Cost Benefit Analysis
(Effort v Reward)
Use this framework to determine priorities for different investments
The idea of plotting effort versus reward or cost versus benefit has been around for over 100 years. It was first mooted by Jules Dupuit, a French engineer and economist in the mid-19th century and subsequently formalised by the famous economist Alfred Marshall.
Cost benefit analysis (CBA) is also sometimes referred to as the action priority matrix. It was originally developed to determine the social benefits of projects such as the construction of a road or a bridge. Its applications have been widened to cover almost any type of investment from public policies on health care through to determining the best investments in business.
Typically the costs or the level of effort is measured on the horizontal axis. Costs and effort could be determined at a very simple level or an attempt may be made to build in time and other resources into the equation. On the vertical axis is measured in the benefit or the rewards that will be generated by the projects. Again, this could be a simple financial measurement or a more sophisticated analysis could take into consideration social benefits.
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The tool is extremely useful in business as it identifies the projects and activities that should receive focus as opposed to those that can be ignored. It can be used on a daily basis to determine how to prioritise a to-do list through to screening major projects that are part of a strategic plan. The more sophisticated analyses may require discounting the costs over time and measuring the risks of things going wrong by using a sensitivity analysis.