How to Write a Cost/Benefit Analysis for a Business Case

Cost/benefit analysis is an estimation and evaluation of net benefits associated with alternatives for achieving defined goals of the business and is the primary method used to justify expenditures. It’s also a critical piece of the business case.

You may or may not need to include a detailed cost/benefit analysis for each alternative in the business case. Some opportunities may warrant having just the final recommendation fully documented in this section. The audience and the opportunity drive the level and complexity of the details required.

A good rule of thumb is that, if the recommendation is obvious to and will mostly be accepted easily by all individuals responsible for approval, you can simply include the details for only the final recommendation. However, if two or more options are viable solutions, providing more detail in this section gives the audience members the additional information they require to make an informed decision.

If the opportunity is outside the expertise of readers, you should include more details to allow them to become comfortable with your recommendation. Companies are looking for a positive return on their investment, and most organizations have minimal financial measurements for the opportunity to achieve before it can be considered cost justified. Therefore, additional details can help companies predict financial impact even when the recommendation isn’t easily measurable.

Where most analysts stumble in writing a business case is in knowing how much analysis is enough but not too much. (You don’t have to fully analyze each recommended option to the point of absolute certainty.) A business case is a vehicle to gain approval to move forward, which means more analysis occurs after approval but before the project is actually developed or software is purchased.

Committing the resources to fully analyze a solution before approval doesn’t make sense. However, not doing enough analysis can result in approval for significantly less funding than is ultimately necessary. Through experience, you’ll become better at aligning the appropriate analysis effort and the amount of the funding request with the final estimates for the actual results.

Financial terminology and metrics for a cost/benefit analysis

Here are a few of the terms and financial metrics you should be familiar with as you develop a business case:

• Tangible/intangible: You can quantify tangible costs and benefits in financial terms, market share, employee satisfaction measures, or by any measurable scale. Intangible costs and benefits must be documented subjectively. Examples of tangible and intangible costs and benefits include the following:
  • Tangible costs: Labor and material costs, overhead, and decreased quality and production
  • Intangible costs: Customer, employee, or vendor dissatisfaction and loss of potential customers
  • Tangible benefits: Increased revenue or income, increased production or quality, and reduced cost
  • Intangible benefits: Goodwill and customer, employee, or vendor satisfaction

  Estimation techniques or a cost/benefit analysis

  If multiple alternatives are being considered, each alternative must be analyzed and documented using the same approach. This step is extremely important for options where a financial comparison is being shown.

  Determining the costs and benefits means estimating two main categories — one-time cost of change and net impact to ongoing operations. The source of cost that is usually most obvious is the one-time cost of change.

  The less-obvious (but equally important) cost is the difference between the cost of the current business process and the cost of the recommendation after it’s in place at some future time: the net impact to ongoing operations. These two categories make up the overall cost/benefit of the proposal, which may reflect a positive or negative cost/savings after calculated.

  

  Credit: Illustration by Wiley, Composition Services Graphics

  The current process is considered your as-is process, and the future recommendation is your to-be scenario. For a brand new initiative, you have only a to-be cost or savings. These costs are composed of the ongoing or operating costs of the new recommendation plus the costs to get it built, implemented, and working in place.

  

  Credit: Illustration by Wiley, Composition Services Graphics

  How to quantify a business’s ongoing/operating costs and benefits

  Initiatives can impact people, processes, or systems and should be analyzed individually to ensure that all aspects have been included. After you’ve identified and quantified all costs and benefits for each impact group, the total of these items makes up your current and future ongoing/operating costs/benefit cost or savings. The difference between these items is your cost justification or comparison for each option.

  About This Article

  This article is from the book:

  About the book authors:

  Paul Mulvey, CBAP, Director, Client Solutions, B2T Training, has been involved in business analysis since 1995. Kate McGoey, Director, Client Solutions, B2T Training, has more than 20 years' experience in application development and life cycle processes business. Kupe Kupersmith, CBAP, President of B2T Training, possesses more than 14 years of experience in software systems development. He serves as a mentor for business analysis professionals.

  This article can be found in the category: