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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 • Corresponding IT Function


Maintain the
Deliver IT services momentum of the
consistently without business through
fuss existing business
systems

Get involved in Contribute to


business improving business
improvement results

Provide the business Provide IT direction


with appropriate and management
information and that is aligned to the
technology leadership needs of the business
February 3, 2010 7
Disconnect Between What the Business Wants and
What IT Delivers

What the Business Wants What the Business Gets

15% 5%

35% 25%

70%
50%

Maintain The Momentum Of The Business Through Maintain The Momentum Of The Business Through
Existing Business Systems Existing Business Systems
Contribute To Improving Business Results Contribute To Improving Business Results

Provide It Direction And Management That Is Aligned To Provide It Direction And Management That Is Aligned To
The Needs Of The Business 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
40%
Investments

Metrics Do Not Adequately Capture Business


45%
Value

Executives Skeptical Of ROI From IT 52%

Find It Difficult To Calculate ROI 62%

CEO/CFO Demanding Better Ways To


71%
Demonstrate Value

0% 10% 20% 30% 40% 50% 60% 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 Managing


Business the
IT Budget

Managing the IT Managing IT for


Capability 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
Ineffe
and U ctive Risk
Effect ncer
i ve
Unce Risk and Unfa Analy tainty
r ta Techn miliar s is
Ident
ificat Analy inty First- ology or
s is
Rang ion of a Time
Use
Probl
em
Confi e
dence of De Acces s Getting
Level Docu tailed s to D
m ata Unre
s and H entation Unre
Proje asonable
Adeq
ua istor Train Unre alistic or ct Bas
Conti
ngen te Data ical E xp e
ed an
d
liable
Data Unre elin e
Mana c y and r ience
ge Detaile Analy d Assumalistic
Reser ment d , St a
b
sts No o ption
ves Agree
d
l e, Comp r Limited s Overo
Requ ariso ptimi
ireme Ag Avail n Data sm
n ts
Assumreed able New
ption Pr ocess
s e s Untra
Proje Inexp ined and
ct Ins er ie
t abilit
y Comp Analy nced
le sts
or Te x Project
chnol Unre
ogy 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 • Capability


− Overly optimistic developers − Mixed skills of team
− Poor assumptions on the use of reused − Optimistic assumption on
code development tools
− Vague or incomplete requirements − Optimistic assumption on productivity
− Not planning for additional effort − Geographically dispersed team making
associated with packages – communication and coordination more
integration, testing difficult
• Complexity • Management
− Tools − Management’s dictating an unrealistic
− Applications: software purpose and schedule
reliability − Incorporating a new method,
− Hardware limitations language, tool or process for the first
− Number of modules affecting time
integration effort − 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

February 3, 2010 18
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% • While minimal
90.0%
costs have
actually been
80.0% spent at the
Costs Committed and Spent

requirements
70.0% phase of the
entire project
60.0%
process,
50.0% Development and approximately
Implementation Starts 80% or more of
40.0% total life cycle
Design Finalised costs have
30.0%
Requirements Defined
already been
20.0% and Agreed determined at
this stage
10.0%
• Need to get
0.0% requirements
right from the
Project Timescale outset to control
costs effectively
Costs Determined by Decisions on Requirements and Design Actual Money Spent

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
TOTAL SYSTEM COST •External Support and Analysis and Design
Maintenance •Ongoing Test
BASIC SYSTEM COST •Training •Subscription Facilities
•Documentation
•Hardware •Support Facilities
•Software •Parallel Running
•Development and •Warranty
Implementation
•Management
•Installation
•Transition and
Cutover
•Conversion

February 3, 2010 25
LCCE Cost Composition
Total Cost of Ownership

System Acquisition Cost Operating and Support 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
Structured Capture
and Management of
Cost Effective Requirements and
Operation of Business Analysis Cost Benefit Analysis
Delivered Solution of Solution Costs
and Effective Solution
Retirement/ Operation
Replacement/
Upgrade Decisions

Design/Selection of
Cost Effective
Solution Solutions to Meet
Architecture and Requirements
Cost Effective Design Including
Delivery of Evaluation of All
Programme and
Projects and Options
Project
Management of Management
Costs

Project Portfolio Prioritisation of


Management Projects and
Investment
Decisions
February 3, 2010 27
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
Business Plans
Organisation and Associated
What Proposed IT
Technology
Strategic Plan Needs Investments Potentially
Solve the Identified
Business Needs?

Pre-Selection and
Identification
Investment
Stage
Results

Did the Selected Which IT


IT Investments Investments
Deliver the Evaluation Stage
Technology and Selection Stage Best Meet the
Expected Systems Portfolio Business
Business Value? Needs?

Control Stage

Are the Selected IT


Investments Performing
as Planned?
February 3, 2010 29
IT Investment Management Stages
Pre-Selection and
Identification Selection Stage
Stage
Identify business needs and prioritise potential Evaluate, score, and rank IT investments
investments Prioritise IT projects
Develop investment business cases
Research possible enterprise/collaboration opportunities
Update the Strategic plan and technology Portfolio

Evaluation Stage Control 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 Submit project status reports, requests for baseline
Analyse gaps between current business needs and adjustments greater than defined percentage (typically
performance of IT assets 10%) and verification and validation reports for each
Make a determination to maintain, migrate, improve, or major IT project
retire each IT asset in the technology portfolio
February 3, 2010 30
IT Investment Management Control Function
Responsibilities
Technical Scope
Management

Technical
Portfolio Management Requirements
Management

IT Investment
Management
Control Function Progress
Earned Value
Reporting and
Management
Management

Scope, Cost and


Risk
Schedule
Management
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 non-
financial), 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 Step 1: Step 2:
Define the Develop the
The audience, what is Purpose of Estimating
being estimated and why the Estimate Plan
It is being estimated are
very importance

Assessment Step 3: Step 4: Step 5: Step 6: Step 7:


Define the Determine Identify Obtain Data Develop
Cost assessment steps Project the Ground Point
are iterative and can be Estimating Rules and Estimate
accomplished in varying Approach Assumptions
order or concurrently

Analysis Step 8: Step 9: Step 10:


Conduct Conduct Risk Document
The confidence in the Sensitivity and the Estimate
point or range of the Analysis Uncertainty
estimate is crucial to the Analysis
decision maker

Presentation Step 11: Step 12:


Present Update
Documentation and Estimate for Estimate to
presentation can make or Approval Reflect
break a cost estimating Actual Costs
decision outcome and Changes
February 3, 2010 35
Cost Estimating Process

• Each of the 12 steps is important for ensuring that high-


quality 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
• Step 4: Determine the Estimating Approach
− 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

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 Interpersonal
•Break-even Analysis Skills
•Personnel Cost •Approach
•Inflation •Estimate
•Present Value •Knowledge
Analysis

Budgeting Commercial
•Organisation •Analysis of
Specific Skills Commercial Models
•Program Specific Cost Analysis •Analysis of
Skills Team Skills Proposals
•Development of
Cost Estimating
Relationship

Information Statistics Accounting


Technology •Forecasting •Cost Data Analysis
•Analysis •Risk/Uncertainty •Financial Analysis
•Design Analysis •Overhead Analysis
•Development •Proposal Analysis
•Testing
•Scheduling
•System Integration
February 3, 2010 48
Centralised vs. Decentralised Costing Function

• Centralised Costing Function • Decentralised Costing Function

− Facilitates the use of standardised − Often results in ad hoc and


and consistent processes inconsistent processes
− Better resource sharing − Decreased independence
− Common tools and training − Greater access to local technical
− Ability to resist pressure to lower resources
the cost estimate when it is higher
than the allotted budget
− Can be remote from technical
experts

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
The organisation has mastered the selection, control, and evaluation
Leveraging IT for processes and now seeks to shape its strategic outcomes by
5 Strategic Outcomes benchmarking its IT investment processes relative to other "best-in-class"
organizations.

The organisation is focused on evaluation techniques to improve its IT


Improving the
4 Investment Process
investment processes and portfolio(s), while maintaining mature selection
and control techniques.

The organisation has developed a well-defined IT investment portfolio


Developing a Complete using an investment process that has sound selection criteria and
3 Investment Portfolio maintains mature, evolving, and integrated selection, control, and
evaluation processes.
Basic selection capabilities are being driven by the development of project
Building the Investment selection criteria, including benefit and risk criteria, and an awareness of
2 Foundation organizational priorities when identifying projects for funding. Executive
oversight is applied on a project-by-project basis.
Ad hoc, unstructured, and unpredictable investment processes
Creating Investment characterise this stage. There is generally little relationship between the
1 Awareness success or failure of one project and the success or failure of another
project.
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Increasing IT Investment Management Maturity
5 Leveraging IT for
Strategic Outcomes

1. The organisation learns from and adopts the tools,


techniques, or methods used by best-in-class external 4 Improving the
organisations
2. Changes to strategic business processes are driven by the Investment Process
capabilities of identified information technologies

1. Evaluation techniques are being used to improve the


3 Developing a Complete investment processes and the portfolio
Investment Portfolio 2. Succession management processes are developed for
retaining or disposing of investments.

1. Criteria are developed for identifying investments that best


fit with the portfolio.
2. The portfolio is developed through the use of 2 Building the Investment
categorisation when comparing investments. Foundation
3. Performance reviews are conducted both during and after
implementation
1. An investment board is established to drive the investment
process
1 Creating Investment 2. Business needs are identified for each project
Awareness 3. An investment selection process is developed
4. Board oversees the progress of individual projects
5. Investment information is collected and disseminated
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More Information

Alan McSweeney
alan@alanmcsweeney.com

February 3, 2010 53