Business Benefits Explained
Financial, Non Financial, Intangible, Soft, and Hard Benefits Defined and Illustrated
Business Encyclopedia ISBN 978-1-929500-10-9. Revised 2014-04-17.
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, projected 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 benefi, and 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
- Financial objectives and benefits
- Non financial objectives and benefits
• Key performance indicators: intangible vs. Tangible benefits
• Soft vs. hard benefits
• Legitimizing benefits
- The benefit is likely
- The benefit is tangible and measurable
- The benefit contributes to an important business objective
• Measuring benefit value
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. 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 in financial terms. 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, even though the objective list includes both financial and non financial objectives (objectives defined and measured first in non financial terms). Both kinds of objectives, moreover, can be important to businesses in private industry, but also to government and non profit organizations outside of the private sector.
Financial objectives and benefits
The highest level objective for profit making companies is typically stated as "making profits." (Although the business school professor might prefer to say "increasing owner shareholder value." However, companies increase shareholder value precisely by making profits, which are either paid to owners as dividends or which are 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 that arguably 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's 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 or 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 organizations or non profit organizations may not be stated as "profits," but rather in terms of a mission statement having to do with 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. Some of these may in fact be called non financial strategic objectives, when they are critical to the organization's survival and growth.
in the eyes of many business people, benefits defined as
contributions to non financial objectives (such as customer satisfaction
or organizational image) are sometimes viewed as "second class"
benefits, unworthy of serious consideration in the business case or
other form of business analysis. Others may acknowledge that such
objectives and benefits are important, but they are still unsure about
how to measure them, value them, compare them to financial objectives
and benefits, or otherwise bring them into business analysis or business
The approach to dealing with non financial objectives and benefits requires a clear understanding of some commonly misused terms, including "intangible" and "soft benefits."
Key performance indicators: Tangible vs. intangible benefits
Several benefit-related terms are frequently misunderstood or used in misleading ways. including the terms intangible benefits (discussed in this section), and "soft" or "hard" benefits (next section).
The word tangible, for example, 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. However, if an objective or benefit outcome is truly "intangible," that means simply there is no evidence it has appeared and no way to measure it. Business objectives and business benefits are tangible if there is some kind of objective evidence they have appeared, by which they can be measured.
Objectives that are truly intangible serve no useful purpose in a
business plan, business strategy, business model, or business case.
Objectives like those just mentioned, however, can be very
important—crucial to a company's strategy—even though they are defined
and measured first non financial terms. 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. There may be no doubt that high customer satisfaction supports other objectives having to do with such things as 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 including increased sales revenues, lower selling costs, and higher profits. 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 kind of customer complaints.
- Customer opinions expressed in "focus group" studies (so-called qualitative research).
- Customer retention rates or "turnover" (churn) / Repeat business rates.
Such measures are sometimes called key performance indicators (KPIs) or, equivalently, key performance measures (KPM.s). KPIs (or KPM.s) are taken as tangible measurable evidence of factors that may not be measurable directly, such as "Customer satisfaction."
The set of customer satisfaction KPIs collectively may be thought of as the organization's definition of "Customer satisfaction," for purposes of setting targets for objectives and measuring the value of business benefits. A target may be set, for instance, as "Achieving the highest percentage of customers 'excellent' ratings in the industry" Other targets for objectives might be expressed as "Reducing annual customer churn rate from 20% to 10%," or "Reducing the monthly number of customer complaints from the current 100 complaints/month to 50 complaints/month or less."
Key performance indicators also support an approach for assigning value to business benefits from actions. If, for instance, a proposed action (e.g., specialized training for customer service professionals) should lead to a measurable change in a K.P.I. (for example, reduction of customer complaints by 20%), the value of that benefit can be assessed in the context of the overall objective target and the known value of reaching the overall target. (See the discussion on measuring benefits, below.)
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 clearly implies that "soft" benefits are outcomes that may be uncertain, or unmeasurable, while "hard" benefits are more certain and subject to quantitative measurement. 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
The business analyst will attempt, in insofar as possible, to assign a credible financial value to non financial benefits, by connecting them to a financial objective or, failing that, at least make the benefit tangible and show in other ways that it is important.
As mentioned above, objectives and benefits that are truly intangible serve no useful purpose in a business plan, business strategy, business model,cost and benefit analysis, or business case, because there is no way to measure them or know when they appear. The challenge for the business analyst is to make them tangible, even when that involves indirect measurement through key performance indicators.
It sometimes comes as a surprise to first-time business case builders, or those engaged in other forms of business analysis, that not all business benefits are automatically seen as legitimate in the eyes of some business people. That may be especially true for benefits that are contributions to non financial objectives, measured indirectly through key performance indicators (benefits such as improved customer satisfaction, or improved company image, for instance).
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, business benefits are readily accepted as legitimate if they meet these criteria:
- The benefit is likely.
- The benefit is tangible and measurable.
- The benefit contributes towards meeting a business objective that is important.
To establish legitimacy of an expected non financial benefit, the analyst may have to help others understand how the benefit meets each of these criteria.
The benefit is likely
The analyst may show in cause-and-effect terms how the outcome (the benefit) results from the action, and how that contributes to a business objective. Consider for instance the following situation:
Proposed action: specialized training for service delivery personnel
Expected outcome (benefit): improved customer service delivery
To show that the benefit is likely, the analyst may refer, for example, to the content of customer complaints about service delivery, or to experience elsewhere with similar training and service delivery, or simply to management judgment on areas of service delivery needing improvement.
The benefit is tangible and measurable
In this case, quality of service delivery may be measured by such tangible measures as: time to complete service requests, successful or non successful resolution of customer problems, and customer feedback on the service incident.
The benefit contributes to an important business objective
The final step in assuring that the benefit is granted legitimacy is showing why or how the benefit should contribute to an important business objective, such as improved customer satisfaction.
For this, the analyst must explain why expected improvements in quality of service delivery (time to complete service requests, successful or not successful resolution of the customer problem, and customer feedback) should impact measures of customer satisfaction (as measured with K.P.I.s such as customer survey scores, numbers of customer complaints, and the repeat business rate).
Note that importance of the business objective is a requirement for establishing benefit legitimacy. Contributions to objectives that management pays little attention to 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.
Measuring benefit value
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 savings in labor costs, or in labor avoided costs, for instance.
Continuing the example from the previous section, a non financial benefit such as "improved service delivery" may contribute towards meeting an important non financial business objective, such as "improved customer satisfaction." What is the benefit worth in financial terms?
Such questions can be approached by asking first: What is the value of reaching the target for the objective itself? A company, for instance may have set targets for the objective's K.P.I.'s, such as: Improve the percentage of customers rating customer service as "excellent" from 50% to 90%, and decrease the number of customer complaints per month by 50%, and increase the percentage of customers who order again from 50% to 75%.
It is reasonable to ask: What is the financial value of reaching these targets? There not a single 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.
If an acceptable value can be agreed for reaching the target, then it is also reasonable to ask, and judge, the value of a benefit contribution that achieves, or partially achieves, the objective target.
For in-depth illustrated examples of benefit valuation, please see
By Marty Schmidt. Copyright © 2004-.