Benefit shortfall
Encyclopedia
A benefit shortfall results from the actual benefits of a venture being lower than the projected, or estimated, benefits of that venture. 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
Risk assessment
Risk assessment is a step in a risk management procedure. Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete situation and a recognized threat...

 and risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...

.

If large benefit shortfalls coincide with large cost overruns in a venture—as happened for the Channel tunnel
Channel Tunnel
The Channel Tunnel is a undersea rail tunnel linking Folkestone, Kent in the United Kingdom with Coquelles, Pas-de-Calais near Calais in northern France beneath the English Channel at the Strait of Dover. At its lowest point, it is deep...

 between the UK and France—then fiscal and other distress will be particularly pronounced for that venture.

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
Cost-benefit analysis
Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...

. Reference class forecasting
Reference class forecasting
Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...

 was developed to reduce the risk of benefit shortfalls and cost overruns.

The discipline of Benefits Realisation Management
Benefits Realisation Management
Benefits realisation management is the explicit planning, delivery and management of whole life benefits from an investment. An investment is only successful if intended benefits are realised and BRM supports key choices and actions to achieve this success...

 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
    Benefits Realisation Management
    Benefits realisation management is the explicit planning, delivery and management of whole life benefits from an investment. An investment is only successful if intended benefits are realised and BRM supports key choices and actions to achieve this success...

  • Cost overrun
    Cost overrun
    A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting...

  • Cost-benefit analysis
    Cost-benefit analysis
    Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...

  • Optimism bias
    Optimism bias
    Optimism bias is the demonstrated systematic tendency for people to be overly optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. Along with the illusion of control and illusory...

  • Reference class forecasting
    Reference class forecasting
    Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...

  • Strategic misrepresentation
    Strategic misrepresentation
    "Strategic misrepresentation is the planned, systematic distortion or misstatement of fact—lying—in response to incentives in the budget process...

  • Underconsumption
    Underconsumption
    In underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. The theory has been replaced since the 1930s by Keynesian economics and the theory of aggregate demand, both of which were influenced by...

    – macroeconomic form
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