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Business Economic Value
 AIE
About BDE
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About Business Decisions Economics

A Chicago based consulting firm that  quantifies the costs, 
benefits and risks of investments.

Using quantitative methods, demonstrates the way to 
prioritize and optimize I T investments

Reduces uncertainty about an investment, and measure intangibles,  
quantifies the value of information.

Improves investment decisions and investment life cycle 
value management
using econometrics.

Shares proven methods usable by everyone to measure  
tangible and intangible costs, benefits and risks.

 


FREQUENTLY ASKED QUESTIONS

·     Who is Business Decisions Economics?

Business Decisions Economics Inc is a Chicago-based consulting firm in the business of helping executives evaluate IT projects as capital investments with measurable and quantifiable benefits and risks. By separating the noise from the investment Business Decisions Economics’ BEV/AIE methodology reduces the uncertainty about the economic value of the Information Technology projects. The results are a powerful enhancement to the usual method of analysis (CBA, EVA, ROI, etc)

Using probabilistic modeling techniques, Monte Carlo simulation, and an Information Value Analysis, HRL quantifies the costs, benefits, and risks delivering results from a true economic perspective. By calculating the investment’s Internal Rate of Return (IRR) and Net Present Value (NPV) Business Decisions Economics is uniquely able to reduce uncertainty about the value of IT investments.

Business Decisions Economics’ extensive Techniques Inventory has been developed in response to needs of clients. Thus, the ability to offer customized Confidence Charts, Intangibles valuation workshops, Investment Clarification sessions, Risk Mitigation, Probability Construction, Information Value Analysis, and Calibrated Estimation workshops is well regarded.

Business Decisions Economics Inc was founded in March of 1999. The four year old company includes among its clients:

American Express

Discovery Communications

Blue Cross/Blue Shield of Illinois and Texas

DOD. Air Force Surgeon General


·     What is BEV/AIE?

Business Economic Valuation / Applied Information Economics is a methodology developed by Business Decisions Economics, integrating scientific and mathematical theories to perform a risk-adjusted valuation of investments. Working primarily in the Information Technology space, Business Decisions Economics has used BEV/AIE successfully (in Fortune 100 sized companies and institutionally), significantly evolving the structure and process, of the original methodology.  Heavily reliant on statistical modeling techniques it uses Decision theory, Information Theory and Actuarial Science formulas to frame the main body of the methodology.  BEV/AIE brings to Information Technology (IT) the same sound justification used for decades by business and institutions. The BEV/AIE analysis of an IT investment is conducted in stages, each increasing the accuracy and quality of the results. The Total Return on Investment (T)ROI model is refined as information needs becomes evident and are satisfied.  The outcome reduces the “noise” within large and risky investments so that the picture of the investments’ risk/return stands out.  


·     What is Value Management and why is it important?

Value Management (VM) allows an organization to understand and improve, at any stage, the economic yield of their dollar investments in I T Solution.  It is an investment performance monitor that can be activated at any time during this investments’ lifecycle.  Value Management looks primarily at the realization of economic benefits for the investment and the effect of risks, periodically calculating the return. It uses the standard Internal Rate of Return (IRR) and Net Present Value (NPV) or other financial measures for its valuations.  VM allows companies to adjust cash flows along the time horizon of the investment, accelerate benefits by adjusting completion dates, and mitigate risks through anticipatory actions.  Value Management uses a Business Decisions Economics (T)ROI model and process (BEV/AIE), in satisfying this enterprise need.

Value Management is important because it defines mutual expectations during the life cycle of an I T Solution.  VM provides the answers from a rational, practical and mathematically sound basis, to questions the client receives from Senior Management regarding the progress of an project’s implementation and “what the organization is getting for its money”  


·     What is deterministic?

A deterministic model is simply a calculation engine, which relies on single number inputs and generates a single number output. It is the type of model most organizations use for investment valuation.  The typical cost/benefit analysis (CBA) is a deterministic model. It reflects today’s standard measurement of the willingness to invest. Uncertainty, if considered at all, is modeled using a few what if scenarios.


·     What is Monte Carlo analysis?  Why do we use it?

The term Monte Carlo comes from the gambling world, Monte Carlo simulation “gambles” over and over, relying on a large number of trials to define the probability of events.

Monte Carlo simulation is a technique that involves the random sampling of each of the many variables (factors) and their probability distributions within the (T)ROI model.  It produces thousands of scenarios, an easy way to deal with many uncertainties.  The power of Monte Carlo is the ability to use random numbers to chose values from a distribution and calculate the output value for a particular model many times thus generating a profile (e.g. probability distribution) for the answer.


·        What is a probability analysis

A Probability is the likelihood of the occurrence of an uncertain future event. Probabilities allow us to express and describe, clearly and unambiguously, our lack of knowledge.  Probabilities eliminate the ambiguity of everyday language such as “I think it will happen”, “There is a chance it will occur” and “it probably will happen”.  Probabilities are expressed as fractions, decimals or percentages between 0 and 1. A probability of 0 means that something will never happen; a probability of 1 means that something will always happen. Probability of a conditional event outcome = P(x) = the number of conditional outcomes of the event divided by the total number of possible outcomes. For example the probability of getting heads in one toss of the coin is: P(Heads) = 1/(1+1) = 0.5 or one half.

There are two types of probabilities, subjective and objective. An objective probability is similar to a coin toss. If you were asked the probability of a coin landing on its head, you would say 50-50. You would say this not because you believe the coin will actually land on its head or tail 50% of the time but because the physical aspect of the coin gives only two alternatives-it only has two sides

A subjective probability represents your state of knowledge about an event and is based on your beliefs, knowledge, data, and experience. Probability is the language of uncertainty. Probabilities are the scientific way to describe and measure uncertainties.


·     Why is this method better than traditional ‘back of the envelope’ analysis?

Information Technology (IT) investments, especially if large and risky require more reduction in uncertainty than the traditional “back of the envelope approach can accommodate. The back of the envelope approach most frequently concentrates on the cost and the “hard benefits”.  This approach leaves on the table many of the more important but harder to measure “soft’ benefits that the investment produces. Anything of value has economic value. Additionally, the back of the envelope seldom considers or quantifies risk.

Every decision that management makes is a “how much” decision. Proposal X is good but how good and for how much?  Even if X is good are there alternative projects or combinations of projects that are better? In making large investments, especially large and risky investments, companies need to “do the math”. . A prudent man will invest 1% or 2% of his investment in a quantitative analysis to find out the best way to invest the other 98% to 99%.

Sometimes you will hear that without precise numbers, mathematical models won’t work. The fact that reminding them that mathematics has long been able to work with probability distributions can mitigate the exact numbers objection.


·        How does this (T)ROI model reflect confidence in the business case (valuation)?

Using the Business Economic Value framework of reference, the (T)ROI model will identify all of the potential costs, benefits and risks for the investment. It will quantify all factors, it will use calibrated estimations on unknown quantities, it will consider the risk as a significant piece in the analysis, and it will remove the surrounding noise as it decreases the uncertainty about whether or not to invest.


·     How does value management help me manage risk?

Risk is defined as the probability of some specific undesirable event.

The specific undesirable event for some people is the chance of losing more than $1 million dollars or the chance of a negative return on the investment, or the chance that half way through the project the solution provider will go out of business without completing the project, or cost overruns, or time overruns, etc. In order to manage risk, one must first identify potential risks, and then calculate the probability of risk happening.

BEV/AIE anticipates risks, quantifies them through calibrated estimating techniques, adjusts the return to provide a risk adjusted return on the investment and suggests ways to mitigate the risks. A value management approach allows monitoring and tracking of those variables identified as risk potentials and a close scrutiny of the predicted economic return on a pre-set periodic basis to ensure the investment is performing as expected.


·        How is uncertainty about benefits and risks handled?

In BEV/AIE, uncertainty about benefits and risks are incorporated into the (T)ROI model through calibrated estimations with 90% confidence of the probability of realizing the benefits or incurring the risks. The more uncertain the estimator, the wider become the ranges of the distributions in the model. Decision analysis provides a method for BEV/AIE to incorporate uncertainty explicitly and quantitatively into economic valuations.


·        Can I only use NPV and IRR?

It is possible for Business Decisions Economics to use the organization’s financial measures of value [e.g. Return on Investment (ROI), Cost Benefit Analysis (CBA) etc.]  NPV and IRR are the most widely used and broadly accepted measures for investment justification.


SOME BASIC REMINDERS

-       Every decision management makes is a "how much" decision.  Proposal X is good but how good and for how much?

-       CBAs normally include only tangible costs and benefits but the hidden benefits and risks create a new investment landscape.

     -       Even if Proposal X is good, are there alternatives that are even better?  

-       Large IT investments are risky; therefore, it’s critical to get a true perspective. (“Do the Math”)   

-       Because BEV/AIE reduces uncertainty, there is likely to be a significant shift in decision making.  

-       Decades of management mantras such as “you can’t measure the intangibles” and other industrial age sayings can impede adoption of BEV/AIE.  

-       Current IT decision processes are unique among large and risky investments in their lack of realistic quantitative analysis.