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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.
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
• 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
Benefits from applying change
management
• 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
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.
• 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:
o What
does "adopting the change" mean for this group?
o How would you
measure if someone had "adopted" the change in their day-to-day work?
•
Ultimate utilization
o Define utilization for this group.
o How
would you measure how many people in the group have adopted the change?
• Proficiency
o What would adopting the change proficiently
mean?
o How would proficiency be demonstrated?
o How would you
measure it?
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 What percentage of
these
people doing their job differently? benefits
result from people
doing there job 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.