VIII 1 ReiferCase

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September 2001 Copyright RCI, 2001 3

Why Write a Book on Software

Business Cases? Over the years, I have observed that software

engineers dont 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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C S EUniversity of Southern CaliforniaCenter for Software Engineering


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I Didnt Write it for the Money Those writing books do it

for recognition and self-

satisfaction Authors dont write

technical books to make lots

of money

If my publisher sold 5,000copies of the book, I wouldmake about $15/hour

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Table of Contents Part I - FundamentalConcepts Chapter 1: Improvement

is Everybodys Business Chapter 2: Making a

Business Case

Chapter 3: Making the

Business Case: Principles,

Rules, and Analysis Tools Chapter 4: Business

Cases that Make Sense

Part II - The Case Studies Chapter 5 - Playing the Game of

Dungeons and Dragons: Process

Improvement Case Study

Chapter 6: Quantifying the

Costs/Benefits: Capitalizing

Software Case Study

Chapter 7: Making Your

Numbers Sing: Architecting

Case Study

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:

Look for updates Converse with author

Realistic case studies

Actual managementbriefings as part of case

studies

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http://www.awl.com/cseng/titles/0-201-72887-7


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Success is a Numbers Game

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Will this proposal save money, cut costs, increase

productivity, speed development or improve quality?

Have you looked at the tax and financial implicationsof the proposal?

Whats 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?

Answer Business-Related Questions


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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 soundfinancial 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

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Business Planning Process

Tradeoff and Analysis Processes

Software Development Process

AnalyticalMethods

Models Guidelines forDecision-Making

Process The business case process proceeds in parallel and

Framework interfaces with the software development process

Principles, Rules and Tools for Business Case Development


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The Business Planning Process

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1. Prepare

white paper

2. Demonstrate

technical feasibility

3. Conduct

market survey

4. Develop

business plan

5. Prepare

business case

6. Sell the idea and

develop support base

7. Get ready

to execute

GQM Results

Idea or proposal

Proof of

ConceptApproval to

go-ahead


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Nine Business Case Principles Decisions are made

relative to alternatives

If possible, use money as

the common denominator Sunk costs are irrelevant

Investment decisions

should recognize the time

value of money Separable decisions must

be considered separately

Decisions should consider

both quantitative and

qualitative factors

The risks associated withthe decision should be

quantified if possible

The timing associated with

making decisions is critical Decision processes should

be periodically assessed

and continuously improved

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Many Rules to Use as Guidelines Prepare business cases in

language to communicate

to management Define all of your terms

thoroughly

Bring in the outside

experts to help if needed Double and triple check

your numbers

Never state a number

without bounding it

Remember, numbers willcome back to haunt you

Never talk cost reduction;

use avoidance instead

Always relate your

numbers to benchmarksand your competition

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Preparation Presentation


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Many Tools and 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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Analysis Techniques


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Supportive Tools

Decision support systems

Tax planning and schedules

Trade studies and analysis

Spreadsheets

Comparative analysis


Software cost models Parametric analysis


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Software packages


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Business Case Information Needs Business cases

Recurring costs

Non-recurring costs

Tangible benefits

Intangible benefits

Benchmarks Competitive comparisons

Industry norms

Metrics

Management measures

Financial data

Inflated labor costs

Labor categories/rates

Overhead/G&A rates

Past costs/performance

Tax rates/legalities

Marketing information Demographic data Market position

Sales forecast

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Preparing a COTS Business Case

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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

Use COCOTS Estimates most of the non-

recurring costs

Recurring costs should be

estimated, for now, using

rules of thumb

Relationship management

Nurtures relationships and

develops partnerships Technology refresh

Market watch looks for better

value for $$$

Use COCOMO II

Estimates benchmark costs for

option of developing code

from scratch or legacy

Calibrate model for domain

Use maintenance model to

include rest of life cycle

Intangibles

Hard to quantify the cost andschedule impacts

Even if you did quantify

them, lots of controversy

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Costs Benefits


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Presenting the Business Case

Determine decision

timeline (5 years)

Take PV of B/C Ratio

Calculate ROI

Make a second pass to

include depreciation

Try to quantify the

intangibles

Discuss the impact, but

dont dilute the numbers

using it (credibility)

List pluses and minuses

of options considered

Make a recommendationbased on the informationpresented

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ROI = ?/year

ROI = ?/year


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COTS Pluses and Minuses

Cheaper; but does notcome for free

Available immediately Known quality (+ or -)

Vendor responsible for

evolution/maintenance

Dont have to pay for it

Can use critical staff

resources elsewhere

License costs can be high

COTS products are not

designed to plug & play Vendor behavior varies

Performance often poor

Vendor responsible for

evolution/maintenance Have no control over the

products evolution

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Pluses Minuses


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The COTS Life Cycle

Requirements

Design

Implementation

Integration & Test

Deploy

Operate & Maintain

Evaluate, Select& Acquire

Tailor Renew

Refresh

COTS tends to have a

life cycle of its own

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COTS Success Strategies Process

Merge COTS life cycleinto your organizationalframework

Make needed tradeoffs Think both technical andbusiness issues

Products

Fit COTS components intoproduct line strategies

Maintain open interfaces

Manage technology refresh

People Make COTS vendors a

part of your team

Increase awareness of

COTS experience Provide workforce withstructure and information

Institutional

Improve purchasing andlicensing processes

Maintain market watch

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 businessissues discussed when making recommendations

for improvement

Hopefully, my book will help software engineersto perform these duties and succeed - as theyve

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 managements

language not ours

Dont be casual about

numbers, be precise If you want to learn more,

read my book

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