Can You Demonstrate the Economic Value of Your Initiative?
You’ve done it all - evaluated the environment, identified goals, developed a measurement framework, and tracked outcomes. You’ve successfully demonstrated the success of your initiative. Is this enough to demonstrate economic value?
Increasingly, grantees, funders, and corporations are looking to maximize the benefit of their financial investment by supporting organizations, programs, and initiatives that create the most value for their stakeholders. Economic evaluation can be a great way to estimate and compare the economic value of initiatives for organizations across a broad spectrum of industries.
Economic evaluation can be a great way to estimate and compare the economic value of initiatives for organizations across a broad spectrum of industries.
Whether you represent a nonprofit organization, corporation, healthcare organization, or public program, knowing the economic value of your initiative by conducting an economic evaluation can help internal and external stakeholders understand the financial impact of your work. At C1C, we use research and analytics to conduct evaluations that are completely customized to meet the needs of your organization. While not an exhaustive list, we’ve identified three key considerations to keep in mind when conducting an economic evaluation.
Choose the right method. There are several different methods for determining the economic value of a project, and they vary in complexity, perspective, and function. The simplest method, Return on Investment (ROI), is a popular calculation for determining the economic value of an initiative. This method calculates the direct and tangible financial benefits of an initiative versus the total costs for implementation. ROI has a focused perspective that typically considers the costs and benefits from the perspective of the main stakeholder, payer, or investor.
Alternatively, Cost-Benefit Analysis (CBA) is a more comprehensive method than ROI and attempts to quantify indirect and intangible financial benefits and costs in addition to direct benefits and costs. Typically, CBA adopts a broader societal perspective when calculating the costs and benefits of an initiative in an attempt to quantify the net effect of an initiative on social well-being.
Finally, a Cost-Effectiveness Analysis (CEA) is used when outcomes cannot be assigned a monetary value. CEA is an economic evaluation technique that compares the cost of an initiative with the benefits, which are measured using units other than monetary units. CEA is often used to compare two or more initiatives or interventions that measure benefits using the same units.
Remember, time is money. We’ve all heard the idiom, and Benjamin Franklin articulated this idea to advocate for the effective use of time, but this phrase has an alternate interpretation that can have a considerable impact on evaluating the economic value of an initiative. Time Value of Money (TVM) is a financial concept that holds that money is more valuable at present than the same amount in the future. This principle is based on the fact that money can earn interest, so any amount of money is worth more now than later.
Since most initiatives produce costs and benefits over a period of time, with costs likely incurred earlier on and benefits earned later, it is important to remember to express the value of any future costs and benefits back to equivalent money or present values. This process of discounting the costs and benefits addresses both the principle of TVM and inflationary trends to arrive at a much more accurate estimate of the economic value of an initiative.
Address uncertainty. Undoubtedly, any estimate of economic value or projection of future costs and benefits will be impacted by uncertainty. Errors in data, inaccuracies or subjectivity in quantifying costs and benefits, challenges of identifying a discount rate, and inability to predict events in the future are all potential contributors to imprecision and uncertainty in economic evaluation. While errors and uncertainty should be addressed throughout the economic evaluation process when possible, there are several methods for reducing uncertainty in any model used to estimate the economic value of an initiative.
Sensitivity Analysis, sometimes called “What-if Analysis,” can be used to analyze how different input values impact the overall model. This type of analysis can help describe how much the overall output values are affected by changes in inputs. Typically, inputs are tested individually or in groups, and all possible outcomes recorded. This type of analysis can be an excellent method for addressing uncertainty in economic evaluation by providing an understanding of all the possible range of outcomes.
Scenario Analysis is an alternate method for testing the impact of model inputs or independent variables on outcomes. However, instead of testing all the possible outcomes due to changes in individual inputs, scenario analysis can test a variety of real-life scenarios where multiple independent variables or inputs are changed within the model to align with the scenario tested. This method of addressing uncertainty in economic evaluation can be useful when you would like to understand the outcomes of specific scenarios.
While a customized solution is best when conducting an economic evaluation, choosing the right method, considering the impact of time, and addressing uncertainty will help you accurately estimate the economic value of your initiative and understand the financial impact of your work. If you would like additional support with economic evaluation, feel free to reach out!