Emes, MR;
Smith, A;
James, AM;
(2007)
Left-shift vs the time value of money: unravelling the business case for systems engineering.
In:
Proceedings of the INCOSE Spring Conference 2007.
INCOSE: Swindon, UK.
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Abstract
The principle of left shift – increasing project expenditure in the early part of a project in order to reduce unanticipated costs later in the project – is advocated as a cornerstone of good systems engineering practice. In fact, the expenditure profile of a project, and in particular the proportion of the total spend attributed to early stage activities such as project definition, is often used as a proxy for the overall level of systems engineering effort expended in a project. In order to establish the business case for systems engineering, this level of systems engineering effort can be compared to the project performance relative to cost and schedule targets. A common premise is that projects that spend more early in the project achieve better outcomes than those that defer expenditure until later. This proactive approach to the management of risk seems sensible as it reduces the probability of unanticipated problems plaguing the project midway through, and recognises the lower cost of rectifying problems identified early on. To assume that such an expenditure profile will be attractive to non systems engineers, however, ignores three crucial factors. Firstly, project managers are judged on measurable progress. Often, these definition activities, whilst possibly preventing costs from being incurred, deliver little visible output. Secondly, in a competitive market, almost all successful project bids are under-costed and underestimate the time required to complete (otherwise they would not win the contract). This puts extreme pressure on choosing risky cost-cutting and timesaving measures. Thirdly, and most importantly, money available now is worth more than money available in the future, since this money could be invested in other projects in the meantime, generating returns typically in the range 10-25%. It is therefore rational for financial managers to insist on minimising early project expenditure. Worse still, the riskier the project, the more rational it is in financial terms to try to defer spending until later in the project. We have developed a model that takes into account financial and engineering risks to predict the optimum resource allocation profile for a given project. This generates some interesting conclusions on the level of up front systems engineering effort that can really be justified under different conditions.
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