IT portfolio managers are constantly on the lookout for better methods to help identify which projects will offer the most benefit to the organization. There are always more projects than the scarce IT resources can possibly complete successfully. Portfolio managers must then focus on those projects that align with the organization’s strategic objectives as well as provide positive financial benefits.
Implementing a simple scoring model that considers the project’s financial elements--such as Net Present Value (NPV) and Internal Rate of Return (IRR)--are useful, but they do not allow the portfolio manager to analyze how fluctuations in a project’s financial parameters can yield different results. Performing a simple sensitivity analysis will give the portfolio manager a much better idea on how susceptible a project is to financial risks.
Sensitivity analysis provides the portfolio manager insight into how sensitive the financial aspects of a project are when specific parameters are manipulated. One such financial indicator is the contribution margin, which--in this context--refers to how a project contributes to the potential profits or cost savings of the organization.
It is calculated by subtracting the estimated variable project costs from the estimated expected revenue or savings and dividing the result by the estimated