Software Project Management

spm - ©2014 adolfo villafiorita - introduction to software project management

Project Initiation: Feasibility and
Project Authorization
Initiating a project

spm - ©2014 adolfo villafiorita - introduction to software project management

 Goals of this Unit
• Learning qualitative and quantitative techniques
to select among different projects
• Learning qualitative and quantitative techniques
to choose the best alternative among different
implementations of the same project
• Understanding how to write a Feasibility Study
• Choosing between internal development or
external development (make or buy)

3
spm - ©2014 adolfo villafiorita - introduction to software project management
 How does a project start?
• Initiation by some stakeholder (a company, a
potential customer, ...) driven by a need (market,
social, legal, technological advance, ...)
• Boundaries and process not always clear or
very formalized
• First activities performed to:
– Agree on the goals (scope)
– Understand value and risks (for the performing
organization and for the other stakeholders)
– Choose a project approach

4
spm - ©2014 adolfo villafiorita - introduction to software project management
 Initiate Plan Execute & Close
Monitor

Assess Formalize Collect

Close
Feasibility Goals
Outputs

and Schedule
Monitor Goals, Cost
Develop Release

Define Kick Off

Schedule Activities

Define Costs

[Obtain
Approval]

Change Control & Configuration Management

Quality Management

Risk Management

Human Resource Management

spm - ©2014 adolfo villafiorita - introduction to software project management

Project Value and Risks

spm - ©2014 adolfo villafiorita - introduction to software project management

 Project Value and Risks
• Two main characteristics determine whether a project
is worth starting:
– The value generated by the project
– The risks associated to the project
• The meaning of value and risk depend upon many
factors
• Value and risks can be assessed qualitatively
or quantitatively
• Sound assessments are difficult, given the
unpredictability of projects (and of the
world)
• Garbage in = Garbage out
spm - ©2014 adolfo villafiorita - introduction to software project management
 Project Value and Risks
• Project Value:
– Direct and indirect value generated by the project
– Sustainability of the project outputs
– Alignment with strategic objectives of an
organization
• Project Risks
– Resource availability
– Timing
– Technical difficulties and uncertainties

spm - ©2014 adolfo villafiorita - introduction to software project management

 Value: Direct and Indirect Value
• Direct and Indirect Value measures the positive and
negative outcomes of a project and its outputs
• Some metrics to consider include:
– Revenues, both direct and indirect
– Social and environmental impact
– Image and publicity
– Know-how acquired

• Direct and indirect value are strictly related to the

business model and to the sustainability of the
project outputs (see next slide)

spm - ©2014 adolfo villafiorita - introduction to software project management

 Value: Sustainability

• Sustainability refers to the capacity of sustaining

the project and its outputs after the project end
• Taking into account the operational costs of a project’s
outputs and the way in which the project outputs will
survive after a project end is an important
consideration to understand whether a project is
worth starting.
• Often overlooked, especially when project
execution generates revenues

spm - ©2014 adolfo villafiorita - introduction to software project management

 Value: Alignment with the Strategic
Objectives

• The alignment with the strategic objectives

measures how important and relevant a project is
for the performing organization
• Priority, resource assigned, internal support,
opportunities for the project team after the project
end are all affected by how strategic a project is for
an organization

spm - ©2014 adolfo villafiorita - introduction to software project management

 Risks: Resource Availability

• Projects require the availability of human,

financial, and technical resources in specific
time-frames
• Although it might be difficult to preempt the
resources in advance, a check on the projects
needs is a good sanity-check
• Some aspects to consider include: the required
resource, current load and availability, projections on
future load and availability, priority and importance
of the project

spm - ©2014 adolfo villafiorita - introduction to software project management

 Risks: Timing

• Many projects have specific time-windows for

the delivery of their outputs
• Deliver too early or too late and the outputs of
the project might be useless
• Consider, for instance, the race of competing firms
in delivering similar products

spm - ©2014 adolfo villafiorita - introduction to software project management

 Risks: Technical Difficulty and
Uncertainty

• The success of many projects relies on the actual

capability of solving various technical challenges,
when the time comes
• Understanding what these challenges are is an
important factor in determining the risks associated to
a project

spm - ©2014 adolfo villafiorita - introduction to software project management

 Techniques to Assess Value and Risks

spm - ©2014 adolfo villafiorita - introduction to software project management

 1. Payback Period

The payback period is the time taken to gain a

financial return equal to the original investments

– Measured in months or years

– When using the payback period the projects/options that
minimize the payback period are chosen in favor of the
others

spm - ©2014 adolfo villafiorita - introduction to software project management

 Example
Project A Project B Project C

Year 0 € (50,000.00) € (20,000.00) € (15,000.00)

Year 1 € 30,000.00 € (10,000.00) € 15,000.00

Year 2 € 30,000.00 € 10,000.00 € 1,000.00

Year 3 € 1,000.00 € 60,000.00

Year 4 € 1,000.00 € 50,000.00

Expenses € (50,000.00) € (30,000.00) € (15,000.00)

Gains € 62,000.00 € 120,000.00 € 16,000.00

Profit € 12,000.00 € 90,000.00 € 1,000.00

Payback 2 3 years 1 year

years
Remark: accounting style notation.
Negative numbers in red and in
parentheses
spm - ©2014 adolfo villafiorita - introduction to software project management
 Discussion
• Advantages
– Simple, readily available data
– It reduces exposure to risk
– Particularly effective in high-technology/fashion
projects
– It favors shorter term benefits
• Disadvantages
– Difficult to use on longer term projects
– Based only on cash flows
– Does not quantify exposure to risk
– Does not look at total gains

spm - ©2014 adolfo villafiorita - introduction to software project management

 2. Payback Weaknesses
• Different projects might have the same payback period, but
different profiles in returning of the investments
• These profiles are not taken into account by the technique
but could make the different between two projects

spm - ©2014 adolfo villafiorita - introduction to software project management

 2. Payback Weaknesses

Same payback period, but Project A gets

more money first (and reduces risks)

Year Project A Project B

Year 0 € (10,000.00) € (10,000.00)
Year 1 € (5,000.00) € (5,000.00)
Year 2 € 10,000.00 € 5,000.00
Year 3 € 5,000.00 € 10,000.00

spm - ©2014 adolfo villafiorita - introduction to software project management

 2. Payback Weaknesses

Different payback periods, Project

A earlier but gets less money

Year Project A Project B

Year 0 € (10,000.00) € (10,000.00)
Year 1 € (5,000.00) € (5,000.00)
Year 2 € 5,000.00 € 5,000.00
Year 3 € 5,000.00 € 11,000.00
Year 4 € 20,000.00

spm - ©2014 adolfo villafiorita - introduction to software project management

 3. Return on Investment (ROI)

ROI calculates the average annual profit and

transforms it into a percentage of the total
investments

Profit = Returns - Investments

Annual Profit = Profit / Duration
ROI = Annual Profit /
Investments

• When using ROI, choose the project with the

highest
spm ROI
- ©2014 adolfo villafiorita - introduction to software project management
 Example
Suppose we have the following projections for a
project we need to decide whether to start or not
Project A Project B Project C

Year 0 € (50,000.00) € (20,000.00) € (15,000.00)

Year 1 € 30,000.00 € (10,000.00) € 15,000.00

Year 2 € 30,000.00 € 10,000.00 € 1,000.00

Year 3 € 1,000.00 € 60,000.00

Year 4 € 1,000.00 € 50,000.00

spm - ©2014 adolfo villafiorita - introduction to software project management

 Example
• Project A
– Profit = 62000 - 50000 = 12000

– Annual Profit = 12000 / 4 = 3000

– ROI = 3000 / 50000 = 6%

• Project B
– Profit = 120000 - 30000 = 90000

– Annual Profit = 90000 / 4 =

22500
– ROI = 22500 / 30000 = 75%
ROI)
• Project C SOLUTION: Project B (highest

– Profit = 16000 - 15000 =

spm - ©2014 adolfo villafiorita - introduction to software project management
 4. Discounted Cash Flows/Inflation
• The value of money decreases over the years (inflation!) according
to the inverse compound interests formula

Discount Factor = 1
(1 + i) n
where “i” is the discount rate and “n” is the number of periods

• Thus, giving it the money we invest now the same weight of money
we will get in five year is over optimistic
• DCF (Discounted Cash Flows) are techniques that take into
account inflation

• Curiosity: where does inflation comes

from? Answer: Debasement
A nice reference:
http://en.wikipedia.org/wiki/Inflation
spm - ©2014 adolfo villafiorita - introduction to software project management
 Net Present Value
• Net Present Value discounts sums in the future in order to provide a
more realistic comparison between presents investments and future
gains

spm - ©2014 adolfo villafiorita - introduction to software project management

 Net Present Value Example
1
Hypothesis
Discount Factor =
Discount Rate: 10% (1 + i) n
(this is “i”)
Year (n) Cash Flow Discount Factor Present Value
0 € (35,000.00) 1.00 € (35,000.00)
1 € 10,000.00 0.91 € 9,090.91
2 € 15,000.00 0.83 € 12,396.69
3 € 20,000.00 0.75 € 15,026.30

Expenditure € (35,000.00) € (35,000.00)

Gains € 45,000.00 € 36,513.90
Profit € 10,000.00 € 1,513.90

spm - ©2014 adolfo villafiorita - introduction to software project management

 Net Present Value: Discussion

• Advantages
– More accurate profit-loss data

• Disadvantages
– It uses a fixed discount rate (may be
unrealistic)
– It favors shorter terms projects

spm - ©2014 adolfo villafiorita - introduction to software project management

 6. Score Matrices
• The financial methods (Payback, ROI, NPV) look only
at some of the financial data
• Scoring matrices allow one to take into account
other factors
• They are based on a standardized set of criteria
and weights, which highlight the relevant features
of a project
• A qualitative evaluation of how a project scores with
respect to each criteria positions the project on a
scale and helps compare it with past or competing
projects

spm - ©2014 adolfo villafiorita - introduction to software project management

 Score Matrix Example
Factor Value Weight SUM Comment

The project aligns with the strategic objectives YES 2 2

The project has a profit > 2 0 % NO 4 0

Payback period < 2 years YES 5 5

Enlarges the customer base YES 2 2

NO 3 0
The project requires a standard technology

The quality constraints are simple to meet YES 1 1

The timing is not too tight

NO 4 0
We have skilled personnel to do the work
YES 5 5

15

– Value can be binary (YES/NO) or a number (e.g. from 1 to

5) and measures how well the project meets the
requirement
– The weight measures how important a factor is for the
spm - ©2014 adolfo villafiorita - introduction to software project management
 Discussion
• Advantages
– Simple
– It encourages standardization and more objectivity in
decision making
– It helps discuss and evaluate the project characteristics
– It widens the range of evaluation
– Not biased toward shorter term projects

• Disadvantages
– A simple model may encourage development of long
and useless lists
– Different factors have same importance (unless the
weight matrix is used)

spm - ©2014 adolfo villafiorita - introduction to software project management

 Caveat
– Not all score matrices are equally good.
– The following is an example of a bad
matrix.
Why?
Factor Valu Weight SUM Comment
e
The project has a profit > 2 0 % YES 3 3

The project is highly risky NO 3 0

SOLUTION
A positive factor (first row) and a negative factor (second row) influence in the same way the matrix

As a consequence an highly risky project is preferred over a project which is not very
risky

spm - ©2014 adolfo villafiorita - introduction to software project management

 33

Caveat

Make sure the questions either all positively

influence or all negatively influence the
decision or use scores with different signs!

spm - ©2014 adolfo villafiorita - introduction to software project management

 7. SWOT analysis
• Technique credited to Albert Humphrey
• Systematic analysis of:
– Strengths
– Weaknesses
– Opportunities
– Threats

... to understand the feasibility of a project and/or

come out with achievable project goals
• Often presented as a 2x2 matrix, with each cell listing
all elements of a given type (see next slide)

spm - ©2014 adolfo villafiorita - introduction to software project management

 Source: http://en.wikipedia.org/wiki/File:SWOT_en.svg (cc license)
spm - ©2014 adolfo villafiorita - introduction to software project management
 36

SWOT: Some factors to consider

• Strengths: • Weaknesses:
– Competences – Disadvantages
– Selling points – Methodology
– ... – Timing
– Capability Gaps

• Opportunities: • Threats:
– Market and – Market and Industry trends
Industry trends – Competing technologies
– Weaknesses of
– Sustainability
competitors

spm - ©2014 adolfo villafiorita - introduction to software project management

 Stakeholder Analysis
• Goal: understanding who are the project
stakeholders and the influence they have on the
project
• Different techniques available
• One technique organizes stakeholders in a 2x2
matrix in which:
– one dimension measures the power a stakeholder can
exert (low or high)
– the other dimension measures the interest a stakeholder
has in a project (negative or positive)
• This allows to define specific management policies
for the different stakeholders
spm - ©2014 adolfo villafiorita - introduction to software project management
 Assessing Sustainability
• The analysis is meant to understand the
operational costs of a project’s output
• Sometimes a specific project activity. A
preliminary sustainability analysis, however, can
help choose among different project
implementations
• Some aspects to consider include the business
model
and the break-even point

spm - ©2014 adolfo villafiorita - introduction to software project management

 The Feasibility Study

spm - ©2014 adolfo villafiorita - introduction to software project management

 Feasibility Study
• The feasibility study is the document that allows
to formally authorize a project and to link it to the
organization’s goals

– Wide range of outputs: from a few to hundreds of

pages (according to complexity and formality)
– The feasibility study can be thought of as a project in the
small, drafting the main information we will define in
more details during the project
– Basis for project selection: Management must choose
what projects to activate.

spm - ©2014 adolfo villafiorita - introduction to software project management

 Goals of a Feasibility Study
• Identify:
– the project goals
– the project constraints

• Assess value and risks (using the techniques

above)
• Ensure the project lines up with
– the customer objectives
– the performing organization objectives

• Demonstrate that the project goals

– can be achieved respecting the quality, cost, and
time constraints

spm - ©2014 adolfo villafiorita - introduction to software project management

 42

Feasibility Document: Structure

– A statement of work, which – An analysis of the
describes what the project stakeholders.
will accomplish. – The project risks.
– The business objectives – Possible alternatives to the
(value) of the project or its project, such as a make
outputs and information about or buy decision.
the business model, if
– An evaluation of the
relevant.
project and of the
– A summary of the project
alternatives, using the
budget, which forecasts techniques described
expenses and incomes. above.
– A summary of the project
milestones, that is, a rough
schedule of the project
identifying the most
importantspmevents.
- ©2014 adolfo villafiorita - introduction to software project management
 Feasibility: Additional
Considerations
• The feasibility document has a value for:
– The client, since it helps understand the
way forward and what are the short and
long term perspectives
– The performing organization, since it helps
understand whether it makes sense to move on
with a project
– The project manager, since it helps understand
whether the project will be in the manager’s
comfort zone or not (and take an informed
decision on whether the project is worth taking or
not)
spm - ©2014 adolfo villafiorita - introduction to software project management
 The Project Approval Process
• The process which brings to the project approval is
more or less structured according to the practices of
the performing organization
• It is organized in the following steps:
– Upon receiving a request, identify a (preliminary)
project manager
– The project manager prepares a feasibility study which
is agreed with the customer and key stakeholders
– The project manager submits the document for
authorization
– The document is analyzed and a formal decision is
taken
– The project manager is appointed and the project moves
to the planning phase
spm - ©2014 adolfo villafiorita - introduction to software project management