Economics of IT projects or how much is a business model
This post was inspired by two topics, I would like to challenge the content of one ( 5 reasons to refuse ratings ), and agree with the second ( How a web project can make money ).
I believe that IT projects have the same economy as any other investment projects, and the income and expenses from these projects are determined by the chosen business model.
This post is more about calculating the financial effectiveness of projects (business planning) using IT examples, so if anyone is interested, I ask for cat.
What is a business model?
In short, this is a way to make money. If a little longer, this is the way of organizing company-managed resources that, together with external factors (such as demand, competition, and others, up to piracy) makes (or does not) make the business financially feasible (with a profit greater than zero), or even better, as profitable as possible.
Why are we talking about investment projects?
I affirm that all commercial projects in IT are investment. Even a regular prepaid site order. An investment project is an investment (investing money and other means in order to generate future income), carried out in the form of a project. In the business model of custom development, the investment is made by the customer, and it is important for him first of all when he can use the product so that his profit increases.
He is an investment and for the performer. The contractor invests his own money in the development (even a freelancer, having spent an advance payment, 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 in a bank today with the goal of generating more revenue in the future. Only the level of risk is different, and the mechanisms for receiving money are different.
Investment efficiency is measured by many indicators, among which the most important is the net present value of the project, or NPV. NPV is the discounted (transaction, reverse interest charge) amount of net (means revenue minus costs) cash flows for the project. Discounted at a rate of 10% 110 rubles, which will be in a year, are equal to 100 rubles today. This means that the company doesn’t care to have 100 rubles today, or 110 in a year. After all, you can borrow at the bank, for example, at 8% :) But this is not the point. The bottom line is that NPV - shows whether to get involved in the project or not. In fact, it goes a little further than profit, and speaks more about how profitable it is to deal with this project compared to alternatives. Alternatives are hidden in the discount rate.
Benefit: NPV of independent projects can be summarized, and get the value of the portfolio of projects (the value of the company, if we subtract its discounted debts and add the extended value).
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 company will prosper or not. How to calculate the cost? From the formula - you need to evaluate the income by periods, expenses by periods, determine the discount rate and calculate. I will not go into the issue of choosing a discount rate, nor in 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? The cost is quite simple - we take the rate, multiply by the clock (that’s why estimates are needed!), Add other expenses for the project (for example, domain registration, payment for hosting, advertising and other), and watch it all by periods. These are negative cash flows.
With the proceeds, the situation is a little more complicated. But we recall that it is the chosen business model that determines (by the way, negative ones as well) cash flows. That is, that way of “organizing managed resources in conjunction with external factors” (“monetizing” the service, paying for the service, demand, supply on the market) determines positive flows. There is some creativity, but very small. We need to understand how our marketing offer provides us with revenue in the form of the number of users multiplied by the user revenue for the period.
You can create a model in Excel, in which, for example, the number of users, and, consequently, revenues will change depending on the cost of advertising. “Having played around”, 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 back in those days when it had no income at all, it was the choice of a business model that determined its value. Imagine, a billion is just a platform, from which there has not been a single income, but those business models that only come to mind are even scary to calculate how much they could give from it.
An example . Let someone decide whether to launch a project of the following service:
Production and sale of custom cakes over the Internet. The user fills in the picture that he wants to receive on the cake, and, say in a day, they bring him to him. This can be said already a business model (custom-made, with the point of orders on the Internet).
Assume that the following costs are required.
For production: salary of 1 cook - 20,000 rubles per month, total of cooks N. Let the cook make 4 cakes a day. For the site: let the development of a site with uploading pictures cost 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 period for features with drawing is another month.
Hosting costs - 5,000 per month. Plus the salary of the manager, who will take and lead orders, even 30,000 rubles. It is planned to spend A rubles for 6 months in a row on promotion in the network. Suppose we know that this will provide us with Y orders per month.
Site support - 20,000 rubles per month - let's add new features.
The receipts will depend on the (driver) “number of orders”. Let a fixed margin be taken for each cake. The cost price (without work, only products) of the cake should be 150 rubles, delivery inside the Moscow Ring Road - even another 100 rubles (by subcontractors). In total, let the cake cost 500 to the final buyer, and 250 will be transferred to us from him. Revenues per month will amount to 250 * Y, and then they will begin only from the second month (in life, the receipts have certainly an uneven structure).
How many cooks do you need? N = Y / 28 (days in a month) / 4 (cakes per day).
How to calculate y? Let the cost of clicking on the advertising link be 1 ruble, and the site and advertising should be designed so that every fifty visitor orders a cake. Then with costs A, we will receive A / 50 orders per month. Let the costs amount to 50,000 rubles (1000 orders per month, 9 cooks).
With such introductory data, without calculating (which is easy to do in Excel), the total for the first year the net income will be -265,000. This means that for this business, you need to find this money at the start. The second year (provided that we have 1000 orders per month, and since the sixth month of the first year we are not wasting money on advertising - such are our assumptions in the business model) + 180 000 thousand, for the third, if everything is the same - still 180 000. The term of the project is 3 years.
Let the one who decides has an alternative available to him invest 265,000 money in the bank and get 10% from them. The cost of the project is 47396.69. You can enter into such a project.
It does not yet take into account the residual value, which is not completely correct, but this example is just an example. In a good way, you must consider ALL revenues and ALL costs. Here, for example, rent of premises, taxes, and much more are not taken into account.
The main thing that the example speaks of is that, having a business model in hand, it is already possible to calculate its economic efficiency with NPV, which is the main one 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 cancel approaches to software development based on the same Agile. Agile does not mean giving up planning. The budget for agile development can also be estimated based on iterations and their costs. Similarly, any other methodology can serve as a basis for cost estimation. What is the cheapest technique? This is a separate issue. Depends on the product / service of the project.
Moreover. Once we have determined the planned revenues and costs, we have a budget that the project manager needs to monitor and make decisions so that the project is financially successful. You will not be full of a good product. Many projects are known that cost more than they were estimated. On the other hand, this is a risk, and the contract should spell out who takes it upon itself.
How to estimate costs.
In the case of RUP, everything is simple. We take RUP waves, estimate the hours of each employee at each iteration.
Agile is even easier. If FDD - then the amount (labor costs per feature * bid). In the case of XP - participants in the iteration * rate * length of the iteration * number of iterations. Similarly, the rest. The main thing is to have a reasonable rate of the hour. But this is a separate issue.
Conclusion
I have evaluated various IT projects more than once, 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 tell you an idea ... but without simple calculations, getting involved in it is often more expensive. And the main thing is the presence of a clear criterion when to accept a project for implementation, and when not.
There are other indicators of investment assessment, such as ROI and its variations. But you won’t spread the ROI for bread, and the present value (NPV) is “real” 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 of value at the output (in relation to the alternatives of course). Moreover, as long as there is a positive flow, there are funds for reinvestment - in the company, in its personnel, in development. This can also be part 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 income and expenses from these projects are determined by the chosen business model.
This post is more about calculating the financial effectiveness of projects (business planning) using IT examples, so if anyone is interested, I ask for cat.
What is a business model?
In short, this is a way to make money. If a little longer, this is the way of organizing company-managed resources that, together with external factors (such as demand, competition, and others, up to piracy) makes (or does not) make the business financially feasible (with a profit greater than zero), or even better, as profitable as possible.
Why are we talking about investment projects?
I affirm that all commercial projects in IT are investment. Even a regular prepaid site order. An investment project is an investment (investing money and other means in order to generate future income), carried out in the form of a project. In the business model of custom development, the investment is made by the customer, and it is important for him first of all when he can use the product so that his profit increases.
He is an investment and for the performer. The contractor invests his own money in the development (even a freelancer, having spent an advance payment, 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 in a bank today with the goal of generating more revenue in the future. Only the level of risk is different, and the mechanisms for receiving money are different.
Investment efficiency is measured by many indicators, among which the most important is the net present value of the project, or NPV. NPV is the discounted (transaction, reverse interest charge) amount of net (means revenue minus costs) cash flows for the project. Discounted at a rate of 10% 110 rubles, which will be in a year, are equal to 100 rubles today. This means that the company doesn’t care to have 100 rubles today, or 110 in a year. After all, you can borrow at the bank, for example, at 8% :) But this is not the point. The bottom line is that NPV - shows whether to get involved in the project or not. In fact, it goes a little further than profit, and speaks more about how profitable it is to deal with this project compared to alternatives. Alternatives are hidden in the discount rate.
Benefit: NPV of independent projects can be summarized, and get the value of the portfolio of projects (the value of the company, if we subtract its discounted debts and add the extended value).
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 company will prosper or not. How to calculate the cost? From the formula - you need to evaluate the income by periods, expenses by periods, determine the discount rate and calculate. I will not go into the issue of choosing a discount rate, nor in 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? The cost is quite simple - we take the rate, multiply by the clock (that’s why estimates are needed!), Add other expenses for the project (for example, domain registration, payment for hosting, advertising and other), and watch it all by periods. These are negative cash flows.
With the proceeds, the situation is a little more complicated. But we recall that it is the chosen business model that determines (by the way, negative ones as well) cash flows. That is, that way of “organizing managed resources in conjunction with external factors” (“monetizing” the service, paying for the service, demand, supply on the market) determines positive flows. There is some creativity, but very small. We need to understand how our marketing offer provides us with revenue in the form of the number of users multiplied by the user revenue for the period.
You can create a model in Excel, in which, for example, the number of users, and, consequently, revenues will change depending on the cost of advertising. “Having played around”, 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 back in those days when it had no income at all, it was the choice of a business model that determined its value. Imagine, a billion is just a platform, from which there has not been a single income, but those business models that only come to mind are even scary to calculate how much they could give from it.
An example . Let someone decide whether to launch a project of the following service:
Production and sale of custom cakes over the Internet. The user fills in the picture that he wants to receive on the cake, and, say in a day, they bring him to him. This can be said already a business model (custom-made, with the point of orders on the Internet).
Assume that the following costs are required.
For production: salary of 1 cook - 20,000 rubles per month, total of cooks N. Let the cook make 4 cakes a day. For the site: let the development of a site with uploading pictures cost 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 period for features with drawing is another month.
Hosting costs - 5,000 per month. Plus the salary of the manager, who will take and lead orders, even 30,000 rubles. It is planned to spend A rubles for 6 months in a row on promotion in the network. Suppose we know that this will provide us with Y orders per month.
Site support - 20,000 rubles per month - let's add new features.
The receipts will depend on the (driver) “number of orders”. Let a fixed margin be taken for each cake. The cost price (without work, only products) of the cake should be 150 rubles, delivery inside the Moscow Ring Road - even another 100 rubles (by subcontractors). In total, let the cake cost 500 to the final buyer, and 250 will be transferred to us from him. Revenues per month will amount to 250 * Y, and then they will begin only from the second month (in life, the receipts have certainly an uneven structure).
How many cooks do you need? N = Y / 28 (days in a month) / 4 (cakes per day).
How to calculate y? Let the cost of clicking on the advertising link be 1 ruble, and the site and advertising should be designed so that every fifty visitor orders a cake. Then with costs A, we will receive A / 50 orders per month. Let the costs amount to 50,000 rubles (1000 orders per month, 9 cooks).
With such introductory data, without calculating (which is easy to do in Excel), the total for the first year the net income will be -265,000. This means that for this business, you need to find this money at the start. The second year (provided that we have 1000 orders per month, and since the sixth month of the first year we are not wasting money on advertising - such are our assumptions in the business model) + 180 000 thousand, for the third, if everything is the same - still 180 000. The term of the project is 3 years.
Let the one who decides has an alternative available to him invest 265,000 money in the bank and get 10% from them. The cost of the project is 47396.69. You can enter into such a project.
It does not yet take into account the residual value, which is not completely correct, but this example is just an example. In a good way, you must consider ALL revenues and ALL costs. Here, for example, rent of premises, taxes, and much more are not taken into account.
The main thing that the example speaks of is that, having a business model in hand, it is already possible to calculate its economic efficiency with NPV, which is the main one 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 cancel approaches to software development based on the same Agile. Agile does not mean giving up planning. The budget for agile development can also be estimated based on iterations and their costs. Similarly, any other methodology can serve as a basis for cost estimation. What is the cheapest technique? This is a separate issue. Depends on the product / service of the project.
Moreover. Once we have determined the planned revenues and costs, we have a budget that the project manager needs to monitor and make decisions so that the project is financially successful. You will not be full of a good product. Many projects are known that cost more than they were estimated. On the other hand, this is a risk, and the contract should spell out who takes it upon itself.
How to estimate costs.
In the case of RUP, everything is simple. We take RUP waves, estimate the hours of each employee at each iteration.
Agile is even easier. If FDD - then the amount (labor costs per feature * bid). In the case of XP - participants in the iteration * rate * length of the iteration * number of iterations. Similarly, the rest. The main thing is to have a reasonable rate of the hour. But this is a separate issue.
Conclusion
I have evaluated various IT projects more than once, 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 tell you an idea ... but without simple calculations, getting involved in it is often more expensive. And the main thing is the presence of a clear criterion when to accept a project for implementation, and when not.
There are other indicators of investment assessment, such as ROI and its variations. But you won’t spread the ROI for bread, and the present value (NPV) is “real” 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.