Economics of IT projects or how much is the business model
This post is inspired by two topics, I would like to challenge the content of one ( 5 reasons to refuse assessments ), and agree with the second one ( How a web project can make money ).
I believe that IT projects have the same economy as any other investment projects, and the revenues and costs from these projects are determined by the chosen business model.
This post is more about counting the financial efficiency of projects (business planning) on ​​examples from IT, so if anyone is interested, I ask for a cat.
')
What is a business model?
In short, this is a way to make money. If it is a little longer, this is the way of organizing the resources managed by the company, which together with external factors (such as demand, competition, and others, including piracy) makes (or does not) the business financially realizable (with a profit greater than zero), or even better, the most profitable.
Why talk about investment projects?
I argue that all commercial IT projects are investment projects. Even the usual order on the site with prepayment. An investment project is an investment (investment of money and other means with the purpose of generating income in the future), carried out in the form of a project. In the business model of customized development, the investment is made by the customer, and it is primarily important for him when he can use the product in such a way that its profits increase.
It is also an investment for the performer. The contractor invests his own money in the development (even the freelancer spending the prepayment invests his own money in the project) in the hope of getting more money in the future.
For an IT company, this is similar to investing money in a bank today in order to generate more income in the future. Only the level of risk is different, and the mechanisms for obtaining money are different.
Investment performance is measured by many indicators, among which the most important is the net present value of the project, or NPV . NPV is the discounted (reverse interest accrual) sum of net (that is, revenues minus costs) cash flow for the project. Discounted at a rate of 10% 110 rubles, which will be in a year, equal to 100 rubles today. This means that it doesn’t matter to the firm to have 100 rubles today, or 110 in a year. In order to get paid, you can borrow at a bank, for example, at 8% :) But this is not the point. The bottom line is that NPV - shows whether to get involved in a project or not. In fact, it goes a little further than profit, and also shows how advantageous it is to engage in this project compared to alternatives. The alternatives are hidden in the discount rate.
Benefit: NPV independent projects can be summed up and get the value of the project portfolio (the value of the company, if you subtract its discounted debts and add the extended cost).
Why is project cost important? And how to calculate it? And where does the business model?
Because it shows whether it makes sense to engage in a project, or not, whether the firm will flourish or not. How to calculate the cost? From the formula - it is necessary to estimate receipts by periods, costs by periods, determine the discount rate and calculate. I will not go into the question of choosing the discount rate, nor to the fact that both costs and revenues are floating. This is a whole separate topic.
It is important to calculate revenues and costs. How to do it? With the costs, it’s quite simple - we take a bet, multiply by the clock (that's what we need estimates for!), Add other project costs (for example, domain registration, hosting, advertising and other), and we’ll watch it all by periods. These are negative cash flows.
With the receipts of the situation a little more difficult. But we recall that it is the chosen business model that determines (by the way, negative ones too) cash flows. That is, that method of “organizing managed resources in conjunction with external factors” (“monetizing” a service, paying for a service, demand, supply on the market) determines positive flows. There is a certain amount of creativity here, but very small. We need to understand how our marketing proposal provides us with revenues in the form of the number of users multiplied by the income per user per period.
You can create a model in Excel, in which, for example, depending on the cost of advertising will change the number of users, and, consequently, revenues. "Play", you can find the maximum value (discounted net cash receipts). I see only benefit from this. This is often called business planning.
I think that when evaluating Twitter even in those times when there was no income from it at all, it was the choice of the business model that determined its value. Imagine, a billion is only a platform, from which there has not been a single income, but those business models that only come to my mind, it is even scary to calculate how much they could give from it.
An example . Let someone decide whether to launch the project of the following service:
Production and sale of custom-made cakes over the Internet. The user uploads the picture he wants to get on the cake, and, let's say in a day, he is brought to him. This can be said already a business model (customized production, with the point of orders on the Internet).
Assume that the following costs are required.
For production: s / n 1 cooks - 20 000 rubles per month, total cooks N. Let the cook make 4 cakes a day. For the site: let the development of a site with a casting of pictures costs 100,000 rubles, for extra. drawing functionality directly on the site, you will need to pay another 50,000 rubles. The delivery time is 1 month, the development time of the drawing features is even a month.
Hosting costs - 5 000 per month. Plus, the salary of the manager who will take and keep orders, even 30,000 rubles. It is planned to spend A rubles on promotion in the network for 6 months in a row. Suppose we know that this will provide us with Y orders per month.
Site support - 20,000 rubles per month - let's say adding new features.
Revenues will depend on (the driver) "number of orders". Let a fixed margin be taken for each cake. Let the cost (without work, only products) of a cake be 150 rubles, delivery within the Moscow Ring Road - even another 100 rubles (by subcontractors). In total, let the cake cost 500 to the final buyer, and we will have 250 drops from it. Receipts per month will be 250 * Y, and then they will start only from the second month (in the life of the receipt, they certainly have no uniform structure).
How many chefs do you need? N = Y / 28 (days in the month) / 4 (cake per day).
How to calculate Y? Let the cost of the transition on the advertising link 1 ruble, and the site, and advertising are designed so that every fiftieth visitor orders a cake. Then at A costs, we get A / 50 orders per month. Let the costs amount to 50,000 rubles (1,000 orders per month, 9 cooks).
With such introductory, without giving calculations (which are easy to do in Excel), the total for the first year net revenues will be -265,000. This means that for this business, you need to find the money at the start. The second year (assuming that we have 1000 orders per month, and we don’t spend money on advertising already since the sixth month of the first year - we have such assumptions in the business model) + 180,000 thousand, for the third, if everything is the same - still 180 000. Project term - 3 years.
Let the one who decides has an alternative available to him to invest 265,000 money in the bank and receive 10% from them. The cost of the project will be 47396.69. In such a project, you can enter.
It still does not take into account the residual value, which is not completely correct, but this example is just an example. In a good way, you need to consider ALL income and ALL costs. Here, for example, the rental of premises, taxes, and much more are not taken into account.
The main thing that the example says is that, having a business model in hand, it is already possible to calculate its economic efficiency by the NPV indicator, which is fundamental for deciding whether to start or not.
This is all some kind of finance. Where is agile, rup and etc?
All of the above does not negate approaches to software development based on the same Agile. Agile does not mean abandonment of planning. The budget for agile development can also be estimated on the basis of iterations and their costs. Similarly, any other methodology can serve as a basis for cost estimation. What is the cheapest method? This is a separate question. Depends on the product / service of the project.
Moreover. Once we have decided on planned revenues and costs, we have a budget that the project manager needs to keep track of and make decisions for the project to be financially successful. Only one good product will not be full. There are many projects that cost more than they were valued. On the other hand, this is a risk, and the contract must state who takes it upon himself.
How to estimate costs.
In the case of RUP, everything is simple. We take waves of RUP, we estimate hours of each employee on each iteration.
In the case of Agile is still easier. If FDD - then the amount (labor costs for the feature * rate). In the case of XP, participants in the iteration * rate * iteration length * number of iterations. Similarly, the rest. The main thing is to have a reasonable hour rate. But this is a separate issue.
Conclusion
I have repeatedly evaluated various IT projects, and I can say that even small changes in the business model can make a big difference in the economic effect. Simple manipulations in Excel can show that, for example, the introduction of a referral system can double the cash flow, even if only every tenth is a referral. Sometimes it happens.
Of course, Excel will not prompt the idea ... but without simple calculations it is often more expensive to get involved in it. And the main thing is the presence of a clear criterion when to accept the project for implementation, and when not.
There are other indicators for evaluating investments, such as ROI and its variations. But ROI "you will not smear on bread", and the current value (NPV) - there is a "live" money. This is the recommendation of this post.
PS Lyrics. Cost is not onlyvaluable fur good for project owners, it is good for the economy. When for every ruble invested, there is more ruble value at the output (in relation to alternatives of course). Moreover, while there is a positive flow, there are funds for reinvestment - in the company, in its staff, in development. This can also be an element of a business model.
PPS This is my first post - I will be glad to any feedback and comments.
I believe that IT projects have the same economy as any other investment projects, and the revenues and costs from these projects are determined by the chosen business model.
This post is more about counting the financial efficiency of projects (business planning) on ​​examples from IT, so if anyone is interested, I ask for a cat.
')
What is a business model?
In short, this is a way to make money. If it is a little longer, this is the way of organizing the resources managed by the company, which together with external factors (such as demand, competition, and others, including piracy) makes (or does not) the business financially realizable (with a profit greater than zero), or even better, the most profitable.
Why talk about investment projects?
I argue that all commercial IT projects are investment projects. Even the usual order on the site with prepayment. An investment project is an investment (investment of money and other means with the purpose of generating income in the future), carried out in the form of a project. In the business model of customized development, the investment is made by the customer, and it is primarily important for him when he can use the product in such a way that its profits increase.
It is also an investment for the performer. The contractor invests his own money in the development (even the freelancer spending the prepayment invests his own money in the project) in the hope of getting more money in the future.
For an IT company, this is similar to investing money in a bank today in order to generate more income in the future. Only the level of risk is different, and the mechanisms for obtaining money are different.
Investment performance is measured by many indicators, among which the most important is the net present value of the project, or NPV . NPV is the discounted (reverse interest accrual) sum of net (that is, revenues minus costs) cash flow for the project. Discounted at a rate of 10% 110 rubles, which will be in a year, equal to 100 rubles today. This means that it doesn’t matter to the firm to have 100 rubles today, or 110 in a year. In order to get paid, you can borrow at a bank, for example, at 8% :) But this is not the point. The bottom line is that NPV - shows whether to get involved in a project or not. In fact, it goes a little further than profit, and also shows how advantageous it is to engage in this project compared to alternatives. The alternatives are hidden in the discount rate.
Benefit: NPV independent projects can be summed up and get the value of the project portfolio (the value of the company, if you subtract its discounted debts and add the extended cost).
Why is project cost important? And how to calculate it? And where does the business model?
Because it shows whether it makes sense to engage in a project, or not, whether the firm will flourish or not. How to calculate the cost? From the formula - it is necessary to estimate receipts by periods, costs by periods, determine the discount rate and calculate. I will not go into the question of choosing the discount rate, nor to the fact that both costs and revenues are floating. This is a whole separate topic.
It is important to calculate revenues and costs. How to do it? With the costs, it’s quite simple - we take a bet, multiply by the clock (that's what we need estimates for!), Add other project costs (for example, domain registration, hosting, advertising and other), and we’ll watch it all by periods. These are negative cash flows.
With the receipts of the situation a little more difficult. But we recall that it is the chosen business model that determines (by the way, negative ones too) cash flows. That is, that method of “organizing managed resources in conjunction with external factors” (“monetizing” a service, paying for a service, demand, supply on the market) determines positive flows. There is a certain amount of creativity here, but very small. We need to understand how our marketing proposal provides us with revenues in the form of the number of users multiplied by the income per user per period.
You can create a model in Excel, in which, for example, depending on the cost of advertising will change the number of users, and, consequently, revenues. "Play", you can find the maximum value (discounted net cash receipts). I see only benefit from this. This is often called business planning.
I think that when evaluating Twitter even in those times when there was no income from it at all, it was the choice of the business model that determined its value. Imagine, a billion is only a platform, from which there has not been a single income, but those business models that only come to my mind, it is even scary to calculate how much they could give from it.
An example . Let someone decide whether to launch the project of the following service:
Production and sale of custom-made cakes over the Internet. The user uploads the picture he wants to get on the cake, and, let's say in a day, he is brought to him. This can be said already a business model (customized production, with the point of orders on the Internet).
Assume that the following costs are required.
For production: s / n 1 cooks - 20 000 rubles per month, total cooks N. Let the cook make 4 cakes a day. For the site: let the development of a site with a casting of pictures costs 100,000 rubles, for extra. drawing functionality directly on the site, you will need to pay another 50,000 rubles. The delivery time is 1 month, the development time of the drawing features is even a month.
Hosting costs - 5 000 per month. Plus, the salary of the manager who will take and keep orders, even 30,000 rubles. It is planned to spend A rubles on promotion in the network for 6 months in a row. Suppose we know that this will provide us with Y orders per month.
Site support - 20,000 rubles per month - let's say adding new features.
Revenues will depend on (the driver) "number of orders". Let a fixed margin be taken for each cake. Let the cost (without work, only products) of a cake be 150 rubles, delivery within the Moscow Ring Road - even another 100 rubles (by subcontractors). In total, let the cake cost 500 to the final buyer, and we will have 250 drops from it. Receipts per month will be 250 * Y, and then they will start only from the second month (in the life of the receipt, they certainly have no uniform structure).
How many chefs do you need? N = Y / 28 (days in the month) / 4 (cake per day).
How to calculate Y? Let the cost of the transition on the advertising link 1 ruble, and the site, and advertising are designed so that every fiftieth visitor orders a cake. Then at A costs, we get A / 50 orders per month. Let the costs amount to 50,000 rubles (1,000 orders per month, 9 cooks).
With such introductory, without giving calculations (which are easy to do in Excel), the total for the first year net revenues will be -265,000. This means that for this business, you need to find the money at the start. The second year (assuming that we have 1000 orders per month, and we don’t spend money on advertising already since the sixth month of the first year - we have such assumptions in the business model) + 180,000 thousand, for the third, if everything is the same - still 180 000. Project term - 3 years.
Let the one who decides has an alternative available to him to invest 265,000 money in the bank and receive 10% from them. The cost of the project will be 47396.69. In such a project, you can enter.
It still does not take into account the residual value, which is not completely correct, but this example is just an example. In a good way, you need to consider ALL income and ALL costs. Here, for example, the rental of premises, taxes, and much more are not taken into account.
The main thing that the example says is that, having a business model in hand, it is already possible to calculate its economic efficiency by the NPV indicator, which is fundamental for deciding whether to start or not.
This is all some kind of finance. Where is agile, rup and etc?
All of the above does not negate approaches to software development based on the same Agile. Agile does not mean abandonment of planning. The budget for agile development can also be estimated on the basis of iterations and their costs. Similarly, any other methodology can serve as a basis for cost estimation. What is the cheapest method? This is a separate question. Depends on the product / service of the project.
Moreover. Once we have decided on planned revenues and costs, we have a budget that the project manager needs to keep track of and make decisions for the project to be financially successful. Only one good product will not be full. There are many projects that cost more than they were valued. On the other hand, this is a risk, and the contract must state who takes it upon himself.
How to estimate costs.
In the case of RUP, everything is simple. We take waves of RUP, we estimate hours of each employee on each iteration.
In the case of Agile is still easier. If FDD - then the amount (labor costs for the feature * rate). In the case of XP, participants in the iteration * rate * iteration length * number of iterations. Similarly, the rest. The main thing is to have a reasonable hour rate. But this is a separate issue.
Conclusion
I have repeatedly evaluated various IT projects, and I can say that even small changes in the business model can make a big difference in the economic effect. Simple manipulations in Excel can show that, for example, the introduction of a referral system can double the cash flow, even if only every tenth is a referral. Sometimes it happens.
Of course, Excel will not prompt the idea ... but without simple calculations it is often more expensive to get involved in it. And the main thing is the presence of a clear criterion when to accept the project for implementation, and when not.
There are other indicators for evaluating investments, such as ROI and its variations. But ROI "you will not smear on bread", and the current value (NPV) - there is a "live" money. This is the recommendation of this post.
PS Lyrics. Cost is not only
PPS This is my first post - I will be glad to any feedback and comments.
Source: https://habr.com/ru/post/120618/
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