At the Wednesday (11/30) meeting of the NYC chapter of the Project Management Institute, Marc Resch gave a compelling presentation on the importance of cash flow models. In a very short time, Mr. Resch covered a lot of important territory. While I don’t have the room to go into all of these ideas here, I did want to focus on a few key concepts. Specifically this Blog is going to focus on the question, “How do we track the benefits that are created through PMO projects?” Sounds simple right? Maybe not! Resch made a convincing argument that most PMO’s are missing this point. They are trying to track project value, but they have chosen to track the wrong metrics. Let’s dig and see what we find!
I: TRACK THE RIGHT PMO METRIC: Generally, we track whether our projects are on time and on budget. Unfortunately, many PMO Directors stop at these two metrics, and miss what really counts… the successful delivery of the project! Even when you are on time and on budget, projects… perhaps the majority of projects… fail to deliver the benefits they promised. Software fails, training doesn’t always improve performance, and of course the cost/benefit assumptions can be wrong. Because of the pressure to show tangible improvement, projects exaggerate their benefits. For example: extending the payback period (for more than three years); omitting key costs; failing to allow for the cost of money; and benefits that don’t really translate into money. What’s the solution?
II: COST IT CORRECTLY: You need to begin with the right cost assumptions, not just the assumptions that you think will get the project approved. A PMO needs to challenge the assumptions of departments when they create a questionable cost-benefit analysis (which the senior sponsor of the project may have not approved, or even be aware of). Many business unit managers may not know how to develop a comprehensive project cost analysis. By pushing back, and explaining why the numbers may be wrong, the PMO can spread knowledge about how to build better financial models for projects. When projects have accurately forecasted benefits, unprofitable projects can be identified and eliminated earlier in the process. Projects that should go forward will have trackable benefits. Reporting to senior management that a $1 million project is 3% under budget is… OK. But, it is far better to report that a $1 million project will hit break even in 60 days, deliver a benefit of $20,000 per month through 2012, and then $100,0000 per month for the 1st six months of 2013. When you talk in terms of the financial results of a project, you speak the same language as your senior management.
III: VERIFY THE BENEFITS: The financial benefits of a project are the true “last deliverable” of every project. However, this deliverable, the justification for doing the project in the first place, may only be fully realized months or years after the project is closed… making it impossible to know, at the time of the closing, if the project actually succeeded. Which is a pretty strange management concept. many things could (and do) go wrong, or go unmeasured. You could address this a couple of ways. You could keep the project open until the benefits are verified, but this wouldn’t work with the culture of most firms. The other option is to look at every project as two separate projects. The primary project is the traditional PMO work; you close by rating the budget and schedule (on-time, on-budget) and other qualities of project management. The second project is follow up on the BENEFITS of the project; here, we have a checkup at set intervals, say every six months. For a project that runs one year past the project close, your PMO would check-in once and then have a final closing that analyzes the benefits of the project.
IIII: SORT THE PROJECT TYPES: In the broadest sense a PMO manages two types of projects – projects you must do and projects that you choose to do. The projects you must do are “cost of doing business” projects. The rest are “improvement” projects that bring benefits to your firm… lower costs, higher volume improved quality, etc. Because PMO’s are under pressure to show a financial benefit, and “must do” projects often do not have direct financial benefits, there is great temptation to show some sort of dollar benefit. Even when teh accounting of benefits is absolutely honest, the assumption that senior management gives priority to projects associated with financial benefits, both the line manager and the PMO director waste a lot of time trying to show benefits that don’t exist. By looking at all projects as just two types, you can avoid this trap. Take a look…
- Cost of Doing Business: You MUST do this project. Perhaps this is because of a legal requirement, or it’s a necessary business function (ex. planning a move to a new office). There might be some financial benefit, but if there is it is incidental. You can’t classify “avoiding a fine” as a financial benefit. Instead, the key project question is, “Do I design this project based on the lowest cost or the lowest risk of failure?” If your firm could be fined $50, you will probably choose the least-expensive option… which might be to do nothing and get a $50 fine every now and then. But if the risk is that your firm will be closed, then you probably want the “lowest risk” option.
- Improvement: An improvement project is driven by a need to improve… something. An improvement project may get combined with a “must do” project, but these are usually separate. The project may not have a direct financial benefit, such as an improvement in customer satisfaction. Here the key project design question is, “Do I want to maximize the benefits of this project, or do I want to minimize the cost?” If you could scale up the project at a low cost, would you argue that it should be expanded so that greater financial benefits can be realized? Or are the benefits very marginal, in which case making it a very minimal project might improve the financial analysis.
Thanks again for Marc Resch for reminding us of the importance of realistic and truthful financial analysis in project management. While we don’t do project management just for the purpose of saving or generating money, PMOs are financed by our firms in order to further financial goals. Yet, we often get so caught up in the process of tracking our projects that we focus on tracking the project management and not the project itself. Cost and schedule matter, but project results matter more. And that’s my Niccolls worth for today!