Course Title:

BIT401: Software Project Management

Unit 2: Project Evaluation and Program Management

Unit 2: Project Evaluation and Program Management

Introduction; Project Portfolio Management; Evaluation of Individual Projects; Cost–

benefit Evaluation Techniques; Risk Evaluation; Program Management; Managing
the Allocation of Resources within Program; Strategic Program Management,
Creating a Program, Aids to Program Management, Some Reservations about
Program Management
 Unit 2: Project Evaluation and Program Management
Unit 2: Project Evaluation and Program Management
Project Evaluation
1. Introduction
2. Project Portfolio Management
3. Evaluation of Individual Projects
4. Cost–benefit Evaluation Techniques
5. Risk Evaluation
Program Management
1. Program Management
2. Managing the Allocation of Resources within Program
3. Strategic Program Management
4. Creating a Program
5. Aids to Program Management
6. Some Reservations about Program Management

Unit 2: Project Evaluation and Program Management

OBJECTIVES: The objectives of this chapter are to

 describe the contents of a typical business plan;

 explain project portfolio management;
 carry out an evaluation and selection of projects against strategic, technical
and economic criteria;
 use a variety of cost–benefit evaluation techniques for choosing among
competing project proposals;
 evaluate the business risk involved in a project;
 explain how individual projects can be grouped into programmes;
 explain how the implementation of programmes and projects can be
managed so that the planned benefits are achieved.
 Unit 2: Project Evaluation and Program Management

Program Management
1. Program Management
2. Managing the Allocation of Resources within Program
3. Strategic Program Management
4. Creating a Program
5. Aids to Program Management
6. Some Reservations about Program Management

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Project Evaluation
Vs
Program Management

Meaning of :
 Project Evaluation
 Program Management
 Business case (project justification or Feasibility Study)
 Portfolio management
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Unit 2: Project Evaluation and Program Management
Project evaluation and Program management are critical aspects of ensuring the
success of any initiative.
Project refers to a planned and organized effort to achieve a specific goal or objective
or product within time frame. Organization undertake many such projects and
evaluate each and include all selected projects as a Program. So, program
management involves overseeing and coordinating multiple interrelated projects to
achieve organization strategic goals.
A business case may be presented for several potential projects, but there may be
money or staff time for only some of the projects. Managers need some way of
deciding which projects to select. This is part of portfolio management.
This chapter will discuss some ways in which projects can be evaluated and
compared for inclusion in a project portfolio.
The chapter finishes by discussing the way groups of projects which together
contribute to a common business objective can be managed as programmes of
projects.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Unit 2: Project Evaluation and Program Management

 Project evaluation involves a business case of a specific project for several

potential projects.
 Program management involves overseeing and coordinating multiple interrelated
projects to achieve strategic goals.
 Unit 2: Project Evaluation and Program Management
OBJECTIVES: The objectives of this chapter are to

 describe the contents of a typical business plan;

 explain project portfolio management;
 carry out an evaluation and selection of projects against strategic, technical
and economic criteria;
 use a variety of cost–benefit evaluation techniques for choosing among
competing project proposals;
 evaluate the business risk involved in a project;
 explain how individual projects can be grouped into programmes;
 explain how the implementation of programmes and projects can be
managed so that the planned benefits are achieved.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Introduction:
 Developers often become aware of an ICT project when they are assigned to the
project team. However, the initiation of new projects doesn't happen
spontaneously; rather, there is a preceding process within organizations. This
process, which varies in complexity across different organizations, is responsible
for determining the feasibility and value of undertaking a particular project. So,
projects are not arbitrary but are the result of a structured decision-making
process within the organization.
 Project approval decisions can be influenced by both the standalone merits of a
project and its contribution to broader strategic goals, emphasizing the
importance of considering the holistic impact of projects within an organizational
context. For example, ICT infrastructure within an organization might not deliver
a direct financial benefit, but could provide a platform for subsequent projects to
do so.
 Single Project Justification
 Strategic Objective Alignment
It might not be possible to measure the benefits of a project in financial terms.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Introduction:
 We will study the importance of a business case for ICT or software
projects. we study what such a business case document might contain.
 A business case may be presented for several potential projects, but there
may be money or staff time for only some of the projects. Managers need
some way of deciding which projects to select. This is part of portfolio
management.
 Will discuss some ways in which projects can be evaluated and compared
for inclusion in a project portfolio.
 The chapter finishes by discussing the way groups of projects which
together contribute to a common business objective can be managed as
programmes of projects.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

A Business Case:
Organizations may have different titles such as a feasibility study or a project
justification for what we call the business case. Its objective is to provide a rationale
for the project by showing that the benefits of the project outcomes will exceed the
costs of development, implementation and operation (or production).
Typically a business case document might contain:
1. Introduction and background to the proposal
2. The proposed project
3. The market
4. Organizational and operational infrastructure
5. The benefits
6. Outline implementation plan
7. Costs
8. The financial case
9. Risks
10. Management plan
Note: read the text book for more details of each topic.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Project Portfolio Management;
Project Portfolio Management provides an overview of all the projects that an
organization is undertaking or is considering. It prioritizes the allocation of resources
to projects and decides which new projects should be accepted and which existing
ones should be dropped.
The concerns of project portfolio management include:
 identifying which project proposals are worth implementation;
 assessing the amount of risk of failure that a potential project has;
 deciding how to share limited resources, including staff time and finance,
between projects
 being aware of the dependencies between projects, especially where several
projects need to be completed for an organization to reap benefits;
 ensuring that projects do not duplicate work;
 ensuring that necessary developments have not been inadvertently been missed.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Project Portfolio Management;

The three key aspects of project portfolio management are

 Portfolio definition
 Portfolio management
 Portfolio optimization.
An organization would undertake portfolio definition before adopting portfolio
management and then proceeding to optimization.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Project Portfolio Management;
Portfolio definition – A portfolio refers to a collection of various projects or
initiatives that an organization is undertaking. An organization should record in a
single repository details of all current projects. A decision will be needed about
whether projects of all types are to be included.
One problem for many organizations is that projects can be divided into new product
developments (NPD) such as a computer game and renewal projects which improve
the way an organization operates -information systems projects.
NPD projects are often more frequent in organizations which have a continuous
development of new goods and services. Renewal projects may be less frequent and
thus inherently more risky as there is less experience of these types of project.
NPD projects find attracting funding easier with their clear relationship between the
project and income.
Where both types of project call upon the same pools of resources, including finance,
the argument for a common portfolio is strong.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Project Portfolio Management;
Project portfolio management - Once the portfolio definition has been established, more
detailed costings of projects can be recorded. Each project's anticipated value, as envisioned
by managers, can also be documented. Actual performance of projects on these performance
indicators can then be tracked. This information can be the basis for the more rigorous
screening of new projects.

Portfolio optimization - The performance of the portfolio can be tracked by high-level

managers on a regular basis. The information gathered from tracking the actual performance
becomes the basis for evaluating and screening new projects.
In other words, the organization can use the data from existing projects to make more
informed decisions about whether to pursue new projects in the future. This is a way to ensure
that new projects align with the organization's goals and have a high likelihood of success.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Evaluation of Individual Projects: How the feasibility of an individual
project can be evaluated?

 Technical assessment
 Cost-benefit analysis
 Cash flow forecasting

Technical assessment - Technical assessment of a proposed system consists of

evaluating whether the required functionality can be achieved with current affordable
technologies. Organizational policy, aimed at providing a consistent hardware and
software infrastructure, is likely to limit the technical solutions considered. The costs
of the technology adopted must be taken into account in the cost-benefit analysis.

This involves understanding the technology, tools, hardware, software, and other
resources needed to meet the project objectives.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Evaluation of Individual Projects: How the feasibility of an individual
project can be evaluated?

 Technical assessment
 Cost-benefit analysis
 Cash flow forecasting

Cost-benefit analysis - Cost–benefit analysis (CBA) is a systematic process used in

project management and decision-making to evaluate the potential benefits of a
project or decision against its costs.
Cost-benefit analysis comprises two steps:
1. Identifying all of the costs and benefits of carrying out the project and operating
the delivered application: These include the development costs, the operating
costs and the benefits expected from the new system. Where the proposed system
is a replacement, these estimates should reflect the change in costs and benefits
due to the new system.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Evaluation of Individual Projects:

2. Expressing these costs and benefits in common units: We must express each cost
and benefit - and the net benefit which is the difference between the two - in
money.

Most direct costs are easy to quantify in monetary terms and can be categorized as:
 development costs, including development staff costs;
 setup costs, consisting of the costs of putting the system into place, mainly of any
new hardware but also including the costs of file conversion, recruitment and
staff
 training; operational costs relating to operating the system after installation.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Evaluation of Individual Projects: How the feasibility of an individual
project can be evaluated?

Cash flow forecasting - Estimating the overall costs and benefits of a project is
essential, it is equally crucial to have a detailed forecast that indicates when money
will be spent and when it will be earned. This helps in avoiding cash flow problems
and ensuring the project's financial health.
We need to spend money, such as staff wages, during a project’s development. Such
expenditure cannot wait until income is received (either from using software
developed in-house use or from selling it). We need to know that we can fund this
development expenditure either from the company’s own resources or by borrowing.
A forecast is needed of when expenditure, such as the payment of salaries, and any
income are to be expected.
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:
Some methods for comparing projects on the basis of their cash flow forecasts:
Table 2.1 illustrates cash flow forecasts for four projects. In each case it is assumed
that the cash flows take place at the end of each year. For short-term projects or where
there are significant seasonal cash flow patterns, quarterly, or even monthly, cash
flow forecasts could be appropriate.
 Net profit
 Payback period
 Return on investment
(accounting rate of return (ARR) in %)
 Net present value
 Internal rate of return

Note: Negative values represent expenditure and positive values income.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:
Some methods for comparing projects on the basis of their cash flow forecasts:

Exercise1: Consider the project cash flow estimates for four projects shown in Table
2.1. Negative values represent expenditure and positive values income.
Rank the four projects in order of financial desirability and make a note of your
reasons for ranking them.
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:

Net profit - The net profit of a project is the difference between the total costs and the
total income over the life of the project.
Project-2 in Table 2.1 shows the greatest net profit but this is at the expense of a large investment.
Indeed, if we had £1m to invest, we might undertake all of the other three projects and obtain an even
greater net profit. Note also that all projects contain an element of risk and we might not be prepared to
risk £1m.
Moreover, the simple net profit takes no account of the timing of the cash flows. Projects-1 and 3 each
have a net profit of £50,000 and therefore, according to this selection criterion, would be equally
preferable.
The bulk of the income occurs late in the life of project-1, whereas project-3 returns a steady income
throughout its life. Having to wait for a return has the disadvantage that the investment must be funded
for longer. Add to that the fact that, other things being equal, estimates in the more distant future are less
reliable than short-term estimates and we can see that the two projects (project-1&3 are not equally
preferable.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:

Payback period - The payback period is the time taken to break even or pay back the
initial investment. Normally, the project with the shortest payback period will be
chosen on the basis that an organization will wish to minimize the time that a project
is ‘in debt’.
The advantage of the payback period is that it is simple to calculate and is not
particularly sensitive to small forecasting errors. Its disadvantage as a selection
technique is that it ignores the overall profitability of the project – in fact, it totally
ignores any income (or expenditure) once the project has broken even. Thus the fact
that projects 2 and 4 are overall more profitable than project-3 but 2 & 4 are ignored.
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:
Some methods for comparing projects on the basis of their cash flow forecasts:

Exercise2: Consider the four project cash flows given in Table 2.1 and calculate the
payback period for each of them.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:

Return on investment - The return on investment (ROI), also known as the accounting
rate of return (ARR), provides a way of comparing the net profitability to the
investment required. There are some variations on the formula used to calculate the
return on investment but a straightforward common version is:

Calculate the ROI for each of the other projects shown in Table 2.1 and decide which, on the basis of this
criterion, is the most worthwhile
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:

Return on investment –

Disadvantages - The return on investment provides a simple, easy-to-calculate

measure of return on capital. Unfortunately, it suffers from two severe disadvantages.
Like the net profitability, it takes no account of the timing of the cash flows. More
importantly, this rate of return bears no relationship to the interest rates offered or
charged by banks (or any other normal interest rate) since it takes no account of the
timing of the cash flows or of the compounding of interest. It is therefore, potentially,
very misleading.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:
Some methods for comparing projects on the basis of their cash flow forecasts:

Exercise3: Calculate the Return on investment (ROI) for each of the projects shown
in Table 2.1 and decide which, on the basis of this criterion, is the most worthwhile.
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:
Net present value (NPV) – is a project evaluation technique that takes into account
the profitability of a project and the timing of the cash flows that are produced.
NPV is a financial metric commonly used in project management and investment
analysis. It is a method for evaluating the profitability of an investment or project by
comparing the present value of expected cash in-flows with the present value of
expected cash out-flows over time.
NPV takes into account the concept of the time value of money, recognizing that a dollar today
is worth more than a dollar in the future. It discounts future cash flows back to their present
value.
This is based on the view that receiving £100 today is better than having to wait until next year
to receive it. We could, for example, invest the £100 in a bank today and have £100 plus the
interest in a year’s time.
If we say that the present value of £100 in a year’s time is £91, we mean that £100 in a year’s
time is the equivalent of £91 now.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:
Net present value(NPV):
For a project, cash flows can include initial investment costs and future returns (profits,
savings, or other benefits) expected over the project's life.
Discount rate: The discount rate represents the required rate of return that an investor or
company expects to earn from the investment. The annual rate by which we discount future
earnings is known as the discount rate – 10% in the example. Similarly, £100 received in two
years’ time would have a present value of approximately £83 – in other words, £83 invested at
an interest rate of 10% would yield approximately £100 in two years’ time.
The discount rate is used to adjust future cash flows to their present value. It represents the
required rate of return or the cost of capital.
The present value of any future cash flow may be obtained by applying the following formula

where r is the discount rate, expressed as a decimal value, and t is the number of years into the
future that the cash flow occurs.
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:
Net present value(NPV):
Discount rate: Alternatively, and rather more easily, the present value of a cash flow may be
calculated by multiplying the cash flow by the appropriate discount factor. A small table of
discount factors is given in Table 2.2.

The NPV for a project is obtained

by discounting each cash flow (both
negative and positive) and summing
the discounted values. It is normally
assumed that any initial investment
takes place immediately (indicated
as year 0) and is not discounted.
Later cash flows are normally
assumed to take place at the end of
each year and are discounted by the
appropriate amount.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:
Net present value(NPV): Example
Assuming a 10% discount rate, the NPV for project 1
(Table 2.1) would be calculated as in Table 2.3. The net
present value for project 1, using a 10% discount rate, is
therefore £618. Using a 10% discount rate, calculate the
net present values for projects 2, 3 and 4 and decide
which, on the basis of this, is the most beneficial to
pursue.
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:
Net present value(NPV): Example
Remarks;
It is interesting to note that the net present values for projects 1 and 3 are significantly
different – even though they both yield the same net profit and both have the same return on
investment. The difference in NPV reflects the fact that, with project 1, we must wait longer
for the bulk of the income.
Disadvantages: The main difficulty with NPV for deciding between projects is selecting an
appropriate discount rate. Some organizations have a standard rate but, where this is not the
case, then the discount rate should be chosen to reflect available interest rates (borrowing costs
where the project must be funded from loans) plus some premium to reflect the fact that
software projects are normally more risky than lending money to a bank.
The exact discount rate is normally less important than ensuring that the same discount rate is
used for all projects being compared.
However, it is important to check that the ranking of projects is not sensitive to small changes
in the discount rate – have a look at the following exercise.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:

Exercise4: Calculate the Net Present Value(NPV) for each of the projects A, B and C
shown in Table 2.4 using each of the discount rates 8%, 10% and 12%.
For each of the discount rates, decide which is the best project. What can you
conclude from these results?
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:
Net present value(NPV): Remarks;
Alternatively, the discount rate can be thought of as a target rate of return. If,
for example, we set a target rate of return of 15% we would reject any project
that did not display a positive net present value using a 15% discount rate.

Note: Any project that displayed a positive NPV would be considered for
selection – perhaps by using an additional set of criteria where candidate
projects were competing for resources.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:
Internal rate of return(IRR):
The "discount rate." is used to discount future cash flows back to their present value.
The discount rate represents the opportunity cost of using funds in a particular
investment rather than in an alternative investment(borrowing capital) with similar
risk.
So, one disadvantage of NPV as a measure of profitability is that, although it may be
used to compare projects, it might not be directly comparable with earnings from
other investments or the costs of borrowing capital.
The internal rate of return (IRR) attempts to provide a profitability measure as a
percentage return that is directly comparable with interest rates. Thus, a project that
showed an estimated IRR of 10% would be worthwhile if the capital could be
borrowed for less than 10% or if the capital could not be invested elsewhere for a
return greater than 10%.
The IRR is calculated as that percentage discount rate that would produce an NPV of zero. In
other words, it is the rate of return at which the present value of cash inflows equals the
present value of cash outflows.
 Unit 2: Project Evaluation and Program Management
Cost-benefit Evaluation Techniques:
Internal rate of return(IRR):
One deficiency of the IRR is that it does not indicate the absolute size of the
return.
A project with an NPV of £100,000 and an IRR of 15% can be more attractive
than one with an NPV of £10,000 and an IRR of 18% – the return on capital is
lower but the net benefits greater.
Another objection to the internal rate of return is that, under certain conditions,
it is possible to find more than one rate that will produce a zero NPV.
However, if there are multiple solutions, it is always appropriate to take the
lowest value and ignore the others.

Unit 2: Project Evaluation and Program Management

Cost-benefit Evaluation Techniques:
NPV Vs IRR:
NPV and IRR are not, however, a complete answer to economic project
evaluation.
 Able to pay interest on any borrowed money - A total evaluation must also
take into account the problems of funding the cash flows – will we, for
example, be able to repay the interest on any borrowed money at the
appropriate time?
 Risky projects - While a project’s IRR might indicate a profitable project,
future earnings from a relatively risky project might be far less reliable than
earnings from, say, investing with a bank. Need more detailed risk analysis.
 Financial condition of organization - We must also consider any one project
within the financial and economic framework of the organization as a whole –
if we fund this one, will we also be able to fund other worthy projects?
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
5. Risk Evaluation
Every project involves risk. There are two types of risks, project risks and business
risk. Project risks, which prevent the project from being completed successfully, are
different from the business risk that the delivered products are not profitable. We
focus on business risk here.

a. Risk identification and ranking

b. Risk and net present value
c. Cost–benefit analysis
d. Risk profile analysis
e. Using decision trees

Unit 2: Project Evaluation and Program Management (5 Hrs.)

5. Risk Evaluation
1. Risk identification and ranking: Properly identifying and ranking risks help
project managers understand potential threats and opportunities, allowing them to
develop effective strategies for risk mitigation and contingency planning. In any
project evaluation we should identify the risks and quantify their effects.
A systematic and comprehensive approach to project risk assessment is using a
project risk matrix, allowing for informed decision-making and proactive risk
management in project evaluation.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Risk Evaluation
Risk identification and ranking: Example of project risk matrix:

Example of project risk matrix

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Risk Evaluation
Risk identification and ranking: Example of project risk matrix:
The key process for risk identification and ranking include:
1. Risk Identification and Quantification - The initial step in project evaluation
involves identifying potential risks and assessing their potential impacts.
2. Construction of a Project Risk Matrix: Systematically evaluate risks is to
construct a project risk matrix. This matrix serves as a visual representation,
typically in the form of a table, where risks are classified based on their relative
importance and likelihood. The risk matrix is populated using a checklist of
possible risks. These risks are categorized based on their perceived importance
and likelihood of occurrence. The importance and likelihood are separately
assessed to provide a comprehensive view of each risk.
3. Importance and Likelihood Assessment: The significance of a risk may not
solely depend on its severity but also on the likelihood of it occurring. Therefore,
the matrix classifies risks as high (H), medium (M), low (L), or exceedingly
unlikely (—) (almost impossible ) based on both importance and likelihood.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Risk Evaluation
Risk identification and ranking: The key process for risk identification and ranking
include:
4. Standardized Risk List for Comparison: To facilitate comparison between projects, it is
crucial that the list of risks used in constructing the matrix is consistent across all projects
assessed. This ensures a standardized evaluation process.
5. Application of the Project Risk Matrix: The project risk matrix can serve dual purposes
– as a tool for evaluating different projects (favoring those with lower risks) and as a
means of identifying and prioritizing risks for a specific project.

The provided matrix above is basic and illustrative, in reality, the list of risks is likely to be
longer, more precise, and tailored to the specifics of each project.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

5. Risk Evaluation
b. Risk and net present value - Where a project is relatively risky it is common
practice to use a higher discount rate to calculate net present value. This risk
premium might, for example, be an additional 2% for a reasonably safe project
or 5% for a fairly risky one. Projects may be categorized as high, medium or
low risk using a scoring method and risk premiums designated for each
category. The premiums, even if arbitrary(based on chance), provide a
consistent method of taking risk into account.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
5. Risk Evaluation
c. Cost–benefit analysis: A more sophisticated approach to the evaluation of risk is
to consider each possible outcome and estimate the probability of its occurring and
the corresponding value of the outcome. Rather than a single cash flow forecast for a
project, we will then have a set of cash flow forecasts, each with an associated
probability of occurring. The value of the project is then obtained by summing the
cost or benefit for each possible outcome weighted by its corresponding probability.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

5. Risk Evaluation
c. Cost–benefit analysis: Example - A software house, is considering developing a
payroll application for use in academic institutions and is currently engaged in a cost–
benefit analysis. Study of the market has shown that, if company can target it
efficiently and no competing products become available, it will obtain a high level of
sales generating an annual income of £800,000. It estimates that there is a 1 in 10
chances of this happening. However, a competitor might launch a competing
application before its own launch date and then sales might generate only £100,000
per year. It estimates that there is a 30% chance of this happening. The most likely
outcome, it believes, is somewhere in between these two extremes – it will gain a
market lead by launching before any competing product becomes available and
achieve an annual income of £650,000. Company has therefore calculated its
expected sales income as in Table 2.6.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
5. Risk Evaluation
d. Risk profile analysis:
Risk profile analysis is a process used to evaluate and understand the potential
risks associated with a particular individual, organization, investment, or
project. It involves assessing various factors to determine the likelihood and
impact of different types of risks.

By studying the results of a sensitivity analysis we can identify those factors

that are most important to the success of the project. We then need to decide
whether we can exercise greater control over them or otherwise mitigate their
effects. If neither is the case, then we must live with the risk or abandon the
project.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

5. Risk Evaluation
e. Using decision trees:
The approaches to risk analysis discussed previously rather assume that we are
passive bystanders allowing nature to take its own course. In this view, our primary
role is to either decline excessively risky projects or select those presenting the most
favorable risk profile.
There exist numerous scenarios where we have the capability to assess the
significance of a risk and, if deemed significant, determine an appropriate course of
action.
Such decisions will limit or affect future options and, at any point, it is important to
be able to assess how a decision will affect the future profitability of the project.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
5. Risk Evaluation
e. Using decision trees:
Example: A successful company is considering when to replace its sales order processing
system. The decision largely rests upon the rate at which its business expands – if its market
share significantly increases the existing system might need to be replaced within two years.
Not replacing the system in time could be an expensive option as it could lead to lost revenue
if it cannot cope with increased sales. Replacing the system immediately will, however, be
expensive as it will mean deferring other projects already scheduled.
It is calculated that extending the existing system will have an NPV of
£75,000, although if the market expands significantly, this will be
turned into a loss with an NPV of –£1 00,000 due to lost revenue. If the
market does expand, replacing the system now has an NPV of
£250,000 due to the benefits of being able to handle increased sales
and other benefits such as improved management information. If sales
do not increase, however, the benefits will be severely reduced and the
project will suffer a loss with an NPV of –£50,000. The company
estimate the likelihood of the market increasing significantly at 20% –
and, hence, the probability that it will not increase as 80%. This
scenario can be represented as a tree structure as shown in Figure.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

5. Risk Evaluation
e. Using decision trees:
The analysis of a decision tree consists of evaluating the expected benefit of
taking each path from a decision point (denoted by D in Figure). The expected
value of each path is the sum of the value of each possible outcome multiplied
by its probability of occurrence.
The expected value of extending the system is therefore £40,000 (75,000 x
0.8 – 100,000 x 0.2) and the expected value of replacing the system £10,000
(250,000 x 0.2 – 50,000 x 0.8).
The company should therefore choose the option of extending the existing
system.
 Unit 2: Project Evaluation and Program Management

Program Management
1. Program Management
2. Managing the Allocation of Resources within Program
3. Strategic Program Management
4. Creating a Program
5. Aids to Program Management
6. Some Reservations about Program Management

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Program Management
There will be an element of risk with any single project. Even where projects produce
real financial benefits, the precise size of those benefits will often be uncertain at the
start of the project. This makes it important for organizations to take a broad view of
all its projects to ensure that while some projects may disappoint, organizational
developments overall will generate substantial benefits.
We will now examine how careful management of programmes of projects can
provide benefits.
D. C. Ferns defined a programme as ‘a group of projects that are managed in a
coordinated way to gain benefits that would not be possible where the projects to be
managed independently’.
Programmes can exist in different forms.
 Business cycle programmes
 Strategic programmes
 Infrastructure programmes
 Research and development programmes
 Innovative partnerships programmes
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Program Management
Business cycle programmes – Program management of business cycle programs
involves overseeing and coordinating a set of related projects that collectively
contribute to achieving the overall goals of the business cycle. Business cycles means
financial year. Managing programs within these cycles(financial year) requires a
strategic approach to ensure alignment with organizational objectives and adaptability
to changing economic conditions. Example: Organizations manage a set of projects,
known as project portfolios, during a planning cycle. Many allocate a fixed budget for
Information and Communication Technology (ICT) development. Decisions must be
made within this budget and accounting period, often aligning with the financial year,
regarding which projects to implement.
Strategic programmes – Several projects together can implement a single strategy.
For example, the merging of two organizations’ computer systems could require
several projects each dealing with a particular application area. Each activity could be
treated as a distinct project, but would be coordinated as a programme.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Program Management
Infrastructure programmes - Organizations can have various departments
which carry out distinct, relatively self-contained, activities. In a local
authority, one department might have responsibilities for the maintenance of
highways, another for refuse collection, and another for education. These
distinct activities will probably require distinct databases and information
systems. In such a situation, the central ICT function would have
responsibility for setting up and maintaining the ICT infrastructure, including
the networks, workstations and servers upon which these distinct applications
run. In these circumstances, an infrastructure programme could refer to the
activities of identifying a common ICT infrastructure and its implementation
and maintenance.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Program Management
Research and development programmes - Truly innovative companies,
especially those that are trying to develop new products for the market, are well
aware that projects will vary in terms of their risk of failure and the potential returns
that they might eventually reap. Some development projects will be relatively safe,
and result in the final planned product, but that product might not be radically
different from existing ones on the market. Other projects might be extremely risky,
but the end result, if successful, could be a revolutionary technological breakthrough
that meets some pressing but previously unsatisfied need. A successful portfolio
would need to be a mixture of ‘safe projects’ with relatively low returns and some
riskier projects that might fail, but if successful would generate handsome profits
which will offset the losses on the failures.

Innovative partnerships - Companies sometimes come together to work

collaboratively on new technologies in a ‘pre-competitive’ phase. Separate projects in
different organizations need to be coordinated and this might be done as a
programme.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Managing the Allocation of Resources within Programmes

Role of Programme Manager and Project Manager ?

Example to state that Programme management needs continually to monitor the

progress of projects and the use of resources.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Managing the Allocation of Resources within Programmes
Managing the allocation of resources within programs is a critical aspect of program
management. Resources include human resources, finances, time, equipment, and
materials. Effectively managing these resources ensures that a program stays on track,
achieves its objectives, and delivers value.
Example: An ICT department has pools of particular types of expertise, such as
software developers, database designers and network support staff, and these might
be called upon to participate in a number of concurrent projects. In these
circumstances, programme managers will have concerns about the optimal use of
specialist staff. These concerns can be contrasted with those of project managers. See
Table below:
The project managers are said to have an
‘impersonal relationship’ with resource types
because, essentially, they require, for example,
a competent systems analyst and who fills that
role does not matter. The programme manager
has a number of individual systems analysts
under his or her control whose deployment has
to be planned.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Strategic Program Management

Meaning of Strategic Programme Management (SPM) ?

 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Strategic Program Management
In Strategic program management approach, a portfolio of projects collectively works
towards a shared goal, such as enhancing customer experience and standardizing
organizational processes.
Strategic Programme Management (SPM) is a comprehensive approach to managing
and executing programs within an organization, aligning them with the overall
strategic objectives. It involves the coordinated management of multiple projects and
initiatives to achieve specific strategic goals. SPM goes beyond traditional project
management by focusing on the interdependencies and synergies among various
projects and their impact on the organization's strategic direction.
For instance, in a maintenance business with varied customer interactions, the
objective is to present a consistent front. Multiple projects address specific areas like
customer interaction, work execution, and accounts, treating each as a separate
project within an overarching program. This method is common in large
organizations with complex structures aiming to streamline and unify diverse systems
for improved overall performance.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Creating a Program
Creating a program refers to the process of developing a set of interrelated
projects that are managed and coordinated together to achieve a common goal
or objective. In software project management, a program typically consists of
multiple projects that are designed to deliver a comprehensive solution,
product, or set of related features.
Some key concepts related to creating a program in software project
management:
 The programme mandate
 The programme brief
 The vision statement
 The blueprint
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Creating a Program
1. The programme mandate - The planning of a program begins with the creation of
an agreed program mandate. This is a formal document that outlines:
 The new services or capabilities that the program is expected to deliver.
 How the organization will benefit or be improved by the implementation of these
new services or capabilities.
 How the program aligns with corporate goals and any other ongoing initiatives
within the organization.
Once the program mandate is established, a program director is appointed to provide
initial leadership for the program. The program director plays a crucial role in
steering the program towards its goals and ensuring its successful execution.
The program requires a champion, someone in a prominent position within the
organization, to advocate for and support the program. This champion signals the
organization's commitment to the program and emphasizes its importance. Having a
champion can help overcome obstacles, garner resources, and enhance the program's
chances of success.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Creating a Program
2. The programme brief - Program brief is a document that outlines the essential
elements and rationale for a particular program within an organization. The key
components are
Preliminary Vision Statement: This is an initial, high-level description of the new
capacity or capability that the organization aims to achieve through the program. It
provides a broad overview of the goals and objectives but is labeled as 'preliminary'
because it will be further detailed and refined as the program progresses.
Benefits of the Program: The program brief includes a section that outlines the
expected benefits that the program is intended to generate.
Risks and Issues: Identifying potential risks and issues is a crucial aspect of program
management. This section of the program brief highlights foreseeable challenges or
uncertainties that may impact the successful implementation of the program.
Estimated Costs, Timescales, and Effort: This section provides an estimation of the
financial resources (costs), the duration (timescales), and the human resources (effort)
required to execute the program.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Creating a Program
3. The vision statement- The program brief is a concise document intended to help
sponsors decide whether to proceed with a detailed definition of the program. If
approved, a small team, led by a program manager, is established to refine the vision
statement from the project brief. The brief should provide a detailed description of the
new organizational capability the program aims to achieve. While precise estimates
may be challenging, there should be indications of how costs, performance, and
service levels might be measured, such as forecasting an increase in repeat business
without specifying the exact magnitude.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Creating a Program
4. The blueprint- The achievement of the improved capability described in the vision
statement can come only through changes to the structure and operations of the
organization. These are detailed in the blueprint. This should contain:
 business models outlining the new processes required;
 organizational structure – including the numbers of staff required in the new
systems and the skills they will need;
 the information systems, equipment and other, non-staff, resources that will be
needed;
 data and information requirements;
 costs, performance and service level requirements.
The organization aims for a consistent customer interface, outlined in the vision
statement. The blueprint details specific strategies like appointing account managers
as client contacts and implementing a unified computer interface for seamless access
to client information across systems.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Creating a Program
4. The blueprint- The blueprint emphasizes the importance of tangible benefits
in a program, cautioning that having a capability doesn't guarantee its effective
use. It highlights the need for evidence of actual business benefits,
emphasizing careful consideration of the timing of benefits realization.
The management structure, project portfolio, cost estimates, expected benefits,
identified risks, and required resources are outlined in a preliminary plan. The
program's financial plan allows higher management to establish budget
arrangements aligned with specific points in the program for progress review
and authorization of further expenditure. The potential challenge of engaging
affected stakeholders is recognized, and a stakeholder map is suggested to
inform a communication strategy for effective information flow.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Aids to Program Management

Other requirements for program management

Dependency diagrams
Delivery planning
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Aids to Program Management
Program management involves coordinating and managing multiple projects
to achieve strategic organizational objectives. Several aids and techniques (i.e.
Dependency diagrams and Delivery planning ) can help in effective
programme management.

Dependency diagrams - Dependency diagrams are useful tools to visually

represent the relationships and dependencies between various components of a
program. They help in understanding the sequence of activities, and managing
dependencies effectively.
There will often be physical and technical dependencies between projects. For
example, a project to relocate staff from one building to another cannot start
until the project to construct the new building has been completed.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Aids to Program Management
Figure shows a dependency diagram for a programme to merge various
existing IT applications of two organizations, the constituent parts of which
are explained below.

A. Systems study/design
B. Corporate image design
C. Build common systems
D. Relocate offices
E. Training
F. Data migration
G. Implement corporate interface
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Aids to Program Management
Delivery planning - The creation of a delivery dependency diagram helps identify and
visualize the dependencies between different elements of a project or program.
Tranches are then defined as groups of projects within the program that are
strategically organized to deliver coherent outcomes. Scheduling tranches involves
considering resource constraints to ensure efficient project execution.
It helps in understanding how various parts of a project or program depend on each
other for successful delivery.
The projects within a tranche are expected to work together to provide a unified and
meaningful outcome. This outcome could be a new capability or a set of benefits that,
when combined, create value for the client or stakeholders.
When scheduling tranches, it's crucial to consider the availability of resources. Scarce
resources, such as skilled personnel, funding, or specialized equipment, need to be
allocated efficiently to avoid contention or conflicts. This means that scheduling
should take into account the capacity of resources to handle multiple projects
simultaneously.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Aids to Program Management
Delivery planning - Figure shows how the programme’s portfolio of projects can be
organized into tranches, each of which delivers some tangible benefits to the user.

The creation of a delivery dependency diagram

would typically lead to the definition of tranches
of projects.
A tranche is a group of projects that will deliver
their products as one step in the programme. The
projects in a tranche should combine to provide a
coherent new capability or set of benefits for the
client. A consideration in scheduling a tranche will
be the need to avoid contention(conflicts) for
scarce resources.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)

Some Reservations about Program Management

( Drawback of the Program Management concept )

Unit 2: Project Evaluation and Program Management (5 Hrs.)

Some Reservations about Program Management

This section highlights concerns about the potential drawbacks of perceiving

programs as rigid, super-projects, emphasizing the importance of balancing structural
and process-oriented considerations and promoting adaptability in program
management.
Programme as some kind of ‘super-project’ - may lead to bureaucratic obstruction in
the individual project activities.
Inflexibility - if need to be modified the programme and projects during execution of
program. If the super-project idea predominates then too much planning at the
beginning plus a reluctance to change the scope of the programme may lead to
inflexibility.
The main lessons here seem to be:
 Programme management is not simply a scaled-up project management;
 Different forms of programme management may be appropriate for different
types of project.
 Unit 2: Project Evaluation and Program Management (5 Hrs.)
Some of the key points in this chapter are:
 Projects must be evaluated on strategic, technical and economic grounds.
 Many projects are not justifiable on their own, but are as part of a broader
programme of projects that implement an organization’s strategy.
 Not all benefits can be precisely quantified in financial values.
 Economic assessment involves the identification of all costs and income over the
lifetime of the system, including its development and operation and checking that
the total value of benefits exceeds total expenditure.
 Money received in the future is worth less than the same amount of money in
hand now, which may be invested to earn interest.
 The uncertainty surrounding estimates of future returns lowers their real value
measured now.
 Discounted cash flow techniques may be used to evaluate the present value of
future cash flows taking account of interest rates and uncertainty.
 Cost–benefit analysis techniques and decision trees provide tools for evaluating
expected outcomes and choosing between alternative strategies.

Unit 2: Project Evaluation and Program Management (5 Hrs.)

 Explain why discounted cash flow techniques provide better criteria for project
selection than net profit or return on investment.