solution. If the sponsoring organization will not enjoy the bulk of the benefits, then don't expect it to fund the project, even if the net value to the company is high. These beneficiaries will be targets for selling your solution later on.

• Ability to be quantified

Tangible benefits, by definition, can be quantified. You may be able to quantify intangible and semi-tangible benefits in other ways, through techniques such as surveys, ratios, etc.

• Ability to be attributed

Does the benefit result directly from the solution? Some high-level benefits, such as increased revenue, are affected by many factors (the overall economy, staffing levels of the sales organization, etc.) and may be difficult to attribute wholly to the solution. The greater the tie-in between the benefit and your solution, the higher its value in the justification.

The final step in quantifying benefits is to estimate their impact. The more accurate your estimates, and the more they rely on actual data and reasonable assumptions, the more credibility they will have with executives. Before including a benefit in your cost justification, consider whether the benefit is realistic, achievable and verifiable.

• Realistic benefit

Is the anticipated benefit realistic or theoretical? How practical is it? If the solution will save one hour of data entry time per day, will clerical workers use that time to advantage? If the one-hour savings occurs as a single block of time, the benefit is more realistic than if the savings occurs in six, ten-minute increments throughout the day.

• Achievable benefit

What does it take for the benefit to fully materialize? If it is dependent on too many other factors which may be outside the control of or unrelated to the solution, then the benefit may be questionable. If there is less than 50% (or 40% or 30%) likelihood that a benefit will be achieved, then its impact may be too uncertain to measure and include in the justification.

• Verifiable benefit

Once the cost justification is complete and executives sign off on the project, it is time to start measuring the benefits actually achieved, and comparing them against the estimates in the cost justification. This final step is crucial to verify assumptions and determine the accuracy of your analysis and estimation methods, and to adjust the project to maximize its benefits. If you have chosen solid benefits, they will be amenable to objective measurement once the project has been deployed. Many semi-tangible benefits in particular will become tangible over time, once measurements are collected. A measurement program will also give you the ammunition and track record to show that you can meet project commitments and help gain buy-in for future projects.

Quantifying a benefit involves measuring current performance and estimating future value. In the ideal scenario, you will have a combination of historical performance data and validated performance improvements to derive your estimates. In the real world, this kind of information is often lacking. You can use any of the following methods to help provide data for your justification.

• Questionnaires

A quick way to collect data for setting current baselines and estimating improvements is through questionnaires. The downside of questionnaires is that they tend to elicit subjective responses rather than objective observations, and the feedback can vary considerably among respondents, requiring some type of normalization. Nevertheless, they are a valid starting point for accumulating data.

• Interviews

To derive insight into the type and size of benefits, consider interviewing the future users of the solution. These users will likely have some idea of the benefits that they expect to attain from the solution, which can serve as a reality check for anticipated benefits. An upside of interviews is that they are interactive, allowing you to explore additional areas of interest or discrepancies.

• Observation/Experimentation

Measuring an activity while it is being conducted is a good way to quantify its expected performance. For highly repetitive activities, such as inventory counts or data entry tasks, this approach is especially useful to obtain an average level of effort per task. Using simulations or a prototype, these measurements can be repeated to garner anticipated future performance rates.

• Historical data

Historical data -- billable hours, production output, budgets, inventory levels -- provides perhaps the most accurate baseline compared to other assessment methods. An organization that focuses on measurement, or that is process oriented, is more likely to have abundant performance data to use as a basis for estimates.

• Company "rules of thumb"

Accounting and finance departments tend to have generally accepted figures for estimation and budgeting purposes. Fully burdened costs per employee, expected work hours and tax rates are some examples. Where possible, use these accepted figures rather than creating your own to save time and permit straight comparisons between your cost justification and others.

• Industry statistics

If reliable internal data is lacking, considering using data from industry analysts, trade publications, industry associations and government bodies to support your cost justification. Obtaining these statistics may be easy, but their reliability is often suspect. Unless you are confident in the underlying quality of the analysis used to produce the data, you may want to cross check or validate the data against other sources. Proceed with caution when using third party statistics.

• Debate sessions

For benefits that are intuitively great, but that resist quantification, debate sessions can help test whether the benefit truly has substance or merely reflects a passing fad. During a session, separate teams play "devil's advocate" roles and mount rigorous debate about the pros and cons of a benefit. Benefits that lack substance tend to wilt under the scrutiny of a debate session. These sessions can also be used to assign a "ballpark" estimate to a benefit.

To continue reading, please go to Part 2 of this article.