Strategy Survival Guide
Strategy Survival Guide
Strategy Survival Guide
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Equation 1. represents the cost per unit of effectiveness (e.g. £/life saved). Projects can be rank ordered by<br />
CE ratio from lowest to highest. The most cost-effective project has the lowest CE ratio.<br />
Equation 2. is the effectiveness per unit of cost (e.g. lives saved/£). Projects should be ranked from highest<br />
to lowest EC ratios.<br />
The outputs to be ranked by cost-effectiveness analysis will often be social or environmental in nature. For<br />
example, work in health economics looking at the cost-effectiveness of different treatments, or work to<br />
assess the net costs of different ways of reducing greenhouse gases. As with CBA, the level of detail for the<br />
analysis will typically depend on the specific issue being addressed, but should take a broad view of costs<br />
and benefits to reflect public and taxpayer interests.<br />
Process for carrying out a CBA/CEA<br />
There are 5 core elements to carrying out a successful CBA or CEA:<br />
• define the objectives<br />
• identify the options (including a base case)<br />
• identify and, if possible, quantify and value the costs, benefits, risks and uncertainties<br />
• analyse the information<br />
• present the results.<br />
Strengths & Weaknesses<br />
CBA and related techniques are tools to be used in decision-making - they provide a means of systematically<br />
and rigorously balancing the costs and benefits of different options. They should be used intelligently,<br />
making use of relevant knowledge and expertise. CBA can be essential in setting out the costs and benefits<br />
associated with different options, and in making a rigorous choice between them. But it is rarely sufficient on<br />
its own, because other, typically more nebulous, factors will also need to be taken into account. The option<br />
identified as "best" from a CBA does not always need to be chosen - but any departure from the "best" option<br />
needs to be very carefully justified.<br />
CBA is based on conventional welfare economics, which provides a utilitarian account whereby value relies<br />
upon individual self-interest. In practice, people express defined preferences for a much wider set of public<br />
goals. Even though in theory this should be compatible with traditional welfare economics, in practice<br />
analytical techniques such as CBA rarely give proper recognition to these wider public preferences.<br />
In carrying out a CBA, there are probably two main pitfalls to avoid:<br />
• The first and perhaps most serious is missing out some key options, or some key costs and benefits.<br />
If this occurs, the results of the analysis can be significantly skewed away from the actual "best"<br />
option. The way to avoid this is to spend some time making an exhaustive list of the options, and<br />
then all the different costs and benefits that could arise - even if some are later excluded.<br />
• The second potential pitfall is relying too much on the data. Information on costs, benefits and risks<br />
is rarely known with certainty, especially when one looks to the future. This makes it essential that<br />
sensitivity analysis is carried out, testing the robustness of the CBA result to changes in some of the<br />
key numbers.<br />
References<br />
The Treasury Green Book is the main source for information on CBA and other appraisal techniques. This<br />
also contains a bibliography of other material.<br />
The Civil Service College runs courses on cost-benefit analysis and related techniques. Details are available<br />
via the CMPS website.<br />
<strong>Strategy</strong> <strong>Survival</strong> <strong>Guide</strong> – <strong>Strategy</strong> Skills<br />
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