50 • The Engineer Entrepreneur

show us which way gives the best value for the money spent, the best
value thereby purporting to be the best risk vs. benefits choice.
Oh if it was so easy! So straightforward!
But a financial evaluation is not sufficient by itself to decide if a deci-
sion is valid. All business decisions need to pass some sort of hurdle rate
that tries to define whether or not implementing the decision is a good
use of the company’s resources. Some would say that the only factor to
consider is if the decision, if implemented, would be the best use of the
company’s money. This is too simplistic an approach because most deci-
sions have many intangibles, such as items of benefit that cannot be eas-
ily measured, if they can be measured at all. Unfortunately, intangibles
are real and cannot be ignored. We can’t say since they are difficult to
measure, we will ignore them by giving them a zero value in the overall
benefits rating. So, financial evaluations are important, but not sufficient
to allow a decision to be implemented or not. We need to do more.
• The third set of information that must be generated is a determination
of how likely to be valid the assumptions are that are used to make the
financial evaluations. We do this in a probabilistic sense, as we shall
see. When we get to the third set we have facts and specific assumptions
that we play against 2 questions: ‘How real is it? Will it happen as we
think it will?’
And we answer in percent probability. If we say we are 100% certain, then
without hesitation we say “implement.” If we are more than than 50% cer-
tain it will happen as predicted, we weigh the consequences of being wrong.
And if we can survive being wrong, we would also go ahead with the deci-
sion. Surviving means we have contingency plans that we feel very confident
will work if the original decision turned out to be wrong. Finally, if we are
less than 50% certain the decision will work to our favor, we should forget
the whole thing and go back to the drawing board.
Using the CNC grinder example, we can trace the evaluation of risk
through the 3 phases.

Phase 1: Judgment
Buy or subcontract. If we buy a CNC grinder, we have complete control of
the process within the company. However, this means allocating cash to
purchase or lease the equipment, dedicating manufacturing space for the
operation, and hiring trained personnel to operate the machine and all the
other subsystems including maintenance to support the machine. On the
other hand, to subcontract means we eliminate all of the infrastructure
necessary to support the grinding operating with all of its supporting
costs. There is definitely less of an administrative obligation we would
have to undertake. But we would be vulnerable to vendors for quality and
timeliness of deliveries. We would also have to set up a more complex pur-
chasing strategy to mitigate the possibility of rising costs due to vendor
inefficiency and/or greed and be concerned with being locked into 1 or

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