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 don’t 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 Didn’t Write it for the Money

• Those writing books do it
for recognition and self-
satisfaction
• Authors don’t 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 Everybody’s 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?
• What’s 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 – Calibrate model for domain
rules 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
don’t dilute the numbers
• Calculate ROI using it (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
– Don’t have to pay for it evolution/maintenance
• Can use critical staff – Have no control over the
resources elsewhere product’s 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 doesn’t 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 they’ve
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 management’s
language not ours
• Don’t be casual about
numbers, be precise
• If you want to learn more,
read my book

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University of Southern California

Business Case Analysis

University of Southern California

September 2001 Copyright RCI, 2001 1

Why Write a Book on Software

I Didn’t 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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