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These are the user uploaded subtitles that are being translated: 1 1 00:00:00,816 --> 00:00:03,369 Let's take a closer look at the most common 2 2 00:00:03,369 --> 00:00:06,365 and simplest business case estimation method. 3 3 00:00:06,365 --> 00:00:08,714 The benefit cost ratio. 4 4 00:00:08,714 --> 00:00:10,776 How do you do it? 5 5 00:00:10,776 --> 00:00:13,835 First, costs are relatively easy to estimate 6 6 00:00:13,835 --> 00:00:16,505 to plus or minus 100% accuracy. 7 7 00:00:16,505 --> 00:00:18,589 One of the best methods for estimating 8 8 00:00:18,589 --> 00:00:22,583 the costs during initiation is with an analogous estimate 9 9 00:00:22,583 --> 00:00:25,268 by comparing it to a similar project. 10 10 00:00:25,268 --> 00:00:27,997 For example, for a health information system project 11 11 00:00:27,997 --> 00:00:30,350 I managed, the initiation business case estimate 12 12 00:00:30,350 --> 00:00:33,819 was calculated by saying "this is about twice as complicated 13 13 00:00:33,819 --> 00:00:36,167 as this other project done a few years ago, 14 14 00:00:36,167 --> 00:00:38,647 and it was $50M, so let's say the estimate 15 15 00:00:38,647 --> 00:00:43,640 for this project is about $100M, give or take 100%." 16 16 00:00:43,640 --> 00:00:46,223 That is a great first estimate. 17 17 00:00:48,123 --> 00:00:50,497 If you don't have a comparable project, 18 18 00:00:50,497 --> 00:00:52,532 you usually just guesstimate by calculating 19 19 00:00:52,532 --> 00:00:55,240 the number of people you think the project will need 20 20 00:00:55,240 --> 00:00:57,640 times the amount of time you think you'll need them 21 21 00:00:57,640 --> 00:00:59,489 times the rates, plus any material 22 22 00:00:59,489 --> 00:01:01,975 and services you might need. 23 23 00:01:01,975 --> 00:01:04,216 If you have a team with any familiarity 24 24 00:01:04,216 --> 00:01:06,267 and experience with the project domain, 25 25 00:01:06,267 --> 00:01:08,084 they can usually put together an estimate like this 26 26 00:01:08,084 --> 00:01:12,967 fairly quickly that gets you well within plus or minus 100%. 27 27 00:01:12,967 --> 00:01:17,465 Once you have the costs, you can estimate the benefits, 28 28 00:01:17,465 --> 00:01:20,706 and that is often less straightforward. 29 29 00:01:20,706 --> 00:01:24,220 You have to estimate benefits in monetary terms, 30 30 00:01:24,220 --> 00:01:27,389 since you'll be expending money to do the project, 31 31 00:01:27,389 --> 00:01:30,381 and want to make sure the effort is worthwhile. 32 32 00:01:30,381 --> 00:01:33,135 Fortunately, with a little experience and practice, 33 33 00:01:33,135 --> 00:01:35,659 it turns out that you can find ways to estimate 34 34 00:01:35,659 --> 00:01:38,915 almost any project's benefits in monetary terms, 35 35 00:01:38,915 --> 00:01:41,823 by finding the areas of benefits 36 36 00:01:41,823 --> 00:01:45,566 and then the ways they tangibly help. 37 37 00:01:45,566 --> 00:01:47,960 This calculation can often be made easier 38 38 00:01:47,960 --> 00:01:51,064 by breaking the problem down with a simple formula. 39 39 00:01:51,064 --> 00:01:53,477 The number of years the benefits will be received 40 40 00:01:53,477 --> 00:01:55,795 times the number of benefits received a year 41 41 00:01:55,795 --> 00:01:59,613 times the monetary upside of each benefit. 42 42 00:01:59,613 --> 00:02:01,560 Then calculate each part of the formula 43 43 00:02:01,560 --> 00:02:04,466 and multiply them together. 44 44 00:02:04,466 --> 00:02:06,960 For construction projects like roads and buildings 45 45 00:02:06,960 --> 00:02:09,010 the time period can be decades, 46 46 00:02:09,010 --> 00:02:11,459 but for process projects we usually assume 47 47 00:02:11,459 --> 00:02:13,879 no more than 3 to 5 years max, 48 48 00:02:13,879 --> 00:02:15,817 since the world will change after that 49 49 00:02:15,817 --> 00:02:18,630 and we can't count on the benefits continuing. 50 50 00:02:18,630 --> 00:02:22,268 Then calculate the number of benefits per year: 51 51 00:02:22,268 --> 00:02:25,283 the number of items sold, number of times cost is decreased, 52 52 00:02:25,283 --> 00:02:28,236 annual hours of time savings, 53 53 00:02:28,236 --> 00:02:30,690 annual hours of productivity increases, 54 54 00:02:30,690 --> 00:02:34,119 number of times cost is avoided, etc. 55 55 00:02:34,119 --> 00:02:37,488 Then calculate the monetary advantage of each benefit. 56 56 00:02:37,488 --> 00:02:40,670 Profit per item, savings per cost decrease, 57 57 00:02:40,670 --> 00:02:43,412 cost of each hour saved, rate of return 58 58 00:02:43,412 --> 00:02:46,054 on each additional productivity hour, 59 59 00:02:46,054 --> 00:02:49,705 cost avoided for each incidents, etc. 60 60 00:02:49,705 --> 00:02:52,525 Then multiply the three numbers together. 61 61 00:02:52,525 --> 00:02:54,856 Since you've broken the calculation down, 62 62 00:02:54,856 --> 00:02:56,658 you'll get the statistical advantage 63 63 00:02:56,658 --> 00:02:59,242 that some of the error will cancel out, 64 64 00:02:59,242 --> 00:03:00,991 increasing the likelihood the accuracy 65 65 00:03:00,991 --> 00:03:04,549 is within plus or minus 100%. 66 66 00:03:04,549 --> 00:03:08,181 If you really can't express the benefits in monetary terms 67 67 00:03:08,181 --> 00:03:10,898 for an extremely subjective project, 68 68 00:03:10,898 --> 00:03:14,464 at least list the areas of benefits in the business case. 69 69 00:03:14,464 --> 00:03:16,964 What are the good reasons for expending effort 70 70 00:03:16,964 --> 00:03:20,312 on this project instead of others? 71 71 00:03:20,312 --> 00:03:23,549 And also consider the "payback period", the time 72 72 00:03:23,549 --> 00:03:26,261 to break-even on the expenditure: 73 73 00:03:26,261 --> 00:03:28,731 as a rule of thumb more than two years 74 74 00:03:28,731 --> 00:03:30,812 for process projects is a warning bell, 75 75 00:03:30,812 --> 00:03:32,480 since it will likely only get longer 76 76 00:03:32,480 --> 00:03:34,040 instead of shorter, and risk rises 77 77 00:03:34,040 --> 00:03:37,966 disproportionally as schedule extends. 78 78 00:03:37,966 --> 00:03:39,498 That's the point of the arrow going 79 79 00:03:39,498 --> 00:03:42,881 from time to risk in the triple constraint triangle, 80 80 00:03:42,881 --> 00:03:44,554 your triangular steering wheel, 81 81 00:03:44,554 --> 00:03:48,620 that's the logo at the top right of these slides. 7198