Information Technology Project

Management – Fifth Edition

By Jack T. Marchewka
Northern Illinois University

3-1 Copyright 2015 John Wiley & Sons, Inc.

 Measurable Organizational Value and the
Business Case
Chapter 3

3-2 Copyright 2015 John Wiley & Sons, Inc.

Measurable Organizational Value (MOV) and Project
Objectives
 The MOV is a “Measure of Success”
 The MOV must support the organization’s vision, mission, and
strategy
 Also, the MOV must:
 Be measurable
 Provide value
 Be agreed upon
 Be verifiable
 Project Objectives – support the MOV and include:
 Scope (the project work to be completed
 Schedule (time)
 Budget (money)
 Quality (conformance or fitness for use)

3-3 Copyright 2015 John Wiley & Sons, Inc.

 The Business Case
 Definition of Business Case: an analysis of the organizational
value, feasibility, costs, benefits, and risks of the project plan.
 Attributes of a Good Business Case
 Details all possible impacts, costs, and benefits
 Clearly compares alternatives
 Documents methods and rationale used to quantify costs and benefits
 Objectively includes all pertinent information
 Shows explicitly how an investment in IT will lead to an increase in
business value
 Systematic in terms of summarizing findings
 Provides senior management with all the information needed to
make an informed decision as to whether a specific project should
be funded
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5 Copyright 2010 John Wiley & Sons, Inc.
Process for Developing the Business Case

Figure 2.3
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Developing the Business Case

 Step 1: Select the Core Team

 Advantages:
 Credibility - all stakeholders and relevant departments
involved
 Alignment with organizational goals
 Access to the real costs
 Ownership
 Agreement
 Bridge building - include critics on the team

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Developing the Business Case
 Step 2: Define Measurable Organizational Value (MOV)
 The project’s goal - measure of success
 Must be measurable
 Provides value to the organization
 Must be agreed upon
 Must be verifiable at the end of the project
 Guides the project throughout its life cycle
 Should align with the organization’s strategy and goals

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Project Alignment

Organizational Drives
Vision & Mission

Drives
Organizational
Strategy
Supports

Project’s
Organizational
Measurable
Supports Value
(MOV)

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Project Alignment
prevent customers
from leaving or
Organizational Drives
switching
Vision to a
& Mission
competitor

develop tighter Drives

Organizational
linkages with
Strategy
Supports customers

Project’s
Develop a B2B
Organizational
application to allow
Measurable
Supports customers
Valueto do
business on-line
(MOV)

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Project Objectives

 Project Objectives – support the MOV and include:

 Scope (the project work to be completed
 Schedule (time)
 Budget (money)
 Quality (conformance or fitness for use)

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The MOV and Project Objectives

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An Example of a Good Goal

I believe that this nation should commit

itself to achieving the goal before this
decade is out, of landing a man on the
moon and returning him safely to Earth.

John F. Kennedy
35th President of the United States
1961-1963

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 Setting Goals
 President Kennedy’s mission to the moon – clear
and measurable goals without saying how to
accomplish the goal
 “Our goal is to land a man on the moon and return him
safely by the end of the decade”
 A human being and not a monkey or unmanned rocket
 Get him back safely to earth
 Do this by 1970
 Short version
http://www.youtube.com/watch?v=2yHKWblDK3g
 Long version
http://www.youtube.com/watch?v=TuW4oGKzVKc
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 Developing the MOV
Example: A company wants to develop and implement a B2C e-
commerce application to expands its current brick and mortar
operations
1. Identify the desired potential area of impact – why does the
organization want to take on the project
Strategic

 Customer
 Financial
 Operational
 Social

B2C – PM meet with plan sponsor to determine how the idea for the
project came about to understand how and why decisions are made by
sponsor’s organization. Strategic & financial – expand b&m operations
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Potential Areas of Project Impact and Examples

3-16 Copyright 2015 John Wiley & Sons, Inc.

 Developing the MOV
2. Identify the desired organizational value of the IT
project – how will this project help achieve what we
want as an organization
 Better?
 Faster?
 Cheaper?
 DoMore? (growth)
B2C – enable the organization to expand its current
operations
Improved customer service and operations would fall under
better, faster and cheaper
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Project Value

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Developing the MOV

3. Develop an Appropriate Metric - should it

increase or decrease?
 Company needs a way to determine if project is a
success and if their investment paid off
 Money ($, £, ¥ )
 Percentage (%)
 Numeric Values (customers, hits on website)

B2C – plan sponsor has set the metric to be a 20%

return on investment and 500 new customers

3-19 Copyright 2015 John Wiley & Sons, Inc.

Developing the MOV
4. Set a time frame for achieving the
MOV
 When will the MOV be achieved?
 Completion of the project does not mean the
MOV has been achieved.
 MOV can change as time passes

B2C – plan sponsor has set the metric to be a 20%

return on investment and 500 new customers within
first year. 25% return and 1000 new customers second
year, 30% return and 1,500 new customers third year.
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Developing the MOV

5. Verify and get agreement from the

project stakeholders
 Ensure that it is accurate and realistic
 Project manager and team can only guide the
process, plan sponsor identifies the vale and target
metrics
 PM should not commit to an unrealistic MOV

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Developing the MOV
6. Summarize the MOV in a clear, concise statement or
table
 Opportunity to get final agreement and verification
 Simple and clear directive to the project team
 Sets explicit expectation for all project stakeholders
This project will be successful if _________________.
Year MOV
MOV: The B2C project 1 20% return on investment
will provide a 20% return 500 new customers
on investment and 500 new 2 25% return on investment
customers within the first 1,000 new customers

year of its operation 3 30% return on investment

1,500 new customers

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Examples of MOV Statements

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Examples of MOV Table Format

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Summary of the Process for Developing MOV to Increase
Awareness for Healthy Living

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The Business Case
 First deliverable in the PLC and is a major theme in
PRINCE2 methodology
 Definition of Business Case: an analysis of the
organizational value, feasibility, costs, benefits, and risks
of several proposed alternatives or options.
 Attributes of a Good Business Case
 Thorough in detailing all possible impacts, costs, and benefits
 Clear and logical in comparing the cost/benefit impact of each
alternative
 Objective through including all pertinent information
 Systematic in terms of summarizing findings

3-26 Copyright 2015 John Wiley & Sons, Inc.

 Developing the Business Case
 Step 1: Define Measurable Organizational Value (MOV)
 As described in previous slides
 Step 2: Form a Cross-Functional Business Case Team
 Advantages:
 Credibility
 Alignment with organizational goals
 Access to the real costs
 Ownership
 Agreement
 Bridge building

3-27 Copyright 2015 John Wiley & Sons, Inc.

 Developing the Business Case
 Step 3: Identify Alternatives
 Base Case Alternative – how would the organization would perform
under the status quo
 Determine costs of maintaining the current system over time
 Increased maintenance costs of hardware and software
 Possibility of more frequent system failures and downtime
 Possible Alternative Strategies
 Change existing process without investing in IT
 Adopting or adapting an application developed by a different area or
department within the organization
 Reengineer the existing system
 Purchasing an off-the-shelf application package from a software vendor
 Custom building a new application using internal resources or outsourcing the
development to another company
3-28 Copyright 2015 John Wiley & Sons, Inc.
Developing the Business Case
 Step 4: Define Feasibility and Assess Risk
 Feasible – doable and worth doing
 Economic feasibility – too costly and/or not provide expected benefits
 Technical feasibility – can infrastructure, IT staff, vendor support the
solution
 Organizational feasibility – will solution be accepted by staff, will
business be disrupted
 Other feasibilities - legal/ethical issues considered
 Risk
 Identification - what can go wrong and what must go right?
 Assessment – what is the impact of each risk?
 Response – how can the organization avoid or minimize the risk?

3-29 Copyright 2015 John Wiley & Sons, Inc.

Developing the Business Case
 Step 5: Define Total Cost of Ownership
 Total cost of acquiring, developing, maintaining and
supporting the application over its useful life
 Direct or Up-front costs – initial cost of hardware,
software, telecomm equipment, development,
installation, outside consultants, etc.
 Ongoing Costs – salaries, training, upgrades, supplies,
maintenance, etc.
 Indirect Costs – initial loss of productivity, downtime
cost, QA, auditing equipment, post-implementation
reviews.

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 Developing the Business Case
 Step 6: Define Total Benefits of Ownership
 Increasing high-value work
 Sales force spends less time on paperwork and more time on calls
to customers
 Improving accuracy and efficiency
 Reduction in errors, duplication, time to complete a business
process
 Improving decision-making
 Getting timely and accurate information
 Improving customer service
 New products/services, faster or more reliable service, etc

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 Developing the Business Case
 Intangible benefits
 Try to quantify them by linking them to tangible benefits that can
be linked to efficiency gains
 Corporate wide directory on an intranet improves communications and
reduces paper documents, printing, etc
 An EDI application enables faster collection of A/R, benefit which can be
valued in terms of investing that money

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 Developing the Business Case
 Step 7: Analyze alternatives using financial models and
scoring models – compare all models the same way
 Payback – how long will it take to recover the initial investment

Payback Period = Initial Investment

Net Cash Flow

= $100,000
$20,000
= 5 years

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Developing the Business Case

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 Developing the Business Case
 Breakeven

Materials (putter head, shaft, grip, etc.) $12.00

Labor (0.5 hours at $9.00/hr) $ 4.50

Overhead (rent, insurance, utilities, taxes,

$ 8.50
etc.)

Total $25.00

If you sell a golf putter for $30.00 and it costs $25.00 to make, you have a profit margin of
$5.00:

Breakeven Point = Initial Investment / Net Profit Margin

= $100,000 / $5.00
= 20,000 units
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Developing the Business Case
 Return on Investment
 shows the relationship between a project’s cost and benefits
 returns must arise as a direct result of the initial investment

Project ROI = Total Expected Benefits – Total Expected Costs

Total Expected Costs

= ($115,000 - $100,000)
$100,000
= 15%

3-36 Copyright 2015 John Wiley & Sons, Inc.

 Developing the Business Case
 Net Present Value – time value of money
 Discounts streams of cash flows in the future so that it can be
determined if investing the time, money and resources is worth
the wait
 Outflows – Year 0: cost to build; Years 1- 4: support and maintenance
 When comparing alternatives, higher NPV is more desirable

Year 0 Year 1 Year 2 Year 3 Year 4

Total Cash Inflows $0 $150,000 $200,000 $250,000 $300,000
Total Cash Outflows $200,000 $85,000 $125,000 $150,000 $200,000
Net Cash Flow ($200,000) $65,000 $75,000 $100,000 $100,000

NPV = -I0 +  (Net Cash Flow / (1 + r)t)

Where:
I = Total Cost or Investment of the Project
r = discount rate
37 t = time period
Developing the Business Case
 Net Present Value
Discounted
Time Period Calculation
Cash Flow
Year 0 ($200,000) ($200,000)

Year 1 $65,000/(1 + .08)1 $60,185

Year 2 $75,000/(1 + .08)2 $64,300

Year 3 $100,000/(1 + .08)3 $79,383

Year 4 $100,000/(1 + .08)4 $73,503

Net Present Value (NPV) $77,371

3-38 Copyright 2015 John Wiley & Sons, Inc.

Net Present Value Analysis

$943.39

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 Developing the Business Case

 Internal Rate of Return

 The discount rate that makes the net present value of investment
zero.
 It is an indicator of the efficiency of an investment, as opposed to
NPV, which indicates value or magnitude.
 The IRR is the annualized effective compounded return rate which
can be earned on the invested capital, i.e., the yield on the
investment.
 A project is a good investment proposition if its IRR is greater than the
rate of return that could be earned by alternate investments (investing
in other projects, buying bonds, even putting the money in a bank
account).
 Thus, the IRR should be compared to any alternate costs of capital
including an appropriate risk premium.

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Developing the Business Case

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Developing the Business Case

 Scoring models
 provide a method for comparing alternatives or projects
based on a weighted score.
 can combine both qualitative and quantitative criteria
 weights and scores can be subjective
 Things to keep in mind about financial and scoring models
 Financial models can be biased toward the short run
 Some criteria are reversed-scored
 Past experience may help create a more realistic business
case.

3-42 Copyright 2015 John Wiley & Sons, Inc.

 Developing the Business Case

 Weighted Scoring Models

 A tool that provides a systematic process for selecting
projects based on many criteria
 Identify criteria important to the project selection
process
 Can combine both qualitative and non-qualitative items
 Weights and scores can be largely subjective
 Assign weights (percentages) to each criterion so they
add up to 100%
 Assign scores to each criterion for each project
 Multiply the scores by the weights and get the total
weighted scores
 The higher the weighted score, the better

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Table 3.3 – Comparison of Project Alternatives

3-44 Copyright 2015 John Wiley & Sons, Inc.

 Developing the Business Case

 Step 8: Propose and Support the Recommendation

 Once the alternatives are identified and analyzed, the last step is
to recommend one of the options.
 Alternative recommended must be supported by your analysis
 Opportunity to make an impression on the client or plan sponsor
 Use template on next slide

3-45 Copyright 2015 John Wiley & Sons, Inc.

Business Case Template

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 Project Selection and Approval
 The IT Project Selection Process
 Organization needs a balance of projects in its project portfolio with
varying degrees of risk, technological complexity, size and strategic intent.
 Due to limited resources, what a company wants to do is not always
feasible
 Committee decides which projects to approve and project manager is
assigned
 The Project Selection Decision
 IT project must map to organization goals
 IT project must provide verifiable MOV
 Selection should be based on diverse measures such as
 tangible and intangible costs and benefits
 various levels throughout the organization (individual, dept, enterprise)
3-47 Copyright 2015 John Wiley & Sons, Inc.