Trade-Off Analysis

We have a limited amount of time and resources, and because of that, whenever we say yes to something we're saying no to something else. There's a trade-off there. What we want to do is we want to perform a trade-off analysis to make sure we're making the right decisions, especially when we're dealing with larger amounts of money.

A scenario

Let's develop a scenario here. Let's say we've already identified several different risks that we have to the organization that we're working for. Not only that, but we've performed risk analysis and determined what level those risks are from a monetary standpoint — that's the inherent risk. We've also identified some solutions that will help mitigate these issues — that's the residual risk right here. This is the amount of risk we have with each one of these risks after we've mitigated these risks.

Now we need to determine which one are we going to tackle. We have a limited amount of resources; we can't tackle all of them. We've determined we can only tackle one of those risks and implement one solution. So how do we determine which one we're going to implement?

Well, initially we can say two of them fall above the threshold, and we have to, by policy, mitigate those issues. So this one right here and this one right here are both that we should mitigate, because they are above that $100,000 threshold limit that we have already set. But the thing is, with those, both of them are a $30,000 improvement. We also see one here that is even more — this is a $36,000 improvement. So which one are we going to actually mitigate here?

So we have to do some assessments on which one we're actually going to mitigate, and where are we going to spend our time and resources. This is called a trade-off analysis. There's trade-offs between whatever decision we make.

A simpler example

Let's take a more simple example. Let's say we are studying for a test the next day. Now it's getting close to the time that we have to go to bed, that we usually go to bed, and maybe we usually get 8 hours of sleep. But we also feel like we need to study more for this test, so maybe we want to borrow more time from sleep to study for the test.

Now the advantage of that is that we're going to study more and we'll be more prepared for the test, perhaps getting a higher grade. So maybe we are going to borrow an hour for more study time and take away from our sleep time here. We might be a little more groggy in the morning, but an hour might not be devastating. And so this is a trade-off decision that we're making, that we're going to spend a little more time studying so that way we can be more prepared for the test.

But we may think, well, an hour isn't really going to be enough, so maybe I need to spend 2 hours and only 6 hours sleeping. Now we might be a little more groggy for that test, but perhaps we've studied more. Or maybe it's going to be 5 hours and then 3 hours studying. Now at some point in time there's a trade-off here that we are determining that it's not worth it, that we're not going to get enough sleep for us to be effective the next day. And so we choose the level that we think is going to be the best, and we weigh out the pros and cons of these decisions.

A real-world example

Here's a real world example that I experienced as an IT director. We had two different projects that we wanted to pay attention to. One of them was in regards to some servers that we had. We were getting into our busy season, and we were a software as a service company, so users really relied on our services. What we were seeing is some concerns over some of the numbers, some of the data that was coming back from these servers, going into this busy season. We were concerned as our users ramped up that it would send these servers into a problem state and actually cause problems for the users, although they hadn't yet. So it was a risk that we had identified and were concerned about.

Then we also had some features that we wanted to roll out for our users as well, something that our users would really love, something that would actually make us more money. And so this was something that there's a lot of pressure for, because it was new and it was something that could help increase the revenue of the company. Versus these servers right here: if they caused problems, it could hinder the users we already had and we would lose some business. So it was a choice between possibly, potentially, maybe losing some business, to a good chance that we could get new business. So this was the decision that we needed to make. So there's a trade-off here.

Now in this example we really didn't have time to tackle both. We had to choose one or the other.

Trade-off analysis and cost benefit analysis

This is where I like to do trade-off analysis. Trade-off analysis is just going through the process of thinking the pros and cons of each of these options. One thing that I like to do a lot of time when I'm making big life decisions or making certain decisions is create a table, a table that has the pros — I write out the pros for a decision and the cons for the decision. And so I just make a list of everything that is the pro and con for one option, and then also the pros and cons for another option. This sometimes makes the decision quite apparent of which one is really the best option in these scenarios.

One of the problems with the method that I just mentioned is that a lot of those measurements are subjective, and it's a little bit hard to compare the two. So what we can do also is try to wrap things up into what is the cost. So right here we have a risk involved on this side, and we already have mentioned some of the ways that we do risk analysis, that we can determine what is going to be the cost of not performing. There's a probability that can happen with this, as well as an impact, and we can come up with, well, what is the risk going to be involved if we go into our busy season with unstable servers.

The other side to this is that there's a potential of revenue that we could increase, the overall revenue that we could have by rolling out a new feature in a timely manner. So if this is a high priority change and going to really affect our revenue, then this also has some sort of monetary value to it, and we can determine what that monetary value is. And if we can do an accurate assessment of the cost involved with these and the benefits of both of these, then what we can do is we can evaluate this on a common ground here. And this method has to do with money, and what is the money going to be associated with both of these options.

What we're really assessing here is the cost to deploy the changes to the servers to make them more stable, and the time invested into these servers to make them more stable, and the amount that the risk of those servers going haywire is going to decrease. So that is what we're analyzing over here. Versus on this side, the cost of deploying whatever feature it is that we need to deploy and the increased revenue that we're going to receive from those services.

We call this a cost benefit analysis. It's a type of trade-off analysis, where we're balancing out these trade-offs but we're doing it based off of cost. So we do a cost benefit analysis to really compare apples and oranges, two very different types of projects that we have here, but it gives common ground to how to assess these.

Return on investment

One way to do this is a return on investment, and in this case right here we can boil this down to what is the return on investment. We have some sort of investment here, which is the cost to deploy in both of these cases, and then we're going to get a return on that. So we have a return on investment, which I'm going to go more in depth into in another lesson. Just a quick mention of what return on investment, or ROI, is: it's essentially taking the benefit that you get out of a solution and then you're dividing that by how much you put into that solution, and you get a percent. And that percent needs to be, first of all, over 100% before we ever agree to this, because we want this to actually have a return on whatever we invest into it. Otherwise, why would we invest money into this? But what this really does is it gives us a common ground to assess which projects we tackle first.

I can tell you in my original example, where we're balancing out between these two options, we had a lot of pressure for these new features that we would roll out, from a lot of people within the company. They're excited about rolling this out. We also had a big unknown on whether these issues were actually going to be a problem or not, and we didn't know how much time it would take to even investigate this issue and get into this issue.

So based off of those pressures and that cost benefit analysis and the trade-off analysis that we did, we ended up deciding to go with the extra feature. I can tell you that this was something that really bit us and caused a lot of problems, because our servers did not perform well when we started loading them up and we started to increase the use of them, and a lot of our customers complained and had a lot of issues with the services that we were providing. At some point in time we had to drop everything else that we were doing and invest a bunch of time into analyzing what the issue was with these servers and fixing the issues. We became a lot more stable after that. But this is just one example where we did this trade-off analysis but we ended up choosing probably what was the wrong decision.