Project Prioritization

 

Project Prioritization

            Project Prioritization is a method of identifying projects that will receive top priority. It is more than project selection. It is much more than annual budgeting or resource allocation across projects; it goes beyond simply developing a prioritized list of projects; and it certainly is more than strategizing and trying to arrive at the best set of projects to meet strategic needs (1998).

Discounted Cash Flow Analysis

            Capital budgeting methods, including the net present value (NPV) technique, permit the firm to choose between alternative investment opportunities to advance the market value of the firm under these types of conditions.

Real Options

            Discounted cash flow analysis was originally developed to determine the value of a static financial security, such as a bond or equity instrument. An opportunity to create an IT investment at some future time is similar to the financial concept of a call option. This is an option (but not an obligation) for the decision maker to buy an asset (e.g., financial security) by paying a given amount on or before a certain point in time. If a financial call option could be identified that is very similar to the IT investment being considered, then the market value of that financial call option, determined in a well-defined and efficient security market, would provide a good approximation of the value of the opportunities expected from the IT investment. As finding such a similar financial security is unlikely, real options analysis attempts to build one.

This is done by mapping five characteristics of the investment opportunity onto five corresponding characteristics of a financial call option. The present value of the investment’s assets to be acquired or developed corresponds to the stock price of the call option. The investment expenditure corresponds to the exercise price of the call option. The length of time before the investment decision must be made corresponds to the option’s time to expiration. The risk concerning the investment project’s cash flows corresponds to the standard deviation of the return to the security. The cost of capital is the risk-free rate of interest. The value of the option to defer the investment derives in large part from the reduction in uncertainty that will occur by deferring the decision. That is, up to the time when the investment must be made, the decision maker is able to acquire evolving information about the wisdom of making the investment, primarily as expected future cash flows become known with greater certainty, but also as intangible benefits of the investment are brought into clearer view and measurement. Thus, the static NPV method and the flexible options approach to this situation will yield equivalent results only when the investment decision cannot be deferred.

Rapid Application Development

            This technique breaks IT projects down into smaller deliverables or chunks. For example, the evaluation team might agree to go forward with a project. At the end of the first deliverable (three to six months), the team can assess the options of whether to deploy the first part, expand it to a second part, or abandon it. If it is deployed, the organization can immediately obtain the benefits of the function provided. If the option to expand the project is selected, the evaluation team should prioritize what function will be included. After the second part is deployed, the team can again assess whether to deploy, expand, or continue with additional function. This approach has an additional benefit in that it helps manage the demand to change requirements that occurs during development. If a requirement change occurs, it should be deferred to a subsequent release. Effective prioritization of function to include in a release will provide a faster payback as compared to the traditional approach that waits for an entire project to be completed before it is deployed. This approach also provides IT with the opportunity to provide and demonstrate wins that are fast, frequent, and meaningful.

 

 

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