Software Project Management

Chapter Two
Project
evaluation and
programme
management

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 1
 Main topics to be covered

The business case for a project

Project portfolios
Project evaluation
Cost benefit analysis
Cash flow forecasting
Programme management
Benefits management

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 2
 The business case

Feasibility studies can also act as a ‘business case’

Provides a justification for starting the project
Should show that the benefits of the project will
exceed development, implementation and operational
costs
Needs to take account of business risks

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 3
 Contents of a business case

1. Introduction/ 5. The benefits

background 6. Outline
2. The proposed project implementation plan
3. The market 7. Costs
4. Organizational and 8. The financial case
operational 9. Risks
infrastructure
10. Management plan

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 4
 Content of the business case

Introduction/background: describes a problem to

be solved or an opportunity to be exploited
The proposed project: a brief outline of the project
scope
The market: the project could be to develop a new
product (e.g. a new computer game). The likely
demand for the product would need to be assessed.

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 5
 Content of the business case -
continued

Organizational and operational infrastructure:

How the organization would need to change. This
would be important where a new information system
application was being introduced.
Benefits These should be express in financial terms
where possible. In the end it is up to the client to
assess these – as they are going to pay for the
project.

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 6
 Content of the business case -
continued

Outline implementation plan: how the project is

going to be implemented. This should consider the
disruption to an organization that a project might
cause.
Costs: the implementation plan will supply
information to establish these
Financial analysis: combines costs and benefit data
to establish value of project

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 7
 Project portfolio management
(PPM)

The concerns of project portfolio management include:

Evaluating proposals for projects
Assessing the risk involved with projects
Deciding how to share resources between projects
Taking account of dependencies between projects
Removing duplication between projects
Checking for gaps

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 8
 Project portfolio management -
continued

There are three elements to PPM:

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

ICT-Information and communication technology

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 9
 Project portfolio management -
continued
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

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 10
 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

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 11
 Product life cycle cash flows

The timing of costs and income for a product of system needs to be

estimated.
The development of the project will incur costs.
When the system or product is released it will generate income that
gradually pays off costs
Some costs may relate to decommissioning – think of demolishing
a nuclear power station.

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 12
 Net profit

Year Cash-flow ‘Year 0’ represents all the costs

before system is operation
0 -100,000
‘Cash-flow’ is value of income
1 10,000 less outgoing
Net profit value of all the cash-
2 10,000 flows for the lifetime of the
application
3 10,000

4 20,000

5 100,000

Net profit 50,000

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 13
 TABLE: A
Year Project 1 Project 2 Project 3 Project 4

0 -100,000 -1,000,000 -100,000 -120,000

1 10,000 200,000 30,000 30,000

2 10,000 200,000 30,000 30,000

3 10,000 200,000 30,000 30,000

4 20,000 200,000 30,000 30,000

5 100,000 300,000 30,000 75,000

Net Profit 50,000 100,000 50,000 75,000

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 14
 Pay back period
This is the time it takes to start generating a surplus of
income over outgoings. What would it be below?

Year Cash-flow Accumulated

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

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 15
Exercise:

Consider the four projects’ cash flow given in

TABLE: A and calculate the payback period for
each of them.
Ans.
Project 1 ------- 5yrs
Project 2 ------- 5
Project 3 ------- 4
Project 4 ------- 4
SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 16
Pay back period….cont

Advantages:
1. Simple to calculate
2. Not sensitive to small forecasting errors

Disadvantages:
1. Ignores the overall profitability
2. Totally ignores any income after breakeven.
(project 2 and 4 are better than project 3)

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 17
 Return on investment (ROI)

ROI = Average annual profit

Total investment X 100

In the previous example of project 1

• average annual profit
= 50,000/5
= 10,000
• ROI = (10,000/100,000) X 100
= 10%

It provides a way of comparing the net profitability to the investment required..

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 18
Exercise:

Calculate the ROI for each of the other projects

shown in TABLE: A and decide which, on the basis of
criterion, is the most worthwhile.

Ans.
Project 1 ………. 10%
Project 2 ………. 2%
Project 3 ………. 10%
Project 4 ………. 12.5%

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 19
Return on investment.... Cont.

Advantage
The return on investment provides a simple, easy-to-
calculate measure of return on capital.

Disadvantage
1. It takes no account of timing of the cash flow.
2. The rate of return bears no relationship to the
interest rates charged by banks.
3. It is potentially very misleading.

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 20
 Net present value

Would you rather I gave you Rs. 1,000 today or in 12

months time?
If I gave you Rs. 1,000 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 Rs. 1,000 in a year’s time?
This figure is the net present value of Rs. 1,000 in one
year’s time

The annual rate by which we discount future earnings

is known as discount rate 10%.
SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 21
 The present value of Rs. 1,000 in a year’s time is
Rs. 910 i.e. Rs. 1000 in a year’s time is the
equivalent of Rs. 910 now.

Rs. 1,000 received in two year’s time would have a

present value of approximately Rs. 830 i.e.
Rs. 830 invested at the annual interest rate of
10% would yield approximately Rs. 1,000 in
two years time.

For any future cash flow

value _ in _ year _ t
Present value =
(1  r ) t
SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 22
 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 ~ 0.91
In the case of 10% rate and two years
Discount factor = 1/(1.10 x 1.10) =0.8294 ~ 0.83

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 23
 Applying discount factors (10%)
TABLE: C
Year Cash-flow Discount factor Discounted cash flow
(Project-1)
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

Net profit 50,000 NPV 618

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 24
Exercise:

Assuming 10% discount rate, the NPV for project

(TABLE: A) would be calculated as in TABLE: C. The
net present value (NPV) for project 1 (TABLE:C),
using 10% discount rate, is therefore Rs. 618. Using
a 10% discount rate, calculate the NPV for project 2,
3 and 4 and decide which, on the basis of this, is the
most beneficial to pursue.

Note: Refer to TABLE: A (slide no. 14).

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 25
Answer:
Year Discount factor Discounted cash flow (Rs.)

Project 2 Project 3 Project 4

0 1.00 -1,000,000 -100,000 -120,000

1 0.90 181,820 27,273 27,273

2 0.82 165,280 24,792 24,792

3 0.75 150,260 22,539 22,539

4 0.68 136,600 20,490 20,490

5 0.62 186,270 18,627 46,568

NPV -179,770 13,721 21,662

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 26
Exercise:
Calculate the NPV for each of the projects A, B and C
shown in table below using each of the discount rate
8%, 10% and 12%. For each of the discount rate,
decide which is the best project. What can you
conclude from these results?
Year Project A (Rs) Project B (Rs) Project C (Rs)
0 -8,000 -8,000 -10,000
1 4,000 1,000 2,000
2 4,000 2,000 2,000
3 2,000 4,000 6,000
4 1,000 3,000 2,000
5 800 9,000 2,000
6 500 -6,000 2,000
Net Profit 4,000 5,000 6,000

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 27
 NPV Discount Factors
TABLE: D
Year Discount rate (%)
8% 10% 12%
1 0.9256 0.9091 0.8929
2 0.8573 0.8264 0.7972
3 0.7938 0.7513 0.7118
4 0.7350 0.6830 0.6355
5 0.6808 0.6209 0.5674
6 0.6302 0.5645 0.5066

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 28
 TABLE: B (Effect on NPV of varying the discount rate)
Year Cash flow values (Rs.)
Project A Project B Project C
0 -8,000 -8,000 -10,000
1 4,000 1,000 2,000
2 4,000 2,000 2,000
3 2,000 4,000 6,000
4 1,000 3,000 2,000
5 500 9,000 2,000
6 500 -6,000 2,000
Net profit 4,000 5,000 6,000
NPV @ 8% 2,111 2,365 2,421
NPV @ 10% 1,720 1,818 1,716
NPV @ 12% 1,356 1,308 1,070
29
 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 which can be
used to calculate

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 30
 Dealing with uncertainty: 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

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 31
Example of a project risk matrix

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 32
 Cost-benefit analysis
BuyRight’s income forecast

Sales Annual sales Probability Expected value

income (Rs.) (Rs.)
i p iXp
High 800,000 0.1 80,000
Medium 650,000 0.6 390,000
Low 100,000 0.3 30,000
Expected income 500,000

Development costs are estimated = Rs. 750,000

Sales levels are expected to be constant for 4 years
Annual marketing and product maintenance cost = Rs. 200,000
Would you advise going ahead with the project?
SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 33
Expected sales per year = Rs. 500,000
Annual costs per year = Rs. 200,000
Expected net income / year = Rs. 300,000
-do- for 4 years = 300,000 X 4 = 1,200,000

Investment (development cost) = Rs. 750,000

Expected profit = Rs. 450,000

If sales will drop what happens to the benefits and costs?

Then go for,
Risk profile analysis – sensitivity analysis
How a decision will affect future profitability of the project?
SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 34
 BuyRight software house
Decision trees

75000X0.8-100000X0.8 40,000

Decision
Point

250,000X0.2-50,000X0.8 10,000

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 35
The company should therefore
choose the option of extending
the existing system

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 36
 Programme management

One definition:
‘a group of projects that are managed in a co-
ordinated way to gain benefits that would not be
possible were the projects to be managed
independently’ . ...... Ferns

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 37
 Programmes may be

Strategic (e.g. merging two organization’s computer system)

Business cycle programmes (undertake the project
within a particular planning cycle. Budgets and accounting period)
Infrastructure programmes (different projects under one
dept. Will require different distinct databases and information
system) highway maintenance, refuse collection, education
Research and development programmes
(development of new product -risk of failure and potential returns,
safe projects- where product is not radically different)
Innovative partnerships (collaborative work on new
technology in a ‘pre-competitive’ phase)

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 38
 Programme managers versus project
managers

Programme manager Project manager

Many simultaneous One project at a time

projects Impersonal

Personal relationship relationship with

with skilled resources resources
Optimization of Minimization of

resource use demand for resources

Projects tend to be Projects tend to be

seen as similar seen as unique

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 39
 Strategic programmes

Based on OGC approach

Initial planning document is the Programme
Mandate describing
The new services/capabilities that the programme
should deliver
How an organization will be improved
Fit with existing organizatioal goals
A programme director appointed a champion for the
scheme

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 40
 Next stages/documents

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

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 41
 Benefits management

developers users organization

use for

the
benefits
application
build to
deliver

•Providing an organization with a capability does not guarantee

that this will provide benefits envisaged – need for benefits
management
•This has to be outside the project – project will have been
completed
•Therefore done at programme level
SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 42
 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

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 43
 Benefits

These might include:

Mandatory requirement
Improved quality of service
Increased productivity
More motivated workforce
Internal management benefits

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 44
 Benefits - continued

Risk reduction
Economies
Revenue enhancement/acceleration
Strategic fit

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 45
 Quantifying benefits

Benefits can be:

Quantified and valued e.g. a reduction of x staff
saving £y
Quantified but not valued e.g. a decrease in customer
complaints by x%
Identified but not easily quantified – e.g. public
approval for a organization in the locality where it is
based

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 46
 Remember!

A project may fail not through poor management but

because it should never have been started
A project may make a profit, but it may be possible to
do something else that makes even more profit
A real problem is that it is often not possible to
express benefits in accurate financial terms
Projects with the highest potential returns are often
the most risky

SPM (5e) Project evaluation and programme management© The McGraw-Hill Companies, 2011 47