Cost Benefit Newsletter No. 52, 8th February 2005 'Does Time Equal Money in the Business Case? '
The most frequently used calculation in business case analysis is the "Time = Money" equation, where Benefits = (time saved) * (the cost of labor). Using this equation blindly, however, can result in seriously overstated benefits.
- If a new software application saves you a half hour time every day, what's that worth in real money?
- An extra week's training means that first-line service people are 10% more efficient. What's the extra 10% of time worth as a business case benefit? Is it worth the cost of the training investment?
- A streamlined loan application process means that bank loan officers need seven hours a day to do the work that used to require eight hours (a 12.5% time savings). Does that mean the business benefit for the new process is 12.5% of their salaries and overhead?
Questions like these arise all the time, because the most frequently used calculation in business case analysis is the "Time = Money" equation, where
Benefits = (time saved) * (the cost of labor).
Using this equation blindly, however, can result in seriously overstated benefits. A few years ago, for instance we worked with a large commercial bank that was considering implementing the streamlined loan process mentioned in the third bullet above.
Here were the raw data (the assumptions) for this calculation:
- Number of loan officers and sales people nationwide: 1,040
- Average annual salary plus overhead: $45,000
- Time saved: One hour per workday = 12.5% of work time saved
Benefit = (1,040) * ($45,000) * (12.5%) = $5,850,000
Is that value credible? Will the bank actually see the savings? The answer is "yes" only if the business case author shows convincingly that time savings turn into productivity at the value calculated. In the case of this bank, the IT director argued plausibly that loan officers and sales people would use their extra hour a day to process more loan applications and sell more financial services.
Other times, however, the time-equals-money formula stands on a weak foundation. The classic example is the software application or operating system upgrade that saves users 60 minutes a month compared to the old version. That works out to roughly 0.6% of work time. For an employee who costs the company, say, $60,000 a year in salary and overhead, the formula says the benefit is $375 per year—enough, maybe, to pay for the individual software user license with change left over. Multiply similar savings in a company with 20,000 computer users and the apparent benefit grows even larger.
But is it a "real" benefit that deserves a line in the business case cash flow statement? Only if users turn their extra 0.6% of time (about 3 minutes a day) into added productivity. It would be difficult to argue that point plausibly in most organizations.
I'm not suggesting cynicism here, just caution. It's probably a good idea to look carefully at operating costs and usage in this way anytime a serious change in workflow or methods is considered. However, the "time=money" equation is presented everyday through hundreds of online "ROI" tools and sales pitches, which are there--no secret--meant to sell something by making a financial case for the product. The "hidden" assumption has to be questioned whenever you estimate the value of time savings: Will the extra time really turn into additional productivity? If so, what is that really worth?
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