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Transcript of VIII 1 ReiferCase
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September 2001 Copyright RCI, 2001 3
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
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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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 5,000copies of the book, I wouldmake about $15/hour
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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Table of Contents Part I - FundamentalConcepts Chapter 1: Improvement
is Everybodys Business Chapter 2: Making a
Business Case
Chapter 3: Making the
Business Case: Principles,
Rules, and Analysis Tools Chapter 4: Business
Cases that Make Sense
Part II - The Case Studies Chapter 5 - Playing the Game of
Dungeons and Dragons: Process
Improvement Case Study
Chapter 6: Quantifying the
Costs/Benefits: Capitalizing
Software Case Study
Chapter 7: Making Your
Numbers Sing: Architecting
Case Study
Chapter 8: Maneuvering the
Maze: Web-Based Economy
Case Study
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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September 2001 Copyright RCI, 2001 6
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
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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Unique Features of Book Web site:
Look for updates Converse with author
Realistic case studies
Actual managementbriefings as part of case
studies
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
http://www.awl.com/cseng/titles/0-201-72887-7
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Success is a Numbers Game
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
Will this proposal save money, cut costs, increase
productivity, speed development or improve quality?
Have you looked at the tax and financial implicationsof 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?
Answer Business-Related Questions
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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 soundfinancial 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
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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September 2001 Copyright RCI, 2001 11
Business Process Framework
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C S EUniversity of Southern CaliforniaCenter for Software Engineering
Business Planning Process
Tradeoff and Analysis Processes
Software Development Process
AnalyticalMethods
Models Guidelines forDecision-Making
Process The business case process proceeds in parallel and
Framework interfaces with the software development process
Principles, Rules and Tools for Business Case Development
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The Business Planning Process
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
1. Prepare
white paper
2. Demonstrate
technical feasibility
3. Conduct
market survey
4. Develop
business plan
5. Prepare
business case
6. Sell the idea and
develop support base
7. Get ready
to execute
GQM Results
Idea or proposal
Proof of
ConceptApproval to
go-ahead
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Nine Business Case Principles Decisions are made
relative to alternatives
If possible, use money as
the common denominator Sunk costs are irrelevant
Investment decisions
should recognize the time
value of money Separable decisions must
be considered separately
Decisions should consider
both quantitative and
qualitative factors
The risks associated withthe decision should be
quantified if possible
The timing associated with
making decisions is critical Decision processes should
be periodically assessed
and continuously improved
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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Many Rules to Use as Guidelines Prepare business cases in
language to communicate
to management Define all of your terms
thoroughly
Bring in the outside
experts to help if needed Double and triple check
your numbers
Never state a number
without bounding it
Remember, numbers willcome back to haunt you
Never talk cost reduction;
use avoidance instead
Always relate your
numbers to benchmarksand your competition
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
Preparation Presentation
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Many Tools and 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
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
Analysis Techniques
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Supportive Tools
Decision support systems
Tax planning and schedules
Trade studies and analysis
Spreadsheets
Comparative analysis
Trade studies and analysis
Software cost models Parametric analysis
Trade studies and analysis
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C S EUniversity of Southern CaliforniaCenter for Software Engineering
Software packages
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Business Case Information Needs Business cases
Recurring costs
Non-recurring costs
Tangible benefits
Intangible benefits
Benchmarks Competitive comparisons
Industry norms
Metrics
Management measures
Financial data
Inflated labor costs
Labor categories/rates
Overhead/G&A rates
Past costs/performance
Tax rates/legalities
Marketing information Demographic data Market position
Sales forecast
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C S EUniversity of Southern CaliforniaCenter for Software Engineering
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Preparing a COTS Business Case
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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
Use COCOTS Estimates most of the non-
recurring costs
Recurring costs should be
estimated, for now, using
rules of thumb
Relationship management
Nurtures relationships and
develops partnerships Technology refresh
Market watch looks for better
value for $$$
Use COCOMO II
Estimates benchmark costs for
option of developing code
from scratch or legacy
Calibrate model for domain
Use maintenance model to
include rest of life cycle
Intangibles
Hard to quantify the cost andschedule impacts
Even if you did quantify
them, lots of controversy
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
Costs Benefits
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Presenting the Business Case
Determine decision
timeline (5 years)
Take PV of B/C Ratio
Calculate ROI
Make a second pass to
include depreciation
Try to quantify the
intangibles
Discuss the impact, but
dont dilute the numbers
using it (credibility)
List pluses and minuses
of options considered
Make a recommendationbased on the informationpresented
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C S EUniversity of Southern CaliforniaCenter for Software Engineering
ROI = ?/year
ROI = ?/year
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COTS Pluses and Minuses
Cheaper; but does notcome for free
Available immediately Known quality (+ or -)
Vendor responsible for
evolution/maintenance
Dont have to pay for it
Can use critical staff
resources elsewhere
License costs can be high
COTS products are not
designed to plug & play Vendor behavior varies
Performance often poor
Vendor responsible for
evolution/maintenance Have no control over the
products evolution
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
Pluses Minuses
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The COTS Life Cycle
Requirements
Design
Implementation
Integration & Test
Deploy
Operate & Maintain
Evaluate, Select& Acquire
Tailor Renew
Refresh
COTS tends to have a
life cycle of its own
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C S EUniversity of Southern CaliforniaCenter for Software Engineering
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COTS Success Strategies Process
Merge COTS life cycleinto your organizationalframework
Make needed tradeoffs Think both technical andbusiness issues
Products
Fit COTS components intoproduct line strategies
Maintain open interfaces
Manage technology refresh
People Make COTS vendors a
part of your team
Increase awareness of
COTS experience Provide workforce withstructure and information
Institutional
Improve purchasing andlicensing processes
Maintain market watch
Capture past performance
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C S EUniversity of Southern CaliforniaCenter for Software Engineering
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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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C S EUniversity of Southern CaliforniaCenter for Software Engineering
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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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C S EUniversity of Southern CaliforniaCenter for Software Engineering
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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 businessissues discussed when making recommendations
for improvement
Hopefully, my book will help software engineersto perform these duties and succeed - as theyve
worked for me over the years
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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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
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering
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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
USC
C S EUniversity of Southern CaliforniaCenter for Software Engineering