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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

PROJECT 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

 

Why

 

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

 

Who

 

Senior management

 

Project manager/coordinator

 

Team leader

 

When

 

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

 

What

 

Strategic assessment

 

Technical assessment

 

Economic assessment

 

How

 

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

 

   Objectives

 

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?

 

MIS

 

What information does the product provide?

 

To whom is the information provided?

How does the product relate to other existing MISs?

 

Personnel

 

What are the staff implications?

 

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

 

Image

 

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

 

Why?

 

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

 

How?

 

Cost-benefit analysis

 

Cash flow forecasting

 

Various cost-benefit evaluation techniques

 

NPV and IRR

 

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. $)

 

Costs

 

Development costs

 

Setup costs

 

Operational costs Benefits

 

Direct benefits

 

Assessable indirect benefits

 

Intangible benefits

 

            EA – Cash Flow Forecasting

 

What?

 

Estimation of the cash flow over time

 

Why?

 

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

 

Need detailed estimation of benefits and costs versus time

 

What?

 

Estimation of the cash flow over time

 

Why?

 

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

 

by

 


 

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

 

Guidelines:

 

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

 

Disadvantage

 

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

 

Advantages

 

Convenient

 

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

 

Useful

 

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

 

Estimation

 

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

 

Top-down

 

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

 

Bottom-up

 

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

 

environment

 

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

 

Issues

 

– 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

 

 

Techniques

 

– 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

 

Cons

 

– 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

 

Pros

 

– 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

 

Cons

 

 

– 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

 

Pros

 

– 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

 

project

 

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

 

Example

 

–  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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Software Project Management : Software Project Management: Project Evaluation |


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