Chapter 4: Project Selection &
Approval
Important factors
Selection Methods
Value Analysis, Optimization
Planning process for project selection
• Strategic planning, determine the organization’s
strategy, goals and objectives.
• Business area analysis, analyze the business process to
achieve strategic goals such improvement of sales,
manufacturing, engineering, or IT.
• Project planning, define projects that address the strategies.
• Resource allocation, choosing which projects to do and
assigning resources for working on them.
IS Project Growth
• billions spent on technology every year
• Sources of project:
– users
– top management
– within information systems
• Process of selecting project
– idea
– estimate benefits, costs
Quotes…..
• If you always blame others for your mistakes,
you will never improve.
• To get a project off the ground, tell a colleague
it was their idea. They will put their heart and
soul into making it successful.
IS Project Motivation
• Cost cutting/avoidance
• Revenue maintenance/enhancement
• Entering new market
• Gaining market share
Measurement of project effect
Estimation pitfalls (difficulties)
• INTANGIBLES
– Difficult to measure cost and benefits
• HIDDEN OUTCOMES
– time, budget subject to great error
• CHANGE of Information technology
– technology changes rapidly
• outdating many good project idea
• Technology is highly dynamic
Measurement of project effect
Estimation pitfalls (difficulties) continued…
•
•
•
•
•
•
•
•
•
•
•
Allowing non-technical staffers to give estimates.
Underestimating design time and debugging time
Inadequate/unclear requirements.
Poorly defined scope of work. This can occur when the work is not broken down
far enough or individual elements of work are misinterpreted.
Omissions. Simply put, you forget something.
Optimism. This is the rose-colored glasses syndrome, when the all-success
scenario is used as the basis for the estimate.
Failure to assess risk and uncertainty. Neglecting or ignoring risk and
uncertainty can result in estimates that are unrealistic.
Time pressure. If someone comes up to you and says, “Give me a ballpark figure
by the end of the day” and “Don’t worry, I won’t hold you to it,” look out! This
almost always spells trouble.
The task performer and the estimator are at two different skill levels
External pressure.
Failure to involve task performers.
Organizational Treatment of IS
Projects
• Focusing on bottom line justification misleads
companies with respect to evaluation of Information
technology investment, by treating IS project as
capital which requires a rigid cost/benefit analysis.
• The most common justification for project adoption:
- reduction of payroll
- accomplishing a strategic objective (often disregarded because
it is difficult to measure)
Organizational Treatment of
IS Projects
• Hinton & Kaye (1996) - survey of 50 organizations
CAPITAL: rigid cost-benefit analysis
REVENUE: need to invest to keep up
Investment
training
marketing
info tech
operations
Capital
0%
4%
39%
58%
Mix
1%
9%
41%
31%
Revenue
99%
87%
20%
11%
Organizational Treatment of IS
Projects
• Cost benefit analysis should consider cost
over the entire life cycle of the project.
Who does estimate the project?
- Developer who estimate their project tend to be
optimistic, so having one group estimate and
other develop the project is a good practice.
Initial Risk Evaluation
Most of these risks have to do with estimating the
time, which depends on a number of factors:
• Project manager ability
• experience with application, environment,
language
• familiarity with modern programming practice
• availability of critical equipment, software
• completeness of project team
• personnel turnover
• project team size
• relative control of project manager over project
team
Common methods used in Project Selection
Decision
• Economic & Financial
– payback
– cost-benefit
– npv/irr
68%
63%
40%
• Multifactor
– Checklist- minimum acceptable level of
requirements
– project profile- strength and weakness
– scoring/rating models
– multicriteria
• Mathematical Programming- optimal
solution for projects
• Expert Systems- systematic manner
38%
26%
26%
11%
18%
6%
ROI and IRR
• Return on investment, is the result of subtracting the project
cost from the benefit and then dividing by the cost.
ROI = (total discount benefit – total discount costs) / discount cost
• IRR, find what discount rate result in an NPV of zero for the project. There
is no direct formula for calculating IRR return. It is found using an iterative
process using NPV. The closest thing to a formula is the following:
If NPV=0 then IRR=discount rate used to calculate the NPV. So we
calculate NPV with different discount interest rates, zeroing in on NPV=0
to find the IRR.
Quotes
• What you don't know hurts you.
• The sooner you begin coding the later you finish.
• If everything is going exactly to plan, something somewhere is
going massively wrong.
• The first 90% of a project takes 90% of the time the last 10%
takes the other 90%
• A minute saved at the start is just as effective as one saved at
the end.
• Projects happen in two ways: a) Planned and then executed or
b) Executed, stopped, planned and then executed.
Selection Methods
• The comparative approach, the value of one project would need to be
compared against the other projects, you could use the benefit
measurement methods. This could include various techniques, of which the
following are the most common.
- You and your team could come up with certain criteria that you want your
ideal project objectives to meet. You could then give each project scores based on how they
rate in each of these criteria, and then choose the project with the highest score.
- When it comes to the Discounted Cash flow method, the future value of a project is
ascertained by considering the present value and the interest earned on the money. The higher
the present value of the project, the better it would be for your organization.
- The rate of return received from the money is what is known as the IRR. Here again, you
need to be looking for a high rate of return from the project.
• The mathematical approach is commonly used for larger projects. The
constrained optimization methods require several calculations in order to
decide on whether or not a project should be rejected.
Selection Methods
- Following is an illustration of two of methods (Benefit Measurement and
Constrained Optimization methods).
IS project approval Criteria
• Financial
– net present value/internal rate of return
– payback
– profitability index/budgetary constraint
• Management
–
–
–
–
support business objectives
respond to competition
better decision making
satisfy legal requirements
• Development
– Project needed for effective operation
– Introduction of new technology
Screening
• Identifying the factors that are important
• Establishing a minimum of acceptable levels
of requirements and eliminate projects that fail
on any one of these standards.
• This is appropriate if the minimum standards
reflect what management demands in return
for its investment.
• a way to implement screening assure
implementation of policy limits
SCREENING
• Eliminate proposals not meeting minimum
requirements, weeding out projects with
unacceptable features.
• Project Profile is to display how the project
proposal compares with standards, as well
as how it compares with other proposals.
PROJECT PROFILE
• Display project features with standards
• Compares strengths, weaknesses
Project Cost
A265 230,000
A801 370,000
A921 790,000
B622 480,000
B837 910,000
C219 410,000
NPV/Cost
0.43
0.51
0.46
0.11
0.22
0.41
Strategic?
no
yes
no
yes
yes
no
Cost Benefit Analysis
• Cost-benefit analysis (CBA), sometimes called benefitcost analysis (BCA), is an economic decision-making
approach, used particularly in government and business.
• CBA is used in the assessment of whether a proposed project
program or policy is worth doing, or to choose between
several alternative ones.
• It involves comparing the total expected costs of each option
against the total expected benefits, to see whether the benefits
outweigh the costs, and by how much.
• In CBA, benefits and costs are expressed in money terms, and
are adjusted for the time value of money so that all flows of
benefits and flows of project costs over time (which tend to
occur at different points in time) are expressed on a common
basis in terms of their "present value."
Cost-Benefit Analysis
• Accurately estimate all benefits
– identify overall profit impact
– in net present terms
• Accurately estimate all costs
– overall profit impact, in net present terms
• RATIO: benefits/costs
<=1, don’t adopt
>1, profitable
can adopt by highest ratio
Payback
• Refers to the period of time required for the return on an investment to "repay" the
sum of the original investment
• For example, a $1000 investment which returned $500 per year would have a two
year payback period. The time value of money is not taken into account.
• Payback period intuitively measures how long something takes to "pay for itself."
Shorter payback periods are preferable to longer payback periods.
• Payback period as a tool of analysis is often used because it is easy to apply and
easy to understand for most individuals. When used carefully or to compare similar
investments, it can be quite useful.
• The most basic method of financial evaluation is simply to compare the income that
will be generated with the initial investment.
• Identify the time needed (rough estimate of time) for costs to be recovered
–
–
simple
doesn’t consider negative cash flow in early period.
• The most common reasons for company failure in US is lack of cash flow.
Payback (example)
In house
cumulative
Out source
cumulative
Year 0
(380,000)
(380,000)
(520,000)
(520,000)
Year 1
70,000
(310,000)
190,000
(330,000)
Year 2
150,000
(160,000)
270,000
(60,000)
Year 3
225,000
65,000
340,000
280,000
Net Present Value
• NPV compares the value of a dollar today to
the value of that same dollar in the future,
taking inflation and returns into account.
• The basic calculation is applied to the benefit,
which must then be offset against the cost.
This figure is called the Net Present Value
(NPV) which equals to present value of benefit
– present value of cost.
NPV - Example
Now
Year 1
Year 2
Year 3
Running cost
30,000
45,000
45,000
revenues
40,000
50,000
60,000
Startup cost
Sales of
business
50,000
70,000
NPV - Example
• NPV= Npv(year1)+ Npv(year1)+ Npv(year1)
= -50000 + ((-30000+40000)/(1+0.12)**1) +
((-45000+50000)/(1+0.12)**2) +
((-45000+60000+70000)/(1+0.12)**3
= -50000 +9828+3986+60501
= 23415
So , the project on this basis is worth pursuing.
Net Present Value – Time Value of
Money
15% (divided by 1.15**t)
In house
cumulative
Out source
cumulative
Year 0
(380,000)
(380,000)
(520,000)
(520,000)
Year 1
70,000
(60,870)
(319,130)
190,000
(165,217)
(354,783)
Year 2
150,000
(113,422)
(205,708)
270,000
(204,159)
(150,624)
Year 3
225,000
(147,941)
(57,767)
340,000
72,932
Value Analysis
(is an alternative to cost/benefit analysis)
• Decision Support System benefits usually very vague.
• Unfair to apply cost-benefit analysis
– benefit estimates unreliable
• Costs - identify as in cost-benefit
• Benefits - leave in subjective terms
• Managerial decision: are you willing to pay this much for
that set of benefits?
• Quantify the intangible in terms of value not in dollars.
Multi-criteria analysis
•
•
•
•
Multi-Criteria Analysis (MCA) is a decision-making tool developed for complex
problems.
By using MCA the members don't have to agree on the relative importance of
the Criteria or the rankings of the alternatives. Each member enters his or her own
judgment, and makes a distinct, identifiable contribution to a jointly reached
conclusion.
SMART is a very simple means of quantitatively combining diverse sets of benefits
by converting them all to an abstract measure of value. (two factors here are weight
and score)
SMART Simple Multi-Attribute Theory
– identify criteria (risk, market share…)
– measure utilities of alternatives over each criterion
– elicit preference weights
• From the most important to the least important
value = S of weights times scores
Weighted scoring model
Criteria
Weight
Project 1
Project2
project3
criteria1
25%
90
90
50
criteria2
30%
70
90
50
Criteria3
40%
50
80
60
Criteria4
5%
80
90
50
Weighted
project score
100%
67.5
86
54
Questions to Help You
Plan Your Project
• When you begin a project, you always feel the pressure to jump in and start
working to meet the aggressive time schedules. You want to be sure it’s planned
out before you start, but you’re not quite sure where to begin, and you’re always
under pressure to start producing results. Answer the following questions in this
chapter to be sure you’ve completely identified all the work your project will
require.
• What’s the Purpose of Your Project? As soon as you’re
assigned to your project, get a clear and complete picture of its significance.
Determine the following:
- What situation(s) led to your project?
- Who had the original idea?
- Who else hopes to benefit from it?
- What would happen if your project weren’t done?
An accurate appreciation of your project’s purpose can lead to better plans, a
greater sense of team-member commitment, and improved performance.
Questions to Help You
Plan Your Project
• Whom Do You Need to Involve? Knowing early whom you need to
involve allows you to plan for their participation at the appropriate times.
Involving these people in a timely manner ensures their input will be available
when it’s needed and lets them know that you value and respect their
contributions. As you determine who may play a role in your project’s success,
categorize them as follows:
_ Drivers: People looking for your project’s results.
_ Supporters: People who can help your project succeed.
_ Observers: People interested in your project.
After you have this comprehensive list, decide whom to involve and when and how
you want to involve them.
• What Results Will You Produce? Specify all the outcomes you
expect your project to produce. Be sure that you describe clearly
each product, service, or impact; make the outcomes measurable
and include performance targets. Confirm that your project’s
drivers believe these outcomes meet their needs and expectations.
Questions to Help You
Plan Your Project
• What Constraints Must You Satisfy? Identify all information,
processes, and guidelines that may restrict your project activities and your
performance. Distinguish between the following:
- Limitations: Restrictions that people outside your project team set.
- Needs: Restrictions that you and your project team members establish.
When you know your constraints, then you can plan to minimize their effect on
your project.
• What Assumptions Are You Making? As soon as you begin thinking
about your project, document all assumptions about its key information because
each of these assumptions leads to one or more project risks that you may
choose to plan for in advance. Continue adding to your list of assumptions as
you develop the parts of your plan. Update your plans whenever an assumption
changes or you find out its actual value.
Questions to Help You
Plan Your Project
• What Work Must Be Done? Identify all the activities required to
complete your project so you can assign responsibilities for them, develop schedules, estimate
resource needs, give specific tasks to team members, and track your project during performance.
For each activity, specify
_ The work to be done: The processes and steps that each activity requires.
_ Inputs: All people, facilities, equipment, supplies, raw materials, funds, and information
necessary to perform each activity.
_ Results you expect: Products, services, or situations that you expect each activity to produce.
_ Interdependencies: Activities that you must complete before you can start the next one;
activities you can start after you’ve completed the current one.
_ Duration: The actual calendar time to perform each activity
• When Does Each Activity Start and End? Develop a detailed schedule
with clearly defined activities and frequent intermediate milestones. Having this information
allows you to give team members precise guidance on when to perform their assignments. This
information also supports your ongoing monitoring and control of work in progress. Take the
following into account when you create your schedule:
_ Duration: The actual calendar time to perform each individual activity.
_ Interdependencies: What you must finish before you can begin your activity.
_ Resource availability: When you need particular resources and when they’re available.
Questions to Help You
Plan Your Project
• Who Will Perform the Project Work? Knowing who will
perform each task and how much effort they’ll have to devote allows you to
plan for their availability and more accurately estimate the overall project
budget. Specify the following information for all people who need to work
on your project:
_ Identify each person by name, by position description or title, or by the
skills and knowledge required to do the assignment.
_ When more than one person must work on the same activity, describe the
specific roles and how these people can coordinate their efforts.
_ Specify the level of effort each person has to invest.
_ If a person will work less than full time on an activity, specify exactly
when she will work. Consult with the people who’ll perform the project
tasks to develop this information.
Questions to Help You
Plan Your Project
• What Other Resources Do You Need? Identify
all equipment, facilities, services, supplies, and funds that you
need to perform your project work. Specify how much of each
resource you’ll need and when.
• What Can Go Wrong? Identify those parts of your
project that may not go according to plan. Decide which risks
pose the greatest dangers to your project’s success and develop
plans to minimize their negative effects.
Summary
• Initial evaluation of projects is where most
are eliminated
• Companies need to avoid non profitable
– if budget scarce, select most profitable
• Many risks need to be considered
• ideally identify net present costs, benefits
• practically need to consider intangibles