Saturday, July 7, 2007

Look Before the Project - Part I

For the next few weeks I'd like to take a closer look at initiating projects, with special attention to costs. This is an area of weakness for many who jump in to do work before looking at the consequences or rewards. Rather than use a microsope, you need a telescope to see to the far and of the project. We'll focus on costs, but once again, there are many other factors which must be analyzed.

There are many different methods and techniques, but one easy one is to determine the ratio of benefits to costs, starting with the "hard dollars" -- the real cash to be spent and saved. This is also a good sales tool since it shows the tangible benefit of buying the project, product, or services. One easy illustration can be found in imaging systems.

Let's looks at the hypothetical costs of the imaging system -- a small server ($5,000), software ($100,000 -- its a high end package), and a high speed scanner ($10,000). We may also need to pay someone to install the system ($20,000) and someone to operate the scanner ($75,000/year in salary and benefits). We may also want to spend $25,000 to train our staff. This means that in a year we will spend a total of $200,000 for our imaging system.

Now we need to look at the hard dollar savings. Through attrition and re-organization, we can reduce our clerical staff. Let's say we save $150,000 in salary and benefits from two clerical positions. Surely we will be able to reduce paper, file cabinet, and office supply costs. A case of moderately priced paper can be $40. If we project savings of 1,000 cases a year (a small amount for many larger companies), that's $40,000. Let's call it $50,000 to include file cabinets and other supplies such as paper clips and file folders. I've also found many large companies lease storage to keep all the paper and file cabinets. Let's assume the lease savings are $100,000 per year. So far, we have identified $300,000.

Of course we could continue on and look at the possibility of more hard dollar costs and savings, but now let's look at the less tangible items. Imaging industry associations may tell us a missing file or paper can take an average of a half hour to locate. How many times have you lost paper? Once a week? Once a month? Who conducts the search for the missing paper and what are they paid per hour? How about productivity of employees who no longer have to get up and walk to the filing room, but can access the image of the piece of paper right from their desktop workstation? These can be either factored directly into the ratio , or more likely, just annotations to back up the hard dollars.

As you can see, the benefits of our hypothetical project outweigh the costs, making the ratio greater than 1. If we line up all potential projects, look at their specific benefit-cost ratio or BCR, we can get a picture of which are the best candidates from a financial standpoint -- the projects with the largest ratio. In fact, most imaging proposals have fairly high hard dollar benefit cost ratios. So why aren't we all working in a paperless world? Well that's beyond the scope of this article!

Have any questions about BCR? Please post them in the comments. Next week, we'll take a look at a more modern approach -- Total Cost of Ownership or TCO.

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