Project Initiation: Strategic Planning and Project Selection

The first step in initiating projects is to look at the big picture or strategic plan of an organization Strategic planning involves determining long-term business objectives IT projects should support strategic and financial business objectives

Identifying Potential Projects

Many organizations follow a planning process for selecting IT projects First develop an IT strategic plan based on the organizations overall strategic plan Then perform a business area analysis Then define potential projects Then select IT projects and assign resources

Methods for Selecting Projects

There are usually more projects than available time and resources to implement them It is important to follow a logical process for selecting IT projects to work on Methods include focusing on broad needs, categorizing projects, financial methods, and weighted scoring models

Categorizing Projects
One categorization is whether the project addresses
a problem an opportunity a directive

Another categorization is how long it will take to do and when it is needed Another is the overall priority of the project

Financial Analysis of Projects

Financial considerations are often an important consideration in selecting projects Three primary methods for determining the projected financial value of projects:
Net present value (NPV) analysis Return on investment (ROI) Payback analysis

Return on Investment
Return on investment (ROI) is income divided by investment
ROI = (total discounted benefits - total discounted costs) / discounted costs

The higher the ROI, the better Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects

Net Present Value Analysis

Net present value (NPV) analysis is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time Projects with a positive NPV should be considered if financial value is a key criterion The higher the NPV, the better

Figure 4-2. Net Present Value Example

Excel file

Return on Investment
Return on investment (ROI) is income divided by investment
ROI = (total discounted benefits - total discounted costs) / discounted costs

The higher the ROI, the better Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects

Payback Analysis
Another important financial consideration is payback analysis The payback period is the amount of time it will take to recoup, in the form of net cash inflows, the net dollars invested in a project Payback occurs when the cumulative discounted benefits and costs are greater than zero Many organizations want IT projects to have a fairly short payback period

Steps
1. For each participant in the exercise, assemble a deck of cards, with the name and description of one project on each card Instruct each participant to divide the deck into two piles, one representing a high priority, the other a low priority level. ( The piles need not be equal) Instruct each participant to select cards from each pile to form a third pile representing the medium-priority level Instruct each participant to select cards from the high-level pile to yield another pile representing the very high level of priority; select cards from the low-level pile representing the very low level of priority Finally, instruct each participant to survey the selections and shift any cards that seem out of place until the classifications are satisfactory

Results at each step

Original deck

2.

High level

Low level

3.

High level

Medium level

Low level

4.

Medium level

Very high level

High level

Low level

Very low level

5.

Weighted Scoring Model

A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria
First identify criteria important to the project selection process Then assign weights (percentages) to each criterion so they add up to 100% Then assign scores to each criterion for each project Multiply the scores by the weights and get the total weighted scores

The higher the weighted score, the better See What Went Right? on pg. 87 for a description of how a mortgage finance agency uses a weighted scoring model for IT projects

Scores Criteria Appearance Braking Comfort Cost, operating* Cost, Original* Handling Reliability
*Cost data in $1000s

1 UGH >165 Bad >$2.5 >$32.5 <45 Worst

2 Poor 165-150 Poor $2.1-2.5 $26-32.5 45-49.5 Poor

3 Adequate 150-140 Adequate $1.9-2.1 $21-26 49.5-55 Adequate

4 Good 140-130 Good $1.6-1.9 $17-21 55-59 Good

Criteria and Weights Cost, operating (0.12) 2 x 0.12 = 0.24 5 x 0.12 = 0.60 4 x 0.12 = 0.48 2 x 0.12 = 0.24 2 x 0.12 = 0.24 Cost, original (0.24) 1 x 0.24 = 0.24 4 x 0.24 = 0.96 3 x 0.24 = 0.72 2 x 0.24 = 0.48 1 x 0.24 = 0.24

Alternative Leviathan 8 NuevoEcon Maxivan Sporticar 100 Ritzy 300

Appearance (0.10) 3 x 0.1 0.30 3 x 0.1 0.30 2 x 0.1 0.20 5 x 0.1 0.50 4 x 0.1 0.40 = = = = =

Braking (0.07) 1 x 0.07 = 0.07 3 x 0.07 = 0.21 1 x 0.07 = 0.07 4 x 0.07 = 0.28 5 x 0.07 = 0.35

Comfort (0.17) 4 x 0.17 = 0.68 2 x 0.17 = 0.34 4 x 0.17 = 0.68 3 x 0.17 = 0.51 5 x 0.17 = 0.85

Handling (0.17) 2 x 0.17 0.34 2 x 0.17 0.34 1 x 0.17 0.17 5 x 0.17 0.85 4 x 0.17 0.68 = = = = =

Reliability (0.12) 3 x 0.12 0.36 4 x 0.12 0.48 3 x 0.12 0.36 2 x 0.12 0.24 5 x 0.12 0.60 = = = = =

sijwi 2.23 3.23 2.68 3.1 3.36

Scores for alternative cars on selection criteria

Project Scoring Sheet

Project A Raw score 5 3 2 Weighted score 50 120 100 270 Project B Raw score 3 3 5 Weighted score 30 120 250 400

Criterium Technical soundness Finanical soundness Marketability Total

Weight 10 40 50 100

Criteria and Weights for Automobile Purchase

Appearance Braking Comfort Cost, operating Cost, original Handling Reliability Total 4 3 7 5 10 7 5 41 .10 .07 .17 .12 .24 .17 .12 .99

Automobile Selection Criteria, Measures and Data Sources

Appearance Braking Comfort Cost, operating Cost, original Handling Reliability Subjective judgment, personal Distance in feet, 60 - 0 mph, automotive magazine Subjective judgment, 30 min. road test Annual insurance cost plus fuel cost Dealer cost, auto-cost service Average speed through standard slalom, automotive magazine Score on Consumer Reports, Frequency-ofRepair data (average of 2 previous years)

Project Evaluation Factors

Production Factors 1. Time until ready to install 2. Length of disruption during installation 3. Learning curve time until operating as desired 4. Effects on waste and rejects 5. Energy requirements 6. Facility and other equipment requirements 7. Safety of process 8. Other applications of technology 9. Change in cost to produce a unit output 10. Change in raw material usage 11. Availability of raw materials 12. Required developments time and cost 13. Impact on current suppliers 14. Change in quality of output Marketing Factors 1. Size of potential market for output 2. Probable market share of output 3. Time until market share is acquired 4. Impact on current product line 5. Consumer acceptance 6. Impact on consumer safety 7. Estimated life of output 8. Spin-off project possibilities Financial Factors Profitability, net present value of the investment Impact on cash flows Payout period 3. Cash requirements 4. Time until break-even 5. Size of investment required 6. Impact on seasonal and cyclical fluctuations Personal Factors 1. Training requirements 2. Labor skill requirements 3. Availability of required labor skills 4. Level of resistance from current work force 5. Change in size of labor force 6. Inter- and intra-group communication requirements 7. Impact on working conditions Administrative and Miscellaneous Factors 1. Meet government safety standards 2. Meet government environmental standards 3. Impact on information system 4. Reaction of stockholders and security markets 5. Patent and trade secret protection 6. Impact on image with customers, suppliers, and competitors 7. Degree to which we understand new technology 8. Managerial capacity to direct and control new process