Defining Benefits for Regulatory projects - Cost Avoidance

Had an interesting discussion with a colleague today - how do you define real benefits for regulatory projects - ie projects that have to be done due to external regulatory or legal reasons . These are the projects that must be done and do not reduce real costs or generate additional revenue. Normally it is very hard to determine the benefits for these types of projects because there are no obvious ones. However we did find one type of benefit - cost avoidance!

So how would you do this? Well here is a breakdown of a hypothetical example that supposes company ABC has to comply with regulation RC 12. With any regulatory/legal type of compliance there is always a potential cost of non-compliance - eg a fine or inability to do business under current operations which could result in potential lost revenue (estimated to be around x% of total monthly).

Assuming the fine or potential lost revenue can be estimated/determined, which should be as they will be stipulated by the legal folks in the compliance documents. the (hypothetical) breakdown for implementing the project would like:

- Cost to Implement
- Benefits are Avoided cost in future years from implementing this solution = Expenses from implementing the solution (ie normal costs without fines) minus Expenses from not implementing the solution (the fines or lost revenue costs)

The NPV should then be calculated based on the above cash flows (this can be done in a simple excel spreadsheet. Check out the NPV resources on the website). Remember the aim is to get to a Zero NPV for cost avoidance type of projects This is because the avoided costs are not revenue and so if they are incurred you get negative cash flows. That is why you must do 2 NPV, IRR and payback calculations - One for the do nothing scenario and one for the one in which you implement the project.

The goal is to try an minimize your costs so that your payback in terms or avoided costs is the quickest for these types of projects.