dolution.
Monte Carlo in Italy
Meghana Rao
ABC is a high – tech company based in the United States. Recently the company
had a major shuffl e in its management and the new management is planning on
expanding into global markets. The CEO realizes that the best way to achieve this
goal is by acquiring and merging with smaller high – tech companies in key loca-
tions across the globe that provide products and services to the high – tech market.
The CEO knows that process integration is an important issue of a successful
merger and acquisition. This case discusses such an activity, especially the project
risk management process.
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As a fi rst step toward this mission, the top management calls for a meeting of all the
Business Unit heads and the Program Managers. The agenda of the meeting is to
identify feasible locations and companies for merger. At the end of the meeting, the
management identifi ed three countries in Europe and three in Asia as prospective
locations for expansion, based on business opportunity, government policies, avail-
ability of skilled personnel, etc. The companies that were selected were all smaller
companies with a good presence in their respective countries, offering high – tech
products and services with a product portfolio matching ABC ’ s range of products.
Additionally, ABC, being a CMM – certified company, has a strong emphasis on
the processes which are followed toward being a better project – oriented organiza-
tion. The management of the company understands that any merger or acquisition
would result in aligning the company ’ s policies and processes with the acquired
company ’ s. Therefore, it is considered important that the acquired company has an
established set of processes for each phase of the product/project life cycle.
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Since this is a critical step, the management decides that a selected group of business
managers, who have a lot of project management experience and have a good under-
standing of the technology domain, would personally visit the companies that are
short – listed and scrutinize their products and processes before fi nalizing any deal.
Peter Davis is one of the business managers working for ABC. He has been
with the company for a long time and has moved up the management ladder, most
recently from the project manager level. He understands the technology manage-
ment aspects at ABC very well and has also worked for some of the top high – tech
companies before joining ABC. He understands the dynamics of high – tech com-
panies and also project life cycle management and is a renowned PMP – certified
professional in the field. The management of ABC therefore chooses Peter as one of
the managers to work with the acquisitions. Because of his prior work experience in
Italy, ABC decides that Peter should go to Italy to verify the processes at PQR Inc.
Soon after his arrival in Italy, Peter schedules meetings with the business
managers and the project managers at PQR Inc. He is really surprised at the
amount of detail that has been given to every aspect of the project life cycle.
He scans through the company ’ s project selection process, project portfolio
mapping process, project planning and control tools for the customer roadmap,
scope (WBS, Change Coordination Matrix, Project Change Request/Log), sched-
ule (Gantt Charts, Critical Path Method, Critical Chain Schedule, Milestone
Prediction Chart, Slip Chart), cost (Analogous Estimate, Parametric Estimate,
Earned Value Analysis), and quality planning (Affinity Diagrams, Quality
Improvement Maps, Cause and Effect Diagrams, and control charts).
Of all the tools that Peter saw at PQR Inc., one tool caught his attention. This
was the Monte Carlo Analysis (MCA) tool for risk planning. PQR Inc., being a
small start – up company in a high – tech market, obviously faced a high degree of risk
in terms of the new technology they were dealing with, competitors, markets, etc.
So utilization of any risk planning tool would provide the company with a strategy
to ward off any undesired events during the execution of projects. Given below is
an implementation of how Monte Carlo Analysis was implemented at PQR Inc.
RISK MANAGEMENT AND THE PLANNING PROCESS
The risk management process at PQR Inc. has been iteratively defi ned by the
following fi ve steps:
Risk Identification: Use past project experiences and data bases to
uncover any risks that might occur during the execution of the current
project. These are termed risk events.
Risk Analysis: Identify drivers that might lead to the occurrence of risks
identified above.
Risk Priority/Impact Analysis: Each risk is given a severity score by
assigning a probability of occurrence and impact of the risk. The risk
severity is then calculated using a P – I matrix and a specific number of
risks that score high on the P – I matrix are considered. For a detailed pro-
cedure of assigning probabilities to the risks, the Monte Carlo Analysis
technique is used.
Risk Resolution: Develop a Risk Response Plan to prevent identified
risks. Contingency plans should be made in case of risks that cannot be
prevented.
Risk Monitoring: A constant monitoring of risks is done at regular inter-
vals to prevent/mitigate them.
Using the above model, PQR Inc. has then implemented Monte Carlo
Analysis for assigning probability to uncertain events such as schedule and cost
probabilities. Below is an example of how MCA has been effectively applied to
avoid the risk of incorrect scheduling on the project leading to late time – to – market,
customer dissatisfaction, and loss in profitability.
A new product development (NPD) project at PQR Inc. has a network dia-
gram showing the dependent tasks/activities in the project.
But seldom is the process of new product development so linear. Since
time – to – market is critical for PQR Inc., most of the tasks are handled in parallel
between Engineering and the Marketing departments (concurrent engineering),
which induces a lot of interdependencies.
The uncertainty in assigning a final deadline to the project is the nature of the
project itself. Since the company deals with high – technology products which are
very new in the market, not many projects of a similar nature have been under-
taken to estimate the schedule of activities with certainty. But accurate assessment
of timelines for the individual tasks under uncertainty is both essential as well as
critical. So then, how will the company provide a final estimate, so that the risks
identified are prevented?
The next step followed in the process is assigning a range of possibilities for
each activity. For example, say activity A can be completed in five days at a mini-
mum, but can extend to 15 days at a maximum. An MCA simulation can be run on
this range of possibilities to evaluate the mean likelihood of A ’ s completion time.
Single point estimates where available can be made use of without using MCA.
The Monte Carlo process thus gives project managers a more precise comple-
tion time of the project. In the case of companies that focus on new product devel-
opment like PQR Inc., this gives a more accurate estimate for the time – to – market.
Peter, who had a PMP certification and had used a lot of project management
tools in his long tenure as a project manager, was really impressed with such a great
method for reducing risks due to schedule slippages. His audition of the company
had given him a great impression of how well PQR Inc. had been managing its
projects and their processes. In his audit results, he therefore gladly recommended
that ABC acquire PQR Inc.
Discussion items
1.What is the key challenge for the company to operationalize its expansion objectives?Required to answer. Single choice.
(1 Point)
System assessment of the new company
System integration of old and new company
System revision and upgrading
System risk assessment through Monte Carlo Analysis
2.Monte Carlo Analysis can be used forRequired to answer. Single choice.
(1 Point)
Deterministic estimates
Probabilistic estimates
Option 3Cost Estimates for certain products
Schedule Estimates for certain products
3.Which was the key methodology at PQR?Required to answer. Single choice.
(1 Point)
Project Planning and Control
Project Planning using best software
Product cost and estimation methodology
Risk Planning using MCA
4.What is the key challenge in estimating project timelines for high-technology products?Required to answer. Single choice.
(1 Point)
Linearity
Complexity
Nonlinearity
Multidimensionality
5.Monte Carlo analysis is good for large projects due to (Choose as many as apply)Required to answer. Multiple choice.
(1 Point)
More data available
More uncertainties
Resource availability
More sensitivity
