Software Project Management

Prof. Durga Prasad Mohapatra

Department of Computer Science and Engineering
National Institute of Technology, Rourkela

Lecture – 12
Project Evaluation and Programme Management (Contd.)

Good afternoon to all of you, last class we have discussed about the cost benefit analysis.
We have seen the different ways of evaluating proposals one is this technical assessment,
then the cost benefit analysis or the financial assessment. So, now, we will take up the
next item for individual project assessment. So, that we will see that now today will first
see the other item that is left for this individual project assessment that is cash flow
forecasting. Then as I have already told you C- B analysis that is the most important
analysis among all the assessment among all the feasibility studies financial assessment
or C- B analysis is the most important.

So, we will see the detailed steps of C- B analysis, then we will see among one of the
steps we have to identify and classify the cost and benefits. So, we will see the details of
the different types of the cost and benefits associated with a project.

(Refer Slide Time: 01:16)

So, like cost benefit analysis it is also very much important to produce a cash flow
forecast. This cash flow forecast indicates when expenditures and income will take plus
will take place during the development project.
You know that development of the project will incur some cost. So, we need to spend
some money such as purchasing equipment staff payments etcetera during the project
development, but these expenses cannot wait until the income until the revenue is
generated from the project, we have to spend some money initially. So, when the system
or product is released then only it will generate a income that gradually a pays off the
cost. But the so, far till that point we cannot wait we have to spend some money, that
money maybe we have to spend from the our own resources the companies own
resources or by taking loan from banks etcetera.

Also we have to consider we have to take into account the timing of the cost and incomes
when cost will incur? When the first income when the first revenue will come out? So,
the timing of cost and income for the product that also needs to be estimated.

(Refer Slide Time: 02:29)

The we have already known that whether we have to you know expect we have to think
of that this initial fund that we required to start up the project, where the fund will come?
So, we need to know that whether the fund the initial fund requirement, the initial
expenses whether we can fund them from the organizations own resources or by
borrowing or by what taking loan from the banks etcetera.

So, a forecast is needed a typical what forecasting is shown here we are seen as I have
already told you during the development of a project, initially we have to spend some
money this is the expenditure this is the initial expenditure. So, here what will happen?
No revenue is there because the project just is started. So, some initial expenditure just
such as purchasing a hardware software, making the site ready and staff recruitment
etcetera we have to make.

And after sometime you see will get gradually the revenue will come up and gradually
the revenue the income will increase and this increase so, some time will come, at some
point of time this income it will outweigh this expenditure, then it will gradually it will
meet the expenses, it will be the expenditure will be equal to what or the income it will
pay off the expenditure that we have made initially then the gradually the income will
increase and after some years again the expenditure are the income the revenue will
come to 0 then it will ask maintenance. So, again you have to put some more
expenditure, this is how the typical product life cycle cash flow this looks likes.

So, basically what the importance is I have to forecast a cash flow and cash flow means,
it will indicate when expenditure will take place and when the income or revenue will
take place.

(Refer Slide Time: 04:27)

With this now will go to the detailed steps of this cost benefit analysis, which is very
important for successful development project. So, these are the steps for the cost benefit
analysis that we have to carry out first we have to identify the cost and benefits
pertaining to the project, then we have to categorize various cost and benefits, then we
have to select a cost benefit evaluation technique we will see there are various cost
benefit evaluation techniques are there we will see them.

Then we have to interpret the results of this cost benefit evaluation techniques for
analysis and then after analyzing the results of the cost benefit evaluation techniques, we
somebody are the organization it has to take appropriate action. So, now, let us see the
first step.

(Refer Slide Time: 05:10)

The first step is identifying the cost and the benefits pertaining to the project. You know
that the certain cost and benefits that easily identifiable. For example, direct cost such as
purchasing a computer and payment to the what a staff members etcetera they can be
easily identified.

These direct and the direct benefits very often they relate one to one to the direct cost,
the direct benefits will directly relate to the direct cost especially the savings that may be
obtained from reducing the cost in the activities in the questions they can be mapped to
the what benefits. Some direct cost and benefits may not be well defined they cannot be
clearly identified since they represent some estimated cost they are not the actual cost
they are estimated cost or they are estimated benefits that have some uncertainty.

So, they cannot be clearly defined, they cannot be clearly measured examples are like the
cost reserved for bad debt etcetera. So, this types of direct cost or this types of some of
the benefits they cannot be what they cannot be well define they cannot be clearly
defined and they cannot be clearly identifiable they cannot be clearly measured. A
category of cost or benefits that is not easily identifiable is opportunity cost. We have
taken here example that or some category of cost or benefit that cannot be easily
identifiable is opportunity cost and opportunity benefits. So, these opportunity cost or the
what do you mean by these opportunity cost or benefits?

Opportunity cost or benefits are the cost or benefits which are forgone by selecting one
alternative over another. If you could have taken another alternative you might have you
might have got better benefit for somehow you have overlook that somehow you have
forgotten that one. So, these are the what. So, this types of cost or benefits those are
forgone by selecting one alternative over another alternative. So, the cost or benefit
associated with the these types of things are known as opportunity cost. So, these
opportunity cost or opportunity benefits they are very much difficult to identify.

(Refer Slide Time: 07:19)

Now, let us see what are the different then the second step as I have already told you first
step is identify the cost and benefits, then next step is categorize the various cost and
benefits. So, what are the various categories of what are the categories of different
various cost and benefits? So, the cost or benefits they can be tangible or intangible, they
can be direct or indirect they can be fixed or variable. So, these are the important
categories of different cost and benefits let us discuss a one by one.
(Refer Slide Time: 07:54)

So, first one is tangible cost. So, what do you mean by tangibility? Tangibility refers to
the ease with which cost or benefits can be measured; how easily you can measure the
cost or the benefits. So, tangible means the ease with which the cost or benefits can be
measured. An outlay of the cash for a specific item or activity is referred to as a tangible
cost. So, tangible cost is defined as an outlay of the cash for a specific item or for a
specific activity. So, this outlay of cash for a specific item or activity is called as tangible
cost. So, examples of tangible cost are what? Purchase of machineries purchase of
devices such as purchase of hardware or different software the what cost required for a
training the personnel the cost required for paying salaries the employees these are
examples of tangible cost.
(Refer Slide Time: 08:47)

Similarly, what do you mean by intangible cost? So, tangible cost means cost which can
be easily what measured which can be easily which can be easily measured what
intangible cost means cost that are known to exist, but with the financial value cannot be
accurately measured. You cannot easily measured these cost some examples let us see
employee morale problems caused by a new system. So, suppose it was earlier some
existing system was there.

Now, you have implemented you have installed a new system, you have followed a new
system then what kind of morale problems will come to the employees? So, that will
incur some cost that you cannot easily measure. So, that is why these are intangible cost.
Similarly lowered company image if the company image is lowered is down in the
market among the customers then it will also incur some customer the difficult to
measure. So, these are some examples of intangible cost. In some cases these intangible
cost are easy to identify, but difficult to measure you can identified them, but you cannot
measure them.

For example the cost of breakdown of an online system. An online system such as
railway reservation system or banking system etcetera it was running, but suddenly they
as a breakdown, then some cost is associated with this due to this what the customers
may be diverted to what other service providers and so, and so, on. So, here the cost of
breakdown of an online system during what the maybe we may take that banking
example, if an online banking system it is a several times it is getting breakdown. So,
there are so, many banks why the people will go for only your bank. So, they may
migrate to other bank.

So, you lose some amount. So, this will incur some cost. The cost of breakdown of an
online system during banking hours will cause the bank to lose deposits as well as waste
the human resources, but is difficult to measure by how much amount you will lose, how
much money you will lose or how much, but human resources you will lose it is very
much difficult to measure. So, this is something about intangible case are caused. So, in
some cases these cost may be difficult even to identify. In many cases here we can
identify this example have taken that cost of breakdown of an online system here it can
be easily identified, but difficult measure.

So, but there are some other cases where these cost may be difficult even to identify you
cannot identify, what is about measurement you cannot identify. So, we cannot measure
them for example, you see improvement in customer satisfaction due to online systems
previously this system was manual. Now you have what followed you have installed
your you have implemented on analysis system. So, difficult analysis the customers will
satisfied, but how much they have satisfied how to quantify it, it is very much difficult to
quantify them or it is very much difficult to what a measure them.

(Refer Slide Time: 11:41)

So, these are intangible cost so, similarly as we have seen tangible cost and the intangible
cost. So, similarly the corresponding category of benefits are there like tangible benefits
and intangible benefits. So, benefits which can be measured. So, tangible benefits means
these are the benefits which can be easily measured or quantified. For example, benefits
due to completing jobs in fewer hours previously the job was for hour you are
completing say 10 jobs for due to what automatic a developing a new automation system,
you are completing what in what the same what 10 jobs you are completing in half an
hour.

So, you are certainly getting some benefits. So, this, but how much this benefits of
course, you can you can measure that previously one for one hour you are doing that 10
jobs now the send 10 jobs you are completing in half an hour or for one hour you are
completing 20 jobs. So, this can be easily measured on quantified. So, this is an example
of tangible benefits. So, similarly producing reports with no errors previously you are
preparing the reports manually. So, there are many errors maybe per page say 10, 20 or
like that, but after automating in your report almost just one or two errors are coming,
this number of errors are present in that reports due to making your system online or
automated. So, this can be measured this is an tangible benefit.

(Refer Slide Time: 13:15)

So, producing the reports with no errors of course, this can be measured and quantified
you can count the number of errors etcetera. So, this is an a example of tangible benefits.
So, similarly what do you mean by intangible benefit? Benefits which cannot be easily
measured or quantified. So, the benefits which you cannot easily measure which cannot
easily quantified there intangible benefits, let us take some example more satisfied
customers. So, if you are having more number of satisfied customers or your company
your corporate has an improved image definitely your benefit will be more but is
difficult to measure them it difficult to quantify them.

So, why we are discussing the different types of cost and benefits? Because all the types
of cost may be tangible and intangible cost may be tangible or intangible benefits or
direct cost indirect cost or direct benefits or intangible benefits all should be considered
in the evaluation process. In the cost benefit analysis all the different types of cost and
benefits including tangible and intangible cost and benefits direct and indirect cost and
benefits they should be considered in evaluation process. It has been observed that many
times the management often tends to deal irrationally with intangible cost or benefits by
ignoring them we should not be. Very often since these intangible benefits they cannot
measure they cannot identify they cannot be identified or they cannot be quantified. So,
management they just ignore them only takes can count what like tangible benefits and
costs.

So, in that way the assessment the financial assessment the cost benefit analysis cannot
be made proper. So, management has to treat equally has to consider all the different cost
and benefits similarly in the C- B analysis method.
(Refer Slide Time: 14:51)

Next category is direct cost. These are the cost those with which a dollar figure can be
directly associated in a project; that means, we can express the cost in a monetary terms
either in terms of rupee or in types of what dollar. So, these are the cost with which a
dollar figure can be directly associated in a project, it is easy to quantified monetary
items. So, this cost can be easily quantified in monetary items let us take a small
example.

Suppose you want to purchase box of diskettes or purchase the number of computers,
purchase what a set of softwares. So, these are examples of direct cost here why?
Because here in this case purchase of the box of diskettes say it is taken thirty five dollar
or so, here you can associate the diskettes with the dollars expended. So, since you can
assign monetized what values to this cost these are known as direct cost and other
examples of direct cost as such as development cost, establishment of the laboratory
etcetera, setup cost and operating cost I mean operating running this system after the
installation is over, these are some examples of direct cost because they can be easily
they can be directly measured, they can be directly quantified.
(Refer Slide Time: 16:04)

What is about direct benefits? These are the benefits which can be specifically
attributable to the given project. So, these benefits can be specifically attributable to the
given project that is why these are known as direct benefits let us take a small example.
Suppose previously you are your system was running manually; now you have
developed a new online system and that can handle 25 percent more transaction per day
due to the manually how many transactions you are completing? So, now, due to making
it online 25 percent more transactions are completed per day.

So, here directly we are getting the benefit and the benefits these are specifically attribute
attributable why? Because due to implementation of the new online system these are
examples of. So, this is the example of direct benefit.
(Refer Slide Time: 16:48)

So, now will call the a direct indirect cost. So, these are the cost or these cost are the
results of operations that are not directly associated with a given system or activity ok.
So, this types of cost which are not a this types of cost are not directly associated with a
given system or a given activity, normally they are often refer to the often referred to as
overhead or overhead cost.

A for example, like insurance, maintenance etcetera these are not specific to a particular
system or a particular activity, these are overall these are required for running of the
overall organization. So, similarly protection of the computer center from the heat and
fire lighting the organization, providing air conditioning facility etcetera these are not
specific these are not directly associated with a given system or with given project or a
given activity this is the required for overall running of the organization these are
examples of indirect cost, but it is a very much difficult to determine the proportion of
each of these which are attributable to a specific activity this is very difficult to
determine and their proportion.
(Refer Slide Time: 17:56)

Now, what is about indirect benefits? The benefits which are realized as a byproduct of
another activity or system. These are not directly actually benefits, but these benefits
realized as a byproduct as a side product of another activity or system let us take a small
example. See this is a main objective of steel plant is produced what I steels, but by the
time this steels are produced also in some cases fertilizers are produced. So, the benefits
due to selling of the fertilizers we can consider this as an indirect benefit.

So, similarly you know that the shop keepers they are what selling the oils different oils,
but after selling the oils that containers the tin boxes, they also sell it in the what to the in
the market. So, the amount the benefit they get out of selling the empty oil containers
just like the tin boxes or this what paper cartoons etcetera these are indirect they may be
treated as the indirect benefits.
(Refer Slide Time: 18:53)

Now let us come to the last category that as fixed cost versus variable cost. So, some
cost are constant regardless of how well a system is used. So, whether you use this
system frequently used or less frequently used or do not used at all. So, some cost are
constant they are called as fixed cost.

So, they are they are encountered only once normally they will not recur again and again,
examples you can see this straight line depreciation of the hardware exempt employee
salaries you are one times suppose you have a exempt employee salary etcetera and the
insurance etcetera these are one time cost these are known as the fixed cost.
(Refer Slide Time: 19:29)

Similarly, variable cost. So, these cost are incurred on a regular basis in contrast to the
fixed cost which are, but only encountered ones they occur only ones whereas, variable
cost they are incurred on a regular basis might be weekly monthly or yearly, they are
usually proportional to the work volume and continue as long as the system is in a
operation.

So, normally they are proportional to the volume of the work and they continue as long
as the system is in a operation will take some examples like cost of the computer forms,
computer printouts that you want to take which vary in proportional to the amount of
processing. So, if you are having large amount of work has to be done large amount of
activities have to be processed; obviously, you have to print more computer printouts
more computer forms are required. Similarly if a it is a less amount of processing has to
be done; obviously, less number of computer forms will be required. Similarly the length
of the reports required more activities performed; obviously, the length of the report will
be more only few activities are performed the length will be less.

So, here the cost associated with a this applications; obviously, that will be vary
according to the volume of the work performed.
(Refer Slide Time: 20:36)

Similarly, let us say about fixed benefits versus variable benefits. These benefits are also
constant and they do not change. So, as fixed cost they normally do not change. So,
similarly a fixed benefits they are also constant and they do not change. So, some
examples of benefits we can say which are fixed benefits like benefits due to the
decrease in the number of personnel by 20 percent resulting from the use of a new
computer.

You are automating your system previously it was running manually now a new
computer system is implemented. So, by this you by due to the use of computer suppose
the number of personnel that you are using previously it is reduced by 20 percent. So,
this is exactly it is a fixed benefit ok. Similarly the benefit of personnel savings may
recur every month, but the benefit of personnel savings how much personnel have been
saved? The benefit of a personnel savings they may occur very every month.
(Refer Slide Time: 21:34)

And variable benefits on the other hand these benefits; that means, variable benefits they
are realized on a regular basis, they change. For example, suppose there is a safe deposit
tracking system that saves 20 minutes preparing customer notices compared with a
manual system.

When it was manual system, it was taking to 20 minutes more for preparing the customer
notices after making it automated, after making a computerized that saves 20 minutes of
a preparing customer notices. So, this will vary the amount of the time saved it varies
with the number of notices produced. How many number of notices are produced
accordingly the time saved it will vary. So, that is why this is an example of variable
benefit.
(Refer Slide Time: 22:19)

So, now we have seen that in summary. So, today we have discussed in this class what
are the different steps for carrying out C- B analysis. We have learnt the different types
of a cost and benefits with suitable examples such as we have seen this direct cost versus
indirect cost, direct benefits versus indirect benefits fixed cost versus variable cost fixed
benefits versus variable benefits similarly this tangible cost versus intangible cost and
tangible benefits versus variable benefits.

So, this cost and benefits have to be considered properly in C- B analysis that is why this
classification is required. We have to consider each and every possible type of cost each
and every type of benefit during the C- B analysis because you have seen that very often
the management, they are not considering they are not taking into account the intangible
benefits and intangible what cost because that difficult to measure the difficult to
identifiable the difficult to quantifiable.

So, that is why they are ignoring this, as a result the result of C- B analysis will not get
proper the financial assessment will not be proper. So, that is why this cost and benefits
have to be considered properly while carrying out C- B analysis or while carrying out the
financial assessment.
(Refer Slide Time: 23:43)

So, last class as well as this class we have taken these materials from this books mainly
serial number 1 by Hughes Cotterell and mall that book will take here the preliminary
book and besides that the different cost and the benefits and the feasibility study on the
cost benefit analysis it is well explained in the system analysis and design book by E M
Awad and then this some fundamental concepts of feasibility study and this cost benefit
analysis and this software project management, some fundamental concepts are given in
this fundamentals of software engineering Rajib malls book you may refer this
references in this books. So, from time to time as an when we will I will use different
materials, different books or different resources I will put all those things in due course
of time.

So, this is all about this different the types of costs and benefits in the next class we will
see the other steps of cost benefit analysis. So, today we have seen three two steps that is
identify the cost, step 1 and step 2 is your classify or categorize the cost. So, these two
steps we have seen of cost benefit analysis, the next step is after identifying and
classifying the different cost and benefits we have to use we have to select a proper cost
benefit evaluation technique there are so many cost benefit evaluation techniques such as
net profit, present value net present value, payback period, internal rate of return. So,
those methods are there. So, how to select this methods based on what that will discuss
in the next class thank you very much. So, we will take up the selection of cost benefit
evaluation technique in the next class.
Thank you very much.