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.