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COST-BENEFIT ANALYSIS GUIDE FOR NIH IT PROJECTS

COST-BENEFIT ANALYSIS GUIDE FOR NIH IT PROJECTS. Prepared by: Office of The Deputy Chief Information Officer October, 1998 Revised May, 1999 SHOBA KRISHNAN Summer 2004. GENERAL CONCEPTS OF COST-BENEFIT ANALYSIS.

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COST-BENEFIT ANALYSIS GUIDE FOR NIH IT PROJECTS

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  1. COST-BENEFIT ANALYSIS GUIDE FOR NIH IT PROJECTS Prepared by:Office of The Deputy Chief Information Officer October, 1998Revised May, 1999 SHOBA KRISHNAN Summer 2004

  2. GENERAL CONCEPTS OF COST-BENEFIT ANALYSIS • Definition: An evaluation of the costs and benefits of alternative approaches to a proposed activity to determine the best alternative. • Purpose: • The current laws relating to managing Information Technology in the Federal government • support better decision-making; demonstrate that at least three alternatives were considered • Guidance:OMB Circular A-94, A-76 • Time Period: system life cycle • Alternative:at least three alternative means of achieving program objectives:one to continue with no change. • Identifying and Measuring Costs and Benefits Analysis. • Benefit-Cost Analysis , Cost-Effectiveness Analysis .

  3. OVERVIEW OF THE CBA PROCESS • HOW IS THE CBA PERFORMED? • Determine/Define Objectives • Document Current Process • Estimate Future Requirements • Collect Cost Data • Choose at Least Three Alternatives • Document CBA Assumptions • Estimate Costs • Discount Costs and Benefits • Evaluate Alternatives • Perform Sensitivity Analysis

  4. HOW IS THE CBA PERFORMED? • Determine/Define Objectives • Document Current Process Customer Services • System Capabilities • System Architecture • System Costs • Estimate Future Requirements Determine Life Cycle Time • Estimate Life-Cycle Demands

  5. Collect Cost Data Historical Organization Data Current System costs Market Research Publications Analyst Judgment Special Studies Choose at Least Three Alternatives Document CBA Assumptions Steps (Contd..)

  6. Steps(Contd..) • Estimate CostsActivities & Resources ,Cost categories,Personnel,Indirect costs,Depreciation and Annual costs Example for Tangible Asset Depreciation

  7. Example of Annual costs-Activity Cost Matrix

  8. CBA Process (Contd..) • ESTIMATE BENEFITS Define, Identify,Establish a measurement Criteria ,Classify –Estimate Tangible Quantify Intangible Benefits Example– Shows the scores for Benefits A-G from 4 reviewers using a scale of 1 to 5

  9. Weighted Scoring

  10. Discount Costs and Benefits • Common unit conversion • P=F(1/(1+I)^ n) where P- Present value,F – future value,n –no of years and I Interest rates.1/(1+I)^ n is the discount factor Exhibit 9, Discounted Costs and Benefits

  11. Evaluate Alternatives • Evaluate with Intangible Benefits Direct compare Convert into relative Values • Evaluate with Dollar value

  12. Perform Sensitivity Analysis • tests the sensitivity of input parameters and the reliability of the results obtained from the benefit-cost analysis. • Input Parameters System Requirement Definition Costs System Development Costs System Operation Costs Transition Costs, Especially Software Conversion System Life Cycle Peak System Demands Dollar Values and Relative Values for Benefits

  13. Return On Investment • RROI is a percentage (TDN-TDC) • ROI=Total Discounted Benefits – Total Discounted costs

  14. A sales director is deciding whether to implement a new computer-based contact management and sales processing system. His department has only a few computers, and his salespeople are not computer literate. He is aware that computerized sales forces are able to contact more customers and give a higher quality of reliability and service to those customers. They are more able to meet commitments, and can work more efficiently with fulfillment and delivery staff. • His financial cost/benefit analysis is shown below:  • Costs:New computer equipment: • 10 network-ready PCs with supporting software @ $1,225 each • 1 server @ $1,750 • 3 printers @ $600 each • Cabling & Installation @ $2300 • Sales Support Software @ $7500 • Training costs: • Computer introduction - 8 people @ $ 200 each • Keyboard skills - 8 people @ $ 200 each • Sales Support System - 12 people @ $350 each • Other costs: • Lost time: 40 man days @ $ 100 / day • Lost sales through disruption: estimate: $10,000 • Lost sales through inefficiency during first months: estimate: $10,000

  15. Other costs: • Lost time: 40 man days @ $ 100 / day • Lost sales through disruption: estimate: $10,000 • Lost sales through inefficiency during first months: estimate: $10,000 • Total cost: $55,800 • Benefits: • Tripling of mail shot capacity: estimate: $20,000 / year • Ability to sustain telesales campaigns: estimate: $10,000 / year • Improved efficiency and reliability of follow-up: estimate: $25,000 / year • Improved customer service and retention: estimate: $15,000 / year • Improved accuracy of customer information: estimate: $5,000 / year • More ability to manage sales effort: $15,000 / year • Total Benefit: $90,000/year • Payback time: $55,800 / $90,000 = 0.62 of a year = approx. 8 months

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