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 2 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. 3 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. 4 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). 5 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% 6 Examples of intangible benefits Improve customer service Make better business decisions Increase market share Better manage financial resources Improve company image 7 Bayesian Analysis A technique that quantifies intangible benefits. 8 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. 9 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. 10 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 11 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 12 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. 13