For almost 15 years we have been witnessing a fundamental shift in how we do business, how we live and how we envision the world. Some have referred to this as a Paradigm Shift (Senge, 1991) brought on by cheaper and more accessible technologies (Ashkenas et al. 1995). As business people, we are constantly faced with solving problems and driving results, but that task is becoming more difficult because the lay of the land has changed and is going to continue to change – for everybody and every industry.
The fact that change and the unknown will have a deep impact on decision makers is not new, in fact Sun Tzu noted this almost 2000 years ago in the Art of War
“We are not fit to lead an army on the march unless we are familiar with the face of the country – its mountains and forests, its pitfalls and precipices, its marshes and swamps.”
Our challenge is to find new ways to understand and model our environment in ways that will provide useful and relevant insight. In this blog we are going to tackle how both Monte-Carlo Simulation/Optimization and Network Analysis can independently or jointly enhance our understanding as well as solve some of today’s toughest management challenges with relative ease.
Social and Organizational Network Analysis (S/ONA)
Over the last decade, we have seen how the internet has transformed our lives progressively and fundamentally. But the internet is not just a tool for collaborating in today’s dynamic environment; it is a model for it (Logan & Stoke, 2002). Marshal McLuhan summarized this idea almost 40 years ago in one simple caption “the Media is the Message”.
What does this mean for decision makers? It means that as the world becomes more inter-connected, understanding how networks form and operate becomes critical success factor in defining and executing relevant strategy and operations.
Examples of social and organizational networking are everywhere – from Facebook to Supply Chain Management, from Google to Cloud Computing, from Microsoft Messenger to Organization Wide Collaboration and Conferencing.
S/ONA has been used by some of the world leading firms to deal with HR (succession planning, compensation analysis, etc.), Knowledge Management as well as Strategic Analysis of suppliers and partners.
In this blog, we are going to explore these ideas and try to make them practical for everyday use.
Monte-Carlo Simulation and Optimization
Monte-Carlo simulation has been around since the 1940’s but has not been easy to apply until recently. Monte-Carlo simulation and optimization enables users to analyze problems in terms of ranges and distributions rather than single point i.e. sales are going to be between 10 and 12 million vs. an 11 million average. Most project managers, executives and analysts tend to model their ideas in terms of single of single point because they are much easier to model than ranges but when pushed to give an answer or a forecast – they will give you a range.
The more you incorporate variance-based variables (i.e. costs, time, effort, complexity, ect.) into your models (i.e. budgets, forecasts, production specs, etc. ), the more you realize that the potential outcome can vary greatly from initial targets.
“Initial cost and schedule estimates for major projects have invariably been over-optimistic. The risk that cost and schedule constraints will not be met and cannot be determined if cost and schedule estimates are given in terms of single points rather than distributions.”
Final Report of the USAF Academy
Risk Analysis Study Team, August 1971
Why is that important? Because through Monte-Carlo simulation and optimization it becomes possible and easier to:
- Simulate Outcomes – By looking at 10,000 or even a 1,000,000 variations of the same situation is much more powerful than looking at 3 point estimates (i.e. Best Case, Worst Case, Most Likely)
- Assess Risk: Using tools such as sensitivity analysis we can pinpoint what is driving the final answer
- Improve Communication and Understanding: Using MC is very powerful to communicate the impact of certain decisions because it is very simple and visual.
- Build and Maintain Credibility - Failures have a big impact on managers’ and executives careers. According to the Standish Group’s 2006 Chaos Report “46% of projects are either delivered late, overbudget or both!”
- You Incorporate Accuracy - The ability to mathematically assign certainty to an answer will enable you to get the budgets they need from the outset – thus mitigating major gaps between projected and real costs. By providing better estimates for time and money, executives and managers demonstrate their ability to get things done right, on-time and on-budget.
In this column/blog we are going to cover these concepts and techniques as well as develop them further. We feel that both techniques are powerful on their own; however we would also like to explore applications where they overlap.
I hope that you will enjoy this column and I look forward to your ideas and feedback.
Eric Torkia
Executive Partner
Technology Partnerz Ltd - Crystal Ball Services Practice