Risk And Relevance 20080414ppt

Risk and Relevance Dr. Murray Cantor Distinguished Engineer, IBM Rational software [email_address]

Value is being created by software/IT Transportation Equipment Hospitals Chemical Manufacturing Software/Information Food Manufacturing Telecommunications Computers/Electronics $0.00 $100.00 $200.00 $300.00 $400.00 $500.00 $600.00 $700.00 $800.00 US Industry Revenue in $B US Census Bureau

Software provides huge value for all the other industries US Industry Revenue in $B US Census Bureau Transportation Equipment Hospitals Chemical Manufacturing Software/Information Food Manufacturing Telecommunications Computers/Electronics $0.00 $100.00 $200.00 $300.00 $400.00 $500.00 $600.00 $700.00 $800.00

Software provides huge value for all the other industries US Industry Revenue in $B US Census Bureau Transportation Equipment Hospitals Chemical Manufacturing Software/Information Food Manufacturing Telecommunications Computers/Electronics $0.00 $100.00 $200.00 $300.00 $400.00 $500.00 $600.00 $700.00 $800.00 This does not include value created by back office/operations support

The concern is we are not creating value efficiently ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],How much value was delivered by all the successful efforts?

How should we meet the challenge of efficiently delivering value? ,[object Object],[object Object],[object Object],[object Object]

History has shown we do not get the estimates ‘right’ From George Stark, Paul Oman, “A comparison of parametric Software Estimation Models using real project data”, in press

History has shown we do not get the estimates ‘right’ From George Stark, Paul Oman, “A comparison of parametric Software Estimation Models using real project data”, in press, 2007 Variance dominates Maybe there is a reason

Eternal wisdom “ There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.” - John F. Kennedy “ Make everything as simple as possible, but not simpler.” - Albert Einstein “ We should be guided by theory, not by numbers.” - W. Edward Deming “ To measure is to know. If you can not measure it, you can not improve it.” - Lord Kelvin

The value conversation can vary ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Product Innovation Operational Efficiency Client Intimacy Your Business?

The value conversation can vary ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],All can be monetized Product Innovation Operational Efficiency Client Intimacy Your Business?

Just enough theory ,[object Object],[object Object],[object Object],[object Object],[object Object]

How much is an incomplete development program worth? ,[object Object],[object Object],[object Object],0 6 Ship date Conventional Wisdom Value Little opportunity to show relevance

Imagine (if you will) you could sell your program ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],This is what the economists call “incomplete market reasoning”

The Net Present Value of a development program ,[object Object],[object Object],[object Object],[object Object],NPV, R i , E j , M k are all random variables

The Net Present Value of a development program ,[object Object],[object Object],[object Object],NPV, R i , E j , M k are all random variables So, how can value be created?

Expense risk: Imagine you have 12 months to deliver a business critical system ,[object Object],[object Object],[object Object],0 6 12

Maybe you realize that program parameters (cost, schedule, effort, quality, …) are random variables ,[object Object],0.80 1.20 1.60 2.00 2.40 2.80 3.20 3.60 4.00 4.40 4.80 5.20 5.60 6.00 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0 0.00 0.40 Likelihood of actual value falling in range is area under curve

Imagine you have 12 months to deliver a business critical systems ,[object Object],0 6 12

Imagine you have 12 months to deliver a business critical systems ,[object Object],48% 0 6 12

Then what? ,[object Object],95% 0 6 12 15

Then what? ,[object Object],95% 0 6 12

The estimate variance reflects current state of understanding ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],0.80 1.20 1.60 2.00 2.40 2.80 3.20 3.60 4.00 4.40 4.80 5.20 5.60 6.00 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0 0.00 0.40

Then what? ,[object Object],[object Object],90% 0 6 12

To summarize so far ,[object Object],[object Object],[object Object],Medium Variance Time Variance in Cost, Schedule… Project Lifecycle Phases Inception Elaboration Construction Transition/Maintenance High Variance Low Variance 80% reduction 96% reduction

Benefits: Delivered value is also a distribution Shortfall in stakeholder needs Value is improved by increasing upside variance 0 Planned $Value Reuse opportunities

Simple inputs ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Model output ,[object Object],[object Object],[object Object],Mean 4,324.45 Standard Deviation 2,738.59 Variance 7,499,853.36 0% -4,836.65 10% 818.52 20% 1,959.10 30% 2,804.66 40% 3,541.42 50% 4,249.81 60% 4,972.52 70% 5,739.09 80% 6,661.06 90% 7,928.97 100% 14,923.77

No initial risk – little opportunity to add value, stay relevant ,[object Object],[object Object],[object Object],0 Planned $Value 0 Planned $Value 0 6 Ship date Conventional Wisdom Value NPV/Options Theory

So, what can you do? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Steer your project to success Actual Path Uncertainty in Stakeholder Satisfaction Space Initial Planned Content Initial Planned Path Uncertainty in delivery Each iteration should reduce variance and increase NPV

Tailor the governance solution ,[object Object],[object Object],[object Object],[object Object],[object Object],Medium Variance Little discovery Variance in Cost, Schedule… Inception Elaboration Construction Transition/Maintenance High Variance Low Variance New platform architecture Service Delivery Code Maintenance New capability with existing architecture Some discovery Much discovery

Tailoring governance is a process ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Assess Implement Manage Plan Governance Lifecycle Deploy Control Monitor Analyze Evaluate Design Set Objective

Adjust Governance Solution for each risk area Medium Variance Time Variance in Cost, Schedule… Adjust Governance Solution for each risk area Inception Elaboration Construction Transition/Maintenance High Variance Low Variance New Platform New Capability on existing platform Maintenance and small change requests ,[object Object],[object Object],Architectural alignment reduces uncertainty due to diseconomy of scale Automate, enforce processes to reduce uncertainty

Disciplined Investment: Apply quantitative portfolio analysis, not only scorecards Cost Project 1 Project 2 Project 3 Project 4 Project 5 Project 7 Project 8 Project 9 Project 6 Project 10

Pilots anyone? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Some final thoughts Staying relevant requires smart risk taking Value can only be reliably delivered if it measured and managed Value delayed is value denied In the end, these techniques do allow us to “ Take risks and add value”

For more information ,[object Object],[object Object]

© Copyright IBM Corporation 2008. All rights reserved. The information contained in these materials is provided for informational purposes only, and is provided AS IS without warranty of any kind, express or implied. IBM shall not be responsible for any damages arising out of the use of, or otherwise related to, these materials. Nothing contained in these materials is intended to, nor shall have the effect of, creating any warranties or representations from IBM or its suppliers or licensors, or altering the terms and conditions of the applicable license agreement governing the use of IBM software. References in these materials to IBM products, programs, or services do not imply that they will be available in all countries in which IBM operates. Product release dates and/or capabilities referenced in these materials may change at any time at IBM’s sole discretion based on market opportunities or other factors, and are not intended to be a commitment to future product or feature availability in any way. IBM, the IBM logo, the on-demand business logo, Rational, the Rational logo, and other IBM products and services are trademarks of the International Business Machines Corporation, in the United States, other countries or both. Other company, product, or service names may be trademarks or service marks of others. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Risk And Relevance 20080414ppt

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Risk And Relevance 20080414ppt