Bad Assumptions Invalidate Business Value and ROI Analysis
A recent email announced “ROI estimates in business fail primarily because managers give too much attention to the “payout” odds and too little attention to measuring and managing “probability” odds. A good risk and sensitivity analysis of the assumptions behind the predictions allows you to do both. ”
This is so true. Inappropriate or unlikely assumptions looking for payout based on the absurd (such as assuming that saving 1 minute per day of employees filling in their time card has a huge savings in a year) and a myriad of other traps cause business value and ROI to be appropriately produced using sound business case analysis.
In the same vein, absurd assumptions can cause cost and schedule estimates to be low. SEER evaluates the viability of assumptions, helping produce estimates that can actually be deployed.
Thank you for reading “Dan on Estimating”, if you would like more information about Galorath’s estimation models, please visit our contact page or call us at +1 310 414-3222.
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This a hearty endorsement of this post, from the perspective of sound management practices. At the most recent PMI Congress was a presentation on “Why Good Managers Make Bad Decisions”. A significant reason is indeed that managers often make decisions that are not driven by quantitative analysis of expected reward versus benefit. There are illusions of time, cost and other constraints which make gut decisions fallible. Decent estimates are a way of exercising numbers and gaining perspective on potentially expensive decisions.
I see mgt knowingly demanding “bad” assumptions in estimates in order to fit w/in fiscal cost constraints. I’m using ranges of estimates (all at 80% CL) w/ differing input assumptions in order to help mgt to at least grasp the likely impact of accepting highly optimistic assumptions, if not budget more reaslistically.