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22 SctftiuLtre Proiect Nltmagernent

If you create a system rvhich


benefits of a proiect in hnancial terms' 0rganiz
It might not be possible to measure the of patients' it might contribute
the more.accurate recorrling of data.o,-r..rning tire n,e<ticar co-nciition -
a110ws
of pain and the preservarion i* it would be difticuit to put a rconey value on ihese' This cle :.
1q shs slleviation "ilii.. case' In this chapter lve
This is t'. -
emphasized that an ICT or software project needed a business broader ''
The last chapter potential projects'
contain' A business c"i" *"y be
prese'ted tor several
explain what such a document might need some wa-v of deciding to be se: -.
rime for onry of the projects' Managers
but there may be money or staff 'o-t chttpter will cliscuss-some ways in which
part of portlbti-n *o'ngn*e',l' This
which project, to ,"l".tf irri, i, portfolio' The chapter hnishes by discussin'q Benefits
*.rurion iio project
projects can be evaluar"a "rJ cornparedfor business objective can be tnanaged
as
togeth., .orJtur. to , .o--on
the wav groups of proiects which Where p

progrlmme s of Projects' organiz-,


saving:
quote .- ::
*.t A Business Case diagntr. '

..rx The seotion on the lorgarrizatitlnsmayhavedifferenttitlessuchasaJ.easibilin..'fu{r^.oraproject.justifi.-


{v business case draws icatirylforwhatwecailthebusinesscase.Itsobjec'tiveistoprol,idearationaleforthe
outcornei will exceed the costs of Outiini
, on B. Hughes (2008) i nrcliect bv showing that the benefits of tl-'t ptol"tt
1 Ex7loiting tT for busi' , il:,'"r-"ni. in,pit-"ntatioti and operation (or production)' ln add .
Briiish
S ness benefrlSoclety' clocument rnight contain: ntltittl;:..,:
CornPuter
,i 1,picatl.v a Lrusiness
case
OLIISOL.I. :
the proposal
l. lntroduction and background to
This
2. The ProPosed Project "'.
identi t, : :
3. The market siat- c: :
4. Organizational and operationai infrastructui'e ttf pr,.l . -
5. The benefits
6. Outline imPlementation Plan Costs
7. Costs
8" The financial case Har rn:
u:!tt* -. -:
9. Risks
10" Management Plan Thei.
in more detaii' ht'. :' :
These sections will now be describerl

Introduction and background The ru


T1'.--,
Thisisadescriptiorroitlrecur.rentenr,ironilentoftheproposeilprc.'-iect.Aprobienrtoiresoivedolliilloppor-
tr"rnity to be expiorted is id-entified' iia..

The proPosed Proiect Risk>


is provided
;\ brief otitline o1'lhe propr"serl plolect 1_)l

* l,; Sectron 2.j we will The nnarket


ffi llprore further the dif- service capability'
is to create nelv product or a new i
T'his is needecl when the Projecl
.

, ference between new tor the product or serr ice


contain inlormation iit* ,t estimated
I
<iemand
,4rn Produci developmeni fhis uould "
EV ano renewai Projects' and any likelY comPetitors'
P ro it ct E t' nl t t n 7 i 6 n 11n ri p v p gr nm m e NIat t o get n e t t t

-rrganizational and operational infrastructure


(-lescr;bcs hor,v the stnlcture of the orgaflizatiol wiil be afi'ectec] by the ilni-'iementatiori oi thc project'
,.
- ) ts of ntost re Ievance rvhere the project is impiementing or mcciilyiiig air infbrlration sryste ni as part ol a
- :i.ier b,siuess cliange prrliect. It rvoulrl also be relevaut il a tailore'-l prodtiction
or distribritit-rn sYstcm has
re -\et up when a new product is designed.

Senefits
, .:re possible, a financiai value should be put on the henefits of the irnpler]lenieci
project. Foi commerciai
pr"ofits c;iused eithcr by increasing income cr by rnaking
-.,nizatio,s this coulcl be related to incr'eased
. iitgs on costs. For not-tbr-profit organizalions u'e lvould try to quantifl' the b:nefits even if ive cannot
, ,re ri precise filancial ',alue. In ari example r've useci eai'iier relating to an IT systcln that irnprrlved the
diirgnosis rnight be quotecl'
- .-grosi., of a particular disease. an increase in itre rate of

Liutline irnplementation plan


- ,,ciditicxr to the ICT aspects of the prcrject. activitier such as lnarketirrg. pronlotic-'n and operatiorlal and
(lne consideration will l-re rvhich pr"oject actjvities can be
-lnrenance inliastructures neecl to tre consicierecl.
,.:.o';rcecl, arrd rvhicl-r are best kept iD-house.
-rL. rvili also detail the management of the irnplerlentation. The responsibilities are allocateci ior the task's
r,r,'here :L health-check r.)n the
_:nrified in the .Lrtline irrplementation plan. Key clecision points or r"niles;tones.
we ivili see. {br: a large irnplernentatiorl a tliimber
-.r: of the impiementation is laken. shoukl tre identifietl. As
:rojects rr-ray be needecl which can be managed as a prosianlme'

. oStS

io set ul, thc operations neecled by tire proposrl. a scl-t.:clule ol erpecteri costs
,,., ing outlinecl the steps needed
-.Lrciated u'ith the planned approach cai) now be presentecl'

.:,rre u,iil clearly be sqmc gnceriainties about sornc of the costs. e.spcciail;v as the drrtails 0ithe lequirements
:. i Ilot ),'et been ucrked out.

The linancial case


--:.r.e ,re a nurrrber of ways in which the information t;n inconte ltnii costs can be an;rlvsed antl the se will be

': subject oi the section on erraluation techniqr-les later itr this cliapter"

R.isks
here that lnan\ e\1i11.]illc\
-,:r,-e again a lnore cletaileci ciiscussicn of risks u,ill lollow in a iatr.:r sccti<ln' We note
project will bc speculati'''e at this stage and the sectiol-i ou risk
. ,.ilsts itild, rnoie particularil,. benetits of the
.t,,uiii take account of this. ln rire last chapr-er r,r,e ciisiinguishecl beir'.,eer.i project and busiiles-c ob,lectives.

,,,: can similarly distin-errish project risk - relating to thrt-ars to \itcucs:iul proje':t execrltiotl - lrom tiusiness
24 So-ftt,wc P roleci L4nnngemtr:-t

risk - relating llrctors ihreritening ihe b,;8cfits of ihe cleliveied projeci. In the business case ihe main foctis
1o Prci e cl
is on businers risk.
:l-: :

,I..q Pra;ee Por{f*trio Managexment .;.: _::


.,Lar-. -:
Or..:ire a gard iiltro,j''r--
#q tioft tc the conceprs cf l zaiion is rindertai.:ir.is or is r-:ofisidering. {t prioritizes the allocation of resotr.tces to
[tr Proj ect
f nrtr.iio. can l]e founci , pro.iuL t\ rrnd ciecides '..v irich ner,v proisgls should be ilcceptcrl and r.vl-ricir e.ristin-9 ones
,' lt.t' De Re-vck et al i rt:.iuia be dropr;eii. Thi r:.
'The rir,paci of pr"oieci
manag*rnent Thc '1 Fl- ,..-
por-tfcli+
c()r!!-el ni lf ir:+jeii porifoliir illariagt:ixent ine !uilc:
cn information technol- :he:,,-.
, ogy projects (2005) o : iclentii, ing which pio,jr:ct picpr:sals at'e rvr-.irth implemenia'.iori:
l;rfer,rallor:al .lotrna! ot
lrrl-i ir . -
ffi prqeci yanagenent a r asses;sitg rire ;ir11o,-rnt cif risk of lailure thiit a potenti;J pro-iecr hasl
-

: ::iOJi: ' , '


.. *-l- 1?1;ll.-,...,,,,..".-.-,-i o deciriing ho+-rto share limiteii rescurcesi includin-e staff tirne and finance. betrveen I'r nar
prole.tr * one pl-rlbie itr i-:;n be that'rcc iuany pr*-iects are started given the resources
at.;rilabie so i'nat ir;c."'iiairiy sonre prciitcts rr'ill miss planned cornpletion dates; Son-ie p
o Lreing aware dcpel,Jencii.:s"betr,,,een projects. especial!,v rr'lrere severai ;-'r-*;ects need
of tire to be
-{n iit,: :
colnplete<1 lbr :in organizati*n to ri:ap benef;is;
proiei.. r

e ensuriug thr.t i:ri;jr:cii do not dupliciiis ui-rrk; iii a ;t:L i.


e ciisuring tirai rrccessiir,v clevi:!+pirie:tis havc ;'t,--:t been inari'"'ertentl;r i-teer: rnisse.l. iir.l. Tirr.
.[l"re calied ..
tirree ke.v ;rspects ol prr:ject pcriirlicr ]nrnil-q!!r.-tii ile ttrtttitiio ileftn-ifi,ttt, porl"{olio tltstriigei?ini a$d
portfoikt ttitfigriluiior.L. An oiganizalisp r.r.,i;sid unrieriake portfclio rje:iiritior: beioic arlopiing pord'olio The oit.."
rrianiigrlnert and the n Froce.:<1in!i tc i;i"rliiniz:rit i trn' prole,-'t; ,:
ievei r-,i '
Froject portfolio de&niti*n Thc'b.
aiVA'! t-
'rlrrarren \4cFarlan s inciucii,-
#B ap- :
{.r9e,i),pcrit.tio ciecisior u,iii iie neccled atroui wiie{hcr p:'o.jtci-r of al1 tl,pes are to L'ri' i::cluCed. ShoLiiil :

"* p.oo.n,,l rnror,nrtion just If i pr.1;li. hc inclLlderi in the repo:rit'-ri\., o!" :liouiii cther pi-r;jr:et.s sltch as the Hoi,ve i-
, sYsienrs H:"?ni -^.-. ' .;ctiing Lrp rii j1 ner,l.'rvaLehou,*c u,i:;i,'8e ilciudedl Cae pi+hlcix fo; tr-,riitv crgar'iz-a- c1*ick ::,.
I ffiffiffi:?fii:' i;,116 i, it*, i.rr3..{s cai'r br ili,:iri*ri ilrti,a ;?.,ri l;ir;iut t i'!<:t'tli.tlttren{'r ii'lPt}) wi:i:re the b1,i s,1r 1'-_1
ffi por{ic,tic c3ilcertir in- 1,:,.,i,urdcir.,'er-rhii is ii pir-.d:.r,-'1. :.r-tiii ts ;i atli;.iptltc'r game, iirai is scl,'l i{} cilstcili'crS. sri:ill tL.'-
ailoc:rtr: _-
r\i,sien!:r pr-cje:ci-r are oiten like ihis. l'l:e ilistinction is ncrt !,ltva'rs ciei:r-iitt. For accepiir-.: :

i::-alnpl:. a iirr,i jltici-]itaiict svttcrn eor-r-1i-i be used io iriL,-r ioe ii .il-'it{}lnei ser'r'ice .cuc}: as r"e':oidille l"te tisieils
,;f p-r:ci;ie L'rlying a i:*'"r' ii:ii;:-atl';': .'l'-rliuii-
,1"'"i Er-

a'cl ser.vii,:e:. ilriir-,.r,*i i:,-c,irci: 11a:{ i-i.: less iicqi-rc;ri and ih,.rs inherenti;r lnore risk--v as ihe:'tr is ltss er.1;crience R'e wiii *.
ci thcse ivrer oi ixfi.ili it]F'Ll prcject:; finr.1 rlt.iu,,::,ing i'u*riin'.: =;r-tier il'iih ii.reir cie::r reiarionshlp i--etwcen tlie
pL{jJeci alrii ini:i-,i;le. Whr:'ie br;f i-r "r'rFL:r oi i-}rL1i.ci e a,i} ui:ct !l:t sa;::t poi,ils o! reso: rrles. inciudit:51 iiniii.rce .
the
Tecltnic
.'aiguftriti frrr I fiJrlllllcir portirlii:, is -sircri!.
'lerl.urii*-
be ach:.' -
hardwar': .
iechnoicr,: .
P r oj e t: t Er, ol t L n t ton,.t rt tl P r o ;;r rt-ti i tt t t M t ; it n gc i ttltt 25

rn loctis Projeet portfalio management


Gnce tire po*ftriiir has becn esrahlished. more cietaileii cr.sti;i!!s oi prc,iects can be recoidcd. T'i:e value that
itan:lg.ts lir:pe 'rili i--e gc'1er:iletl ir1, eiici, projec| can aistt be iecoided. Autrial perfon-nanee ol prt';e'-ls on
rhese perforniance inCiciitois c:rn thei'i br: lrackeLi.'firis ini'crrmation can be thc b;i"ris ibl tire,;torr'ricotous
icrcenrng L)l neir/ pro.iects.
ol.ga'.ir!-
.l: c.s to
r1!I OneS Project pcrtiolio *ptiinization
The prerfbrr-niirrce of the pcrtfi:iio can be trackerl by high-level mana-9ei-s on a regular basis. A
lretier tral;ince
of pr-rljects ma-v be achieveri. Some prcljects i:ould potentiallir be veiv protitable but couid also be risk-v. In
rhe i:ase oi ln e-comnerce site, for exaraple. sales may not be as great as hoped because estabiished compet-
:r-ors rcduce priees. Other projecrs could have modest benetits. sttch as those cuttiilg costs i:ry autonratins
.riocessL-s. but har.e i-iwer ilsks. ihe portlblio ought to huve a carelul1;v thotrght-otlt balance t-refu''een th. two
tai\r.,eell :i pes of pi-();ect.
] \OUTCES

Some problerns with pr*ject portfolio rnanagen?ent


,.l to he
\n iinporianf role crf pro.iect portlolio managentent is sharing resoutces bet\L'een
ir,",.""i,"n,"" nni",r.
rroiecis. 'ihere can he prol'rleras bccause t,'hile apparently full-titnc' slaff are a,ilocaied the practical orobiems
,r .i prcjcct" thelr rnay efi"eciivell' be pait-iime lrecausc they still ha",e roiitine wr.irk to of por-rJolics can be
.lri. iitis i:.; p;irticuiarly, st-r with users, and witir de.,,elopers wh,.r tnaY oll oecasion be ibunci in 3. S. Blichfelcit
and P. Eskerod (2008)
r ili OfiC ,-rl1ed iriva'.v from proieci u,i-rrk to deai with s*pport tasks" 'Project portfolio man-
,rrifoiio agemei-]t - inere 3
lhe otlicial pr{rc'ct poltlblio ttreteil' reflect organizationai :icti''' iil- il sorle
1.nay not ace
inole t{] it thar man- i

:i,.rjetl.s arc e;r.cir.rc]e cl. A forrrral ,jecision unll, pro;ecis o\. cr ii r-erlaill
ma,v be rn;ide ihat aEement enacts',i.?f er- Iti
:',ei *f ,,;ost will be reccrded in the pc;rtfblio. natiana! iaurnai oi
Project !,/lanagement
Th.- 'belcr.,. rhe linc'projects co':ld in iact cr-rrisrime substantial staff effort aild bleed 26: 357-65.

,',-,'r" rff{-ri:t irorn the offlcial pitliects" It can Lre argr.reC that ali projects should be
nclurled. !l ti",e ofiicial porttblio.
:{,-rt-,ei'er, iliere iire atlvarriages iI irlioriing these iiisks. it ailov,'s sr:riril ad htic tasks lo be tlolle. such as
:uick li:ie-: I.:ri,siei.ns to eieal wilh r-.:.tern;'i!iy'ilnposcC chauges.'Iire1'redrice iv<,,rk ii:r higher ii1&ni.genleni
-'. sitvin:i ihent iiom ha.,ing 1-o Dr{}ccss :r largc nut:itrcr oi small worit requests. Developers mair find these
.:rriii! iasii-s r"e..va1iiitg: dealir1g r.r.ilit ihere smaii rcquests is an easY way to l:eep u-ters happy.-['lius lvhen
.,iir-,'calilg i.rsolrrces tr: f,olect,.. r, nrarqilr .hrrLrld be set tc allow irrst-line managers some jud-uenleiit in
, -' uei:tin g non-$lanneil,'.vr-lrk.

{ooCs
. EvaEuatiqir? +>f trsadividual Proiects
*'rience .i c wiil noil, lcci; nrure i.'ioseiy i.rt hcru, tire f-easibiiitlt ol an inclividual project can be e.,'aiua'ied.
l.!1 the
raa- thrl
Teehnicai a.qse$sffint
:;hr:i..al slsc:.!rllelii cl ri ilii)p()s.,-! svitrra conrc;stt si svaiuating ivi'ieiher the required funclior1alily car,
-: aihiei.ed.*.!lh L',J-nert:riforrl;rble teci:lologres. O;-ganizetlr,.nd p+iiey. aimed lt pror,icliiig ll cotisistent
-,:ciwlile/soiirvai:r,- ir:fi'astr-uctlllr-, is iikeiy to ii*:it tt:e techiric:li sol*tior,s consiCered. l'he costs oi'tht:
-.'hir*log,r, arlopted r;.:usi be take il it!<-- a.cott;lt ic ti-re cost-benefit anailisis
26 So-fturnre Project Manngentertt

Cost-benefit analysis
- Even where the e:tirnatecl benefits wiii exceecl the estimated costs. it is olien necessaq/
. ;;; il;;;;;,;;
ffi u r"ttrn ona minimum,
in'restinent i to cleci,1e if tirr: ploposed ploject is the best ol several options. Not ali pro-iects can
I must, as be unclertaken ai any one time and, in any case. the most va,-rable projects shouid get
i provide a greatel ben- Ii
* efit than p;ttrng that mosl rcsuurcc:;'
t{J investment
- in, say. a j:
i ;;il Cost-benefit analysis comprises two steps:

o ltlentifiilg atl o.f the c15t,s tmj bene.fits o.f r:trry'ing out the prrtiect antl operitling the clelitered ctppli'
catiortThese include the developrnent costs. the operating costs and the benelits expected
fiotn the new
systeln. Where the proposed system is a replacement, these estimates shoulci reflect the change
in costs
and benefits due t,: ihe new system. A new sales order processirr-q s1,stem. fbr exarnple. coulci only claim
to henefit an organization by the increase in sales due to the use of the new systeln.

Expressing these cctsts ctnel beneJits in cammon urrll.s We must express each cost and henefit -
and the
o
net benefit which is rhe difference between the t'rvo - in money'
Most Cirect costs are easy to quantify in monetary terms and can be categorized as:
:
i o rlet'eiopmetlt costs, including developrnent staff costs;
,*^ the
{L}
different types of
beneltts wlll ols-
De o setup ro.srs. consisting of the costs of putting the s)'stem into place, mainl,v of any
cussecj in greater- detaii
I in the context of ben- ii
new.hardware but also inclu,Jing the costs of file conversion. recruitment ancl staff
(;$ efits management latei training:
in this chapter.
o operati'ncLl tvisl.r l"eiating to operating the systerri after installation.

ExERCrs-E
@
Brightmouth College is consiciering the replaceinent of the erisfing payroll sert'ice, operated by a third
parl1,. ivith a tailored, off'-the-shelf cornputer-'Dased sysiem. Lisl srime of the costs it might consider
under the headings of:
o Development costs
c Setup cost"r
o Operational costs
List sonie of the beneflts under the headings:
o Quantitted and valuc-d benefits
r Quantified hut not vaiued
c ldentified but not easiil' valued
For each cost or benefit. explain how. ln principie. it rnight be measured in moni:tary' ,.."'.t,t,

: Typically products gen-


Cash flow forecasting
,4.\ erate a negative cash
1* flow during their devel-
' opment follcwed bY a A-s important as estimating the o.",erall costs. and benetlts of a project is producing
i positive cash flow over a cash fjor,v folecast r,vhich indicaters r',,itell expetlCitrlre ancl income will iakc place
: their operating iife.
(Figure 2. i ).
* There mioht be decom-
lv I.nission'n*g costs at the
end of a product's life. ."
Project Eaaluation and Programme Management 27

We need to spend money, such as staff wages, during a project's development. The difficulty and
importance of cash
Such expenditure cannot wait until income is received (either from using software 'flow forecasting is
recessary developed il-house use or from selling it). We need to know that we can fund this evidenced by the
fects can development expenditure either from the company's own resources or by borrowing. number of co,.mpanies
hould get that suffer bankgptcy
A forecast is needed of when expenditure, such as the payment of salaries, and any .beqau$e,:although
income are to be expected. thell are dsvetoping
profitable products or
Accurate cash flow forecasting is difficult, as it is done early in the project's life services, they canEoi
ed appli cycle (at least before any significant expenditure is committed) and many items to sustain an unplanned
eash flovrr.
n the new be estimated (particularly the benefits of using software) might be some years in the
p in costs future.
nly claim

- and the

nly of any
t and staff
FIGURE 2.1 Typical product life cycle cash flow

When estimating future cash flows, it is usual to ignore the effects of inflation. Forecasts of inflation rates tend
to be uncertain. Moreove! if expenditure is increased due to inflation it is likely that income will increase
proportionately.
r_---.,
'a third
2.5 Cost-benefit Evaluation Techniques
onsider
We now take a look at some methods for comparing projects on the basis of their cash flow forecasts.

Table 2.1 illustrates cash flow forecasts for four projects. In each case it is assumed that lhe cash flows
take place at the end of each year. For short-term projects or where there are significant seasonal cash flow
patterns, quarterly, or even monthly, cash flow forecasts could be appropriate.

TABI-E 2.1 Four project cash flow projections - figures are end of year totals (f )

producing
take place
28 SoftzL,ore Projac! Mtumgttnui

EXEECISE
@
, Consider the Oroject cash fior,v erslirlate-t tor four prcjects ai JOE
shorvn in Tabls 2. i. l.ieglitive val,es
, represent expencliture and pr-rsitive r,,alue.s income.
l

r Rank the, lbur projecis il order of ilnancini desirabilif;, and make a note cf \.our ieas()ns for
ranking
1

Net profit
The net profit t.rfl a project is the difference between the total costs and
the total incorrie over the lit'e of the
project' Project 2 in fhble 2.1 shows the greatest net profit hut this
is at the expense of a large investment.
Indeed, if we had rl m to invest. we ntight underiake atl ofthe other
tirree piojects and obtain an e\.en sreater
net profif Nole aiso ihat all prnjecis contaiu iin eleurent of risk
antl r.."e might not be prepared to risk f i m.
we shali iook at the effects of risk ancl in-,,estment rater in this chapter.
- Moreover. the sirnple net profit takes no account of the timing of
;* cash ilows take o'r""
PiLrJects i alrd 3 each have a nei profiI of l-50,000 and theref"ore,
the cash flow.s.
{'q.}atthe.endof each according to this
year'Theyearcrepre- I selectiott crlterion, r.r'r-iuld
be prei'elable. The bulk of the income occurs late
sents the rniiral rnvest- "qu"ily
tnt itir' ol t p|oject
d*u rrei-,i mace at the srart :: Iro.;ee 1. wirerea-( -1 returns a steariy income throughour its life.
of the project. i Having tC rvaii for a return has the rlisadvantage lhat the inve-qtrrent must
i*'i"."4i'r*'*n*4*,-"-"'-"=.f
-({J be fu,d.etl
fcr longer. Add to that the 1'act rhat. other things bein-t equal, estimates in the
more
distant fttture are less reliable than short-term estimates anrl u,e can
see that the irvo projects are noi equally
preie raL';ie.

Payback period )
The pttt:l;ock Tteriotl is the $n:e taketi to break er,eii or pay 6o.r, the
initial itr..,estment. iriorrna1ly,. the pro-ject
with the shortest pai'back perioC will be ch,-rien on the hasis that an organization
u,iil wish to minimize the
time that a prcject is 'in debt'.

Consider the lbur pro-iect cash llon's gi';en i,


EXERCISE
@
Tribie 2.1 a,d ci*,lcuiate tire pay5a.tr peiioci ibr-eaeh of
them.

The adi'antage of the piiyililck period is tharr ir is simpie i,o crlr:qlate


and is not partrcLrlariy sensitir-e to s'rail
fcrecasting eritlis' Its <iisadvaniage as .r seler:ti+ll technirrur is that it ignores
the oi,erall profitabiiitv ,c1'the
project - in fact, it iiltaliy ignores any iircome (or expear-ilture) once
the f,r:oject iras broken even. Thus rhe fact
that proiects 2 ancl 4 are. overali. mcrre pr.iitabie than project 3 is ignored.

Retum Gn inye$tffleftt
Tbe rettrrn tm irti'eslntet;l IROI1. ii]st I'nourr :rs iile .7.taar t.ttit.t,q rtfe p.f rttt.rrit
{r\Rlt;, irrc.,.ides a tvay of
conrparin{ the nei profitability to the investmelt r,-:quired. 'fhere a-re so;re
va.riatio:r-i oil ihe 1ormula used ta
calculate the return on investmeni but a straighti'orrvarci coillmon versioi:
ls:
P r t: ! t' ; ! t iti i.i ii t i n
L-, i:i t t d P rt: r r tl it tt t i i: i\'in : it : i: ;; t t ti f 29

,iri r",,{,,'r11'.11,;.' 1>r'


.'!!

t i :i a ! i n i, t.; ;i
1 i e. iii
&
:19
EXEfl{,CISH ffi
w
is ili}0.000' Thc
Caleulaiing the RLli ti,r pr*jer,:l i. tlie uer i:rlrfit is t50"{)0{i ancl the tr;tai in,'estnrtnt
rcturir oil invcstrnetrl is ih*reiiri-e calcul2tod its
,ll r,ilvd tttttit'rti ttt''tlit
R{){- __ l{){, ----:r \
I{)tii! in|e.rti?tnt
,.f the
.ment. __=-_
_ 5Ll , 0001
5
){ !ilO = l0l.i
:ia ater 1(;{}.0i10
:l
rn.
Ccleui:ite tlre FI.OI lcir each til ihe other pi'i{ects s}rr:u'n in Table l.! arrd decirle r',hich. crr ihe bils;s oi
ti:;is crilerion, is the n'iost worth$tliie.
ior''" s.

', this
.:. iate Ihc ierurn .)fi investtnen{ pr,-rr,,ides a sirnpie. eiisv-to-caiculate merLsure oi retru:n cn ij;lpitai. Uirforiunatel.v'
rl \iilfers lirm Iw. sevelr.: disaclvaillagr-i. L.ii-c thr net pr;litili-.iiit-v, it iakes no iiccoilllr 01'thc
tilniiig of the
:: life.
,:ish fl{r1v*i. Moic igiportanriy. lhis rate oi rei-urn Llears ilo reliiiioir:,.ilip to tire inlersi raies
oii'ercd or charged
. unded
l more rr ha*ks(oranyoiirernormalinterr-sttite)sineeittal:.esnoiic.()Lliltof theiimirtgr,-'ilhr:u;r:ih{ior.t'sor-rli'the
:qually ;rrmpi.)unding ot'inleres1. lr i: therctore. potr.-nti;-rlly. r'et'", n-}isleaiiing.

Net present value


The calculation of rrsl presltlt yuitrc it rr l,.l'r).icci evaluat;o* tecir*ique that lake:
into *-t r*=".i
.iCCoutlt the profitabilit-1, ol a pro-ject and lhe tirning oi the cash ilor,r, s iilat ale prc'dr-iceci.
"",-*
I ([]P\'l) and internal #l
:rfoJect
This is based on rhe viei.v that rcceivin{ {lrjLi tcciay is better thlin havtrrg lr; ait ttritii ,Xtilililti,,X[::Tt
-tu-e n
the
l.xt vear to receir.,e it. We could. f'or exant;:le. in','e,qt lhe ili')0 in a ban]'' ir--d1f
11d ; discounted rash fiow &
r:rve I1(i0 piLrs the iiiiercst in ii veari'-s trri:e . If rt'e -qil) ihxt the Dr?.\e,tl I'rllii+: oi ti0t! r
(D,CF) technlques'

.n ii year'slin,e is f9 I, we irlean ihal i100 in il )'ear s tinte ir the erf,ui';;rient r'f i9 I


F :10\1.'.

equivlrlence c;f 5cl! Ilow allll ti00 in ti year's iiule ueans \'i r1l'' disc':unirn:: Iire #$
:t ()1
-lhc : !"iciethaitiilr+xai'npie
,iiiure inCome li-V app;cx-in:atcl-V 1Oti.If ,','e lecclrrtl f9 l Ar,rr', ltd inie::i.-'i i! ii.)r 'ilt,.;:: u:''ia;rir''if i'r'1r'-

,lr- f,i;t:t' &


I !-er ilt an annuai ii:te i-est rarE of 10%. it r.r,r-rr"rld bt r'vcrth i lt-ril ;,- ,. ,'..r.t -
Jnnual raie i:y. rvhich rve tiisct.,unt i uiurc elunirrgs is knoil n ii:'. 1i-re t;'isl r,',,';ti
rctt - t,ii"'t
t,r !n'.xi1
:-; ihe ahove e:ilniPle.
:r cl tl-ie
. ihe fact >mrilarly, I10U recciveC in two years' tililc rvotLlri iiltvt li presenl value oi :ippro;(l- : A i-are of i{),4 t1\3-..}
rlrti:iy f83 - in other words- {83 irli'cster'1 at ilii intere:1t rtrte of til',i r,"'oiLlci -vieid r b+ unrr:alisiic !,:ut is
' us+i hei+ ilr ease of
ffi
.ipprt;x iruliel y i I 0i) i n tr.vo', c:ilts' ii lt.ie ,sr,lici,i::iicn.

ihe preser.rt value of any iulr.rre ..t5l.r flc-\,,'tua1, he ol;tainerl n1' ruplf irrg thr iol!r;r'vifig
'.r ay cf :r-rimrtia
iised t,-t
Presetit raiue
30 Sa.ftzLtarc Projcct Mortngenrent

wheie ;'is the discount rate, expressed as a decimal value. and I is the number of years inro the luture that the
cash f.lilw occurs.

Alternatively, and rather more easil\,, the present '.rillue of a cash flriu lrlay be calcu-
: More extensive or
lated by rnultiplying the cash flow by the appropriate discourrt faclor. A srnail table of
ffi detaited tables may be
i constructed using the discount factors is given in Tabie 2.2.
fcrmuia discount fac-
, tor 1 for various The NPV for a project is obtained by discounting each cash fiow (both negative
i (t*ty'
irnd positive; and summing the discounted values. It is normally assumed that any
u61 values of (tlre drscount initialin,,,estrnent takes piace iinmediateiv (indicated as year {-}) and is not iliscounted.
tv rate) and f (the number
I of years from now). Later cash flows are normallv assumeC to iake place at the end of each year anci are
dis.ounted hv the appropriltc rrnourrt.

TABI- E 2.2 NPV discouni factors

't^* Discount rate (Yal


f Year 5 6 I t0 t2 15
i*
r 1 0.9524 0.9,134 {.\.9259 0.9091 0.8929 0."q696
I
Z 0.9070 0.8900 0.8573 0.8254 a.1972 0.75{:l

3 0.8638 0.8396 0.7938 0.7513 0.7i r8 a.65"i5

4 0.8217 4.i921 l./. r'-i-\(l 0.5830 0.6355 0.57 r8

5 0.78-15 \]. t-+ I \ 0.6806 0.620e 0"5611 0.4977

6 4.7162 0.7050 0.6102 {).-5645 0.5066 0.,i12-l

7 0.7 l0'7 0.6651 ti.58-15 0.5 132 0.4523 0.3759

8 0.6768 0.62?.r 0.-q403 0.4565 0.40-39 a3269

9 0.54.18 t].59 I !) 0.5002 a.4241 0.360{-, 0.28.i3

i{) 0.irl:19 t) 1632 0.3855 4322A 0.2472

15 0.4810 0.!t i 7l 0.3152 {).2394 0. I 827 t).1229

20 0._1769 0.3il8 0.214_s 0. i486 0.1 03? 0.061 1

25 i).29-{3 {) 1330 0. r 460 o"{}923 0 05s8 0.0304

A
ffi
EXERCISE .w
ffi
n6s

Assuming a l07n.liscor"tnt rate. the NPV ti-rr project I t'fabie 2. l) woulcl be caiculateci as in Table 2.3.
The netpresentvalue fbrpro.ject i. using a i0% discor-int rate. is theref-ore f.518. Using a 10% discount
rate. calculate the net present values fbr projects 2. 3 and.l anci decide wirich, on the basis of this, is the
rnosl beneticial to pursue.
? r t: i e : t F. t, i,,! tt it t i Ln1 ri1 r tl l) r t; g r o m n rc A4 Lit t ii. qt tt tt t ! 31

: :ilat r-hc- -ABLE 2.3 Appiying the disccur,t facicrs ic iticje(t 1

'r'ealcu- l'ear Pro.iect I tash tluir tt) Discoun! Iactor (,) i0c' Discounled cash flou 1S..t

. ::il:1e of
0 - i0(1.(J0() l.0rJ00 -1m.00{}
i i 0.fl00 r.).9091 9.09i
1.'gative
:hrt an)' ) 10"000 0.8264 8.:6,i
,.,!iniac.
' .Lild are -) i0.0()0 ti.75 1 3 ?.513

1 20.000 0.rlE30 1i.6fi]


5 l0{).iiu) 0,6209 52.i)90 I

I g

i Net Profit: {50.000 lrtPV: !6i8


i
--*--J
l:
?
1

. *,VO i
+ . :nterestjngIcl nole thai ilie riet pres.eni vrlues fbr projects i and 3 ars s;gniflcirnll_r- difierent - even though
-ah1 -- both vielci the:rarre net profit arld both har.'e the sanre return cn investrr:ent. The difl'ererce in NPV
- -.1\ the fact that. lvith proiect i. ile rnusl u,aii longer fbr the trulk of'{he incon:t:.
:-il-i - : l.nain di1'ficillty , 'ith NPV fbr deciding betr,r,een pro.jects is selectin-e an apprr-rpriate discount rate. Some
r-18 *rniziltiLlns have a standard rate trut..,r.hcie this is not the case. then the discounr r31e sholrld be chosen
.:ilect available interest rates (borrowing ct-'sts ivhele the pro.iect lirust be furded froin ioans) plus some
::nilliir tti t'eflcct the flrct lhat softwar. projecis are noniralll, rnore riskr,than lending money to a bank.
-:.:ilici ciiscotint rale is lonnally less irriportant th:ilr ensuring ihai th* sarle iiisconnt rate is used 1br all
- '3cis being comparecl. Hovrre\ilrr" it is important to rheck that the ranking ol projects is t.rot seusiiive to
j-59 ..11 changes in thr- discount rate
- have a looi. at the lblio.,tilg exercise .
&.
ffi
.,ilculate the net present .,,aiLie
fbr each ol the projects A.
EXERCISE
-Iable
w
'r-l
Ei an,,l C shr,\.r,n in 2."1 usilig eech of f-he
r:.otrnt laies 89i. lG% itnd l7',c.
trr each oi the discount rales. decicle rvhich is the l.rcsi L1t"oi*cr. \\rhat cln r.ou
'-'t'rrii.'lude
ii'r..rr:l iheEe
: -\ults?

riil+
-AB[-E 2.4 Three estimated project cash flows
'*.-""**;
Year Pro.iectd (S) Proiect B () Prqlset ('tf t i
rL
Fg () ,8.00U
;

H
F -8.0110 -i0"0{itr I
:
I -i.000 1.()i-i{-} :.{,00 i
rre 1.3.
1

:C()LlIlt
. i. the
( Contd)
3? 5t, fttL'ate i'' r ti jt,ct lvTc'ri r 24cutc
i tti

, {,|-rrr,lril
C
4..J00 6.00{}
2.{ifti b
1 {l(N}
f.ii0,O 3 00{)

500 f .i)0u 2.*0i) *r


2.txi()
5 500 -6,lllli] Ere
a

5.000 5.ili]0 con


Ner Prcfit 4.000
Pro

set a tai'g':i r'iie


trf as a targetril.re Lrf returrt. r[. roi exlir:-i;ile, "\'e Ri
Alternativeil. the.di:r:oirnt ii1t9 ca-a be irrought pr'-q,-:lt viiiue r"i-ilrg i ii i
prcject that riicl n,:t dispial' a positi.''e iiet
of reiurn of i51,,i 11,3 ..r.,1-ritjl re.i.ct 3n) ii;r sele i:rion-.;;r:rhaps il1' ttsit:g In
a pcsi{ivc- l{PY '*ould l.:e c'otlsicereri
discoiLnt raie. i\ny irro-icl-'i ihai tiispla-vec ai
an a<lditional se! r:f ;riieria where
cradidai* prrrjects ivcre cr:mpetin!-l 1'or resouices'
im
CC,

Internal rate of relu i{t rh.


aitirorigl.r i1 t-n;r., be ul.eri t..;..].jilii-1ail..proju-it:, ul
one disadvmtiige *iN}iV :l:. a:irt'].}sure oi 'Drotitalrilit,v is tlr;ri" eapita.l
fuoL r.+her invcsin.fil3 i]f illc: c(lst-q of bcrror"'ing ua
it uright noi be dirr,i:ti)l (on..,plrr.]hl. v.,lth earnings (1}1R) rttenpts
percorlt.rgt;l}tt.r*st rate. The irrtctnll! rare i}fretilrrr
Such ccsts are ustraiiy rlucteri as ii
1:
interesi rirtes''llltrs''0a
llleasllfL: as a percentiige retllrn ihat is clirecti-v cor*pa'abie with
provi,le a profitabiiit,v r:apitai co*i'l be iiorrov''eil fuiless Il
ic-.;L w]ouid be wrirti*lhileiltiie
pro.iect thl.rt shcrwed r!i1 fsrimi:red rRRt-.f iOrii''
thafi1{}%orif thecupiroir-:oukitir:tbeirrvcsletlelscwherefor;iret*rtisl.eai'rtliail
pel.r:entage r"1isr:orult rate tliat rvcrilil
pr*dir*e aii NPV gi z,elrl. lt is' 1l1<-l:t e asi}'v T
The lR.R. is ci:1c....1ated a-s i}-tli't
onn,irr,r.. fr,r*.-*r that pra'ides futrctions
io: cale'iati'g tl.'e IRF:'
calc'late,l usii.rg a spreacisheei.r otl-ier with a* initiai guess ilr seerl v'iiie
N{icrosoft Ex-cei. tbi e.x-an.iple. pror.,iiles
iRR i.unction.s rvhicir. p'ovidec
iln IR[l'
(which may br- zsro), rviii selrcir fcr anii ietut'n
a'}ii}\r
i*ir;.iir.{, irrr: ai,.siilure size c1'tire lctli,';\
pr+-leci witi-r
tine iiefici=iri1,r:i ihc iRR i: tirai ii ar;cs iiri
oli16g"tXii!arri'rr,-r-:iRii3f i5'i c.ri1 i,1-Iili.lii.ittrilctiveihani'rllr:lviti"rairNPVof{i(i-0i'll};rnti;raIRR<;t'-1!i'i-'
,- t.hi: rctt:in,r+ '-'iii-'ila! i-t ir.-rir;t bul :' t'-'' l'*l''lliis 'ireaier'
re!uri:i ls rha-t. *ndei.ce'rain crrlrditicr,s-
it is pi-rssibie tt; find n-rcri: thari
Anorher.'i;jsctio' t. ti1. i't,Jrn:,.i rai.: ci

iir'-: lowegi ','ltiue ,l;'i'i ::11-ri:ie ih': r-'ti:cr:'

lir-1\1,f\,tr, a ctr:trri;ictt: ili]!!t,tJi t+ ei:enrlittic proiecl evaluliiltx-r.


NPV iinj i[]*{ ;rr-.!.-ri.
eAtciaiel.ilil,,ltii..:nlnLl:,t;tlst'.iakeiatoaci]oEiltthcproblei:rstliilirrdirigihecashflo',vs-.',.,i]l.;.:.lLcr
t:l
exa.i:rple"beahlii:rrrpai/lheinte1'fsttctliell]'l"an'owcrin'!or:e't'latihcappr*piiltt*ti1l! proiect
pru.!cci. iiiture e*rnii':gs ft.crr.' a r.cl;-r:ir,eji,risk3,
e Wirijr a p,;r:-ir.:i.. iRR. liight rnr.lielte ;-i prcli:abil: ;riqiit a nlorc
irtrn . ,ri. inr'esling rvith I i:;.nk we rludcrtairc
migirt be 1ar ir:,.:. icliai:le til,in e:lffiings
Cei;rilr:ii ri:ii il;i;Lit ;l- as cits':iihed i--cio*''

c\.Ileilrustais,.rf(-)i1-iiilelJn:Jon''rl-io:ectwithii-rtheiinancialaii''i!:t()noiiliCliainer'"',lrkofiltcor-ani-
z.ationiLsawlioie-ifrrefurltlthisoire.li'iilwealso'oeabletofundothei:lr'orti.rypro-iects?
Project Eraluatitm antl Progrnntne Nlanasenrcnt 33

Ex-ERCrsE
@
Check if the projects A,.8, and C shou'n in Table 2.4 are worth takin.q up when the rate of interest on
borroued canltal is l5(,

. * Risk Evaluation
-"ery project invoh,es risk. We have already noted that prLtject risks. u,hich preverlt the project from being
- ,nrpleted successfully. are different liom the busirLess risk that the delivered products are not profitable.
::oject risks will be discusseC in Chapter 7. Here we focus on business risk.

-ri IIi
,, i:i,/; Risk identification and ranking
! usitlg
.rny project evaluation n'e should identify the risks and quantify their eliects. One approach is to construct
:roject risk matrir utilizing a checklist of possible risks and classifying risks according to their reiative
:-Lportance and likelihood. Importance and likelihood need to be separately assessed - we might be less
, rcerned with something that, although serious, is very unlikely to occur than with something less serious
,t is alnlost certain. Table 2.5 illustrates a basic project risk matrir listing sorne of the business risks for
i!ile! t)"
- :roject. with their importance and likelihood classilied as high (H), medium (M), low (L) or exceedingly
- rri-rl1r1.
llpi! i'-)
- ,ikely (-). So that projects may be compared, the list of risks must be the sarne for each project assessed.
. likely, in reality, that it would be longer than shown and more precise.
Thr,rs, a
iiri less. : project risk matrix may be used as a way of evaluating projects (those with high risks being less f'avoured)
-1! a rneans of identityrng and ranking the risks for a specific project.

.r ;J !ii \ -iBLE 2.5 A fragment of a basic project/business risk matrix for an e-commerce application
:.1: iB.F',
j r,alr-re
Risk Importance Likelihood

.- \:i]1 l Client rejects proposed look and I'eel of site H


,t i 5'. Competitors undercut prices H M

Warehouse unable to deal with increased demand ]\I L


, r'i' fh!",!i
j i(r'iiil:e Online payment has security problems M M

\4aintr'nance costs higher than cstimated L L

Response times deter purchasers M M


\i.(:. icf

, ir!:0is61 !-rsk and net present value


, li llltliS
-: eaprojectisrelativelyriskyitiscommonpracticetouseahigherdiscountratetocalculatenetpresent
r crgani- -: Thisriskpremiunrrnight,forexarnple,beanadditional 2c/c,forareasonablysaf'eprojector-57ofora
. , risky one. Projects may be categorized as high, medium or low risk using a scoring method and risk
34 SoftiL,cre Prctiect Mnna\etncnt

even if arbitrary' provide a consistent method of


prer.tliutns rJesignated fbr each category. The premtums.
taking risk into liccount.

Cost-benefit analYsis
Arathernroresophisticate<lapproachttrtlreevaluationofriskistoconsidereachpossibleoutcomeand than a single
the corresponcling value of the outcome' Rather
estimate the probabiliry of its o...,..ing ar.icl proba-
will then have a set oi cash flow lbrecasts. each u'ith an
associated
cash flow tbrecast for a pro.iect. we
bilitvofoccurring",Ihevtlueoftheprojectisthenobtainedbysurniningthecostor.benefitforeaclrpossible
horv this n.ray be done'
Exercise 2'8 illustrates
outcolne r.leighted by its colrespcrndingprobabilit,v'
A
XERCISE ffi
payroll applicatic.rn for use in academic institu-
I BuyRight. soiiware house. is considering cleveloping a
a
if BuyR'ight
anaiy sis. S-tucty of the market has shown that'
, tions and i-q currently engaged in a cost-benetit
become availabie' it wiltr obtain a high ievel of sales
products
, can target it eificiently and tro cornpeting happening'
, generating an an,ual in.o,o. of 1800.000 It estiniates thai there is a 1 in I 0 chances of this
belbre its own lar'rnch date and then sales
applicatioD
However, a competitor might iaunch a competing
rhere is a 307o chance of this happening' The
. migirt generate onty f 100,000 per year. tt estimitesihat
in between these two extremes - it wilt gain
a market
I most likeiy outcome. it believes. ii somewhere of
beconies available anci achieve an annual income
lead by launching before any competing product
ireso.ooo.BuyRighthasthereforecalculateditsexpectedsalesincomeasinTLrbie2.6.

TABLE 2.5 BuyRight's income forecasts

{sutusAnnualsalesincome(f)ProtralrilityExpeltedvalue(s}{ ixtj i
I ' P I

800.000 0.i
High
650.000 0.6
Medium
t00,000 0.3
Low

I Erpectecl lncome
;*.-..***
at 1200'000' ifiespective of
DevelopmentcostsareestirnatedattT50'000'saleslevelsaru-erpeetedtobectlnstantforatleastfour:
mainienance are estirnated
: years. Annual costs of marketing and proeluct I

going ahead with the prtrject?


i tf," *u*"t shzr-re. Would you adi'ise

sucf as tl1tlr-rding of motorways' where variables


This approach is irecluently used to evaluate larse^rro51ts
l.rel'rce the total benefit oi shorter
jourlley tiil1es' are uncertain' The technique' of
such as traflic .,o,:,r"0. cxtensive
"n.1 of octt"'entt io each scenario' which requires
course. relies on being able to assign plobabilities
research.
cost-benefit approach' by 'averagint * .11:,l"tative
and
When used to evaluate a single ma.ior proiect. the 'r'vorst-case scenarios" Because
not take tull account
positlve outcoirles of tne diiltrent-scenalios" rloes 'f
'**r

P roi ec t E t: nlunl ion rti't tl P ro q7s.1 71 111 17 Mt1 n0 !!11i olf 35

-orl of : ihis. it i-q nrore ilppropriate ibr the evaiuation of r porttoiio of nrojects ."vhere overail prciitab,ility is the
-.iitra,i'r'aoticern. lnore successful pltrjects can ofi.let the impact itf less succes:ilr-ll nnes.

Risk profile analysis


re and rn approac:h n hich atlernpts to o','ercome some of the objections to cosi-benefit averagii.ts is ihc .ons{11ictiL)n
:ingie i risk profiles using sensitivitr anall,sis.
prciba-
Lrssibie
Ihis invoil'es varyirig each ofthr prralneters that aff'ect the project's cost or benefits to asceriairr hcu selsitive
ile prrrject"s profitability is to each iactor. \&'e might. for exirn'rple. \,ary one of our iiriginal r-stiinates b1, phts
: minus 5% and recalcuiate the erpected costs and beneiits fbr the project. By repeating this exercise for
:rch o1'our estimates in {urn."\,'e can evaluate the sensitivity of the prr;ject io each tactor.
>
Br stuCying the results oi l sensitivity analysis we can iclentif_v those l'actors tirnt are most imporlant to the
'xc.e ss o1'theproiect. We then need to decide whether we dan exercise greater control over the m or otherwise
:rtu-
'llitigate their effects" If ueither is the case. then we must live rvith the risk or rtrandon the project.
-rght
.rles
rr ng. Using decision trees
..r1es
The approaches lo lisk anaiysis discussed previously rather asstime that w,e are passive hystanclers ailow.ing
The
rlf,ture to take its cwn collrse -- tlie best we can do is to reject over-risky projects or choose those r,vith the best
rrket
risk rrroi'ile. There are manv situaliot.ts. hou,ever, where we can evalulrte ri,:hether a risk is ilrpoltant and. if it
ie of
.s. decide a suitable course of action.

SLich decisittns ivill iimit or aftect future options and" at any point" it is iurportant to he able to assess how a
lecision will affect the iuture profitabiiiiv of the project.

I \s an exarnple. say a successful compant- is considering wher to replace its sales order processing s1.stern.
The decision largell' rests upon the rate at ivhich its business expands - if its market share significantly
tncreases (whiclt it believes rvill happen if rurnours ol a competitor's imminent trankruptcy are fulfiiled) the
e:listing s-v-stem might need lo be replaced within two 1,g11.r. Not replacing the system iu time could be an
:rpensive ontitln as it could lead to lost revenue ifit cannot cope with increasecl sales. Replacing the system
:ntmediatelv will, hoil,ever" bc expensive as it will mean def'erring other projects already sche<iuleci.

It is calculated that extending the existin-r svstem rvill have an NPV oi f7-5.000. although if the market
:rpands significantlv. fhis will ire turneci into a loss with an NPV of--11 00.tj00 due to lost revenue. If rhe
l.iarket cloes expand, replacing the svstenl now has an NPV of J250.000 ciue r.o the benefrts of beilg able to
handle increasecl sales and other benefits such as improved management information. lf sales do not inerease,
iour holet,et. ihe henelils i.r''ill be severely reduced and the project w,iil suifer a ioss with an NPV of
-{-50.000.
.e of
The cortpany estimate the likelihood of the rnarket increasing si-enific:antlv at 20% ancl. hence. the proba-
-
biiity that it will not increase as 809t. This scenario c;m be representecl .rs a tree structure as shorvn in
Figure 2.2.
,rriables The analysis of a clecision tree ctlnsists of evaluating the expected benefit of taking each path fi'orn a decision
iL1ue. of point (denoted by D in Figure 2.21.The expected value of each path is the sum of the vaiue of each possible
,.tenSi\re
i-)Lltcome tnr.ritiplied by its probahilitl'oi'occun'ence. The expecteci valuc ot eitending thc systein is therefore
!'10.000 (7-5.000 x 0.8 - 100.000 X 0.2)and the expected value o1'repiacing the system t10.000 (250.000 X
tive and 0.2 - 50.0iX) x 0.8). The companv should therefbre choose the option iilextenctring thc existing svstem.
Jecause
36 Softu,are Ptoiect Managemen!

Stra
Seve:
comi
coul;

Infi
Org,
a 1c',

relu
and
and
disi:
ide:

Re
Tr-
B;.
FIGURE 2'2 A decision tree
hu:

3.? Programme Management


---- .-- -.- It shouid now have been made clear that there will be an element of risk with any
i,---- precise size
;1
(9 Ferns'paper appeared i ,ionf. project. Even where projects produce real financiai benef,ts, the
in th" tnternationat i ;; i.;; b.n"fit. will often be uncerrain at the start of the project. This makes it
ro take a broad view of all its projects to ensure that while
fut;:Izifl::?i;fr",, , iil;; r".
"rg."ir"ions overall will generate
l:#:: some pro;ects may disappoint, organizational developments
----*: substantial benefits.
k
careful managernent of
we introduced project portfolios in Section 2.3. We will now examine how
L.

as'a Srou'p of pro'iects


programmes of projects can provide benefits. D. c. Ferns defined
a programme :_
to gctitt benefits thctt woulcl not be ptossible were the projects to
be
tltat are managecl in a conrdinated w*ay
monag e d ind e P e nde nt l.r-' .
1
Programmes can exist in different forms, as can be seen below'

Business cycle Programmes


The collection of projects that an organization undertakes
within a particular planning cycle has already been
seen that many organizations have a lixed budget for
discussed unrler the topic of project-portfolios. w'e have
to implement within that budget within
ICT development. Decisioni ftuu. ,o be made about which projects
year'
the accounting period, which ofien coincides with the financial
Project ktaluation and Programme Management 37

Strategic programmes
Several projects together can implement a single strategy. For example, the merging of two organizations'
cmputer systems could require several projects each dealing with a partioular application area. Each activity
could be treated as a distinct project, but would be coordinated as a programme.

Infrastructure programmes i
Organizations can have various departments which carry out distinct, relatively self-contained, activities. In
a local authority, one department might have responsibilities for the maintenance of highways, another for
refuse collection, and another for education. These distinct activities will probably require distinct databases
and information systems. In such a situation, the central lCT function would have responsibility for getting up
and maintaining the ICT infrastructure, including the networks, workstations and servers upon which these
distinct applications run. In these circumstances, an infrastructure prograrnme could refer to the activities of
identifying a coflrnon ICT infrastructure and its implementation and maintenance. I

Research and development programmes


Truly innovative companies, especially those that are trying to develop new products for the market, are
well aware that projects will vary in terms of their risk of failure and the potential returns that they might
eventually reap. Some development projects will be relatively safe, and result in the final planned product,
but that product might not be radically different from existing ones on the market. Other projects might be
extremely risky, but the end result, if successful, could be a revolutionary techno-
Alarr,Webh{2001), ,..
}ogical brealthrough that meets some pressing but previously unsatisfied need. 'Whenpr,eject manage-
ft with any ment doesn'trivork'
precise size A successful portfolio would need to be a mixture of 'safe projects' with relatively Pro$d,{tanqgeigtr.nf ,

ris makes it low returns and some riskier projects that might fail, but if successful would generate ?bdayMalr . '

e that while handsome profits which will offset the losses on the failures.
ill generate
Innovative partnerships
rgement of Companies sometimes come together to work collaboratively on new technologies in a 'pre-competitive'
of projects phase. Separate projects in different organizations need to be coordinated and this might be done as a
ojects to be pfogramme.

2.8 Managing the Allocation of Resources within Programmes


We are now going to examine in more detail programmes where'lbsources have to be shared between
concurrent projects. Typically, an ICT department has pools ofparticular types of expertise, such as software
rlready been developers, database designers and network support staff, and these might be called upon to participate in a
dbudget for number of concurrent projects.
dget within
In these circumstances, progmilrme managers will have concerns about the optimal
is
Reiss rt
Thecomparison
useof specialist staff. These concerns canbe contrastedwith those of project managers based on G.
- see Table 2.7. (1 96J Progr.arnme
Management'
The project managers are said to have an 'impersonal relationship' with resource Demystified, Chapman
& HalL
types because, essentially, they require; for exarnple, a competent systems analyst
38 Sot'twnre Proiet:t Mtnugenrctti

project managers
TAB!-E 2.7 Programme managers versus

iI \1*ur '-^ --- r':' rc


- simultrncous One project at a tit-tre
liulr'c1\
t}pe
!:esources hrpersonal rel:rtionship \4'ith rescurce
{ P"rsonal reiationshlp,rith skillecl
I
tesource-s Need to mininrize demantl for resources
! N""O ,o maxitnize utillzation of
! ren<i to be
Ploiects ten<i
Plojects be dissimilr i
$ Froiects tend t{} De slmltiir -*'*'**
L***-*!:.--@***s***,-
a numbel of i,<li'idual systeins rnalysls
.Joes not $latte,.. The programme i.nan*ger has
and rvho lilrs that rr.1e
una*.r,i,olherControiwhosecleployrlenthastobepianned,
Whenaprcrjectispianrred.atthestageofallocatirrg,..oY::,.,.1i:.,..,:.1*."managem()ntlvillbeinvoir,ed.
technical statr irre treed lrorn work
have to be deial'!'i until the lelulsite
sorne activities in the project might thcn yon wouid want to avoicl them
on other projects. where expensive
technical ,rotr or= empioyed fuli-tirne'
havingshortperiodscfintenseactii'il5,-int.-rspe.sed,,ltt.,t,,ngperiodsolidleness'durirrguihichthei,arestill
r:rost econoutic rt'hen ihe demand for
work is evenly spread fiom month to rronth'
being paid. It is

AswillbeseeninLlhaptergonrroriitoringandcontrol'whenirprojectisexecutedactivitiescantakelonger
preve,ter'l fr.m nroving
(or sometimes even lEss time) tiran ptanne,1.
n"ruv. .or'r"ean th;t specialist staff are
continually tc'r monitor the
on to their next pro,ect. ii*rr." it .rn
b" ,e"n that programme mantrgement needs
progress of proiects and the use of resources'

2"S Strategic Programme Management


is rvhere a
wrtfol]o-11 proiects ail contribute to a cornlncll
A ditferent tbrm of programme manageffient oui mailtteuance work fbr clients' A customer
s
Take. for a business canies
objective.
"^rlpt*. ^which to be ver;r' variable and inconsistent' The ernployee who
exper.ience of the organizatioil might
n" rot*j
a*d diil'erellt
cafr-Y out the work
is ciiffereni iionr the pe.-rple who act*ally
records the customer,s requirement-. expiain to one company ernployee
again from ihe clcr:k whoieais with rhe
*..nun*. ciften a cLlstomer has to
other e,nployee' A business ob-iective rnighl be
clisc-usseol ot i..ngti-r ruith some
a probierir il);:ri i,Liis aiLel ,ly becli it: to a nuniber oi
ro the-ciient' This objective m;girt :-f :l:ie's
to preseni a .cnsisieilr anri ur,,iti:i:in fr,;ni work to reorganize each indi'idual
L-,een'large1,v serf-cc,ntained. The
different systems which urtil 'cw have pfogramme'
project, coordinated at a higher ievel as
a
area coulil be treated as a )cp3r:ite
i----.-,,-.*-,- the*, The se t;;pes of programrne are most ollen needecl by iarge organizations which are
have a
typical
I Recatt that OGC is ; large and coniPlicate :cl organii:atiolai strirctrtre. Goverrunent departmenis
{S ffi;;it*"*r""t was I examples and ir is ,*t thai tl're oGC- the Uniterj Kingclon gc)verlimeilt
, commerce whrch 'inrprluing CC"rA) fbr the intioduction of PRINCE2
project
, ,t c"nt,ui
i,i.uirv , ;;.;:i, ;n;; *"; ;;;;uir.,l" tuitn*t,'.il::lll":..::.::::il:::,"::,H:11::J"-ramme
"
ffi f;H"TlY,iL1,,o", ;;;;;r.,;;;, ,,,na*J'u, t as directed basecr on the occ guideli
H:::ilX;TiTX""' i ffi;il;;. il"r*r,'r, ro," describecl is
P rt.ti t r:t Ei'ni tr tttitn't ortl Pro q r att lrc Nl nit t gem en t 39

: il Creating a Programme
The programme mandate
.leoGCenvisagesthattheplarrnineofaprogianrtl-rcuilll-retriggerecl|rvthccreaiioncrfallagreeclT)togrLllnlne
cir-rcument descrihing:
.,-,,clrttr.iclerrllf this shouki i--e a fortnnl
r ilrc ner,r' services or capubilities tire progtaittte should deiivei:
t"'v r:se t'i the ner" serviect or ciipabillt-v:
o how the r..rrgairizatitrn will'rre improved
ehclwilreprogranr-rrefrtswithcorpolategolrlsarrclanYotherinitiatir.es.
..*-J
-..thispoint.a['}ri),qrdllinledire{|()t.rrtlghttobcappointe.itopi.or,iclcinitialle"rrlerslripicrthepr:ogramrr-ie.To
ri'ithin tile organiz-ation' This
.l v sls - : :*ccesslul, charnpion wh. is in I prornine.t positi'n
ihe program,te nee rls a
takes thu' programine'
ril signal the seriousness with r'hicrr trre orsanization
,l',,cd.
ork
ir The programme brief
I rireia case fol the prourarnme. It wiil have sections
'jr()ur(ot1tl1e brie.f isuow producecl which outlines the Lrusitress
:i itill . .inu otlt:
the new capaclty that the organization seeks - it is
o a preliminary ul.sloir stoienrcnt which describes
Lr1138 f clescribecils'preliminary'becausc:thiswilllaterbeelaborated;
qenerated and how
-..-.r'ing
create - including when they ' are iikeiy to be
i0r the
o the berteJitt that the programme shotrlcl
thr'r Inighl he tncasttretl:
r risks and issues;
o estimated costs. timescales and effort'

,i]]l1l0n The vision statement


a mofe
.r.rllef S
enough infirrt-nation rt' decide rvhether to lequest
re programme brief should give the sponsors
:e who -
of the prografirme. This stage woulJ
justify the setting up of a small team' A prog'nunme
,riailecj clefinition
Itt'lreui
,'11(l.q,erwithdal-ttl-ciayresponsibilitytbrthepiogran.iner,vouldbeappointeci,
rlloYee sho*rd describe in
projeur brict arrd r-eii.es a*cr erpani-ls it. It
'.,':ht be group takes the vision statement rrom the
.ir
wrll give the organizaiion' ll csii*rate-c fosis'
lirr pt:iforniance
::rber of :..r.ril the new capability that the programlne
Jrr idual .-..iserviceievelscannotbeprovidecl.thenthereshotrki;rtleasibeanindic;rtiollo[howthel"mightbe
increased' even if the precise
r.irsurecl: frir example. one might be
able to say that repeat busilltrss *'il b"
-e of the increase cannot be provicleci'
l have a
: tYPical
ifnmerli The biuePrint
I project the visi,, starement cail corre only tiiror-rgh changes
:-e r_.chievement of the improved capabiiitv describe<i ir-r

:Iiifi1me
l'hestru.turearrtloperatiollsrlltheorgalrizaticrn.Tlreseirrerletailc.rlint\eb!ueprirrt..Ihisshorrldctlntain:
o business models outlining the new' processes requireri:
llew anti thc skiils tiiey,
incluiiirrg tire nut'ilbers o1 staif reqrrireci in the
SVStemS
o organizational sirtictttre -
t'ili need:
r-tot.r-siaff. resottrces that will be needed:
o ihe iniili-rration sysienls. eqriipment and ciiher.
40 Softzuare Project Management

o data and information requirements;


. costs. perlormance and service level requirements.

To return to the example of the organization which wants to present a consistent interface to its customers:
while this aspiration might be stated in the vision statement, the way that it is to be achieved would have to
be stated in the blueprint. This might, for example, suggest:
o the appointment of 'account managers' who could act as a point of contact for the client throughout
their business transactions with the company;
o a cofilmon computer interface allowing the account manager to have access to all the information
relating to a particular client orjob, regardless of the computer system from which it originates.

The blueprint is supportedby benefit projiles which estimate when the expected benefits will be experi-
enced following implementation of the enhanced capability. One principle is that a programme should deliver
tangible beneflts. Being provided with a capability does not guarantee that it will be used to obtain the benefits
envisaged. For example, as a part of the programme above, the marketing department might be provided
with sales and demographic information which allows them to target potential customers more accurately.
This should improve the ratio of sales revenue to advertising costs. However, just because this information
is available does not mean that the marketing staff will necessarily make effective use of it. Hence the need
for evidence of actual business benefits. The timing of the benefits needs to be carefully considered. Thus
marketing campaigns that target particular customers mrght take time to plan and organize and the benefits in
increased sales and/or iower advertising costs could take some months to become apparent.

The management structure needed to drive this programme forward would also need to be planned and
organized.

A preliminary list of the projects needed to achieve the programme objectives will be created with estimated
timescales. This programme portfulio will be presented to the programme sponsors.
:',
,'---,'.---',,'' ,'',- ,'--,'',
($ pians 1 A major risk is that some of those whose work will be affected by the programrne

ffi
communication

;,:il::n:[IJ;i:;:l1ti:.*ffi JI-,lx'Lti':"v"!::*:,Ty,;ffi 1H:.',1;


interests could be drawn up. This can be used to write a communications strategy and plan showing how the
appropriate information flows between stakeholders can be set up and maintained.

We noted back in Chapter 1 that with conventional project planning, it is not usually possible to plan all the
phases of a project at the outset, as much of the information needed to produce the detailed plans will not be
available. This is more so with programmes. However, at the initial programme planning stage, a preliminary
plan can be produced containing:
o the project portfblio;
o cost estirnates for each project;
o the benefits expected (including the appropriate benefits profile);
o risks identilied:
o the resources needed to manage, support and monitor the programme.
This information allows a financial plan to be created. This enables higher management to put in place the
budget arrangements to meet the expected ccsts at identified points in time. These will be tied to points in the
programme when higher management review progress and authorize further expenditure.
Projtcl E,t,it!unli.tttt rtttLl proqraminL: L4nttngement 41

Aids to Prograrnrne Managernent

litomers: -1, c p endency diagrarns


J have to -:" -*ill often be phvsical and teclrnical deirencieucies beiween projects. For exarrple. a
nrojeut to relocate
iiom one buiiding to another cilnnof start unijl the projeci to construct ihe new builcling
has been
:oughout :leied. Dependency diagran.rs. ['hicli are verl, sinriiar to activitl' networks irt projecl
level. can show
' .., jependencies. Hower.er. r,l,here projeets
rrin cr)ncurrcntl-1, in a pl.olrrarnme ancl protiilcts inlerchange. the
:-:rrienc_v <iiagrams couid hecoine qriite ccmplicafed.
'!rrmation
C\. t --:: 1.3 shons;r de0r:nderc-v iiiagrarr: l',.',r a prtigranmte to merge tlvo organizatiotis,
the consttluent parts
,: experi- -Leh are e.rplair.red beli-rrr,.

,d i-leliver '' !-r"tlt'rri !';ttttlttiksign A prt;ject is can'iercl or-rt which e:lamiiles the r.,arious exisling IT applications
in the
: benefits rIii o]ri orgil:tizatictts, anai;'ses theirfunctionality. and rrukes recointlenclations
abouth.rv tirev are t.
provided l-',r. i:onfbinerj.

..urately.
:,rlmation
r the need
h': corporate image lbr the new organizrition. This woritct inctucte aesigri
-be it tle jii pendencies
ll::"^:llil",,l]:19"-.-
between C
S)
ierl ir:go to put on colnllany documents
I
::d. Thus
:enefits in
lJitild comr,., s\,,ttem\ orrce prriect A lia,s Lrce, completed. work c;rn
be ;.._0l.T1"L9'*
and D that will need to

,
&
inggered *n the construclion of the rrew comlnLrii ICT apirlications.

:tned and

istimated

:1lgrafillne
:riving the
particular
:s how the

1an all the


,r ill not be
reliminary

: G U RE 2.3 An example of a dependency diagram

' . ttte oflites This is the project that plans and carnes oul thr physical co-location
of the statT in the
iLrrmer organizations. ln this scenario. tliis has io wait untii ttre completion
of project A because that
- :;'rhas exaniined how the t\4'o seis of *pirliiaiiori-c f or the pi'evious organizations
coulcl t-.e broirght
-:ti.ltt'. and this has repercussiotrs rln the dep.irimr-:ntal -\iructrlili ot'the new inerged orgrrnization.
Once stalihave been brriught ti,'gether. perl-raps with some stafl being rnacie
redunclant, trainint
l place the :i"rrr,9
Lise of tlte neti, systems carr begin.
,rnts in the '; tttiqrotirttt Wl'ren the ne\v' joint, applications ili,rve br.en developecl and staff
have been h-ained in
: uSC. dala can be migrated frorr: existing iiatl.lb;ises to the nelv cons61,,lur.,,
dalabasr..
42. Softtrtttrtt Ilroi ect M snnsentt'ttt

"go
live'. the intertaces' including the
{--, lnqtiente,t {.or.p{)tttte irterfrtceBetr:re the nerv applications can
be mociitleci to ccrnform to the new compan)r
clccumrntatic;n gerlefatecl for extemal cLlstonters. must
image.

Delivery planning
to the detiniti<n ttl rranche'r of projects'
The creation of a delivery,citpenclenclr diagram ivoulcl typicalll'leacl
as one step in the progremme' The projects i[ a
Atranche is a grclup ol pro jects tliat',r,i11 cielivcl' their prcducts
or ser of bc,nefiii for the che,t. A consideration
tranche shoulcl corrbine io provicie a co,herent ne.v capability
tr.anche rvill be the need 1o aloid contention for -scarce
resotllces'
in schedr-rling a

can be orgenizecl into tranches' each ot which


Figure 2.4 shor,vs l]ow ihe prc]gral.Iln]e's porttolio cf projects
deliv,:rs some tangible benelits to ihe user ffit#?-'
t!1ll:ri$&SAl(Jtif.*Li#rEni{ii*}*{a".i*fE&}* 4**n' t}EWlffi 9

Tranche i Tranche 2 Tranche 3


I

Pr"l""t{

Project E
I
I

* I
I

I Project G I

*
I

Benef ii Benetit Benef it


delive ry delivery deliver;r
&

FIGURE 2.4 Delivering tranches of project deliverables


This could be initiated by the writing ol
Ar this point. the plunrin.r of inclividual projeets i:an be consiilered'
brie.fs. definiirg the scope and objectives o1'each
project'
llrojerr

i.l ,i some Reservations about Prograrnme Management


r'vay they see the ideas ol
SuIe writers on pro-iect managetuent haYe expresseci reservations ahout the
like the one we have dcscribed above
pfogramme manasement being fre-"ented. lt is aigu.,1 that approaches
ibcr.rs on st nt{titre - iol eranple. u'ho Ieilorts to
whom - at the expense of prace'ss - tbr example' the basis
on which dr--cisitlils iiid lrede.
kind of 'super-pro-iect'' This could lead to twt'
The rnain concer:n is thrit thr pr(rgiall-utle t.ria1'be seen ils st'ime
controi over the subordinate projects'
pi:oblems: tlrst. that proglitlnlne munagement nlay exelt an LtnnecessarY
programmes shouid be ser-n rs thc meilns hy rvhrch
leading to bureaucraiic obstrttctioti. The second is that
at the level of projects' The business seriironment is
the objectives of the business are convelted lnto action
to evoive and be rnoditred during the course oI
constantly changing anci as ii consequence plograinlnes need
Proiect Exnlrtntion and Progrttnrne Mnntqentent 43

plus reltlc-
-.li -xecution. If the super-prqject idea predomiiiates then too much planning at the beginning
a
.1ing the
rll1lPaflY - ,e to change the scope of the programme may lead to inflexibility'
. case of the companl' merger programme, the projects within a programme may be
- ,,. e have seen in the
integration is
, i:]iff'erent fiom one another. Also. sorne prog.u-rr.. - for example where engineering
could atford a filore flexible
:,.)fiant - uray need to be quite tightly coordinated, whereas other programmes
: - lt!.
plo.lects.
lects in a - : rnain lessons here seem to be:
lileration . programme manaHement is not simply a scaled-up project manaqemellt;
r ditferent t'orms of programme management rnay be appropriate for diff'erent t;-pes of project'
of rvhich
Benefrts Management Thomas K. Landauer

: jve already noted that providing a capability does not guarantee that the capability
:-.
(1995) The Trouble
with Computers:
ry
re usecl to deliver the planned beneiits. Businesses have become aware of the Usefu/ness, Usability
.
. ,ri evidence of some investments in ICT increasing the
productivity of organiza- and ProductivitY,MlT
Press, explores the is-
- . E,ven rvifh busires.r process re-eng,ineering (BPR). the radical retlrganization G}
sues of the 'Productiv-
- --,inesses to deiiver improvements in efhciency and effectiveness, there are many ity paradox'in lT.
' -l:c1 cases where the expected benefits have not materialized'
-irs managerrent is an attempt to remecly this. It encompasses the identification, optimization and
. :rs of the expecteci benefits fiom a business change in order to ensure that they are actually achieved'
. tl.ris, you must:
o rlefine the erpected bene{its fror.r.r the programn}ei
o .nalyse the balance betrveen costs and benefits;
r rlirn how the benefits will be achieved and measured;
r ,ilocate responsibilities for the successful delivery of the benefits;
r :ronitor the realization of the benefits.
. '. r'an be ol'murl; dil'f,erent tvpes. includin.e:
t \landcrtrtr,; crrtnpliance Governrnental or European legislation rnight rnake certain changes lnandatory'
\\ iltlllg a
t ,)trclit1- o.f'.servir:e An insurance colnparry, tbr exarnple, might tr'ant to settle claims by customers more
-uickiy.
t Drr,dtrc:tit,itr,Thesanre.ore\.eninore,workcanbedoneatlesSccistinStafftirne'
, 1.lrtt.
ilu)tit'c$ecl work.fon-'e Thrs rnight be because of an irnproved rewards system, or through job
r!' ideas i .':l1argement ol job enrichn.rent.
Job enlargernent and S)
tiraL ill.otTctgement lte'ne.fits (for instiince. bettor decision rnaking) To take
an
rihr:d abo',. I i enrichmentwill be dis-
of insurance clairns could pinpoint those (J)
,.'. the bas. rt)Llratlce example again. better analysis cussed in Chapier 11 ^'.
- jregories of business which are most
risky and ailow au insurance companv to
leail to ttt -:tr,tst premiums to cover thi-s.
protect an organi-
,,teproject' r r if retluctionThe insurance exarnple might also he appiicabie hcre, but illeasures to
:ri.n's netr.vorks and databases fiom inirusion and external malicitlus attack
\vould be even more
t. bY whi.
' ifonment - :.ti nent.
:-i: course
t. r

44 Sofiiaare Proiect Management

policies might be put


o Economy The reduction of costs, other than those related to staff - procurement
in place which encourage the consolidation
discount.
of purchasing in order to take advantage of bulk-buying at q.(
they can pay them.
o Revenue enhancement/accelerationThe sooner bills reach customers, the sooner Icdl
o might not directly beneflt a particular group within the organization but has to be
Strategic fir A change rht
made in order to obtain some strategic advantage for the organization as a whole'
o!E
A change could have more than one of these types of benefit. In fact, benefits are often hter-linked' An q
examplJ of this is an insurance company w\ich introduced a facility whereby when settling claims for rNo
damage to property, they directly uo*g"a for\'rcontractors to cal.ry. out the remediai work' This irnproved
trouble oflogatfnq-a reputable contractor, reduced costs
rEs
quality of serviie for customers as it saved them the ir
ofthe bulk purchase of services, and improved
to the insurance company because they could take\advantage q
the insurance company's front-line staff and the
staff morale because of the goodwill generated belween
customer.
r\l
ET

Quantifying benefits
rTl
eDi
We have already seen that benefits can be: D
c quantified and valued - that is, a direct financial benefit is experienced; rCr
o quantified but not valued - for example, a decrease in the number of customer complaints; :t
? o identified but not easily quantified - for example, public approval of the organization in the locality
I where it is based.
t
mean that more money
A particular activity might also have disbenefils. For example, increased sales might
has to be spent on expensive overtime working.
:td
particular benefits claimed for it,
There can be controversy over a whether a business change will lead to the tr
key tests have been suggested in order
for example that a new .o*puny logo will improve staff morale' Some
:E
to sound out whether a putative benefit is likely to be genuine:
il
o Can you explain in precise terms why this benefit should result from this business change? i-r
o Can you.identify the ways in which we will be able to see the consequences of this benefit? i
o Ifthe required outcomes do occur, can they be anributed directly to the change, or could other factors d
explain them? I
o Is there any way in which the benefits can be measured? F
how benefits will be experienced'
I
We mentioned earlier the need for benefit profiles thatestimate when and
benefits actually materialize'
Speciflc staff have to be allocated responsibility for ensuringldhat the planned
These will often be business change rnanagers.
the project will almost
Beneflts cannot normally be monitored in a purely project environment because
certainly have been offlcially closed before the benefits start to fllter through.
and users jointly
In our view, benefits management brings to the fore the powerful idea that developers
ate

responsibie fot ensuring the delivery ofthe benefits ofprojects'


'qtr

Profect Eitaluatirnt nnd progrnrnnte Manttgement


:.r_rht tre put 45
-i.-buying at
CONCLUSION
: rl them.
.lt :e of the key points in this chapter are:
has to be
r Projects mu-st be evaruated on strategic. technicar and
economic grounds.
'-linked. An o N{any proJects are not justiliable on their own, but are
as part of a broader programme of projects that
implen.rent an organization,s strategy.
.-inims for
. irnproved
r Not all benefits can be precisely quantifiecl in financial values.
iuced costs r Economic assessment involves the iclentification oI ali
costs and income over the lif'etime of the svstern,
-r rniproved including its development and operation and checking that
the total v.lue of be,efits exceecls total
,rff and the expenditure.
o Money' r'eceived in the future is worth less than the
sanre amount of money in hand
invested to earn interest.
no*' which ,ray be

I The uncertainty surrounding estirnates of firture returns


lowers their reai value measured now.
o Discounted cash flo"v techniques nral' be used to evaluate
the Dresent value of future cash flows taking
account of interest rates and uncertainty.
o clost-benefit analysis techniques and ciecision trees provide
tools for evaluating expected oulcomes and
choosin-u between alternative stratesies.
ire lrtcalit.v..

t,t]-e rnonev FURTHER EXERCTSES


identify the rnajor risks that coulcl affect the success of the
imed lbr it. Brightmouth College payroll project ar.rd try
to rank lhern in order ol. imporlrnce.
i:d in order
Explain why discounted cash flow techniques provide
better criteria ibr project selection tha, net protit
0r return on investment.
'{n insurance company has examined the way that it
settles house insurance claims. It decides to
introduce a new computer-based claims settlement
her factors svstem which will reduce lhe time taken to settle
claims' This reduction in effort is partly achieved by
enabling the claims clerk to obtain the infbr-
mation needed directlv' rather than having to go through
otheidepartrnents. Also, as part of the ner.v
process' new repair work will be aliocated by the
insuran.. .orrrp.ry to authorizecl builclers. decorators.
plurnbers etc" rather than the claimant having
rperienced. to make o.rn-*.-.ni, to get estimates. and so on.
raterialize. (a) Explain the possible benefits and disbenefits that
might be generated bl this application. Note
that the benefits could come under the following headings;
,r ill almost Mandatory. coinpliance
QualitY of seryice
Productivity
. are jointlt More motirrated work force
Internal management benefits
Risk reduction
Economy
Revenue enhancement/acceleration
Strategic fit
How could the actual benefit be assessecl in each
case?
45 Softroare Proiect Management

staff at the insurance company


(b) when the application is implemented, some of the claims
irate customers grumbling about trades-
complain abolut the additional stress of dealing with
peoplebeingslowtodorepairworkoraboutp-oorqualityworkmanship.Also,insomeplaces
thereareshortagesofqualifiedrepairpeopleleadingtodelaysingettingworkdone.
developments?
Which projected benefits are being affected by these
How would you deal with these problems?
How would you assess your success in dealing
with these problems?
payroll software off-the-shelf at f50'000
4. Suppose Brightmouth College has the option of either buying
oremployingaproglailrmerforsixmonthsatasalaryoff5000todevelopthesoftware.Performcost-
you can make suitable assumptions regarding any factor that has
benefit analysis for the two options.
not been mentioned in this problem statement'

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