In praise of ROI
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.
Any 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.
MAY 2010 PM NETWORK