Laxmi’s snippets of wisdom: Cost-benefit analysis

This is a guest post by Hariharan Laxminarayan 

Imagine that you've recently taken on a new project, and your people are struggling to keep up with the increased workload.

 You are therefore considering whether to hire a new team member. Clearly, the benefits of hiring a new person need to significantly outweigh the associated costs.

 This is where Cost-Benefit Analysis is useful.

 As its name suggests, Cost-Benefit Analysis involves adding up the benefits of a course of action and then comparing these with the costs associated with it.

 The results of the analysis are often expressed as a payback period – this is the time it takes for benefits to repay costs. Many people who use it look for payback in less than a specific period – for example, three years.

 You can use the technique in a wide variety of situations. For example, when you are:

• Deciding whether to hire new team members. 
• Evaluating a new project or change initiative. 
• Determining the feasibility of a capital purchase.

 However, bear in mind that it is best for making quick and simple financial decisions. More robust approaches are commonly used for more complex, business-critical or high-cost decisions.

 In Negotiation, when competition does not exist or is imperfect, you may need to consider cost

analysis. While cost modelling may allow you to estimate cost components, by far the best

situation is when you can obtain accurate cost information from suppliers. Such information generally can only be assumed to be accurate and useful when it obtained under the condition

of a long-standing collaborative relationship with a supplier where trust is present. Under such

condition, cost analysis should be one component of an ongoing collaborative effort at cost

reduction and containment. When practised in this manner, cost analysis becomes a tool

applied toward mutual gain and success of Negotiation.

Hariharan Laxminarayan is a procurement professional with 25 years’ experience. He is an active member of the Chartered Institute of Procurement and Supply (CIPS), being a Chartered FCIPS, CIPS Global Congress Member and Chair at CIPS UAE - Northern Emirates. And a person I am happy to have as a friend and mentor for the past several years.