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Capital Planning and Investment Management and Control in Information Technology Alan McSweeney
| Date post: | 17-Oct-2014 |
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Capital Planning and Investment Management and Control in Information Technology
Alan McSweeney
February 3, 2010 2
Objectives
• To provide information on a structured approach to Capital Planning and Investment Control in Information Technology
February 3, 2010 3
Agenda
• Capital Planning and Investment Control in Information Technology (CPIC-IT)
• IT Investment Management (ITIM)
• Cost Estimation
• Cost Assessment Team
• IT Investment Management Maturity
February 3, 2010 4
Capital Planning and Investment Control (CPIC-IT)
• CPIC-IT is a systematic process logical IT investments in new systemsand maintaining and operating existing systems
• CPIC-IT is a process for effective decision-making that ensures IT investments integrate strategic planning, budgeting, procurement, and the management of IT in support of organisation needs − Determines if a given investment in IT is justified
− Ensures IT investment decisions support the needs of the organisation, minmise risks and maximise returns throughout the investment lifecycle
• CPIC-IT is a structured process for managing the risks and returns associated with IT investments
• CPIC-IT is designed to ensure that IT investments are implemented at acceptable costs, within reasonable and expected timeframes, andcontribute to tangible, observable improvements in organisation performance
February 3, 2010 5
IT Investment Issues
• IT is a key enabler of organisational strategy
• Many organisations do not know exactly how much is spent on IT
• Many organisations cannot accurately characterise IT assets
• In many organisations, IT accounts for 50% or more of capital expenditure
• IT architecture is perceived as not providing the adaptability that is needed
• IT is seen as a friction point for change and not enough of an enabler
• Organisations must implement processes for managing IT investment both for the value they deliver as well as their cost
• There has been significant waste of IT investments and unused ITsystems due to lack of investment validation− Over 80% of projects do not come close to their original goals of lifecycle costs− More expensive to implement and/or operate than initially stated
February 3, 2010 6
Questions on IT Investments
• Is your organisation’s IT portfolio a manifestation of your organisation’s mission and strategy?
• Can you identify which IT projects are interdependent with adjacent people and process initiatives?
• Do you have a rigorous IT investment selection process that is devoid of emotion and politics?
• Do you account for multiple risk categories - technical, business, project, customer - when evaluating investment proposals?
• Is IT operating expense in line with organisation growth?
• Can you identify which IT investments contribute to true competitive advantage or mission achievement?
• Do IT investment decision making methods mesh with the decision making framework of organisation?
February 3, 2010 7
What the Business Wants From IT
• Business Requirement • Corresponding IT Function
Provide the business with appropriate information and technology leadership
Contribute to improving business results
Provide IT direction and management that is aligned to the needs of the business
Get involved in business improvement
Maintain the momentum of the business through existing business systems
Deliver IT services consistently without fuss
February 3, 2010 8
Disconnect Between What the Business Wants and What IT Delivers
What the Business Wants
15%
50%
35%
Maintain The Momentum Of The Business Through
Existing Business Systems
Contribute To Improving Business Results
Provide It Direction And Management That Is Aligned To
The Needs Of The Business
What the Business Gets
70%
25%
5%
Maintain The Momentum Of The Business Through
Existing Business Systems
Contribute To Improving Business Results
Provide It Direction And Management That Is Aligned To
The Needs Of The Business
February 3, 2010 9
IT Value Management is a Key Topic for IT
71%
62%
52%
45%
40%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
CEO/CFO Demanding Better Ways To
Demonstrate Value
Find It Difficult To Calculate ROI
Executives Skeptical Of ROI From IT
Metrics Do Not Adequately Capture Business
Value
Do Not Measure Business Value From IT
Investments
• Results of managing IT for business value− Budget flexibility coupled with strategic IT alignment leads to 50% greater IT
payoffs− Improving management practices alongside IT investment drives 20% higher IT
yields
February 3, 2010 10
Core Elements of IT Value Management
• An effective approach to Capital Planning and Investment Control is an essential component of IT Value Management
Managing IT Like a Business
Managingthe
IT Budget
Managing the IT Capability
Managing IT for Business Value
February 3, 2010 11
IT Investment Core Requirements
• Determine the scale, scope, and sources of funding for IT
• Assign financial resources to competing activities within the IT portfolio
• Establish a balance between capital expenditure (new projects) and operating expenditure (running systems delivered by past projects)
• Optimise the total cost of ownership
• Manage IT portfolios for value and not just cost
• IT needs to implement a process for justifying its costs and be seen to be taking these steps
February 3, 2010 12
W5H
• Who - Who makes the decisions?
• Why - Why is the funding sought, how is it aligned to the
needs of the business and what benefits are anticipated?
• What - Precisely what IT initiatives and business initiatives
are to be funded?
• When - When is the funding required and when are
benefits expected to flow?
• Where - From which source is the funding to be derived?
• How - How are funding decisions to be made?
February 3, 2010 13
IT Investment Management
• Aligns IT Investments to organisation strategy (scoring)
• Prioritises investments (ranking)
• Provides strategic criteria for investment analysis
• Conduct annual IT portfolio management reviews
• Provides recommendation to stop, slow, maintain or accelerate program funding
• Identifies redundant/inefficient systems
• Integrates IT architectures within investments
• Ensures compliance with funding standards
February 3, 2010 14
Characteristics of Credible Cost Estimates
• Clear identification of requirements of the ultimate deliverable
• Broad participation in preparing estimates
• Availability of valid data for performing estimates – historical, experience, benchmarks
• Standardised and comprehensive estimate structure that includes all possible sources of cost
• Provision for uncertainties – include known costs explicitly and allow for unknown costs
• Recognition of inflation
• Recognition of excluded costs
• Independent review of estimates for completeness and realism
• Revision of estimates for significant changes in requirements
February 3, 2010 15
Challenges of Developing Good Cost Estimates
• Requires detailed, stable, agreed requirements
• Agreed assumptions
• Access to detailed documentation and historical data for comparison
• Trained and experienced analysts
• Risk and uncertainty analysis
• Identification of a range of confidence levels
• Adequate contingency and management reserves
February 3, 2010 16
Reasons for Good and Bad Cost Estimates
Detailed, Stable, Agreed Requirements Agreed Assumptions
Detailed Documentation and Historical Data
Effective Risk and Uncertainty Analysis
Trained and Experienced Analysts
Identification of a Range of Confidence LevelsAdequate Contingency and
Management Reserves
Complex Project or Technology
Unrealistic Project Savings
New Processes Untrained and Inexperienced Analysts
No or Limited Comparison Data Available
Project Instability
Unrealistic Assumptions Overoptimism
Unrealistic or Unreliable Data
Unfamiliar Technology or First-Time UseProblems Getting Access to Data Unreasonable
Project Baseline
Ineffective Risk and Uncertainty Analysis
• Lost of reasons for and causes of inaccurate cost estimates
February 3, 2010 17
Sources of Risk and Uncertainty in Estimating Costs
• Lack of understanding of the project requirements
• Shortcomings of human language and differing interpretations of meaning of project
• Behaviour of parties involved in the cost estimation process
• Haste
• Deception
• Poor cost estimating and pricing practices
February 3, 2010 18
Specific Risks
• Sizing and Technology− Overly optimistic developers− Poor assumptions on the use of reused
code− Vague or incomplete requirements− Not planning for additional effort
associated with packages –integration, testing
• Complexity− Tools− Applications: software purpose and
reliability− Hardware limitations− Number of modules affecting
integration effort
• Capability− Mixed skills of team− Optimistic assumption on
development tools− Optimistic assumption on productivity− Geographically dispersed team making
communication and coordination more difficult
• Management− Management’s dictating an unrealistic
schedule− Incorporating a new method,
language, tool or process for the first time
− Not handling creeping requirements and change proactively
− Inadequate quality control, causing delays in fixing unexpected defects
− Unanticipated risks associated with package software upgrades and lack of support
February 3, 2010 19
Importance of System Requirements and Solution Lifecycle Costs
• System requirements drive costs, both implementation and operation
• A factor present in every successful project and absent in every unsuccessful project is sufficient attention to requirements
• Half of all bugs can be traced to requirement errors
• Fixing these errors consumes 75% of project rework costs
• 25%- 40% percent of all spending on projects is wasted as a result of re-work
• 66% of software projects do not finish on time or on budget
• 56% of project defects originate in the requirements phase of the project
• Completed projects have only 52% of proposed functionality
• 75-80% of IT project failures are the result of requirements problems
• The average project exceeds its planned schedule by 120%
• 53% of projects will cost 189% of their original estimate
• 30% of projects are cancelled before completion
• 50% of projects are rolled back out of production
• The typical project expends least effort on analysis where most errors originate and whose errors cost most to fix
• Requirements errors cost the most and that poor requirements are the main cause of project failure
February 3, 2010 20
Requirements Drive Project Costs
• While minimal costs have actually been spent at the requirements phase of the entire project process, approximately 80% or more of total life cycle costs have already been determined at this stage
• Need to get requirements right from the outset to control costs effectively
Development and
Implementation Starts
Design Finalised
Requirements Defined
and Agreed
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Project Timescale
Co
sts
Co
mm
itte
d a
nd
Sp
en
t
Costs Determined by Decisions on Requirements and Design Actual Money Spent
February 3, 2010 21
Aligning the Solutions Being Delivered
• Need more than project management− Not the complete picture
− Cannot treat project management in isolation
• Need to ensure that the solution being managed meets business requirements
• Need to ensure business requirements are captured
• Need to ensure that solutions are designed to deliver business requirements and comply with organisation’s enterprise architecture
• Getting requirements right is essential for effective IT investment management
• Fundamentally the project exists to manage the delivery of the solution that has been designed to meet business requirements that assist with delivery of the business plan
February 3, 2010 22
Complete Picture of Project Selection and Delivery
• Need to consider all aspects of project selection and delivery:
−What the business wants (requirements)
−What the business gets (solution that delivers on requirements)
−Delivered according to business priority (project portfolio management)
− Implemented properly (project management)
• Cannot take an individual view without risking problems
• Need to emphasise the importance of the solution whole lifecycle and the interdependence of the roles
February 3, 2010 23
Lessons Learned From Large Systems Implementation
80 %
65 %
60 %
50 %
45 %
35 %
35 %
30 %
20 %
More attention on process optimisation
Align systematically to company goals
Pay more attention to understanding the subject area spanned
Outsource project management of the project to a third party
Increase investment in training
Greater employees involvement
Enforce changes more courageously
Identify and capture proof of benefits and saving as part of scope
Avoid big-bang implementations
55 % Implementation of a management information system as part of scope
February 3, 2010 24
Types of Cost Estimates
• Life Cycle Cost Estimate (LCCE) - includes independent cost estimates, independent cost assessments and total ownership costs− Encompasses all past (or sunk), present and future costs for every aspect of the
program, regardless of funding source
• Business Case Analysis (BCA) - includes an analysis of alternatives and/or economic analyses− Cost benefit or comparative analysis that presents facts and supporting details
among competing alternatives− Includes life-cycle costs from LCCE and also quantifiable and unquantifiable
benefits
• Rough Order of Magnitude (ROM ) - developed when a quick estimate is needed and few details are available− Usually based on historical ratio information− Typically developed to support what-if analyses− Helpful for examining differences in high-level alternative see which are the
most feasible− A rough order of analysis should never be considered a budget-quality cost
estimate
February 3, 2010 25
Life Cycle Cost Estimate (LCCE) Composition
•Hardware•Software•Development and Implementation•Management•Installation•Transition and Cutover•Conversion
BASIC SYSTEM COST•Training•Documentation•Support Facilities•Parallel Running•Warranty
TOTAL SYSTEM COST •External Support and Maintenance•Subscription
PROCUREMENT COST
•Planning, Research, Analysis and Design•Ongoing Test Facilities
SYSTEM ACQUISITION COST •Operations
•Internal Support•Disposal
LIFE CYCLE COST
February 3, 2010 26
LCCE Cost Composition
• Depending on the life of the solution being implemented, the operating costs can be 1-3 times the cost of acquisition
System Acquisition Cost
COST
YEARS
Operating and Support Cost
Total Cost of Ownership
February 3, 2010 27
IT Investment Management and Project and Solution Lifecycle
Business Analysis
Solution Operation
Solution Architecture and
Design
Project Portfolio Management
Structured Capture and Management of Requirements and
Cost Benefit Analysis of Solution Costs
Design/Selection of Cost Effective
Solutions to Meet Requirements
Including Evaluation of All
Options
Prioritisation of Projects and Investment Decisions
Cost Effective Delivery of
Projects and Management of
Costs
Programme and Project
Management
Cost Effective Operation of
Delivered Solution and Effective Retirement/
Replacement/ Upgrade Decisions
February 3, 2010 28
Benefits of Effective IT Investment Management Framework
• Aligns investments to business goals and objectives
• Identifies and track spending on IT investments
• Controls and monitor IT investment projects
• Confirms that IT investments are meeting business objectives
• Leverages IT investment opportunities that may generate internal capital
• Make informed decisions on an IT investment portfolio by assessing value and risk
• Demonstrates that IT can be trusted to invest wisely
February 3, 2010 29
IT Investment Management Framework
Pre-Selection and Identification
Stage
Selection StageEvaluation Stage
Control Stage
Technology and Systems Portfolio
Organisation Strategic Plan
Business Plans and Associated
Technology Needs
Investment Results
What Proposed IT Investments Potentially
Solve the Identified Business Needs?
Which IT Investments
Best Meet the Business Needs?
Are the Selected IT Investments Performing
as Planned?
Did the Selected IT Investments
Deliver the Expected
Business Value?
February 3, 2010 30
IT Investment Management Stages
Translate business value into performance measures
Develop detailed project plans and execute projects in accordance with project management standards
Develop applications in accordance with technical and data standards for information technology
Submit project status reports, requests for baseline adjustments greater than defined percentage (typically 10%) and verification and validation reports for each major IT project
Conduct post implementation reviews on major IT projects using the asset performance measures established in the Control Phase
Use asset performance measures to measure the business value
Document IT asset performance
Analyse gaps between current business needs and performance of IT assets
Make a determination to maintain, migrate, improve, or retire each IT asset in the technology portfolio
Evaluate, score, and rank IT investments
Prioritise IT projects
Identify business needs and prioritise potential investments
Develop investment business cases
Research possible enterprise/collaboration opportunities
Update the Strategic plan and technology Portfolio
Pre-Selection and Identification
StageSelection Stage
Evaluation Stage Control Stage
February 3, 2010 31
IT Investment Management Control Function Responsibilities
Portfolio Management
Earned Value Management
Scope, Cost and Schedule
Management
Risk Management
Progress Reporting and Management
Technical Requirements Management
Technical Scope Management
IT Investment Management
Control Function
February 3, 2010 32
Portfolio Management
• Portfolio Management is an approach typically combined with a set of tools for identifying, diagnosing, controlling, and increasing the aggregate return on investments at a given level of risk tolerance
• Based on the management principle that any set of investments requires proactive management to maximise value while minimisingrisk
• IT portfolio management takes advantage of an integrated set of IT management processes, techniques, and tools that assist decisionmakers in analysing, selecting, evaluating, and controlling an optimal set of investments
• Properly executed IT portfolio management delivers the benefits of balancing supply and demand of IT resources (financial and non-financial), eliminating redundancy, and enabling better alignment with strategic goals
February 3, 2010 33
Earned Value Management
• Earned Value Management (EVM) is a project management metric that integrates the technical scope of work with schedule and cost elements for investment planning and control
• Compares the value of work accomplished in a given period with the value of the work expected in that period
• Differences in expectations are measured in both cost and schedule variances
• Use EVM in performance-based management systems
• Management of a cost estimate involves continually updating the estimate with actual data as they become available (EVM) revising the estimate to reflect changes and analysing differences between estimated and actual costs
February 3, 2010 34
Cost Estimation Best Practices Checklist
• The cost estimate type is clearly defined and is appropriate for its purpose
• All applicable program costs have been estimated, including all life-cycle costs
• The cost estimate is independent of funding source
• An affordability analysis has been performed at the agency level to see how the project fits within the overall portfolio
• The estimate is updated as actual costs become available from the EVM system or as requirements change
• Post mortems and lessons learned exercises are continually documented as information becomes available
February 3, 2010 35
Cost Estimating Process
Step 1: Define the Purpose of
the Estimate
Step 2: Develop the Estimating
Plan
Step 3: Define the
Project
Step 4: Determine
the Estimating Approach
Step 5: Identify Ground
Rules and Assumptions
Step 6: Obtain Data
Step 7: Develop
Point Estimate
Step 8: Conduct
Sensitivity Analysis
Step 9: Conduct Risk
and Uncertainty
Analysis
Step 10: Document
the Estimate
Step 11: Present
Estimate for Approval
Step 12: Update
Estimate to Reflect
Actual Costs and Changes
Initiation and Research
The audience, what is being estimated and why It is being estimated are
very importance
Assessment
Cost assessment steps are iterative and can be accomplished in varying
order or concurrently
Analysis
The confidence in the point or range of the
estimate is crucial to the decision maker
Presentation
Documentation andpresentation can make or
break a cost estimatingdecision outcome
February 3, 2010 36
Cost Estimating Process
• Each of the 12 steps is important for ensuring that high-quality cost estimates are developed and delivered in time to support important decisions
February 3, 2010 37
Cost Estimating Process
• Step 1: Define the Purpose of the Estimate
−Determine the estimate’s purpose
−Determine the level of detail required
−Determine who will receive the estimate
−Determine the overall scope of the estimate
• Step 2: Develop the Estimating Plan
−Determine the cost estimating team
−Outline the cost estimating approach
−Develop the estimate timeline
−Determine who will do the independent cost estimate
−Develop the schedule
February 3, 2010 38
Cost Estimating Process
• Step 3: Define the Project − Identify in a technical baseline description document− The purpose of the project− Its system and performance characteristics− Any technology implications− All system configurations− project acquisition schedule− Acquisition strategy;− Relationship to other existing systems− Support (manpower, training, etc.) and security needs− Risks− Assumptions− System quantities for development, test, and production− Deployment and maintenance plans;− Predecessor or similar legacy systems
• Step 4: Determine the Estimating Approach− Define work breakdown structure (WBS) and describe each element − Choose the estimating method best suited for each WBS element− Identify potential cross-checks for likely cost and schedule drivers.− Develop a cost estimating checklist
February 3, 2010 39
Cost Estimating Process
• Step 5: Identify Ground Rules and Assumptions− Clearly define what is included and excluded from the estimate− Identify global and program specific assumptions such as:
• The estimate’s timescale, including time-phasing and life cycle• Program schedule information by phase• Program acquisition strategy• Any schedule or budget constraints• Inflation assumptions• Costs such as travel and other expenses• Equipment the organisation is to furnish• Prime contractor and major subcontractors• Use of existing facilities or new modifications or developments• Technology refresh cycles• Technology assumptions and new technology to be developed• Commonality with legacy systems and assumed heritage savings• Effects of new ways of doing business
• Step 6: Obtain Data− Create a data collection plan with emphasis on collecting current and relevant technical, programmatic, cost, and
risk data.− Investigate possible data sources− Collect data and normalise them for cost accounting, inflation, learning, and quantity adjustments− Analyse the data to look for cost drivers, trends, and outliers compare results against rules of thumb and
standard factors derived from historical data− Interview data sources and document all relevant information including an assessment of data reliability and
accuracy
February 3, 2010 40
Cost Estimating Process
• Step 7: Develop Point Estimate− Develop the cost model by estimating each WBS element, using the best methodology
from the data collected− Include all estimating assumptions in the cost model− Express costs in constant year currency− Time-phase the results by spreading costs in the years they are expected to occur,
based on the pro gram schedule− Sum the WBS elements to develop the overall point estimate− Validate the estimate by looking for errors like double counting and omitting costs− Compare estimate against the independent cost estimate and examine w here and why
there are differences− Perform cross-checks on cost drivers to see if results are similar− Update the model as more data become available or as changes occur and compare
results against previous estimates
• Step 8: Conduct Sensitivity Analysis− Test the sensitivity of cost elements to changes in estimating input values and key
assumptions− Identify effects of changing the program schedule or quantities on the overall estimate− Determine which assumptions are key cost drivers and which cost elements are
affected most by changes
February 3, 2010 41
Cost Estimating Process
• Step 9: Conduct Risk and Uncertainty Analysis− Determine the level of cost, schedule, and technical risk associated with each WBS element and discuss with
technical experts− Analyse each risk for its severity and probability of occurrence− Develop minimum, most likely, and maximum ranges for each element of risk− Use an acceptable statistical analysis methodology to develop a confidence interval around the point estimate− Determine type of risk distributions and reason for their use− Identify the confidence level of the point estimate− Identify the amount of contingency funding and add this to the point estimate to determine the risk-adjusted
cost estimate− Recommend that the project office develop a risk management plan to track and mitigate risks
• Step 10: Document the Estimate− Document all steps used to develop the estimate so that it can be recreated quickly by a cost analyst unfamiliar
with the program and produce the same result− Document the purpose of the estimate, the team that prepared it, and who approved the estimate and on what
date− Describe the program, including the schedule and technical baseline used to create the estimate− Present the time-phased life-cycle cost of the program− Discuss all ground rules and assumptions− Include auditable and traceable data sources for each cost element− Document for all data sources how the data were normalised− Describe the results of the risk, uncertainty, and sensitivity analyses and whether any contingency funds were
identified− Document how the estimate compares to the funding profile− Track how this estimate compares to previous estimates, if applicable
February 3, 2010 42
Cost Estimating Process
• Step 11: Present Estimate for Approval− Develop a briefing that presents the documented life-cycle cost estimate for management
approval, including• An explanation of the technical and programmatic baseline and any uncertainties;• A comparison to an independent cost estimate (ICE) with explanations of any differences;• A comparison of the estimate (life-cycle cost estimate (LCCE) or independent cost estimate to the budget;
and• Enough detail so the presenter can easily defend the estimate by showing how it is accurate, complete, and
high in quality.
− Focus the briefing, in a logical manner, on the largest cost elements and drivers of cost− Make the content concise and complete so that those who are unfamiliar with it can easily
comprehend the competence that underlies the estimate results− Make backup slides available for more probing questions− Act on and document feedback from management− The cost estimating team should request acceptance of the estimate
• Step 12: Update Estimate to Reflect Actual Costs and Changes− Update the estimate to
• Reflect any changes in technical or program assumptions• Keep it current as the program passes through new phases
− Replace estimates with EVM EAC and Independent estimate at completion (EAC) from EVM− Report progress on meeting cost and schedule estimates− Perform a post mortem and document lessons learned for elements whose actual costs or
schedules differ from the estimate.− Document all changes to the program and how they affect the cost estimate
February 3, 2010 43
Work Breakdown Structure
• Cornerstone of every project because it defines in detail the work necessary to accomplish a project’s objectives− Essential part of developing a project’s cost estimate
− WBS reflects the delivery of the agreed requirements to the agreed solution design
• A typical WBS reflects the requirements, resources and tasks that must be accomplished to develop a program
• WBS communicates to everyone what needs to be done and how the activities relate to one another
• Provides a consistent framework for planning and assigning responsibility for the work
• Define a project in terms of product-oriented elements, broken into a hierarchical structure
• Product-oriented WBS ensures that all costs are captured
February 3, 2010 44
Validating Cost Estimates
• Cost estimates should be validated against best practice characteristics
− Comprehensive
−Well-documented
−Accurate
− Credible
February 3, 2010 45
Validating Cost Estimates
• Comprehensive
− Completely define the program and reflect the current schedule
− Include all possible costs using a logical WBS that accounts for all requirements
− Ensure that no costs are omitted nor double-counted
− Explain and document key assumptions that are technically reasonable
• Well-documented
− They can be easily repeated or updated and traced to original sources through auditing
− Supporting documentation identifies the data sources, justifies all assumptions, and provides a description of each estimating methodology for every WBS cost element
− Schedule milestones and deliverables are traceable and consistent with the cost estimate documentation
February 3, 2010 46
Validating Cost Estimates
• Accurate− They are not overly conservative or too optimistic− Based on an assessment of most likely costs and adjusted properly for inflation − Contain few, if any, mistakes that are minor in nature− Are updated when assumptions or requirements change to reflect current status − Cost estimating relationships and parametric cost models are validated to ensure they are good
predictors of costs• Data is current and applicable to the new program, • The relationships between technical parameters are logical and statistically significant• Results are tested with independent data
• Credible − They clearly identify any limitations because of uncertainty or biases surrounding the data or assumptions− Results are similar to cross-checks and an independent cost estimate derived using different
methodologies• Independent cost estimates performed by estimators farthest away from the acquiring program office represent a
best practices because they− Tend to produce higher and more accurate cost estimates than those performed by staff sharing a common supervisor
with the program office− Produce more credible estimates than other types of independent estimate reviews which may not be as inclusive as an
ICE (e.g., IGCE, ICA, Sufficiency Review, etc.)
− A sensitivity analysis has been performed to identify cost drivers and the impacts of varying assumptions − A risk / uncertainty analysis has been performed to determine the level of risk associated with the point
estimate
February 3, 2010 47
Cost Assessment Team
• Cost estimates are frequently developed with an incomplete knowledge of what the exact final technical solution will be
• Cost assessment team must manage a great deal of risk, especially for programs that are complex or use leading edge of technology
• Cost estimates define what a given solution will ultimately cost
• Estimate will be affected by multiple assumptions and an interpretation of what the historical data represent
February 3, 2010 48
Disciplines and Concepts in Cost Analysis
Economics•Break-even Analysis•Personnel Cost•Inflation•Present Value Analysis
Cost Analysis Team Skills
Budgeting•OrganisationSpecific Skills•Program Specific Skills
Information Technology
•Analysis•Design•Development•Testing•Scheduling•System Integration
Statistics•Forecasting•Risk/Uncertainty Analysis
Accounting•Cost Data Analysis•Financial Analysis•Overhead Analysis•Proposal Analysis
Interpersonal Skills
•Approach•Estimate•Knowledge
Commercial•Analysis of Commercial Models•Analysis of Proposals•Development of Cost Estimating Relationship
February 3, 2010 49
Centralised vs. Decentralised Costing Function
• Centralised Costing Function
− Facilitates the use of standardisedand consistent processes
− Better resource sharing
− Common tools and training
− Ability to resist pressure to lower the cost estimate when it is higher than the allotted budget
− Can be remote from technical experts
• Decentralised Costing Function
− Often results in ad hoc and inconsistent processes
− Decreased independence
− Greater access to local technical resources
February 3, 2010 50
Cost Assessment Team Best Practices Checklist
• The estimating team’s composition has the skills needed for the program of work− The team has the proper number and mix of resources
− The team has the proper number and mix of resources
− The team includes experienced and trained cost analysts
− The team includes, or has direct access to, analysts experienced in the program’s major areas
− Team members’ experience, qualifications, certifications, and training are identified
• A master schedule with a written study plan has been developed
• The team has access to the necessary subject matter experts
February 3, 2010 51
IT Investment Management Maturity Stages
DescriptionDescription
Creating Investment
Awareness
Building the Investment
Foundation
Developing a Complete
Investment Portfolio
Improving the
Investment Process
Leveraging IT for
Strategic Outcomes5
4
3
2
1
The organisation has mastered the selection, control, and evaluation
processes and now seeks to shape its strategic outcomes by
benchmarking its IT investment processes relative to other "best-in-class"
organizations.
The organisation is focused on evaluation techniques to improve its IT
investment processes and portfolio(s), while maintaining mature selection
and control techniques.
The organisation has developed a well-defined IT investment portfolio
using an investment process that has sound selection criteria and
maintains mature, evolving, and integrated selection, control, and
evaluation processes.
Basic selection capabilities are being driven by the development of project
selection criteria, including benefit and risk criteria, and an awareness of
organizational priorities when identifying projects for funding. Executive
oversight is applied on a project-by-project basis.
Ad hoc, unstructured, and unpredictable investment processes
characterise this stage. There is generally little relationship between the
success or failure of one project and the success or failure of another
project.
February 3, 2010 52
Increasing IT Investment Management Maturity
1 Creating Investment
Awareness
2 Building the Investment
Foundation
3 Developing a Complete
Investment Portfolio
4 Improving the
Investment Process
5 Leveraging IT for
Strategic Outcomes
1. The organisation learns from and adopts the tools, techniques, or methods used by best-in-class external organisations
2. Changes to strategic business processes are driven by the capabilities of identified information technologies
1. Evaluation techniques are being used to improve the investment processes and the portfolio
2. Succession management processes are developed for retaining or disposing of investments.
1. Criteria are developed for identifying investments that best fit with the portfolio.
2. The portfolio is developed through the use of categorisation when comparing investments.
3. Performance reviews are conducted both during and after implementation
1. An investment board is established to drive the investment process
2. Business needs are identified for each project3. An investment selection process is developed4. Board oversees the progress of individual projects5. Investment information is collected and disseminated
