Jez Humble
October 15, 2018
650

# Economic Frameworks for Portfolio and Product Management

This class presents the idea of using economic frameworks for portfolio and project management. We’ll begin with an overview of the three horizons model, and discuss the economic models that are suitable in each horizon. We’ll then discuss and experiment with economic tools that can be applied in each horizon, including the Value of Information, Monte Carlo and Cost of Delay.

October 15, 2018

## Transcript

1. ### i290 lean/agile product management unit 5: economic frameworks @jezhumble https://leanagile.pm/

[email protected] This work © 2015-20 Jez Humble Licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
2. ### grasp the principles of cost of delay understand the principles

of decision theory calculate the value of information make product decisions in an economic framework know how to apply optionality learning outcomes

5. ### “you may ignore economics, but economics won’t ignore you” —

Don Reinertsen “The measure of execution in product development is our ability to constantly align our plans to whatever is, at the moment, the best economic choice.” — Don Reinertsen
6. ### decision theory The analysis of complex decisions with signiﬁcant uncertainty

can be confusing because 1) the consequence that will result from selecting any speciﬁed decision alternative cannot be predicted with certainty, 2) there are often a large number of diﬀerent factors that must be taken into account when making the decision, 3) it may be useful to consider the possibility of reducing the uncertainty in the decision by collecting additional information, and 4) a decision maker's attitude toward risk taking can impact the relative desirability of diﬀerent alternatives. Craig W Kirkwood, Decision Tree Primer, p1
7. ### risk matrix probability (0-1) impact (\$) low probability low impact

high probability low impact low probability high impact high probability high impact
8. ### decision tree temperature sensor: • development cost: \$100k, revenue \$1m

• probability of success: 0.5 pressure sensor: • development cost: \$10k, revenue \$400k • probability of success: 0.8
9. ### decision trees Craig W Kirkwood, Decision Tree Primer, p4 EV=\$400,000

EV=\$400,000 EV=\$310,000 EV=\$0

11. ### value of information • information reduces uncertainty about decisions that

have economic consequences • information aﬀects the behavior of others, which has economic consequences • information sometimes has its own market value Douglas Hubbard, How to Measure Anything (3rd edn), p145
12. ### measurement A quantitively expressed reduction of uncertainty based on one

or more observations Douglas Hubbard, How to Measure Anything (3rd ed.), p31
13. ### perfect information Value of perfect information = EV after -

EV before = \$100k
14. ### not normally binary decisions — a continuum humans are risk

averse when the stakes are high use utility functions; reduce stakes don’t capture time dependence use calculus monte carlo analysis problems with decision trees
15. ### opportunity cost In microeconomic theory, the opportunity cost of a

choice is the value of the best alternative foregone, where a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the beneﬁt that would be had by taking the second best choice available. Wikipedia
16. ### cost of delay Task A: upgrade package to support credit

card encryption CoD: ﬁne of \$50,000 per day we’re not in compliance. Duration: 2 weeks Task B: Complete a feature for a key customer CoD: we’ll close \$100,000 per week with this feature Duration: 1 week
17. ### cost of delay Task A: 2 weeks, CoD \$250k /

week Task B: 1 week, CoD \$100k / week

19. ### exercise Should I wait for the feature? We have completed

suﬃcient features for 85% of our target customers. We can: a) Launch what we have, add last 15% in next release, 6 months from now b) Take 2 more months to ﬁnish last 15% Cost of delay for project: \$200,000 / month
20. ### batching up work “Black Swan Farming using Cost of Delay”

| Joshua J. Arnold and Özlem Yüce | bit.ly/black-swan-farming

22. ### three horizons Baghai, M., Coley, S. and White, D., The

Alchemy of Growth