Process Improvement Guidelines with Project Proposal Template

Transcription

1 Process Improvement Guidelines with Project Proposal Template

2 Contents Project Improvement Guidelines... 1 Step 1- Define the Problem... 1 Step 2 Research Causes... 1 Step 3 Analyze Alternatives... 2 Step 4 Design Solution... 4 Step 5 Develop Recommendations... 5 Step 6 Implement Project... 7 Step 7 Measure Performance... 8 Process Improvement Summary... 9 Project Proposal Template Section 1 Background And Problem Statement Section 2 Current Environment Section 3 Proposed Environment Section 4 Implementation Scope Section 5 Estimated Costs Section 6 Expected Benefits Section 7 Financial Analysis Section 8 Competitive Impact Section 9 Business Alignment Section 10 Risk Assessment Section 11 Key Assumptions Section 12 Major Issues Section 13 Alternative Solutions About Us Peter DiSantis Consulting Associates, PLLC Page 0

3 Process Improvement Guidelines Project Improvement Guidelines Step 1- Define the Problem During this initial step, the basic groundwork for all further analysis is established. The key activity at the start of the business analysis process is to clearly understand the real problem at hand and determine what the desired result should be. At this point, the overall scope of analysis should be agreed upon. The objective of this step is to complete a clear problem statement, which includes two parts: a description of the current problem a definition of the desired state or result In order to complete the problem definition, data must be gathered to support the assessment of the current condition. in many cases, weak problem statements stem from a lack of meaningful information about the current environment or the performance of that environment. If not enough meaningful information is available, develop a plan for gathering enough facts to validate that a real problem exists. A clear problem statement helps to focus the efforts of those trying to solve the problem and will help management clearly understand the scope and magnitude of the issue at hand. Byknowing both what the problem is, and the desired result, it becomes much easier to identify obstacles that must be overcome in order to achieve an effective solution. There are several points that will help you develop a clear description of the current problem: Be as specific as possible Do not try to define the causes of the problem Don t include solutions or potential solutions Keep it focused the scope should not be too broad Similarly, there are several points to keep in mind when describing the desired state or result: Be clear and unambiguous Use measurable terms - so that an independent observer would be able to confirm that the desired state or result had been achieved 2009 Peter DiSantis Consulting Associates, PLLC Page 1

4 Process Improvement Guidelines There will be times, however, when defining specific results may be premature. For example, you may be assigned to find the most cost-effective solution to a certain problem. In these situations, defining the expected outcome in specific, measurable terms is not feasible. You don t know if a ten percent reduction in overall cost per unit is either achievable or optimal. In this case, the definition of measurable results (i.e., a 12% reduction in cost per unit) is delayed until Step 4, when more detailed cost and benefit information is available. When the problem statement is complete, get it approved by your manager before proceeding. It can save you valuable time spent solving the wrong problem. It is much more efficient (and less frustrating!) to refine your scope and objectives now, rather than after you ve completed your research and analysis. When solving capacity related problems: Clearly define the demand Forecasts Units per period Define current resources and capacity Alternative solutions Estimate resources required to meet demand 2009 Peter DiSantis Consulting Associates, PLLC Page 0

5 Process Improvement Guidelines Step 2 Research Causes Once the problem statement has been approved, more information must be gathered to fully understand the nature and extent of the problem. There are many sources for information that can be used during this phase of business analysis including observation, interview, questionnaires, data collection and group brainstorming sessions. Identify as many potential causes of the problem as you can. Then, use thorough investigation to confirm or eliminate specific causes. if you find that you cannot identify causes for the problem, the problem definition may not be clear enough. If so, go back to step one and revise your problem statement. Once you are comfortable that you have identified the actual cause, or causes, of the problem, begin the search for ways to either eliminate or reduce the problem. There is no one way to find solutions. Developing ideas for potential solutions can be based upon previous experience, interviews, research, and looking for similar or parallel problems/solutions elsewhere. Use whatever imagination and ingenuity you can muster to identify potential solutions. In some cases, use of group sessions is an excellent way to quickly derive lists of potential solutions. These can be as simple as brainstorming sessions where multiple ideas are gathered quickly and without critique or analysis, or more formalized approaches that utilize trained facilitators Peter DiSantis Consulting Associates, PLLC Page 1

6 Process Improvement Guidelines Step 3 Analyze Alternatives As soon as the group of potential solutions has been identified, the next step is to begin the evaluation of each alternative. The first activity is to determine how you will evaluate the alternatives. List those factors that will differentiate a good solution from a bad solution. Some potential evaluation factors include: Business Requirements does the solution fulfill the stated requirements? Effectiveness - how well will it solve the problem? Customer Satisfaction will the customer (internal or external) be satisfied? Quality will the results meet or exceed expectations? Time how long will it take to implement and to receive fun benefits? Acceptability will the solution be accepted or will compliance be an issue? Organizational Scope is the solution within the control of the sponsoring group? In many cases, an evaluation matrix can be a valuable tool to present the results of the alternatives evaluation process. In the example below, the columns were completed using descriptive phrases and the factors were weighted to give greater value to those areas that have the greatest impact on the business. Weight Alternative 1 Alternative 2 Alternative 3 Etc. Factor 1 High Very thorough Limited Thorough Factor 2 Medium Strong Strong Weak Factor 3 Medium 70% requirements met Meets all requirements Meets all requirements Factor 4 Low Not Available Yes Yes Etc Peter DiSantis Consulting Associates, PLLC Page 2

7 Process Improvement Guidelines The matrix can also be completed using numerical weights and rating scores. For example: Weight Alternative 1 Alternative 2 Alternative 3 Etc. 0-5 scale 0-10 scale 0-10 scale 0-10 scale Factor Factor Factor Factor TOTAL The evaluation of each alternative should be objective. Do not become pre-sold on any solution prematurely. Try to view each alternative solution from both sides - why would this alternative be great? What might make this solution fail? Use the experience and advice of other knowledgeable resources wherever practical. As additional information is gathered and a fuller understanding of the alternatives emerges, continue to develop a clear picture of the alternatives. Each alternative should be clearly described so that they can be more easily understood and reviewed by others. Based upon the evaluation criteria established, select two or three primary alternatives. It is best not to limit yourself to a single alternative at this point because you may not know enough yet to make a definitive selection. It is advisable to have at least one alternate (and acceptable) solution in case you uncover an insurmountable problem with the first-choice alternative. Including too many alternatives, however, will expand the work required to complete the rest of the analysis Peter DiSantis Consulting Associates, PLLC Page 3

8 Process Improvement Guidelines Step 4 Design Solution Using the primary alternatives developed in the Analyze Alternatives step, it is time to drive the solution to an additional level of detail. During this step, a clear and detailed description of the proposed environment is prepared. It should include business functions, process flows, and organizational roles and responsibilities, requisite staffing levels, automated system requirements, equipment configurations, facilities requirements and any other significant component of the overall solution. Selection and recommendation of the best alternative Will be dependent upon the information that is gathered up to this point. That selection is based primarily on four factors: financial performance, competitive impacts, alignment with business directions and risk. Of the four criteria, financial performance is normally given the highest relative weight. in order to properly document the financial considerations, three major questions must be thoroughly answered: What are the one-time costs required to implement the solution? Once implemented, what will it take to support the solution on an ongoing basis? What financial benefits will accrue once implementation takes place? Chapter Two, Preparing 7he Project Proposal, provides more specific guidelines on how to estimate costs and benefits, as well as providing a helpful checklist to ensure cost or benefit dollars are not overlooked. Use appropriate resources or experts to help you gather the cost and benefits information you don t need to do all the groundwork yourself. You must also develop a high-level plan for implementing the solution. The detailed implementation project plan is beyond the scope of the business analysis process and is usually assigned to the implementation manager to prepare. But, a high-level plan is necessary to provide the timing information needed to complete the financial analysis, i.e. When will the equipment need to be purchased? How soon will the expected benefits begin to accrue? How soon will full benefits be achieved? As you develop the high-level project plan, look for logical ways of breaking the work into manageable pieces. Whenever feasible, find ways to implement those pieces of the overall solution that provide the largest benefit first For large projects, you should include multiple management progress and funding reviews in your plan. In addition to developing the financial analysis of the proposed solutions, you will be expected to assess the primary alternatives according to the other factors identified above. More detail on these factors is included on the next page and in Chapter Two Peter DiSantis Consulting Associates, PLLC Page 4

9 Process Improvement Guidelines Step 5 Develop Recommendations Once the best solution has been developed, it needs to be packaged into an appropriate project proposal to submit for management approval- Since there are so many different types of projects at The organization, the Company has adopted no specific formats for project proposals. There are, however, common topics that will help define the problem, the solution, expected impacts and alternative solutions. This information should be provided in every proposal. Chapter Two, Preparing The Project Proposal, describes each topic, or section, in more detail. The level of management approval required will vary with the size and scope of the proposed project. An overview of the funding process for large projects (those over $100,000) is included in Chapter Three, The Project Review and Approval Process. Smaller projects will follow somewhat different procedures check with your manager. Management uses many factors and decision criteria to approve projects and to allocate funds between competing projects. For those projects that require Executive Steering Committee review and approval, four primary factors are used: 1) Economic Cost/Benefit - the expected impact of the project on corporate financial performance. This includes net present value, return on investment and payback period. 2) Competitive Advantage - the impact that the project has in either gaining a competitive advantage or in eliminating or reducing a competitive disadvantage. 3) Business Alignment - including: Strategic Match - the degree to which the project objectives support the stated strategic directions for the Company or business unit. Management Information Support - the ability of the project to contribute meaningful data or information that can be used to more effectively monitor performance and manage Company activities. Technical Compliance - an assessment of how closely the proposed hardware, software and networks match the future technical plans established for The organization. 4) Project Risk - an assessment of both business and technical risks faced by the project. This is an indication of the potential that the project will be unsuccessful in achieving full stated benefits or in meeting established budgets. Conduct a thorough review before finalizing the proposal, it is a good idea to have a draft of the proposal reviewed by experienced analysts or managers. Have someone play a devil s advocate role by anticipating the tough questions, and developing specific answers to those questions, the quality and credibility of the proposal is increased significantly Peter DiSantis Consulting Associates, PLLC Page 5

10 Process Improvement Guidelines Prior to seeking management approval, make sure that you have a strong commitment from the people responsible for implementing the project and from those accountable for realizing the stated benefits. For major responsibilities, make sure that you know who will be accountable. Do they know what they are being asked to do? Have they agreed to do it? As benefits are derived and estimated, ask yourself in which account and in what department will this dollar benefit show up? Get that department to sign up to deliver those dollars. Defining how actual benefits will be measured should be included as part of the process of obtaining commitment. Remember that not all good projects get approved and funded. The organization has a limited amount of resources that can be invested in any given period. During that time, management is continually making choices between multiple investment opportunities. Providing clear and accurate estimates of a project s full impact is the analyst s responsibility; selecting between competing projects is management s role. The better the analysis performed, the easier it will be for management to select the best of the available opportunities Peter DiSantis Consulting Associates, PLLC Page 6

11 Process Improvement Guidelines Step 6 Implement Project After the proposed solution has been approved, it must be implemented. In many cases the detailed development of the full solution ( i.e., writing detailed procedures, coding computer programs, and designing forms) occurs after management has approved funding for that solution. Responsibility for the detail design may shift away from the original analyst and be assigned to a project team with more specific technical or development expertise. The activities included in implementation development closely parallel those in Step 4 - Design Solution only in more detail. Large project implementation usually will be handled by a project manager and a project team. The project manager s role is to direct the development and implementation of the approved solution. The role of the business analyst is to provide as much guidance and clear direction to simplify the project management process. Factors identified at an earlier step may need attention and follow-up. For example: Project scope must be controlled to avoid runaway project costs. Issues need to be tracked to keep them from impacting the project schedule. Risks need to be managed to prevent unwanted surprises. During the development phase it is very important to remain on target. Project costs. benefits and schedules are commitments to management that should be treated accordingly. Delays in the project schedule don t come free usually, they are accompanied by increased project implementation costs and the loss of benefit dollars. If problems are encountered, they should be communicated to the appropriate level of management attention for prompt resolution. During implementation, business sponsors and managers must pay close attention to the progress of the implementation efforts and must be ready to assist in keeping the project on track towards achieving the full stated benefits Peter DiSantis Consulting Associates, PLLC Page 7

12 Process Improvement Guidelines Step 7 Measure Performance The focus of performance measurement can be linked directly back to the approved project proposal. In order to prepare for project funding, estimates for each identified cost and benefit are developed and included in the proposal. But, estimates are just that once implementation has occurred, it is important to assess the results. There are two major reasons for this measurement: To provide a clear picture of accomplishments, including actual project costs, realized benefits and the impact on ongoing expenses. To capitalize on the experience gained through the process. By understanding where estimates were off the mark, The organization is in a better position to improve the accuracy of future estimates. Measurement of actual results may be handled by another individual or another team. The role of the business analyst is to be sure that as much of the definition as possible has occurred up front, so that meaningful performance data can be collected from the very start of the new environment s operation. Also, performance measurement is critical for developing a continuous improvement mentality. It has been demonstrated that what you measure improves. Without measurement and evaluation, the Company has no objective way of knowing if the solution was a success, to what extent it was a success, and whether or not it introduced new problems that need to be resolved. If new problems are created... if a new bottleneck shows up... or if an older problem now has higher visibility and attention, the process starts over. Loop back to Define Problem and move through the business analysis process again Peter DiSantis Consulting Associates, PLLC Page 8

13 Process Improvement Guidelines Process Improvement Summary >>>> START... Step 1 - Define Problem Develop clear problem statement Gather information on the current environment Step 2 - Research Causes Identify as many potential causes as possible; investigate them Determine the actual cause(s) Generate potential solutions Step 3 - Analyze Alternatives Define evaluation factors Evaluate the alternatives Select two or three primary alternatives Step 4 - Design Solution Develop a clear and detailed description of the proposed environment Conduct financial analysis Assess competitive impacts, alignment with business direction, and risk Prepare a high level plan for implementation Step 5 - Develop Recommendation Prepare project proposal Conduct thorough review Secure commitments from key individuals Step 6 - Implement Project Detailed design and development of full solution Manage scope, issues, schedules, and risks Step 7 - Measure Performance Collect meaningful performance data Compare to approved project proposal LOOP BACK TO START >>>>>>> 2009 Peter DiSantis Consulting Associates, PLLC Page 9

14 Project Proposal Template Section 1 Background And Problem Statement Providing background information will help establish the overall context for the current problem and the proposed solution. It can contain a chronology of events or a description of the overall business process whatever is necessary to set the stage for the problem statement. The problem statement then creates the compelling reason to move forward. What is the real problem facing the organization and why should action be taken now? When defining the background and problem statement, it is important to focus on clearly describing the problem and not jumping to potential solutions prematurely. The Business Analysis Process chapter provides advice on how to prepare a good problem statement one that clearly describes the problem and expected results. Define the project scope clearly. Avoid bundling multiple disparate business issues into one large, unwieldy project. Unrelated problems should be viewed separately. However, when business problems and appropriate solutions are clearly tied to each other, combining the solutions into one project can be cost effective. Relevant Questions to Ask: What is the primary reason for this project? What do you hope to achieve by solving the problem? Why is it important to do something now? What will happen if the current environment doesn t change? Is the identified problem really a symptom of a larger problem? Can the problem be broken down into more manageable issues? What is the overall cost or contribution of the function or group involved? Should the function be performed? What sequence of events led up to the current situation? Potential Analysis Activities and Deliverables: Interview business unit managers, customers, and/or key staff and summarize the results. Gather data to validate the problem statement. Compare current experience with historical trends to determine if the problem is growing or shrinking Peter DiSantis Consulting Associates, PLLC Page 10

15 Section 2 Current Environment This section should provide a brief overview of how the business function is performed today. This would include relevant processes and organizational responsibilities, as well as any existing automation, equipment or facilities. Wherever possible, objective performance measurement criteria should be used to describe the overall effectiveness of the current environment. Answers to the five Ws should be provided: What is being done? Where does it happen? When does it occur?-w-ho is responsible for making it happen? Why is it done? Relevant Questions to Ask: Why does it have to be done? What would happen if it wasn t done? What is the product or service in question? Who is the service provider? Who is the customer? What are the customer requirements? How do you know? Have customer requirements changed? Why? What steps in the current process add value? Are there processes that don t? How many times is the process handed off to someone else? Does the process cross department boundaries? Which ones? Why? What other groups within the organization perform the same, or similar, functions? Are there regulations concerning the activity in question? Are there existing policies that cover the process? What are the causes of the defined problem? What obstacles must be overcome to eliminate the problem? What is working properly and shouldn t be changed? How is performance of the function currently measured? What are the results? 2009 Peter DiSantis Consulting Associates, PLLC Page 11

16 Potential Analysis Activities and Deliverables: Interview current process participants and document the current or as-is environment using process flow charts. Describe organizational roles and responsibilities using organization charts and/or responsibility matrices. Gather detailed information about the current environment (transaction counts, staff count, location volumes, operating statistics, etc.). If possible, collect two years of data to provide meaningful trends information. This information can be presented as reports, charts, graphs or spreadsheets. Collect any existing performance measurement data and look for alternate ways the current environment might be measured Peter DiSantis Consulting Associates, PLLC Page 12

17 Section 3 Proposed Environment A description of the proposed environment is necessary to develop a clear understanding of the proposed solution. Project sponsor and team members must be able to know where they are headed and what it will look like when they get there. This should be a clear description of the desired state that would eliminate the problem in question... What will it look like? What impact will there be on organizational responsibilities, business processes, automated systems and/or the physical environment? The description of the proposed environment must take clear shape. It is important for everyone involved to know clearly what is included in the picture and what has been specifically excluded from the scope of the final solution. Relevant Questions to Ask: What would the proposed environment look like? What are the fundamental differences between old and new? What wouldn t change? How do you know that the new environment will be better? Has this solution, or one closely like it, been tried before? With what results? What are the critical success factors associated with achieving the new environment? How have other companies or competitors solved this problem? What. is different about The organization s approach? Are all of the different components of the problem and solution directly related? If you have eliminated a process bottleneck, where is the next bottleneck most likely to occur? Potential Analysis Activities and Deliverables: Develop and document new process flows using process flow charts and validate the new flows using known transactions or functions. Define data requirements and usage using data models and data flows. Describe any changes to organizational roles and responsibilities. Include organization charts, staffing summaries, organizational responsibility definitions, or function matrices as appropriate. Prepare new facility layouts, equipment specifications or network configurations Peter DiSantis Consulting Associates, PLLC Page 13

18 Section 4 Implementation Scope After the appropriate overall solution has been determined, review alternative ways to sequence the implementation to maximum benefits early in the process. Are there ways of sizing the project effort to follow the 80/20 rule, aiming for 80% of the benefits with only a portion of the effort? Phasing the project can accomplish two benefits: 1) benefit streams from early phased implementations can help fund subsequent phases, and 2) the commitment of investment in areas where returns may be marginal can be deferred until more detail is known of actual costs and actual benefits. There are tradeoffs; phased implementation can achieve a quicker benefit stream, but may introduce additional costs associated with repetitive project tasks in subsequent phases. For example, if the same computer program is changed twice it needs to be tested twice. Scope analysis tries to balance the benefits of a phased approach with the economies of scale that might be possible with a single implementation. Relevant Questions to Ask: Are there separate components of the solution? is there a way to phase them in? How can I get the most benefit immediately? Is there a way to make the project self-funding after a point in time where ongoing net benefits will fund the required additional investments in later phases? If only one piece was to be included, which would it be? If one had to go, which would it be? Why? Is there any required sequence of acquisition, development or implementation? Are there pieces that must be built upon other pieces? Are there any required combinations of features or work processes that must be implemented together? Would there be redundant effort if the project was split into multiple phases? Potential Analysis Activities and Deliverables: Analyze benefits by location, by business function, by customer group, etc. and rank the features from most important to least important. Evaluate the percentage distribution of volumes by location, function, or group, etc. Determine the feasibility or benefit of geographical phasing. Develop phased implementation plans - by feature or by location Peter DiSantis Consulting Associates, PLLC Page 14

19 Section 5 Estimated Costs There are two primary categories of cost that need to be estimated for every project: 1) the one-time costs required to develop and implement the recommended solution and 2) the recurring expenses associated with ongoing operation of the proposed environment. While the cost estimates for a project will always begin with very rough numbers, it is important to get the numbers researched, refined and validated quickly. Ongoing analysis efforts will refine the estimates, but it is important to be as accurate as possible, as early as possible, since under estimating project cost could lead to projects with poor, or negative, return on investment. Use actual cost data whenever possible. Gather historical information related to previous expenses. For new or additional acquisitions or services, get estimates and quotes in writing and have the estimates based upon written specifications or assumptions. Cost estimates that are very preliminary or subject to wide fluctuation should be identified. Cost estimates should include peripheral expenses associated with the design, development, implementation, and operation of the proposed environment. A Est of potential cost items is included at the end of this section. The organization staffing costs associated with the development, implementation and ongoing operation of the solution should be identified. When utilizing Systems Development department resources, all hours are charged at the current billable rate. Business unit staff costs for development and implementation should be included if incremental labor expense is anticipated examples would include back filling behind an individual assigned to the project team or use of incremental overtime to accomplish project tasks or required training. All incremental business unit staffing costs should be included in the estimate of ongoing operational costs. Business unit labor expenses should include the wages and benefits using standard rates supplied by Human Resources. Relevant Questions to Ask: What could cause the expected cost to go up? or down? Are there ways to limit cost increases in the future? Is there a historical record of price performance for the given cost component? Was inflation factored in? Where did the price estimate come from? Is the estimate reasonable? Are there contracts or purchase agreements in place? Was the price obtained in a competitive bid situation? What criteria were used to select the vendor? Was the vendor with lowest overall cost selected? If not, why not? Are there other contracts in place that can be leveraged for this project? Are there alternative vendors or sources that might be less expensive in total? Have all costs been included, including down stream or indirect costs? 2009 Peter DiSantis Consulting Associates, PLLC Page 15

20 Potential Analysis Activities and Deliverables: Review the expense budget for the business unit for each account number, determine if impacts are likely and estimate the dollar amount of that impact. Determine which business volumes drive ongoing expense and develop an operating cost model for the proposed environment. Use Request for Information (RFI), Quote (RFQ), or Proposal (RFP) processes to obtain vendor price information. Document the comparative evaluation using evaluation matrices. Always follow competitive bid processes to ensure The organization receives the most favorable terms possible. Potential Cost Items: The following list identifies many categories of cost that should be considered. It is not meant to be allinclusive, but to serve as a did you consider checklist when completing cost estimates. One time project costs and ongoing operating costs should be identified separately. The project sponsor is responsible to be sure that all related costs have been identified and estimated. Cost estimates should be provided by knowledgeable experts whenever possible. Labor Expense Development staff - use billing rate and estimated number of hours Business project staff - use payroll cost plus benefits and number FTE Division staff - use payroll cost plus benefits and number FTE Other corporate staff - use payroll cost plus benefits and number FTE Required Equipment Systems hardware and/or software Furniture, tooling and other equipment Installation costs Packaging, handling, freight, duties and/or taxes Maintenance agreement fees - include any warranty considerations Operating expenses - utilities, preventative maintenance, etc. New use of existing computing resources (i.e., CPU, DASD), if significant 2009 Peter DiSantis Consulting Associates, PLLC Page 16

21 Professional Fees Consulting expense Contracted or professional services expense Facilities Construction or remodeling costs Facilities acquisitions Department relocations Inventory Incremental inventory requirements Spare parts or supplies Inventory disposal costs Communications New voice or data line installations Line charges and other operating expenses Other Expenses Travel expense Education - project team Training - operating staff Forms and supplies - include the cost of obsolescing old forms Telephone expense Advertising or marketing costs Other miscellaneous costs 2009 Peter DiSantis Consulting Associates, PLLC Page 17

22 Section 6 Expected Benefits There are four categories of benefit related to the implementation of a new project: direct cost savings, indirect or deferred cost savings, revenue enhancements and non-quantifiable benefits. Each category of benefit is evaluated a little differently to better assess its potential financial impact on the Company. Some benefits are discounted because there are many factors that could both diminish the project benefit and are outside the control of either the project team or the sponsoring business unit. When estimating benefits, it is important to be thorough in all steps of the analysis. Many analysts stop collecting benefit information once they think that they have enough benefit dollars to justify the project investment. But, if subsequent project review and analysis eliminates a large portion of estimated benefit, they will have to start quantifying benefits over again, potentially losing valuable time. It is important to note that not all Projects have quantifiable benefits - some projects are simply required to support the needs of the business. In these cases, the emphasis is not on calculating benefits, but on finding the lowest total cost solution that meets the business requirements. Direct Cost Savings Any expense reductions that can be obtained directly and would go straight to the bottom line should be taken at 100% of their value if they can be validated. This validation should include an analysis of relevant business transaction volumes and clearly identified improvements in productivity or decreases in cost per unit. Benefit numbers can be increased in subsequent years if there has been verifiable historical growth and growth assumptions have not changed and there is a clear correlation between actual business volume growth and the affected expense category. Increased shipment growth of 20% does not drive all expenses up at the same 20% rate! it is imperative that the project sponsor develops a plan to achieve the benefit and commit to the savings. Projected expense reductions should be reflected in operating budgets. This is especially critical when the actual budget for those expenses is not within the project sponsor s control. Staff reduction commitments should identify names and positions of those jobs to be eliminated and be communicated confidentially by the project sponsor to the responsible senior executive. Documentation of expense or staffing reduction commitments helps ensure that a detailed analysis of the impact of the project has been completed and that the project sponsor is committed to achieve the stated benefits. Actual implementation of the reductions can take a different form, as long as the same or greater total benefit is achieved. Indirect or Deferred Cost Savings Increased productivity or elimination of required work steps will not always cause a direct reduction in labor expense. Most frequently, the time saved is expected to yield an indirect or deferred benefit. For example, fewer staff additions may be required in the future due to the increased capacity of the staff Peter DiSantis Consulting Associates, PLLC Page 18

23 Many times, however, the small amounts of time saved per day are too granular to collect it will be absorbed with minimal, if any, economic benefit to the Company. As a result, savings of less than ten minutes per day per person are not considered meaningful and cannot be used as a labor savings benefit. When the savings are greater than ten minutes per person per day, but no staff reductions are planned, the project benefits will not occur until some future period. Unless the economic value of additional work performed can be assessed, the only benefit will be deferred staff growth. The benefits associated with deferred staff growth should be discounted by 50% to reflect the uncertainty in actually collecting the benefit. The estimate should factor in staff growth rates, wage and benefit rates, transaction volumes and transaction specific productivity improvements. Growth assumptions (i.e., staff growth, transaction volumes) should be based on verifiable historical trends and should be specific to the area of benefit being considered. If a significant reduction in mainframe computer usage is expected, contact the Information and Technology Services representative for assistance in calculating and validating the financial benefits associated with any deferral of mainframe capacity upgrades. Revenue Enhancements There is a three-step process used to estimate the potential impact of additional revenue. The process yields a benefit number that reflects the uncertainty of obtaining revenue and the costs associated with servicing that business. Step 1. Revenue estimates must be based upon documented demand for a product or service. Specific customer examples are important. If customers are expected to shift from an existing product or service to a new one, the revenue loss on the existing product must be estimated. Step 2. Gross revenue estimates need to be discounted to reflect the uncertainty of obtaining the specific business identified in Step 1. The amount of the discount should be appropriate based upon the level of detail gathered when making the revenue estimate. Step 3. Gross revenue must be burdened by the full-expected cost of servicing the customer. If there is a track record of actual net profit from the service (after all support costs have been allocated), that net profit percentage should be applied to the discounted revenue projection in Step 2. Assumptions related to available capacity (i.e., mainframe computer or ABX aircraft lift) must be validated by the provider of that capacity. Potential Benefit Items The project sponsor should ensure that all potential benefits are identified to properly reflect the full value of the anticipated project. The following fist of potential benefit areas is provided to assist in capturing all of the project s quantifiable dollar benefits Peter DiSantis Consulting Associates, PLLC Page 19

24 Direct Cost Savings Actual work force reduction - state FTE* number and dollar value Actual overtime reductions Contract labor eliminated Direct reduction in operating expenses Capital avoidance - if the capital cost is certain or in an approved budget Indirect Cost Savings Deferred staffing increases Overtime labor increases avoided Deferred reductions in operating expense categories Capital avoidance - if clearly anticipated, but not certain Revenue Enhancement New services sold to new and/or existing customers Existing services sold to new customers Increased volumes (at current margins) from current customers Increased revenues on existing services from current customers **Note - Full Time Equivalent (FTE) is a better measure of benefit than head count since head count can include a mix of full-time, part-time and/or casual employees. Non-quantifiable Benefits What is a non-quantifiable benefit? In many cases the benefits of implementation are either non-financial or are so difficult to isolate and measure that it is best to describe them subjectively. These benefits should be documented. but not included in the financial analysis Categories of non-quantifiable benefits may include customer service, quality, regulatory compliance, or labor relations. For example, the new process will eliminate a call back to the customer, improving customer service Peter DiSantis Consulting Associates, PLLC Page 20

25 Many analysts make the mistake of ignoring non-quantifiable benefits and do not include them in project funding requests. While they will not be part of the financial analysis, they help provide a more thorough picture of the overall solution and should be accurately described in the project proposal. Measuring Benefits For each benefit presented, there must be an established way to objectively measure the attainment of that benefit. For expense reductions, clearly identify which budget account will be reduced and by how much. Staffing reductions or deferred hiring should be just as specific identify expected FTE levels within each department. A benefit that can t be measured stands a very high risk of not being collected! Criteria for measuring total project benefits should be documented and agreed to before completing the cost-benefit analysis. This lays the groundwork for a straightforward post-implementation project review Peter DiSantis Consulting Associates, PLLC Page 21

26 Section 7 Financial Analysis Financial analysis can become complicated very quickly as multiple economic and regulatory variables are added into the equation. The goal of these guidelines is not to develop every analyst or manager into a CPA but to provide a working knowledge of some of the basics of financial analysis. The organization s standard financial analysis model provides a simple tool to conduct that basic analysis. When projects become very complex financially, or have significant economic consequences, contact either the Corporate Treasury Group in Seattle or the manager of Planning in Wilmington (ABX only) for assistance in accurately assessing financial impacts. Standardized Financial Analysis Model Using standard financial analysis allows The organization management to compare different projects on consistent terms. This analysis is required for all projects with project costs in excess of $100,000. This financial analysis provides five key measurements: Annual Net Benefit: The amount of total benefits received, less the costs incurred to receive those benefits. This is the expected cash flow, year by year. It is not discounted to reflect the present value of those dollars. Accumulated Net Benefit: This figure is the simple sum of the Annual Net Benefit amounts for each year in the established life span of the project. Net Present Value: Each future Annual Net Benefit amount has a lower current value that reflects a discount rate. The discount rate is set by the Corporate Treasury Group and is the same for all projects. The Net Present Value is the sum of the present values for each of the Annual Net Benefit amounts. Internal Rate of Return: This is the discount rate that equates the present value of the expected benefits (cash inflows) to the present value of the project s expected costs (cash outflows). Payback Period. This calculates the period of time it will take to fully recover the original project investment from net cash flows. Net cash flows are not discounted. The standard cost benefit model uses five elapsed years starting with the date of Project funding approval. Year I of the analysis starts at that point in time and ends twelve months later. Therefore, a project with a ninemonth implementation phase typically would have only three months of benefit in Year I and twelve months of benefit starting in Year 2. If, however, there is a significant business reason that the project benefits would accrue over a longer (or shorter) time period, use the more appropriate time period. Be prepared to justify the use of that time frame. Remember that not all projects will have quantifiable benefits or an internal rate of return; they are undertaken to meet the needs of the business. When these projects are studied, the emphasis of the financial analysis is on determining the lowest total cost solution Peter DiSantis Consulting Associates, PLLC Page 22

27 All analysis should be performed assuming that significant capital expenditures are purchased instead of leased. The method of financing a particular project (lease vs. purchase or different sources of funds) should not be considered in the standard cost/benefit model. Unique Situations For projects that require capital investments greater than $250,000, the Corporate Treasury Group should be contacted to determine if an after tax cash flow analysis is required. This analysis will take appropriate depreciation rules, tax credits, and corporate tax rates into consideration. Systems development projects that are estimated to require over 10,000-development hours may be able to capitalize their internal development costs. The option of capitalizing these expenses should be reviewed with The organization s chief financial officer. Financing alternatives and determining sources of funds are the responsibility of senior financial management (the treasurer and chief financial officer). If a project includes significant leasing and purchase options, the Corporate Treasury Group should be contacted to perform a formal lease vs. buy analysis Peter DiSantis Consulting Associates, PLLC Page 23

28 Section 8 Competitive Impact Frequently, projects are undertaken to improve the Company s competitive position in the market. To properly assess the competitive impact of a project, the sponsor needs to know The organization s current offering, have a good idea of what the competitors offer, and understand what the customers want (and are willing to pay for). It is important to note that not all projects will have competitive impacts if there are none, simply state that fact. Relevant Questions to Ask: What are the competitors currently offering in this area? What are they planning to offer? How do they differ from The organization s products and services? What have customers specifically requested? Is The organization losing business today? How much annual revenue? How many shipments? How do you know? Is the existing business profitable? How do you know? What new customer requirements can be addressed? What other product or service alternatives are available in the market? How big is the market for this service? Is it growing? Will it continue to grow? How do you know? Who controls what portion of the market? Is this an effort to gain competitive advantage or to close a competitive disadvantage? How long would it last? Potential Analysis Activities and Deliverables: Conduct customer surveys and market segment analysis. Gather competitive intelligence through interviews, independent analyst reports or other expert opinions. Review any industry research or published articles for relevant information Peter DiSantis Consulting Associates, PLLC Page 24

29 Section 9 Business Alignment Business alignment is assessed by comparing project direction and objectives with stated business directions in three different areas: linkage with strategic business plans, support of management information requirements and compliance with stated technical directions. Finding specific documentation regarding current business directions may not be. easy. Frequently directional statements are imbedded within other documents, i.e. mission statements, organizational objectives or technical architecture definitions. The strategic plans for the sponsoring business unit should be compared to the project goals. Strategic alignment is an assessment of how closely the project objectives match, or provide support for, stated strategic directions for both the company and the affected business unit(s). Not all projects need to be directly linked to strategic goals. There are times when making shorter-term tactical moves to deliver immediate benefits will outweigh the advantages of a longer-term fit with the strategic plan. Assessing support of management information requirements is done by evaluating the key operational performance data and/or any management reports provided by the proposed solution. Will there be any significant increase in information availability, or accessibility, that will help The organization managers tune the performance of the operation? In what ways win that data enable managers to make more informed business decisions? Technical compliance is a comparison of the proposed hardware, software and communications technologies with the guidelines established in The organization s Technical Architecture Principles. This evaluation should be completed by the appropriate information systems representative, and then reviewed by the project sponsor. Relevant Questions to Ask: Is there a strategic plan for the sponsoring unit? Are there aspects of the strategic plan that require what the project is planned to deliver? Where does the project fully support the plan? Where does it differ from the plan? Are there pressing conditions that take precedence over the strategic plan? What information is used today to manage the business function? What additional information would be available? What is the potential impact of this information? Are the technical components of the proposed solution consistent with The organization s Technical Architecture? What is the business rationale for any divergence? Potential Analysis Activities and Deliverables: Conduct management interviews and technical architecture component reviews Peter DiSantis Consulting Associates, PLLC Page 25