The Cost/Benefit Ratio and the Acquisition of Information

Cost-Benefit Ratio of Information

 

One of the most frequent and frustrating occurrences I see among corporate managers is the failure to understand the cost-benefit ratio of information.  This is the idea that it costs a certain amount to obtain each bit of information, and that cost rises as you approach 100% of the information you might need (or think you need) while the value of each bit of information falls.  To relate it to the Pareto principle, in almost any situation you can get 80% of the information for 20% of the cost, but the other 20% of the information will cost you four times as much.  This is perhaps a bit of an overstatement, but illustrates the concept. 

In the end, you may only need 80% of the information to know whether you have a problem or not.  In some high-risk circumstances, like deciding whether to shut down a plant at a cost of $5 million per day, the critical point may approach 97% of the information, for example, justified by the high cost and risk involved.  It is also possible in such cases that the first 10% of the information may reveal a problem that is a “show-stopper”, in which case the critical decision can be made without going farther, and it may be wiser to re-plan the appropriate schedules, inform the stakeholders of the changes, and restart the information gathering effort (if it is not going on continuously) at an appropriate time.

I can’t tell you how many times I and many other workers have been sent scurrying madly by a nervous project manager to call and email suppliers, ambush people outside meetings, and chase people down halls or across the world in an effort to get “100%” of the information about something.  In no case, even when the information was finite and tightly-defined, such as the status on a list of parts, have we EVER gotten 100% of the information.  In all cases there was still risk, as unforeseen things could still go wrong.  In most cases it caused a lot of frustration and wheel-spinning waste, and, in the worst cases, made some of us unwelcome with people from whom we frequently needed key pieces of information.  In most cases, chasing information beyond the point of diminishing returns also caused us to neglect other work which had a much greater potential to affect the success of the organization.  This is my effort to help you understand this issue, and hopefully will help you better explain the concept to those who need to understand it.

As always, I welcome your comments.

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