In preparing a business case, the business analyst is often required to conduct some measure of cost analysis. When highlighting the benefits associated with an initiative, it is extremely important to also indicate the costs that will go along with implementing the initiative. Information regarding costs is particularly important in making go or no-go decisions when deciding which projects to implement. The business analyst should work with the project manager to identify these costs and arrive at realistic estimates.
Here are some categories of costs you should be able to identify, whenever they are applicable to your business case.
1. Costs can be classified as either variable or fixed
Variable costs are dependent on the quantity of output generated. For example, the more finished goods are produced in a manufacturing process, the higher the cost of supplies. Other examples of variable costs include fuel costs, wages, production materials and supplies. As a second example, if you need to hire certain equipment during a project, the longer the period of hire, the higher the costs you can expect to incur.
Fixed costs on the other hand, remain the same, regardless of the output generated. They are one-off costs that are incurred once and for all. An example is paying for job advertisements to recruit a scrum practitioner. Flag these costs to arrive at a realistic estimate for your business case.
2. Another categorization of costs is direct and indirect
Direct costs are linked to the work carried out on the project, such as project materials, travel costs, licenses purchased as a result of project work, allowances earned by project team members, etc. For example, if you outsource software development to certain professionals, the amount you pay them constitutes part of your project’s direct costs.
Indirect costs are costs incurred by multiple projects or the costs of doing business, in general. Examples include taxes, general administrative expenses, cleaning services, project manager’s pay, etc. It is expected that indirect costs will be incurred as part of running the business or working on multiple projects at a time.
3. Costs can be tangible or intangible
A tangible cost is one you can measure for example, the costs of production and labour. Intangible costs however, are difficult to quantify. For example, the cost of low employee morale caused by job losses due to introduction of new technology. These costs need to be flagged in the business case since they do have an important significance on the overall costs the business will incur, should your recommendation be implemented.
4. Sunk Costs
This is a term explaining costs incurred in the past, and should not in any way affect future costs regardless of whether the opportunity that led to the said cost is ongoing or not. These costs should not be included when calculating the overall cost of implementing the business case, otherwise the result would be incorrect. It is however, necessary to flag this cost as it might aid the decision-making process.
Each of these costs can contribute to developing a comprehensive estimation of how much a solution will cost so it is important to keep them in mind when preparing business cases, so that decision makers can have an accurate picture of what to expect with each recommendation.