Project Benefit Calculation : How to calculate tangible project benefits?

Managing project benefits is a critical part of project management. The senior management within the company will always be interested in knowing how the project will enhance the company profit. We will look at calculating the cost benefit of Resource, Software and Hardware Savings.

Note : The examples used in this article are imaginary and meant to make the understanding of the article easy.

Project Benefit Calculation
Project Benefit Calculation

Calculating Resource Benefits

In a typical project resource savings means that after the project is implemented there will be certain cost savings from resources which will be the key benefit. The cost benefits could be coming from reduction in manual work , process improvements, natural attrition or fixing system issues. 
  • In general the resource savings or benefits can be calculated in two ways. 
  • First, an hourly basis which involves taking an hourly rate and multiplying it by the number of hours saved. 
  • Second, an overall resource cost where implementing a project will cause reduction in headcount. In the case of headcount the salary per year should be considered as cost savings.

In both the cases it is easy to get an hourly or yearly cost for a contractor as they are generally hired on a specific hourly rate. For internal employees Cost to Company can be provided by HR  or finance department for the resource. Now lets look at a few examples of how we can arrive at a dollar value for a benefit of resource cost savings.

Benefit Calculation Example 1: Reduction in manual tasks by introducing system changes

In this example for project benefit calculation we will look at a scenario where a project or functionality which will help in sending automatic emails after certain steps in a loan approval process is complete. Follow the below steps to get an estimated benefit :
  1. Get an average number of loans written per day (assume 100 loans).
  2. Get an average number of minutes spent composing and writing an email(assume only 5 mins).
  3. Get an average time to process a loan (assume 60 mins).
  4. Get an average revenue per loan( assume $200).
  5. Multiplying the no. of loans by minutes and dividing by 60 will give you the total time of 8 hours a day.
  6. So, the benefit here is that per month the company will save 160 hours by adding the auto email functionality and that will allow the company to process an additional 160 loans which in turn will get an additional revenue of $32,000 per month
  7. Annually it will be a benefit of $384,000 to the company.
The above method of calculation benefits can also be used for process  improvements, fixing of system issues.

Benefit Calculation Example 2: Project implementation results in natural attrition or headcount reduction

In this example for project benefit calculation we will look at scenario where a system change will reduce the need of manpower which will lead to head count reduction and natural attrition.

For the sake of this benefit example lets assume that the system will replace an old legacy system because of which the people required on the job will be less.

In such cases I would suggest that you be conservative when determining how many workers will be affected. If for example it is 3 people then the savings annually will 3 multiplied by $120,000 ( assuming that is the average salary).

In cases where there is chance to reuse the resources in different departments resource reallocation of resources can be the benefit. The company might be able to reduce the hiring need or do more with the number of people either of which will add to the bottom line of the company profit.

In case of relocation of resources it is difficult to estimate a cost so it better to put the no. of resources. For example 12 resources will be relocated to different departments in the next 6 months.

Software Cost Savings

It is common in the IT world to upgrade or decommission old software which is not used or used less. In the case of software savings benefit we will look at two examples - first license costs and second saving maintenance costs.

Benefit Calculation Example 1 : Replacing the current software with an open source software. 

  • The benefit for this project will be the cost that the company will save on the licensing of the software which is lets says around $300,000 per year.
  • It is important to keep in mind that the benefit for the first few years will be less as the company will spend some money on building or migrating to the open source software.  
  • Also, it is important to factor in any costs related to the product support, hardware etc which are peripheral costs.
Running Costs of Current System
- Licensing Cost : $350,000 per year.
- Product Support Cost : $20,000 per year.
- Hardware Cost : $15,000 per year.

Total per year cost of the current system : $385,000.

Cost to build the Open Source System (one time)
- Software development cost : $500,000.
- Hardware Cost : $20,000 first year.
- Consulting Cost ( Software + Hardware):  $50,000.

Total cost of building the system in the first year : $570,000

Running Costs of New System ( after the first year)
- Product Support Cost : $10,000 per year.
- Hardware Cost : $15,000 per year.

Total per year cost of the new system : $25,000.

The key benefit would be that the company would save $535,000 in the first 3 years and then more than $1,000,000 in the next 3 years.

Benefit Calculation Example 2 : Reduction in software maintenance costs

Reduction in software maintenance cost is one of the most common project benefits. In this example we will look at benefits the company will get when it replaces a complex COBOL system with a open source java rules engine.

As COBOL skills are not available the company has to had to pay the developers expensive salaries and as they know only COBOL they cannot be cross utilized in other areas.

Assuming the COBOL developers / testers cost $150,000 with a team of 4 the cost to the company is around $600,000 per year.  We will assume the hardware costs would be the same.

As an average Java developer/tester would cost around $100,000 with a team of 4 the cost benefit to the company would be a saving of $200,000 per year simply by replacing the resources. Simply replacing the resources is not possible as we need to build the new system.

Assuming that building the system costs $500,000 and the project runs for one year during which both  the COBOL and Java Developers will be needed the company will end up paying $600,000 ( COBOL Team)  + $400,000 ( Java Team) + $500,000 (System build) which is around $1,500,000. 

So, in the next 5 years the project will save the company around $200,000 in resource costs and provide the flexibility to adapt new technology.

Hardware Cost Savings

Is it common for some of the IT Projects to decommission old hardware and replace it with either new or optimize the existing hardware. While the task seems simple the benefit that such tasks can give the company should not be underestimated. 

Lets take an example of where we have multiple servers of rules engine running on different servers built for different departments which can be consolidated in one.

Current Infrastructure Costs
- 5 standard servers which cost the company $5,000 each per year total to $25,000 per year.

Proposed Server Consolidation 
- Move all the services from 5 standard servers to one standard server.
- Increase the server capacity by 100% which will cost $3,000 per year.
- The cost of moving the services and doing adequate testing will cost around $30,000.
- One time service charge for making the hardware changes $5,000.

The total one time cost for moving the servers is $38,000.  The consolidation project will reduce the cost of services to $8,000 per year which is cost benefit of $20,000 per year. 

The project will pay itself in the first two years. Not to mention the benefit of having reduced infrastructure will mean less maintenance. 

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