Is 'Avoided Loss' a Benefit?
“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 several projects justified with ‘avoidance of loss’ cited as the major (sometimes only) benefit.
The argument can be quite genuine. 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 is 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 its realisation is measurable. You must be able to determine if the benefit has been realised/delivered at (or after) the end of the project. But you cannot measure a loss that never happened.
By definition, if you do the project you avoid the loss, you 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 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 the 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’ would occur if they were not done, and yet 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 reason in the ‘benefits’ column. It fits under the “risks of not doing this project” heading.
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 realisable benefits and that the potential loss was actually nearer $700m! Both very good reasons for doing the project, but only the $40m were real, bankable benefits.
This benefit and the extra value loss potential were discovered in just two weeks using the TOP Benefits Management Program.