Business benefit can be defined as an outcome of an action or decision that contributes towards meeting business objectives.
That definition serves well for many business planning and business analysis needs. Defining business benefits in terms of business objectives provides a practical basis for measuring, valuing, and comparing both financial and non financial benefits.
Financial vs. Non Financial Benefits.
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. Those pursuing these activities learn quickly, however, that some kinds of benefits are easier to measure and value than others.
- Most business people readily accept positive financial outcomes as business benefits. These are easy to measure in terms such as cost savings, revenue growth, cash inflows, or increased profits.
- Many people, however, are uncertain about how to measure or value contributions to business objectives they define in non financial terms. These may include, for instance, changes in key performance indicators for objectives having to do with:
- Customer satisfaction
- Employee engagement.
- Risk reduction
- Quality of service delivery.
- Company image.
Measure and Value All Benefits.
This article explains and illustrates a rationale for measuring and valuing all classes of business benefits. The benefits rationale appears in context with common benefit-related terms including:
- Financial benefits and non financial benefits.
- "Hard" benefits and "soft" benefits.
- Tangible benefit and intangible benefit.
- What is a business benefit?
- Using benefits and business objectives in cost and benefit analysis.
- How do business benefits receive value by reaching business objectives?
- Financial vs. non financial objectives and benefits. What are the differences?
- What is the meaning of "soft benefits? How do they compare with "hard benefits"?
- Intangible vs. and intangible benefits. How are the different?
- How are key performance indicators KPIs used to make non financial benefits tangible?
- Legitimizing non financial benefits.
- Assigning value to non financial benefits.
- Example case with subjective value judgments.
Practical 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. However, such definitions have little practical value for analysts, and decision makers. They need instead cost and benefit definitions that provide a practical basis for recognizing, measuring, valuing, and comparing all classes of business benefits and costs.
For those purposes, benefit and cost definitions are more useful when they refer to business objectives:
- A business benefit is an outcome of an action or decision that contributes towards reaching business objectives.
- A business cost is an outcome of a decision or action that works against reaching business objectives.
Costs Are Not the Same Thing as Expenses.
Note incidentally that a business cost is not necessarily an expense. Cost is a broader term that includes expenses but other kinds of outcomes or events as well. Exhibit 1, below, summarizes the kinds of events that qualify as costs for purposes of business analysis.
Accountants and financial specialists define expense formally as a decrease in owner’s equity caused by using up assets. More broadly, however, most business people simply think of expenses as spending, and many use the terms expense, expenditure, and cost interchangeably. For more on the meanings of individual terms in Exhibit 1, see Expense.
For those interested in cost - benefit analysis, however, expenses are one kind of cost. But other kinds of costs are possible, as well.
Financial and Non Financial Costs and Benefits in the Same Analysis
These definitions may seem awkward on first reading. However, they provide a way to bring both financial and non financial benefits and costs into the same analysis. And, they are especially useful when you must show, beyond doubt, that non financial benefits are real and important.
Note also that by these definitions, an action may have both cost and benefit outcomes. And, recognizing both kinds of outcomes this way lets the analyst treat the action as a business investment. For instance, spending on a marketing program (the action) could have these outcomes:
- Cost: Spending expense is a business cost, because it works against meeting profit objectives.
- Benefit: The program will increase sales revenues. This is a business benefit because it contributes towards meeting sales objectives.
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 setting have business value only when they contribute towards meeting business objectives. And, when contributions have financial value, they can be analyzed with investment metrics such as return on investment (ROI) or payback period.
Consequently, the search for business benefits and their values begins by understanding which objectives the action addresses. In fact, specific business objectives should be in view for every proposed:
- Strategy change.
- Re-engineering plan.
- Process revision.
- Product launch.
Benefits Come From High and Low Level Objectives Alike.
Benefit outcomes may appear in the form of progress towards high and low level objectives alike. For example:
- Benefit = Progress towards high level strategic objectives:
- 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.
- Benefit = Progress towards lower level tactical objectives:
- 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%.
Benefits Come From All Classes of Objectives.
Business objectives that define business benefits may include many different classes of objectives. For example:
Increase earnings per share by 25%.
Increase profits by 10%.
Reduce costs in specific operating areas by 20%.
Shorten average sales cycle time by 50%.
Increase average order size by 40%.
Increase sales revenues by 10%.
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 competitors on 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 service calls.
Increase annual inventory turn rate by 50%.
Increase employee productivity by 10%.
Penalty or Problem Avoidance objectives
Achieve compliance with 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. Objectives like these are the driving force in strategies, business plans, and action proposals of all kinds. As a result, those who pursue such objectives can use the reasoning below to demonstrate business benefits.
When looking for business objectives that an action might address, do not overlook known business problems and needs. Remember that specific objectives are usually obvious in any discussion of needs or problems. When employee turnover is high and costly, for instance, the problem points to an objective: Reduce employee turnover rate.
An Action May Address Multiple Objectives
Notice that actions for approaching one objective may help reach other objectives as well. Acting to improve product quality, for instance, may also help meet objectives for lower warranty service costs, branding, and customer satisfaction. The benefit (higher product quality) can receive business value from each of these objectives.
Any of the objectives above may be important to a company organization. This means that important objectives may include both:
- Financial objectives.
These are defined and measured in financial terms, such as cost savings, sales revenues, or profits.
- Non financial objectives.
These are defined and measured first in non financial terms. These may include changes in key performance indicators, accident rate, or customer satisfaction survey scores.
Both kinds of objectives can be important in private industry, government, and non profit groups. Both kinds can, in fact, represent strategic objectives for these groups.
Financial Objectives, Financial 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 earning profits.") Companies can use profits only two ways.
- Firstly, pay profits directly to owners as dividends.
- Secondly, keep profits 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 action outcome that arguably contributes to the profit objective qualifies as a business benefit. Note firstly that outcomes such as increasing sales revenues, or cost savings meet this criterion. When one can 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) raises profits, by bringing revenue increases that exceed expense increases. 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. All outcomes that contribute directly to meeting these objectives are financial benefits.
Note that the highest level objectives for government and nonprofit organizations are not" earning profits." High level objects for these groups appear in mission statements about service delivery and the populations they serve. These organizations, nevertheless, also pursue financial revenue objectives such as these:
- Obtaining funding.
- Staying within budget.
- Controlling costs
- Minimizing costs
- Improving cost efficiency.
- (In some cases) Generating revenue.
Outcomes that help to meet objectives like these are no less "financial benefits" than are similar outcomes in private industry.
Non Financial Objectives, Non Financial Benefits
Not all business objectives are defined first in financial terms. Business people usually define objectives for customer satisfaction or company image, for instance, in terms of non financial key performance indicators (KPIs).
Unfortunately, many people see contributions to non financial objectives like these as "second class" benefits, unworthy of serious consideration. Others may say that such benefits are important, but still not know how to measure and value them. Or, they may not know how to compare them to financial benefits. As a result, non financial benefits often receive only cursory notice in business case results and other cost/benefit analyses.
The first step towards dealing seriously with non financial benefits is to understand, clearly, some commonly misused terms. Foremost among these are "soft benefits" and "intangible benefits."
Some people in business classify benefits either as soft benefits or as hard benefits. Neither term has a standard definition. However, the frequent use of these terms implies that hard benefits are preferred, or superior to soft benefits. For many, "hard" benefit outcomes are certain and measurable, while "soft" benefits are neither. And, other people use the terms "soft" and "hard" to refer to non financial benefits and financial benefits, respectively.
Using these terms inevitably positions the "soft" benefits as second class outcomes in the eyes of many. For many, soft benefits carry less weight or importance than so-called hard benefits. As a result, it is more helpful always to avoid the terms "hard" and "soft" altogether, and instead classify benefits and objectives as being either:
- Financial or non financial.
- Tangible or intangible.
The word tangible means touchable, but many use the term incorrectly, saying " intangible" when they mean "financial." People sometimes say "intangible" when referring to objectives and benefits such as improvements in customer satisfaction, branding, employee morale, or reduced risk. This is probably because they believe the financial value of these outcomes is unclear.
Business objectives and benefits are indeed tangible if there is objective evidence they exist. Tangible objectives, in other words, are "touchable." Calling a benefit intangible simply says there is no evidence for it and no way to measure it. Therefore, truly intangible benefits clearly do not belong in plans, strategies, models, or business cases.
Non financial objectives like customer satisfaction or branding can be very important or even crucial to a company's strategy. Consequently, people who want to assign value to non financial benefits must find tangible measures for the objectives they represent. They can do this, even if the measures are necessarily indirect.
Objectives and benefits having to do with customer satisfaction, for instance, are extremely important to companies in highly competitive industries. And, customer satisfaction no doubt supports other objectives such as the following:
- Customer retention.
- Average order size.
- Length of sales cycle.
- Repeat business.
- Referral business.
- Lower service costs.
No one doubts that improvements in these factors lead ultimately to financial gains. Nevertheless, the objective itself—customer satisfaction—is a condition of the customer mind. Because they cannot measure that directly, some people label the objective "intangible."
Key Performance Indicators: Indirect but Tangible
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.
- Customer complaints: Number and severity.
- 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 specific KPIs that leaders pay attention to constitute, essentially, the group's definition of "customer satisfaction." In this way, KPIs serve for setting goals and measuring the value of business benefits.
For instance, customer satisfaction goals may include KPI targets such as these:
- Achieve the highest rate of customer "excellent'" scores in the industry.
- Reduce the annual customer churn rate from 20% to 10%.
- Reduce customer complaints from the current 100/month to 50 or less.
Many businesspeople do not automatically view all benefits in a cost/benefit discussion as "real." In other words, they do not automatically see all benefit claims as legitimate. That is especially true for contributions to non financial objectives, which they measure indirectly through key performance indicators.
For instance, analysis looks forward to cost savings under a proposal plan, most people readily accept the savings as a "legitimate" benefit. If however, the analyst shows a $5M benefit coming from something like higher customer satisfaction, or a better company image, probably not everyone automatically grants the benefit the same legitimacy. For this, they must be led 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:
- Firstly, tangible and measurable.
- Secondly, likely to follow from the action
- Thirdly, contributing to meeting important business objectives.
To establish benefit legitimacy, the analyst may have to help others see how the outcome meets each of these criteria.
Consider for instance the following action and benefit:
Proposed action: Training for service delivery personnel.
Expected outcome (benefit): Higher customer satisfaction.
1. Show That the Outcome is Tangible
The analyst shows that the outcome is tangible and measurable by referring directly to this group's KPI's for customer satisfaction (above). These are satisfaction survey scores, complaints, opinions, and retention rates.
2. Show That the Outcome Is Likely to Follow From the Action
To show that the benefit probably follows from the action, the analyst can reason from several kinds of evidence. For example:
- Customer complaints about service delivery. Here, it is important to know the reason for complaints.
- Surveys of returning and non-returning customers. Why, in other words, did customers choose to stay or leave?
- The experience of competitors who score high on the same KPIs.
- Industry analyst ratings and service delivery reviewers.
3. Show That the Business Objective is Important.
Outcomes are seen as legitimate benefits only if they address important objectives. Contributions to objectives that receive little management attention probably will not carry weight in business planning and decision support.
An objective is clearly important if it meets one or more of the following criteria:
- Management sets targets for the objective.
- Management has already invested resources towards reaching the target.
- The objective has high visibility in business plans and leader messages.
- Progress towards meeting the objective is a factor in performance reviews.
Objectives that meet none of these criteria are poor candidates for legitimizing business benefits.
Ultimately, benefit value in the business world is best expressed in either of two ways:
- Firstly, stating value directly in financial terms such as dollars, euro, pounds or yen,
- Secondly, by comparison to something of known financial value.
In other words, the analyst will first try, insofar as possible, to value business benefits directly in financial terms. Failing that, the analyst can compare a non financial benefit to another benefit that does have known financial value. That judgment, of course, may include a subjective component.
Some benefits impact financial objectives directly.
Some non financial benefits can receive financial value because they directly impact financial objectives.
- An increase in "employee productivity" (the non financial benefit) may be tied rather directly to labor cost savings, or to avoided hiring costs.
- A lower customer churn rate (the non financial benefit) may point directly to known costs of acquiring new customers. or the known loss of revenues and profits from departing customers and lost market share.
Connecting KPI changes with financial value
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 value for the objective
Establish an agreed and acceptable financial value for reaching the organization's overall tangible target for the objective.
Step 2. Apportion value to the benefit.
Establish an agreed and acceptable percentage of that value that should be credited to the specific action.
Example KPIs for non financial objectives
Organizations typically establish KPI's and targets for important objectives having to do with such things as:
- Image and branding.
KPIs may include survey scores for such things as brand awareness, brand recognition, or brand preference.
- Employee satisfaction.
KPIs may refer to employee satisfaction survey scores, employee productivity measures, turnover rates, absentee rates, or disciplinary data.
- Customer satisfaction survey scores.
KPIs may include customer satisfaction survey scores, product return rates, or customer complaints. They may also refer to "qualitative" research results (e.g., from customer focus groups).
- Employee health, safety, and well being.
KPIs in these areas may refer to employee absenteeism due to illness, on the job accident rates, or use of employee services.
- Quality of service delivery.
KPIs may include direct measures of service performance, such as mean time to complete customer service requests. They may also include customer satisfaction-like indicators, such as survey scores or numbers of complaints.
- Product quality.
KPIs may include data on warranty requests, customer complaints, or customer survey scores.
- Recognition as a "Green" organization
Many professional organizations offer membership and certification to groups or companies that meet certain "green" criteria. These stand as KPIs for green status. Also, demonstrated compliance with environmental laws and standards serves as a credible KPI for green status.
- Recognition for positive contributions to the community.
KPIs for this objective include awards or other formal recognition from civic groups, and public service organizations.
Step 1. Establish the Value of Reaching the Target.
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.
Step 2. Establish Benefit Value.
If leaders agree on a value for reaching the objective target, then the analyst can also move to Step 2 and ask: What percentage of the target value from Step 1 should go to the benefit outcome? The value of the benefit can then be taken as the product of the Step 1 and Step 2 answers.
The Objective and the Target
Consider a manufacturing company where managers intend to lower the factory floor accident rate by 50%. To achieve this objective, they will consider ten different initiative proposals. These include, for instance, proposals to hire safety engineers, add protective barriers, and improve real-time sensors on the production line. And, there is also a proposal for expanding and improving employee safety training.
Managers require business case support for each initiative proposal. Initiatives that cannot demonstrate good return on investment (ROI) will not receive funding. Each Initiative leader, therefore, must estimate two figures:
- Firstly, total initiative cost. This is the "I" in ROI.
- Secondly, the value of initiative returns. This is the "R" in ROI.
Step 1: What is the Overall Value of Reaching the Accident Rate Target?
Finding initiative costs may easy, but finding the financial value of training returns is a different matter. The analyst will have to ask and answer this question:
"What is the financial value of the benefit (reduced accident rate) due specifically to employee training?"
Answering will require both steps outlined above. The Step 1 question asks: What is the overall value of all initiatives which, together, 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 result from simply by getting leaders to agree on a price they would 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.
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.
Step 2. What Percentage of Step 1 Value Should Be Credited to One Initiative?
With a Step 1 figure in hand, the analyst can move to Step 2 and ask: What percentage of the Step 1 value should they assign to one specific action initiative, the employee safety training program?
Management may very well decide to credit benefits to each of the ten initiatives 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.
Subjective Value Judgments Can Be Valid and Rational
Note especially that Step 1 and Step 2 value statements may involve subjective judgments. For that reason, some may question the validity of ROI figures and other results based on these values. As a results, some people may very well declare these values invalid for this analysis. However, those who object in this way, however, should remember that managers make subjective value judgments like this routinely and often. Directing the use of resources, for instance, calls for such judgments continually. What is important is that leaders agree on the value figures.
Using Benefit Values
- Benefit values found 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 leaders try 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 ebooks