Chapter 2: Project evaluation and programme management (3708)

Chapter 2: Project evaluation and programme management (3708)

1. Projects chosen when benefits exceed the costs. Or when part of a strategic objective

   • ICT infrastructure in an organisation can maybe not yield a direct financial benefit but the platform for future projects to do so
   • Portfolio management -> deciding which projects are more likely to give the benefits required
     • Programmes ->Groups of projects which yield common business objectives

2. 2.2 A business case

   • Also called a feasibility study or Project justification
     • benefits of the project will exceed development, implementation and operational costs
     • Contents of a business case
       • 1. Introduction/ background
         • describes a problem to be solved or an opportunity to be exploited
       • 2. The proposed project
         • a brief outline of the project scope
       • 3. The market
         • The likely demand for the product would need to be assessed
       • 4. Organizational and operational infrastructure
         • How the organization would need to change
       • 5. The benefits
         • These should be express in financial terms where possible
       • 6. Outline implementation plan
         • how the project is going to be implemented. disruptions to the organisation as well
       • 7. Costs
         • the implementation plan will supply information to establish these
       • 8. The financial case
         • combines costs and benefit data to establish value of project
       • 9. Risks
         • business risk
       • 10. Management plan

3. 2.3 Project portfolio management

   • Decide which projects are to be accepted
   • concerns of project portfolio management include:
     • Evaluating proposals for projects
     • Assessing the risk involved with projects
     • Deciding how to share resources between projects
     • Taking account of dependencies between projects
     • Removing duplication between projects
     • Checking for gaps
   • three elements to PPM
     • portfolio definition
       • Create a central record of all projects within an organization
       • decide whether to have ALL projects in the repository or, say, only ICT projects
       • Note difference between new product development (NPD) projects and renewal projects
         • NPD -> new product developed for customers
         • RP -> Improves the way an oganisation operates
     • portfolio management
       • Actual costing and performance of projects can be recorded and assessed
         • assists with the evaluation of new projects
     • portfolio optimisation
       • balance projects based on risk/reward factor to manage overall risk
   • Issues:
     • Some projects are not worth the man hours to support it and could be better spent on more effective projects
     • below the line projects should maybe not form part of the portfolio definition
     • small projects and support can allow developers to do small rewarding tasks and apply quick fixes

4. 2.4 Evaluating individual projects

   • Technical assessment
     • Can the functionality be achieved with current affordable technology
     • Organisational policy
     • Cost of technology should be taken into account in the cost-benefit analysis
       • Cost benefit analysis (CBA)
         • Not all projects can be undertaken at one time. The most valuable should be taken on first
         • 1. Identifying all of the costs and benefits of carrying out the projects and operating the delivered application
           • Development costs
           • Set-up costs
           • Operational costs
         • 2. Expressing these costs and benefits in common units
           • Net benefit -> benefits less costs
             • Direct costs such as mentioned in point 1 are east to quantify
   • Cash flow forecasting
     • Important to know when income and expenditure is expected
     • Inflation is not usually taken into account as it proportionately increases expense and income

5. 2.5 Cost-benefit evaluation techniques

   • Cash flows can be calculated on any period
   • Net profit -> Total income -Total Expense
     • Highest NP is not always the best
   • Payback period
     • This is the time it takes to break even (payback the initial investment) and start generating a surplus of income over outflows
     • Normally a project with the shortest payback period will be chosen as the project is "out of debt" soonest
     • Good tool, not too sensitive to inaccuracies. Does not take into account income and expenditure after the project has broken even
     • Ignores the overall profitability. It doesn't take into account the timing of cashflows
   • Return on investment (ROI)
     • Net profit / total investment
     • Doesn't take account of the timing of cashflows
     • No relation to the interest rates and charges of the banks. Also not the time value of money
   • Discounted Cash Flow Technique (DCF)
     • Net present value (NPV)
       • Accounts for profitability and the timing of cash flows
       • If earning 10% interest p.a then R91 today is equivalent to R100 next year
         • The 10% is the discount rate.
         • Discount rate can be thought of as the target rate of return
         • In the case of 10% rate and one year Discount factor = 1/(1+0.10) = 0.9091 In the case of 10% rate and two years Discount factor = 1/(1.10 x 1.10) =0.8294
       • FV =PV*(1+i)^n
         • PV=FV/(1+i)^n
       • NPV compares different projects but doesn't account for the earnings relative to other investments and the cost of capital
     • Internal Rate of Return (IRR)
       • Compares projects relative to earnings from other investments and the cost of capital
       • A project with IRR of 10% is good if the cost of capital is less than 10% and the capital spent can't earn more than 10% in another investment
       • IRR shows a percentage return so that the percentages can be compared with other investments directly
       • IRR doesn't indicate the absolute size of the return
       • IRR is the percentage discount rate which will produce a zero NPV
       • There may be two discounted rates which will produce a zero NPV. The lowest rate should be chosen
     • NPV and IRR are not a complete answer to economic evaluation
       • Total evaluation must include funding the cash flows. Can I pay the interest payments at the time they needed?
       • Profitability might be high but the risk factors may be too high
       • Consider projects as a part of the whole organisation. Can we fund more projects that are worthy if we do this one?

6. 2.6 Risk evaluation

   • Risk identification and ranking
     • Identify risks and quantify
     • Risk Matrix -> importance and likelihood of occurring
   • Risk and NPV
     • Riskier project may account for higher discount rates . +5%
   • Cost-benefit analysis
     • Forecast a cash flow for each risk in the risk matrix and the probability of occurring.
     • Sum all the outcomes to get the total expected value
   • Risk Profile analysis
     • More effective when evaluation the profitability of a portfolio of projects
     • By varying some input estimates of a project the sensitivity to changes in those parameters can be tested to identify critical success factors
   • Using decision trees

7. 2.7 Programme management

   • a group of projects that are managed in a co-ordinated way to gain benefits that would not be possible were the projects to be managed independently’ Ferns
   • Business cycle programmes
     • The projects which are undertaken during a specific planning cycle
   • Strategic programmes
     • Two projects can be run together for a unified outcome. Each is its own project but are run together as a programme
   • infrastructure programmes
     • There may be many systems to maintain as distinct systems part of a single organisation.
   • R&D programmes
     • Future ready systems. Mix between risk and return projects
   • Innovative partnerships
     • Collaborations/Synergies

8. 2.8 Managing the allocation of resources within programmes

   • When resources are shared between concurrent projects

9. 2.9 Strategic Programme Management

   • Portfolio of projects contribute to a common objective
   • Based on the OGC -> Office of Government Commerce

10. 2.10 Creating a programme

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