When would you use a Cost Benefit Analysis(CBA)?
January 16, 2011 11:09 AM Subscribe
When would you use a Cost Benefit Analysis(CBA)?
I have recently asked for help in general in asking what CBA is. I now have a good understand of what it is and it's strengths and weaknesses. Could someone please tell me why/when CBA's are used.
I have recently asked for help in general in asking what CBA is. I now have a good understand of what it is and it's strengths and weaknesses. Could someone please tell me why/when CBA's are used.
Its most frequently used in strategic analysis, most frequently by governmental organizations. The GAO (Government Accountability Office) uses these frequently when doing analysis of various pieces of legislation.
It can also be used in businesses for strategic planning.
posted by bitdamaged at 11:15 AM on January 16, 2011
It can also be used in businesses for strategic planning.
posted by bitdamaged at 11:15 AM on January 16, 2011
Response by poster: Atrazine: For part of a report I'm doing, I have to explain when a CBA would be used. I'm hoping to retrieve the basics from here so that I can get a basic understanding of it.
posted by sockpim at 11:19 AM on January 16, 2011
posted by sockpim at 11:19 AM on January 16, 2011
Not only is this homeworkfilter, but this particular question was pretty well answered in your last one.
Try Wikipedia if you didn't get what you need last time.
posted by supercres at 11:28 AM on January 16, 2011 [2 favorites]
Try Wikipedia if you didn't get what you need last time.
posted by supercres at 11:28 AM on January 16, 2011 [2 favorites]
Response by poster: The question from last week was asked by me.
It would be homework if I was still at school. Sadly those days are over. If you don't wish to help supercres then please don't spam my question.
posted by sockpim at 11:31 AM on January 16, 2011
It would be homework if I was still at school. Sadly those days are over. If you don't wish to help supercres then please don't spam my question.
posted by sockpim at 11:31 AM on January 16, 2011
Every time I've encountered real world use of a CBA is when a company has no other real motivation to either pursue an action or ignore it. When it's unclear how a decision will impact a company financially and otherwise, a CBA is tool similar to a coin toss. They don't care either way and use the CBA to give them reasons for support (or nonsupport) for an action.
posted by msbutah at 11:37 AM on January 16, 2011
posted by msbutah at 11:37 AM on January 16, 2011
Engineering Economics uses it quite often. For all my civil engineering road projects we had to run a LCCA to compare the costs of various proposals.
posted by JJ86 at 11:37 AM on January 16, 2011
posted by JJ86 at 11:37 AM on January 16, 2011
@msbutah, I don't know how it is in other fields but us engineers do it because running actual data through the LCCA calculations provides answers that are helluva better than a coin toss. Engineers don't like to guess where cost savings lie.
posted by JJ86 at 11:40 AM on January 16, 2011
posted by JJ86 at 11:40 AM on January 16, 2011
You make CBAs every minute of every day. Let's say you're standing outside a movie theater. You have only enough money and time to see one movie. You weigh the options available to you, trying to find the movie that will entertain you the most appropriately for your current mood. Or, you decide to spend your money on something else entirely. Voila.
posted by Cool Papa Bell at 11:49 AM on January 16, 2011 [1 favorite]
posted by Cool Papa Bell at 11:49 AM on January 16, 2011 [1 favorite]
@JJ86 I was thinking of a CBA from a business management perspective, where things are not so definite as engineering.
posted by msbutah at 1:36 PM on January 16, 2011
posted by msbutah at 1:36 PM on January 16, 2011
Ok, so say I want to purchase a document configuration management system for my department . I would start by getting the cost of software and liscencing, training (if applicable). I would then have a base cost. I would estimate how long the product would be in use for, and then calculate any maintenance costs. From this, I would have a total cost which I would have to match or exceed in savings for the purchase to be worth it. Maybe we need the configuration mangement tool because there have been man hours lost from people working on the wrong document. The goal would be to have the total savings across the department beat the cost. Now, sometimes the cost isn't a straight savings like that, maybe that puts me in compliance with a client's requirement, meaning that now we can do a spcific job for them, and/or future work for them. That now puts things in a different light, and may stretch even a non-cost effective cbs into a tollerable range - although I did just merge my description with a compliance analysis.
posted by Nanukthedog at 2:31 PM on January 16, 2011
posted by Nanukthedog at 2:31 PM on January 16, 2011
A CBA is supposed to:
- bring some rigour to what is usually a 'gut instinct' process;
- provide some assurance to stakeholders that you've done your due diligence; and
- allow to you compare competing options objectively.
You should perform a CBA for any moderately complex proejct or investment, because:
- writing it down and subjecting your analysis to external scrutiny will reduce the risk that you will overlook risks and costs, or reduce the significance of those you do identify;
- there is likely to be more than way way to reach your objectives, but it is rarely obvious which will be the most efficient and effective, and intuition is next-to-useless for making these sorts of judgments;
- the CBA will give you some useful indicators to watch to make sure you're on track - a sort of early warning system - and if things go pear-shaped, you can look at your underlying assumptions, then correct them for future exercises.
In practice, most CBA activities aren't sufficiently rigourous to overcome participants' natural bias toward overestimating benefits, their expertise and the speed with which tasks can be accomplished while underestimating costs, risks and the consequences of failure. If anything, these biases are exaggerated by CBAs because group think sets in and those portraying sunshine and lollipops are 'doers' who are 'committed to the project' while those who raise costs and risks are naysayers with a 'doom and gloom' mentality. Be suspicious of CBAs undertaken by beneficiaries rather than independent outsiders - the incentive structures are all wrong, and you can bet the analysis will be clouded.
posted by obiwanwasabi at 4:17 PM on January 16, 2011
- bring some rigour to what is usually a 'gut instinct' process;
- provide some assurance to stakeholders that you've done your due diligence; and
- allow to you compare competing options objectively.
You should perform a CBA for any moderately complex proejct or investment, because:
- writing it down and subjecting your analysis to external scrutiny will reduce the risk that you will overlook risks and costs, or reduce the significance of those you do identify;
- there is likely to be more than way way to reach your objectives, but it is rarely obvious which will be the most efficient and effective, and intuition is next-to-useless for making these sorts of judgments;
- the CBA will give you some useful indicators to watch to make sure you're on track - a sort of early warning system - and if things go pear-shaped, you can look at your underlying assumptions, then correct them for future exercises.
In practice, most CBA activities aren't sufficiently rigourous to overcome participants' natural bias toward overestimating benefits, their expertise and the speed with which tasks can be accomplished while underestimating costs, risks and the consequences of failure. If anything, these biases are exaggerated by CBAs because group think sets in and those portraying sunshine and lollipops are 'doers' who are 'committed to the project' while those who raise costs and risks are naysayers with a 'doom and gloom' mentality. Be suspicious of CBAs undertaken by beneficiaries rather than independent outsiders - the incentive structures are all wrong, and you can bet the analysis will be clouded.
posted by obiwanwasabi at 4:17 PM on January 16, 2011
A nice overview of CBA from the Australian Government's Office of Best Practice Regulation:
What is cost-benefit analysis; and how and where can it be used?
posted by obiwanwasabi at 6:39 PM on January 16, 2011
What is cost-benefit analysis; and how and where can it be used?
posted by obiwanwasabi at 6:39 PM on January 16, 2011
This thread is closed to new comments.
posted by atrazine at 11:15 AM on January 16, 2011