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Assessing intranet
cost-benefits
Hyperbole surrounding the
rate of return on investment
of intranets has fueled
enthusiasm to dive into
projects with little or no
understanding of its
cost-benefit. Here, Clive
Shepherd explains that a
cost-benefit analysis is not
only desirable but is also
achievable without an army
of accountants.
In 1998, Paul Korzeniowski
of Info World Electric
stated, "Rather than
carefully evaluating
bottom-line benefits,
corporations are plunging
headfirst into the intranet
waters. New applications
have sprung up in months or
even weeks and top
management approval is often
assumed rather than
requested." So why go to all
the trouble of a proper
analysis? This article puts
forward the arguments for a
comprehensive cost-benefit
analysis, with the primary
reasons being as follows:
- Even relatively
intangible costs and
benefits can be measured
if you are prepared to
approximate.
- The benefits of an
intranet may be obvious
to you, but not
necessarily to your
senior managers (upon
whose commitment your
intranet will survive or
perish), nor to the
majority of potential
end users who feel they
are already overburdened
with information and
systems to manage it.
- The up-front direct
costs of an intranet may
be relatively low, but
the human costs of
setting it up,
populating it with
content and then
maintaining that content
are considerable.
Perhaps the strongest
argument for conducting a
proper assessment of the
costs and benefits of an
intranet is that it should
provide you with the
ammunition you need to do
the job properly, with an
appropriate budget and a
realistic timetable. If it
doesn't, then at least you
will be prepared.
A method for calculating
cost-benefits
Scoping your intranet
It's not possible to conduct
a meaningful analysis
without a clear indication
of what you want your
intranet to achieve. There
are many ways of
categorizing what an
intranet does. Here's mine:
- Information
publishing: using the
intranet to deliver news
and other information in
the form of directories
and Web documents.
- E-mail: implementing
an e-mail system that
integrates seamlessly
with the intranet,
allowing information to
be both "pushed" and
"pulled."
- Document management:
using the intranet to
allow users to view,
print and work
collaboratively on
office documents
(word-processed
documents, spreadsheets,
presentations, etc.).
- Training: using the
intranet to deliver
training at the desktop.
- Workflow: using the
intranet to automate
administrative
processes.
- Databases and other
bespoke systems: using
the intranet as a
front-end to
organization-specific
systems, such as
corporate databases.
- Discussion: using
the intranet as a means
for users to discuss and
debate issues.
Don't be distracted by
predicting too far into the
future - apart from anything
else it will make your
calculations more complex
and less useful. Concentrate
on what you expect to
achieve in the first major
wave of implementation -
let's say the first year.
Establishing some basic
facts and figures
To make your calculations
later you will need to
gather some basic facts and
figures about your audience.
For example: the size of
your intranet target
population and the
proportion this represents
of your organization's total
projected intranet user
population; the number of
people within the target
population who will need new
PCs; the number who are
currently not networked and
the number who will be
provided with access to the
Internet; and for
calculating labor savings
and productivity gains, the
average annual salary and
benefits of the target
population, and the average
working hours in a day and
working days in a year.
Analyzing costs
Start-up capital costs
Hardware and software costs
form a major part of your
up-front investment.
Because, as fixed assets,
they have a useful life of
several years and a re-sale
value, they are normally
written off over three or
four years. Your finance
department will be able to
tell you what your
organization's depreciation
policy is. You'll also need
to consult your IT
department to get estimates
for all the hardware and
software needed—items such
as: new PCs (for providing
intranet access to employees
without their own PCs);
network connections to PCs
not currently networked; and
Web servers and server
software.
You also need to provide for
the cost of software
applications, whether they
are developed on a bespoke
basis (in-house or outside)
or purchased off-the-shelf.
You can pay considerable
prices for "industrial
strength" applications, but
much cheaper or even free
applications can be obtained
with a little research. What
you'll need will depend on
what you are using your
intranet for.
Start-up revenue costs
These also form
part of your up-front
investment, but are more
likely to be written off in
the first year of
implementation:
- Design consultancy:
the cost, whether
internal or external, of
creating a structural,
navigational and
graphical design for the
part of the intranet
being analyzed.
- Promotion: the cost,
again internal or
external, of launching
the intranet to your
target population.
- Training: the total
cost per user, of
providing training in
how to use the intranet
and how to provide
content.
Ongoing capital costs
Some money will
have to be reserved each
year, from year two, for
upgrades to your server
hardware and software and
your off-the-shelf
applications. Perhaps the
best way of estimating this
will be as a percentage of
the initial cost - say 25
percent.
Ongoing revenue costs
A considerable
amount of effort is required
to maintain and continuously
improve your intranet. These
costs need to be budgeted
from year one:
- Editorial and design
personnel: the people
required to administer
intranet policies and
act as overall content
editors for your target
population. Remember to
include salaries,
benefits and expenses.
- Technical personnel:
the people required by
the organization as a
whole to keep your
intranet up and running
from a technical
perspective.
- Internet access: the
cost of providing lines
out to the Internet. A
simple way of estimating
this is to make a small
annual allowance, say
US$75 or UKŁ50, for each
employee who will have
access.
The following costs apply
after the first year,
expressed as a percentage of
their respective start-up
costs:
- Ongoing consultancy:
continuous modifications
and improvements to your
intranet design.
- Ongoing promotion:
continuing promotion of
the intranet to your
target population.
- Ongoing training:
largely to account for
employee turnover.
- Maintenance of
bespoke applications:
assuming this work is
not carried out by the
technical personnel
listed above, make an
allowance for continuing
development of your
bespoke applications,
say 25 percent of the
initial cost.
Forecasting benefits
calculating costs is easy.
It takes a little more
ingenuity to pin down the
benefits. Each category of
intranet usage has its own
associated benefits (see
Figure One):
Direct cost savings
Savings in expenditure other
than labor—print, paper,
telephone, travel costs,
etc.—that can be directly
attributed to the
introduction of the
intranet. These can usually
be calculated in three
steps: (1) the number of
incidences of expenditure in
the time period; (2) the
cost of each incidence; and
(3) the proportion of these
that could be eliminated
using the intranet.
Labor savings
The same can be done to
calculate time saved by
intranet usage. This can be
expressed in minutes per
person per day. To calculate
the saving, divide the
number of minutes saved by
the number of minutes in the
day (60 x the number of
working hours) and multiply
by the size of the
population and the average
salary.
Productivity increases
These are the increases in
output per person
attributable to the
introduction of the
intranet, expressed as a
percentage. Because personal
productivity has such a wide
range of implications from
job to job and organization
to organization, it's
probably easier to convert
these to simple labor
savings. For example, if the
total productivity gains
were three percent, you
would calculate the savings
as (3 ÷ 103) x the size of
the population x the average
salary. The actual effect of
higher productivity, such as
increases in sales, could
well be much larger and, if
you can estimate these, you
should.
Analyzing the results
Before you can draw any
conclusions from your
findings, you'll need to
summarize costs and benefits
and compare the two.
Summarizing costs
If your target population is
a subset of your
organization's total
intranet population, then
you need only take a
proportion of the costs that
are borne centrally, such
as: server hardware and
software; the purchase,
development, maintenance and
upgrades to software
applications; and the
provision of technical
personnel.
Summarizing benefits
Total up the benefits for
each intranet category under
the three benefit headings:
direct cost savings, labour
savings and productivity
increases. Before making
your calculations, it is
necessary to determine the
proportion of the target
population that is affected
by each of the intranet
categories. For example, the
whole population may be
affected by the use of the
intranet for information
publishing, but only 30
percent for document
management and 40 percent
for workflow. If you don't
make these distinctions, you
are likely to over-estimate
your benefits.
Comparing costs and benefits
Obviously you will be
interested to see whether
your benefits do indeed
exceed your costs. To do
this in a way which reflects
the impact on your
organization's profit and
loss account, you should
spread your capital costs
over the write-off period.
You may also decide to
reduce the benefits in year
one to take account of the
time taken to develop and
launch the intranet and to
train users.
The cost-benefit calculator
Even with a structured
approach to follow, it's a
lot of work to construct
your own analysis from
scratch and input it all
onto a spreadsheet. With
that in mind, I have
developed a Web-based tool
that does the whole job for
you. Of course, as with any
generic tool, it will not
meet every eventuality, but
may well get you off to a
good start. An Excel version
is also available, which can
be experimented with and
customized more easily. You
can try out the intranet
cost-benefit calculator at
www.intranet-cafe.co.uk.
Just one final word of
warning. When IDC's study of
Netscape intranets showed a
typical Return on Investment
(ROI) of over 1000 percent,
people might have taken note
but they would have been
justifiably skeptical. On
the other hand, META Group's
June 1997 study showed that
80 percent of companies
generated a positive ROI,
with an average annual
return of 38 percent -
figures closer to managers'
real world experiences and
more likely to generate a
positive response. So, if
your figures show outlandish
returns, you might like to
revisit your estimates –
after all, then you have the
potential to exceed your
forecasts!
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EPNET
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