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

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.

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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.

* 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.

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.

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.

* 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.

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.