When confronted with making decisions on software projects in the presence of uncertainty, we can turn to an established and well tested set of principles found in Software Engineering Economics.
First a definition from Guide to the Systems Engineering Body of Knowledge (SEBoK)
Software Engineering Economics is concerned with making decisions within the business context to align technical decisions with the business goals of an organization. Topics covered include fundamentals of software engineering economics (proposals, cash flow, the time-value of money, planning horizons, inflation, depreciation, replacement and retirement decisions); not for-profit decision-making (cost-benefit analysis, optimization analysis); estimation, economic risk and uncertainty (estimation techniques, decisions under risk and uncertainty); and multiple attribute decision making (value and measurement scales, compensatory and non-compensatory techniques).
Engineering Economics is one of the Knowledge Areas for educational requirements in Software Engineering defined by INCOSE, along with Computing Foundations, Mathematical Foundations, and Engineering Foundations.
A critical success factor for all software development is to model the system under development as holistic, value-providing entities have been gaining recognition as a central process of systems engineering. The use of modeling and simulation during the early stages of the system design of complex systems and architectures can:
- Document system needed capabilities, functions and requirements,
- Assess the mission performance,
- Estimate costs, schedule, and needed product performance capabilities
- Evaluate tradeoffs,
- Provide insights to improve performance, reduce risk, and manage costs.
The process above can be performed in any lifecycle duration. From formal top down INCOSE VEE to Agile software development. The process rhythm is independent of the principles.
This is a critical communication factor - separation of Principles, Practices, and Processes, establishes the basis of comparing these Principles, Practices, and Processes across a broad spectrum of domains, governance models, methods, and experiences. Without a shared set of Principles, it's hard to have a conversation.
Engineering Economics
Developing products or services with other peoples money means we need a paradigm to guide our activities. Since we are spending other peoples money, the economics of that process is guided by Engineering Economics.
Engineering economic analysis concerns techniques and methods that estimate output and evaluate the worth of products and services relative to their costs. (We can't determine the value of our efforts, without knowing the cost to produce that value) Engineering economic analysis is used to evaluate system affordability. Fundamental to this knowledge area are value and utility, classification of cost, time value of money and depreciation. These are used to perform cash flow analysis, financial decision making, replacement analysis, break-even and minimum cost analysis, accounting and cost accounting. Additionally, this area involves decision making involving risk and uncertainty and estimating economic elements. [SEBok, 2015]
The Microeconomic aspects of the decision making process is guided by the principles of making decisions regarding the allocation of limited resources. In software development we always have limited resources - time, money, staff, facilities, performance limitations of software and hardware.
If we are going to increase the probability of success for software development projects we need to understand how to manage in the presence of the uncertainty surrounding time, money, staff, facilities, performance of products and services and all the other probabilistic attributes of our work.
To make decisions in the presence of these uncertainties, we need to make estimates about the impacts of those decisions. This is an unavoidable consequence of how the decision making process works.
The opportunity cost of any decision between two or more choices means there is a cost for NOT choosing one or more of the available choices. This is the basis of microeconomics of decision making. What's the cost of NOT selecting an alternative?
So when it is conjectured we can make a decision in the presence of uncertainty without estimating the impact of that decision, it's simply NOT true.
That notion violates the principle of Microeconomics
