As information technology (IT) projects face more cost and schedule scrutiny (hard start/finish, scope, budget, etc.), executive managers frequently require business cases to justify new project expenditures. You may have found that project approvals are tough to come by unless you have a well-documented plan on paper. Your executive does not want to commit the big bucks until you have demonstrated your schedule of expenditures and the corresponding return on the investment. A business case will help sell your project to the executive by providing this information.

Or, if you've managed to obtain funding this year without a business case, what better way to secure future funding than to develop a business case on an existing project. During a multiyear project, it's inevitable that someone in the organization will ask, "Why are we spending on this project? What are the benefits?" You can quickly answer these questions with the business case that's in your hip pocket. Developing the business case will force you to answer the tough questions that are guaranteed to be asked at some point in your project.

This paper discusses the reasons for doing a cost-benefit analysis, the steps involved in the analysis, and the typical benefit areas and trends for information technology in the Energy Delivery industry.

1. WHY COST-BENEFIT ANALYSIS?

Why should you do a cost-benefit analysis for your project? In the authors' recent experience, executive managers have commonly required cost-benefit analyses, particularly for information technology (IT) projects. According to the Project Management Institute, IT projects frequently overpromise and underdeliver. Executive managers have become aware of this performance issue and the cost-benefit analysis is their guarantee that the project team has carefully evaluated the project before commencement, studying the whole life cycle costs and the expected benefits. Utility regulators are imposing heightened scrutiny as well. In today's unbundled energy delivery environment, regulators want more information about projects that will be added to the rate base and more detail regarding how the projects will benefit the consumer. There is a high likelihood that executive management and/or the regulator will require a cost-benefit analysis for your next project.

Your existing project could be at risk of getting its budget cut if you cannot quickly and concisely prove its worth. Many times a multiyear project is approved at inception, but is subject to scrutiny each year at budget time. During the budget cycle your project is vying with a number of other corporate initiatives for precious funding. What makes your project any more attractive than the next one? If you have prepared and effectively communicated your benefits case with the company's budget managers your project will shine in the contest for funds. This is particularly true if the implementation is significantly underway and has already demonstrated early benefits. You have effectively validated and underscored management's trust in your project. Management will respond by keeping the budget dollars coming.

The cost-benefit analysis provides a third advantage?its detailed documentation of the project's scope via the statements of cost and benefit. When developing the cost-benefit analysis you are required to be razor sharp in your logic surrounding the project. Which benefits are you striving for? Exactly how will the project deliver those benefits? Have you budgeted adequately to achieve those benefits? Committing numbers to paper forces you to actively address these issues. Once you have completed your mental model of the project, all decisions regarding the project are easier to make. You now have a guiding framework that can be used daily throughout the project's execution. When challenged with a tough decision you can immediately ask yourself how your decision will influence the cost-benefit performance of the project. For example, will the addition of an extra training class and its associated schedule and budget impact have a positive impact to the project's benefits? Do the benefits outweigh the costs? If yes, then do the training. If not, save your precious dollars for something that is already in your plan.

Information technology has tremendous potential to effect positive change in an organization. Business processes, which may have been static for years, can be radically transformed with the advent of IT. The cost-benefit framework will assist the company in documenting the promised transformations. After all, the project's benefits rely on effective transformation. Therefore it is essential to thoroughly document the benefits to prove the credibility of the project. Stakeholders will continually reference a quality benefits analysis throughout the project, adopting it as their mental model for business transformation success.

The benefits portion of your analysis should be communicated to your project team, vendor partners, end users, and everyone else involved in the project. The project team's understanding of the benefits targets will align their goals just as it aligned yours. George S. Patton, the famous military general, attributes his success not to his own military prowess but instead to the execution of his plan by the troops. Patton maintained that effectively communicating the plan to his troops was the single most important component to the Allied victory in Europe. IT can effect change only when the strategy is shared with stakeholders.

Finally, the cost-benefit analysis can be used as a measuring device once the IT project begins to deliver its promised functionality. The type of analysis performed before the project is known as ex-ante. Ex-ante is your prediction of how the project will progress from a cost-benefit standpoint. When the project progresses toward completion, you can implement an auditing scheme to check the actual costs and the actual attainment of benefits. The ex-ante analysis becomes the baseline for your audit. When the project is complete, users have been trained, and new processes are in place you then measure actual performance against the ex-ante analysis. Once the new systems are in place you cannot go back and measure the how the company previously performed. Here, the ex-ante cost benefit is invaluable for the auditing function because you invested the time to study the "business-as-usual" case before implementation.

2. COST-BENEFIT METHODOLOGY

You have accepted the advantages of cost-benefit analysis and are committed to conducting an analysis for one of your current or planned projects, but where do you begin? This section discusses the major activities, as follows:

• Determine your audience and its requirements.
• Determine the project scope.
• Determine baseline or "do nothing" cost of business.
• Estimate comprehensive lifecycle project costs.
• Determine benefits.
• Schedule the investment and benefits.
• Analyze the cash streams.
• Communicate the results of your analysis with your audience and gain acceptance.
• Assign responsibility for benefits attainment using the A-R-C-I methodology (which stands for Accountable, Responsible, Contributing, and Informed).

Understand the audience
In the authors' experience, determining your audience and understanding their expectations is one of the cornerstones that will ensure the ultimate success and acceptance of your cost-benefit analysis. Who will be the recipient of your study? What format are they seeking? What level of detail are they expecting?

Your audience will help you determine the level of detail needed in your analysis. This can range anywhere from simple lists of costs and benefits to a detailed time-phased, cash-stream analysis. The level of effort required to produce the different levels of detail varies considerably, so understand the requirements before you produce overkill.

Write the scope
Establish an understanding of the business problem you are trying to solve with the information technology. Companies do not implement technology for its own sake; they implement technology to solve a particular problem, improve a certain process, make a task more efficient, etc. Document these business drivers. Then list your project's deliverables and how they support the business drivers. Also list what the project will not deliver. Setting the scope will require quite a bit of effort and socialization of your results with the company. The scope must balance the needs of the users with the constraints established by your management.

Establish the baseline cost of business
One component of a detailed cost-benefit analysis is the baseline cost of business. Baseline means what the company spends today in the domain under which the project's information technology will operate. Recalling the business drivers mentioned above, how much does the company spend today on those business processes, materials, equipment, old information systems, etc.? Anything that your information technology project will ultimately affect belongs in the baseline. By establishing the baseline you will know the size of the domain of your project and, once you have calculated the benefits, what the benefits are in that domain. The baseline is important because you can use it to effectively communicate the magnitude of the business domain and today's expenditures in that domain.

Determine project cost
You've written the scope, you understand the business domain and drivers, now it's time to calculate your ex-ante estimate of the project's costs. There are two things to keep in mind here. One, ensure that the analysis includes all the cost categories. Typical cost categories are as follows:

• Software
• Software configuration and customization
• Integration with other systems
• Hardware (clients and servers)
• Local-area and/or wide-area network
• Data
• Internal staff
• Delivery services (project management, change management, etc.)
• Training (both core software and business process context training)
• Hardware and software maintenance

Two, express how much it will cost to maintain the system after implementation. This is known as the full lifecycle cost. Calculating the full lifecycle cost and accounting for each of the above-mentioned cost areas demonstrates to management that the analysis is comprehensive.

Your estimates of project cost will aid the project team in evaluating software vendor price proposals, forcing the team to consider whether proposals that are out of the budget range will adversely affect the nature of the project's financial performance.

Determine the benefits
Going back to the scope and the business domain, list the benefits that the project will target. Then for each listed benefit, write the quantification method. Next calculate the ex-ante benefit. Determining the benefit amount can be challenging. One asset you already have is the baseline cost of business. Against the baseline you can calculate percentage benefits estimates using benchmarks for the business domain. Sources of benefits benchmarks are industry trade groups, software vendors, consulting companies who specialize in the business domain, benchmarking institutes, and research firms.

Section 3 of this paper discusses the types of benefits you can target with an information technology project in the electric and gas utility business domain.

Schedule the investment and benefits
At this step, the analysis contains the baseline cost of business, the ex-ante project costs, and the ex-ante project benefits. Depending on the level of detail required for the analysis, you may be done! But, if a more detailed cash-stream analysis is required you must schedule the costs and benefits over the expected project implementation and maintenance duration. This requires a fairly detailed project schedule. The schedule first specifies the timing of the project investment and results in statement of negative cash flow. Next the schedule indicates the timing of the benefits, which results in positive cash flow. Adding the two cash flows together produces the net project cash stream. The project's financial indicators can be calculated using this cash stream.

Analyze the cash stream
The project's net cash stream will contain a dollar value for each year starting with the first year of the project and ending with the terminus of the study period, usually 10 years. The first years are negative reflecting the investment required to conduct the project, then the benefits kick in and the project eventually reaches a break-even point at which the net cash stream become positive. The values will remain positive for the duration of the study period unless you expect a significant reinvestment later on. The cash stream is the cornerstone of the financial analysis. From it you can calculate Internal Rate of Return (IRR), Net Present Value (NPV), and Payback.

Communicate results with audience and gain acceptance
The cost-benefit analysis has little value unless it is communicated to the company. If you do not effectively explain the results of the analysis, no one will take action, and your project will not progress. The authors have found that personal one-on-one meetings with the audience are necessary to reinforce the study's credibility. Your audience will be much more accepting of the information if they understand the details behind it. They will also offer constructive criticism, which you can use to further refine your case and bolster its credibility. An effective means of communicating your analysis is with charts and graphs that clearly depict the financial parameters of the project and the benefits.

Assign benefits accountability
If your company is serious about achieving the ex-ante benefits, the company must establish an accountability mechanism wherein individual managers are held accountable for the attainment of each listed benefit. The benefits must show on the managers' personal radar screens. All other parties involved must understand their role in delivering the benefits. One successful accountability methodology is known as "A-R-C-I."

• Accountable - Makes the decision. The person ultimately accountable. Includes strategic authority, yes/no, veto and assignment powers, and final approval.
• Responsible - Performs the work. The person(s) assigned the job by the "A." Includes tactical responsibility for doing the work and completing the tasks.
• Contributing - Communicates the work (two-way). The person(s) who provide special support or should be consulted in making decisions or doing work.
• Informed - Explains the work (one-way). The person(s) needing to be informed at key decision points during the work. The work's providers, customers, and beneficiaries.

To use this methodology, develop a matrix that lists each targeted benefit down the left and the letters A,R,C, and I in individual columns across the top. At the intersecting cells in the matrix, fill in the names of the people who are assigned to each benefit. Table 1 illustrates an A-R-C-I matrix.

TABLE 1   A-R-C-I Responsibility Matrix

3. TYPICAL PROJECT BENEFITS FOR ELECTRIC AND GAS ENERGY DELIVERY

Estimating a project's ex-ante benefits has proven to be one of the more challenging steps in cost-benefit analysis. The following discussion will aid the Energy Delivery information technology project analyst in establishing the benefits catalog.

Benefit Categories
Your benefits catalog will probably contain a lengthy list of benefits. Your audience will grasp the benefits catalog much easier if you assign each benefit to a category. Table 2 lists a set of categories that the authors have used in practice along with an example benefit for each category.

TABLE 2   Benefit Categories and Examples

After categorizing the benefits, you may also need to classify your benefits as either "Capital" or "Expense." This further classification will assist the company's finance department in understanding the accounts that the benefits are associated with.

Information Technology and Benefits
Information technology is actively driving significant benefits in the Energy Delivery industry. Utilities repeatedly rate information technology as a strategic business enabler. But which technologies drive which benefits? The following table depicts a typical set of Energy Delivery information technologies and the benefits that the individual technologies drive.

TABLE 3  Benefits Derived from Energy Delivery Information Technology

Trends in benefits analysis
The authors have witnessed some trends regarding cost-benefit analysis in the Energy Delivery industry. These trends are as follows:

• IT systems integration is a multiplier of benefits. Sharing of information between systems creates a synergy unknown to silos of automation. In order to achieve the synergistic benefits of integration the implementation must take into account how IT will interact within the business process. Therefore, business domain knowledge is a requisite.
• In addition to labor efficiency, projects are proving savings in other areas. For example, the savings resulting from maintaining an accurate asset database are beginning to overshadow savings related to more efficient record keeping. Asset management is king.
• The industry desires to put decision making at the economic level, not the engineering or accounting level. Accurate economic decision making requires precise, timely asset data.
• Good asset data drives capital equipment savings and enables reliability-centered maintenance.
• Automation is infusing the field workforce. Savings are significant in the mobile workforce management arena.
• Strategic benefits are solely justifying projects. Examples of strategic benefits are:
  • Customer service
  • Outage restoration
  • Regulatory compliance

4. CONCLUSION

Information technology has proven significant hard-dollar benefits in the Energy Delivery industry. Some utilities view the strategic benefits of information technology as more important than the quantitative benefits. Many times the desired strategic outcome cannot be realized without information technology. An example of a strategic benefits-driving technology is outage management. Without an outage management system and its supporting network database, utilities find it difficult to improve their customer service during storms and other emergencies. A cost-benefit analysis will help the company understand where the benefits are and which technologies can deliver the benefits.

Integrated IT is capable of catalyzing even more radical business transformation. Integration can multiply the benefits of IT if it is used to drive process change. However, for the utility to realize the benefits of process change and IT integration, the workforce must be trained to use the new systems and processes within the context of their jobs. A technological Band-Aid approach to a poor process will not deliver benefits and may actually impose negative productivity effects.

Cost-benefit analysis is very straightforward if the analyst follows the basic steps prescribed in Section 2. The critical areas for a successful analysis are understanding the audience's expectations, thoroughly researching the potential benefits, providing a comprehensive cost estimate, and communicating the results of the study with the audience to ensure accuracy and credibility.

Finally, cost-benefit analysis is becoming essential for information technology projects due to management and regulatory mandates. There are many advantages to conducting a well-communicated and thorough analysis. The document will help the project gain initial and ongoing approval, will serve as a guide for the project's scope, and can ultimately be used as the framework for a post-implementation benefits audit. Benefits realization depends on the team's understanding of the project goals and the documented assignment of benefits accountability to individuals in the company.