Business Decisions Economics
Chicago based consulting firm that quantifies
benefits and risks of investments.
quantitative methods, demonstrates the way to
prioritize and optimize I T investments
uncertainty about an investment, and measure
quantifies the value of
investment decisions and investment life cycle
management using econometrics.
proven methods usable by everyone to measure
tangible and intangible costs, benefits and
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,
Using probabilistic modeling techniques,
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:
Blue Cross/Blue Shield of
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
reliant on statistical modeling techniques it uses
Decision theory, Information Theory and Actuarial
Science formulas to frame the main body of the
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
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
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
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
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.
do we use it?
comes from the gambling world, Monte Carlo
simulation “gambles” over and over, relying on
a large number of trials to define the probability
simulation is a technique that involves the random
sampling of each of the many variables (factors)
and their probability distributions within the (T)ROI
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
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
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%
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
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
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
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
Can I only use NPV and IRR?
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
Decades of management mantras such
as “you can’t measure the intangibles” and
other industrial age sayings can impede adoption
Current IT decision processes are
unique among large and risky investments in their
lack of realistic quantitative analysis.