I have seen several times where projects are described in terms of only their benefits. No mention is made of costs and/or risks. This is just plain wrong. Any project or initiative has a cost associated with it. Perhaps the cost is sunk or sometimes implicit but there is always a cost.

Just like there are two types of benefits – hard (usually easily measurable) and soft (usually a point of contention), there are two types of costs that are relevant to a value model

In a true economic model, there are various kinds of costs: fixed, variable, opportunity, marginal, accounting, etc. For our value case, we are primarily focused on two categories: one time and recurring costs. It is not that we are ignoring the other categories. In the equation that calculates the cost metrics, we take it into account differently depending on whether it is fixed, variable, economic or marginal, etc.

One-time costs are those that occur usually at the onset of the project. These are typically infrastructure costs, setup costs, development costs, and the like.

Recurring costs are those that occur periodically. Examples of recurring costs are an annual subscription to a service, salaries, maintenance, etc.

It is quite tempting for value modelers to only consider those obvious costs such as consulting, infrastructure, setup, etc. One area where a mistake is often made is in underestimating the people and process costs in the overall equation. In any significant project, there is time devoted to the adoption of the new solution or process. The existing process may need to change, new people may need to be hired, current staff may need to be retrained. All of these are real costs that hit the company’s books. Not taking them into an equation presents an unnecessarily rosy picture of the value proposition.

In my next blog post, I will discuss how to quantify cost measurements. In many ways, it is probably easier to quantify costs when compared to benefits.