The case for earned value
Michael A. Hatfield, PMP
How are we doing?” For the remainder of this article, I'll refer to this question as the question—as critical to project management types as “What is the meaning of life?” is to philosophers and “Would you like to buy this flower?” is to airport Moonies. The ability to answer the question quickly and accurately is what project control theory is really all about.
Amazingly, the one most important tool used in answering the question has come under fire in some quarters, most notably in the government sector. The use of Earned Value is commonplace in private enterprise, but its government-housed cousin, the Budgeted Cost of Work Performed (BCWP), has become more unpopular at the Department of Energy and is virtually alien to projects at the Department of the Interior. Real project management types can grind their teeth in frustration all they want, but sissy project management types are doing away with this, the most important of cost management tools, in a most glacier-like fashion: slowly, coldly, and seemingly unstoppably.
When I have occasion to teach the Cost section of the PMBOK Guide, either at the University of New Mexico or in small, in-house sessions, I like to start with a story problem:
“You are a project manager,” I begin, “and you are in charge of a two-month project.”
(Some will begin to write this down, while others continue to stare blankly.)
“You are to make 2,000 widgets in two months, and you have a $2,000 budget to accomplish it. That works out to 1,000 widgets and $1,000 per month, right?”
(Okay so far, although some are beginning to suspect they will have to think in a minute.)
“At the end of the first month, you have spent $1,100.”
Then comes the question: “How are you doing?”
The staring-blankly types usually offer the first answer, because the others already suspect a trick question.
“We are doing poorly. We're overspent.”
“So, you might go tell the shop foreman that you are disappointed with the project team's performance?”
“What if I were to tell you that you have completed 1,300 widgets?”
This problem illustrates, in a nutshell, the case for Earned Value. Simply comparing the budget with the actuals (the “accountant's folly”) tells you next to nothing. Without some assessment of how much of the project's objectives have been met in relation to how many had been planned, the difference between budget and actual costs can be misleading and produce wrong decisions, such as yelling at the widget project's shop foreman.
Another example of the irrefutably high value of Earned Value lies in the fact that even those project managers who refuse to do it formally will do it informally. Which project manager, upon hearing that she has spent half of her budget, does not automatically think “Am I half done?”
Of course, private sector managers rarely need to be convinced of the importance of Earned Value. In 11 years as a management consultant, the best Earned Value-based management information system I have seen was not at the Departments of Defense or Energy, or in government at all. Levi Strauss' Albuquerque plant had a remarkable system in place, generating a report that resembled a Cost Performance Report (format 1) every hour. A quantity of denim would arrive at the loading dock, with a ticket describing the number and style of garment that was expected. Each machine used in processing the garments kept track of actual costs and time as well as the number of garments that had been processed and to what extent they had been finished.
Tight variance thresholds allowed true management-by-exception, as negative variances attracted the attention of floor supervisors, who could themselves help the operators or assign extra personnel. Positive variances were noted in individual employee's records and served as the basis for bonuses.
The Earned Value information that was being collected and used as the basis for the needed management information was so ingrained in the way this plant did its business that the Levi Strauss managers and floor supervisors literally could not imagine doing business without their hourly status reports.
If Earned Value is so critical to the way business should be done, then why the controversy in the public sector? One of the biggest reasons has to do with management philosophy. Traditional management approaches are rooted in the financial manager's life goal: maximize shareholder earnings. It's obvious that making decisions that save the shareholders money will help achieve this goal—what is not so obvious is that achieving customer satisfaction helps achieve this goal as well. Making management decisions based on the make-the-customer-happy approach are often in conflict with short-term money-making (or saving) tactics, and it takes a far-sighted manager to recognize the inherent trade-off in such decisions. Earned Value is a critical performance indicator, meaning that it belongs in the realm of the meeting-customer-objectives approach.
In other words, the importance of Earned Value as a tool is rarely obvious to traditional management philosophy types. True project managers, however, have learned that they cannot manage a project of any size without it. To them, there is no cost management without Earned Value.
Also contributing to this management tool's unpopularity is an unfortunate but commonly held notion that management, like leadership, is next to impossible to learn—that you either have it or you don't. To many managers, the ability to manage should be somewhat intuitive, and should certainly not require any education past common sense. Hydrogeologists adopting such an approach are called “dowsers,” and surgeons embracing this approach are denigrated as “witch doctors.”
Managers with this approach (no, they are not called “vice presidents”) are just as dangerous, because many projects conducted by the government and its contractors have serious, widespread effects. I am not saying that any manager that does not use Earned Value is ignorant or superstitious; but they are certainly less well-informed than their BCWP-using counterparts.
The next-to-last point I will make is that I have never heard a valid argument against the use of Earned Value. That's not to say that I have never heard criticisms and complaints about it: people say it is too complicated (it isn't), that it is hard to implement (not really), that their project is too small to benefit from it (this occurs, but rarely), or that they will not benefit from the reports (this guy is a project manager?).
Finally, what project management tool is out there to replace it? Imagine a carpenter who disliked the carpenter's square. Clearly he would need a tool that performs this function, or else his work would become crooked rather quickly. Project managers who eschew Earned Value should consider if the tool they use in its place is sufficient, or if their management has become as poor as the square-less carpenter's.
So, how are you doing? ■
Michael A. Hatfield, PMP, CCC, is a senior project controls engineer for Los Alamos Technical Associates in Albuquerque, N.M. He has been previously published in PM Network and the Project Management Journal.
PM Network • December 1996