Even though I am a legal professional at base, during last 14 years I performed many cost-benefit checks and now I use this tool for important personal decisions as well.
Usually, legal professionals are not asked if a proposed project will be worth the effort and resources before the project starts. However, conducting a cost-benefit analysis is a must for many businesses, organizations, and entrepreneurs.
What is a cost benefit?
A cost benefit analysis is usually a process performed by a dedicated team in an organisation comparing the estimated costs and opportunities associated with a project decision. The process has as aim to determine whether the decision to perform the project makes sense from a business perspective. In a project many times the process is performed by legal professionals.
When studying law, we have never tested a cost benefit process. Cost-benefit analysis is a decision-making based on facts and data and is most often utilized in business, when establishing companies, in merger and acquisitions, but it may be used also when preparing a litigation plan or a legal strategy. The basic principles are applicable to any decision-making process.
Cost benefit process
The process has 5 simple stages:
1. Identification of the objectives of the project.
2. Identification of the costs by estimation: direct costs, indirect costs, opportunity costs.
3. Identification of the benefits: direct, indirect, and competitive costs.
4. Establishment of the monetary unit in order to make the costs and benefits comparable.
5. Comparing the costs and benefits.
If the projected benefits / opportunities outweigh the costs, the decision is a good one to make. If, on the other hand, the costs outweigh the benefits, then is better to rethink the decision or project in order to save money, time and personal energy from the beginning.
So, next time when you are asked to start a project, and you are not sure on benefits, just do a cost benefit analysis and the client will appreciate your approach. Or when you offer to work for a very low fee for a project just to have your name there, when you need time for many other personal projects. Or when you want to buy another pair of shoes just ask yourself: what are the benefits of having another pair near over 50 pairs at home? Is it worth the total cost?