Is ‘avoided loss’ a benefit?
by jed simms on September 23, 2008
“If we don’t do this project, we’ll lose market share/customers/opportunities and that’ll be worth $XXm in lost revenue/profit!”
I’ve seen a number of projects justified with ‘avoidance of loss’ cited as the major (sometimes only) benefit.
The argument can be quite genuine. If the Blackberry did not respond to the iPhone, it would potentially lose significant market share. If your competitors are offering a sought after facility in the market and you don’t provide it, you’ll potentially lose market share, revenue and profit.
That’s all okay but is this avoidance of loss a ‘benefit’?
The answer is ‘No’ because it fails one of the fundamental requirements of a benefit — that it’s realization is measurable.
You must be able to determine if the benefit has been realized/delivered at (or after) the end of the project.
By definition, if you do the project you avoid the loss and therefore cannot measure it. Trying to claim “We would have lost $400m if we had not done the project, but we didn’t, so we just saved $400m” is an unverifiable benefits claim.
Having no loss is not a measure as there is no guarantee that you would incur the loss without the project due to customer loyalty, other features you offer, the cost of transfer, or whatever. Notice above I always said “potential loss” as I’ve seen projects refused, that claimed the end of the world as we know it if they were not done, and nothing significant happened.
A genuine potential avoidance of loss is a legitimate reason for doing the project, a ‘risk’ if we don’t do the project, but is not a benefit of doing the project.
As an executive you’d be foolish to ignore such a reason for doing the project; but you should not put this in the ‘benefits’ column. It fits under the “Risks of not doing this project” heading.
However, when you have such a claim and it is a big number there is a tendency to not look for other benefits. In a recent case, where the Board refused to sanction a project whose only benefit was a $400m avoidance of loss, we found $40m of realizable benefits and that the potential loss was actually nearer $700m! Both very good reasons for doing the project, but only the $40m was a real benefit.
This benefit and the extra value loss potential were discovered in just two weeks using our Benefits Management Program.
What do you think?
How to Identify and How to Quantify your benefits are both available from valuedeliverymanagement.com.
© Jed Simms valuedeliverymanagement.com, 2008
2 comments
I can understand the points you are making. However, what about the following circumstances:
I am forced to undertake a project in order to comply with new legislation. If I do not comply, my company is subject to sanctions, such as “substantial” or “unlimited” fines.
Under these circumstances, I think avoided loss is a verifiable benefit. You might also add the possible legal fees in defending your case.
by Chris Leitch on November 5, 2008 at 5:25 pm. #
Chris’ point illustrates the need to differentiate between ‘benefits’ and ‘reasons’
If you are illegal and will be fined if you don’t comply, this is a compelling ‘reason’ for doing the project and a key factor in the risks of doing nothing and should be pointed out and made clear to the execs. Do nothing is not an option in this circumstances because of the cost of doing nothing in fines, etc
However it is not a ‘benefit’ as at the end of the day once you’ve completed the project you’ll comply with the law/ regulation full stop. Being legal is not a benefit but a requirement of being in business. Correcting such problems is also a requirement of being in business
If you do nothing then you’ll incur fines. But this is a consequence of lack of risk mitigation rather than a benefit
Otherwise, you can generate great benefits for projects by making sure your current state is illegal! Not recommended
In the evaluation process the Execs should be asking firstly, “Why are we doing this project?” This is where the fines avoidance comes in as a compelling reason.
Their second question should be “What value/benefits should we get from this?” which challenges if this compliance project is going to actually deliver some additional value over and above compliance. This is where the additional benefits should be stated
by Jed Simms on November 13, 2008 at 8:33 am. #