On any project with significant Value at Risk Economic Analysis provides visibility to the data needed for decision making. This Value at Risk paradigm is a critical starting point for applying all processes of decision making. The choice of decision process must be matched to the opportunity cost (actually the value of the loss for the alternative not chosen).
- Objective - what capabilities need to be produced by this project which the customer will value (in some useful units of measure)? These objectives can be easily described by Capabilities of the Outcomes. Features, stories, requirements are of little use to the customer if they do not directly enable a capabilities to accomplish the business mission or vision. The customer bought the capability, not the feature.
- Assumptions and Constraints - there are always assumptions. These are conditions in place that impact the project.
- Alternatives - there is always more than one way to do something. What are costs for each alternatives?
- Benefits - what are the measurable benefits for this work? It can be monetary. It can be some intangible benefit.
- Costs - what will it cost to produce the value to be delivered to the customer? Along with this cost, what resources are needed? What schedule are these resources available?
- Rank Alternatives - with this information we can rank the alternatives in some objective manner. These measures can be assessment of effectiveness or
- Sensitivity and Risk Analysis - tradeoffs are always probabilistic in nature, since all project work is probabilistic in nature. Rarely if ever are the single value non-varying numbers. This is the case only when the work is complete and no more activities are being performed. These actual values are useful, but they can be used for making future decisions only if there past performance statistical behaviors are collected. This is the Flaw of Averages problem. No average has value without know the variance.
- Make a decision - with all this information we can now make decisions. Of course the information about the past can be used and of course there is information about the future. Both are probabilistic nature.
With these probabilistic outcomes driven by the underlying statistical process of all project work, we need to be able to estimate all the values of the random variables and their impact on the processes above.
Next is an example of applying this probabilistic decision making in the presence of uncertainty for cost and schedule assessment. This can be for other probabilistic variables on the project. Technical Performance Measures, Measures of Effectiveness, Measures of Performance, Key Performance Parameters, and many other ...ilities (maintainability, supportability, survivability, etc.)