1. Jump to first page 1 4. Cost Estimates n The aggregate cost of work units described in the work breakdown structure. n The work unit approach makes cost estimating more manageable. n There are situations where an overall cost of a project is required for the initial decision and before WBS is done.

2. Jump to first page 2 4. Costs n Tangible – easier to estimate. F E.g., routers, switches, connectors, cables, servers, and human resources. n Intangible – difficult to evaluate. F E.g., cost benefit analysis of outsourcing or offshoring information system function in terms of security, privacy, know how, innovation, etc.

3. Jump to first page 3 4. Costs n Direct – associated with a work unit F E.g., hours worked on a unit or the portion of management time (direct overhead costs) used for a work unit. n Indirect – difficult to assign F E.g., promotional expenses for the entire organization; difficult to prorate portion of this cost to a work unit or a project.

4. Jump to first page 4 4. Payback analysis n Payback period – the length of time that it takes to recover the amount of money invested in the technology. n Payback occurs when the cumulative benefits are greater than cumulative costs. n For short-term investors, the payback period may be only a couple of years.

5. Jump to first page 5 4. Payback analysis for two projects Project AYr1Yr2Yr3Yr4Yr5Yr6Total Cost20,000 10,000 5,000 70,000 Revenue0030,00040,00030,00020,000120,000 Difference(20,000) 20,00030,00025,00015,00050,000 Cumulative(20,000)(40,000)(20,000)10,00035,00050,000 Project BYr1Yr2Yr3Yr4Yr5Yr6Total Cost25,000 15,00010,0005,000 85,000 Revenue10,00015,00045,00030,00020,00010,000120,000 Difference(15,000)(10,000)30,00020,00015,0005,00045,000 Cumulative(15,000)(25,000)5,00025,00040,00045,000

6. Jump to first page 6 4. Net Present Value n The formula for calculating NPV is: NPV = ∑ t=1 …n A/(1+r) t where t represents the year in which cash flow occurs, A represents the amount of cash flow for that year, and r represents the discount rate. n Using a specified rate of interest, this formula sums up the present value for the number of years that estimates have been made.

7. Jump to first page 7 4. NPV example n The present value of $3,000 cost projected for the third year of a project with an interest rate of 15% is $1972.50; calculated as: $3000 * 1/(1+0.15) 3 or $3000 * 0.6575 = $1972.50 n If the projected revenue for the same project in the third year is $2,000 then the present value will be $1512.20; calculated as: $2000 * 1/(1+0.15) 3 or $2000 * 0.6575 = $1512.30

8. Jump to first page 8 4. Discount factors at 15% YearFormulaDiscount factor 11/(1+0.15) 1 0.8696 21/(1+0.15) 2 0.7561 31/(1+0.15) 3 0.6575 41/(1+0.15) 4 0.5718 51/(1+0.15) 5 0.4972 61/(1+0.15) 6 0.4323

9. Jump to first page 9 4. Payback analysis for Project A Project AYr1Yr2Yr3Yr4Yr5Yr6Total Cost20,000 10,000 5,000 70,000 Revenue0030,00040,00030,00020,000120,000 Difference(20,000) 20,00030,00025,00015,00050,000 Cumulative(20,000)(40,000)(20,000)10,00035,00050,000

10. Jump to first page 10 4. NPV for Project A n Year 1 =.8696 * ($20,000)= ($17,392) n Year 2 =.7561 * ($20,000)= ($15,122) n Year 3 =.6575 * $20,000= $13,150 n Year 4 =.5718 * $30,000= $17,154 n Year 5 =.4972 * $25,000= $12,430 n Year 6 =.4323 * $15,000= $6,485 NPV (Project A) = ∑ t=1 …n A/(1+r) t = $16,705

11. Jump to first page 11 4. ROI analysis for Project A YearFactorRevenueDisc. Rev.CostDisc. Cost 10.8696$0 ($20,000)($17,392) 20.7561$0 ($20,000)($15,122) 30.6575$30,000$19,725($10,000)($6,575) 40.5718$40,000$22,872($10,000)($5,718) 50.4972$30,000$14,916($5,000)($2,486) 60.4323$20,000$8,646($5,000)($2,162) Total$120,000$66,159($70,000)($49,455)

12. Jump to first page 12 4. ROI analysis for Project B YearFactorRevenueDisc. Rev.CostDisc. Cost 10.8696$10,000$8,696($25,000)($21,740) 20.7561$15,000$11,342($25,000)($18,903) 30.6575$45,000$29,588($15,000)($9,863) 40.5718$30,000$17,154($10,000)($5,718) 50.4972$20,000$9,944($5,000)($2,486) 60.4323$10,000$4,323($5,000)($2,162) Total$120,000$81,047($85,000)($60,872)

13. Jump to first page 13 4. ROI – Projects A & B n ROI for Project A: ($66,159 – $49,455)/49,455 * 100 = 33.8% n ROI for Project B: ($81,047 – $60,872)/60,872 * 100 = 33.1%

14. Jump to first page 14 4. Caution n There is a risk in using a single measure to evaluate the potential contribution of a project. n Many organizations put a limit on their project payback period. n Many would use a minimum rate of return on investment. n There are pros and cons to having rigid standards. n IT investment is treated differently.

15. Jump to first page 15 4. Sources of estimates n Experience – individuals within the organization. u this method considers workplace culture, talent pool, interorganizational relations, and HR policies. u Overestimation? u Underestimation? u ‘Safe’ estimates?

16. Jump to first page 16 4. Sources of estimates n Documentation – archival information from previous projects. u Relatively current? u Similar projects? u Free from bias? Politics? u Based on actual recorded numbers. u Adjustment may be necessary if changes have occurred since the document was prepared – new laws, new equipment, change in working hours, and holidays.

17. Jump to first page 17 4. Sources of estimates n Expert opinion – widely used and includes a broad pool of internal and external experts. u Similar to experience in pros and cons u Used for new and innovative systems where little record exists. u More formalized and expensive. u May require visits by external experts and sharing of information.

18. Jump to first page 18 4. Considerations n A combination of internal and external estimates, while costly, has advantages. n Team members should be involved with providing estimates but the project manager must be aware of biases. n Provide supporting material on methods of estimation. n Establish guidelines for cost and time estimation.

19. Jump to first page 19 4. Considerations n Based on history and experience, project managers may adjust estimates given by individuals. n This, in turn, will result in further adjustment (overestimation or underestimation) by those providing estimates. n This cycle creates ‘game play’ and a non- productive environment. n It may be necessary to work out some kind of reward for reliable and accurate estimates.

20. Jump to first page 20 4. Hints n Use work units and bottom-up approach. n Define clearly work units and tasks. n Avoid memory recollection. n Involve team members to improve commitments and match tasks and skills. n Obtain multiple estimates: u The best case scenario. u The most probable scenario. u The worst case scenario. n Assign weights to these estimates.

21. Jump to first page 21 4. Multiple estimates n Use average scores and variance. n Provide contingency resources for estimates with large variance. n Calculate ‘upper limit’ and ‘lower limit’ measures for project duration. n Example: A project is estimated to take 165 hours to complete with a standard deviation of 29 hours. Assuming + and – 3 standard deviations, we will have:

22. Jump to first page 22 4. Multiple estimates n The project upper limit: (3 * 29 + 165) = 252 hours n The project lower limit: (-3 * 29 + 165) = 78 hours n Upper limit as % of estimate: (252/165)100 = 152.73% n Lower limit as % of estimate: (78/165)100 = 47.27% There is a high probability that the project will be complete within 78 to 252 hours. The project completion time may be over extended or under extended by about 53%.

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24. Jump to first page 24 4. Phase estimating n Sometimes, due to uncertainty, estimates are feasible for initial phase only. n Only rough estimates of subsequent phases are initially feasible. n Project development life cycle (initiation, planning, development, implementation, closure) can be the base for phase estimating. n Project owners and sponsors must commit to a project with incomplete information about cost and time – not always an easy situation.

25. Jump to first page 25 4. Considerations n Estimates are used to request funding, make decisions, schedule, negotiate, set goals, evaluate performance, etc. n Events happen, technology advances, priorities change, and biases creep in. n Credibility of the estimates and those preparing them must be considered. n Methods, their appropriateness, strengths, and weaknesses must be explained. n Assume ‘normal conditions’ – free from extreme case assumptions.

26. Jump to first page 26 4. Contingency plan n For out-of-ordinary situations. n Extreme or extraordinary situations. n Funds must be appropriated at the planning phase of the project development life cycle. n Document and communicate contingency situations. n Such funds are not directly accessible by the project manager. n Simply adding a margin to estimates must be avoided; suggests poor planning, interpreted as add-on slush money by watchful sponsors.

27. Jump to first page 27 4. Risk analysis n Appropriate where there is uncertainty regarding activity duration. n Leads to developing alternative responses. n Includes prediction or likelihood of happening. n Includes estimate of risk impact n Depending on the nature and size of a project, it could be more or less extensive, detailed, or formalized. n Leads to a change management process.

28. Jump to first page 28 4. Change management n Change is beneficial - innovative ideas or suggestions are often made by team members. n A change management committee can facilitate and encourage change proposals. n With the approval of management, additional resources can be provided through contingency funds.

29. Jump to first page 29 4. Change management n Membership includes stakeholders from the entire organization. Change management committee must: u identify possible risks u predict the likelihood of risks happening u estimate risks impact u communicate risks to stakeholders u prepare alternative response.

30. Jump to first page 30 4. Change management n Changes must be consistent with the overall goals and objectives of the organization and the broad scope of the project. n Responses to change requests must be timely, especially for time-sensitive changes. n Proposals to drastically change a project may replace the project with a new one.

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32. Jump to first page 32 4. Discussion question n Assume you are working for an organization that is keen to invest in information technology to improve employee innovation, productivity, customer satisfaction, and management control. However, top management in your organization has a short-term payback expectation for their technology investment. Explain to the leadership of your organization why such a policy may be dysfunctional in the long term.

33. Jump to first page 33 4. Discussion question n This chapter argues that organizational game play and politics are a function of management decision-making style. Do you agree with this statement? Why? n Is it possible to totally eliminate organizational politics?

34. Jump to first page 34 4. Discussion question n Assume you are an IT project manager. How would you deal with issues of politics and game play that affect time and cost estimates for your projects?

35. Jump to first page 35 4. Discussion question n Would your reaction be the same overestimation and underestimation of cost and time? n When do you think ‘overestimation’ happens? ‘Underestimation’?

36. Jump to first page 36 Work Package Estimates

37. Jump to first page 37 4. In-class assignment n Do exercise 4.10-c in Chapter 4 (payback analysis, NPV, and ROI for two projects).