Guide to Benefits Analysis

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Guide to Benefits Analysis
Guide to
Benefits Analysis
Contents
 Why benefits analysis is needed?
 Identifying the benefits
 How are benefits identified?
 Examples of tangible benefits
 Examples of intangible benefits
 The basis of Bayesian analysis
 The Bayesian method
 Example of Bayesian analysis
 The Bayesian estimate
 The next steps
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Why benefits analysis is needed…
• Benefits analysis identifies what positive value is
expected to be obtained from a project.
• Helps in the assessment of whether the project is
worth doing.
• Provides a basis for future assessment of
whether the benefits were realised.
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Identifying the benefits
There are two types of benefits:
• Tangible benefits: where the dollar value of the
benefit can be easily assigned because values
are readily measurable.
• Intangible benefits: where the dollar value of the
benefit is not able to be assigned.
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How are benefits identified…
• The sponsor of the project is the best person to identify the
benefits. The sponsor owns the benefits.
• Consult with a number of different areas that are going to
be impacted by the solution to identify additional benefits
• Brainstorming is a useful technique for identifying possible
benefits.
(refer to Guide to brainstorming for instructions on this
technique).
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Examples of tangible benefits
 Reduce clerical labour costs
 Reduce clerical equipment expense
 Reduce space & overhead costs
 Reduce inventory carrying expense
 Reduce accounts receivable & bad debts
 Increase sales by 10%
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Examples of intangible benefits
Improve customer service
Make better business decisions
Increase market share
Better manage financial resources
Improve company image
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Bayesian Analysis
A technique
that quantifies
intangible
benefits.
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The basis of Bayesian analysis
Assumes that out of several identified
possible events, one will certainly occur.
Uses expert opinion to identify what events
are likely to occur and the probability of each.
The sum of these probabilities must equal 1.
Hence a value can be assigned based on the
value of each possible event and the
likelihood of it occurring.
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The Bayesian method
For each benefit:
 Identify the most appropriate expert(s)
 Identify each value outcome that can result from the intangible
benefit
 For each value outcome, the expert(s) identify each of the possible
scenarios (events) that are likely to occur as a result of the
intangible benefit
 The expert(s) quantify for each event the probability (a number
between zero and 1) that it will happen
 The probabilities are refined until the sum of these is equal to one.
 A dollar value is assigned to each event.
 Multiply the probability of each event by the dollar value of the event
and sum the result to produce the Bayesian benefit value.
 Repeat the process for each year the benefit is being
evaluated for.
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Example of Bayesian Analysis
Project: Advertising campaign
Intangible benefit: improved brand awareness
Value outcome: increased sales
Possible
events
Change in
gross sales
Expert estimate
of probability
1
2
3
4
no increase
1% increase
3% increase
5% increase
Total:
0.10
0.50
0.25
0.15
1.00
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The Bayesian estimate
Project: Advertising campaign
Intangible benefit: improved brand awareness
Value outcome: increased sales
Possible increase Revenue based Probability of
in gross sales
on occurence
occurence
0%
1%
3%
5%
$0
$750,000
$2,250,000
$3,750,000
0.10
0.50
0.25
0.15
1.00
Expected
return
$0
$375,000
$562,500
$562,500
$1,500,000
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The next steps
The values assigned to the benefits are recorded
in the business case and entered into the
benefits section of the financial calculator for
financial analysis.
For further assistance refer to the guide for
financial analysis.
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