Capital Planning and
Investment Management
and Control in Information
Technology


Alan McSweeney
Objectives

•   To provide information on a structured approach to
    Capital Planning and Investment Control in Informat...
Agenda

•   Capital Planning and Investment Control in Information
    Technology (CPIC-IT)
•   IT Investment Management (...
Capital Planning and Investment Control (CPIC-IT)

•   CPIC-IT is a systematic process logical IT investments in new syste...
IT Investment Issues

•   IT is a key enabler of organisational strategy
•   Many organisations do not know exactly how mu...
Questions on IT Investments

•   Is your organisation’s IT portfolio a manifestation of your
    organisation’s mission an...
What the Business Wants From IT

•   Business Requirement                       •   Corresponding IT Function
            ...
Disconnect Between What the Business Wants and
What IT Delivers

              What the Business Wants                    ...
IT Value Management is a Key Topic for IT
                  Do Not Measure Business Value From IT
                        ...
Core Elements of IT Value Management

                       Managing IT Like a      Managing
                          Bu...
IT Investment Core Requirements

•   Determine the scale, scope, and sources of funding for IT
•   Assign financial resour...
W5H

• Who - Who makes the decisions?

• Why - Why is the funding sought, how is it aligned to the
 needs of the business ...
IT Investment Management

•   Aligns IT Investments to organisation strategy (scoring)
•   Prioritises investments (rankin...
Characteristics of Credible Cost Estimates

•   Clear identification of requirements of the ultimate deliverable
•   Broad...
Challenges of Developing Good Cost Estimates

•   Requires detailed, stable, agreed requirements
•   Agreed assumptions
• ...
Reasons for Good and Bad Cost Estimates
                                                                                  ...
Sources of Risk and Uncertainty in Estimating Costs

•   Lack of understanding of the project requirements
•   Shortcoming...
Specific Risks

•   Sizing and Technology                       •   Capability
      − Overly optimistic developers       ...
Importance of System Requirements and Solution
Lifecycle Costs
•   System requirements drive costs, both implementation an...
Requirements Drive Project Costs
                            100.0%                                                       ...
Aligning the Solutions Being Delivered

•   Need more than project management
      − Not the complete picture
      − Can...
Complete Picture of Project Selection and Delivery

•   Need to consider all aspects of project selection and
    delivery...
Lessons Learned From Large Systems
Implementation
 80 % More attention on process optimisation
 65 % Align systematically ...
Types of Cost Estimates

•   Life Cycle Cost Estimate (LCCE) - includes independent cost
    estimates, independent cost a...
Life Cycle Cost Estimate (LCCE) Composition
                                                                              ...
LCCE Cost Composition
                                                 Total Cost of Ownership


                       Sy...
IT Investment Management and Project and
Solution Lifecycle
                                                              ...
Benefits of Effective IT Investment Management
Framework
•   Aligns investments to business goals and objectives
•   Ident...
IT Investment Management Framework
                                 Business Plans
      Organisation               and As...
IT Investment Management Stages
Pre-Selection and
  Identification                                                        ...
IT Investment Management Control Function
Responsibilities
                                                    Technical S...
Portfolio Management

•   Portfolio Management is an approach typically combined with a set
    of tools for identifying, ...
Earned Value Management

•   Earned Value Management (EVM) is a project management metric
    that integrates the technica...
Cost Estimation Best Practices Checklist

• The cost estimate type is clearly defined and is appropriate
  for its purpose...
Cost Estimating Process
 Initiation and Research        Step 1:        Step 2:
                              Define the   ...
Cost Estimating Process

•   Each of the 12 steps is important for ensuring that high-
    quality cost estimates are deve...
Cost Estimating Process

•   Step 1: Define the Purpose of the Estimate
      − Determine the estimate’s purpose
      − D...
Cost Estimating Process

•   Step 3: Define the Project
      −    Identify in a technical baseline description document
 ...
Cost Estimating Process

•   Step 5: Identify Ground Rules and Assumptions
      − Clearly define what is included and exc...
Cost Estimating Process

•   Step 7: Develop Point Estimate
      − Develop the cost model by estimating each WBS element,...
Cost Estimating Process

•   Step 9: Conduct Risk and Uncertainty Analysis
      − Determine the level of cost, schedule, ...
Cost Estimating Process

•   Step 11: Present Estimate for Approval
      − Develop a briefing that presents the documente...
Work Breakdown Structure

•   Cornerstone of every project because it defines in detail the work
    necessary to accompli...
Validating Cost Estimates

•   Cost estimates should be validated against best practice
    characteristics
      − Compre...
Validating Cost Estimates

•   Comprehensive
      −    Completely define the program and reflect the current schedule
   ...
Validating Cost Estimates

•   Accurate
      −    They are not overly conservative or too optimistic
      −    Based on ...
Cost Assessment Team

•   Cost estimates are frequently developed with an
    incomplete knowledge of what the exact final...
Disciplines and Concepts in Cost Analysis
                               Economics                                Interper...
Centralised vs. Decentralised Costing Function

•   Centralised Costing Function              •   Decentralised Costing Fu...
Cost Assessment Team Best Practices Checklist

•   The estimating team’s composition has the skills needed
    for the pro...
IT Investment Management Maturity Stages

                                                                               D...
Increasing IT Investment Management Maturity
  5 Leveraging IT for
  Strategic Outcomes

                     1.   The org...
More Information

          Alan McSweeney
          alan@alanmcsweeney.com




 February 3, 2010                  53
Upcoming SlideShare
Loading in...5
×

Capital Planning And Investment Management And Control In Information Technology

3,567
-1

Published on

Capital Planning and Investment Management and Control in Information Technology

Published in: Business, Economy & Finance
0 Comments
5 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
3,567
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
316
Comments
0
Likes
5
Embeds 0
No embeds

No notes for slide

Capital Planning And Investment Management And Control In Information Technology

  1. 1. Capital Planning and Investment Management and Control in Information Technology Alan McSweeney
  2. 2. Objectives • To provide information on a structured approach to Capital Planning and Investment Control in Information Technology February 3, 2010 2
  3. 3. Agenda • Capital Planning and Investment Control in Information Technology (CPIC-IT) • IT Investment Management (ITIM) • Cost Estimation • Cost Assessment Team • IT Investment Management Maturity February 3, 2010 3
  4. 4. Capital Planning and Investment Control (CPIC-IT) • CPIC-IT is a systematic process logical IT investments in new systems and maintaining and operating existing systems • CPIC-IT is a process for effective decision-making that ensures IT investments integrate strategic planning, budgeting, procurement, and the management of IT in support of organisation needs − Determines if a given investment in IT is justified − Ensures IT investment decisions support the needs of the organisation, minmise risks and maximise returns throughout the investment lifecycle • CPIC-IT is a structured process for managing the risks and returns associated with IT investments • CPIC-IT is designed to ensure that IT investments are implemented at acceptable costs, within reasonable and expected timeframes, and contribute to tangible, observable improvements in organisation performance February 3, 2010 4
  5. 5. IT Investment Issues • IT is a key enabler of organisational strategy • Many organisations do not know exactly how much is spent on IT • Many organisations cannot accurately characterise IT assets • In many organisations, IT accounts for 50% or more of capital expenditure • IT architecture is perceived as not providing the adaptability that is needed • IT is seen as a friction point for change and not enough of an enabler • Organisations must implement processes for managing IT investment both for the value they deliver as well as their cost • There has been significant waste of IT investments and unused IT systems due to lack of investment validation − Over 80% of projects do not come close to their original goals of lifecycle costs − More expensive to implement and/or operate than initially stated February 3, 2010 5
  6. 6. Questions on IT Investments • Is your organisation’s IT portfolio a manifestation of your organisation’s mission and strategy? • Can you identify which IT projects are interdependent with adjacent people and process initiatives? • Do you have a rigorous IT investment selection process that is devoid of emotion and politics? • Do you account for multiple risk categories - technical, business, project, customer - when evaluating investment proposals? • Is IT operating expense in line with organisation growth? • Can you identify which IT investments contribute to true competitive advantage or mission achievement? • Do IT investment decision making methods mesh with the decision making framework of organisation? February 3, 2010 6
  7. 7. What the Business Wants From IT • Business Requirement • Corresponding IT Function Maintain the Deliver IT services momentum of the consistently without business through fuss existing business systems Get involved in Contribute to business improving business improvement results Provide the business Provide IT direction with appropriate and management information and that is aligned to the technology leadership needs of the business February 3, 2010 7
  8. 8. Disconnect Between What the Business Wants and What IT Delivers What the Business Wants What the Business Gets 15% 5% 35% 25% 70% 50% Maintain The Momentum Of The Business Through Maintain The Momentum Of The Business Through Existing Business Systems Existing Business Systems Contribute To Improving Business Results Contribute To Improving Business Results Provide It Direction And Management That Is Aligned To Provide It Direction And Management That Is Aligned To The Needs Of The Business The Needs Of The Business February 3, 2010 8
  9. 9. IT Value Management is a Key Topic for IT Do Not Measure Business Value From IT 40% Investments Metrics Do Not Adequately Capture Business 45% Value Executives Skeptical Of ROI From IT 52% Find It Difficult To Calculate ROI 62% CEO/CFO Demanding Better Ways To 71% Demonstrate Value 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% • Results of managing IT for business value − Budget flexibility coupled with strategic IT alignment leads to 50% greater IT payoffs − Improving management practices alongside IT investment drives 20% higher IT yields February 3, 2010 9
  10. 10. Core Elements of IT Value Management Managing IT Like a Managing Business the IT Budget Managing the IT Managing IT for Capability Business Value • An effective approach to Capital Planning and Investment Control is an essential component of IT Value Management February 3, 2010 10
  11. 11. IT Investment Core Requirements • Determine the scale, scope, and sources of funding for IT • Assign financial resources to competing activities within the IT portfolio • Establish a balance between capital expenditure (new projects) and operating expenditure (running systems delivered by past projects) • Optimise the total cost of ownership • Manage IT portfolios for value and not just cost • IT needs to implement a process for justifying its costs and be seen to be taking these steps February 3, 2010 11
  12. 12. W5H • Who - Who makes the decisions? • Why - Why is the funding sought, how is it aligned to the needs of the business and what benefits are anticipated? • What - Precisely what IT initiatives and business initiatives are to be funded? • When - When is the funding required and when are benefits expected to flow? • Where - From which source is the funding to be derived? • How - How are funding decisions to be made? February 3, 2010 12
  13. 13. IT Investment Management • Aligns IT Investments to organisation strategy (scoring) • Prioritises investments (ranking) • Provides strategic criteria for investment analysis • Conduct annual IT portfolio management reviews • Provides recommendation to stop, slow, maintain or accelerate program funding • Identifies redundant/inefficient systems • Integrates IT architectures within investments • Ensures compliance with funding standards February 3, 2010 13
  14. 14. Characteristics of Credible Cost Estimates • Clear identification of requirements of the ultimate deliverable • Broad participation in preparing estimates • Availability of valid data for performing estimates – historical, experience, benchmarks • Standardised and comprehensive estimate structure that includes all possible sources of cost • Provision for uncertainties – include known costs explicitly and allow for unknown costs • Recognition of inflation • Recognition of excluded costs • Independent review of estimates for completeness and realism • Revision of estimates for significant changes in requirements February 3, 2010 14
  15. 15. Challenges of Developing Good Cost Estimates • Requires detailed, stable, agreed requirements • Agreed assumptions • Access to detailed documentation and historical data for comparison • Trained and experienced analysts • Risk and uncertainty analysis • Identification of a range of confidence levels • Adequate contingency and management reserves February 3, 2010 15
  16. 16. Reasons for Good and Bad Cost Estimates Ineffe and U ctive Risk Effect ncer i ve Unce Risk and Unfa Analy tainty r ta Techn miliar s is Ident ificat Analy inty First- ology or s is Rang ion of a Time Use Probl em Confi e of De Acces s Getting dence Level Docu tailed s to D m ata Unre s and H entation Unre Proje asonable Adeq ua istor Train Unre alistic or ct Bas Conti ngen te Data ical e Exper d and liable Data Unre elin e Mana cy an ien geme d Detai led, S Analy ced Assumalistic Reser nt sts No o ption ves Agree table, Comp r Limited s Overo Requ d ariso ptimi ireme Agr Avail n Data sm n ts Assum eed able New ption Pr ocess s e s Untra Proje Inexp ined and ct Ins er ie t abilit y Comp Analy nced le sts or Te x Project chnol Unre ogy alistic Savin Project gs • Lost of reasons for and causes of inaccurate cost estimates February 3, 2010 16
  17. 17. Sources of Risk and Uncertainty in Estimating Costs • Lack of understanding of the project requirements • Shortcomings of human language and differing interpretations of meaning of project • Behaviour of parties involved in the cost estimation process • Haste • Deception • Poor cost estimating and pricing practices February 3, 2010 17
  18. 18. Specific Risks • Sizing and Technology • Capability − Overly optimistic developers − Mixed skills of team − Poor assumptions on the use of reused − Optimistic assumption on code development tools − Vague or incomplete requirements − Optimistic assumption on productivity − Not planning for additional effort − Geographically dispersed team making associated with packages – communication and coordination more integration, testing difficult • Complexity • Management − Tools − Management’s dictating an unrealistic − Applications: software purpose and schedule reliability − Incorporating a new method, − Hardware limitations language, tool or process for the first − Number of modules affecting time integration effort − Not handling creeping requirements and change proactively − Inadequate quality control, causing delays in fixing unexpected defects − Unanticipated risks associated with package software upgrades and lack of support February 3, 2010 18
  19. 19. Importance of System Requirements and Solution Lifecycle Costs • System requirements drive costs, both implementation and operation • A factor present in every successful project and absent in every unsuccessful project is sufficient attention to requirements • Half of all bugs can be traced to requirement errors • Fixing these errors consumes 75% of project rework costs • 25%- 40% percent of all spending on projects is wasted as a result of re-work • 66% of software projects do not finish on time or on budget • 56% of project defects originate in the requirements phase of the project • Completed projects have only 52% of proposed functionality • 75-80% of IT project failures are the result of requirements problems • The average project exceeds its planned schedule by 120% • 53% of projects will cost 189% of their original estimate • 30% of projects are cancelled before completion • 50% of projects are rolled back out of production • The typical project expends least effort on analysis where most errors originate and whose errors cost most to fix • Requirements errors cost the most and that poor requirements are the main cause of project failure February 3, 2010 19
  20. 20. Requirements Drive Project Costs 100.0% • While minimal 90.0% costs have actually been 80.0% spent at the Costs Committed and Spent requirements 70.0% phase of the entire project 60.0% process, 50.0% Development and approximately Implementation Starts 80% or more of 40.0% total life cycle Design Finalised costs have 30.0% Requirements Defined already been 20.0% and Agreed determined at this stage 10.0% • Need to get 0.0% requirements right from the Project Timescale outset to control costs effectively Costs Determined by Decisions on Requirements and Design Actual Money Spent February 3, 2010 20
  21. 21. Aligning the Solutions Being Delivered • Need more than project management − Not the complete picture − Cannot treat project management in isolation • Need to ensure that the solution being managed meets business requirements • Need to ensure business requirements are captured • Need to ensure that solutions are designed to deliver business requirements and comply with organisation’s enterprise architecture • Getting requirements right is essential for effective IT investment management • Fundamentally the project exists to manage the delivery of the solution that has been designed to meet business requirements that assist with delivery of the business plan February 3, 2010 21
  22. 22. Complete Picture of Project Selection and Delivery • Need to consider all aspects of project selection and delivery: − What the business wants (requirements) − What the business gets (solution that delivers on requirements) − Delivered according to business priority (project portfolio management) − Implemented properly (project management) • Cannot take an individual view without risking problems • Need to emphasise the importance of the solution whole lifecycle and the interdependence of the roles February 3, 2010 22
  23. 23. Lessons Learned From Large Systems Implementation 80 % More attention on process optimisation 65 % Align systematically to company goals 60 % Pay more attention to understanding the subject area spanned 55 % Implementation of a management information system as part of scope 50 % Outsource project management of the project to a third party 45 % Increase investment in training 35 % Greater employees involvement 35 % Enforce changes more courageously 30 % Identify and capture proof of benefits and saving as part of scope 20 % Avoid big-bang implementations February 3, 2010 23
  24. 24. Types of Cost Estimates • Life Cycle Cost Estimate (LCCE) - includes independent cost estimates, independent cost assessments and total ownership costs − Encompasses all past (or sunk), present and future costs for every aspect of the program, regardless of funding source • Business Case Analysis (BCA) - includes an analysis of alternatives and/or economic analyses − Cost benefit or comparative analysis that presents facts and supporting details among competing alternatives − Includes life-cycle costs from LCCE and also quantifiable and unquantifiable benefits • Rough Order of Magnitude (ROM ) - developed when a quick estimate is needed and few details are available − Usually based on historical ratio information − Typically developed to support what-if analyses − Helpful for examining differences in high-level alternative see which are the most feasible − A rough order of analysis should never be considered a budget-quality cost estimate February 3, 2010 24
  25. 25. Life Cycle Cost Estimate (LCCE) Composition LIFE CYCLE COST SYSTEM ACQUISITION COST •Operations PROCUREMENT COST •Internal Support •Planning, Research, •Disposal TOTAL SYSTEM COST •External Support and Analysis and Design Maintenance •Ongoing Test BASIC SYSTEM COST •Training •Subscription Facilities •Documentation •Hardware •Support Facilities •Software •Parallel Running •Development and •Warranty Implementation •Management •Installation •Transition and Cutover •Conversion February 3, 2010 25
  26. 26. LCCE Cost Composition Total Cost of Ownership System Acquisition Cost Operating and Support Cost COST YEARS • Depending on the life of the solution being implemented, the operating costs can be 1-3 times the cost of acquisition February 3, 2010 26
  27. 27. IT Investment Management and Project and Solution Lifecycle Structured Capture and Management of Cost Effective Requirements and Operation of Business Analysis Cost Benefit Analysis Delivered Solution of Solution Costs and Effective Solution Retirement/ Operation Replacement/ Upgrade Decisions Design/Selection of Cost Effective Solution Solutions to Meet Architecture and Requirements Cost Effective Design Including Delivery of Evaluation of All Programme and Projects and Options Project Management of Management Costs Project Portfolio Prioritisation of Management Projects and Investment Decisions February 3, 2010 27
  28. 28. Benefits of Effective IT Investment Management Framework • Aligns investments to business goals and objectives • Identifies and track spending on IT investments • Controls and monitor IT investment projects • Confirms that IT investments are meeting business objectives • Leverages IT investment opportunities that may generate internal capital • Make informed decisions on an IT investment portfolio by assessing value and risk • Demonstrates that IT can be trusted to invest wisely February 3, 2010 28
  29. 29. IT Investment Management Framework Business Plans Organisation and Associated What Proposed IT Technology Strategic Plan Needs Investments Potentially Solve the Identified Business Needs? Pre-Selection and Identification Investment Stage Results Did the Selected Which IT IT Investments Investments Deliver the Evaluation Stage Technology and Selection Stage Best Meet the Expected Systems Portfolio Business Business Value? Needs? Control Stage Are the Selected IT Investments Performing as Planned? February 3, 2010 29
  30. 30. IT Investment Management Stages Pre-Selection and Identification Selection Stage Stage Identify business needs and prioritise potential Evaluate, score, and rank IT investments investments Prioritise IT projects Develop investment business cases Research possible enterprise/collaboration opportunities Update the Strategic plan and technology Portfolio Evaluation Stage Control Stage Conduct post implementation reviews on major IT projects Translate business value into performance measures using the asset performance measures established in the Develop detailed project plans and execute projects in Control Phase accordance with project management standards Use asset performance measures to measure the business Develop applications in accordance with technical and value data standards for information technology Document IT asset performance Submit project status reports, requests for baseline Analyse gaps between current business needs and adjustments greater than defined percentage (typically performance of IT assets 10%) and verification and validation reports for each Make a determination to maintain, migrate, improve, or major IT project retire each IT asset in the technology portfolio February 3, 2010 30
  31. 31. IT Investment Management Control Function Responsibilities Technical Scope Management Technical Portfolio Management Requirements Management IT Investment Management Control Function Progress Earned Value Reporting and Management Management Scope, Cost and Risk Schedule Management Management February 3, 2010 31
  32. 32. Portfolio Management • Portfolio Management is an approach typically combined with a set of tools for identifying, diagnosing, controlling, and increasing the aggregate return on investments at a given level of risk tolerance • Based on the management principle that any set of investments requires proactive management to maximise value while minimising risk • IT portfolio management takes advantage of an integrated set of IT management processes, techniques, and tools that assist decision makers in analysing, selecting, evaluating, and controlling an optimal set of investments • Properly executed IT portfolio management delivers the benefits of balancing supply and demand of IT resources (financial and non- financial), eliminating redundancy, and enabling better alignment with strategic goals February 3, 2010 32
  33. 33. Earned Value Management • Earned Value Management (EVM) is a project management metric that integrates the technical scope of work with schedule and cost elements for investment planning and control • Compares the value of work accomplished in a given period with the value of the work expected in that period • Differences in expectations are measured in both cost and schedule variances • Use EVM in performance-based management systems • Management of a cost estimate involves continually updating the estimate with actual data as they become available (EVM) revising the estimate to reflect changes and analysing differences between estimated and actual costs February 3, 2010 33
  34. 34. Cost Estimation Best Practices Checklist • The cost estimate type is clearly defined and is appropriate for its purpose • All applicable program costs have been estimated, including all life-cycle costs • The cost estimate is independent of funding source • An affordability analysis has been performed at the agency level to see how the project fits within the overall portfolio • The estimate is updated as actual costs become available from the EVM system or as requirements change • Post mortems and lessons learned exercises are continually documented as information becomes available February 3, 2010 34
  35. 35. Cost Estimating Process Initiation and Research Step 1: Step 2: Define the Develop the The audience, what is Purpose of Estimating being estimated and why the Estimate Plan It is being estimated are very importance Assessment Step 3: Step 4: Step 5: Step 6: Step 7: Define the Determine Identify Obtain Data Develop Cost assessment steps Project the Ground Point are iterative and can be Estimating Rules and Estimate accomplished in varying Approach Assumptions order or concurrently Analysis Step 8: Step 9: Step 10: Conduct Conduct Risk Document The confidence in the Sensitivity and the Estimate point or range of the Analysis Uncertainty estimate is crucial to the Analysis decision maker Presentation Step 11: Step 12: Present Update Documentation and Estimate for Estimate to presentation can make or Approval Reflect break a cost estimating Actual Costs decision outcome and Changes February 3, 2010 35
  36. 36. Cost Estimating Process • Each of the 12 steps is important for ensuring that high- quality cost estimates are developed and delivered in time to support important decisions February 3, 2010 36
  37. 37. Cost Estimating Process • Step 1: Define the Purpose of the Estimate − Determine the estimate’s purpose − Determine the level of detail required − Determine who will receive the estimate − Determine the overall scope of the estimate • Step 2: Develop the Estimating Plan − Determine the cost estimating team − Outline the cost estimating approach − Develop the estimate timeline − Determine who will do the independent cost estimate − Develop the schedule February 3, 2010 37
  38. 38. Cost Estimating Process • Step 3: Define the Project − Identify in a technical baseline description document − The purpose of the project − Its system and performance characteristics − Any technology implications − All system configurations − project acquisition schedule − Acquisition strategy; − Relationship to other existing systems − Support (manpower, training, etc.) and security needs − Risks − Assumptions − System quantities for development, test, and production − Deployment and maintenance plans; − Predecessor or similar legacy systems • Step 4: Determine the Estimating Approach − Define work breakdown structure (WBS) and describe each element − Choose the estimating method best suited for each WBS element − Identify potential cross-checks for likely cost and schedule drivers. − Develop a cost estimating checklist February 3, 2010 38
  39. 39. Cost Estimating Process • Step 5: Identify Ground Rules and Assumptions − Clearly define what is included and excluded from the estimate − Identify global and program specific assumptions such as: • The estimate’s timescale, including time-phasing and life cycle • Program schedule information by phase • Program acquisition strategy • Any schedule or budget constraints • Inflation assumptions • Costs such as travel and other expenses • Equipment the organisation is to furnish • Prime contractor and major subcontractors • Use of existing facilities or new modifications or developments • Technology refresh cycles • Technology assumptions and new technology to be developed • Commonality with legacy systems and assumed heritage savings • Effects of new ways of doing business • Step 6: Obtain Data − Create a data collection plan with emphasis on collecting current and relevant technical, programmatic, cost, and risk data. − Investigate possible data sources − Collect data and normalise them for cost accounting, inflation, learning, and quantity adjustments − Analyse the data to look for cost drivers, trends, and outliers compare results against rules of thumb and standard factors derived from historical data − Interview data sources and document all relevant information including an assessment of data reliability and accuracy February 3, 2010 39
  40. 40. Cost Estimating Process • Step 7: Develop Point Estimate − Develop the cost model by estimating each WBS element, using the best methodology from the data collected − Include all estimating assumptions in the cost model − Express costs in constant year currency − Time-phase the results by spreading costs in the years they are expected to occur, based on the pro gram schedule − Sum the WBS elements to develop the overall point estimate − Validate the estimate by looking for errors like double counting and omitting costs − Compare estimate against the independent cost estimate and examine w here and why there are differences − Perform cross-checks on cost drivers to see if results are similar − Update the model as more data become available or as changes occur and compare results against previous estimates • Step 8: Conduct Sensitivity Analysis − Test the sensitivity of cost elements to changes in estimating input values and key assumptions − Identify effects of changing the program schedule or quantities on the overall estimate − Determine which assumptions are key cost drivers and which cost elements are affected most by changes February 3, 2010 40
  41. 41. Cost Estimating Process • Step 9: Conduct Risk and Uncertainty Analysis − Determine the level of cost, schedule, and technical risk associated with each WBS element and discuss with technical experts − Analyse each risk for its severity and probability of occurrence − Develop minimum, most likely, and maximum ranges for each element of risk − Use an acceptable statistical analysis methodology to develop a confidence interval around the point estimate − Determine type of risk distributions and reason for their use − Identify the confidence level of the point estimate − Identify the amount of contingency funding and add this to the point estimate to determine the risk-adjusted cost estimate − Recommend that the project office develop a risk management plan to track and mitigate risks • Step 10: Document the Estimate − Document all steps used to develop the estimate so that it can be recreated quickly by a cost analyst unfamiliar with the program and produce the same result − Document the purpose of the estimate, the team that prepared it, and who approved the estimate and on what date − Describe the program, including the schedule and technical baseline used to create the estimate − Present the time-phased life-cycle cost of the program − Discuss all ground rules and assumptions − Include auditable and traceable data sources for each cost element − Document for all data sources how the data were normalised − Describe the results of the risk, uncertainty, and sensitivity analyses and whether any contingency funds were identified − Document how the estimate compares to the funding profile − Track how this estimate compares to previous estimates, if applicable February 3, 2010 41
  42. 42. Cost Estimating Process • Step 11: Present Estimate for Approval − Develop a briefing that presents the documented life-cycle cost estimate for management approval, including • An explanation of the technical and programmatic baseline and any uncertainties; • A comparison to an independent cost estimate (ICE) with explanations of any differences; • A comparison of the estimate (life-cycle cost estimate (LCCE) or independent cost estimate to the budget; and • Enough detail so the presenter can easily defend the estimate by showing how it is accurate, complete, and high in quality. − Focus the briefing, in a logical manner, on the largest cost elements and drivers of cost − Make the content concise and complete so that those who are unfamiliar with it can easily comprehend the competence that underlies the estimate results − Make backup slides available for more probing questions − Act on and document feedback from management − The cost estimating team should request acceptance of the estimate • Step 12: Update Estimate to Reflect Actual Costs and Changes − Update the estimate to • Reflect any changes in technical or program assumptions • Keep it current as the program passes through new phases − Replace estimates with EVM EAC and Independent estimate at completion (EAC) from EVM − Report progress on meeting cost and schedule estimates − Perform a post mortem and document lessons learned for elements whose actual costs or schedules differ from the estimate. − Document all changes to the program and how they affect the cost estimate February 3, 2010 42
  43. 43. Work Breakdown Structure • Cornerstone of every project because it defines in detail the work necessary to accomplish a project’s objectives − Essential part of developing a project’s cost estimate − WBS reflects the delivery of the agreed requirements to the agreed solution design • A typical WBS reflects the requirements, resources and tasks that must be accomplished to develop a program • WBS communicates to everyone what needs to be done and how the activities relate to one another • Provides a consistent framework for planning and assigning responsibility for the work • Define a project in terms of product-oriented elements, broken into a hierarchical structure • Product-oriented WBS ensures that all costs are captured February 3, 2010 43
  44. 44. Validating Cost Estimates • Cost estimates should be validated against best practice characteristics − Comprehensive − Well-documented − Accurate − Credible February 3, 2010 44
  45. 45. Validating Cost Estimates • Comprehensive − Completely define the program and reflect the current schedule − Include all possible costs using a logical WBS that accounts for all requirements − Ensure that no costs are omitted nor double-counted − Explain and document key assumptions that are technically reasonable • Well-documented − They can be easily repeated or updated and traced to original sources through auditing − Supporting documentation identifies the data sources, justifies all assumptions, and provides a description of each estimating methodology for every WBS cost element − Schedule milestones and deliverables are traceable and consistent with the cost estimate documentation February 3, 2010 45
  46. 46. Validating Cost Estimates • Accurate − They are not overly conservative or too optimistic − Based on an assessment of most likely costs and adjusted properly for inflation − Contain few, if any, mistakes that are minor in nature − Are updated when assumptions or requirements change to reflect current status − Cost estimating relationships and parametric cost models are validated to ensure they are good predictors of costs • Data is current and applicable to the new program, • The relationships between technical parameters are logical and statistically significant • Results are tested with independent data • Credible − They clearly identify any limitations because of uncertainty or biases surrounding the data or assumptions − Results are similar to cross-checks and an independent cost estimate derived using different methodologies • Independent cost estimates performed by estimators farthest away from the acquiring program office represent a best practices because they − Tend to produce higher and more accurate cost estimates than those performed by staff sharing a common supervisor with the program office − Produce more credible estimates than other types of independent estimate reviews which may not be as inclusive as an ICE (e.g., IGCE, ICA, Sufficiency Review, etc.) − A sensitivity analysis has been performed to identify cost drivers and the impacts of varying assumptions − A risk / uncertainty analysis has been performed to determine the level of risk associated with the point estimate February 3, 2010 46
  47. 47. Cost Assessment Team • Cost estimates are frequently developed with an incomplete knowledge of what the exact final technical solution will be • Cost assessment team must manage a great deal of risk, especially for programs that are complex or use leading edge of technology • Cost estimates define what a given solution will ultimately cost • Estimate will be affected by multiple assumptions and an interpretation of what the historical data represent February 3, 2010 47
  48. 48. Disciplines and Concepts in Cost Analysis Economics Interpersonal •Break-even Analysis Skills •Personnel Cost •Approach •Inflation •Estimate •Present Value •Knowledge Analysis Budgeting Commercial •Organisation •Analysis of Specific Skills Commercial Models •Program Specific Cost Analysis •Analysis of Skills Team Skills Proposals •Development of Cost Estimating Relationship Information Statistics Accounting Technology •Forecasting •Cost Data Analysis •Analysis •Risk/Uncertainty •Financial Analysis •Design Analysis •Overhead Analysis •Development •Proposal Analysis •Testing •Scheduling •System Integration February 3, 2010 48
  49. 49. Centralised vs. Decentralised Costing Function • Centralised Costing Function • Decentralised Costing Function − Facilitates the use of standardised − Often results in ad hoc and and consistent processes inconsistent processes − Better resource sharing − Decreased independence − Common tools and training − Greater access to local technical − Ability to resist pressure to lower resources the cost estimate when it is higher than the allotted budget − Can be remote from technical experts February 3, 2010 49
  50. 50. Cost Assessment Team Best Practices Checklist • The estimating team’s composition has the skills needed for the program of work − The team has the proper number and mix of resources − The team has the proper number and mix of resources − The team includes experienced and trained cost analysts − The team includes, or has direct access to, analysts experienced in the program’s major areas − Team members’ experience, qualifications, certifications, and training are identified • A master schedule with a written study plan has been developed • The team has access to the necessary subject matter experts February 3, 2010 50
  51. 51. IT Investment Management Maturity Stages Description The organisation has mastered the selection, control, and evaluation Leveraging IT for processes and now seeks to shape its strategic outcomes by 5 Strategic Outcomes benchmarking its IT investment processes relative to other "best-in-class" organizations. The organisation is focused on evaluation techniques to improve its IT Improving the 4 Investment Process investment processes and portfolio(s), while maintaining mature selection and control techniques. The organisation has developed a well-defined IT investment portfolio Developing a Complete using an investment process that has sound selection criteria and 3 Investment Portfolio maintains mature, evolving, and integrated selection, control, and evaluation processes. Basic selection capabilities are being driven by the development of project Building the Investment selection criteria, including benefit and risk criteria, and an awareness of 2 Foundation organizational priorities when identifying projects for funding. Executive oversight is applied on a project-by-project basis. Ad hoc, unstructured, and unpredictable investment processes Creating Investment characterise this stage. There is generally little relationship between the 1 Awareness success or failure of one project and the success or failure of another project. February 3, 2010 51
  52. 52. Increasing IT Investment Management Maturity 5 Leveraging IT for Strategic Outcomes 1. The organisation learns from and adopts the tools, techniques, or methods used by best-in-class external 4 Improving the organisations 2. Changes to strategic business processes are driven by the Investment Process capabilities of identified information technologies 1. Evaluation techniques are being used to improve the 3 Developing a Complete investment processes and the portfolio Investment Portfolio 2. Succession management processes are developed for retaining or disposing of investments. 1. Criteria are developed for identifying investments that best fit with the portfolio. 2. The portfolio is developed through the use of 2 Building the Investment categorisation when comparing investments. Foundation 3. Performance reviews are conducted both during and after implementation 1. An investment board is established to drive the investment process 1 Creating Investment 2. Business needs are identified for each project Awareness 3. An investment selection process is developed 4. Board oversees the progress of individual projects 5. Investment information is collected and disseminated February 3, 2010 52
  53. 53. More Information Alan McSweeney alan@alanmcsweeney.com February 3, 2010 53
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×