Business Case Analysis: University of Southern California and Reifer Consultants, Inc

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University of Southern California

C S E Center for Software Engineering
Business Case Analysis

Donald J. Reifer

and
Reifer Consultants, Inc.
September 2001 Copyright RCI, 2001 1

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

Business Cases?
Over the years, I have observed that software
engineers dont know how to prepare sound
business cases and improvement justifications
However, these same engineers are being asked
to justify recommended investments using
business cases as software is being capitalized
The book was written to fill this void and to
serve as a textbook for those teaching the subject
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I Didnt Write it for the Money

Those writing books do it
for recognition and self-
satisfaction
Authors dont write
technical books to make lots
of money
If my publisher sold 5,000
copies of the book, I would
make about $15/hour

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Table of Contents
Part I - Fundamental Part II - The Case Studies
Concepts Chapter 5 - Playing the Game of
Chapter 1: Improvement Dungeons and Dragons: Process
is Everybodys Business Improvement Case Study
Chapter 2: Making a Chapter 6: Quantifying the
Business Case Costs/Benefits: Capitalizing
Software Case Study
Chapter 3: Making the
Business Case: Principles, Chapter 7: Making Your
Rules, and Analysis Tools Numbers Sing: Architecting
Case Study
Chapter 4: Business
Cases that Make Sense Chapter 8: Maneuvering the
Maze: Web-Based Economy
Case Study
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Contents (Continued)
Part III - Finale
Chapter 9: Overcoming
Adversity: More Than a
Pep Talk
Appendix A:
Recommended Readings
Appendix B: Compound
Interest Tables
Acronyms
Glossary
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Unique Features of Book

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

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

Answer Business-Related Questions
Will this proposal save money, cut costs, increase
productivity, speed development or improve quality?
Have you looked at the tax and financial implications
of the proposal?
Whats the impact of the proposal on the bottom line?
Are our competitors doing this? If so, what are the
results they are achieving?
Who are the stakeholders and are they supportive of
the proposal?
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Business Cases Supply You with

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

Process The business case process proceeds in parallel and
Framework interfaces with the software development process
Business Planning Process
Tradeoff and Analysis Processes

Software Development Process
Analytical Models Guidelines for

Methods Decision-Making
Principles, Rules and Tools for Business Case Development
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The Business Planning Process

GQM Results
1. Prepare 7. Get ready
white paper Idea or proposal to execute
2. Demonstrate 6. Sell the idea and

technical feasibility develop support base
3. Conduct 5. Prepare
market survey business case
Proof of
Concept
4. Develop Approval to
business plan go-ahead
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Nine Business Case Principles

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

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

Analysis Techniques
Break-even analysis
Cause and effect analysis
Cost/benefit analysis
Value chain analysis
Investment opportunity
analysis
Pareto analysis
Payback analysis
Sensitivity analysis
Trend analysis
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Supportive Tools
Software packages
Decision support systems
Tax planning and schedules
Trade studies and analysis
Spreadsheets
Comparative analysis
Software cost models
Parametric analysis

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Use Engineering Economics As

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

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

Non-recurring costs Tangible benefits
- Market research/purchasing - Cost avoidance
- Package assessment - Reduced taxes (credits
- Package tailoring & tuning and depreciation)
- Glue code/wrapper development Intangible benefits
Recurring costs - Market drives features
- Glue code maintenance - Vendor maintains the
- Licensing/purchasing product (good and bad)
- Market watch/test-bed - Package mature (better
- Relationship management quality/more robust)
- Technology refresh - Lever the marketplace
TOTAL TOTAL
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Computing Costs/Benefits
Costs Benefits
Use COCOTS Use COCOMO II
Estimates most of the non- Estimates benchmark costs for
recurring costs option of developing code
Recurring costs should be from scratch or legacy
estimated, for now, using rules Calibrate model for domain
of thumb Use maintenance model to
Relationship management include rest of life cycle
Nurtures relationships and Intangibles
develops partnerships Hard to quantify the cost and
Technology refresh schedule impacts
Market watch looks for better Even if you did quantify
value for $$$ them, lots of controversy

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Presenting the Business Case

Determine decision Try to quantify the
timeline (5 years) intangibles
Take PV of B/C Ratio Discuss the impact, but dont
dilute the numbers using it
Calculate ROI (credibility)
ROI = ?/year List pluses and minuses
of options considered
Make a second pass to
Make a recommendation
include depreciation
based on the information
ROI = ?/year presented

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COTS Pluses and Minuses

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

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COTS Critical Success Factors

Successful firms:
Make COTS-based system tradeoffs early
Try before they buy
Avoid modifying COTS at all costs
Reconcile products with their architectures
Emphasize use of standards and open interfaces
Understand that COTS doesnt come for free
Plan to manage parts/technology obsolescence
Make the vendor a part of the team, whenever possible
Negotiate enterprise-wide licenses for COTS products
Influence future paths the vendor will take
Address the cultural and process issues
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The COTS Life Cycle

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

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

Cost of Sales
Cost/Benefit Ratio
Debt/Equity Ratio
Earnings/Share
Overhead Rate
Return on Assets
Price/Sales Ratio
Rate of Return
Return on Earnings
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Putting Cost Models to Work

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

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

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

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

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USC

University of Southern California

Business Case Analysis

University of Southern California

September 2001 Copyright RCI, 2001 1

Why Write a Book on Software

I Didnt Write it for the Money

September 2001 Copyright RCI, 2001 4

Unique Features of Book

September 2001 Copyright RCI, 2001 7

Success is a Numbers Game

Business Cases Supply You with

Business Process Framework

Business Planning Process

Tradeoff and Analysis Processes

Analytical Models Guidelines for

The Business Planning Process

2. Demonstrate 6. Sell the idea and

Nine Business Case Principles

Many Rules to Use as Guidelines

Many Tools and Techniques

September 2001 Copyright RCI, 2001 16

Use Engineering Economics As

Business Case Information Needs

Preparing a COTS Business Case

September 2001 Copyright RCI, 2001 20

Presenting the Business Case

September 2001 Copyright RCI, 2001 21

COTS Pluses and Minuses

September 2001 Copyright RCI, 2001 22

COTS Critical Success Factors

The COTS Life Cycle

COTS Success Strategies

Lots of Other Business Yardsticks

Putting Cost Models to Work

Summary and Conclusions

For Example: Making Your

September 2001 Copyright RCI, 2001 29

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