A product is an economic good (or output) that is created in a process that transforms product factors (or inputs) to an output. When sold, a product is a deliverable that creates both a value and an experience for its users. A product can be a combination of systems, solutions, materials, and services delivered internally (e.g., in-house IT solution) or externally (e.g., software application), either as-is or as a component for another product (e.g., embedded software).
Project
A project is “a temporary endeavor undertaken to create a unique product, service, or result”.1 In software engineering, different project types are distinguished (e.g., product development, outsourced services, software maintenance, service creation, and so on). During its life cycle, a software product may require many projects. For example, during the product conception phase, a project might be conducted to determine the customer need and market requirements; during maintenance, a project might be conducted to produce a next version of a product.
Program
A program is “a group of related projects, subprograms, and program activities managed in a coordinated way to obtain benefits not available from managing them individually.”2 Programs are often used to identify and manage different deliveries to a single customer or market over a time horizon of several years.
Portfolio
Portfolios are “projects, programs, subportfolios, and operations managed as a group to achieve strategic objectives.”3 Portfolios are used to group and then manage simultaneously all assets within a business line or organization. Looking to an entire portfolio makes sure that impacts of decisions are considered, such as resource allocation to a specific project—which means that the same resources are not available for other projects.
Product Life Cycle
A software product life cycle (SPLC) includes all activities needed to define, build, operate, maintain, and retire a software product or service and its variants. The SPLC activities of “operate,” “maintain,” and “retire” typically occur in a much longer time frame than initial software development (the software development life cycle—SDLC—see Software Life Cycle Models in the Software Engineering Process KA). Also the operate-maintain-retire activities of an SPLC typically consume more total effort and other resources than the SDLC activities (see Majority of Maintenance Costs in the Software Maintenance KA). The value contributed by a software product or associated services can be objectively determined during the “operate and maintain” time frame. Software engineering economics should be concerned with all SPLC activities, including the activities after initial product release.
Project Life Cycle
Project life cycle activities typically involve five process groups—Initiating, Planning, Executing, Monitoring and Controlling, and Closing [4](see the Software Engineering Management KA). The activities within a software project life cycle are often interleaved, overlapped, and iterated in various ways [3*, c2] [5] (see the Software Engineering Process KA). For instance, agile product development within an SPLC involves multiple iterations that produce increments of deliverable software. An SPLC should include risk management and synchronization with different suppliers (if any), while providing auditable decision-making information (e.g., complying with product liability needs or governance regulations). The software project life cycle and the software product life cycle are interrelated; an SPLC may include several SDLCs.
Proposals
Making a business decision begins with the notion of a proposal. Proposals relate to reaching a business objective—at the project, product, or portfolio level. A proposal is a single, separate option that is being considered, like carrying out a particular software development project or not. Another proposal could be to enhance an existing software component, and still another might be to redevelop that same software from scratch. Each proposal represents a unit of choice—either you can choose to carry out that proposal or you can choose not to. The whole purpose of business decision-making is to figure out, given the current business circumstances, which proposals should be carried out and which shouldn’t.
Investment Decisions
Investors make investment decisions to spend money and resources on achieving a target objective. Investors are either inside (e.g., finance, board) or outside (e.g., banks) the organization. The target relates to some economic criteria, such as achieving a high return on the investment, strengthening the capabilities of the organization, or improving the value of the company. Intangible aspects such as goodwill, culture, and competences should be considered.
Planning Horizon
When an organization chooses to invest in a particular proposal, money gets tied up in that proposal—so-called “frozen assets.” The economic impact of frozen assets tends to start high and decreases over time. On the other hand, operating and maintenance costs of elements associated with the proposal tend to start low but increase over time. The total cost of the proposal—that is, owning and operating a product—is the sum of those two costs. Early on, frozen asset costs dominate; later, the operating and maintenance costs dominate. There is a point in time where the sum of the costs is minimized; this is called the minimum cost lifetime.
To properly compare a proposal with a fouryear life span to a proposal with a six-year life span, the economic effects of either cutting the six-year proposal by two years or investing the profits from the four-year proposal for another two years need to be addressed. The planning horizon, sometimes known as the study period, is the consistent time frame over which proposals are considered. Effects such as software lifetime will need to be factored into establishing a planning horizon. Once the planning horizon is established, several techniques are available for putting proposals with different life spans into that planning horizon.
Price and Pricing
A price is what is paid in exchange for a good or service. Price is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. The other three Ps are product, promotion, and place. Price is the only revenue-generating element amongst the four Ps; the rest are costs.
Pricing is an element of finance and marketing. It is the process of determining what a company will receive in exchange for its products. Pricing factors include manufacturing cost, market placement, competition, market condition, and quality of product. Pricing applies prices to products and services based on factors such as fixed amount, quantity break, promotion or sales campaign, specific vendor quote, shipment or invoice date, combination of multiple orders, service offerings, and many others. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus, pricing is very important in marketing. Pricing is initially done during the project initiation phase and is a part of “go” decision making.
Cost and Costing
A cost is the value of money that has been used up to produce something and, hence, is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision.
A sunk cost is the expenses before a certain time, typically used to abstract decisions from expenses in the past, which can cause emotional hurdles in looking forward. From a traditional economics point of view, sunk costs should not be considered in decision making. Opportunity cost is the cost of an alternative that must be forgone in order to pursue another alternative.
Costing is part of finance and product management. It is the process to determine the cost based on expenses (e.g., production, software engineering, distribution, rework) and on the target cost to be competitive and successful in a market. The target cost can be below the actual estimated cost. The planning and controlling of these costs (called cost management) is important and should always be included in costing.
An important concept in costing is the total cost of ownership (TCO). This holds especially for software, because there are many not-so-obvious costs related to SPLC activities after initial product development. TCO for a software product is defined as the total cost for acquiring, activating, and keeping that product running. These costs can be grouped as direct and indirect costs. TCO is an accounting method that is crucial in making sound economic decisions.
Performance Measurement
Performance measurement is the process whereby an organization establishes and measures the parameters used to determine whether programs, investments, and acquisitions are achieving the desired results. It is used to evaluate whether performance objectives are actually achieved; to control budgets, resources, progress, and decisions; and to improve performance.
Earned Value Management
Earned value management (EVM) is a project management technique for measuring progress based on created value. At a given moment, the results achieved to date in a project are compared with the projected budget and the planned schedule progress for that date. Progress relates already-consumed resources and achieved results at a given point in time with the respective planned values for the same date. It helps to identify possible performance problems at an early stage. A key principle in EVM is tracking cost and schedule variances via comparison of planned versus actual schedule and budget versus actual cost. EVM tracking gives much earlier visibility to deviations and thus permits corrections earlier than classic cost and schedule tracking that only looks at delivered documents and products.
Termination Decisions
Termination means to end a project or product. Termination can be preplanned for the end of a long product lifetime (e.g., when foreseeing that a product will reach its lifetime) or can come rather spontaneously during product development (e.g., when project performance targets are not achieved). In both cases, the decision should be carefully prepared, considering always the alternatives of continuing versus terminating. Costs of different alternatives must be estimated—covering topics such as replacement, information collection, suppliers, alternatives, assets, and utilizing resources for other opportunities. Sunk costs should not be considered in such decision making because they have been spent and will not reappear as a value.
Replacement and Retirement Decisions
A replacement decision is made when an organization already has a particular asset and they are considering replacing it with something else; for example, deciding between maintaining and supporting a legacy software product or redeveloping it from the ground up. Replacement decisions use the same business decision process as described above, but there are additional challenges: sunk cost and salvage value. Retirement decisions are also about getting out of an activity altogether, such as when a software company considers not selling a software product anymore or a hardware manufacturer considers not building and selling a particular model of computer any longer. Retirement decision can be influenced by lock-in factors such as technology dependency and high exit costs.
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Published on : 30-May-2018
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