SPM Chapter3

Project Evaluation
CHAPTER
3
Software Project Management Slide# 1

Project Evaluation
CHAPTER
3
Objectives
• Explain how individual projects can be grouped into programs;

• Explain how the implementation of programs and projects can be managed
so that the planned benefits are achieved;
• Carry out an evaluation and selection of projects against strategic, technical
and economic criteria;
• Use a variety of cost-benefit evaluation techniques for choosing among

completing project proposals;
• Evaluate the risk involved in a project and select appropriate strategies for
minimizing potential costs.

Project Evaluation
3.1 Introduction
0
Select Project
1 Identify project 2 Identify project
scope and objective infrastructure
3 Analyze project
characteristics
4 Identify the
Review products and activities
5 Estimate effort
for activity
For each activity
Lower level detail 6 Identify
activity risks
10 Lower level planning 7 Allocate resources
9 Execute plan 8
Review/publicize plan
Project evaluation is carried out in Step 0

Project Evaluation
3.2 Program Management
Program Management
“A group of projects that are managed in a coordinated
way to gain benefit that would not be possible were the projects
to be managed independently” (D.C. Ferns)
Program Management is a collection of projects that all
contribute to the same overall organizational goals. Effective
program management requires that there is a well-defined
program goal and that all the organization’s projects are selected
and tuned to contribute to this goal. A project must be evaluated
according to how it contributes to this program goal and its
viability, timing, resourcing, and final worth can be affected by
the program as a whole.

Project Evaluation
3.2 Program Management
Program Management
 Strategic program
 Business cycle program
 Infrastructure program
 Research and development program
 Innovative partnerships

Project Evaluation
3.3 Managing the allocation of resource within programs
Program Management
Program Manager Project Manager

Many simultaneous projects One project at a time
Personal relationship with skilled Impersonal relationship with
resources resource type
Need to maximize utilization of Need to minimize demand for
resources resources
Projects tend to be similar Projects tend to be dissimilar
Program manager versus project managers

Project Evaluation
3.3 Managing the allocation of resource within programs
Project Managers
Project A Project B Project C Project D

Program Management
Resource W X X
Resource X X
Resource Y X X
Resource Z X X X
Projects sharing resources

Project Evaluation
3.5 Creating a Program
Program Mandate
 The new services or capabilities the program should deliver

 How the organization will be improved by use of the new
services or capability
 How the program fits with corporate goals and any other
initiative

Project Evaluation
Program Brief
 A preliminary vision statement which describes the new

capacity that the organization seeks – it is described as
‘preliminary’ because this will later be elaborated
 The benefits that the program should create
 Risks and Issues
 Estimated costs, timescales and effort

Project Evaluation
The Vision Statement
 Program manager who would have day-to-day responsibility

for running program could well be appointed. The program
manager is likely to be someone with considerable project
management experience
 This group can now take the vision statement outlined in the
project brief and refine and expand it. It should describe in
detail the new capability that the program will give the
organization

Project Evaluation
Blueprint
 Business models outlining the new processes required

 Organizational structure
 The information systems, equipment and other, non-staff,
resources that will be needed
 Data and information requirements
 Costs, performance and service level requirements

Project Evaluation
Blueprint – Preliminary plan can be produced containing:
 The project portfolio

 Cost estimates for each project
 The benefits expected
 Risks identified
 The resources needed to manage, support and monitor the
program

Project Evaluation
3.6 Aids to program management
Dependency diagrams
Dependency diagrams are very similar to activity networks

at project level, they can be used to show these dependencies.
Where projects run concurrently in a program and pass products
between one another, the dependency diagrams could become
very quite complicated

Project Evaluation
Dependency diagrams (Example)
B Corporate G Implement
image design corporate interface
A System C Build common

F Data migration
study/design systems
D Relocate offices E Training

Project Evaluation
Delivery Planning
 The creation of a delivery dependency diagram would

typically be a precursor to more detailed program planning.
As part of this planning, tranches of project could be defined.
 A tranche is a group of projects that will deliver their products
as one step in the program. The main criterion for grouping
projects into tranches is that the deliverables of each of the
projects combine to provide a coherent new capability or set
of benefits for the client.

Project Evaluation
Delivery Planning
Project A Project B
Project C
Project D
Project E
Project F Project G

Project Evaluation
3.7 Benefits Management
Benefit Management is an attempt to remedy this. It

encompasses the identification, optimization and tracking of the
expected benefits from a business change in order to ensure that
they are actually achieved.
• Defined the expected benefits from the program

• Analyze the balance between costs and benefits
• Plan how the benefits will be achieved and measured
• Allocate responsibilities for the successful delivery of the benefits
• Monitor the realization of the benefits

Project Evaluation
Benefits can be of many different types, including:
 Mandatory compliance
 Quality of service
 Productivity
 More motivated workforce
 Internal management benefits
 Risk reduction
 Economy
 Revenue enhancement/acceleration
 Strategic fit

Project Evaluation
Quantifying benefits
 Quantified and valued

 Quantified but not valued
 Identified but not easily quantified

Overview of Feasibility Project Evaluation

• A systems request must pass several

tests, called a feasibility study, to see
whether it is worthwhile to proceed
further

• Economic Feasibility
– Total cost of ownership (TCO)
– Tangible benefits
– Intangible benefits
– Tangible Costs
– Intangible Costs

• Economic Feasibility
 Cost-benefit Analysis
 Net Profit
 Payback Period
 Return on Investment
 Net Present Value
 Internal Rate of Return

• Technical Feasibility
– Technical feasibility refers to technical
resources needed to develop, purchase,
install, or operate the system
• New Technology
• Existing Technology
• Expertise, Professional

• Operational Feasibility
– Operational feasibility means that a
proposed system will be used effectively
after it has been developed
• Performance
• Information
• Economy
• Control
• Efficiency
• Services

Project Evaluation
3.8 Evaluation of individual projects
Three major factors will need to be considered in the

evaluation of potential projects:
 Technical feasibility
 The balance of costs and benefits
 The degree of risk associated with the project

Project Evaluation
3.9 Technical assessment
• Evaluating the required functionality against the hardware

and software available.
• The Constraints
Cost of the solution
Cost-benefit analysis

Project Evaluation
3.4 Cost-benefit Analysis
The standard way of evaluating the economic benefits of any project is to carry
out a cost-benefit analysis, which consists of two steps:
Identifying and estimating all of the costs and benefits of

carrying out the project and operating the system.
Expressing these costs and benefits in common units.

Project Evaluation
Most direct costs are easy to identify and measure in monetary terms.
Development costs
Setup costs
Operational costs

Project Evaluation
Benefits may be categorized as follows:
Direct benefits
Assessable indirect benefits
Intangible benefits
Any project that shows an excess of benefits over costs is

clearly worth considering for implementation

Project Evaluation
3.11 Cash flow forecasting
Income
Expenditure
Time
Typical product life cycle cash flow
A cash flow forecast will indicate when expenditure and income will
take place.

Project Evaluation
3.11 Cash flow forecasting
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

Project Evaluation
3.12 Cost-benefit evaluation techniques
How to calculate Net Profit?
Net Profit = Total income – Total cost
Project 1 Project 2 Project 3 Project 4
Net Profit 50,000 100,000 50,000 75,000

Project Evaluation
How to calculate Payback Period?
Payback Period
Is the time taken to break even or pay back the initial investment.
Year Cash Flow Payback Period
0 -100,000 -100,000
1 10,000 -90,000
2 10,000 -80,000
Project 1 3 10,000 -70,000
4 20,000 -50,000
5 100,000 50,000 Year 5

Project Evaluation
Return on Investment
The return on investment (ROI) also known as the accounting rate of
return (ARR), provides a way of comparing the net profitability to the
investment required.
average  annual  profit

ROI  100
total  investment

Project Evaluation
Net Present Value (NPV)
NPV is a project evaluation technique that takes into

account the profitability of a project and the timing of the cash flows
that are produced. It does so by discounting future cash flows by a
percentage known as the discount rate. This is based on the view
that receiving $100 today is better than having to wait until next
year to receive it, because the $100 next year is worth less than
$100 now.
value  in  year  t
Pr esent  Value 
1  r t
Where r is the discount rate.

Project Evaluation
Table 3.4: Applying the discount factors to project 1
Year Cash flow Discount factor Discount cash flow

(10%)
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
1
1  .1 1
Project Evaluation
Internal rate of return
IRR attemps to provide a profitability measure as a percentage return

that is directly comparable with interest rates. It is a convenient and useful
measure of the value of a project in that it is a single percentage figure that may
be directly compared with rates of return on other projects or interest rates
quoted elsewhere.
8,000
0
8 10 12
-6,000
Estimating the internal rate of return for project 1

Project Evaluation
• A total evaluation must also take into account the problems of

funding the cash flows.
• While a project’s IRR might indicate a profitable project, future

earnings from a project might be far less reliable than
earnings from, say, investing with a bank.
• We must also consider any one project within the financial and
economic framework of the organization as a whole.

Project Evaluation
3.13 Risk evaluation
Risk identification and ranking

• Construct a project risk matrix utilizing a checklist of possible risks and
to classify each risk according to its relative importance and likelihood.
• Risk classification:
 High (H)
 Medium (M)
 Low (L)
 exceedingly unlikely (-)

Project Evaluation
Risk identification and ranking
Table 3.7 A fragment of a basic risk matrix
Risk Importance Likelihood
Software never completed or delivered H -

Project cancelled after design stage H -
Software delivered late M M
Development budget exceeded <= 20% L M
Development budget exceeded > 20% M L
Maintenance costs higher than estimated L L
Response time targets not met L H

Project Evaluation
Risk and net present value
• Where a project is relatively risky it is common practice to use a

higher discount rate to calculate NPV.
• Project may be categorized as high, medium or low risk using a

scoring method and risk premiums designated for each category.

Project Evaluation
Cost-benefit analysis
• Evaluation of risk is to consider:
• each possible outcome
• estimate the probability of its occurring and corresponding value of
the outcome

Project Evaluation
Example 3.7:
Buyright, a software house, is considering developing a payroll application for use

academic institutions and is currently engaged in a cost-benefit analysis. Study of the
market has shown that, if they can target it efficiently and no competing product
become available, they will obtain a high level of sales generating an annual income
$800,000. They estimate that there is 1 in 10 chance of this happening. However
competitor might launch a competing application before their own launch date and then
sales might generate only $100,000 per year. They estimate that there is a 30% chance
of this happen. The most likely outcome, they believe, is somewhere between these
two extremes – they will gain market lead by launching before any competing product
become available and achieve an annual income of $650,000. Calculate the expected
income?
Total development costs are estimated at $750,000 and sales are expected to be
maintained at a reasonably constant level for at least four years. Annual cost of
marketing and product maintenance are estimated at $200,000, irrespective of the
market share gained. Would you advise them to go ahead with the project?

Project Evaluation
Risk profile analysis

• Involve varying each of the parameters that affect the project’s
cost or benefits to ascertain how sensitive the project’s
profitability is to each factor
• Sensitivity analysis
• Monte Carlo simulation
Project B
Project C
Project A
Profitability
Expected Profitability

Project Evaluation
NPV
Using decision trees
-100,000
Expansion
0.2
0.8
Extend
No expansion 75,000
D
Expansion 250,000
Replace
0.2
0.8
No expansion -50,000
What are you decide to extend or replace machine?

Project Evaluation
Questions Amenda’s decision tree is selecting the extend or replace machines.

NPV ($)
Further 0.5 -100,000

expansion
Continue
0.1 0.5
extension 80,000
Early market No Further
expansion D2 expansion
Further
Extend 0.5 200,000
Abandon expansion
0.9
And replace
D1 0.5
No Further -30,000
No early expansion
Replace expansion
Expansion 0.1
-100,000
0.9
No expansion 75,000
Expansion 0.2
250,000
0.8
No expansion -50,000

Project Evaluation
3.14 Conclusion
 Projects must be evaluated on strategic, technical and economic grounds

 Economic assessment involves the identification of all costs and income over the
lifetime of the system, including its development and operation and checking that
the total value of benefits exceeds total expenditure
 Money received in the future is worth less than the same amount of money in
hand now, which may be invested to earn interest
 The uncertainty surrounding estimates of future returns lowers their real value
measured now
 Discounted cash flow techniques may be used to evaluate the present value of
future cash flows taking account of interest rates and uncertainty
 Cost-benefit analysis techniques and decision trees provide tools for evaluating
expected outcomes and choosing between alternative strategies

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Project Evaluation

Software Project Management Slide# 1

• Explain how individual projects can be grouped into programs;

• Use a variety of cost-benefit evaluation techniques for choosing among

Software Project Management Slide# 2

10 Lower level planning 7 Allocate resources

Project evaluation is carried out in Step 0

Software Project Management Slide# 3

Software Project Management Slide# 4

 Business cycle program

 Research and development program

Software Project Management Slide# 5

Program Manager Project Manager

Program manager versus project managers

Software Project Management Slide# 6

Project A Project B Project C Project D

Projects sharing resources

Software Project Management Slide# 7

 The new services or capabilities the program should deliver

Software Project Management Slide# 8

 A preliminary vision statement which describes the new

Software Project Management Slide# 9

The Vision Statement

 Program manager who would have day-to-day responsibility

Software Project Management Slide# 10

 Business models outlining the new processes required

Software Project Management Slide# 11

Blueprint – Preliminary plan can be produced containing:

 The project portfolio

Software Project Management Slide# 12

Dependency diagrams are very similar to activity networks

Software Project Management Slide# 13

Dependency diagrams (Example)

A System C Build common

D Relocate offices E Training

Software Project Management Slide# 14

 The creation of a delivery dependency diagram would

Software Project Management Slide# 15

Software Project Management Slide# 16

Benefit Management is an attempt to remedy this. It

• Defined the expected benefits from the program

Software Project Management Slide# 17

Benefits can be of many different types, including:

Software Project Management Slide# 18

 Quantified and valued

Software Project Management Slide# 19

Software Project Management Slide# 20

• A systems request must pass several

Software Project Management Slide# 21

Software Project Management Slide# 22

Software Project Management Slide# 23

Software Project Management Slide# 24

Software Project Management Slide# 25

Three major factors will need to be considered in the

Software Project Management Slide# 26

• Evaluating the required functionality against the hardware

Cost of the solution

Software Project Management Slide# 27

Identifying and estimating all of the costs and benefits of

Expressing these costs and benefits in common units.

Software Project Management Slide# 28

Software Project Management Slide# 29

Benefits may be categorized as follows:

Assessable indirect benefits