©Donna Fitzgerald.

Business Case Analysis:Tips and Techniques for

Project Managers

Donna Fitzgerald

©Donna Fitzgerald.

The Changing World of Project Management

All projects are receiving more scrutiny– Increased need for bottom line return

Responsibilities of a Project Manager are increasing. Must have:– Technical systems knowledge– General business knowledge– financial knowledge

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The Role and Function of the Business Case

The business case is necessary for gaining initial approval to begin the system development effort

It provides guidance during the project as to which features or designs contribute most to the business objectives

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Rule of Thumb #1 If you don’t develop the

business case someone else will do it for you

Their version will include too little money and be due in too short a time

©Donna Fitzgerald.

Developing the Business Case

Determine the real requirements Analyze the costs & benefits of current

system Analyze the costs & benefits of the new

system Determine the development,

implementation and ongoing support costs Develop the Business Case P&L

©Donna Fitzgerald.

Target Activity.

Is activity required

by customer?

Can activity be

eliminated?

Eliminate activity - reduce

cost.

Can frequency be

reduced?

Reduce Activity frequency

- reduce cost.

Does Activity

contain non-valued

adding tasks?

Eliminate non-value added

tasks - reduce cost.

No cost reduction

opportunities identified.

No

Yes

Yes

No

Yes

No

Yes

No

Analysis of system change

what

who

why

where

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Costs & Benefits - Current System

True costs– beware of allocations

fallacy of steady state assumption– What does the company’s strategic

plan say?– what are the trends in the industry?

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Rule of Thumb #2 The current system will

not stay static. Assign a degree of risk to

any numbers used for the “as-is” or “do nothing “ situation.

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Analyzing On-Going Benefits How to define a “Hard” cost savings

– cash payments– eliminated function

Soft cost savings– incremental productivity improvement– cost avoidance

TANSTAAFL

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Analyzing Headcount Savings

What work is being eliminated Who currently does the work What percentage of their time is

currently spent doing that work. Where are they located

geographically and is reassignment possible in order to reduce headcount

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Rule of Thumb #3 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.

©Donna Fitzgerald.

TANSTAAFL There ain’t no such thing as a free

lunch Cost transfers

– within the company»Eliminating Accounts Payable

– outside of the company» Just-In-Time

Can’t save on allocated costs– client-server/mainframe conversion

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Rule of Thumb #4 Make sure your proposed

system completely eliminates a cost and doesn’t just transfer it.

Otherwise include these cost as ongoing expense of the new system.

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Development & Implementation Costs

Capital Software Labor

– Internal– consultant

Direct non-wage expense Restructing costs

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Project CostsTeam Member # of People Wage O.T. Non-Wage TOTALS

Project Team

Project Manager 0.5 74 15 44

Programmer/Analyst 1 62 6 15 83

DBA 0.3 62 6 15 25

Sub-Totals 1.8 117 8 27 152

Process Support

Project Manager 0.75 74 15 66

Training Development 0.6 74 15 53

Employee SME 1.5 62 6 15 124

Sub-Totals 2.85 192 9 43 244

Contract Prgmr 0.75 150 5 5 120

Business Analyst 1.5 150 5 5 240

Sr. DBA 0.75 198 5 5 156

Sub-Totals 3 486 15 15 516

Outside Service 200

Total 8 794 32 85 1111

EMPLOYEE # 4.7 EMPLOYEE $ $395

CONTRACT # 3.0 O/S LABOR $ $516

O/S SERVICE $200

EMPLOYEE & O/S LABOR 7.7 TOTAL $1,111

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The Project Profit & Loss Statement

Usually developed for a 5 year timeframe

Includes incremental revenue Project related costs

– Development and implementation– On-going support and maintenance

Project related expense savings Net return from project

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Business Case Profit & Loss

Implementation Costs 5 YR1996 1997 1998 1999 2000 Total

Capital Requirements 75 0 0 0 0 75ExpenseContract/Outside Service 530 15 15 15 15 590Wage & Non Wage 1,500 100 100 100 100 1,900

Total Expense 2,030 115 115 115 115 2,490Total Implementation Costs 2,105 115 115 115 115 2,450

Savings 5 YR1996 1997 1998 1999 2000 Total

Expense Savings 380 1,140 1,140 1,140 1,140 3,800Savings - Component A 125 376 376 376 376 1,630Savings - Component B 255 764 764 764 764 3,310

Total Savings 380 1,140 1,140 1,140 1,140 3,800

Force Reduction 1996 1997 1998 1999 2000 Total

Management Force Reduction 0.0 0.0 0.0 0.0 0.0 Region A 0.0 Region B 0.0 Non-Management Force Reduction 19.0 0.0 0.0 0.0 19.0 New England 6.5 0.0 6.5 New York 12.5 0.0 12.5

Force Reductions 19.0 0.0 0.0 0.0 0.0 19.0

P&L AnalysisPayback 2.5yearsNPV @ 8% ($1,658) $879 $814 $753 $698 $1,485IRR 54.51%

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Financial Indicators - Payback

The number of years it takes to recover your initial investment.

Disadvantage of this method is that it is not time adjusted.

Payback is calculated by subtracting the cost against the stream of payments and determining the time frame in which the number reaches zero.

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Financial IndicatorsNet Present Value

Time Adjusted Determined by multiplying a stream

of net future cash flows by a discount rate then subtracting the initial investment in the project.

Only becomes controversial on the subject of what discount rate to use.

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Excel NPV

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NPV (cont.)

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Financial IndicatorsInternal Rate of Return

It is the discount rate equating the npv of cash inflows to the npv of cash outflows to zero.

The internal rate of return assumes cash inflows are reinvested at the internal rate.

The internal rate of return can be compared with the required rate of return (cutoff or hurdle rate).

©Donna Fitzgerald.

Excel IRR

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IRR (cont)

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Rule of Thumb #5 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.

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Probability & Risk Adjusted Rates

Usually ignored

Sophisticated mathematical equations – Usually driven by one person– may be measuring the wrong thing

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Rule of Thumb #6 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.

©Donna Fitzgerald.

The Dilbert Rule of Business Case Development