Effective Date: 7/6/93

Series: Information Resources Management

Part 375: IRM Program Management

Chapter 7: Benefit/Cost Analysis in Support of IRM Decisionmaking

Originating Office: Office of Information Resources Management

7.1 Purpose. This chapter prescribes policies and guidelines for the performance and use of benefit/cost analysis to support information resources management (IRM) decisionmaking. It prescribes the use of benefit/cost analysis in planning, budgeting, developing, acquiring, or replacing Federal information processing (FIP) resources used by bureaus and offices in support of missions, programs, and administrative activities.

7.2 Application and Scope. This chapter applies to all bureaus and offices of the Department. It also applies to all FIP resource projects undertaken or services performed by contractors or other Government agencies on behalf of Departmental organizations. Benefit/cost analysis is valuable in all IRM decisionmaking. The depth or extent of the analysis should always be appropriate to the level of planned complexity and investment. A benefit/cost analysis for a single personal computer can be as simple as comparing the cost of one computer to another with the identical capabilities. The benefit/cost analysis for a large or major FIP resource project will involve much more significant study and evaluation of relative values and alternatives. Appendix 1 provides recommended guidelines for performing benefit/cost analyses of FIP resource projects.

7.3 Background. Benefit/cost analysis is a management tool, which is especially valuable in IRM decisionmaking. It provides for a systematic approach to evaluating FIP resource project proposals on an economic basis, particularly where several alternative approaches are feasible.

While benefit/cost analysis is useful, it is not an end in itself and should not serve as the sole basis for a decision. Rather, it is only an input to the decisionmaking process. Other factors may outweigh economic considerations in the final decision. A benefit/cost analysis also serves as an important element in the project management audit trail, documenting the basis for decisions or actions taken with respect to a project.

7.4 Definitions. Common terms related to the performance of a benefit/cost analysis are defined below. Readers desiring further explanation of terms used may consult the Federal Information Processing Standard (FIPS) Pub 64, "Guidelines for Documentation of Computer Programs and Automated Data Systems for the Initiation Phase," August 1979 and Department of the Interior, Office of Information Resources Management's (PIR), "A Project Manager's Guide to Benefit/Cost Analysis of Information Technology Investments," January 1989.

A. Benefit/Cost Analysis. A systematic approach for evaluating the relative value of proposed projects. A benefit/cost analysis can be used to compare alternative means of implementing a specific project or compare the relative values of a number of competing project proposals. It can also be used to assess the economic consequences of decisions that have already been made and help managers establish future courses of action. A benefit/cost analysis is sometimes referred to as an economic analysis.

B. Benefits. Improvements in mission performance or cost savings expected to be received or achieved over a given time period as a result of a proposed investment. Benefits may be categorized as:

(1) Tangible Benefits. Improvements in mission performance, effectiveness, or cost savings that can be quantified in dollars or other material terms; or

(2) Intangible Benefits. Improvements in mission performance or effectiveness that cannot easily be quantified in dollars or other material terms, but are considered worthwhile or beneficial.

C. Present Value Analysis. An analytical process used to equate all future costs and benefits to their equivalent present worth for comparison purposes.

D. Discounted Payback Analysis. An analytical process for determining the time period over which accumulated present value benefits offset the total present value investment costs of a proposed alternative.

E. Benefit/Cost Ratio. A representation of the relationship between benefits and the investment cost incurred in producing the benefits (e.g. increases in productivity or cost savings). This indicator is used to assess alternatives having unequal costs and unequal benefits. Benefits and costs used to calculate the ratio are defined in terms of their present values (PV). The highest ratio value indicates the most cost effective alternative, and the one alternative which should be recommended, provided all else is equal.

F. Return on Investment (ROI). A measure of the net benefit expected over the life of a project compared to the planned level of investment. ROI is usually expressed as a percentage.

G. Incremental Cost Analysis. A technique for identifying the amount of additional resources required or costs incurred to acquire some additional capability or benefit within a given alternative.

H. Sensitivity Analysis. A technique for assessing the extent to which changes in assumptions or input variables to a benefit/cost analysis will affect the output or results of the analysis, particularly the preference ranking of alternatives.

7.5 Responsibilities.

A. Office of Information Resources Management (PIR). PIR is responsible for:

(1) Prescribing policies for performing and using benefit/cost analyses in IRM decisionmaking.

(2) Reviewing and approving benefit/cost analysis reports prior to their submission to Congress, Office of Management and Budget (OMB), or other oversight agencies.

(3) Overseeing bureaus' effectiveness in performing and using benefit/cost analyses in support of IRM decisionmaking.

(4) Recommending Departmentwide priorities and strategies, based on results of benefit/cost analyses, to the Secretary, Deputy Secretary, and Assistant Secretary - Policy, Management and Budget (PMB).

B. Program Assistant Secretaries. Program Assistant Secretaries are responsible for:

(1) Including benefit/cost analysis results in the IRM decisionmaking process for establishing mission priorities and strategies.

(2) Ensuring that bureaus implement the policies and procedures of this chapter pertaining to the performance and use of benefit/cost analysis.

(3) Reviewing and approving benefit/cost analysis reports, and validating findings prior to their submission to the Information Resources Management Review Council (IRMRC) or the Assistant Secretary - PMB.

C. Heads of Bureaus and Offices. Heads of bureaus and offices are responsible for:

(1) Using benefit/cost analysis results as a management tool in establishing FIP resource program priorities.

(2) Establishing a management decision process for FIP resource projects which incorporates benefit/cost analysis results.

(3) Implementing the policies and guidelines prescribed by this chapter.

(4) Documenting and submitting benefit/cost analysis reports to the Office of the Secretary to support budget requests, acquisition approvals, or information system life cycle management approval requests.

(5) Ensuring bureau benefit/cost analysis methods are effective, and bureau personnel are adequately trained in performing and using benefit/cost analysis as a management tool.

7.6 Policy. It is the policy of the Department to employ benefit/cost analysis principles and findings to support IRM decisionmaking.

7.7 Requirements and Procedures. An analysis will be performed and documented whenever information resources investments are planned and FIP resource acquisition or development projects are implemented. Benefit/cost analysis also will be used as an evaluation tool in assessing the cost effectiveness of existing information resources assets and operations. The depth or extent of the analysis should be appropriate to the level of planned investment. Appendix 1 provides recommended guidelines for performing benefit/cost analyses of FIP resource projects.

A. Requirements for Performing Benefit/Cost Analyses. Bureaus and offices will perform and document benefit/cost analyses as outlined below:

(1) IRM Budget Requests. A benefit/cost analysis will be performed whenever budget requirements are identified to support proposed FIP resource projects. The benefit/cost analysis will be considered a part of the justification for the requested funds and/or staff positions. When a planned project is expected to require a major investment (over $25 million in total life cycle costs), a benefit/cost analysis will be provided with the budget request. For a major investment the benefit/cost analysis will be included with the budget request as OMB Circular No. A-11, Exhibit C. For FIP resource projects requiring less than a major investment, a benefit/cost analysis will be completed prior to the budget request and retained with the life cycle management documentation.

(2) Acquisition of Information Technology and Services. A benefit/cost analysis will be performed whenever a project is planned for the acquisition of FIP resources (automated data processing (ADP), telecommunications, and office automation) or services.

(3) Development or Upgrade of ADP Application Systems and Data Bases. A benefit/cost analysis will be performed whenever a project is planned for development or upgrade of an ADP application system or data base.

(4) Assessment of Ongoing Operations and Services. A benefit/cost analysis will be performed as a part of the assessment of existing major ADP application systems or information technology facilities and services. Assessments include Office of the Secretary and bureau management reviews, Office of the Inspector General (OIG) audits, and assessments conducted under the Federal IRM Review Program. The results of a benefit/cost analysis should aid in assessing the cost effectiveness of current operations and in identifying alternatives for improving productivity or reducing operations costs.

B. Submission of Benefit/Cost Analysis Reports to the Office of the Secretary

(1) Initial Submission of Benefit/Cost Analysis Reports. Benefit/cost analysis reports will be submitted to the Office of the Secretary (Attn: PIR) at the time requests are made for:

(a) Office of the Secretary Budget Approvals. While a benefit/cost analysis should be completed for all FIP resource projects prior to budgeting, only completed benefit/cost analysis reports for projects exceeding $5 million in total life cycle costs need be submitted to the Office of the Secretary (Attn: PIR).

(b) Approvals of Major Application System Developments or Upgrades. While a benefit/cost analysis is to be performed by bureaus for all planned application system developments or upgrades, reports only need be submitted to the Office of the Secretary (Attn: PIR) for projects that exceed $5 million in total life cycle costs.

(2) Submission of Updates to Benefit/Cost Analysis Reports. For multiyear or projects over $10 million in life cycle costs, benefit/cost analysis reports should be periodically refined and updates provided to reviewing/approving authorities (refer to 376 DM 10 and associated handbooks for requirements for updating benefit/cost analyses for application systems). Large dollar projects requiring multiyear budget authority will specifically require updated benefit/cost analysis reports prior to approval of subsequent budget increments.

C. Use of Benefit/Cost Analyses in Decisionmaking and Approvals.

(1) Use of Benefit/Cost Analyses in Decisionmaking. Benefit/cost analysis results will be used to support decisionmaking by bureau and Office of the Secretary managers and approval officials. Benefit/cost analysis findings should be used to aid in prioritizing and approving or disapproving specific project proposals. Following the guidance of OMB Circular A-11, "Preparation and Submission of Budget Estimates", Section 43.2(C), paragraph (2), specific project proposals should provide an anticipated minimum 10 percent return on investment (ROI).

For initiatives which show an ROI of less than 10 percent, additional justification must be provided to supplement the benefit/cost analysis. This justification must show that the proposed initiative is either specifically required by statute or the initiative will result in quantifiable, but non-economic, improvements to the bureau's ability to perform valid missions. The relative weight or bearing of benefit/cost analysis findings in approval/disapproval decisions should be formally documented and preserved as a part of the audit trail for the planning and implementation of a major FIP resource project proposal.

(2) Office of the Secretary Approvals of Benefit/Cost Analysis Reports. Project proposals (with accompanying benefit/cost analysis reports) submitted for Office of the Secretary (including IRMRC) approval will be forwarded first to the appropriate Program Assistant Secretary. Program Assistant Secretaries are responsible for validating the underlying mission requirements for each proposal and assessing the relative worth and attainability of cited benefits. After Program Assistant Secretary approval, project approvals will be forwarded through the Assistant Secretary-PMB, to PIR and/or IRMRC as required for further review or final approval.

D. Benefit/Cost Analysis Methods and Standards. Various analytical methods or tools may be used in performing benefit/cost analyses. A specific methodology is not required; however, FIPS Pub 64 and Departmental/PIR publication, "A Project Manager's Guide to Benefit/Cost Analysis of Information Technology Investments," provide the essential guidelines for documenting benefit/cost analyses. The selected benefit/cost analysis method should provide the means for addressing all costs associated with a project or proposal and both tangible and intangible benefits. Benefits should be quantified whenever possible.

Care must be taken to include in the analysis all development/start-up costs and operational costs including: equipment, software, software conversion, data communications, personnel, direct support services, travel, training, space occupancy, supplies and utilities, security and privacy, contractual services, and overhead costs. The selected analysis method should include the means for performing present value analysis, discounted payback analysis, sensitivity analysis, and computation of benefit/cost ratios. OMB Circular A-94, "Discount Rates to Be Used in Evaluating Time Distributed Costs and Benefits," provides the discount rates to be used in making present value cost and benefit calculations.

Bureaus and offices should ensure that benefit/cost analysis procedures are effective, and personnel performing these analyses are adequately trained.

E. Benefit/Cost Analysis Guide. The Department has published "A Project Manager's Guide to Benefit/Cost Analysis of Information Technology Investments," and has adopted it for Departmentwide use. This project manager's guide may be obtained from PIR.

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1. Introduction. This Appendix provides some general guidelines for performing benefit/cost analyses for Federal information processing (FIP) resource projects. These guidelines, together with the Departmental/PIR "A Project Manager's Guide to Benefit/Cost Analysis of Information Technology Investments," are recommended for use by all bureaus and offices planning new initiatives and investments in information technology or services. The guidelines are applicable to a wide range of projects; however, unique considerations of particular Federal information processing (FIP) resource projects may require some deviations from the guidelines.

2. Bases for Guidelines. The guidelines provided in this Appendix are based on the following postulates:

A. The higher the level of planned investment, the more detailed the benefit/cost analysis should be to improve confidence in investment decisions and reduce the risks of making ill-advised decisions.

B. The lower the level of investment, the more streamlined the analysis process should be, though a high degree of confidence in the investment decision should still be present.

C. Projects requiring high dollar investments often include levels of high uncertainty or risk; therefore, a combination of analysis techniques is required to provide a full understanding of these projects and make good management decisions.

D. The higher the planned investment level, the greater the need to consider a wide range of alternatives including mission performance alternatives, feasible organization/management alternatives, and IRM alternatives. This postulate is based on the recognition that sometimes it is more beneficial to target investments towards improving performance and management of the basic mission than to invest in technology for support of an existing inefficient or ineffective mission performance structure.

3. Recommended Guidelines.

A. Formulating Alternatives. One of the early steps in preparing for a benefit/cost analysis should be to identify a feasible set of alternatives that can be subjected to more detailed examination. The set of alternatives selected for further analysis may be viewed as originating from three main areas, each of which may include several more narrowly focused alternatives:

(1) Mission performance alternatives;

(2) Management alternatives; and

(3) IRM (technical) alternatives.

Several iterations of benefit/cost analyses and restructuring of alternatives may be required to yield complete, satisfactory results and serve as a suitable basis for making management decisions.

In formulating alternatives, bureaus should be aware of OMB's guidance to agencies for preparing benefit/cost analyses for new budget initiatives, which is included in the annual updates to OMB Circular No. A-11, "Preparation and Submission of Budget Estimates." The guidance includes the following:

B. Analysis of Alternatives. A set of at least two alternatives to the proposed approach is essential to test the validity of the analysis. The set of alternatives developed should:

(1) Include at least one other way of providing a similar level of services as the proposed approach;

(2) Include a scaled-down approach that is less ambitious than the proposed approach; and

(3) Contain only reasonable and technically feasible options.

In most cases, one alternative should be a "baseline" approach that maintains existing levels of service with changes to existing systems kept to the minimum required to meet mission requirements.

Bureaus and offices should keep the above guidelines in mind during the process of formulating alternatives.

C. Selecting Benefit/Cost Analysis Techniques. There are many techniques that can be used to analyze the economic considerations of proposed projects. The purpose of applying these techniques is to provide differing views of a particular project to gain better management insight and assist in the decisionmaking process. For example, performing a discounted pay-back analysis provides a view of how much time must expire before a project, or an alternative, begins to yield a net positive benefit compared to the status quo. A cash flow analysis provides a view of the funding requirements for a project or alternative and valuable information for budget planning purposes. The selected benefit/cost analysis techniques for a particular project should be guided by the planned level of investment and other specific management needs or concerns associated with the project. This Appendix provides recommended benefit/cost analysis guidelines. These guidelines are found in paragraph 3.

D. Factors Bearing on Decisionmaking. A benefit/cost analysis often will be only one of many factors influencing decisionmaking. The higher the level of investment, and the more complex the project, the more likely other noneconomic factors will have a major influence on the final decisions relating to a project.

E. Recommended Benefit/Cost Analysis Guidelines for Differing Levels of Investment. The guidelines summarized in this Appendix address the types of alternatives and benefit/cost analysis which should be applied to IRM projects as a function of the planned level of investment. These guidelines are found in Paragraph 2. These guidelines should be considered only as a starting point in planning for the analysis. The analysis techniques ultimately selected should be tailored to meet the special management needs of each particular project, considering the probable impacts or importance of the required decisions.

7/6/93 #2978

Replaces 7/20/87 #2752