Since the early ’60s mature companies in industries such as high technology, construction and communications have routinely applied project management practices as part of a complex and integrated network of business processes. But few companies in younger industries such as biotechnology recognize the benefits of project management and actively embrace it—even though they are looking for ways to improve their product development efficiency in response to the combined challenges of intense competition and limited availability of capital. Most continue to believe that project management is something meant for the aerospace and construction industries; they view it primarily as an overhead expenditure.
In those instances where project management is considered, managers do not realize that it takes much more to improve product development efficiency and increase the probability of long-term success than simply introducing project managers and project teams into their organizations. For project teams to meet their goals, other company processes (such as strategic planning, organizational structure, quality systems, and purchasing) must carefully link to the project management process and follow it scrupulously. I'll discuss the impact of one such process—the budget process—on new product development projects.
The Traditional Budgeting Process. In the biotechnology industry, most companies were founded by university scientists with novel ideas for products or services. These scientists came from the academic world, where research institutions were organized into specialty areas called departments, and departments were subdivided into further specialized laboratories. Each lab consisted of a head scientist (usually a tenured faculty member) with a group of associates, postdoctoral fellows, graduate students, and technicians, all of them working on one or more closely related projects. Consequently, when these scientists started their own companies, they organized them to reflect a structure not unlike the ones with which they were familiar: a functional organization. In typical functional organizations, projects are passed along from function to function throughout the product development phase. Unfortunately, when these new organizations need to execute multidisciplinary projects, they eventually manifest the symptoms associated with this type of organizational structure:
Ray Sánchez-Pescador, Ph.D., PMR is a consultant with more than 15 years experience in the biotechnology field, including 10 years in project management.
Conflicts over the relative priorities of different projects in competition for limited resources
Lack of project continuity as projects are passed from one function to another
Disagreements between functions over responsibilities or over a deliverable
No centralized project coordination
Inefficient use of scarce resources.
It should come as no surprise that the budgeting process in these companies is also functionalized. The functionally oriented budget process involves management's distribution of the available dollars among the respective functions at the beginning of each fiscal year, based only on the information provided by the functional managers. The process is generally long, painful and labor intensive, as evidenced by the gloomy mood of managers during this time of the year.
Organizations that typically benefit from such a process are those involved in providing the same product or service in a repetitive manner, with little need for change. However, a company involved in the development of multiple new products or services and that uses this type of budget process can experience limitations because in the functional budget process:
Money is allocated based on the perceived needs of the functional departments, not on the needs of the projects.
The distribution of money does not necessarily reflect the company strategy or project portfolio, but rather the political skill and assertiveness of each functional manager.
There is little or no coordination between functions on how money is being allocated and spent.
Functional managers do not use formal estimating processes, mostly guessing or padding the number of resources they will require for project work and improvising when their predictions fall short.
There is no accountability for and visibility to projects.
Project priority is assigned based on warm-fuzzy feelings, not on validated net present value or similar financial metrics.
The project manager, if he or she exists, has no influence on how money is being allocated or spent in his or her project.
Valuable resources are frequently reallocated between project and functional tasks within a function, without any impact to the function's budget but with serious implications to the project's budget.
Planning and tracking of project expenditures is nonexistent or difficult and mostly inaccurate.
Standard project performance metrics (for example, earned value analysis) cannot be calculated because no baseline budget is assigned to the project.
This type of organizational structure is likely to generate strong functional managers who are not accountable for project success. When a project cannot be completed on time or on target, the it-is-some-one-else's-fault syndrome appears, rather than the team spirit fostered in efficient, mature organizations.
In companies using this traditional, academic budgeting approach, executive management becomes limited by its systems when trying to answer critical questions, such as:
How are we spending our money?
Why does it cost so much to develop a product?
How can we improve our return on investment?
When will our projects be done?
Why are our projects always late?
Why do we never have enough people to do what we want?
Who is working on our projects, and what are they doing?
Why can't we just move people from another project?
These questions are hard to answer because the information is buried within the organization, is out of date, or is nonexistent because of the lack of importance given to the project planning process.
Some companies have attempted to solve the problem of lack of information by assigning a project manager to the project. These champions are not empowered to make decisions or have any control over the budget or resources assigned to the project but are now responsible for the project's success. They become more like project expediters than project managers, in that their role is simply to provide information and act as staff assistants to the executive management [Cable and Adams in Organizing for Project Management, 1982, PMI®]. Management thus believes these project expediters should now be able to provide them with timely answers to their questions by virtue of having been made responsible for the project. Right! When this solution fails, as it inevitably does, management becomes concerned with the skill of its project managers and sends them out for training, as the obvious solution to a complex problem.
Other companies have instituted a process whereby each employee reports on how his or her effort was allocated during a specified period. At the end of each such period, generally monthly, the Finance Department circulates an authorized projects list on which employees enter hours or the percentage of time spent on each project (not task) during that period. Since this is done once a month, to avoid burdening (R&D) personnel with too much paperwork, the numbers entered are based on individual memory and generally fudged as needed to add up to 100 percent. The data is summarized by Finance and used by management to review project expenditures, to make critical decisions related to the project portfolio, and to evaluate company performance. Since the data collected are not linked to a work breakdown structure or to task or activity definitions and are of questionable accuracy, the project cost calculations are soft, portfolio decisions are many times unjustified, and the company performance is whatever the data manager wants it to be. Inasmuch as it's retrospective and general in nature, this type of data does not flag problems or delays in specific project areas, and certainly does not provide information on project performance. There is no record of the efficiency with which tasks are being completed, limiting the ability to learn from past experience, and nothing to indicate when resources with specific skills will become available for the next endeavor.
Other organizations only address project progress during project review meetings at the end of the year. Typically, the project technical status is presented to management with an estimation of what will be needed for next year to meet the goals. Little or no financial information is presented or discussed, and rarely is a poorly performing project terminated. If management does not know what the project has cost so far, it is difficult for them to decide when they have overspent and whether it is time to consider termination. The lack of accurate assessments results in the all too common runaway projects present in many organizations.
Of course, companies with hot new technologies or strong intellectual property positions may be financially successful in spite of these deficiencies. When money is abundant, upper management will not likely perceive the need for change. However, when revenues decrease because of increased competition or a downturn of the economy, these same upper managers will immediately look for ways to trim expenses. Since these companies don't have realistic estimates for project costs, it is difficult for them to consider which projects are worth saving and which must be postponed or cancelled altogether. Instead, upper management asks functional managers to find ways to do the same work with less money. We have all heard the words, “We all need to tighten our belts,” and know that they mean an indiscriminate reduction of money being allocated to the functions (usually an across-the-board percentage). A reduction of the Development functional budget will result in less effort dedicated to all development activities, including any projects that happened to be on their table. Marketing will need to make do with less expensive promotional activities, market studies and advertisements; Operations will need to find ways to automate manufacturing processes and reduce the cost of goods sold; and so on. None of these cost reductions is based on targeted project worth, project performance, or efficiency.
There must be a better way to manage the allocation of precious R&D dollars. I offer the following alternative.
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An Alternative Budgeting Process. Let's pretend for a moment that we are starting a company, called SIRALOI, with a clear definition of our corporate mission and strategy. Because of the importance and worth of our projects, we define our R&D organizational structure following the strong matrix model. We include a Project Management Office, Finance, Marketing, and all the other necessary functions relevant to our business, ensuring their alignment with the predefined corporate mission and strategy. We carefully implement detailed project management training and practices throughout the organization (not just for project managers). However, when defining our budgeting strategy, we choose to assign budgets to projects, rather than the traditional allocation to each of the different functions, because we recognize that it is projects, not functions, that make innovative R&D companies successful. Now let's analyze the impact of such a small but critical choice.
The first thing we notice happening in SIRALOP is that functional managers become highly motivated to get their people involved with projects, because this is now the only way to fund most of the functional expenses. Discretionary money for specialized training, conferences, seminars, and so forth, continues to be allocated directly to the functional areas specifically for them to maintain their leading edge since technical competence is also critical to the company's success. However, headcount and other resource costs, and their justification, are now linked to and accounted for by the projects. Other areas of the organization involved in repetitive activities, like quality control, routine manufacturing, human resource functions, and purchasing, will not benefit as much from a matrix or project organization, and remain functionally oriented. Budgets for these areas are assigned in relation to the amount of support they provide to the organization.
Second, upper managers finally know what the impact of a project is to the bottom line since the project managers and their teams have properly gone through the initiation and planning processes for their respective projects. At SIRALOI? project plans provide managers with detailed project scopes and thorough estimations of project costs, cash flows, time lines, resource requirements and risks, all of which become the baselines for measuring the respective project performance.
With a better understanding of the project costs, SIRALOP management calculates realistic indices like net present value and return on investment and prioritizes the projects in its portfolio according to its business strategy and mission statement. Upper management uses the information generated during the planning phase to assign a prioritized project budget that is consistent with the overall business strategy. In addition, managers use the project baseline to monitor project performance and make educated decisions during review meetings and annual employee performance reviews.
Having budgets assigned to projects will also make everyone in the organization responsible and accountable for the success of the projects. People will recognize that their efforts have a direct impact on the long-term survival of the company and develop a new team spirit. Now managing by objectives will mean completing the project scope.
As an added bonus, the R&D budgeting process is dramatically altered. Imagine that SIRALOP chooses to work on three projects for the next three years and that a fourth project will be initiated when resources with specific skills become available. This long-term plan is designed to be consistent with the business strategy and the desired project portfolio. The project plans are developed following project management practices and, thus, issues like project costs, resource requirements, and cash flow are well defined. Guess what: The consolidated plan, consisting of the summation of the three ongoing projects plus overhead, just became the R&D budget. Now, instead of the annual daunting traditional budgeting process, we simply verify that our assumptions are still correct, that the risks we identified are under control, and that the projects are performing as expected. If changes are required, we make sure these are made following the change control process implemented with our project management practices. No more long weeks trying to figure out what each function requires for next year. Simply analyze the resource requirements from the consolidated project plan to proactively develop your skill-set inventory. In addition, this approach to R&D budgeting automatically institutes a set of checks and balances into the process, as functional requests for headcount and dollars are directly linked to the project work breakdown structure and cross-checked by the stakeholders. The added level of detail results in a more accurate projection of project and functional requirements.
The consolidated plan also helps SIR-ALOP prioritize multiple projects and define how many can be conducted at any given time. By looking at available resources (people, money, facilities), SIRALOP can start populating the top-priority project until all its requirements are met. Then, the second project is populated, and so on and so forth. Once people or money or facilities become limiting, no more projects can be populated, thus defining the maximum number of projects the company should consider working on simultaneously. Of course, the use of tools like resource leveling will help to further refine the final schedule for the projects.
In order for SIRALOP to be successful in the long term, projects must deliver their products as promised. To do so, critical business processes need to be implemented early in the company's life cycle; including corporate goals and strategy definition, organizational structure, roles and responsibilities, project management processes, quality systems, a structured new product development process, and a R&D projectized budget process. In particular, the projectized budgeting process, in conjunction with the project management process, will allow companies to accurately define the ongoing achievements, status and performance of their projects. This knowledge will result in more efficient utilization of limited resources and an increase in the number of projects completed on time, on target and within budget. All of these and other processes will have to be customized, followed dutifully and improved upon constantly, under the protective wing of upper management, to ensure that the company moves forward as a unified high-performance team.
AS THE BIOTECHNOLOGY industry matures, more and more organizations will achieve improvements with efficiencies that they did not think possible. Only such companies will survive the need for constant change imposed on them by the ever-increasing market demands of the 21st century.