Business Case Analysis: Tips and Techniques for Project Managers

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Business Case AnalysisTips and Techniques for
Project Managers

• Donna Fitzgerald

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The Changing World of Project Management

• All projects are receiving more scrutiny
• Increased need for bottom line return
• Responsibilities of a Project Manager are
  increasing. Must have
• Technical systems knowledge
• General business knowledge
• financial knowledge

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The Role and Function of the Business Case

• The business case is necessary for gaining
  initial approval to begin the system development
  effort
• It provides guidance during the project as to
  which features or designs contribute most to the
  business objectives

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Rule of Thumb 1

• If you dont develop the business case someone
  else will do it for you
• Their version will include too little money and
  be due in too short a time

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Developing the Business Case

• Determine the real requirements
• Analyze the costs benefits of current system
• Analyze the costs benefits of the new system
• Determine the development, implementation and
  ongoing support costs
• Develop the Business Case PL

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Analysis of system change
why
who
where
what
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Costs Benefits - Current System

• True costs
• beware of allocations
• fallacy of steady state assumption
• What does the companys strategic plan say?
• what are the trends in the industry?

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Rule of Thumb 2

• The current system will not stay static.
• Assign a degree of risk to any numbers used for
  the as-is or do nothing situation.

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Analyzing On-Going Benefits

• How to define a Hard cost savings
• cash payments
• eliminated function
• Soft cost savings
• incremental productivity improvement
• cost avoidance
• TANSTAAFL

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Analyzing Headcount Savings

• What work is being eliminated
• Who currently does the work
• What percentage of their time is currently spent
  doing that work.
• Where are they located geographically and is
  reassignment possible in order to reduce
  headcount

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Rule of Thumb 3

• Be careful using a fully burdened labor rate when
  determining savings. Unless youre eliminating
  an entire division or downsizing by the thousands
  these saving will be overstated.

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TANSTAAFL

• There aint no such thing as a free lunch
• Cost transfers
• within the company
• Eliminating Accounts Payable
• outside of the company
• Just-In-Time
• Cant save on allocated costs
• client-server/mainframe conversion

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Rule of Thumb 4

• Make sure your proposed system completely
  eliminates a cost and doesnt just transfer it.
• Otherwise include these cost as ongoing expense
  of the new system.

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Development Implementation Costs

• Capital
• Software
• Labor
• Internal
• consultant
• Direct non-wage expense
• Restructing costs

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Project Costs
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The Project Profit Loss Statement

• Usually developed for a 5 year timeframe
• Includes incremental revenue
• Project related costs
• Development and implementation
• On-going support and maintenance
• Project related expense savings
• Net return from project

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Business Case Profit Loss
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Financial Indicators - Payback

• The number of years it takes to recover your
  initial investment.
• Disadvantage of this method is that it is not
  time adjusted.
• Payback is calculated by subtracting the cost
  against the stream of payments and determining
  the time frame in which the number reaches zero.

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Financial IndicatorsNet Present Value

• Time Adjusted
• Determined by multiplying a stream of net
  future cash flows by a discount rate then
  subtracting the initial investment in the
  project.
• Only becomes controversial on the subject of what
  discount rate to use.

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Excel NPV
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NPV (cont.)
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Financial IndicatorsInternal Rate of Return

• It is the discount rate equating the npv of cash
  inflows to the npv of cash outflows to zero.
• The internal rate of return assumes cash inflows
  are reinvested at the internal rate.
• The internal rate of return can be compared with
  the required rate of return (cutoff or hurdle
  rate).

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Excel IRR
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IRR (cont)
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Rule of Thumb 5

• If the IRR equals or exceeds the required rate
  the project should be accepted. The required
  rate can be the company's cost of capital, or an
  average of all other competing proposals.

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Probability Risk Adjusted Rates

• Usually ignored
• Sophisticated mathematical equations
• Usually driven by one person
• may be measuring the wrong thing

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Rule of Thumb 6

• Only use probability or risk adjustment if that
  is the corporate standard otherwise while your
  rates might be accurate they will understate your
  project on a comparative basis.

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The Dilbert Rule of Business Case Development