Topic 7: Business cases and tenders

Project planning

In this section we discuss what tasks need to be completed and identify the information and items required to enable us to achieve our outcomes—a completed tender or a sound business case. Two tasks we need to do are: complete a high-level system design and a project schedule to
deliver this design. As you already know, the work breakdown structure (WBS) is the key to the integration of the project activities. The system breakdown structure (SBS—see below) will enable you to describe the performance of the proposed solution, and the WBS should enable you to show the customer how you will manage the development or implementation. The project schedule would be at a high level, but needs to be completed.

If all the deliverables are known, then the boundary of the system can be defined. Within this boundary, system-level deliverables may be broken down into lower levels of deliverables, which are referred to as sub-systems, segments, configuration items (CIs), computer software configuration items (CSCIs) and hardware configuration items (HWCIs). Regardless of the names, the deliverables can be uniquely named and their structure and components identified. This is the system breakdown structure (SBS).

Associated with deliverables are artefacts, which are also known as work products. These items may or may not be 'delivered' to the customer. These 'internal deliverables' define the outcome of most tasks, and are the reason why other tasks must wait until the preceding task concludes. Also associated with deliverables are contract data requirements (CDR). Most projects have requirements placed on them that identify the data that must be provided. These contract data requirements can be broken down into standards, guides, plans, reports and (baseline) documents.

Standards. Standards are documents that define how future work will be undertaken, or more particularly, the minimum requirements for the artefacts, the CDR or deliverables that will be produced by that element of work. Guides are documents that explain how people should undertake tasks. Plans are an indication of intent. The project management plan (PMP) indicates how things will be done. Reports merely indicate the current status of something. Baseline documents describe the status at the configuration management baselines and are placed under configuration management during the life of the project.

During development, the deliverables will follow a system development lifecycle (e.g. requirements, design, build, test, implement, operate/maintain and retire). It is critical that you know the scope or boundaries of the project with regard to the lifecycle. Once this lifecycle is known, the tasks for the lifecycle can be mapped against the SBS to create the WBS and to link both the list of deliverables (LOD) and contract data requirements list (CDRL) to the WBS elements that create them.

Scheduling is one of the critical skills of a project manager. It is perhaps the biggest or most obvious difference between a project manager and a normal business manager. A typical scheduling sequence of tasks would look like this. 1. Define the deliverables., 2. Create the system breakdown structure (SBS)., 3. Define the systems engineering lifecycle for the project., 4. Define the milestones that mark the conclusion of these stages., 5. Create the documentation structure. 6. Create the work breakdown structure, 7. As an adjunct to the WBS, calculate the undistributed budget., 8. Assign management responsibility., 9. Develop the basis of estimate., 10. Link elements., 11. Set the duration for the task., 12. Assess risks., 13. Include duration uncertainty., 14. Set milestones., 15. Late scheduling., 16. Resourcing., 17. External events., 18. Reviews and approvals., 19. Budget., 20. Earned value

Commercial aspects

Planning should be a top-down activity in which the overall requirement is successively broken into smaller and smaller problems. Costing should be a bottom-up activity though, as the most detailed piece of work is the one that is most accurately estimated.

Cost' is a very context-specific term. An estimate is someone's opinion of what will happen. A budget is an agreed allocation. Actuals are measured after something has been done. Price is a commercial decision usually made by senior managers. 'Cost' may also refer to 'direct cost', 'indirect cost', 'transfer cost', and 'fully-loaded cost' as well as several other terms.

For short projects, the costs are unlikely to change enough to worry about the time value of money. For long projects, however, this must be taken into account. Long projects tend to either work at a 'base-date dollar' (e.g. June 2009) and then apply CPI changes to convert 'current costs' into 'base-date costs'; or they tend to work in six-monthly blocks of costs and include projected CPI changes into each of these six-monthly blocks.

People are willing to accept some risk when they invest money. However, as the investment becomes more risky, less people are willing to invest. Better returns are required to encourage people to make more risky investment decisions. The 'market beta' is the angle of a graph of investment risks vs returns that the market requires to invest. The reason that 'market beta' is important for projects is that we can often find people or companies that are willing to accept risk that we, or our company, are not willing to accept.

When any of us makes an investment, we hope to gain more benefit from the investment than we expend in making the investment. The basis of a business case is that the investment will return more money to the shareholders than the cost of the investment (the return on investment or ROI). Business cases are usually ranked in terms of the ROI. The time value of money affects the benefits that can be gained from a project or investment. It erodes the true value of the returns, so that we need additional income (benefits) to cover the time value of the money. The return rate (on benefits) required to achieve both the debt return, and the equity return, is termed the weighted average cost of capital (WACC).

The payback period is also a simple calculation. It is simply the number of years that are required before the total income exceeds the total expenditure. High tech companies generally look to a short payback period (e.g. two years), while construction contracts can be very long (e.g. 20 years). The discounted payback period calculation takes into account the time value of the money. The net present value (NPV) of an income stream is the sum of the various benefits that will be achieved over time (discounted by the time value of when they are received). The internal rate of return (IRR) turns this formula around and looks at what return on the company's funds the investment is achieving. The IRR should exceed a set hurdle rate to make the investment worthwhile. It is effectively the interest rate where the NPV equals zero.

Pricing

Setting a price is a difficult process. Unfortunately, almost everything that you need to know to set your price is unknown to you. You cannot guarantee your managers that your estimates are right. Your resource estimates will have been turned into cost estimates by the application of rates, and assume things like constant pay rates, constant inflation and constant overheads. While the customer may be willing to pay more than this budget, you will at some point cost more than they are willing to pay. More important than the customer, though, is your competition. Assuming that they are competent, they will also be working out what their costs are, what the market will bear, and what you are doing.

Business cases

Business cases can be thought of as mini-proposals for internal customers. The analysis undertaken in the business case will not be included in the tender response. This analysis usually involves some cost-benefit aspects, return-on-investment, cash flow and risk/assumption sensitivity analysis. The purpose of including these in the business case is to show that you have done the right analysis and provide sufficient data that someone can use should they choose to undertake some of the other analyses we looked at earlier.

Business cases are usually developed by one person—usually a project manager—and should focus not on 'winning', but on providing the correct information and analysis to allow a typical senior manager to understand the situation and make an informed decision. It is not the job of the business case writer to 'convince' or 'sell' the concept.

Customers and requirements

The senior manager is the 'real customer' and has the 'real requirements'. How closely your company—the tenderer—can match your tender response to these real requirements will determine whether or not you win the business. In a RFT, the customer project manager will attempt to understand the system requirements and create a team who can document these system requirements. The most common approach to evaluating responses is then to have a tender evaluation team assess the responses against the requirements using a weighted assessment of the importance of the requirement.

The tender process

A tender response is dramatically different to either a development project or a sale. Tenders differ from sales in that a salesperson can discuss a sale over a number of visits, fine-tune the offer, and negotiate the price. In a tender, there is no second chance or an opportunity to fine-tune. The 'sudden death' nature of tendering means that all the material included in the final submission should be thoroughly reviewed by independent personnel.

Tendering—and winning—is about beating the competition. Assuming that you are aware of the pending RFT, you can undertake a competitive analysis to see if your organisation is a likely winner. Your organisation's marketing team is responsible for ensuring that the market is aware of your company, and perceives it positively relative to your competitors (e.g. cheaper, more reliable, better, faster). Your organisation's sales team is focused on specific customers and their needs. If the sales team has identified a company as a potential customer, then it should already have talked to the senior manager, be aware that a tender is pending.

Competitive analysis starts with examining and knowing your 'market position' (the marketing team helps with this). The sales team's feedback gives the tender team an understanding of how the customer sees your company in relation to the competition. Typical ways to increase your score include focussed advertising, press releases at specific times, meetings with influencers, etc. Typical ways to reduce the opposition's score include releasing negative news about the opposition.

Sales themes are ideas that are spread throughout your tender response that subtly convey a message. This message might be 'we are more reliable than you thought', 'we are more reliable than the opposition', or the fear-uncertainty-and-doubt (FUD) approach of 'we are reliable, but others aren't'. The most important sales theme is the 'core theme' or 'primary theme'. This is effectively your tender team's motto.

There are various types of themes you can put forward in a tender response.
* A discriminator theme is something that you have that no-one else has.
* Ah-has are sales themes that show that your company or your product are better than those of your competitors.
* A ghost is a scary thing that you just can't find. Ghost themes are 'rumours' or innuendos that are spread about your competitors.
* Oh-ohs are the opposite of ghosts. Ghosts are negative items of information about your company that the competition is aware of and can use against you.

Two plans drive the tendering process:
* the tender schedule. The tender schedule will plan out all of the activities that will happen during the tender period and ensure that all personnel are aware of the activities.
* the document plan. Most requests for tenders (RFTs) have specific submission requirements that will only become obvious once the RFT is released. The document plan breaks the tender response into small sections that are owned by volume managers.

The writing style used for tender responses varies from company to company. A tender response may be drafted by twenty people, but it should not look like it has been—it must have internal consistency. The style and tone used is formal and professional. It should be objective and free from any bias. All tender responses should contain an executive summary. A compelling and well written executive summary is crucial as it is likely to be read by a broad range of people.