Limitations Of A Cost-Benefits Analysis
Cost-Benefit (CB) Analysis is a powerful tool to assess project initiatives or activities and to take decisions by using the outcome of the analysis. The process involves monetary value of initial and ongoing expenses vs. expected return (wiki).
There are many benefits of this planned approach. But there are also disadvantages of which one is critical.
And this is not so much the analysis on itself but the way in which it is used. Normally there is not one project to assess. CB analysis can be a recurring activity. Everybody can setup a plan, assess the return and come up with some costs. Should you than decide to execute any project that has a positive net return?
The main challenge is not to assess a new project, but to assess the goal of where the company is heading and to check whether initiatives fit in that direction. This is normally another activity than setting up a CB Analysis.
Projects are about bringing new elements to a existing business or sometimes they add a feature to the organization, or even change the culture of the organization. If thought feasible. So, projects change the business of the company. And you need to know whether this change is the right one.
What CB analysis cannot offer is a match of the project with the direction of the strategy. Many projects contribute little to the main strategy of the company, whereas the cost benefit analysis would indicate that the net future return is positive.
If there are many projects to assess the project with the best CB outcome could obtain the highest priority but could mismatch the goal of the organization.
More or less the same issue comes up when assessing a project on advantages and disadvantages. These -- lists -- do not give you a sense of direction.
In the end a CB analysis is required to check projects before initiating them. But that is standard practice. Try to diminish analysis resources on random activities. If there is a clear direction, CB analysis can be left out as much as possible.
2008 Hans Bool
Hans Bool writes articles about management, culture and change. If you are interested to read or experience more about these topics have a look at: Astor White.
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