Selecting Alternatives in IT: A Decision-Making Model

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1 Decision Framework, J. Feiman Research Note 18 February 2003 Selecting Alternatives in IT: A Decision-Making Model IT decision makers typically evaluate several alternatives before making a selection. Our investment pyramid decision-making model is based on assessing three fundamental factors: cost, time and risk. Core Topic Emerging Trends and Technologies: The Future of Technology, Business and Society Key Issue What are the best practices in tracking, prioritizing and transferring emerging technologies? Decision making in the IT industry is about deciding to invest in one of several alternatives. For example: Technology selection Microsoft or Java? Sourcing in-house development or outsourcing? Training train legacy developers in new technology or hire new specialists? Technology portfolio management retire or keep a technology? Making these types of decisions requires assessing and answering three fundamental questions: How much will the option cost? The cost factor reflects expenses and losses that an enterprise incurs when it selects a product, process or service. The cost factor addresses how much an enterprise agrees to spend or lose in pursuit of an alternative. Expenses include employee compensation, technology acquisition, training and other issues. Losses include loss of productivity while employees adopt new technologies, loss of productivity due to process and policy changes, and other factors. How long will it take to implement? The time factor reflects the time frame that an enterprise (its financial officers, IT executives, and business sponsors) must agree to wait before it achieves its goal for example, until it receives a return on its investment in a technology. What is the risk? The risk factor reflects the risk level that an enterprise is willing to accept. This factor is measured in the probability of failure of the selected alternative. Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 These three factors can be graphically presented as a threedimensional investment pyramid, with the sides representing cost, risk and time. For ease of graphical presentation, the investment pyramid's factors also can be drawn as twodimensional histograms (see Figure 1 for an example). Figure 1 Migrating Legacy Developers to Java Skills 60% $57,000 40% $52,000 Key Risk Cost Time 12 months 10 months $23,000 5% 5 months Visual Basic, PowerBuilder and Fourth-Generation Language A Model Example: Migrating Legacy Developers to Java We applied the investment pyramid model to whether it was worth the investment to retrain legacy developers in Java technology in "Migrating Developers to Java: Is It Worth the Cost and Risk?" The Problem and Solution: An enterprise considers adopting Java technology. Is it worth the cost, time and risk to migrate its legacy developers to Java? We considered three alternatives: ; Visual Basic (), PowerBuilder (PB) and fourthgeneration language (4GL); and "migrants." Figure 1 demonstrates our estimates. For example: The cost of migrating a developer to Java is $57,000 this includes direct training expenses, and loss of productivity during training and technology adoption. The time/duration of the migration is 12 months including training time and time allowed for skill maturation. The risk of failure is 60 percent that is, six out of 10 developers will fail to become professional Java developers. 18 February

3 The investment pyramid can be represented in another twodimensional graphic that makes it easier to demonstrate the process of selecting among the alternatives (see Figure 2). Time 12 months 10 months 5 months 5% 40% 60% Figure 2 A Model Example $23,000 $50,000 9 months $52,000 30% $57,000 Cost Risk To choose between a "worth a try" and "don't do it" option, an enterprise must assign "acceptance threshold" values to the cost, time and risk factors. Table 1 contains the values that we chose for our legacy-to-java skills migration example. Table 1 Sample Acceptance Threshold Values Factor Acceptance Threshold Value Cost $50,000 or less Time Nine months or less Risk 30% or less The shaded area in Figure 2 encompasses legacy technologies that satisfy the acceptance criteria. Thus, if an enterprise chooses the acceptance threshold values as given in Table 1, its developers who migrate to professional Java will fail to satisfy the criteria. Migrants from, PB and 4GL also will not satisfy the criteria, but they will be closer to doing so. Migrants from easily satisfy all criteria. Factor Evaluation Often, it is not important or too difficult to measure factors in absolute units for example, to measure cost in dollars or measure time in months. It's also possible to measure factors as ratios, comparing alternative choices and using empiric values, such as low/medium/high or using a scale from 0.0 to February

4 Total Weighted Score Weighted Score Cost, risk and time factors are functions of a variety of parameters. The parameters for these factors may be the same or different for various categories of decision-making problems. An enterprise can select a set of factors' parameters for problems that would be solved most often. For example, a mostcommon set of parameters can be chosen for selecting tools or vendors that best meet an enterprise's requirements for application development (AD). Figure 3 offers a template for an investment pyramid that might be used for assessing tools or vendors for AD. Weights reflect the importance of the parameter. Analysts should assign scores to each parameter (the weight and scores given here are only examples of the process). Multiplication of the weight and score gives a weighted score. Summation of weighted scores presents a total weighted score. The total scores are used to compare options. Figure 3 Investment Pyramid Model Example for Tool/Vendor Selection Total Weight Weight Score Parameters % Low: 0.0 to 0.3 Medium: 0.4 to 0.7 High: 0.8 to 1.0 Cost % High: 0.8 Technology acquisition cost % Medium: 0.6 Technology adoption cost (for example, training) % Medium: 0.5 Cost of AD with chosen technology % Risk % Medium: 0.6 Legal issues affecting vendor (for example, Napster vs. U.S. recording industry; Microsoft vs. U.S. Department of Justice) % High: 0.8 Economic conditions in the country (for example, a recession that affects enterprises commitment to invest in the technology) % Medium: 0.4 Vendor s failure to deliver on promises % Medium: 0.6 Client s difficulties to learn the technology (for example, developers difficulties in learning Java) % Time Total 0.17 = (0.62x0.55x0.50) % Medium: 0.5 Duration of technology adoption % Medium: 0.5 AD cycle duration This template can be used by an enterprise to make a selection among three vendors, for example, such as IBM VisualAge for Java and WebSphere; Microsoft's and COM/MTS; and Computer Associates' Cool:Biz and Cool:Joe. Applying the 18 February

5 template to these three vendors will produce three investment pyramids. An enterprise would choose the vendor that best matches the acceptance criteria. Evaluating Alternatives To choose an alternative, an enterprise can compare investment pyramids by their volumes. The volume of the right-angle pyramid is a production of cost, time and risk (actually, one-sixth of the production, but the constant "one-sixth" can be ignored). The pyramid with the minimal (among all pyramids) volume might be chosen to represent an optimal combination of cost, time and risk, and thus represent the optimal solution. Another way of choosing an alternative is to compare each of the relevant factors that is, cost vs. cost, time vs. time, and risk vs. risk. The pyramid with cost, risk and time factors that are closest to the acceptance thresholds would represent the solution. When to Use the Model Use this model when: Note 1 Type A, B and C Enterprises Gartner classifies enterprises based on how early and rapidly they adopt innovative IT. Type A enterprises are typically technically aggressive and well-funded, and use IT to gain a competitive advantage. Type B enterprises, which are in the majority, are mainstream IT users with adequate funding that use IT for productivity. Type C enterprises are technologically conservative and risk-averse, and seek to control IT costs. Selecting vendors or tools for a project category, such as for workgroup, departmental and enterprise-class projects. It also can be used for selecting vendors/tools for different categories of enterprises, such as for Type A, B and C enterprises (see Note 1), or for small, midsize and large enterprises. Choosing a category of legacy developers that should be migrated to emerging technologies (see "Migrating Legacy Developers to Java: Costs, Risks and Strategies"). Choosing what managerial principle opportunistic or systematic should be used to conduct the project. Deciding what application should be outsourced or developed in-house, and what legacy application should be rewritten or left alone. Examining a problem, as well as a category of problems. For example, the model can be used to select a vendor or tool for an AD project, as well as for making general recommendations on what kind of vendors or tools should be used for workgroup, departmental and enterprise-class projects. How to Use the Model To make the optimal choice, we recommend that IT decision makers implement this process: 18 February

6 1. Use the three fundamental factors of cost, time and risk to assess the alternatives. 2. Define parameters that affect these factors. For example, for the cost factor, it might be the cost of technology, the cost of development and maintenance, and the cost of training; for risk, it might be the risk of the failure to adopt new technology or the risk that the vendor will fail to deliver. 3. Weigh and score the parameters, and calculate the weighted score for cost, time and risk. 4. Set the acceptance values for the factors that is, state how much you agree to pay (acceptable cost), how long you agree to wait (acceptable time) and what level of risk you agree to tolerate (acceptable risk). 5. Choose the alternative for which weighted and scored factors best satisfy the acceptable cost, time and risk. Why Use the Model? Enterprises often use an incomplete, insufficient or even incorrect set of factors to make IT decisions. Most often, they simply use technological parameters of the factors, such as the user-friendliness of an AD tool, the purity of object-oriented features in the languages, the universality of application programming interfaces or the degree of cross-platform portability. Sometimes, enterprises only use cost-related parameters, such as the cost of developing applications vs. outsourcing to external service providers; or they agonize over the cost of technology, when that should not be their major concern. Risk assessment is used least frequently. Enterprises seldom examine all three critical factors together. Often, enterprises base their decisions on the IT vendors' strategic vision and ability to deliver on that vision. Although these are important factors, they must be applied to an enterprise's specific needs. The investment pyramid can serve as a valuable tool for explicitly assessing cost, time and risk of implementing alternatives. Benefits of the Model The investment pyramid decision-making model has these advantages: It's measurable factors can be measured in absolute measurement units (dollars or months) or empiric units (for example, high/medium/low scores). 18 February

7 It's action-oriented, because it offers a model for choosing the alternative that best satisfies the acceptance value (for example, choosing an investment pyramid with minimal cost, time and risk factors). It allows for estimating an effect on the cost, time and risk factors caused by the change of parameters' scores enabling completion of a "what if?" exercise. It explicitly requires enterprises to analyze economic and social parameters (for example, lawsuits and country/worldwide economic conditions) in addition to technological parameters, thus addressing the needs of CEOs, CIOs and CMOs not just the needs of technical managers. It's applicable for general assessments, such as selecting optimal AD tool vendors for average enterprises, as well as for detailed assessments, such as for a specific enterprise. Acronym Key 4GL AD PB Fourth-generation language Application development Common Business Oriented Language PowerBuilder Visual Basic Bottom Line: When IT decision makers must choose between several alternatives, they must consider a myriad of factors some important, others not. The investment pyramid decisionmaking model distills important criteria into three critical factors: cost, time and risk. We recommend that enterprises use this model to enable IT practitioners to assess these factors and choose the optimal option. IT management should use analytic techniques to improve its IT decisions by making cost, time and risk trade-offs tangible. 18 February