Everyone talks about it, and there is no lack of opinions about what they are, but when it comes to project benefits it’s often hard to reach consensus on what people actually mean.
Additional revenue, higher profit margin, happy employees, satisfied customers, new clients, less pollution, less waste, operational efficiency. They are all benefits.
Most dictionaries define a benefit as something like “a helpful or good effect.” But good effects are very hard to measure, compare, and understand.
Therefore, in my opinion ALL benefits of a technology project should be expressed in dollars (or any other currency).
Using dollars is helpful for a number of reasons. The key advantage is that, with the benefits being expressed in a uniform way, you can compare projects immediately between business areas, across delivery streams, and in the whole project portfolio.
Another reason for assigning dollars to benefits is to prevent determining the benefits of a project by measuring “who shouts the loudest,” something many organizations suffer from.
And given that most of the costs of a project are already measured in dollars, you can easily compare the costs and benefits of a project to determine it’s overall value.
While estimating a number for costs is generally easy to do, assigning a dollar value to the benefits is more of a challenge. Getting to data and assumptions that make estimating benefits in dollars possible is difficult, but it can be done.
And it pays off: You'll gain a clear idea about what the expected benefits are, and what assumptions you need to test, in a way that all project stakeholders will be able to understand.
Focus on Economic Benefits
Many projects have objectives like “delighting the customer,” “improving time to market,” “happy employees,” or “operational efficiency.” But hardly any project will be blessed with unlimited resources to invest, and there’s just no getting around the fundamental challenge that all organizations face: sustaining themselves.At some point the projects you invest your limited resources in should help the organization to sustain itself and possibly even grow. So the question becomes “How do these benefits impact the economics of your organization?”.
The risk of placing too much focus on the economic benefits is relatively small and one can argue that lately it's largely been ignored by many organizations (just have a look at the number of Silicon Valley unicorns that are currently imploding). It is of no help having happy customers and no revenue.
The biggest risk of focusing on the economic benefits of projects is when organizations find opportunities to reduce costs that may ultimately have a negative impact on the customer experience. This is particularly problematic for service organizations, where a more efficient operation often translates to less happy customers.
To make estimating the benefits of a project easier and more realistic, I use a simple model to assess the economic benefits of a project. It consists of five benefit types (or buckets).
1) Increased Revenue
2) Protected Revenue
3) Reduced Costs
4) Avoided Costs
5) Positive Impacts
Each project must contribute to one or more of these; if it doesn't, it has no benefits at all.
Increased Revenue
Increased revenue is the revenue associated with either increasing sales to existing customers or gaining new customers. It may involve increasing share of wallet, market share or even the size of the market itself. It can be done by making changes that add value to existing products or services that customers are willing to pay for, or adding new products or services that either existing or new customers are willing to pay for.The projects in this area are likely to be “delighting” features for either current customers or new ones. This is also where innovation occurs, enabling new business models and increasing the size of the market by serving new markets and undercutting others.
Protected Revenue
Protected revenue is the revenue that is currently being received from existing customers who are paying for the products and services you already sell. Sustaining and protecting this revenue often requires ongoing improvements to at least keep up with competitors and maintain existing market share.The projects in this area are more defensive in nature, making processes faster and easier to use and removing any pain that might drive customers to consider switching to a competing product or service. The changes made here are usually not considered valuable enough for existing customers to pay extra, though. This is the basic maintenance of existing products and services that can be described as “sustaining innovations.”
Reduced Costs
All those ideas about how to be more efficient contribute to this bucket. The projects that add to this bucket will reduce the costs that you are currently incurring. A typical example of this can be changes that speed up or automate processes, reducing the number of people required. It can also result in savings in overhead, equipment or other costs.Avoided Costs
Avoided costs are costs you are not currently incurring but there is some likelihood that you will in the future, unless some action is taken. Some examples of these might be the need to hire additional people to handle a new process, fines you may have to pay, or loss of reputation that impacts goodwill or brand value.This category typically includes a lot of things that many organizations might consider to be operational or strategic risks — often with an estimate of the probability of an event occurring.
Positive Impacts
Positive impacts are benefits that cannot be translated to one of the above but are important enough for your organization to take into account when evaluating a project. For example, creating less pollution and waste, or helping the family of a deceased colleague, or working for free for a non-profit.When such benefits are important for you and your organization you will give them a disproportionate dollar amount as value. This way projects with such benefits will always be part of the short list of projects to be selected for implementation.
When these benefits are not so important, make the dollar value of the benefits equal to the costs, and projects like these will only be part of the short list if they have additional economic benefits.
And when the importance of these benefits are just lip service just give them a zero dollar value and you will see them almost never in your shortlist.
Make Assumptions Transparent
Once you have identified the benefit types of your project, getting to a dollar figure typically requires some assumptions about the effects of the change or the cost of alternatives. The reality of technology projects is that they involve many risks, unknowns and uncertainties. In order to calculate the dollar benefits, you will often have to make assumptions or educated guesses and apply probability where necessary.The goal of these estimations and assumptions is accuracy, not precision. Accuracy is how close an estimate is to the true value. Precision is the number of significant figures you give in your estimate. These are two different things.
The initial process of estimating the benefits of projects needs to be fast — less than one week. Over time you will get better information to improve your assumptions or replace them with facts. You can then update your estimations and re-evaluate.
By making assumptions transparent you prevent blatant gaming of the benefits and cost figures. This means all assumptions are part of the document that estimates the benefits. Transparency of assumptions also allows others to scrutinize and improve those assumptions. And better assumptions will lead to more reliable estimations.
In some cases, the same assumptions are used again and again. It can be helpful to use the same numbers for particular project benefits and even start building a repository of assumptions and key data points that are shared and built on over time.
And Now What?
Now that you've arrived at an estimate of your project benefits expressed in dollars, and you already estimated the real costs of your project in dollars you are now ready to determine the real value of your project. This will be the topic of my next article.In a nutshell: Estimating the benefits of your project in dollars is essential for making good decisions, comparing projects, and aligning stakeholders.
You can buy my eBook The Project Valuation Model ™ by clicking here or on the image.
