1.1 Dr. Honghui Deng Associate Professor MIS Department UNLV MIS 746 IS Project Management

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Dr. Honghui DengDr. Honghui Deng

Associate ProfessorAssociate Professor

MIS DepartmentMIS Department

UNLVUNLV

MIS 746 IS Project Management

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Session 7.Session 7.

Video 11 Project Cost/CompletionVideo 11 Project Cost/Completion

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Session 7. Session 7. IS Project GrowthIS Project Growth

• Corcoran (1997): Corcoran (1997): billions spent on technology billions spent on technology every yearevery year

• SourcesSources– users– top management– within information systems

• ProcessProcess– idea– estimate benefits, costs

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IS Project MotivationIS Project Motivation

• Cost cutting/avoidanceCost cutting/avoidance

• Revenue Revenue maintenance/enhancementmaintenance/enhancement

• Entering new marketsEntering new markets– data mining

• Gaining market shareGaining market share

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Session 7. Cost EstimatesSession 7. Cost Estimates

• The aggregate cost of work units The aggregate cost of work units described in the work breakdown described in the work breakdown structure.structure.

• The work unit approach makes cost The work unit approach makes cost estimating more manageable.estimating more manageable.

• There are situations where an overall cost There are situations where an overall cost of a project is required for the initial of a project is required for the initial decision and before WBS is done.decision and before WBS is done.

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Estimation PitfallsEstimation Pitfalls

• INTANGIBLESINTANGIBLES– nebulous benefits

• better decision makingbetter decision making

• HIDDEN OUTCOMESHIDDEN OUTCOMES– time, budget subject to great error

• CHANGECHANGE– technology changes rapidly

• outdating many good project ideasoutdating many good project ideas

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Session 7. CostsSession 7. Costs

• TangibleTangible – easier to estimate. – easier to estimate. • E.g., routers, switches, connectors, E.g., routers, switches, connectors,

cables, servers, and human cables, servers, and human resources.resources.

• IntangibleIntangible – difficult to evaluate. – difficult to evaluate. • E.g., cost benefit analysis of E.g., cost benefit analysis of

outsourcing or offshoring information outsourcing or offshoring information system function in terms of security, system function in terms of security, privacy, know how, innovation, etc. privacy, know how, innovation, etc.

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Session 7. CostsSession 7. Costs

• DirectDirect – associated with a work – associated with a work unit unit

• E.g., hours worked on a unit or the E.g., hours worked on a unit or the portion of management time (portion of management time (direct direct overhead costs)overhead costs) used for a work unit. used for a work unit.

• IndirectIndirect – difficult to assign – difficult to assign• E.g., promotional expenses for the E.g., promotional expenses for the

entire organization; difficult to prorate entire organization; difficult to prorate portion of this cost to a work unit or a portion of this cost to a work unit or a project. project.

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Evaluation TechniquesEvaluation Techniques

• Economic & FinancialEconomic & Financial– payback 68%– cost-benefit 63%– npv/irr 40%

• MultifactorMultifactor– checklist 38%– project profile 26%– scoring/rating models 26%– multicriteria 11%

• Mathematical ProgrammingMathematical Programming 18%18%• Expert SystemsExpert Systems 6%6%

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Session 7. Payback analysisSession 7. Payback analysis

• Payback periodPayback period – the length of time – the length of time that it takes to recover the amount of that it takes to recover the amount of money invested in the technology.money invested in the technology.

• PaybackPayback occurs when the occurs when the cumulativecumulative benefits are greater than benefits are greater than cumulativecumulative costs.costs.

• For short-term investors, the For short-term investors, the payback period may be only a couple payback period may be only a couple of years.of years.

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Session 7. Payback analysis for two projects Session 7. Payback analysis for two projects

Project AProject A Yr1Yr1 Yr2Yr2 Yr3Yr3 Yr4Yr4 Yr5Yr5 Yr6Yr6 Total Total

CostCost 20,00020,000 20,00020,000 10,00010,000 10,00010,000 5,0005,000 5,0005,000 70,00070,000

RevenueRevenue 00 00 30,00030,000 40,00040,000 30,00030,000 20,00020,000 120,000120,000

DifferenceDifference (20,000)(20,000) (20,000)(20,000) 20,00020,000 30,00030,000 25,00025,000 15,00015,000 50,00050,000

CumulativeCumulative (20,000)(20,000) (40,000)(40,000) (20,000)(20,000) 10,00010,000 35,00035,000 50,00050,000

Project BProject B Yr1Yr1 Yr2Yr2 Yr3Yr3 Yr4Yr4 Yr5Yr5 Yr6Yr6 Total Total

CostCost 25,00025,000 25,00025,000 15,00015,000 10,00010,000 5,0005,000 5,0005,000 85,00085,000

RevenueRevenue 10,00010,000 15,00015,000 45,00045,000 30,00030,000 20,00020,000 10,00010,000 120,000120,000


CumulativeCumulative (15,000)(15,000) (25,000)(25,000) 5,0005,000 25,00025,000 40,00040,000 45,00045,000

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Session 7. Net Present ValueSession 7. Net Present Value

• The formula for calculating NPV is:The formula for calculating NPV is:

NPV = ∑NPV = ∑t=1 …nt=1 …n A/(1+r) A/(1+r)tt

where where tt represents the year in which cash represents the year in which cash flow occurs, flow occurs, AA represents the amount of represents the amount of cash flow for that year, and cash flow for that year, and rr represents represents the discount rate. the discount rate.

• Using a specified rate of interest, this Using a specified rate of interest, this formula sums up the present value for the formula sums up the present value for the number of years that estimates have been number of years that estimates have been made. made.

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Session 7. NPV exampleSession 7. NPV example

• The present value of The present value of $3,000$3,000 cost projected for cost projected for the the thirdthird year of a project with an interest rate year of a project with an interest rate of 15% is of 15% is $1972.50;$1972.50; calculated as: calculated as:

$3000 * 1/(1+0.15)$3000 * 1/(1+0.15)33 or or $3000 * 0.6575 = $1972.50$3000 * 0.6575 = $1972.50

• If the projected revenue for the same project in If the projected revenue for the same project in the the thirdthird year is year is $2,000$2,000 then the present value then the present value will be will be $1512.20;$1512.20; calculated as: calculated as:

$2000 * 1/(1+0.15)$2000 * 1/(1+0.15)33 or or $2000 * 0.6575 = $1512.30$2000 * 0.6575 = $1512.30

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Session 7. Discount factors at 15%Session 7. Discount factors at 15%

YearYear FormulaFormula Discount factorDiscount factor

11 1/(1+0.15)1/(1+0.15)11 0.86960.8696

22 1/(1+0.15)1/(1+0.15)22 0.75610.7561

33 1/(1+0.15)1/(1+0.15)33 0.65750.6575

44 1/(1+0.15)1/(1+0.15)44 0.57180.5718

55 1/(1+0.15)1/(1+0.15)55 0.49720.4972

66 1/(1+0.15)1/(1+0.15)66 0.43230.4323

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Session 7. Payback analysis for Project ASession 7. Payback analysis for Project A

Project AProject A Yr1Yr1 Yr2Yr2 Yr3Yr3 Yr4Yr4 Yr5Yr5 Yr6Yr6 Total Total

CostCost 20,00020,000 20,00020,000 10,00010,000 10,00010,000 5,0005,000 5,0005,000 70,00070,000

RevenueRevenue 00 00 30,00030,000 40,00040,000 30,00030,000 20,00020,000 120,000120,000


CumulativeCumulative (20,000)(20,000) (40,000)(40,000) (20,000)(20,000) 10,00010,000 35,00035,000 50,00050,000

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Session 7. NPV for Project ASession 7. NPV for Project A

• Year 1 = .8696 * ($20,000)Year 1 = .8696 * ($20,000) = ($17,392)= ($17,392)• Year 2 = .7561 * ($20,000)Year 2 = .7561 * ($20,000) = ($15,122)= ($15,122)• Year 3 = .6575 * $20,000Year 3 = .6575 * $20,000 = $13,150= $13,150• Year 4 = .5718 * $30,000Year 4 = .5718 * $30,000 = $17,154= $17,154• Year 5 = .4972 * $25,000Year 5 = .4972 * $25,000 = $12,430= $12,430• Year 6 = .4323 * $15,000Year 6 = .4323 * $15,000 = $6,485= $6,485

NPV (Project A) = ∑NPV (Project A) = ∑t=1 …nt=1 …n A/(1+r) A/(1+r)t t

= = $16,705$16,705

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Session 7. ROI analysis for Project ASession 7. ROI analysis for Project A

YearYear FactorFactor Revenue Revenue Disc. Rev.Disc. Rev. CostCost Disc. Cost Disc. Cost

11 0.86960.8696 $0$0 $0$0 ($20,000)($20,000) ($17,392)($17,392)

22 0.75610.7561 $0$0 $0$0 ($20,000)($20,000) ($15,122)($15,122)

33 0.65750.6575 $30,000$30,000 $19,725$19,725 ($10,000)($10,000) ($6,575)($6,575)

44 0.57180.5718 $40,000$40,000 $22,872$22,872 ($10,000)($10,000) ($5,718)($5,718)

55 0.49720.4972 $30,000$30,000 $14,916$14,916 ($5,000)($5,000) ($2,486)($2,486)

66 0.43230.4323 $20,000$20,000 $8,646$8,646 ($5,000)($5,000) ($2,162)($2,162)

Total Total $120,000$120,000 $66,159$66,159 ($70,000)($70,000) ($49,455)($49,455)

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Session 7. ROI analysis for Project BSession 7. ROI analysis for Project B

YearYear FactorFactor Revenue Revenue Disc. Rev.Disc. Rev. CostCost Disc. Cost Disc. Cost

11 0.86960.8696 $10,000$10,000 $8,696$8,696 ($25,000)($25,000) ($21,740)($21,740)

22 0.75610.7561 $15,000$15,000 $11,342$11,342 ($25,000)($25,000) ($18,903)($18,903)

33 0.65750.6575 $45,000$45,000 $29,588$29,588 ($15,000)($15,000) ($9,863)($9,863)

44 0.57180.5718 $30,000$30,000 $17,154$17,154 ($10,000)($10,000) ($5,718)($5,718)

55 0.49720.4972 $20,000$20,000 $9,944$9,944 ($5,000)($5,000) ($2,486)($2,486)

66 0.43230.4323 $10,000$10,000 $4,323$4,323 ($5,000)($5,000) ($2,162)($2,162)

Total Total $120,000$120,000 $81,047$81,047 ($85,000)($85,000) ($60,872)($60,872)

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Session 7. ROI – Projects A & B Session 7. ROI – Projects A & B

• ROI for Project A: ROI for Project A:

($66,159 – $49,455)/49,455 * 100 = ($66,159 – $49,455)/49,455 * 100 = 33.8%33.8%

• ROI for Project B: ROI for Project B:

($81,047 – $60,872)/60,872 * 100 = ($81,047 – $60,872)/60,872 * 100 = 33.1%33.1%

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Session 7. Caution Session 7. Caution

• There is a risk in using a single There is a risk in using a single measure to evaluate the potential measure to evaluate the potential contribution of a project.contribution of a project.

• Many organizations put a limit on Many organizations put a limit on their project payback period.their project payback period.

• Many would use a minimum rate of Many would use a minimum rate of return on investment. return on investment.

• There are pros and cons to having There are pros and cons to having rigid standards. rigid standards.

• IT investment is treated differently. IT investment is treated differently.

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Session 7. Sources of estimatesSession 7. Sources of estimates

• ExperienceExperience – individuals within – individuals within the organization.the organization.– this method considers workplace

culture, talent pool, interorganizational relations, and HR policies.

– Overestimation?

– Underestimation?

– ‘Safe’ estimates?

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• DocumentationDocumentation – archival information – archival information from previous projects.from previous projects.– Relatively current?– Similar projects?– Free from bias? Politics?– Based on actual recorded numbers.– Adjustment may be necessary if changes

have occurred since the document was prepared – new laws, new equipment, change in working hours, and holidays.

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• Expert opinionExpert opinion – widely used and – widely used and includes a broad pool of internal and includes a broad pool of internal and external experts.external experts. – Similar to experience in pros and cons

– Used for new and innovative systems where little record exists.

– More formalized and expensive.

– May require visits by external experts and sharing of information.

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Session 7. ConsiderationsSession 7. Considerations

• A combination of internal and external A combination of internal and external estimates, while costly, has advantages. estimates, while costly, has advantages.

• Team members should be involved with Team members should be involved with providing estimates but the project providing estimates but the project manager must be aware of biases.manager must be aware of biases.

• Provide supporting material on methods Provide supporting material on methods of estimation. of estimation.

• Establish guidelines for cost and time Establish guidelines for cost and time estimation. estimation.

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Session 7. ConsiderationsSession 7. Considerations

• Based on history and experience, project Based on history and experience, project managers may adjust estimates given by managers may adjust estimates given by individuals. individuals.

• This, in turn, will result in further adjustment This, in turn, will result in further adjustment (overestimation or underestimation) by (overestimation or underestimation) by those providing estimates.those providing estimates.

• This cycle creates ‘This cycle creates ‘game playgame play’ and a non-’ and a non-productive environment.productive environment.

• It may be necessary to work out some kind It may be necessary to work out some kind of reward for reliable and accurate of reward for reliable and accurate estimates.estimates.

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Session 7. HintsSession 7. Hints

• Use work units and Use work units and bottom-up bottom-up approach.approach.• Define clearly work units and tasks.Define clearly work units and tasks.• Avoid memory recollection.Avoid memory recollection.• Involve team members to improve Involve team members to improve

commitments and match tasks and skills.commitments and match tasks and skills.• Obtain multiple estimates: Obtain multiple estimates:

– The best case scenario.– The most probable scenario.– The worst case scenario.

• Assign weights to these estimates.Assign weights to these estimates.

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Session 7. Multiple estimatesSession 7. Multiple estimates

• Use average scores and variance.Use average scores and variance.

• Provide Provide contingency resources contingency resources for for estimates with large variance. estimates with large variance.

• Calculate ‘Calculate ‘upper limitupper limit’ and ‘’ and ‘lower limitlower limit’ ’ measures for project duration.measures for project duration.

• Example: A project is estimated to take Example: A project is estimated to take 165 hours165 hours to complete with a standard to complete with a standard deviation of deviation of 29 hours29 hours. Assuming + and – . Assuming + and – 3 standard deviations, we will have: 3 standard deviations, we will have:

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Session 7. Multiple estimatesSession 7. Multiple estimates

• The project upper limit:The project upper limit:(3 * 29 + 165) = 252 hours(3 * 29 + 165) = 252 hours

• The project lower limit:The project lower limit:(-3 * 29 + 165) = 78 hours (-3 * 29 + 165) = 78 hours

• Upper limit as % of estimate:Upper limit as % of estimate:(252/165)100 = 152.73%(252/165)100 = 152.73%

• Lower limit as % of estimate:Lower limit as % of estimate:(78/165)100 = 47.27% (78/165)100 = 47.27%

There is a high probability that the project will be There is a high probability that the project will be complete within 78 to 252 hours. The project complete within 78 to 252 hours. The project completion time may be over extended or under completion time may be over extended or under extended by about 53%. extended by about 53%.

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Session 7. Phase estimatingSession 7. Phase estimating

• Sometimes, due to uncertainty, estimates Sometimes, due to uncertainty, estimates are feasible for initial phase only.are feasible for initial phase only.

• Only rough estimates of subsequent Only rough estimates of subsequent phases are initially feasible. phases are initially feasible.

• Project development life cycle (initiation, Project development life cycle (initiation, planning, development, implementation, planning, development, implementation, closure) can be the base for phase closure) can be the base for phase estimating.estimating.

• Project owners and sponsors must Project owners and sponsors must commit to a project with incomplete commit to a project with incomplete information about cost and time – not information about cost and time – not always an easy situation.always an easy situation.

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Session 7. Considerations Session 7. Considerations

• Estimates are used to request funding, Estimates are used to request funding, make decisions, schedule, negotiate, set make decisions, schedule, negotiate, set goals, evaluate performance, etc.goals, evaluate performance, etc.

• Events happen, technology advances, Events happen, technology advances, priorities change, and biases creep in.priorities change, and biases creep in.

• Credibility of the estimates and those Credibility of the estimates and those preparing them must be considered. preparing them must be considered.

• Methods, their appropriateness, strengths, Methods, their appropriateness, strengths, and weaknesses must be explained.and weaknesses must be explained.

• Assume ‘Assume ‘normal conditionsnormal conditions’ – free from ’ – free from extreme case assumptions.extreme case assumptions.

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Session 7. Contingency plan Session 7. Contingency plan

• For out-of-ordinary situations.For out-of-ordinary situations.• Extreme or extraordinary situations.Extreme or extraordinary situations.• Funds must be appropriated at the planning Funds must be appropriated at the planning

phase of the project development life cycle.phase of the project development life cycle.• Document and communicate contingency Document and communicate contingency

situations.situations.• Such funds are not directly accessible by the Such funds are not directly accessible by the

project manager.project manager.• Simply adding a margin to estimates must be Simply adding a margin to estimates must be

avoided; suggests poor planning, interpreted avoided; suggests poor planning, interpreted as as add-on slushadd-on slush money by watchful sponsors. money by watchful sponsors.

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Session 7. Risk analysis Session 7. Risk analysis

• Appropriate where there is uncertainty Appropriate where there is uncertainty regarding activity duration.regarding activity duration.

• Leads to developing alternative responses.Leads to developing alternative responses.• Includes prediction or likelihood of Includes prediction or likelihood of

happening.happening.• Includes estimate of risk impactIncludes estimate of risk impact• Depending on the nature and size of a Depending on the nature and size of a

project, it could be more or less extensive, project, it could be more or less extensive, detailed, or formalized. detailed, or formalized.

• Leads to a Leads to a change management processchange management process. .

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Session 7. Change management Session 7. Change management

• Change is beneficial - innovative Change is beneficial - innovative ideas or suggestions are often made ideas or suggestions are often made by team members. by team members.

• A A change management committeechange management committee can can facilitate and encourage change facilitate and encourage change proposals. proposals.

• With the approval of management, With the approval of management, additional resources can be provided additional resources can be provided through contingency funds.through contingency funds.

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• Membership includes stakeholders Membership includes stakeholders from the entire organization. Change from the entire organization. Change management committee must: management committee must: – identify possible risks– predict the likelihood of risks happening – estimate risks impact – communicate risks to stakeholders– prepare alternative response.

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• Changes must be consistent with the Changes must be consistent with the overall goals and objectives of the overall goals and objectives of the organization and the broad scope of organization and the broad scope of the project.the project.

• Responses to change requests must Responses to change requests must be timely, especially for time-sensitive be timely, especially for time-sensitive changes.changes.

• Proposals to drastically change a Proposals to drastically change a project may replace the project with a project may replace the project with a new one. new one.

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Session 6. Discussion questionSession 6. Discussion question

• Assume you are working for an Assume you are working for an organization that is keen to invest in organization that is keen to invest in information technology to improve information technology to improve employee innovation, productivity, employee innovation, productivity, customer satisfaction, and management customer satisfaction, and management control. However, top management in your control. However, top management in your organization has a short-term payback organization has a short-term payback expectation for their technology expectation for their technology investment. investment. Explain to the leadership of Explain to the leadership of your organization why such a policy may your organization why such a policy may be dysfunctional in the long termbe dysfunctional in the long term. .

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Session 6. Discussion question Session 6. Discussion question

• This chapter argues that This chapter argues that organizational organizational game playgame play and and politics are a function of politics are a function of management decision-making style. management decision-making style. Do you agree with this statement? Do you agree with this statement? WhyWhy? ?

• Is it possible to totally eliminate Is it possible to totally eliminate organizational politics? organizational politics?

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• Assume you are an IT project Assume you are an IT project manager. How would you deal with manager. How would you deal with issues of politics and issues of politics and game playgame play that affect time and cost estimates that affect time and cost estimates for your projects? for your projects?

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• Would your reaction be the same Would your reaction be the same overestimationoverestimation and and underestimationunderestimation of cost and time? of cost and time?

• When do you think ‘overestimation’ When do you think ‘overestimation’ happens? ‘Underestimation’? happens? ‘Underestimation’?

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Work Package EstimatesWork Package Estimates

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Session 6. In-class assignmentSession 6. In-class assignment

• Do exercise ? in Chapter 4 (payback Do exercise ? in Chapter 4 (payback analysis, NPV, and ROI for two analysis, NPV, and ROI for two projects). projects).

Documents

1.1 Dr. Honghui Deng Associate Professor MIS Department UNLV MIS 746 IS Project Management