8 Part 8: Annex

8.1 Method References

8.1.2 Cost-Benefit Analysis

Usage

Reference

Purpose

The »Cost-Benefit Analysis does not evaluate the profit to be gained from a measure, but compares the monetary benfit with the costs of the measure. Therefore, the cost-benefit analysis should be used for projects which are not focussed on gaining a profit. This is the case in the public sector, non-profit enterprises and internal projects.

The cost-benefit analysis examines and evaluates the economic effectiveness of projects in advance. The results are the basis for the selection of the projects which enable the respective organizational unit to pursue their strategic goals most effectively.

Cost-Effectiveness Considerations

IT cost-effectiveness considerations (cost-effectiveness considerations for information technology projects) can be used to evaluate and document IT projects and to present them in a project portfolio. Each project is tested on a criteria catalog. The cost-effectiveness considerations distinguish between two kinds of cost-effectiveness: monetary cost-effectiveness and cost-effectiveness in a broader sense.

In this concept the monetary cost-effectiveness is the result of the costs and benefits that can be quantified in monetary values. When compiling the costs and benefits, the net present value method is taken as a basis to adequately take into account the chronological sequence of the accrouing costs and benefits. In the cost-effectiveness considerations, the monetary criteria are subdivided for this process into two groups. The first group includes criteria concerning the the development costs and development benefits. These are normally non-recurring costs and accrue prior to the introduction of a IT project, and they are strictly speaking the capital investments that are paid in and out. In this process the monetary benefit is generated mostly from the savings when the previous procedure is replaced. The second group of criteria are the criteria related to operating costs and benefits. They usually accrue after the introduction of the IT project in the form of running costs and benefits and have to be determined for the period of the expected service life. The standard period assumed in the cost-effectiveness considerations is five years.

For many IT projects it is often not possible to furnish proof of cost-effectiveness in a narrower sense. Therefore the cost-effectiveness considerations provide not only an examination according to the net present value method, but in addition also an evaluation for which the utility analysis is used. In this process two evaluation areas are formed, the urgency values and the qualitative-strategic values.