Digital White Papers

31 WWW.ILTANET.ORG | ILTA WHITE PAPER FINANCIAL MANAGEMENT The Cost-Benefit Analysis Process: Making an Educated Decision The key issue with a traditional CBA is that reality is never as rosy as we envision. There are several reasons for this, such as: » The Planning Fallacy: A natural tendency to underestimate task completion times » Focalism: The tendency during decision-making to anchor, or overly rely on, information or a specific value and then adjust to that value to account for other elements of the circumstances » Impression Management: The aempt to impress your boss or peers with performance » Optimism Bias: Plain old wishful thinking, a tendency to underestimate costs and overestimate benefits » Negligence: Missing important things » Strategic Misrepresentation: Stretching the truth because you know an initiative will not get approval unless the figures are good There are a number of techniques one can use to improve the CBA process and avoid falling into the gotchas above, including: » Do not determine business benefit estimates yourself; get representatives from the business ("sponsors") to identify them or at least sign off on your estimates of potential benefits » Be aware of sponsors' pet projects and get them to show and justify any assumptions behind their thinking » Be pessimistic and err on the side of underestimating benefits and overestimating costs » Do not assume all benefits accrue from day one; they must be phased in over time » Make allowance for a drop in productivity during migration to any new system » Never forget the importance, cost and time of change management » Never forget the importance, cost and time of training » Measure your actual costs and benefits against the initial CBA estimates (few organizations do this) » Learn from your mistakes for future CBA exercises (known as "reference class forecasting," this process is regarded as the holy grail of continuous planning improvement) An Objective Assessment Sometimes a project that brings no financial benefit or even a financial loss might be worth doing because it is vital to the business, furthers a fundamental business objective or is a prerequisite to some other vital new system. If the firm believes such a small change is feasible, saying yes becomes easy.

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