I am a huge proponent of conducting a financial analysis on all proposed projects as a method for prioritizing and pursuing those that generate a positive return. It just makes good business sense.
An increasing number of companies are recognizing the value in routinely conducting such financial analyses, but some use a flawed process due to their inability or unwillingness to properly handle the so-called soft benefits. Failure to account for soft benefits increases the risk that an organization will reject many potentially lucrative projects.
Most projects produce some combination of “hard benefits” and “soft benefits.” It is easier to agree on the existence and value of hard benefits. This type of benefit is real, tangible and measurable. Examples of hard benefits include:
- Increase in product sales, service revenues and/or market share
- Reduction in rework and/or head count
Calculating the financial worth of hard benefits tends to be straightforward. It’s not quite that easy for soft benefits, or “intangible benefits,” which can be challenging to quantify financially. Examples of soft benefits include:
- Increased customer or user satisfaction
- Improved product quality
- Service excellence
- Increased employee productivity
THE DILEMMA
In many cases, organizational managers are uncomfortable with the process of converting and/or verifiably measuring soft benefits in financial terms. They instead choose to view soft benefits as a kind of bonus, if they are realized. This kind of overly conservative stance seems like a low-risk approach, but it actually produces significant business risk. By using a “hard benefits only” approach, it’s likely that many potentially lucrative projects will not be approved because a portion of their financial benefit is simply not incorporated into the analysis.
THE SOLUTION
Any time a project is expected to generate a soft benefit, its financial impact must be quantified and included in the ROI analysis. This requires sound, unbiased judgment and a deep knowledge of your core business.
It also requires the use of a “benefits rationale”—a chain of logic for converting a soft benefit into money. I became aware of this technique in the late 1990s through the work of Marty Schmidt of Solution Matrix Ltd.
As an example, consider a project that claims to improve customer satisfaction of Product ABC (a soft, nonfinancial benefit). A logical question would be, “How would that customer satisfaction manifest itself?” Someone (typically, a proponent of the project) might respond, “Customers who buy Product A will begin buying more Product A.”
If that statement is reasonably verifiable (that’s where judgment and business knowledge come in), we’re almost done; we would simply multiply the quantity of new sales by the net profit per sale, yielding a monetary value for the soft benefit.
Mr. Schmidt offers a much more extensive tutorial on developing a benefits rationale, and further explains many of the points made earlier in this column.
If the proper incorporation of soft benefits is an issue or concern in your organization, I urge you to read Mr. Schmidt’s explanation at www.business-case-analysis.com/business-benefit.html. PM
| Gary R. Heerkens, MBA, CBM, PMP, president of Management Solutions Group Inc., is a consultant, trainer, speaker and author with 25 years of project management experience. His latest book is The Business-Savvy Project Manager. |