Benefit Measurement Methods

Benefit measurement methods employ various forms of analysis and comparative approaches to make project decisions. These methods include comparative approaches such as cost-benefit analysis, scoring models, and benefit contribution methods that include various cash flow techniques and economic models. You'll examine several of these methods, starting with cost-benefit analysis.

Cost-Benefit Analysis

One common benefit measurement method is the cost-benefit analysis. The name of this method implies what it does—it compares the cost to produce the product, service, or result of the project to the benefit (usually financial in the form of savings or revenue generation) that the organization will receive as a result of executing the project. Obviously, a sound project choice is one where the costs to implement or produce the product of the project are less than the financial benefits. How much less is the organization's decision. Some companies are comfortable with a small margin, while others are comfortable with a much larger margin between the two figures.

When examining costs for a cost-benefit analysis, include the costs to produce the product or service, the costs to take the product to market, and the ongoing operational support costs. For example, let's say your company is considering writing and marketing a database software product that will allow banks to dissect their customer base, determine which types of customers buy which types of products, and then market more effectively to those customers. You will take into account some of the following costs:

■ The costs to develop the software, such as programmer costs, hardware costs, and testing costs

■ Marketing costs such as advertising, traveling costs to perform demos at potential customer sites, and so on

■ Ongoing costs such as having a customer support staff available during business hours to assist customers with product questions and problems

Let's say the cost to produce this software plus the ongoing support costs total $5 million. Initial projections look like the demand for this product is high. Over a three-year period,

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