Beyond benefit-cost analysis

A simple trick to push your thinking

Imagine the following scenario: You and your colleagues get together to brainstorm possible ideas to improve a given situation or problem, say how to reduce your company's churn rate. You might here even use a variety of more advanced ideation techniques (6-5-3, Morphological Matrix and so forth). You then score your ideas along some variant of the classic 2x2 benefit-cost matrix. You prioritize those 15-20% ideas with the highest benefit and the lowest costs or investment. You ultimately decide to pursue and implement, say, 30% of these "low-hanging fruits," This leaves you with some 90% or so of ideas "for later" - meaning they will probably never see the light of day, especially those which didn't get prioritized in the first place.

This some like a waste - but who's to blame? You can only implement so much, can't you?

Yes and no. There's no denying that you need to focus and prioritize your actions. What bothers me is the following: We typically put in a lot of effort and creativity to come up with a long list of ideas and possible solutions to a given problem - this might take multiple rounds over several weeks, after all. But then all of the sudden it's like you jettison all that positive creativity and score your ideas along a simple benefit-cost matrix. This is not just lazy thinking; its destroying a lot of potential value.

Here's the thing: benefits and costs seem fairly static, we treat them as a given- it's not like you could easily change them, could you? But what if you were to reframe benefits and costs as effectiveness and efficiency, respectively?

Effectiveness and efficiency are dynamic categories, something which can be improved. It seems like we're almost hardwired to ask ourselves: How could we increase the efficiency of a given measure? How could we boost its effectiveness?

So I'm suggesting the following: Let's complement the simple benefit-cost analysis with an effectiveness-efficiency analysis. First do your simple analysis, and then run a second analysis (or creative session, if you will), where you ask yourself three very simple questions:

  • In which ways could we increase the efficiency of our idea (i.e. by reducing its cost or investment)?
  • In which ways could we increase the effectiveness of our idea (i.e. by increasing its benefit)?
  • ...or ultimately: How do we turn our "B" or "C" idea into an "A" idea?

(Diageo, by the way, uses a similar matrix as the one to the right to assess their marketing actions - see here for more information.)

Let me give an example: We recently had a client engagement where we were evaluating, among a ton of other ideas, whether or not to implement an analytics-based Next Best Activity (NBA) software to assist call center agents during the decision-making process. Now this is the type of idea which typically gets scored in the "B" or "C" category - extremely high impact, but heck is it expensive and complicated! Unless, of course, you start asking yourself whether you could, for example, introduce a more pragmatic, hands-on NBA software, i.e. lower the investment costs and shift this idea from "B" to "A". So this is what we did; and only a few weeks later, the first prototype was well under its way - something which, hadn't we done our due diligence, probably would have never seen the light of day anytime soon.

There's no magic here. But I do believe it's essential to push our thinking and our analytical toolbox to the lean, pragmatic, fast-prototyping kind of world we live in.

 

SMP AG

Konstantin Schaller (konstantin.schaller@smp-ag.de)