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

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  • The Business Case:

    A Commercial

    Perspective

    Building the IT Business Case

    Information 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 weve made the

    right decision?

    4

  • The Basic Questions

    How much should we invest in IT?

    How should we allocate the IT investment

    budget?

    How do we know whether weve made the

    right decision?

    5

  • Determining the IT investment budget

    Last year plus Inflation plus x.

    % of O&M.

    Zero based budgeting.

    Industry Best Practices.

    Other.

    6

  • Determining the IT investment budget

    Gomolski, B. How IT Spending Varies According to Company Size.

    Gartner .9 May 2005. ID G00125306. 7

  • Determining the IT investment budget

    Gomolski, B. How IT Spending Varies According to Company Size.

    Gartner .9 May 2005. ID G00125306. 8

  • The Basic Questions

    How much should we invest in IT?

    How should we allocate the IT investment

    budget?

    How do we know whether weve made the

    right decision?

    9

  • Commercial Model- an example

    Keep the doors open

    Infrastructure

    Software maintenance

    Mandated

    Y2K

    Sarbannes-Oxley

    Privacy

    New Initiatives

    Tactical

    Strategic

    10

  • 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.

    11

  • Federal Agency IT Investments

    12

    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

    14

  • Assessment

    Quantitative

    Costs

    Benefits

    Risks

    Qualitative

    Costs

    Benefits

    Risks

    Includes:

    Facts

    Assumptions

    Constraints

    15

  • Facts

    Did we include all relevant facts bearing on

    the investment?

    Are they facts or are they beliefs?

    Are they provable?

    Are they demonstratable?

    16

  • Assumptions

    Assumption: A factor that is

    considered to be true, real or

    certain, without proof.. affects the

    projectcontains risk.

    Assumptions as to benefits

    External

    Internal

    Assumptions as to cost.

    Assumptions as to schedule.

    May require some testing.

    Cost

    Benefit

    ?

    17

  • Constraints

    Constraint: A factor that limits the

    organizations options.

    Examples:

    Cost

    Schedule

    Skills available

    Facilities available

    Legal & regulatory

    Includes Exclusions

    Cost

    Benefit

    18

  • Comparison of projects

    19

  • 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 Simulation21

  • 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

    23

  • Portfolio Selection

    Select in order COSTTOTAL BENEFITTOTAL

    A 400 10 400 10

    B 500 13 900 23

    C 100 4 1000 27

    D 300 6 1300 33

    E 200 5 1500 38

    Select by lowest cost COSTTOTAL BENEFITTOTAL

    C 100 4 100 4

    E 200 5 300 9

    D 300 6 600 15

    A 400 10 1000 25

    B 500 13 1500 38

    PROJECT COST BENEFIT

    A 400 10

    B 500 13

    C 100 4

    D 300 6

    E 200 5

    Budget = 1200

    Cost: 1000

    Benefit: 27

    Cost: 1200

    Benefit: 29

    Cost: 1000

    Benefit: 25

    Select by highest benefit COSTTOTAL BENEFITTOTAL

    B 500 13 500 13

    A 400 10 900 23

    D 300 6 1200 29

    E 200 5 1400 34

    C 100 4 1500 38

    24

  • Portfolio Selection

    PROJECT COST BENEFIT RATIO

    A 400 10 0.025

    B 500 13 0.026

    C 100 4 0.040

    D 300 6 0.020

    E 200 5 0.025

    Select by Benefit to Cost ratio COSTTOTAL BENEFITTOTAL

    C 100 4 100 4

    B 500 13 600 17

    E 200 5 800 22

    A 400 10 1200 32

    D 300 6 1500 38

    Cost: 1200

    Benefit: 32

    25

  • Graphical Comparison Based on Two

    Criteria

    GO

    CAUTION

    TERMINATE

    BE

    NE

    FIT

    Risk

    Hig

    hM

    ediu

    mLow

    High Medium Low

    PMBOK

    26

  • Multifunction Selection

    27

    A B C

    Obj 1 2 2 3

    Obj 2 3 2 2

    Obj 3 1 3 2

    Obj 4 1 3 2

    Obj 5 3 2 2

    Total 10 12 11

    Weight A B C

    Obj 1 5 10 10 15

    Obj 2 10 30 20 20

    Obj 3 5 5 15 10

    Obj 4 1 1 3 2

    Obj 5 5 15 10 10

    Total 61 58 57

    Weight A B C

    Obj 1 10 20 20 30

    Obj 2 5 15 10 10

    Obj 3 3 3 9 6

    Obj 4 5 5 15 10

    Obj 5 5 15 10 10

    Total 58 64 66

    Weight

    Obj 1 5

    Obj 2 10

    Obj 3 5

    Obj 4 1

    Obj 5 5

    Total

    Weight

    Obj 1 10

    Obj 2 5

    Obj 3 3

    Obj 4 5

    Obj 5 5

    Total

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

  • Multifunction Selection

    A B C D

    Obj 1 10 7 1 2

    Obj 2 8 3 1 2

    Obj 3 7 4 2 3

    Obj 4 0 3 2 2

    Obj 5 4 6 0 6

    Total 29 23 6 15

    Cost 1000 1000 300 700

    Budget: 2000

    28

  • Multifunction Selection

    A B C D Total

    Obj 1 10 7 17

    Obj 2 8 3 11

    Obj 3 7 4 11

    Obj 4 0 3 3

    Obj 5 4 6 10

    Total 29 23 52

    Cost 1000 1000 2000

    A B C D Total

    Obj 1 10 1 2 13

    Obj 2 8 1 2 11

    Obj 3 7 2 3 12

    Obj 4 0 2 2 4

    Obj 5 4 0 6 10

    Total 29 6 15 50

    Cost 1000 300 700 2000

    A B C D Total

    Obj 1 7 1 2 10

    Obj 2 3 1 2 6

    Obj 3 4 2 3 9

    Obj 4 3 2 2 7

    Obj 5 6 0 6 12

    Total 23 6 15 44

    Cost 1000 300 700 2000 29

  • Multifunction Selection

    Selection Criteria

    10 is maximum

    value for any

    objective

    A B C D Total

    Obj 1 10 7 17 10

    Obj 2 8 3 11 10

    Obj 3 7 4 11 10

    Obj 4 0 3 3 3

    Obj 5 4 6 10 6

    Total 29 23 52 39

    Cost 1000 1000 2000

    A B C D Total

    Obj 1 10 1 2 13 10

    Obj 2 8 1 2 11 10

    Obj 3 7 2 3 12 10

    Obj 4 0 2 2 4 4

    Obj 5 4 0 6 10 10

    Total 29 6 15 50 44

    Cost 1000 300 700 2000

    A B C D Total

    Obj 1 7 1 2 10 10

    Obj 2 3 1 2 6 6

    Obj 3 4 2 3 9 9

    Obj 4 3 2 2 7 7

    Obj 5 6 0 6 12 10

    Total 23 6 15 44 42

    Cost 1000 300 700 200030

  • Multifunction Selection

    Selection Criteria

    10 is maximum

    value

    Total must score

    at least 5 for

    each objective

    A B C D Total

    Obj 1 10 7 17 10

    Obj 2 8 3 11 10

    Obj 3 7 4 11 10

    Obj 4 0 3 3 3

    Obj 5 4 6 10 6

    Total 29 23 52 39

    Cost 1000 1000 2000

    A B C D Total

    Obj 1 10 1 2 13 10

    Obj 2 8 1 2 11 10

    Obj 3 7 2 3 12 10

    Obj 4 0 2 2 4 4

    Obj 5 4 0 6 10 10

    Total 29 6 15 50 44

    Cost 1000 300 700 2000

    A B C D Total

    Obj 1 7 1 2 10 10

    Obj 2 3 1 2 6 6

    Obj 3 4 2 3 9 9

    Obj 4 3 2 2 7 7

    Obj 5 6 0 6 12 10

    Total 23 6 15 44 42

    Cost 1000 300 700 200031

  • The Basic Questions

    How much should we invest in IT?

    How should we allocate the IT investment

    budget?

    How do we know whether weve made the

    right decision?

    32

  • Did we get what we paid for?

    Year after

    Project

    Completion

    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 2009

    Revenue 190$ 220$