FOUNDATIONS ON COST AND BENEFITS OF BPR / IT PROJECTS

Transcription

1 FOUNDATIONS ON COST AND BENEFITS OF BPR / IT PROJECTS Introduction How to estimate project / system benefits How to estimate project costs Assignment

2 Introduction What is cost / benefit analysis When cost / benefit analysis applies What are benefits 2

3 What is cost / benefit analysis Project cost Total balance Annual balance Benefits Costs From a business view point a project is an investment Therefore, its profitability has to be estimated A typical equation for project profitability is R = PC ) where R is the total balance of the project PC is the total cost of the project B are the annual benefits of the solution C are the annual costs of the solution n is the estimated duration of the solution, typically 3 to 5 years 3

4 What is cost / benefit analysis : investment assessment equations For management profitability is a project KPI to be estimated e.g. ROI (Return On Investment): How profitable is the investment? ROI = Profit / Investment * 100 = ) / PC * 100 PP (Payback Period): How many years are needed to pay the investment? PP = PC/ ( ) /n) DCF (Discounted Cash Flow): What is the actual value of the future flow of money of a project? It applies an interest rate «r» that decreases the actual value of money over time DCF = PC ) / 1 Some companies reject projects with a ROI lower than 20-30%; however, other companies accept projects with an even balance, since they consider IT and BPR as a discretionary operational expense (OPEX) rather than an investment (CAPEX) 4

5 When cost / benefit analysis applies Strategic projects Innovative projects Large Projects Minor Projects Example Lombardy SISS (Healthcare & Welfare Information System) CRM in a Media company Mobility by smart phone Clouding HR self service management in a Multinational Company Technology change in an existing CRM system Cost analysis Benefit analysis Yes Yes Yes Yes Yes Yes Yes Risk analysis Yes Yes Cost benefit is used to assess Strategic and innovative projects Large projects (often also strategic) Other projects are assessed only on costs and risks 5

6 What are benefits? Management value Social value Tangible Cost saving Sales increase Tangible Social saving Higher value Intangible Image/Brand QoS/ KPI Risk reduction Governance Intangible QoS/ KPI Risk reduction 6

7 Benefits taxonomy Class Subclass Element Example Logic Management value Tangible Cost saving (change in usage of the company s resources) Saving on HW Saving in HR Saving in materials Saving in space Net measurable change in resources ( Emerging cost- Ceasing cost) Sales increase Support to a new product / service New sales EBIT Intangible Image / brand 24 hr Customer Care Survey on users Qos /KPI Shorter fulfillment Measurable change in KPIs Governance Consolidated report Error variance ; Time Risk reduction Credit evaluation Risk change Social value Tangible Social saving Web based healthcare Time saved by users & operators Higher value Multichannel info service Survey on users Intangible QoS/ KPI Shorter customer order fulfillment Measurable change in KPIs Other Data privacy Ad hoc 7

8 Cost benefit analysis and business case Cost benefit analysis is a classic concept born with management theory to address the «mini-max issue» minimize costs and maximize benefits (Cleland and King 1968) Nowadays a roughly equivalent concept is «business case» that is equivalent to «feasibility» A business case is an assessment of an IT related initiative that includes (according to Wiki) A business case captures the reasoning for initiating a project or task. It is often presented in a well-structured written document, but may also sometimes come in the form of a short verbal argument or presentation. The logic of the business case is that, whenever resources such as money or effort are consumed, they should be in support of a specific business need. An example could be that a software upgrade might improve system performance, but the "business case" is that better performance would improve customer satisfaction, require less task processing time, or reduce system maintenance costs. A compelling business case adequately captures both the quantifiable and unquantifiable characteristics of a proposed project. 8

9 How to estimate projects How to estimate project / system benefits How to estimate project costs

10 Total balance Project cost Annual balance Project management Software project BPR Hardware Benefits Costs Analysis (modelling) Analysis Mobile Management value Social value Network services Development Education/ training/ change LAN/ Clients Tangible Intangible Tangible Operations staff System Test Miscellanous Servers Cost saving Intangible Energy User Test Miscellaneous Sales Increase Maint Hw / Sw platforms Software platform Cloud services Maint SW application Miscellaneous Maint BPR Fields filled in yellow are detailed in the subsequente pages Miscellaneous

11 Project management It includes the effort of the project manager and project office Cost is typically 10% of the total cost of the development It is raised by the risk R; in our exercise: PM-cost = 0,1D + R Where D : cost of development + analysis (effort in man days ) R = Risk net score = (Risk score - 50) / 50 *100 E.G. a project with an effort 1K man days With a risk score of 70 points in our model shall have a PM cost = 1.000*0,1+ 50%= 150 man-days With a risk score of 100 points in our model shall have a PM cost = 1.000*0,1+ 100%= 200 man-days 11

12 Analysis Analysis models the system Information (SIRE/ ER + DFM) Interface (GOA + Mockup ) Flow and transactions (Flow and Use Cases) Deployment architecture Statistically the effort for the analysis is about % of the development cost Analysis is hard estimate in advance: in our exercise we allocate 20 days to each BPMN lane in a CRASO business process 12

13 Development It includes (custom software development) Implementation architecture Detailed analysis of an use case or function (State Chart, Class Diagram) Coding Documentation Unit Test Integration Review Estimation methods are mainly based on Function Points, where the effort depends on the functions (elementary action e.g. print, display) that are elicited from a use case ( In our exercise we assume 5 man days for each function 13

14 Test & User Test Systems Test In our exercise we assume that a system test is 20% of the effort of Development The value may grow because of risk User Test It includes definition of the test case and context, expected results, documentation It cannot last less than one month in total for a significant system We assume that each use case (= 1 elementary activity equals N use cases) requires at least 2 man days 14

15 Software platform It includes: Application platform purchased or installed for the application system to be run e.g. Siebel Middleware platforms : DBMS, EAI, etc. Cost includes the incremental license cost: It may be 100% if the platform is purchased specifically It is only a % if the license has to be extended (i.e. nominal users added to an existing DBMS) Costs typically include One time license price (that is included in project cost) that can be computed as Absolute cost Cost per user or alike variable Absolute cost + cost per user Annual support fee that entitles the customer to receive assistance and support and normally account about 20 % to 10% (that is included in operational cost) In cloud SaaS / PaaS costs are service costs (i.e. annual fees) In our exercise we assume that No license is needed 15

16 Miscellaneous Miscellaneous costs include contingency costs and other costs we have not specified Generally contingency is estimated about 20% of the other costs 16

17 BPR Analysis It includes Organizational performance analysis : KPI, Benchmarking etc Driver analysis It is generally estimated ad hoc (how much can we afford) e.g. 3 days for each organization unit In our exercise we assume 100 days Education / change It includes The out of pocket cost of training and education (effort + premises and rents) Costs of promotion, HR development, re-trainingand and alike It does not include the opportunity cost of trained people In our exercise we consider onnly education i.e. 1 day education for each class of 20 MD = 1.500/ 20 = 75 days + 20 days preparation = 100 days 17

18 Hardware It includes the full range of hardware purchased or expanded for the project Mobile / Tablets Laptop/ Desktop Server Other equipment (router etc.) 18

19 Tangible benefits Tangible benefits can be measured by money Tangible benefits include Savings Decrease of resources saved in execution thanks to better efficiency and productivity Savings are typical (not excusive however) to the automation of existing activities with limited innovation In our case are mostly time saved (no more wast of time) See the example Increased sales Increase of income thanks to the opportunity enabled by the project Savings are typical (not exclusive however) to the automation of existing activities with limited innovation In our case may consist of a higher number of patents coming form other regions and therfore a higher number of DRG 19

20 Tangible benefits : savings SAVINGS METRIC APPROACH EXAMPLE : PICKING COMMENT HR unit effort * expected labor price * Qty Estimate differences by stakeholder and activity (BPM lane) unit effort : + 10 seconds Labor cost : 36 euro / hour qty: 30% (less travels) on 12 M travels = 4 M total benefit is 0,01 euro a second * 0,3*12M = 40K euro a year SPACE Used space * Unit annual rent value Estimate differences by resources used in each BPM lane space : square meters Unit annual rent value : 10 euro / square meter 1.000*10 = 10kK euro / year MATERIALS & PRODUCT qty * average value * interest rate (stock) or qty * average value (usage) Estimate differences by warehouse (stock) and by physical process stock : 1% of an average 10M euro * 10% = 100k euro scrap : 5% of an average 1 M write off = 50k euro Stock + Scrap = 150K euro a year EQUIPMENT qty * annual rent (or lease) or annual rent Estimate the variation on the whole architecture No change (computer are added no saved) The additional harware is computed in the project cost section SERVICE annual amount Estimate variation by service No change No change 20

21 Intangible benefits They include impacts that cannot be monetized and should be measured or estimated trough specific methods The non- monetization does not mean they are pointless Image / brand : Survey on users This is typical of customer care projects ; in our case may be assumed as an higher reputation of Lombardy QoS /KPI : Measurable change in KPI It is typical of projects on long running processes e.g. Healthcare, Government services, Loan delivery etc. Governance: Error variance and time (e.g. a report in a shorter time) It is critical in large organizations where data quality is essential for management It is a main driver of management control projects and ERP in multinational corporations Risk reduction: risk decreased thank to a deeper analysis of the customer It is critical in banking and financial applications 21

22 Social value Social saving: It reflects the variation of the cost to customer Higher value ; It is the additional value the citizens perceive = the higher price they are willing to pay To be estimated by a survey QoS/ KPI It includes measurable changes in KPIs on quality, time, flexibility In our exercise we assume they are measured by the KPI analysis and are not mentioned anymore Ad hoc Specific benefits In some exercise they could include the better quality of life 22

23 Annual costs They include additional cost to be sustained because of the project; The annual value has to be multiplied for the years of life of the solution Network services They include annual additional costs of network renting In our exercise we assume they do not change Operations staff They include the annual variation of operation staff cost In our exercise we assume they do not change Energy They include the annual variation of energy cost In our exercise we assume it is not relevant Maint Hw This is the annual fee for HW equipment In our case we assune it as 15% of the project cost Maint SW platforms This is the annual fee for SW platforms In our case we assune it as 15% of the project cost Maint BPR This the annual cost to update orgaization trough a priodi check up In our case we assune it as 50 % of the analysis cost Miscellaneous It can include a contingency In our exercise we assume it as 20% 23

24 Assignment Structure Table

25 Structure of the Assignment Introduction Table of costs and benefits Detail of analysis items Table of contents Table Project Costs Items coinsidered Assumptions Values Objectives and limits Histogram Annual Benefits Items coinsidered Assumptions Values Annual Costs Items coinsidered Assumptions Values 25

26 Project Economics Table Year 0 Year 1 Year 2 Year 3 Total PM costs Development Costs Test Costs BPR costs Total Project Costs Annual savings HR Other savings Other benefits Operations cost Other costs Total Annual Balance Overall Balance 26