Cost Justification Process.

INTRODUCTION TO COST JUSTIFICATION©

The cost justification process is a method of gathering data from current operational processes and comparing that data against a proposed system's costs. The projected differences are viewed over a period of time and the result will tell you whether your new system is a good or bad investment. Cost justification applies to document imaging, document management, groupware, and workflow.

Many companies plan their capital investments and compare each investment against the others that are being proposed. Although different for each company, each potential investment is compared to others in terms of the return on investment (ROI) that will be achieved. Generally speaking, if the ROI for new high-speed reproduction center is better than the ROI for an imaging system, the reproduction center will have a better chance of getting funded. The bottom line measurement for many companies is comparing the potential new expenditure against what that money would earn if not spent.

The cost benefit analysis needs to be accomplished with as much accuracy as possible. It is the foundation upon which your image project is built and will become the basis for long-term evaluation of imaging technology. At its most simple form, a cost justification is composed of the following steps:

1. Analysis of Current Operations. Current operations are analyzed to determine and document the functions that are being performed, the resources that are used to perform those functions, and the volume of paper being processed. This information is then used to determine the cost of operations, by function, in the current manual environment.

2. Image Strawman Architecture. Once the current operation is analyzed, ERM system features are identified that can fully or partially automate the manual processes. Your job is to estimate the potential efficiency improvement for each function. Those estimates are applied against the current operations cost to project the cost of operations in the image environment. For example, if you have four customer service workers and you estimate ERM technology will automate 50% of their work, then the same four workers can do 50% more work or the current work can be accomplished by only 2 workers.

3. Strawman Equipment and Pricing. Once you have developed a strawman system architecture that will support the functionality of the work being done, and you have made your projections as to the improvements in efficiency for current operations, the next step is to determine how much equipment and at what price. One consideration that you may have, for example, is whether you want to have redundant equipment for key components such as scanners, printers, servers, etc.

4. Cost Justification Benefits. Benefits are determined by subtracting image operations costs from current operations costs. Projections of costs and benefits are made over anticipated system life, such as five years, to determine the return on investment (ROI), net present value, and cash flow.

Once the detailed analysis has been accomplished and you are satisfied that you have worked at a level of detail that will satisfy your management team, the data can be manipulated and a number of "what-if" scenarios can be prepared. For example, what if the development software costs are off by a factor of 35%? How will that affect the investment? What if hardware prices and quantities are underestimated? How much incremental change can the model stand before the investment turns negative? Or, what will it take to turn a negative analysis into a positive analysis?

This brief explanation of cost justifications is to provide you with an overview of the process itself. We suggest that prior to starting your analysis, you consult with your financial department and explain what you are going to do and what will be the intended result. It is entirely possible that your CFO has additional ROI indicators that should be looked at and prepared for at the conclusion of the study. Certain other information will be required from the financial people, such as your company's cost of money, depreciation method, and depreciation time.

The work accomplished will provide you with an insight into your company's operations that perhaps few managers will share. Based on this knowledge, and the benefits that can be achieved through ERM technology, the detailed data behind the numbers will become a solid foundation for your system request.

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