Cost-Effectiveness

Cost-Effectiveness

We all know from experience that the cheapest product is not always the best. For example, one pair of shoes may cost £ 20 but wears out in only two months, while another pair that costs £ 60 will last for a year. The more expensive shoes are actually better value for money, as the cost per month of wear is only half of that for the cheaper shoes.

On the other hand, a programme can be very effective without being efficient. For example, intensive one-to-one tutorials are generally very effective in producing good examination results, but are a very expensive way of doing so.

We need another term to express the balance between effectiveness and efficiency. Cost-effectiveness is that term.

Definition

Hülsmann defines cost-effectiveness as “. . . the most efficient way to achieve a set goal (2004, page 22).” Essentially, it expresses a balance between attempts to keep costs to a minimum while maximising the outcomes/outputs of an educational institution or programme.

The most common measure of cost-effectiveness is the average cost per graduate, which is simply a variant of the Average Costs Equation. In this context, the term ‘graduate’ refers to a student who successfully completes a subject/course/programme rather than someone who holds a qualification from an institution of higher education.

Equation for Average Cost per Graduate:

AC_g = TC ÷ TN_g

Where:

AC_g = average cost per graduate

TC = total costs for programme or institution as a whole

TN_g = total number of graduates

Activity

EXERCISE 9.3 Just as with Exercise 9.1, this activity should be carried out with other members of staff in your own institution. You should already know the total expenditure for your institution for the previous financial year, but you will also need to have to hand statistics on the total number of students who passed their examinations or successfully completed courses with your institution for the corresponding period. Using this information and the average cost per graduate equation, calculate the cost-effectiveness of your institution. With your colleagues, brainstorm the limitations of this measure. Feedback: Unit 8 outlined some of the limitations of using examination performance on its own as a measure for establishing equivalency between full-time students in conventional education and those studying at a distance. In brief, ODL learners may not be starting from the same level as conventional students or they may not have the same aptitude or ability. In addition, those in the formal education system may have studied for a number of years before sitting for an examination, while those studying at a distance usually sit for an examination at the end of each year (or semester) of their course. Thus, any measure that does not take into account the duration and work-load required to complete a course can produce misleading results.

Cost-Effectiveness Ratio

Keeping these reservations in mind, it is possible to compare the cost-effectiveness of one programme in relation to another, or of one institution relative to another. The term cost-effectiveness ratio is used to refer to the relationship between the average cost per graduate in one programme, institution or system of education and the average cost per graduate in another programme, institution or system. The equation for calculating the cost-effectiveness ratio is the same as that for the efficiency ratio, but the average cost per graduate is used in place of the average cost per student.

EQUATION for Cost-Effectiveness Ratio

CER = ACG_ODL ÷ ACG_C

Where:

CER = cost-effectiveness ratio

ACG_ODL = average cost per graduate of ODL programme/institution

ACG_C = average cost per graduate of conventional programme/institution

The cost-effectiveness ratio is concerned not only with average unit costs, but also with the relative success rates of different systems. In this respect, it factors in an assessment of positive learning outcomes. The cost-effectiveness ratio should be interpreted as follows:

• When the ratio equals 1.00, then both modes are equally cost-effective.
• When the cost-effectiveness ratio is less than 1.00, then ODL is more cost-effective.
• When the cost-effectiveness ratio is greater than 1.00, then ODL is less cost-effective.

Activity

Exercise 9.4 provides an opportunity to practice calculating cost-effectiveness. Feedback: Check your calculations by clicking on Exercise 9.4 - Answer Sheet.

Exercise 9.4 illustrates a situation where providing a course through open and distance learning is much more efficient than conventional classroom-based education, but is less cost-effective.

Activity

Exercise 9.5 Open the Hülsmann resource in a new window Go to Section 4: Cost-Effectiveness of ODL Go to Part B: Efficiency & Cost-Effectiveness Ratios Click on Activity A13 and follow the instructions in the MS Excel worksheets. Return to the to Part B. Click on Activity A14 and follow the instructions in the MS Excel worksheets.