Newsletter 182. Do Labor Savings Equal Cost Savings in the Business Case? Maybe. Maybe Not.
Many ROI tools generally rely on a formula that is used everywhere in business case work: Benefits = (time saved) * (the cost of labor). The formula, in fact is one of the primary sources of benefits taught in our business case seminars. When used blindly, however, the numerical results can be meaningless and grossly misleading.
If a new PC operating system saves you time every day by making you more productive, what's that worth in real money? Maybe a lot, maybe very little. Nevertheless, when using "ROI" templates, or other business case tools, it's easy to forget that the answer to the question should be: "It depends." It depends on how the time saved will be used. The assumptions behind the "time savings equal money" calculation need to be tested, every time you use it. To apply the math blindly is to risk seriously overstated benefits.
To experience the risk firsthand, try running MIcrosoft's "Windows Vista ROI Calculator" accessible by clicking here. Microsoft provides the tool so that you can "...find out what a difference the right operating system can make ...." The tool delivers an ROI figure based on a small amount of data you input about your operating environment, as well as the tool's assumptions about time savings for users and IT staff under the Windows Vista. Perhaps not surprisingly, I discovered many more than $63,000 in benefits waiting for Solution Matrix Ltd. over the next three years if we upgrade 17 computers Vista. But will we ever actually see that money?
I'm not suggesting cynicism here, just healthy skepticism. It is a good idea to look carefully at operating costs and usage in this way anytime a serious change is considered. However, the Vista ROI tool is one of dozens online, which are there—no secret—to help sell something by making a financial case for the product. In order to calculate benefits, these tools generally rely on the formula mentioned above that is used in business case work everywhere: benefits equal time saved multiplied by the cost of labor.
If three professionals each cost their company $70,000 a year (salary plus overhead), and if each saves an hour a day (12.5% of the work day), the total annual benefit works out to $26,250. Or, does it? The "hidden" assumption has to be questioned whenever you estimate the value of time savings: Will the extra time really turn into additional productivity? If so, what is that really worth? (For a more complete coverage of assumptions that need to be tested and methods for valuing time savings, see the Business Case Guide.
With the Vista ROI tool, I found, for instance, that over $9,000 of our three year windfall would come from "improved search performance." Presumably, that means users spend a few seconds less time waiting for results every time they search. But will that really translate into $9,000 worth of increased productivity? Give a typical professional a few extra seconds here and few extra seconds there every day, and it's not likely the time will go into extra productivity. The question has to be asked. I would probably use my extra seconds to get an extra cup of coffee.
Take action! Learn more about business case building from the Business Case Guide. Learn and practice proven methods for building your cases at a "Building the Business Case" Seminar.
Marty Schmidt
13 April 2009
mschmidt@solutionmatrix.com
www.solutionmatrix.com
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