Expected Monetary Value - EMV (Project Management Series)
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Project Management Course Expected Monetary Value EMV Universidade do Vale do Itajaí University of Vale do Itajaí Univali Incremental Tecnologia English version
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Expected Monetary Value - EMV (Project Management Series)
- 1. marcello.thiry@gmail.comExpected Monetary Value (EMV) Project Management Series
- 2. Sandra is the Project Manager in a small software company Once her team is small, all members always work on a single project at a time
- 3. Today, Sandra has a problem to solve She has to choose one between two projects candidates: Customers Helpdesk
- 4. Which project will bring more return to the organization?
- 5. marcello.thiry@gmail.com We can estimate the expected return of each project!
- 8. But and if we consider risks?
- 9. marcello.thiry@gmail.com Decision needs to consider multiple paths
- 11. marcello.thiry@gmail.com Probability of occurrence of the risk x Estimated value of the risk Calculating the expected monetary value of each risk... Expected Monetary Value (EMV) of the risk =
- 12. marcello.thiry@gmail.com Monetary value of the impact of the risk Positive = opportunity Negative = threat Probability of occurrence of the risk x Estimated value of the risk Expected Monetary Value (EMV) of the risk =
- 13. marcello.thiry@gmail.com EMV of the riski To calculate the Project’s EMV... Project’s EMV = …
- 15. marcello.thiry@gmail.com Customers = $40.000,00 Helpdesk = $45.000,00 How to interpret? Is it what we will earn from each project? NO
- 16. marcello.thiry@gmail.com If each project were executed many times, in the very same conditions… Probable average return of each execution Customers = $40.000,00 Helpdesk = $45.000,00 How to interpret?
- 17. marcello.thiry@gmail.com It helps to estimate Contingency reserves Customers = $40.000,00 Helpdesk = $45.000,00 How to interpret? More used in larger projects (large number of risks)
- 18. marcello.thiry@gmail.com The difficulty is in appropriately quantify the value of the impact But there is no magic!
- 19. marcello.thiry@gmail.com Limitations… – Definition of the value of the impact can be subjective or biased – Decision should consider the variance – Large variation between earns and losses can affect decision makers
- 20. marcello.thiry@gmail.com Limitations… (DAVIES & LAM, 2001) – Will you accept a 50/50 bet for $5? Probably YES – Will you accept a 50/50 bet for $5m? Probably NO – BUT BOTH HAVE AN EMV = 0! – In some way you ‘care’ more about losing $5m than winning $5m
- 21. marcello.thiry@gmail.com Limitations… (DAVIES & LAM, 2001) – Your house is worth $200,000 – The probability of destruction by fire is 1/10,000 – EMV of the loss = $20 – So $20 is the most you will pay for insurance? – NO, YOU CARE MORE ABOUT THE CHANCE OF LOSING YOUR HOUSE
- 22. marcello.thiry@gmail.com Risk #1: The software designer will be transferred to other project. • Probability = 30% • Substitution cost = $12,000.00 (threat, negative impact) • EMV = 0.3 x 12,000.00 = $-3,600.00 Revisiting... Project XPTO Total cost: $300,000.00
- 23. marcello.thiry@gmail.com Risk #2: New approved legislation. • Probability = 50% • Modification cost = $20,000.00 (threat, negative impact) • EMV = 0.5 x 20,000.00 = $-10,000.00 Revisiting... Project XPTO Total cost: $300,000.00
- 24. marcello.thiry@gmail.com Revisiting... Risk #3: Current version of the framework already attends the project. • Probability = 60% • Work reduction = $5,000.00 (opportunity, positive impact) • EMV = 0.6 x 5,000.00 = $+3,000.00 Project XPTO Total cost: $300,000.00
- 25. marcello.thiry@gmail.com Take also a look at… (DAVIES & LAM, 2001). Managerial Economics: An Analysis of Business Issues. 3rd ed. FT Prentice- Hall. (HAIMES, 2015). Risk Modeling, Assessment, and Management. 4th ed. Wiley. (KENDRICK, 2015). Identifying and Managing Project Risk: Essential Tools for Failure-Proofing Your Project. 3rd ed. AMACOM. (PMBOK, 2013). A Guide to the Project Management Body of Knowledge (PMBOK® Guide). 5th ed. Project Management Institute (PMI). (TALEB, 2010). The Black Swan: The Impact of the Highly Improbable Fragility. 2nd ed. Random House.