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Capital Planning and Investment Management and Control in Information Technology

Capital Planning and Investment Management and Control in Information Technology

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Published by Alan McSweeney
Capital Planning and Investment Management and Control in Information Technology
Capital Planning and Investment Management and Control in Information Technology

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Published by: Alan McSweeney on Feb 03, 2010
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Capital Planning and Investment Management and Control in Information Technology

Alan McSweeney

Objectives

To provide information on a structured approach to Capital Planning and Investment Control in Information Technology

February 3, 2010

2

Agenda

Capital Planning and Investment Control in Information Technology (CPIC-IT) IT Investment Management (ITIM) Cost Estimation Cost Assessment Team IT Investment Management Maturity

• • • •

February 3, 2010

3

Capital Planning and Investment Control (CPIC-IT)
• •

CPIC-IT is a systematic process logical IT investments in new systems and maintaining and operating existing systems CPIC-IT is a process for effective decision-making that ensures IT investments integrate strategic planning, budgeting, procurement, and the management of IT in support of organisation needs
− Determines if a given investment in IT is justified − Ensures IT investment decisions support the needs of the organisation, minmise risks and maximise returns throughout the investment lifecycle

• •

CPIC-IT is a structured process for managing the risks and returns associated with IT investments CPIC-IT is designed to ensure that IT investments are implemented at acceptable costs, within reasonable and expected timeframes, and contribute to tangible, observable improvements in organisation performance
February 3, 2010 4

IT Investment Issues
• • • • • • • •

IT is a key enabler of organisational strategy Many organisations do not know exactly how much is spent on IT Many organisations cannot accurately characterise IT assets In many organisations, IT accounts for 50% or more of capital expenditure IT architecture is perceived as not providing the adaptability that is needed IT is seen as a friction point for change and not enough of an enabler Organisations must implement processes for managing IT investment both for the value they deliver as well as their cost There has been significant waste of IT investments and unused IT systems due to lack of investment validation
− Over 80% of projects do not come close to their original goals of lifecycle costs − More expensive to implement and/or operate than initially stated
February 3, 2010 5

Questions on IT Investments
• • • • • • •

Is your organisation’s IT portfolio a manifestation of your organisation’s mission and strategy? Can you identify which IT projects are interdependent with adjacent people and process initiatives? Do you have a rigorous IT investment selection process that is devoid of emotion and politics? Do you account for multiple risk categories - technical, business, project, customer - when evaluating investment proposals? Is IT operating expense in line with organisation growth? Can you identify which IT investments contribute to true competitive advantage or mission achievement? Do IT investment decision making methods mesh with the decision making framework of organisation?
February 3, 2010 6

What the Business Wants From IT

Business Requirement
Deliver IT services consistently without fuss

Corresponding IT Function
Maintain the momentum of the business through existing business systems Contribute to improving business results

Get involved in business improvement

Provide the business with appropriate information and technology leadership
February 3, 2010

Provide IT direction and management that is aligned to the needs of the business
7

Disconnect Between What the Business Wants and What IT Delivers
What the Business Wants
15% 35%

What the Business Gets
5% 25%

50%
Maintain The Momentum Of The Business Through Existing Business Systems Contribute To Improving Business Results Provide It Direction And Management That Is Aligned To The Needs Of The Business

70%

Maintain The Momentum Of The Business Through Existing Business Systems Contribute To Improving Business Results Provide It Direction And Management That Is Aligned To The Needs Of The Business

February 3, 2010

8

IT Value Management is a Key Topic for IT
Do Not Measure Business Value From IT Investments Metrics Do Not Adequately Capture Business Value 40%

45%

Executives Skeptical Of ROI From IT

52%

Find It Difficult To Calculate ROI CEO/CFO Demanding Better Ways To Demonstrate Value
0% 10% 20% 30% 40% 50% 60%

62%

71%
70% 80% 90% 100%

Results of managing IT for business value
− Budget flexibility coupled with strategic IT alignment leads to 50% greater IT payoffs − Improving management practices alongside IT investment drives 20% higher IT yields
February 3, 2010 9

Core Elements of IT Value Management
Managing IT Like a Business Managing the IT Budget

Managing the IT Capability

Managing IT for Business Value

An effective approach to Capital Planning and Investment Control is an essential component of IT Value Management
February 3, 2010 10

IT Investment Core Requirements
• •

Determine the scale, scope, and sources of funding for IT Assign financial resources to competing activities within the IT portfolio Establish a balance between capital expenditure (new projects) and operating expenditure (running systems delivered by past projects) Optimise the total cost of ownership Manage IT portfolios for value and not just cost IT needs to implement a process for justifying its costs and be seen to be taking these steps
February 3, 2010 11

• • •

W5H
• Who - Who makes the decisions? • Why - Why is the funding sought, how is it aligned to the

needs of the business and what benefits are anticipated?
• What - Precisely what IT initiatives and business initiatives

are to be funded?
• When - When is the funding required and when are

benefits expected to flow?
• Where - From which source is the funding to be derived? • How - How are funding decisions to be made?
February 3, 2010 12

IT Investment Management
• • • • •

Aligns IT Investments to organisation strategy (scoring) Prioritises investments (ranking) Provides strategic criteria for investment analysis Conduct annual IT portfolio management reviews Provides recommendation to stop, slow, maintain or accelerate program funding Identifies redundant/inefficient systems Integrates IT architectures within investments Ensures compliance with funding standards
February 3, 2010 13

• • •

Characteristics of Credible Cost Estimates
• • • • • • • • •

Clear identification of requirements of the ultimate deliverable Broad participation in preparing estimates Availability of valid data for performing estimates – historical, experience, benchmarks Standardised and comprehensive estimate structure that includes all possible sources of cost Provision for uncertainties – include known costs explicitly and allow for unknown costs Recognition of inflation Recognition of excluded costs Independent review of estimates for completeness and realism Revision of estimates for significant changes in requirements
February 3, 2010 14

Challenges of Developing Good Cost Estimates
• • •

Requires detailed, stable, agreed requirements Agreed assumptions Access to detailed documentation and historical data for comparison Trained and experienced analysts Risk and uncertainty analysis Identification of a range of confidence levels Adequate contingency and management reserves

• • • •

February 3, 2010

15

Reasons for Good and Bad Cost Estimates
Effect i ve Unce Risk and r ta Ident Analy inty ificat s is Rang ion of a e Confi De dence of Docu tailed Level m s and H entation Adeq Train istor ua Conti ed an Data ical ngen te E d x p e r c ience y and Mana D d etaile Analy ge d , St a sts Reser ment b l ves e, Agree d Requ ireme Agree n ts d Assum ption s Unfa Techn miliar First- ology or Time Use Unre Unre alistic or liable Data No o Comp r Limited ariso Avail n Data able Proje ct Ins t abilit y Ineffe and U ctive Risk ncer Analy tainty s is Probl em Acces s Getting s to D ata Unre Assumalistic ption s New Pr ocess e

Unre Proje asonable ct Bas elin e Overo ptimi

sm

s

Comp le or Te x Project chnol ogy

Untra Inexp ined and er ie Analy nced sts Unre alistic Savin Project gs

Lost of reasons for and causes of inaccurate cost estimates
February 3, 2010 16

Sources of Risk and Uncertainty in Estimating Costs
• •

Lack of understanding of the project requirements Shortcomings of human language and differing interpretations of meaning of project Behaviour of parties involved in the cost estimation process Haste Deception Poor cost estimating and pricing practices

• • •

February 3, 2010

17

Specific Risks

Sizing and Technology
− Overly optimistic developers − Poor assumptions on the use of reused code − Vague or incomplete requirements − Not planning for additional effort associated with packages – integration, testing

Capability
− Mixed skills of team − Optimistic assumption on development tools − Optimistic assumption on productivity − Geographically dispersed team making communication and coordination more difficult

Complexity
− Tools − Applications: software purpose and reliability − Hardware limitations − Number of modules affecting integration effort

Management
− Management’s dictating an unrealistic schedule − Incorporating a new method, language, tool or process for the first time − Not handling creeping requirements and change proactively − Inadequate quality control, causing delays in fixing unexpected defects − Unanticipated risks associated with package software upgrades and lack of support
18

February 3, 2010

Importance of System Requirements and Solution Lifecycle Costs
• • • • • • • • • • • • • • •

System requirements drive costs, both implementation and operation A factor present in every successful project and absent in every unsuccessful project is sufficient attention to requirements Half of all bugs can be traced to requirement errors Fixing these errors consumes 75% of project rework costs 25%- 40% percent of all spending on projects is wasted as a result of re-work 66% of software projects do not finish on time or on budget 56% of project defects originate in the requirements phase of the project Completed projects have only 52% of proposed functionality 75-80% of IT project failures are the result of requirements problems The average project exceeds its planned schedule by 120% 53% of projects will cost 189% of their original estimate 30% of projects are cancelled before completion 50% of projects are rolled back out of production The typical project expends least effort on analysis where most errors originate and whose errors cost most to fix Requirements errors cost the most and that poor requirements are the main cause of project failure
February 3, 2010 19

Requirements Drive Project Costs
100.0% 90.0%

Costs Committed and Spent

80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Requirements Defined and Agreed Design Finalised Development and Implementation Starts

Project Timescale
Costs Determined by Decisions on Requirements and Design Actual Money Spent

While minimal costs have actually been spent at the requirements phase of the entire project process, approximately 80% or more of total life cycle costs have already been determined at this stage Need to get requirements right from the outset to control costs effectively

February 3, 2010

20

Aligning the Solutions Being Delivered

Need more than project management
− Not the complete picture − Cannot treat project management in isolation

• • • • •

Need to ensure that the solution being managed meets business requirements Need to ensure business requirements are captured Need to ensure that solutions are designed to deliver business requirements and comply with organisation’s enterprise architecture Getting requirements right is essential for effective IT investment management Fundamentally the project exists to manage the delivery of the solution that has been designed to meet business requirements that assist with delivery of the business plan
February 3, 2010 21

Complete Picture of Project Selection and Delivery

Need to consider all aspects of project selection and delivery:
− What the business wants (requirements) − What the business gets (solution that delivers on requirements) − Delivered according to business priority (project portfolio management) − Implemented properly (project management)

• •

Cannot take an individual view without risking problems Need to emphasise the importance of the solution whole lifecycle and the interdependence of the roles

February 3, 2010

22

Lessons Learned From Large Systems Implementation
80 % More attention on process optimisation 65 % Align systematically to company goals 60 % Pay more attention to understanding the subject area spanned 55 % Implementation of a management information system as part of scope 50 % Outsource project management of the project to a third party 45 % Increase investment in training 35 % Greater employees involvement 35 % Enforce changes more courageously 30 % Identify and capture proof of benefits and saving as part of scope 20 % Avoid big-bang implementations
February 3, 2010 23

Types of Cost Estimates

Life Cycle Cost Estimate (LCCE) - includes independent cost estimates, independent cost assessments and total ownership costs
− Encompasses all past (or sunk), present and future costs for every aspect of the program, regardless of funding source

Business Case Analysis (BCA) - includes an analysis of alternatives and/or economic analyses
− Cost benefit or comparative analysis that presents facts and supporting details among competing alternatives − Includes life-cycle costs from LCCE and also quantifiable and unquantifiable benefits

Rough Order of Magnitude (ROM ) - developed when a quick estimate is needed and few details are available
− Usually based on historical ratio information − Typically developed to support what-if analyses − Helpful for examining differences in high-level alternative see which are the most feasible − A rough order of analysis should never be considered a budget-quality cost estimate
February 3, 2010 24

Life Cycle Cost Estimate (LCCE) Composition
LIFE CYCLE COST SYSTEM ACQUISITION COST •Operations PROCUREMENT COST •Internal Support •Planning, Research, •Disposal •External Support and Analysis and Design •Ongoing Test Maintenance Facilities •Subscription

TOTAL SYSTEM COST BASIC SYSTEM COST •Hardware •Software •Development and Implementation •Management •Installation •Transition and Cutover •Conversion •Training •Documentation •Support Facilities •Parallel Running •Warranty

February 3, 2010

25

LCCE Cost Composition
Total Cost of Ownership Operating and Support Cost

System Acquisition Cost

COST

YEARS

Depending on the life of the solution being implemented, the operating costs can be 1-3 times the cost of acquisition
February 3, 2010 26

IT Investment Management and Project and Solution Lifecycle
Cost Effective Operation of Delivered Solution and Effective Retirement/ Replacement/ Upgrade Decisions Business Analysis Solution Operation Structured Capture and Management of Requirements and Cost Benefit Analysis of Solution Costs

Cost Effective Delivery of Projects and Management of Costs

Solution Architecture and Design Programme and Project Management

Design/Selection of Cost Effective Solutions to Meet Requirements Including Evaluation of All Options

Project Portfolio Management

Prioritisation of Projects and Investment Decisions
27

February 3, 2010

Benefits of Effective IT Investment Management Framework
• • • •

Aligns investments to business goals and objectives Identifies and track spending on IT investments Controls and monitor IT investment projects Confirms that IT investments are meeting business objectives Leverages IT investment opportunities that may generate internal capital Make informed decisions on an IT investment portfolio by assessing value and risk Demonstrates that IT can be trusted to invest wisely
February 3, 2010 28

IT Investment Management Framework
Organisation Strategic Plan
Business Plans and Associated Technology Needs What Proposed IT Investments Potentially Solve the Identified Business Needs? Pre-Selection and Identification Stage

Investment Results

Did the Selected IT Investments Deliver the Expected Business Value?

Evaluation Stage

Technology and Systems Portfolio

Selection Stage

Which IT Investments Best Meet the Business Needs?

Control Stage Are the Selected IT Investments Performing as Planned?
February 3, 2010 29

IT Investment Management Stages
Pre-Selection and Identification Stage Identify business needs and prioritise potential investments Develop investment business cases Research possible enterprise/collaboration opportunities Update the Strategic plan and technology Portfolio Evaluation Stage Control Stage Evaluate, score, and rank IT investments Prioritise IT projects Selection Stage

Conduct post implementation reviews on major IT projects Translate business value into performance measures using the asset performance measures established in the Develop detailed project plans and execute projects in Control Phase accordance with project management standards Use asset performance measures to measure the business Develop applications in accordance with technical and value data standards for information technology Document IT asset performance Analyse gaps between current business needs and performance of IT assets Make a determination to maintain, migrate, improve, or retire each IT asset in the technology portfolio
February 3, 2010

Submit project status reports, requests for baseline adjustments greater than defined percentage (typically 10%) and verification and validation reports for each major IT project

30

IT Investment Management Control Function Responsibilities
Technical Scope Management
Portfolio Management

Technical Requirements Management

Earned Value Management

IT Investment Management Control Function

Progress Reporting and Management

Scope, Cost and Schedule Management

Risk Management

February 3, 2010

31

Portfolio Management

Portfolio Management is an approach typically combined with a set of tools for identifying, diagnosing, controlling, and increasing the aggregate return on investments at a given level of risk tolerance Based on the management principle that any set of investments requires proactive management to maximise value while minimising risk IT portfolio management takes advantage of an integrated set of IT management processes, techniques, and tools that assist decision makers in analysing, selecting, evaluating, and controlling an optimal set of investments Properly executed IT portfolio management delivers the benefits of balancing supply and demand of IT resources (financial and nonfinancial), eliminating redundancy, and enabling better alignment with strategic goals
February 3, 2010 32

Earned Value Management

Earned Value Management (EVM) is a project management metric that integrates the technical scope of work with schedule and cost elements for investment planning and control Compares the value of work accomplished in a given period with the value of the work expected in that period Differences in expectations are measured in both cost and schedule variances Use EVM in performance-based management systems Management of a cost estimate involves continually updating the estimate with actual data as they become available (EVM) revising the estimate to reflect changes and analysing differences between estimated and actual costs
February 3, 2010 33

• •

Cost Estimation Best Practices Checklist
The cost estimate type is clearly defined and is appropriate for its purpose • All applicable program costs have been estimated, including all life-cycle costs • The cost estimate is independent of funding source • An affordability analysis has been performed at the agency level to see how the project fits within the overall portfolio • The estimate is updated as actual costs become available from the EVM system or as requirements change • Post mortems and lessons learned exercises are continually documented as information becomes available

February 3, 2010 34

Cost Estimating Process
Initiation and Research The audience, what is being estimated and why It is being estimated are very importance Assessment Cost assessment steps are iterative and can be accomplished in varying order or concurrently Analysis The confidence in the point or range of the estimate is crucial to the decision maker Presentation Documentation and presentation can make or break a cost estimating decision outcome
February 3, 2010

Step 1: Define the Purpose of the Estimate

Step 2: Develop the Estimating Plan

Step 3: Define the Project

Step 4: Determine the Estimating Approach

Step 5: Identify Ground Rules and Assumptions

Step 6: Obtain Data

Step 7: Develop Point Estimate

Step 8: Conduct Sensitivity Analysis

Step 9: Conduct Risk and Uncertainty Analysis

Step 10: Document the Estimate

Step 11: Present Estimate for Approval

Step 12: Update Estimate to Reflect Actual Costs and Changes
35

Cost Estimating Process

Each of the 12 steps is important for ensuring that highquality cost estimates are developed and delivered in time to support important decisions

February 3, 2010

36

Cost Estimating Process

Step 1: Define the Purpose of the Estimate
− Determine the estimate’s purpose − Determine the level of detail required − Determine who will receive the estimate − Determine the overall scope of the estimate

Step 2: Develop the Estimating Plan
− Determine the cost estimating team − Outline the cost estimating approach − Develop the estimate timeline − Determine who will do the independent cost estimate − Develop the schedule
February 3, 2010 37

Cost Estimating Process

Step 3: Define the Project
− − − − − − − − − − − − − − Identify in a technical baseline description document The purpose of the project Its system and performance characteristics Any technology implications All system configurations project acquisition schedule Acquisition strategy; Relationship to other existing systems Support (manpower, training, etc.) and security needs Risks Assumptions System quantities for development, test, and production Deployment and maintenance plans; Predecessor or similar legacy systems Define work breakdown structure (WBS) and describe each element Choose the estimating method best suited for each WBS element Identify potential cross-checks for likely cost and schedule drivers. Develop a cost estimating checklist

Step 4: Determine the Estimating Approach
− − − −

February 3, 2010

38

Cost Estimating Process

Step 5: Identify Ground Rules and Assumptions
− Clearly define what is included and excluded from the estimate − Identify global and program specific assumptions such as:
• • • • • • • • • • • • • The estimate’s timescale, including time-phasing and life cycle Program schedule information by phase Program acquisition strategy Any schedule or budget constraints Inflation assumptions Costs such as travel and other expenses Equipment the organisation is to furnish Prime contractor and major subcontractors Use of existing facilities or new modifications or developments Technology refresh cycles Technology assumptions and new technology to be developed Commonality with legacy systems and assumed heritage savings Effects of new ways of doing business

Step 6: Obtain Data
− Create a data collection plan with emphasis on collecting current and relevant technical, programmatic, cost, and risk data. − Investigate possible data sources − Collect data and normalise them for cost accounting, inflation, learning, and quantity adjustments − Analyse the data to look for cost drivers, trends, and outliers compare results against rules of thumb and standard factors derived from historical data − Interview data sources and document all relevant information including an assessment of data reliability and accuracy

February 3, 2010

39

Cost Estimating Process

Step 7: Develop Point Estimate
− Develop the cost model by estimating each WBS element, using the best methodology from the data collected − Include all estimating assumptions in the cost model − Express costs in constant year currency − Time-phase the results by spreading costs in the years they are expected to occur, based on the pro gram schedule − Sum the WBS elements to develop the overall point estimate − Validate the estimate by looking for errors like double counting and omitting costs − Compare estimate against the independent cost estimate and examine w here and why there are differences − Perform cross-checks on cost drivers to see if results are similar − Update the model as more data become available or as changes occur and compare results against previous estimates

Step 8: Conduct Sensitivity Analysis
− Test the sensitivity of cost elements to changes in estimating input values and key assumptions − Identify effects of changing the program schedule or quantities on the overall estimate − Determine which assumptions are key cost drivers and which cost elements are affected most by changes
February 3, 2010 40

Cost Estimating Process

Step 9: Conduct Risk and Uncertainty Analysis
− Determine the level of cost, schedule, and technical risk associated with each WBS element and discuss with technical experts − Analyse each risk for its severity and probability of occurrence − Develop minimum, most likely, and maximum ranges for each element of risk − Use an acceptable statistical analysis methodology to develop a confidence interval around the point estimate − Determine type of risk distributions and reason for their use − Identify the confidence level of the point estimate − Identify the amount of contingency funding and add this to the point estimate to determine the risk-adjusted cost estimate − Recommend that the project office develop a risk management plan to track and mitigate risks

Step 10: Document the Estimate
− Document all steps used to develop the estimate so that it can be recreated quickly by a cost analyst unfamiliar with the program and produce the same result − Document the purpose of the estimate, the team that prepared it, and who approved the estimate and on what date − Describe the program, including the schedule and technical baseline used to create the estimate − Present the time-phased life-cycle cost of the program − Discuss all ground rules and assumptions − Include auditable and traceable data sources for each cost element − Document for all data sources how the data were normalised − Describe the results of the risk, uncertainty, and sensitivity analyses and whether any contingency funds were identified − Document how the estimate compares to the funding profile − Track how this estimate compares to previous estimates, if applicable

February 3, 2010

41

Cost Estimating Process

Step 11: Present Estimate for Approval
− Develop a briefing that presents the documented life-cycle cost estimate for management approval, including
• An explanation of the technical and programmatic baseline and any uncertainties; • A comparison to an independent cost estimate (ICE) with explanations of any differences; • A comparison of the estimate (life-cycle cost estimate (LCCE) or independent cost estimate to the budget; and • Enough detail so the presenter can easily defend the estimate by showing how it is accurate, complete, and high in quality.

− Focus the briefing, in a logical manner, on the largest cost elements and drivers of cost − Make the content concise and complete so that those who are unfamiliar with it can easily comprehend the competence that underlies the estimate results − Make backup slides available for more probing questions − Act on and document feedback from management − The cost estimating team should request acceptance of the estimate

Step 12: Update Estimate to Reflect Actual Costs and Changes
− Update the estimate to
• Reflect any changes in technical or program assumptions • Keep it current as the program passes through new phases

− Replace estimates with EVM EAC and Independent estimate at completion (EAC) from EVM − Report progress on meeting cost and schedule estimates − Perform a post mortem and document lessons learned for elements whose actual costs or schedules differ from the estimate. − Document all changes to the program and how they affect the cost estimate
February 3, 2010 42

Work Breakdown Structure

Cornerstone of every project because it defines in detail the work necessary to accomplish a project’s objectives
− Essential part of developing a project’s cost estimate − WBS reflects the delivery of the agreed requirements to the agreed solution design

• • • • •

A typical WBS reflects the requirements, resources and tasks that must be accomplished to develop a program WBS communicates to everyone what needs to be done and how the activities relate to one another Provides a consistent framework for planning and assigning responsibility for the work Define a project in terms of product-oriented elements, broken into a hierarchical structure Product-oriented WBS ensures that all costs are captured
February 3, 2010 43

Validating Cost Estimates

Cost estimates should be validated against best practice characteristics
− Comprehensive − Well-documented − Accurate − Credible

February 3, 2010

44

Validating Cost Estimates

Comprehensive
− − − − Completely define the program and reflect the current schedule Include all possible costs using a logical WBS that accounts for all requirements Ensure that no costs are omitted nor double-counted Explain and document key assumptions that are technically reasonable

Well-documented
− They can be easily repeated or updated and traced to original sources through auditing − Supporting documentation identifies the data sources, justifies all assumptions, and provides a description of each estimating methodology for every WBS cost element − Schedule milestones and deliverables are traceable and consistent with the cost estimate documentation

February 3, 2010

45

Validating Cost Estimates

Accurate
− − − − − They are not overly conservative or too optimistic Based on an assessment of most likely costs and adjusted properly for inflation Contain few, if any, mistakes that are minor in nature Are updated when assumptions or requirements change to reflect current status Cost estimating relationships and parametric cost models are validated to ensure they are good predictors of costs
• Data is current and applicable to the new program, • The relationships between technical parameters are logical and statistically significant • Results are tested with independent data

Credible
− They clearly identify any limitations because of uncertainty or biases surrounding the data or assumptions − Results are similar to cross-checks and an independent cost estimate derived using different methodologies
• Independent cost estimates performed by estimators farthest away from the acquiring program office represent a best practices because they
− Tend to produce higher and more accurate cost estimates than those performed by staff sharing a common supervisor with the program office − Produce more credible estimates than other types of independent estimate reviews which may not be as inclusive as an ICE (e.g., IGCE, ICA, Sufficiency Review, etc.)

− A sensitivity analysis has been performed to identify cost drivers and the impacts of varying assumptions − A risk / uncertainty analysis has been performed to determine the level of risk associated with the point estimate

February 3, 2010

46

Cost Assessment Team

Cost estimates are frequently developed with an incomplete knowledge of what the exact final technical solution will be Cost assessment team must manage a great deal of risk, especially for programs that are complex or use leading edge of technology Cost estimates define what a given solution will ultimately cost Estimate will be affected by multiple assumptions and an interpretation of what the historical data represent
February 3, 2010 47

Disciplines and Concepts in Cost Analysis
Economics
•Break-even Analysis •Personnel Cost •Inflation •Present Value Analysis

Interpersonal Skills
•Approach •Estimate •Knowledge

Budgeting
•Organisation Specific Skills •Program Specific Skills

Commercial

Cost Analysis Team Skills

•Analysis of Commercial Models •Analysis of Proposals •Development of Cost Estimating Relationship

Information Technology
•Analysis •Design •Development •Testing •Scheduling •System Integration
February 3, 2010

Statistics
•Forecasting •Risk/Uncertainty Analysis

Accounting
•Cost Data Analysis •Financial Analysis •Overhead Analysis •Proposal Analysis

48

Centralised vs. Decentralised Costing Function

Centralised Costing Function
− Facilitates the use of standardised and consistent processes − Better resource sharing − Common tools and training − Ability to resist pressure to lower the cost estimate when it is higher than the allotted budget − Can be remote from technical experts

Decentralised Costing Function
− Often results in ad hoc and inconsistent processes − Decreased independence − Greater access to local technical resources

February 3, 2010

49

Cost Assessment Team Best Practices Checklist

The estimating team’s composition has the skills needed for the program of work
− The team has the proper number and mix of resources − The team has the proper number and mix of resources − The team includes experienced and trained cost analysts − The team includes, or has direct access to, analysts experienced in the program’s major areas − Team members’ experience, qualifications, certifications, and training are identified

A master schedule with a written study plan has been developed • The team has access to the necessary subject matter experts

February 3, 2010 50

IT Investment Management Maturity Stages
Description

5 4 3 2 1
February 3, 2010

Leveraging IT for Strategic Outcomes Improving the Investment Process Developing a Complete Investment Portfolio Building the Investment Foundation Creating Investment Awareness

The organisation has mastered the selection, control, and evaluation processes and now seeks to shape its strategic outcomes by benchmarking its IT investment processes relative to other "best-in-class" organizations. The organisation is focused on evaluation techniques to improve its IT investment processes and portfolio(s), while maintaining mature selection and control techniques. The organisation has developed a well-defined IT investment portfolio using an investment process that has sound selection criteria and maintains mature, evolving, and integrated selection, control, and evaluation processes. Basic selection capabilities are being driven by the development of project selection criteria, including benefit and risk criteria, and an awareness of organizational priorities when identifying projects for funding. Executive oversight is applied on a project-by-project basis. Ad hoc, unstructured, and unpredictable investment processes characterise this stage. There is generally little relationship between the success or failure of one project and the success or failure of another project.
51

Increasing IT Investment Management Maturity
5 Leveraging IT for Strategic Outcomes
1. 2. The organisation learns from and adopts the tools, techniques, or methods used by best-in-class external organisations Changes to strategic business processes are driven by the capabilities of identified information technologies 1. 2.

4 Improving the Investment Process

3 Developing a Complete Investment Portfolio
1. 2. 3.

Evaluation techniques are being used to improve the investment processes and the portfolio Succession management processes are developed for retaining or disposing of investments.

Criteria are developed for identifying investments that best fit with the portfolio. The portfolio is developed through the use of categorisation when comparing investments. Performance reviews are conducted both during and after implementation 1.

2 Building the Investment Foundation

1 Creating Investment Awareness
February 3, 2010

2. 3. 4. 5.

An investment board is established to drive the investment process Business needs are identified for each project An investment selection process is developed Board oversees the progress of individual projects Investment information is collected and disseminated
52

More Information
Alan McSweeney alan@alanmcsweeney.com

February 3, 2010

53

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