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Business Case Analysis Donald J. Reifer University of Southern California and Reifer Consultants, Inc. Aim of Presentation Introduce you to the subject of business case analysis and walk you through my book Highlight significant concepts and focus on what you need to do to succeed

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Business case analysis l.jpg

Business Case Analysis

Donald J. Reifer

University of Southern California

and

Reifer Consultants, Inc.

Copyright RCI, 2001


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Aim of Presentation

  • Introduce you to the subject of business case analysis and walk you through my book

  • Highlight significant concepts and focus on what you need to do to succeed

  • Discuss how to use software cost models like COCOMO II to help prepare business cases

  • Hopefully, motivate you to read and use the book in practice, the classroom and for fun

Copyright RCI, 2001


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Why Write a Book on Software Business Cases?

  • Over the years, I have observed that software engineers don’t know how to prepare sound business cases and improvement justifications

  • However, these same engineers are being asked to justify recommended investments using business cases as software is being capitalized

  • The book was written to fill this void and to serve as a textbook for those teaching the subject

Copyright RCI, 2001


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I Didn’t Write it for the Money

  • Those writing books do it for recognition and self-satisfaction

  • Authors don’t write technical books to make lots of money

  • If my publisher sold 5,000 copies of the book, I would make about $15/hour

Copyright RCI, 2001


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Part I - Fundamental Concepts

Chapter 1: Improvement is Everybody’s Business

Chapter 2: Making a Business Case

Chapter 3: Making the Business Case: Principles, Rules, and Analysis Tools

Chapter 4: Business Cases that Make Sense

Part II - The Case Studies

Chapter 5 - Playing the Game of Dungeons and Dragons: Process Improvement Case Study

Chapter 6: Quantifying the Costs/Benefits: Capitalizing Software Case Study

Chapter 7: Making Your Numbers Sing: Architecting Case Study

Chapter 8: Maneuvering the Maze: Web-Based Economy Case Study

Table of Contents

Copyright RCI, 2001


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Contents (Continued)

  • Part III - Finale

    • Chapter 9: Overcoming Adversity: More Than a

      Pep Talk

  • Appendix A: Recommended Readings

  • Appendix B: Compound Interest Tables

  • Acronyms

  • Glossary

Copyright RCI, 2001


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Unique Features of Book

  • Web site:

    • Look for updates

    • Converse with author

  • Realistic case studies

  • Actual management briefings as part of case studies

http://www.awl.com/cseng/titles/0-201-72887-7

Copyright RCI, 2001


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Fundamentals

Key Point Summary

  • Must view software as a business

  • Must use business measures to justify improvements

  • Making the leap forward involves overcoming the resistance to change

Reduce Avoid/Cut

Time to Market Cost

Productivity Quality

Increase Improve

Copyright RCI, 2001


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Success is a Numbers Game

Answer Business-Related Questions

  • Will this proposal save money, cut costs, increase productivity, speed development or improve quality?

  • Have you looked at the tax and financial implications of the proposal?

  • What’s the impact of the proposal on the bottom line?

  • Are our competitors doing this? If so, what are the results they are achieving?

  • Who are the stakeholders and are they supportive of the proposal?

Copyright RCI, 2001


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Business Cases Supply You with the Numbers

  • Business Case = the materials prepared for decision-makers to show that the proposed idea is a good one and that the numbers that surround it make sound financial sense

    • Most software engineers prepare detailed technical rather than business justifications

    • Many of their worthwhile proposals are rejected by management as a consequence

    • Use of business cases will increase your chances of success

Copyright RCI, 2001


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Business Process Framework

Process The business case process proceeds in parallel and

Frameworkinterfaces with the software development process

“Principles, Rules and Tools for Business Case Development”

Business Planning Process

Tradeoff and Analysis Processes

Software Development Process

Analytical

Methods

Models

Guidelines for

Decision-Making

Copyright RCI, 2001


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The Business Planning Process

GQM Results

Idea or proposal

7. Get ready

to execute

1. Prepare

white paper

2. Demonstrate

technical feasibility

6. Sell the idea and

develop support base

3. Conduct

market survey

5. Prepare

business case

Proof of

Concept

4. Develop

business plan

Approval to

go-ahead

Copyright RCI, 2001


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Decisions are made relative to alternatives

If possible, use money as the common denominator

Sunk costs are irrelevant

Investment decisions should recognize the time value of money

Separable decisions must be considered separately

Decisions should consider both quantitative and qualitative factors

The risks associated with the decision should be quantified if possible

The timing associated with making decisions is critical

Decision processes should be periodically assessed and continuously improved

Nine Business Case Principles

Copyright RCI, 2001


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Prepare business cases in language to communicate to management

Define all of your terms thoroughly

Bring in the outside experts to help if needed

Double and triple check your numbers

Never state a number without bounding it

Remember, numbers will come back to haunt you

Never talk cost reduction; use avoidance instead

Always relate your numbers to benchmarks and your competition

Many Rules to Use as Guidelines

Preparation Presentation

Copyright RCI, 2001


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Many Tools and Techniques management

Analysis Techniques

  • Break-even analysis

  • Cause and effect analysis

  • Cost/benefit analysis

  • Value chain analysis

  • Investment opportunity analysis

  • Pareto analysis

  • Payback analysis

  • Sensitivity analysis

  • Trend analysis

Copyright RCI, 2001


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Supportive Tools management

Software packages

  • Decision support systems

    • Tax planning and schedules

    • Trade studies and analysis

  • Spreadsheets

    • Comparative analysis

    • Trade studies and analysis

  • Software cost models

    • Parametric analysis

    • Trade studies and analysis

Copyright RCI, 2001


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Takes cost of money into account management

A $ today is worth more than tomorrow due to inflation

Takes compounding into account

Normalizes future expenditures using current year dollars as a basis for comparison

Lets you establish a minimum attractive rate of return

Use Engineering EconomicsAs Your Basis

FW = P (1 + i)N PV = FW/(1 + i)N

Future Worth Present Value

Copyright RCI, 2001


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Business cases management

Recurring costs

Non-recurring costs

Tangible benefits

Intangible benefits

Benchmarks

Competitive comparisons

Industry norms

Metrics

Management measures

Financial data

Inflated labor costs

Labor categories/rates

Overhead/G&A rates

Past costs/performance

Tax rates/legalities

Marketing information

Demographic data

Market position

Sales forecast

Business Case Information Needs

Copyright RCI, 2001


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Preparing a COTS Business Case management

Non-recurring costsTangible benefits

- Market research/purchasing - Cost avoidance

- Package assessment - Reduced taxes (credits

- Package tailoring & tuning and depreciation)

- Glue code/wrapper developmentIntangible benefits

Recurring costs - Market drives features

- Glue code maintenance - Vendor maintains the

- Licensing/purchasing product (good and bad)

- Market watch/test-bed - Package mature (better

- Relationship management quality/more robust)

- Technology refresh - Lever the marketplace

TOTAL TOTAL

Copyright RCI, 2001


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Use COCOTS management

Estimates most of the non-recurring costs

Recurring costs should be estimated, for now, using rules of thumb

Relationship management

Nurtures relationships and develops partnerships

Technology refresh

Market watch looks for better value for $$$

Use COCOMO II

Estimates benchmark costs for option of developing code from scratch or legacy

Calibrate model for domain

Use maintenance model to include rest of life cycle

Intangibles

Hard to quantify the cost and schedule impacts

Even if you did quantify them, lots of controversy

Computing Costs/Benefits

Costs Benefits

Copyright RCI, 2001


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Determine decision timeline (5 years) management

Take PV of B/C Ratio

Calculate ROI

Make a second pass to include depreciation

Try to quantify the intangibles

Discuss the impact, but don’t dilute the numbers using it (credibility)

List pluses and minuses of options considered

Make a recommendation based on the information presented

Presenting the Business Case

ROI = ?/year

ROI = ?/year

Copyright RCI, 2001


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Cheaper; but does not come for free management

Available immediately

Known quality (+ or -)

Vendor responsible for evolution/maintenance

Don’t have to pay for it

Can use critical staff resources elsewhere

License costs can be high

COTS products are not designed to plug & play

Vendor behavior varies

Performance often poor

Vendor responsible for evolution/maintenance

Have no control over the product’s evolution

COTS Pluses and Minuses

Pluses Minuses

Copyright RCI, 2001


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COTS Critical Success Factors management

  • Successful firms:

    • Make COTS-based system tradeoffs early

    • Try before they buy

    • Avoid modifying COTS at all costs

    • Reconcile products with their architectures

    • Emphasize use of standards and open interfaces

    • Understand that COTS doesn’t come for free

    • Plan to manage parts/technology obsolescence

    • Make the vendor a part of the team, whenever possible

    • Negotiate enterprise-wide licenses for COTS products

    • Influence future paths the vendor will take

    • Address the cultural and process issues

Copyright RCI, 2001


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The COTS Life Cycle management

Requirements

Operate & Maintain

Design

Implementation

Deploy

Refresh

Integration & Test

Tailor

Renew

Evaluate, Select

& Acquire

COTS tends to have a

life cycle of its own

Copyright RCI, 2001


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Process management

Merge COTS life cycle into your organizational framework

Make needed tradeoffs

Think both technical and business issues

Products

Fit COTS components into product line strategies

Maintain open interfaces

Manage technology refresh

People

Make COTS vendors a part of your team

Increase awareness of COTS experience

Provide workforce with structure and information

Institutional

Improve purchasing and licensing processes

Maintain market watch

Capture past performance

COTS Success Strategies

Copyright RCI, 2001


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Lots of Other Business Yardsticks management

  • Cost of Sales

  • Cost/Benefit Ratio

  • Debt/Equity Ratio

  • Earnings/Share

  • Overhead Rate

  • Return on Assets

  • Price/Sales Ratio

  • Rate of Return

  • Return on Earnings

Copyright RCI, 2001


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Putting Cost Models to Work management

  • I use cost models in my book to:

    • Create benchmarks to compute benefits for a typical project

    • Assess available options and perform sensitivity analysis

    • Quantify risk and its cost and schedule consequences

    • Address the many “what-if” questions that arise via parametric analysis

Copyright RCI, 2001


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Summary and Conclusions management

  • For software engineers to prosper in business, they need to learn to prepare business cases

  • The technical merit of engineering issues needs to be quantified and the associated business issues discussed when making recommendations for improvement

  • Hopefully, my book will help software engineers to perform these duties and succeed - as they’ve worked for me over the years

Copyright RCI, 2001


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For Example: Making Your Numbers Believable management

  • Concepts:

    • Cash Flow Impacts

    • Cost Basis

    • Cost/Benefits

    • Estimate Fidelity

    • Present Value (PV)

    • Profit and Loss

    • Risks and Their Impacts

    • Sources of funds

    • Tax implications

Copyright RCI, 2001


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Final Thoughts management

  • Numbers can be your ally when asking for money

  • When asking for money, talk your management’s language not ours

  • Don’t be casual about numbers, be precise

  • If you want to learn more, read my book

Copyright RCI, 2001


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