Benefits Tracking

A comprehensive guide to understanding the fundamental best practice approach for definition and realization of benefits for strategic initiatives

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Leaders from operations, finance and IT, who are otherwise capable, often struggle with consistently making and managing decisions concerning strategic initiatives.

Many organizations use manual, off-line processes to outline potential programs.

This approach results in both a lack of efficiency and effectiveness. Inevitably, business case owners become unaware of or deviate from standards. As users pass files between partners involved in the assembly process, fidelity and accountability are lost.

For organizations, the downstream impact on the ability to effectively track benefits is severe. For project sponsors and the organization at large, this can be devastating. Leaders propose ideas, and senior executives approve initiatives based on projected benefits.

A chronic lack of structure around benefits definition and a sound approach to tracking benefits realization plagues many organizations.

Inpensa brings a fresh perspective to understanding this challenge. Summarized below is the best practice approach for benefits tracking from the standpoint of overall strategic initiative governance.

Defining Business Case Benefits

Executives often define a potential project in terms of requirements that must be satisfied to generate specific results.  Perhaps executives require new capabilities to deliver on goals for revenue, operating ratio, or other targets. Sometimes, an organization’s investment in an initiative is compelled by regulatory, compliance or corporate mandates.

A project sponsor must complement their narrative vision for an initiative with details of costs and benefits to demonstrate its feasibility and make the case for approval.

Organizations may implement a governance process that subjects different types of business cases to varying levels of rigor concerning benefit definition.  For example, proposed initiatives below an investment threshold may require high-level annual benefits projections. More significant investments may require benefits projections in quarterly or even monthly increments.

For all participants engaged in the creation, review and approval of a new project, it is crucial to understand that very often, the vast majority of benefits associated with a project accrue to the organization after the execution of the project.Some organizations reference the project execution period as the set-up phase.

At project completion, organizations encounter a failure of systems and processes, just when benefits tracking moves to the foreground.

When an organization lacks focused people, process and tools, it is unclear whether a project achieves its purpose in terms of benefits.

key performance indicators

Business Case KPIs and Underlying Benefit Types

Analysts combine several benefit types and contrast them with costs to make it easy to assess business cases on an individual basis, or in the broader context of programs and portfolios.

With a harmonized approach, sponsors and executives can more easily assess relative value and priority of one business case compared to another or make assessments at the program or portfolio level.

When project owners conventionally define benefits at the initial feasibility stage, analytical capabilities are available throughout the entire initiative life-cycle from feasibility, to approval for execution, to the set-up period, and the value period that follows.

Analysts use a series of KPIs (key performance indicators) powered by underlying benefits data and tracking methods to communicate the value of an investment.

KPIs

Executives, board members, and sometimes even shareholders (in cases where executives report results of critical initiatives), assess the degree of program success using specific metrics.

Each organization will have elements embedded in its KPIs that are unique to the company operating model, such as interest rate and discount rate.  Some organizations may require an understanding of initiatives using corporate financial reporting criteria such as Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA), or Net Earnings Before Interest and Tax (NEBIT).

For KPIs to reflect accurately, benefits must be carefully defined and tracked with rigor.

  • Return on Investment (ROI), which is the ratio of financial benefits to costs
  • Payback Period, which is the length of time required for accumulated financial benefits to equal costs
  • Internal Rate of Return (IRR), which is the percentage of a projected return calculated by analyzing projected costs relative to expected cash flows and comparing it to the cost of capital
  • Net Present Value (NPV), which is an assessment of whether the present value of financial benefits exceeds the current value of costs
Standards and practices

Financial Benefit Types

Initiative owners should take special care to define financial benefits unique to their business case using the company’s standards.

An organization should publish a standard list of benefit categories with a corresponding list of eligible general ledger accounts for each, where available.

  • Revenue impact directly attributable to a proposed project
  • Savings on current expenses achieved by the initiative
  • Cost Avoidance in terms of future projected expenses no longer incurred

Non-Financial Business Benefits

When considering potential new initiatives, companies often focus on measurable business outcomes, as well. Such benefits include those that are quantifiable, yet not financial.  Non-financial benefits, combined with projected financial performance, can create a compelling value proposition for a proposed project.

Here are some examples of business benefits that can be quantified:

  • Increased transaction throughput as a result of a system upgrade or implementation of a replacement system
  • Repurposing headcount for deployment in another work area thereby adding capacity
  • Decreased system dwell time as a result of process streamlining
  • The number of new customers
  • Other operational and business performance metrics can be included

While revenue, savings and cost avoidance form the structure of financial benefits, non-financial business benefits are numerous and varied, but should always be quantifiable and verifiable.

When creating a business benefits framework, initiative owners should clearly outline:

  • Benefit description
  • Unit of measure
  • Baseline date and value
  • Target date and value
  • Monitoring frequency

Intangible Benefits

In addition to measurable financial benefits and objective non-financial business outcomes, project sponsors may elect to include intangible benefits that would accrue as a result of the initiative.

Intangible benefits include things like a demonstration of management commitment to staff in targeted locations or functions, general customer goodwill, support for environmental or other community concerns, and many others.

Benefits Realization

Project owners must think carefully about defining benefits and how they will be measured.  As necessary, sponsors must think through the timeframe for the realization of each benefit, especially the estimated timeline for the start of benefits accrual.

In particular, program stakeholders must carefully review how benefits realization schedules map to payback period and from the standpoint of benefits relative to a cash view and a balance sheet view.

For many strategic initiatives, most, if not all, of financial benefits begin to flow only after the project itself is executed.  Benefit plans are impacted most significantly by the set-up phase when employing a traditional waterfall model for project development and delivery.

For organizations with flexibility, it is sometimes helpful to consider an agile delivery model.  In this case, capabilities may be available to the organization in phases, which sometimes allows corresponding benefit flow to begin sooner.

Benefits Realization Management

Many organizations find the process of benefits realization management challenging to establish and even harder to maintain.

Sometimes, executive sponsors facing a discrepancy between benefits contemplated at project commission with benefits realized will point to delivery issues affecting the set-up period, changes in the market or overall economic conditions, or other causes for benefits realization shortfalls.

For specific projects in particular organizations, these factors and many others may be at issue. Accordingly, this makes the establishment of a standard benefits realization management template informed by real-time data all the more important to ensuring timely decisions on continued deployment of capital available for investment in strategic initiatives.

The likelihood of success

Business Case Financial Results

Achievement of financial benefits compared with actual costs incurred drive the KPIs organizations typically use to assess project health, the likelihood of success in terms of project execution, and attainment of anticipated outcomes.

For typical initiatives in most organizations, best practices suggest monthly tracking of benefits and costs to understand how the timing and level of each map to the cash flows outlined in the business case.  Stakeholders benefit significantly from viewing this information at a summary level from a plan, forecast and actual perspective.

Some companies prefer a standard forecast methodology that can be automated, based on the current actuals to date, combined with percentage completion, and any number of other factors.

Other organizations require project stakeholders to engage by directly updating the program forecast periodically.

Financial managers should be able to tie summary benefits information directly to details at any point when actuals and forecast data are updated.  While analysts can map much of the financial benefits data from a general ledger, data must be structured and recorded in a company’s financial systems with appropriate detail.

Also, analysts need a tool to source and record financial benefits data that do not exist as a general ledger credit or debit entry, especially cost avoidance financial information.

Further, business process owners should be able to do the same for measurable business outcomes, managing these benefits with similar rigor.

Data and systems architecture

Certifying Benefits

With appropriate data and systems architecture, organizations can automate a good deal of benefits tracking.

However, the savvy organization understands that benefits must be certified for the team to record them as realized.

Business, financial and technology stakeholders should review and confirm benefits data regularly to certify benefits realization.  A governance model around benefits realization that is standardized and harmonized across all disciplines gives organizations the visibility, transparency and accountability required for executives to place confidence in results reported for strategic initiatives.

This governance process serves teams best when it uses software that institutionalizes workflow and records all reviews, revisions and approvals.

Benefits certification is equally essential for validating financial and non-financial outcomes. Those responsible for results must be able to confirm, for example, that reported correctly is the incremental revenue attributable to an initiative or that the team achieved re-deployed headcount without adding FTEs elsewhere through a third party agreement.

Strategic Initiative Outcomes

Organizations can rapidly certify benefits with real-time access to information in a standard format, backed by a robust governance process.  Teams can deliver consolidated results in an executive dashboard that supports senior management in effective decision-making that is both on target and timely for impacting outcomes and optimizing capital.