Tuesday, December 13, 2005
Business Case Preparation - Part 1 of 2 (Principles)
Often, within each SDLC, there are various decisions that need to be made. For example, should we buy or make the middleware for a project? Is it more effective to repair or replace a highly defective module? What are the options available, and what is the cost and benefits associated with each? Using business case tradeoffs to study each option, we can decide based on quantitative and qualitative factors involving both technical and business considerations. The following principles can serve as a guide in the preparation of a business case:
Decisions are made relative to alternate options - there may not be an ideal solution. Each option has its pros-and-cons. A choice is made relative to the pro-and-cons of other options, the technical and business constraints of the project.
Use money as a common deminator - Apply this where possible; highlighting the prospective consequences of each option using common monetary units. This should also be presented using Net Present Value (NPV) to take into account time value of money. This allows a common base on which to compare options against; and it is a familiar comparison means to business decision makers.
Sunk Costs are Irrelevant - Sunk costs are funds already committed. They have no impact on future actions and should not be taken into consideration.
Investment decisions should factor time value of money - Money's value decrease over time, due to inflation; or increase over time, due interests from bank. Money left in bank can earn interests of x% (minimum rate of return). Therefore, any investment option should yield more than x% to be worth consideration. Bearing this in mind, future projected returns must be presented using net present value (NPV) for a complete comparison. Example assuming interest rate of 8%
Decisions are made relative to alternate options - there may not be an ideal solution. Each option has its pros-and-cons. A choice is made relative to the pro-and-cons of other options, the technical and business constraints of the project.
Use money as a common deminator - Apply this where possible; highlighting the prospective consequences of each option using common monetary units. This should also be presented using Net Present Value (NPV) to take into account time value of money. This allows a common base on which to compare options against; and it is a familiar comparison means to business decision makers.
Sunk Costs are Irrelevant - Sunk costs are funds already committed. They have no impact on future actions and should not be taken into consideration.
Investment decisions should factor time value of money - Money's value decrease over time, due to inflation; or increase over time, due interests from bank. Money left in bank can earn interests of x% (minimum rate of return). Therefore, any investment option should yield more than x% to be worth consideration. Bearing this in mind, future projected returns must be presented using net present value (NPV) for a complete comparison. Example assuming interest rate of 8%
- Project A returns $50K annually over 4 years.
- Project B returns $25K annually over 8 years.
At surface, it seems both projects return $200K (50K x 4 or 25K x 8) eventually. However, Project A has a higher NPV of $178.9K compared to Project B's NPV of only $154.9K. So Project A is a better investment choice than Project B. This principle only applies for large sums occuring over long period.
Separable decisions should be considered separately - The decision of whether to invest in unit trust should not be mixed with the decision on which unit trust to invest in. They are 2 different decisions that should be considered separately.
Decision should consider both quantitative and qualitative factors - Whenever possible, options should be weighted quantitatively. However, this is not always possible. For example, morale of team members, customer satisfaction are hard to quantify accurately. This does not mean that these factors should be omitted in business case tradeoffs.
Risk associated with a decision should be quantified if possible - A decision made will have its associated risks. What if the option selected did not work out? What are the mitigation and contingencies measures? What are the related costs of these measures? These should be quantified and factored into the overall tradeoffs.
Timing associated with the decisions is critical - If relevant, take into account issues of budgetary cycle. Some companies have budget cycles that if missed, will mean another year of waiting before you can request for new budget.
- Adapted from 'Making the Software Business Case - Improvements by the Numbers', Donald J. Reifer
Separable decisions should be considered separately - The decision of whether to invest in unit trust should not be mixed with the decision on which unit trust to invest in. They are 2 different decisions that should be considered separately.
Decision should consider both quantitative and qualitative factors - Whenever possible, options should be weighted quantitatively. However, this is not always possible. For example, morale of team members, customer satisfaction are hard to quantify accurately. This does not mean that these factors should be omitted in business case tradeoffs.
Risk associated with a decision should be quantified if possible - A decision made will have its associated risks. What if the option selected did not work out? What are the mitigation and contingencies measures? What are the related costs of these measures? These should be quantified and factored into the overall tradeoffs.
Timing associated with the decisions is critical - If relevant, take into account issues of budgetary cycle. Some companies have budget cycles that if missed, will mean another year of waiting before you can request for new budget.
- Adapted from 'Making the Software Business Case - Improvements by the Numbers', Donald J. Reifer
