When you must choose among several options, decision analysis can help you identify the tradeoffs of each choice. Another approach to decision-making when some of the factors are unknown is to analyze the impact if the risks are realized, and translate the risks into hard numbers, such as dollars or lost time. For example, consider a team that must choose a solution from vendor A, B, or C. The vendors' proofs of concept are dead-on for some of the highest-priority requirements, but there's still a lot unknown about how each solution will perform when it's implemented. A table of the options and impacts can help guide the decision
Vendor A | Vendor B | Vendor C | |
---|---|---|---|
Current relationship with vendor | None – vendor is new to industry | Active – vendor has delivered other solution to our organization | Previous – vendor relationship ended due to high cost of ongoing maintenance |
Cost to manage vendor relationship (annually, based on anticipated % of headcount/salary, estimated by exchanges with vendor). | $25,000 | $10,000 | $15,000 |
Cost of solution | $500,000 | $600,000 | $800,000 |
Cost of ongoing maintenance (annual) | $5,000 | $6,000 | $16,000 |
Ballpark cost to build an internal solution to fulfill requirements not met by the vendor's solution | $200,000 | $125,000 | $10,000 |
Cost to restore if the system fails | $25K for every hour of business lost. | $25K for every hour of business lost | $25K for every hour of business lost |
Likelihood of quick system restore | Unknown – small vendor, probably has limited ability to respond quickly; contract says vendor will cover business losses after 8 hours. | Medium – vendor has proven that they can restore within 6 hours. | High – large vendor with multiple redundancy, failsafe, and backup options, cites 2-hour response |
Cost of system failure, assumes 2 failures in 3 years ($25K per hour x expected hours of failure) | $200,000 | $150,000 | $50,000 |
Total cost over 3 years | $1,190,000 | $1,073,000 | $1,003,000 |
Drawing a grid can be a very useful exercise, even though, in this case, it's difficult to estimate the exact cost of an internal build, and it's impossible to know how often the system will fail. Still, the grid enables the team to calculate a rough dollar estimate of the total cost over three years. Depending on the risk tolerance of the organization, a grid can at least serve as an organizing aid for choosing a vendor.
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