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Capital Planning and Investment Management and Control in Information Technology

Alan McSweeney

Capital Planning and Investment Management and Control in Information Technology Alan McSweeney
Capital Planning and Investment Management and Control in Information Technology Alan McSweeney
Objectives • To provide information on a structured approach to Capital Planning and Investment Control
Objectives • To provide information on a structured approach to Capital Planning and Investment Control

Objectives

To provide information on a structured approach to Capital Planning and Investment Control in Information Technology

February 3, 2010

2

Agenda • Capital Planning and Investment Control in Information Technology (CPIC-IT) • IT Investment Management
Agenda • Capital Planning and Investment Control in Information Technology (CPIC-IT) • IT Investment Management

Agenda

Capital Planning and Investment Control in Information Technology (CPIC-IT)

IT Investment Management (ITIM)

Cost Estimation

Cost Assessment Team

IT Investment Management Maturity

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Capital Planning and Investment Control (CPIC-IT) • CPIC-IT is a systematic process logical IT investments
Capital Planning and Investment Control (CPIC-IT) • CPIC-IT is a systematic process logical IT investments

Capital Planning and Investment Control (CPIC-IT)

CPIC-IT is a systematic process logical IT investments in new systems and maintaining and operating existing systems

CPIC-IT is a process for effective decision-making that ensures IT investments integrate strategic planning, budgeting, procurement, and the management of IT in support of organisation needs

Determines if a given investment in IT is justified

Ensures IT investment decisions support the needs of the organisation, minmise risks and maximise returns throughout the investment lifecycle

CPIC-IT is a structured process for managing the risks and returns associated with IT investments

CPIC-IT is designed to ensure that IT investments are implemented at acceptable costs, within reasonable and expected timeframes, and contribute to tangible, observable improvements in organisation performance

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IT Investment Issues • IT is a key enabler of organisational strategy • Many organisations
IT Investment Issues • IT is a key enabler of organisational strategy • Many organisations

IT Investment Issues

IT is a key enabler of organisational strategy

Many organisations do not know exactly how much is spent on IT

Many organisations cannot accurately characterise IT assets

In many organisations, IT accounts for 50% or more of capital expenditure

IT architecture is perceived as not providing the adaptability that is needed

IT is seen as a friction point for change and not enough of an enabler

Organisations must implement processes for managing IT investment both for the value they deliver as well as their cost

There has been significant waste of IT investments and unused IT systems due to lack of investment validation

Over 80% of projects do not come close to their original goals of lifecycle costs

More expensive to implement and/or operate than initially stated

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Questions on IT Investments • Is your organisation’s IT portfolio a manifestation of your organisation’s
Questions on IT Investments • Is your organisation’s IT portfolio a manifestation of your organisation’s

Questions on IT Investments

Is your organisation’s IT portfolio a manifestation of your organisation’s mission and strategy?

Can you identify which IT projects are interdependent with adjacent people and process initiatives?

Do you have a rigorous IT investment selection process that is devoid of emotion and politics?

Do you account for multiple risk categories - technical, business, project, customer - when evaluating investment proposals?

Is IT operating expense in line with organisation growth?

Can you identify which IT investments contribute to true competitive advantage or mission achievement?

Do IT investment decision making methods mesh with the decision making framework of organisation?

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What the Business Wants From IT • Business Requirement • Corresponding IT Function Deliver IT
What the Business Wants From IT • Business Requirement • Corresponding IT Function Deliver IT

What the Business Wants From IT

Business Requirement

Corresponding IT Function

Deliver IT services consistently without fuss Maintain the momentum of the business through existing business
Deliver IT services
consistently without
fuss
Maintain the
momentum of the
business through
existing business
systems
Get involved in business improvement Contribute to improving business results
Get involved in
business
improvement
Contribute to
improving business
results
Provide the business with appropriate information and technology leadership Provide IT direction and management that
Provide the business
with appropriate
information and
technology leadership
Provide IT direction
and management
that is aligned to the
needs of the business

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Disconnect Between What the Business Wants and What IT Delivers What the Business Wants What
Disconnect Between What the Business Wants and What IT Delivers What the Business Wants What

Disconnect Between What the Business Wants and What IT Delivers

What the Business Wants

What the Business Gets

5% 15% 35% 25% 70% 50%
5%
15%
35%
25%
70%
50%

Maintain The Momentum Of The Business Through Existing Business SystemsWants What the Business Gets 5% 15% 35% 25% 70% 50% Contribute To Improving Business Results

Contribute To Improving Business ResultsMomentum Of The Business Through Existing Business Systems Provide It Direction And Management That Is Aligned

Provide It Direction And Management That Is Aligned To The Needs Of The BusinessBusiness Systems Contribute To Improving Business Results February 3, 2010 Maintain The Momentum Of The Business

February 3, 2010

Maintain The Momentum Of The Business Through Existing Business SystemsIs Aligned To The Needs Of The Business February 3, 2010 Contribute To Improving Business Results

Contribute To Improving Business ResultsMomentum Of The Business Through Existing Business Systems Provide It Direction And Management That Is Aligned

Provide It Direction And Management That Is Aligned To The Needs Of The Business3, 2010 Maintain The Momentum Of The Business Through Existing Business Systems Contribute To Improving Business

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IT Value Management is a Key Topic for IT Do Not Measure Business Value From
IT Value Management is a Key Topic for IT Do Not Measure Business Value From

IT Value Management is a Key Topic for IT

Do Not Measure Business Value From IT Investments

Metrics Do Not Adequately Capture Business Value

Executives Skeptical Of ROI From IT

Find It Difficult To Calculate ROI

CEO/CFO Demanding Better Ways To Demonstrate Value

40% 45% 52% 62% 71% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
40%
45%
52%
62%
71%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%

Results of managing IT for business value

Budget flexibility coupled with strategic IT alignment leads to 50% greater IT payoffs

Improving management practices alongside IT investment drives 20% higher IT yields

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Core Elements of IT Value Management Managing IT Like a Business Managing the IT Budget
Core Elements of IT Value Management Managing IT Like a Business Managing the IT Budget

Core Elements of IT Value Management

Managing IT Like a Business Managing the IT Budget Managing the IT Capability Managing IT
Managing IT Like a
Business
Managing
the
IT Budget
Managing the IT
Capability
Managing IT for
Business Value

An effective approach to Capital Planning and Investment Control is an essential component of IT Value Management

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IT Investment Core Requirements • Determine the scale, scope, and sources of funding for IT
IT Investment Core Requirements • Determine the scale, scope, and sources of funding for IT

IT Investment Core Requirements

Determine the scale, scope, and sources of funding for IT

Assign financial resources to competing activities within the IT portfolio

Establish a balance between capital expenditure (new projects) and operating expenditure (running systems delivered by past projects)

Optimise the total cost of ownership

Manage IT portfolios for value and not just cost

IT needs to implement a process for justifying its costs and be seen to be taking these steps

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W 5 H • Who - Who makes the decisions? • Why - Why is
W 5 H • Who - Who makes the decisions? • Why - Why is

W 5 H

Who - Who makes the decisions?

Why - Why is the funding sought, how is it aligned to the needs of the business and what benefits are anticipated?

What - Precisely what IT initiatives and business initiatives are to be funded?

When - When is the funding required and when are benefits expected to flow?

Where - From which source is the funding to be derived?

How - How are funding decisions to be made?

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IT Investment Management • Aligns IT Investments to organisation strategy (scoring) • Prioritises investments
IT Investment Management • Aligns IT Investments to organisation strategy (scoring) • Prioritises investments

IT Investment Management

Aligns IT Investments to organisation strategy (scoring)

Prioritises investments (ranking)

Provides strategic criteria for investment analysis

Conduct annual IT portfolio management reviews

Provides recommendation to stop, slow, maintain or accelerate program funding

Identifies redundant/inefficient systems

Integrates IT architectures within investments

Ensures compliance with funding standards

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Characteristics of Credible Cost Estimates • Clear identification of requirements of the ultimate deliverable •
Characteristics of Credible Cost Estimates • Clear identification of requirements of the ultimate deliverable •

Characteristics of Credible Cost Estimates

Clear identification of requirements of the ultimate deliverable

Broad participation in preparing estimates

Availability of valid data for performing estimates – historical, experience, benchmarks

Standardised and comprehensive estimate structure that includes all possible sources of cost

Provision for uncertainties – include known costs explicitly and allow for unknown costs

Recognition of inflation

Recognition of excluded costs

Independent review of estimates for completeness and realism

Revision of estimates for significant changes in requirements

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Challenges of Developing Good Cost Estimates • Requires detailed, stable, agreed requirements • Agreed assumptions
Challenges of Developing Good Cost Estimates • Requires detailed, stable, agreed requirements • Agreed assumptions

Challenges of Developing Good Cost Estimates

Requires detailed, stable, agreed requirements

Agreed assumptions

Access to detailed documentation and historical data for comparison

Trained and experienced analysts

Risk and uncertainty analysis

Identification of a range of confidence levels

Adequate contingency and management reserves

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Reasons for Good and Bad Cost Estimates Ineffective Risk and Uncertainty Analysis Unfamiliar Unreasonable
Reasons for Good and Bad Cost Estimates Ineffective Risk and Uncertainty Analysis Unfamiliar Unreasonable

Reasons for Good and Bad Cost Estimates

Ineffective Risk and Uncertainty Analysis Unfamiliar Unreasonable Technology or Problems Getting Access to Data
Ineffective
Risk
and
Uncertainty
Analysis
Unfamiliar
Unreasonable
Technology
or
Problems Getting
Access to Data
Project
Baseline
First-Time Use
Effective
Risk and
Unrealistic Data
or
Unrealistic
Uncertainty
Overoptimism
Unreliable
Assumptions
Analysis
Identification
of a
and Detailed
Trained
and
or Limited
Untrained
Documentation
Range of
Experienced
Comparison
Data
Inexperienced
Historical
New Processes
Confidence
Levels
Analysts
No Available
Analysts and
Data
Adequate
Detailed,
Stable,
Contingency
and
Agreed
Complex
Project
Unrealistic
Project
Agreed
Management
Assumptions
Project Instability
Savings
Requirements
or Technology
Reserves

Lost of reasons for and causes of inaccurate cost estimates

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Sources of Risk and Uncertainty in Estimating Costs • Lack of understanding of the project
Sources of Risk and Uncertainty in Estimating Costs • Lack of understanding of the project

Sources of Risk and Uncertainty in Estimating Costs

Lack of understanding of the project requirements

Shortcomings of human language and differing interpretations of meaning of project

Behaviour of parties involved in the cost estimation process

Haste

Deception

Poor cost estimating and pricing practices

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Specific Risks • Sizing and Technology − Overly optimistic developers − Poor assumptions on the
Specific Risks • Sizing and Technology − Overly optimistic developers − Poor assumptions on the

Specific Risks

Sizing and Technology

Overly optimistic developers

Poor assumptions on the use of reused code

Vague or incomplete requirements

Not planning for additional effort associated with packages – integration, testing

Complexity

Tools

Applications: software purpose and reliability

Hardware limitations

Number of modules affecting integration effort

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Capability

Mixed skills of team

Optimistic assumption on development tools

Optimistic assumption on productivity

Geographically dispersed team making communication and coordination more difficult

Management

Management’s dictating an unrealistic schedule

Incorporating a new method, language, tool or process for the first time

Not handling creeping requirements and change proactively

Inadequate quality control, causing delays in fixing unexpected defects

Unanticipated risks associated with package software upgrades and lack of support

18

Importance of System Requirements and Solution Lifecycle Costs • System requirements drive costs, both implementation
Importance of System Requirements and Solution Lifecycle Costs • System requirements drive costs, both implementation

Importance of System Requirements and Solution Lifecycle Costs

System requirements drive costs, both implementation and operation

A factor present in every successful project and absent in every unsuccessful project is sufficient attention to requirements

Half of all bugs can be traced to requirement errors

Fixing these errors consumes 75% of project rework costs

25%- 40% percent of all spending on projects is wasted as a result of re-work

66% of software projects do not finish on time or on budget

56% of project defects originate in the requirements phase of the project

Completed projects have only 52% of proposed functionality

75-80% of IT project failures are the result of requirements problems

The average project exceeds its planned schedule by 120%

53% of projects will cost 189% of their original estimate

30% of projects are cancelled before completion

50% of projects are rolled back out of production

The typical project expends least effort on analysis where most errors originate and whose errors cost most to fix

Requirements errors cost the most and that poor requirements are the main cause of project failure

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Requirements Drive Project Costs 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% Development and Implementation Starts 40.0%
Requirements Drive Project Costs 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% Development and Implementation Starts 40.0%

Requirements Drive Project Costs

100.0% 90.0% 80.0% 70.0% 60.0% 50.0% Development and Implementation Starts 40.0% Design Finalised 30.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
Development and
Implementation Starts
40.0%
Design Finalised
30.0%
Requirements
Defined
20.0%
and Agreed
10.0%
0.0%
Costs Committed and Spent
20.0% and Agreed 10.0% 0.0% Costs Committed and Spent Project Timescale Costs Determined by Decisions on

Project Timescale

Costs Determined by Decisions on Requirements and Design

February 3, 2010

by Decisions on Requirements and Design February 3, 2010 Actual Money Spent • While minimal costs

Actual Money Spent

While minimal costs have actually been spent at the requirements phase of the entire project process, approximately 80% or more of total life cycle costs have already been determined at this stage

Need to get requirements right from the outset to control costs effectively

20

Aligning the Solutions Being Delivered • Need more than project management − Not the complete
Aligning the Solutions Being Delivered • Need more than project management − Not the complete

Aligning the Solutions Being Delivered

Need more than project management

Not the complete picture

Cannot treat project management in isolation

Need to ensure that the solution being managed meets business requirements

Need to ensure business requirements are captured

Need to ensure that solutions are designed to deliver business requirements and comply with organisation’s enterprise architecture

Getting requirements right is essential for effective IT investment management

Fundamentally the project exists to manage the delivery of the solution that has been designed to meet business requirements that assist with delivery of the business plan

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Complete Picture of Project Selection and Delivery • Need to consider all aspects of project
Complete Picture of Project Selection and Delivery • Need to consider all aspects of project

Complete Picture of Project Selection and Delivery

Need to consider all aspects of project selection and delivery:

What the business wants (requirements)

What the business gets (solution that delivers on requirements)

Delivered according to business priority (project portfolio management)

Implemented properly (project management)

Cannot take an individual view without risking problems

Need to emphasise the importance of the solution whole lifecycle and the interdependence of the roles

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Lessons Learned From Large Systems Implementation 80 % More attention on process optimisation 65 %
Lessons Learned From Large Systems Implementation 80 % More attention on process optimisation 65 %

Lessons Learned From Large Systems Implementation

80 %

More attention on process optimisation

Implementation 80 % More attention on process optimisation 65 % Align systematically to company goals  
Implementation 80 % More attention on process optimisation 65 % Align systematically to company goals  

65

%

Align systematically to company goals

 

60

%

Pay more attention to understanding the subject area spanned

55

% Implementation of a management information system as part of scope

50

%

Outsource project management of the project to a third party

45

%

Increase investment in training

 

35

%

Greater employees involvement

 

35

%

Enforce changes more courageously

 

30

%

Identify and capture proof of benefits and saving as part of scope

20

%

Avoid big-bang implementations

 
proof of benefits and saving as part of scope 20 % Avoid big-bang implementations   February
proof of benefits and saving as part of scope 20 % Avoid big-bang implementations   February

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Types of Cost Estimates • Life Cycle Cost Estimate (LCCE) - includes independent cost estimates,
Types of Cost Estimates • Life Cycle Cost Estimate (LCCE) - includes independent cost estimates,

Types of Cost Estimates

Life Cycle Cost Estimate (LCCE) - includes independent cost estimates, independent cost assessments and total ownership costs

Encompasses all past (or sunk), present and future costs for every aspect of the program, regardless of funding source

Business Case Analysis (BCA) - includes an analysis of alternatives and/or economic analyses

Cost benefit or comparative analysis that presents facts and supporting details among competing alternatives

Includes life-cycle costs from LCCE and also quantifiable and unquantifiable benefits

Rough Order of Magnitude (ROM ) - developed when a quick estimate is needed and few details are available

Usually based on historical ratio information

Typically developed to support what-if analyses

Helpful for examining differences in high-level alternative see which are the most feasible

A rough order of analysis should never be considered a budget-quality cost estimate

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Life Cycle Cost Estimate (LCCE) Composition LIFE CYCLE COST SYSTEM ACQUISITION COST PROCUREMENT COST •Operations
Life Cycle Cost Estimate (LCCE) Composition LIFE CYCLE COST SYSTEM ACQUISITION COST PROCUREMENT COST •Operations

Life Cycle Cost Estimate (LCCE) Composition

LIFE CYCLE COST SYSTEM ACQUISITION COST PROCUREMENT COST •Operations •Internal Support •Disposal TOTAL SYSTEM
LIFE CYCLE COST
SYSTEM ACQUISITION
COST
PROCUREMENT COST
•Operations
•Internal Support
•Disposal
TOTAL SYSTEM COST
BASIC SYSTEM COST
•External Support and
Maintenance
•Subscription
•Planning, Research,
Analysis and Design
•Ongoing Test
Facilities
•Hardware
•Software
•Development and
Implementation
•Management
•Installation
•Transition and
Cutover
•Conversion
•Training
•Documentation
•Support Facilities
•Parallel Running
•Warranty

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LCCE Cost Composition Total Cost of Ownership COST System Acquisition Cost Operating and Support Cost
LCCE Cost Composition Total Cost of Ownership COST System Acquisition Cost Operating and Support Cost

LCCE Cost Composition

LCCE Cost Composition Total Cost of Ownership COST System Acquisition Cost Operating and Support Cost YEARS

Total Cost of Ownership

COST

LCCE Cost Composition Total Cost of Ownership COST System Acquisition Cost Operating and Support Cost YEARS
System Acquisition Cost Operating and Support Cost

System Acquisition Cost

Operating and Support Cost

COST System Acquisition Cost Operating and Support Cost YEARS • Depending on the life of the
COST System Acquisition Cost Operating and Support Cost YEARS • Depending on the life of the

YEARS

Depending on the life of the solution being implemented, the operating costs can be 1-3 times the cost of acquisition

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IT Investment Management and Project and Solution Lifecycle Structured Capture and Management of Requirements and
IT Investment Management and Project and Solution Lifecycle Structured Capture and Management of Requirements and

IT Investment Management and Project and Solution Lifecycle

IT Investment Management and Project and Solution Lifecycle Structured Capture and Management of Requirements and Cost

Structured Capture and Management of Requirements and Cost Benefit Analysis of Solution Costs

Cost Effective Operation of Delivered Solution and Effective Retirement/ Replacement/ Upgrade Decisions

Business Analysis
Business Analysis
Retirement/ Replacement/ Upgrade Decisions Business Analysis Solution Operation Programme and Project Management
Solution Operation
Solution
Operation
Upgrade Decisions Business Analysis Solution Operation Programme and Project Management Design/Selection of Cost

Programme and Project Management

Design/Selection of Cost Effective Solutions to Meet Requirements Including Evaluation of All Options

Solution Architecture and Design
Solution
Architecture and
Design

Cost Effective Delivery of Projects and Management of Costs

Cost Effective Delivery of Projects and Management of Costs Project Portfolio Management Prioritisation of Projects
Project Portfolio Management Prioritisation of Projects and Investment Decisions
Project Portfolio
Management
Prioritisation of
Projects and
Investment
Decisions

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Benefits of Effective IT Investment Management Framework • Aligns investments to business goals and objectives
Benefits of Effective IT Investment Management Framework • Aligns investments to business goals and objectives

Benefits of Effective IT Investment Management Framework

Aligns investments to business goals and objectives

Identifies and track spending on IT investments

Controls and monitor IT investment projects

Confirms that IT investments are meeting business objectives

Leverages IT investment opportunities that may generate internal capital

Make informed decisions on an IT investment portfolio by assessing value and risk

Demonstrates that IT can be trusted to invest wisely

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IT Investment Management Framework Organisation Strategic Plan Business Plans and Associated Technology Needs What
IT Investment Management Framework Organisation Strategic Plan Business Plans and Associated Technology Needs What

IT Investment Management Framework

Organisation Strategic Plan

Business Plans and Associated Technology Needs

What Proposed IT Investments Potentially Solve the Identified Business Needs? Pre-Selection and Identification Stage
What Proposed IT
Investments Potentially
Solve the Identified
Business Needs?
Pre-Selection and
Identification
Stage
Evaluation Stage
Technology and
Systems Portfolio
Selection Stage
Control Stage
and Systems Portfolio Selection Stage Control Stage Investment Results Did the Selected IT Investments Deliver

Investment

Results

Did the Selected IT Investments Deliver the Expected Business Value?

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Are the Selected IT Investments Performing as Planned?

Which IT Investments Best Meet the Business Needs?

29

IT Investment Management Stages Pre-Selection and Identification Stage Identify business needs and prioritise potential
IT Investment Management Stages Pre-Selection and Identification Stage Identify business needs and prioritise potential

IT Investment Management Stages

Pre-Selection and Identification Stage

Identify business needs and prioritise potential investments

Develop investment business cases

Research possible enterprise/collaboration opportunities

Update the Strategic plan and technology Portfolio

Evaluation Stage

Conduct post implementation reviews on major IT projects using the asset performance measures established in the Control Phase

Use asset performance measures to measure the business value

Document IT asset performance

Analyse gaps between current business needs and performance of IT assets

Make a determination to maintain, migrate, improve, or retire each IT asset in the technology portfolio

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Selection Stage
Selection Stage

Evaluate, score, and rank IT investments

Prioritise IT projects

Control Stage
Control Stage

Translate business value into performance measures

Develop detailed project plans and execute projects in accordance with project management standards

Develop applications in accordance with technical and data standards for information technology

Submit project status reports, requests for baseline adjustments greater than defined percentage (typically 10%) and verification and validation reports for each major IT project

30

IT Investment Management Control Function Responsibilities Technical Scope Management Technical Portfolio Management
IT Investment Management Control Function Responsibilities Technical Scope Management Technical Portfolio Management

IT Investment Management Control Function Responsibilities

Technical Scope Management Technical Portfolio Management Requirements Management IT Investment Management Control
Technical Scope
Management
Technical
Portfolio Management
Requirements
Management
IT Investment
Management
Control Function
Earned Value
Management
Progress
Reporting and
Management
Scope, Cost and
Schedule
Management
Risk
Management

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Portfolio Management • Portfolio Management is an approach typically combined with a set of tools
Portfolio Management • Portfolio Management is an approach typically combined with a set of tools

Portfolio Management

Portfolio Management is an approach typically combined with a set of tools for identifying, diagnosing, controlling, and increasing the aggregate return on investments at a given level of risk tolerance

Based on the management principle that any set of investments requires proactive management to maximise value while minimising risk

IT portfolio management takes advantage of an integrated set of IT management processes, techniques, and tools that assist decision makers in analysing, selecting, evaluating, and controlling an optimal set of investments

Properly executed IT portfolio management delivers the benefits of balancing supply and demand of IT resources (financial and non- financial), eliminating redundancy, and enabling better alignment with strategic goals

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Earned Value Management • Earned Value Management (EVM) is a project management metric that integrates
Earned Value Management • Earned Value Management (EVM) is a project management metric that integrates

Earned Value Management

Earned Value Management (EVM) is a project management metric that integrates the technical scope of work with schedule and cost elements for investment planning and control

Compares the value of work accomplished in a given period with the value of the work expected in that period

Differences in expectations are measured in both cost and schedule variances

Use EVM in performance-based management systems

Management of a cost estimate involves continually updating the estimate with actual data as they become available (EVM) revising the estimate to reflect changes and analysing differences between estimated and actual costs

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Cost Estimation Best Practices Checklist • The cost estimate type is clearly defined and is
Cost Estimation Best Practices Checklist • The cost estimate type is clearly defined and is

Cost Estimation Best Practices Checklist

The cost estimate type is clearly defined and is appropriate for its purpose

All applicable program costs have been estimated, including all life-cycle costs

The cost estimate is independent of funding source

An affordability analysis has been performed at the agency level to see how the project fits within the overall portfolio

The estimate is updated as actual costs become available from the EVM system or as requirements change Post mortems and lessons learned exercises are continually documented as information becomes available

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Cost Estimating Process Initiation and Research The audience, what is being estimated and why It
Cost Estimating Process Initiation and Research The audience, what is being estimated and why It

Cost Estimating Process

Initiation and Research

The audience, what is being estimated and why It is being estimated are very importance

Assessment

Cost assessment steps are iterative and can be accomplished in varying order or concurrently

Analysis

The confidence in the point or range of the estimate is crucial to the decision maker

Presentation

Documentation and presentation can make or break a cost estimating decision outcome

February 3, 2010

Step 1: Define the Purpose of the Estimate
Step 1:
Define the
Purpose of
the Estimate
Step 3: Define the Project
Step 3:
Define the
Project
Step 8: Conduct Sensitivity Analysis
Step 8:
Conduct
Sensitivity
Analysis
Step 11: Present Estimate for Approval
Step 11:
Present
Estimate for
Approval
Step 2: Develop the Estimating Plan
Step 2:
Develop the
Estimating
Plan
Step 4: Determine the Estimating Approach
Step 4:
Determine
the
Estimating
Approach
Step 9: Conduct Risk and Uncertainty Analysis
Step 9:
Conduct Risk
and
Uncertainty
Analysis
Step 12: Update Estimate to Reflect Actual Costs and Changes
Step 12:
Update
Estimate to
Reflect
Actual Costs
and Changes
Step 5: Identify Ground Rules and
Step 5:
Identify
Ground
Rules and

Assumptions

and Changes Step 5: Identify Ground Rules and Assumptions Step 10: Document the Estimate Step 6:
Step 10: Document the Estimate
Step 10:
Document
the Estimate
Step 6: Obtain Data
Step 6:
Obtain Data
Step 7: Develop Point Estimate
Step 7:
Develop
Point
Estimate

35

Cost Estimating Process • Each of the 12 steps is important for ensuring that high-
Cost Estimating Process • Each of the 12 steps is important for ensuring that high-

Cost Estimating Process

Each of the 12 steps is important for ensuring that high- quality cost estimates are developed and delivered in time to support important decisions

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36

Cost Estimating Process • Step 1: Define the Purpose of the Estimate − Determine the
Cost Estimating Process • Step 1: Define the Purpose of the Estimate − Determine the

Cost Estimating Process

Step 1: Define the Purpose of the Estimate

Determine the estimate’s purpose

Determine the level of detail required

Determine who will receive the estimate

Determine the overall scope of the estimate

Step 2: Develop the Estimating Plan

Determine the cost estimating team

Outline the cost estimating approach

Develop the estimate timeline

Determine who will do the independent cost estimate

Develop the schedule

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Cost Estimating Process • Step 3: Define the Project − Identify in a technical baseline
Cost Estimating Process • Step 3: Define the Project − Identify in a technical baseline

Cost Estimating Process

Step 3: Define the Project

Identify in a technical baseline description document

The purpose of the project

Its system and performance characteristics

Any technology implications

All system configurations

project acquisition schedule

Acquisition strategy;

Relationship to other existing systems

Support (manpower, training, etc.) and security needs

Risks

Assumptions

System quantities for development, test, and production

Deployment and maintenance plans;

Predecessor or similar legacy systems

Step 4: Determine the Estimating Approach

Define work breakdown structure (WBS) and describe each element

Choose the estimating method best suited for each WBS element

Identify potential cross-checks for likely cost and schedule drivers.

Develop a cost estimating checklist

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Cost Estimating Process • Step 5: Identify Ground Rules and Assumptions − Clearly define what
Cost Estimating Process • Step 5: Identify Ground Rules and Assumptions − Clearly define what

Cost Estimating Process

Step 5: Identify Ground Rules and Assumptions

Clearly define what is included and excluded from the estimate

Identify global and program specific assumptions such as:

The estimate’s timescale, including time-phasing and life cycle

Program schedule information by phase

Program acquisition strategy

Any schedule or budget constraints

Inflation assumptions

Costs such as travel and other expenses

Equipment the organisation is to furnish

Prime contractor and major subcontractors

Use of existing facilities or new modifications or developments

Technology refresh cycles

Technology assumptions and new technology to be developed

Commonality with legacy systems and assumed heritage savings

Effects of new ways of doing business

Step 6: Obtain Data

Create a data collection plan with emphasis on collecting current and relevant technical, programmatic, cost, and risk data.

Investigate possible data sources

Collect data and normalise them for cost accounting, inflation, learning, and quantity adjustments

Analyse the data to look for cost drivers, trends, and outliers compare results against rules of thumb and standard factors derived from historical data

Interview data sources and document all relevant information including an assessment of data reliability and accuracy

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Cost Estimating Process • Step 7: Develop Point Estimate − Develop the cost model by
Cost Estimating Process • Step 7: Develop Point Estimate − Develop the cost model by

Cost Estimating Process

Step 7: Develop Point Estimate

Develop the cost model by estimating each WBS element, using the best methodology from the data collected

Include all estimating assumptions in the cost model

Express costs in constant year currency

Time-phase the results by spreading costs in the years they are expected to occur, based on the pro gram schedule

Sum the WBS elements to develop the overall point estimate

Validate the estimate by looking for errors like double counting and omitting costs

Compare estimate against the independent cost estimate and examine w here and why there are differences

Perform cross-checks on cost drivers to see if results are similar

Update the model as more data become available or as changes occur and compare results against previous estimates

Step 8: Conduct Sensitivity Analysis

Test the sensitivity of cost elements to changes in estimating input values and key assumptions

Identify effects of changing the program schedule or quantities on the overall estimate

Determine which assumptions are key cost drivers and which cost elements are affected most by changes

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Cost Estimating Process • Step 9: Conduct Risk and Uncertainty Analysis − Determine the level
Cost Estimating Process • Step 9: Conduct Risk and Uncertainty Analysis − Determine the level

Cost Estimating Process

Step 9: Conduct Risk and Uncertainty Analysis

Determine the level of cost, schedule, and technical risk associated with each WBS element and discuss with technical experts

Analyse each risk for its severity and probability of occurrence

Develop minimum, most likely, and maximum ranges for each element of risk

Use an acceptable statistical analysis methodology to develop a confidence interval around the point estimate

Determine type of risk distributions and reason for their use

Identify the confidence level of the point estimate

Identify the amount of contingency funding and add this to the point estimate to determine the risk-adjusted cost estimate

Recommend that the project office develop a risk management plan to track and mitigate risks

Step 10: Document the Estimate

Document all steps used to develop the estimate so that it can be recreated quickly by a cost analyst unfamiliar with the program and produce the same result

Document the purpose of the estimate, the team that prepared it, and who approved the estimate and on what date

Describe the program, including the schedule and technical baseline used to create the estimate

Present the time-phased life-cycle cost of the program

Discuss all ground rules and assumptions

Include auditable and traceable data sources for each cost element

Document for all data sources how the data were normalised

Describe the results of the risk, uncertainty, and sensitivity analyses and whether any contingency funds were identified

Document how the estimate compares to the funding profile

Track how this estimate compares to previous estimates, if applicable

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Cost Estimating Process • Step 11: Present Estimate for Approval − Develop a briefing that
Cost Estimating Process • Step 11: Present Estimate for Approval − Develop a briefing that

Cost Estimating Process

Step 11: Present Estimate for Approval

Develop a briefing that presents the documented life-cycle cost estimate for management approval, including

An explanation of the technical and programmatic baseline and any uncertainties;

A comparison to an independent cost estimate (ICE) with explanations of any differences;

A comparison of the estimate (life-cycle cost estimate (LCCE) or independent cost estimate to the budget; and

Enough detail so the presenter can easily defend the estimate by showing how it is accurate, complete, and high in quality.

Focus the briefing, in a logical manner, on the largest cost elements and drivers of cost

Make the content concise and complete so that those who are unfamiliar with it can easily comprehend the competence that underlies the estimate results

Make backup slides available for more probing questions

Act on and document feedback from management

The cost estimating team should request acceptance of the estimate

Step 12: Update Estimate to Reflect Actual Costs and Changes

Update the estimate to

Reflect any changes in technical or program assumptions

Keep it current as the program passes through new phases

Replace estimates with EVM EAC and Independent estimate at completion (EAC) from EVM

Report progress on meeting cost and schedule estimates

Perform a post mortem and document lessons learned for elements whose actual costs or schedules differ from the estimate.

Document all changes to the program and how they affect the cost estimate

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Work Breakdown Structure • Cornerstone of every project because it defines in detail the work
Work Breakdown Structure • Cornerstone of every project because it defines in detail the work

Work Breakdown Structure

Cornerstone of every project because it defines in detail the work necessary to accomplish a project’s objectives

Essential part of developing a project’s cost estimate

WBS reflects the delivery of the agreed requirements to the agreed solution design

typical WBS reflects the requirements, resources and tasks that must be accomplished to develop a program

A

WBS communicates to everyone what needs to be done and how the activities relate to one another

Provides a consistent framework for planning and assigning responsibility for the work

Define a project in terms of product-oriented elements, broken into

a

hierarchical structure

Product-oriented WBS ensures that all costs are captured

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Validating Cost Estimates • Cost estimates should be validated against best practice characteristics − Comprehensive
Validating Cost Estimates • Cost estimates should be validated against best practice characteristics − Comprehensive

Validating Cost Estimates

Cost estimates should be validated against best practice characteristics

Comprehensive

Well-documented

Accurate

Credible

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Validating Cost Estimates • Comprehensive − Completely define the program and reflect the current schedule
Validating Cost Estimates • Comprehensive − Completely define the program and reflect the current schedule

Validating Cost Estimates

Comprehensive

Completely define the program and reflect the current schedule

Include all possible costs using a logical WBS that accounts for all requirements

Ensure that no costs are omitted nor double-counted

Explain and document key assumptions that are technically reasonable

Well-documented

They can be easily repeated or updated and traced to original sources through auditing

Supporting documentation identifies the data sources, justifies all assumptions, and provides a description of each estimating methodology for every WBS cost element

Schedule milestones and deliverables are traceable and consistent with the cost estimate documentation

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Validating Cost Estimates • Accurate − They are not overly conservative or too optimistic −
Validating Cost Estimates • Accurate − They are not overly conservative or too optimistic −

Validating Cost Estimates

Accurate

They are not overly conservative or too optimistic

Based on an assessment of most likely costs and adjusted properly for inflation

Contain few, if any, mistakes that are minor in nature

Are updated when assumptions or requirements change to reflect current status

Cost estimating relationships and parametric cost models are validated to ensure they are good predictors of costs

Data is current and applicable to the new program,

The relationships between technical parameters are logical and statistically significant

Results are tested with independent data

Credible

They clearly identify any limitations because of uncertainty or biases surrounding the data or assumptions

Results are similar to cross-checks and an independent cost estimate derived using different methodologies

Independent cost estimates performed by estimators farthest away from the acquiring program office represent a best practices because they

Tend to produce higher and more accurate cost estimates than those performed by staff sharing a common supervisor with the program office

Produce more credible estimates than other types of independent estimate reviews which may not be as inclusive as an ICE (e.g., IGCE, ICA, Sufficiency Review, etc.)

A sensitivity analysis has been performed to identify cost drivers and the impacts of varying assumptions

A risk / uncertainty analysis has been performed to determine the level of risk associated with the point estimate

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Cost Assessment Team • Cost estimates are frequently developed with an incomplete knowledge of what
Cost Assessment Team • Cost estimates are frequently developed with an incomplete knowledge of what

Cost Assessment Team

Cost estimates are frequently developed with an incomplete knowledge of what the exact final technical solution will be

Cost assessment team must manage a great deal of risk, especially for programs that are complex or use leading edge of technology

Cost estimates define what a given solution will ultimately cost

Estimate will be affected by multiple assumptions and an interpretation of what the historical data represent

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Disciplines and Concepts in Cost Analysis Economics Interpersonal •Break-even Analysis •Personnel Cost
Disciplines and Concepts in Cost Analysis Economics Interpersonal •Break-even Analysis •Personnel Cost

Disciplines and Concepts in Cost Analysis

Economics Interpersonal •Break-even Analysis •Personnel Cost •Inflation •Present Value Analysis Skills
Economics
Interpersonal
•Break-even Analysis
•Personnel Cost
•Inflation
•Present Value
Analysis
Skills
•Approach
•Estimate
•Knowledge
Commercial
Cost Analysis
Team Skills
•Analysis of
Commercial Models
•Analysis of
Proposals
•Development of
Cost Estimating
Relationship
Proposals •Development of Cost Estimating Relationship Statistics •Forecasting •Risk/Uncertainty Analysis
Statistics •Forecasting •Risk/Uncertainty Analysis
Statistics
•Forecasting
•Risk/Uncertainty
Analysis
Accounting •Cost Data Analysis •Financial Analysis •Overhead Analysis •Proposal Analysis
Accounting
•Cost Data Analysis
•Financial Analysis
•Overhead Analysis
•Proposal Analysis
Budgeting •Organisation Specific Skills •Program Specific Skills
Budgeting
•Organisation
Specific Skills
•Program Specific
Skills
Information Technology •Analysis •Design •Development •Testing •Scheduling •System Integration
Information
Technology
•Analysis
•Design
•Development
•Testing
•Scheduling
•System Integration

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Centralised vs. Decentralised Costing Function • Centralised Costing Function − Facilitates the use of standardised
Centralised vs. Decentralised Costing Function • Centralised Costing Function − Facilitates the use of standardised

Centralised vs. Decentralised Costing Function

Centralised Costing Function

Facilitates the use of standardised and consistent processes

Better resource sharing

Common tools and training

Ability to resist pressure to lower the cost estimate when it is higher than the allotted budget

Can be remote from technical experts

February 3, 2010

Decentralised Costing Function

Often results in ad hoc and inconsistent processes

Decreased independence

Greater access to local technical resources

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Cost Assessment Team Best Practices Checklist • The estimating team’s composition has the skills needed
Cost Assessment Team Best Practices Checklist • The estimating team’s composition has the skills needed

Cost Assessment Team Best Practices Checklist

The estimating team’s composition has the skills needed for the program of work

The team has the proper number and mix of resources

The team has the proper number and mix of resources

The team includes experienced and trained cost analysts

The team includes, or has direct access to, analysts experienced in the program’s major areas

Team members’ experience, qualifications, certifications, and training are identified

A master schedule with a written study plan has been developed

The team has access to the necessary subject matter experts

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IT Investment Management Maturity Stages 5 Leveraging IT for Strategic Outcomes The organisation has mastered
IT Investment Management Maturity Stages 5 Leveraging IT for Strategic Outcomes The organisation has mastered

IT Investment Management Maturity Stages

IT Investment Management Maturity Stages 5 Leveraging IT for Strategic Outcomes The organisation has mastered the
5 Leveraging IT for Strategic Outcomes The organisation has mastered the selection, control, and evaluation
5
Leveraging IT for
Strategic Outcomes
The organisation has mastered the selection, control, and evaluation
processes and now seeks to shape its strategic outcomes by
benchmarking its IT investment processes relative to other "best-in-class"
organizations.
4
Improving the
Investment Process
The organisation is focused on evaluation techniques to improve its IT
investment processes and portfolio(s), while maintaining mature selection
and control techniques.
3
Developing a Complete
Investment Portfolio
The organisation has developed a well-defined IT investment portfolio
using an investment process that has sound selection criteria and
maintains mature, evolving, and integrated selection, control, and
evaluation processes.
2
Building the Investment
Foundation
Basic selection capabilities are being driven by the development of project
selection criteria, including benefit and risk criteria, and an awareness of
organizational priorities when identifying projects for funding. Executive
oversight is applied on a project-by-project basis.
1
Creating Investment
Awareness
Ad hoc, unstructured, and unpredictable investment processes
characterise this stage. There is generally little relationship between the
success or failure of one project and the success or failure of another
project.

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Increasing IT Investment Management Maturity 5 Leveraging IT for Strategic Outcomes 1. The organisation learns
Increasing IT Investment Management Maturity 5 Leveraging IT for Strategic Outcomes 1. The organisation learns

Increasing IT Investment Management Maturity

5 Leveraging IT for Strategic Outcomes 1.
5 Leveraging IT for
Strategic Outcomes
1.

The organisation learns from and adopts the tools, techniques, or methods used by best-in-class external organisations

4 Improving the Investment Process

external organisations 4 Improving the Investment Process 2. Changes to strategic business processes are driven by
external organisations 4 Improving the Investment Process 2. Changes to strategic business processes are driven by

2. Changes to strategic business processes are driven by the capabilities of identified information technologies

3 Developing a Complete Investment Portfolio
3 Developing a Complete Investment Portfolio

3 Developing a Complete Investment Portfolio

3 Developing a Complete Investment Portfolio
3 Developing a Complete Investment Portfolio
3 Developing a Complete Investment Portfolio

1. Evaluation techniques are being used to improve the investment processes and the portfolio

2. Succession management processes are developed for retaining or disposing of investments.

are developed for retaining or disposing of investments. 1. Criteria are developed for identifying investments that

1. Criteria are developed for identifying investments that best fit with the portfolio.
2. The portfolio is developed through the use of categorisation when comparing investments.

3. Performance reviews are conducted both during and after implementation

2 Building the Investment Foundation

after implementation 2 Building the Investment Foundation 1. An investment board is established to drive the
after implementation 2 Building the Investment Foundation 1. An investment board is established to drive the

1. An investment board is established to drive the investment process

2. Business needs are identified for each project

3. An investment selection process is developed

4. Board oversees the progress of individual projects

5. Investment information is collected and disseminated

1 Creating Investment Awareness

projects 5. Investment information is collected and disseminated 1 Creating Investment Awareness February 3, 2010 52

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More Information Alan McSweeney alan@alanmcsweeney.com February 3, 2010 53
More Information Alan McSweeney alan@alanmcsweeney.com February 3, 2010 53

More Information

Alan McSweeney alan@alanmcsweeney.com

February 3, 2010

53