Year 1

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Chapter 2
Conceptualizing and Initializing The IT Project
1
Chapter 2 Objectives
ƒ Define what a methodology is and describe the role it serves in IT projects.
ƒ Identify the phases and infrastructure that makes up the IT project methodology
introduced in this chapter.
ƒ Develop and apply the concept of a project’s measurable organizational value
(MOV).
ƒ Describe and be able to prepare a business case.
ƒ Distinguish between financial models and scoring models.
ƒ Describe the project selection process as well as the Balanced Scorecard
approach.
Methodology
ƒ A strategic level plan for managing and controlling IT projects
ƒ A template for initiating, planning, & developing an information system
ƒ Recommends in support of an IT project:
ƒ phases
ƒ deliverables
ƒ processes
ƒ tools
ƒ knowledge areas
ƒ Must be flexible and include best “practices” learned from experiences over time
Phases
ƒ Phase 1: Conceptualize and Initialize
ƒ Phase 2: Develop the Project Charter and Detailed Project Plan defined in terms
of project’s:
ƒ scope
ƒ schedule
ƒ budget
ƒ quality objectives
Phases continued
ƒ Phase 3: Execute and Control the Project using approach such as the SDLC .
ƒ Phase 4: Close Project
ƒ Phase 5: Evaluate Project Success
ƒ Post mortem by project manager and team of entire project
ƒ Evaluation of team members by project manager
ƒ Outside evaluation of project, project leader, and team members
ƒ Evaluate project’s organizational value
IT Project Management Foundation
ƒ Project Management Processes
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Initiating processes
Planning processes
Executing processes
Controlling processes
Closing processes
ƒ Project Objectives
IT Project Management Foundation
ƒ Tools - e.g. CASE
ƒ Infrastructure
ƒ Organizational Infrastructure
ƒ Project Infrastructure
ƒ Project Environment
ƒ Roles and Responsibilities of team members
ƒ Processes and Controls
ƒ Technical Infrastructure
ƒ Project Management Knowledge Areas
The Business Case
ƒ Definition of Business Case: an analysis of the organizational value, feasibility,
costs, benefits, and risks of the project plan.
ƒ Attributes of a Good Business Case
ƒ Details all possible impacts, costs, benefits
ƒ Clearly compares alternatives
ƒ Objectively includes all pertinent information
ƒ Systematic in terms of summarizing findings
Principles of Cost Management
ƒ Most CEOs and boards know a lot more about finance than IT, so IT project
managers must speak their language
ƒ Profits are revenues minus expenses
ƒ Life cycle costing is estimating the cost of a project plus the maintenance
costs of the products it produces
ƒ Cash flow analysis is determining the estimated annual costs and benefits for
a project
ƒ Benefits and costs can be tangible or intangible, direct or indirect
ƒ Sunk cost should not be a criteria in project selection
Cost of Software Defects
When Defect is Detected
User Requirements
Coding/Unit Testing
System Testing
Acceptance Testing
After Implementation
Typical Cost of Correction
$100-$1,000
$1,000 or more
$7,000 - $8,000
$1,000 - $100,000
Up to millions of dollars
It is important to spend money up-front on IT projects to avoid spending a lot
more later.
Resource Planning
ƒ The nature of the project and the organization will affect resource planning
ƒ Some questions to consider:
ƒ How difficult will it be to do specific tasks on the project?
ƒ Is there anything unique in this project’s scope statement that will affect
resources?
ƒ What is the organization’s history in doing similar tasks?
ƒ Does the organization have or can they acquire the people, equipment, and
materials that are capable and available for performing the work?
Cost Estimating
ƒ An important output of project cost management is a cost estimate
ƒ There are several types of cost estimates and tools and techniques to help create
them
ƒ It is also important to develop a cost management plan that describes how cost
variances will be managed on the project
Types of Cost Estimates
Type of Estimate
Rough Order of
Magnitude (ROM)
Budgetary
Definitive
When Done
Why Done
How Accurate
Very early in the
project life cycle,
often 3–5 years
before project
completion
Early, 1–2 years out
Provides rough
ballpark of cost for
selection decisions
–25%, +75%
Puts dollars in the
budget plans
–10%, +25%
Later in the project, <
1 year out
Provides details for
purchases, estimate
actual costs
–5%, +10%
Cost Estimation Tools and Techniques
ƒ 3 basic tools and techniques for cost estimates:
ƒ analogous or top-down: use the actual cost of a previous, similar project as
the basis for the new estimate
ƒ bottom-up: estimate individual work items and sum them to get a total
estimate
ƒ parametric: use project characteristics in a mathematical model to estimate
costs
Problems with IT Cost Estimates
ƒ Developing an estimate for a large software project is a complex task requiring
significant effort. Estimates are done at various stages of the project
ƒ Many people doing estimates have little experience doing them. Try to provide
training and mentoring
ƒ People have a bias toward underestimation. Review estimates and ask questions
to make sure estimates are not biased
ƒ Management wants a number for a bid, not a real estimate. Project managers
must negotiate with project sponsors to create realistic cost estimates
Cost Budgeting
ƒ Cost budgeting involves allocating the project cost estimate to individual work
items and providing a cost baseline
Cost Control
ƒ Project cost control includes
ƒ monitoring cost performance
ƒ ensuring that only appropriate project changes are included in a revised cost
baseline
ƒ informing project stakeholders of authorized changes to the project that will
affect costs
ƒ Earned value management is an important tool for cost control
Earned Value Management (EVM)
ƒ EVM is a project performance measurement technique that integrates scope, time,
and cost data
ƒ Given a baseline (original plan plus approved changes), you can determine how
well the project is meeting its goals
ƒ You must enter actual information periodically to use EVM.
Earned Value Management Terms
ƒ The planned value (PV), also called the budget, is that portion of the approved total
cost estimate planned to be spent on an activity during a given period
ƒ Actual cost (AC), is the total of direct and indirect costs incurred in accomplishing
work on an activity during a given period
ƒ The earned value (EV), is an estimate of the value of the physical work actually
completed
Earned Value Formulas
Rules of Thumb for Earned Value Numbers
ƒ Negative numbers for cost and schedule variance indicate problems in those areas.
The project is costing more than planned or taking longer than planned
ƒ CPI and SPI less than 100% indicate problems
Process for Developing the Business
Case
Developing the Business Case
ƒ Step 1: Select the Core Team with a goal of providing the following advantages:
ƒ Credibility
ƒ Alignment with organizational goals
ƒ Access to the real costs
ƒ Ownership
ƒ Agreement
ƒ Bridge building
Developing the Business Case
ƒ Step 2: Define Measurable Organizational Value (MOV) the project’s overall goal
ƒ MOV must:
ƒ be measurable
ƒ provide value to the organization
ƒ be agreed upon
ƒ be verifiable
ƒ Aligning the MOV with the organizational strategy and goals.
The IT Value Chain
Project Goal ?
ƒ Install new hardware and software to improve our customer service to world
class levels
versus
ƒ Respond to 95% of our customers’ inquiries within 90 seconds with less than 5%
callbacks about the same problem.
A Really Good Goal
ƒ Our goal is to land a man on the moon and return him safely by the end of the
decade.
John F. Kennedy
Steps to develop MOV
ƒ MOV Step 1 - Identify the desired area of impact
ƒ Strategic: increased market share
ƒ Customer: more choices for products or services
ƒ Financial: increased profits or margins
ƒ Operational: increased operational effectiveness
ƒ Social: education, health, safety, environment
Steps to develop MOV
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MOV Step 2 - Identify the desired value of the IT project
ƒ Better
ƒ Faster
ƒ Cheaper
ƒ Do more
Steps to develop MOV
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MOV Step 3 - Develop an Appropriate Metric
• provide target
• set expectations
• enable success/failure determination
• common metrics
ƒ Money ($ £ ¥)
ƒ Percentage (%)
ƒ Numeric Values
Steps to develop MOV
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MOV Step 4 - Set a time frame for Achieving MOV
MOV Step 5 - Verify and Get Agreement from the Project Stakeholders
MOV Step 6 - Summarize MOV in a Clear, Concise Statement or Table.
Year
1
MOV
20% return on investment
500 new customers
2
25% return on investment
1,000 new customers
3
30% return on investment
1,500 new customers
Developing the Business Case
ƒ Step 3: Identify Alternatives
ƒ Base Case Alternative
ƒ Alternative Strategies
ƒ Change existing process sans IT investment
ƒ Adopt/Adapt systems from other organizational areas
ƒ Reengineer Existing System
ƒ Purchase off-the-shelf Applications package
ƒ Custom Build New Solution
Developing the Business Case
ƒ Step 4: Define Feasibility and Asses Risk
ƒ Economic feasibility
ƒ Technical feasibility
ƒ Organizational feasibility
ƒ Other feasibilities
ƒ Risk focus on
ƒ Identification
ƒ Assessment
ƒ Response
Developing the Business Case
ƒ Step 5: Define Total Cost of Ownership
ƒ Direct or Up-front costs
ƒ Ongoing Costs
ƒ Indirect Costs
ƒ Step 6: Define Total Benefits of Ownership
ƒ Increasing high-value work
ƒ Improving accuracy and efficiency
ƒ Improving decision-making
ƒ Improving customer service
Developing the Business Case
ƒ Step 7: Analyze Alternatives using financial models and scoring models
ƒ Payback
ƒ Payback Period = Initial Investment / Net Cash Flow
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= $100,000 / $20,000
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= 5 years
Return on Investment
ƒ Return on investment (ROI) is calculated by subtracting the project costs from
the benefits and then dividing by the costs
ƒ ROI = (total discounted benefits - total discounted costs) / discounted costs
ƒ The higher the ROI, the better
ƒ Many organizations have a required or minimum acceptable rate of return on an
investment
ƒ Internal rate of return (IRR) can by calculated by setting the NPV to zero
Developing the Business Case
ƒ Return on Investment
Project ROI =(total expected benefits – total expected costs)
total expected costs
= ($115,000 - $100,000)
$100,000
= 15%
Net Present Value Analysis
ƒ Net present value (NPV) analysis is a method of calculating the expected net
monetary gain or loss from a project by discounting all expected future cash inflows
and outflows to the present point in time
ƒ Projects with a positive NPV should be considered if financial value is a key criterion
ƒ The higher the NPV, the better
NPV Calculations
ƒ Determine estimated costs and benefits for the life of the project and the products it
produces
ƒ Determine the discount rate (check with your organization on what to use)
ƒ Calculate the NPV (see text for details)
ƒ Notes: Some organizations consider the investment year as year 0, while others
start in year 1. Some people enter costs as negative numbers, while others do not.
Check with your organization for their preferences.
Developing the Business Case
ƒ Net Present Value
Year 0
Year 1
Year 2
Year 3
Year 4
Total Cash Inflows
$0
$150,000
$200,000
$250,000
$300,000
Total Cash Outflows
$200,000
$85,000
$125,000
$150,000
$200,000
Net Cash Flow
($200,000)
$65,000
$75,000
$100,000
$100,000
NPV = -I0 + Σ (Net Cash Flow / (1 + r)t)
Where:
I = Total Cost or Investment of the Project
r = discount rate
t = time period
Developing the Business Case
ƒ Net Present Value
Time Period
Calculation
Discounted Cash Flow
Year 0
($200,000)
($200,000)
Year 1
$65,000/(1 + .08)1
$60,185
Year 2
$75,000/(1 + .08)2
$64,300
Year 3
$100,000/(1 + .08)3
$79,383
Year 4
$100,000/(1 + .08)4
$73,503
Net Present Value (NPV)
$77,371
Developing the Business Case
ƒ Step 8: Propose and Support the Recommendation
Business Case Template
Project Selection and Approval
ƒ The IT Project Selection Process
ƒ The Project Selection Decision
ƒ IT project must map to organization goals
ƒ IT project must provide verifiable MOV
ƒ Selection should be based on diverse measures such as
ƒ tangible and intangible costs and benefits
ƒ various levels throughout the organization
Balanced Scorecard Approach
Reasons Balanced Scorecard Approach Might Fail
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Nonfinancial variables incorrectly identified as primary drivers
Metrics not properly defined
Goals for improvements negotiated not based on requirements
No systematic way to map high-level goals
Reliance on trial and error as a methodology
No quantitative linkage between nonfinanacial and expected financial results
MOV and the Organization’s Scorecard
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