IT Managers Who Care Know How To Do A Sensitivity Analysis

by drjim on July 26, 2012

Image CreditNo, not that kind of sensitivity…

No, not that kind of sensitivity…

How good of a guesser are you? I thought so – you’re not perfect are you? This may not matter that much on a day-to-day basis, but it can matter a great deal when it comes to setting up a budget for your IT team. If the assumptions that you made were wrong, then all sorts of bad things can happen. What’s an IT manager to do now?

What Is Sensitivity Analysis?

The budget that you create as an IT manager is only going to be as good as the assumptions that you came up with to base it on. The problem is that you’re not perfect – some of those assumptions, even if they are not 100% wrong, are still going to be off the mark. That’s not showing leadership!

Things that can cause your assumptions to be incorrect include assumptions about the company winning major new contracts that would require IT support, assumptions about the level that vendors will increase the prices for the software that your team is using, and assumptions about the number of IT workers who will leave your team this year and will need to be replaced.

This is where sensitivity analysis can come to your rescue. What a sensitivity analysis does is it allows you to play “what-if” games with your assumptions. You can hold the other assumptions steady while you vary one of your assumptions. What would happen if the company didn’t get that new contract? What would happen if one of your software vendors suddenly doubled the price that they charge your team each year? What would happen if half of your IT team suddenly decided to leave and had to be replaced?

The purpose of performing a sensitivity analysis on your budget is to provide you with a way to identify alternative options. What you’d like to be able to understand is if any of the scenarios that you are identifying during the sensitivity analysis came to pass, what would you have to do as an IT manager?

How Do You Use A Sensitivity Analysis?

When you use sensitivity analysis as a type of budgetary tool, it can provide an IT manager with a great deal of assistance. A sensitivity analysis allows your budget to be used as a tool for feedback, planning, and even for IT team course correction.

When you perform a sensitivity analysis on your budget, you’ll be applying a what-if tool in order to determine what the effect of a potential change would be on your original budget data. Because of the number of calculations that may be involved in performing one of these analysis, more often than not some sort of software package is used.

Proper use of a sensitivity analysis can provide an IT manager with budgetary insights that they’ve never had before. You’ll have a new tool that can estimate the benefits and costs that are associated with various possibilities and options.

What Does All Of This Mean For You

None of us can predict the future with 100% accuracy. What this means is that there is a very good chance that the assumptions that you used when you provided the budget for your IT dream team to your management are wrong.

Sensitivity analysis is a powerful tool that IT managers can use to play “what-if” games with the budgets that they have created. By testing the impact of different scenarios on their budget, managers can start to create plans for dealing with possible future scenarios

The simple realization that no budget is set in stone is the key to creating a successful budget. Using tools such a sensitivity analysis to test your assumptions and allow you to create plans for dealing with possible future events is what will make you a successful IT manager..

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Management Skills™

Question For You: If your sensitivity analysis of your budget reveals that one assumption could change everything, what steps do you think that you should take?

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What We’ll Be Talking About Next Time

Look, you have to create an annual budget for your IT team so just get over it. Since you have to do it, it sure seems like you’d want to find ways to turn this chore into a team building and planning tool. If this sounds like a good idea to you, then we’re going to have to have a talk about just exactly how you can go about making this happen.

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