Part II (50 marks) The Government of Ontario business analysis team has been planning a systems...

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Part II (50 marks) The Government of Ontario business analysis team has been planning a systems project designed to improve Ontario's main information system, which has been developed and maintained internally. The Team Leader and another Business Analyst (BA) have worked for two months in May and June of 2020 to develop the project's Business Requirements specifications, which at this point includes complete requirements, excluding detailed user interface designs. (Hint: See Table A to estimate the accuracy implications of this.) The average overall cost per hour for the team lead and the other BA is $100, and the government assumes 160 hours per month in labor per full-time employee. Based on those Business Requirements specifications, the IT team has a single figure, "most likely case" estimate that it will take a team of fourteen people-BAs, developers, testers-six months, July through December, to construct and deliver those enhancements. The average overall cost per hour for the team works out to $75. This suggests that "go live" for the enhancements will happen at the beginning of January of next year (2021). Further, the business projects efficiency gains that will translate into increased profits of $800K in 2021, $1M in 2022, and $1.2M in 2023. (The government only projects benefits with a three-year planning horizon.) Note that, because this is an existing, operational system, there are no added license or system infrastructure costs anticipated for the project. Based on this data: Table A Initial concept Approved product definition Requirements complete User interface design complete Detailed design complete Table B Cost/benefit categories IT labor (noncapitalized) IT labor (capitalized) Licenses System infrastructure Total costs Business benefits (positive values) Net profit impact (positive values) Acceptable estimation error Low side 0.25 (-75%) 0.50 (-50%) 0.67 (-33%) 0.80 (-20%) 0.90x ( -10 %) Amortization period 36 months High side 4.0x (+300%) 2.0x (+100%) 1.5 (+50%) 1.25x (+25%) 1.10x (+10%) Live date Jan 2021 Jan 2021 Jan 2021 Jan 2021 Costs Range of high to low estimates 16x 4x 2.25x 1.6x 1.2x One-time Capital Annual Profit impact 2019 2020 2021 Total Part 1 (50 marks) One of the top consulting corporations in Alberta, Marketing Know All's (MKA), specializes in helping companies evaluate, draft, and update their Marketing strategy and plans (S&Ps). In an environment where marketing competition and practices are changing rapidly, MKA has found a rapidly growing niche, with MKA performing evaluations and updates for 700 different clients on a yearly basis. This is generating $3,850,000 in revenue per year. However, MKA finds that it is struggling to support that growth as effectively as it might. In particular, reading, evaluating, and updating clients' Marketing S&Ps requires deep expertise and judgment from senior MKA consultants. For example, out of five consultant seniority levels (the most junior, Level A, through the most senior, Level E), the process requires the top three levels to do more than half the work (see the "Pre-enhancements Employee Level" grid that follows). This means that MKA's growth is limited-currently at 10 percent per year-by the time needed for newly hired junior staff to gain experience and judgment. The cost of these senior consultants is also high, meaning that MKA's profitability is lower than it might be, with an operating margin of 45 percent. Because of these issues, MKA has initiated a systems project to improve systems support for its Marketing S&P services via automation, natural language processing, and artificial intelligence. Based on studies of its business processes, MKA believes that this project would save 10 hours of labor effort per client per year. Further, MKA believes that the project will reduce the amount of work that must be performed by senior staff, with the top three levels only needing to do 30 percent of the work (see the "Post-enhancements Employee Level" grid that follows). This will allow MKA to lower its blended cost per hour. It will also allow MKA to grow at double the current rate-20 percent per year rather than 10 percent per year. Utilize the current state versus future state parameters to generate estimated business benefits at three levels. Utilize the data and templates that follow; using a three-year business benefits planning horizon, estimate the increased business benefits to MKA over a three-year planning period. Known parameters are already filled in in these templates: a. Estimate overall business benefits, including efficiencies gained from reducing the amount of time needed each client's yearly review and update, but not changes in the mix of consultants or additional growth in clients. (10 marks) b. Building on (a), estimate the overall business benefits when also including efficiencies from changes in the blended labor cost per hour. (10 marks) c. Building on (b), estimate overall business benefits when also including a more rapid growth in lients. (10 marks) d. Assume that MKA requires a minimum estimated ROI ratio of 2:1, with a preferred estimated ROI ratio of 3:1 (where ROI = Estimated Business Benefits / Estimated System Costs). Discuss the decision regarding approval of the project if the projected system costs are: (20 marks) i. $1.4 million ii. $2.1 million iii. $3.1 million A Factor 1 2 Clients 3 Annual revenue for book of business 4 Annual revenue per client 5 Operating margin 6 Operating costs 7 Operating costs per client 8 Blended cost per hour 9 Hours of effort per client 10 Assumed time savings per client 11 Post-enhancement hours of effort per client 12 Post-enhancement operating costs per client 13 Increase in profitability per client 14 Increase in profitability for book of business 15 Post-enhancement operating margin 16 Sales growth rate per year (pre-enhancement) 17 Assumed sales growth rate (post-enhancement) Current state (no enhancements) Clients Revenue Operating profit Future state (with enhancements) Clients Revenue Operating profit Increased profit over 3 years B Values 700 $ 3,850,000 Year 0 700 $3,850,000 $ $ 700 $3,850,000 $ S S 45% 10 10% 20% Year 1 E Pre-enhancements Employee level A B C D E Blended Cost Per Hour Post-enhancements Employee level A B C D E Blended cost per hour $ $ $ SS $ $ Year 2 S SS S F Hourly rate % effort Weighted $30 10% 30% 20% 20% 20% Year 3 $40 $47 G $53 $77 Hourly rate % effort Weighted $30 40% $40 30% $47 15% $53 10% $77 5% Total (3 years) a. Assume the government of Ontario uses the ROI approach to evaluate systems project, including requiring at least a 2:1 (ROI = Estimated Business Benefits/ Estimated Systems Costs) benefits/cost ratio and preferring a 3:1 ratio. Based on the data provided, how do you evaluate the project based on the "most likely case" estimate? Explain your answer. (10 marks) b. Per Table A below, what is the implication for the accuracy of remaining development costs at this point? (Remember that the two months of work that the team leader and the other BA did is already complete and, as such, not subject to estimating error). As a BA, should you accept being asked to finalize a project business case where you will need to commit to the "most likely case" estimate? Why or why not? What might be a more reasonable cost-estimate figure to commit to, again per Table A? (10 marks) c. Using that "cost/benefit estimate figure to commit to" from the prior point, re-evaluate the project ROI using the same criteria as above. Is the project still worth doing? How has the evaluation changed from point (a) above? (5 marks) d. Complete the cost/benefit analysis grid that follows (Table B), using the cost-estimate figure you will commit to from point c. Count the Business Requirements costs already incurred as noncapitalized IT labor. The other costs should be counted as capitalized IT labor and amortized over thirty-six months. When counting business benefits, do not adjust for the time value of money. (10 marks) e. In what year does the project begin to show an overall positive net profit impact? (5 marks) f. Assume the government has a weighted average cost of capital (WACC) of 6 percent. How would that impact the net present value of business benefits in 2020, 2021, and 2022? How does the overall impact of applying the WACC discount rate to the business benefits compare to the overall impact of the "padding" (normally done to account for contingency) of the cost estimate?" (10 marks) Part II (50 marks) The Government of Ontario business analysis team has been planning a systems project designed to improve Ontario's main information system, which has been developed and maintained internally. The Team Leader and another Business Analyst (BA) have worked for two months in May and June of 2020 to develop the project's Business Requirements specifications, which at this point includes complete requirements, excluding detailed user interface designs. (Hint: See Table A to estimate the accuracy implications of this.) The average overall cost per hour for the team lead and the other BA is $100, and the government assumes 160 hours per month in labor per full-time employee. Based on those Business Requirements specifications, the IT team has a single figure, "most likely case" estimate that it will take a team of fourteen people-BAs, developers, testers-six months, July through December, to construct and deliver those enhancements. The average overall cost per hour for the team works out to $75. This suggests that "go live" for the enhancements will happen at the beginning of January of next year (2021). Further, the business projects efficiency gains that will translate into increased profits of $800K in 2021, $1M in 2022, and $1.2M in 2023. (The government only projects benefits with a three-year planning horizon.) Note that, because this is an existing, operational system, there are no added license or system infrastructure costs anticipated for the project. Based on this data: Table A Initial concept Approved product definition Requirements complete User interface design complete Detailed design complete Table B Cost/benefit categories IT labor (noncapitalized) IT labor (capitalized) Licenses System infrastructure Total costs Business benefits (positive values) Net profit impact (positive values) Acceptable estimation error Low side 0.25 (-75%) 0.50 (-50%) 0.67 (-33%) 0.80 (-20%) 0.90x ( -10 %) Amortization period 36 months High side 4.0x (+300%) 2.0x (+100%) 1.5 (+50%) 1.25x (+25%) 1.10x (+10%) Live date Jan 2021 Jan 2021 Jan 2021 Jan 2021 Costs Range of high to low estimates 16x 4x 2.25x 1.6x 1.2x One-time Capital Annual Profit impact 2019 2020 2021 Total Part 1 (50 marks) One of the top consulting corporations in Alberta, Marketing Know All's (MKA), specializes in helping companies evaluate, draft, and update their Marketing strategy and plans (S&Ps). In an environment where marketing competition and practices are changing rapidly, MKA has found a rapidly growing niche, with MKA performing evaluations and updates for 700 different clients on a yearly basis. This is generating $3,850,000 in revenue per year. However, MKA finds that it is struggling to support that growth as effectively as it might. In particular, reading, evaluating, and updating clients' Marketing S&Ps requires deep expertise and judgment from senior MKA consultants. For example, out of five consultant seniority levels (the most junior, Level A, through the most senior, Level E), the process requires the top three levels to do more than half the work (see the "Pre-enhancements Employee Level" grid that follows). This means that MKA's growth is limited-currently at 10 percent per year-by the time needed for newly hired junior staff to gain experience and judgment. The cost of these senior consultants is also high, meaning that MKA's profitability is lower than it might be, with an operating margin of 45 percent. Because of these issues, MKA has initiated a systems project to improve systems support for its Marketing S&P services via automation, natural language processing, and artificial intelligence. Based on studies of its business processes, MKA believes that this project would save 10 hours of labor effort per client per year. Further, MKA believes that the project will reduce the amount of work that must be performed by senior staff, with the top three levels only needing to do 30 percent of the work (see the "Post-enhancements Employee Level" grid that follows). This will allow MKA to lower its blended cost per hour. It will also allow MKA to grow at double the current rate-20 percent per year rather than 10 percent per year. Utilize the current state versus future state parameters to generate estimated business benefits at three levels. Utilize the data and templates that follow; using a three-year business benefits planning horizon, estimate the increased business benefits to MKA over a three-year planning period. Known parameters are already filled in in these templates: a. Estimate overall business benefits, including efficiencies gained from reducing the amount of time needed each client's yearly review and update, but not changes in the mix of consultants or additional growth in clients. (10 marks) b. Building on (a), estimate the overall business benefits when also including efficiencies from changes in the blended labor cost per hour. (10 marks) c. Building on (b), estimate overall business benefits when also including a more rapid growth in lients. (10 marks) d. Assume that MKA requires a minimum estimated ROI ratio of 2:1, with a preferred estimated ROI ratio of 3:1 (where ROI = Estimated Business Benefits / Estimated System Costs). Discuss the decision regarding approval of the project if the projected system costs are: (20 marks) i. $1.4 million ii. $2.1 million iii. $3.1 million A Factor 1 2 Clients 3 Annual revenue for book of business 4 Annual revenue per client 5 Operating margin 6 Operating costs 7 Operating costs per client 8 Blended cost per hour 9 Hours of effort per client 10 Assumed time savings per client 11 Post-enhancement hours of effort per client 12 Post-enhancement operating costs per client 13 Increase in profitability per client 14 Increase in profitability for book of business 15 Post-enhancement operating margin 16 Sales growth rate per year (pre-enhancement) 17 Assumed sales growth rate (post-enhancement) Current state (no enhancements) Clients Revenue Operating profit Future state (with enhancements) Clients Revenue Operating profit Increased profit over 3 years B Values 700 $ 3,850,000 Year 0 700 $3,850,000 $ $ 700 $3,850,000 $ S S 45% 10 10% 20% Year 1 E Pre-enhancements Employee level A B C D E Blended Cost Per Hour Post-enhancements Employee level A B C D E Blended cost per hour $ $ $ SS $ $ Year 2 S SS S F Hourly rate % effort Weighted $30 10% 30% 20% 20% 20% Year 3 $40 $47 G $53 $77 Hourly rate % effort Weighted $30 40% $40 30% $47 15% $53 10% $77 5% Total (3 years) a. Assume the government of Ontario uses the ROI approach to evaluate systems project, including requiring at least a 2:1 (ROI = Estimated Business Benefits/ Estimated Systems Costs) benefits/cost ratio and preferring a 3:1 ratio. Based on the data provided, how do you evaluate the project based on the "most likely case" estimate? Explain your answer. (10 marks) b. Per Table A below, what is the implication for the accuracy of remaining development costs at this point? (Remember that the two months of work that the team leader and the other BA did is already complete and, as such, not subject to estimating error). As a BA, should you accept being asked to finalize a project business case where you will need to commit to the "most likely case" estimate? Why or why not? What might be a more reasonable cost-estimate figure to commit to, again per Table A? (10 marks) c. Using that "cost/benefit estimate figure to commit to" from the prior point, re-evaluate the project ROI using the same criteria as above. Is the project still worth doing? How has the evaluation changed from point (a) above? (5 marks) d. Complete the cost/benefit analysis grid that follows (Table B), using the cost-estimate figure you will commit to from point c. Count the Business Requirements costs already incurred as noncapitalized IT labor. The other costs should be counted as capitalized IT labor and amortized over thirty-six months. When counting business benefits, do not adjust for the time value of money. (10 marks) e. In what year does the project begin to show an overall positive net profit impact? (5 marks) f. Assume the government has a weighted average cost of capital (WACC) of 6 percent. How would that impact the net present value of business benefits in 2020, 2021, and 2022? How does the overall impact of applying the WACC discount rate to the business benefits compare to the overall impact of the "padding" (normally done to account for contingency) of the cost estimate?" (10 marks)