Decision Analysis using Equity3
Most Equity3 models are built to best allocate monetary resources to a portfolio of investments. This could be the choice of which R&D projects to invest in or how to most effectively spend the Marketing budget. As preparation for Equity3 modelling, raw data is collated on the costs and outcomes of these projects. These often number in the hundreds, making the task of allocating funds even more complex. There are 5 main stages to modelling in Equity3.Stage 1 - Constructing a model
The first stage in Equity3 modelling is to construct the outline of the model. The potential investment options are identified and grouped into areas of similar investment, creating towers in the model structure. The options in each tower could represent different levels of funding for a single project or several discrete projects in an area of activity.
Each of the optional projects is now scored against a set of defined criteria. It is usual that these criteria are grouped into costs and benefits. The criteria do not all have to be monetary. Part of the power of Equity3 and MCDA is that it allows quantification of non-monetary assets. This is especially important for public sector users who do not have the luxury of monetary targets like profit. Scores can be input to an Equity3 model either numerically or graphically.
This is the key differentiator of MCDA over other decision analysis techniques. At this stage the decision maker(s) must make a value judgement on the relative importance of different aspects of the model. Preferences are set using swing-weighting techniques. These are technically more robust than simply setting relative importance of criteria. Most often, it is a group of senior decision makers who perform this task. Catalyze provides Decision Conferencing services to manage this process.
When the model is populated, various analyses can be performed. Weighted Benefit-Cost Ratio is used to sort all the options within areas. Graphs are used to analyse the Benefit-Cost Ratio – projects with the steepest lines provide the most benefit for the money invested. This shows that they have priority over projects with lesser benefits.
To achieve the most efficient investment across the whole portfolio, all the options in all the areas must be considered together. This produces the envelope graph and shows every possible combination of investments. The upper surface of the graph is termed the Efficient Frontier. This represents the investment portfolios that generate the most benefit for a given cost.
The graph also shows a P symbol representing the original portfolio proposed by the decision makers. The B symbol shows how to achieve more benefits for similar cost. In our experience, the effectiveness improvement from P to B averages 30%.
The analysis includes many other features, such as finding the best performing portfolio for a given project and automatic project trade in functionality.
Equity3 is designed to help support more effective decision-making. It does not make the decision for you. However, it does provide a recommendation of the order in which resource can be most efficiently allocated to projects. The graphic above shows the Order of Priority listing. Equity3 displays the results of analysis and provides the Order of Priority to aid the decision makers in their task.
Finally Equity3 can produce an HTML report; you can see an example report here.