Doing the numbers
BY GREG HUTCHINS, CONTRIBUTING EDITOR
Not too long ago, any feel-good project was approved. The project drivers would be such questionable metrics as first to critical mass and first to capture eyeballs. Huh? Yep, those were the good old days.
Successful projects these days come down to two critical success factors: successful metrics and strategic alignment.
Metrics and More Metrics
In this severe economy, senior management wants metrics. The most popular question is: “What's the return on investment (ROI)?” Rigorous financial analysis is back in favor. Capital investment is being scrutinized, justified and managed much more carefully than in the past.
This is especially evident in information technology, where the huge past, present and future IT investments are being examined with an electron microscope. But I'm finding this in all projects. Senior management wants to know the hard numbers. You can't blame them; many projects were justified on shaky assumptions, atmospheric customer requirements and voodoo economics. Guess what? A lot of these investments didn't pan out. Benefits were hazy. Stock prices crashed. Thousands got downsized. So, here we are in a time where every project must demonstrate hard benefits.
Where's the Beef?
ROI thinking not only applies to single, discrete projects but also to project portfolios where organizational risks and benefits are examined. A recent McKinsey & Co. study [Productivity in the United States, 2001] challenged the fundamental IT business investment model, basically reporting that stand-alone IT project investments are a strategic mistake, so forget one-off project or one-application wonders.
IT investments should be coupled with business and operational models. Wal-Mart did this and captured 30 percent of its market in 1999, up from 9 percent in 1987. This brings us to the second critical success factor to a successful project: strategic alignment.
First a quick story. Recently, I gave a career development talk to the PMI Portland, Ore., USA chapter. About one-third of the project manager attendees were looking for work.
Your project does not offer clear, demonstrable, strategic benefits. So, it's axed and you're downsized.
“How many of you know your company's business model and how your project is aligned with your organization's mission critical objectives?” I asked the attendees. Less than eight out of 80 attendees raised their hands. This is not good.
If you don't know how your project is aligned and supports a strategic objective, then chances are your project is a stand-alone, which supports McKinsey's contention that discrete IT project investments are a strategic mistake.
It should then come as no surprise when your project is canceled. This is what happens these days: Your boss's boss's boss has a list of 50 or more projects in need of triage. Your project does not offer clear, demonstrable, strategic benefits. So, it's axed and you're downsized. It's nothing personal. Your project was not clearly aligned with a strategic, mission-critical need. Those are the easiest to cut.
To demonstrate every project's importance to the bottom line, learn and do some fundamental financial analysis. To determine ROI:
- Measure project returns on decreasing costs based on alternative ways of doing the same things
- Determine new sources and streams of revenue as a result of the project
- Measure simple project payback
- Determine measures for increased efficiency, effectiveness and operational economics
- Determine simple risk mitigation probabilities and cost/exposure savings
- Determine benefits of resulting reduced head count.
A caveat: We've done many types of financial simulations, including ROI, internal rate of return (IRR), net present value (NPV), economic value added (EVA) and return on opportunities (ROO). They look great on paper, but the bottom line is make sure your assumptions are realistic, otherwise the numbers are garbage in, garbage out (GIGO). Base your ROI on supportable assumptions because senior management will surely challenge them.
Whose job is it to justify your project's value: you, your boss, or your boss's boss's boss? Ultimately, it's yours. Know your primary customer and ultimate stakeholders. Then, align your project with strategic goals and know your project metrics. The reality is that less than 10 percent of project managers do. PM
Greg Hutchins, PE, is a principal with QPE, a program, process and project management advisory firm in Portland, Ore., USA. He can be reached at [email protected].
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PM NETWORK | MARCH 2002 | www.pmi.org