Presentation on theme: "Project Selection (Ch 4)"— Presentation transcript:
1 Project Selection (Ch 4) Dr. James J. JiangUniversity of Central Florida
2 Learning ObjectivesDescribe 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 ThreatsAs 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.
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 problemAn opportunityA directiveAnother 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) analysisReturn 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 thattotals areequal, butNPVs arenot because of the time value of money.
12 Return on InvestmentReturn 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 costsThe 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 AnalysisThe 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 selectionPoor-quality portfolios (e.g., projects)Reluctance to kill projectsScare resources, a lack of focusSelecting short-term and easy projectsInformation overflow (or lack of quality of information)Decision making basing on power
18 Project Selection Stages Stage 1: Strategic Considerations PhaseConsidering both external and internal business environmentsMatching with business strategiesStage 2: Project Evaluation PhaseEconomic returnsRisk analysis… Other criteriaStage 3: Project/Portfolio Selection PhaseScoring method
19 Project Selection Decision Process Step1: Proposal SubmissionEnsure the completeness of proposalStep 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 coordinatorsValidate the peer review resultsStep 4: Aggregation of review results (division managers)Recommend proposal list for panel evaluationStep 5: Panel evaluation (department/division managers & experts)Suggest a funded listStep 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 projectsFinancial analysis: ROI, NPV, Payback, …Risk analysis: complexity, technology risk, cash flow, organizational changes …Interdependencies among projectsOverall analysis: focus on overall portfolio performanceAccountability and governance: top management involvement, business leaders accountable, using regular project portfolio reporting
21 Challenge of Project/Portfolio Selection Lack of knowledge to evaluate risksLack of commitment of business leadersLack of cross-functional communicationLack of a clear company strategyLack of appropriate way to measure project/portfolio benefitsLack of knowledge of portfolio management techniques