- 39.1 Purpose
- 39.2 Strengths, weaknesses, and limitations
- 39.3 Inputs and related ideas
- 39.4 Concepts
- 39.5 Key terms
- 39.6 Software
- 39.7 References
39.1 Purpose
An organization is often faced with numerous information system development opportunities and inadequate funds to pay for them all. Risk-payoff analysis is widely used to evaluate and prioritize information system projects based on their relative risks (and uncertainties) and their potential payoffs.
39.2 Strengths, weaknesses, and limitations
Risk-payoff analysis is a useful tool for screening out projects that are associated with large risks or uncertainties, thus saving resources for more promising projects. Intangible risks and payoffs are very difficult to quantify, however, and other tools and techniques such as cost/benefit analysis (# 38) must still be used.
39.3 Inputs and related ideas
Before performing a risk-payoff analysis, a given project must be understood in enough depth to reasnably estimate its likely risks, uncertainties, and payoffs. Generally, such estimates cannot be made until near the end of the problem definition stage (Part II), and estimates made after the analysis stage (Part IV) is concluded are likely to be much more accurate. In some organizations, risk-payoff analysis is performed when the feasibility study reports (# 13) for proposed projects are evaluated by a steering committee.
39.4 Concepts
Risk-payoff analysis is widely used to evaluate and prioritize information system projects based on their relative risks (and uncertainties) and their potential payoffs.
39.4.1 Risk and uncertainty
Every information systems project is associated with risk, uncertainty, or both. Risks are possible negative outcomes that can be interpreted, estimated, or quantified by applying past experience. Uncertainties are possible negative outcomes that cannot be interpreted or estimated based on experience because they never happened before. In the discussion that follows, the term risk implies risk, uncertainty, or both. Note, however, that risk-payoff analysis requires that all parameters, including uncertainty, be defined and documented in an easily quantifiable form.
Technological change is perhaps the most obvious risk associated with developing an information system, but there are many others. User or technical personnel might be under-trained, inadequately skilled, or not sufficiently computer literate. A project might be unexpectedly delayed or a given phase might be rushed in an effort to stay on schedule. The need to deal with side issues might slow progress. Poor user or data requirements analysis or incomplete data collection during the problem definition or analysis stages might cause delays during design. Inadequate testing or poor implementation procedures can negatively impact training, maintenance, or user acceptance of the system. The list is endless.
39.4.2 Quantifying risks, uncertainties, and payoffs
The first step in the risk-payoff analysis process is to investigate the possible risks associated with each project and categorize them as tangible or intangible.
The midpoint value associated with each tangible risk is estimated based on such quantifiable parameters as cost, time, resource requirements (people, computers, etc.), and experience. The midpoint is determined by selecting a middle or average value from a range of reasonable estimates. For example, if the cost of a delayed shipment is estimated to lie between $50,000 and 150,000, the midpoint is $100,000.
The midpoint for each intangible risk is estimated using subjective or objective judgment. Often, the informed opinions of several experts are combined to form a range of reasonable values from which the midpoint is selected. The risks (tangible and intangible) associated with a given project are then summed to get a project total.
Quantifying risk is difficult (at best). An analyst might consider such factors as expected failure or error rates, the average elapsed time for new versions of relevant technology to reach the market, estimates of the completeness or quality of significant software, and typical or baseline values associated with a given methodology (e.g., object-oriented, structured) or operating concept (e.g., batch, client-server). Even given such factors, however, there is no way to perfectly quantify risk. Reasonable (or ballpark) estimates can usually be generated, however.
Given estimates of risk, the possible payoffs associated with each project are identified and categorized as tangible or intangible. Once again, the midpoints for each tangible payoff are estimated using quantifiable parameters, the midpoints for the intangible payoffs are estimated using judgment, and the tangible and intangible values are summed.
39.4.3 The risk-payoff matrix
The final step is to construct a risk-payoff matrix (Figure 39.1), with risk on the x-axis and payoff on the y-axis. The risk and payoff midpoints previously computed for each project are then used as x and y coordinates to position each project on the matrix.
 Figure 39.1 A risk-payoff matrix. |
On the matrix, the average payoff (for all projects) defines a line marking the horizontal midpoint and the average risk defines a line marking the vertical midpoint. Together, those two lines divide the matrix into four quadrants. Area 1 (top right) is the high payoff, high risk quadrant. Area 2 (bottom right) is low payoff and high risk. Area 3 (top left) is high payoff and low risk. Area 4 (bottom left) is low payoff and low risk.If a given project lies in area 1, the recommended action is to wait until additional analysis reduces the risk.
If the project lies in area 2, the recommended action is to stop immediately (abandon the project). If the project lies in area 3, the recommended action is to advance immediately so the project can be completed as quickly as possible. If the project lies in area 4, the recommended action is to do nothing until adequate resources are available or until the expected payoff increases.
39.5 Key terms
- Intangible —
- Difficult to define in concrete, physical (e.g., financial) terms.
- Midpoint —
- The middle or average value from a range of reasonable estimated values for a parameter.
- Payoff —
- A benefit.
- Risk —
- A possible negative outcome that can be interpreted, estimated, or quantified by applying past experience.
- Tangible —
- Easily defined, concrete, physical; for example, payoffs, risks, and uncertainties that can be expressed in financial terms are considered tangible.
- Uncertainty —
- A possible negative outcome that cannot be interpreted or estimated based on experience because it has never happened before.
39.6 Software
Not applicable.
39.7 References
- 1. Gibson, M. L. and Hughes, C. T., Systems Analysis and Design: A Comprehensive Methodology with CASE, Boyd & Fraser, Boston, MA, 1994.
- 2. Laudon, K. C. and Laudon, J. P., Managing Information Systems: A Contemporary Perspective, Macmillan, New York, 1991.
Posts
No comments:
Post a Comment