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Cost-benefit analyses for better decisions

Cost-benefit analyses for better decisions 15.03.2017 - Decisions are an everyday aspect of project management and project managers are often expected to make them both quickly and professionally. That’s not an easy ask because to make informed decisions you need enough time to consider all the facts. In a project environment, however, this time isn’t always available, so the project manager will resort to using one of several possible decision support tools. He may opt for the cost-benefit analysis, a tool that helps project managers to make fast and informed decisions.
 
Choosing the best alternative
 
Over the course of a project decisions will have to be taken to keep the project on track. In many cases there won’t be time to consider all the alternatives at length, and the project manager won’t always have all the information he really needs to make the decision. Despite this, he has to make the best possible decision as quickly as possible. One approach is to make a list of the pros and cons for each of the proposed alternatives. Although this is helpful in simple decisions, it can be misleading in complex ones. At some time or another in his career, every project manager will find himself holding a list of pros and cons clearly pointing in one direction and a gut feeling clearly pointing in the other. This is an intrinsic aspect of decision making because one single argument can sometimes be so crucial that it overrides five other arguments. So a list of pros and cons alone isn’t enough. But it is a good starting point that provides a structured overview of all the decision criteria in advance of a cost-benefit analysis.

Structuring decisions with cost-benefit analyses
 
The cost-benefit analysis is a decision support tool that can be used in various areas of business, though it is mainly used in project management. It‘s the ideal tool when there are several possible alternatives to choose from. First of all, the options and alternatives have to be listed. It’s always a good idea to select between two and four possible alternatives and to group similar solutions together, otherwise the analysis will be too complex and fragmented. In the second step the decision criteria have to be defined on the basis of the project‘s objectives and context, on the one hand, and the customer’s requirements and specifications, on the other. It makes sense to define between eight and twelve criteria, depending on the project's type and scope, in this phase. The next step is to weight the criteria. If quality is more important to the customer than meeting deadlines, the quality criteria must have a stronger weighting than the schedule criteria and vice-versa. One way of expressing the weightings is in percentage terms. Then the project manager rates each criterion according to a defined scale. For example, the scale could be one to five points, with one point denoting “irrelevant” and five points denoting “very relevant” and everything in between.
 
Making decisions with cost-benefit analyses
 
The last step in the cost-benefit analysis is to assign points to each of the criteria in combination with each of the alternatives. The points awarded indicate which alternatives offer more advantages over the other alternatives. The most important thing isn’t the number of arguments in favour of a specific alternative, but the weighting of the alternatives according to the specific criteria that the project manager has defined for his project. The cost-benefit analysis and its result, expressed in points, helps the project manager to make the right decision, whereby the most important part of the analysis process is the weighting. In the weighting process, the project manager has to take customer requirements into account, and it can be helpful to request a meeting with the customer to specifically discuss the defined project objectives again. Some customers will have a stronger focus on quality, while others will attach more importance to schedule or budget compliance (the project management constraints in the iron triangle model). However, in the cost-benefit analysis the project management team has to look beyond the three criteria of costs, time and quality, because some customers put factors such as creativity, innovation or design first.
 
The advantages and disadvantages of the cost-benefit analysis
 
One definite advantage of the cost-benefit analysis is transparency. The project manager and everyone else involved in the analysis can follow the entire process and they are aware of the analysis and decision making criteria. Even several months further down the line the entire project team can look at the analysis and see the reasoning behind the decision. Also, the decision doesn't have to be taken by the project manager alone, and a cost-benefit analysis is a great opportunity to encourage teamwork and include all project stakeholders. One slight disadvantage is that the weighting of the criteria is always subjective, so the decision is also subjective. This is because any cost-benefit analysis is always based on a definition of how important the individual criteria are. Also, cost-benefit analyses are not ideal if there are too many alternatives because the analysis process then becomes too complex. If there are many different alternatives, it could well be more practical to use a different analysis tool.

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