Data-driven estimation the power of the Monte Carlo Simulation

Nearly thirty years ago I worked in the Construction industry and one of my roles was to create estimates for how long a future novel piece of work would take in time/effort; resources and then attribute a risk profile and lastly the margin of return known as gross profit. At that point we have something like ten different teams. I say teams. We called them gangs. Whilst some of the gangs were relatively stable others were not given the fluid nature of the jobs in the pipeline team members needed to move for short periods of time. I would often seek to bring gangs together in response to the size, complexity and milestone (payment dates) as back then much of the work we did was earned value given key milestones.

How did we grow a successful business? There were many key factors that made the family business distinctive: branding; attitude to safety, strong leadership; performance-related pay and bonus schemes; highest standards of training; professional accreditation and many more. But for getting our estimates right? Monte Carlo was key. We were a deeply data-driven and data intelligent business.

Stated simply, the Monte Carlo simulation furnishes the decision-maker with a range of possible outcomes and the probabilities they will occur for any choice of action.. It shows the extreme possibilities—the outcomes of going for broke and for the most conservative decision—along with all possible consequences for middle-of-the-road decisions.

Stated briefly, Monte Carlo simulation provides a number of advantages over deterministic, or “single-point estimate” analysis including:

  • Probabilistic Results. Results show not only what could happen, but how likely each outcome is.
  • Graphical Results. Because of the data a Monte Carlo simulation generates, it’s easy to create graphs of different outcomes and their chances of occurrence.  This is important for communicating findings to other stakeholders.
  • Sensitivity Analysis. With just a few cases, deterministic analysis makes it difficult to see which variables impact the outcome the most.  In Monte Carlo simulation, it’s easy to see which inputs had the biggest effect on bottom-line results.
  • Scenario Analysis: see exactly which inputs had which values together when certain outcomes occurred.  This is invaluable for pursuing further analysis.
  • Correlation of Input model interdependent relationships between input variables.  It’s important for accuracy to represent how, in reality, when some factors goes up, others go up or down accordingly.

Of course, you do need a decent understanding of statistics. To this day I am still very grateful for my practical training back then, as well as completing advanced statistics such as multiple regression, analysis of variance and mixed analysis of variance when I completed my MSc in Organisational Psychology at Cardiff University.

One of the most exciting prospects of the current online Kanban tool is that we are starting a journey of moving from guess-estimates (data neutral based on faulty human reasoning and bias) to a data-driven science of estimation. And delight of delights? This tool has an in-build Monte Carlo simulation! Yes…dreams sometimes can come true…

Have a good weekend,

Jason

 

 

 

 

Business Strategy as Narrative: Why Are Stories So Powerful?

Organisational Strategy. One of the most set of two powerful words known to man; well at least in the modern business lexicon. According to Amazon there are over 7,000 books under the general search for ‘business management strategy’.

Typically, a popular book in hard-back can sell for between £ 20.00 and £ 40.00. Some of the classic texts are still selling thousands of copies per annum and some are in the realms of the 5th edition this year like Mintzberg’s classic. To be fair it still remains a tour de force.

What about strategic thinking as an educational need? Take a look at the fees from Harvard in 2016:

Class of 2016
Tuition $58,875
Health Fees $3,358
Program Fees $7,360
Room/Utilities $11,544
Board/Etc $13,963
Total $95,100

As you would anticipate the Harvard web-space has some excellent and very persuasive data demonstrating the various career routes that their students take; as well as the typical salary rates over the next 5-years. You won’t be too surprised that the most popular route is ‘consultancy’ with some 23% taking that route, and with a starting salary of $ 135,000.

I think you’d agree that this makes for a powerful narrative or story. Their ‘offer’ is that you ‘invest’ some $95k in your own self-development.. and then when you leave in your consultancy role you are earning $135k. Happy days!

narrative
This new book is one that I can’t wait to buy. Ask my wife and she will tell you that my office at home is over-flowing with such books. But this one…this one is different. Isn’t it? Surely? The truth is that it does strikes me as interesting read.. as it looks to analyse the ways by which a powerful narrative, or story, is made all the more compelling with the right numbers (or what we might call data).

This is not the only role for a decent strategy of course. But a good strategy should take you on a journey from where we are as a business, or as an organisation, to the ‘End Game’- where we want to be. Of course, the End Game is a powerful and compelling Vision that has been shaped, debated, argued-over and developed. If you are a public sector organisation then one would anticipate that participatory methods have been expertly used to co-create the End Game.

A good strategy uses a range of powerful images and ideas such as:-

  • icons that give rise to meaning in the readership
  • graphics that take complexity and then simplify things- for easy movement in and between the strategic stages/sections
  • maps that ground the narrative
  • case studies that demonstrate the ways by which innovation from external strategic scanning re(search) will be adopted
  • data, data, and data
  • personal stories from different segments of your customer base (or service clients) that help convince other users that your strategy meets their needs, expectations and hopes and also that it addresses some of the their genuine fears

One of the reasons stories are so powerful is beautifully expressed in this excellent read by Geoff Mead. It is not pushing it too far to say that this book has changed my life in many positive, and unexpected ways! It is a ‘must read’ to be honest. You can find some of the work that he does here at

http://www.narrativeleadership.org

leadership

I have a four-year old son. He absolutely loves stories. Part of the ‘deal’ is that if he             co-operates with me brushing his teeth…then…we have more time for stories. Currently each evening the ‘deal’ is that we have 2 read stories (that he borrows from our local Caerphilly library), and then 1 more story that we have to co-create. Fab fun!

So stories are deeply powerful, cultural ways to share meaning. They stimulate or evoke emotions. They engage and persuade us when they are working.. and they move us in various ways. To live out our values in the world, I guess?

Strategy really ought to do just the same!

whatisbp