Options Analysis - A Brief Guide
The project manager reported that the project is now going through Options Analysis and the Board will need to wait until it is completed before we know how to progress. You nodded. It sounded serious and important. However, to be honest, you had no idea what this ‘Options Analysis’ thing was about. The clue is in the title: it involves options and it involves analysis.
What is an Options Analysis?
Options Analysis is one of the most important techniques to select the option that meets a project’s needs and which, at the same time, is worth the investment from a financial and technical viewpoint. Typically conducted as part of the Feasibility stage of a project or business initiative, in the pre-project or preliminary initiation activities, an Options Analysis is usually carried out by a team of Business Analysts and, depending on the scale of the project and number of options involved, can even be considered a project on its own right sometimes!
Option Analysis Purpose -
The Purpose of Options Analysis is to identify, analyse, and select the best possible investment opportunity. That is, the option that maximizes value for money by combining the best expected outcome in terms of:
- Desirability: does the option does what we need?
- Viability: does the option offer return for money?
- Feasibility: do we have the resources to pursue the option?
Based on the size of the project or business endeavour, the analysis can be captured as a section or appendix to the Business Case or can exist as a separate Options Analysis paper. Regardless of the format and vehicle, it should provide sufficient information to enable an informed decision-making by the senior leadership teams.
The Options Analysis Process
The process of performing Options Analysis includes, by order:
It all starts with a list of potential ideas to solve the project or business initiative problem. The list is not intended to be exhaustive; instead it should show that different options have been considered. This is usually represented by the following 3-options model:
- Do nothing: this is your baseline and refers to the current situation
- Do the minimum: this one refers to an incremental approach, where minimal effort is put into the option; it may not entirely solve the problem but can still address it a lower cost/risk
- Do something: this is where you will probably spend more time since doing something may mean a range of solutions; consider a scenario of unlimited resources – what options are available to solve the project problem?
Another common alternative is to make vs buy, which can be further decomposed under the ‘Do Something’ approach.
Reality is here to remember us that there is no such thing as unlimited resources; you may have limited budget, limited number of people to work on the option, or limited time to implement it. Wherever you look, you’ll likely find scarce resources. Thus, the next step is to analyse what exactly does each option identified means in terms of their implications. Again, depending on the formality and complexity of the project, the way you analyse options may vary. However, a good practice is to analyse options through the following parameters:
- Cost: how much is such option going to cost to implement?
- Benefits: what benefits, financial and non-financial, can result from implementing such option?
- Resources: how many people are needed to implement such option?
- Timescale: how long would it take to implement such option?
- Risks: what risks are involved in the implementation of such option?
At the end of the day, it should be clear what are the pros and cons of each option.
Select Recommended Option
Once the analysis is completed, you can generate insights and provide a recommendation on each you think is the option that offers maximum impact for the lowest cost and risk. Usually, it won’t be up to you to make the decision, yet, based on facts stated by the Options Analysis paper or Business Case, you can argue in favour of a certain option. This section should clearly state why a certain option is preferable.
The document is then passed to the Senior Leadership Teams, which will review it and decide.
Real Options Analysis Example
The Options Analysis Paper i.e real option analysis example will be the main output of the analysis exercise. It doesn’t matter if you do it on a spreadsheet, a document, a poster, or a napkin – although you may prefer not to use a napkin for such valuable information. What matters most is that options are listed, evaluated, and a winning option is identified.
The Paper typically contains the following sections:
- Problem Statement: a recap of why the options analysis is needed in the first place; after all, we have a problem that needs solving!
- Constraints: if there are any known constraints at this stage, such as time or budget constraints that can limit the recommendations resulting from the analysis, you should state them in the document too.
- Options and their Analysis: following the process mentioned above, this is where options are listed and assessed.
- Recommended Option: the long-awaited moment: our “ladies and gentlemen, and the winner is…” moment!
Have a look at the Option Analysis example we created just for you.
Hints and Tips
Don’t go straight to number 1
it is natural that you’ll have your own opinion of which option to go for even before doing an Options Analysis but don’t neglect the value of performing a comparative study; you may uncover options not thought of before and turn out to find a different winning option when all facts are weighted in the analysis.
Run an Options workshop
don’t try to do it all alone. Identifying different options is not an easy task – use the power of brainstorming and seek the views of the subject matter experts to list all the relevant options to consider in the analysis.
Consider maintenance costs
when completing an Options Analysis, you need to tell the whole story so that decision-makers have all the information they need for the optimal decision. Rather than just focusing on implementation or one-off costs, also consider the costs involved in running the solution after implementation.
Quantitatively assess options
while more difficult to calculate, by assigning estimates and actual figures to your options analysis enables a decision which is more objective and factual, emotion-free. Don’t be afraid to use Cost-Benefit Analysis, Net Present Value and other financial measures and ratios.
Use a tabular view
information is better structured and organised by using tables rather than just descriptive text. Use a table listing the options as headings and the parameters as rows for a nice and easy to read evaluation of each option.
Allow sufficient time for discussions
conducting an Options Analysis can indeed take time but it can also make the difference between a successful or unsuccessful initiative. Allow sufficient time for discussions with vendors, internal departments and specialists. Don’t rush it.
You are not committing just yet
the Options Analysis is a preliminary document used for Feasibility decisions; it uses rough-order-of-magnitude estimates and it is not the complete analysis of the final solution! The selected solution will later need to go through proper requirements gathering and the project can still be stopped at any point.
Options Analysis is a bit like the Oscars:
you pick your nominees, you run the list through the wise people in the industry/company and, you prepare for that spectacular night when the winner is announced. It may not have all the glamour but it definitely makes for a good show!