Project Management Institute

Balanced budgets

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BY LARRY SOCHOCKI

As you manage a large system implementation over months or even years, budgeting becomes critical. With strategic attention to comprehensive project tracking, project consultants can exceed stakeholder expectations while hitting accurate targets.

For example, PwC Consulting achieved a successful implementation and ongoing relationship when working with Toyota Motor Sales USA's North American Parts organization, Torrance, Calif., USA, on its Monarch program. Initiated for users in California and Kentucky, the Monarch program, based in Long Beach, Calif., USA, is a group of projects designed to improve inventory management of Toyota's North American Parts Operations (NAPO) business. The effort includes system, business process, training, organizational, hardware/infrastructure and architectural projects.

For the successful forecasting, inventory planning and replenishment planning software system implementation, Toyota, PwC and the software vendor managed 100 people on the project, including 25 consultants and subcontractors, with a medium to large budget ($10 million to $30 million for the consultants). While managing the financial aspects of any project can be challenging, you can create visual controls to smooth the road ahead.

Financial Endeavors

On large system implementation projects, the comprehensive financial plan must be monitored against some baseline estimate. Because an approximation of the program cost could change every month, Toyota set a baseline of $20 million (Exhibit 1). This measure is updated every reporting period, which, in this case, is every two weeks.

Tracking the overall program budget essentially means keeping tabs on a number of smaller, sectional budgets. On the Monarch program, individual project finances are tracked every reporting period for all consultants and subcontractors (Exhibit 2). The bar graph of cumulative consultant fees, project budget to date vs. actual, gives an early warning when a project is in trouble and costing more than projected.

Tracking the overall program budget essentially means keeping tabs on a number of smaller, sectional budgets.

The monthly overall program budget (Exhibit 3) is more finely detailed than the overall program budget. It's simply the projected budget of the current month against the actual cost. This view really measures the accuracy of the forecast of the overall program budget one month into the future. Similarly, the monthly individual project budget (Exhibit 4) is a closer view of the individual project budget control. Though not exact, this statistic effectively warns if the project is exceeding the planned budget on a month-to-month basis.

Eyeballing Expenses

The expense budget always seems to be a sensitive issue with clients, but it's really a small portion of the overall cost of the program (Exhibit 5). Typically, there are long negotiations regarding what an allowable expense can be and what is reasonable for lodging, as well as how many people can reasonably share a rental car (if any sharing is reasonable).

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Exhibit 1. The baseline for the Monarch program was set at $20 million, even though the current estimate for completing the program is different now. The $20 million baseline is a maximum fee number; the project manager would be alerted if a run rate was taking the project over $20 million and penalties were at risk of being enforced. The actual bar graph is calculated by comparing the actual overall program expenditure to date against the projection of what the project should have spent, given its budget.

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Exhibit 2. Each active project is tracked by actual expenditure cumulatively-to-date and reported against the expected budget-to-date. Each project's actual expenditures and expected budget-to-date is then summed and tracked on the far right of the graph for the total program-to-date expenditures vs. budget expectation.

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Exhibit 3. The monthly overall program budget can be seen in this graph of month-to-date fees, budget vs. actual.

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Exhibit 4. This Monarch report shows October 2001 consultant fees, project budget vs. actual.

Note: Numbers are illustrative and not actual Toyota statements.

In the contracting stage for the Monarch project, Toyota and PwC agreed on a percentage of fees that they would bill for expenses. Fifteen percent worked well on this long-term project where people come from out-of-town and can take advantage of long-term housing arrangements. The consultant then managed this percentage: If PwC comes in under 15 percent, the under-run is shared equally between Toyota and the firm. If over, then PwC absorbs the amount. This motivates Toyota, and PwC even more so, to control expenses.

With extreme amounts of unplanned turnover, a program will suffer unavoidable timeline variances. The continuous replacement and retraining of people slows progress and problem-solving ability.

If expenses are higher than 15 percent or below 11 percent, they are considered out of control. If less than 11 percent in expenses is incurred, and a significant number of consultants are out of town, then there should be concern that the people are abusing themselves to save on expenses. In either case, it will eventually have a negative impact on the project by distracting the key human resources you are counting on to deliver.

Individual subcontractors can be of tremendous benefit or detriment to a program. The systems integrator has overall program responsibility, but in many cases there are software vendor's consultants involved in implementing a solution. The program manager handles the subcontractors' budgets.

When examining subcontractor month-to-date fees, budget vs. actual, on the Monarch project, the monthly re-forecast occurred during the overall program re-forecast (Exhibit 6).

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Exhibit 5. In this representation of cumulative expenses on the Monarch project, each reporting period's effect on the overall expense percentage is shown.

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Exhibit 6. Shown are subcontractor month-to-date fees budget vs. actual for the Monarch program. The software vendor's consultants were needed more than originally expected due to some software-unique issues that only their developers could help solve. The software vendor's forecasts were adjusted to reflect the higher forecast.

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Exhibit 7. PwC monitored the turnover trend of its consultant program team to avoid going over budget on the Monarch project.

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Exhibit 8. This simple chart tracks where each open invoice is currently located and

Note: Numbers are illustrative and not actual Toyota statements.

MODIFIED ECONOMIC VALUE ADDED

While real economic value added (EVA) seems about as easy to understand as Einstein's Theory of Relativity, you can make the process more intuitive. Modified EVA calculations can tell you at a glance how well you're completing the work on time.

Economic value indicators (EVIs) offer a simple calculation method (Exhibit 9). Divide your performance against schedule (PAS) by your cost performance (CP). A total greater than one indicates very good performance, but it still may not be perfect. If the number is less than one, there is a problem.

For example:

If the plan of record shows that 1,267 tasks should have been completed by this time and 1,245 tasks have been completed, the PAS is 98 percent.

If the budget indicates the program should cost $11,977,069 at this point, and you have only spent $9,441,084 to date, you have achieved 79 percent CP.

Divide the PAS by the CP to get 1.247. This value indicates that the program is more efficient than planned, but the program still has only accomplished 98 percent of the activities. On the bright side, it took only 79 percent of the budget to complete those tasks.

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Exhibit 9. An example of how economic value indicators can demonstrate if you're adhering to schedule.

Turnover and Over

Although this may not be an obvious financial measure, the turnover a program experiences can be deadly. With extreme amounts of unplanned turnover, a program will suffer unavoidable timeline variances. The continuous replacement and retraining of people slows progress and problem-solving ability.

Eventually, the turnover on a project will result in over-running budgets and missed deadlines. If a project exceeds 10 percent, greater retention measures must be taken quickly, such as instituting project completion bonuses worth 20 percent of the resources' salaries. Additional ideas include investigating the program's leadership, culture, work style and timelines to determine problems.

Exhibit 7 shows the total number of consultants and subcontractors on the Monarch program and the cumulative percentage of involuntary turnovers that have occurred.

Accurate Invoices

To avoid misunderstanding and encourage prompt payment, as a consultant, you must determine the payment system, track it and manage it for your clients. You must know, at least on a bi-monthly basis, where every one of your unpaid invoices resides.

Know what the next step in receiving payment is, and advise your clients or follow up with them when an invoice gets stuck (Exhibit 8). Make sure you know what the payment terms are for your invoices and what terms the client prefers to take. Manage to a 30-day payment plan, and try to negotiate it into a master services agreement. Another option is instituting financial penalties for missing a payment. PM

Larry Sochocki is a San Jose, Calif., USA-based director of PwC Consulting, the global consulting arm of PricewaterhouseCoopers.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM NETWORK | OCTOBER 2002 | www.pmi.org
OCTOBER 2002 | PM NETWORK

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