Cost-benefit and cost-performance analysis
Cost-performance and cost-benefit analyses estimations are used to determine the level of investment that is appropriate for your project. They are ways of answering the questions, "Is this worth doing?" and "How will we know whether it was worth it when we're done?" These tools are methods for assessing the value of a project by comparing its costs to measures of its performance, or more generally to the value of benefits it produces. The analysis requires accurate cost data, as well as measures of performance in appropriate units and overall benefits. Cost-benefit analysis tends to emphasize quantitative evaluation, while the broader concept of cost-performance analysis more readily accounts for qualitative results.
Cost and performance data can be obtained from operational records, direct observation, surveys, or group meetings at which those who perform the operations report and discuss costs and performance measures. Both one-time costs and ongoing costs should be included. If you have used the tools above to generate modest, moderate and elaborate alternatives and to estimate costs, then you are ready to make comparisons on a cost-performance or cost-benefit basis.
What are they?
A way to understand the value proposition. Many books and articles have been written about cost-benefit analysis and it can be extremely intensive and elaborate in implementation. At its heart, however, this kind of analysis helps decision makers understand the value that can be obtained (in terms of goals achieved) for the investment to be made.
A way to compare competing alternatives. Cost-benefit or cost-performance analyses that compare alternative approaches on the same criteria help decision makers choose the best alternative given desired goals and resources available.
What are they good for?
Making informed choices. When decision makers look at a business case, information from these kinds of analyses are important in choosing whether and how to go ahead with a project. They lay out the value proposition for various alternatives by showing how they can achieve program goals and what it will cost to reach them. Decision makers can see the strengths and weaknesses of different approaches and make the trade-offs that lead to a final decision about whether and how to proceed.
Identifying new alternatives. By explicitly comparing the costs and benefits of the various approaches against a given set of criteria, you may be able to spot additional alternatives that combine different elements of the original set. For example, you may see a way to take advantage of elements of one approach early on and then move to a second approach later.
Evaluating a project. The results of your cost-benefit or cost-performance analyses form an important basis for evaluation. After a project is implemented, these cost and performance measures can be used to evaluate whether the initiative actually achieved its goals within its expected budget.
Some limitations and considerations
Complex environment. A comprehensive analysis of your project's impact may be difficult to prepare because of the complex environment in which public sector programs reside, and the many factors that may affect the intended outcomes of the project. It is often difficult or impossible to attribute outcomes and impacts directly to one specific initiative to the exclusion of all other efforts that are seeking similar goals.
Can over-emphasize quantitative data. Classic cost-benefit analysis seeks to place a quantitative value on every aspect of cost and benefit. For example, if a project saves lives, classic cost benefit would put a dollar figure on every life saved. In the public sector, many efforts are aimed at qualitative goals that are difficult or impossible to quantify. These goals may improve convenience for citizens, improve quality of life, or act in concert with other programs so the direct effects are impossible to discern. Nevertheless, these benefits need to be identified, described and taken into account.
For more information
Bloniarz, P., and K. Larsen (2000). "A Cost and Performance Model for Supporting Web Service Investments." Communications of the Association for Computing Machinery, 43 (2) 109-116.
Boardman, A. E., D. H. Greenberg, A. Vining, and D. L. Weimer, eds. (2000) Cost Benefit Analysis: Concepts and Practice. 2nd Ed. Upper Saddle River, NJ: Prentice Hall.
Boehm, B. W. (1988) "A Spiral Model of Software Development and Enhancement." Computer, (May), 61-72
Center for Technology in Government. "Return on Investment in IT: A Guide for Government Decision Makers." www.ctg.albany.edu/publications
[Retrieved August 10, 2003].
Levin, H., and P. McEwan, eds. (2000) Cost Effectiveness Analysis: Methods and Applications. Thousand Oaks, CA: Sage Publications.
Nas, T. F. (1996) Cost Benefit Analysis: Theory and Application. Thousand Oaks, CA: Sage Publications.