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The Role of Intangible Benefits
A cost benefit analysis is a popular tool used to evaluate the total anticipated cost of a project compared to the total expected benefits. This determines whether a proposed implementation is worthwhile for a company or project team. It is relatively easy to estimate financial values for tangible items. However, many business owners and project managers fail to accurately estimate the monetary value of intangible costs and benefits, which are common cost benefit analysis errors that result in ineffective decision-making.
Two of the most common intangible items that pose the greatest problem in estimating financial returns are increased levels of customer and employee satisfaction. In order to accurately project monetary returns on increased levels of satisfaction, it is critical to understand the direct results of increased satisfaction. Once the results are identified, the monetary value can then be estimated by summing the resulting tangible items.
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Measuring Increases in Customer Satisfaction
Although it is difficult to objectively determine the financial returns of increased customer satisfaction, it is simple to identify the direct results of increases in customer satisfaction. The three direct results are increased sales, increased loyalty, and increased instances of recommending others to conduct business with the company.
To measure financial increases in sales as a result of enhanced customer satisfaction, one must evaluate sales patterns before similar implementations to sales values after the change, while holding all other variables constant to reduce extraneous influences. This observed difference is the most realistic and approximate estimation of one of the direct effects of increased customer satisfaction.
When considering increases in customer loyalty, it is important for project managers to consider not only increased sales to returning customers but also the likelihood of winning future contracts with repeat customers. Upon examining purchasing history of current customers, one can make a reasonable judgment on the level of influence that increased customer satisfaction and loyalty have on sales. Furthermore, additional monetary benefits include the profits expected from returning customers on new contracts.
The final component of increased customer satisfaction is estimating the financial impact that referrals have for a project team. One way to track referrals is to offer a monetary reward to current customers who successfully recommend new clients, which can then be evaluated to determine the frequency and success rates of the referrals.
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Measuring Increases in Employee Satisfaction
It is more difficult to measure financial returns on increases in employee satisfaction because many employee satisfaction benefits are also intangible. Therefore, to objectively and accurately measure returns on increased employee satisfaction, it is recommended that one focus only on the tangible benefits, which include reduced turnover, increased organizational commitment, and enhanced innovation and creativity.
Many studies suggest that the cost of turnover is one-and-a-half times an employee’s salary, when considering recruitment, selection, and training costs. Therefore, to monetarily measure the impacts of reduced turnover, one can evaluate the retention rates before and after similar implementations and calculate the expected cost of replacing employees who chose not to leave as a result of increased employee satisfaction.
Measuring increased organizational commitment can be more complicated, but when simplifying commitment to include only internal growth and advancement, one can easily estimate the cost savings associated with promoting from within rather than having to hire externally and train a replacement. This cost savings can be seen as one of the financial benefits of increased employee satisfaction.
Finally, when evaluating levels of enhanced innovation and creativity, one should examine the quantity of new services/products and any process improvements that speed up the production time. The revenue from the new products as well as the monetary value of the time saved in process improvements can be considered the final tangible benefit resulting from increased employee satisfaction.
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Although it is difficult to comprehensively measure intangible benefits, it is reasonable to conclude one can sum the financial returns on the tangible benefits directly resulting from the original intangible items in question.
Once a project manager or leader is confident in the resulting monetary estimations, one can download the sample this Cost Benefit Analysis Template and record the expected benefits of increased customer and employee satisfaction.