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Cost-benefit analysis for change management
From the "why change management" tutorial series

 

Prosci is releasing a four-part series on "why change management" to provide several different perspectives on how to make the case for applying a structured approach to manage the people side of change for organizational initiatives. This series includes:

  • Correlation data on the impact of effective change management
  • Cost-benefit analysis for change management
  • Case study on project impact of effective change management
  • Emergence of change management

This tutorial presents a cost-benefit analysis for investing in change management. It presents five perspectives on the "benefits" of applying change management on projects in the organization. Given the importance of change in today's environment, these approaches to making the case for change management can help ensure that change management is viewed as a "must have" and not a "nice to have" on the projects you support. 

- Tutorial highlights -

  • There are numerous approaches to sharing the benefits change management brings to organizational change
  • When making the cost-benefit analysis, appeal to what your audience cares about
  • Download the benefit worksheets

 

Cost-benefit analysis overview

When evaluating whether or not to undertake an effort, many leaders and decision makers conduct a cost-benefit analysis. This process involves identifying and listing out the potential costs of the undertaking and the expected benefits of the undertaking. When discussing the value and importance of change management, a cost-benefit analysis can be a powerful framework. Below is a simple table showing likely costs and five different perspectives on the benefits of applying change management on projects and initiatives.

 

Change management cost-benefit analysis

Costs for applying change management Benefits from applying change management
  • Dedicated resource(s) on project team. For a small change to a change-ready group, the project manager may take on the responsibility. For a large change to a change-resistant group, this might be a team of people with supporting subteams. In either case, there needs to be someone dedicated to the people side of change working on the project.

  • Procurement of methodology and tools for use by change management resource(s)

  • Purchase of source materials for use by managers and supervisors in their coaching exercises

  • Training time and costs for everyone involved - managers and supervisors as coaches of change, senior leaders as sponsors of change, change management resource(s), project teams

  • Perspective 1: three "people side" ROI factors - faster speed of adoption, higher ultimate utilization and higher proficiency; change management drives project ROI

  • Perspective 2: cost avoidance - poorly managing change is costly to the project and the organization; change management is a cost avoidance tactic

  • Perspective 3: risk mitigation - individuals, the project and the organization are all put at risk when change is poorly managed; change management is a tool to mitigate risks

  • Perspective 4: benefits realization insurance - consider how much of the value of the project ultimately depends on people doing their jobs differently; change management provides benefits realization insurance

  • Perspective 5: probability of meeting objectives - data shows that projects with effective change management in place are more likely to meet objectives, stay on schedule and stay on budget; change management increases the probability of meeting objectives

 

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Below are more in-depth discussions of the five benefit perspectives presented in the cost-benefit chart above. These are not necessarily sequenced in the order that you would use them. Rather, know your audience and select the benefit perspectives that will be the most effective. Focus on the concerns of your audience and connect change management to their success by picking the right mix from the benefit perspectives presented below.

 

Benefit perspective 1 - three "people side" ROI factors

Prosci's ROI of change management model describes the three "people side" factors which contribute to, or limit, the value a change delivers to the organization. The foundation of the three factors is that any time a change requires individuals to do their jobs differently, it is how effectively those individuals make the change that determines the business value the project delivers for the organization. The three ROI factors are:

  • Speed of adoption - How fast do people adopt the new processes or behaviors?
  • Ultimate utilization - How many impacted employees made the change (and how many did not)?
  • Proficiency - How effective were employees at following the new processes or behaviors?

These three factors are universal - whenever a change requires employees to change how they do their jobs there are elements of how fast, how many and how effectively. Unfortunately, many project teams do not consider, or make implicit assumptions about, the people side of their change. A team supporting a large IT implementation that gives users new interfaces might implicitly and erroneously assume that all users (100% ultimate utilization) will begin expertly using the system (extremely high proficiency) the day that the system goes live (instantaneous speed of adoption). When the three people side factors are added to the business case and ROI calculations, the importance of change management is highlighted. The three factors can even be used to conduct sensitivity analysis to generate actual numeric values for the impact the people side factors have on ROI (for instance, if speed of adoption was over six weeks instead of three and 15% of users did not adopt the system, then the ROI for the project would actually be X instead of Y).

The three "people side" ROI factors can help you to:

  1. More clearly define the individual changes required by a project at its initiation.
  2. Calculate the impact of slower speed of adoption, lower ultimate utilization and lower proficiency - and position change management as a tool for delivering business results in concrete terms.
  3. Elevate the discussion and document assumptions early on in the process related to the people side of change

The worksheet below helps you to think about a change you are supporting and identify the thee "people side" ROI factors.

Three "people side" ROI factors worksheet
Name of project:  
One group that is being impacted
by the change:
 
Identify the specific changes in
behaviors or processes required
of this group.
 
Speed of adoption:
What does "adopting the change" mean for this group?
How would you measure if someone had "adopted" the change in their day-to-day work?
 
Ultimate utilization
Define utilization for this group.
How would you measure how many people
in the group have adopted the change?
 
Proficiency
What would adopting the change proficiently mean?
How would proficiency be demonstrated?
How would you measure it?
 

* Download a PDF with all of the benefit worksheets

 

 

Benefit perspective 2 - cost avoidance

When changes are poorly managed - there are real and tangible costs to the organization. When change management is applied effectively, these costs can be avoided or minimized. Some of the costs are difficult to quantify - such as morale declines - but some of the costs are very concrete and easily quantified. One way to characterize the benefits of change management is as a cost avoidance mechanism.

Costs to the organization if change is poorly managed
(those that can be more easily quantified are italicized):
  • Productivity plunges (deep and sustained)
  • Impact on customers
  • Impact on suppliers
  • Loss of valued employees
  • Morale declines
  • Decline in quality of work
  • Resistance (both active and passive)
  • History of failed change
  • Stress, confusion, fatigue
  • Change saturation

Costs to the organization if the change is not implemented:

  • These costs are tied directly to what the change was aiming to do.
  • These costs could include: expenses not reduced, efficiencies not gained, revenue not increased, market share not gained, waste not eliminated, regulations not met resulting in fines/penalties, etc.
  • Additionally, the organization loses the investment made in the project when the project does not deliver results.
Costs to the project if change is poorly managed:
  • Project delays
  • Missed milestones
  • Project put on hold
  • Resources not made available to project team
  • Budget overruns
  • Obstacles appear unexpectedly
  • Rework required on project design
  • Project fails to deliver on objectives
  • Project is fully abandoned
  • Loss of work by project team

The worksheet below gives you the opportunity to define - in as specific terms as possible - the costs you can avoid on your projects by applying change management.

Cost avoidance worksheet

Identify costs to the organization of poorly managing change
(where possible, estimate a dollar value)

Identify costs to the project of poorly managing change
(where possible, estimate a dollar value)

 

 

 

 

 

Identify potential costs to the organization if the project is not
fully implemented (where possible, estimate a dollar value)

 
 

 

 

 

 

 

 

Benefit perspective 3 - risk mitigation

Another perspective, similar to the cost avoidance perspective, is to outline the potentials risks to the project and the organization associated with the people side of change. Risk management on projects is a well-developed discipline. The Project Management Institute even has a PMI Risk Management Professional® credential complete with an application, audit and examination process. If your organization already conducts extensive risk assessments on projects, work to position "people-side risk" as one of the risks that is considered along with other risks like financial risks, technology risks, schedule risks and dependency risks. If a project is being planned and has a high "people-side risk" component, then applying a structured approach to change management is the right risk mitigation technique. 

The worksheet below helps you identify the people side risks and potential consequences for the project and the organization.

Risk mitigation worksheet
Outline the three biggest
people risks
facing
this particular change:
1.

2.

3.
 

Outline the three biggest
risks facing the project
if the people side of
change is ignored:
1.

2.

3.
 

Outline the three biggest
risks to the organization
if the change fails:
1.

2.

3.
 

* PMI Risk Management Professional (PMI-RMP) is a registered trademark of Project Management Institute, Inc.

 

 

Benefit perspective 4 - benefits realization insurance

The fourth perspective is benefits realization insurance. Here, the context for showing the value of change management is tied to an examination of the potential benefits the project is working to achieve. The objectives of the project - as outlined in the project charter, business case or project plan - are a good starting point. For each objective, ask yourself, "is meeting this objective dependant on people doing their job differently?" For some of the questions the answer might be "no" - such as lower maintenance contract costs for a new piece of technology. But, many of the objectives will be tied directly to the people side of change. For these objectives, you can ask the follow up question of, "what percentage of these benefits result from people doing their jobs differently?" This is the amount of benefit you can "insure" by applying a solid change management approach - and the amount of the benefit you are leaving uninsured by not investing in change management.

The worksheet below walks you through the process of estimating a percentage of benefits tied to the people side of change.

Benefits realization insurance worksheet
How much "people change"
will this project require?
 
Identify several of the primary
process and behavioral changes
required by the project.
 

List five of the objectives of this particular change and identify if they are dependent on the people side of change and how much of the benefit is tied to people doing their jobs differently.

Objective: Is meeting this objective dependant on people doing their job differently? What percentage of these benefits result from people doing their jobs differently?
1.    
2.    
3.    
4.    
5.    
What percentage of the overall
project benefits are tied to people
doing their jobs differently?
 
How effectively have you insured
this portion of the project benefits?
 
 

 

 

Benefit perspective 5 - probability of meeting objectives

The final benefit perspective is probability of meeting objectives. This is tied to the growing body of data which shows that more effective change management results in a higher likelihood of delivering intended results. A 2002 McKinsey Quarterly article titled "Helping Employees Embrace Change" shows a direct correlation between value delivered to the organization and the effectiveness of change management - with projects featuring effective change management delivering five times the value of projects with poor change management. Likewise, Prosci's last three benchmarking studies included correlation analysis on the relationship between meeting objectives and effective change management. The first tutorial in this series shared the 2009 benchmarking data correlating change management effectiveness to meeting project objectives, staying on schedule and staying on budget. Below is the graph showing change management effectiveness correlated to meeting or exceeding objectives. Projects with "excellent" change management in place were six times more likely to meet objectives than those with "poor" change management - and even those using "good" change management were five times more likely to meet objectives. 

 

 

Takeaways

 

Below is a simple table summarizing the five "benefit" perspectives. Based on your audience, your organization and your culture - select the most compelling benefit perspectives and work to make them as specific to your change as possible. Download a PDF with all of the benefit worksheets presented above.

 

Summary of five "benefit" perspectives for change management
Perspective 1:
three "people side" ROI factors
Change occurs at the individual level. The value that a project delivers to the organization is ultimately tied to how quickly we can get individuals to make the changes required (speed of adoption), how many of them do their work the new way (ultimate utilization) and how effective each one of them is when they have adopted the change (proficiency).
Perspective 2:
cost avoidance
We incur significant and quantifiable costs when changes are poorly managed, at both the project and the organizational levels. In addition to the extra costs of fixing the people-side issues that creep if we ignore change management up front, the organization also fails to derive the value it needed from the project in the first place. Change management is an effective cost avoidance technique we can apply on our projects. 
Perspective 3:
risk mitigation
Ignoring the people side of change results in numerous risks to the project and to the organization. We leave ourselves exposed to these people risk if we do not use a structured approach for managing the people side of change. When applied effectively, change management can help to mitigate or eliminate many of the numerous risks associated with the people side of change.
Perspective 4:
benefits realization insurance
For the most important and most strategic changes in the organization, much of the value that is expected is tied to how people do their jobs. Applying a structured change management approach is like taking out an insurance policy against the goals and objectives of the project.
Perspective 5:
probability of meeting objectives
There is a growing body of data showing that the more effectively the people side of change is managed, the more likely the project is to meet objectives. Prosci's benchmarking data and the McKinsey Quarterly article "Helping employees embrace change" show that projects with effective change management were five to six times more successful than projects that did not address the people side of change effectively.

 

 

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Prosci Change Management Certification

Program highlights:
  • Apply the methodology as you learn it on a real project
  • Learn from experienced executive instructors
  • Become part of a change management community
  • Earn 2.4 CEUs, 24 PDUs and 23.5 HRCI recertification credits
  • Walk away with products and course materials worth over $1000

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Upcoming sessions:

  • February 2 - 4, 2010: Tampa, FL area
  • February 9 - 11, 2010: Denver, CO area
  • March 2 - 4, 2010: San Francisco, CA area
  • March 16 - 18, 2010: Denver, CO area
  • March 23 - 25, 2010: Washington, DC area
  • April 13 - 15, 2010: Denver, CO area
  • April 20 - 22, 2010: Las Vegas, NV area
  • May 18 - 20, 2010: Washington, DC area

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“The best training class I have had in years. Goes way beyond the strategy and framework and focuses on real world problems and the tools to solve them.”
- Jennifer J., April 2009 participant

“This was the most effective and engaging course I've ever taken. I feel that I can truly use this knowledge in my personal and professional life immediately.”
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“Awesome - truly one of the most beneficial programs I have ever attended - immediate application on the job!”
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“This program absolutely over-delivered my expectations. I now feel more prepared and better equipped to do my job.”
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Offerings for applying Prosci's change management methodologies:

Training:

  • Change management certification ($2800)- 3-day program where you bring a project you are working on and apply all of the assessments and tools as you learn them - taught by former fortune 500 executives at locations across the US - includes over $1000 in products, including the Best Practices in Change Management benchmarking report, the Change Management Toolkit and the Change Management Pilot 2010
  • Train-the-trainer ($3500) - learn how to teach Prosci change management training programs in your organization
  • Onsite training - bring Prosci to your location for 3-day certification programs, 4-6 hour executive briefings, 1-day manager programs or 1-day employee programs - call +1-970-203-9332 for more information

Methodology tools:

  • Change Management Toolkit ($389) - hardcopy 3-ring binder presenting Prosci's change management methodology, includes templates, checklists and assessments for managing the people side of change (includes USB drive)
  • Change Management Pilot Pro 2010 ($449) - online tool including Prosci's change management methodology, eLearning modules and downloadable templates, assessments, presentations and checklists
  • Change Management Guide for Managers and Supervisors ($189) - tools to help supervisors engage and coach their direct reports through change (includes 4 copies of the Employee's Survival Guide)
  • PCT Analyzer ($149/$349) - web-based tool for collecting PCT Assessment data, analyzing results, identifying risks and developing action steps

References and books:

  • Best Practices in Change Management benchmarking report ($289 / quantity discounts available) - journal-style report with lessons learned and best practices from 650 participants, presented in an easy-to-use format - reads as a checklist of what to do and what not to do
  • Change Management: the people side of change ($18.95 / quantity discounts available) - a primer for anyone involved in organizational change that addresses why manage change, individual change management and organizational change management
  • ADKAR: a model for change ($18.95 / quantity discounts available) - the definitive work on Prosci's ADKAR® Model
  • Employee's Survival Guide to Change ($14.95 / quantity discounts available) - a handbook to help employees survive and thrive during change, answers frequently asked questions and empowers employees to take charge of change

 

 

*** Prosci also offers leadership packages - groupings of products at discounts that offer you some of the most helpful and common combinations of Prosci change management resources

 

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Email a Prosci analyst or call 970-203-9332 with questions about the methodology, its application, or finding the right resources to support your change management activities.

 

 


 

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