The mundane cost-benefit analysis (CBA) is a much maligned and misunderstood tool. Its importance in the IT budgeting and project selection process is something everybody knows. But like so many things everybody knows, it suffers from a real lack of understanding.
The basic concept is simplicity itself: prove that doing or buying something is both better than doing nothing and better than anything else you can do. That something can be an IT project, an IT acquisition, or any other activity or initiative that will result in spending corporate time or money.
Simple, right? Well, not so simple that very bright people are often slightly unclear on the concept. Go back right now and reread the first sentence of the preceding paragraph. Did you pick up the "better than anything else you can do" part? It has eluded many IT executives.
Here's the issue: a good solution is not necessarily the best solution. Even the best IT solution may not be the best business solution. Business problems often admit of many solutions, and not all of them are the kinds of solutions that leap to mind in the IT department's conference room. Technology does many things well, but workflow re-engineering, training, and other noncapital investments do things pretty well, too.
OK, here's your CBA test of the day (borrowed from The Smart Way to Buy Information Technology):
Chris Clerk spends 50 percent of his time performing a function that could be automated. Your competitor has already automated the function. Chris's salary is $40,000/year plus 20 percent for benefits. The costs to automate include a $25,000 software package, a $4,000 hardware upgrade, a $2,000 training course for Chris, and 20 hours of techie time at $100/hour to load and configure the software. The task is needed for only a year, and no one can pick up the other functions that Chris performs, so you can't terminate Chris. There's nothing else you need Chris to do. Do you automate? One theory people who track the so-called technology (or productivity) paradox – the inability for years to find the real productivity gains attributable to the tremendous improvements we have seen in business technology – have developed is the strategic necessity hypothesis, which is the perceived need to buy what your competitor is buying to maintain competitive position. In some cases technology improvements have indeed changed the "baseline" technology for an industry (a good example is car insurance companies offering a portal that allows consumers to get quotes online). In other cases, jumping on trends can wind up being an expensive knee-jerk reaction. If the CIO in Chris's company is able to ignore the siren song of perceived strategic necessity and instead run the numbers, he will see that automating this function is a bad idea. There is a nominal manual cost versus higher costs of automation and no benefits.
Not every case is so clear-cut, of course, and this business of assessing costs and benefits is inherently inexact. No one can claim to know the exact values of pertinent costs and putative benefits for any IT project, or any alternative to any IT project, including the alternative of doing nothing. But it's foolhardy to fail to consider all the alternatives to anything IT, including those that involve doing things the old way, or doing nothing at all.
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