In a Project Manager role you cannot stay away from a cost benefit analysis. Not only is a cost benefit analysis useful while working on a new bid but it is always useful in understanding a business and its levers to make it profitable. Without further ado we will get into 10 crucial mistakes you will find while trying to understand a cost benefit analysis.
#1 Not Selecting Appropriate Duration
Experts suggest selecting at least 3 years time frame to realize the full benefits of a particular change. Many business cases are based around a lower time frame than this. If it is possible, the Project Manager should always select the appropriate time frame unless the pitch is specifically of lesser duration
#2 Not involving appropriate stakeholders in planning the costs
Assumptions are good but relying on them and making a full fledged business case out of it can land you into trouble!!! For example only a seasoned HR executive can quote the price of the resource you need in a specific country or region and a seasoned IT head can quote the costs of a new leased line! End of the day a Costs & Benefits Analysis is a collaborated effort!!
#3 Not Plugging in COLA - Cost Of Living Adjustment
A cost of Living adjustment is an increase in benefits to counteract inflation. This is where you need an expert to tell you the % of COLA. A native of the country where you are planning operations will be able to tell you appropriate COLA. The calculation used by finance to calculate Employee remuneration is using the formula
Year 2 = Year 1 Benefits + COLA Adjustment.
#4 Selecting Appropriate Currency
Standard currency agreed upon with stakeholders should be used by the Project Manager. Imagine a European company planning operations in United States and trying to project cost & benefits in European currency. It’s a finance nightmare.
#5 Not converting Currency
The IT head normally sends the IT Opex(operational expenditure) projections in $(dollars). If the Project Manager is projecting his Costs & Benefits analysis in Euro or any other currency then he needs to remember converting these costs. There could be other costs for example facilities costs received in $(dollars). Remember to convert the currency.
#6 Not Planning Corporate Allocation
Big organizations have cost centers to understand cash flow. One such cost centre is the corporate. This is a centralized team in most companies that plans centralized costs such as employee life insurance, medical insurance and other benefits. Any new business won by the organization allocates a certain percentage of revenue to Corporate allocation so as to cover these costs. The corporate allocation % could range from 3% to 10% depending on the organization
#7 Not Planning Training Costs
When you onboard new employees, they usually go through a learning curve. They need to be provided cultural training, soft skills and in some cases technical trainings. All these costs need to be accounted for.
#8 Not Planning Appropriate Support Staff
You set up a 50 member team and forgot to ask the HR if they would need to ramp up their capacity in order to attend to additional HR tasks generated? Support staff comprises not only of Human Resources but Quality Analysts, MIS, facilities etc. You need to consider these costs
#9 Not Planning General & Admin Expenses
All new bids and deals come with a certain travel costs, Facility costs, Maintenance costs etc. Have you planned a certain portion of your revenue going into this category of expenses?
#10 Not planning Overlap Costs
When you are taking over another business or outsourcing a certain business there are overlap costs because the incumbent team needs to train the new team on tasks and activities. In business terminology this phase is sometime referred to Shadow Support or Parallel run. This is the time period when the incumbent team watches over the work of new team and dedicates time to make sure the new team comes up the learning curve. Since both new & old teams are working, this environment causes overlap costs that need to be accounted for.
Imagine telling your key stakeholders that they will be saving a certain $100k once a bid goes through. The stakeholder reaches out to his finance department and finds the savings projected are slipping through the cracks because additional costs were not projected!!!
Expert advise: Creating a Costs & Benefits analysis is a project in itself and a collaborated effort. A great cross functional team is the ideal way to go about this project.