PRJ566: Project Planning and Management

Payback

Agenda

What is cost benefit analysis? Payback Examples

Costs--one time Development costs – wages, contract

fees Initial Training costs Initial equipment costs – hardware,

software, network

Costs--ongoing Overhead - facilities, office space, etc. Web site costs--domain name renewal, Web

hosting Communication costs--phone, Internet, and so

on Maintenance of software and hardware “Maintenance” of staff (ongoing training, and

so on)

Benefits-can come from Cost savings

People (use less), time (get work done faster), equipment (eliminate), mistakes (make less)

New services to clients - revenue Mandatory changes Strategic advantage

Make more money! Technical reasons

Cost Benefit Analysis

Timeframe0 Timeframe1 Timeframe2 Timeframe3Costsongoing cost 1ongoing cost 2recurring cost 1Cumulative Costs 0 0 0 0

BenefitsbenefitCumulative benefits 0 0 0

Cumulative means add in total from previous column

Include previous column total into next column

Project timeframe: months or years, etc

Note: be sure all costs are consistent to fit your timeframe. i.e. if your timeframe is months, each cost amount must be a monthly cost

Note: Timeframe 0 is for project development

Example 1 Purchase & Install Remote Control Software

Currently:

20% calls (=200/mo) involve visit to client’s office

Visit averages 15 min, with average 2 hour client wait time

Example 1Purchase & Install Remote Control Software

Currently:

Use $60/hr client time

Wait time costs 200 x 2hrs x $60/hr

Wait time costs $24,000 per month

Example 1Purchase & Install Remote Control Software

Proposed Solution:

$90,000 remote control software

To install--$10,000 labour and training

Maintenance of $8,400 per year ($700/mo)

Cost Benefit Analysis

Option 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200

Benefits

Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000

Agenda

What is cost benefit analysis? Payback Examples

Payback

Represents the point in time when the benefits are greater than the costs

Cumulative Benefits – Cumulative Costs

Example 1Option 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200

Benefits

Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000

Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800

Payback Analysis Payback period = time required to recoup

costs of project Payback occurs when accumulated benefits >

accumulated costs (the sooner the better!) Typically - there is a ceiling

Return on Investment Analysis You invested a certain amount of $ (costs) What did you earn on this money?(Benefits) What was your return in a certain amount of

time?

Return On Investment Analysis

ROI =Accum. Benefits - Accum. Costs

Accum. Costs

X 100

Example 1Option 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200

Benefits

Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000

Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800

ROI Example 1

ROI =$16,500

$103,500

X 100 = 16%

Over 5 months

ROI Example 1

ROI =$39,800

$104,200

X 100 = 38%

Over 6 months

When Comparisons are Difficult What do you do when the best option does

not come out on top in terms of $? Look at risks Look at intangible costs and benefits

Example 2 GMS--Great Marketing Services asks the IT

Project Manager to research improvements to its outdated flyer development system

GMS develops marketing fliers for various organizations

Example 2 GMS collects photos, diskettes from client GMS scans photos, lays out flyer using old

flyer software GMS prints flyer, courier to client Client reviews, corrects, courier back GMS prints final copy, sends to printer GMS arranges for flyer distribution

Example 2Situation: Flyer development takes too long and is too

manual. Automation of the process is necessary

Manual systems are causing lengthy delays, high errors

Competitors are going to automation, to the Internet

Example 2One time Costs: Software $90k, Installation $120k Internet infrastructure (labour, hardware, software)

$190K PM Salary $100K Upgrade PCs/monitors $120k Train layout staff $20k Marketing to clients $80k

Example 2Ongoing Costs: Maintenance of internet infrastructure $15k/yr

then $17k/yr after 1 year New Software maintenance $10k/yr Hardware upgrade costs $15k/yr then $20k/yr

after 2 years

Example 2

Example 2Benefits: Save $70k/yr wages in review/correct process Save $40k/yr (1 employee) in layout process

(cut from 2 to 1 weeks) Estimate $50k/yr increase in business for 4

years, then stay level

Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5

BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New business 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000

Example 2

Example 2Analysis Payback ROI

Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5CostsNew Software 90,000Software Ins tallation 120,000Project m anager 100,000Internet Infras tructure 190,000Hardware Purchase 120,000Training for s taff 20,000Marketing to clients 80,000Internet Maintenance 15,000 17,000 17,000 17,000 17,000Software Maintenance 10,000 10,000 10,000 10,000 10,000Hardware Maintenance 15,000 15,000 20,000 20,000 20,000Cumulative Costs 720,000 760,000 802,000 849,000 896,000 943,000

BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New bus iness 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000Cumulative Benefits - Cumulative Costs -720,000 -600,000 -432,000 -219,000 44,000 307,000ROI 5% 33%

Example 2 Analysis

Payback in Year 4 ROI = $44k/$896k = 5% at 4 years ROI = $307k/$943k = 33% at 5 years

Example 2 Recommendation?

Is this ROI acceptable to management? Payback takes a LONG time!

What are other factors? Competition--is there a choice? Risks--can clients handle new system? Risks--can employees handle new system?