Calculating the value of project benefits

In my many years as a Project Manager, both for Six Sigma and non Six Sigma Projects, some of the most contentious, interesting and heated debates occur around the subject of how a project benefit should be calculated. It is often believed that a project is successful if it satisfies the "Triple Constraints theory" (i.e. cost, time and scope).

While that is true to some extent , a project is fully successful when it delivers optimum benefit to the organization and its stakeholders.

Project benefits can be classified into many types. Some benefits impact the top line or bottom line very clearly. In other cases, the project benefit is not immediately apparent or may need some time for it to emerge. Hence it is important to understand and be able to differentiate between different types of benefits.

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What are the types of project benefits?

Types of project benefits are:

• Hard benefits

  These are counted from the firm belief that a project has resulted in measurable differences in the amount of revenue generated or savings realized. When claiming hard benefits, the organizational entity will actually increase their revenue budget or reduce their expense budget because of the impact of this project. A financial benefit which is traceable line item/s in the financial statements (P&L/ Balance Sheet) is a hard financial benefit.

• Soft benefits

  These are financial benefits which do not get reflected in the financial statements but to which a monetary value can still be attached through robust calculation or proxy measurements. Soft benefits come from the strong belief of the organization that the benefits will be there – but they may be hesitant to make changes to their budget.

  An important type of soft benefit is Cost Avoidance eg - a project that automates or eliminates a manual process or reduces number of steps taken to do a process without impacting quality of the transaction and could allow the company to increase the number of transactions processed without adding incremental headcount.

  Other examples are benefits that are subject to risk could be dealt with by making them soft benefits; if the manager is confident of the magnitude of the savings but not of the likelihood of the savings.

• Sustainable benefit

  This is a benefit which is expected/assumed to recur in the foreseeable future. The concept of benefit being sustainable becomes important to ensure that any modifications to the budget as an outcome of project benefits are permanent. For example, if a lean project results in elimination of non-value added steps in a process resulting in faster processing time, this may lead to the same task being done with fewer headcount. Sustainability is important to ensure that the reduction in headcount budget is permanent and effective year on year.

• One time benefit

  This is a benefit which is a cost reduction or revenue increase at a single instance and is not expected to recur in the coming financial years. Most ITES companies in India provide company transport to all employees. If the organization initiates a project to reduce transport costs and the projects results in reduction on transport cost per employee per month (through better utilization and routing), that would be a sustainable save. However, if the project also results in the organization needing fewer vehicles due to which additional vehicles can be sold off, that is a one-time benefit. Similarly a 5S initiative may result in identification of excess inventory (without impacting need), resulting in fewer inventory cost for couple of months. This is another example of a one- time cost save.

• Productivity benefit

  This is one of the most common benefits type arising from projects. This typically arises from projects involve automating manual processes and/or streamlining overly complex processes. Productivity is increased when it takes less time for fewer people to generate more work and more results. Productivity benefits are quantified as a reduction in the total number of effort-hours per hour/day/month required to perform a task. We often speak in terms of full time equivalents, or FTEs. Productivity could be a hard or a soft benefit depending upon whether or not we remove people or reduce overtime from the work force when implementing productivity initiatives.

How to create a business case

Project benefits are articulated through a statement / document often called a business case. A properly written business case is imperative to the measurement of project success. Project managers receive proper training and guidance to write a clear, concise and measurable business case for all projects. These are some of the salient points that all project managers need to remember while writing a business case.

Create an initial business case during project initiation stage itself. This is critical as it will help the portfolio manager to prioritize which projects need to be done and which can be kept in the back burner. The project benefit and cost estimation is often of pivotal importance during project go –no go decisions. Clearly show how the initiative contributes to the organizational strategy including the core reason for the initiative. There must be measurable benefits that specifically relate to the organization's goals and objectives

A good business case will have certain elements such as clear articulation of project benefits , people who are accountable for achieving those benefits and a governance process by which the business case is evaluated at regular intervals to check its relevance to the organization.

Any project benefit needs to be evaluated before, during and after completion ie, during the project lifecycle, after the project closure, ongoing basis.

People must agree to these benefits being monitored over time, with appropriate adjustments made when necessary. Appropriate action is taken if required to alter direction (i.e. the organization changes course and the intended project benefits are no longer relevant)

The business case needs to be a core relevant document for the project and not created simply for project initiation and audit purposes.

How to create and refine your business case for different project types

* Project manager must ensure that Finance teams/Financial comptroller is/ are involved in each stage of benefit calculation

How to calculate financial benefits

It is critical that project manager ensure a base line of existing data (whether costs or revenue) to establish existing pre-project performance. This will give a true picture of project success. Project manager needs to ensure that seasonal variations have been taken into account in baselining itself. Special cause variation should be removed for baselining purposes. A minimum of three months data is needed for establishing the baseline. Also, the financial benefit must be traceable as an outcome of the project implementation.

Financial benefits must be calculated based on standard costs at the lowest aggregate level at which such cost data is available. Most conservative estimates should be used for financial benefit calculation.

Hard financial benefits must be reported only after the actual realization has started. Every hard financial benefit should be attributable to line items in the financial statements to ensure traceability. Avoidance of costs qualify as hard financial benefits only when they have been previously incurred or their future incidence is certain (i.e. these have been budgeted for in the AOP). Reduction in utilization of fixed assets/ reduction in incidence of fixed costs would qualify as hard financial benefit only when these result in either current/future avoidance of cost or in disposal of asset. The benefit should be quantified based on replacement cost.

Soft benefits should be reflected separately and should not be added to the hard financial benefits. Sustainable financial benefits and one time financial benefits should be reported separately. Sustainable benefits should be annualized for reporting purposes to enable easy comparisons. Recurring costs should be factored into the sustainable hard financial benefit calculation.

The certified hard financial benefits for closed projects should be reviewed periodically post implementation to ensure that assumptions made in the calculation continue to be valid. If a consistent observation is made in post implementation reviews, then the benefit figures should be adjusted as appropriate.

Toll Gates are a must for Certification of Financial Benefit. The financial controller should be consulted at each stage of the financial validation process.