How Much is Better Information & More Control Worth to You?

Incite! takes a different approach to risk management than is usually associated with common practices. Risk management to us is really decision management - supported by decision analysis. Of the several key insights that decision analysis delivers, value of information and control are two of the most powerful.

The value of information (VOI) tells us the most we should spend on more precise information in order to make a clear decision. For this reason, some people refer to it as the value of clairvoyance. It is essentially the value of obtaining better information, not just more (typically useless) information.

The value of control (VOC) tells us the most we should spend in order to get a desired outcome by controlling what was otherwise a critical uncertainty. It is the cost to turn critical uncertainties (which expose us to risk or regret) into decisions under our control. And for this reason, some people refer to it as the value of wizardry.

The following vignettes describe how clients benefited directly from such analysis.

Enterprise Resource Planning System Capital Justification

A major petroleum exploration & production company wanted to reduce the capital cost of an ERP system rollout in order to justify the net economic value, which was originally judged to be $0 (yeah!) on a spend of $100M (oh yeah!). Critical uncertainty analysis showed that the areas targeted for capital cost reduction would actually destroy the value of the system further. VOC analysis showed that spending additional capital in those same areas could provide an additional $300M of opportunity value.

The Value of Understanding the Target Market

A product development company believed they needed to control the cost of R&D on all projects as a means to improve the value of the company through improvements in capital efficiency. For a new product under consideration, VOI analysis revealed that practically all the effort for improving the contribution to value should be placed in understanding some essential market parameters (e.g., actual market size, potential market penetration, and time on max penetration). In other words, instead of spending resources on an immediately tangible, but ineffective, area of control, VOI analysis showed what the maximum budget should be for understanding the target market better and how much that better understanding was worth. Spending resources to reduce R&D was like looking for a lost quarter under the street lamp, although ten dollars had been lost over in the dark bushes.

Technology Start Up Capitalization Was Too Low

The leadership of a new technology company estimated they needed ~$500K of start-up capital. Our decision analysis showed that this level of capitalization bought about a 30% chance of success, while ~$2.5M bought about a 90% chance of success. The company underestimated their required capital by ~5X! Furthermore, VOC analysis showed

  1. the means to maximize the long term value was related to getting effective sales people on board as quickly as possible
  2. the level of sales staff that was needed
  3. the value of utilizing cloud computing resources vs homegrown hosting

Understanding the level of capitalization they really needed and the critical areas worth receiving their immediate attention helped them construct a more believable pitch for funding as well as prioritize their development efforts effectively.

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