1. www.ischool.drexel.edu INFO 631 Prof. Glenn Booker Week 1 – Chapters 1-3 1INFO631 Week 1

2. www.ischool.drexel.edu Introduction and Foundations Chapters 1-2 INFO631 Week 12 Slides adapted from Steve Tockey – Return on Software

3. www.ischool.drexel.edu Goals Harsh realities Science vs. engineering Relevance of engineering economy to software Business on purpose Roadmap Introduction and Foundations Outline 3INFO631 Week 1

4. www.ischool.drexel.edu Goals Understand the importance of addressing the business consequences of your technical decisions Know, and be able to use, sane and rational decision-making techniques for your technical decisions Understand the implications of “software engineering” 4INFO631 Week 1

5. www.ischool.drexel.edu Harsh Realities 23% of software projects fail to deliver any working software at all Of projects that do deliver, they average –63% late –45% over budget –67% of the features and functions delivered 40% of commercial applications of computers have been uneconomical Reference: [Standish01], [Kidder81] 5INFO631 Week 1

6. www.ischool.drexel.edu Harsh Realities (cont) Annual software budget in the US is about $275 billion –$63 billion/year in cancelled projects alone –As much as $149 billion/year in net money- losing projects Reference: [Standish01] 6INFO631 Week 1

7. www.ischool.drexel.edu The Cost of Bad Decisions Poor software project performance can almost always be traced back to bad decisions (whether accidental or intentional), either by the customer, the development staff, or both –Which projects to do –Not getting good requirements –Not giving good requirements –Using inappropriate technology –Choosing the wrong design or architecture –Not giving the project team adequate resources –Not planning and/or managing the project –Not paying attention to quality –… 7INFO631 Week 1

8. www.ischool.drexel.edu Not a New Issue “Railway location obviously is a field in which many alternatives are likely to be available. Nevertheless, Wellington observed what seemed to him to be an almost complete disregard by many locating engineers of the influence of their decisions on the prospective costs and revenues of the railways. In his first edition (1877) he said of railway location, “And yet there is no field of professional labor in which a limited amount of modest incompetency at $150 per month can set so many picks and shovels and locomotives at work to no purpose whatsoever” Reference: [Grant90] 8INFO631 Week 1

9. www.ischool.drexel.edu Not a New Topic Recognized engineering degree programs usually require a course in Engineering Economy –Applied micro-economics Fundamental question of software professionals –“Is it in the organization’s best interest to invest its limited resources in this technical endeavor, or would the same investment produce a higher return elsewhere?” 9INFO631 Week 1

10. www.ischool.drexel.edu Science vs. Engineering Definition: Science “a department of systematized knowledge as an object of study; knowledge or a system of knowledge covering general truths or the operation of general laws esp. as observed and tested through the scientific method” Definition: Engineering “the profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind” Reference: [Webster94], [ABET00] 10INFO631 Week 1

11. www.ischool.drexel.edu Science vs. Engineering (cont) Demarco defines engineering as: –“Finding the balance between what is technically feasible and what is economically acceptable” Wellington defines engineering as: “The art of doing that well with one dollar which any bungler can do with two” In general –Science – pursuit of knowledge –Engineering – application of that knowledge Reference: [DeGarmo93], [Wellington1887] 11INFO631 Week 1

12. www.ischool.drexel.edu Science vs. Engineering (cont) So relationship between science and engineering is: Engineering = Scientific Theory + Practice + Engineering Economy 12INFO631 Week 1

13. www.ischool.drexel.edu Economics: the Science of Choice “… software economics has often been misconceived as the means of estimating the cost of programming projects. But economics is primarily a science of choice, and software economics should provide methods and models for analyzing the choices that software projects must make” Reference: [Levy87] 13INFO631 Week 1

14. www.ischool.drexel.edu Software Engineering vs. Computer Science Software Engineering = Computer Science + Practice + Engineering Economy 14INFO631 Week 1

15. www.ischool.drexel.edu Software Engineering vs. Computer Science (cont) Computer Science “a department of systematized knowledge about computing as an object of study; a system of knowledge covering general truths or the operation of general laws of computing esp. as observed and tested through the scientific method” Software Engineering “the profession in which a knowledge of the mathematical and computing sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, computing systems for the benefit of mankind” 15INFO631 Week 1

16. www.ischool.drexel.edu Relevance of Engineering Economy to Software Every professional developer is affiliated with some public or private enterprise Every day, we make decisions that impact that enterprise –Staffing –Internally-developed software –Leased or purchased software –Operation of software systems As professionals, we had better be concerned with the impacts of our decisions –“… a limited amount of modest incompetency …” 16INFO631 Week 1

17. www.ischool.drexel.edu Business on Purpose (Ch-2) Why are companies in business? Because it’s fun? Educational? A way to have a positive impact on society? No: companies are in business to make a profit for the owners Where does the money come from? Where does the money go? 17INFO631 Week 1

18. www.ischool.drexel.edu Where Does the Money Go? 18INFO631 Week 1

19. www.ischool.drexel.edu PeopleSoft, 2003 $2,267M (100.0%) $868M (38.3%) $117M (5.2%) -$22M (-0.9%) $139M (6.1%) $85M (3.8%) $0M (0.0%) $85M (3.8%) $1,282M (56.6%) $53M (2.3%) 19INFO631 Week 1

20. www.ischool.drexel.edu Profit Margin A key indicator of the health of a company Typically 2% to 10% How expensive is software? –Full Time Equivalent (FTE) is usually between $150k and $300k (in year 2002) Fully burdened salary 20INFO631 Week 1

21. www.ischool.drexel.edu Decision-Making in For-Profit Organizations “All other things being equal, the role of the technical person in a for-profit company should be to choose—from the set of technically possible solutions to a problem—the solution that maximizes the organization’s objective: profit” 21INFO631 Week 1

22. www.ischool.drexel.edu Decision-Making in Not-For-Profit Organizations “All other things being equal, the role of a technical person in a not-for-profit organization should be to choose—from the set of technically possible solutions to a problem—the solution that maximizes the organization’s objective: providing the greatest benefit at the least cost” 22INFO631 Week 1

23. www.ischool.drexel.edu Decision-Making in Your Own Personal Finances You probably don’t have an unlimited supply of money –You work hard for the limited income you get –You want to get the most you can out of it 23INFO631 Week 1

24. www.ischool.drexel.edu Key Points Software projects don’t perform very well Science and engineering are related but distinct Companies don’t have a lot of money to play around with –Neither do you 24INFO631 Week 1

25. www.ischool.drexel.edu Fundamental Concepts of Business Decisions Chapter 3 INFO631 Week 125 Slides adapted from Steve Tockey – Return on Software

26. www.ischool.drexel.edu Concepts to align technical decisions with business decisions. –Proposal –Cash-flow instance –Cash-flow stream –Cash-flow diagram –Developing cash-flow streams –Business case for agile projects Fundamental Concepts of Business Decisions Outline 26INFO631 Week 1

27. www.ischool.drexel.edu Proposal A single, separate option that’s being considered Examples –Do project Alpha –Enhance product Beta –Use the NIFF algorithm in the Pack module –Use a doubly linked-list data structure for messages 27INFO631 Week 1

28. www.ischool.drexel.edu Proposal Con’t Each proposal represents a binary choice –Carry out or –Reject Purpose of decision making is to –Figure out, given current business circumstances, which should be carried out and which ones shouldn’t. Each proposal should be evaluated from a business perspective 28INFO631 Week 1

29. www.ischool.drexel.edu Cash-Flow Cash-flow describes the business perspective of a proposal Cash-flow instance –A specific amount of money flowing into or out of the organization at a specific time as a direct result of a proposal Dev staff payroll in 3 rd month of the Beta project Separate payment on a loan Cash-flow stream –The set of cash-flow instances, over time, which would be caused by carrying out some given proposal Basically the complete financial picture of a proposal. The financial view of the Beta project 29INFO631 Week 1

30. www.ischool.drexel.edu Categories of Cash Flow Initial investment –One-time, non-recurring costs associated with starting up a proposal Buying a new development environment so we can enhance product Beta Operating and maintenance costs –Costs occurring after the proposal is started that continue through its retirement Maintenance fees on the development environment for the Beta enhancement Sales income –Direct income generated by the proposal Net increased sales on the enhanced Beta product Cost avoidance –Indirect income, caused by a reduction in costs instead of an increase in sales Reduced software maintenance costs on the enhanced Beta product Salvage value –Recoverable value in assets at the end of the proposal What we could sell the development environment for at the end of the Beta project 30INFO631 Week 1

31. www.ischool.drexel.edu Cash-Flow Diagram Picture of a cash-flow stream –Gives quick overview of financial picture Characteristics –Time runs left to right –Income shown above time-line –Expense shown below time-line –Arrow length proportional to $ amount –By convention, net cash-flow per period shown –Initial investment shown “at the end of period zero” 31INFO631 Week 1

32. www.ischool.drexel.edu Example Cash-Flow Diagram Time  Initial investment Income Expense 32INFO631 Week 1

33. www.ischool.drexel.edu Cash-Flow Diagram Con’t Cash flow stream (cash-flow diagram) –Based on the specific perspective of the organization –Changing perspective will change the cash flow stream 33INFO631 Week 1

34. www.ischool.drexel.edu Cash-Flow Diagram Perspectives 34INFO631 Week 1

35. www.ischool.drexel.edu Developing Cash-Flow Streams The Work Breakdown Structure (WBS) is a useful tool –Typically a hierarchical decomposition of the proposal –Decompose only until reasonable timing and cost estimates can be made –All work necessary to complete the proposal needs to be included –Only work necessary to complete the proposal should be included –Income needs to be represented See: [PMI02], [DoD98], or [Fleming00] 35INFO631 Week 1

36. www.ischool.drexel.edu A Simple WBS Example My Software Project –Construct software [Big task #1] Requirements [Smaller task #1.1] –Part A Requirements [Tiny task #1.1.1] –Part B Requirements [Tiny task #1.1.2] –... Design [Smaller task #1.2] –Part A Design [Tiny task #1.2.1] –… Construction [Smaller task #1.3] –Part A Code [Tiny task #1.3.1] –… –Software quality assurance [Big Task #2] Peer reviews [Smaller task #2.1] Testing [Smaller task #2.2]... 36INFO631 Week 1

37. www.ischool.drexel.edu An Example Project: Automated Test Equipment (ATE) One person-year = $125k Initial investment –$300k for test hardware and development equipment (Year 0) –20 person-years of software development staff (Year 1) –10 person-years of software development staff (Year 2) Operating and maintenance costs –$30k per year for test hardware and dev equipment (Years 1-10) –5 person-years of software maintenance staff (Years 3-10) Sales income –None Cost avoidance –$1.3 million in reduced factory staffing (Years 2-10) Salvage value –Negligible 37INFO631 Week 1

38. www.ischool.drexel.edu Automated Test Equipment (cont) Year Dev Staff Equipment O & M Savings Total 0 0 -$300K 0 0 -$300K 1 -$2.5M 0 -$30K 0 -$2.53M 2 -$1.25M 0 -$30K $1.3M $20K 3 -$625K 0 -$30K $1.3M $645K 4 -$625K 0 -$30K $1.3M $645K 5 -$625K 0 -$30K $1.3M $645K 6 -$625K 0 -$30K $1.3M $645K 7 -$625K 0 -$30K $1.3M $645K 8 -$625K 0 -$30K $1.3M $645K 9 -$625K 0 -$30K $1.3M $645K 10 -$625K 0 -$30K $1.3M $645K 38INFO631 Week 1

39. www.ischool.drexel.edu Cash-Flow Diagram for ATE -$300K -$2.53M $20K $645K 01 2345678910 39INFO631 Week 1

40. www.ischool.drexel.edu Business Case for Agile Projects Agile methods assume the project’s goals and/or requirements are inherently unstable –How can you build a WBS? An Agile project’s business case involves estimating how much business value can be returned (and when it’s returned) given the level of investment the customer is willing to make 40INFO631 Week 1

41. www.ischool.drexel.edu Key Points A proposal is a single, separate option that’s being considered A cash-flow instance is an amount of money at a given time caused by a proposal A cash-flow stream is the financial view of a proposal A cash-flow diagram is a picture of a cash-flow stream The WBS can be a useful tool for developing cash-flow streams The business case for agile projects is different 41INFO631 Week 1