ADVISORY
By Dr. Kenneth Smith, PMP
Honolulu, Hawaii
& Manila, The Philippines
Last month’s article shed some light on Benefit/Cost (B/C) Analysis. Although sometimes confused and conflated with B/C Analysis, Cost:Effectiveness (C:E) Analysis is distinctly different. Whereas Benefit/Cost determines whether a particular proposed Outcome is economically worthwhile, Cost:Effectiveness assists managers select the most efficacious way to attain an acceptable Outcome within their resources compared to other alternatives where:
- The End Objective (or Result) is not — or cannot be — monetized,
- Cost is not always the overriding consideration, and
- The ‘resource budget’ may also not even be in monetary terms.
The C:E analysis first ‘Ceiling estimates’ – i.e. guesses — ‘How Much’ each option is likely to entail. Although several approaches may be more effective than the current situation, they may not all be affordable or doable within available resources, and less effective ones may be all they can undertake. Then, rather than a definitive “GO/NO GO” quantitative decision based on a pre-determined Benefit Cost Ratio (BCR) as in Benefit/Cost analysis, a subjective decision weighing economy, efficiency and effectiveness can be made at what level ‘the juice is worth the squeeze.’
More often than not, Cost:Effectiveness is used to analyze social development projects during the Planning Phase; to review alternatives which, although abstract, can still be subjectively quantified – by rank-ordering — in a variety of ways. Given a particular program or project Outcome, subject matter experts (SME’s) — occasionally brainstorming with ‘out-of-the-box’ stakeholders — establish intermediate target levels, develop criteria for each level, then identify (or create) possible interventions to attain them. The program cost per incremental unit is then estimated. Where several alternative approaches are considered feasible, the focus in comparing options is to determine the ‘Most Effective’ for the Least Cost per “unit of output” – colloquially known as getting the ‘biggest bang for the buck.’ In some instances, the ‘cost’ per se may be ‘level of effort’ rather than monetary.
For example, in education projects, a higher level of education is perceived as a desirable objective. Salient, easily-quantified, variables could be
- the ‘Period of study’ by a particular approach to attain a pre-determined level of understanding, or competence; and
- the Cost of each option for providing it.
Given a target of how much new knowledge might be acquired per approach, per unit of time studied, the yardstick for comparing options could then be calculated for each option in terms of either cost per unit level, or hours of study time per unit level. With respect to Cost:Effectiveness for instance, purchasing a book to read or a tape to listen to may be relatively low cost options to learn a foreign language, but considerably less efficient in terms of duration or effective than the higher cost of hiring a private tutor. Level of effort –i.e. study/contact hours — per rank-order level of achievement may also be the more significant measure rather than monetary cost. Moreover, although the levels may be rank-ordered, they may not be equi-distant, so attaining successively higher levels may require considerably more resource inputs (the counterpoint to diminishing returns). Subsequently, a correlation study should be used to determine the actual amount of learning gained per time or cost unit of various options, for future planning use.
Since both the “effectiveness” indicator as well as the “cost” in Cost:Effectiveness Analysis could be qualitative, not simply monetary values, there is wide scope for creativity in model building. Moreover, the analysis can transcend sectors, so analysis can be undertaken on different combinations of options — even between different sectors ¾ and “rational” subjective trade-off choices made in terms of either “Least Cost” or “Maximum Effectiveness.” For example, the relative merits and contributions of an integrated multisector project ¾ including infrastructure, agricultural and social development (as means towards a common end or objective) i.e. “Quality of Life” — can be made explicit, measured, factored, weighed and evaluated in terms of one or two across-the-board indicators.
More…
To read entire article, click here
How to cite this article: Smith, K. (2021). Comprehending Cost : Effectiveness, PM World Journal, Vol. X, Issue IX, September. Available online at https://pmworldlibrary.net/wp-content/uploads/2021/09/pmwj109-Sep2021-Smith-comprehending-cost-effectiveness.pdf
About the Author
Dr. Kenneth Smith
Honolulu, Hawaii
& Manila, The Philippines
Initially a US Civil Service Management Intern, then a management analyst & systems specialist with the US Defense Department, Ken subsequently had a career as a senior foreign service officer — management & evaluation specialist, project manager, and in-house facilitator/trainer — with the US Agency for International Development (USAID). Ken assisted host country governments in many countries to plan, monitor and evaluate projects in various technical sectors; working ‘hands-on’ with their officers as well as other USAID personnel, contractors and NGOs. Intermittently, he was also a team leader &/or team member to conduct project, program & and country-level portfolio analyses and evaluations.
Concurrently, Ken had an active dual career as Air Force ready-reservist in Asia (Japan, Korea, Vietnam, Thailand, Indonesia, Philippines) as well as the Washington D.C. area; was Chairman of a Congressional Services Academy Advisory Board (SAAB); and had additional duties as an Air Force Academy Liaison Officer. He retired as a ‘bird’ colonel. After retirement from USAID, Ken was a project management consultant for ADB, the World Bank, UNDP and USAID.
He earned his DPA (Doctor of Public Administration) from the George Mason University (GMU) in Virginia, his MS from Massachusetts Institute of Technology (MIT Systems Analysis Fellow, Center for Advanced Engineering Study), and BA & MA degrees in Government & International Relations from the University of Connecticut (UCONN). A long-time member of the Project Management Institute (PMI) and IPMA-USA, Ken is a Certified Project Management Professional (PMP®) and a member of the PMI®-Honolulu and Philippines Chapters.
Ken’s book — Project Management PRAXIS (available from Amazon) — includes many innovative project management tools & techniques; and describes a “Toolkit” of related templates available directly from him at kenfsmith@aol.com on proof of purchase of PRAXIS.
To view other works by Ken Smith, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/dr-kenneth-smith/
