Posted by George Huhn on Mon, Feb 22, 2010 @ 05:25 AM
"Does it make the decision for me?"
That's a question that somebody asked me again last week, and it is a question that I hear often from people when I tell them about our software. Underneath this question there is an unspoken worry that using a decision analysis tool will somehow override their often very good subjective decision-making ability and authority. I answer it by explaining that it is something like the difference between digging a basement for a house with a hand shovel or a using back-hoe: you still get to choose where and how the basement is dug (the most important subjective decision), but the back-hoe will give you a much faster and better result.
In other words, a good decision analysis tool will enhance and support your subjective judgment by giving you a wider and more focused view of your alternatives.
Decision analysts like to say that they help people make "more objective decisions." This is true if the methodology is sound. (By the way, that is a big "if." Lousy methodology can make things worse.) But in complex and unique business decisions, objective analysis doesn't mean that you can just feed in some numbers and out pops the perfect answer. Instead, a good decision analysis tool will move the subjective analysis to a higher and more strategic level of the decision-making process while leaving the objective number-crunching to the application.
In project portfolio analysis, even using sophisticated tools like Optsee®, there is still a lot of subjectivity that enters into the analysis. For example, there's project risk assessment, budget estimates, and NPV valuations, just to name a few. Then there's assigning weights to the criteria so the project ranking reflects your company's strategy. Finally, there is trying different budget and optimization strategies to select a portfolio that brings you the highest value based on your project set, budget and resource constraints, and business goals.
How is this more or less subjective than doing it manually?
Using spreadsheets or labor-intensive "one model at a time" analyses bog you down in a very low tactical level of subjectively trying to find an optimal portfolio, one project at a time, from billions of possible portfolios. And when you're doing it as a team, this process can quickly become tedious and non-strategic as discussions focus on arguing over the subjective criteria of including or excluding individual projects while losing sight of the big picture.
In other words, when you're at the bottom of a basement digging with a shovel, it is hard to see what the whole thing looks like from the top.
With a portfolio and budgeting analysis tool like Optsee®, you move way up the strategic scale, from picking projects to build a portfolio to picking an optimized portfolio from a few already-optimized alternatives. The "objective" parts – ranking the projects based on value and optimizing against different combinations of business constraints – has already been done for you. So you get to focus your time, energy, and judgment on the most important strategic question – how you can allocate you company's resources to get the highest return from your portfolio.
Like using a back-hoe instead of a hand shovel to dig a basement, using software that moves you up from just making tactical decisions to making more strategic decisions makes sense. But are there places in your company where you're still digging basements with shovels?
Posted by George Huhn on Mon, Jan 25, 2010 @ 12:54 PM
The Gantt chart was introduced to the world by Henry Laurence Gantt between 1910 and 1915. He described his invention quite simply in his book Organizing for Work published in 1919:
"…the following principles upon which this chart system is founded are easily comprehended:
First: The fact that all activities can be measured by the amount of time needed to perform them.
Second: The space representing the time unit on the chart can be made to represent the amount of activity which should have taken place in that time."
In addition to inventing this staple of project management, Organizing for Work shows that Gantt was a strong proponent of social responsibility for engineers and industry and the idea of an honest and democratic workplace:
"Industrial control is too often based on favoritism or privilege, rather than on ability. This hampers the healthy, normal development of industrialism, which can reach its highest development only when equal opportunity is secured to all, and when all reward is equitably proportioned to service rendered. In other words, when industry becomes democratic." (Organizing for Work, 1919)
"The business system must accept its social responsibility and devote itself primarily to service, or the community will ultimately make the attempt to take it over in order to operate it in its own interest. (Organizing for Work, 1919)
Doesn't that last quote sound a little bit like it came from the current healthcare reform debate?
I also thought that it would be great if these words from Gantt were hung in a prominent place in every project and project portfolio management office:
"First: We have no right morally to decide as a matter of opinion that which can be determined as a matter of fact.
Second: If we allow ourselves to be governed by opinion where it is possible to obtain facts, we shall lose in our competition with those who base their actions on facts.
The substitution of fact for opinion is the basis of modern industrial progress, and the rate of this progress is controlled by the extent to which the methods of scientific investigation supplant the debating society methods in determining a basis for action." (Organizing for Work, 1919)
The Henry Laurence Gantt Medal was established in 1929 by the American Society Of Mechanical Engineers is given for "distinguished achievement in management and for service to the community."
Mr. Gantt is one of those people that I like to imagine what more he might have done had computers been around when he was!
Posted by George Huhn on Wed, Jan 13, 2010 @ 02:56 PM
If you're trying to sell a big cost-saving project to senior managers, then you are likely to be competing against a lot of other big projects, including sales and marketing and new product development projects. Chances are that you're going to need to sell your project to people who don't necessarily have the background to understand the technical details and the benefits of your project. And if they don't understand it then you are going to have a difficult time selling it.
So it can help to present your project's cost-saving numbers in terms of the equivalent increase in sales that your company would need to achieve the same bottom-line result.
Why?
Because increasing sales is hard and expensive – and every manager knows it. Framing your cost-saving project in terms of sales numbers that everybody understands can help you sell it across technical and non-technical departments and get it included in the
project portfolio.
There are three basic strategies to increase profits in a company: increasing the number of units sold, increasing the marginal profit from each unit sold, or cutting costs. Allocating resources to maximize profits from these three often-competing strategies is one of a manager's greatest challenges. By stating your cost-savings in terms of sales numbers, you're helping your management make a direct comparison between investing in your cost-saving project and investing in projects for increasing sales.
Therefore, you'll want to know both the equivalent increase in the number of units and the percentage that increase represents. For example, instead of just saying "this project will save us $5 - $7 million over the next five years," you should say "this project will save us $5 – 7 million over the next 5 years, which is equivalent to a 5 - 7% increase in sales above forecast or 1 million additional units of our best selling widget."
If investing in your cost-cutting project can add more cash to your company's bottom-line than investing the same amount to increase sales, then you have a very strong case for your project. If it doesn't add more cash, all other things being equal, then the money would probably be better invested in increasing sales.
Posted by George Huhn on Mon, Jan 04, 2010 @ 02:08 PM
If you don't know the values and costs of not executing your projects then you're probably not maximizing the value of your project portfolio and you may be working on the wrong projects.
When project portfolio managers meet to decide which projects that their businesses are going to execute and which they are going to reject, they often have a summary business case for each project that includes the business value and attributes. Business attributes can include selection criteria such as
net present value (NPV),
return on investment (ROI), costs, resource requirements, and risks.
Thus, when the managers select a project to execute, the value and associated costs of the project are added to the total portfolio value and costs, respectively. When they reject a project, usually the identical "if-executed" values and costs are subtracted from the total portfolio because there is no separate evaluation of the value and costs of not executing the project. Therefore, the value of a rejected project is essentially set to zero by default and the total portfolio loses value.
When they reject a project in this way, any intrinsic positive or negative values and costs derived from not executing the project are not factored-in to the final portfolio. And when these values and costs are not factored-in, the total portfolio value and cost can be dramatically over- or under- estimated.
There are many ways a project can add or subtract value from a portfolio. Even projects that have negative individual ROIs can add value, such as a project that adds revenue to a product line because of its strategic fit. Analogously, there are many ways that not executing a project can add or subtract value from a portfolio. For example, positive value can come from increased revenue streams if the rejected project would have cannibalized revenues from other products; and negative value can come from a loss of revenue from a product line that could have been enhanced by the executing the project. Costs that can be incurred from not executing a project might include costs associated with contract terminations, closing facilities, and reassigning resources.
So, perhaps counter-intuitively, you can see that rejecting (not executing) a particular project may actually add more real value to a project portfolio than selecting another project!
How can you ensure that you're capturing the value and costs of not executing a project?
For each potential project in your portfolio, you could create an associated "Not" project that includes the overall value for not executing the project calculated using the identical attribute categories (rewards, costs, risk, etc.). Then, before
optimizing the portfolio against constraints, you could set up a mandatory dependency between these two projects such that either the actual project is selected
or its corresponding "Not" project is selected. In this way, either the value and costs of executing the project OR the value and costs of not executing the project are included in the portfolio totals.
Of course, if the value and costs of not executing a project are truly "0" and do not impact the total portfolio value and costs, then you don't need to create an associated "Not" project.
In our
project portfolio management tool Optsee®, you can perform rigorous
project portfolio optimizations against multiple constraints (such as limited money and resources) while maintaining four different types of project dependency relationships, including an "Or" relationship. When you select the "Or" dependency relationship between two projects, either one project or the other (but not both) are included in the optimized portfolio. This way it is easy to set up and accurately analyze the real value and costs of your portfolios under different constraint combinations because you're factoring-in the values and attributes of both selected and rejected projects.
Do you currently assign values and costs to not executing projects in your project portfolios? What other suggestions do you have for capturing these values?
Posted by George Huhn on Tue, Dec 22, 2009 @ 12:11 PM
Remember how mapping the human genome was going to lead to cures for different genetic diseases? The idea was pretty simple: compare the genes of healthy people to the genes of people with diseases ranging from cancers to allergies and – voila – fix the genes that were making them sick. Instant cures, right?
Well, maybe not.
It seems like things turned out to be a lot more complicated than that.
In
The Gene Bubble published in November's Fast Company, David Freedman explains that in spite of the billions of dollars poured into mapping the human gnome "with precious few exceptions virtually no promising new treatments or even highly useful diagnostics have emerged."
Why?
Because of "junk DNA." Apparently, junk DNA "accounts for 80% of a genes influence over disease and is incredibly difficult to sort out."
"It's very discouraging, but we don't have any kind of code for understanding junk DNA. I can find the switches, but I don't know what they do. There are switches for the switches, and switches for those switches. It's endless."
So remember: even in nature, how you fold your junk matters.
Posted by George Huhn on Thu, Dec 17, 2009 @ 05:43 PM
Sunk costs are the costs that have already been incurred and cannot be recovered. We aren't supposed to consider sunk costs when making rational investment decisions, only the future costs.
But people do anyway.
How many times have you heard someone say, "Well, since we've already spent this much on it, we might as well finish it." They're making their decision based on sunk costs.
Ideas have sunk costs, too, only they're different from economic costs. When we spend a lot of time thinking about and working on a new idea, it is hard to let go of it in our minds, even when it proves unworkable or unfeasible. So we keep mulling it over and eventually we can become over-invested in it.
And then we can't evaluate the actual outcomes rationally.
Take the current Health Care Reform debate. Some people have so much sunk into the idea that Health Care Reform must be passed that they want to see anything signed, regardless of what is in the final bill. Others have so much sunk into the idea that Health Care Reform can never be good that they don't want to see anything signed, again, regardless of what is in the final bill.
Both of these groups are basing their positions on their sunk investments into their ideas of Health Care Reform, and not necessarily on the future costs and benefits of what is actually currently being discussed.
About 12 years ago I worked on a potential new treatment for AIDS. It was a unique molecule that ultimately failed in clinical trials. Since then it has wandered as a potential treatment from one disease du jour to another and failed each time. Recently, I heard that it had been proposed as H1N1 flu vaccine booster, again, with no plausible scientific rationale.
So now it is just an interesting molecule with no proven clinical application or clear rational for using or trying it as a future treatment for anything else.
It is an idea whose time came and went more than a decade ago, yet the inventors just kept trying. They can't let it go, regardless of the fact that the odds for success are much longer now than they ever were. But the accumulated sunk cost of their initial promising idea keeps driving them to continue investing in it.
"If we only keep trying…"
Sometimes it is useful to deliberately stop and consider if you're continuing to work on an idea because of what you have already mentally and emotionally invested in it or because of its actual future potential.
And sometimes the only way to avoid investing more time in thinking about a once-good idea is to just start working on a new and different one.
Posted by George Huhn on Thu, Dec 10, 2009 @ 02:02 PM
Good project execution is essential to achieving the strategic goals of a company, but most companies either don't measure it or don't measure it well.
In companies where the quality of project management execution is assessed at all, it is usually measured against meeting budget, timing, and resource objectives that were often ill-conceived to start with. So when projects go over budget or are under resourced or when timelines are missed, it is too often blamed on "execution," and rarely on the poor quality of the initial budget, timing, resource, and risk assessments (or lack thereof).
How often have you seen managers record a quantitative basis for their planning estimates at the beginning of a project and then assess them at the end of a project?
Too often managers look at Gantt charts as if they are THE PROJECT PLAN carved in stone. They aren't. Most of the time, Gantt charts represent the best guesses of well-intentioned people who tend to underestimate risks, resources, and timing (because that is what human beings tend to do). Most of the time, the "data" used to support the project planning either doesn't exist, hasn't been checked, or hasn't been derived empirically. Task start and end dates are fixed with virtually no meaningful or quantitative discussion about the probabilities of meeting those dates or modeling the dramatic cumulative effects of small amounts of slippage on project value.
A big contributor to those results may not be just poor project execution, but how and where the project finish lines were drawn at the start of the project. So it is past the time for managers to be measuring the quality of project execution based on chiseled-in-stone Gantt charts.
Instead, today's managers need to start using quantitative risk analyses, databases of empirical data from previous experiences, and statistical tools for probabilistic project planning so they can truly assess and improve the quality of project execution.
Posted by George Huhn on Sat, Dec 05, 2009 @ 03:54 PM
In spite of the fact that counting, numbers, and games of chance have been around for millenniums, it wasn't until the middle of the 17th century when three Frenchmen, Blaise Pascal, Pierre de Fermat, and Chevalier de Méré, developed the foundations for modern probability theory.
So even though probability theory seems obvious to us today, it was relatively late in human history that it was developed. With that in mind, I have been enjoying teaching some of the concepts of probability to my 9-year old son using a fun little book called
Do You Wanna Bet?: Your Chance to Find Out About Probability By Jean Cushman and Martha Weston. It is an entertaining story of two boys, Danny and Brian, discovering the impact of probability in their everyday experiences and developing a practical understanding of how to apply these concepts to others.
Oliver Wendell Holmes once said, "One's mind, once stretched by a new idea, never regains its original dimensions." Probability is one of those great ideas that can stretch a person's mind, particularly a child's. Once a child has learned the basic concepts of arithmetic, it is probably never too early begin teaching these great ideas, and this book is a wonderful way to start.
Posted by George Huhn on Thu, Nov 26, 2009 @ 08:07 AM
The debate over global warming is heating up again. A group of allegedly stolen e-mails is giving fuel to the fire to those who believe that global warming caused by human activities or Anthropogenic Global Warming (AGW) is a scientific fraud of massive proportions.
However, the question shouldn't be whether or not global warming is caused by AGW. It isn't a yes or no question.
The question should be: What is the percent probability that AGW will have catastrophic effects (between 0 and 100% probability)?
(Those of you who truly believe that the percent probability is 0% can stop reading now. And if you don't believe that any kind of global warming is occurring then you can also stop reading.)
After we have estimated the percent probability, we need to estimate what the economic costs will be if AGW causes a global catastrophe because we did nothing to stop it.
Let's assume the costs would represent millions or billions of dead human beings, beneficial ecosystems destroyed, and mass extinctions of animal and plant species. (I recognize that putting this in sterile economic terms will seem heartless to many, but we don't really have another good way to put a number on it.)
Once we have these two values, we can calculate the "expected value" of the cost of AGW. We'd take the cost of a global catastrophe and multiply it by the probability of it occurring:
Cost($) * Probability of occurrence(%) = expected value of the cost of AGW($)
Once we have that value, it would be prudent of us to figure out what the cost and risks of trying to stop or ameliorate the severity of AGW would be. If the cost to stop it is less than the expected value of the cost of a global catastrophe caused by AGW and the associated risks trying are acceptable, then we're fools as a species not to consider paying the costs of trying to stop it.
What do you think the expected value is?
Posted by George Huhn on Thu, Nov 19, 2009 @ 12:35 PM
Quantitative financial analysts ("Quants") who design trading algorithms or optimize them to work just a few milliseconds or even microseconds faster are in high-demand these days. Successful trading algorithms often work by taking advantage of millisecond market inefficiencies that aren't widely recognized by other traders. This advantage is lost once other traders discover and begin to trade on the same inefficiencies.
Since the profitable lifespan of proprietary trading algorithms keeps getting shorter, optimizing an algorithm to execute faster is one way to extend its lifespan. So the competition for hiring really good quants that can discover, develop, and optimize new trading algorithms is fierce.
Your business probably doesn't require microsecond decision-making, but the speed and quality with which your business can execute is going continue to become increasingly important. World-wide competition is speeding up innovation, shortening product development times, and reducing product lifecycles.
While many companies are using IT to improve business processes, most of them are just scratching the surface when it comes to using meaningful business analytics to speed up those processes.
When everybody in an industry is using the same IT and business processes, nobody has an advantage. The advantage will come to those who can discover, develop, and optimize business processes beyond what everybody else is doing. That might mean just looking at the little things that everybody else overlooks (or doesn’t think is important) and speeding them up by a few days or even just a few hours. Just as saving a few microseconds is important to a quant, saving those few days or hours could mean the difference between leading in your business or just being one of the pack.
Look around. What's limiting the speed of your business?