PRJ566: Project Planning and Management Payback

Agenda What is cost benefit analysis? Payback Examples

Costs--one time Development costs – wages, contract fees Initial Training costs Initial equipment costs – hardware, software, network

Costs--ongoing Overhead - facilities, office space, etc. Web site costs--domain name renewal, Web hosting Communication costs--phone, Internet, and so on Maintenance of software and hardware “Maintenance” of staff (ongoing training, and so on)

Benefits-can come from Cost savings People (use less), time (get work done faster), equipment (eliminate), mistakes (make less) New services to clients - revenue Mandatory changes Strategic advantage Make more money! Technical reasons

Cost Benefit Analysis Project timeframe: months or years, etc Cumulative means add in total from previous column Include previous column total into next column Note: be sure all costs are consistent to fit your timeframe. i.e. if your timeframe is months, each cost amount must be a monthly cost Note: Timeframe 0 is for project development

Example 1 Purchase & Install Remote Control Software Currently: 20% calls (=200/mo) involve visit to client’s office Visit averages 15 min, with average 2 hour client wait time

Example 1 Purchase & Install Remote Control Software Currently: Use $60/hr client time Wait time costs 200 x 2hrs x $60/hr Wait time costs $24,000 per month

Example 1 Purchase & Install Remote Control Software Proposed Solution: $90,000 remote control software To install--$10,000 labour and training Maintenance of $8,400 per year ($700/mo)

Cost Benefit Analysis

Agenda What is cost benefit analysis? Payback Examples

Payback Represents the point in time when the benefits are greater than the costs Cumulative Benefits – Cumulative Costs

Example 1

Payback Analysis Payback period = time required to recoup costs of project Payback occurs when accumulated benefits > accumulated costs (the sooner the better!) Typically - there is a ceiling

Return on Investment Analysis You invested a certain amount of $ (costs) What did you earn on this money?(Benefits) What was your return in a certain amount of time?

Return On Investment Analysis Accum. Benefits - Accum. Costs ROI = X 100 Accum. Costs

Example 1

ROI Example 1 $16,500 ROI = X 100 = 16% Over 5 months $103,500

ROI Example 1 $39,800 ROI = X 100 = 38% Over 6 months $104,200

When Comparisons are Difficult What do you do when the best option does not come out on top in terms of $? Look at risks Look at intangible costs and benefits

Example 2 GMS--Great Marketing Services asks the IT Project Manager to research improvements to its outdated flyer development system GMS develops marketing fliers for various organizations

Example 2 GMS collects photos, diskettes from client GMS scans photos, lays out flyer using old flyer software GMS prints flyer, courier to client Client reviews, corrects, courier back GMS prints final copy, sends to printer GMS arranges for flyer distribution

Example 2 Situation: Flyer development takes too long and is too manual. Automation of the process is necessary Manual systems are causing lengthy delays, high errors Competitors are going to automation, to the Internet

Example 2 One time Costs: Software $90k, Installation $120k Internet infrastructure (labour, hardware, software) $190K PM Salary $100K Upgrade PCs/monitors $120k Train layout staff $20k Marketing to clients $80k

Example 2 Ongoing Costs: Maintenance of internet infrastructure $15k/yr then $17k/yr after 1 year New Software maintenance $10k/yr Hardware upgrade costs $15k/yr then $20k/yr after 2 years

Example 2

Example 2 Benefits: Save $70k/yr wages in review/correct process Save $40k/yr (1 employee) in layout process (cut from 2 to 1 weeks) Estimate $50k/yr increase in business for 4 years, then stay level

Example 2

Example 2 Analysis Payback ROI

Example 2 Analysis Payback in Year 4 ROI = $44k/$896k = 5% at 4 years

Example 2 Recommendation? Is this ROI acceptable to management? Payback takes a LONG time! What are other factors? Competition--is there a choice? Risks--can clients handle new system? Risks--can employees handle new system?