This document discusses various costing methodologies that can be used for information technology projects. It describes parametric methods like cost estimating relationships, learning curves, and regression analysis. It also covers bottom-up and top-down approaches, as well as total cost of ownership versus total cost of acquisition. Additional topics include life cycle costing, cost benefit analysis using net present value and return on investment, and examples of parametric cost models like COCOMO. The document emphasizes that accurate cost estimation requires defining the problem, alternatives, and quantifying benefits and costs to support project selection and resource allocation decisions.

1. Costing Methodologies for
Information Technology
I f i T h l
Tennessee IT Symposium
April 21, 2008
Thomas Danford
Th D f d
Chief Information Officer
Tennessee Board of Regents

2. SCIENCE APPLICATIONS INTERNATIONAL
CORPORATION (SAIC) ORLANDO, FL
Cost Analyst: Developed baseline cost estimates acquisition cost estimates budgetary
estimates, estimates,
proposals, and other cost/budget related studies for a variety of Department of Defense
programs. Program assignments included: The Conduct of Fire Trainer (COFT), for use by the
US Army in the training of M1, M1A1, M60, and Bradley Fighting Vehicle crews. The Main Tank
Gun/Weapon Effects Signature Simulator (MTG/WESS), a battlefield simulator for use in force-
on-force training b the armor and i f
f i i by h d infantry schools. GUARDFIST I & II i
h l II, interactive videodisk
i id di k
trainers for Army National Guard armor units. Chemical Warfare Oxygen Generator (CWOG), a
device designed to produce therapeutic oxygen while operating in a CW environment, and
other cost studies relating to military training and simulation requirements. These assignments
involved t e a a ys s o life cyc e cost, budget/co t act requirements, cost be e t,
o ed the analysis of e cycle budget/contract equ e e ts, benefit,
contingency, sensitivity and trade-off.

3. Goa s, Objectives, a d G ou d
Goals, Object es, and Ground
Rules
Discussion of Current Budgetary Climate
Overview of Cost Estimating Tools and
Methodologies Used in IT
The Role of Costing in Determining Better
Resource Allocation Decisions
No Math/Accounting Lessons or Review!
All Examples Presented are for Illustrative
Purposes Only!
Focus on Quantitative not Qualitative

4. Cost Estimate vs. Cost
st ate s
Methodology vs. Cost Model
What is A Cost Estimate?
The analysis of all cost elements of a project proposal or on-going work. It
includes verification of cost data, determination and evaluation of all
elements of costs and projection of these data to determine the effect on
costs,
price.
What Is A Cost Methodology?
An
A organized, d
i d documented set of practical id
t d t f ti l ideas, proven practices,
ti
procedures and guidelines used for determining one or more cost
elements of a cost analysis.
What is A Cost Model?
A set of mathematical relationships arranged in a systematic sequence to
incorporate/formulate a cost methodology(ies) in which cost estimates are
derived
deri ed from inp ts T picall a cost model is in the form of a comp ter
inputs. Typically computer
program or spreadsheet.

5. Types of Cost Estimates
Order of Magnitude Estimates
Budgetary Estimates
g y
Definitive (Detailed) Estimates

6. Cost Methodologies
(Appropriate & Popular in IT Costing)
Parametric
Cost Estimating Relationships (CERs)
Learning Curve
Regression
Design to Specification “Bottom-up”
Design to Budget “Top-down”
D i t B d t “T d ”
Ratios

7. Parametric Methods
Cost Estimating Relationships (CERs)
Based upon hi
B d historical d
i l data and statistics
d i i
Industry/use specific
Statistically i bl
St ti ti ll viable (F & T St ti ti )
Statistic)
Learning Curve (Slide Follows)
Regression (Slide Follows)

8. CERs
CER
Home Grown Avg. HD Requests/Business Day: 7.68
Avg. Time (Hrs) to Resolution/Request: 3.25
Approx. R
A Requests/Year:
t /Y 1,896
1 896
Approx. Person Hours/Year: 6,162
FTEs Required for SMO Requests: 4
Industry “Accepted”
System Project Management (SPM)
General & Administrative (G&A)
Average Change Traffic (ACT)

9. Learning Curve
100
90
80
70
Labor Hours
s
60
50
40
30
20
10
0
0 20 40 60 80 100 120
Task Repetition
A sample 90% learning curve. The first time the task is performed requires 100 hours of labor
to complete and as the number of times the task is repeated, the labor hours required
decreases due to learning. After the 50th time in performing the task however, the reduction in
labor hours from learning diminishes.

10. Regression
LEAP Conversion Cost Estim ates
(Standalone by Tier)
8.0
7.0
70
6.0
Co (in $M)
5.0
4.0
ost
3.0
2.0
1.0
0.0
II III IV V VI
SunGard Licensing Tier Best Fit
Know n LEAP Conversions
A “best fit” curve for calculating approximate costs of “stand alone” ERP
implementations of all HEP Tiers.

11. Bottom-up vs. Top-down
Both require extensive analysis of direct and (as
much as possible) indirect costs
Direct & indirect costs are identified/established
through the work breakdown structure (WBS)
May utilize/incorporate parametric methodologies
Bottom-up is requirements driven whereas Top-
down is funding driven

12. 1.0 Hardware Costs
1.1 Servers
1.2 Storage
1.3 Network Equipment
Sample WBS
S l 1.4
1.5
Backup
De-installation/disposal fees
Elements will vary by project … 2.0 Software Costs
2.1 Applications
2.2
22 OS
2.3 Middleware
Note on Indirect Costs: When expenses 2.4 Security (NMS, access, etc.)
2.5 Media conversion (tapes)
are shared among projects/departments 3.0 Professional services
such as legal services security
services, security, 3.1 Project Management
accounting, purchasing, payables, and 3.2 Consulting
the like, they are defined as indirect 3.3 Training
3.4 Expenses (travel & per diem)
costs. Identifying and accounting for 4.0 Site preparation and implementation
these costs are among the biggest 4.1 AC power cabling
challenges for cost estimating. 4.2 HVAC
4.3 Racking
4.4 Network cabling
Indirect costs inevitably benefit (or 5.0 Recurring
burden) all projects and since calculating 5.1 Personnel
the full cost of a project is required for 5.2 Hardware maintenance
5.3 Software maintenance
true discounted cash flow analysis, every 5.4 AC power & HVAC
effort should be made to identify them as 5.5 Insurance
much as possible or determine a burden 6.0 Miscellaneous
6.1 Parallel operations (maintenance, backfill, etc.)
rate. 6.2 Indirect cost burden

13. Total Cost of Ownership (TCO) vs.
Total Cost of Acquisition (TCA)
TCO can and usually does vary dramatically
against TCA
i t
TCO is more relevant in determining the
viability of any capital i
i bilit f it l investment
t t
Vendors typically focus on either acquisition
or maintenance costs but the two must be
i t t b t th t tb
considered together

14. Life Cycle Cost g – The Time
e Cyc e Costing e e
Value of Money
Research & Development
Production
Fielding (1-3 yrs)
Sustainment (over the useful life)

15. Cost Benefit Analysis
The discounted value of a project’s life cycle
benefits is compared to the discounted value
p
of its life cycle costs
Qualitative vs. Quantitative
Discounted Cash-flow (DCF) Methods
Net Present Value (NPV)
Internal Rate-of-return (IRR)
Revenue Neutral Projects - NPV

16. NPV Analysis
NPV of Two Technologies/Methodologies
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
Year #1 Year #2 Year #3 Year #4 Year #5
§ 49-7-1___(a)(2)(A) Costs § 49-7-1___(a)(2)(B) Costs
5 Year Cumulative Costs for TCA Title 49, Chapter 7, Part 1 Amendment (Residential Only)
Year #1 Year #2 Year #3 Year #4 Year #5 NPV
§ 49-7-1___(a)(2)(A) Costs 697,500 1,274,100 1,861,767 2,460,722 3,071,192 2,817,244
§ 49-7-1___(a)(2)(B) Costs 1,365,000 1,569,750 1,774,500 1,979,250 2,184,000 2,064,151

17. Return on Investment (ROI)
Ratio of resources gained or lost on a project
relative t th amount of resources invested
l ti to the t f i t d
Choice of investment alternatives can be
essential t hi h ROI
ti l to high
Leveraging Economies of Scale Results in a
Greater
G t ROI
Appreciating vs. Depreciating ROI

18. ROI
Distance Education Programs
Campus Delivered vs. Collaborative Online
Campus Collaborative
Program Program
Course Development Costs $3,000 -$6,000
Online Fee/Course 40 40
Reimbursement Rate/Course 30% 30%
Number of Students 20 100
Marginal Return/Course $12 $12
Total Revenue $240 $1,200
ROI -92% 120%
Many Indirect Cost Savings
-24x7 Helpdesk
-Library
-Hosting
-Professional Development

19. Applications o Cost-Benefit &
pp cat o s of Cost e e t
ROI Analysis in IT
Whether or not to pursue a project
Select among alternatives with different
benefits
Select among competing projects in IT
Select among competing projects in and
outside of IT

20. Cost–Benefit & ROI
Tips for a Better Analysis
Don’t start with a predetermined conclusion
Clearly define problem with realistic baseline, all
reasonable alternatives, and benefits and costs
measures
Monetize benefits and costs as much as
possible
Use credible data
Deal appropriately with risk and uncertainty

21. Parametric Cost Models
COnstructive COst MOdel (COCOMO) –
Long History & Open Source
g y p
SEER-SEM – Galorath Inc.
PRICE-S
Software Cost Modeling System (COSMOS)
– ETSU

22. COCOMO
( )
(PH)AM = (ACT)(PH)DEV
( )( )
Contract Modifications Only
SunGard SMO Staff Only
(PH)AM : Annual Maintenance in Person Hours 2,347
(PH)DEV : Development Effort in Person Hours 8,094
ACT : Fraction of software that undergoes change during a year 29.00%
TBR SMO Staff Only
(PH)AM : Annual Maintenance in Person Hours 809
(PH)DEV : Development Effort in Person Hours 8,094
ACT : Fraction of software that undergoes change during a year 10.00%
All Modifications To Date
SunGard SMO Staff Only
(PH)AM : Annual Maintenance in Person Hours
( ) 6,891
(PH)DEV : Development Effort in Person Hours 23,763
ACT : Fraction of software that undergoes change during a year 29.00%
TBR SMO Staff Only
(PH)AM : AAnnual M i
l Maintenance i P
in Person H
Hours 2,376
23 6
(PH)DEV : Development Effort in Person Hours 23,763
ACT : Fraction of software that undergoes change during a year 10.00%

23. Ratios – Comparison of “similar” requirements
with different approaches (E.g. ERP vs. 3GL)
Integrated Commercial RDBMS ERP (Student
(Student,
HR/Payroll, Finance)
FTEs - 15
Total Annual Personnel Cost = $755K
Management Ratio = 16%
Best of Breed/Home Grown 3GL System (Student,
HR/Payroll, Finance)
FTEs - 27
Total Annual Personnel Cost = $1.3M
Management Ratio = 33%

24. The Consequences of
Estimation E
E ti ti Error
Underestimation:
undermine planning &
shortchange upstream
activities
Accurate Estimates: fall
within 5-10%
5 10%
Overestimation:
Parkinson’s Law (efforts
expand to fill available
budget and resources)

25. Summary & Few Caveats
Business Case Requires Cost Analysis
Judgment
Optimism Bias
Strategic Misrepresentation
Q
Qualitative Issues Accompany Cost
p y
Risk Needs to be Evaluated

26. RESOURCES
The Society of Cost Estimating and Analysis
http://www.sceaonline.net/
http://www sceaonline net/
The International Society of Parametric
Analysts http://www ispa cost org/
http://www.ispa-cost.org/
Data & Analysis Center for Software
https://www.thedacs.com/databases/url/key/4/152
Thanks for joining me today!!