Cost vs Price Webinar on Demand - Click here

Author: Charles Orlando

Live Training: Effective Ways to Realistically Achieve Savings

Zoom Webinar: Thursday, October 28 @ 10 am PT / 1 pm ET

Video will be made available to registrants after the event

 

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Guest Speaker: Dr. Christian Smart

 

Short description:

Decision makers are always looking for ways to reduce mission costs and shorten schedules. Most missions tend to be very expensive and take a long time to complete. Despite efforts to plan for lower costs and shorter schedules, more than 70% of project overrun their initial planned costs, and more than 80% take longer than planned. However, there are cases when missions have been executed at much lower costs than the average. In this webinar, we look at the factors that allow these missions to succeed in lowering cost and reducing schedules. We provide nine proven strategies for reducing costs and also discuss three approaches that are appealing but never work in practice.

 

What you’ll learn:

  • This webinar will provide time-tested methods for reducing costs
  • Methods that are often promoted as lowering cost, but do not work in practice, will be discussed
  • Case studies will be used to illustrate the methods that work as well as those that do not

Who this is for:

  • Cost estimators at all companies
  • Budget analysts at all companies
  • Project/program managers for commercial projects
  • Project/program managers for government projects
  • Senior leaders with the government

About the speaker:

  • Dr. Smart has twenty years of experience with cost and schedule risk analysis, predictive analytics, probabilistic reliability analysis and machine learning.
  • His background in aerospace includes missile defense programs, nuclear thermal propulsion, hypersonics, and robotic and crewed space vehicles.
  • He served as the lead cost estimator for the Ares I launch vehicle and served on the Review of United States Human Space Flight Plans Committee. He worked on a Space Shuttle probabilistic risk assessment.

About Galorath:

Galorath is the leader in analytical program management, empowering analysts and organizational leaders to make complex business decisions with confidence through the use of predictive analytics. On the web @ https://galorath.com/

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Why Function Points?

Quantitative software measurement extends significant benefits to IT organizations. Relatively few successful, robust, and mature measurement frameworks have been implemented.Function Pointscontinues to be the “de facto” standard for software measurementaround the world.

“When performance is measured, performance improves” (Galorath, D & Evans, M. 2006)

Control of your software development productivity is probably the most tangible benefit derived from the implementation ofFunction Points. Organizations that can measure their productivity (Hours/Function Point) can establish modelsto benchmark their productivity againstthe rest of the industry(which includes competitors and similar organizations)and their own historical performance. Based on this,they can truly startto develop a competitive advantage by identifying ways to develop software faster and cheaper, without impacting quality and overall end user satisfaction.

The impacts of software measurement extend multiple levels within an organization:

At this first level,development teams and project managers are primarily accountable for project delivery. This requiresthe proper tools and methods to track and control performanceas well as the ability to estimate software deliverables (work packages).The second level of the organization features middle managers. These are typically department or business division managers, PMO directors and portfolio/account managers responsible for multiple projects.Metrics that provide this insight include productivity, cost monitoring and control, performance and efficiency, and overall quality.Finally, CEO level managementneed information to make goodstrategic decisions based oninformation provided by software measurement.Function Points are the underpinning metric that makes all this possible.

At Galorath, we willhelp you to:-Familiarize with the counting practices as officially established by IFPUG (www.ifpug.org)-Learn by using real and relevant examples from your organization-Get on your way to the IFPUG CFPScertification-And most important, bring value to your organization in the form of controlled productivity

About the instructor:

Esteban Sanchez is a Galorath instructor, Certified Function Points Specialist who also serves at the IFPUG Functional Sizing Standards Committee(FSSC Board)

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The impact of COVID-19 on Your Cybersecurity Budget

In response to the pandemic, plenty of organizations had to re-invent themselves or significantly change the way they do business. Many business-as-usual (BAU) operations such as direct customer care, dealing with suppliers and collocated teams arejust not possible during the times of COVID-19. However, the need for information and increased productivity is, as always, on demand. Therefore,organizations had to embrace change and innovate.

According to McKinsey, airlinesrevenue dropped by 40%this year; people just would not share the same air with 200 strangerswhile flying at 10000 feet. Salesforce, Cisco Systems and PayPal cutstaff even after their executives voted not to do so. Some others sent people to work from home, despite the challenges and risks that this represents. Risk is a necessary evil in times of change. Planning, mitigating and acting against these cyber risks is part of the cost of COVID-19.

Understanding the cost of security measures is important for decision making. For example, employees working from home and connecting thru an insecure network representa vulnerability that can result in disclosure, theft,or damage of valuable information. Deployment of Virtual Private Networks (VPNs) an Intrusion Detection Systems (IDSs) can significantly reduce such risks.Any intrusionactivity or violation is reported to the Cybersecurity team or logged in an Event Management System for future analysis. The cost associated with security measures in times of pandemic has two components: The Projecteffort to deploy a security device or softwaresuch as a Firewall or IDS and the Ongoingeffort to analyze network traffic for malicious activity.

The global tendency to work-from-home (WFH) over the past year has increased the threat landscape, leaving organizations with arecurring task to protect staff and information. Cybercrime is expected to becomethe 3rdlargest economy in the worldby 2025, only after US and China. Organizations must carefully plan and budget for cybersecurity measures like:

Threat Analysis: Your Cybersecurity budget must be based on the threats that you face and their economic impact. This Threat Analysis will also help to justify your next year’s cybersecurity budget.

Ongoing Threat Monitoring: a group of cybersecurity experts analyzing network traffic and reports from firewalls, IDSs and other security devices within your organization

Training: In thesetimes of pandemic, people are certainly the most vulnerable channel. Training is required to ensure that people working from home understandhow to protect themselves and the company assets.

Incident Resolution: Plan for how many incidents you expect to receive per month and how much this will cost

Hardware Upgrades: Older laptops and servers withoutdated operating systems and antivirus software may work well behind your firewall, but they will certainly fall short when exposed to a public network

Insurance: Cybercrime is increasing so you can expect your cybersecurity insurance premiums to do exactly the same. Make sure to capture year-over-year growth in the cost of insurance

Security as a Service (SECaaS): If you think all the above is too much and your organization does not have the bandwidth or knowledge to deal with it, consider transferring the responsibility (and risk)to an outside company.That was a quick look at the window to see what iscoming. Let usnow get prepared for it!At Galorathweemploy predictive analytics to help you plan for your next year’s Cybersecurity budget.

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What is Should Cost Analysis?

The drivers of raw materials and manufacturing costs are vital to maximizing cost savings. Limited visibility into these factors and the comprehensive production process can impact component pricing significantly, making it more challenging to find ways to reduce costs.Should cost analysis is an effective tool that empowers the procurement team to provide cost forecasts to suppliers and formulate an accurate final cost estimate for negotiations.

Should Cost Analysis

Should cost analysis was developed by the Defense Department to help procurement officers determine fair and reasonable pricing. Now, should cost analysis is required for government procurement processes due to the Federal Acquisition Regulations.In the past few decades, should cost analysiswas adopted by a variety of industries for outsourcing, including Cisco and Apple. This type of analysis determines what a product should cost based on the costs of overhead, labor, materials, and profit margin.A should cost model can help you:

  • Estimate the cost of products or components before the Request for Quotation process
  • Understand supplier cost structure
  • Facilitate in-depth discussions between engineers and suppliers in the beginning phases of design
  • Negotiate costs and collaborate with suppliers without negatively impacting the supplier margin
  • Develop evidence-based comparisons between technical solutions
  • Verify supplier cost quotations

Benefits of Should Cost Analysis

Should cost analysis offers deeper insights into supplier profit margins to gain purchasing power. Once the key cost drivers are identified, the procurement team can choose which components tomanufacture or purchase.Performing an analysis also assists with price comparisons on parts and assembly if they’re outsourced to different locations. For example, the procurement team can evaluate the costs of having a product manufactured in the UnitedStates or overseas and learn how that decision can impact profit margins.
With strategic sourcing, should cost analysis can be a valuable tool to ensure supplier negotiations are favorable and profitable. By evaluating the supplier’s strengths and quality, the procurement team can determine if the supplier can meet the business’s current and future needs.Finally, should cost analysis can help with sourcing the best materials for the budget. Procurement teams can learn how different materials affect the cost and decide if a different material is a better choice. In some cases, cheaper materials may not outweigh concerns of performance or quality.Accurate cost estimations are crucial to a business’s profitability. If the cost of a product or materials vary considerably from the estimate, it can eat into profits and negatively impact bottom-line performance. Depending on the current cash flow, a loss of profits can cause a business to go under.

Strategic Sourcing vs. Should Cost Analysis

Many businesses rely onstrategic sourcing to determine costs, which consists of requestion quotes and comparing prices to find the best deal.Should cost analysis takes an entirely different approach and seeks to understand the underlying material and labor costs that impact the final price. This estimate is then used to negotiate the final prices.Both methods have merit for different businesses. Here are the advantages and disadvantages of each method:

Strategic Sourcing

Strategic sourcing, on its basic level, is a comparison of prices. More advanced strategic sourcing gathers spend data and uses it to drive negotiations, which can be complicated in large companies.Despite this shortcoming, strategic sourcing has been a successful and widely implemented method in most US industries. In fact, strategic sourcing is a contributing factor to US-based manufacturing being outsourced to lower-cost global regions.If products and suppliers are abundant and similar, competitive pricing with strategic sourcing can be beneficial. If the products are asymmetrical or rare, price comparisons alone miss a big part of the picture. In this case, strategic sourcing can’t illustrate the differences in performance and quality.

Should Cost Analysis

Should cost analysis examines the materials and labor required to create a product. This is especially useful with asymmetrical or rare materials, components, or suppliers, which can vary widely in quality and performance.In asymmetrical markets, few high-quality manufacturers will lower prices based on competition alone, especially if they know the competitors have inferior products. These contractors are more likely to negotiate with procurement teams that have a direct and informed negotiation that involves true costs and options to lower them.Should cost analysis isn’t appropriate for every product or business, however. Many businesses can get the information they need from strategic sourcing alone. As mentioned, this is true for businesses that source similar products from similar suppliers, all with comparable quality and performance.Another consideration for should cost analysis is that the procurement team must understand the product and the processes necessary to produce it, from raw materials to final quality-control inspections. The accuracy of should cost analysis relies entirely on the knowledge of the team building the model. Failure to properly conduct the analysis can significantly impact the accuracy of the final estimate.

How to Conduct Should Cost Analysis

Input Study

The first step in should cost analysis is compiling the parts and processes necessary to produce a product. This may include specifications, assembly procedures, models, drawings, and testing protocols. The analysis should take place early in the product life cycle, so that any issues can be identified and corrected before the full production run.

Process Requirements

The second step for should cost analysis is analyzing the processes and planning, considering compliance regulations, and compiling material costs. This may include equipment and machinery, labor, manufacturing locations, and overhead.

Cost Modeling

The third step of should cost analysis is outlining the batch quantities and annual volumes to define cost parameters. At this stage, all aspects of the processes and materials are clearly defined.

Output

The fourth step of should cost analysis is determining outputs, which include:

  • Graphs for key cost drivers
  • Cost parameters with a full breakdown of the processes and factors
  • Processing time for each individual process
  • “Breakeven” cost as it relates to production volume

Reporting

The final step of should cost analysis is reporting, which provides a comprehensive summary of the findings. This includes:

  • Piece part cost, or the cost of a single component without other factors
  • Itemized breakdown of processes, setup, materials, processing time, and rejects
  • Non-recurring engineering cost estimate, or the one-time, upfront costs for product research, design, development, and testing
  • Amortizationcost, or accumulated portion of the recorded cost that’s considered an expense through depreciation or amortization

About Galorath

For over 30 years, Galorath has guided organizations in their approach to complex, specialized projects to develop an in-depth understanding of financial decisions. We can take the guesswork out of your projects and provide answers to the most difficult questions, no matter the industry or challenge.Contact ustoday to learn more about our software solutions for cost estimation, projectplanning, and execution!

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BHP: Galorath Estimation Framework Identified the Cost to Build a Smart Mine

The Challenge

BHP Group Limited is the world’s largest mining company by market capitalization and is based in Melbourne, Australia. In 2015 BHP began development of the world’s largest potash mine near the town of Jansen, near Saskatoon Canada. When complete, the Jansen mine is expected to produce eight million tons of marketable potash at full capacity.

To better understand the cost of this multi-billion-dollar project, BHP requested Galorath Incorporated to help generate an estimate for the Jansen Mine data infrastructure.  However, this is far from a typical data center.  Covering over 9600 square kilometers in size, the Jansen Mine will be an innovative and integrated smart city – underground.

Our Solution

With the boring machines beginning the first of two vertical shafts, Galorath assembled a team of experts that worked alongside the BHP project engineers to capture all the smart city requirements.  The team identified what Internet of Things components would make the journey 1000 meters below the surface as a fully connected environment.  According to Loren Budd, a Principal Business Analyst in Technology at BHP Billiton, the company was looking for an estimation capability that would provide a steadfast estimate and carry its project forward.

“We were looking for something we could use to build a comparable model for our mine and stand behind the numbers we got out of the model. We also needed to use it on a regular basis for day-to-day work once we’re in construction, as we revise it, as we finish projects, as we change our assumptions, and feed into our next project,” Budd said. “I’m really looking at this as a total solution to provide process and tooling to create that defendable budget, but also to use long term.”

The Result

Galorath estimation framework allowed BHP engineers to understand the complexity and cost of the thousands of interconnected computers, sensors, safety monitors, and intricate mining pathways. At the end of 2019, BHP CEO Andrew Mackenzie announced the project as 50% complete, with all major items on schedule and budget.  This includes the successful delivery of a 975-meter production mine at and service shaft 1,005 meters deep.

BHP is now completing the construction stages of the mine and will create an entire city to house the 2500 operations staff.  When complete, the Jansen mine will result in BHP producing fifteen percent of the world’s much-needed potash resources.

Galorath is proud to have been a part of the BHP Jansen Mine success story. Our vast range of experience in large complex projects and IoT technologies positions Galorath to be an invaluable partner for all technology and project types.

The future is now.  Let Galorath be your guide as you move onward from the ordinary and begin embracing this new dawn of innovation and smart cities of the future.

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Lines of Code Versus Function Points Versus Use Cases For Sizing

I, along with many others, have written about the virtues of one size metric versus another.  Some attempt to make their measure look better by bashing the others (a curious approach used by too many, in my opinion)

Lines of Code: Can Work I hear some people say “Lines of code don’t work because people don’t know how to count them.”  I certainly agree that if the definition of a line is not consistent sizing will suffer.  But some of these same people say “function points do work because they are not language specific and they are better defined that is sometimes true.

So many issues with Lines of code counting..  My personal favorite definition of lines of code involves using logical lines meaning that the number of physical lines it takes to write a statement is irrelevant.  That it is the logical statement that is important.  Even there some people call my definition of logical lines physical lines.  Go figure.  Of course SEER for Software will work with any definition, as well as the many function point definitions.

Function Points Can Work: There is some sound logic to the argument that function points work because they have a common definition.  Only problem is…

So many organizations make up their own definition… I recall reviewing a project estimate on a major program.  One of my standard questions “what is a function point” got an odd stare.  They said they would have to get back to me on that.  When they finally did I found that they had their own, company specific definition, nearly 10 times bigger than traditional.   Now that is not all bad.. if a consistent definition is used it is likely OK for estimating.  Only problem is they didn’t normally advertise that their definition was different.  So, when showing productivity they were much more productive.  But models showed over estimation (in SEER for Software they could have defined their new function point method and resolved this but they didn’t… they just put their not a function point count in as normal function points.  This is not a one time occurrence.  I have seen this on numerous occasions.

Oh.. and go tell senior management a system is 4000 function points.  More likely than not you will receive a blank stare.  A function point is a pretty esoteric concept to the uninitiated.

SEER-FBS in the table refers to SEER’s function based sizing.  Function based sizing can be used to approximate function points from simple characteristics with end user oriented language.  And it shows independent functionality.  For example, what is the effort to add 1 report.  Function based sizing was developed during a multi year study of how to make function point analysis quicker and consumable by laymen.

Use Cases Can Work:Then there are those who want to use use cases as their size measure.  I like use cases and we have written papers on this topic and even have an automated use case extraction  adapter to SEER-SEM.  Unfortunately, however, use cases cannot, by their very nature, provide as much fidelity in the estimate as more granular measures.  So… use cases are great for early estimates or high level portfolio planning.  But if a project manager wants a detailed estimate and plan, use cases provide too much variance in the estimate.  This is due to their nature.  They are wonderful since they are natural artifacts of the development process.  But they are much higher level abstractions of the problem.  My recommendation, use use cases early, then a more detailed size measure when producing a detailed project plan. Use case points, derived from use cases can help a bit if you are willing to refine the use case point estimates.  But now you may sink back into the function point issues.

Bottom line: all three measures, lines, function points and use cases can be used for estimation.  Definition is important.  And the closer to the natural artifacts of development the approach is the more likely it is to be used.  But just using use cases will have more variance.

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What Is Parametric Modeling?

Unlike most project management tools which focus on automating features or workflow, parametric, predictive modeling tools help organizations model and optimize project feasibility and ensure that projects meet established delivery guidelines. Parametric modeling takes its name from the project parameters or variables that are modified during the project simulation process.

Parametric models are built from a set of mathematical equations. These may be standard equations found in reference books, proprietary equations developed by consultants or vendors, or some combination of the two. In order for parametric models to have any validity they must be based on or proven using actual project data. It is the sophistication of the data analysis methods and the extensiveness of the underlying project data which determines the effectiveness of a modeling solution.

Parametric methods are very useful for subjecting uncertain situations to the rigors of a pre-defined and proven mathematical model. They can usefully embody a great deal of prior experience and are less biased than human thought processes alone.

Commercial parametric modeling solutions typically offer extensive graphical feedback, thus making them easier to use. Commercial models also offer other benefits, including support for risk-based inputs, sizing “wizards” and numerous assessment mechanisms to improve the accuracy of estimates.

Want to know more about parametrics? Software Sizing, Estimation, and Risk Management, a 541-page hardcopy reference book by Daniel Galorath and Michael Evans is available at Amazon.com.

Galorath Incorporated has worked for over two decades to help organizations better plan for and control project risks, costs, duration and quality. In developing the SEER line of project management tools, they have leveraged modeling technology and project-applicable knowledge bases to replicate actual project outcomes.

Contact us to learn more.

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Price to Win: What It Is and When Estimation Gets Involved

I am continually amazed at the wide variety of opinions about what Price-To-Win is and who plays what role in Price-To-Win.

I have spoken to some customers that are offended by the term Price-To-Win.  They hear it as “trick the customer to win.”  Of course that is not what price-to-win is all about.  Price-to-Win is about choosing the most affordable alternative that fulfills the customer need and that also will be successful against competition.

PRICE-TO-WIN GOALS

Price-to-Win identifies the correct balance of capability that can be delivered to the customer at the value the customer wants. Price-to-Win provides management insight for:

  • Competitive positioning
  • Strategic partnering
  • Risk tolerance
  • Customer relations
  • Optimal bid strategy

This information is derived by:

  • Market inputs
  • Engineering identification of viable alternatives
  • Engineering architectural design of each alternative
  • Cost and risk analysis of alternatives and risk alternatives
  • Price analysis (cost and price are two different issues)

PRICE-TO-WIN 8 STEP PROCESS

  • Step 1: Gather market intelligence: Marketing personnel identify competitors possible strategies and
  • Step 2: Determine requirements & features
  • Step 3: Sketch out Architecture Design
  • Step 5. Determine viable alternatives
  • Step 6: Cost Analysis & Estimation of Alternatives
  • Step 7: Select best alternative
  • Step 8: Establish price

GALORATH ROLE IN PRICE-TO-WIN

Galorath and SEER primarily support the estimation and analysis of alternatives, taking inputs from engineering, marketing and others.  The result of this includes cost and cost risk.  Once that cost is determined, price analysis will determine the actual price to bid. This price may vary significantly from the cost based on business decisions.

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What Is IT Infrastructure: A Definition and a Taxonomy

There are probably as many definitions of IT Infrastructure as there are IT organizations.  I believe the following definitions are representative and appropriate:

IT Infrastructure: “IT infrastructure consists of the equipment, systems, software, and services used in common across an organization, regardless of mission/program/project.  IT Infrastructure also serves as the foundation upon which mission/program/project-specific systems and capabilities are built.” from cio.gov

ITIL defines infrastructure more like: All of the components (Configuration Items) that are needed to deliver IT Services to customers. The IT Infrastructure consists of more than just hardware and software.

Additionally, for project planning purposes I believe IT Infrastructure should be subdivided into several components:

  1. Software Development
  2. Software Maintenance (corrective perfective, adaptive, block changes)
  3. Purchased Software (e.g. ERP system)
  4. IT Infrastructure hardware (e.g. servers, switches)
  5. IT Services (e.g software setup, help desk, computer administration)

Further, there are two major divisions of labor: the project and ongoing operations:

  • Project: The project is the portion of the system life cycle where the system is developmental, that is where it is not yet in operation.
  • Ongoing Operations: The ongoing operations is the portion of the system life cycle where the system is deployed to users

Of course, these major activities need to be further subdivided for detailed analysis and planning purposes.

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Should Cost Model – Should Cost Analysis For Projects

The advantages of outsourcing a project can be substantial – allowing your organization to free up internal resources, gain access to world-class capabilities, and increase revenue potential. Of course, there can also be significant cost savings.

However, to utilize these advantages, you must have a clear understanding of what you should be paying for an outsourced project. Without knowing the “should cost”, there is a strong likelihood that you will either be paying too much or requiring more hands-on attention than you originally anticipated.

A should cost analysis provides a solution that can give you the knowledge, data, and framework to empower you with the information you need to determine fair market pricing when negotiating with outsourced vendors. With the SEER project management tools from Galorath, you can create an accurate should cost model that enables you to effectively negotiate with suppliers while maximizing profitability through the optimization of a variety of critical parameters.

SEER’s “should cost” models provide the credible and defendable estimates necessary to effectively negotiate and give the insight to compare outsourcing options with in-house capabilities.

For nearly three decades, Galorath Incorporated has been dedicated to the mathematical science of parametrics in the application of cost estimation technology, developing solutions that assist project estimation, planning and management. SEER by Galorath solutions combine an intuitive interface, extensive project-applicable knowledge bases, sophisticated should-cost and project-modeling technologies and rich reporting features to accurately forecast real-world outcomes by combining advanced modeling technology with a database of industry and user-defined metrics.

SEER for Software provides a systematic approach for estimating the resources and scheduling that software development and maintenance projects require. Along with an unparalleled capability for trade-off and risk analysis, SEER contributes to the generation of realistic project plans, thus increasing the probability of a project’s success.

SEER for Hardware, Electronics and Systems provides total cost of ownership for the development of components, systems and integrated product assemblies from concept through design, test, production, operations and support.

SEER for IT enables organizations to develop an early, accurate assessment of costs, schedules and risks for IT projects and their operations, helping to maximize productivity and output with fixed or declining budgets.
SEER for Manufacturing estimates part and assembly manufacturing costs. All state-of-practice and state-of-the art manufacturing processes are supported and are routinely updated.
The SEER for Electro-Optical Sensors plug-in expands the capabilities of SEER for Hardware, Electronics & Systems, allowing you to perform a full lifecycle cost for space, manned aircraft, unmanned aircraft and missile based EO sensors.

The SEER-IC Integrated Circuit Estimation Model provides the automated tools you need to estimate the costs, schedules, and risks associated with developing and producing Application Specific Integrated Circuits (ASICs), Field Programmable Gate Arrays (FPGAs) and Radio Frequency Integrated Circuits (RFICs).

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