Project Management Institute

In praise of ROI

VIEWPOINTS

THE BUSINESS OF PROJECTS

BY GARY R. HEERKENS, MBA, CBM, PMP

Just the other day, a colleague (and reasonably well-known figure in the project management community) said in an e-mail, “I am not a big fan of using ROI in the project management world. ROI and its relatives were all invented for capital investment decisions where cash-out and cash-in were pretty knowable.”

His remarks highlight a huge problem today. A profound lack of understanding seems to exist—and continues to be propagated—by people and organizations that may have experience in executing projects but do not fundamentally understand the mechanics behind how business and projects interconnect. In the quote above, for example, note the use of the word invented and the way he tied ROI to only capital projects.

The time has come to bring some clarity to the many connections between good projects and good business. Let's begin with ROI.

Simply stated, projects are financial investments. As such, any project that does not generate a positive financial return should not be approved. It's that simple.

There are at least three basic models that illustrate how the above statement is applied:

1. Companies that are in business to make money: This is the most straightforward case. These companies must do whatever they can to ensure that every initiative they pursue returns more money than it takes to execute. (I used the word initiative instead of project because the post-project life cycle must be part of the ROI analysis.) Companies that fail to do this are, in effect, paying money for the privilege of pursuing that initiative.

2. Public-sector organizations that pursue projects on the basis of economic return: Most projects pursued by public-sector entities are not financially motivated. The projects are a way of fulfilling promises made to their constituencies, but most of these organizations are also charged with being fiscally responsible. This means that some of their projects will rally around the notion of efficiency improvements—doing the most they can for the minimum outlay of cash. Those kinds of projects should be analyzed for ROI in exactly the same way as the projects described above.

img

imgAny project that does not generate a positive financial return should not be approved. It's that simple.

3. Organizations that execute so-called “mandatory” projects: Projects driven by legal or regulatory mandates are easily among the least understood within the context of ROI. Most companies don't even consider doing ROI calculations for these projects. But no one is forced to do any project. Companies should still weigh the cost of execution against the benefit of avoiding fines, penalties, lawsuits or a degradation in business. Although many “must-do” projects will pass the ROI test, conducting the analysis can be an enlightening and productive experience.

In future columns, I will spend some time describing the mechanics of ROI calculations, including a lesson on cash-flow modeling. In the meantime, let's all agree to elevate ROI to its rightful place as one of the most important, most valuable and most applicable techniques in the world of project management. PM

Gary R. Heerkens, MBA, CBM, PMP, president of Management Solutions Group Inc., is a consultant, trainer, speaker and author with 25 years of project management experience. His latest book is The Business-Savvy Project Manager.

img
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.

MAY 2010 PM NETWORK

Advertisement

Advertisement

Related Content

  • Project Management Journal

    The Long Road to Benefits Management member content locked

    By Svejvig, Per | Schlichter, Bjarne Rerup This article reports on a four- year action research study, where the aims were to study benefits management at a detailed, practical level and to evaluate the benefits management practices applied.…

  • PM Network

    A Measure of Urgency

    By Grgurich, Hayley Saving the planet is the ultimate goal for climate change initiatives. But before those projects get the green light, their leaders must show how they're moving the needle. Three project leaders…

  • PM Network

    Prefab Push

    To drive down construction costs, shave project schedules and sidestep the U.S. labor shortage hindering its build projects, hotel brand Marriott announced in 2017 that it would be embracing modular…

  • PM Network

    Transfer of Power

    By Parsi, Novid Anxiety and opportunity have gripped Germany's project management. With all eyes focused on post-Brexit repercussions, political and economic uncertainty threaten to slow Germany's full-throttle…

  • PM Network

    Leading Edge

    By Fister Gale, Sarah In the face of unprecedented disruption, organizations must adapt. This year's PMI® Project Excellence Award winners proved that, when teams embrace the need to pivot, they can deliver real value to…

Advertisement