Decision-Making Tool or Technique

Decision Making Tool: Cost/Benefit Analysis

The decision making tool to be discussed is a cost/benefit analysis. A cost/benefit analysis generally is used within management to generate solutions to problems and help teams decide what course of action is best based on a set of established criteria. The solutions developed as a result of a cost benefit analysis may or may not prove worthwhile; however they do allow management the opportunity to decide whether or not it is 'worth' their time to invest money and effort into solving or addressing a specific problem or proposition (Mind Tool, 2004).

Cost/Benefit analyses are widely used in many different fields, primarily as a means to determine whether or not change needs to be implemented. The technique generally requires that management decide what the value of a particular change may be or what value a change may add to an organization. It is one of the simplest organizational and decision making tools available for use.

The cost benefit analysis requires the decision maker to determine whether costs are a one time incursion or ongoing. Benefits are weighed against the costs over time. The decision maker can use a cost benefit analysis to calculate what that "payback" will be from implementing a change (Mind Tool, 2004).

Generally cost benefit analysis is used to help the decision maker project the risk associated with investment in a particular resource or change and promote efficient resource allocation (CIT, 2004). Generally the time period that a cost benefit analysis is conducted in may be a short or long duration.

Cost Benefit Analysis or CBA allows estimation of the total equivalent money value of the benefits and costs associated with a particularly project (Watkins, n.d.). Such estimation allows the decision maker to project the viability of an investment or project. CBA requires that a common unit of measurement be utilized to gauge the benefit to cost ration. In order to reach a conclusion with regard to the viability of a certain endeavor, all aspects of a project or change must be evaluated and expressed in terms of units (Watkins, n.d.). Most often the common unit that is used to measure the value is money. Thus all the benefits and costs of a project will be described with regard to their money value (Watkins, n.d.).

Benefits and costs have to be described over a designated period of time as well. The "valuation" of benefits and costs should also be indicative of the preferences and choices made by the organization. The value should be reported as something reflective of actual vs. perceived behavior.

One potential risk of utilizing the cost benefit analysis tool is the potential to double count benefits or costs. It is critical that auditing occurs as part of the process to ensure that all costs and benefits are accounted for only once during the life cycle of a product or period of time the study being conducted occurs in.

A project is considered valuable if the benefits exceed the costs of the project in the long-term. Cost benefit analysis can be used in any organization in any situation. Most often is used by financial analysts to determine whether a corporation should invest in something. Alternatively it may be used by an operations department to assess whether a project is worthwhile or not.

An external analysis or case study of a cost benefit analysis applied to an external environment would be the case of an organization considering an employee assistance program.

The cost of implementing such a program (designed to help employees deal with emotional issues) is traditionally based on utilization, meaning that the costs are associated with the number of employees using the program and the number of average visits an employee uses for an established fee. Typical costs might be somewhere in the realm of $3-4 per employee on a monthly basis if a small percentage of employees are utilizing the program.