1 Setting Goals, Securing Commitment and Project Justification Project Charter & Business Case Kathy S. Schwaig

2 Conceptualizing and Initializing the IT Project Conceptualize and Initiate Define Overall goal of the project. “How do we know how to get somewhere if we don’t know where we are going” Kerzner Alternatives for reaching goal Costs, benefits, feasibility, risk Goals and analysis of alternatives are delivered in a business cases Sr. Management/Steering Committee makes a decision/selection

3 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

4 Steps in Scope Management Step 1 Project 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 2 Project Charter Formally recognizes the existences of a project…signed by key stakeholders and acknowledges agreement on need and intent of project

5 Steps in Scope Management Step 3 Work 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!

6 Why Write a Business Case for Pursuing a Project ? Most projects require some form of justification to secure resources and funding The discipline of writing a business case forces us to: make tacit assumptions explicit provides basis for allocating capital document 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

7 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.”

8 Contents of a Business Case Describe the problem Impacts/effects of problem Identify who/what is affected Impact of ignoring the problem Desired outcome Alternatives Define feasibility (economic, technological, organizational) and assess risk Value/benefit of desired outcome Total cost of ownership Total benefits of ownership Interface integration/compatibility issues Uncertainties/unknowns Key assumptions Constraints Background and supporting information

9 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

10 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)

11 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!!!

12 Costs & Benefits Costs Hardware Telecommunications Software Services Personnel

13 Costs & Benefits Benefits Tangible (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

14 Cost & Benefits Benefits Intangible improved 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

15 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

16 Level II Business Decision Build/Buy If 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

17 Level II Business Decision Build/Buy Financial 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 argument The 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)

18 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..

19 Level I & II Business Decision Go/No Go and Build/Buy In 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.

20 Managing the Business Decision to Invest in IT Analytical Tools Commonly Used Payback Method Accounting Rate of Return Cost-benefit Ratio Net Present Value (NPV) Profitability Index Internal Rate of Return

21 Payback Method A measure of the time required to payback the initial investment on a project 1st Year investment Annual net cash flows Payback=

22 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 Investment where Net Benefit = Total Benefits - Total Cost - Depreciation Useful Life

23 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

24 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

25 Profitability Index Used to compare the profitability of alternative investments Profitability Index = PV of Cash Inflows Investment

26 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 = 0 variation of NPV considers the time value of money

27 Level III Business Decision Buy #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

28 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 precise to include risk factors in the overall assessment, a single index value for all risks taken together should be created this risk index value can then be considered in a scoring model

29 Level III Business Decision The result? Vendor bids rejected and some accepted. preparation of contract negotiation of contract signing/awarding of contract

30 What is a Project Charter? A project charter is a mission statement that clearly defines the project The chartering process should help build commitment to the project objectives The process of developing the project charter is as important as the charter itself Project chartering needs to be a group activity because it will help to build the project team

31 Purpose of a Project Charter To establish a shared understanding of project scope and objectives To gain commitment to the project To communicate objectives to those outside the project team To provide measurable goals and objectives

32 Characteristics of a Good Project Charter Should be clear Should be concise—no more than 3 pages Should be developed by consensus Should contain realistic/achievable objectives Should contain an assessment of project risk

33 Contents of a Good Project Charter Short description of end-product and scope definition Primary objective Secondary objective(s) Completion date (target or constraint) Total cost (target or constraint) Key constraints and assumptions Key project personnel

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