Cost Benefit Analysis

Definition and Purpose
A technique that can be used to evaluate government projects and programs It encompasses an appraisal of a policy based on the costs and benefits of the project It should be performed for each investment alternative to enable the evaluation and comparison of alternatives

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Net Present Value The sum of the present value of each cost and other effects of a project A positive NPV indicates that benefits outweigh the costs of a project Benefit Cost Ratio the ratio obtained by dividing of the sum of the present value of the benefits by the sum of the present value of the costs A BCR greater than 1 indicates that the benefits outweigh the cost of a project Net Present Value per unit of Investment the net present value divided by the present value of a project’s capital cost

Measurement in the Cost Benefit Analysis

Process
1. Determine/Define Objectives  problem definition, pertinent background information and a list of investment objectives that identify how the system will improve the work process and support the mission. 2. Document Current Process, with items to consider:  Customer service  System architecture 3. Estimate Future Requirements  Lifecycle time  Lifecycle demands

Process (Cont’d)
4. Collect Cost Data  Historical Organization Data  Current System Costs  Market Research  Publications  Special Studies  Analyst Judgment 5. Choose at Least Three Alternatives “Do nothing” or “Continue current operations” should not be considered as an alternative ! 6. Document CBA Assumptions  If an alternative is eliminated because it is not feasible, the assumption should be clearly explained and justified 7. Estimate Costs (annual, personnel costs, depreciation,activities)

Process (Cont’d)
8. Estimate Benefits
Define Benefits  Identify Benefits  Establish Measurement Criteria  Classify Benefits  Estimate Tangible Benefits  Quantify Intangible Benefits 9. Discount Costs and Benefits convert to a common measurement unit by discounting future dollar values and transforming future benefits and costs to their “present value”

Process (Cont’d)
10. Evaluate Alternatives
Table 1. Sample Investment Comparison

Alternativ e 1 2 3 4

Discounted Discounted Cost (DC) Benefit (DB) 1,800,000 1,850,000 2,000,000 2,200,000 2,200,000 1,750,000 2,000,000 2,100,000

Discounted Net (DCDB) 400,000 (-100,000) 0 (-100,000)

Benefit-Cost Ratio (DC/DB) 1,22 0,95 1,00 0,95

11. Perform Sensitivity Analysis Identify Input Parameters Repeat the Cost Analysis Evaluate results

Process (Cont’d)
12. Compare Investments  Even if the CBA shows that benefits will outweigh costs, using Payback Period and Return on Investment (ROI) analysis help demonstrate an investment is a better utilization of funds than other proposed investments

Cost Effectiveness Analysis
Frando R. Saragih 2206655

Introduction

Cost-effectiveness analysis refers to the consideration of decision alternatives in which both their costs and consequences are taken into account in a systematic way. It is a decision oriented tool, in that it is designed to ascertain which means of attaining particular educational goals are most efficient. For example, there are many alternative approaches for pursuing such goals as raising reading or mathematics achievements. Developed in the military, CEA was first applied to health care in the mid-1960s and was introduced with enthusiasm to clinicians by Weinstein and Stason in 1977

Basic of Cost Effectiveness Analysis

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Comparing the relative value of various clinical strategies Comparison tools to evaluate choice Provide peer-reviewed evidence for decision support

Measuring Cost Effectiveness

Assessing effectiveness
Determine the problem and measure the effectiveness

Cost Estimation
1. Identification of Ingredients 2. Determination of the value or cost of the ingredients and the overall costs of an intervention 3. An analysis of the costs in an appropriate decision-oriented framework

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Common Application

Evaluating Program Options
Determining appropriate screening frequencies is a useful application of cost-effectiveness analysis

Justifying Program Implementation
Cost-effectiveness analyses can be used to support qualitative arguments for health interventions

Utility Analysis

Introduction

Utility analysis is a quantitative method that estimates the dollar value of benefits generated by an intervention based on the improvement it produces in worker productivity. Utility analysis provides managers information they can use to evaluate the financial impact of an intervention, including computing a return on their investment in implementing it.

What Is Needed to Complete a Utility Analysis
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A method for measuring role productivity A way to assign monetary value to role productivity The distribution of productivity among performers of the role The dollar value of a one standard deviation difference in role productivity (SD$) A method to measure the intervention's impact on role productivity

Method
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Understand the people whose decision-making the study will support. Learn about the intervention we will assess. Learn about the role(s) whose productivity is affected by the intervention. Determine how to measure the productivity of the performers of each role. Determine how to value role productivity in dollars. Decide how to measure the affect of the intervention on role productivity. Create a plan for the utility analysis.

Doing the Analysis
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Determine the productivity of performers. Determine the dollar value of a one standard deviation difference in role productivity (SD$). Compute the effects on performer productivity associated with the performer's participation in the intervention being evaluated. Compute the dollar value of productivity improvements generated by the

Following Up the Analysis
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Add context to the findings. Report the results of the analysis.

What is Balance Scorecard?

The Balanced Scorecard According to Kaplan & Norton
Harvard Business Review – January-February 1992

Defined: “a set of measures that gives top managers a fast but comprehensive view of the business”

Includes:

Financial Measures Operational Measures  Customer Satisfaction  Internal Processes  Innovation and Improvement Activities

The Balanced Scorecard

Ties performance measures to corporate strategy “Balance” includes: • short & long term objectives • financial and non-financial measures • external & internal measures • various perspectives Purposes of the balanced scorecard include: • clarify & translate vision & strategy • communicate & link strategic objectives & measures • plan, set targets & align strategic initiatives • enhance strategic feedback & learning

Why We Use Balanced Scorecard?

Kaplan & Norton

Clarify and update strategy Communicate strategy throughout the company Align unit and individual goals with strategy Link strategic objectives to long term targets and annual budgets Identify and align strategic initiatives Conduct periodic performance reviews to learn about and improve strategy Keep Focus Accurate, comprehensive view business performance

Cause-effect linkages

How individual staff members and teams help contribute to the overall outcomes Connecting the desired outcomes with the drivers of results • Information literacy training and excellence in teaching, learning and research

Who Implement Balanced Scorecard?

Organization Bank of Tokyo-Mitsubishi BMW Financial Services DaimlerChrysler ExxonMobil Corp. Hilton Hotels Corp. IBM Philips Electronics Sears Roebuck & Company Siemens AG Southern Gardens Citrus Processing Corp. St. Michael's Hospital UK Ministry of Defence Unicco Service Co. United Way of Southeastern New England University of California, Los Angeles UPS US West Walt Disney World Company

Sector Banking Financial Services Manufacturing Energy Hospitality Information Technology Manufacturing Retail Manufacturing Food Processing Health Care Government Industrial Services Humanitarian Higher Education Shipping Telecommunications Entertainment

Country Japan Germany Germany USA USA USA Netherlands USA Germany USA Canada UK USA USA USA United States USA USA

CONCLUSION

Defines the strategic linkages to integrate performance across organizations Communicates objectives and measures to a business unit, joint venture, or shared service Aligns everyone within an organization so that all employees understand how what they do supports the strategy Provides a basis for compensation provides feedback to senior management if the strategy is working The Balanced Scorecard is part of a performance management system to enable organizations to achieve their goals Translates vision and strategy

Four Fundamental Perspectives
Financial perspective How do we perform according to our shareholders? Customer perspective How do our customer see us? Vision and Strategy Learning and growth perspective Can we continue to improve & create value? Business proses perspective What must we excell at?

Revolution in Strategic Planning
No 1 2 TRADITIONAL STRATEGIC PLANNING Planning cycle typically 5 years Innovation and major change is not likely to occur Contains a large number of goals, objectives Managers tend to focus on short term financial goals No performance reporting mechanism Not transparent BALANCED SCORECARD Planning process shorter than 3 years Innovation emerges functional teams from across

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Focus on a 3 or 4 strategic themes Managers have a balanced view of the major perspectives of performance Performance data is widely reported via a distributed software system Transparent

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Advantages Balanced Scorecard

A framework to focus on key perspectives Helps align key performance measures Provides management with a comprehensive picture of business goals and strategies Gives a new way to executives to assess :  how well their organization is functioning  how to predict future performance  how to align the organization toward new strategies to achieve breakthrough performance Transforms the strategic plan from an attractive but passive document into the marching orders for the organization on a daily basis Enables executives to truly execute their strategies

Disadvantages Balanced Scorecard

Lack of time for the decision makers to focus on strategy Confusion between operational efficiency and strategy Difficult in creating well defined metrics and connecting them to deliverables Cascading the objectives down to the staff that can deliver the results Difficult and time consuming to implement a comprehensive balanced scorecard system in a large organization Require sustained top level support and commitment to ramp up and put the system in place

How to Implement BSC

Organizational assessment Identify strategic themes Define perspectives and strategic objectives Develop a strategy map Derive performance metrics Craft and prioritize strategic initiatives Automate and communicate Cascade the balanced scorecard through the organization Collect data, evaluate, and revise

Example BSC : Regionale Airline

Mission : Dedication to the highest quality customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit Vision : Continue building on our unique position – the short haul, low fare, high frequency, point to point carrier in America

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