Software Project

Management
Lecture 07

Project Evaluation

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SPM: Topics
• The Business case for a Project
• Project Portfolios
• Project Evaluation
• Programme Management
• Benefits Management

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SPM – Business Case
• Objective is to provide a rationale for the project by showing that the
benefits of the project outcomes will exceed the costs of
development, implementation and operation
• Need to account for business risks

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SPM – Business Case - Contents
1. Introduction/ background
• Description of the problem to be solved or the opportunity to be tapped in
2. The proposed project
• Describes the scope of the project briefly
3. The market
• In case of new product or service, estimates the demand and likely
competition
4. Organizational and operational infrastructure
• How the organization could impact or potentially would change or need to
change

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SPM – Business Case - Contents
5. The Benefits
• Financial benefits, profits, savings. Operational efficiencies.
6. Outline Implementation Plan
• Execution plan
7. Costs
• Cost of execution, schedule of payments, unexpected costs
8. The financial case
• Evaluate the cost and benefits
9. Risks
• Risks associated with estimates

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SPM – Project Portfolio Management
Portfolio project management provides an overview of all the projects
that an organization is undertaking or is considering

3 key parts
1. Portfolio Definition
2. Portfolio Management
3. Portfolio Optimization

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SPM – Project Portfolio Management
1. Project portfolio definition
• Create a central record of all projects within an organization
• Must decide whether to have ALL projects in the repository or, say, only ICT
projects
• Note difference between new product development (NPD) projects and
renewal projects e.g. for process improvement

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SPM – Project Portfolio Management
2. Project portfolio management
• Actual costing and performance of projects can be recorded and assessed

3. Project portfolio optimization

• Information gathered above can be used achieve better balance of projects
e.g. some that are risky but potentially very valuable balanced by less risky
but less valuable projects
You may want to allow some work to be done outside the portfolio e.g.
quick fixes

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SPM – Project Portfolio Management
The concerns of project portfolio management include:
• Assessing the risk involved with projects
• Deciding how to share resources between projects
• Challenge of what projects to include

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SPM – Cost Evaluation
• Technical Evaluation
• Cost-Benefit Analysis
• Financial Forecasting

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SPM – Cost Benefit Analysis (CBA)
This relates to an individual project. You need to:
• Identify all the costs which could be:
• Development costs
• Set-up
• Operational costs
• Identify the value of benefits
• Check benefits are greater than costs

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SPM – CBA – Net Profit
Year Cash-flow
• ‘Year 0’ represents all the
costs before system is 0 -100,000
operation
1 10,000

• ‘Cash-flow’ is value of income 2 10,000

less outgoing 3 10,000

4 20,000
• Net profit value of all the
cash-flows for the lifetime of 5 100,000
the application
Net profit 50,000

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SPM – CBA – Net Profit

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SPM – CBA – Payback Period
This is the time it takes to start generating a surplus of income over
outgoings.
Year Cash-flow Accumulated(recover)

0 -100,000 -100,000

1 10,000 -90,000

2 10,000 -80,000

3 10,000 -70,000

4 20,000 -50,000

5 100,000 50,000
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SPM – CBA – Payback Period
• The payback period would be about 4.5 years. This can be calculated
as the last year in which the accumulated cash flow was negative +
(absolute accumulated cash flow at the end of that year / cash-flow
for the next year) e.g. year 4 + (50,000/100,000). This assumes that
the flow of cash is constant throughout the year in question e.g.
£100,000/12 or £8,333 a month in year 5

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SPM – CBA – Return on Investment (ROI)
A way of comparing the net profitability to the investment required

RIO = Average annual profit X 100

Total investment

Average annual profit = 50,000/5

= 10,000

ROI = (10,000/100,000) X 100

= 10%
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SPM – CBA – Net Present Value (NPV)
• Would you rather I gave you PKR 1000 today or in 12 months time?
• If I gave you PKR 1000 now you could put it in savings account and get
interest on it.
• If the interest rate was 10% how much would I have to invest now to
get PKR 1000 in a year’s time?
• This figure is the net present value of PKR 1000 in one year’s time

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SPM – CBA –NPV – Discount Factor
Discount factor = 1/(1+r)t
r is the interest rate (e.g. 10% is 0.10)
t is the number of years
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

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SPM – CBA –NPV – Applying Discount Factor
Year Cash-flow Discount factor Discounted cash flow

0 -100,000 1.0000 -100,000

1 10,000 0.9091 9,091
2 10,000 0.8264 8,264
3 10,000 0.7513 7,513
4 20,000 0.6830 13,660

5 100,000 0.6209 62,090

NPV 618

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SPM – CBA –Internal Rate of Return (IRR)
• 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 ( bank,
gold, mutual fund etc)
• There is a Microsoft Excel function which can be used to calculate

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SPM – Risk Evaluation
• Project A might appear to give a better return than B but could be
riskier
• Could draw up draw a project risk matrix for each project to assess
risks – see next overhead
• For riskier projects could use higher discount rates

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SPM – Risk Evaluation

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SPM – Decision Trees

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SPM – Programme Management
• D. C. Ferns defi ned a 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’.

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SPM – Programme Management
1. Strategic
Several projects together implement a single strategy. For example,
merging two organizations will involve many different activities e.g. physical
re-organization of offices, redesigning the corporate image, merging ICT
systems etc. Each of these activities could be project within an overarching
programme.
2. Business cycle programmes
A portfolio of project that are to take place within a certain time frame e.g.
the next financial year
3. Infrastructure programmes
In an organization there may be many different ICT-based applications which
share the same hardware/software infrastructure

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SPM – Programme Management
4. Research and development programmes
In a very innovative environment where new products are being
developed, a range of products could be developed some of which are
very speculative and high-risk but potentially very profitable and some
will have a lower risk but will return a lower profit. Getting the right
balance would be key to the organization’s long term success
5. Innovative partnerships
“pre-competitive co-operation” to develop new technologies that could
be exploited by a whole range of companies

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 SPM – Programme Manager vs Project
Manager
Programme manager Project manager
• Many simultaneous projects • One project at a time

• Personal relationship with • Impersonal relationship with

skilled resources resources

• Optimization of resource use • Minimization of demand for

resources
• Projects tend to be seen as • Projects tend to be seen as
similar unique
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SPM – Next Stages
• The programme brief – equivalent of a feasibility study: emphasis on
costs and benefits
• The vision statement – explains the new capability that the
organization will have
• The blueprint – explains the changes to be made to obtain the new
capability-
• The programme brief – is it worth it?
• The vision statement – the ‘what’
• The blueprint – the ‘how

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SPM – Benefits Management
To carry this out, you must:
• Define expected benefits
• Analyse balance between costs and benefits
• Plan how benefits will be achieved
• Allocate responsibilities for their achievement
• Monitor achievement of benefits

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SPM – Benefits Management
These might include:
• Mandatory requirement
• Improved quality of service
• Increased productivity
• More motivated workforce
• Internal management benefits

 better decision-making

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SPM – Benefits Management
• Risk Reduction
• Economies
• Cost Cutting

• Revenue Enhancement
• Strategic fit (according to plan)
• Benefits can be:
• Quantified & Valued
• Quantified but not valued e.g. a decrease in customer complaints by x%
• Identified but not easily Quantified

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Reference
• Software Project Management 5th Edition by Mike Cotterell, Bob
Hughes, Rajib Mall
• Project Evaluation and Programme Management - Chapter 2

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