An Introduction to the Lichtenberg Method

An Introduction to the Lichtenberg Method

The Lichtenberg Method is a structured approach to modelling the future which enables decisions and plans to be made with a greatly enhanced understanding of the key issues, assumptions and risks that are involved. The original concept was developed by Professor Steen Lichtenberg at the Technical University in Copenhagen, and the approach is now widely used throughout Scandinavia and Northern Europe for activities such as strategic planning, project control, R&D and tendering.

The Lichtenberg Method involves an Analysis Group in a creative, multi‑disciplinary process in which qualitative and quantitative data about the future are captured and modelled. The total "world" of the task is considered - the task itself, the client organisation, the business environment; human issues, technical issues, economic/financial issues. A "top-down" philosophy helps to avoid unnecessary detail and enables the Group to develop the best possible result in the minimum time.

An Overview of the Lichtenberg Method

The process is led by a neutral facilitator, and software applications are available which can be used to capture, model and process the data that emerges. Selection of the participants in the Analysis Group should be based on obtaining a suitably diverse range of disciplines and personality types. This enables a richer exchange of views and information, as well as a more balanced decision making capability.

Qualitative Assessment involves a thorough and honest appraisal of what the future might hold. A neutral view of the future is required, free from the organisational biases and desires that so often cloud reality in forecasts and business plans.

The Quantitative Assessment stage is where the information gained during the Qualitative Stage is modelled. It begins with a small number of items or activities which together cover the total scope of the task. After calculating the overall result of the estimate, more items are then added into the calculation structure by breaking down the most uncertain aspects of the estimate into more detail. In this way, a budget or time schedule result is calculated with as much accuracy as possible, but with the minimum of effort.

By the end of the Quantitative Stage, a list of the key possibilities, uncertainties and risks emerges, which enables the Analysis Group to make informed decisions, develop action plans and to decide on contingency measures. It is here that active control of the uncertainties commences, where we move from uncertainty analysis to uncertainty management.

Stage 1: Qualitative Assessment

Qualitative Assessment involves the generation of a short description of the purpose and aims of the analysis, followed by identification of the key project issues, the assumptions behind them, and how these could vary.

Purpose

First of all, the Group develops a description of the analysis which contains the key conditions and limits for the situation that is being analysed. This covers:

- Aims and Objectives. What do we want to obtain? What is the purpose of the analysis?

- Basic Facts. What are the start and end points of the analysis? What are the important project milestones? What currency unit is to be used, etc?

- Uniqueness. Is there anything new, unique or unusual about the project/situation under discussion?

- Limitations. What is the scope of the analysis? What will be included, and what will be excluded?

- Fixed Conditions. What conditions are so fundamental that they will require a new analysis if they are changed?

- Quality Parameters. How is a successful project outcome to be measured?

Project World

Having defined the purpose of the analysis, the Group then turns its full attention to the subject of the analysis. The "Project World" contains both hard and soft issues. They may be of a technical nature, but they can also be people issues or commercial issues.

The Analysis Group carries out a brainstorming exercise in order to establish the issues in the Project World. A matrix is generally used to stimulate sufficient breadth of thought.

TECHNICAL

ISSUES

PEOPLE

ISSUES

COMMERCIAL ISSUES

Technical trends

Design codes

Approvals

Environmental issues

Local labour force

Industrial unrest

Government policies

Customers

Suppliers

Distributors

Oil prices

Currency fluctuations

General economics

Price trends

Experience of similar

projects

Change management

Development policy

Production

Test facilities

Key personnel

Recruitment policy

Working conditions

Organisational

changes

Ambition level

Morale

Cash flow influences

Annual budgets

Strategic plans

Market research

Standard designs

Technical know-how

Specific technical

issues

Project management

Skills/training

Project priority

Sub-contractors

Key individuals

Contract policy

Project budget

Funds

Cash flow

A Matrix of Issues in the "Project World"

Overall Influences

It will be seen that the matrix contains issues that relate to specific aspects of the project and issues that could affect all or at least a substantial part of the project. Issues that fall into this second category are known as Overall Influences. By their nature, Overall Influences have a systematic effect on the outcome, and they are therefore of great importance in developing a comprehensive understanding of the project, and in how the quantitative (modelling) stage is tackled. We believe that the reason why so many major projects overrun in time and cost is that the systematic effect of Overall Influences is often grossly under‑estimated.

Scenarios

Having grouped similar issues together to produce Overall Influences, the Analysis Group defines what will be assumed for each one (the Base Case or Planning Reference), and how this could possibly vary, for better and for worse.

Two examples are shown below.

Overall Influence	Planning Reference (Base Case)	How it Could be Better	How it Could be Worse
Key Personnel	Key personnel will be available as and when required by the project.	Key personnel are dedicated to the project.	Key personnel are unavailable due to work on other projects, customer support and work on new bids.
Project Priority	No different from any other project.	Strategic importance results in Board-level support.	Other projects take precedence.
Etc.

Stage 2: Quantitative Assessment

The purpose of the Qualitative Assessment stage was to establish the basis for modelling the situation that is being analysed. The Quantitative Assessment now follows, which can be in terms of time, some form of budget, or both.

A budget item or a time schedule activity is a variable which can have a range of values, depending on how uncertain it is. Since we are concerned with the future, it is rare that truly relevant historical data will be available, and in most cases our estimating relies on professional judgement about the range of outcomes that could occur.

The Lichtenberg Method utilises a triple estimate to define the uncertainty of a variable, and the Analysis Group is required to assess the following three values:

- the extreme minimum value (1% probability);

- the most likely value (the value with the highest probability);

- the extreme maximum value (99% probability).

The quantitative models are always developed from a top-down perspective. In other words, we start with a limited number of items or activities in the model which together cover the total scope of the task, and then add to these by specifying the most uncertain items or activities in more detail. The most uncertain items are listed in order of significance in an Uncertainty Profile. A new Uncertainty Profile results each time the model is extended, and this then forms the basis for deciding which item or activity is the next to be specified in more detail.

Simplified examples of the typical structures of a time schedule analysis and a budget analysis are given overleaf, showing successive specifications of the most uncertain items or activities. The examples indicate how the Overall Influences are included in the models.

Successive Development of a Profitability Analysis

Successive Development of a Time Schedule Analysis

Presentation and Interpretation of the Results

The results from an Uncertainty Analysis are usually shown as probability distributions. In traditional analyses, the probability distribution of the result is usually skewed, such that the worst case is often much further from the mean than the best case. However, the Lichtenberg Method is based on the use of independent variables and the result is normally distributed, even if the individual random variables that comprise the model are not. The normal distribution is symmetrical about the mean value, and the probability of a particular variation in either direction is therefore the same.

Typical Probability Distribution of the Result

of a Time Schedule Analysis

Uncertainty Profile

The Uncertainty Profile shows the principal uncertainties in the model, in order of priority. This information is used to specify the most uncertain items in more detail, and to guide the decision maker as to the management priorities:

Order Name Priority

1 Priority over staff 26%

2 Time Costs rate 19%

3 Project Management effectiveness 11%

4 Government policies 11%

5 Exchange rates 8%

6 Materials 5%

7 Sub-Contract 1 3%

8 Integration of modules 2%

9 Procurement contracts 2%

10 Remaining items 13%

Total Uncertainty 100%

The Uncertainty Profile can also be presented graphically, together with an indication as to whether or not a particular uncertainty can be controlled or partially controlled:

Criticality of Activities in Time Schedule Analyses

Rather than using the traditional idea of the critical path, the Lichtenberg Method uses the concept of criticality. This means that the decision maker can see not just those activities are likely to be close to or on the critical path, but also those that have some criticality. This is illustrated in the example below.

The decision maker would be particularly interested in activities that have a high chance of being critical and which are highly uncertain (i.e. they are significant in the Uncertainty Profile).

Output from a Time Schedule Analysis

showing the Criticality of Different Activities

and their Mean Durations

Stage 3: Responding to the Results

The Group should concentrate on those items, activities and Overall Influences which show up as the top priorities in the Uncertainty Profile(s). Experience suggests that where the action plan is too long, then the results are ineffective. In short, concentration on three or four key problem areas will be of far greater benefit than trying to deal with a dozen smaller issues separately.

Besides agreeing what must be done, we also need to decide who will be responsible, and when the work packets will be completed. The final output from an Uncertainty Analysis should therefore be an Action Plan, which might look like the following:

Work Packet	Responsibility	Completion Date	Done?
Contact supplier X	Mr. A	15/1
Establish the date of Milestone 1	Ms. B	31/1
Secure the required human resources (numbers, skills and know-how)	Project Leader	28/3
Establish communication policies internally and with the customer	Line Manager C	15/4

Besides Action Plans, management may also wish to develop contingency measures in the event that certain uncontrollable risks actually occur, or to set aside funds against possible cost overruns.

Process Summary

- a neutral Process Facilitator leads a multi-disciplinary Analysis Group, which represents all important aspects of the task in question;

- the process is designed to a generate a top-down, comprehensive view of the task in which the key uncertainties and risks are exposed, and detail is systematically avoided except where it has a beneficial effect on the analysis;

- the first stage involves a Qualitative Assessment, comprising agreement of a Statement of Purpose, a brainstorming session in which all issues in the "Project World" are noted, the grouping of similar issues into Overall Influences, and finally, describing the assumptions and possible scenarios for each Influence;

- Quantitative Assessment then follows, using triple estimates to reflect the uncertainty associated with specific items or activities. The process begins with a small number of items in the calculation structure, and more items or activities are then added by breaking down the most uncertain aspects into more detail (successive calculations), as revealed by the Uncertainty Profile. The estimating always reflects the situation as described during the Qualitative Assessment, especially the Planning Reference states of the Overall Influences;

- the number of successive calculations is limited by the uncertainty contributed by the Overall Influences. Action Plans must then be agreed in order to control the key uncertainties and risks. Some may result in improved information or knowledge about certain aspects, others will be active and possibly on-going risk management tasks;

- the model can be updated at suitable intervals to reflect the current level of knowledge and progress on the project.

The potential benefits of the Lichtenberg Method to different parts of an organisation are illustrated below.

Stakeholders	Possible Reasons for Interest
Senior Management	Portfolio management Overall resources planning Corporate budgeting and planning Project overviews/reviews Ensure a common approach Greater certainty that key issues are being exposed
Sales and Marketing	Sales budgeting and planning Bid preparation and development Enhanced credibility/professionalism
Project Managers	Project start-ups Generation of a comprehensive overview Development of realistic budgets and plans Time planning that includes uncertainty Greatly reduced estimating times Exposure of assumptions Improved understanding of the key issues Consideration of opportunities as well as risks Creative problem-solving Action plans for risk control Team-building Multi-disciplinary group-working Contingency planning Usable by non-specialists after training Supported by customisable software which runs on almost any operating platform
Quality Assurance	Planning properly tied to performance and/or quality parameters Improved project control Common approach/methodology Active problem-solving at the heart of the process
Specialist Risk Managers	A simple yet highly effective approach Not dominated by statistics Easier to "sell" to the non-specialist Enables comprehensive analysis of the project Includes past data and professional judgement Helps with corporate contingency planning