PROJECT METRICS & Selection Criteria

"Without metrics, you are just another person with an opinion"

-Michael Mah, Senior Consulting Cutter Consortium

Metrics help remove chaos from IT projects. Typical criteria used when evaluating opportunities:

Measured independently of their impact on other areas of the organization, most IT projects would fail a cost-benefit test...thus the measurement process should involve all parties impacted by the proposed system: marketing, sales, customer service, finance, etc. to produce performance metrics that are directly tied to the organization's overall business goals.

 GQM paradigm

CHECK OUT PROJECT MANAGEMENTS - COST MANAGEMENT

NET PRESENT VALUE (NPV)

DISCOUNT FACTOR

Return On Investment 

PAYBACK ANALYSIS

WEIGHTED SCORING MODEL

VENDOR SPECIFIC METRICS

VALUE ANALYSIS

INTERNAL RATE OF RETURN

GENERAL PURPOSE CALCULATORS - a list of links to various calculators/converters

BALANCED SCORECARDING

KPI

A Developmental Employee Metric for Strategy-focused Organizations    by Otto Laske (Acrobat PDF, 81K)

 

 

 

 

 

 

 GQM paradigm- The most common methodology for determining metrics is based on the GQM paradigm:  Goals > Questions > Metrics.

To select suitable metrics for an organization, first have a look and organizational goals.

From each organizational goal derive a set of questions that needs to be answered to achieve the particular goals. The answers of these questions will provide you a set of metrics that the organization should focus upon.

 

 

 

 

 

 

 

VALUE ANALYSIS

ROI is normally concerned with rates rates of return, and often times applied simplistically.  Value anlysis includes financial metrics such as ROI, and qualitative criteria such as:  Does the application improve corporate image, customer satisfaction, indirect impact on revenue, etc.

Earned value and balanced scorecards are fairly common methods of implementing value analysis for software.  Under the balanced Scorecard approach, conventional financial metrics are augmented by measures that focus on learning and growth, business processes and customers/

 

 

 

 

NET PRESENT VALUE (NPV) =   åT+1...N A/(1+r)t   Where t equals the year of the cash flow, A is the amount of the cash flow each year and r is the discount rate.

The net present value of an investment is today's value of a series of future payments and income. 

EXAMPLE 1:  NET PRESENT VALUE COMPARISON BETWEEN TWO PROJECTS

Annual Interest Rate = 10%

PROJECT 1 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 TOTAL
REVENUES $0 $2,000 $3,000 $4,000 $5,000 $14,000
COSTS $5,000 $1,000 $1,000 $1,000 $1,000 $9,000
CASH FLOW ($5,000) $1,000 $2,000 $3,000 $4,000 $5,000
NPV $2,316          
Formula NPV(10%, -5000, 1000,2000,3000,4000)      
           
PROJECT 2 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 TOTAL
REVENUES $1,000 $2,000 $4,000 $4,000 $4,000 $15,000
COSTS $2,000 $2,000 $2,000 $2,000 $2,000 $10,000
CASH FLOW ($1,000) $0 $2,000 $2,000 $2,000 $5,000
NPV $3,201          
Formula NPV (10%, -1,000,0,2000,2000,2000)      
           
Select Project Based on NPV PROJECT 2        
             
Formula   =IF(B9>B16,A5,A12)      
 

 

EXAMPLE 2 :  Net present value of $10,000 Investment one year from today, and receive income three years following.

Investment Year 1 Year 2 Year3 Year 4    
Income 0 3,000 4200 6800    
Cash Flow -10000 3000 4200 6800    
NPV $1188.44
Formula NPV(10%,   -10000,3000,4200,6800

 

INTERNAL RATE OF RETURN

IRR - The internal rate of return on an investment or potential investment is the annualized effective compounded return rate that can be earned on the invested capital - the interest rate at which the costs of the investment lead to the benefits of the investment. This means that all gains from the investment are inherent to the time value of money and that the investment has a zero net present value at this interest rate.

Because the internal rate of return is a rate, it can be used as an indicator of the efficiency, quality, or yield of an investment. This is in contrast with the net present value, which is an indicator of the value of an investment.

An investment is considered acceptable if its internal rate of return is greater than an established minimum acceptable rate of return. In a scenario the minimum rate may be the cost of capital of the investment. In general, an investment where the IRR exceeds its cost of capital adds value for the company (i.e., it is profitable).

IRR  is used to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of return (ROR).  In thee savings and industry IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors such as the interest rate or inflation.

The IRR (r) is a function of the Net Present Value (NPV), Where C is cash, n is period expressed as a positive integer and N is the total number of periods.

Since IRR  is the rate of interest that equates the initial investment (I) with the present value (NPV) of future cash inflows. That is, at IRR, I = PV. or NPV (net present value) = 0. Under the internal rate of return method, the decision rule is: accept the project if IRR exceeds the cost of capital; otherwise, reject the proposal.

For example, consider the following data:

Initial investment

$16,200

Estimated life

10 years

Annual cash inflows

$ 3000

Cost of capital (minimum required of return)

10%

 I = NPV --> 16,200 = $3000 × NPV

 

$

 


Then NPV = $16,200/$3000 = 5.400, which stands somewhere between 12% and 14% in the 10-year line of table 4 in the back of the book. Because the investment's IRR (13.15%) is greater than the cost of capital (10%), the investment should be accepted.

 

 

 

 

 

DISCOUNT FACTOR (DF)= DF= 1/(1+r)t  where r is the discount rate and t is the year

DF is the multiplier for each year based on the discount rate for that year.

Example:  Discount rate = 10%

  Year 1 Year 2 Year 3
DF 1(1+0.10)1 1(1+0.10)2 1(1+0.10)3
DF 0.91 0.83 0.75

 

 

 

 

 

Return On Investment = Income/investment

Payback Period = Time it takes to recoup investment in a project.  Payback period occurs when the cumulative discounted benefits and costs are greater than zero.

 

 

 

Weighted Scoring Model - a systematic process to select investment projects based on corporate criteria and weight

Example:  Weighted Scoring Model to compare various projects

Criteria Weight Project 1 Project 2 Project 3 Project 4
Supports key business objectives 25% 90 90 50 20
Has strong internal sponsor 15% 70 90 50 20
Has strong customer support 15% 50 90 50 20
Realistic level of technology 10% 25 90 50 70
Can be implemented in one year or less 5% 20 20 50 90
Provides positive NPV 20% 50 70 50 50
Has low risk in meeting scope, time, and cost goals 10% 20 50 50 90
  Weighted Project Scores 100% 56 78.5 50 41.5

 

 

 

 

 

 

 

Return on Assets:  = Income/Assets

 

 

 

 

 

 

 

Vendor Specific Metrics:

Rapid Economic Justification = REJ

Rapid Return on Investment = R2OI

 

 

 

 

 

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Last modified: December 07, 2009