Cost Benefit Analysis

Definition and Purpose

A technique that can be used to evaluate
government projects and programs

It encompasses an appraisal of a policy

based on the costs and benefits of the
project

It should be performed for each investment

alternative to enable the evaluation and
comparison of alternatives
 Measurement in the Cost Benefit
Analysis
1. Net Present Value
 The sum of the present value of each cost and
other effects of a project
 A positive NPV indicates that benefits outweigh the
costs of a project
4. Benefit Cost Ratio
 the ratio obtained by dividing of the sum of the
present value of the benefits by the sum of
the present value of the costs
 A BCR greater than 1 indicates that the benefits
outweigh the cost of a project
8. Net Present Value per unit of Investment
 the net present value divided by the present value
of a project’s capital cost
 Process
1. Determine/Define Objectives
 problem definition, pertinent background
information and a list of investment objectives
that identify how the system will improve the
work process and support the mission.
2. Document Current Process, with items to consider:
 Customer service
 System architecture
3. Estimate Future Requirements
 Lifecycle time
 Lifecycle demands
 Process (Cont’d)
4. Collect Cost Data
 Historical Organization Data

 Current System Costs

 Market Research

 Publications

 Special Studies

 Analyst Judgment

5. Choose at Least Three Alternatives

“Do nothing” or “Continue current operations” should
not be considered as an alternative !
6. Document CBA Assumptions
 If an alternative is eliminated because it is not feasible,
the assumption should be clearly explained and justified
7. Estimate Costs (annual, personnel costs,
depreciation,activities)
 Process (Cont’d)
8. Estimate Benefits
 Define Benefits
 Identify Benefits

 Establish Measurement Criteria

 Classify Benefits

 Estimate Tangible Benefits

 Quantify Intangible Benefits

9. Discount Costs and Benefits

convert to a common measurement unit by
discounting future dollar values and transforming
future benefits and costs to their “present value”
 Process (Cont’d)
10. Evaluate Alternatives
Table 1. Sample Investment Comparison

Alternativ Discounted Discounted Discounted Benefit-Cost

e Cost (DC) Benefit Net (DC- Ratio
(DB) DB) (DC/DB)
1 1,800,000 2,200,000 400,000 1,22
2 1,850,000 1,750,000 (-100,000) 0,95
3 2,000,000 2,000,000 0 1,00
4 2,200,000 2,100,000 (-100,000) 0,95
11. Perform Sensitivity Analysis
Identify Input Parameters
Repeat the Cost Analysis
Evaluate results
 Process (Cont’d)
12. Compare Investments
 Even if the CBA shows that benefits will outweigh

costs, using Payback Period and Return on Investment

(ROI) analysis help demonstrate an investment is a
better utilization of funds than other proposed
investments
Cost Effectiveness
Analysis
Frando R. Saragih
2206655
 Introduction
 Cost-effectiveness analysis refers to the
consideration of decision alternatives in which
both their costs and consequences are taken into
account in a systematic way. It is a decision
oriented tool, in that it is designed to ascertain
which means of attaining particular educational
goals are most efficient. For example, there are
many alternative approaches for pursuing such
goals as raising reading or mathematics
achievements. Developed in the military, CEA
was first applied to health care in the mid-1960s
and was introduced with enthusiasm to clinicians
by Weinstein and Stason in 1977
 Basic of Cost Effectiveness
Analysis
 Comparing the relative value of
various clinical strategies
 Comparison tools to evaluate choice
 Provide peer-reviewed evidence for
decision support
 Measuring Cost Effectiveness
 Assessing effectiveness
Determine the problem and measure the
effectiveness
 Cost Estimation
1. Identification of Ingredients
2. Determination of the value or cost of the
ingredients and the overall costs of an
intervention
3. An analysis of the costs in an appropriate
decision-oriented framework

.
 Common Application
 Evaluating Program Options
Determining appropriate screening frequencies is
a useful application of cost-effectiveness analysis

 Justifying Program Implementation

Cost-effectiveness analyses can be used to
support qualitative arguments for health
interventions
Utility Analysis
 Introduction
 Utility analysis is a quantitative method
that estimates the dollar value of benefits
generated by an intervention based on the
improvement it produces in worker
productivity. Utility analysis provides
managers information they can use to
evaluate the financial impact of an
intervention, including computing a return
on their investment in implementing it.
 What Is Needed to Complete a
Utility Analysis
 A method for measuring role productivity
 A way to assign monetary value to role
productivity
 The distribution of productivity among
performers of the role
 The dollar value of a one standard
deviation difference in role productivity
(SD$)
 A method to measure the intervention's
impact on role productivity
 Method
1. Understand the people whose decision-making
the study will support.
2. Learn about the intervention we will assess.
3. Learn about the role(s) whose productivity is
affected by the intervention.
4. Determine how to measure the productivity of
the performers of each role.
5. Determine how to value role productivity in
dollars.
6. Decide how to measure the affect of the
intervention on role productivity.
7. Create a plan for the utility analysis.
 Doing the Analysis
1. Determine the productivity of
performers.
2. Determine the dollar value of a one
standard deviation difference in role
productivity (SD$).
3. Compute the effects on performer
productivity associated with the
performer's participation in the
intervention being evaluated.
4. Compute the dollar value of productivity
improvements generated by the
 Following Up the Analysis
 Add context to the findings.
 Report the results of the analysis.
What is Balance Scorecard?
 The Balanced Scorecard
According to Kaplan & Norton
Harvard Business Review – January-February 1992

Defined: Includes:

“a set of measures that gives  Financial Measures

top managers a fast but
comprehensive view of the  Operational Measures
business”
 Customer Satisfaction
 Internal Processes
 Innovation and
Improvement Activities
 The Balanced Scorecard
 Ties performance measures to corporate strategy
 “Balance” includes:
• short & long term objectives
• financial and non-financial measures
• external & internal measures
• various perspectives
 Purposes of the balanced scorecard include:
• clarify & translate vision & strategy
• communicate & link strategic objectives & measures
• plan, set targets & align strategic initiatives
• enhance strategic feedback & learning
Why We Use Balanced
Scorecard?
 Kaplan & Norton
 Clarify and update strategy

 Communicate strategy throughout the company

 Align unit and individual goals with strategy

 Link strategic objectives to long term targets and annual

budgets

 Identify and align strategic initiatives

 Conduct periodic performance reviews to learn about and

improve strategy

 Keep Focus

 Accurate, comprehensive view business performance

 Cause-effect linkages

 How individual staff members and teams help contribute to

the overall outcomes

 Connecting the desired outcomes with the drivers of results

• Information literacy training and excellence in teaching,
learning and research
Who Implement Balanced
Scorecard?
Organization Sector Country

Bank of Tokyo-Mitsubishi Banking Japan

BMW Financial Services Financial Services Germany

DaimlerChrysler Manufacturing Germany

ExxonMobil Corp. Energy USA

Hilton Hotels Corp. Hospitality USA

IBM Information Technology USA

Philips Electronics Manufacturing Netherlands

Sears Roebuck & Company Retail USA

Siemens AG Manufacturing Germany

Southern Gardens Citrus Processing Corp. Food Processing USA

St. Michael's Hospital Health Care Canada

UK Ministry of Defence Government UK

Unicco Service Co. Industrial Services USA

United Way of Southeastern New England Humanitarian USA

University of California, Los Angeles Higher Education USA

UPS Shipping United States

US West Telecommunications USA

Walt Disney World Company Entertainment USA

 CONCLUSION
 Defines the strategic linkages to integrate performance
across organizations

 Communicates objectives and measures to a business unit,

joint venture, or shared service

 Aligns everyone within an organization so that all

employees understand how what they do supports the
strategy

 Provides a basis for compensation provides feedback to

senior management if the strategy is working

 The Balanced Scorecard is part of a performance

management system to enable organizations to achieve
their goals

 Translates vision and strategy

 Four Fundamental Perspectives
Financial perspective

How do we perform
according to our
shareholders?

Customer perspective Vision Business proses

and perspective
How do our customer Strategy
see us? What must we excell at?

Learning and growth

perspective

Can we continue to
improve & create value?
 Revolution in Strategic Planning
TRADITIONAL
No STRATEGIC PLANNING BALANCED SCORECARD
Planning cycle typically 5
1 Planning process shorter than 3 years
years

Innovation and major Innovation emerges from across

2
change is not likely to occur functional teams

Contains a large number of

3 Focus on a 3 or 4 strategic themes
goals, objectives

Managers tend to focus on Managers have a balanced view of the

4
short term financial goals major perspectives of performance

No performance reporting Performance data is widely reported via

5
mechanism a distributed software system
6 Not transparent Transparent
Advantages Balanced Scorecard
 A framework to focus on key perspectives

 Helps align key performance measures

 Provides management with a comprehensive picture of

business goals and strategies

 Gives a new way to executives to assess :

 how well their organization is functioning
 how to predict future performance
 how to align the organization toward new strategies to
achieve breakthrough performance

 Transforms the strategic plan from an attractive but

passive document into the marching orders for the
organization on a daily basis

 Enables executives to truly execute their strategies

 Disadvantages Balanced Scorecard
 Lack of time for the decision makers to focus on strategy

 Confusion between operational efficiency and strategy

 Difficult in creating well defined metrics and connecting

them to deliverables

 Cascading the objectives down to the staff that can deliver

the results

 Difficult and time consuming to implement a

comprehensive balanced scorecard system in a large
organization

 Require sustained top level support and commitment to

ramp up and put the system in place
 How to Implement BSC
 Organizational assessment

 Identify strategic themes

 Define perspectives and strategic objectives

 Develop a strategy map

 Derive performance metrics

 Craft and prioritize strategic initiatives

 Automate and communicate

 Cascade the balanced scorecard through the

organization

 Collect data, evaluate, and revise

 Example BSC : Regionale Airline
 Mission : Dedication to the highest quality customer service
delivered with a sense of warmth, friendliness, individual pride,
and company spirit
 Vision : Continue building on our unique position – the short haul,
low fare, high frequency, point to point carrier in America