SPM-Lecture -3.ppt

Programme Management
and Project Evaluation
1

Main topics to be covered
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 Programme management
 Benefits management
 Project evaluation
 Cost benefit analysis
 Cash flow forecasting
 Project risk evaluation

Programme management
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 One definition:
‘A group of projects that are
managed in a co-ordinated way
to gain benefits that would not
be possible were the projects to
be managed independently’

Programmes may be
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 Strategic
 Business cycle programmes
 Infrastructure programmes
 Research and development
programmes
 Innovative partnerships

Strategic Programmes
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 Several projects together can implement a single
strategy.
 For example :
 Two organizations are merging
 So we have create unified pay roll and accounting
application.
 Physical reorganization of offices
 Training, new org. procedures, re-creating corporate image
using media
 All of these project can be treated as separate
project
 But would be coordinated as a program

Business cycle programmes
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 Portfolio????
 The collection of projects that an organization
undertakes within a particular planning cycle is
sometimes refers to as a portfolio.
 Planners needs to assess the comparative
value and urgency of projects within a
portfolio.

Infrastructure programmes
8
 Some organization have integrated
infrastructure.
 And some organization have departments.
 So it is required to have a uniform
infrastructure to share the information among
different departments.
 In this situation infrastructure program setup
and maintain infrastructure, include the
networks, workstation and server.

Research and development
programmes
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 A search for knowledge
 R&D programs are carried out by the
innovative companies.
 These company develops new products for
market.
 There is always a greater amount of risk with
these type programmes.
 Companies doing R&D IBM, APPLE ,MS,
Google, Yahoo

Innovative partnerships
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 Some technological developments benefits
whole industries.
 In this type of programs companies comes
together to develop new technologies
 Example World wide web, GSM

Programme managers versus
project managers
Programme manager
 Many simultaneous
projects
 Personal
relationship with
skilled resources
 Optimization of
resource use
 Projects tend to be
seen as similar
Project manager
 One project at a
time
 Impersonal
relationship with
resources
 Minimization of
demand for
resources
 Projects tend to be
seen as unique
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Allocation of Resource
 What is a project?
 Planned Activity
 What is Resource?
 support that may be drawn upon when needed
 Each project needs Resources to achieve there
objective.
 Resources may be:
 Programmers
 Skilled resources
 Infrastructure (PC, Network, Server, Work stations
etc)
 Mangers
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Managing the allocation of
resources within programmes
 In company there are many project running
concurrently at same time
 But resources are limited in company so they
need to be managed within the organization.
 So we need to manage these resource.
 ICT department has pools of:
 Expertise
 Software Developer
 Database designer
 Network Support Staff
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 These experts may be needed in number of
projects running in company.
 So it is the responsibility of program manager
to use these resources in optimum way.
 And program manager have personal
relationship with these skilled resources. i.e.
he/she has the knowledge about these
resources
 On the other hand, project manager need not
to have personal relations with resources
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 One resource may be needed by different
project
 So we need to identify the priority of the
project
 We can delay the start of activity of a project
with least priority.
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Creating Programme
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 Based on OGC approach
 OGC is a UK govt. Agency responsible for
introduction of PRINCE and PRINCE2 tools for
programme management
 Programme triggered by the creation of
programme mandate
 Initial planning document is the Programme
Mandate describing
 The new services/capabilities that the programme
should deliver
 How an organization will be improved
 Fit with existing organizational goals

Creating Programme(cont.)
 A programme director appointed a champion
for the scheme
 Programme director is responsible for success
of the programme
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Next stages/documents
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 The programme brief
 equivalent of a feasibility study:
 It will have sections:
Vision Statement
Benefits
Risks and Issues
Estimation cost, timescale and effort

The vision statement
 The vision statement – explains the new
capability that the organization will have
 Provides information to sponsoring that it is worth
moving to more detailed definitions.
 Next Step is team forming
 A small team is formed with a programme manager
 This team will now take the outline vision and prepare
a detailed vision
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The blueprint
 The blueprint – explains the changes to be
made to obtain the new capability
 It contains:
 Business model outline
 Organizational structure (staff & new system
needed )
 The other non-staff resource needed
 Data and information requirements
 Cost, performance and service level requirements
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Aid to Programme management
 Dependency Diagram
 Shows the dependency between projects
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1. System
Design/Study
2. Corporate
Image Design
3. Build
common
system
4. Relocate
office
5. Training
7. Implement
corporate
interface
6. Data
Migration

Example
 1. System Design/study
 This project will examine existing systems of two
companies and make recommendation about how
to combine two system
 2. Corporate Image Design:
 This project is independent of Project 1
 This project will design the new image of the
company
 E.g new tag line, logo, new name
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 3. Build Common System
 After project 1 we will develop a new common
system
 4. Relocate office
 Carried out after project 1?
 Training
 After merger of two staff we will give training to
whole staff about new system
 Data Migration
 Implement corporate interface
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2. Delivery planning
 Delivery dependency diagram
 It is precursor to the detailed programme
planning
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 A Tranche is a group of project that will deliver
their product as one step in the programming
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Benefits management
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the
application
developers users
benefits
build
use
to
deliver
organization
for

Benefits management
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In Benefit management, we identify, optimise
and track the benefits from a business
change
To carry this out, you must:
 Define expected benefits
 Analyse balance between costs and benefits
 Plan how benefits will be achieved
 Allocate responsibilities for their
achievement
 Monitor achievement of benefits

Benefits
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These might include:
 Mandatory requirement
 Government changes rules
 Improved quality of service
 Claims more customer
 Increased productivity
 Less cost of production
 More motivated workforce
 Reward system

Benefits - continued
 Internal management benefits
 Insurance
 Risk Reduction
 By reducing risks
 Economy
 Reduction in cost in terms of staff salary etc.
 Revenue enhancement/acceleration
 Sooner bill reaches sooner they can pay
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Benefits - continued
 Strategic fit
 A change that will not give direct benefits but can
give at later stages
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Quantifying benefits
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Benefits can be:
 Quantified and valued e.g. a reduction of x
staff saving £y
 Quantified but not valued e.g. a decrease in
customer complaints by x%
 Identified but not easily quantified – e.g.
public approval for a organization in the locality
where it is based

Cost benefit analysis (CBA)
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You need to:
 Identify all the costs which could be:
 Development costs
 Set-up
 Operational costs
 Identify the value of benefits
 Check benefits are greater than costs

Cash Flow Forecasting
 It is as important as the cost and benefit
estimation of a project
 It tells the flow of cash thought the project. See
figure:
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Cost-benefit evolution techniques
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Cash Flow Forecasting(cont.)
 But
 It is usual that we ignore the effect of inflation
 If we include the inflation the forecasting is
uncertain.
 So accurate cash flow forecast is not easy.
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Net profit
 Net Profit= Total income-Total cost
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Net profit
‘Year 0’ represents all
the costs before
system is operation
‘Cash-flow’ is value of
income outgoing
Net profit value of all the
cash-flows for the
lifetime of the
application
Year Cash-flow
0 -100,000
1 10,000
2 10,000
3 10,000
4 20,000
5 100,000
Net
profit
50,000
40

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Pay back period
This is the time it takes to start generating a surplus
of income over outgoings. What would it be below?
Year Cash-flow Accumulated
0 -100,000 -100,000
1 10,000 -90,000
2 10,000 -80,000
3 10,000 -70,000
4 20,000 -50,000
5 100,000 50,000

Return on investment (ROI)
 aka. Accounting rate of return
 Compares net profit with investment
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ROI =
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Average annual profit
Total investment
X 100
In the previous example
• average annual profit
= 50,000/5
= 10,000
• ROI = 10,000/100,000 X 100
= 10%

 Disadvantages
 No account of timing of cash flow
 It has no relationship with the interest charged by
the bank.
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Net present value
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Would you rather I gave you £100 today or in
12 months time?
If I gave you £100 now you could put it in
savings account and get interest on it.
If the interest rate was 10% how much would I
have to invest now to get £100 in a year’s
time?
This figure is the net present value of £100 in
one year’s time

Net present value
 NPV is a project evolution technique that takes
into account the profitability and timing of the
cash flows.
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Discount factor
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Discount factor = 1/(1+r)t
r is the interest rate (e.g. 10% is 0.10)
t is the number of years
In the case of 10% rate and one year
Discount factor = 1/(1+0.10) = 0.9091
In the case of 10% rate and two years
Discount factor = 1/(1.10 x 1.10) =0.8294

 Present value = value in year t/(1+r)t
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Applying discount factors
Year Cash-flow Discount factor Discounted cash
flow
0 -100,000 1.0000 -100,000
1 10,000 0.9091 9,091
2 10,000 0.8264 8,264
3 10,000 0.7513 7,513
4 20,000 0.6830 13,660
5 100,000 0.6209 62,090
50,000 NPV 618
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Internal rate of return
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 Internal rate of return (IRR) is the discount
rate that would produce an NPV of 0 for the
project
 Can be used to compare different
investment opportunities

 Example: Let us say you can get 10% interest
on your money of $1,000
 So now could earn $1,000 x 10% = $100 in a
year.
 Your $1,000 now would become $1,100 in a
year's time
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 Present Value
PV = FV / (1+r)n
 PV is Present Value
 FV is Future Value
 r is the interest rate (as a decimal, so 0.10, not
10%)
 n is the number of years
52

Example:
 Alex promises you $900 in 3 years, what is
the Present Value (using a 10% interest rate)?
 The Future Value (FV) is $900,
 The interest rate (r) is 10%, which is 0.10 as a
decimal, and The number of years (n) is 3.
 Use the formula to calculate Present Value
of $900 in 3 years:
 PV = FV / (1+r)n
 PV = $900 / (1 + 0.10)3
 = $900 / 1.103 = $676.18 (to nearest cent).
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 Example: try that again, but use an interest
rate of 6%
 The interest rate (r) is now 6%, which
is 0.06 as a decimal:
 PV = FV / (1+r)n
 PV = $900 / (1 + 0.06)3 = $900
/ 1.063 = $755.66 (to nearest cent).
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 Example: You invest $500 now, and get back
$570 next year. Use an interest Rate of 10%.
 Money Out: $500 now
 You invest $500 now, so PV = -$500.00
 Money In: $570 next year
 PV = $570 / (1+0.10)1 = $570 / 1.10 = $518.18 (to
nearest cent)
 And the Net Amount is:
 Net Present Value = $518.18 - $500.00
= $18.18
 So, at 10% interest, that investment has NPV
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 But your choice of interest rate can change things!
 Example: Same investment, but the interest Rate is 15%
 You invest $500 now, so PV = -$500.00
 Money In: $570 next year:
 PV = $570 / (1+0.15)1 = $570 / 1.15 = = $495.65 (to
nearest cent)
 Work out the Net Amount:
 Net Present Value = $495.65 - $500.00 = -$4.35
 So, at 15% interest, that investment has NPV = -$4.35
 It has gone negative!
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 Now it gets interesting ... what Interest Rate would make the NPV
exactly zero? Let's try 14%:
 Example: Try again, but the interest Rate is 14%
 You invest $500 now, so PV = -$500.00
 Money In: $570 next year:
 PV = $570 / (1+0.14)1 = $570 / 1.14 = $500 (exactly)
 Work out the Net Amount:
 Net Present Value = $500 - $500.00 = $0
 Exactly zero!
 At 14% interest NPV = $0
 And we have discovered the Internal Rate of Return ... it is 14% for
that investment.
 Because 14% made the NPV zero.
57

Let's try a bigger example:
 Example: Invest $4000 now, receive 2 yearly
payments of $110 each, plus $1500 in the 2rd
year with 14% interest:
58

 Now: PV = -$2,000
 Year 1: PV = $100 / 1.10 = $90.91
 Year 2: PV = $100 / 1.102 = $82.64
 Year 3: PV = $100 / 1.103 = $75.13
 Year 3 (final payment): PV = $2,500 /
1.103 = $1,878.29
 Adding those up gets: NPV = -$2,000 + $90.91
+ $82.64 + $75.13 + $1,878.29 =$126.97
59

 I will take a better guess now, and try a 12%
interest rate:
 Example: (continued) at 12% interest rate
 Now: PV = -$2,000
 Year 1: PV = $100 / 1.12 = $89.29
 Year 2: PV = $100 / 1.122 = $79.72
 Year 3: PV = $100 / 1.123 = $71.18
 Year 3 (final payment): PV = $2,500 / 1.123 = $1,779.45
 Adding those up gets: NPV = -$2,000 + $89.29 + $79.72
+ $71.18 + $1,779.45 =$19.64
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Ooh .. so close. Maybe 12.4% ?
 Example: (continued) at 12.4% interest rate
 Now: PV = -$2,000
 Year 1: PV = $100 / 1.124 = $88.97
 Year 2: PV = $100 / 1.1242 = $79.15
 Year 3: PV = $100 / 1.1243 = $70.42
 Year 3 (final payment): PV = $2,500
/ 1.1243 = $1,760.52
 Adding those up gets: NPV = -$2,000 + $88.97 + $79.15
+ $70.42 + $1,760.52 = -$0.94
 That is good enough! Let us stop there and say
the Internal Rate of Return is 12.4%
 In a way it is saying "this investment would earn 12.4%"
61

 NPV and IRR are not complete answer to the
economic project evolution
 A total evolution is needed
 Detailed risk analysis needed
64

Dealing with uncertainty: Risk
Evaluation
66
 Every project involves risk of some form.
 Project A might appear to give a better return
than B but could be riskier
 How to choose ?????

Risk Evaluation
 1.Risk Identification and Ranking
 We need to identify the risk and quantify it.
 One technique is draw risk matrix.
 Could draw up draw a project risk matrix for each
project to assess risks
 Classify risk into two categories :
 Important
 Likelihood
 Matrix may be used for project evolution
67

Risk Evaluation(Cont.)
 2. NPV and Risk
 For riskier projects could use higher discount
rates.
 This is known as risk premium.
 We can increase Discount rate for risky project
by 5 to10%.
68

 3. Cost-benefit Analysis:
 It is more sophisticated approach to evaluate risk
 In this approach we consider each possible
outcome and estimate the probability of its
occurrence.
 So instead of single cash flow we will have set of
cash flow and its occurrence.
69

 Example: one company wants to create a
software for open market.
 1. They release the product and there will be no
such product in market and they earn Rs.8lakh
probability is 1/10.
 2. Their competitor launch similar application
before them and they might earn Rs.1lakh and
probability is 30%
 3. They launch the product before the competitor
and they earn Rs. 6.5Lakh and probability is 60%
70

Sales Annual Sales
Income
Probability Expected value
High 8,00,000 0.1 80,000
Medium 6,50,000 0.6 390,000
Low 100,000 0.3 30,000
Expected Income 5,00,000
71

 4. Risk Profile Analysis
 We can analysis the risk with project by varying
the parameters of project that affects the cost or
benefits of the project.
 First we do the estimation then we vary it and
check its sensitivity.
 For example we are varying the original
estimation by + or – 5% and then recalculate
the cost and benefits. If the project cost and
benefits changes drastically then we called
that parameter as sensitive
72

 Decision trees: This is also a risk evaluation
technique
 Example:
 Some company is providing payroll service to
their customers.
 Their system is old and number of customer is
increasing. There is a probability that market will
expand more.
 They have two option
 Expand the existing system
 Replace the old with new
73

 They have calculated that extending existing
system will have NPV of 75000(80%
probability)
 If market expands more the loss will be –
100000(20% probability)
 If market does expand after replacing the
system the profit will be 250000 (20%
probability)and if reverse happens then the
loss will be -50000(80% probability)
74

 If it is decided to extend the system the
sum of the values of the outcomes is
Rs40,000 (75,000 x 0.8 – 100,000 x 0.2)
 while for replacement it would be
Rs.10,000 (250,000 x 0.2 – 50,000 x
0.80).
 Extending the system therefore seems to
be the best bet (but it is still a bet!).
75

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