Resource allocation: in series or in parallel?

I remember being taught in undergrad finance that the enterprise "can always find enough resource to pursue all opportunities whose return exceeds the risk adjusted cost of capital" (or words to that effect).   A fine theory. But every organisation I've ever worked in always seemed to be short of resources somewhere.

So, scarce resources need to be allocated.

Should you fully resource you highest priority project, then the next, then the next (i.e. in series)? Or should you spread your resource amongst all of the projects (i.e. in parallel)?

This can be visualised as shown below.   In the top half of the diagram we see resources allocated in series - only once Priority 1 has all of the resources it needs, do resources overflow into priority 2.   In this case, priority 4 gets nothing.   In the bottom half of the diagram we see resources allocated in parallel based on the weighting, or relative importance of each of the projects.   (In practice, of course, the buckets would also be of different sizes.)
Most organisations I have encountered have a tendency to resource projects in parralel.   Everyone gets a little resource to appease their demands.   It's a political thing as much as anything else.

But there are three good reasons why it's better to allocate resources to projects in series:

1. From a practical perspective, it makes sense to allocate resources in series.   It's better to have one project properly resourced and with a chance of success, than it is to have two projects inadequately resourced and with less chance of success.
2. In a pure financial sense, it also makes more sense to resource projects in series.   Consider these respective NPV calculations (discounted at 15%) where project A and project B both cost £200 and have a payoff of £300.

In series	NPV	Year 1	Year 2	Year 3	Year 4	Year 5
Project A	34.68	-100	-100	300	0	0
Project B	26.23	0	0	-100	-100	300
TOTAL	60.91




In parallel	NPV	Year 1	Year 2	Year 3	Year 4	Year 5
Project A	6.40	-50	-50	-50	-50	300
Project B	6.40	-50	-50	-50	-50	300
TOTAL	12.80


The NPV from funding the projects in series is clearly higher.   Not to mention the additional option value of being able to decide not to start Project B at all at the later date.


3. It's better for morale - when the first prject finishes, it will give people a morale boost which will carry forward to the later project.

That's not to say you'll never run projects in paralel, just that you should apply all of the resources project A can usefully use before you look at what is available for project B.

For example, not all resources are created equal, and those not suitable to project A might be usefully applied to project B before project A completes. (Consider for example a Marketing intensive project A with few IT implications and an IT intensive project B with few marketing implications.)

So, in practice, whilst there will always be some parallelism in projects, serial resource allocation should be you starting point.

Web 2.0 and privacy - are we really ready yet?

I spotted 3 quite different posts today, all relating to issues around privacy and web 2.0.

1. Rudder.com accidentally gave its customers' data away

In Day of Reckoning for PFMs?, @mikelinskey reports an apparent problem where the PFM site Rudder.com was (still is?) e-mailing confidential account information to the wrong customers (as well as getting their balances wrong as a result).   (The story was subsequently picked up by TechCrunch, as well as by NetBanker.)

2. Mint.com is thinking about selling its customers' data

Rudder.com was presumably sharing its customers' data by accident (if one can euphemise it in that manner), but ReadWriteWeb then picked up on a report from Bloomberg that Mint.com is considering monetizing (selling) the aggregated data it has collected about and from its customers.   Although the aggregated data is supposedly anonymised, the ReadWriteWeb post points to further work demonstrating how easily and accurately personal data can be reattributed.

3. Google wants to hold on to its custmers' data longer

And finally, the BBC reports that Larry Page has argued against the European Commission's plans to force Google to ditch the data it collects about its users after 6 months, saying that this would reduce Google's ability to spot and map pandemics (Page was demo-ing how Google had been able to spot the  like the Mexican Swine 'Flu pandemic ahead of the authorities).

All of which got me thinking: web 2.0, by definition, has more and more people creating and publishing more and more different types of information, some of it personal, in more and more different ways.   And more and more businesses are storing more and more information about us in ways that we probably don't understand even if we're aware of them.   And yet, I suspect that few of us have given any real thought to how this might impact on our personal privacy.

The businesses that facilitate web 2.0 have no choice but to pay attention to these issues, even if its customers do not adequately do so.   There is an implied social contract between the creators and the users of web 2.0 applications - regardless of what their legal terms and conditions allow.   Facebook has only recently felt the backlash that can follow if customers feel that this contract is not being honoured.   I suspect that Rudder.com is also busy discovering the consequences of what happens when you betray that trust!

Tobey Macguire (or was it Stan Lee) said: "With great power must also come - great responsibility".   Web 2.0 brings great power to us all - the power to create and to communicate.   Do we yet understand all of the responsibilities and risks that come with it?

Diversification works - most of the time

Portfolio theory has taken quite a beating over the last year. I've heard a number of people comment that the 4th quarter of 2008 demonstrated that different asset classes are no longer not correlated and so the diversification effects underpinning portfolio theory no longer hold.

Of course, that is not true. Correlation is a statistical concept - probabilistic, but not definite. As such, we don't talk about asset classes being correlated or uncorrelated - rather we talking about them being more or less (positively or negatively) correlated.

Portfolio theory is based on the fact that different assets and asset classes are not perfectly correlated. However, it does not assume that they are perfectly uncorrelated.

In practical terms that means that, whilst most of the time assets and asset classes won't move in the same direction together, sometimes they will.

And that is what happened last year - they moved together en masse in a spectacular fashion with disasterous consequences.

However, whilst this may be considered to be an extremely rare occurence, it is entirely consistent with the statistical theory. And it demonstrated Nassim Nicholas Taleb's Black Swan hypothesis - that the world is more shaped by rare and unforeseen events than by the more frequently encountered

So, I believe it is business as usual for portfolio theory, albeit after a painful reminder of what happens if you ignore the full scope of the theory on which you rely.

Innovation in Personal Financial Management: Culture or just numbers

I was recently bemoaning how far behind the USA the UK lags in personal financial management ("PFM") web-sites (see for example @mikelinskey's write up of Finnovate Start-up 2009, as well as in search of perfect PFM at Finovate).

Why is that Americans are so much more innovative?   Is it a cultural issue?   Surely that must be a factor - after all, America was seeded with those Europeans who had the gumption to up sticks and move there in the first place.

However it also strikes me that the USA is simply a much larger market (United Kingdom: Pop 61m, United States: Pop 306m).

So any mass retail online product such as PFM in the USA has an 5 times larger target market than the same in the UK - a 5 times larger prize to play for.   And financial services are a product that does not travel well, so your target market is stypically fairly limited to your national market.   Its not just the currency (although all those $ signs are usually the first clue that a product is used-based, as the US-based web-sites are surprisingly silent about the fact that they are US-targeted), the tax and product rules are also very country specific.

Where does that leave UK competitors?   Clearly the economics are, at least in this respect, less favourable towards innovation.

One solution is simply to copy and adapt solutions from the US.   The UK certianly has a track record of doing that.

On a policy level, it also demonstrates the value in belonging to a larger currency, tax and product regulatory unit.   The EU seems ready made for that purpose, certainly on the currency front, although there is a long way to go yet on the tax and regulatory front.