Prioritization

A Structured Framework that Gives Order to Multiple Options

Intro

There is a broad range of methods that portfolio managers and organizations use to prioritize. At the most basic level, it is just a list of items and inert heuristics that you use in order to force rank the projects or alternatives. Moving up the maturity curve, you may use a simple rating scale, say from 1-5, to score projects. The most mature organizations prioritize based on the objectives that they are trying to achieve – the final priority rank is a direct cross-walk and reflection back on the strategic imperatives of the organization. What the more basic forms of prioritization gain in simplicity and convenience, they lose in fidelity and accuracy. For decisions that are inconsequential, a simple listing may be enough.  The more consequence that the decision has to the organization, the more sophistication that should be employed in the prioritization process.

At the most basic level, it is just a list of items and inert heuristics...

There are 2 key challenges in prioritization as a strategic effort.  The first is how to quantify what are typically “intangible” factors such as “support to mission” or “alignment to strategy”. It has been shown that the human mind is capable of keeping order amongst 5-7 factors under consideration. Once the number of factors grows beyond that, the complexity overwhelms the mind and the process of prioritization usually devolves into advocacy-based decision making, arguments, and power plays. The use of a methodology to frame the prioritization process, and at the same time to quantify the intangible factors, is at the core of creating a continuous, repeatable, institutionalizable, and robust process. The Analytic Hierarchy Process (AHP), through its method of pairwise comparisons (relative measurement) in order to establish priority, is exceptional at helping to quantify the intangible vs. the tangible strategic factors that will be the guidepost for evaluation. The second challenge in prioritization is how to combine many factors that have non-commensurate scales of measurement so as to create a level playing field in which the evaluation can take place. For example, how would you combine height, speed, and degrees Fahrenheit in the same evaluation set? Within an analytical framework, these factors apply measurement scales which take the underlying evaluation metrics (either quantitative or qualitative), and put them on a zero to one scale. Whether your scale ranges from “unacceptable” to “exceptional” or instead is a height measure between “zero” and “ten feet”, any scale can be normalized in this fashion to deliver a value between zero and one for measurement and commonality purposes. This is not to say that each factor on the scale should be equidistant from the others – for example if you were selecting an NBA player, the difference between a 6 foot 2 inch player and a 6 foot 6 inch player might not be that great, but the value of a 6 foot 6 inch player and a 6 foot 10 inch player might be of much greater value – this is captured in the relative scores at each tier of the measurement scale.

This section discusses prioritization and the importance of thinking strategically and aligning business needs to the underlying alternative investments or projects under consideration.

What is the Analytic Hierarchy Process

The basic problem of decision making is to choose the best one in a set of competing alternatives that are evaluated under conflicting criteria. The Analytic Hierarchy Process (AHP) provides us with a comprehensive framework for solving such problems. It enables us to cope with the intuitive, the rational, and the irrational, all at the same time, when we make multi-criteria and multi-actor decisions. We can use the AHP to integrate our perceptions and purposes into an overall synthesis. The AHP does not require that judgments be consistent. The degree of consistency (or inconsistency) of the judgments is revealed at the end of the AHP process. Most of us have difficulty examining even a few ideas at a time. We need instead to organize our problems in complex structures which allow us to think about them one or two at a time. We need both simplicity and complexity. We need an approach that is conceptually simple so that we can use it easily. And at the same time…

We need an approach that is robust enough to handle real world decisions and complexities.

The Analytic Hierarchy Process is such a problem-solving framework. It is a systematic procedure for representing the elements of any problem. It organizes the basic rationality by breaking down a problem into its smaller constituent parts and then calls for only simple pairwise comparison judgments to develop priorities in each hierarchy.

Additional Resources

What the AHP does

Measurements in the physical world involve arbitrary units and need experience and understanding to interpret what they mean. One must have considerable experience with any scale of measurement we use to interpret what a number on that scale means. Thus judgment is fundamental for understanding what measurements mean. So in science we first create measurements then use judgment to interpret them.

The Analytic Hierarchy Process (AHP) is a theory of measurement that uses judgment first to make comparisons with respect to some property and then derives scales of priority measurement from these judgments. In doing that the AHP can be used to derive measurements for anything and the meaning depends on the judgments. That leads to the priority scale. The question is: does it work and how valid and reliable is it?

This section provides materials on the AHP and how it works, and the numerous applications for which it has been utilized.

Measurement of Intangibles

A common kind of decision problem we face is something like this: which house to buy?

The different houses being considered have some attributes or criteria in common that are important to the decision maker. If one house were best on every criterion, the choice would be easy, but usually the house that is the best on one criterion (e.g., cost) is worst on another (e.g., size).

How should one make the tradeoff?

We describe and discuss a mathematical model, the Analytic Hierarchy Process (AHP), not a prescriptive (normative) but a descriptive psychophysical process that can be used to make such decisions by dealing with the measurement of intangibles using human judgment. Intangibles can be nonphysical influences that are passing and very transient. No conceivable instrument can be devised to measure them other than the mind itself, which must also interpret their meaning. Intangibles leave an impact on our minds, which are biologically endowed to respond to influences, by making comparisons both consciously and subconsciously.

It is a way of measurement that took place long before Nicole Oresme, Pierre de Fermat, and finally René Descartes more rigorously introduced general coordinate systems for physical measurements and assumed that they were extensible from zero to infinity by using an arbitrarily chosen unit applied uniformly over the entire range of measurement. Taking ratios removes the arbitrariness of the unit and creates relative absolute scales, invariant under the identity transformation.

Eigenvector

The principal eigenvector, known to be unique to within a positive multiplicative constant (thus defining a ratio scale), and made unique through normalization, is the only plausible candidate for representing priorities derived from a positive reciprocal near consistent pairwise comparison matrix.

Ratings

The data that an enterprise has around strategy is like no other data in the organization.

It is a combination of qualitative assessments with quantitative factors. Data, in and of itself, has no intrinsic meaning unless it is put into context, and this is especially true of the data related to strategy.

By way of example, what does 40 degrees Fahrenheit mean to a Floridian vs. an Alaskan? Two very different things. Cold is a relative concept. Data, like temperature readings, needs to be evaluated as to how it applies to the decision at hand.

Data needs to be evaluated as to how it applies to the decision at hand.

The ratings process not only values data in this way by using ratings scales with tiered increments that apply value to data or judgments based on what the impact is on a particular evaluation factor, but it also enables a group to see where there are areas of agreement and disagreement in the evaluation.

Oftentimes we will see groups that violently disagree on the rating of particular projects only to find that their understanding of the criterion on which they are rating is vastly different. For example, in our work with the NFL, we found conflicting ratings for the same players under the term “agility”. In working with the scouts, some of them believed that agility was a measure of speed, while others considered it to be a measure of maneuverability on the field of play.

Many organizations move through planning processes with fundamental misunderstandings or misalignment on priorities, and it is only through an analytical, repeatable, and transparent process that full alignment and better outcomes can be realized.

Additional Resources

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