CHAPTER 7, DECISION CRITERIA and SCOPING THE OPTIONS

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CHAPTER 7, DECISION CRITERIA and SCOPING THE
OPTIONS

• From the problem solving model, figure 7.1, we
  have moved the highlight to criteria and
  alternatives.

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Figure 7.1, the problem solving model.
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ESTABLISHING DECISION CRITERIA

• A decision criterion is a driver for choosing
  between alternative courses of action to solve a
  problem or take advantage of an opportunity.
• The five Total Impact accounts represent the
  broad framework for a set of decision criteria

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Financial Efficiency and Effectiveness

• This criteria documents the "cash-flow" impacts
  on the organization and stakeholder groups
  resulting from project alternatives

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Figure 7.2, the Financial Criteria
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Social and Stakeholder Criteria.

• The remaining criteria have financial impacts
  that are not internal to the organization. The
  financial impacts are felt by stakeholder groups
• If two alternatives are identical in terms of
  financial costs and benefits, then the
  alternative that best suits the social system
  should be chosen out of a sense of social
  responsibility.

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Sustainability of the Economic Environment

• Organizations are recognizing that the economic
  system is a network of partnerships, it is
  necessary for all organizations to prosper in
  order for the economic system to flourish.
• Organizations create jobs that stimulate the
  economy, and they create spin off businesses that
  support the organization. These benefits can be
  measured as follows

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Figure 7.3, the Sustainability Criteria
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Stewardship of the Natural Environment

• The environmental criteria documents a wide range
  of potential impacts that project alternatives
  could have on the natural environment.
• The end result of effective environmental
  management is to cause an improvement in
• Wildlife health
• Aquatic health
• Vegetation health

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Figure 7.4 The environmental Criteria
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Safety of Employees and the Public (Social
Impacts)

• The Safe Keeping of the quality of our lives
  therefore means that projects must be analyzed in
  terms of their impact on a broad range of social
  safety issues.

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Figure 7.5, The Social Impact Criteria
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Customer Service Impacts

• The ultimate measure of customer satisfaction can
  be found on the income statement. If they are not
  satisfied, they will not buy from you!
• Who is the customer? The customer is the one who
  transfers cash from their account to yours.

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Figure 7.6, the Customer Service Criteria
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Risk, often the most powerful criteria

• Risk is loosely defined as the likelihood that a
  consequence that you dont want, will happen to
  you.
• A comprehensive analysis of the risks in a
  project will improve the decision process, and
  increase the likelihood that the optimal solution
  will be realized.
• First we will deal with the risks of assumptions
  made in analyzing alternatives.

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Dealing with risks in the analysis phase

• Some of the risks that should be considered are
• timing of the project/cash flow sequence,
• project completion risk,
• assumption error,
• estimate error,
• obsolescence,
• risks related to operational efficiency,
  maintenance frequency and system reliability.

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Dealing with risks in the analysis phase

• Analyzing alternatives should address issues such
  as these
• What are the risks and where is the major
  uncertainty in the project?
• How sensitive is the expected benefit/cost ratio
  or net present value to a change in assumption
  for important variables such as in-service date,
  projected benefits or costs?
• How much of the project cost would be lost if
  something major went wrong?

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Dealing with risks from a total project view

• The procedure for a risk analysis is to take
  every single event and assumption in the project
  and ask the following questions
• What could go wrong?
• What could go more right than expected? (too much
  success is risky)
• What is the likelihood of this event occurring?
• How will the effect be felt?
• What can be done to mitigate the effect?

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Dealing with risks from a total project view

• What system will I use to tell me when the risk
  event has occurred?
• What is the earliest possible time I can notice
  that things are not going as planned?
• What corrective action needs to be taken after
  the event has occurred?
• What risks are associated with staying with the
  status quo or the do nothing alternative?
• Am I comfortable enough with the probability and
  cost of risk to allow the project to proceed?
• There are two views of risk analysis, a micro
  view that deals with project specific risk and a
  macro view that deals with risks coming from the
  environment.

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The Micro View of Risks

• Project specific risks are those risks associated
  with project events such as
• technical fit with existing systems
• projected costs and benefits
• supplier delivery and quality control
• meeting the installation timeline
• Project specific risks are generally regarded as
  predictable and controllable by managers.

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The Macro View of Risks

• The macro view deals with environmental risks
  that are outside of the project scope.
• technical obsolescence
• economic forces, (recession and inflation)
• legislative changes in areas such as
  environmental compliance and human rights
• population growth and preferences
• These risks might be predictable but are largely
  uncontrollable by the manager.

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The Macro View of Risks

• While these events are largely uncontrollable, a
  manager can still mitigate the effect of the risk
  by developing a system that enables early
  recognition of the event and having an action
  plan in place to deal with the consequences.
• Builders insurance, performance bonds etc

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Using Criteria to Rank Alternatives

• At this point you should have several criteria to
  use to assist in the selection of the best
  solution to a problem. The criteria define the
  dimensions of the analysis that alternatives will
  be subjected to.
• You will also find that criteria need to be
  weighted as to their relative significance in the
  decision process

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Using Criteria to Rank Alternatives

• The same logic holds in business decisions.
  Before you go shopping for alternative solutions
  to a problem, rank your criteria in descending
  order of importance, and put values on how the
  criteria will be measured, either in financial or
  non-financial terms.
• The show stopper is a single criteria that if
  un-met, will cause all alternatives to fail.

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IDENTIFYING ALTERNATIVES

• Identifying alternative courses of action
  involves the following steps
• Use the problem statement
• Use the decision criteria
• Search for a limited number of alternatives.
• Put a boundary on the scope
• Dont be afraid to challenge or shift existing
  rules,

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IDENTIFYING ALTERNATIVES

• All problem situations have a variety of
  alternative approaches
• (Abandonment) Eliminate the problem by abandoning
  the process that is the cause.
• (Redevelop) Eliminate the problem by employing a
  new process or changing an old process.
• (Rehabilitate) Eliminate the problem by
  replacing the process with a similar process.
• (Do nothing) Stay with the status quo.

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IDENTIFYING ALTERNATIVES

• In general, a well scoped list of options will
  facilitate a logical and well balanced analysis
  of the possible solutions to a problem.
• Once we are satisfied that the complete set of
  logical solutions has been found its time to
  match the alternatives to the criteria and put
  the alternatives in order of attractiveness.

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Chapter summary

• This chapter was about building a framework for
  making a decision.
• The foundation of the framework is the set of
  decision criteria which will be applied to a set
  of reasonable alternatives which might solve the
  problem/opportunity.

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Chapter Summary

• There are two critical learnings from this
  chapter.
• care must be taken to ensure that the set of
  criteria are complete and that the criteria have
  measures so that alternatives can be ranked.
• The scoping of alternatives must be broad enough
  to contain the best possible solution.
• Problem solving can be easy if you do it wrong,
  but you wont be finding the best solution!

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Closing remarks

• We are almost ready to make a choice, except for
  one major element. Financial evaluation.
• The financial evaluation is often the most
  complex part of decision analysis. Thats why it
  is deserving of a chapter of its own.