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Cost/Benefit Analysis

June 15, 2016

Background/Introduction

 

When: 2012
Customer: EPCI Company

 

The environment in which the company was operating had changed. While there used to be significant synergies between divisions, low complexity and a single market focus, the new reality was that the service offering had become more complex, specialised and diversified, at the same time as the company was now operating in multiple markets with a significant use of partnering to stay price competitive.

The management realised that the new ecosystem in which it operates required a change in the way it was organised and managed, and necessitated changes to technology which could enable the required international collaboration.

A full review of the operating model, including leadership, organisation, business processes and technology was conducted and the proposed changes were defined.

An important part of the analysis was a cost/benefit analysis (“CBA”) of the proposed change programme, which would also form the basis for the recommendation to the Board of Directors.

 

Project:

 

The project team applied the following methodology:

  1. Identify all options in terms of alternative projects/programs

  2. List alternative scenarios (“as is” or change)

  3. Identify all costs and benefits over relevant time period (5-7 years)

  4. Convert all costs and benefits into a common currency (“NOK”)

  5. Apply discount rate and calculate NPV

  6. Perform sensitivity analysis

  7. Adopt recommended choice

Deliveries/results

 

The analysis described and quantified all identified costs and benefits, including the consequences of carrying on with business as usual (“costs of doing nothing”). The final report presented a detailed CBA with the Net Present Value (“NPV”) of implementing the change programme.

 

Lessons Learned
  • Costs are tangible, hard and financial while benefits are hard and tangible, but also soft and intangible. It is therefore paramount to provide supporting arguments for the quantification of the soft and intangibles (e.g. lower turnover, improved collaboration etc.). Sources for such arguments are:

    • Comparables

    • Industry standards/average as a minimum

    • Best in class ambitions

    • Research by credible sources

    • In-house examples

    • External quotes

    • Best/educated guess

  • CBA is an excellent tool to engage stakeholders around the value creation of one’s decisions

  • CBA is not an accurate science, but forms the best basis for structured discussions and takes one closer to fact based decision making

  • CBA highlights/identifies elements that are affected by change and enables management to make considered decisions

  • We continuously make decisions based on CBA, either consciously or “automatically” and often it can be beneficial to verify that gut feeling by facts and supporting evidence

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