The Project Notebook

Look Before the Project – Part II

Last week we looked at the BCR — Benefit-Cost Ratio as a way of evaluating a project. This week I’d like to look at a related technique — Total Cost of Ownership (TCO). The purpose of many projects is to introduce a new product or service. Often this new product or service has a later ongoing operation. For example, if you have installed Oracle Financials, there is a need to develop the customized software and populate the initial data, but once that is complete, there are expenses associated with rolling out the project, paying the maintenance fees, hiring the staff to keep the data current, etc. Similarly if you project is to construct a housing development, there are ongoing expenses after the homes are built to sell them and get the buyers moved in.

Total Cost of Ownership goes beyond BCR in that it looks at the ongoing expenses associated with a project and let’s you know more about what it will really cost to keep things going once the project has ended. This is an important component of expenses to examine since the “care and feeding” of a product or project can be significant. Likewise, the benefits may extend out as well. About a year ago I did a TCO analysis for installing and operating MS SharePoint. You can click here to download my analysis and follow along.

This analysis starts off quite straightforward. A minimal server is needed (for a small site), some software, some consulting, and some fractional personnel to maintain the system. These all represent the hard dollar costs. The hard dollar savings, however, are difficult to identify. There may be some reduced costs on the IT infrastructure, but predicting what they are is difficult, and chances are the savings are minimal. This would especially be true in the first year. Most of the savings comes from productivity increases. I identified a list in the lower right hand corner. The key, of course, is in organization and collaboration. The savings attributable to these is simply an estimate. I also envisioned a premium offering for customers based on a SharePoint implementation, but like the other hard dollar savings, I declined to include a committed estimate.

Note that I ran this analysis out for five years. This gave me some space to show ongoing operational requirements. Things that might have been included here would be increased server capacity if the number of users were to grow or add on software costs if additional packages would be required. The general observation you should make, however, is that the savings outweigh the costs, making this a reasonable investment. The lack of hard dollar savings might see it prioritized after other projects, but unless something better comes along, its likely to be implemented at some point.

Once again, if you have any questions about the analysis, please leave a comment or drop me an email. Next week, in the third and final part of Look Before the Project, I’ll take a look at a Statement of Work and how it can be used to set and manage project expectations at the start.

Look Before the Project – Part I

For the next few weeks I’d like to take a closer look at initiating projects, with special attention to costs. This is an area of weakness for many who jump in to do work before looking at the consequences or rewards. Rather than use a microsope, you need a telescope to see to the far and of the project. We’ll focus on costs, but once again, there are many other factors which must be analyzed.

There are many different methods and techniques, but one easy one is to determine the ratio of benefits to costs, starting with the “hard dollars” — the real cash to be spent and saved. This is also a good sales tool since it shows the tangible benefit of buying the project, product, or services. One easy illustration can be found in imaging systems.

Let’s looks at the hypothetical costs of the imaging system — a small server ($5,000), software ($100,000 — its a high end package), and a high speed scanner ($10,000). We may also need to pay someone to install the system ($20,000) and someone to operate the scanner ($75,000/year in salary and benefits). We may also want to spend $25,000 to train our staff. This means that in a year we will spend a total of $200,000 for our imaging system.

Now we need to look at the hard dollar savings. Through attrition and re-organization, we can reduce our clerical staff. Let’s say we save $150,000 in salary and benefits from two clerical positions. Surely we will be able to reduce paper, file cabinet, and office supply costs. A case of moderately priced paper can be $40. If we project savings of 1,000 cases a year (a small amount for many larger companies), that’s $40,000. Let’s call it $50,000 to include file cabinets and other supplies such as paper clips and file folders. I’ve also found many large companies lease storage to keep all the paper and file cabinets. Let’s assume the lease savings are $100,000 per year. So far, we have identified $300,000.

Of course we could continue on and look at the possibility of more hard dollar costs and savings, but now let’s look at the less tangible items. Imaging industry associations may tell us a missing file or paper can take an average of a half hour to locate. How many times have you lost paper? Once a week? Once a month? Who conducts the search for the missing paper and what are they paid per hour? How about productivity of employees who no longer have to get up and walk to the filing room, but can access the image of the piece of paper right from their desktop workstation? These can be either factored directly into the ratio , or more likely, just annotations to back up the hard dollars.

As you can see, the benefits of our hypothetical project outweigh the costs, making the ratio greater than 1. If we line up all potential projects, look at their specific benefit-cost ratio or BCR, we can get a picture of which are the best candidates from a financial standpoint — the projects with the largest ratio. In fact, most imaging proposals have fairly high hard dollar benefit cost ratios. So why aren’t we all working in a paperless world? Well that’s beyond the scope of this article!

Have any questions about BCR? Please post them in the comments. Next week, we’ll take a look at a more modern approach — Total Cost of Ownership or TCO.

Past Articles

Links and Buttons

Add to Technorati Favorites

Blogging Fusion Blog Directory

San Diego Blog News

Submit Express Inc.Submit Express - SEO Services


All opinions on this blog are those of the site owner and do not reflect the opinion of any other entity. Information on this site may contain errors or inaccuracies; The Project Notebook does not make warranty as to the correctness or reliability of the site's content. If you believe something on this site is inappropriate and should be removed, please contact the site owner at sdcapmp at aol dot com.


"PMP" is a registered mark of the Project Management Institute.


© 2010-2012 Ray W. Frohnhoefer, MBA, PMP, CCP