September 2001Copyright RCI, 20011 Business Case Analysis Donald J. Reifer University of Southern...

September 2001 Copyright RCI, 2001 1

Business Case Analysis

Donald J. Reifer

University of Southern California

and

Reifer Consultants, Inc.

USC

C S E University of Southern CaliforniaCenter for Software Engineering


Aim of Presentation• Introduce you to the subject of business case

analysis and walk you through my book

• Highlight significant concepts and focus on what you need to do to succeed

• Discuss how to use software cost models like COCOMO II to help prepare business cases

• Hopefully, motivate you to read and use the book in practice, the classroom and for fun

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Why Write a Book on Software Business Cases?

• Over the years, I have observed that software engineers don’t know how to prepare sound business cases and improvement justifications

• However, these same engineers are being asked to justify recommended investments using business cases as software is being capitalized

• The book was written to fill this void and to serve as a textbook for those teaching the subject

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I Didn’t Write it for the Money

• Those writing books do it for recognition and self-satisfaction

• Authors don’t write technical books to make lots of money

• If my publisher sold 5,000 copies of the book, I would make about $15/hour

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Table of Contents• Part I - Fundamental Part I - Fundamental

ConceptsConcepts– Chapter 1Chapter 1: Improvement

is Everybody’s Business

– Chapter 2Chapter 2: Making a Business Case

– Chapter 3Chapter 3: Making the Business Case: Principles, Rules, and Analysis Tools

– Chapter 4Chapter 4: Business Cases that Make Sense

• Part II - The Case StudiesPart II - The Case Studies– Chapter 5Chapter 5 - Playing the Game of

Dungeons and Dragons: Process Improvement Case Study

– Chapter 6Chapter 6: Quantifying the Costs/Benefits: Capitalizing Software Case Study

– Chapter 7Chapter 7: Making Your Numbers Sing: Architecting Case Study

– Chapter 8Chapter 8: Maneuvering the Maze: Web-Based Economy Case Study

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Contents (Continued)• Part III - FinalePart III - Finale

– Chapter 9Chapter 9: Overcoming Adversity: More Than a

Pep Talk

• Appendix AAppendix A: Recommended Readings

• Appendix BAppendix B: Compound Interest Tables

• AcronymsAcronyms

• GlossaryGlossary

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Unique Features of Book

• Web site:

– Look for updates

– Converse with author

• Realistic case studies• Actual management

briefings as part of case studies

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http://www.awl.com/cseng/titles/0-201-72887-7


Fundamentals

• Must view software as a business• Must use business measures to justify improvements

• Making the leap forward involves overcoming the resistance to change

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Key Point Summary

Time to Market Cost

Productivity Quality

Increase Improve

Reduce Avoid/Cut


Success is a Numbers Game

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• Will this proposal save money, cut costs, increase productivity, speed development or improve quality?

• Have you looked at the tax and financial implications of the proposal?

• What’s the impact of the proposal on the bottom line?• Are our competitors doing this? If so, what are the

results they are achieving?• Who are the stakeholders and are they supportive of the

proposal?

Answer Business-Related QuestionsAnswer Business-Related Questions


Business Cases Supply You with the Numbers

• Business CaseBusiness Case = the materials prepared for decision-makers to show that the proposed idea is a good one and that the numbers that surround it make sound financial sense– Most software engineers prepare detailed technical rather

than business justifications

– Many of their worthwhile proposals are rejected by management as a consequence

– Use of business cases will increase your chances of success

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Business Process Framework

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Business Planning Process

Tradeoff and Analysis Processes

Software Development Process

Analytical Methods

Models Guidelines for Decision-Making

Process The business case process proceeds in parallel and

Framework interfaces with the software development process

“Principles, Rules and Tools for Business Case Development”


The Business Planning Process

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1. Prepare white paper

2. Demonstratetechnical feasibility

3. Conduct market survey

4. Developbusiness plan

5. Preparebusiness case

6. Sell the idea anddevelop support base

7. Get ready to execute

GQM Results

Idea or proposal

Proof ofConcept Approval to

go-ahead


Nine Business Case Principles• Decisions are made

relative to alternatives• If possible, use money as

the common denominator• Sunk costs are irrelevant• Investment decisions

should recognize the time value of money

• Separable decisions must be considered separately

• Decisions should consider both quantitative and qualitative factors

• The risks associated with the decision should be quantified if possible

• The timing associated with making decisions is critical

• Decision processes should be periodically assessed and continuously improved

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Many Rules to Use as Guidelines

• Prepare business cases in language to communicate to management

• Define all of your terms thoroughly

• Bring in the outside experts to help if needed

• Double and triple check your numbers

• Never state a number without bounding it

• Remember, numbers will come back to haunt you

• Never talk cost reduction; use avoidance instead

• Always relate your numbers to benchmarks and your competition

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PreparationPreparation PresentationPresentation


Many Tools and Techniques

• Break-even analysis

• Cause and effect analysis

• Cost/benefit analysis

• Value chain analysis

• Investment opportunity analysis

• Pareto analysis

• Payback analysis

• Sensitivity analysis

• Trend analysis

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Analysis TechniquesAnalysis Techniques


Supportive Tools

• Decision support systems– Tax planning and schedules

– Trade studies and analysis

• Spreadsheets– Comparative analysis


• Software cost models– Parametric analysis


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Software packagesSoftware packages


Use Engineering Economics As Your Basis

• Takes cost of money into account– A $ today is worth

more than tomorrow due to inflation

• Takes compounding into account

• Normalizes future expenditures using current year dollars as a basis for comparison

• Lets you establish a minimum attractive rate of return

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FW = P (1 + i)N PV = FW/(1 + i)N

Future WorthFuture Worth Present Value Present Value


Business Case Information Needs• Business cases

– Recurring costs

– Non-recurring costs

– Tangible benefits

– Intangible benefits

• Benchmarks– Competitive comparisons

– Industry norms

• Metrics– Management measures

• Financial data– Inflated labor costs– Labor categories/rates– Overhead/G&A rates– Past costs/performance– Tax rates/legalities

• Marketing information– Demographic data– Market position– Sales forecast

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Preparing a COTS Business Case

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Non-recurring costs Tangible benefits- Market research/purchasing - Cost avoidance - Package assessment - Reduced taxes (creditscredits- Package tailoring & tuning and depreciationand depreciation)- Glue code/wrapper development Intangible benefitsRecurring costs - Market drives features- Glue code maintenance - Vendor maintains the- Licensing/purchasing product (good and badgood and bad)- Market watch/test-bed - Package mature (betterbetter- Relationship management quality/more robustquality/more robust)- Technology refresh - Lever the marketplace

TOTAL TOTAL


Computing Costs/Benefits

• Use COCOTS– Estimates most of the non-

recurring costs

– Recurring costs should be estimated, for now, using rules of thumb

• Relationship management– Nurtures relationships and

develops partnerships

• Technology refresh– Market watch looks for better

value for $$$

• Use COCOMO II– Estimates benchmark costs

for option of developing code from scratch or legacy

– Calibrate model for domain

– Use maintenance model to include rest of life cycle

• Intangibles– Hard to quantify the cost and

schedule impacts

– Even if you did quantify them, lots of controversy

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CostsCosts BenefitsBenefits


Presenting the Business Case• Determine decision

timeline (5 years)

• Take PV of B/C Ratio

• Calculate ROI

• Make a second pass to include depreciation

• Try to quantify the intangibles– Discuss the impact, but don’t

dilute the numbers using it (credibility)

• List pluses and minuses of options considered

• Make a recommendation based on the information presented

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ROI = ?/year

ROI = ?/year


COTS Pluses and Minuses

• Cheaper; but does not come for free

• Available immediately

• Known quality (+ or -)

• Vendor responsible for evolution/maintenance– Don’t have to pay for it

• Can use critical staff resources elsewhere

• License costs can be high

• COTS products are not designed to plug & play

• Vendor behavior varies

• Performance often poor

• Vendor responsible for evolution/maintenance– Have no control over the

product’s evolution

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PlusesPluses Minuses Minuses


COTS Critical Success Factors• Successful firms:

– Make COTS-based system tradeoffs early– Try before they buy– Avoid modifying COTS at all costs– Reconcile products with their architectures– Emphasize use of standards and open interfaces– Understand that COTS doesn’t come for free– Plan to manage parts/technology obsolescence– Make the vendor a part of the team, whenever possible– Negotiate enterprise-wide licenses for COTS products– Influence future paths the vendor will take– Address the cultural and process issues

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The COTS Life Cycle

Requirements

Design

Implementation

Integration & Test

Deploy

Operate & Maintain

Evaluate, Select & Acquire

Tailor Renew

Refresh

COTS tends to have a life cycle of its own

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COTS Success Strategies• Process

– Merge COTS life cycle into your organizational framework

– Make needed tradeoffs– Think both technical and

business issues

• Products– Fit COTS components into

product line strategies– Maintain open interfaces– Manage technology refresh

• People– Make COTS vendors a

part of your team– Increase awareness of

COTS experience– Provide workforce with

structure and information

• Institutional– Improve purchasing and

licensing processes– Maintain market watch– Capture past performance

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Lots of Other Business Yardsticks• Cost of Sales

• Cost/Benefit Ratio

• Debt/Equity Ratio

• Earnings/Share

• Overhead Rate

• Return on Assets

• Price/Sales Ratio

• Rate of Return

• Return on Earnings

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Putting Cost Models to Work• I use cost models in my

book to:– Create benchmarks to

compute benefits for a typical project

– Assess available options and perform sensitivity analysis

– Quantify risk and its cost and schedule consequences

– Address the many “what-if” questions that arise via parametric analysis

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Summary and Conclusions• For software engineers to prosper in business,

they need to learn to prepare business cases

• The technical merit of engineering issues needs to be quantified and the associated business issues discussed when making recommendations for improvement

• Hopefully, my book will help software engineers to perform these duties and succeed - as they’ve worked for me over the years

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For Example: Making Your Numbers Believable

• Concepts:– Cash Flow Impacts

– Cost Basis

– Cost/Benefits

– Estimate Fidelity

– Present Value (PV)

– Profit and Loss

– Risks and Their Impacts

– Sources of funds

– Tax implications

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Final Thoughts

• Numbers can be your ally when asking for money

• When asking for money, talk your management’s language not ours

• Don’t be casual about numbers, be precise

• If you want to learn more, read my book

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September 2001Copyright RCI, 20011 Business Case Analysis Donald J. Reifer University of Southern...

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