Cost Benefit Analysis Tips

Summer approaches and I’m loving it. Ah, the sun, the sand, the sea! Yet I wonder. How can a season that includes things as pleasant as baseball, beaches and barbeques share time with something as dreaded as the annual business planning cycle?

If you would like to preserve as much of your Summer as possible and lose as little as possible to wrestling with dueling spreadsheets, then understanding how to clearly present your case is important. You want to build strong and meaningful cases, and spend your time on the ones that really matter - those that will directly support core objectives.

As simple as these tips may sound, you would be surprised at how often they are forgotten or ignored when Cost Benefit Analyses (CBA) are prepared. Here they are, put them to good use.

· When you have multiple options always include a decision tree at the front end of the CBA.

· Use the decision tree to help tell the full story, illustrating why you have selected only the most beneficial for full analysis.

· Make sure the analysis is objective. Include all valid alternatives.

· Tell the story clearly. What are you trying to do technically? What are the objectives? What will you be able to accomplish as a result of the project that you couldn’t otherwise?

· Use understandable language and metrics. Simplify so that your non-technical decision making audience will actually understand what you are saying and why it is important. Use metrics that they care about; cost per end unit, shareholder value, etc.

· Include only marginal costs, do not include sunk costs.

· Answer the “Why now?” question. Differentiate between what you must do now that enables future steps and what can be delayed. Define the cost of doing now vs. delaying both in money and opportunity.

· Match the complexity of the CBA to the cost/benefit/risk of the project. Scale the process so that you are doing the most analysis on those items that carry the biggest risk.

· Do not spend more on the analysis than the marginal benefit of the project (a common trap in analytical organizations).

· Identify the consequences of various scenarios and the cost of those consequences.

I think you get the point. CBA’s are a fact of life, but you don’t need to make them more difficult than needed. Keep it simple, clear, and compelling. And use all the time you save to enjoy the season’s more amenable pursuits.

Strange Buildings of the World

Without meaning to offend the creators of these masterpieces (some really are) I refer you to http://villageofjoy.com/50-strange-buildings-of-the-world/ where you will find more pictures like this of buildings and homes that someone, oddly enough, thought were a good idea at the time. Although some are serious buildings (The Guggenheim, etc.) many are whimsical in the extreme.

The point? There is none. Simply enjoy and be bemused at the creative and (not always) good sense displayed by the design community world wide. Who says we don’t have a sense of humor?

Vision and Belief Inseparable from Leadership

We often talk about “the vision thing” when discussing keys to good leadership. It is correct that we do so because a vision of a preferable future is what drives us to accept the challenges of making changes required to achieve that new future. But vision alone is not enough, and vision held only by the leader or top echelon is doomed.

Recently I met with a leader who is searching for a way to help move his organization out of its complacency and on to bigger things. It is one of those situations where there is a general feeling that something is about to happen, but what it is remains unknown. The “what” is becoming clear to one person, however, the leader. And now he is struggling. Why? Because he isn’t certain others will get it, want to get it, or will know what to do with it if they do get it.

In other words, he doesn’t believe in his people. And without that belief the vision will be unrealized.

It is an interesting dynamic, isn’t it? The leader must have credibility at all levels of the organization in order to be effective. People must believe that the leader knows what they are doing, trust their integrity and accept their decisions even when they do not necessarily agree. That requires belief. The leader, on the other hand, must believe in their people or they will never be able to successfully transfer the vision of a better future to them.

One of the more difficult aspects of vision casting is that the instant you begin to release the vision to others you lose some degree of control over it and the outcome. Leaders must release it to others before it can take form and become reality. As others receive it they will interpret it in their own way and adapt it. It is in this way that a vision held at the top becomes a widely held vision that motivates acceptance of change, gaining momentum and moving the initiative forward.

If the leader does not have faith in the people then it will be very difficult to release the vision to them. The people must believe in the leader or they will not follow. The leader must believe in the people or they lead in title only and live a lonely existence.

When my children were young and learning their multiplication tables they would sometimes come to me for help or to show off. Every once in a while they would make up big numbers and try to stump me. I turned those around to teach them another life lesson. I used to show off with the zeroes.

72 x 0 = 0

845,386 x 0 = 0

1, 487,568 x 0 = 0

943,584 x God = God

God x you = all the computers in the world can’t hold that number

A leader’s vision x 0 = 0. The vision must be released, and that requires belief – in both directions.

The Many Sides of Leadership

Leadership is often defined as a study in contrasts. One way of expressing this sentiment is thinking of knowledge sets as the science of leadership, and behavioral sets as the art of leadership. Said another way, knowing what and how is the science of leadership, knowing when is the art of leadership.

Like a pure diamond, good leadership exhibits many facets and clarity regardless of the environmental situation. Those who understand the art know when to turn each facet toward the light so that it becomes the one reflecting energy. Other facets fade to background as it takes center stage. They have not disappeared, they are simply waiting their time.

Strategic vs. Operational

There are times when planning for the future should be paramount and the leaders drive is a positioning effort. Long range planning, investment in innovation, merger and acquisition, R&D emphasis and new product development are hallmarks of the strategic planning phase.

In contrast, operational focus is centered on driving results in the near term. Understanding and managing the details of day-to-day operations is key. Project implementation, cost reductions, efficiency improvements and honing process systems become the order of the day.

Autocratic vs. Enabling

There are times when a forceful posture and behavior is both appropriate and needed. A classic example would be during a time of crisis, but there are others as well. Taking charge, making decisions and giving strong direction pushes the organization to perform at a higher level and/or accelerated pace. Leaders using this tool set high expectations of their staff and demand performance that matches.

The servant leader, however, focuses on removing obstacles so others can succeed. This may be an appropriate style after a change vision has been adopted and the leader is freeing others to implement the new strategy, for example. In this case what matters most is a common view of the big picture. The leader’s role once this is attained is to free others to implement the vision, giving them leeway in how they do so as long as the core tenants and outcomes are maintained.

The point is that none of these styles or behaviors is exclusive of each other. All have their time and place and just like the facets of the diamond each will have their turn in the light. As a leader one of your prime goals is to always know which is right for the time and situation at hand.

Tracking CRE Economic Trends With One Click

Well, maybe not one but pretty close to it. The best indicator tracking site I’ve seen on the web is at Calculated RISK. This blog tracks economic indices of all types including jobs, markets, home starts and sales, construction activity, imports exports, office vacancy rates, architectural billings, miles driven and a host of others. Historical information on each is presented in a chart with accompanying summary comments. The blog also contains an extensive list of links to other economic information and opinion sources.

Why is tracking this data important to you right now? If you have CRE in your responsibility portfolio then you are charged with understanding market conditions and trends, and how they may affect your organization from strategic, tactical and capital perspectives.

Now more than at most times staying abreast of the financial environment is critical. Here are a few current articles from other sources that should be of interest as well.

Commercial Property Faces Crisis (Wall Street Journal)

U.S. Office Vacancies Hit 15.2% - and Rising (Wall Street Journal)

Defaults Rise as Worst Is Yet to Come for Commercial Property (Bloomberg)

Soros Says Commercial Property Values Will Fall 30 Percent (Bloomberg)

Manhattan Office Market Vacancies Could Rival 90’s (Reuters)

What is the point of all these links to depressing news, you ask? Not to depress you but to make sure you are staying informed. It is too easy and too tempting to stick our heads in the ground when times are tough. That’s not what you’re getting paid to do. Get your head “up and locked” and be aware of what’s going on around you. You won’t be able to recognize risks and opportunities if you’re not looking.

Besides, it won’t always be bad news. You won’t want to miss the party when all the trend lines start heading back up.