Tech Firm Corp Finance Interview Question: How can you allocate resources of developers to various products
Hi All, I was asked a question in Tech firm corp finance role. The interviewer asked how i can allocate software engineers resources to various prod. say why should we invest more engineers to this product and less to another prod. Thank you for all thoughts from talents here.
One way or another it will be driven by the best roi.
Thank you. ROI caculates the rate of investment ((gains-costs)/costs). What if the prod with higher ROI but takes a long time to achieve it? how may we take time into consideration?
Apply discount rates to arrive at a present value. Projects might have differing risk levels as well...example. Project A may take a long time but company has a lot of expertise. Project B might be shorter in duration but company has little/no expertise and thus would require a higher discount rate.
Just compare NPVs of Project A vs. Project B, and whichever has the higher NPV at the respectively appropriate discount rates is the project you should most likley invest in. This of course ignores any situational specific nuances or qualitative assessments that may impact your analysis, but from a quantitative standpoint you're just comparing the ROI (either with an NPV or an IRR Is fine too) of the two projects and going with the one that yields a higher return.
Lets say the project does not work, and is thus scrapped. You would end up using capital budgeting methods on a sunk cost. I would guess that he is going to have to make some sort of justification for whatever inputs he decides to use, but this sounds like an operations question, especially if he were given a couple of things like x produces 50 lines of code per hour on a 6 million line project and y produces 45 per hour on a project of 35 million lines. What is the correct number of engineers to allocate to each project so that the averages are the same?
I'm not fully appreciating how sunk costs matter here. Obviously looking at things in hindsight it's easier to say if Project A failed, we should have gone with Project B. But if I'm standing here today looking into the future, whether a project ends up failing, no one can 100% predict, but that is the point of having different discount rates that supposedly accounts for the higher risks of a project.
On your other point air enough I suppose we should take into consideration the "efficiency" of the engineers. But ultimately, isn't it still cash flow driven? And the salary expense associate with Project A vs. Project B should inherently account for how much more complicated a particularly project is to code (presumably more line requires more FTEs which increases salaries expense). Also, while I have no studies to back this up, is there that high of a correlation between number of lines in project vs. revenue? At the end of the day, I need to maximize my net cash flows into perpetuity. Now, I do think if you were to say: Project A requires 10 engineers and would produce $100 of net cash into perpetuity (set aside discounting for a second), and Project B requires only 3 engineers and would produce only $3 of net cash and allows you to allocate the 7 other engineers to even higher ROI projects, then the staffing optimization question comes more into play - because you're not just comparing A vs. B, but really A vs. B+X+Y+etc (or whatever other permutation).
At the end of the day, I think this is what partially makes some CEOs great. There are a number (hundreds, thousands) of different initiatives that can be taken, and each have their own level of risk and their own level expected return. No one can run permutations quantitatively on every and all the possibilities to undertake, and predict with high accuracy which ones will be most profitable. But some CEOs have an innate / intuitive ability to understand what consumers actually want (vs. what consumers think they want), and execute against that.
It was a staffing model question. I am going to go out on a limb and say that the role probably dealt quite a bit with operations.
Edit: to clarify it was an Optimization Staffing Model, that you can bang out with solver in excel.
Some update thoughts: Should the analyst consider calculating contribution margin of each prod to get breakeven unit. Let's say fixed asset/ weighted avg contribution margin per unit. Then use that overall breakeven unit to get breakeven unit per prod ( overall breakeven unit * prod a budget sales / budget total sales) ..and then allocate engineers resource per breakevent unit for each prod. How does everyone think?
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