Business Benefits Explained
Financial, Non Financial, Intangible, Soft, and Hard Benefits Defined and Illustrated
Business Encyclopedia, ISBN 978-1-929500-10-9. Revised 2014-09-18.
Reaching objectives has value. Defining business benefits in terms of business objectives enables both financial and non financial benefits to be measured, valued, and compared.
Business benefit can be defined as an outcome of an action or decision that contributes towards meeting one or more business objectives. The business benefit concept is central in strategic planning and most forms of business case analysis, where business people evaluate investments and actions in terms of likely cost and benefit outcomes.
Some kinds of benefits are easier to verify, measure and value than others. For most business people, positive financial outcomes are readily accepted as business benefits and easily measured. Such outcomes include cost savings, cash inflows, and increased profits.
However, many people are uncertain about how to measure or value contributions to business objectives defined first in non financial terms, such as changes in key performance indicators for customer satisfaction, risk, branding, or quality of service delivery.
This entry explains and illustrates the reasoning for measuring and valuing all classes of business benefits. The benefits rationale is presented in the context of common benefit-related terms including
- Financial benefit, non financial benefit,
- Hard benefit, soft benefit,
- Tangible benefit, intangible benefit.
• Business benefits and business objectives in cost and benefit analysis
- Practical working definitions for cost and benefit
- Benefits have value because reaching objectives has value
• Financial vs. non financial benefits
• Soft vs. hard benefits
• Intangible vs. tangible benefits
• Key performance indicators KPIs: Making non financial benefits tangible
• Legitimizing benefits
• Assigning financial value to non financial benefits
- Example: The value of a reduced accident rate
Business benefits and business objectives in cost benefit analysis
Practical working definitions for cost and benefit
To some people thinking about costs and benefits, benefits are simply "good" outcomes and costs are simply "bad" outcomes. To others, "cost" means funds flowing out and "benefit" means funds flowing in. Benefit and cost analysts and those making strategic business decisions, however, need definitions for cost and benefit that provide a practical basis for recognizing, measuring, valuing, and comparing all classes of business benefits and costs. To meet this need, "benefit" and "cost" are better defined with reference to business objectives:
- A business benefit is an outcome of an action or decision that contributes towards meeting a business objective. Benefits have positive value for the business.
- A business cost is an outcome of a decision or action that works against meeting a business objective. Costs have negative value for the business.
Note incidentally that a "cost" is not necessarily an expense. An expense is defined as a decrease in owner’s equity caused by the using up of assets. Expenses are usually thought of as spending, expressed with a currency figure. Expenses are one kind of cost, but other kinds of costs are possible, as well.
These definitions may seem awkward at first, but they provide a way to bring both financial and non financial benefits and costs into the same analysis. In particular, these definitions support a line of reasoning that establishes the reality and importance of non financial costs and benefits.
Note also that by these definitions, a single action may have both cost and benefit outcomes. Recognizing both kinds of outcomes in this way lets the action be evaluated as a business investment. Spending funds on a marketing program (the action) has these outcomes:
- Cost: Spending is an expense (cost), which works against profit objectives.
- Benefit: The marketing program contribues towards increased sales revenues objectives.
Benefits have value because reaching objectives has value
In business, reaching objectives has value. Action for its own sake does not necessarily have value. In other words, actions and outcomes in the business environment have business value only when they contribute towards meeting business objectives. When contributions can be measured in financial terms, actions can be evaluated with investment metrics such as return on investment (ROI) or payback period.
The search for business benefits and their values begins by understanding the business objectives addressed by the action. Specific business objectives should be in view for every proposed investment, project, program, initiative, acquisition, alliance, partnership, product launch, reorganization, process revision, or any other significant change in the business environment.
Business benefits may appear in the form of progress towards high and low level objectives alike:
- Benefits = Progress towards high level, "strategic" objectives, for example:
- Grow annual sales revenues by 10%.
- Become industry leader in customer satisfaction.
- Establish brand leadership in the market.
- Become the industry leading low-cost provider.
- Benefits = Progress towards lower level, "tactical" objectives, for example:
- Reduce average customer wait time on call center phone by 50%.
- Increase product mean time between failure by 100%.
- Reduce office supplies expenses by 10%.
Business objectives that define business benefits, moreover, include many different classes of objectives, for example:Financial objectives
Increase earnings per share by 25%.
Increase profits by 10%.
Reduce costs in specific operational areas by 20%.
Shorten the average sales cycle time by 50%.
Increase the average order size by 40%.
Increase sales revenues by 10% (also a Financial objective).
Enter a new geographic market.
Achieve industry leading market share.
Branding and Image objectives:
Establish brand awareness for a new product line.
Achieve industry recognition for product quality.
Exceed the competition in customer satisfaction ratings.
Become the vendor of choice for small and medium size businesses.
Improve employee satisfaction survey scores.
Reduce employee annual turnover by 25%.
Operational and Efficiency objectives
Provide same day response to 100% of customer service calls.
Increase annual inventory turn rate by 50%.
Increase employee productivity by 10%.
Penalty or Problem Avoidance objectives
Achieve compliance with new environmental regulations.
Reduce the risk of laboratory equipment failure.
Improve data security.
And so on—the list of objectives that help define business benefits could extend indefinitely. Well-articulated and targeted objectives are the driving force in strategic business plans, project plans, program plans, product management, asset life cycle management, and funding requests.
When looking for business objectives that might be addressed by an action, do not overlook known business needs and known problems. Specific objectives are usually implied in any discussion of needs or problems. Employee turnover that is too high and too costly, for instance, is a problem that points to an objective: Reduce employee turnover rate.
Business people who propose actions to address specific objectives can use the reasoning illustrated below to establish, measure, and value expected business benefits.
Notice that actions undertaken to approach one objective may contribute to meeting other objectives as well: an action meant to improve product quality, for instance, may also contribute to meeting objectives for lower cost of warranty service delivery, improved branding, and improved customer satisfaction. The benefit (improved product quality) can receive business value from each objective it contributes to.
Financial vs. non financial objectives and benefits
Any of the objectives above may be very important to a company or organization, including both financial and non financial objectives (objectives defined and measured first in non financial terms). Both kinds of objectives can be important to businesses in private industry, government and non profit organizations.
Financial objectives and benefits
The highest level objective for profit making companies is typically stated as "earning profits." (Although the business school professor might prefer to say "increasing owner value" by making profits, which are either paid to owners as dividends or kept as retained earnings, thereby increasing owners equity). In any case, most other objectives in private industry exist at least in principle to support the high level profit objective. Any outcome of an action thatarguably contributes to the profit objective (such as increased sales revenues or cost savings) can be considered a business benefit. When it is possible to estimate the contribution to profit, then the benefit financial value is also known. Such might be the case for instance, if a marketing program (the action) is expected to bring an increase in profits (the outcome, or benefit). Expected contributions to profits, in other words, provide one basis for establishing and measuring benefits.
Businesses typically have other financial objectives that support the profit objective, such as "Increased sales revenues," "increased margins," "cost control," "staying within budget," "cost savings," or "avoided costs." Benefits (outcomes) that contribute directly to meeting these objectives may be called financial benefits.
Note that the highest level objectives for government and non profit organizations are not stated as "earning profits," but rather through mission statements about service delivery and a population served. These organizations, nevertheless, also pursue financial objectives for obtaining funding, creating and living within budgets, controlling and minimizing costs, and in some cases generating revenues. Outcomes that contribute to meeting such objectives are no less "financial benefits" than are similar contributions in private industry.
Non financial objectives and benefits
Not all business objectives are defined and measured first in financial terms. Objectives for customer satisfaction or company image, for instance, are usually defined first in terms of non financial key performance indicators.
Unfortunately, in the eyes of many business people, contributions to non financial objectives such as customer satisfaction or image are sometimes viewed as "second class" benefits, unworthy of serious consideration. Others may acknowledge that such objectives and benefits are important, but they are still unsure about how to measure them, value them, or compare them to financial objectives and benefits. In any case, the approach to dealing with non financial objectives and benefits requires a clear understanding of some commonly misused terms, including "soft" and "intangible benefits."
Soft vs. hard benefits
Some people in business classify benefits as soft benefits or hard benefits. While there is no established definition for either term, the frequent use of these terms implies that "soft" benefits are outcomes that may be uncertain, or unmeasurable, while "hard" benefits are more certain and measureable. In other cases, the terms "soft" and "hard" are meant to refer to non financial benefits and financial benefits, respectively.
Using these terms in this way inevitably positions benefits called soft as second class outcomes, of less weight or importance than so-called hard benefits. It is almost always more appropriate to avoid the terms "hard" and "soft" benefits, and instead classify benefits and objectives as discussed in the sections above, as either:
- Financial or non financial benefits and objectives
- Tangible or intangible benefits and objectives
Tangible vs. intangible benefits
The word tangible means "touchable," but the term is often used incorrectly as though it meant "financial." People sometimes say "intangible" when referring to objectives and benefits such as improved customer satisfaction, improved branding, improved employee morale, or reduced risk, because for them, presumably, the financial value of these outcomes is unclear.
Business objectives and business benefits are tangible if there is some kind of objective evidence they have appeared, by which they can be measured. Calling an objective or benefit intangible means simply there is no evidence it has appeared and no way to measure it. Objectives that are truly intangible serve no useful purpose in a business plan, business strategy, business model, or business case.
Key performance indicators KPIs: making non financial benefits tangible
Non financial objectives like those just mentioned can be very
important or even crucial to a company's strategy. The business
person seeking to understand the value of non financial
objectives or benefits must find acceptable tangible measures for
them, even if the measures are necessarily indirect and initially
Objectives and benefits having to do with customer satisfaction, for instance, may be extremely important to companies in highly competitive industries. High customer satisfaction no doubt supports other objectives for customer retention, average order size, length of the sales cycle, repeat business, and referral business. Improvement on all these factors should lead ultimately to financial gains.
But the objective itself—customer satisfaction—is a condition of the customer mind which cannot be measured directly, which leads some people to label the objective "intangible."
In such cases, however, it is reasonable to make inferences about customer satisfaction levels from indirect but very tangible measures such as:
- Customer satisfaction survey scores.
- Number, frequency, and severity of customer complaints.
- Customer opinions expressed in "focus group" studies (qualitative research).
- Customer retention rates or "turnover" (churn) / Repeat business rates.
Such measures are sometimes called key performance indicators (KPIs) or key performance measures (KPMs). The set of customer satisfaction KPIs collectively may be thought of as the organization's definition of "Customer satisfaction," for purposes of setting objective targets and measuring the value of business benefits. Customer satisfaction objectives may be expressed as KPI targets such as these:
- Achieve the highest percentage of customer 'excellent' ratings in the industry.
- Reduce the annual customer churn rate from 20% to 10%.
- Reduce customer complaints from the current 100 complaints/month to 50 or less.
The use of KPI targets in this way provides an approach for assigning value to business benefits from actions.
Not all business benefits appearing in a cost/benefit discussion are automatically regarded as "real," or having positive value that deserves consideration. Not all benefits, that is, are automatically seen as "legitimate." That may be especially true for outcomes that are contributions to non financial objectives, measured indirectly through key performance indicators.
If for instance, analysis looks forward to a cost savings under a proposed plan, the savings is readily accepted by most people as a "legitimate" benefit. If however, the analyst shows a $5M benefit coming from something like improved customer satisfaction, or improved employee satisfaction, or an improved company image, it cannot be assumed that all involved will automatically grant the benefit the same legitimacy—until they have been taken through the reasoning presented in this section and the next.
In the eyes of most business people, outcomes are readily accepted as legitimate business benefits if they are (1) tangible and measurable, (2) likely to follow from the action, and (3) contribute towards meeting an important business objective. To establish benefit legitimacy, the analyst may have to help others understand how the outcome meets each of these criteria.
Consider for instance the following action and expected benefit:
Proposed action: Specialized training for service delivery personnel.
Expected outcome (benefit): improved customer satisfaction.
1. Demonstrating that the outcome is tangible and measurable
The analyst shows that the outcome is tangible and measurable by referring directly to this organization's established KPI's for customer satisfaction (listed above) : Customer satisfaction survey scores, customer complaints, customer opinions, and customer retention rates.
2. Demonstrating that the outcome is likely to follow from the action
To show that the benefit is likely to follow from the action, the analyst can reason from several kinds of evidence, for example ...
- The content of customer complaints about service delivery.
- Surveys of returning and non-returning customers, identifying reasons for the choice to stay or leave.
- The experience of competitors in the same industry who score high on the same KPIs.
- Commentaries from industry analysts, and published reviews of the company's service delivery.
3. Demonstrating that the business objective addressed is important.
Outcomes are seen as legitimate benefits only if they address important objectives. Contributions to objectives that receive little management attention are not likely to carry much weight in business planning and decision support.
An objective can be considered important if it meets one or more of the following criteria:
- Management has set targets for the objective.
- Management has already invested resources towards reaching the objective target.
- The objective has a prominent position in business plans and management communications.
- Progress towards meeting the objective factors in the performance reviews of individuals, or evaluations of group performance.
Objectives that meet none of these criteria are poor candidates for legitimizing business benefits.
Assigning financial value to non financial benefits
Ultimately, value in the business world is best expressed either directly in financial terms, such as dollars, euro, pounds or yen, for instance, or else by comparison to something of known financial value. The business analyst will try, insofar as possible, to value business benefits in financial terms or, failing that, designate a non financial benefit as having more or less value than another benefit that does have known financial value.
Some non financial benefits can readily be given financial value because they directly impact financial objectives.
- An increase in "employee productivity" (the non financial benefit) may be associated rather directly with labor cost savings, or with avoided hiring costs, for instance.
- A reduction in customer churn rate (the non financial benefit) may be associated rather directly with the known costs of acquiring new customers, or the known loss of revenues and profits from departing customers and lost market share.
In other cases, the connection between KPI changes and financial value may not be so obvious. In those cases, the analyst will approach assigning financial value to the non-financial benefit in two steps:
Step 1. Establish an agreed and acceptable financial value for reaching the organization's overall tangible target for the objective.
Step 2. Establish an agreed and acceptable percentage of that value that should be credited to the specific action.
Organizations typically establish KPI's and targets for important objectives having to do with such things as:
- Image and branding
- Employee satisfaction survey scores
- Customer satisfaction survey scores
- Employee health, safety, and well being
- Quality of service delivery
- Product quality
- Recognition as a "Green" organization
- Recognition for positive contributions to the community.
There may be no direct and obvious connection between KPI targets for such objectives and financial gains or costs, but it is still reasonable to take Step 1 and ask: What is the value of reaching the target? There is not a single "one size fits all" approach to answering such questions for all objectives, but many times an acceptable answer can be reached by assessing:
- The contribution to increased sales or profits from reaching the objective.
- Costs that follow from not reaching the target.
- The cost of reaching the objective by the next least-costly approach.
- Simply the price management is willing to pay to reach the objective target.
As a "last resort" for answering the Step 1 question, the final suggestion above can be surprisingly successful in producing an acceptable, agreeable value for reaching a target. When management is willing to state a figure they would simply be willing to pay, to buy arrival at the target, management has in fact put a precise financial value on reaching the target.
If an acceptable value can be agreed for reaching the target, then it is also reasonable to take Step 2 and ask: What percentage of the the value from Step 1 should be assigned to the specific beneficial outcome? The value of the benefit can then be taken as the product of the Step 1 and Step 2 answers.
Example: The Value of a Reduced Accident Rate
Specialized employee safety training may be proposed as one of ten different action initiatives proposed by management meant to reduce the employee accident rate on the factory floor by 50%.
The analyst may ask: What is the financial value of the benefit (reduced accident rate) due specifically to employee training?
The Step 1 question asks: What is the overall value of the ten actions taken to reduce the accident rate by 50%? Some direct financial benefits can probably be estimated for reaching the target, of course, such as reductions in lost production time and reduced insurance premiums.
To all involved, however, such benefits do not capture the full value of a lower accident rate. Those obvious financial benefits do not factor in the value of reduced employee pain and suffering, reduced family distress, or improved employee morale, for instance. A more satisfying answer to the Step 1 question might be obtained simply by getting management agreement on a price they would be willing to pay to realize the lower accident rate.
Depending on the size of the company and its workforce, management might be comfortable with a figure such as $1M, or $10M, or something else. In any case, this will certainly equal the total currently budgeted for the ten safety initiatives, but it might very well exceed that total.
With a Step 1 figure in hand, the analyst can move to Step 2 and ask: What percentage of the Step 1 value should be credited to one specific action initiative, the employee training program?
Management may very well be decide to credit benefits to each of the ten initiatives in proportion to their individual costs, or in proportion to their estimated effectiveness reducing accidents, or by still other reasoning. In order to avoid over-valuing benefits, they may consciously choose a conservative percentage—say, 5%—but they will very likely not choose 0%.
Where the value of reaching the overall target is agreed as $10M (Step 1), and where the employee training program is granted credit for 5% of that (Step 2), the value of the training program benefit is thus established as 5% of $10M, that is, $500,000.
Answers to Step 1 and Step 2 questions may involve subjective judgements and it may or may not be possible to find quantitative answers that are agreeable and acceptable to everyone involved, for a given situation. However, in cases where the answers are agreed and accepted, the resulting benefit value is established.
Regarding the use of benefit values ...
- Benefit values established this way should not be viewed as expected revenues that will flow in to the organization if the training program is implemented.
- Benefit values established this way do provide a highly credible and rational basis for choosing actions, for decision support, and for evaluating business case results.
With this approach, benefit values for each of the ten safety initiatives can be established and compared to initiative costs with simple return on investment (ROI) analysis. This can provide guidance in cases where the safety program budget has to be reduced and management needs to know which initiatives should be cut, or where management wants to accelerate the accident rate reduction and needs to know which specific initiatives deserve increased investment.
For more on benefit valuation and in-depth illustrated examples, please see
By Marty Schmidt. Copyright © 2004-.