VIII 1 ReiferCase

Business Case Analysis: 

Business Case Analysis Donald J. Reifer University of Southern California and Reifer Consultants, Inc.

Aim of Presentation: 

Aim of Presentation Introduce you to the subject of business case analysis and walk you through my book Highlight significant concepts and focus on what you need to do to succeed Discuss how to use software cost models like COCOMO II to help prepare business cases Hopefully, motivate you to read and use the book in practice, the classroom and for fun

Why Write a Book on Software Business Cases?: 

Why Write a Book on Software Business Cases? Over the years, I have observed that software engineers don’t know how to prepare sound business cases and improvement justifications However, these same engineers are being asked to justify recommended investments using business cases as software is being capitalized The book was written to fill this void and to serve as a textbook for those teaching the subject

I Didn’t Write it for the Money: 

I Didn’t Write it for the Money Those writing books do it for recognition and self-satisfaction Authors don’t write technical books to make lots of money If my publisher sold 5,000 copies of the book, I would make about $15/hour

Table of Contents: 

Table of Contents Part I - Fundamental Concepts Chapter 1: Improvement is Everybody’s Business Chapter 2: Making a Business Case Chapter 3: Making the Business Case: Principles, Rules, and Analysis Tools Chapter 4: Business Cases that Make Sense Part II - The Case Studies Chapter 5 - Playing the Game of Dungeons and Dragons: Process Improvement Case Study Chapter 6: Quantifying the Costs/Benefits: Capitalizing Software Case Study Chapter 7: Making Your Numbers Sing: Architecting Case Study Chapter 8: Maneuvering the Maze: Web-Based Economy Case Study

Contents (Continued): 

Contents (Continued) Part III - Finale Chapter 9: Overcoming Adversity: More Than a Pep Talk Appendix A: Recommended Readings Appendix B: Compound Interest Tables Acronyms Glossary

Unique Features of Book: 

Unique Features of Book Web site: Look for updates Converse with author Realistic case studies Actual management briefings as part of case studies http://www.awl.com/cseng/titles/0-201-72887-7

Fundamentals: 

Fundamentals Must view software as a business Must use business measures to justify improvements Making the leap forward involves overcoming the resistance to change Key Point Summary Time to Market Cost Productivity Quality Increase Improve Reduce Avoid/Cut

Success is a Numbers Game: 

Success is a Numbers Game Will this proposal save money, cut costs, increase productivity, speed development or improve quality? Have you looked at the tax and financial implications of the proposal? What’s the impact of the proposal on the bottom line? Are our competitors doing this? If so, what are the results they are achieving? Who are the stakeholders and are they supportive of the proposal? Answer Business-Related Questions

Business Cases Supply You with the Numbers: 

Business Cases Supply You with the Numbers Business Case = the materials prepared for decision-makers to show that the proposed idea is a good one and that the numbers that surround it make sound financial sense Most software engineers prepare detailed technical rather than business justifications Many of their worthwhile proposals are rejected by management as a consequence Use of business cases will increase your chances of success

Business Process Framework: 

Business Process Framework Business Planning Process Tradeoff and Analysis Processes Software Development Process Analytical Methods Models Guidelines for Decision-Making Process The business case process proceeds in parallel and Framework interfaces with the software development process “Principles, Rules and Tools for Business Case Development”

The Business Planning Process: 

The Business Planning Process 1. Prepare white paper 2. Demonstrate technical feasibility 3. Conduct market survey 4. Develop business plan 5. Prepare business case 6. Sell the idea and develop support base 7. Get ready to execute GQM Results Idea or proposal Proof of Concept Approval to go-ahead

Nine Business Case Principles: 

Nine Business Case Principles Decisions are made relative to alternatives If possible, use money as the common denominator Sunk costs are irrelevant Investment decisions should recognize the time value of money Separable decisions must be considered separately Decisions should consider both quantitative and qualitative factors The risks associated with the decision should be quantified if possible The timing associated with making decisions is critical Decision processes should be periodically assessed and continuously improved

Many Rules to Use as Guidelines: 

Many Rules to Use as Guidelines Prepare business cases in language to communicate to management Define all of your terms thoroughly Bring in the outside experts to help if needed Double and triple check your numbers Never state a number without bounding it Remember, numbers will come back to haunt you Never talk cost reduction; use avoidance instead Always relate your numbers to benchmarks and your competition Preparation Presentation

Many Tools and Techniques: 

Many Tools and Techniques Break-even analysis Cause and effect analysis Cost/benefit analysis Value chain analysis Investment opportunity analysis Pareto analysis Payback analysis Sensitivity analysis Trend analysis Analysis Techniques

Supportive Tools: 

Supportive Tools Decision support systems Tax planning and schedules Trade studies and analysis Spreadsheets Comparative analysis Trade studies and analysis Software cost models Parametric analysis Trade studies and analysis Software packages

Use Engineering Economics As Your Basis: 

Use Engineering Economics As Your Basis Takes cost of money into account A $ today is worth more than tomorrow due to inflation Takes compounding into account Normalizes future expenditures using current year dollars as a basis for comparison Lets you establish a minimum attractive rate of return FW = P (1 + i)N PV = FW/(1 + i)N Future Worth Present Value

Business Case Information Needs: 

Business Case Information Needs Business cases Recurring costs Non-recurring costs Tangible benefits Intangible benefits Benchmarks Competitive comparisons Industry norms Metrics Management measures Financial data Inflated labor costs Labor categories/rates Overhead/G&A rates Past costs/performance Tax rates/legalities Marketing information Demographic data Market position Sales forecast

Preparing a COTS Business Case: 

Preparing a COTS Business Case Non-recurring costs Tangible benefits - Market research/purchasing - Cost avoidance - Package assessment - Reduced taxes (credits - Package tailoring & tuning and depreciation) - Glue code/wrapper development Intangible benefits Recurring costs - Market drives features - Glue code maintenance - Vendor maintains the - Licensing/purchasing product (good and bad) - Market watch/test-bed - Package mature (better - Relationship management quality/more robust) - Technology refresh - Lever the marketplace TOTAL TOTAL

Computing Costs/Benefits: 

Computing Costs/Benefits Use COCOTS Estimates most of the non-recurring costs Recurring costs should be estimated, for now, using rules of thumb Relationship management Nurtures relationships and develops partnerships Technology refresh Market watch looks for better value for $$$ Use COCOMO II Estimates benchmark costs for option of developing code from scratch or legacy Calibrate model for domain Use maintenance model to include rest of life cycle Intangibles Hard to quantify the cost and schedule impacts Even if you did quantify them, lots of controversy Costs Benefits

Presenting the Business Case: 

Presenting the Business Case Determine decision timeline (5 years) Take PV of B/C Ratio Calculate ROI Make a second pass to include depreciation Try to quantify the intangibles Discuss the impact, but don’t dilute the numbers using it (credibility) List pluses and minuses of options considered Make a recommendation based on the information presented ROI = ?/year ROI = ?/year

COTS Pluses and Minuses: 

COTS Pluses and Minuses Cheaper; but does not come for free Available immediately Known quality (+ or -) Vendor responsible for evolution/maintenance Don’t have to pay for it Can use critical staff resources elsewhere License costs can be high COTS products are not designed to plug & play Vendor behavior varies Performance often poor Vendor responsible for evolution/maintenance Have no control over the product’s evolution Pluses Minuses

COTS Critical Success Factors: 

COTS Critical Success Factors Successful firms: Make COTS-based system tradeoffs early Try before they buy Avoid modifying COTS at all costs Reconcile products with their architectures Emphasize use of standards and open interfaces Understand that COTS doesn’t come for free Plan to manage parts/technology obsolescence Make the vendor a part of the team, whenever possible Negotiate enterprise-wide licenses for COTS products Influence future paths the vendor will take Address the cultural and process issues

The COTS Life Cycle: 

The COTS Life Cycle Requirements Design Implementation Integration & Test Deploy Operate & Maintain Evaluate, Select & Acquire Tailor Renew Refresh COTS tends to have a life cycle of its own

COTS Success Strategies: 

COTS Success Strategies Process Merge COTS life cycle into your organizational framework Make needed tradeoffs Think both technical and business issues Products Fit COTS components into product line strategies Maintain open interfaces Manage technology refresh People Make COTS vendors a part of your team Increase awareness of COTS experience Provide workforce with structure and information Institutional Improve purchasing and licensing processes Maintain market watch Capture past performance

Lots of Other Business Yardsticks: 

Lots of Other Business Yardsticks Cost of Sales Cost/Benefit Ratio Debt/Equity Ratio Earnings/Share Overhead Rate Return on Assets Price/Sales Ratio Rate of Return Return on Earnings

Putting Cost Models to Work: 

Putting Cost Models to Work I use cost models in my book to: Create benchmarks to compute benefits for a typical project Assess available options and perform sensitivity analysis Quantify risk and its cost and schedule consequences Address the many “what-if” questions that arise via parametric analysis

Summary and Conclusions: 

Summary and Conclusions For software engineers to prosper in business, they need to learn to prepare business cases The technical merit of engineering issues needs to be quantified and the associated business issues discussed when making recommendations for improvement Hopefully, my book will help software engineers to perform these duties and succeed - as they’ve worked for me over the years

For Example: Making Your Numbers Believable: 

For Example: Making Your Numbers Believable Concepts: Cash Flow Impacts Cost Basis Cost/Benefits Estimate Fidelity Present Value (PV) Profit and Loss Risks and Their Impacts Sources of funds Tax implications

Final Thoughts: 

Final Thoughts Numbers can be your ally when asking for money When asking for money, talk your management’s language not ours Don’t be casual about numbers, be precise If you want to learn more, read my book