Assign Values to Costs and Benefits Once the types of costs and benefits have been identifiest, you will need to assign specific dollar values to them. This may seem impossible– How can someone quantify costs and benefits that haven’t happened yet? And how can those predictions be realistic? Although this task is very difficult, you have to do the best you can to come up with reasonable numbers for all of the costs and benefits. Only then can the approval committee make an educated deci- sion about whether or not to move ahead with the project. The most effective strategy for estimating costs and benefits is to rely on the people who have the best understanding of them. For example, costs and benefits that are related to the technology or the project itself can be provided by the com- pany’s IT group or external consultants, and business users can develop the numbers associated with the business (c.g., sales projections, order levels). The company also can consider past projects, industry reports and vendor information, although these sources probably will be a bit loss accurate. Likely, all of the estimates will be revised as the project proceeds. If predicting a specific value for a cost or benefit is proving difficult, it may be useful to estimate a range of values for the cost or benefit and then assign a like- lihood (probability) estimate to each value. With this information, an expected value for the cost or benefit can be calculated. Recall the calculations shown in Figure 1-6 in which the Tane Source marketing staff developed expected values for projected sales. As more information is learned during the project, the value esti- mates and the probability estimates can be revised, resulting in a revised expected value for the cost or benefit. What about the intangible costs and benefits? Sometimes, it is acceptable to list intangible benefits, such as improved customer service, without assigning a dollar value. Other times, estimates have to be made regarding how much an intangible benefit is worth.” We suggest that you quantify intangible costs or benefits if at ali possible. If you do not, how will you know if they have been realized? Suppose that a system claims to improve customer service. This benefit is intangible, but let’s assume that the improvement in customer service will decrease the number of cus- tomer complaints by 10% cach year over three years and that $200.000 is currently spent on phone charges and phone operators who handle complaint calls. Suddenly, we have some very tangible numbers with which to set goals and measure the orig. inally intangible benefit Figure 1-10 shows costs and benefits along with assigned dollar values. In this example, for simplicity, all development costs are assumed to occur in the current year 2009, and all benefits and operational costs are assumed to begin when the system is implemented at the start of 2010, and continue through 2013. Notice that the customer service intangible benefit has been quantified, based on a decrease in cus- tomer complaint phone calls. The intangible benefit of being able to offer services that competitors currently offer was not quantified, but it was listed so that the approval committee will consider the benefit when assessing the system’s economic feasibility. Determine Cash Flow A formal cost-benefit analysis usually contains costs and benefits over a selected number of years (usually, three to five years) to show cash flow over time. (See Figure 1-10.) With this cash flow method, the years are listed across the top of the spreadsheet to represent the period for analysis, and numeric. values are entered in the appropriate cells within the spreadsheet’s body. Some- times, fixed amounts are entered into the columns. For example, Figure 1-10 lists

Scenario MDVIP is a group of primary care physicians that offers a non-traditional pricing structure. Traditional primary care physicians do not charge an annual fee. They charge only visit fees. MDVIP charges a fee of $1,800 a year to each patient plus fees for each visit. If you do not see a doctor during the year, the fee is not refundable. The fee is not covered by health insurance. The average number of visits annually to a MDVIP physician is 10 Both the MDVIP and Traditional physician charge $65 a visit. A traditional physican sees an aveage of 33% of their patients a year. Of these active patients the average number of visits is 2 The group practice originally had 6,000 patients. After introducing the $1,800 fee the practice shrank to 300 patients. But, patients time with a doctor on each visit has increased from 10 minutes on average to 45 minutes on average. Also, most patients can be seen the day they ask to visit a doctor. In most cases, a traditional practice will ask patients to wait at least 24 hours if not a week or longer. 1 What is MDVIP’s cost efficiency compared to a traditional physician? 2 What is the customer responsiveness of MDVIP compared to a traditional physician? 3 What is the quality of MDVIP compared to traditional practices, where quality is time spent with the doctor?