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CHAPTER 8
COST BENEFIT ANALYSIS
1. Ada 3 kriteria Cost Benefit Analysis (CBA) yg baik, apa saja? Jelas kan!

1. Step 1: The Analysis Has to Have A Financial Outcome.

1. Every investment in an organization leads to financial, other quantitative and qualitative benefits. An example
of a potential financial benefit after an ERP implementation is lower working capital requirements. A
potential non-financial quantitative benefit could be lower emission of toxic gas by better production
planning. An example of a qualitative benefit is lower workload in the finance department during financial
month ends because of a higher degree of automation.
2. Step 2: A Thorough Cost Benefit Analysis Has to Be Complete.
2. In most companies, many investment opportunities exist, while the total investment budget is limited. The
budget that is made available for an ERP implementation could also be used for alternative investment
proposals, that could potentially have higher benefits. For this reason, the ERP cost benefit analysis has to be
complete: all relevant costs and benefits have to be included, and not just a few obvious categories. Only
when cost benefit analyses are complete, organizations can make well-founded investment decisions.
3. Step 3: A Cost Benefit Analysis Has to Be Integrated.
3. The outcomes of the other two steps in the ex ante evaluation, the functional fit analysis and the risk analysis,
are in financial terms already, and now have to be incorporated in the cost benefit analysis. In the functional
fit analysis, the costs and benefits of process modifications have been estimated, as well as the costs of
software modifications. These estimates have to be incorporated in the cost benefit analysis. The risk analysis
also has a strong connection with the cost benefit analysis. The severities of the various risks in the cost
benefit analysis need to be taken into account as ERP implementation costs. After this, the costs and severity
reduction have to be included for each of the control measures that have been selected for implementation in
the risk analysis. Finally, the costs associated with the critical success factors have to be added to the cost
benefit analysis.
2. Metode apa yg digunakan dlm melakukan CBA yg baik? Jelas kan!

NET PRESENT VALUE (OR: NPV) METHOD.

Methods specifically developed for IT investments also exist, such as Information Economics or one of the
various grid methods. These methods are multi-criteria methods: they use several measures to allow comparison
of investment opportunities, and NPV is often one of them. General methods, that can not only be used for
evaluation of IT investments, are the Internal Rate of Return (or: IRR), or the Payback Period method. It can
be shown on theoretical grounds that these measures are not as strong as the NPV. An NPV calculation is based
on the costs and benefits of an investment during the whole life cycle of that investment. Various authors describe
the use of NPV specifically for ERP or for general IT investments.

The NPV for an investment is calculated by filling in the costs and benefits in the following formula:

The NPV method can only be applied if all costs and benefits of the ERP investment are expressed in financial
terms. Gathering all required information is not an easy task for the costs, and for the benefits it is often even
more complicated. A method to determine the benefits of an ERP investment in financial terms has been
designed by Murphy & Simon. In the Table below their method is explained on the basis of an ERP example.

By the combined usage of the NPV method, the method of Murphy & Simon for translation of benefits in
financial terms, and the incorporation of the outcomes of the functional fit analysis and the risk analysis , a cost
benefit analysis will be executed that satisfies the criteria of a good cost benefit analysis: it has a financial
outcome, and it is complete and integrated.

3. Sebut kan 4 langkah melaksanakan CBA! Jelas kan!

1. Firstly, The Parameters of The NPV Method Have to Be Determined. For the planning horizon T and the
cost of capital d suitable values have to be determined. For the length of the planning horizon, five years is
recommended, unless the organization uses a standardized value of different length. The value of d is
organization-specific. For listed companies the cost of capital can be calculated using stock prices, interest
rates and tax rates, for other organizations the finance director is the best source for the value of d.
2. Secondly, Costs and Benefits of ERP Have to Be Estimated, for each of the combinations of ERP supplier,
implementation partner and application service provider in the preselection. The first step is the
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identification of the benefits of the ERP implementation, and the conversion of these benefits into financial
terms. The list of benefits is based upon the characteristics of ERP systems: data integration and support for
best practices. In financial terms, these benefits can lead to reduction of working capital, reduction of other
costs, or increase of revenue.
3. The third step Is the Estimation of Costs of The ERP Implementation, for each of the time periods in the
planning period. The list of costs and benefits is company-specific. A good starting point for a list is
presented in Table 8.2, other sources are checklists for project management or information management.
Finally, the results of the functional fit analysis and the risk analysis are integrated into the cost benefit
analysis, again for each of the combinations of ERP system, implementation partner and application service
provider in the preselection

4. Ada 2 hal yg hrs dihindari slm mengeksekusi CBA, apa? Jelas kan!

1. THE CONFUSION OF ACCOUNTING COSTS WITH CASH FLOWS.

For the correct NPV calculation all amounts should reflect cash flows. As an example: when in the first-year
hardware is purchased, the whole cash out has to be taken in the first year of the NPV calculation, although in the
organization’s financial accounts an annual depreciation will be recorded during several years.

2. IGNORING INTERCOMPANY CHARGES.

In many organizations, IT costs are recharged to the departments that use the IT services. For correct NPV
calculations all costs including recharges have to be taken into account.