Chapter 12: Software Engineering Economics - Revision history

Daniel Robbins: /* Offshoring and Outsourcing */

2015-08-27T16:09:45Z

‎Offshoring and Outsourcing

Daniel Robbins: /* Offshoring and Outsourcing */

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‎Offshoring and Outsourcing

Daniel Robbins: /* Offshoring and Outsourcing */

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‎Offshoring and Outsourcing

Daniel Robbins: /* For-Profit Decision Analysis */

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‎For-Profit Decision Analysis

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Daniel Robbins: /* Goals, Estimates, and Plans */

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‎Goals, Estimates, and Plans

Daniel Robbins: /* Goals, Estimates, and Plans */

2015-08-27T15:15:59Z

‎Goals, Estimates, and Plans

Daniel Robbins: /* Risk and Uncertainty */

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‎Risk and Uncertainty

Daniel Robbins: /* Project */

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‎Project

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Daniel Robbins: /* Product */

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‎Product

Daniel Robbins: /* Valuation */

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‎Valuation

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 useful examples illustrate how the business case
 is formulated and quantified.
 }}

@@ Line 1,094: / Line 1,094: @@
 {{EndSection|title=Further Readings|body=
-''A Guide to the Project Management Body of
+''A Guide to the Project Management Body of Knowledge (PMBOK® Guide)'' [4].
 Knowledge (PMBOK® Guide)'' [4].
 The ''PMBOK® Guide'' provides guidelines for

@@ Line 1,105: / Line 1,105: @@
 profession.
-''Software Extension to the Guide to the Project
+''Software Extension to the Guide to the Project Management Body of Knowledge (SWX)'' [5].
 Management Body of Knowledge (SWX)'' [5].
 ''SWX'' provides adaptations and extensions to the
@@ Line 1,116: / Line 1,115: @@
 adaptive life cycle software projects.
-B.W. Boehm, ''Software Engineering Economics''
+B.W. Boehm, ''Software Engineering Economics'' [6].
 [6].
 This book is the classic reading on software
@@ Line 1,125: / Line 1,123: @@
 still is worth reading.
-C. Ebert and R. Dumke, ''Software Measurement''
+C. Ebert and R. Dumke, ''Software Measurement'' [7].
 [7].
 This book provides an overview on quantitative
@@ Line 1,134: / Line 1,131: @@
 making.
-D.J. Reifer, ''Making the Software Business Case:
+D.J. Reifer, ''Making the Software Business Case: Improvement by the Numbers'' [8].
 Improvement by the Numbers'' [8].
 This book is a classic reading on making a business

← Older revision		Revision as of 15:28, 27 August 2015
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	not meet the initial goals.		not meet the initial goals.
	[[File:Goals, Estimates, and Plans.jpg\|thumb\|400px\|frame\|Figure 12.4: Goals, Estimates, and Plans]]		[[File:Goals, Estimates, and Plans.jpg\|thumb\|400px\|frame\|Figure 12.4: Goals, Estimates, and Plans]]
		+
		+	===Estimation Techniques===
		+	{{RightSection\|{{referenceLink\|number=3\|parts=c6}}}}
		+
		+	Estimations are used to analyze and forecast the
		+	resources or time necessary to implement requirements
		+	(see Effort, Schedule, and Cost Estimation
		+	in the Software Engineering Management KA
		+	and Maintenance Cost Estimation in the Software
		+	Maintenance KA). Five families of estimation
		+	techniques exist:
		+
		+	* Expert judgment
		+	* Analogy
		+	* Estimation by parts
		+	* Parametric methods
		+	* Statistical methods.
		+
		+	No single estimation technique is perfect, so
		+	using multiple estimation technique is useful.
		+	Convergence among the estimates produced by
		+	different techniques indicates that the estimates
		+	are probably accurate. Spread among the estimates
		+	indicates that certain factors might have
		+	been overlooked. Finding the factors that caused
		+	the spread and then reestimating again to produce
		+	results that converge could lead to a better
		+	estimate.
		+
		+	===Addressing Uncertainty===
		+	{{RightSection\|{{referenceLink\|number=3\|parts=c6}}}}
		+	Because of the many unknown factors during
		+	project initiation and planning, estimates are
		+	inherently uncertain; that uncertainty should be
		+	addressed in business decisions. Techniques for
		+	addressing uncertainty include
		+
		+	* consider ranges of estimates
		+	* analyze sensitivity to changes of assumptions
		+	* delay final decisions.
		+
		+	===Prioritization===
		+	{{RightSection\|{{referenceLink\|number=3\|parts=c6}}}}
		+	Prioritization involves ranking alternatives based
		+	on common criteria to deliver the best possible
		+	value. In software engineering projects, software
		+	requirements are often prioritized in order to
		+	deliver the most value to the client within constraints
		+	of schedule, budget, resources, and technology,
		+	or to provide for building product increments,
		+	where the first increments provide the
		+	highest value to the customer (see Requirements
		+	Classification and Requirements Negotiation in
		+	the Software Requirements KA and Software
		+	Life Cycle Models in the Software Engineering
		+	Process KA).
		+
		+	===Decisions under Risk===
		+	{{RightSection\|{{referenceLink\|number=1\|parts=c24}} {{referenceLink\|number=3\|parts=c9}}}}
		+	Decisions under risk techniques are used when
		+	the decision maker can assign probabilities to the
		+	different possible outcomes (see Risk Management
		+	in the Software Engineering Management
		+	KA). The specific techniques include
		+
		+	* expected value decision making
		+	* expectation variance and decision making
		+	* Monte Carlo analysis
		+	* expected value of perfect information.
		+
		+	===Decisions under Uncertainty===
		+	{{RightSection\|{{referenceLink\|number=1\|parts=c25}} {{referenceLink\|number=3\|parts=c9}}}}
		+	Decisions under uncertainty techniques are used
		+	when the decision maker cannot assign probabilities
		+	to the different possible outcomes because
		+	needed information is not available (see Risk
		+	Management in the Software Engineering Management
		+	KA). Specific techniques include
		+
		+	* Laplace Rule
		+	* Maximin Rule
		+	* Maximax Rule
		+	* Hurwicz Rule
		+	* Minimax Regret Rule.
		+	==Economic Analysis Methods==
		+	===For-Profit Decision Analysis===
		+	{{RightSection\|{{referenceLink\|number=1\|parts=c10}}}}
		+
		+	Figure 12.5 describes a process for identifying
		+	the best alternative from a set of mutually exclusive
		+	alternatives. Decision criteria depend on the
		+	business objectives and typically include ROI
		+	(see section 4.3, Return on Investment) or Return
		+	on Capital Employed (ROCE) (see section 4.4,
		+	Return on Capital Employed).
		+
		+	For-profit decision techniques don’t apply for
		+	government and nonprofit organizations. In these
		+	cases, organizations have different goals—which
		+	means that a different set of decision techniques
		+	are needed, such as cost-benefit or cost-effectiveness
		+	analysis.
		+	[[File:The for-profit decision-making process.jpg\|thumb\|400px\|frame\|Figure 12.5: The for-profit decision-making process]]

@@ Line 715: / Line 715: @@
 process, because an initial estimate typically does
 not meet the initial goals.
-[[File:Goals, Estimates, and Plans.jpg|thumb|400px|frame|Figure 9.1:  Goals, Estimates, and Plans]]
+[[File:Goals, Estimates, and Plans.jpg|thumb|400px|frame|Figure 12.4:  Goals, Estimates, and Plans]]

← Older revision		Revision as of 15:15, 27 August 2015
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	==Risk and Uncertainty==		==Risk and Uncertainty==
		+	===Goals, Estimates, and Plans===
		+	{{RightSection\|{{referenceLink\|number=3\|parts=c6}}}}
		+	Goals in software engineering economics are
		+	mostly business goals (or business objectives). A business goal relates business needs (such as
		+	increasing profitability) to investing resources
		+	(such as starting a project or launching a product
		+	with a given budget, content, and timing).
		+	Goals apply to operational planning (for instance,
		+	to reach a certain milestone at a given date or to
		+	extend software testing by some time to achieve a
		+	desired quality level—see Key Issues in the Software
		+	Testing KA) and to the strategic level (such
		+	as reaching a certain profitability or market share
		+	in a stated time period).
		+
		+	An estimate is a well-founded evaluation of
		+	resources and time that will be needed to achieve
		+	stated goals (see Effort, Schedule, and Cost Estimation
		+	in the Software Engineering Management
		+	KA and Maintenance Cost Estimation in the Software
		+	Maintenance KA). A software estimate is
		+	used to determine whether the project goals can
		+	be achieved within the constraints on schedule,
		+	budget, features, and quality attributes. Estimates
		+	are typically internally generated and are not
		+	necessarily visible externally. Estimates should
		+	not be driven exclusively by the project goals
		+	because this could make an estimate overly optimistic.
		+	Estimation is a periodic activity; estimates
		+	should be continually revised during a project.
		+
		+	A plan describes the activities and milestones
		+	that are necessary in order to reach the goals of a project (see Software Project Planning in the
		+	Software Engineering Management KA). The
		+	plan should be in line with the goal and the estimate,
		+	which is not necessarily easy and obvious—
		+	such as when a software project with given
		+	requirements would take longer than the target
		+	date foreseen by the client. In such cases, plans
		+	demand a review of initial goals as well as estimates
		+	and the underlying uncertainties and inaccuracies.
		+	Creative solutions with the underlying
		+	rationale of achieving a win-win position are
		+	applied to resolve conflicts.
		+
		+	To be of value, planning should involve consideration
		+	of the project constraints and commitments
		+	to stakeholders. Figure 12.4 shows how
		+	goals are initially defined. Estimates are done
		+	based on the initial goals. The plan tries to match
		+	the goals and the estimates. This is an iterative
		+	process, because an initial estimate typically does
		+	not meet the initial goals.
		+	[[File:Goals, Estimates, and Plans.jpg\|thumb\|400px\|frame\|Figure 9.1: Goals, Estimates, and Plans]]

← Older revision		Revision as of 13:49, 27 August 2015
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	==Life Cycle Economics==		==Life Cycle Economics==
	===Product===		===Product===
		+	{{RightSection\|{{referenceLink\|number=2\|parts=c22}} {{referenceLink\|number=3\|parts=c6}}}}
		+	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===
		+	{{RightSection\|{{referenceLink\|number=2\|parts=c22}} {{referenceLink\|number=3\|parts=c1}}}}
		+	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.

← Older revision		Revision as of 12:12, 27 August 2015
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	expressed in similar terms so that they can be		expressed in similar terms so that they can be
	evaluated objectively.		evaluated objectively.
		+
		+	===Inflation===
		+	{{RightSection\|{{referenceLink\|number=1\|parts=c13}}}}
		+	Inflation describes long-term trends in prices.
		+	Inflation means that the same things cost more
		+	than they did before. If the planning horizon of
		+	a business decision is longer than a few years, or
		+	if the inflation rate is over a couple of percentage
		+	points annually, it can cause noticeable changes
		+	in the value of a proposal. The present time value
		+	therefore needs to be adjusted for inflation rates
		+	and also for exchange rate fluctuations.
		+
		+	===Depreciation===
		+	{{RightSection\|{{referenceLink\|number=1\|parts=c14}}}}
		+	Depreciation involves spreading the cost of a
		+	tangible asset across a number of time periods;
		+	it is used to determine how investments in capitalized
		+	assets are charged against income over
		+	several years. Depreciation is an important part
		+	of determining after-tax cash flow, which is critical
		+	for accurately addressing profit and taxes. If
		+	a software product is to be sold after the development
		+	costs are incurred, those costs should be
		+	capitalized and depreciated over subsequent time
		+	periods. The depreciation expense for each time
		+	period is the capitalized cost of developing the
		+	software divided across the number of periods
		+	in which the software will be sold. A software
		+	project proposal may be compared to other software
		+	and nonsoftware proposals or to alternative
		+	investment options, so it is important to determine
		+	how those other proposals would be depreciated
		+	and how profits would be estimated.
		+
		+	===Taxation===
		+	{{RightSection\|{{referenceLink\|number=1\|parts=c16, c17}}}}
		+	Governments charge taxes in order to finance
		+	expenses that society needs but that no single organization
		+	would invest in. Companies have to pay
		+	income taxes, which can take a substantial portion
		+	of a corporation’s gross profit. A decision analysis
		+	that does not account for taxation can lead to the
		+	wrong choice. A proposal with a high pretax profit
		+	won’t look nearly as profitable in posttax terms.
		+	Not accounting for taxation can also lead to unrealistically
		+	high expectations about how profitable a
		+	proposed product might be.
		+
		+	===Time-Value of Money===
		+	{{RightSection\|{{referenceLink\|number=1\|parts=c5, c11}}}}
		+	One of the most fundamental concepts in
		+	finance—and therefore, in business decisions—
		+	is that money has time-value: its value changes
		+	over time. A specific amount of money right now
		+	almost always has a different value than the same
		+	amount of money at some other time. This concept
		+	has been around since the earliest recorded
		+	human history and is commonly known as ''time-value''.
		+	In order to compare proposals or portfolio
		+	elements, they should be normalized in cost,
		+	value, and risk to the net present value. Currency
		+	exchange variations over time need to be taken
		+	into account based on historical data. This is particularly
		+	important in cross-border developments
		+	of all kinds.
		+
		+	===Efficiency===
		+	{{RightSection\|{{referenceLink\|number=2\|parts=c1}}}}
		+	Economic efficiency of a process, activity, or
		+	task is the ratio of resources actually consumed to
		+	resources expected to be consumed or desired to
		+	be consumed in accomplishing the process, activity,
		+	or task. Efficiency means “doing things right.”
		+	An efficient behavior, like an effective behavior,
		+	delivers results—but keeps the necessary effort to
		+	a minimum. Factors that may affect efficiency in
		+	software engineering include product complexity,
		+	quality requirements, time pressure, process
		+	capability, team distribution, interrupts, feature
		+	churn, tools, and programming language.
		+
		+	===Effectiveness===
		+	{{RightSection\|{{referenceLink\|number=2\|parts=c1}}}}
		+	Effectiveness is about having impact. It is the
		+	relationship between achieved objectives to
		+	defined objectives. Effectiveness means “doing
		+	the right things.” Effectiveness looks only at
		+	whether defined objectives are reached—not at
		+	how they are reached.
		+
		+	===Productivity===
		+	{{RightSection\|{{referenceLink\|number=2\|parts=c23}}}}
		+	Productivity is the ratio of output over input from
		+	an economic perspective. Output is the value delivered. Input covers all resources (e.g., effort)
		+	spent to generate the output. Productivity combines
		+	efficiency and effectiveness from a valueoriented
		+	perspective: maximizing productivity
		+	is about generating highest value with lowest
		+	resource consumption.
		+	==Life Cycle Economics==
		+	===Product===