1. ©Donna Fitzgerald. Business Case Analysis: Tips and Techniques for Project Managers Donna Fitzgerald

2. ©Donna Fitzgerald. The Changing World of Project Management l All projects are receiving more scrutiny –Increased need for bottom line return l Responsibilities of a Project Manager are increasing. Must have: –Technical systems knowledge –General business knowledge –financial knowledge

3. ©Donna Fitzgerald. The Role and Function of the Business Case l The business case is necessary for gaining initial approval to begin the system development effort l It provides guidance during the project as to which features or designs contribute most to the business objectives

4. ©Donna Fitzgerald. Rule of Thumb #1 l If you don’t develop the business case someone else will do it for you l Their version will include too little money and be due in too short a time

5. ©Donna Fitzgerald. Developing the Business Case l Determine the real requirements l Analyze the costs & benefits of current system l Analyze the costs & benefits of the new system l Determine the development, implementation and ongoing support costs l Develop the Business Case P&L

6. ©Donna Fitzgerald. Analysis of system change what who why where

7. ©Donna Fitzgerald. Costs & Benefits - Current System l True costs –beware of allocations l fallacy of steady state assumption –What does the company’s strategic plan say? –what are the trends in the industry?

8. ©Donna Fitzgerald. Rule of Thumb #2 l The current system will not stay static. l Assign a degree of risk to any numbers used for the “as-is” or “do nothing “ situation.

9. ©Donna Fitzgerald. Analyzing On-Going Benefits l How to define a “Hard” cost savings –cash payments –eliminated function l Soft cost savings –incremental productivity improvement –cost avoidance l TANSTAAFL

10. ©Donna Fitzgerald. Analyzing Headcount Savings l What work is being eliminated l Who currently does the work l What percentage of their time is currently spent doing that work. l Where are they located geographically and is reassignment possible in order to reduce headcount

11. ©Donna Fitzgerald. Rule of Thumb #3 l Be careful using a fully burdened labor rate when determining savings. Unless you’re eliminating an entire division or downsizing by the thousands these saving will be overstated.

12. ©Donna Fitzgerald. TANSTAAFL l There ain’t no such thing as a free lunch l Cost transfers –within the company »Eliminating Accounts Payable –outside of the company »Just-In-Time l Can’t save on allocated costs –client-server/mainframe conversion

13. ©Donna Fitzgerald. Rule of Thumb #4 l Make sure your proposed system completely eliminates a cost and doesn’t just transfer it. l Otherwise include these cost as ongoing expense of the new system.

14. ©Donna Fitzgerald. Development & Implementation Costs l Capital l Software l Labor –Internal –consultant l Direct non-wage expense l Restructing costs

15. ©Donna Fitzgerald. Project Costs

16. ©Donna Fitzgerald. The Project Profit & Loss Statement l Usually developed for a 5 year timeframe l Includes incremental revenue l Project related costs –Development and implementation –On-going support and maintenance l Project related expense savings l Net return from project

17. ©Donna Fitzgerald. Business Case Profit & Loss

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

19. ©Donna Fitzgerald. Financial Indicators Net Present Value l Time Adjusted l Determined by multiplying a stream of net future cash flows by a discount rate then subtracting the initial investment in the project. l Only becomes controversial on the subject of what discount rate to use.

20. ©Donna Fitzgerald. Excel NPV

21. ©Donna Fitzgerald. NPV (cont.)

22. ©Donna Fitzgerald. Financial Indicators Internal Rate of Return l It is the discount rate equating the npv of cash inflows to the npv of cash outflows to zero. l The internal rate of return assumes cash inflows are reinvested at the internal rate. l The internal rate of return can be compared with the required rate of return (cutoff or hurdle rate).

23. ©Donna Fitzgerald. Excel IRR

24. ©Donna Fitzgerald. IRR (cont)

25. ©Donna Fitzgerald. Rule of Thumb #5 l 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.

26. ©Donna Fitzgerald. Probability & Risk Adjusted Rates l Usually ignored l Sophisticated mathematical equations –Usually driven by one person –may be measuring the wrong thing

27. ©Donna Fitzgerald. Rule of Thumb #6 l 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.

28. ©Donna Fitzgerald. The Dilbert Rule of Business Case Development