ADVISORY ARTICLE
By Dr. Kenneth Smith, PMP
Honolulu, Hawaii
& Manila, The Philippines
In my previous two PMWJ Advisory articles, Benefit/Cost analysis was presented as a systematic technique to determine whether a particular approach was worth the monetary cost in terms of a Benefit/Cost Ratio; whereas Cost:Effectiveness analysis was for comparing the relative benefit of two or more options in terms of subjective effectiveness, where either or both the benefit and the cost were in non-monetary terms. Decision Tree analysis is another useful quantitative Planning Phase[1] technique in the Benefit-Cost-Effectiveness trilogy in project situations where several alternatives – i.e. not just Plan A, but also Plans B[2], C, D, E or whatever – are under consideration (and in contention) to achieve a particular objective, and:
- Both benefits and costs are monetary, and the
- Benefit/Cost Ratio is in terms of Expected Monetary Value (EMV).[3]
Decision Tree Analysis attempts to take the major risk factors into consideration ¾ both negative and positive ¾ into consideration in all options, depicting them in a complex multi-stage decision process as a series of steps, then systematically quantifies and weighs alternate approaches to select the best option under pre-selected conditions of uncertainty before deciding on a particular course of action. Such step-by-step clarification is helpful ¾ even when all the data for completing the analysis are not readily available. Project options are usually both numerous and complex and the best choice is not readily apparent, so systematic analysis is usually better than no analysis at all. Even when — superficially — one choice appears to be better than others, taking the time to do some systematic analysis is also helpful, as frequently there are hidden issues; and apparent options are sometimes counter-intuitive. This is where active team participation and brain-storming really pays off.
As its name implies, Decision Tree Analysis identifies various project options in a graphic format as a tree – actually a ‘fallen tree’ – then is developed further in the following manner:
- A series of anticipated events and expected consequences for the “normal” situation (i.e. without the project) is first outlined as a process flow chart, with bars and milestones.
- Several hypothetically feasible alternatives are then developed — represented as parallel branches.
- Each branch is further sub-divided at key milestones, according to the criteria and weights specified by the team or decision-maker, in conjunction with technical specialists.
- The probabilities of each event occurring and relative outcomes are then estimated together with their monetary value.
- The alternate paths are then computed to determine the expected “payoffs” for each option.
- From this process, the most appropriate alternative should then become more apparent.
Once the various tree options have been established, Sensitivity Analysis trials can also be conducted to examine how susceptible particular aspects might be to fluctuations ¾ and hence the extent to which they are able to withstand drastic deviations from “normal” expectations. From such an analysis the more robust option(s) can be determined, recommended and/or selected for adoption.
In essence, if the major aspects of a situation can be quantified, a systematic process can be used to conduct repetitive “what if” simulation trials. The biggest drawback of course is that the probabilities of different future events and impacts are often difficult if not impossible to obtain ¾ or even, sometimes, to get anyone to estimate. Hence — although the results can be refined somewhat through simulation trials and sensitivity analysis — the reliability of the decision is often questioned &/or questionable. Thus, because the choice is being made systematically, the manager may be falsely reassured — but the choice may be for the wrong option. Nevertheless, since no-one can forecast the future accurately, we do the best we can!
The step-by-step procedure is detailed below…
More…
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How to cite this article: Smith, K. F. (2021). Decision Trees, EMV and Thee, PM World Journal, Vol. X, Issue X, October. Available online at https://pmworldlibrary.net/wp-content/uploads/2021/09/pmwj110-Oct2021-Smith-decision-trees-emv-and-thee.pdf
About the Author
Dr. Kenneth Smith
Honolulu, Hawaii
& Manila, The Philippines
Initially a US Civil Service Management Intern, then a management analyst & systems specialist with the US Defense Department, Ken subsequently had a career as a senior foreign service officer — management & evaluation specialist, project manager, and in-house facilitator/trainer — with the US Agency for International Development (USAID). Ken assisted host country governments in many countries to plan, monitor and evaluate projects in various technical sectors; working ‘hands-on’ with their officers as well as other USAID personnel, contractors and NGOs. Intermittently, he was also a team leader &/or team member to conduct project, program & and country-level portfolio analyses and evaluations.
Concurrently, Ken had an active dual career as Air Force ready-reservist in Asia (Japan, Korea, Vietnam, Thailand, Indonesia, Philippines) as well as the Washington D.C. area; was Chairman of a Congressional Services Academy Advisory Board (SAAB); and had additional duties as an Air Force Academy Liaison Officer. He retired as a ‘bird’ colonel.
After retirement from USAID, Ken was a project management consultant for ADB, the World Bank, UNDP and USAID.
He earned his DPA (Doctor of Public Administration) from the George Mason University (GMU) in Virginia, his MS from Massachusetts Institute of Technology (MIT Systems Analysis Fellow, Center for Advanced Engineering Study), and BA & MA degrees in Government & International Relations from the University of Connecticut (UCONN). A long-time member of the Project Management Institute (PMI) and IPMA-USA, Ken is a Certified Project Management Professional (PMP®) and a member of the PMI®-Honolulu and Philippines Chapters.
Ken’s book — Project Management PRAXIS (available from Amazon) — includes many innovative project management tools & techniques; and describes a “Toolkit” of related templates available directly from him at kenfsmith@aol.com on proof of purchase of PRAXIS.
To view other works by Ken Smith, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/dr-kenneth-smith/
[1] The technique can also be used during Program Evaluation to update prior assumptions about probabilities after some experience has been gained, to reassess the likelihood of an actual project outcome, in order to determine the relative merits of an on-going program.
[2] On a humorous note: There is a company in Bangkok — as well as a bar in Metro Manila — named “Plan B”!
[3] The Decision Tree technique can also be used to estimate the size of a project management reserve schedule & cost buffer based on an assessment of risk probabilities and impacts — as outlined in my September 2020 PMWJ article: Smith, K. (2020). Risk Exposure, Murphy’s Law & Management Reserve, PM World Journal, Vol. IX, Issue IX, September. https://pmworldlibrary.net/wp-content/uploads/2020/08/pmwj97-Sep2020-Smith-risk-exposure-murphys-law-and-management-reserve.pdf
