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Chapter Four Project Initiation and Integration

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Learning Objectives Discuss the strategic planning process and apply different project selection methods/Select projects and set priorities Select a project manager and project team Explain the importance of creating a project charter to formally initiate projects/write a project charter Describe project management plan development, understand the content of these plans, and review approaches for creating them Gather requirements for a project Prepare and write a project scope Explain project execution, its relationship to project planning, the factors related to successful results, and tools and techniques to assist in directing and managing project work Describe the process of monitoring and controlling a project Discuss the strategic planning process and apply different project selection methods/Select projects and set priorities Select a project manager and project team Explain the importance of creating a project charter to formally initiate projects/write a project charter Describe project management plan development, understand the content of these plans, and review approaches for creating them Gather requirements for a project Prepare and write a project scope Explain project execution, its relationship to project planning, the factors related to successful results, and tools and techniques to assist in directing and managing project work Describe the process of monitoring and controlling a project

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Project Integration/Initation

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Projection Integraion/Initiation

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Project Selection Form upper management team Identify, organize, and set criteria for all projects including financial and qualitative factors Gather data on all projects Estimate time and resources required Analyze and decide on projects Implement initial project plans Form upper management team Identify, organize, and set criteria for all projects including financial and qualitative factors Gather data on all projects Estimate time and resources required Analyze and decide on projects Implement initial project plans

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Project Selection Process

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There are usually more projects than available time and resources to implement them Methods for selecting projects include: focusing on broad organizational needs categorizing information technology projects performing net present value or other financial analyses using a weighted scoring model implementing a balanced scorecard There are usually more projects than available time and resources to implement them Methods for selecting projects include: focusing on broad organizational needs categorizing information technology projects performing net present value or other financial analyses using a weighted scoring model implementing a balanced scorecard Methods for Selecting Projects

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It is often difficult to provide strong justification for many IT projects, but everyone agrees they have a high value “It is better to measure gold roughly than to count pennies precisely” Three important criteria for projects: There is a need for the project There are funds available There’s a strong will to make the project succeed It is often difficult to provide strong justification for many IT projects, but everyone agrees they have a high value “It is better to measure gold roughly than to count pennies precisely” Three important criteria for projects: There is a need for the project There are funds available There’s a strong will to make the project succeed Focusing on Broad Organizational Needs

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Project Screening Process

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One categorization is whether the project addresses a problem an opportunity, or a directive Another categorization is how long it will take to do and when it is needed Another is the overall priority of the project One categorization is whether the project addresses a problem an opportunity, or a directive Another categorization is how long it will take to do and when it is needed Another is the overall priority of the project Categorizing IT Projects

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Categorizing IT Projects Continued Projects can be categorized as one of the following: Compliance: Projects that are essential to meet new requirements imposed by internal and external entities Internal entities may be executive management External entities may be government regulations and requirements “Must do” projects; if not implemented, may face penalties Emergency: Projects that are needed to meet emergency conditions; may be “must-do” projects; if not implemented, organizations may not be fully operational to fulfill their core competencies Projects can be categorized as one of the following: Compliance: Projects that are essential to meet new requirements imposed by internal and external entities Internal entities may be executive management External entities may be government regulations and requirements “Must do” projects; if not implemented, may face penalties Emergency: Projects that are needed to meet emergency conditions; may be “must-do” projects; if not implemented, organizations may not be fully operational to fulfill their core competencies

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Categorizing IT Projects Continued Mission Critical: Critical to the mission of a company If not completed, would cause immediate, unacceptably negative impact to business Operational: Projects that are needed to support current operations Increase process efficiency Reduce product cost Improve performance and other metrics Strategic: Projects that are essential to support long-range mission (increase revenue, increase market-share) Mission Critical: Critical to the mission of a company If not completed, would cause immediate, unacceptably negative impact to business Operational: Projects that are needed to support current operations Increase process efficiency Reduce product cost Improve performance and other metrics Strategic: Projects that are essential to support long-range mission (increase revenue, increase market-share)

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Financial considerations are often an important consideration in selecting projects Three primary methods for determining the projected financial value of projects: Net present value (NPV) analysis Return on investment (ROI) Payback analysis Financial considerations are often an important consideration in selecting projects Three primary methods for determining the projected financial value of projects: Net present value (NPV) analysis Return on investment (ROI) Payback analysis Financial Analysis of Projects

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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 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 Net Present Value Analysis

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NPV Calculations Determine estimated costs and benefits for the life of the project and the products it produces Determine the discount rate (check with your organization on what to use) Calculate the NPV Notes: Some organizations consider the investment year as year 0, while others start in year 1. Some people entered costs as negative numbers, while others do not. Check with your organization for their preferences Determine estimated costs and benefits for the life of the project and the products it produces Determine the discount rate (check with your organization on what to use) Calculate the NPV Notes: Some organizations consider the investment year as year 0, while others start in year 1. Some people entered costs as negative numbers, while others do not. Check with your organization for their preferences

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Net Present Value (NPV/Qualitative) If you are investing $600,000 and expecting $750,000 a year from now, Present Value = Discount factor * Future Value Where discount factor = where r is the discount rate If the discount rate was 10%, the present value is: 750,000/1.10 = $681,818. The building is worth $681,818, your investment is $600,000 and your NPV is $81,818. Therefore, NPV = PV – investment. If you are investing $600,000 and expecting $750,000 a year from now, Present Value = Discount factor * Future Value Where discount factor = where r is the discount rate If the discount rate was 10%, the present value is: 750,000/1.10 = $681,818. The building is worth $681,818, your investment is $600,000 and your NPV is $81,818. Therefore, NPV = PV – investment.

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Net Present Value (NPV/Qualitative)

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Return on Investment (ROI) 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 finding the discount rate that makes the NPV equal to zero 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 finding the discount rate that makes the NPV equal to zero

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ROI Example For example, if you invest $100 today and if the $100 is worth $105 next year, the ROI is: $105/$100 = 0.05 or 5%. ROI = 5% is the ROI of that investment. For the two projects Project 1 and Project 2 in Example 4- 1, ROI can be calculated as 58% and 59% respectively. Here, the higher the ROI, the better for the organization. For example, if you invest $100 today and if the $100 is worth $105 next year, the ROI is: $105/$100 = 0.05 or 5%. ROI = 5% is the ROI of that investment. For the two projects Project 1 and Project 2 in Example 4- 1, ROI can be calculated as 58% and 59% respectively. Here, the higher the ROI, the better for the organization.

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Internal Rate of Return (IRR) IRR is used frequently and is defined as the return or discount rate which makes NPV = 0. This means that in order to find the IRR for a project lasting t years, we must solve for IRR from the following expression: Project 1 and Project 2, IRR is calculated as 28% and 30% respectively. Once again, the higher the IRR, the better the financials return of a project. IRR is used frequently and is defined as the return or discount rate which makes NPV = 0. This means that in order to find the IRR for a project lasting t years, we must solve for IRR from the following expression: Project 1 and Project 2, IRR is calculated as 28% and 30% respectively. Once again, the higher the IRR, the better the financials return of a project.

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Payback Analysis Another important financial consideration is 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 net cumulative discounted benefits equals the costs Many organizations want IT projects to have a fairly short payback period Another important financial consideration is 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 net cumulative discounted benefits equals the costs Many organizations want IT projects to have a fairly short payback period

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Payback Analysis

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Project Comparison NPVROIIRRPayback Project 1$ 3.45 MM 58%28%3 years Project 2$ 3.47 MM 59%30%3½ years Project 2 promises better revenues What about benefits?

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Project Strategy and Value Project strategic value is defined as the impact a project will have on external entities like customers and suppliers. Competitive differentiation may depend upon: Economies of scale Product differentiation Capital Requirements Access to distribution channels Cost disadvantages independent of scale Government policies Perceived competitive reactions in the market, and Price of organization’s products and services. Project strategic value is defined as the impact a project will have on external entities like customers and suppliers. Competitive differentiation may depend upon: Economies of scale Product differentiation Capital Requirements Access to distribution channels Cost disadvantages independent of scale Government policies Perceived competitive reactions in the market, and Price of organization’s products and services.

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Project Strategy and Value Value of a project can be determined by cash benefits (both magnitude and its timing). Magnitude and timing of cash benefits when compared to investments made on the projects have to be evaluated in project selection as well. If a project is not expected to bring some benefit to the organization, then there is no point in implementing this project. Value of a project can be determined by cash benefits (both magnitude and its timing). Magnitude and timing of cash benefits when compared to investments made on the projects have to be evaluated in project selection as well. If a project is not expected to bring some benefit to the organization, then there is no point in implementing this project.

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Implementing a Balanced Scorecard Drs. Robert Kaplan and David Norton developed this approach to help select and manage projects that align with business strategy A balanced scorecard is a methodology that converts an organization’s value drivers, such as customer service, innovation, operational efficiency, and financial performance, to a series of defined metrics See www.balancedscorecard.org for more information Drs. Robert Kaplan and David Norton developed this approach to help select and manage projects that align with business strategy A balanced scorecard is a methodology that converts an organization’s value drivers, such as customer service, innovation, operational efficiency, and financial performance, to a series of defined metrics See www.balancedscorecard.org for more information

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Balanced Scorecard Example

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

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Sample Weighted Scoring Model for Project Selection

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Decision Trees and Expected Monetary Value (EMV) A decision tree is a diagramming analysis technique used to help select the best course of action in situations in which future outcomes are uncertain Estimated monetary value (EMV) is the product of a risk event probability and the risk event’s monetary value You can draw a decision tree to help find the EMV A decision tree is a diagramming analysis technique used to help select the best course of action in situations in which future outcomes are uncertain Estimated monetary value (EMV) is the product of a risk event probability and the risk event’s monetary value You can draw a decision tree to help find the EMV

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Decision Trees and Expected Monetary Value (EMV) Two new products ProdA and ProdB have been proposed in NewProd, Inc. and the leadership team is considering using a decision tree analysis to decide on which product to invest before making a commitment to the project. The investment is based on estimated revenues of $1 million from the new product, ProdA and $400K from ProdB. The development costs are estimated to be $100K for ProdA and $10K for ProdB. Moreover, suppose recent market analysis shows that the probability of high demand forecast for both products is 0.5 and that of low demand is also 0.5. Two new products ProdA and ProdB have been proposed in NewProd, Inc. and the leadership team is considering using a decision tree analysis to decide on which product to invest before making a commitment to the project. The investment is based on estimated revenues of $1 million from the new product, ProdA and $400K from ProdB. The development costs are estimated to be $100K for ProdA and $10K for ProdB. Moreover, suppose recent market analysis shows that the probability of high demand forecast for both products is 0.5 and that of low demand is also 0.5. P – probability PO – Payoff EV – Expected Value

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Decision Trees

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Decision Trees Continued ProdA payoff with high demand = Revenues – Cost = $1,000,000 - $100,000 = $900,000 ProdA payoff with low demand = Revenues – Cost = $0 - $100,000 = ($100,000) ProdB payoff with high demand = Revenues – Cost = $400,000 - $10,000 = $390,000 ProdB payoff with low demand = Revenues – Cost = $100,000 - $10,000 = $90,000 Using Equation 4-6, we can calculate EV: The Expected Value (EV) for ProdA = ($1,000,000*0.5) + ($200,000*0.5) - $100,000 = $500,000 ProdA payoff with high demand = Revenues – Cost = $1,000,000 - $100,000 = $900,000 ProdA payoff with low demand = Revenues – Cost = $0 - $100,000 = ($100,000) ProdB payoff with high demand = Revenues – Cost = $400,000 - $10,000 = $390,000 ProdB payoff with low demand = Revenues – Cost = $100,000 - $10,000 = $90,000 Using Equation 4-6, we can calculate EV: The Expected Value (EV) for ProdA = ($1,000,000*0.5) + ($200,000*0.5) - $100,000 = $500,000

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Decision Trees Continued Forecast Demand Initial Demand Prior Probability Conditional Probability Joint Probability Posterior Probability High ( h )High (H)0.50.60.30.67 High ( h )Low (L)0.50.30.150.33 Low ( l)) High (H)0.50.30.150.30 Low ( l)) Low (L)0.50.70.350.70

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Decision Trees Continued

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Third Decision Tree Analysis The new marketing survey (MS) will be the third analysis in this example with ProdA and ProdB being the other two that we have discussed in Example 4-2. Using the calculated posterior probability, we can calculate the expected values of high and low demands of ProdA and ProdB: EV of ProdA for high demand: ($1,000,000*0.67)+($200,000*0.33) – 100,000 = $633,333 EV of ProdB for high demand: ($400,000*0.67)+($100,000*0.33) – 10,000 = $290,000 EV of ProdA for low demand: ($1,000,000*0.30)+($200,000*0.70) – 100,000 = $340,000 EV of ProdB for low demand: ($400,000*0.30)+($100,000*0.70) – 10,000 = $180,000 The new marketing survey (MS) will be the third analysis in this example with ProdA and ProdB being the other two that we have discussed in Example 4-2. Using the calculated posterior probability, we can calculate the expected values of high and low demands of ProdA and ProdB: EV of ProdA for high demand: ($1,000,000*0.67)+($200,000*0.33) – 100,000 = $633,333 EV of ProdB for high demand: ($400,000*0.67)+($100,000*0.33) – 10,000 = $290,000 EV of ProdA for low demand: ($1,000,000*0.30)+($200,000*0.70) – 100,000 = $340,000 EV of ProdB for low demand: ($400,000*0.30)+($100,000*0.70) – 10,000 = $180,000

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Third Decision Tree Analysis Now, the EV of the marketing survey option can be computed using the bigger EV of ProdA and ProdB and the total joint probability that we computed in the above table as: ($633,333*0.45)+(340,000*0.5)-$100,000 = $355,000. When compared to the original EV of ProdA and ProdB that we computed in Example 4-2, we can see that ProdA has the highest EV of $500,000. Therefore, the decision should be with ProdA. Even though the marketing survey did not work in an overall sense with an EV of $355,000, it would certainly be beneficial to the organization with the collected information. Now, the EV of the marketing survey option can be computed using the bigger EV of ProdA and ProdB and the total joint probability that we computed in the above table as: ($633,333*0.45)+(340,000*0.5)-$100,000 = $355,000. When compared to the original EV of ProdA and ProdB that we computed in Example 4-2, we can see that ProdA has the highest EV of $500,000. Therefore, the decision should be with ProdA. Even though the marketing survey did not work in an overall sense with an EV of $355,000, it would certainly be beneficial to the organization with the collected information.

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