©RCI, USC-CSSE1 Business Case Analysis Adapted from Donald J. Reifer’s 2005 lectures Barry Boehm CS 510, 577, Fall 2014 09/22/2014

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Business Case Analysis

Adapted from Donald J. Reifer’s 2005 lectures

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C S E University of Southern CaliforniaCenter for Software Engineering

Barry BoehmCS 510, 577, Fall 2014

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Business Cases in ICSM Decision MilestonesFeasibility Evidence Description

• Evidence provided by developer and validated by independent experts that:

If the system is built to the specified architecture, it will– Satisfy the specified operational concept and requirements

• Capability, interfaces, level of service, and evolution– Be buildable within the budgets and schedules in the plan– Generate a viable return on investment (ROI)– Generate satisfactory outcomes for all of the success-critical

stakeholders• Shortfalls in evidence are uncertainties and risks

– Should be resolved or covered by risk management plans• Assessed in increasing detail at major anchor point milestones

– Serves as basis for stakeholders’ commitment to proceed– Serves to synchronize and stabilize concurrently engineered elements

Can be used to strengthen current schedule- or event-based reviews

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Business Cases Quantify the Impact of Proposed Changes

• Engineering decisions involve many options and difficult tradeoffs – May be several technical solutions for the problem– The best technical solution is determined by

evaluating the tradeoffs using a variety of criteria selected for that purpose

• Software engineering provides you the methods and tools to understand the tradeoffs and select the best answer (typically under constraints)– Management rejects many of these recommendations

if the business benefits are not quantified

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Pervasive Issues When Developing Business Justifications

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• Common definition of costs and benefits not widely accepted across the industry

• Productivity, cost and quality data considered highly confidential and kept secret

• Common definition of the justification processes involved lacking within the engineering community

• Difficult to attribute resulting numbers to one cause or another

• Hard to communicate results - engineers talk technical, decision-makers talk business

• Goal of the lecture is to help you communicate better

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Benefit Chain Diagram

• A good example

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Nine Business Case Principles1. Decisions should be made

relative to alternatives

2. If possible, use money as the common denominator

3. Sunk costs are irrelevant (Engineering Econ 101)

4. Investment decisions should recognize the time value of money

5. Separable decisions must be considered separately

6. Decisions should consider both quantitative and qualitative factors

7. The risks associated with the decision should be quantified if possible

8. The timing associated with making decisions is critical

9. Decision processes should be periodically assessed and continuously improved

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1. Do nothing, learn by themselves2. On-the-job training3. Bring in seminar / hands-on

training How can a training seminar save costs / save time / improve quality ? Calculate that in $$

thinking about running a seminar.

What happened in the past, stay in the past. Already ran a java seminar last year ? it does not matter. New staff$10 today = $8 next yearSave in the bank, %6 interestAny better option ?If you need select a training firm, use different criteria, don’t mix them up.

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Nine Business Case Principles6. Decisions should consider

both quantitative and qualitative factors

7. The risks associated with the decision should be quantified if possible

8. The timing associated with making decisions is critical

9. Decision processes should be periodically assessed and continuously improved

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Training seminar might improve image and morale.

What if no trainer available , any back up plan ? What is the extra cost?

thinking about running a seminar.

Time your decision carefully. Any budget cycle ?Propose when there is money available.

Keep your eyes open, look for possible improvement.

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Case Study- Justifying Process Improvement

• Purpose of case– Justify investments in process improvement

• Goals of effort– Develop numbers that get management to buy into

near- and long-term investment tactics

• Constraints– Deal with the firm’s related process improvement

folklore, biases and history

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Organizational Structure

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Senior Management

Engineering Field SupportManufacturing Program Mgmt

Process GroupQA Group

Senior Staff

* Systems * Fabrication * Field service* Software * Assembly * Training* Digital design * Production * Test & evaluation

Project A

Line of BusinessManagement

* Fund functional groups* Coordinate * Facilitate

Yourhome

Aerospace firm

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History of Process Improvement

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Maturity Level

1985 1987 1989 1991 1993 1995 1997 1999 Now

Level 3 -a customerrequirement

Reach Level 3 - corporate goal

5

4

3

2

1

Processbudgetaxed

Acquisitionfalls through

Firm positionedto be acquired

Process groupreformed

Seniorsget serious

about process

Aim- ReachLevel 4

in 2 years

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The SEI Software CMMI• Used by many to characterize the maturity of the

processes used to develop software• Important because:

– Employed as a means to benchmark firms– Acts as a framework for structuring improvements– Shown to have positive effect on productivity,

quality and cost– Makes it easier to tackle a big software job like

the one you are working on

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The Software

CMM

- Requirements management- Software project planning- Software project tracking and oversight- Software subcontract management- Software qualify assurance- Software configuration management

- Organization process focus- Organization process definition- Training program- Integrated software management - Software product engineering- Inter-group coordination- Peer reviews

- Quantitative process management - Software quality management

- Defect prevention- Technology change management - Process change management

3

2

4

5

Contains:- 5 Maturity Levels- 18 Key Process Areas- 318 Key Practices

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CMMI Lessons Learned • Takes 18 to 30 months to move a maturity level

– From Level 1 to 2 - average of 23 months– From Level 2 to 3 - average of 21 months– From Level 3 to 4 - average of 28 months

• Average investment to move up a maturity level is several million $ for a 500-person organization

• The gains attributable to early error detection and correction are substantial (20X cheaper per error)

• The average increase in productivity attributable to process improvement is 10 percent per level

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Rules of Engagement• Let the numbers do the talking• Don’t assume that Program Managers understand

software (many are clue-less)• Justifications must be made at the project level• You must address past experience, both pro & con• Your plan must focus on near-term results• Any software processes must be compatible with your

existing management infrastructure• You must track/demonstrate accomplishment of goals

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Start - Why Focus on Process?

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Why (Goal):

Questions:

Metrics:

Models:

Increase Productivity and Meet Customer Requirements

Measured What Why this how? option? option?

SLOC/hour Do Process Other ROI Nil improvement approaches

COCOMO SEI Maturity Non-discounted Model ROI

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Process Group Budget = $2.4M/year• Process development

– 4 employees ($700K)

• Education & training– 2 part-timers ($200K)– $250K for seminars

• Process roll-out/project support– 2 consultants ($450K)– Retirees with

credibility

• Process assessment– $200K for outside

facilitator

• Promotion and outreach– $250K to prepare

news-letter, work with clients and attend conferences

• Support environment– $350K for web site

development

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Your Justification Approach• Justify process budget by ROI analysis of the

initial and continuing:– Cost and impact of COCOMO-determined 10%

annual productivity increase, including cost of staff training

– Impact of early error detection/correction– Impact of COTS usage strategy– Cost and impact of moving to an architecture-

based reuse strategy • Show intangibles as added value

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Early Error Detection/Correction• Benefit of achieving Level 4 is a reduction in errors

by a factor of between 20 and 25% – Majority caught early in requirements and design phases

• Cost avoidance associated with early defect removal is $20/defect

• For the 12 major programs in your firm, you compute cost avoidance is 1.2 million calculated as follows:

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(12 jobs/year)(10 defects1/KSLOC)(500KSLOC/job) = 60Kdefects/year(60K defects/year)($20/defect (avoidance)) = $1.2 million/year

1 As jobs enter test and evaluation; goal is 0.1 defect/KSLOC on delivery

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Exploitation of COTS• Benefits of enterprise-wide licensing can be

substantial– At the corporate level, this includes major software

packages like DBMS– At the project level, this includes software tools and

specialized software like operating systems

• As part of your Level 4 initiative, you plan to put in a licensing process that allows you to lever your buying power and save $1 million/year as an early payoff of the productivity initiative

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COTS Pluses and Minuses

• Cheaper; but does not come for free

• Available immediately• Known quality (+ or -)• Vendor responsible for

evolution/maintenance– 15-20% annual fee

• Can use critical staff resources elsewhere

• License costs can be high• COTS products are not

designed to plug & play• Vendor behavior varies• Vendor responsible for

evolution/maintenance– Have no control over

the product’s evolution

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Pluses Minuses

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Architecture-Based Reuse• Architectures are the framework you use to pull your

product lines together– They are domain-specific and standards-based– They encapsulate generality and variability

• They guide selection and use of high-leverage assets– The 20% responsible for 80% of the reuse

• They allow you to take full advantage of both COTS components and reusable assets– Cost to build for reuse must be factored into analysis– Benefits of reuse adhere to the 3 times rule

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Reuse-Based Development Paradigm

DomainAnalysis

Domain Design

Domain Model

AssetDevelopment

Requirements Software Integration Operations & Analysis Development & Test Maintenance

Software Reuse LibraryArchitecture

Project-specific deliverables

Products for sale

Scope

Requirements

Purchased products

Domain EngineeringAssets

Assets

Applications Engineering

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COCOMO II Reuse ModelESLOC = ASLOC [AA + AAF(1 + 0.02(SU)(UNFM))] AAF < 0.5 100

ESLOC = ASLOC [AA + AAF + (SU)(UNFM)] AAF > 0.5 100

Where: AAF = 0.4 (DM) + 0.3 (CM) + 0.3 (IM) SU = Software Understanding

(zero when DM = 0 & CM = 0) UNFM = Programmer Unfamiliarity AA = Assessment and Assimilation ASLOC = Adapted SLOC ESLOC = Equivalent new SLOC

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The Impact of Reuse

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Without Reuse With ReuseNominal Development Time (months) 30 23.4Nominal Effort (staff-months) 845.3 383.7Shortest Development Time (months) 22.5 17.6Shortest Development Time Effort 1208.7 548.7

Application Without Reuse With ReuseReal-time executive 10,000 500Scheduler 25,000 500Real-time data acquisition 50,000 10,000Sensor data processing 50,000 21,000Data analysis and alarms 25,000 10,000

TOTAL 160,000 42,000

Conservative estimate of savings is $10 million/year, minus cost of $2 million/year in evolving reusable assets

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Reuse Cost/Benefit Worksheet• Non-Recurring Costs

– Domain engineering – $500K– Reusable assets – added $1000K– Infrastructure creation – $500K

• Recurring Costs (per year)– Architecture maintenance $500K– Asset maintenance 1500K

• Tangible Benefits– Cost avoidance $10 million

• Intangible Benefits– Deliver 12 months earlier than the

norm– 10 times reduction in efforts at

delivery– Architecture stable, proven and can

be demonstrated to clients– Scheduling algorithms can be

optimized and improved

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Total Costs $2M + $2M/yr Total Benefits $10 million09/22/2014

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Strategy Yields Positive Returns Early Error Reduction• Cost avoidance = $1.2M/year• Increased customer satisfaction based on quality

Exploitation of COTS• Cost avoidance = $1M/year• Improved maintenance and license leverage with vendors

Productivity Improvement• Cost avoidance = $7.5M/year• Improved capabilities & capacity

Systematic Reuse• Cost avoidance = $10M/year• Faster to market• Can be built by enhancing

first-project assets• COCOMO added cost $2M• Process can be built with reuse in mind

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Return-On-Investment Is High• Annual Software Staff Cost: 500 * $150K/yr = $75M/yr• Process Group Cost: 2 * $2.4M/yr = $4.8M• 3 week staff training cost: $75M * .06 = $4.5M• Developing reusable assets: $2M• Initial investment cost: $11.3M over 2 years• Annual evolution cost: $3M: $1M process; $2M reusable assets• Annual benefits $19.7M: Reuse $10M, COTS $1M; EER $1.2M;

Productivity 10% 0f $75M/year = $7.5M/year• Cumulative ROI: (Benefits –Costs)/Costs• After year 1: ($19.7M - $14.3M)/$14.3M = 38%• After year 2: ($39.4M - $17.3M)/$17.3M = 128%• After year 3) ($59.1M - $20.3M)/$20,3M = 191%

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ROI Includes IntangiblesInclude these in briefings

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• Better product quality

• Quicker to market

• Increased customer satisfaction

• Improved employee morale

• Responds directly to customer needs

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When Briefing Management - Always Ask For Help

• Reaching Level 4 will take 2 years assuming things go as planned

• The major challenge is to get those in the middle motivated; top management can help

• There are a number of operational challenges– Need help in staffing process group – getting

requisitions through the system is tedious– Need help in licensing – buyer, legal and staff support

• Must keep the momentum going

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Case Study - Final Thoughts• Process improvement is a good investment• To get management support, a good action plan

and solid business case is needed• When justifying initiatives, cost avoidance is

preferred to cost reduction• When determining benefits, categorize them as

tangibles and intangibles• Be conservative, but make your case using the

numbers to justify the investments

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Most Importantly – Talk and Think Like a Business-Person

• Talk like a business-person– Translate technical jargon into business goals

• Act as a business-person– Assess both the business and technical aspects of the

proposal– Show your bosses you can run a business operation

• Be a business-person– Focus on the bottom-line using the numbers when you

can to make decisions that are good for the firm

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Lots of Available Web ResourcesTopic Web Resources

Engineeringeconomics andbusiness cases

www.isye.gatech.edu (Georgia Institute of Technology) - The WWW virtual library of industrial engineering with information

on academic programs, conferences, courses, publications whichemphasize their engineering economics core expertise area

Computereconomics andbusiness cases

http://info.berkeley.edu/resources/infoecon (UC Berkeley) - Economics of the Internet with pointers to sites on E-Commerce, E-

Publishing, intellectual property, etc.www.computereconomics.com - IT cost management support including industry benchmarks- E-Business strategies and market forecastswww.hbsp.harvard.edu (Harvard Business School) - Access to case studies on E-Commerce and the Internet, change

management, entrepreneurship and new technologySoftwareeconomics andbusiness cases

http://sunset.usc.edu (University of Southern California) - Information on cost estimating/analysis and the COCOMO suite- Access to software downloads (COCOMO and code counters)www.sei.cmu.edu (Software Engineering Institute) - Information on their Team Software Process (TSP) and Software

Engineering Measurement & Analysis (SEMA) effortswww.software.org (Software Productivity Consortium) - Practical measurement techniques including controlled access to their

guidebooks, case studies and lessons learned reportsAddison-Wesleysite for this book

www.aw.com/softwarebusinesscases - Updates to this book, student exercises and pointers to additional

useful information

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Documents

©RCI, USC-CSSE1 Business Case Analysis Adapted from Donald J. Reifer’s 2005 lectures Barry Boehm CS 510, 577, Fall 2014 09/22/2014