We all have likely heard of cost-benefit analysis.
On the surface, it is a very simple tool that is meant to help us make better decisions.
The origin of this tool is said to go back close to 200 years.
The simplest definition of cost-benefit analysis could be stated as the process of calculating any change or action taken that results in measurable benefits that outweigh any measurable costs.
Our decision making is facilitated because if the benefits outweigh the costs, we move forward with the change or action.
Sounds simple enough. Decision made.
Given this simplicity, you would think cost-benefit would be a primary tool for leaders and decision makers.
Yet, in all my years, I can hardly remember a scenario when someone presented a cost-benefit analysis as a tool to influence an important decision.
Moreover, I can’t remember a time when I have used a cost-benefit analysis alone to influence decision making.
I can’t endeavor to explain for others, I can only relay my perspective.
To me, cost-benefits is somewhat one-dimensional. I find it somewhat like pros and cons which I personally do not usually use.
Both these tools lack weight of importance, qualitative measures, and non-financial factors.
If you are simply looking at $ benefit and $ cost, the tool might work.
Yet, how many major important decisions in your life have simply been a factor of $ alone?
And, as human beings, we gain great satisfaction from moments of enjoyment, time spent with family and friends, traveling to exciting places, eating great food.
For these instances, it may be very easy to affix a $ cost yet what is the $ benefit?
Additionally, what if you can do a $ cost benefit analysis and show a large $ benefit yet the cost would entail compromising your own mental health or that of employees?
What decision do you make then?
Would that $ benefit be worth it?
It may be possible to calculate the $ cost of absent employees, yet what about the human impact?
And what is the $ benefit today is large, at the expense of the environment in the future?
This is sometimes referred to as an “Economic Bad.”
Imagine businesses had to account for “Economic Bad” in their financial statement?
Or, if countries had to factor an “Economic Bad” figure in their Gross Domestic Product (GDP) calculations?
Needless to say, there are more qualitative factors that need to be considered in any type of cost-benefit analysis.
So, the next time someone talks to you about cost-benefit, ask them to quantify the qualitative factors as well, if possible.