Business cases for information technology projects
Management uses business cases to make critical investment decisions and to determine which projects receive funding and which ones are deferred or canceled. In addition, information technology (IT) project business cases have their own challenges. Developing an effective business case requires skills in different areas, including project management, business, and finance. Some IT projects produce quantifiable benefits, such as reducing the cost of business processes. Others produce benefits that are hard to quantify, such as improved customer service or enhanced overall system reliability.
A business case is a “justification for pursuing a course of action in an organizational context to meet stated organizational objectives or goals.” (Keen & Digrius, 2002[j1]) Business cases are used for a variety of purposes with the most common purpose being communicating to management the value of the project and its expected costs and benefits. Additional uses often include authorizing funds for the project, designating the project manager, identifying the impacted organizations, and identifying the project risks and opportunities.
Before delving into business cases, we must distinguish between two other types of documents that are closely associated with business cases: the feasibility study and the project plan.
A feasibility study is an “analysis or research into the practicality of a proposed plan or method, based on factors like marketplace, competition, available technology, manpower, and financial resources (Webster's New Millennium TM Dictionary of English. V 0.9.6). The most popular model of feasibility study is “TELOS”, which stands for Technical, Economic, Legal, Operational, and Schedule. (http://www.teach-ict.com/as_a2/topics/system_life_cycle/slc_kjs.htm, Fesability Study ¶1). In other words, the feasibility study answers the broad question: “Is this project doable?”
If the answer to the above question is “Yes”, then the business case for the project comes into play. The business case for the project answers more specific questions; Does the project make sense from the company's point of view? What are the alternatives? How much would it cost? What benefits will it deliver? What will happen if things go wrong?
The resulting benefits of some IT projects can be measured monetarily. For example, a project may produce a savings in labor hours, reduce cost of operations, increase profit, or otherwise give the implementing company a financial advantage. However, other IT projects are implemented for non-monetary reasons. For example a company may implement a project because of legal requirements or to eliminate operational vulnerabilities. If the project is done for monetary benefits, then the business case should include a financial metrics reflecting the financial results of the project. These financial metrics include Return on Investment (ROI), Break Even Analysis (BEA), Net Present Value (NPV), and Internal Rate of Return (IRR).
Assuming the business case was acceptable to management and the project is authorized, then the next step is to prepare a project plan. The project plan defines in a greater degree of detail who will do what, at what cost, when it will be completed, how, and. A project plan is “A formal, approved document used to guide both project execution and project control. The primary uses of the project plan are to document planning assumptions and decisions, facilitate communication among stakeholders, and document approved scope, cost, and schedule baselines. A project plan may be summary or detailed.” (PMI, 2000 p. 205)
IT projects have different types of benefits. Some of these benefits are quantifiable in monetary value (Dollars, Euros), while others are harder to quantify such as improved morale or increased skill level. Here is an example to illustrate this point. Company ABC, who has a server farm of 200 servers supporting its operations worldwide, is considering a server virtualization project. After the virtualization is complete, the company is expected to have a total of 60 servers with similar capabilities to those of the existing system. What are the costs and what are the benefits for the company considering such a project?
Quantitative or Tangible Benefits
In order for the benefits to be calculated, one should first calculate the cost of maintaining the current system. This cost will include the cost associated with the operation, maintenance, and upgrade of the current server farm over its expected useful life. Let's call this scenario the as-is of cost.
Second, one should calculate the cost of the new system, including the project implementation and the cost of operating, maintaining, and upgrading the new system. First, there is the cost of planning and implementing the project. This usually include the labor cost, cost of hardware and software and the, cost of any professional services associated with project. Then there is the cost for the ongoing operation over the expected useful life of the project. Let's call this the proposed-system-cost.
The difference between proposed-system-cost and the as-is cost over the expected useful life of the system is the expected benefits of the system. This could be quantified in Dollars or Euros. For the purpose of this discussion, let's call this “Quantifiable Benefit.” Quantifiable benefits then are the project's benefits that can be translated directly into monetary value. Quantifiable benefits are often referred to as tangible or hard benefits. This category of benefits include labor savings, reduction in operating cost, reduction in time-to-market cost, increased revenue, and increased market shares.
Qualitative or Soft Benefits
In addition to the quantifiable benefits, there are other qualitative benefits that are often un-quantifiable or hard-to-quantify. For example, one of often cited benefits of such a project is the low power usage resulting from reducing the number of servers. The power savings could be easily quantified, and thus could fit into the category of quantifiable benefits. However, the lower power usage also has environmental benefits that are harder to quantify. In addition to the benefit to the environment, a company can boost environmental sensitivity and put this into its literature. In large companies, implementing “green” projects could have a large political and/or marking value that exceeds the direct monetary value expected of the project. Let's call this type of benefit “qualitative” (versus quantitative) benefit. This type of benefit is often referred to as intangible or soft benefit. This category of benefits includes improved moral, reducing risk, and improved decisions making abilities,
As is often is the case, there is a category of benefit that straddles the two categories identified above. For example, in the virtualized server environment, every large application can have its own virtual server. This enables the server administrator to assign a server capacity that matches application needs. In addition, the fact that each application has its own server eliminates the potential conflict that may result from having multiple applications on one server. So, what is the value of this benefit? Could this be quantified? Does ABC Company have a historical baseline of problems that resulted from having multiple applications on shared servers, and can reasonably estimate the cost of fixing these problems. If so, the company can then use this cost as a baseline to estimate the future cost of similar problems if the virtualization project were not implemented. This type of calculation involves making one or multiple assumptions. The type of benefits that straddle the quantitative and qualitative types are referred to as semi-quantifiable benefits. Increased brand-name recognition and improved skill level would be two examples of the semi-quantifiable benefits.
Keen, J. & Digrius, B. (2002). Making Technology Investments Profitable: ROI Roadmap to Better Business Cases. Hoboken, NJ: John Wiley and Sons.
Kipfer, B. A. (Ed) (2005) Webster's New Millennium TM Dictionary of English V 0.9.6 Long Beach, California: Lexico Publishing Group.
Teach-ICT.com (2006) AS ICT and A2 ICT Systems Life Cycle - From KJS. Retrieved from: http://www.teach-ict.com/as_a2/topics/system_life_cycle/slc_kjs.htm
PMI (2000) A Guide to the Project Management Body of Knowledge (PMBOK® Guide). Newtown Square, PA: Project Management Institute.
©2007 Alex M. Azimi
Originally published as part of proceedings PMI Global Congress 2007 – Budapest, Hungary