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decision analysis

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decision analysis

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    1. Decision Analysis Institute of Management AccountantsApril 17, 2008

    2. www.decisionpointanalysts.com 2

    3. www.decisionpointanalysts.com 3 What is Decision Analysis? In its simplest form, Business Cases that support investments. In the broader context, it includes Executive Decision Processes; Strategy; Scenarios and Alternatives; Modeling; Budgeting; Planning; Implementation; Tracking; and Ensuring Accountability.

    4. www.decisionpointanalysts.com 4 Does Your Company Invest According to its Strategy? Does your company’s Senior Leadership Team have an agreed upon Strategy? Are there more requests for R&D and Capital funding than your company can afford? Does your company’s Executive Decision Process optimize R&D and Capital portfolio choices against its strategy?

    5. www.decisionpointanalysts.com 5 Does Your Company Have a Strong Business Case Discipline? Does every R&D and Capital proposal include a Business Case in the same format with the same information? Do all Business Cases include Key Performance Indicators (KPIs) that allow you to measure whether you’ve gotten the promised benefits? Do you regularly track KPIs after funding the program? Do you hold sponsors accountable when programs don’t meet the KPIs? Do you roll out programs that exceed their KPIs to multiple businesses?

    6. www.decisionpointanalysts.com 6 Are Your Business Cases Tied to Both Budgets and Operational Plans? Have the organizations that have to deliver the improved service or lower cost agreed on both the level of improvement and the KPIs that will measure their success? Have they agreed that the resource levels included in the Business Case are what they need to deliver those benefits? Is their budget sufficient to fund those resources and/or have you agreed on how much budget relief they require, and for how long?

    7. www.decisionpointanalysts.com 7 Phases of Decision Analysis Discovery - Understanding the Scope and Complexity of the Decision - Identifying Relevant Stakeholders and Decision Makers - Identifying Criteria Upon Which Decisions Will Be Evaluated Framing - Understanding Alternatives and Scenarios - Modeling Facts, Decisions and Uncertainties Evaluation - Understanding Risks vs. Rewards and the Range of Outcomes Implementation - Resource Planning, Funding, Delivery and Tracking Not all decisions include all phases. Discovery is included if the strategy is not already clear. All Business Cases include Framing and Evaluation. Cases that are to be funded must also go through Implementation to align plans, resources and budgets.Not all decisions include all phases. Discovery is included if the strategy is not already clear. All Business Cases include Framing and Evaluation. Cases that are to be funded must also go through Implementation to align plans, resources and budgets.

    8. www.decisionpointanalysts.com 8 Discovery Understanding the Decision Scope Understanding the Decision Complexity and Risk/Reward Potential Examining the Industry and Market Understanding the Company’s Strengths and Weaknesses along the Value Chain

    9. www.decisionpointanalysts.com 9 Discovery Understanding the Decision Scope: Given Facts and Uncertainties, what Decisions do we want to make, Using What Criteria Facts: e.g., available budget, corporate policies Uncertainties: outcomes of future events Criteria: Objective bases for comparison of alternatives

    10. www.decisionpointanalysts.com 10 Discovery Understanding the Decision Complexity and Risk/Reward Potential: Even when everyone agrees on both the facts and the uncertainties, different stakeholders may have different goals. Depending on the Level of Uncertainty vs. the Level of Goal Congruence, different analyses are called for. Top Left– S.B. Resolved by Risk Analysis, not Gut Feel Bottom Right– S.B. Resolved by Framing to Achieve Alignment, not Power PlayTop Left– S.B. Resolved by Risk Analysis, not Gut Feel Bottom Right– S.B. Resolved by Framing to Achieve Alignment, not Power Play

    11. www.decisionpointanalysts.com 11 Discovery Examining the Industry and Market: What if the Company doesn’t have a clear Strategy? Examine the Industry and Market (e.g., using Porter’s Five Force Model) Perform a SWOT Analysis: Strengths, Weaknesses, Opportunities and Threats Perform a PEST Analysis: Political, Economic, Social and Technological Influences

    12. www.decisionpointanalysts.com 12 Discovery Understanding the Companies Strengths and Weaknesses along the Value Chain

    13. www.decisionpointanalysts.com 13 Framing Exploring Strategic Alternatives and Scenarios using a Strategy Table Building an Influence Diagram

    14. www.decisionpointanalysts.com 14 Framing Exploring Strategic Alternatives Using a Strategy Table One of the outputs from Discovery was a list of Decisions to be made. One task in Framing is to combine investment choices into coherent scenarios for further analysis.

    15. www.decisionpointanalysts.com 15 Framing For each Scenario, Build an Influence Diagram to Identify Choices, Uncertainties, KPIs, and Objectives Identify Subject Matter Experts to Narrow the Range of Uncertainty

    16. www.decisionpointanalysts.com 16 Evaluation Building a Deterministic Model Sensitivity Analyses and Tornado Diagrams Decision Trees Risks and Rewards: S-Curves

    17. www.decisionpointanalysts.com 17 Evaluation Building a Deterministic Model: The easy part--- taking a well done influence diagram and building an Excel model from it!

    18. www.decisionpointanalysts.com 18 Evaluation Sensitivity Analyses and Tornado Diagrams Varying each uncertainty over its range of possibilities and calculating the change in the objective function (e.g., NPV or total cost) allows you to identify the most critical uncertainties. With this information, you may be able to “buy better information” or, at the minimum, measure and track that uncertainty as the initiative is implemented.

    19. www.decisionpointanalysts.com 19 Evaluation Decision Trees Decision trees often model the same information as influence diagrams, but point out “Real Options”. Real Options are phased investments in a project that provide information that narrows uncertainty and clarifies decisions on further investments.

    20. www.decisionpointanalysts.com 20 Evaluation Risks and Rewards: S-Curves Investments can be compared using payback period, maximum dollars at risk, NPV per dollar invested, IRR, etc.

    21. www.decisionpointanalysts.com 21 Implementation Identifying Organizations and Budgets Impacted Confirming Availability of Resources and Linkages to Budgets Developing Timelines and Milestones Setting up KPIs and a Tracking Plan Project Management and Execution

    22. www.decisionpointanalysts.com 22 Implementation Identifying Organizations and Budgets Impacted

    23. www.decisionpointanalysts.com 23 Implementation Confirming Availability of Resources and Linkages to Budgets Each Officer whose budget is impacted must sign off to confirm that the resource levels in the business case are those required to deliver the stated benefit, that they have sufficient budget to deliver those benefits (and/or identify the amount of budget relief that they require). If budget relief is required, the CFO must adjust specific organization budgets before the case is approved.

    24. www.decisionpointanalysts.com 24 Implementation Developing Timelines and Milestones

    25. www.decisionpointanalysts.com 25 Implementation Set up Measurable KPIs and a Tracking Plan: Often--Volumes, Revenue/Unit, Cost/Unit, Direct Measures of Quality (DMOQs)

    26. www.decisionpointanalysts.com 26 Implementation Project Management and Execution With agreement on KPIs to be met, their targeted levels over time, how they will be measured, by whom and how often, periodically measure agreed upon KPIs and compare actual values vs. forecasted values If NPV (Net Present Value) and/or DPP (Discounted Payback Period) are worse than planned, have original sponsors review variances and assess whether remedial actions can bring benefits back in line with plan. If not, decide whether or not to stop the project! If NPV (Net Present Value) and/or DPP (Discounted Payback Period) are better than planned, have original sponsors review variances and assess whether similar benefits can be obtained by implementing a similar project in others Lines of Business. Then, decide whether or not to roll out those other projects!

    27. www.decisionpointanalysts.com 27 Decision Analysis- Best Practices Strategic Alignment Across Executive Team All R&D and Capital Investments Are Prioritized According to the Agreed Upon Strategy Business Case Discipline Includes Planning, Control and Feedback Business Cases are Linked to Budgets Measurable KPIs are Identified in Each Business Case KPIs are Tracked, and Sponsors are Held Accountable to Take Corrective Actions and/or to Spread Successes to Other Business Units

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