{"id":25394,"date":"2018-03-21T09:47:00","date_gmt":"2018-03-21T09:47:00","guid":{"rendered":"https:\/\/kepner-tregoe.com\/is-cost-benefit-analysis-leading-to-bad-decisions\/"},"modified":"2025-07-10T14:41:42","modified_gmt":"2025-07-10T14:41:42","slug":"is-cost-benefit-analysis-leading-to-bad-decisions","status":"publish","type":"post","link":"https:\/\/kepner-tregoe.com\/fr\/blogs\/is-cost-benefit-analysis-leading-to-bad-decisions\/","title":{"rendered":"Is cost-benefit analysis leading to bad decisions?"},"content":{"rendered":"<p class=\"intro\">Cost-benefit analysis is one of the most widely used methods used by companies and governments to compare alternatives and drive decision making.\u00a0 What makes this method so popular is its quantitative basis and relative simplicity \u2013 the concept of cost-benefit analysis is easy for almost anyone to grasp.\u00a0 But is this evaluation tool being over-used and leading to bad decisions?\u2026 perhaps.<\/p>\n<p>The general premise of cost-benefit analysis is that the total costs are compared to the total benefits of an option \u2013 yielding a value that can be compared easily against other options in a portfolio \u2013 to provide an apples-to-apples comparison of alternatives.\u00a0 In concept that\u2019s great\u2026 but there are a number of disadvantages and limitations to this method that you should be aware of.<\/p>\n<ul>\n<li>Under-valuing of factors that cannot be quantitatively expressed \u2013 often referred to as \u2018intangibles\u2019, there are a large number of considerations that aren\u2019t easily quantified for inclusion in cost-benefit analysis either because they deal with unknowns or involve a high degree of subjectivity in the way they are assessed.<\/li>\n<li>Benefits are often based on hidden assumptions about the current environment \u2013 When decision makers and analysts quantify benefits, they are usually framed in the context fo the current business\/operational environment or a \u2018most-likely\u2019 set of assumptions about the future.\u00a0 Both of these benefit framing techniques have a strong bias towards option that influence factors that are known and can cause highly innovative opportunities to be overlooked.<\/li>\n<li>Both cost and benefit estimates tend to be overly optimistic \u2013 there is some degree of subjectivity involved even in quantitative analysis methods.\u00a0 As a general trend, analysts tend towards being optimistic and over-estimate benefits and under-estimate costs.\u00a0 If done consistently and used only in a comparative evaluation, this isn\u2019t a problem, however cost-benefit analysis frequently is used to set stakeholder expectations on the chosen-alternative.<\/li>\n<li>Failure to properly consider opportunity costs \u2013 very few organizations have unlimited resources and that is why they are performing the cost-benefit analysis in the first place (because a decision needs to be made).\u00a0 A common mistake when making decisions is to only consider direct alternatives as the opportunity costs of the choice being made, instead of considering the broader set of alternatives that the organization could use its resources for.\u00a0 When this happens, companies often select one of the given alternatives when the best choice is to select none of the options and re-allocate the resources elsewhere.<\/li>\n<li>Timing of costs and benefits in the context of a portfolio \u2013 most options in a set of alternatives include some variation in the timing of costs and benefits.\u00a0 The typical method for normalizing timing factors in cost-benefit analysis is through the use of net present value calculations.\u00a0 What NPV doesn\u2019t take into account is the impact that timing plays on the cash-flow of the organization as a whole in combination with other investments being made in the portfolio.\u00a0 Considering only the total cost and benefit of each alternative can lead to sub-prime optimization of the organizations resources.<\/li>\n<\/ul>\n<p>Cost-benefit analysis can be a powerful tool for portfolio analysis and decision making but it has limitations that are often over-looked in its simplicity- leading to bad decisions.\u00a0 By considering these limitations and supplementing cost-benefit analysis with other portfolio analysis techniques, the common pitfalls can be identified and mitigated leading to better quality and more consistent outcomes from your portfolio decisions.\u00a0 The key is for the decision maker to look at the bigger picture of this decision in the context of the organization as a whole \u2013 balancing quantitative techniques like cost-benefit with other (qualitative) methods.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Cost-benefit analysis is one of the most widely used methods used by companies and governments to compare alternatives and drive decision making.\u00a0 What makes this method so popular is its quantitative basis and relative simplicity \u2013 the concept of cost-benefit analysis is easy for almost anyone to grasp.\u00a0 But is this evaluation tool being over-used [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":653,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"ppma_author":[163],"class_list":["post-25394","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-other"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.7 (Yoast SEO v27.7) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Is cost-benefit analysis leading to bad decisions? - Kepner-Tregoe<\/title>\n<meta name=\"description\" content=\"The general premise of cost-benefit analysis is that the total costs are compared to the total benefits of an option - yielding a value that can be compared easily against other 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