Earned value management

bureaucratic decree or managerial choice?

Sean Alexander, President, Meridianet

Historically, earned value management has been employed only to meet a government requirement. Thus, the benefits of earned value management (EVM) have accrued only to those organizations that have been forced to implement the disciplined, integrated project management practices of an earned value management system (EVMS). But times change; organizations change. There is a new, emerging breed of organization that shuns the “head-in-the-sand” approach to project management. It may be a small business moving to a professional project management model, or a division of a large, ponderous, well-established company looking to increase the value of its project management investment. This type of organization can see the benefits of a disciplined approach to project management. Recognizing that an earned value management system provides that discipline, this forward-looking organization forges ahead on its own toward earned value implementation.

This paper explores the implementation of an earned value management system at just such an organization. First we will explore how management came to the decision to proceed with the implementation of an earned value management system. We will examine the goals and objectives of the implementation project, and the implementation process itself will be disclosed and discussed. Four and a half centuries ago Niccolo Machiaveli warned us that change is difficult: “It must be remembered that there is nothing more difficult to plan, more doubtful of success, more dangerous to manage, than the creation of a new system.” Thus, it was expected that the needed change in policies and practices would encounter resistance, even in an environment where senior management had mandated the change. We will expose and explore several of those barriers to implementation: some were expected, others came out of left field. The tactics used to overcome those barriers will be presented and discussed. Sometimes they worked, sometimes they didn’t. Finally, we will investigate the major lessons learned during the implementation. We will delineate and deliberate them for understanding. What worked, and what did not work, will be investigated for insight and future benefit. We will finish with an exploration of the need for all of us to consider a more disciplined approach to project management, but not at the expense of intelligently designed management processes.

Exhibit 1. Project Time-Phased Budget

Project Time-Phased Budget

Exhibit 2. Budget vs. Actuals (Is the Underrun Real?)

Budget vs. Actuals (Is the Underrun Real?)

Overview of Earned Value Management Principles

Those unfamiliar with earned value management will need to gain an understanding of the basic concept of earned value and how it differs from the standard budget vs. actuals approach used on projects around the world. Herewith is a brief explanation of the principles that make earned value such a powerful tool.

At the beginning of any project, there is usually an attempt to quantify the needs of the project by scheduling the scope of work (SOW) over the time period allotted for the project. Sometimes that period of time actually coincides with the time it will take to accomplish the SOW. Once scheduled, the project is then budgeted by determining the resources needed to accomplish the tasks contained within the schedule. This budget is then typically graphed for presentation to senior management and/or an external customer. Such a time-phased budget is depicted in Exhibit 1.

As work is accomplished on the project, the money spent to perform the work is collected and its value is plotted on the same graph. At the end of any given time period, which is usually referred to as Time Now, the actuals are compared against the cumulative budget (through Time Now) and a variance is calculated. This variance is then considered to provide information that is meaningful to project management as well as to the customer, whether internal or external. Typically, the project manager will declare the project to be overrun or underrun based on the comparison of actuals to budget. Exhibit 2 depicts a project that would be considered to be in a cost underrun condition.

Unfortunately, comparing actuals to budget results in, at best, a spending variance, and, at worst, is useless. The problem stems from the fact that the actual costs for the work that was performed are being compared to the budgeted cost for work scheduled (BCWS), i.e., the work planned. This is a classic case of comparing apples and oranges. What should be done, and what earned value management requires, is a comparison of the actual cost of work performed (ACWP) with the budgeted cost for work performed (BCWP). Such a comparison will result in a true cost variance. Exhibit 3 depicts the addition of the performance line (BCWP) to our chart. In this case we can see that the actual cost of work performed (ACWP) is above the budgeted cost for work performed (BCWP). Thus, the project is experiencing a cost overrun, rather than the cost underrun that we originally calculated by comparing the actual cost of work performed (ACWP) to the budgeted cost for work scheduled (BCWP).

From this treasure-trove of newly found information, many other types of analyses can be developed (see Exhibit 4).

For instance, we can forecast the rate of work accomplishment and a meaningful estimate to complete for that work. We can calculate an independent look at the final cost for the project by using the true current cost condition as the starting point. We can look at efficiencies for both cost and schedule. Then, to ensure the delivery of valid project information to the project manager and others, disciplined control of the established performance measurement baseline will be maintained.

Exhibit 3. Performance Added to Management Chart

Performance Added to Management Chart

Exhibit 4. EVM Data Elements and Projections

EVM Data Elements and Projections

EVMS by Bureaucratic Decree

Even this brief tutorial on earned value management readily shows why it is generally believed to be superior to the classic budget v. actuals methodology. It is this fact that has driven several governmental bodies (e.g.,U.S. Department of Defense, Swedish FMV, Canada Public Works and Government Services) to require the use of an earned value management system (EVMS) for the management of projects they award to contractors.Too many times, the applied management system met the basic government requirements, but did not truly address the needs of management: neither the government’s nor the contractor’s.

Sadly, this state of affairs has been more the norm than the exception. Overtime, it became increasingly difficult to know exactly what a good management system should look like. Today, blind EVMS implementation as it has always been done, simply because that’s the way it has always been done, tends to lead to less-than-meaningful project management information as well as procedural overkill by bureaucratic decree.

The publication in 1998 of the ANSI Standard, Earned Value Management Systems (EIA-748) brought some sanity back into the process of EVMS implementation. Contractors are now less often confronted with procedural requirements that are not really needed to successfully implement EVM. Government review teams have switched their focus from reviews of a contractor’s management system to that of a project’s performance measurement baseline.

That said, the discussion so far has focused on the implementation of EVM because a governmental agency has required it. Today, there is a growing trend toward EVMS implementation even when there is no outside entity requiring it. The forward-looking companies that take this step recognize the inherent benefits of EVM and are willing to support an initiative to propagate its use throughout the organization. It is just such an organization that is the subject of the rest of this paper.

EVMS by Managerial Choice

The Decision

What type of company considers EVMS as a valid alternative to the classic budget v. actuals methodology? Typically, it is one that has experienced difficulty in bringing projects in on cost and/or schedule and/or technical parameters. Like any type of change, implementation of an EVMS is typically raised as an alternative when the need for change is already upon the company. It is dissatisfaction with current results that drives management to consider a different approach. The more pronounced the dissatisfaction, the more likely is it that management will try something new.

The company that is the subject of this paper had reached such an inflection point. There were several reasons for their dissatisfaction, as follows:

1. Because it was growing rapidly, by the constant addition of new projects, they were having increasing difficulty keeping track of their one-and-only contract.

2. There were multiple stakeholders/customers, each with its own set of reporting requirements.

3. Previous relationships with their principal customer were no longer providing the competitive advantage that the company had enjoyed in previous years.

4. The company was a small business that was experiencing rapid growth and was seeking new management system capabilities.

5. Customer oversight was expected to increase in the future.

If they continued to manage projects the way they had for the previous several years, their contract award rate was likely to drop dramatically—perhaps precipitously. Thus, management started looking for new approaches. Since they were a contractor to an agency of the U.S. federal government, the contractor had been aware of earned value, but had never been required to implement it. Even though they were keenly aware of the arguments against implementation, they quickly came to see that EVM was, in fact, the disciplined approach to project management they desperately needed.

Goals and Objectives of Implementation

With the introduction of EVM, the subject company wanted to accomplish one principal goal and several complimentary objectives.

The Goal: Develop Earned Value Management as a Core Competency

This would bring project management to the forefront within the company. All who would seek to move into senior management would have to include a stint as a project manager in their career plan. More immediately, all projects would be managed from a common set of principles and processes.

The Objectives

1. Development of knowledgeable project managers. EVM was considered to be a project manager capability that would ensure profitable projects.

2. Control the delegation of project responsibility and authority. Accomplished by the introduction of an established methodology for the formal delegation of scope, schedule and budget.

3. Early identification of both favorable and unfavorable cost and schedule conditions. Accomplished as a natural product of EVMS operation.

4. Better communications with all project stakeholders. Terminology would be consistent across all projects. Communications between projects, stakeholders and management would improve dramatically.

5. Better control of change traffic. Disciplined control of the baseline would require the establishment of logs and approval documents that ensured the complete and precise incorporation of both internal and external changes into the baseline.

Barriers to Implementation (a.k.a. Delays and Pratfalls)

Change can be hard, even with the best of intentions and a mandate from senior management. Such was the case with the subject company. There were eleven significant barriers that arose in the path of implementation of the EVMS. Some of them were expected; others were surprises. They all required a response from the Implementation Team.

1. The biggest surprise came from a high-ranking middle manager. In the face of repeated statements of support for the implementation process from senior management this middle manager refused to participate. Even after being counseled by his immediate supervisor, a vice president, the manager provided inaccurate, incomplete and irrelevant inputs. After his project responsibilities were cut from $20 million to $2 million, he began to accept the introduction of EVM.

2. The creation of a project control team should have been an easy thing. It wasn’t. The earned value administrators and project schedulers were so accustomed to fulfilling every request made by line personnel that they—the administrators and schedulers—could not stop doing so. Even when the new EVMS required that a process be performed in a prescribed manner, it was likely done in accordance with the manager’s desire, not the system requirements. In the final analysis, it required the hiring of an experienced EVM practitioner to bring about the change in attitude that was needed to ensure the successful implementation of the EVMS.

3. Software system integration was not prioritized highly enough to ensure that it was operational when it was needed. An outside consultant was needed to make it all work.

4. Senior management did not “walk the talk.” Senior management chose to invest in an EVMS. They announced to the world that EVM was the new paradigm. They attended training classes and conducted a kick-off meeting. Then they neglected to use the system. They failed to show, by example, the importance of the system to the success of the project and the company. Once they demonstrated the level of involvement they expected of others, everybody else adopted the EVMS processes.

5. The development of the Responsibility Assignment Matrix (required by a sound EVMS) did not happen quickly. Thus, roles and responsibilities were ad hoc and confusing. Once the RAM was in place, the entire implementation gained a solid footing.

The remaining six barriers did not slow things down as much as the five listed above, but they did cause a considerable amount of confusion, consternation and collateral damage.

6. Lack of meaningful functional organization inputs to the EVMS system description.

7. Charge number assignments continued to require signatures from a central authority.

8. Schedule development and integration was slow.

9. Control account plan development was slow.

10. The training of managers was delayed several times.

11. The customer resisted the increased discipline by which they then had to abide.

A Dozen Things That Helped (a.k.a.“Attaboys,”“Well Done’s,“and Lessons Learned)

In any change activity it is sometimes hard to see that quite a few things are working correctly. Herewith are the 12 things that helped the most. The first six had the greatest positive impact on the implementation.

1. Immediate senior management support. The fact that senior management chartered the EVMS implementation made the initial tentative steps much easier.

2. The Draft System Description was available during the first two weeks of the implementation. Having a “Bible” that answered most questions was “proof” that EVM was “here to stay.”

3. Communication and understanding of the relationships between budget, schedule and scope. Keeping these three elements at the forefront of all earned value discussions had a major impact on everyone’s understanding of the system. Insuring that every budget transaction had a corresponding change in scope sped up system acceptance by front-line managers.

4. Added an additional level of work authorization documents. Sometimes more paperwork actually simplifies the process. By including an authorization level that delegated the work from the program manager to the project managers, clarity was brought to the entire process.

5. Transition to a milestone-driven schedule changed the focus of every manager. Previously, managers were concerned with working on tasks. Once their focus changed to completing milestones schedule performance increased dramatically.

6. A fast-track baseline goal fostered the proper focus. By insisting that the establishment of the performance measurement baseline was the highest priority, the need to assign the required level of project control resources became evident. Without this focus the process would have been delayed to the point of jeopardizing the entire implementation.

7. Development of a cohesive project control function. By bringing the financial analysts and project schedulers together in one organization, work instructions could be developed and instantly spread throughout the entire company.

8. The immediate initial training of project control personnel. By ensuring that the operators of the system were well grounded in the principles of earned value, an organization of experts was quickly available to the entire company.

9. The early initial training of lower level management personnel. The front line is where the action is. Front-line managers quickly discovered the importance of establishing a meaningful baseline. But the real benefit was realized when data started to emerge from the system. The front-line managers knew what the system was telling them, and, therefore, knew how to convert the system data into meaningful management information.

10. Development of a unique charge number methodology. Eliminated the need for added identification features in the accounting system.

11. Eliminated the WBS Dictionary requirement. The EVMS System Description originally required a WBS Dictionary. When it became apparent that the dictionary (normally a customer requirement) provided no added benefit to the project it was eliminated, and thereby saved hundreds of hours that would have been needed to first build and then maintain the dictionary throughout the life of the project.

12. Eventual demonstrated buy-in by senior management. When senior management switched from talking about the importance of the EVMS to showing how it was important to them, everybody else on the project became much more involved.

Earned Value Management as a Core Competency

The implementation of an earned value management system is not to be undertaken lightly. It requires dedication and focus. It almost always requires a change of attitude and behavior. The payback is manifest in a level of project management capability that cannot be as easily gained through any other approach. Earned value management is not just a simple trick. It is an entire process for successful project management.

By developing project managers who understand and use EVM, we foster an environment that requires fact-based decision- making. Everyone tends to look for the easy solution to project management. Some try to find it in software packages. Others attempt to keep management information hidden from those who need it most—the front-line managers. Still others try to rely on yesterday’s management approaches to solve today’s management dilemmas. What is needed is a defined, dedicated and disciplined methodology for project management that empowers the manager on the firing line. Earned value management does just that.

Since the introduction of Scientific Management by Frederick Winslow Taylor in 1911, we have been trying to find the means to effectively understand and control the inner-workings of our everyday work life. While the PMBOK® Guide provides the framework within which that goal can be realized, earned value management points the way to a specific methodology for its accomplishment. Now is the time to implement earned value management: not because we have to, but because we choose to.

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 or any listed author.

Proceedings of the Project Management Institute Annual Seminars & Symposium
September 7–16, 2000 • Houston,Texas,USA

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