Cost-Effectiveness Model


Cost-Effectiveness Model

As discussed earlier, traditional cost “benefit analysis was often an application of cost-effectiveness models.

This model ignores benefits and focuses on costs and risks only. In effect, the process is relatively simple. As shown in Figure 9.7, the costs of maintaining the status quo or base case are estimated over an agreed-on period of time.

Figure 9.7. Cost-effectiveness

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The development and support costs of the proposed solution are also estimated over the same period and, if the total development and support costs of the proposed solution are less than the ongoing support costs of the base case, then the proj ect is viable . Typically, there would be a requirement for at least two alternatives to the base case.

This approach is particularly useful for projects that are functionally replacing an existing technology or process. For example, it could be used for local area network (LAN), hardware, and other technology projects. However, it is only viable when the new technology or process replaces the existing technology or process. Any additional benefits from the proposed solution should be ignored to avoid double-counting . Otherwise, the project value analysis approach should be used.

Another Form of Double-Counted Benefits

It is common that a number of project objectives and, more interestingly, a number of projects may have different outputs but the same outcome.

For example, an organization may be concerned about loss of existing clients to competitors . A number of projects are initiated, such as a project to improve formal written communication with existing clients and another project to increase direct personal contacts with the clients. In both projects, the outputs are different (revised letters , more phone calls) but the outcome (reduced client turnover ) is the same. To avoid double-counting the outcome benefits, these two projects should be combined as a single program as shown in Figure 9.8.

Figure 9.8. Two projects, same outcome

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Additional Added-Value Drivers

Many organizations use other factors to assist in the difficult area of project prioritization. The factors that our client companies use include these:

  • Strategic alignment

  • Technology impact

  • Competitive advantage

  • Organizational impact

The use of a simple scoring system such as 0 (the project has no relationship to the corporate strategic plan) to 5 (the project is an integral component of the corporate strategic plan) can be used to rank projects. We have a full example of this approach on our Web site (www.Thomsett.com.au).

In addition, using a concept developed by McKinsey & Company, some of our clients also consider competing projects using the concept of innovative horizons:

  • Horizon 1: Projects developing products in an existing portfolio; for example, a bank is developing another bank product.

  • Horizon 2: Projects developing products in a proven portfolio, but not one with which the organization is operating. The bank decides to develop insurance products.

  • Horizon 3: Products that are totally innovative and unproven. The bank decides to develop artificial intelligence (AI) salespeople.

This model ensures that the organization is creating a project portfolio that balances risk, innovation, and growth. There are different governance guidelines for projects in different horizons. For example, Horizon 3 projects, which are inherently more risky, would have a more tight and regular governance.

All these added-value factors are analyzed during the RAP session.

A Final Note on Added-Value Analysis

Although the adoption of added-value analysis ensures that the project justification process is professional and equitable, it should not be forgotten that undertaking this process is a vital element in ensuring that the project manager and team understand the client's expectations for the project. It is true that many of the initial estimates used to develop the added-value analysis will be incorrect and based on assumptions that eventually are proven incorrect.

By undertaking an added-value analysis with the stakeholders and team members , the project manager is also building a team that shares a set of common expectations for the project based on business rather than technical drivers.

The P Files Episode 6: The Missing Brain

One of the scariest terms that has entered contemporary business, thanks to Bill Gates, is the term no brainer. We consulted on a project that had already commenced. A senior manager told us, before we met the team, that the project was a "no brainer." What he meant was that it was obvious to the management team that the project would be highly beneficial to the organization and that everyone believed this to be true. After a few hours of looking at the project's outputs and outcomes, it was obvious to everyone at the review that the outputs would not lead to any of the expected outcomes. Worse, none of the outcomes had any benefits at all for the organization. There was no stakeholder buy-in and the budget was 300% larger than the one management had approved. We reported back that indeed the proj ect was a no brainer. As we reported , "We couldn't find any evidence of any brain being applied to the project at all!"

The P Files Team Comment

If you are working on a no brainer, then don't switch off your brain just because everyone else has. No brainer is too often an excuse for avoiding any proper project management.

Case Study ”Added-Value Analysis

Edwina returns to the RAP and resolves that Smuthe office consultants will train Big Bucks clients but you have to train Smuthe people. Smuthe will acquire all the technology based on your team's recommendation and the support of the new systems is outside scope; in effect, another contract. The revised objectives are:

graphics/09fig09.gif

You can now turn to the added-value analysis.

We'll use one objective to show how the added-value analysis is applied.

Objective Output Outcome
To capture extended client personal details More information about the client's family, lifestyle, and accommodation preference for Smuthe consultants More appropriate placement for clients
  Improved service (to Smuthe clients and Smuthe consultants) Increased revenue (increase in fees for faster service)
  Avoided costs (less research required for consultants, fewer accommodation showings) Notional avoided cost (reduced level of potential clients loss)

This is an example of different outputs leading to the same outcome as all objectives and outputs lead to the same outcomes.

What is revealed during the added-value chain analysis is a number of operational problems that Edwina and her team are facing . The first is that by not having up-to-date and complete details of potential clients (i.e., Big Bucks executives) Edwina and her team often suggest inappropriate accommodation, which leads to multiple site visits by Smuthe consultants and clients. In addition, there are some Big Bucks executives who have found that dealing with Smuthe is time-consuming and these people have chosen not to use the service.

In addition, Edwina has negotiated a premium fee arrangement for clients who use the company's Web site.

Edwina agrees to gather some data to estimate the financial information and improved service measures.

In addition, you discuss these added-value issues:

  • Strategic impact;

  • Technology impact;

  • Organizational impact; and

  • Competitive advantage.

You agree with Edwina that Project Connext is ranked as follows :

  • Strategic impact ”5

The project is an integral component of the corporate strategic plan.

  • Technology impact ”4

The project is deploying technology that is an integral component of the corporate strategic plan.

  • Organizational impact ”3

The project is driving change that impacts a significant component of the business process.

  • Competitive advantage ”4

The project is delivering a product that is ahead of similar products in the competitive area.



Radical Project Management
Radical Project Management
ISBN: 0130094862
EAN: 2147483647
Year: 2002
Pages: 136
Authors: Rob Thomsett

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