1. September 2001Copyright RCI, 20011 Business Case Analysis Donald J. Reifer University of Southern California and Reifer Consultants, Inc.

2. September 2001Copyright RCI, 20012 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

3. September 2001Copyright RCI, 20013 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

4. September 2001Copyright RCI, 20014 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

5. September 2001Copyright RCI, 20015 Table of Contents Part I - Fundamental ConceptsPart I - Fundamental Concepts –Chapter 1 –Chapter 1: Improvement is Everybody’s Business –Chapter 2 –Chapter 2: Making a Business Case –Chapter 3 –Chapter 3: Making the Business Case: Principles, Rules, and Analysis Tools –Chapter 4 –Chapter 4: Business Cases that Make Sense Part II - The Case StudiesPart II - The Case Studies –Chapter 5 –Chapter 5 - Playing the Game of Dungeons and Dragons: Process Improvement Case Study –Chapter 6 –Chapter 6: Quantifying the Costs/Benefits: Capitalizing Software Case Study –Chapter 7 –Chapter 7: Making Your Numbers Sing: Architecting Case Study –Chapter 8 –Chapter 8: Maneuvering the Maze: Web-Based Economy Case Study

6. September 2001Copyright RCI, 20016 Contents (Continued) Part III - FinalePart III - Finale –Chapter 9 –Chapter 9: Overcoming Adversity: More Than a Pep Talk Appendix AAppendix A: Recommended Readings Appendix BAppendix B: Compound Interest Tables AcronymsAcronyms GlossaryGlossary

7. September 2001Copyright RCI, 20017 Unique Features of Book Web site: –Look for updates –Converse with author Realistic case studies Actual management briefings as part of case studies http://www.awl.com/cseng/titles/0-201-72887-7

8. September 2001Copyright RCI, 20018 Fundamentals Must view software as a business Must use business measures to justify improvements Making the leap forward involves overcoming the resistance to change Key Point Summary Time to Market Cost Productivity Quality Increase Improve Reduce Avoid/Cut

9. September 2001Copyright RCI, 20019 Success is a Numbers Game 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? Answer Business-Related Questions

10. September 2001Copyright RCI, 200110 Business Cases Supply You with the Numbers Business CaseBusiness 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

11. September 2001Copyright RCI, 200111 Business Process Framework Business Planning Process Tradeoff and Analysis Processes Software Development Process Analytical Methods ModelsGuidelines for Decision-Making Process The business case process proceeds in parallel and Framework interfaces with the software development process “Principles, Rules and Tools for Business Case Development”

12. September 2001Copyright RCI, 200112 The Business Planning Process 1. Prepare white paper 2. Demonstrate technical feasibility 3. Conduct market survey 4. Develop business plan 5. Prepare business case 6. Sell the idea and develop support base 7. Get ready to execute GQM Results Idea or proposal Proof of Concept Approval to go-ahead

13. September 2001Copyright RCI, 200113 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

14. September 2001Copyright RCI, 200114 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 PreparationPresentation

15. September 2001Copyright RCI, 200115 Many Tools and 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 Analysis Techniques

16. September 2001Copyright RCI, 200116 Supportive Tools 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 Software packages

17. September 2001Copyright RCI, 200117 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 FW = P (1 + i) N PV = FW/(1 + i) N Future Worth Present Value

18. September 2001Copyright RCI, 200118 Business Case Information Needs Business cases –Recurring costs –Non-recurring costs –Tangible benefits –Intangible benefits Benchmarks –Competitive comparisons –Industry norms Metrics –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

19. September 2001Copyright RCI, 200119 Preparing a COTS Business Case Non-recurring costsTangible benefits - Market research/purchasing- Cost avoidance credits - Package assessment- Reduced taxes (credits and depreciation - Package tailoring & tuning and depreciation) - Glue code/wrapper development Intangible benefits Recurring costs- Market drives features - Glue code maintenance- Vendor maintains the good and bad - Licensing/purchasing product (good and bad) better - Market watch/test-bed- Package mature (better quality/more robust - Relationship management quality/more robust) - Technology refresh- Lever the marketplace TOTAL TOTAL

20. September 2001Copyright RCI, 200120 Computing Costs/Benefits Use COCOTS –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 $$$ Use COCOMO II –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 Intangibles –Hard to quantify the cost and schedule impacts –Even if you did quantify them, lots of controversy CostsBenefits

21. September 2001Copyright RCI, 200121 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 ROI = ?/year

22. September 2001Copyright RCI, 200122 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 Pluses Minuses

23. September 2001Copyright RCI, 200123 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

24. September 2001Copyright RCI, 200124 The COTS Life Cycle Requirements Design Implementation Integration & Test Deploy Operate & Maintain Evaluate, Select & Acquire TailorRenew Refresh COTS tends to have a life cycle of its own

25. September 2001Copyright RCI, 200125 COTS Success Strategies Process –Merge COTS life cycle into your organizational framework –Make needed tradeoffs –Think both technical and business issues Products –Fit COTS components into product line strategies –Maintain open interfaces –Manage technology refresh People –Make COTS vendors a part of your team –Increase awareness of COTS experience –Provide workforce with structure and information Institutional –Improve purchasing and licensing processes –Maintain market watch –Capture past performance

26. September 2001Copyright RCI, 200126 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

27. September 2001Copyright RCI, 200127 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

28. September 2001Copyright RCI, 200128 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

29. September 2001Copyright RCI, 200129 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

30. September 2001Copyright RCI, 200130 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