Professional Documents
Culture Documents
Project Initiation
4-1
Project Initiation
Before a project manager begins working on a project, he or she needs to understand how and why the organization decided to spend valuable resources-money and time-on the project. You will understand the project management initiation process when you can
4-2
Objectives
Define the project initiation process group, with all its component processes and deliverables Understand why selecting the right projects to work on is important and sometimes difficult for an organization Understand the importance and contents of a project charter and the stakeholder assessment matrix Understand how to conduct a project kickoff meeting
4-3
Objectives
Understand the importance and contents of a project charter and the stakeholder assessment matrix Understand how to conduct a project kickoff meeting
4-4
Objectives
Learn the tools and techniques of project selection, including:
1. The strategic planning process for the organization and IT department 2. Quantitative methods, including the following:
1. 2. 3. 4. Return on investment (ROI) Net present value (NPV) Internal rate of return (IRR) Payback analysis
3. 4. 5. 6.
Qualitative methods Balanced scorecard Real options The weighted scoring model (WSM)
4-5
4-6
4-7
4-8
4-10
1. Business value IT project managers must look at a project from a business perspective by identifying what business process(es) will be most affected. They must understand the process thoroughly and the impact the project will have on these processes. They must also understand what impact the project will have on associated processes. Using the systems approach assists in learning what impact a project will have on all parts of the organization.
4-11
2. Technology The technology used for a project needs to be well tested, scalable, secure, modifiable, and usable. Has the technology been used in the organization before, and do we have experience with it? What technology is the competition using, and how might technology allow this organization to see what works and doesn't work in their specific industry?
4-12
3. Cost/benefit questions An organization needs to understand whether the complete costs-including acquisition, development, and ongoing support costs-of the project outweigh its benefits. .
4-13
4. Risk IT project managers must do a thorough risk assessment for the project. They must know what kinds of issues or problems might surface during the project such as the software vendor going out of business in the middle of the project or funding for the project being cut in half during execution and be sure to have appropriate safeguards or workarounds in place so the project can still be completed
4-14
Business Case
4-16
4-17
Credibility-Credibility is achieved because the information comes from many different sources, allowing for checks and balances. Accuracy-Accuracy is improved for the same reasons as credibility, as well as the fact that the information comes from the people who are best equipped to provide it.
For example, to get salary data for key resources needed for the project, you go to the human resources department, which can provide the basic salary data plus overhead rates (insurance, vacation, and so on), or to get market impact, you solicit input from the marketing and sales department.
4-18
Thoroughness-Thoroughness is aided by this approach if all team members are allowed input into the process. Ownership-It's important that IT projects not be viewed as solely the property of the IT department. All stakeholders from all affected departments need to feel like part of the process and take some ownership in making sure the project is successful.
4-19
4-20
Before moving on to building the business case and the project selection tools.
4-22
Strategic Planning
A formal document that outlines an organizations 3 to 5 year mission, vision, goals, objectives, and strategies The main goal of any project should be to deliver some form of business value: higher market share, new product or market, better customer support, higher productivity, lower operating costs, etc. All of these are typically defined in the companys strategic plan as goals and objectives. Listed next to each goal or objective is a list of strategies which will fulfill the objective
4-23
Strategic Planning
The development of strategies (projects) must focus on what is needed to meet the strategic plans goals and objectives A question that is often asked - Does the proposed project deliver a product or service which was defined as an objective on the strategic plan?
4-24
Strategic Planning
An often used tool to build the strategic plan is called SWOT analysis. An information gathering technique to evaluate external influences against internal capabilities
Strengths Weaknesses Opportunities Threats
4-25
Strategic Planning
Strength A strength is an organizational resource (money, people, location, equipment,IT) that can be used to meet an objective. . Weakness A weaknesses is a missing or limited resource that bears on the organization's ability to meet an objective. .' . .
4-26
Strategic Planning
Opportunity An opportunity is a circumstance that may provide the organization a chance to improve its ability to compete. . . Threat A threat is a potentially negative circumstance that, if it occurs, may hinder an organization's ability to compete
4-27
Strategic Planning
Because today's organizations face an evergrowing number of opportunities and threats, they must be able to successfully execute multiple proJects multiple departments. A technique that assists orgamzations managing multlple projects is called portfolio management.
4-28
Strategic Planning
IT project portfolio management organizes a group of IT proJect into a single portfolio consisting of reports that capture project goals,. costs, time lines, accomplishments, resources, risks, and other critical factors. Chief Information Officer (CIOs) and other IT managers can then regularly review entIre portfolios, allocate resources as needed, and adjust projects to produce the highest returns.
4-29
Selection Tools
Qualitative Models
Subject matter expert judgments Sacred Cow Mandates
Quantitative Models
Net Present Value (NPV) Internal Rate of Return (IRR) Return on Investment Payback Period
4-30
4-31
SMEs
SMEs can evaluate projects with or without more complex quantitative models and can categorize projects with low, medium,and high priority rankings.
4-32
SACRED COW
Sacred cow decisions are made because someone-generally in upper management really wants a particular project to be done. These decisions are not always in the best interest of the organization but of one individual or a group. Unfortunately, many organizations still operate today using this method.
4-33
SACRED COW
The scenario usually goes something like this: A senior manager from a non-IT department picks up a trade magazine and reads about show all the best companies are doing XYZ to be competitive. He then schedules a meeting with an IT manager and explains that XYZ is something we have to implement.
4-34
SACRED COW
The IT manager, not knowing any better launches a project, gathers resources, and begins to operate under the directive to "get it done ASAP." Other projects that these individuals are working on are all delayed, as they work on the "sacred" one.
4-35
Mandates
Mandates can come from vendors, government agencies, industry sectors, or markets. Vendors may in the case of computer software release a new version and stop support for previous versions: You either upgrade or risk losing support. Some vendor contracts stipulate that you will keep the software current.
4-36
Mandates
A project may be mandated by key customers. Many consumer goods retailers are mandating that all suppliers be capable of conducting business-including orders, shipping information, and inventory control-completely electronically. If your company doesn't have this capability but wants to do business with the customer, you will be required to add these capabilities.
4-37
Qualitative Models
Subject matter expert (SME) judgments
Individuals either within the company or outside the company who possess expertise or unique knowledge in a particular facet of the business either by work experience, education, or a combination of both SMEs can be used to evaluate projects with or without more complex quantitative models and categorize projects with low, medium, and high priority rankings
Sacred Cow
Sacred Cow decisions are made because someone
generally in upper management really wants the project to get done
4-38
Qualitative Models
Mandates
Generated from vendors, government agencies, industry sectors, or markets
4-39
QUANTITATIVE MODELS
QUANTITATIVE MODELS Every IT project will have some level of financial benefit to the organization as well as some level of cost. The bottom line is that IT projects cost money. The reason we create financial models for project selection analysis is simply to ascertain whether the benefits outweigh the costs and to what degree
4-40
Quantitative Models
Financial considerations are often an important factor in selecting projects but not always! Four primary methods for determining the estimated financial value of projects:
Net present value (NPV) analysis Return on investment (ROI) Payback analysis Internal Rate of Return (IRR)
4-41
4-42
Example: You have a project that promises you $1000 of profit at the end of the first year with the discount rate at 10% PV = $1,000 = $909 (1+0.1)1
The project is worth only $909 today
4-44
4-45
4-46
4-47
NPV Example
NPV is calculated using the following formula: NPV = t=0n CF/ (1+i)t
Where
t = the year of the cash flow n = the last year of the cash flow CF = the cash flow at time t i = interest rate or discount rate
4-48
Year 1
Year 2 Year 3
($40,000) / (1 + .08)1
$25,000 / (1 + .08)2 $70,000 / (1 + .08)3
($37,037)
$21,433 $55,569
Year 4
Year 5 NPV
$130,000 / (1 + .08)4
$80,000 / (1 + .08)5 Add them up ($75,000)
$95,553
$54,448 $69,966 ($75,000)
Project 2
Year 0
Year 1
Year 2 Year 3 Year 4 Year 5 NPV
($5,000) / (1 + .08)1
$70,000 / (1 + .08)2 $45,000 / (1 + .08)3 $30,000 / (1 + .08)4 $5,000 / (1 + .08)5 Add them up
($4,630)
$60,014 $35,723 $22,051 $3,403 $41,561
4-49
4-52
The higher the ROI or higher the ratio of benefits to costs, the better Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects
4-53
ROI Example
Step 1: determine discount factor for each year. Step 2: calculate discounted benefits and costs
4-54
ROI Example
4-55
ROI Example
ROI Project 1 = ($436,000 - $367,100) / $357,100 = 19% ROI Project 2 = ($335,000 - $256,000) / $256,000 = 31%
4-56
Payback Period
The payback period is the amount of time it will take a project before the accrued benefits surpass accrued costs, or how much time an investment takes to recover its initial cost. As with the other quantitative models, many organizations have a maximum number in mind that all projects must meet or beat. If an IT project has a payback period of four years but the organization demands two years, then either you won't be allowed to proceed with the project or you must make adjustments to change the equation .
4-57
Payback Period
The payback period ignores the time value of money but offers a glimpse at the potential risk associated with each of the projects. A longer payback period generally infers a riskier project. The longer it takes before a project begins to make money for the organization,the greater the chances that things can go wrong on the project
4-58
Payback Analysis
The payback period is the amount of time it will take a project before the accrued benefits surpass accrued costs or how much time an investment takes to recover its initial cost track the net cash flow across each year to determine the year that net benefits overtake net costs (not discounted cash flows) Many organizations want IT projects to have a fairly short payback period (< 1 year)
4-59
Payback Example
Same numbers as earlier examples. Table shows net cash flows Project 1 payback occurs sometime during year 4 Project 2 payback occurs sometime during year 3
4-60
4-61
4-64
4-65
Balanced Scorecard
Drs. Robert Kaplan and David Norton developed this approach to help select and manage projects that align with business strategy A balanced scorecard converts an organizations value drivers, such as customer service, innovation, operational efficiency, and financial performance to a series of defined metrics
4-66
Balanced Scorecard
Organizations record and analyze these metrics to determine how well projects help them achieve strategic goals The balanced scorecard measures organizational performance across four balanced perspectives: financial, customers, internal processes, and learning
4-67
Balanced Scorecard
4-68
Real Options
Derives from a financial model considering the management of a portfolio of stock investment options Has not yet become a very popular option for IT investments A fundamental definition of an option is the right, but not the obligation, to buy (call option) or sell (put option) an investment holding at a predetermined price (called the exercise price or strike price) at some particular date in the future
4-69
Real Options
A stock option lets us make a small investment today in order to reduce our risk later on. At the same time, it keeps open the possibility of making a bigger investment later, if the future goes the way we expect
The more uncertain the times, the more valuable an options approach becomes
4-70
Real Options
In order to make real options easier to understand, T.A. Leuhrman (1998) used the analogy of a tomato garden: In a tomato garden, not all the tomatoes are ripe at the same time; some are ready to pick right now, some are rotten and should be thrown away, and some will be ready to harvest at a later date We can apply this line of thinking for evaluating investments.
4-71
Real Options
Traditionally, the evaluation of investments has been limited to a yes/no ripe or rotten decision based solely on net present value. With real options, an investment with a negative net present value may still be good, but perhaps its just not the right time (its not ripe yet)
If you can delay until the proper time (now ripe) your once negative NPV net present value would reflect a positive one
Viewing an investment as an option allows projects to be evaluated and managed in respect to future value and a dynamic business environment
4-72
Real Options
4-73
Selection Summary
This completes our section on project selection techniques. As you can see, a variety of choices are available to help organizations become better at selecting the right projects Many studies have been done to review the use and effectiveness of these techniques. The problem in trying to draw any conclusions from these studies is that they all address different industry segments, over different time periods, using different technologies
4-74
Selection Summary
The choice of which techniques to use is based on many factors: company culture, financial position, industry segment, technology, length of project, size of project, and so on Organizations should use a method that builds a WSM which consists of elements and weights that are pertinent to the organization at a point in time and circumstances
4-75
Project Initiation
4-76
Project Initiation
The projects have been selected, now time to begin First project artifact is the Project Charter, but
First we must do a stakeholder analysis
4-77
Stakeholder Analysis
Identifies the influence and interests of the various stakeholders and documents their needs, wants, and expectations These needs and wants form the basis of the scope statement described in Chapter 5 The influence and interests section of the analysis can make the PM job much easier and lead to more successful projects
4-78
Old Saying
If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle
4-79
4-81
4-82
Project Charter
Is the first tangible work product created in all projects, regardless of size and type After deciding what projects to work on, it is important to formalize the project start A project charter is a document (legal) which formally authorizes the work to begin on a project and provides an overview of objectives and resource requirements
4-83
Project Charter
Key project stakeholders should sign a project charter to acknowledge agreement on the need and intent of the project
4-84
4-85
4-86
Kick-Off Meeting
With the completion of the stakeholder analysis and the signing of the project charter, its time to schedule and conduct the kickoff meeting First step, use the stakeholder analysis to make sure to invite the right people Everyone at the start of the project hears the same message Get agreement from everyone on Project Charter
4-87
4-89
4-93
4-94
4-95
Chapter Review
1. In most organizations, there are more projects than there are resources to support them. Organizations need to follow a disciplined projectselection process to ensure that they are working on the correct mix of projects. 2. IT professionals must lmderstand the systems context in which the project they are working on exists. The following four key issues will assist in understanding the business context: business value, technology,cost/benefit questions, and risks
4-96
Chapter Review
3.A business case is a document composed of a set of project characteristics that aid organization decision makers in deciding what projects to work on. The key parts are objectives, methods and sources, benefits, consequences, costs, qualitative and quantitative models, and risks. 4. A project may be undertaken to fulfill an initiative as part of an organization's strategic plan. IT has become a strategic enabler of most or all of the items on strategic plans
4-97
Chapter Review
5. Project selection techniques fall into two groups: qualitative models and quantitative models. Qualitative models consist of relying on 5MB judgments, sacred cow decisions, and mandates. The quantitative models are NPY, IRR, ROI, and payback period. 6. The WSM is used to compare the merits of projects based on the organization's specific priorities, such as risk, financial concerns, strategic plan initiative, and competition. Each project is evaluated fairly, based on its relative score in the model
4-98
Chapter Review
7. The balanced scorecard approach was developed in the early 1990s to enable companies to identify what they should measure in order to balance the financial perspective of the organization. The organization should be viewed from four perspectives: financial, customer, internal business process, and learning and growth.
4-99
Chapter Review
8. Real options is a methodology that allows an organization to select a mix of projects derived from a financial model of managing a portfolio of stock investment options. 9. A stakeholder analysis is used to identify the influence and interests of the various stakeholders and documents their needs, wants, and expectations. This information will form the basis of the scope statement
4-100
Chapter Review
10. A project charter is the key deliverable of the initiation phase of every project, regardless of size. The charter officially recognizes the start of a project for all stakeholders. Once signed, the charter should be placed under configuration control. The charter consists of the project title and active date, the version number, a short project description, the project manager's name and authority level, project objectives, major deliverables, critical success factors, assumptions, constraints, risks, and key role responsibilities. The last section consists of key project stakeholder signatures, signifying their approval of the charter and thus the project.
4-101
Chapter Review
11. The kickoff meeting is organized by the project sponsor to officially announce the start of the project. The project charter should be used to provide information for all participants. Many times, the key stakeholders are asked to sign the charter at the conclusion of the meeting.
4-102
Glossary
business case A document composed of a set of project characteristics-costs, benefits, risks, and so on-that aids organization decision makers in deciding what projects to work on. portfolio management Control and monitoring of an organization's mix of projects to match organizational objectives for risk and investment returns. project charter A document that formally authorizes the work to begin on a project and provides an overview of objectives and resource requirements.
4-103
Glossary
qualitative model A model that involves making selection decisions based on subjective evaluation using nonnumeric values of project characteristics. quantitative model A model that involves making selection decisions based on objective evaluation involving numeric values of project characteristics. stakeholder analysis A process used to identify the influence and interests of the various stakeholders and to document their needs,wants, and expectations
4-104
Glossary
strategic plan A formal document that outlines an organization's three- to five-year mission,vision, goals, objectives, and strategies. subject matter expert (SME) A person who has the level of knowledge and/or experience in a particular facet of the business needed to support decision making. SWOT analysis An analysis of strengths, weaknesses, opportunities, and threats; an information gathering and analysis technique to evaluate external influences against internal capabilities.
4-105
Glossary
time value of money The concept that a sum of money is more valuable the sooner it is received: A dollar today is worth more than the promise of a dollar tomorrow. The worth is dependent on two variables: the time interval and rate of discount.
4-106
Review Questions
1. Explain the advantages and disadvantages associated with each of the following project selection methods: mandates, sacred cow decisions, NPY, IRR, payback period, and ROI. 2. Explain the importance of an organization's strategic plan to the selection process. 3. Why is it important for an organization to conduct a project selection process? 4. Define and describe the key components of a business case
4-107
Review Questions
5. Explain why the contents of a business case might change, depending on the project. 6. Describe the stakeholders who should participate on the project selection team. 7. Explain the differences between qualitative and quantitative models and where each may be appropriate for project selection decisions. 8. Using your own words and example, explain the concept of the time value of money
4-108
Review Questions
9. Explain the process of creating a WSM. Include an explanation of the selection of weights for each criterion. 10. How does the real options approach apply to the selection of IT projects? 11. List and explain the four perspectives the balanced scorecard uses to analyze an organization's performance. How does this relate to project selection?
4-109
Review Questions
12. What is a project charter and what are its principal uses? 13. List and explain the major components of a project charter. 14. What type of information is collected through a stakeholder analysis? Explain the process. 15. Describe the contents of a stakeholder assessment matrix. 16. Who should be the individual responsible for planning and organizing (scheduling, sending out the invitations, and so on) the kickoff meeting. Justify your answer
4-110
Review Questions
17. "The preliminary scope statement describes each of the major milestones of a project in detail." Do you agree with this statement? Why or why not? l8. Who should be invited to attend the kickoff meeting? 19. Describe the 10-step project selection process. 20. In your opinion, what are some of the major drawbacks to qualitative models? 21. What does the acronym SWOT stand for? Explain Its use
4-111
4-114
4-115
4-116