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Setting Goals, Securing Commitment and Project

JustificationProject Charter & Business Case

Kathy S. Schwaig

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Conceptualizing and Initializing the IT Project

Conceptualize and InitiateDefine Overall goal of the project. “How do we know how to get somewhere if we don’t know where we are going” KerznerAlternatives for reaching goalCosts, benefits, feasibility, riskGoals and analysis of alternatives are delivered in a business casesSr. Management/Steering Committee makes a decision/selection

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Project Scope Management

Includes the process required to ensure that the project includes all the required work and all the work required. What are the product/deliverables and what are the processes required to deliver the products

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Steps in Scope Management

Step 1Project Selection:

On which projects do we work? Review organization’s strategic plan, focus on broad organizational needs, financial analysis, scoring models. A business case documents a lot of this information.

Step 2Project Charter

Formally recognizes the existences of a project…signed by key stakeholders and acknowledges agreement on need and intent of project

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Steps in Scope Management

Step 3Work Breakdown Structure

Output of scope definition process. Outcome oriented analysis of the work involved in a project that defines the total scope of the project. Basis for planning and managing project schedules, costs, and changes. Good WBS’s are hard to create!

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Why Write a Business Case for Pursuing a Project?Most projects require some form of justification to secure resources and fundingThe discipline of writing a business case forces us to:

make tacit assumptions explicitprovides basis for allocating capitaldocument the reasons for pursuing a project

The business case serves as a communication tool and helps to define what the project is (and is not) at its inception

An analysis of the organizational value, feasibility, costs, benefits, and risks of several proposed alternatives or options

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Business Case

“Like an attorney, the business case developer has a large degree of latitude to structure arguments, select or ignore evidence, and deliver the final presentation. Outcome depends on the ability to use compelling facts and logic in order to influence an individual or group with decision-making authority.”

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Contents of a Business CaseDescribe the problemImpacts/effects of problemIdentify who/what is affectedImpact of ignoring the problemDesired outcomeAlternativesDefine feasibility (economic, technological, organizational) and assess risk Value/benefit of desired outcome

Total cost of ownershipTotal benefits of ownership

Interface integration/compatibility issuesUncertainties/unknownsKey assumptionsConstraintsBackground and supporting information

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Three Types of Arguments to Develop a Business Case

Arguments of Facts“The system will eliminate the need for hiring two positions for an annual savings of $100K”Justify using hard data, quantitative, structured feasibility assessment

Arguments of Faith“IS is infrastructure. We need it to support our growth and stability”Justify by vision. Investment X will lead to benefit Y

Arguments of Fear“If we don’t do this we may be eaten alive by our competition”Justify by perception of events

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Business Decision

Level I Business Decision (Go/No Go)

Status Quo or Manual Solution vs. Build and or Buy (Buy #1 or Buy #2 or Buy #3)cost-benefit analysis & risk analysis

Level II Business Decision (Build/Buy)Level III Business Decision (Vendor 1, Vendor 2 or Vendor 3)

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Level 1 Business Decision

(Go/No Go)Cost-benefit analysis = comparison of expected costs to expected benefits to determine if a computerized solution--irrespective of build/buy or particular vendor decisions--makes sense. Spreadsheets are often used as computerized tools for this analysis!!!

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Costs & Benefits

CostsHardwareTelecommunicationsSoftwareServicesPersonnel

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Costs & Benefits

BenefitsTangible (i.e. cost savings):

increased productivity; lower operational costs; reduced work force; lower computer expenses; lower clerical & professional costs; reduced rate of growth in expenses; reduced facility costs

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Cost & BenefitsBenefits

Intangibleimproved asset utilization; improved resource control; improved organizational planning; increased organizational flexibility; more timely information; more information; increased organizational learning; legal requirements attained; enhanced employee goodwill; increased job satisfaction; improved decision making; improved operations; higher client satisfaction; better corporate image

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Level I Business Decision (Go/NoGo)

Risk Analysis - analysis of the uncertainties in going ahead or not going ahead with a change

Risks included general factors such as the level of experience of the IS dept. in this type of system, the fit with the organizational culture, & the stability of the technology to deliver as required.They also include specific factors such as those in the level II business decisions

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Level II Business Decision

Build/BuyIf a software investment is involved, then…comparative software cost-benefit analysis

compare the financials on a decision to insource versus a decision to outsource“Buy” estimates, which may be assembled by systems integration managers from vendor responses to an RFI (request for information), are highly preliminary

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Level II Business Decision

Build/BuyFinancial argument

The argument is whether a choice to build or buy results in a greater production cost advantage. This is the “economies of scale” issue in the outsourcing decision

Non-Financial argumentThe argument is whether a choice to build or buy makes sense in the light of the other major questions related to outsourcing, (core competency, expertise)

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Level II Business Decision

Build/Buy“Build” risks refer to the uncertainty that the in-house project will be completed to the user’s satisfaction and that the estimated timelines and costs are reasonably accurate“Buy” risks in this situation refer to the uncertainties that the vendor software is real (not vaporware), that it will perform as advertised, that the vendor will not go out of business during the period that the software is in use, etc..

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Level I & II Business Decision

Go/No Go and Build/BuyIn situations when an already existing system is being replaced, benefits include the expenses that will be avoided by scrapping the old system plus the additional benefits realized by integrating a wholly new system.

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Managing the Business Decision to Invest in IT

Analytical Tools Commonly Used

Payback MethodAccounting Rate of ReturnCost-benefit RatioNet Present Value (NPV)Profitability IndexInternal Rate of Return

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Payback Method

A measure of the time required to payback the initial investment on a project

1st Year investment

Annual net cash flowsPayback =

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Accounting Rate of Return

Calculation of the rate of return from an investment by adjusting cash inflows produced by the investment for depreciation. Approximates the accounting income earned by the investment.

ROI =Net Benefit

Total Initial Investmentwhere

Net Benefit =

Total Benefits - Total Cost - Depreciation

Useful Life

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Cost-Benefit Ratio

A method for calculating the returns from a capital expenditure. Ex. A cost/benefit ratio of 1.42 indicates that benefits are 1.42 times greater than cost.Cost -Benefit = Total Benefits

Total Costs

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Net Present Value (NPV)

Amount of money an investment is worth, taking into account its cost, earnings and the time value of money

compare the cost of the investment (cash outflow in year 0) with net cash inflows. Any dollars received in the future must be discounted by some appropriate % rate (prevailing interest rate or cost of capital)NPV = PV of expected cash flows - Initial Investment Cost

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Profitability Index

Used to compare the profitability of alternative investments

Profitability Index =

PV of Cash Inflows

Investment

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Internal Rate of Return

Rate of return or profit an investment is expected to earn; the discount (interest) rate that will equate to PV of the project’s future cash flows to the initial cost of the project.

i.e. that rate which will result in PV - 1st year investment = 0variation of NPVconsiders the time value of money

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Level III Business DecisionBuy #1 vs. Buy #2 vs. Buy 3 RFP process or small $ investment data gathering

Compare alternatives (detailed) analysis

thorough analysis of proposals and responses to RFPs risk analysis

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Level III Business Decision

Buy#1 vs. Buy #2 vs. Buy #3 - Risk Analysis

similar to that of business level II except that the vendor’s bids are more preciseto include risk factors in the overall assessment, a single index value for all risks taken together should be createdthis risk index value can then be considered in a scoring model

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Level III Business DecisionThe result?

Vendor bids rejected and some accepted. preparation of contractnegotiation of contractsigning/awarding of contract

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What is a Project Charter?A project charter is a mission statement that clearly defines the projectThe chartering process should help build commitment to the project objectives

The process of developing the project charter is as important as the charter itselfProject chartering needs to be a group activity because it will help to build the project team

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Purpose of a Project Charter

To establish a shared understanding of project scope and objectivesTo gain commitment to the projectTo communicate objectives to those outside the project teamTo provide measurable goals and objectives

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Characteristics of a Good Project Charter

Should be clearShould be concise—no more than 3 pagesShould be developed by consensusShould contain realistic/achievable objectivesShould contain an assessment of project risk

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Contents of a Good Project Charter

Short description of end-product and scope definitionPrimary objectiveSecondary objective(s)Completion date (target or constraint)Total cost (target or constraint)Key constraints and assumptionsKey project personnel

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What can happen if you don’t What can happen if you don’t have a good project charter?have a good project charter?