Are you a risk seeker or are you risk averse?

1. A project manager is sourcing equipment for a new IT project and must choose between two vendors: Odd IT and Even IT.

To simplify the problem, the project manager decides to base the evaluation of the vendors’ proposals on the basis of total cost of ownership (TCO) and product reliability.

• Through research and talking to other project managers, the manager finds that Odd IT has a 60% chance of providing reliable equipment and its parts cost $300,000 (this includes costs of installations and maintenance). There is, however, a 40% chance that the equipment will fail – in which case, costs could increase to $850,000.
• If Even IT is chosen, there is an 80% chance of high reliability at a cost of $750,000 and a 20% chance of failure. Even IT provides lifelong guarantees and maintenance services.

1. To which of the two vendors would you award the contract? Why?

2. Use the formula below to calculate the risk associated with each of the two vendor proposals. Hint: the impact of the Odd IT proposal would be $550,000.

Risk=Impact* Probability Cost

1. What does the value calculated by this formula represent?
2. Odd IT risk =
3. Even IT risk =
4. Should the choice you made above. change? Why?