OVO Tech Blog

Cost-Benefit Analysis as a Way to Assist in Decision Making

Introduction

Eleanor Stowe


business analysis creativity design, service design, blueprint, ux design management

Cost-Benefit Analysis as a Way to Assist in Decision Making

Posted by Eleanor Stowe on .
Featured

business analysis creativity design, service design, blueprint, ux design management

Cost-Benefit Analysis as a Way to Assist in Decision Making

Posted by Eleanor Stowe on .

One of the key competences of business analysis is to be an adviser, and a key moment where this matters is when a decision needs to be made between multiple options.

Before we jump into one of the most useful and long-lived tools in the BA kit, it’s worth noting that before we get to this point we’ve hopefully had a chance to ideate with stakeholders and prototype different ideas to test their viability. To learn more about this, here’s a video on ideation and prototyping. Sometimes the time-frames restrict the suitability of this work however, and you're left with some options, a tight deadline and a critical decision which needs making. In this situation, conducting a Cost-Benefit Analysis is a great way to help decision makers see which option is most likely to succeed.

What is a Cost-Benefit Analysis?

Put simply, with each available option you list all the costs, benefits and risks which may occur as a result of picking this option. I tend to put all options in slide deck. Here’s an example of a summary slide of a Cost-Benefit Analysis.

An image of a Cost Benefit Analysis. 4 Options are shown with Benefits, Costs and Risks listed for each option. One option is recommended.

Cost-Benefit Analyses can be very lengthy, and it’s often tricky to lay it out in such a way which is easily digestible and which makes it easy to compare between options. In my experience, slides has been the best solution. Here’s my reasoning:

  • You can have a summary page (as above) and then break this down in more detail by having one option per page in the rest of the slide deck. If you keep the format the same for each option, stakeholders can see at a glance that the list of costs or risks is much longer for one option than another. It’s also easier for them to print these (if required) and compare them side by side.
  • Flexibility - where multiple decisions need to be made or diagrams need to be shown, the slides format allows you to adapt your document to the needs of the decision maker.

How can I found out about costs, benefits and risks?

Ask lots of people of course! Doing lots of stakeholder analysis on who might be affected by the change is a key starting point, and then any time you speak to someone, ask them “who else should I speak to about this?”

Three stick figures

Stakeholders

As always in business analysis, a holistic approach should be taken - different stakeholders have different concerns, and it’s important to get these all documented and verified.

Key business areas may be:

  • Finance/Commercial/Sales
  • Legal/Regulations/Compliance
  • Brand/Marketing
  • Technology/Product/Data
  • HR/People/OD
  • Customer Services
  • Operations
  • Supplier Relationship Managers
  • Project Management
  • Anyone who has worked on something similar in the past

Where any estimates can be made, ask the subject matter experts (SMEs) to make the estimations. You may be a maths genius, but there are bound to be things you don't know, for example hiring costs, average number of customers gained per year, seasonal peaks and troughs in revenue, etc. By asking the SMEs to calculate these for you, these estimates are bound to be more accurate.

Lastly remember to get your work reviewed regularly by people with lots of experience in your business so they can help spot any gaps.

Three dollar signs

How do I list the costs and benefits?

With costs and benefits, it’s important to bear in mind that some benefits are tangible (you can normally associate a monetary value to these) and intangible (difficult to measure). Normally stakeholders care more about the tangible benefits as these often directly relate to company goals like revenue and gross margin. Another way of looking at it is by this “hierarchy” as laid out by Ward, Daniel and Peppard. Their ordering goes:

  • Financial. The stuff you list first: money that can be made/saved by the option. E.g. 200 extra sales will mean added revenue of £200,000 per year.
  • Quantifiable. These are measurable costs/benefits for which we have an estimation. E.g. Adding a manual process will increase FTE (full-time employees needed per week) by 2.
  • Measurable. These are measurable costs/benefits for which we have no idea of the return. E.g. Advertising on buses may increase visitors to the website.
  • Observable. Subjective costs/benefits which are not measurable. Normally “increased/decreased reputation” goes in this category. These are often listed last as they are quite woolly and less likely to sway the decision.

While this is a standard hierarchy, it will always depend on the project and stakeholder as to what the more important costs and benefits are. If for instance, you are in a company which has a strong reputation, it may be more important to keep that reputation than to do something that is seen as unethical, even if it makes the company more money. The short term benefit of the increased revenue may be offset by long term scandals and loss of customer confidence and trust, so it’s important to make stakeholders aware of all these costs and benefits, even if one may be seem more important than another.

What’s the difference between a cost and a risk?

Put simply, a cost is something we know we will definitely have to pay in order to do the thing, whereas a risk is a cost which may happen, but is not a certainty. It’s sounds very simple, but it’s easy to accidentally put some risks in the costs list, where we assume they will definitely happen if we take a certain action. This is particularly the case when there are areas of the business that are very worried about that thing happening, for instance in legal, regulations and compliance. The risks these departments talk about are normally very important to consider, and there’s often evidence to suggest that the bad things will happen (e.g. fines issued by regulators to other companies), but it’s tricky to say for absolute certainty that they will happen.

Why is this important?

It depends on the company, the situation and the decision maker. Some businesses may have a high risk appetite; they have to make risky moves in order to stay competitive in aggressive markets. In this instance, the decision maker has the right to make a gamble, if they think the benefits are worth it. Other businesses like those in the public and 3rd sectors are very risk averse, but they still may have to make tricky decisions - think about patient waiting times, where a long wait may contribute to a patient dying. If the decision is on tech which is proven to be life-saving but may be time consuming, the decision maker needs to know if longer waiting times is a risk or a certainty in order to make the right decision.

A stick figure, shrugging

The ‘Do Nothing’ Option

Doing nothing is always an option and should always be included in a Cost-Benefit Analysis. Normally the risks and costs incurred for doing nothing are pretty high, otherwise our decision maker would probably not be asking for help to decide how to change things. This said, sometimes ‘Do Nothing’ can be the most beneficial option, where a change doesn’t actually have to happen and may even be more effort than it’s worth. The Cost-Benefit Analysis will help to highlight that this is the case and may help to reassure stakeholders that the company is doing the right thing already.

Recommend an Option

Hopefully your stakeholder will have the time to look at all this wonderful, thorough analysis you’ve conducted, but sadly this may not be the case. Given that you have pulled the analysis together, you should be in a pretty good place to recommend something, and even if you aren’t sure, the recommendation can act as a starter for ten, which enables decision makers to decide if they agree.

Conclusion

Cost-Benefit Analysis is a great tool, which is useful for all kinds of decision making. From business work to personal admin, a Cost-Benefit Analysis can give you a great basis for a logical, well thought-through decision.

Using the tool? Let me know how you get on!

Eleanor Stowe

View Comments...