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Assessing intranet cost-benefits
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by Clive Shepherd

The cost-benefits of intranets are meant to be self-evident. After all, the set up costs appear to be minimal and the benefits although largely intangible are, by all accounts, substantial. So why not just get on with it and see what happens?

Is this the way to approach the introduction of a new communication medium that could quite possibly have a profound effect on how people work in your organisation? Clive Shepherd thinks not. In this article, he explains that the cost-benefit analysis of intranets is not only desirable, it is feasible to accomplish without armies of accountants. He sets out a step-by-step method for calculating intranet cost-benefits that you can easily adapt for use in your organisation and points you to a tool that, for the less mathematically inclined, does all the calculations for you.

Contents

Why is cost-benefit analysis necessary?
A method for calculating cost-benefits
Scoping your intranet
Establishing some basic facts and figures
Analysing costs
Forecasting benefits
Analysing the results
The cost-benefit calculator


Why is cost-benefit analysis necessary?

For many people, the process of measuring the costs and benefits of an intranet is one that, with any luck, can be avoided. After all:

  • "There are so many intangibles, it's impossible to do."
  • "The benefits of an intranet are so obvious, there's no point."
  • "An intranet is so cheap to set up that there's no requirement to justify it."
  • "An intranet is just a basic tool, like fax and word processing, that can be taken for granted."
  • "The figures are far too complex to calculate."

Paul Korzeniowski writes in Info World Electric: ‘Rather than carefully evaluating bottom-line benefits, corporations are plunging headfirst into the intranet waters. New applications have sprung up in months or even weeks and top management approval is often assumed rather than requested.’

So why spoil this cosy situation and go to all the trouble of a proper analysis?

  • Because even relatively intangible costs and benefits can be measured if you are prepared to approximate.
  • Because the benefits of an intranet may be obvious to you, but not necessarily to your senior managers, upon who's commitment your intranet will survive or perish, nor to the majority of potential end users who feel they are already overburdened with information and systems to manage it.
  • Because the up-front direct costs of an intranet may be relatively low, but the human costs of setting it up, populating it with content and then maintaining that content are considerable.
  • Because even word processing and fax had to be justified when they were first introduced (don’t say anything - if they weren’t, they should have been!).
  • And because, if you’re prepared to follow a straightforward step-by-step procedure, you’ll find the calculations are not complicated at all.

Perhaps the strongest argument for conducting a proper assessment of the costs and benefits of an intranet is that this should provide you with the ammunition you need to do the job properly, with an appropriate budget and a realistic timetable. If it doesn’t, then at least you will be forewarned enough to drop the subject quietly or look to get a job with another organisation, where an intranet is going to be of more use.

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A method for calculating cost-benefits

There is no rocket science in the method I am suggesting for calculating intranet cost-benefits:

  • Determine what you want your intranet to be able to do in its initial implementation.
  • Analyse what it will cost you to make this happen – both up-front and in ongoing maintenance.
  • Anticipate the cost savings and the productivity benefits that will arise.
  • Calculate the return you will get on your investment and how long this will take to materialise.

Let’s go through these one by one.

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Scoping your intranet

It is not possible to conduct a meaningful analysis without a clear indication of what you want your intranet to achieve. There are many ways of categorising what an intranet does. Here’s mine:

  • Information publishing: using the intranet to deliver news and other information in the form of directories and web documents.
  • E-mail: implementing an e-mail system that integrates seamlessly with the intranet, allowing information to be both 'pushed' and 'pulled'.
  • Document management: using the intranet to allow users to view, print and work collaboratively on office documents (word-processed documents, spreadsheets, presentations, etc.).
  • Training: using the intranet to deliver training at the desktop.
  • Workflow: using the intranet to automate administrative processes.
  • Databases and other bespoke systems: using the intranet as a front-end to organisation-specific systems, such as corporate databases.
  • Discussion: using the intranet as a means for users to discuss and debate issues.

Pretty well every organisation will implement the first of these – information publishing. The majority will have ambitions to extend their intranet to cover the rest of the list at some stage. Don’t be distracted into predicting too far into the future - apart from anything else it will make your calculations more difficult and less useful. Concentrate on what you expect to achieve in the first major wave of implementation – let’s say the first year.

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Establishing some basic facts and figures

To make your calculations later you will need to gather some basic facts and figures about your audience:

  • The size of your intranet target population and, if appropriate, the proportion this represents of your organisation's total projected intranet user population.
  • The number of people within the target population who will need new PCs, the number who are currently not networked and the number who will be provided with access to the Internet.
  • The average annual salary and benefits of the target population, the average working hours in a day and working days in a year (used to calculate labour savings and productivity gains).

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Analysing costs

The next step is to analyse the costs that will be incurred in setting up and running your intranet. There are two main categories of cost:

  • Capital costs: hardware and software costs that will be met by the organisation’s capital budget and, normally, written off over a number of years.
  • Revenue costs: other costs that are likely to be borne by the organisation’s normal expense budget.

It is also necessary to make a distinction between the one-off costs associated with start-up and ongoing maintenance costs. Here’s some ideas for what to include in each case:

Start-up capital costs
These costs form a major part of your up-front investment. Because, as fixed assets, they have a useful life of several years and a resale value, they are normally written off over three or four years. Your finance department will be able to tell you what your organisation’s depreciation policy is. You’ll also need to consult your IT department to get estimates for all the hardware and software needed:

  • New PCs – for providing intranet access to employees without their own PCs.
  • Providing network connections to PCs not currently networked.
  • Web servers and server software.

You also need to provide for the cost of software applications, whether they are developed on a bespoke basis (in-house or outside) or purchased off-the-shelf. You can pay considerable prices for ‘industrial strength’ applications, but much cheaper or even free applications can be obtained with a little research. What you will need will depend on what you are using your intranet for:

  • Information publishing: examples of automated applications include directories (phone, employees, products, services, locations, etc.) and applications that automate the production of news pages, classified ads or newsletters.
  • E-mail: intranet e-mail is typically provided with a single off-the-shelf application, plus individual client licenses.
  • Document management: typically one main application.
  • Training: for ease of calculation, assume that an intranet training application represents one hour of self-instructional material.
  • Workflow: applications include on-line forms (holiday, sickness, expenses, timesheets, purchasing, surveys, bookings for rooms, training or travel). If these simply submit messages to be processed manually, they will be relatively inexpensive to develop. If complete administrative processes are to be automated, which use the intranet as a front-end, a more substantial investment will be required, whether in bespoke software development or purchase of/upgrade to intranet-enabled versions of off-the-shelf systems such as HR databases, media libraries, sales support systems, etc.
  • Databases and other bespoke systems: include any application that provides users with an intranet front-end to a major, existing, bespoke corporate system.
  • Discussion: there will typically be one application to allow users to debate topics over the intranet.

Start-up revenue costs
These also form part of your up-front investment, but are more likely to be written off in the first year of implementation:

  • Design consultancy: the cost, whether internal or external, of creating a structural, navigational and graphical design for the part of the intranet being analysed.
  • Promotion: the cost, again internal or external, of launching the intranet to your target population.
  • Training: the total cost, per user, of providing training in both how to use the intranet and how to provide content.

Ongoing capital costs
Some money will have to be reserved each year, from year 2, for upgrades to your server hardware and software and to your off-the-shelf applications. Perhaps the best way of estimating this will be as a percentage of the initial cost – say 25%.

Ongoing revenue costs
A considerable amount of effort is required to maintain and continuously improve your intranet. These costs need to be budgeted from year one:

  • Editorial and design personnel: the people required to administer intranet policies and act as overall content editors for your target population. Remember to include salaries, benefits and expenses.
  • Technical personnel: the people required by the organisation as a whole to keep your intranet up and running from a technical perspective.
  • Internet access: the cost of providing lines out to the Internet. A simple way of estimating this is to make a small annual allowance, say 50, for each employee who will have access.

The following costs apply after the first year of implementation:

  • Ongoing consultancy: continuous modifications and improvements to your intranet design, expressed as a percentage of start-up design consultancy costs.
  • Ongoing promotion: continuing promotion of the intranet to your target population, expressed as a percentage of start-up promotional costs.
  • Ongoing training: a percentage of start-up training costs, largely to account for employee turnover.
  • Maintenance of bespoke applications: assuming this work is not carried out by the technical personnel listed above, make an allowance for continuing development of your bespoke applications, say 25% of the initial cost.

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Forecasting benefits

Not many people have trouble calculating costs. It takes a little more ingenuity to pin down the benefits. There are three main categories of benefit:

  • Direct cost savings: savings in expenditure other than labour - print, paper, telephone, travel costs, etc. - that can be directly attributed to the introduction of the intranet. These can usually be calculated in three steps: (1) the number of incidences of expenditure in the time period, (2) the cost of each incidence and (3) the proportion of these that could be eliminated using the intranet. For example, if the number of pages of formal printed material received per person per year was 500, the cost in pence per page, including printing and delivery, was 6p and the percentage of these pages that could be delivered on-line was 70%, the saving in pounds would be 500 x (6 / 100) x 70% x the size of the population.
  • Labour savings: savings in the amount of time required to carry out tasks as a result of introducing the intranet. These can be expressed in minutes per person per day. To calculate the saving, divide the number of minutes saved by the number of minutes in the day (60 x the number of working hours) and multiply by the size of the population and the average salary.
  • Productivity increases: increases in output per person attributable to the introduction of the intranet, expressed as a percentage. Because personal productivity has such a wide range of implications from job to job and organisation to organisation, it is probably easier to convert these to simple labour savings. For example, if the total productivity gains were 3%, calculate the savings as (3 / 103) x the size of the population x the average salary. The actual effect of higher productivity, such as increases in sales, could well be much larger and, if you can estimate these, then you should.

Each category of intranet usage has its own associated benefits:

Information publishing
Direct cost savings: the print, paper and delivery costs that can be saved by making documents available on-line and discontinuing their paper equivalents. Clearly this saving can not be realised if paper and on-line versions operate in parallel.

Labour savings: faster access to information; more rapid and easy exchange of information; less duplication of effort (because there need be only one owner for each piece of information) and less interruptions (because you can control when you access information).

Productivity increases: through the availability of more accurate and up-to-date information and making available information that was not previously available.

Intranet e-mail
Direct cost savings: Costs of phone calls, faxes, memos, letters, diskettes and other digital media, saved through the use of e-mail both within and outside the organisation.

Labour savings: less time trying to get through on the ‘phone; less time spent preparing and checking items to be sent out and less interruptions (because you can control when you access information).

Productivity increases: faster access to information.

Document management
Direct cost savings: the print, paper, digital media and delivery costs that can be saved by making documents available on-line for review, editing and approval rather than distributing as hard copy or on diskette.

Labour savings: less time spent sending out documents for review, editing and revision; less time spent locating/obtaining documents for review, editing and revision; less duplication of effort (data can be shared between documents by linking or copying and pasting); less time wasted correcting errors caused by work being undertaken on incorrect versions.

Productivity increases: faster access to accurate and up-to-date business documents.

Training
Direct cost savings: savings in travel and accommodation, trainers, rooms and equipment for courses delivered via the intranet rather than in a classroom.

Labour savings: less time spent travelling to courses; less time required to reach learning objectives (through the use of more efficient self-instructional methods).

Productivity increases: immediate access to required knowledge and skills.

Workflow
Direct cost savings: the print, paper and delivery costs that can be saved by making forms available on-line.

Labour savings: less time spent per person per form in obtaining up-to-date copies of the form to complete; for each fully-integrated workflow application, the number of days saved in admin time per year.

Productivity increases: faster and more reliable admin processes.

Databases/bespoke systems
Labour savings: less time required to learn and use applications.

Productivity increases: through information being available that was not previously available.

Discussion
Direct cost savings: travel and accommodation costs for meetings that could instead be conducted on-line.

Labour savings: less time spent travelling to meetings; less time spent in meetings.

Productivity increases: faster resolution of issues and concerns; the resolution of issues and concerns that would not have been possible without the intranet.

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Analysing the results

Before you can make any conclusions from your findings, you’ll need to total up your costs and benefits.

Summarising costs
If your target population is a subset of your organisation’s total intranet population, then you need only need to take a proportion of the costs that are borne centrally. The following costs are likely to be central:

  • server hardware and software
  • the purchase, development, maintenance and upgrades to software applications
  • provision of technical personnel

Remember that you only need to take account of the cost of applications that are required to support your initial intranet implementation.

Summarising benefits
Total up the benefits for each intranet category under the three benefit headings: direct cost savings, labour savings and productivity increases. Before making your calculations, it is necessary to determine the proportion of the target population that is affected by each of the intranet categories. For example, the whole population may be affected by the use of the intranet for information publishing, but only 30% for document management and 40% for workflow. If you don’t make these distinctions, you are likely to over-estimate your benefits.

Comparing costs and benefits
Obviously you will be interested to see whether your benefits do indeed exceed your costs. To do this in a way which reflects the Impact,Arial Black,Helvetica on your organisation’s profit and loss account, you should spread your capital costs over the write-off period. You may also decide to reduce the benefits in year one to take account of the time taken to develop and launch the intranet and to train users. Here’s an example of a layout for your analysis:

Benefits

Year 1

Year 2

Year 3

Year 4

Year 5

Information publishing

91346

182693

182693

182693

182693

E-mail

0

0

0

0

0

Document management

0

0

0

0

0

Training

22336

44671

44671

44671

44671

Workflow

22170

44340

44340

44340

44340

Databases/bespoke systems

0

0

0

0

0

Discussion

165459

330917

330917

330917

330917

301311

602622

602622

602622

602622

Depreciation of capital costs
New PCs

6667

6667

6667

0

0

Networking

5000

5000

5000

0

0

Server h'ware & s'ware

16667

20833

25000

12500

12500

Applications

152222

158333

164444

18333

18333

180556

190833

201111

30833

30833

Revenue costs
Editorial/design personnel

30000

30000

30000

30000

30000

Technical personnel

200000

200000

200000

200000

200000

Internet access

2500

2500

2500

2500

2500

Maintenance of bespoke apps

0

95833

95833

95833

95833

Design consultancy

20000

5000

5000

5000

5000

Promotion

10000

2500

2500

2500

2500

Training

15000

3000

3000

3000

3000

277500

338833

338833

338833

338833

Total costs

458056

529667

539944

369667

369667

Profit or loss

-156745

72955

62677

232955

232955

Accumulated profit or loss

-156745

-83790

-21113

211842

444797

This example assumes that information publishing, training, workflow and discussion are implemented, that the write-off period is three years and that year one benefits are 50% of those in subsequent years.

Return on investment
Return on investment is a way of expressing as a percentage the return you have made relative to the amount you have invested:

    ROI = benefits – investment x 100
                    investment

Your investment is the sum of your up-front capital and revenue costs. For the example above, that gives a total of 586667. Your return is calculated as the annual benefits less the ongoing capital and revenue costs. Here’s a completed analysis:

Year 1

Year 2

Year 3

Year 4

Year 5

Benefits

301311

602622

602622

602622

602622

Ongoing capital costs

0

30833

30833

30833

30833

Ongoing revenue costs

232500

338833

338833

338833

338833

Net return

68811

232955

232955

232955

232955

Return on investment (%)

12

40

40

40

40

Accumulated ROI (%)

12

51

91

131

171

Payback period
The payback period is the time it takes to ‘break even’ on your investment, in other words when the accumulated return on investment figure first exceeds 100%. In the example above, the payback period is 39 months, or three months into the fourth year.

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The cost-benefit calculator

Even with a structured approach to follow, it’s a lot of work to construct your own analysis from scratch and input it all onto a spreadsheet. With that in mind, I have developed a web-based tool that does the whole job for you. Of course, as with any generic tool, it will not meet every eventuality, but may well get you off to a good start. An Excel version is also available free of charge, which can be experimented with and customised more easily.

Whether you take advantage of this tool or go it alone, you have a lot to gain by conducting a thorough cost-benefit analysis:

  • you’ll give the project the credibility it deserves
  • you’ll have the ammunition to silence the sceptics
  • you’ll be able to argue for the budget and resources required to realise the returns
  • you’ll know which intranet applications are likely to provide the biggest pay-offs
  • there will be fewer surprises and less regrets

Just one final word of warning. When IDC’s study of Netscape intranets showed a typical ROI of over 1000%, people might have taken note but they would have been justifiably sceptical. On the other hand, META Group’s June 1997 study showed that 80% of companies generated a positive ROI, with an average annual return of 38% - figures closer to managers’ real world experience and more likely to generate a positive response. So, if your figures show outlandish returns, you might like to revisit your estimates – after all, then you have the potential to exceed your forecasts!

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