Opex Financial Impact

Financial Impact Calculations - Cost Savings
Cost savings is defined as the benefit realized from actions that reduce WSU's overall spending in a way that directly impacts its bottom line. Actions that can result in cost savings range from improving the efficiency of a process to negotiating lower prices for supply purchases to eliminating an ongoing expense which may no longer be needed.
Cost savings calculations are derived depending upon the circumstances, however, in general a cost rate is applied to a volume or unit of activity on a “before” basis and on an “after” basis. The two results are compared and the difference is savings. Any significant incremental costs to achieve the savings should be deducted from the calculated result to obtain the true net savings.

WSU’s policy is to claim Cost Savings for two fiscal years: beginning in the fiscal year when the project is complete and for the following fiscal year. A two year method was chosen since some projects may be completed late in a fiscal year and a two year benefit is reasonable when a cost savings is introduced.

Example: The WSU Operational Excellence team undertakes a project to streamline an existing process using Google Forms. Before, the process took a staff person 20 hours a week to complete the process. As a result of the Google Forms solution, the staff person now only has to spend about 8 hours per week on the process. Since the staff person has an annual salary of $50,000/year, the savings is calculated as follows: (20 hours – 8 hours) = 12 hours/week savings. $50,000/year salary divided by 2000 hours per year yields a hourly wage rate of $25/hour. 12 hours savings * $25/hour = $300/week savings times 50 weeks per year is $15,000 in cost savings, reported for the project in the years completed.

Cost avoidance has to do with any action that avoids having to incur costs in the future. Cost avoidance results in lower potential increased expenses and helped lower future costs.
Cost avoidance constitutes a specific set of preemptive actions that avert any prospective increases in future costs. Cost avoidance is not something that is reflected or measured in a company’s financial statements or in a company’s financial budget in contrast to the way that cost savings are sometimes reflected in the University’s budget and flow into the University’s financial statements.
In the short run, cost avoidance may, in fact, incur temporary additional costs; however, these additional costs take place in order to lower future prospective costs. For example, the University could choose to undergo a one-time investment, in which it would invest in new technology (e.g. solar panels) that would allow its current electrical costs to decline over time.
WSU plans to take credit for savings from cost avoidance in the fiscal year the project is closed. WSU may also, at its discretion, apply a discount factor or probability factor in the cost avoidance calculations to be conservative in estimating financial impact. Typically, WSU will compare publicly available information in estimating cost avoidance on projects.

Example: The WSU Operational Excellence team undertakes to move the online employee phone directory behind the University’s fire wall to prevent public access to potentially sensitive data (names, phone numbers and email addresses). This results in better protection for the University against potential phishing and hacking attacks. While there are no identifiable cost savings with the project, the Operational Excellence project team determined that other universities which had been hacked recently had experienced actual financial losses. A survey of three recent incidents revealed that University 1 had a financial loss of $1m, University 2 had a loss of $1.5m, and University 3 had a loss of $500k. The average loss for these three universities was $1m. There was an assumed 10% probability that WSU would have incurred similar losses in the event of a similar attack had the project not been undertaken. Therefore, the Operational Excellence team claimed $100k in cost avoidance for having completed the project to protect WSU from similar attacks: (($1m * 10% probability) = $100k cost avoidance). The cost avoidance is recognized beginning in the fiscal year the project is completed.

Revenue enhancement is the result of a project or activity that increases revenue for the University. This can be a new revenue stream or an enhancement to an existing revenue stream. Enhancements to existing revenue streams can come from an increase in volumes or an increase in price.
Enhanced revenue will be claimed for 2 fiscal years beginning in the year implemented.

Example: WSU Operational Excellence team conducts a project to identify potential new revenue streams for WSU’s CESO (Conference & Event Services Office). It is determined that a change in the fee structure for summer programs administered by CESO would result in $200k more revenue annually for the University. This change is implemented in FY27. The revenue enhancement of $200k per year would be recognized by the Operational Excellence project team for two years: FY 27 and FY 28. Resulting in a total of $400k recognized in total for the project.