So your writing a business case or trying to justify a crucial or innovative solution that will bring wonders to your/your customers organization. The only problem is it’s going to require money being spent before we get to this wonderful end state. Now I’m sure a number of people have utilized vendor TCO/ROI tools and have been amazed at how the numbers come out by clicking next, next, finish etc.
Well apart from the usual “default” values of 100% benefit on day 1 that they seem to provide they also almost always utilize indirect benefit analysis. Indirect benefit analysis is a way of providing financial numbers for an intangible event. For example:
We estimate that by replacing Bob in marketing’s aging PC (4 Years old) that we will provide Bob with a far greater platform to work form that will enable Bob to be more productive. Now the problem we have here is that we don’t know Bob’s worth (I’m sure Bob’s a great guy and really valuable but that doesn’t put pound signs in people’s eyes).
So how do we justify replacing Bob’s beige computer with a nice sleek little black number. Well to start with let’s look at a method.
One method that can be used is the Bayesian Analysis (https://support.sas.com/rnd/app/stat/procedures/BayesianAnalysis.html)
Baysian Analysis gives us a position where can attribute value for intangible events.
To do this you will need to know a few pieces of information.
In this case the event is “increase productivity”
The event variance
So in Bob’s case we want to increase Bob’s productivity in a time period, let’s say in a one week period.
Using an expert (or team of) opinions we need to carve up increase productivity into slots. For this example we can use hours.
I’m going to suggest that we list these out:
0 Hour Increase. .25
1 Hour Increase .5
2 Hour Increase .125
3 Hour Increase .125
For each event we assign a probability based on expert likeliness to occur. In this example we give the chance of zero increase a 25% chance of occurrence, 1 hour increase a 50% of occurring and the remaining two we feel are less likely to occur.
Bob’s worth per Hour
Now we’re faced with another piece of missing data, what does one hour of Bob’s time equal in financial terms. There are a couple of starting places for this:
1) We take Bob’s hourly rate and assign that
2) We take Bob’s share or revenue value (total revenue/share value / number of employees)
3) We use another method e.g. Sales Conversion Figures
I’m going to stick with a basic simple example and use Bob’s hourly (fully burdened) salary.
So now we know it’s most likely that we will increase Bob’s productivity by an hour a week. We have assigned Bob a value of £11.50 per hour.
We then discount this hour by the probability of occurrence giving £5.75
For the next three years
So using the known information above we can work out that in a year (48 weeks) Bob’s new computer’s increased productivity value is: £276
Over 3 years this gives £828
Let’s take this concept to our whole company
Now if we have 3000 people that we do the same with we suddenly get £2,484,000
As you can see using a simple set of values, assumptions and expert opinion I’ve managed to find justification of £828 per employee or ~2.5 Million Pounds for my three year PC refresh, based on improving productivity by only a marginal amount.
When conducting indirect benefit analysis make sure you include all known benefits and use expert opinion and known financial information to calculate the benefits. It’s a good idea to work with a team of stakeholders when doing this, or at very least make sure you demonstrate all your working out. Indirect benefit analysis while subjective, does provide a far greater level of accuracy than just stating “increase in productivity”. If used correctly additional funding should be able to be secured when trying to justify IT spend. Whilst I would potentially conduct direct benefit without indirect, I’d always want to use the two in the indirect analysis if possible.
When I get time I’ll try and draw up some diagrams for this method to make it easier to understand.