4.5 Net Present Value

4.3 Benefit/Cost Ratio

Benefit/cost ratio (B/CR) is simply the ratio of benefits to costs. B/CR is a measure of how much money is gained from using a SPI method. B/CR measures the economic magnitude of using a new and improved software process. For example, a B/CR of one to one or 1:1 means that for every dollar spent, one dollar is earned. That's a pretty good economic ratio. Many organizations would consider themselves fortunate, wise, and well prepared if they could achieve a B/CR of 1:1. What does this mean? Well, in simple terms, a B/CR of 1:1 means that for every dollar spent, one dollar in revenue is always earned. Translated into plain English, this would mean that everything is free. Pay a dollar for a meal, and get a dollar back in change. That's a free meal. Pay a dollar for your car's fuel, and get a dollar in return. That's a free ride. Figure 9 illustrates the formula for B/CR.

Figure 9: Formula for Benefit/Cost Ratio

Let's look at one or two more examples. A B/CR of 2:1 means that for every dollar spent, two dollars is returned. Life is no longer free but instead is profitable if you can achieve a B/CR of 2:1. If you achieve a B/CR of 0.5:1, it means that for every dollar spent, 50 cents is returned. At first this seems unattractive. Perhaps even grounds for firing your accountant . However, upon closer examination, it doesn't seem so bad after all. What if it took 20 dollars to fill up your car, but you received 10 dollars in change? That would mean you are probably one lucky person. The point is to provide a simple explanation of B/CR and enlighten the reader with the range of possibilities.

Since many SPI methods are losing propositions , let's put this into context. If a SPI method has a B/CR of 0.5:1, 1:1, or 2:1, it means you will receive 50 cents, one dollar, or two dollars for every dollar spent. You will be instantly promoted to CEO if you can do this. You may stumble upon a SPI method that yields 10:1, 100:1, or even 1,000:1. That means for every dollar you spend , you get 10, 100, or 1,000 dollars in return. By gosh, you're a flaming genius. There are a few good SPI methods which have a B/CR in this range. Have your ears perked up yet?

Well, they should, because there are several good SPI methods that exhibit a very good B/CR. The Software Inspection Process and Personal Software Process ^SM have good B/CR values.