Scoring Intangible Project Factors

1. From Intuition to Structure: Weighted Scoring Models

When you're faced with choosing between, say, refactoring a legacy system versus building a speculative new feature, your decision involves trading off different kinds of value. This is a classic Multi-Criteria Decision Analysis (MCDA) problem. While the theory can be complex, the most common and practical approach is the weighted scoring model.

Let's begin by reading a short overview of MCDA to understand its core components.

As the article explains, the goal is to move beyond "gut feel" to a more transparent process. A weighted scoring model does this by breaking the decision down:

1. Criteria: The factors that matter for the decision (e.g., Strategic Fit, Cost, Risk).
2. Weights: The relative importance of each criterion.
3. Scores: A rating of how well each alternative performs on each criterion.

By combining these, we can calculate a single, overall score for each alternative. Here is a clear example of what a completed model looks like.

This is the tool we are going to learn how to build and apply.

2. The 6-Step Process for Applying a Scoring Model

The article from 1000minds.com also outlines a clear, six-step process for performing MCDA. This provides a systematic workflow, which you'll recognize as essential from your experience in software development and project management. Let's walk through it.

Step 1 & 2: Structure the Problem and Specify Criteria

First, you define your alternatives (the projects you're choosing between) and your criteria. The criteria are the heart of the model and should reflect the project's strategic goals, including the intangible benefits we discussed last time.

But what makes a good criterion? They should be relevant, comprehensive, and avoid overlap.

The video gives us excellent examples of criteria you might use to evaluate a software project:

• Stakeholder Commitment: How much support does this project have from key executives?
• Internal Expertise: Do we have the skills in-house to complete this project successfully?
• Risk: What is the level of technical or market risk involved? (Note that he scores this inversely: low risk = high score).
• Third-Party Dependence: How much do we have to rely on external suppliers or partners?

These criteria are far more telling than a simple financial forecast and directly address project feasibility and strategic alignment.

Step 3 & 4: Measure Performance, Score Alternatives, and Weight Criteria

This is where we translate qualitative assessments into numbers.

Scoring: For each criterion, you need a consistent scale. Ricardo Vargas used 0-1000, but 0-100 or 1-5 are also common. The key is to clearly define what each point on the scale means.

• For Stakeholder Commitment, you might define it as: 0 = Actively hostile, 50 = Neutral, 100 = Fully supportive champion.
• For Internal Expertise, it could be: 0 = No experience, 50 = Some experience, but requires training, 100 = World-class experts on the team.

Weighting: This is the most subjective step. Here, you decide the relative importance of each criterion. If reducing risk is twice as important as strategic alignment, its weight should be twice as high. A simple method is direct rating: give each criterion an importance score (e.g., out of 100), and then normalize the scores so they sum to 1.0 (or 100%). This is a team exercise to reflect shared priorities.

Step 5: Calculate the Total Score

Once you have weights and scores, the calculation is straightforward. For each alternative, you multiply the score for each criterion by its weight and sum the results.

The formula is:
$\text{Total Score}={\sum }_{i=1}^n({\text{Weight}}_i\times {\text{Score}}_i)$

Where $i$ represents each criterion from 1 to $n$.

The Excel video below demonstrates exactly how this is done using the SUMPRODUCT function, which is purpose-built for this calculation. You don't need to be an Excel expert; the logic is the main takeaway.

Step 6: Support Decision-Making

The final scores—for example, Project A gets 78 and Project B gets 65—are not absolute truths. They are tools to facilitate a more informed discussion. A project with a lower score might still be chosen for strategic reasons not captured in the model. The model's primary value is making the trade-offs explicit and the decision process defensible.

3. The Theory Behind the Practice: A Nod to MIT

Your goal is to learn this material in accordance with MIT's standards. It's important to know that these practical scoring models are a simplified application of a rigorous field called Applied Utility Theory.

In essence, MAUT provides the theoretical foundation for creating a "utility function" — a formula that converts a set of attributes (our criteria) into a single number representing value or preference. Our weighted scoring model is a simple, linear utility function. Knowing this connects the practical tool we've built to the robust academic principles taught at institutions like MIT.

Conclusion

Today you learned a powerful, structured method for making complex project decisions. By moving beyond financials to include critical intangible factors, you can make choices that are more strategically sound and easier to justify to stakeholders.

• Key Takeaways:
  • Weighted scoring models are a practical form of Multi-Criteria Decision Analysis (MCDA).
  • The process involves defining alternatives, criteria, and weights, then scoring each alternative against the criteria.
  • The final score is calculated as the sum of Weight * Score for all criteria, often using a SUMPRODUCT function.
  • The model's output is a tool to support decision-making, not dictate it, by making trade-offs explicit and transparent.
  • This practical method is a simplified application of the more formal Multi-Attribute Utility Theory (MAUT).

Preview of the Next Lesson

We've now spent several lessons on the "front-end" of project evaluation—cash flows, benefit-cost ratios, and non-monetary factors. Next, we will pivot to a crucial "back-end" topic that affects a project's real-world financial reporting and profitability. We will define depreciation and explain its role in after-tax economic analysis, a fundamental concept for any manager dealing with capital assets.