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Developing A Cost Benefit Analysis for Internships, Part 2
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As we discussed in the first half of this series, internships are becoming a crucial part of a recruiting platform. Developing a cost benefit analysis will help you demonstrate how your company will see a return on investment (ROI) in such a program in hard numbers. Once you have developed the cost and benefit categories as described in Part 1, you are ready to start assigning estimates and determining ROI. Determining Return on Investment As with many human capital investments, the costs will be in the short term and many, if not all, of the benefits will be long term. Therefore any examination of return on investment must take into account the time value of money. For example, when one examines the cost savings due to increased retention, one must consider what the savings will be in that future time and discount that back to present day dollars. Only then, through a comparison to the costs of the internship program, will the firm be able to determine if the investment made today is worth the anticipated savings of the future. The other elements to consider are the confidence intervals around the benefit numbers. Because the benefits will be realized in a later time frame, costing out these benefits in both best and worst case scenarios and examining the confidence intervals will provide the best estimates. <*SPONSORMESSAGE*> With those factors in mind, the first step in determining the ROI is to estimate the cost of such a program. Through our cost measures, the firm should put together ranges of costs and confidence intervals for those ranges to determine the present day investment of the internship program. Secondly, through a similar measure, the firm should develop a benefits estimate of such a program. In the benefits step, the firm should be careful to take into account the multiple time periods of these benefits. For example, increased productivity for interns may take place in the first year but increased retention and reduction of college hiring costs may be realized over a period of several years. Once these numbers have been determined, the firm can determine simply if the cost today warrants the future savings and benefits. However, the firm must also consider the Internal Rate of Return on the project and the related Cost of Capital. Internal Rate of Return (IRR) is the percentage of return you expect by investing in the project. The Cost of Capital is what it costs your company to raise money either through debt or equity, to pay for its expenses. If the IRR over the period of the project is favorable but still less than the Cost of Capital, the firm may choose not to invest is such a program or may choose to examine some of the variable costs to determine if there are ways to reduce current costs enough to raise the IRR to match or beat the Cost of Capital. Making the Case to Management With such financial benefit analysis in hand, making the case for the development of an internship program will be easier than without the hard data. In presentation to a senior executive team, use the following outline:
With this outline, senior management would have the benefit of all the background information and analyses performed. You would be presenting not only the budget for such a program, but the return on investment. This would enable senior management to compare the benefits of such a program not only to the costs but also to the return of programs competing for the same budget money. Armed with such tools, you’ll be better able to compete for dollars in tight budgets and better able to demonstrate the contributions of human capital investments to the bottom line.