Lesson 1, Topic 1
In Progress

1.19. Cost-benefit analysis techniques

ryanrori February 1, 2021

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Compare the potential benefits of investing in data quality with anticipated costs, through an in-depth evaluation. This includes return on investment (ROI) – profit from an investment as a percentage of the amount invested.

This technique and ROI are standard management approaches to making financial decisions. This detailed information may be required before considering or proceeding with any significant financial investment – and investments in information quality are often considerable. Management has the responsibility to determine how money is spent and will need to weigh investment options against each other.

Cost—benefit analysis and return on investment (ROI) are standard management approaches to making financial decisions. Your company may require this type of information before considering or proceeding with any significant financial outlay – and investments in information quality improvement are often significant. Management has the responsibility to determine how money is spent and will need to weigh its investment options.

It is unlikely that a technique this involved will be necessary for most business impact assessments. It may be needed for very large investments.

Definition A cost-benefit analysis compares potential benefits of investing in data quality with anticipated costs, through an in-depth evaluation. It includes return on investment, that is, the profit calculated as a percentage of the amount invested.

Approach

Cost—Benefit Analysis

A cost—benefit analysis evaluates if the benefits of a new investment or business opportunity over a given time frame outweigh its associated costs.

  1. Look for and use any standard template or form employed by your company for this purpose. 

This form probably already exists somewhere. Check with your manager or someone involved in finance or the budgeting process. The form will contain sections for both costs and benefits.

  1. Identify the costs associated with the new investment or business opportunity. 

Include human resources, training, hardware, software, and support costs.

  1. Identify the potential additional revenues and other benefits that will result. 

Being able to identify the benefits of high quality data has been a perennial challenge. The value of data improvements and the cost of poor-quality data are opposite sides of the same coin. Use output from other business impact techniques to present the benefits.

  1. Identify the cost savings. 

Cost savings are the difference between benefits and costs.

  1. Estimate a timeline for the anticipated revenues and expected costs. 
  2. Evaluate the benefits and costs that cannot be quantified. 

Though the form may not ask for these, include them in a comment area or cover letter. Benefits and costs that cannot be quantified should still be made visible.

Return on Investment

ROI compares the benefit (or return) on an investment compared to the cost or amount of money invested. It is the profit calculated as a percentage of the invested amount.

Definition Return on investment is the profit calculated as a percentage of the amount invested.
  1. Calculate the ROI. 

What is included in the gains and costs can be modified to suit your situation. You may look at cost savings, incremental profit, or value appreciation. Use input from the cost—benefit analysis. The formula for calculating ROI is

Image from book
  1. Evaluate the ROI. 

The investment should have a positive return.

  1. Compare your ROI to the ROI of other opportunities. 

Having a positive ROI is not enough. The investment will also be compared to the ROI of other opportunities before being undertaken. Be aware of the competition for money and resources within the company.