Project Initialization

The Business Case

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Learning Objectives
 Develop and apply the concept of a project’s
measurable organizational value (MOV).
 Describe and be able to prepare a business case.
 Distinguish between financial models and scoring
models.
 Describe the project selection process as well as the
Balanced Scorecard approach.

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 The Business Case
• Definition of Business Case: an analysis of the
organizational value, feasibility, costs, benefits,
and risks of the project plan.
• Attributes of a Good Business Case
– Details all possible impacts, costs, and benefits
– Clearly compares alternatives
– Objectively includes all pertinent information
– Systematic in terms of summarizing findings

Copyright 2012 John Wiley & Sons, Inc. 2-3

Process for Developing the Business Case

Copyright 2012 John Wiley & Sons, Inc. 2-4

 Developing the Business Case

• Step 1: Select the Core Team

• Advantages:
• Credibility
• Alignment with organizational goals
• Access to the real costs
• Ownership
• Agreement
• Bridge building

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 Developing the Business Case

• Step 2: Define Measurable Organizational

Value (MOV) the project’s overall goal

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 Measurable Organizational Value
(MOV)
• The project’s goal
• Measure of success
• Must be measurable
• Provides value to the organization
• Must be agreed upon
• Must be verifiable at the end of the project
• Guides the project throughout its life cycle
• Should align with the organization’s strategy and
goals

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 The IT Value Chain
Organizational Drives
Vision & Mission

Drives
Organizational
Strategy
Supports

Project’s
Organizational
Measurable
Supports Value
(MOV)

Copyright 2012 John Wiley & Sons, Inc. 2-8

 Project Goal ?
• Install new hardware and software to improve
our customer service to world class levels

• Respond to 95% of our customers’ inquiries

within 90 seconds with less than 5% callbacks
about the same problem.

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 A Really Good Goal
• I believe that this nation should commit
itself to achieving the goal before this
decade is out, of landing a man on the
moon and returning him safely to Earth.

John F. Kennedy
May 25, 1961

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 Process for Developing the MOV

1. Identify the desired area of impact

Potential Areas:
• Strategic
• Customer
• Financial
• Operational
• Social

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 Process for Developing the MOV

2. Identify the desired value of the IT project

Organizational Value:
• Better?
• Faster?
• Cheaper?
• Do More? (growth)

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 Process for Developing the MOV

3. Develop an Appropriate Metric

 Should it increase or decrease?

Metrics:
• Money ($, £, ¥ )
• Percentage (%)
• Numeric Values

Copyright 2012 John Wiley & Sons, Inc. 2-14

 Process for Developing the MOV

4. Set a time frame for achieving the MOV

 When will the MOV be achieved?
5. Verify and get agreement from the project
stakeholders
 Project manager and team can only
guide the process

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 Process for Developing the MOV

6. Summarize the MOV in a clear, concise

statement or table

This project will be successful if _________________.

MOV: The Web Site will provide a 20% return on

investment and 500 new customers within the
first year of its operation

Copyright 2012 John Wiley & Sons, Inc. 2-16

Year MOV

1 20% return on investment

500 new customers

2 25% return on investment

1,000 new customers

3 30% return on investment

1,500 new customers

Example MOV Using Table Format

Copyright 2012 John Wiley & Sons, Inc. 2-17

Developing the Business Case

• Step 3: Identify Alternatives

– Base Case Alternative
– Possible Alternative Strategies
• Change existing process without investing in IT
• Adopt/Adapt systems from other organizational areas
• Reengineer Existing System
• Purchase off-the-shelf Applications package
• Custom Build New Solution

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Developing the Business Case

• Step 4: Define Feasibility and Assess Risk

– Economic feasibility
– Technical feasibility
– Organizational feasibility
– Other feasibilities
Risk focus on
– Identification
– Assessment
– Response
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Developing the Business Case
• Step 5: Define Total Cost of Ownership
– Direct or Up-front costs
– Ongoing Costs
– Indirect Costs
• Step 6: Define Total Benefits of Ownership
– Increasing high-value work
– Improving accuracy and efficiency
– Improving decision-making
– Improving customer service

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 Developing the Business Case

• Step 7: Analyze alternatives using financial

models and scoring models
– Payback

Payback Period = Initial Investment

Net Cash Flow

= $100,000
$20,000
= 5 years

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 Developing the Business Case
– Break Even
Materials (putter head, shaft, grip, etc.) $12.00

Labor (0.5 hours at $9.00/hr) $ 4.50

Overhead (rent, insurance, utilities, taxes,

$ 8.50
etc.)

Total $25.00

If you sell a golf putter for $30.00 and it costs $25.00 to make, you have
a profit margin of $5.00:

Breakeven Point = Initial Investment / Net Profit Margin

= $100,000 / $5.00
= 20,000 units
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 Developing the Business Case

– Return on Investment
Project ROI =(total expected benefits – total expected costs)
total expected costs
= ($115,000 - $100,000)
$100,000
= 15%

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 Developing the Business Case

– Net Present Value

Year 0 Year 1 Year 2 Year 3 Year 4

Total Cash Inflows $0 $150,000 $200,000 $250,000 $300,000

Total Cash Outflows $200,000 $85,000 $125,000 $150,000 $200,000

Net Cash Flow ($200,000) $65,000 $75,000 $100,000 $100,000

NPV = -I0 +  (Net Cash Flow / (1 + r)t)

Where:
I = Total Cost or Investment of the Project
r = discount rate
t = time period
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Developing the Business Case

– Net Present Value

Discounted Cash
Time Period Calculation
Flow
Year 0 ($200,000) ($200,000)

Year 1 $65,000/(1 + .08)1 $60,185

Year 2 $75,000/(1 + .08)2 $64,300

Year 3 $100,000/(1 + .08)3 $79,383

Year 4 $100,000/(1 + .08)4 $73,503

Net Present Value (NPV) $77,371

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 Weight Alternative Alternative B Alternative C
Criterion A
ROI 15% 2 4 10
Financial Payback 10% 3 5 10
NPV 15% 2 4 10
Alignment with
strategic objectives 10% 3 5 8
Organizational Likelihood of
achieving project’s 10% 2 6 9
MOV
Availability of skilled
team members 5% 5 5 4

Project Maintainability 5% 4 6 7
Time to develop 5% 5 7 6
Risk 5% 3 5 5
Customer
satisfaction 10% 2 4 9
External
Increased market
share 10% 2 5 8

Total Score 100% 2.65 4.85 8.50

Notes: Risk scores have a reverse scale – i.e., higher scores for risk imply lower levels of risk
How to calculate Total Score
 Developing the Business Case

• Step 8: Propose and Support the

Recommendation

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Business Case Template

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 Project Selection and Approval
• The IT Project Selection Process
• The Project Selection Decision
– Project must map to organization goals
– Project must provide verifiable MOV
– Selection should be based on diverse measures
such as
• tangible and intangible costs and benefits
• various levels throughout the organization

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 Balanced Scorecard Approach

• A strategic planning and management system

that is used extensively in business and
industry, government, and nonprofit
organizations worldwide to align business
activities to the vision and strategy of the
organization, improve internal and external
communications, and monitor organization
performance against strategic goals.
Balanced Scorecard Approach

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 Reasons for Balanced Scorecard
Approach Might Fail
• Non-financial variables incorrectly identified as
primary drivers
• Metrics not properly defined
• Goals for improvements negotiated not based on
requirements
• No systematic way to map high-level goals
• Reliance on trial and error as a methodology
• No quantitative linkage between non-financial and
expected financial results

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