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Project Selection (Ch 4)

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1 Project Selection (Ch 4)
Dr. James J. Jiang University of Central Florida

2 Learning Objectives Describe an overall framework for project selection process

3 Strategic Planning and Project Selection
Strategic planning involves determining long-term objectives, predicting future trends, and projecting the need for new products and services. Organizations often perform a SWOT analysis: Strengths, Weaknesses, Opportunities, and Threats As part of strategic planning, organizations should: A) Identify potential projects. B) Use realistic methods to select which projects to work on. C) Formalize project initiation by issuing a project charter.

4 A. Identifying Potential Projects
It’s crucial to align IT projects with business strategy. Supporting explicit business objectives is the number one reason cited for investing in IT projects. Companies with consolidated IT operations have a 24 percent lower operational cost per end user. The consistent use of IT standards lowers application development costs by 41 percent per user.

5 Information Technology Planning Process

6 Methods for Selecting Projects
There is usually not enough time or resources to implement all projects. Methods for selecting projects include: 1. Focusing on broad organizational needs. 2. Categorizing information technology projects. 3. Performing net present value or other financial analyses. 4. Using a weighted scoring model.

7 1. Focusing on Broad Organizational Needs
“It is better to measure gold roughly than to count pennies precisely.” Three important success criteria for projects: There is a need for the project. There are funds available for the project. There is a strong will to make the project succeed.

8 2. Categorizing IT Projects
One categorization assesses whether the project provides a response to: A problem An opportunity A directive Another categorization is based on the time it will take to complete a project or the date by which it must be done. Another categorization is the overall priority of the project.

9 Financial Analysis of Projects
Financial considerations are often an important aspect of the project selection process. Three primary methods for determining the projected financial value of projects: Net present value (NPV) analysis Return on investment (ROI) Payback analysis

10 Net Present Value Analysis
Net present value (NPV) analysis is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time. Projects with a positive NPV should be considered if financial value is a key criterion. The higher the NPV, the better.

11 Figure 4-2. Net Present Value Example
Note that totals are equal, but NPVs are not because of the time value of money.

12 Return on Investment Return on investment (ROI) is calculated by subtracting the project costs from the benefits and then dividing by the costs. ROI = (total discounted benefits - total discounted costs) / discounted costs The higher the ROI, the better. Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects. Internal rate of return (IRR) can by calculated by setting the NPV to zero.

13 Payback Analysis The payback period is the amount of time it will take to recoup, in the form of net cash inflows, the total dollars invested in a project. Payback occurs when the cumulative discounted benefits and costs are greater than zero. Many organizations want IT projects to have a fairly short payback period.

14 Figure 4-4. Charting the Payback Period
Excel file

15 Weighted Scoring Model
A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria. Steps in identifying a weighted scoring model: Identify criteria important to the project selection process. Assign weights (percentages) to each criterion so they add up to 100 percent. Assign scores to each criterion for each project. Multiply the scores by the weights to get the total weighted scores. The higher the weighted score, the better.

16 Sample Weighted Scoring Model for Project Selection

17 Problems in Project Portfolios (Added by J.J.)
No link between strategy and project selection Poor-quality portfolios (e.g., projects) Reluctance to kill projects Scare resources, a lack of focus Selecting short-term and easy projects Information overflow (or lack of quality of information) Decision making basing on power

18 Project Selection Stages
Stage 1: Strategic Considerations Phase Considering both external and internal business environments Matching with business strategies Stage 2: Project Evaluation Phase Economic returns Risk analysis … Other criteria Stage 3: Project/Portfolio Selection Phase Scoring method

19 Project Selection Decision Process
Step1: Proposal Submission Ensure the completeness of proposal Step 2: Assignment of external reviewers (division managers) Assign each proposal to one or more “peer reviewers” Step 3: Peer review (external reviewers/division managers) Division managers coordinate the process as coordinators Validate the peer review results Step 4: Aggregation of review results (division managers) Recommend proposal list for panel evaluation Step 5: Panel evaluation (department/division managers & experts) Suggest a funded list Step 6: Final decision (top management division managers)

20 Key Success Factors for Project/Portfolio Selection
Centralised view: have and inventory of current and proposed significant projects Financial analysis: ROI, NPV, Payback, … Risk analysis: complexity, technology risk, cash flow, organizational changes … Interdependencies among projects Overall analysis: focus on overall portfolio performance Accountability and governance: top management involvement, business leaders accountable, using regular project portfolio reporting

21 Challenge of Project/Portfolio Selection
Lack of knowledge to evaluate risks Lack of commitment of business leaders Lack of cross-functional communication Lack of a clear company strategy Lack of appropriate way to measure project/portfolio benefits Lack of knowledge of portfolio management techniques

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