Value Networks

 and the true nature of collaboration

   

Chapter 5: Advanced Analysis

Tips for Cost / Benefit Analysis and ROI

 

 

Tips for Cost / Benefit Analysis and ROI

A Cost/Benefit Analysis is a classic business problem-solving method.

In Value Network Analysis (VNA) it is used to analyze costs or potential risk associated with Transactions and Deliverables, and to compare those to possible tangible or intangible benefits that result from the activity. It provides a reality check for the value potential of exchanges, transactions, or value-adding activities.

In VNA the Cost/Benefit analysis is not a standalone analysis - but 
a component of the Impact Analysis and Value Creation Analysis.

Use it when facing a whole-system redesign challenge - to determine high-leverage investments and activities, and assess potential risk or loss.


Use it at the role level to determine costs and benefits of each input and output.


Use it at the network level to compare the aggregated costs or negative impact of network transactions to its positive contributions to the industry, social good, or the environment.
How to do the Cost/Benefit Analysis

Consider each transaction in turn, asking:

- What is the real cost of doing this?

- What is at risk in this transaction?

- Is there an opportunity cost?

- Who loses?

- Who gains or benefits?

- How does this contribute to our success?

- What opportunities does this activity present?
What to look for

Look for costs/risks or improvements in:

- Financial costs

- Performance

- Knowledge loss or gain

- Learning curves and competence

- Allocation of resources (including human)

- Demands on internal structures and systems

- Business relationships

- Brand and image

- Physical environment
Helpful questions to ask
   

Question

Explanation

Is the sum of the value received from a value input or transaction equal to or greater than the sum of the costs or risks incurred?

For every value input the sum of the values received should be equal to or greater than the sum of the costs or risks.

Is each role, participant, or stakeholder receiving positive value for their involvement with the organization or value network?

For every role the sum of the values received must be equal to or greater than the sum of the costs or risks incurred to continue operating or participating in a value network.

If this is not true for every key role in a system, the system will become unstable and either collapse or re-form in a new configuration. If this is not true for an individual participant, they may withdraw from the network.

Are the costs of providing a value output low, medium, or high?

Is a role providing the highest possible value for the lowest possible cost or risk?

Some companies are focused on being a low-cost provider of a given value and concentrate on efficiencies. Other companies may deliberately take on a higher cost or risk in order to provide a higher quality output.

ROI (Return on Investment) is a cost/benefit comparison of the 
cost of an investment or activity compared to 
the financial and non-financial benefits that result.

ROI calculations are helpful for making decisions regarding investments of all kinds - from capital investments in plants and equipment to intangible asset deployment. ROI can be used to understand the payoffs for supporting knowledge sharing, collaboration, brand image, political positioning, customer relationship management, and other non-financial goals.

 

Some people think ROI is only calculated in financial terms, but it more broadly refers to any positive or negative business outcomes that are the result of making a particular investment. The "return" might be measured by progress toward goals, positive impact on intangible assets, increased competence, improved morale, employee or partner satisfaction, and other non-financial benefits. Costs can be calculated in both financial terms and in non-financial terms such as risk or impact on intangible assets and resources.
How to calculate ROI
ROI is basically a cost/benefit analysis. You would compare the cost of a particular activity to the return that is realized. In VNA an ROI can be calculated at the level of a single transaction, or transactions can be aggregated to look a the ROI for the entire activity.

 

 

  

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