A case for project revenue management
Over the years, businesses have become increasingly more reliant on using project management to deliver products and services to their clients. This dynamic change has produced a new challenge for the modern day project manager. This new challenge is the ability to manage the revenue processes which are a critical goal of such product/service delivery projects.
As a certified PMP since 2003, I have always enjoyed the diversity afforded by a career in project management. The cross-functional nature of projects allows project managers to gain valuable experience across the entire organization. I always believed that I succeeded in this environment because such variety was a constant source of energy. True, project managers must be able to work through many issues that arise during a project’s life cycle. But I thrived on the fact that such issues may one day have me working with our engineering team, legal department, and field operations team.
Today, project managers find themselves working more and more with finance and accounting to grasp the intricacies of revenue management. This white paper introduces this project management area of expertise by describing the need for a Project Revenue Management© (PRM©) Knowledge Area within the A Guide to the Project Management Body of Knowledge (PMBOK® Guide). In addition, it defines the revenue processes and how they interact with the project management processes defined in the PMBOK® Guide.
The Need for Project Revenue Management© (Prm)
The complex nature of today’s business environment requires many businesses to use project management processes to deliver products and services to their client (service delivery projects). Such service delivery projects are quite common in the telecommunications and information technology business sectors. But these are not the only business sectors employing such projects today. Since these projects involve delivering a product or service to a client, the projects contain a revenue component. Simply put, the client or receiver of the product or service is paying for these services. In some cases, full payment is due upon project completion when the full product or service has been provided. But in many cases, client payment is provided at multiple points throughout the project typically as key project milestones are achieved.
The end result is that multiple revenue processes are executed throughout the project. However, there is no one entity, group, or manager within the delivery organization responsible for overseeing these key processes and their interaction with the project management processes. Since these processes are an integral part of the overall project, the responsibility must fall on the project manager. This ensures that the revenue processes are integrated with the overall project. A Project Revenue Management (PRM) Knowledge Area would provide the project manager with the information and tools needed to manage these processes. Such a revenue-based Knowledge Area would produce four main outcomes:
1. Provide Standards Based Revenue Management Processes
A PRM Knowledge Area would define the project revenue processes consistent with standard accounting and financial policies and procedures. There are three financial statements that are typically used to evaluate, analyze, and in the case of public companies report on a company’s financial performance. These are the income statement, balance sheet, and cash flow statement. Similar to revenues generated by everyday sales, revenue generated from a product or service delivery project impacts all of these financial statements. Therefore, projects require a set of processes to manage revenues generated during a project’s life cycle that are consistent with each of these statements as well as regulatory and company policies and procedures. One of the most critical revenue processes is Revenue Recognition. In fact, most accountants and financial personnel will acknowledge that Revenue Recognition is a difficult concept to grasp and is especially difficult to apply when revenue is generated from a complex project. Revenue Recognition is documented and sometimes reported, in the case of public companies, on the income statement. As such, it is subject to strict accounting rules and procedures as well as oversight from federal agencies such as the Securities and Exchange Commission (SEC). Therefore, the Project Revenue Management Knowledge Area must incorporate these strict guidelines and regulations.
PRM would also clearly establish the project manager with the ultimate responsibility of managing project revenue. This responsibility coupled with a consistent accounting/financial methodology, would allow the project manager to manage project revenue milestones similar to any other project milestone or deliverable.
2. Integrate Revenue Processes with other Project Management Knowledge Areas
A PRM Knowledge Area would for the first time define how the revenue processes integrate with the defined Project Management Knowledge Areas. As with other Knowledge Areas, integration among the various processes is critical to effective project management. PRM employs various tools and techniques to integrate the revenue processes with existing project management processes.
In the case of Scope Management, PRM changes the current mindset by establishing revenue as an objective in the project charter. Project manager’s must understand that revenue is critical to a project’s success and consequently actively managed. In addition, they must see scope changes as not only changes that impact their budget, but rather as opportunities to increase project revenue.
During the Initiation and Planning stages, PRM identifies revenue as an objective in the project charter and develops a Project Revenue Management Plan© (PRMP©). While the first establishes a clear revenue-related objective for the project manager, the PRMP provides an effective tool to plan, track, and manage this objective. The PRMP generates a revenue timeline that defines a revenue recognition forecast based on key contract terms and project milestones. This integrates the project revenue plan with the overall project plan allowing the project manager to effectively plan and manage the revenue processes. In addition, the PRMP includes an invoice and payment timeline allowing the project manager to plan and manage these processes based on key contract terms and project milestones. Figure 1 provides an example of a typical revenue timeline. This timeline shows the project’s planned value (PV) and a revenue planned value© (RPV©). This RPV depicts the points in the project’s timeline where revenue recognition occurs and the corresponding dollar amount for this revenue. (Exhibit 1)
Exhibit 1 – Typical Revenue Timeline (PV and RPV)
PRM also includes a revenue risk plan© (RRP©) and incorporates this plan into the project’s overall risk management plan. Similar to other project milestones, the project manager must identify the risks associated with achieving each milestone and an appropriate mitigation strategy. Some examples of project revenue risks and associated mitigation strategies are provided in Exhibit 2:
Exhibit 2: Example of Project Revenue Risks and Associated Mitigation Strategies
As shown in the table, many revenue risks have multiple mitigation strategies and communication is often an effective strategy. Therefore, integration with the project’s communication plan is critical to success as well as identification of the project revenue stakeholders. The client’s internal invoice approval process may include stakeholders that would not be defined if revenue was not being actively managed on the project. The impact of not identifying and managing these stakeholders could result in late payments which ultimately impacts the bottom line.
PRM also defines the integration of the pricing process with both cost management and risk management. While cost allows the project manager to define the project budget, the pricing process provides a reasonable markup consistent with the organization’s goals and policies as well as the client’s expectations. The pricing process also considers the associated project risk as pricing provides a critical risk mitigation strategy that is frequently overlooked during risk planning. In its most basic form, pricing accounts for higher risk by increasing the return and ultimately the price. We are all familiar with the expression: “the higher the risk, the higher the price.” However, the pricing process also applies various terms, conditions, and assumptions to minimize risk. Some examples include: set up or install charges, monthly recurring fees, termination charges, late fees, bulk discounts, minimum purchase amounts, and assumptions that limit the project scope especially in cases with a poorly defined statement of work.
3. Accounts for Total Project Financial Performance
The current Project Management Knowledge Areas place a considerable emphasis on time and cost management. While earned value provides a beneficial tool to assess a project’s schedule and cost performance, it does not account for a project’s revenue performance. Exhibit 3 best illustrates this limitation:
Exhibit 3: Example of Earned Value for Project
Figure 2 depicts a project with a January 2010 start and February 2011 finish. The blue line labeled PV shows the planned value for this project which starts at zero and culminates in February 2011 with a PV of $500,000. This project is currently in the execution phase and we can see that in July 2010 it has achieved an earned value (EV) of $250,000 with actual costs (AC) of $230,000. Given the planned value of $180,000 in July 2010, we calculate the following schedule and cost variance:
|SV = EV – PV||CV = EV - AC|
|SV = $250,000 - $180,000||CV = $250,000 - $230,000|
|SV = $70,000||CV = $20,000|
Earned value tells us that an SV > 0 indicates we are ahead of schedule and a CV > 0 indicates we are ahead of the budget. But can we conclude that this project is financially sound at this point? Based on EVM, the answer is unequivocally yes. But has the project recognized any revenue? Has the project submitted any invoices? Has the project received any form of payment? Based on the information above, we simply do not know. The EVM methodology does not provide insight into any of these questions. To accurately depict the project’s total financial status, we must consider the status of the revenue processes. PRM provides a quantitative tool similar to EVM that allows the project manager to assess project performance against the revenue plan.
4. Positions Project Management as Proving Ground for Executive Management
Let’s face it, a career in project management does not typically provide a direct path to the executive suite. Despite the cross-functional exposures that project managers receive, they are usually viewed as being somewhat one dimensional. That one dimension is the essential ability to manage projects on time and on budget. But they are not known for possessing the ability to manage revenue and achieve a revenue plan. This is unfortunate given the unique set of leadership, technical, analytical, and business skills demonstrated by project managers on a daily basis.
PRM changes this mindset by recognizing that the project manager is responsible for managing the revenue processes across his or her project. This allows the project manager to take the lead from forecasting project revenue through revenue recognition, payment, and account closure. This new found capability to manage revenue coupled with the project manager’s existing cost management skills allows the project manager to take full responsibility for the project profit and loss (P&L). With P&L experience, project managers will be ideal candidates for senior executive roles.
Project Revenue Management Defined
Project Revenue Management (PRM) includes the processes and activities needed to develop a revenue plan, recognize revenue, process payments, and perform project account closure within the project life cycle. By defining these processes and their interactions with the other project management process groups, project managers can effectively manage project generated revenues and achieve the following four objectives:
- Ensure revenue is recognized in a timely manner
- Ensure revenue generates appropriate project cash flows
- Ensure all payments & credits are closed out at project completion
- Ensure scope changes are priced and integrated into the revenue process
PRM consists of nine revenue processes. These processes are described below:
1. Identify the Target Project Revenue© (Initiating Process Group)
The process of developing and documenting forecast project revenue that meets the stakeholder expectations. This revenue target essentially serves as a revenue forecast for the project which feeds directly into the project charter. Therefore, it is a key objective of the project that is communicated to all stakeholders during the initiation phase. This reminds external stakeholders of their project costs while also communicating to internal stakeholders that this project contributes positively to the company bottom line.
Building accurate target project revenue requires the project manager to consider multiple inputs including the proposal, contract, purchase order (PO) and allocated funding. Project managers must review these documents for inconsistencies and work with other organizational departments to build the forecast. Exhibit 4 outlines the inputs, tools & techniques, and outputs for this process.
Exhibit 4 :Inputs, Tools & Techniques, and Outputs for Identify the Target Project Revenue
2. Determine Pricing (Planning Process Group)
The process of developing or confirming the price of the product being delivered or service being rendered to the client. For projects with a revenue component, it is not sufficient to manage the project solely based on cost. The project provider must estimate the project costs, determine the budget, and use this information to apply appropriate pricing. The Determine Pricing process applies a reasonable markup to projects in the proposal phase. Post contract, this process serves to confirm established pricing based on the contract terms. In addition, it provides an approach to support any scope changes that require new or updated pricing. Exhibit 5 outlines the inputs, tools & techniques, and outputs for this process.
Exhibit 5: Inputs, Tools & Techniques, and Outputs for Determine Pricing
3. Identify the Revenue Milestones (Planning Process Group)
The process of identifying the project and policy activities necessary to recognize revenue, submit invoices, and process payments. Similar to other project milestones, the revenue milestones are integrated into the overall project schedule. This allows the project manager to track, manage, and report on the key project revenue activities. When developing these milestones, project managers must consider the contract, client acceptance criteria, and the organization’s revenue recognition policy. Exhibit 6outlines the inputs, tools & techniques, and outputs for this process.
Exhibit 6: Inputs, Tools & Techniques, and Outputs for Identify the Revenue Milestones
4. Develop the Project Revenue Management Plan (Planning Process Group)
The process of documenting the revenue timeline, project revenue activities, and risks and mitigation strategies associated with managing project revenue. Similar to other project activities, the project manager must integrate these items into the overall project management plan in order to provide effective oversight. Exhibit 7outlines the inputs, tools and techniques, and outputs for this process.
Exhibit 7: Inputs, Tools & Techniques, and Outputs for Develop the Project Revenue Management Plan
5. Recognize Revenue (Execution Process Group)
The process of recording and reporting revenue in a company’s accounting books and on the income statement. Revenue must be earned and realized in order to be recognized. Revenue recognition is one of the most important and most difficult accounting concepts to understand and apply. It is especially important for a public company managing complex product or service delivery projects. Such projects require accurate revenue recognition forecasting and close monitoring of the revenue plan against the actual project delivery activities to ensure both technical and financial objectives are met. Public companies benefit especially from this process since the output is reported in the company’s income statement. Exhibit 8 outlines the inputs, tools and techniques, and outputs for this process.
Exhibit 8: Inputs, Tools & Techniques, and Outputs for Recognize Revenues
6. Submit Invoices (Monitor & Control Process Group)
The process of delivering a bill for services rendered to a client. The invoicing process is critical to ensuring recognized revenue results in positive project cash flows. Project managers must actively manage this process by tracking invoices similar to other project milestones. Exhibit 9 outlines the inputs, tools & techniques, and outputs for this process.
Exhibit 9: Inputs, Tools & Techniques for Submit Invoices
7. Process Payments (Monitor & Control Process Group)
The process of receiving and accounting for client payments received for products delivered or services performed under the contract. Projects containing a revenue component have the ultimate goal of receiving cash for the product delivered or service rendered. Client payments contribute directly to the company’s cash flow. For multi-year projects with payments throughout the contract term, project managers must frequently review the status of these milestones. Non-payment could result in a company initiating collections procedures or legal action. By tracking these milestones, project managers can communicate risks and issues to all stakeholders and significantly reduce the probability of escalation. Exhibit 10 outlines the inputs, tools & techniques, and outputs for this process.
Exhibit 10: Inputs, Tools & Techniques for Process Payments
8. Revenue Control (Monitor & Control Process Group)
The process of determining if the project is executing in accordance with the revenue plan. While earned value provides an excellent schedule and cost control tool, it does not consider revenue. Revenue Control requires a distinct set of tools to assess the project’s revenue performance against the revenue plan. Exhibit 11 outlines the inputs, tools & techniques, and outputs for this process.
Exhibit 11. Inputs, Tools & Techniques, and Outputs for Revenue Control
Based on the earned value tool, revenue value (RV©) evaluates the performance of the project against the overall revenue plan. RV calculates a revenue schedule variance© (RSV©) and a revenue cost variance© (RCV©) to determine if the project is recognizing revenue on schedule and if the project is reaching its gross margin plan.
The RV tool introduces two new variables: (1) revenue planned value© (RPV©) and (2) revenue value© (RV©). The RPV is the revenue that the project plans on recognizing at any given point in the project schedule. This value is determined in the planning phase and the RPV is identified on the revenue timeline. Once the project is in the execution phase, the RV represents the actual revenue recognized at any given time.
Using these two variables, a revenue schedule variance© (RSV©), revenue schedule performance index© (RSPI©), revenue cost variance© (RCV©) and revenue cost performance index© (RCPI©) are determined. Similar to the SV calculated using EVM, an RSV equal to zero indicates that the project is performing on the revenue timeline. That is, the project is recognizing revenue that is on schedule. An RSV greater than zero indicates the project is recognizing revenue ahead of schedule. An RSPI greater than or equal to one would indicate the same respective results. In the case of the RCV, we cannot use the same approach as EVM and simply assess whether the RCV is greater than or equal to zero. This is because the RCV is simply the gross margin for the project. This formula is just another way of representing the financial formula: gross margin (GM) = revenue – actual cost. Therefore, to assess a project’s RCV we must compare it to the planned GM for this project. Exhibit 12 summarizes the revenue value variables and formulas as compared to earned value.
Exhibit 12: Comparison of Earned Value to Revenue Value
The following provides an example of how to employ the RVM tool:
Exhibit 13 depicts a project’s planned revenue timeline. This timeline shows a Planned Value (PV) line in blue and a Revenue Planned Value (RPV) in red. From this revenue timeline, we can see the following:
- The project plans to recognize $75,000 in revenue in June
- The project plans to recognize another $75,000 in revenue in October for a total RPV of $150,000 at that point
- The project plans to recognize another $75,000 in revenue in January for a total RPV of $225,000 at that point
Note the difference between the RPV ($225,000) and the PV ($180,000) is the planned gross margin for this project. In this case, it is $45,000. This planned gross margin is what the project manager uses to assess whether the actual recognized revenue and actual costs are producing the desired results.
Exhibit 13: Example of Planned Revenue Timeline for Project
At project completion, Exhibit 14 shows the results for earned value (EV), actual cost (AC), and revenue value (RV). Exhibit 15 summarizes EVM and RVM at different points in the timeline.
Exhibit 14: Results for Earned Value, Actual Cost and Revenue Value
Exhibit 15: Summary of EVM and RVM at Different Points in Project Timeline (see Figure 12)
Based on EVM, this project ran ahead of schedule and ultimately finished on time. From a cost perspective, it was ahead of budget until the final month and ultimately finished on budget. However, the RVM analysis provides a different perspective on this project’s financial performance. The RSV tells us that in June the project did not recognize revenue on schedule. This results in a negative RSV which is a red flag to the project manager that some criteria have not been satisfied to allow revenue recognition. Although EVM tells us that the project is performing well in June, RVM tells us that the project is not on the revenue timeline. Therefore, RVM provides a valuable tool in assessing a projects revenue performance.
9. Close Account (Closing Process Group)
The process of reconciling and processing all final invoices, credits, and payments until the account balance is zero, thus indicating that all payments have been received and processed for products delivered or services rendered under the project. Closing the account is part of the Closing Process Group within the project life cycle. As such, it should be incorporated into the overall project lessons learned and fed directly into the Closing Process Group. Project managers must assess the project’s performance in regards to the revenue plan. Exhibit 16 outlines the inputs, tools & techniques, and outputs for this process.
Exhibit 16 : Inputs, Tools & Techniques, and Outputs for Close Account
Project Revenue Management provides the project manager with the methodology required to manage the revenue processes. While revenue is often tracked at a portfolio level, it must be actively managed at the project level in order to ensure the portfolio objectives are achieved. This allows the project manager to report, track, and manage all project objectives that “roll up” to the portfolio level. In order to provide project managers with the required tools, techniques, and guidance to manage revenue, PRM should be incorporated into the PMBOK® Guide as a separate Knowledge Area. This would produce:
- A PRM Knowledge Area would define the project revenue processes consistent with standard accounting and financial policies and procedures.
- A PRM Knowledge Area would define how the revenue processes integrate with the 12 defined Project Management Knowledge Areas.
- A PRM Knowledge Area would provide the project manager with a quantitative tool to measure the project’s revenue performance and thus provide an assessment of the project’s total financial performance.
- A PRM Knowledge Area would change the perception that project managers are strictly budget managers but are also revenue managers.
Project managers possess critical skills desired by most senior executives. Combining these skills with an ability to manage the revenue processes would solidify project management as the ultimate training ground for future executives.
© 2010, Peter J. Varani
Originally Published as a Part of 2010 PMI Global Congress Proceedings – Washington, DC