Cost-Benefit Analysis

Cost-Effectiveness Analysis

Objective: to understand how CBA  and CEA could help in evaluating a program or project

Type of evaluations

•          . Goal-based evaluation

•          b. Process-based evaluation

•          c. Outcomes-based evaluation

•          Related to those type of evaluations:

•          Cost-Benefit Analysis CBA

•          Cost-effectiveness Analysis CEA

•          Financial Evaluation

Why CBA or CEA?

•          All programs aim to produce benefits that outweigh their costs.

•          Costs and benefits can be compared to determine the worthiness of a program.

•          Cost-benefit and cost-effectiveness analysis are the most common methods used to accomplish the comparison between costs and benefits.

•          Both analyses provide information about the net present value (NPV) of a program. NPV is an indicator of how much value an investment or project adds to the firm. The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. 

•          In CBA the benefits are transformed into monetary terms and compared to program costs.

•          In CEA benefits are transformed into non-monetary unit, such as lives saved, people attended, and are compared with program costs in dollars.

How do they work?

•          At the planning stage, CBA or CEA may be undertaken before the fact, based on estimates of anticipated cost and benefits.

•           They are tools analysis, particularly as ways to examine the net benefits of a proposed project or program involving large capital investments.

•          After a program has been in operation for some time, CBA and CEA may be used after the fact, to assess whether the actual costs of the program were justified by the actual benefits.

CBA

•          CBA is a quantitative analytical tool to aid decision-makers in the efficient allocation of resources.

•          CBA helps managers answer questions such as:

•          Does the proposal provide a net benefit to the community as a whole?

•          Should the proposed project, programme or policy be undertaken?

•          Should the project or programme be continued?

•          Which of various alternative projects or programmes should be undertaken?

•          The CBA could be done from three perspectives or points of view:

1. Individual’s perspective
2. government perspective
3. social perspective.

•          Definition of costs and benefits will usually differ from one perspective to the next.

The social perspective, for example accounts for all costs and benefits to society. However, the individual perspectives may help shed light on differing viewpoints about the worth of the program, or explain a program’s success or failure.

The individual’s perspective

•          It examines the program costs and benefits to the program participant: person, a family, a company or a non-profit organization.

•          CBA done from such a perspective often produce high benefit-cost ratios because the government or society subsidizes the program from which the participant benefits.

Government perspective

•          The analysis from a government perspective values costs and benefits from the point of view of the funding source.

•          It is basically a financial analysis, examining the financial costs and the direct financial benefits to the government.

•          Cash flows that would be examined: program administrative costs, direct cash outlays (expenditure), taxes paid, unemployment insurance, and others.

Planning Your Program Evaluation

Depends on What Information You Need to Make Your Decisions and On Your Resources.

Often, management wants to know everything about their products, services or programs. However, limited resources usually force managers to prioritize what they need to know to make current decisions.

Your program evaluation plans depend on what information you need to collect in order to make major decisions. Usually, management is faced with having to make major decisions due to decreased funding, ongoing complaints, unmet needs among customers and clients, the need to polish service delivery, etc. For example, do you want to know more about what is actually going on in your programs, whether your programs are meeting their goals, the impact of your programs on customers, etc? You may want other information or a combination of these. Ultimately, it's up to you.

But the more focused you are about what you want to examine by the evaluation, the more efficient you can be in your evaluation, the shorter the time it will take you and ultimately the less it will cost you (whether in your own time, the time of your employees and/or the time of a consultant).

There are trade offs, too, in the breadth and depth of information you get. The more breadth you want, usually the less depth you get (unless you have a great deal of resources to carry out the evaluation). On the other hand, if you want to examine a certain aspect of a program in great detail, you will likely not get as much information about other aspects of the program.

For those starting out in program evaluation or who have very limited resources, they can use various methods to get a good mix of breadth and depth of information. They can both understand more about certain areas of their programs and not go bankrupt doing so.

Key Considerations:

Consider the following key questions when designing a program evaluation.
1. For what purposes is the evaluation being done, i.e., what do you want to be able to decide as a result of the evaluation?
2. Who are the audiences for the information from the evaluation, e.g., customers, bankers, funders, board, management, staff, customers, clients, etc.
3. What kinds of information are needed to make the decision you need to make and/or enlighten your intended audiences, e.g., information to really understand the process of the product or program (its inputs, activities and outputs), the customers or clients who experience the product or program, strengths and weaknesses of the product or program, benefits to customers or clients (outcomes), how the product or program failed and why, etc.
4. From what sources should the information be collected, e.g., employees, customers, clients, groups of customers or clients and employees together, program documentation, etc.
5. How can that information be collected in a reasonable fashion, e.g., questionnaires, interviews, examining documentation, observing customers or employees, conducting focus groups among customers or employees, etc.
6. When is the information needed (so, by when must it be collected)?
7. What resources are available to collect the information?

Some Major Types of Program Evaluation

When designing your evaluation approach, it may be helpful to review the following three types of evaluations, which are rather common in organizations. Note that you should not design your evaluation approach simply by choosing which of the following three types you will use -- you should design your evaluation approach by carefully addressing the above key considerations.

Goals-Based Evaluation

Often programs are established to meet one or more specific goals. These goals are often described in the original program plans.

Goal-based evaluations are evaluating the extent to which programs are meeting predetermined goals or objectives. Questions to ask yourself when designing an evaluation to see if you reached your goals, are:
1. How were the program goals (and objectives, is applicable) established? Was the process effective?
2. What is the status of the program's progress toward achieving the goals?
3. Will the goals be achieved according to the timelines specified in the program implementation or operations plan? If not, then why?
4. Do personnel have adequate resources (money, equipment, facilities, training, etc.) to achieve the goals?
5. How should priorities be changed to put more focus on achieving the goals? (Depending on the context, this question might be viewed as a program management decision, more than an evaluation question.)
6. How should timelines be changed (be careful about making these changes - know why efforts are behind schedule before timelines are changed)?
7. How should goals be changed (be careful about making these changes - know why efforts are not achieving the goals before changing the goals)? Should any goals be added or removed? Why?
8. How should goals be established in the future?

Process-Based Evaluations

Process-based evaluations are geared to fully understanding how a program works -- how does it produce that results that it does. These evaluations are useful if programs are long-standing and have changed over the years, employees or customers report a large number of complaints about the program, there appear to be large inefficiencies in delivering program services and they are also useful for accurately portraying to outside parties how a program truly operates (e.g., for replication elsewhere).

There are numerous questions that might be addressed in a process evaluation. These questions can be selected by carefully considering what is important to know about the program. Examples of questions to ask yourself when designing an evaluation to understand and/or closely examine the processes in your programs, are:
1. On what basis do employees and/or the customers decide that products or services are needed?
2. What is required of employees in order to deliver the product or services?
3. How are employees trained about how to deliver the product or services?
4. How do customers or clients come into the program?
5. What is required of customers or client?
6. How do employees select which products or services will be provided to the customer or client?
7. What is the general process that customers or clients go through with the product or program?
8. What do customers or clients consider to be strengths of the program?
9. What do staff consider to be strengths of the product or program?
10. What typical complaints are heard from employees and/or customers?
11. What do employees and/or customers recommend to improve the product or program?
12. On what basis do employees and/or the customer decide that the product or services are no longer needed?