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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

Business Case Analysis

Donald J. Reifer

University of Southern California


Reifer Consultants, Inc.

Copyright RCI, 2001

aim of presentation
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

why write a book on software business cases
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

i didn t write it for the money
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

table of contents
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

contents continued
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

unique features of book
Unique Features of Book
  • Web site:
    • Look for updates
    • Converse with author
  • Realistic case studies
  • Actual management briefings as part of case studies

Copyright RCI, 2001


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

success is a numbers game
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

business cases supply you with the numbers
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

business process framework
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




Guidelines for


Copyright RCI, 2001

the business planning process
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


4. Develop

business plan

Approval to


Copyright RCI, 2001

nine business case principles
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

many rules to use as guidelines
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

many tools and techniques
Many Tools and Techniques

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

supportive tools
Supportive Tools

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

use engineering economics as your basis
Takes cost of money into account

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

business case information needs
Business cases

Recurring costs

Non-recurring costs

Tangible benefits

Intangible benefits


Competitive comparisons

Industry norms


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

preparing a cots business case
Preparing a COTS Business Case

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


Copyright RCI, 2001

computing costs benefits

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 $$$


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


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

presenting the business case
Determine decision timeline (5 years)

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

cots pluses and minuses
Cheaper; but does not come for free

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

cots critical success factors
COTS Critical Success Factors
  • 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

the cots life cycle
The COTS Life Cycle


Operate & Maintain





Integration & Test



Evaluate, Select

& Acquire

COTS tends to have a

life cycle of its own

Copyright RCI, 2001

cots success strategies

Merge COTS life cycle into your organizational framework

Make needed tradeoffs

Think both technical and business issues


Fit COTS components into product line strategies

Maintain open interfaces

Manage technology refresh


Make COTS vendors a part of your team

Increase awareness of COTS experience

Provide workforce with structure and information


Improve purchasing and licensing processes

Maintain market watch

Capture past performance

COTS Success Strategies

Copyright RCI, 2001

lots of other business yardsticks
Lots of Other Business Yardsticks
  • 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

putting cost models to work
Putting Cost Models to Work
  • 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

summary and conclusions
Summary and Conclusions
  • 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

for example making your numbers believable
For Example: Making Your Numbers Believable
  • 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

final thoughts
Final Thoughts
  • 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