Policy Approach

COST BENEFIT ANALYSIS INTRODUCTION Cost-benefit analysis is basically how we describe our decision processes across a wide variety of settings.

We use it many times a day in our personal lives—when choosing the route to take to work, what to eat, or what to buy. We do it so often that the process is intuitive. In many instances, the process is quite simple.

Other times, it is complex. We can deal with that complexity in a number of ways—exhaustive analysis or simplified choices and processes are two examples. For organizational, program and administrative analysis, the same process may or may not be appropriate depending on the setting and other factors. It is important for a public administrator to be able to practice good judgment and also use objectives measures and criteria when deciding to fund, change, redesign or eliminate a public program or agency.

Let's walk through some basic, logical and interrelated steps in laying the groundwork for a cost benefit or cost effectiveness study.

SCENARIO Picture yourself designing an action research evaluation of an agency or organization...

Agency Head: "We're facing some tough decisions this year and will have to trim or eliminate some agency programs. I'd like you to take a look at your organization and tell me if you're using the best and most effective model of service. Can it be streamlined? Is it meeting its stated goals? Can services be modified to be more efficient and still meet the public need?" That's a tough but direct question—and one that you need to know how to address. What information would you need to know to make this recommendation? What factors would you consider? Let's consider some basic steps.

STEP 1 Define the program and the outcome indicators.

• What does the program produce?

• What kind of data does the program collect?

• What do you define as success & how is it measured?

STEP 2 Develop research questions. Page 1 of 3 Transcript 04 /19 /201 7 http://media.capella.edu/CourseMedia/DPA8106/CostBenefitAnalysis/transcript.htm l • What are your main research questions?

• What do you need to know, why?

• How will you find answers to these questions? STEP 3 Compute costs.

• What is your cost perspective? Funder, agency or society?

• Personnel: salary and fringe for all employees.

• Facilities: rent and related costs of housing.

• Equipment: office and training supplies, audio-visual equipment, books or research needs.

• Other: travel, workshops, indirect costs.

STEP 4 Program outcome data.

• Timeframe, volume and type of data, sampling issues.

• Determined by size of organization, research questions.

STEP 5 Compute program outcomes.

• Document success with objective measures.

• People served, resources saved, problems averted.

• There may be multiple success indicators, subjective and objective.

STEP 6 Compute the costs effectiveness ratio.

• Computed by dividing the total costs by the number of successes.

• Displays ratio of cost to outcomes.

STEP 7 Perform a sensitivity analysis.

• Test your data for flexibility to variation, unknowns.

• Compare ranges or alternative scenarios if portions of data are estimates.

• Consider changing conditions, prices, financial fluctuations. Page 2 of 3 Transcript 04 /19 /201 7 http://media.capella.edu/CourseMedia/DPA8106/CostBenefitAnalysis/transcript.htm l CONCLUSION We could have considered other factors, but these will begin to get you to a cost effectiveness ratio, the possible development of alternative scenarios for your agency head and financial administrators to allow for unseen fluctuations in prices or resources, and an analysis based on societal need, which your supervisor highlighted. By society, you may decide s/he meant taxpayers, the community at large, or society as a whole, depending on the service or product, but you may generate alternative analyses in your recommendation based on different interpretations, financial and political costs associated with each perspective as well.

The decision process can be complex. Costs are relatively easy to calculate, but impact, need, and societal benefit are more subjective measures. Here, some historical statistical and trend data may help put the current environment in a broader context. Since cost benefit or cost effectiveness analysis requires objective monetary values, but the value of intangible benefits such as keeping the unemployed on benefits, allow premature babies to live, or ensuring that all children have equal access to education is harder to calculate. Simply ignoring data, efficiency and outcome data is not an option, but a cost benefit analysis may not always be the best way to assess value, especially in considering economic, cultural and regional differences in perspectives and priorities. There are other approaches to measuring worth, satisfaction and benefit, and we will consider these in the course our discussions.

CREDITS Subject Matter Expert:

Interactive Design:

Instructional Designer:

Project Manager:Cathie J. Witty, Ph.D., Adjunct Faculty Tara Schiller, Christina Adams Megan Eskola Kristin Baabedosh Licensed under a Creative Commons Attribution 3.0 License. Page 3 of 3 Transcript 04 /19 /201 7 http://media.capella.edu/CourseMedia/DPA8106/CostBenefitAnalysis/transcript.htm l