Benefit shortfall

A benefit shortfall results from the actual benefits of a venture being lower than the projected, or estimated, benefits of that venture.^[1] If, for instance, a company is launching a new product or service and projected sales are 40 million dollars per year, whereas actual annual sales turn out to be only 30 million dollars, then the benefit shortfall is said to be 25 percent. Sometimes the terms "demand shortfall" or "revenue shortfall" are used instead of benefit shortfall.

Public and private enterprises alike fall victim to benefit shortfalls. Prudent planning of new ventures will include the risk of benefit shortfalls in risk assessment and risk management.

If large benefit shortfalls coincide with large cost overruns in a venture—as happened for the Channel tunnel between the UK and France—then fiscal and other distress will be particularly pronounced for that venture.^[2]

The root cause of benefit shortfalls is benefit overestimation during the planning phase of new ventures. Benefit overestimation (and cost underestimation) are main sources of error and bias in cost-benefit analysis. Reference class forecasting was developed to reduce the risk of benefit shortfalls and cost overruns.^[3]

The discipline of Benefits Realisation Management seeks to identify any benefits shortfall as early as possible in a project or programmes delivery in order to allow corrective action to be taken, costs to be controlled and benefits realised.

See also

• Benefits Realisation Management
• Cost overrun
• Cost-benefit analysis
• Optimism bias
• Reference class forecasting
• Strategic misrepresentation
• Underconsumption – macroeconomic form

References

1. ^ Flyvbjerg, Bent; Holm, Mette S.; Buhl, Søren L. (2005). "How (In)accurate Are Demand Forecasts in Public Works Projects?". Journal of the American Planning Association 71 (2): 131–146. http://flyvbjerg.plan.aau.dk/Traffic91PRINTJAPA.pdf. 
2. ^ Flyvbjerg, Bent; Bruzelius, Nils; Rothengatter, Werner (2003). Megaprojects and Risk: An Anatomy of Ambition. Cambridge: Cambridge University Press. http://books.google.com/books?vid=ISBN0521009464. 
3. ^ Flyvbjerg, B. (2008). "Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting in Practice". European Planning Studies 16 (1): 3–21. http://www.sbs.ox.ac.uk/centres/bt/Documents/Curbing%20Optimism%20Bias%20and%20Strategic%20Misrepresentation.pdf.