Section 4: Cost Analysis

Defining the Cost Analysis Problem

Each cost analysis and data collection system's design should be based on the answers to the following three questions: Why is information on cost needed? Who needs to know about the costs of the program? What do administrators want them to know? The answers to these three questions will shape the entire cost analysis or cost data collection system.

Answering these questions involves three interrelated tasks:

• Clearly specifying why the cost information is needed and the alternatives that are to be considered.
  In most cases, cost analysis is used to inform a decision. This decision may be about the adoption of a new program or policy. It may be about possible modifications to old programs or policies, such as alternative ways to deliver the same service. For example, a cost analysis based on time allocation for home visitation programs in the United States Air Force Family Advocacy Program (USAF-FAP) was useful in estimating alternative scenarios for case load size and number of weekly home visits possible for the New Parent Support Program that came on line in 1999.
• Identifying the specific audiences - people and organizations that are the intended users of information about the program's costs and gathering pertinent information about each audience.
• Developing goal statements that specify what the evaluator hopes to accomplish by providing cost information to each audience.

At this beginning stage, the evaluator should try to expand rather than limit his or her thinking. Once the evaluator has identified the question being asked and the alternatives to be considered, all potentially important goals and audiences need to be identified. Later, the list can be narrowed down to the most important goals and audiences based on program priorities and resources available for the cost analysis. As many of the staff as possible should be involved in this process. One approach to involving audiences is to form a steering committee. If there are important external audiences, members of these audiences can be included as well. This participatory approach can help alleviate the concerns of those being studied about how the information will be used and whether it will be accurate, enable the evaluator to obtain more complex and accurate information, and increase the chances that the information will be used as intended by intended users.

• Identify The Need For Cost Information

It is essential at this stage of the analysis that the evaluator carefully specify the purpose and scope of the cost analysis. Is the cost analysis just for general information or is there a decision to be made? What is that decision and what are the alternatives under consideration? Is there a need to choose between alternative ways of employing staff time in the existing program? Is the choice between the existing program and a new program or between two new models? In most cases answers to those questions require careful specification of the program to be studied or the alternatives that are to be compared. In addition, the evaluator must specify the scope of the analysis. From whose perspective is the cost analysis to be conducted? Is it the perspective of the organization and the clients of its direct services, the perspective of the larger organization to which the organization reports. or the perspective of the community within which that organization operates? This decision will determine whose costs will be considered, and whether the evaluator should expand the analysis as well to connect costs and programs outcomes and benefits.

• Identify Internal And External Audiences

The audiences and their information needs can be divided into two distinct groups: internal and external. Internal audiences (program management, service and support staff, organization head, and others in the organization) are typically the most important users of cost information and need it in its most detailed form. External audiences also can be very important, but usually need less detailed information. Sometimes the same cost information may be needed for internal and external audiences. Worksheet 4.1 at the end of this section will help the evaluator identify the audience for cost information.

If key decision makers are new to cost analysis, it may not be clear to them how cost analysis might be used to inform decision making about the organization's policies and programs. The lists of possible uses given above should help with that. However, it may also be useful for the evaluator to systematically explore ways in which cost analysis might be useful to the organization. One approach to identify potential internal needs for cost information is as follows:

1. Divide the organization's mission into major activity areas or program components - for example, treatment and prevention.
2. Review the goals and objectives associated with each area.
3. Develop questions that probe issues or provide important information about costs associated with each area.

The table below provides some questions to help the evaluator identify internal cost information needs, using an example of a prevention program such as a family support program conducted through home visits.

To identify external audiences the evaluator can:

1. Create a list of all individuals and organizations to whom services are provided or to whom information about the program could be provided.
2. Determine what information these audiences require.
3. Determine what benefits the organization conducting the cost analysis would obtain by providing the information.
4. Prioritize audiences based on expected benefits to the organization undergoing the cost analysis.
5. Be specific when listing external audiences including names, titles, positions, and organizational affiliations.

• Specify Goals For The Analysis

Specify exactly what is to be accomplished by providing cost data to certain audiences. A worksheet can be designed that will capture this information in three sections. The first section of the form is for listing as much identifying information for each audience as possible. The second section of the form, desired outcomes, may be the most important. Desired outcomes should reflect knowledge of the audience's desires for outcomes as well as the actual outcomes desired by the organization undergoing the cost analysis.

This can be a difficult task. The importance of an outcome to an external audience may not depend on the benefits to the clients of a service or match the opinions of program staff about what is important. In some cases, the desired outcome may be that the program will meet the mandates of regulations (e.g., a financial status report to account for funds expended). Other goals may be to obtain additional funding for the program, to assist others in adopting a model that the organization developed, or to provide new knowledge about costs to others in the field. The third section should specify the actions that must be taken to ensure that information provided is used to attain the desired outcomes. It is important to understand that defining the cost analysis problem is an iterative process. Identifying audience, goals, and required actions will assist the evaluator in determining what information is needed as well as specifying whose perspective will be taken into account (see example captured in Worksheet 4.1).