Mispar Consulting adds value by transforming single point valuation measures into a comprehensive picture of the future. We believe that unpredictable results can be transformed into actionable information. We understand that no matter how efficient and effective your processes, organization, and tools, these can be improved with the right data turned into information.
We go beyond traditional measures like Net Present Value (NPV) and Internal Rate of Return (IRR), integrating these with more advanced approaches to make clear the risks you face in the future, so you can make better-informed decisions.
If given the following choices, which would you prefer?
- 90% chance of making $5M, and 0% chance of losing money or making more than $7M?
- 50% chance of making $10M, and a 20% chance of losing money or making more than $15M?
Neither is “right” or “wrong” – every company will evaluate these options based on their risk appetites, and decide which is best. The problem is that none of the common valuation techniques yield this information.
Risk Management is too Late
You need to integrate risk into your decision-making process. By the time you are looking to manage your risk exposure, the risk is already yours. We can help you clearly focus on the risks you want to take, rather than manage the ones with which you are already living.
The NPVs you see every day are one path through the future – average results, average costs, average prices. But life is guaranteed not to be average. Our clients really need to understand, “What can the future hold?”
You need to understand the chance that your project will lose money. Or that it will fall below your hurdle rate. Or that it will be a home run. Without that information, you’re buying an “average” project that you’re guaranteed not to get. Here’s a more visual example.
When most people hear the term “risk,” they think of either physical risks, or insurance-type risks – the risk of loss. At Mispar Consulting, we think of risk in a broader way: The natural, unknowable, and unpredictable outcomes of every decision. We quantify that risk to give you decision criteria.
You Have Options
The other big “feature” that traditional valuation techniques ignore are the real (as opposed to financial) options that are found most projects: Decision points along the way that allow you to cut your losses, or to expand as you de-risk your new opportunities. Being able to “trim” the decision tree as you go adds value.
Good decision analysis looks at these options and adds their value to the project.
You Have Too Many Options
Most companies have a range of projects available to them, but few good rules for picking the ones to pursue. Some of the common ones:
- Manage your cashflow? You have no idea of the profit potential.
- Rank order by NPV? You have no idea if you’re maximizing your profit for the capital invested.
- Select the most capital efficient? Now you’re maximizing the profit – on average. But you won’t get average. What’s the risk, the spread, in that set of choices?
Of course, no one is this simplistic in their approaches – but without sophisticated tools and analysis, you can’t make sophisticated choices.