Do the Math and Build an IT - Finance Partnership February 25 th, 2015 Learning Lab Session 4B 1
Speaker Introduction Tom Dawson, CPA, CFE IT Controller NRECA, Arlington, VA Tom.Dawson@NRECA.coop 2
Famous Almost Accountants Kenny G Chuck Liddell Bob Newhart Robert Plant John Grisham 3
AGENDA Partnering for the Big Project Developing a Business Case Feasibility Analysis Total Cost of Ownership Project Reporting Questions??? 4
Partnership 5
To help protect your privacy, PowerPoint has blocked automatic download of this picture. Partnering for the Big Project Key to success Building Positive Working Relationships -Dave Wood, TypeFocus 6
Project Management Institute - Definition of a Project Temporary group activity Defined beginning and end in time Defined scope and resources Unique product, service or result Not a routine operation Specific set of operations Accomplish a singular goal 7
Themes of Successful Projects Initiated with a robust business case, aligned with corporate strategy Limit size and scope Bigger projects = higher failure rate An effective project sponsor, who provides clear direction Manage risk actively Use PM methodology consistently 8
Our focus today! Project Life Cycle Planning Support Analysis Implementation Design 9
Planning Phase Understanding why a system should be built/bought Determining how the project team will go about building/buying it. 10
Developing a Business Case See the OPPORTUNITY Assess the Business Need/Improvement The more a new system addresses a BUSINESS need the higher likelihood of a success I is in BUSINESS but we don t pronounce it because it is a team effort New technology is a common driver but should be second to organizational needs 11
Business Case See separate example business cases 12
Feasibility Analysis Organizational Economic Technical Should we build? If we build, will they come? Can we build? 13
Feasibility Study See example provided separately 14
Technical and Organizational Feasibility Experts and senior management collaboration Not covered in this presentation Example shown in separate handout 15
Economic Feasibility IT, Finance and Business Unit Buy vs. build analysis Cost benefit analysis Cash Flows Costs and benefits over selected number of years 3 to 5 years common Return on Investment (ROI) Net Present Value (NPV) Sensitivity Analysis 16
Buy vs. Build Analysis Required skills available? Resources available? Commercial product available? Which costs more? Funds available? What produces the best value? 17
Cost Benefit Analysis What are benefits? Quantitative Benefits Easier to see, tangible Money you receive versus the money you spend Qualitative Benefits Based on intuition and belief How do you measure improved member service? Best if you can determine a tangible worth 18
Example Cash Flow In (000 s) 2016 ($) 2017 ($) 2018 ($) Total ($) Increased Sales 500 600 700 1,800 Improved Member Service 95 95 95 285 Total Benefits 595 695 795 2,085 2 Servers @ $100 200 0 0 200 Server Software 100 0 0 100 Development Labor 700 0 0 700 Total Development Costs 1,000 0 0 1,000 Hardware 55 75 80 210 Software 20 20 20 60 Operational Labor 105 110 110 325 Total Operational Costs 180 205 210 595 Total Costs 1,180 205 210 1,595 Net Total (585) 490 585 490 19
Return on Investment (ROI) ROI = (Benefits less Costs)/Total Costs Percentage calculation Higher the better 3 to 5 year cash flow Time value of money? 20
Example ROI Assumes no present value calculation ROI = Net Total/Total Costs ROI = 490/1,595 ROI = 31% 21
Net Present Value (NPV) NPV is the discounted monetary value of the expected net benefits of the project. 22
Discounted Cash Flows In (000 s) 2016 ($) 2017 ($) 2018 ($) Total ($) Net Total (585) 490 585 490 Discount rate 5% PVF.95.91.86 Discounted Net Total (557) 444 505 392 PVF = 1 (1+DR)^N PVF present value factor DR discount rate N year in cash flow projection NPV = 392 23
Sensitivity Analysis Range of inputs Worst and best case scenarios What if In (000 s) 2016 ($) 2017 ($) 2018 ($) Total ($) Net Total (585) 490 585 490 Low Scenario (600) 450 550 400 High Scenario (550) 520 600 570 24
Change for the Future A good process is worth the time to set up! 25
Bloomfire Example http://nreca.bloomfire.com/ An online knowledge-based, collaboration site being evaluated by a volunteer group of IT Community members 26
Total Cost of Ownership (TCO) TCO = purchase price + operational cost 27
Cost to implement operate, support and maintain, enhance or extend, and decommission an application Sunk Costs - Application costs in previous years Current Cost of Ownership - Cost of application services in current year Future Cost of Ownership Probable Application Costs Before Decommissioning 28
Accounting Expense versus Capital (OpEx vs. CapEx) Future benefit? Day to day functioning Capital Useful life Depreciation method 29
Reporting Project status reports Can be a simple Excel or Word document Comparative statement - budget to actual Tracked in Excel or financial system 30
Sample Status Report Fields Report Date Overall Status Project Summary Key Issues Identified Risks Tasks and Next Steps Decisions Needed Key Future Dates Budgeted Cost Spend to Date 31
Conclusions Form strong partnerships Build informative business cases Analyze project feasibility Review costs vs. benefits Prioritize resources Communicate Collaborate 32
Questions??? Feel free to email me with any questions Or Sarah Kiely Sarah.Kiely@NRECA.coop Tom.Dawson@NRECA.coop 33