Six Factors to Consider in an Effective Cost Benefit Analysis
Originally aired on 7/17/19
Although the concept was introduced in the 1840s, the motivations behind conducting a cost/benefit analysis remain relevant today. Even with the business landscape changing through innovative technologies and new operating models, the cost/benefit analysis, or CBA, still allows for better decision-making and a more thoughtful analysis when weighing construction software solution options.
In the webinar from David Wager of InEight, you’ll learn the six key factors that should be considered in undertaking a CBA. David will also examine the rationale behind conducting such an important analysis.
Hello, I’m John Klobucar with InEight and I’d like to welcome you to the latest webinar in our construction document management series. Today’s webinar is titled “Six Factors to Consider in an Effective Cost Benefit Analysis.” Our presenter today is Dave Wagner, Vice President of Product Marketing at InEight. Dave has been creating and managing construction-based ROI tools for the last 15 years and has worked with over 200 companies to better understand the cost-benefit structure for construction software.
At the conclusion of today’s webinar, we’ll share a phone number and email address for you to pose questions. Also, today’s webinar is being recorded and we’ll be sending out a link to the video within the next week. Thank you for joining us today, and now, let me introduce Dave Wagner, who will take it from here.
Thanks, John. Before we get started in talking about some of the factors with respect to a cost-benefit analysis or an ROI, I first want to take just a little bit of time and talk about the concept behind analysis and why we do it in the first place. The idea here is what you really are trying to do is objectively measure the cost of a solution versus the benefits that you will derive from the solution. My advice is first start by asking yourselves, “What are the benefits that I’m most interested in?” And identify those benefits first. Are you interested in understanding increasing your effectiveness or your efficiency? Are you trying to measure something that you can’t do today and this will allow you to do it tomorrow? Or do something that maybe you’re not doing as efficiently as you would like and gain improvements so you can do it in less time and more efficiently in the future?
Or maybe, your goal is to create new customers or happy existing customers and try to understand how that affects your overall cost-benefit analysis. Or maybe you’re also interested in looking at your risk or your associated cost and how by reducing those, you can update your overall value. Another popular area to look at is to minimize redundancies, double entry in your system, or eliminate errors altogether. Another common benefit is also to increase your visibility and transparency to make sure that your extended project team has better access, better visibility, better clarity into the information that you’re providing them. So, regardless of which benefit it is, or combination of benefits, when you understand what the goal and the benefits you’re looking for are, then you can start to better understand how you want to do that analyst work.
What I mean by that is how do you want to take those benefits and actually translate those into tangible numbers and actual ROI that you can get your arms behind? So, when you’re looking at these various benefits, it’s important to understand which ones you can measure and which ones you can’t, because it’s only going to be the measurable ones, the ones that are consistent and believable, that you are likely to be able to get bio from your organization that really does affect your overall ROI.
With that in mind, let’s take a look on the quadrant where some of these benefits play. Productivity gains is, I would argue, the easiest and best measure to objectively understand the dollars that you can bring to your organization by bringing in a solution. Productivity gains tend to be very consistent. They happen throughout the life of the project, through a lot of different people and a lot of different projects. They also tend to be very believable. People can understand and get their arms around the fact that if it took me 10 hours to do something last week and now I can get that down to five hours, that five hours of savings is very believable and can be relatively easily measured.
Cost avoidance is another one that’s relatively easy and objective to measure. You can get a high level of consistency because you are consistently typically avoiding a specific cost in your business and it’s believable because once that cost goes away, then it is an obvious reduction in your overall amount of money that you’re paying for your solution. However, not all the benefits are equally consistent and believable. Let’s take disaster avoidance, for instance. In this case, this is very believable. People understand when they’ve avoided a disaster, but it’s hard to predict how often these disasters are going to happen.
Take the general problem that someone has in terms of distributing information out to the larger project team. If a project team member says they never got the updated plans, they go and build against those plans and then now you’ve been asked to basically pay for its demolition and rebuild. That is a disaster and could be a huge amount of money. That amount of money you have to pay out alone could end up paying for your solution. When you have a solution that prevents that, where you can prove that, yes, you did send that information out, it was distributed, you know when that party received it and who received it, you’ve avoided that disaster. But asking someone on a project team, “Well, how often are you likely to have these disasters?” is a difficult thing to predict.
Similarly, risk mitigation again is believable. People understand that they have risk in their business, but how easy is it to actually measure that reduction in risk? It is consistent, but it’s not the easiest thing to believe. Happy customers are even harder. How do you justify when a customer comes back to you again for a new job? How much of that was as a result of the solution that you put in front of them to use? Again, it may be consistent that you get the customers to a certain degree, but how believable is it when you say, “Well, the solution was responsible for 50% of the reason that that customer came back,” versus 80% versus 20%? And even more difficult is brand new business. When a new business comes to you, how believable and how consistent is it that the reason why you got that new customer is because of this new solution you put in place?
My advice is focus on the upper right when you do your objective analysis. Focus on these things that are easy to measure, they’re believable and consistent. Whereas when you get down into the lower left, look for stories that relate to you as part of your analysis. Look to talk and ask specific questions about how people have used these systems to create new business and get happy customers and mitigate their risk. But trying to put those into an overall analysis typically can be very frustrating because it’s not easy to do and frequently the people you’re sharing it with may not believe it.
Here’s just an example of some of the things that we see in a typical construction project that are quantifiable. This is the upper right for the most part as you move more down to the lower left with subjective things. Let’s take a little more defined example now when we talk about quantifying measures. How do you actually assign values to one of these quantifiable pieces? And we’re going to use this document search, this idea that teams have to find document information and how can a true construction document management system effectively improve your efficiency around document search?
We know from a recent study that, on average, a construction professional spends about five-and-a-half hours a week just searching for documents. Not remaking them if they can’t find them, not actually using them, which is of course the reason they were searching for them in the first place, but just trying to find them, whether that’s looking on their network drive, looking on SharePoint or another file cloud sharing system, whether it’s searching through emails and all the attachments. Right now, it’s a huge time consuming process just to find information. So, in our fictitious company we’re doing an ROI for here, that five-and-a-half hours means that’s 264 hours a year each employee is spending searching. Let’s pretend that we have 50 professionals that are searching in this organization for documents and on average, each one has a loaded salary of $80,000 a year. That equates to you’re spending close to a half a million dollars a year with your team just searching for information.
Now, if we can take that five-and-a-half hours a week and you can feel comfortable that you’re able to reduce that to, say, down to three and-a-half hours, so reduced that by let’s say a third-ish, two hours per week, through a single source of truth, through hierarchal searching, Google-like searching, through different searching mechanisms that allow you to find what you’re looking for significantly more intuitively and quickly, then now that can equate to $180,000 per year of labor that your team is not spending searching on documents. Now, if you look at your benefits and you look at your quantifiable benefits that are important to you and you do these type of equations for each of them, you can start to total up the benefits across your organization that a certain solution and product brings.
Now, of course, we are talking about a cost-benefit analysis and ROI, so there is an associated cost that you have to consider as well. And when looking at the cost, it’s pretty obvious you’re going to include the cost of the actual software solution, the web browsing service, whatever it is, and the associated services that go along with that whether that’s implementation or training led by the vendor. But, don’t forget about the other costs, the ones that are not quite so obvious, little bit below the line. If this is a field-based solution and you need to buy mobile devices, don’t forget to include those in along with their associated data services. If it’s an on-premise solution that still requires a server, don’t forget to include the cost of the hardware in. If you have an administrative team that is administrating this whole piece, that has an associated cost, and don’t forget about your employee training time.
Earlier when we talked about services, we talked about the cost of actually paying the vendor to train you on the product, but that doesn’t incorporate all the time that your employees are actually in the training session and they’re not doing their day job. That is a lost cost. That’s a cost to your company that they’re not creating that productivity. So, once you now have those benefits and you now have those costs, you can truly start to analyze the ROI data.
Another key element of the cost too is not just the cost of what it’s costing you, but also the cost of what you could be reducing. You could have some additional software products that you’ve been using in the past that you can either get rid of in their entirety or minimize the licenses on. You also have the opposite of what I mentioned earlier. Maybe you have an on-premise server today that you have to use, but you’re moving to a cloud-based system, so you no longer need the server and the administrative side and the licenses of that. That cost can be eliminated as well.
Before we start looking at some of the factors then on how you want to analyze a cost-benefit analysis, I want to talk about one of the biggest driving factors that goes into an ROI analysis that the vast majority of ROI tools never consider, and that’s adoption. This idea that the day that you buy the software, you will be 100% efficient with 100% of your users, using 100% of the features that were demoed to you, on 100% of your projects, is completely unrealistic. Even the best companies need an on ramp. They need to be able to adopt to the software you’re bringing in to achieve this full benefit that’s typically, we just talked about, on the beneficial side of things. So, I would encourage you to get your arms around what is a realistic adoption goal for you. Is it to be able to be at 50% of your overall team’s features and projects by the end of year one and up to 75 by year two? But understanding that adoption will also help you set goals for when you adopt the product and implement it, but also making sure you’re not overstating the benefits, especially during the early years.
What are some key factors to look at, now that you’ve collected this data? The first one is to understand that when you do an ROI analysis on a tool that you may be bringing in, what you’re also doing is giving yourself a whole new way to look at your product. All too often when we look at products today, we tend to look at it from a cool new feature perspective, and look through the feature side of things. But when you do a quantitative connection of features, when you actually measure their benefit, it forces you to connect the dots. It forces you to look at each of the features that you’re analyzing and what type of benefit that’s going to bring to you. It makes you understand in a way what you wouldn’t necessarily get just by seeing a demo; it’s “where is the true value of that solution to your organization?”
Relatedly, what you may also find as part of this process is features that you thought were by far and away the most valuable; and maybe the way you would have scored them in an initial perception analysis may not actually be the case when you go through and look at them from a value-based perspective. What you may find is some of the features that may seem the most mundane and the less glitzy end up being the ones that actually provide your team the most benefit across more people and provide more value. Another key element to look at is that payback period. How long does it take before you’re at that breakeven point where the benefit and the cost essentially are the same?
I’m sure many of you can remember from days not all that long ago where most systems were sold on-premise, you had a big server and you bought them, so there was a relatively high year one cost, and then you paid some level of services or maintenance and support, which was maybe 10, 15, 20, 25% of the original cost. Well, during those days, the general rule of thumb is you wanted an ROI that was somewhere between two and three years. That was the goal. But that world has changed. Now, very frequently, the days of the on-prem server are gone and things are hosted on the web, so you don’t have all that initial hardware cost and now very frequently, you subscribe to a solution and essentially pay the same from year to year to year, as opposed to a big payment the first year. So, I would suggest when you’re looking at your payback, you’re looking for things that fall under a year. Anything above a year, especially during this web-based subscription model, probably means that you’re waiting too long for your benefit to be truly derived. So, keep track as part of that analysis where that breakeven point is.
Another key element to keep in mind is cost of delay. This is the idea that every day that you wait to not put a new system in you could be throwing away money. It’s that delayed cost. So, consider that it’s not always the best thing to say, “We’ll just put it off till the next day. We’ll put it off six months, put it off eight months,” because if you find that you have a very strong ROI, every month you wait is dollars that you could be saving that you’re not.
I would also encourage you to analyze net present value. Net present value is this idea of what is the value of the present sum of money in contrast to the future value. When your net present value is positive, it means this is a positive investment. It means it is one that in the end will be positive for your company. Negative, as you would expect, means it is probably not the right decision to move forward. But with a net present value, it’s also taking into consideration the value of money. So if you just kept that money in the bank, how does that compare from a value perspective versus actually investing in a solution?
The last factor I would like to touch upon is making sure that you understand going into an analysis like this is: knowing what you want to do with your benefits. Assuming this is a positive situation and you are saving time, you are reducing cost, you are freeing up resources to do additional things, what do you want to do with that time? If the answer is you want your employees to improve their fantasy football team, then it’s probably not the wisest decision. But if you want to, for instance, to use it to grow your company, do more projects, do bigger projects with the same amount of people, then that’s a valuable use of this derived benefit.
I’ve also had others, companies that I’ve talked to in the past, tell me they don’t want to actually necessarily grow their business; they just feel like they’re working their existing employees to death. And because of that, they’re leaving the company in a rapid rate and that loss of employees is hurting that company’s bottom line. So, by bringing in a system that, let’s say, overall reduces or increases efficiency by 30%, now maybe that typical 13 or 14 hour a day turns into a nine-hour day or a ten-hour day, and attrition starts to drop dramatically. And although I don’t think it’s anyone’s first choice, there is always the option to basically do the same with less and you can potentially look at reducing your overall head count.
This is a little bit about some of the lessons that we’ve learned on things that you may want to look at when doing an ROI analysis and then some of the factors to take into account as you collected data. Now, for those that are interested in learning more about the InEight suite of products, we have built out our own ROI tool as well, which allows you to sit down with our ROI consultants and find out a little bit about your business. Are you a contractor, an engineer, an owner? What type of projects do you work on? And then based on learning a little bit about our system, what are some of the products that you may be interested? And then based on that, what we’ve done is formulate a series of questions that we can ask you to help us better understand your business. Understand what other tools, for instance, that you may be using today that you can either reduce or eliminate entirely in the future.
And then based on an overall solution cost, using both those above and below lines on our iceberg, you can now start to get into the details of seeing really where your benefits are being derived and in what areas. And then based on a specific cost of capital, see what your net present value is, your rates of return, your paybacks, your cost of delays. See overall summaries of the information in terms of seeing graphs on overall return and investment to really get your arms behind exactly what your specific situation looks like. So, if this is of interest to you, I would encourage you to continue to investigate ROI, and if you’d like to learn more on the InEight side, by all means, please give us a ring.
Thank you, Dave. To learn more about InEight and request a detailed return on investment analysis, visit ineight.com and click on the “request a demo” button. If you have any questions or comments regarding cost-benefit analysis, please email them to firstname.lastname@example.org. Thank you for watching. This concludes our webinar.
David Wagner is vice president of industry solutions at InEight and serves as a voice of the market for InEight’s document management and capital contract management solutions. He has more than 20 years of experience developing and marketing construction project management software solutions with a specific emphasis on construction document management. David provides the necessary insight and expertise to develop strategic solutions that help InEight customers succeed in a highly competitive industry.