Fundamentals for Project Initiation
Cost Benefit Analysis
The process of adding up the expected value of a project—the benefits—and comparing them to the dollar costs.
- Establish project goals
- Create the scope
- Provide deliverables
- Define success criteria
Benefits
- Minimize risks and maximize gains for projects
- Reduce biases and keep stakeholder self-interest from influencing decisions
- Help you make a strong business case
Guiding questions
To determine the benefits of a project, you might ask:
- What value will this project create?
- How much money could this project save our organization?
- How much money will it bring in from existing customers?
- How much time will it save?
- How will it improve the customer experience?
And to determine the costs of a project, consider questions such as:
- How much time will people have to spend on this project?
- What are the one-time costs?
- Are there any ongoing costs?
- What about long-term costs?
You might also consider questions about intangible benefits. These are gains that are not quantifiable, such as:
- Customer satisfaction. Will the project increase customer retention, causing them to spend more on the company's products or services?
- Employee satisfaction. Is the project likely to improve employee morale, reducing turnover?
- Employee productivity. Will the project reduce employee's overtime hours, saving the company money?
- Brand perception. Is the project likely to improve the company's brand perception and recognition, attracting more customers or providing a competitive advantage?
Calculating costs and benefits
(G-C)%C=ROI
In this formula, G represents the financial gains you expect from the project, and C represents the upfront and ongoing costs of your investment in the project.
For example, imagine your project costs $6,000 up front plus $25 per month for 12 months. This equals $300 per year, but you estimate that the project will bring in $10,000 in revenue over the course of that year. Using the formula above, you calculate the ROI as: ($10,000 - $6,300) ÷ $6,300 = 0.58 = 58%