This tutorial presents a cost-benefit analysis for investing in change management. It presents five perspectives on the "benefits" of applying change management on projects in the organization. Given the importance of change in today's environment, these approaches to making the case for change management can help ensure that change management is viewed as a "must have" and not a "nice to have" on the projects you support.
The costs of change management
Applying change management on a project is not free. It takes time, energy and resources. According to the Prosci 2011 benchmarking study, the primary cost components of change management include:
- Change management resource costs - Salary and compensation for change management practitioners
- Training costs - Design, development, delivery and materials
- Communications costs - Design, development, delivery and materials
In addition to these primary cost components which were identified most frequently, there were several secondary cost components identified by study participants including:
- Consultant costs
- General expenses
- Event costs (workshops, group meetings, "lunch and learn" events, road shows and town hall meetings)
- Change management materials
- Reinforcement and recognition costs
Estimating costs for change management can be tricky. Several approaches include:
- Allocating as a percentage of total project budget
- Allocating as a percentage of project FTE (Full Time Equivalents)
- Adding in the nature and complexity of the change to scale resource requirements (i.e. a small, incremental change does not require the same change management resources as a large, dramatic change)
- Estimating work required to complete change management activities (i.e. creating a work breakdown structure of the activities in the methodology and estimating time for completion)
- Drawing on previous experience and examples in your organization
To "tip the scale" toward buy-in and investment in managing the people side of change, the benefits of change management must outweigh these cost components.
The benefits of change management
When articulating the benefits of change management, it is essential to begin and end with one concept: achievement of the results and objectives of the project or initiative. There are numerous benefit perspectives for change management, but to make a compelling case that wins the hearts and minds of your audience, you must connect each of these benefits back to the intended outcomes of the project or initiative.
Change management is only valuable because it increases the successful implementation of change.
Below are five "benefit perspectives" with the associated analysis and story about how change management improves the successful implementation of projects and initiatives.
1. Benefits realization Insurance
Benefits realization (achievement of results and outcomes) depends on individuals embracing, adopting and utilizing a change. If individuals do not change how they do their job - e.g. use the new technologies, adhere to the new processes, exhibit the new behaviors - then the change will not occur and benefits cannot be realized. This is the reality of change. Change management is a solution to the reality of change, not an add-on.
Change management provides a structured approach to enabling and encouraging the individual transitions required by a project or initiative.
2. Likelihood of success
There is a direct and distinct correlation between the effectiveness of change management and the likelihood of meeting objectives, staying on schedule and staying on budget. Prosci's research over the last three studies shows that projects with excellent change management met or exceeded objectives 95% of the time, while projects with poor change management met or exceeded objectives 15% of the time.
With more effective change management, the probability of meeting objectives on time and on budget increases significantly.
3. People side factors that define project ROI
Any time a change impacts how employees do their jobs, there are three people side factors that define or constrain return on investment. The Prosci ROI of Change Management Model identifies these three factors as: speed of adoption (how quickly employees make the change), ultimate utilization (how many of them in total make the change) and proficiency (how effective they are when they have made the change). When the people side of change is not managed effectively, employees are slower to make the change, fewer of them make the change and they are less effective once they have made the change. Each of these factors directly impacts project ROI.
Effective change management results in faster speed of adoption, higher ultimate utilization and greater proficiency, which all drive higher ROI.
4. Two costly letters in implementing change
When the people side of change is ignored or addressed late in a project, the result is a number of wasteful, non-value adding, costly and discouraging REs: redesign, rework, revisit, redo, reevaluate, retrain, rescope, reschedule. Project teams absorb these costs in terms of budget impacts and schedule delays. When the people side of change is addressed up front, these REs can be avoided.
Effective change management helps eliminate many unnecessary "RE" costs that can crush a project and destroy ROI.
5. Avoiding costs and minimizing risks
Poorly managing the people side of change adds excessive costs and risks at two levels: the project level and the organizational level. The consequences for the project include: delays, budget overruns, loss of work by project team, active resistance, passive resistance, and resources not being made available. The consequences for the organization include: productivity plunges, loss of valued employees, reduced quality of work, morale declines, stress, confusion and fatigue.
Change management is an effective cost avoidance and risk mitigation tool.
What is the hold up?
The logic is sound: projects and initiatives ultimately require individuals to do their jobs differently. The correlation data is clear (from Prosci and other sources): the likelihood of success increases with effective change management. The people side ROI factors can be quantified: you can calculate the impact of speed of adoption, ultimate utilization and proficiency. Furthermore, there are countless anecdotes and examples of the costly nature of ignoring the people side of change.
However, organizations still seem to encounter some reluctance to fully invest and commit to change management. Many practitioners still face the situation where the decision to invest in change management is not occurring.
Cost-benefit analysis overview
When evaluating whether or not to undertake an effort, many leaders and decision makers conduct a cost-benefit analysis. This process involves identifying and listing out the potential costs of the undertaking and the expected benefits of the undertaking. When discussing the value and importance of change management, a cost-benefit analysis can be a powerful framework. Below is a simple table showing likely costs and five different perspectives on the benefits of applying change management on projects and initiatives.
Change management cost-benefit analysis
Costs for applying change management
- Dedicated resource(s) on project team. For a small change to a change-ready group, the project manager may take on the responsibility. For a large change to a change-resistant group, this might be a team of people with supporting subteams. In either case, there needs to be someone dedicated to the people side of change working on the project.
- Procurement of methodology and tools for use by change management resource(s)
- Purchase of source materials for use by managers and supervisors in their coaching exercises
- Training time and costs for everyone involved - managers and supervisors as coaches of change, senior leaders as sponsors of change, change management resource(s), project teams
Benefits from applying change management
- Perspective 1: three "people side" ROI factors - faster speed of adoption, higher ultimate utilization and higher proficiency; change management drives project ROI
- Perspective 2: cost avoidance - poorly managing change is costly to the project and the organization; change management is a cost avoidance tactic
- Perspective 3: risk mitigation - individuals, the project and the organization are all put at risk when change is poorly managed; change management is a tool to mitigate risks
- Perspective 4: benefits realization insurance - consider how much of the value of the project ultimately depends on people doing their jobs differently; change management provides benefits realization insurance
- Perspective 5: probability of meeting objectives - data shows that projects with effective change management in place are more likely to meet objectives, stay on schedule and stay on budget; change management increases the probability of meeting objectives
Below are more in-depth discussions of the five benefit perspectives presented in the cost-benefit analysis above. These are not necessarily sequenced in the order that you would use them. Rather, know your audience and select the benefit perspectives that will be the most effective. Focus on the concerns of your audience and connect change management to their success by picking the right mix from the benefit perspectives presented below.
The cost-benefit analysis for change management is not unlike other cost-benefit analyses - you are attempting to show the relationship between what it costs to manage the people side of change and the benefits of applying a structured approach to enabling and encouraging employees to adopt a change. You will only receive the buy in and investment necessary to apply change management if you can "tip the scale" by showing that the real and tangible benefits of change management outweigh the costs. This tutorial presents the cost components of change management and five benefit perspectives you can use to make the case.
Benefit perspective 1 - three "people side" ROI factors
Prosci's ROI of change management model describes the three "people side" factors which contribute to, or limit, the value a change delivers to the organization. The foundation of the three factors is that any time a change requires individuals to do their jobs differently, it is how effectively those individuals make the change that determines the business value the project delivers for the organization. The three ROI factors are:
- Speed of adoption - How fast do people adopt the new processes or behaviors?
- Ultimate utilization - How many impacted employees made the change (and how many did not)?
- Proficiency - How effective were employees at following the new processes or behaviors?
These three factors are universal - whenever a change requires employees to change how they do their jobs there are elements of how fast, how many and how effectively. Unfortunately, many project teams do not consider, or make implicit assumptions about, the people side of their change. A team supporting a large IT implementation that gives users new interfaces might implicitly and erroneously assume that all users (100% ultimate utilization) will begin expertly using the system (extremely high proficiency) the day that the system goes live (instantaneous speed of adoption). When the three people side factors are added to the business case and ROI calculations, the importance of change management is highlighted. The three factors can even be used to conduct sensitivity analysis to generate actual numeric values for the impact the people side factors have on ROI (for instance, if speed of adoption was over six weeks instead of three and 15% of users did not adopt the system, then the ROI for the project would actually be X instead of Y).
The three "people side" ROI factors can help you to:
- More clearly define the individual changes required by a project at its initiation.
- Calculate the impact of slower speed of adoption, lower ultimate utilization and lower proficiency - and position change management as a tool for delivering business results in concrete terms.
- Elevate the discussion and document assumptions early on in the process related to the people side of change
Benefit perspective 2 - cost avoidance
When changes are poorly managed - there are real and tangible costs to the organization. When change management is applied effectively, these costs can be avoided or minimized. Some of the costs are difficult to quantify - such as morale declines - but some of the costs are very concrete and easily quantified. One way to characterize the benefits of change management is as a cost avoidance mechanism.
Costs to the organization if change is poorly managed
(those that can be more easily quantified are italicized):
- Productivity plunges (deep and sustained)
- Impact on customers
- Impact on suppliers
- Loss of valued employees
- Morale declines
- Decline in quality of work
- Resistance (both active and passive)
- History of failed change
- Stress, confusion, fatigue
- Change saturation
Costs to the project if change is poorly managed:
- Project delays
- Missed milestones
- Project put on hold
- Resources not made available to project team
- Budget overruns
- Obstacles appear unexpectedly
- Rework required on project design
- Project fails to deliver on objectives
- Project is fully abandoned
- Loss of work by project team
Costs to the organization if the change is not implemented:
- These costs are tied directly to what the change was aiming to do.
- These costs could include: expenses not reduced, efficiencies not gained, revenue not increased, market share not gained, waste not eliminated, regulations not met resulting in fines/penalties, etc.
- Additionally, the organization loses the investment made in the project when the project does not deliver results.
Benefit perspective 3 - risk mitigation
Another perspective, similar to the cost avoidance perspective, is to outline the potentials risks to the project and the organization associated with the people side of change. Risk management on projects is a well-developed discipline. The Project Management Institute even has a PMI Risk Management Professional credential complete with an application, audit and examination process. If your organization already conducts extensive risk assessments on projects, work to position "people-side risk" as one of the risks that is considered along with other risks like financial risks, technology risks, schedule risks and dependency risks. If a project is being planned and has a high "people-side risk" component, then applying a structured approach to change management is the right risk mitigation technique.
Benefit perspective 4 - benefits realization insurance
The fourth perspective is benefits realization insurance. Here, the context for showing the value of change management is tied to an examination of the potential benefits the project is working to achieve. The objectives of the project - as outlined in the project charter, business case or project plan - are a good starting point. For each objective, ask yourself, "is meeting this objective dependent on people doing their job differently?" For some of the questions the answer might be "no" - such as lower maintenance contract costs for a new piece of technology. But, many of the objectives will be tied directly to the people side of change. For these objectives, you can ask the follow up question of, "what percentage of these benefits result from people doing their jobs differently?" This is the amount of benefit you can "insure" by applying a solid change management approach - and the amount of the benefit you are leaving uninsured by not investing in change management.
Benefit perspective 5 - probability of meeting objectives
The final benefit perspective is probability of meeting objectives. This is tied to the growing body of data which shows that more effective change management results in a higher likelihood of delivering intended results. A 2002 McKinsey Quarterly article titled "Helping Employees Embrace Change" shows a direct correlation between value delivered to the organization and the effectiveness of change management - with projects featuring effective change management delivering five times the value of projects with poor change management. Likewise, Prosci's last three benchmarking studies included correlation analysis on the relationship between meeting objectives and effective change management.
Below is the graph showing change management effectiveness correlated to meeting or exceeding objectives. Projects with "excellent" change management in place were six times more likely to meet objectives than those with "poor" change management - and even those using "good" change management were five times more likely to meet objectives.
Below is a simple list of the five "benefit" perspectives. Based on your audience, your organization and your culture - select the most compelling benefit perspectives and work to make them as specific to your change as possible.
Summary of five "benefit" perspectives for change management
Perspective 1: three "people side" ROI factors
Change occurs at the individual level. The value that a project delivers to the organization is ultimately tied to how quickly we can get individuals to make the changes required (speed of adoption), how many of them do their work the new way (ultimate utilization) and how effective each one of them is when they have adopted the change (proficiency).
Perspective 2: cost avoidance
We incur significant and quantifiable costs when changes are poorly managed, at both the project and the organizational levels. In addition to the extra costs of fixing the people-side issues that creep if we ignore change management up front, the organization also fails to derive the value it needed from the project in the first place. Change management is an effective cost avoidance technique we can apply on our projects.
Perspective 3: risk mitigation
Ignoring the people side of change results in numerous risks to the project and to the organization. We leave ourselves exposed to these people risk if we do not use a structured approach for managing the people side of change. When applied effectively, change management can help to mitigate or eliminate many of the numerous risks associated with the people side of change.
Perspective 4: benefits realization insurance
For the most important and most strategic changes in the organization, much of the value that is expected is tied to how people do their jobs. Applying a structured change management approach is like taking out an insurance policy against the goals and objectives of the project.
Perspective 5: probability of meeting objectives
There is a growing body of data showing that the more effectively the people side of change is managed, the more likely the project is to meet objectives. Prosci's benchmarking data and the McKinsey Quarterly article "Helping employees embrace change" show that projects with effective change management were five to six times more successful than projects that did not address the people side of change effectively.