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Chapter: Software Project Management

Software Project Management: Project Evaluation

1 Strategic Assessment 2 Technical Assessment 3 Cost Benefit Analysis 4 Cash Flow Forecasting 5 Cost Benefit Evaluation Techniques 6 Risk Evaluation



1 Strategic Assessment

2 Technical Assessment

3 Cost Benefit Analysis

4 Cash Flow Forecasting

5 Cost Benefit Evaluation Techniques

6 Risk Evaluation



 Project Evaluation:


A high level assessment of the project


to see whether it is worthwhile to proceed with the project


to see whether the project will fit in the strategic planning of the whole organization


            Project Evaluation




Want to decide whether a project can proceed before it is too late


Want to decide which of the several alternative projects has a better success rate, a higher turnover, a higher ...


Is it desirable to carry out the development and operation of the software system




Senior management


Project manager/coordinator


Team leader




• Usually at the beginning of the project e.g. Step 0 of Step Wise Framework




Strategic assessment


Technical assessment


Economic assessment




Cost-benefit analysis


Cash flow forecasting


Cost-benefit evaluation techniques


•   Risk analysis




        1 Strategic Assessment


Used to assess whether a project fits in the long-term goal of the organization


Usually carried out by senior management


Needs a strategic plan that clearly defines the objectives of the organization


Evaluates individual projects against the strategic plan or the overall business objectives Programme management


suitable for projects developed for use in the organization Portfolio management


suitable for project developed for other companies by software houses


SA – Programme Management


Individual projects as components of a programme within the organization


Programme as “a group of projects that are managed in a coordinated way to gain benefits that would not be possible were the projects to be managed independently


SA – Programme Management Issues




How does the project contribute to the long-term goal of the organization?


Will the product increase the market share? By how much?


   IS plan


Does the product fit into the overall IS plan?


How does the product relate to other existing systems?


Organization structure


How does the product affect the existing organizational structure? the existing workflow? the overall business model?




What information does the product provide?


To whom is the information provided?

How does the product relate to other existing MISs?




What are the staff implications?


What are the impacts on the overall policy on staff development?




How does the product affect the image of the organization?


            SA – Portfolio Management


suitable for product developed by a software company for an organization


may need to assess the product for the client organization


Programme management issues apply


need to carry out strategic assessment for the providing software company


Long-term goal of the software company


The effects of the project on the portfolio of the company (synergies and conflicts)


Any added-value to the overall portfolio of the company


2 Technical Assessment


Functionality against hardware and software


Thestrategic IS plan of the organization


any constraints imposed by the IS plan


1 Economic Assessment




Consider whether the project is the best among other options


Prioritise the projects so that the resources can be allocated effectively if several projects are underway




Cost-benefit analysis


Cash flow forecasting


Various cost-benefit evaluation techniques




2 EA – Cost-benefit Analysis


A standard way to assess the economic benefits


Two steps


Identify and estimate all the costs and benefits of carrying out the project


Express the costs and benefits in a common unit for easy comparison (e.g. $)




Development costs


Setup costs


Operational costs Benefits


Direct benefits


Assessable indirect benefits


Intangible benefits


            EA – Cash Flow Forecasting




Estimation of the cash flow over time




An excess of estimated benefits over the estimated costs is not sufficient


Need detailed estimation of benefits and costs versus time




Estimation of the cash flow over time




An excess of estimated benefits over the estimated costs is not sufficient


Need detailed estimation of benefits and costs versus time


Need to forecast the expenditure and the income


Accurate forecast is not e asy


Need to revise the forecast from time to time


4 Cost-benefit Evaluation Techniques


•   Net profit


= Total income – Total costs


•   Payback period


= Time taken to break even


•   Return on Investment ( ROI)



5 Cost-benefit Evaluation Techniques – NPV Net present value (NPV)


It is the sum of the presennt values of all future amounts.


Present value is the value which a future amount is worth at present


It takes into account the p rofitability of a project and the timing of the cash flows


Let n be the number of yea r and r be the discount rate, the present value (PV) is given





Issues in NPV


Choosingan appro priate discount rate is difficult


Ensuring that the rankings of projects are not sensitive to small changes in discount rate




Use the standard rate prescribed by the organization


Use interest rate + premium rate


Use a target rate of return


Rank the projects using various discount rates




May not be directly comparable with earnings from other investments or the costs of borrowing capital


Internal Rate of Return (IRR)


The percentage discount rate that would produce a NPV of zero


A relative measure






Directly comparable with rate of return on other projects and with interest rates




Dismiss a project due to its small IRR value


Indicate further precise evaluation of a project


Supported by MS Excel and Lotus 1-2-3




Why? – to define the project budget and to ‘refine’ the product to realize the budget


Who? – the manager


What? – size and cost


When? – always


How? – techniques and models


Issues related to Estimation


Difficult to make accurate estimation


Better to have previous data and analyze the actual values against their estimates so that you know how accurate you are


Even better to have previous data of the whole organization so that you know how accurate the estimation method, if any, used within the organization


Positive Attitude Towards Estimation


Use your estimation as a guide to manage your project


From time to time, you need to revise your estimation based on the current status of the project


Estimation Approaches


Expert judgement


Ask the knowledgeable experts


Estimation by analogy


Use the data of a similar and completed project


Pricing to win


Use the price that is low enough to win the contract




An overall estimate is determined and then broken down into each component task




The estimates of each component task are aggregated to form the overall estimate


Algorithmic model


Estimation is  based  on  the characteristics  of the product and  the development




Size Estimation


Problems related to size estimation


Size Estimation Model


Function Point Analysis (FPA)


Problems related to size estimation


Nature of software


Novel application of software


Fast changing technology


Lack of homogeneity of project experience


Subjective nature of estimation


Political implications within the organization



3 Cost-Benefit Analysis


Cost/benefit analysis, comparing


– Expected costs


– Expected benefits




– Estimating costs


– Estimating benefits


Use of financial models to evaluate


 Cost-Benefit Analysis-Two Steps


Identifying and estimating all of the costs and benefits of carrying out the project and operating the delivered application


Expressing the costs and benefits in common units


 Cost-Benefit Analysis-Cost Estimation


Estimate costs to compare with benefits/other investment options


Overall estimation based on


– Estimation of required activities (structure)


– Estimation for each activity


– Estimation of installation/setup cost


– Estimation of operational cost


Difficult, as a lot of these are`estimates’;


estimation errors cascade


Cost-Benefit Analysis-Cost Category


Development costs


Setup costs


Operational costs


Cost-Benefit Analysis-Development Costs


Salaries (base, incentives, and bonuses)


Equipment for development


– Hardware


– Software


Cost-Benefit Analysis-Setup Cost


Hardware and software infrastructure


Recruitment/staff training


Installation and conversion costs


Cost-Benefit Analysis-Operational Costs


Costs of operating the system once it has been installed


– Support costs


– Hosting costs


– Licensing costs


– Maintenance costs


– Backup costs


Cost-Benefit Analysis-Benefit Estimation


Estimate benefits of new system based on– Estimation of cost savings and money generation when deployed– Value of information obtained for objective driven project


– Value of intangibles


Cost Benefits Analysis-Benefits Types


Direct benefits


Indirect benefits


Intangible benefits


Cost Benefits Analysis-Direct Benefits


Directly accountable to new system


– Cost savings (e.g., less staff, less paper, quicker turnaround)


– Money generation (e.g., new revenue stream, new markets) Measurable after system is operational

Have to be estimated for cost/benefit analysis


Cost Benefits Analysis -Intangible Benefits


Positive side effects of new system


External system (e.g., increase branding, entry to new markets)


Internal system (increased interest in job for users, enabler for other systems) Often very specific to a project; not measurable even after a system is operational Part of strategic decision rather than cost/benefit analysis


 4 Cash Flow Forecasting


Indicates when expenditure and income will take place


1Cash Flow Analysis


Typically there are outgoing payments initially and then incoming payments There might be additional costs at the end of the project life


Cash flow considerations


– Is initial funding for the project available?


– Is timing of incoming/outgoing cash flow in line with financial plans?


– If cash flow is critical, forecasting should be done quarterly or monthly

Risky/expensive projects might be funded using venture capital


5 Cost-Benefit Evaluation-Techniques


Costs and benefits have to be expressed using the same scale to be comparable Usually expressed in payments at certain times (cash flow table)


Payments at different points in time are not comparable based only on the amount Time of payment should be considered





– Net profit


– Payback period


– Return on investment


– Net present value


– Internal rate of return


Cost-Benefit Evaluation Techniques -Net Profit


Difference between total cost and total income Pros: Easy to calculate




– Does not show profit relative to size investment (e.g., consider Project 2)


– Does not consider timing of payments (e.g., compare Projects 1 and 3) Not very useful other than for "back of envelope" evaluations

            Cost-Benefit Evaluation Techniques -Payback Period


Time taken to break even




– Easy to calculate


– Gives some idea of cash flow impact Cons: Ignores overall profitability

Not very useful by itself, but a good measure for cash flow impact


            Costs-Benefit Evaluation Techniques-Return On Investment


Also known as the accounting rate of return (ARR)


Provides a way of comparing the net profitability to the investment required The common formula– ROI = (average annual profit/total investment) X 100

            Cost-Benefit Evaluation Techniques -Return On Investment


Pros: Easy to calculate





– Does not consider the timing of payments


– Misleading: does not consider bank interest rates Not very useful other than for "back of envelope" evaluations


            Cost-Benefit Evaluation Techniques-Net Present Value


A project evaluation technique that takes into account the profitability of a project and the timing of the cash flows that are produced


Sum of all incoming and outgoing payments, discounted using an interest rate, to a fixed point in time (the present)


Cost-Benefit Evaluation Techniques-Net Present Value


Present value = (value in year t)/(1+r)^t


– r is the discount rate


– t is the number of years into the future that the cash flow occurs


– (1+r)^t is known as discount factor


In the case of 10% rate and one year


– Discount factor = 1/(1+0.10) = 0.9091 In the case of 10% rate and two years


– Discount factor = 1/(1.10 x 1.10) = 0.8294




– Takes into account profitability


– Considers timing of payments


– Considers economic situation through discount rate Cons: Discount rate can be difficult to choose

Standard measure to compare different options


            Cost-Benefit Evaluation Techniques -Internal Rate of Return


Internal rate of return (IRR) is the discount rate that would produce an NPV of 0 for the




Can be used to compare different investment opportunities


There is a Microsoft Excel function to calculate IRR



Pros: Calculates figure which is easily comparable to interest rates


Cons: Difficult to calculate (iterative)


Standard way to compare projects


            Definition of Risk


A risk is a potential problem – it might happen and it might not Conceptual definition of risk


–  Risk concerns future happenings


–  Risk involves change in mind, opinion, actions, places, etc.


– Risk involves choice and the uncertainty that choice entails Two characteristics of risk


– Uncertainty – the risk may or may not happen, that is, there are no 100% risks (those, instead, are called constraints)


–  Loss – the risk becomes a reality and unwanted consequences or losses occur


1 Risk Categorization – Approach


Project risks


They threaten the project plan


If they become real, it is likely that the project schedule will slip and that costs will increase


Technical risks


They threaten the quality and timeliness of the software to be produced If they become real, implementation may become difficult or impossible


Business risks


They threaten the viability of the software to be built


If they become real, they jeopardize the project or the product Sub-categories of Business risks


Market risk – building an excellent product or system that no one really wants


Strategic risk – building a product that no longer fits into the overall business strategy for the company


Sales risk – building a product that the sales force doesn't understand how to sell


Management risk – losing the support of senior management due to a change in focus or a change in people


Budget risk – losing budgetary or personnel commitment


Known risks


Those risks that can be uncovered after careful evaluation of the project plan, the business and technical environment in which the project is being developed, and other reliable information sources (e.g., unrealistic delivery date)


Predictable risks


Those risks that are extrapolated from past project experience (e.g., past turnover)


Unpredictable risks


Those risks that can and do occur, but are extremely difficult to identify in advance


.2Reactive vs. Proactive Risk Strategies

Reactive risk strategies


–  "Don't worry, I'll think of something"


–  The majority of software teams and managers rely on this approach


–  Nothing is done about risks until something goes wrong


            The team then flies into action in an attempt to correct the problem rapidly (fire fighting)


–  Crisis management is the choice of management techniques


Proactive risk strategies


–  Steps for risk management are followed (see next slide)


– Primary objective is to avoid risk and to have a contingency plan in place to handle unavoidable risks in a controlled and effective manner


            Steps for Risk Management


            Identify possible risks; recognize what can go wrong


            Analyze each risk to estimate the probability that it will occur and the impact (i.e., damage) that it will do if it does occur


3) Rank the risks  by probability and impact

- Impact may be negligible, marginal, critical, and catastrophic



            Develop a contingency plan to manage those risks having high probability and high impact


            Risk Identification


            Risk identification is a systematic attempt to specify threats to the project plan


            By identifying known and predictable risks, the project manager takes a first step toward avoiding them when possible and controlling them when necessary


            Generic risks


–  Risks that are a potential threat to every software project


            Product-specific risks


– Risks that can be identified only by those a with a clear understanding of the technology, the people, and the environment that is specific to the software that is to be built


–  This requires examination of the project plan and the statement of scope


–  "What special characteristics of this product may threaten our project plan?"


            Risk Item Checklist


            Used as one way to identify risks


            Focuses on known and predictable risks in specific subcategories (see next slide)


            Can be organized in several ways


–  A list of characteristics relevant to each risk subcategory


–  Questionnaire that leads to an estimate on the impact of each risk


– A list containing a set of risk component and drivers and their probability of occurrence




            Known and Predictable Risk Categories


            Product size – risks associated with overall size of the software to be built


            Business impact – risks associated with constraints imposed by management or the marketplace


            Customer characteristics – risks associated with sophistication of the customer and the developer's ability to communicate with the customer in a timely manner


            Process definition – risks associated with the degree to which the software process has been defined and is followed

            Development environment – risks associated with availability and quality of the tools to be used to build the project


            Technology to be built – risks associated with complexity of the system to be built and the "newness" of the technology in the system


            Staff size and experience – risks associated with overall technical and project experience of the software engineers who will do the work


            Questionnaire on Project Risk


Have top software and customer managers formally committed to support the project?


Are end-users enthusiastically committed to the project and the system/product to be built?


Are requirements fully understood by the software engineering team and its customers?


Have customers been involved fully in the definition of requirements?


Do end-users have realistic expectations?


Is the project scope stable?


Does the software engineering team have the right mix of skills?


Are project requirements stable?


Does the project team have experience with the technology to be implemented?


Is the number of people on the project team adequate to do the job?


Do all customer/user constituencies agree on the importance of the project and on the requirements for the system/product to be built?


            Risk Components and Drivers


            The project manager identifies the risk drivers that affect the following risk components


– Performance risk - the degree of uncertainty that the product will meet its requirements and be fit for its intended use


–  Cost risk - the degree of uncertainty that the project budget will be maintained


– Support risk - the degree of uncertainty that the resultant software will be easy to correct, adapt, and enhance


– Schedule risk - the degree of uncertainty that the project schedule will be maintained and that the product will be delivered on time

The impact of each risk driver on the risk component is divided into one of four impact levels

–  Negligible, marginal, critical, and catastrophic


Risk drivers can be assessed as impossible, improbable, probable, and frequent


6 Risk Projection (Estimation)


Risk projection (or estimation) attempts to rate each risk in two ways


–  The probability that the risk is real


–  The consequence of the problems associated with the risk, should it occur


The project planner, managers, and technical staff perform four risk projection steps (see next slide)


The intent of these steps is to consider risks in a manner that leads to prioritization


Be prioritizing risks, the software team can allocate limited resources where they will have the most impact


1 Risk Projection/Estimation Steps


Establish a scale that reflects the perceived likelihood of a risk (e.g., 1-low, 10-high)


Delineate the consequences of the risk


Estimate the impact of the risk on the project and product


Note the overall accuracy of the risk projection so that there will be no misunderstandings


2 Contents of a Risk Table


A risk table provides a project manager with a simple technique for risk projection


It consists of five columns


–  Risk Summary – short description of the risk


–  Risk Category – one of seven risk categories (slide 12)


–  Probability – estimation of risk occurrence based on group input


–  Impact – (1) catastrophic (2) critical (3) marginal (4) negligible


– RMMM – Pointer to a paragraph in the Risk Mitigation, Monitoring, and Management Plan



3 Developing a Risk Table


List all risks in the first column (by way of the help of the risk item checklists)


Mark the category of each risk


Estimate the probability of each risk occurring


Assess the impact of each risk based on an averaging of the four risk components to determine an overall impact value (See next slide)


Sort the rows by probability and impact in descending order


Draw a horizontal cutoff line in the table that indicates the risks that will be given further attention


.4 Assessing Risk Impact


Three factors affect the consequences that are likely if a risk does occur


–  Its nature – This indicates the problems that are likely if the risk occurs


– Its scope – This combines the severity of the risk (how serious was it) with its overall distribution (how much was affected)


–  Its timing – This considers when and for how long the impact will be felt


The overall risk exposure formula is RE = P x C


–  P = the probability of occurrence for a risk


–  C = the cost to the project should the risk actually occur




–  P = 80% probability that 18 of 60 software components will have to be developed


–  C = Total cost of developing 18 components is $25,000


–  RE = .80 x $25,000 = $20,000


Risk Mitigation, Monitoring, and Management


• An effective strategy for dealing with risk must consider three issues (Note: these are not mutually exclusive)


–  Risk mitigation (i.e., avoidance)


–  Risk monitoring


–  Risk management and contingency planning


Risk mitigation (avoidance) is the primary strategy and is achieved through a plan Example: Risk of high staff turnover


Seven Principles of Risk ManagementMaintain a global perspective



– View software risks within the context of a system and the business problem that is is intended to solve


Take a forward-looking view


–  Think about risks that may arise in the future; establish contingency plans


Encourage open communication


–  Encourage all stakeholders and users to point out risks at any time


Integrate risk management


–  Integrate the consideration of risk into the software process


Emphasize a continuous process of risk management


– Modify identified risks as more becomes known and add new risks as better insight is achieved


Develop a shared product vision


– A shared vision by all stakeholders facilitates better risk identification and assessment


Encourage teamwork when managing risk


– Pool the skills and experience of all stakeholders when conducting risk management activities


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