Annex 4 - Cost benefit analysis methodology

Estimated or exact approach:

Not all services require the same level of analysis. It is recommended that the level of detail corresponds to the complexity and/or investment cost associated with the common service. The more costly or more complex the investment, the more detailed the CBA needs to be. Cost can be assessed using two different approaches: the exact approach and the estimated approach.

• Exact approach: If the data is available and it is cost effective to do so, an exact approach draws on actual and quantitative data from agency databases, actual data from business process maps (BPM) such as time expenditure/labour cost, and quality surveys. This data supports the establishment of cost-avoidance targets within the BOS Results Framework. The advantage is more accurate data. The disadvantage is higher transaction cost.

• Estimated approach: If exact data is not available an estimated approach provides a valuable indication of trends and potential change. The CBA draws on approximate figures from alternate regional or country data for similar costs. The estimated approach provides more ‘directional data’, meaning a rough idea of the anticipated impact or change over time. The advantage is a faster transaction and lower transaction cost. The disadvantage is lower accuracy of data.

The OMT decides which approach to use in their specific country context. Local needs, capacity, and the cost of data collection generally influence which combination of approaches are used. Some services are analyzed with the exact approach, e.g. using actual procurement figures. Some services are analyzed using the estimated approach, e.g. business process maps, or activity-based costing using standard data for HR, or general costs for ICT from an alternate country or region.

Methodology:

The detailed CBA starts with the identification of direct monetary and labour costs (one-time/investment costs and recurring costs) of a service being implemented individually by each agency minus the estimated cost of implementing the service collaboratively. The final amount is the expected cost avoidance.

• Monetary costs - are the cash investments needed to establish and implement a service.

  • One-time monetary costs – are the upfront one-time only investments that need to be made to establish the common service, for example the cost of advertising for establishing LTA, or the cost of procuring equipment or technical expertise to establish a service (IT equipment, solar panels, GPS technology, database software).

  • Recurring monetary costs – are the ongoing costs of maintaining the established common service, for instance periodic maintenance of equipment or upgrade of software.

• Labour Costs – refer to the cost of labour (staff) to establish and implement a service. Labour costs (time) are converted into a dollar value and calculated using activity-based costing or process maps to list all involved labour (process steps and time required) in any one service and to then estimate the total labour cost.

  • One-time labour costs – the upfront and one-time only labour costs of establishing a service, for example the labour costs of rolling out a procurement process for establishing an LTA, or one-time installation of wiring for new shared technologies.

  • Recurring labour costs – the ongoing labour costs of maintaining a common service, for example LTA renewal processes, staff implementation of any one common service e.g. reception or help desk services.

Examples of one time and recurring monetary and labour costs and cost avoidance: