Tony DeMarco on Accurate Estimating

Barak Obama's 2010 U.S. Federal Budget proposal promises a "New Era of Responsibility", and in the introduction he says,  

"...we must begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing."

Tough choices indeed. There in lies the greatest challenge.  With the best intentions, our government tries to do good things, but always starts more projects than it can afford.  And often the expected "value" of an initiative is never fully vetted before a project is launched. 

How can you decide among project alternatives and choose an optimal strategy if you have not determined the value of each?

How can you restore fiscal discipline and cut the budget deficit if you do not know the cost-benefit analyses your projects? 

Since a new era of government spending responsibility will hinge upon making tough decisions, they must be supported by the disciplines of 
business case analysis, analysis of alternatives, and portfolio management optimization to be successful.


 These disciplines have been areas of study for us at PRICE Systems for the past two years and our work was released this week in TruePlanning 2009.  There are three innovative new features in this release:

1. Value models - enabling analysts to estimate the value and benefits of project once it is delivered, and over its lifetime
2. Business Case Analysis - enabling analysts to prepare and score a case for the project including the cost/benefit analysis, payback period, investment rate of return, strategic benefits, and other evaluation criteria scoring.  The business case tells the story of the project.
3. Analysis of Alternatives and Portfolio Analysis - enabling decision-makers to view Risk/Reward charts of alternatives and planners to reconcile total project estimates to budgets.

In this post I will give you an overview of these features and I hope to dive deeper in future posts.  Consider the decision a government planner must make on whether or not to launch a Business Process Automation (BPA) project.  The figure below shows a TruePlanning Payback view for the BPA project.



The three panels in this view tell the story of the project and make its business case.  The product breakdown structure view below identifies the elements of the project that will cost money and identifies the various benefits expected from the project implementation.



Each element in the tree represents either a cost item or a benefit associated with the project.  The cost items and benefit items are grouped into separate folders so that they can be reviewed individually or summarized.  

The Payback chart below shows how costs and benefits are realized over time so that project cost/benefit cash flow can be analyzed.



Each bar quantifies the costs and benefits realized in each year, the line shows the cumulative cash flow over time.

The Metrics table shown below shows the most commonly used financial metrics used for business case analysis.



This alternative of the BPA has a payback period of just over five years and has an IRR of nearly thirty-nine percent.

However, there is a problem.  When we combine our BPA project with the other projects in our portfolio we identify an estimated budget overrun.  As shown in the project portfolio view below, the sum of the project estimates exceeds our agency budget over time.




Now we must decide what we cannot do or what project we must cancel to stay within budget.  We know the business case for the BPA project,  how does that compare to the other projects?  The chart below shows the risk/reward for the projects under consideration. 



Tough decision time!  If you only had budget for two projects, which would you choose?  Are you willing to say NO to the others? 

TruePlanning 2009 has been delivered just in time to empower government decision-makers with the right tools so that they can "begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing".  TruePlanning cost management software estimates software development costs, IT project costs, and now, the value of those projects. The value of determining a project's true value is more important than ever.