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Estimation of expediency of investments into an information technology of the design organisation
In the conditions of limitation of resources it is not enough to estimate efficiency of separate projects to gain the greatest effect, it is necessary to consider all possible alternatives. In this article one of methods of a complex estimation of potential of development of an information technology of the organisation performing design works is considered “turnkey”.

Information technology all affirms as a role of the high-grade participant of business of the companies, and not just the parasite and the consumer of resources, therefore more confidently and the investment approach to an estimation of IT-projects became recognised. However, speaking about such approach, the small nuance a little changing a sight at an estimation of investments in IT is always missed. Any business is the activity directed on reception of profit in the conditions of limitation of resources, and in view of this limitation there is a competitive nature of investment process. On the one hand, as now IT-divisions became the high-grade factor influencing competitive advantages and profit of the company, IT-projects compete to projects in sphere of the basic manufacture or any others not the IT-projects which are carried out by the organisation, performing design works. On the other hand, whereas the list of technologies is great enough, and everyone promises the benefits, demanding this or that volume of investments, there is a competition between various IT-projects. Thus, considerations of efficiency of the separate IT-project chosen a priori, insufficiently. More systematised approach based on the purposes and plans of the organisation, performing design works is necessary. Making a start from strategy of the design organisation it is necessary to generate a portfolio of the IT-projects influencing strategically important indicators, and then to calculate indicators of their economic efficiency. Thus, the company management will receive the necessary information for decision-making on formation of a portfolio of investment projects and possibility optimum to use available resources for achievement of objects in view. However the most known techniques do not meet these requirements in the force, restrictions inherent in them. So, perhaps, the most known, cumulative cost of possession (TCO, Total cost of ownership) estimates only a costly part, disregarding advantages from introduction. Therefore this technique is in the pure state applicable only for an estimation of the decisions providing similar functionality. Return from investments, ROI, i.e. the recoupment of investments) – the relation of increase in investments (net profit) to volume of investments, shows, provides what financial result, each rouble invested in the project, but does not give an accurate and clear way to define absolute size of this result. Definition of qualitative and financial effects, is in the best way provided with system of the balanced indicators (Balanced Scorecard, BSC), but the long spadework frequently demanding change of existing approaches to management by the company is necessary for its introduction, as, according to some experts, BSC not simply technique, and a way of life of the organisation performing design works. More simple and accessible to use, but, at the same time, yielding accurate and well-founded results the technique has been developed by company Microsoft – a technique “a fast economic substantiation (Rapid Economic Justification, REJ).

Objectivity of an estimation is provided with use within the limits of REJ several aforementioned techniques: TCO, elements BSC (critical factors of success and key indicators of efficiency), ROI and others, and also consideration of risks inherent in projects. In spite of the fact that the given technique has been born in bowels of such large player in the market of an information technology, in the basis it is independent of concrete technologies or manufacturers, and allows to receive objective results. The subjective warp in estimation IT arises, at definition of cost of system and calculation of expected effect of introduction, the majority of large manufacturers is offered by the recommendations about calculation of cumulative cost of possession by their product and the vision of effect from their introduction. While REJ it only the algorithm offering accurately structured sequence of steps, following to which, we can reach the shortest way of required true. And the decision on use of the concrete data at this or that stage depends exclusively on experts conducting research, it can be both recommendations of any manufacturer or an analyst, and own operating time, and the given technique that within the limits of accurate algorithm of achievement of result is interesting to those, it leaves open space for creativity of researchers.

REJ is based on three “whales”:
- A line-up of analysts;
- Algorithm of performance of research;
- Business plan structure.

Observance of recommendations about each point should lead you to reception of exact results in the shortest way. Generalising available experience, we will consider estimation process on an example of a certain hypothetical company “NP Project” engaged preparation of the design documentation within the limits of performance of projects “turnkey”. The market on which the company operates, is sated. The company share in the market remains, for the last few years, stable. The company “NP Project” has the central office, three design departments (group of engineers on heat, group of complex designing and bureau of mechanisation of repair work and the non-standard equipment) and ten regional representations. The documentation prepared by the design organisation extends through representations, each of which has a warehouse, and directly co-operates with clients of the company. All divisions are territorially divided. At the central office of the company separate modules of ERP-system are introduced. Information systems of divisions developed separately, the IT-infrastructure in each separately taken division is developed well, but the information system of the company as a whole is diverse enough. A management of the design organisation, realising the importance of an information technology, has made decision to systematise process of financing of their development. The estimation of expediency of investments in IT has been for this purpose spent.

The Command

Before to start research, it is necessary to generate collective of experts. Within the limits of REJ to group structure huge significance, mindful the unsuccessful project on tower building in Babylon is attached, it is difficult to disagree with them. For anybody not a secret that employees of different divisions, frequently, “speak” in different languages, as it is clear, at everyone the problems, vital and professional experience. To receive complete all-round vision IT in structure of the concrete organisation performing design works, it is possible only by attraction of experts of various divisions IT, industrial, financial and economic. In structure of working group it is supposed five roles.

1. Executive Director. It is desirable, that in this role the representative of the top management of the design organisation, having influence on decision-making on investment, as the chief executive – the sign figure of the project symbolising interest of company management in its performance acted. Its everyday participation in group work is not required. First, it should provide to members of working group access to necessary material, information and administrative resources. Very few people begins to argue what to motivate employees on participation in the project supervised by a management, much easier. Secondly, its participation guarantees correct understanding experts of strategic targets of the organisation performing design works.

2. Manager of the project. Coordinates activity of all participants of the project, their interaction with each other, access to necessary resources, and also is responsible for estimation performance in the confirmed terms and according to methodical recommendations. The expert having experience in management by projects is necessary for this role, working out of business plans and carrying out of estimations by method REJ. As a matter of fact, it, instead of the chief executive is the real project head. It is offered to invite to this position of foreign experts from consulting and analytical firms, but, in practice in this role acts the IT expert (usually main system administrator or the chief of department of ACS of the company).

3. Business analyst. Is responsible for definition of strategic targets, critical factors of success of the organisation, and the subsequent identification of key business processes having resources for modernisation. The business analyst should possess experience of industrial designing or modelling of processes.

4. IT-analyst. Should be informed on possibilities existing and prospects of a new information technology, their value for business, and also weak places. With its help the working group should generate a portfolio of the technologies which introduction can influence critical factors of success. It is desirable that the expert occupied in this role, had, not only, experience in area of an information technology, but also good enough representation about the basic business of the company.

5. Financial analyst. Supervises realness and adequacy of planning of monetary streams of the investments allocated for realisation of the project of introduction of chosen technologies, correctness of performance of calculation of financial indicators and other questions of financial discipline. The financial analyst should be well informed on features of the organisation of system of the finance and norms of the administrative account accepted in the given organisation, performing design works.

Basically, on the basis of experience of experts and the requirements shown to each role, one expert can combine some roles in the project. Combination of roles of the IT-analyst with the chief executive, a business analyst and a financial analyst is undesirable only. However if there is a possibility better nevertheless to avoid such combination as is not present that less professional than, something universal.

The company “NP Project” had no competent experts, according to efficiency IT and to the business analysis, therefore it has been decided to invite the foreign adviser, to roles of the manager of the project and a business analyst, accordingly. The assistant to the general director on development was the chief executive of the project supervising its performance. Functions of a financial analyst were carried out by the assistant to the financial director, the IT-analyst – the chief of department of ACS of the company.

So, the command is generated, roles are distributed, it is possible to start business and to begin research.

Research
The plan of work according to a company information technology consists of five stages.

The step 1. A business estimation. research begins with definition of problems important for company management. It allows analysts to coordinate IT-decisions to problems important for success of the design organisation. Such coordination considerably accelerates research carrying out as members of working group concentrate the attention only on problems critical for achievement by the organisation of objects in view. First of all define critical factors of success of the organisation performing design works, make the plan of their achievement, and define indicators of achievement of critical factors of success. For this purpose study the strategic plan for development of the company, the business plan, carry out consultations of company management, heads of functional divisions and key experts.

By means of company management “NP Project” experts have made the list of critical factors of success (table 1). The increase in profitableness of the company has been named by a company overall objective, and other three factors concretise strategy of its achievement.

Table 1 – Critical factors of success of Open Society “NP Project”
NCritical success factorStrategyКey indicator
1Increased profitability of the companyIncrease in sales revenues, reduced costs related to sales of productsProfitability of sold products
2Decrease in accounts receivableStrengthening control over accounts receivable, the activation work with debtorsAccounts receivable turnover
3Increase SalesImproving the quality of customer service, increase efficiency of receiving and processing orders, improving the security of officers selling the necessary information Revenues from sales
4Production cost reductionReducing the cost of storage of finished productsSelling expenses


The following problem – identification of works, the most significant for achievement of critical factors of success, according to the chosen strategy. Works are subdivided into three groups, on degree of automation (table 2):
- completely automated – all possible resources of use IT for optimisation are settled;
- partially automated – an information technology is used, but there are additional resources for automation;
- not automated – IT-decisions are not applied.

Table 2 – Key works
Critical Success FactorJobGroup
Increase SalesGetting information about the state storePartially automated
Providing employees and customers with information about new products and future developmentsFully Automated
Delivery of products to customersFully Automated
Production cost reductionCollection and analysis of requests from missionsPartially automated
Matching production schedule with the plan of salesFully Automated
Of ordersFully Automated
Logistics cash flowsFully Automated
Decrease in accounts receivableControl over the execution of the debtors of their obligationsPartially automated
Work with violators of treaty obligationsFully Automated
Control over the appearance of receivablesPartially automated


Further two groups of partially automated and not automated processes as only in business processes of these groups there is a possibility of reception of benefit from application of technological decisions are considered only.

The step 2. A decision choice. For each work defined on the previous step, it is necessary to find, with what use of an information technology it is possible to improve its efficiency. The list is with that end in view made “demanded possibilities” – technological features or functions increasing an overall performance and business process as a whole. If “demanded possibilities” coincide with functions and possibilities of the analyzed decision it is considered that introduction of such decision will have positive influence on considered business process.

In other words, the cause and effect analysis revealing is made “bottlenecks” in each of the chosen processes and then such IT-decision which allows to eliminate the found lacks steals up and to receive positive qualitative result from introduction of an information technology.

Thus, as a result of the spent analysis, we have received potentially useful three IT-decisions. Though it is desirable to consider all possible variants of realisation of each decision (use of the equipment of various manufacturers, installation by own forces or by means of foreign experts, etc.), in case of Open Society “NP Project” experts found possible to choose concrete variants of realisation without the additional analysis of alternatives (table 3).

Table 3 – The projects approved to the further consideration
NThe project approved to the further consideration
1Creation corporate VPN with possibility of remote access to a network – working out of the project and equipment delivery was supposed to charge the companies to the system integrator, and starting-up and adjustment works, the further administration, development and modernisation to carry out forces of own department of ACS
2Introduction of the module of ERP-system for work with debtors – realisation of the given project, as well as the further support, it was supposed to charge completely the companies to a wound introducing other modules ERP, to assign operative user support to ACS department
3The intracorporate system of formation of orders with planning and forecasting functions – access to system to carry out through the WEB-interface, The project was supposed to be realised own forces


The step 3. Calculation of profit and expenses. After possible technical decisions are chosen, the command of analysts calculates potential profit on their introduction and necessary volume of capital investments for each project. The method of cumulative cost of possession (TCO) offered by company Gartner became for the first time the standard de facto at calculation of cost of IT Systems. Later many large suppliers IT have offered the versions of the given method. As already it was told above, at carrying out of research experts can use any, the most suitable in their opinion, a technique. Possibly, most objective results are given by the compilation of several widely known approaches added with a private experience, however such technique it appears also the most labour-consuming.

As activity of IT-service of Open Society “NP Project” it is poorly formalized, and last experience does not collect on a regular basis, for estimation of cost of costly making projects simplified method Total Cost of Ownership (table 4) has been used. At calculations of cost of projects two components were considered:
- Creation cost – expenses connected with project working out, equipment purchase, installation works and other expenses which are necessary to start system functioning, and are carried out at a time at project creation, more often;
- Functioning cost – the expenses connected with service, repair and modernisation of functioning system and as investments are carried out periodically during all life cycle of the project, functioning cost pays off for any period of time.

Having executed accounting of expenses have received following results:

Table 4 – Cumulative cost of possession of projects
NProjectCost of setting up, rub.Cost of operation, rbl./year
1Creating a corporate VPN with remote access to the network1618000609000
2The introduction of the module of ERP system to work with debtors31250001000000
3Intracorporate formation system orders with the functions of planning and forecasting1152000300000


For calculation of the income of introduction of technologies it is necessary qualitative benefits, such as labour productivity increase, increase in loyalty of clients, acceleration of turnover means and other, to translate in economic benefit. Thus the help of various services of the company of marketing, economical and others is required to a working command of researchers. The forecast of quantitative effect of introduction of each project is calculated on the basis of the forecast of qualitative effects made at the second stage; financial and economic indicators of the company; and also plans of the divisions which activity is mentioned by introduced decisions (table 5).

So as a result of introduction of the module of ERP-system for work with debtors it is supposed to lower infringement of treaty obligations therefore will increase of accounts receivable turnover on 20%. At the expense of reduction of the size receivables debts 1898700 roubles which will be refinanced in the basic manufacture will be liberated. Profitability of circulating assets makes 23%, and duration of one turn of 60 days, hence, the increase in profit at 2620206 roubles will be result of introduction of the module. Reasonings and for other projects are in a similar way conducted.

Table 5 – Quantitative effects of projects
NProjectQualitative conclusionsEconomic EffectQuantitative result
1Creating a corporate VPN with remote access to the networkIncreased sales by 7%Increase sales, rbl./year1386051
2The introduction of the module of ERP system to work with debtors20% reduction in violations of contract terms customersThe increase in profit, rbl./year2620206
3Intracorporate formation system orders with the functions of planning and forecastingReduction of warehouse space by 10%, the optimization of logistics schemes of production, reduction of insurance reserves of raw materials by 14%Reducing business costs, rbl./year223000


The increase in profit, rbl./year772800


Profits and expenses are described traditional, for financial plans, projects of monetary streams for each decision. So the project corporate VPN assumes following distribution of expenses to network creation: 70% – an advance payment during the current year, and 30% – next year, after the beginning of functioning of system. Monetary streams of the project “Corporate VPN” are presented in table 6.

Table 6 – Monetary streams of the project “Corporate VPN”
PeriodStart of project1 year2 year3 year
The cost of creating, rbl.1132600485400

Cost of operation, rbl.
609000609000609000
Effect, rbl.
138605113860511386051


Monetary streams for other projects are similarly represented.

The step 4. Risks. In the project beginning it is impossible to know everything that happens in the course of its realisation, therefore all investments are interfaced to risk. At the given investigation phase, the working group tries to define and measure risks peculiar to IT-projects, and also the uncertainty, carrying out of an estimation arising directly at a stage.

Authors of a technique suggest to consider following kinds of risks:
Risk of conformity. the conformity of the IT-project to the purposes of the design organisation is more rigid, the it is less risk. It is necessary to notice that for some projects an establishment of accurate conformity of technologies to strategic targets of business a problem difficult doable (for example, improvement of an infrastructure of information system), however investments into them are necessary for the further development of an information technology.
- Selling risk. Considers possibility of that real cost of realisation of the project will differ from the settlement.
Operational risk. Considers possibility of that cost of functioning of system will differ from the assumed.
Technological risk.Than it is known about the chosen decision more and the the chosen technologies, the less this risk are more worked. However projects with small value of technological risk not always provide high enough potential advantages. As they say: “The above risk, the above profit”.
Risk of monetary streams. Considers possibility of doubtful definition of benefits from the project and inexact calculation of positive monetary streams, and also possibility of occurrence of other unforeseen financial problems. For example, the decision to increase capitalisation of business or others, more important from the point of view of a management will be accepted, problems will demand derivation of means from the considered project therefore it will not be possible to reach prospective benefits in full.

Risks can be described both quantitatively, and is qualitative. At a quantitative estimation risks are considered in the form of reduction of a monetary stream. But frequently the information from desirable result and probability of their occurrence has enough for definition of the sizes of possible deviations. Therefore at an estimation of projects on Open Society “NP Project” risk quality standard was carried out. Risks were estimated on a five-point scale from “1” – small risk to “5” – the big risk. Each member of working group gave the estimations of risks, then average estimations of risks under each project were tabulated with short comments and further have been included in the business plan. An estimation of risks of the project “corporate VPN” it is resulted in table 7.

Table 7 – Risks of the project “Corporate VPN”
NKind of riskScoreComments
1Risk compliance1.2Objective functions and business processes have been agreed with management
2Realizable risk1.2The market is not subject to strong fluctuations and the probability of deviation from the planned cost of the system size is small
3Operational risk2.4The cost of the system can be affected by many factors. Incorporating all these factors at the stage of system development is not possible.
4Technological risk2VPN technology sufficiently developed, but there is some probability of occurrence of complications in the implementation of specific project
5Risk of cash flows2.6Market situation is unstable, there is a significant price fluctuations in the company's products and raw data to predict fluctuations in the current stage it is not possible


The step 5. Calculation of financial indicators. On the basis of the received discounted monetary streams corrected taking into account risks, the financial indicators accepted in the given organisation, performing design works pay off. The time of recovery of outlay, return from investments (ROI) and others can be such indicators the pure resulted income (NPV), internal norm of profitableness (IRR), the added cost (EVA).

As an information technology dynamically develops, analysts have accepted term of a life of projects to equal four years. Proceeding from it, the financial indicators of efficiency accepted on Open Society have been calculated “NP Project”: a time of recovery of outlay, the pure resulted income and return from investments. The received results for each project are resulted in table 8.

Table 8 – Financial indicators of projects
NProjectPayback period, yearsNPV, rbl.ROI
1Corporate VPN24744780.37
2ERP module “Debtors”22379470.29
3Formation system is orders22860740.51


Thus, from the received results it is visible that at an identical time of recovery of outlay the pure resulted income (the discounting rate is accepted equal profitability of the basic manufacture) more for the project of construction corporate VPN, however the best return on each invested rouble is expected for investments into working out of corporate system of formation of orders and planning.

So, all information assembled, the data is analysed, carried out necessary calculations and results are checked up, it is necessary to issue, as they say. Results of work lasting many days and sleepless nights of a command of analysts are reduced in the business plan which, telling on “business language” what benefits in competitive struggle give an information technology for the company, should help to a management to represent better a role and value IT for business and, on the basis of it, to invest means in those projects which are most significant for achievement of strategic targets of the organisation performing design works.

We will consider the business plan.

It is integrated the business plan consists of the resume in which the short review of the basic results of research for those who has no time is presented and that in it does not understand, but nevertheless is interested, and the basic part where researches and all results are in details described, conclusions are drawn and recommendations are made.

The basic part can have the following structure:
1. Introduction. As well as any other introduction respecting, should bring the reader up to date and combine the necessary base to perception of the further material. In this section the huge open space for creativity of authors opens. Here it is possible to consider, for example, a condition of information system of the organisation performing design works, the purposes of business and a condition of the surrounding business environment, possibility of modern technologies, requirements and the hopes assigned to their introduction by the given company, and also the purposes which are pursued by carrying out of the given research. But be not limited to the listed themes, give open space to the feather.
2. The description of the design organisation. Describes functioning of the organisation performing design works, weak places of business and a problem which the decision demand.
3. The description of decisions. In this section IT-decisions which can be significant for business are considered. As a rule, there are some decisions which can be introduced in the given organisation performing design works. In this part of the business plan it is desirable to describe all possible variants.
4. The economic benefit analysis. In the given chapter it is necessary to pass from quality indicators to quantitative, and to calculate economic benefit of introduction of each decision described in the previous section. Results are made out in the form of projects of monetary streams, or cash flow as financiers speak.
5. The analysis of risks. The possible risks corresponding to each decision, and also measures on their elimination or decrease Are described.
6. Calculation of financial indicators. Transformation of the monetary streams corrected taking into account risks, to the financial indicators accepted in the given organisation, performing design works, for an estimation of efficiency of investment projects and capital investments.

Drawing up of the business plan has no algorithm and has creative character.


Sources:
1. Solopov R. The evaluation of investment in IT. – 2005
[http://www.cfin.ru/itm/kis/it_investment.shtml]
2. Wikipedia: Cumulative cost of possession
[http://ru.wikipedia.org/wiki/Total_cost_of_ownership]
3. Wikipedia: The pure discounted income [http://ru.wikipedia.org/wiki/NPV]
4. Wikipedia: Internal norm of profitableness [http://ru.wikipedia.org/wiki/IRR]
5. Wikipedia: The recoupment of investments [http://ru.wikipedia.org/wiki/ROI]

The author: Челябэнергопроект
Date: 03/23/2010

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