Bbc 09 a commercial perspective rev 9-2011 narrative- test

The Business Case:A Commercial

Perspective

Building the IT Business CaseInformation Resources Management College

National Defense University

8-1-20111

Objectives

Identify significant factors influencing investment decisions in the public and private sectors.

Evaluate and compare alternative investments in the light of strategic business objectives.

Select and justify an investment based on a variety of financial and non-financial criteria.

Analyze a private sector business case development model for application to the public sector.

2

Challenges in Federal IT Acquisitions

Political Influences Size/Complexity Budget Cycle Goals and Measures Other

3

The Basic Questions

How much should we invest in IT? How should we allocate the IT investment

budget? How do we know whether we’ve made the

right decision?

4

The Basic Questions



right decision?

5

Determining the IT investment budget

Last year plus Inflation plus x…. % of O&M…. Zero based budgeting…. Industry Best Practices…. Other….

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Gomolski, B. How IT Spending Varies According to Company Size. Gartner .9 May 2005. ID G00125306. 7


Gomolski, B. How IT Spending Varies According to Company Size. Gartner .9 May 2005. ID G00125306. 8

The Basic Questions



right decision?

9

Commercial Model- an example

Keep the doors open Infrastructure Software maintenance

Mandated Y2K Sarbannes-Oxley Privacy

New Initiatives Tactical Strategic

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Investment by Type by Sector

Light, M., Rosser, B. & Hayward S. Realizing the Benefits of Project and Portfolio Management. Gartner. 4 January, 2005. ID G00125673.

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Federal Agency IT Investments

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PART

Effective Moderately Effective

Adequate Ineffective

The Environment

IT Manufacturing Marketing

…etc

Investment Portfolio

Selection

13

The Business Case Model- Purpose

Aid Management select best value for investment dollars: Justification Analysis

Includes Costs Benefits Risks

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Assessment

Quantitative Costs Benefits Risks

Qualitative Costs Benefits Risks

Includes: Facts Assumptions Constraints

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Facts

Did we include all relevant facts bearing on the investment?

Are they facts or are they beliefs? Are they provable? Are they demonstratable?

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Assumptions

Assumption: A factor that is considered to be true, real or certain, without proof.. affects the project…contains risk.

Assumptions as to benefits External Internal

Assumptions as to cost. Assumptions as to schedule. May require some testing.

Cost

Benefit

?

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Constraints

Constraint: A factor that limits the organization’s options.

Examples: Cost Schedule Skills available Facilities available Legal & regulatory

Includes Exclusions

Cost

Benefit

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Comparison of projects

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Portfolio Selection

Cost

Benefit

Total investment budget

A

B

C

Problem: Allocation of investment dollars to maximize total benefit Typical solution: Investment Review Panels and Multi-Function Analysis

Portfolio Selection

Cost

Benefit

Total investment budget

B

Problem: Different investments have different risk profiles

B’

Typical Solutions: Use of risk adjusted discount rates. Modeling and Simulation

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Portfolio Selection

Budget year

Net Benefit

Problem: Cost/Benefit profile over time must be considered

1 2 3

DE

F

Typical solution: Payback Period and NPV 22

Selection of the right projects

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Portfolio SelectionSelect in order COSTTOTAL BENEFITTOTAL

A 400 10 400 10B 500 13 900 23C 100 4 1000 27D 300 6 1300 33E 200 5 1500 38

Select by lowest cost COSTTOTAL BENEFITTOTAL

C 100 4 100 4E 200 5 300 9D 300 6 600 15A 400 10 1000 25B 500 13 1500 38

PROJECT COST BENEFITA 400 10B 500 13C 100 4D 300 6E 200 5

Budget = 1200

Cost: 1000Benefit: 27



Select by highest benefit COSTTOTAL BENEFITTOTAL

B 500 13 500 13A 400 10 900 23D 300 6 1200 29E 200 5 1400 34C 100 4 1500 38

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Portfolio Selection

PROJECT COST BENEFIT RATIOA 400 10 0.025B 500 13 0.026C 100 4 0.040D 300 6 0.020E 200 5 0.025

Select by Benefit to Cost ratio COSTTOTAL BENEFITTOTAL

C 100 4 100 4B 500 13 600 17E 200 5 800 22A 400 10 1200 32D 300 6 1500 38


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Graphical Comparison Based on Two Criteria

GO

CAUTION

TERMINATE

BE

NE

FIT

Risk

Hig

hM

ediu

mLo

w

High Medium Low

PMBOK®

26

Multifunction Selection

27

A B CObj 1 2 2 3Obj 2 3 2 2Obj 3 1 3 2Obj 4 1 3 2Obj 5 3 2 2Total 10 12 11

Weight A B CObj 1 5 10 10 15Obj 2 10 30 20 20Obj 3 5 5 15 10Obj 4 1 1 3 2Obj 5 5 15 10 10Total 61 58 57

Weight A B CObj 1 10 20 20 30Obj 2 5 15 10 10Obj 3 3 3 9 6Obj 4 5 5 15 10Obj 5 5 15 10 10Total 58 64 66

WeightObj 1 5Obj 2 10Obj 3 5Obj 4 1Obj 5 5Total

WeightObj 1 10Obj 2 5Obj 3 3Obj 4 5Obj 5 5Total

Rating from 1 (min) to 3 (max) Score = Weight times rating


A B C DObj 1 10 7 1 2Obj 2 8 3 1 2Obj 3 7 4 2 3Obj 4 0 3 2 2Obj 5 4 6 0 6Total 29 23 6 15Cost 1000 1000 300 700

Budget: 2000

28


A B C D TotalObj 1 10 7 17Obj 2 8 3 11Obj 3 7 4 11Obj 4 0 3 3Obj 5 4 6 10Total 29 23 52Cost 1000 1000 2000

A B C D TotalObj 1 10 1 2 13Obj 2 8 1 2 11Obj 3 7 2 3 12Obj 4 0 2 2 4Obj 5 4 0 6 10Total 29 6 15 50Cost 1000 300 700 2000

A B C D TotalObj 1 7 1 2 10Obj 2 3 1 2 6Obj 3 4 2 3 9Obj 4 3 2 2 7Obj 5 6 0 6 12Total 23 6 15 44Cost 1000 300 700 2000 29


Selection Criteria 10 is maximum

value for any objective

A B C D TotalObj 1 10 7 17 10Obj 2 8 3 11 10Obj 3 7 4 11 10Obj 4 0 3 3 3Obj 5 4 6 10 6Total 29 23 52 39Cost 1000 1000 2000

A B C D TotalObj 1 10 1 2 13 10Obj 2 8 1 2 11 10Obj 3 7 2 3 12 10Obj 4 0 2 2 4 4Obj 5 4 0 6 10 10Total 29 6 15 50 44Cost 1000 300 700 2000


30


Selection Criteria 10 is maximum

value Total must score

at least 5 for each objective

A B C D TotalObj 1 10 7 17 10Obj 2 8 3 11 10Obj 3 7 4 11 10Obj 4 0 3 3 3Obj 5 4 6 10 6Total 29 23 52 39Cost 1000 1000 2000



31

The Basic Questions



right decision?

32

Did we get what we paid for…?

Year afterProjectCompletion

Net Benefit

Planned

Actual

The key: Know the baseline

Know how to measure performance 33

Practical Exercise

34

Practical Exercise- IRMC Electronics

Maker of Information Technology Products. The following data represents the results of its Data Server Division.

Note: all $ in 000,000.

2005 2006 2007 2008 2009Revenue 190$ 220$ 260$ 260$ 270$ Profit 19$ 20$ 24$ 23$ 22$

35

Practical Exercise- Competition The Data Server Division has two major

competitors, SMNS and LECANT.

Note: all $ in 000,000.

2005 2006 2007 2008 2009IRMC-E 190$ 220$ 260$ 260$ 270$ SMNS 30$ 40$ 60$ 80$ 100$ LECANT 20$ 50$ 65$ 55$ 100$ Total 240$ 310$ 385$ 395$ 470$

36

Practical Exercise- Product Segment

The market for data servers is divided into three segments: high-end, mid-range and low-end.

Note: all $ in 000,000.

2005 2006 2007 2008 2009High End 25% 23% 25% 26% 33%Mid Range 29% 35% 35% 34% 31%Low End 46% 41% 40% 39% 36%

Revenue Profit ReturnHigh End 27$ 4$ 15%Mid Range 90$ 11$ 12%Low End 153$ 7$ 5%Total 270$ 22$ 8%

2005 2006 2007 2008 2009High End 30% 25% 20% 15% 10%Mid Range 33% 33% 33% 33% 33%Low End 37% 42% 47% 52% 57%

Product Distribution- IRMC-E

0%20%40%60%80%

100%

2005 2006 2007 2008 2009

Low EndMid RangeHigh End

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Practical Exercise- Corporate Objectives IRMC-E Strategic Objectives for the next three

years: Meet or exceed the company’s internal rate of

return of 15%. Maintain leadership in market segment Establish a significant presence in emerging

international markets Reduce key technical and managerial turnover Regain reputation for technical excellence

38

Practical Exercise- the Investment Choices

Engineering has developed a business case proposing an investment of $1,000k to develop a high-end server to be delivered in 12 months.

Manufacturing has developed a business case proposing an investment to reduce manufacturing costs. This investment would cost $500K.

Projected financial comparisons are to be developed using the standard IRMC-E cost analysis form and the data provided by Manufacturing and Engineering/Marketing.

You are the IRMC-Electronics Data Server Division Investment Review Committee (IDSDIRC). You are to recommend which of these two investments to approve.

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Financial Comparison

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IRMC-Electronics Cost Analysis Form

IRR: 15%

Year: 0 1 2 3 4

Option 1: Manufacturing ImprovementInvestment $ 500.0 Savings $ - $ 50.0 $ 150.0 $ 150.0 $ 150.0 Net: $ (500.0) $ 50.0 $ 150.0 $ 150.0 $ 150.0

NPV =

Option 2: New productInvestment $ 1,000 Net Profit Increase: $ 50 $ 250 $ 500 $ 1,000 Net: $ (1,000) $ 50 $ 250 $ 500 $ 1,000

NPV=

Evaluation

New Server

Improved Mfr Other

Financial analysis

Mkt Ldrshp

Emerging Mkts

HR Turnover

Tech Reputation

Score

Risk Rating

Recommended (Y/N)

Facts

Assumptions: 41

Challenge

I’m the boss: Convince me!

42

Thoughts for Consideration

What triggers the need for a new investment? Does this affect the case study?

Is selling an IT investment any different than selling other types of investments?

Are the risks the same for a Government investment and a commercial investment?

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Challenges Do we really achieve our ROI’s? Do we really achieve our non-financial

objectives? Linking IT investment to Corporate objectives is

still as much an art as a science. Focus on quarterly results can skew judgments.

44

Questions?

45