The IT director of the Office of Cost Reduction thought it was going to be a bad day when was running late for work. Her pessimism was muted when she got to work for her weekly meeting with the Commissioner of OCR. The Commissioner wanted to know whether OCR could accomplish its mission in a cheaper way. A friend of his at the Office of Mental Hygiene had told the Commissioner about their Web site, and now the Commissioner wanted to find out whether a Web site could be useful for OCR.

The IT director and her team had been eager for months to conduct an Internet development project. She left his office full of energy; however the Commissioner's words "Only if it saves us money" were still ringing in her ears when she left his office.

Thinking about the agency's collection of information from the general public, local government, and certain private sources such as insurance companies and appraisers, she come up with the first areas that should be addressed. The agency had a number of paper based forms and information packets that it distributes to these constituents. "If we could distribute and collect these forms electronically, we might be able to save money," she thought to herself. She decided to explore the option of allowing key business partners the option of submitting forms electronically by building an Web site, and giving these partners access.

She walked back to her office and opened a draft of this guide that she had received a month ago. She found the chapter on Benefit-Cost analysis, Resource Allocation methods, and Multi- attribute Utility models. After reading through them she decided that the appropriate analysis tool would be the Benefit-Cost analysis, not only because it was the best one for dealing with "cheaper" type situations, but the Director had earlier shown a certain fondness for this method.

There were four things she had to do to complete a benefit-cost analysis:

Understanding the potential value of the tools available, she got together a small team of people to plan the service. Staff from the program areas, from human resources, from the IT division, and from OCR's public information office did the planning. Using the "system features and functionality" worksheet, the group was able to specify three potential systems, ranging from giving the public electronic access to their most popular forms, to on-line submission of the forms from key business partners (see Figure 8).

Figure 8. System Features and Functionality, OCR

System Features and Functionality
	Modest	Moderate	Elaborate
Who are your customers?	citizens, taxpayers, government officials at all levels	same as modest, plus local tax officials, libraries	same as moderate, plus key business partners:realtors, appraisors, and insurance companies
What information-based services will you provide?	e-mail, limited number of existing documents published on the WWW	same as modest, plus many more documents and forms	same as moderate, plus on-line forms for the key business partners and access to agency databases
How will customers get access to these services?	e-mail and WWW as available in the customer base	same as modest	same as moderate
What will customers be able to do?	send e-mail to agency, receive e-mail replies, access our web page	same as modest	same as moderate, plus fill in forms. web front end to agency databases
What system features will be included?	e-mail and web page	same as modest	same as moderate, plus on line forms. support for partners to help them fill out on line forms.
What information sources (internal and external) must be coordinated?	all Departments creating forms	same as modest	same as moderate, plus departments that manage agency databases
What security and confidentiality measures must be implemented?	none	same as modest	heightened-policies, plus restricted access, encryption and authenticity
What activities will be outsourced?	none	same as modest	traning and support for key business partners that want to fill out on line forms

The final "system features and functionality" worksheet showed that the modest and the moderate alternatives would be fairly similar. The elaborate alternative included a Web site with access for agency key partners to register forms themselves.

Enthusiastic after filling out the last worksheet the team started the job of quantifying the costs of offering the specified services on the Web. The team soon realized that because their agency was already well-equipped technically, not all cells had costs in them.

Figure 9. Cost Worksheet, OCR

Cost Worksheet
	MODEST		MODERATE		ELABORATE
	First Year Cost	Subseq. Annual	First Year Cost	Subseq. Annual	First Year Cost	Subseq. Annual
Organizational Readiness
Training for Technology Awareness
Planning for Internet Presence	10,000		10,000		10,000
Access for Agency Staff and Other Users
Hardware for End Users					12,000	4,000
Software for End Users					5,000	2,000
Network and Internet Access for End Users					10,000	3,000
Other Vendor Service
Human Resources
Start-up Process for Equipment Procurement					2,000
Establish and Manage Vendor and ISP Contracts	1,000		1,000		5,000	1,000
End User Support
Vendor Services					10,000	15,000
Human Resources
Establish and Manage Vendor Contractsx					2,000	1,000
Development and Delivery of User Training	2,000	2,000	2,000	2,000	35,000	15,000
User Time in Training	2,000	2,000	2,000	2,000	2,000	2,000
Help Desk for Users					20,000	20,000
Content Development and Maintenance Host of Site-Infrastructure
Hardware for Content Developers	3,000	3,000	3,000	3,000	3,000	3,000
Software for Content Developers	1,000	1,000	1,000	1,000	1,000	1,000
Network and Internet Access for Content Developers	3,000	1,000	3,000	1,000	30,000	15,000
Other Vendor Services
Human Resources
Start-up Process for Equipment Procurement					3,000	3,000
Establish and Manage Vendor Contracts	1,000	1,000	1,000	1,000	1,000	1,000
Development and Delivery of Staff Training	15,000	15,000	15,000	15,000	30,000	30,000
Staff Time in Training	20,000	10,000	20,000	10,000	40,000	20,000
Webmaster	45,000	45,000	45,000	45,000	45,000	45,000
Editorial Review
Content Creation and Coordination	3,000	3,000	3,000	3,000	10,000	5,000
Web Site Design and Development	10,000	10,000	10,000	10,000	100,000	50,000
Staff Support for Service	15,000	15,000	20,000	20,000	30,000	30,000
Programming Support					40,000	20,000
Database Administration					20,000	20,000
Other Management Support
Other Clerical Support	3,000	3,000	3,000	3,000	3,000	3,000
Content Development and Maintenance Host of Site-Infrastructure
Hardware	8,000	4,000	8,000	4,000	8,000	4,000
Software	3,000	1,000	3,000	1,000	6,000	2,000
Network and Internet Access	1,500	1,500	1,500	1,500	1,500	1,500
Other Vendor Services
Human Resources
Front-end Research and Technical Evaluation	500	500	500	500	1,000	1,000
Start-up Process for Equipment Procurement	500		500		500
Establish and Manage Vendor and ISP Contracts
Development and Delivery of Staff Training	1,000	1,000	1,000	1,000	2,000	2,000
Staff Time in Training	500	500	500	500	2,000	2,000
Network and Systems Administration	3,000	3,000	3,000	3,000	6,000	6,000
Web Server Management	1,000	1,000	1,000	1,000	5,000	3,000
Operations Support	1,000	1,000	1,000	1,000	3,000	3,000
Clerical Support	0
INFRASTRUCTURE AND OTHER SUBTOTAL	29,500	11,500	29,500	11,500	96,500	50,500
HUMAN RESOURCES SUBTOTAL	124,500	113,000	129,500	118,000	407,500	283,000
TOTAL COSTS	154,000	124,500	159,000	129,500	504,000	333,500

With the cost worksheet filled out, the group had its total costs over the three dimensions (modest, moderate, and elaborate). It was now time to go to the next step in the benefit-cost process, assessing the benefits of the new system.

Because their primary objective was reduced costs, the group decided to develop only the "cheaper" dimensions of the "Performance Variables, Measures, and Targets" worksheet. This resulted in two different "cheaper" variables, as depicted in Figure 10

Figure 10. Performance Variables, Measures, and Targets, OCR

The group felt ready to finally get to the benefit-cost analysis. Having the costs ready, it was now time to specify the benefits in quantitative terms. Each benefit had to be turned into a dollar amount. Additional information about the agency's annual printing, and data entry costs were collected. With the performance variables, measures, and targets to draw on, the group managed to quantify the benefits reasonably quickly.

Figure 11. Benefit-Cost Table, OCR

	Modest	Moderate	Elaborate
Benefits:
Printing Costs	$100,000	150,000	400,000
Data Entry			400,000
Sum Benefits:	100,000	150,000	650,000
Sum Costs (from cost worksheet):	124,500	129,500	407,500
Benefit-Cost Ratio	0.80	1.16	1.59

The benefit-cost table above indicates that investment at the modest level will not pay off. For each dollar invested, only 80 cents are saved. However, at the moderate level the agency would see a payoff. For each dollar invested, $1.16 is saved. Finally, at the elaborate level, the investment will pay off with $1.59 saved per dollar invested. It would seem that the elaborate level would be the right investment for OCR.

After doing the calculations in the benefit-cost table, the group decided to do sensitivity analysis on the numbers. They questioned their own beliefs about the numbers, and tested how different assumptions about both benefits and costs related to different benefit cost ratios. They found that the ratios were fairly sensitive to changes in the underlying assumptions, but as they felt reasonably confident in their assumptions, the group decided to recommend that the agency invest in an elaborate Web site. However, knowing that a lot of uncertainties needed to be resolved, the group also recommended a project development strategy of first developing a moderate Web site, with a prototype of the elaborate functions. The elaborate functions would then be worked on after the moderate Web site had been implemented and the agency had more experience developing services for the Internet.

The benefit-cost model developed in this example is very simple. An agency deciding to do a benefit-cost analysis should have, or get, expertise on benefit-cost modeling. Issues that were not addressed in this example such as opportunity cost, interest rates, and multi-year investments, can in many cases change the results completely. For an introduction to benefit- cost analysis, see James Edwin Kee, "Benefit-Cost Analysis in Program Evaluation," in Joseph S. Wholey, Harry P. Hatry, and Kathryn E. Newcomer (eds.), Handbook of Practical Program Evaluation. San Francisco: Jossey-Bass, 1994.