Can good project management actually cost less?
Can highly mature project management practices cost less than their less endowed counterparts? Research performed at the University of California, Berkeley says they can. Data collected by the authors regarding the percentage of project costs allocated to management presents a pleasing finding: many of the most mature organizations actually spend less on project management than their less mature peers. However, the relationship between Project Management Maturity (PMM) and project management cost is not linear. In fact, the least mature organizations also spend proportionately less on project management. For the companies in between, project management may be an expensive venture.
The objective of this paper is to use quantitative methods to display that, for firms with high PMM, project management may actually cost less than their less mature counterparts. Data regarding project management cost (PM Cost), PMM and the return on project management investments (PM/ROIsm) have been used to develop a model that companies can use to determine the growth and health of project management capabilities and ensure prudent project management investing. This model, dubbed the Virtuous Cycle of Project Management, will be presented. The four-quadrant matrix can be used to track the correlation between PM Cost Percentage and PM/ROIsm. The four quadrants will be defined as to demonstrate how organizations can classify their project management ability as a function of both PMM and PM Cost (for more on PMM, refer to Ibbs, Reginato, & Morris 2001; Ibbs & Kwak, 2000).
Project Management Cost versus Project Management Maturity
Recently, project management research at the University of California has centered on determining the quantifiable value of project management. Through in-depth assessments of a wide variety of publicly- and privately-owned corporations, government agencies and nonprofits, we have been able to glean detailed data as to how companies spend money on project management. The assessment process breaks project management costs down into such categories as direct wage and burden costs for project management personnel, the amortized cost of information technology tools used for project management (hardware, software, communications, etc.), project management training, travel and per diem costs, amortized building and equipment costs and costs associated with consultants and subcontractors, among others. The detail involved with the assessment process allowed organizations to consider costs that they may have otherwise not consider as associated with project management. We followed each assessment with a phone interview to ensure data quality.
Exhibit 1. Project Management Maturity vs. PM Cost Percentage
Exhibit 2. The Virtuous Cycle of Project Management
After each of the individual cost categories were summed together, the total was divided by the total cost of projects delivered. The resulting ratio is the PM Cost percentage. A breakdown of how PM Cost relates to PMM is presented in Exhibit 1.
As stated above, it is important to observe that the relationship between PMM and PM Cost is not linear. As the trend line in Exhibit 1 shows, PM Cost increases as PMM increases until PMM is approximately 3. From there, it PM Cost steadily decreases as PMM increases.
Through the follow-up interviews, we were able to ascertain the reasons behind the non-linearity of the PMM-PM Cost curve. When organizations are young, project management protocol has yet to fully evolve. The lack of established project management processes result in a lack of project management spending. While PM Cost is low, little is being gained from project management practices, thus PM/ROIsm is also low.
It is not until organizations develop project management processes that project management costs begin to increase substantially. Establishment of project management processes tends to not only increase PMM, but it also requires increased spending on project management. Unfortunately, at this juncture the increases in project management spending outstrip the subsequent gains in PMM, resulting in a relatively low PM/ROIsm. Because PM Cost is increasing ahead of PMM, this is not a position that firms should be in for any extended period of time. The key is to build project management competence, and then focus on reducing project management-related costs.
Fortunately, once an organization reaches higher levels of PMM, PM Costs start to decrease. The reasons behind this trend lie with organizational structure and economies of scale. For example, as companies become more mature, procedures are implemented in an effort to maximize the efficiencies of project management efforts.
For those companies that scale the mountain of the highest levels of PMM, we have found that a sweet reward waits. Organizations that have achieved a PMM approximately greater than 4 have a PM Cost of less than 12%, and the overwhelming majority have a PM Cost of less than 9%. Better yet, for many of these firms, project management becomes increasingly less expensive as PMM increases. Through detailed case studies, we have determined that once organizations reach a PMM of 4, PM Cost actually decreases incrementally with subsequent incremental gains in PMM. This finding demonstrates that improved project management maturity actually costs less once a high level of PMM has been achieved.
The Virtuous Cycle of Project Management
From the quantitative and qualitative observations and in-depth interviews discussed previously, we have been able to create an effectiveness matrix that allows organizations to map their aptitude and investments in project management to ensure they are progressing in a logical and sustainable manner.
As Exhibit 2 depicts, the axes of the matrix plot PM/ROIsm against PM Cost Percentage. The boundary between “good” and “bad” PM Cost is approximately 5% to 7%; the PM/ROIsm division is approximately 26% to 30%. Project management growth normally flows along the clockwise cycle represented on this diagram. Because PM/ROIsm and PMM are directly correlated, substantial gains in both can be achieved lockstep as an organization moves from left to right along the x-axis.
The four quadrants are defined as follows:
• Quadrant I: Companies in this area have both low PMM and PM Cost. These organizations are underinvested in project management and are earning low returns, if any.
• Quadrant II: PM Cost increases as companies invest more in project management, but gains in PMM are slower to materialize. Quadrant II is the next logical place to progress from Quadrant I, but it is an area where no organization should reside for any prolonged duration. Here, project management investments have begun to increase, but benefits have not yet been fully realized.
• Quadrant III: Improvements in PMM are visible and the organization's project management begins to add significant value. However, the cost of those improvements remains steep.
• Quadrant IV: Project Management Maturity and PM/ROIsm are maximized, but are done so at a lower PM Cost than peer companies. In Quadrant IV, the spread between the return on project management investments and PM Cost widens favorably as organizational capabilities become a competitive strength. This region is the ideal locale for companywide project management practices. Companies in this category have best-of-class PMM and very high PM/ROIsm.
A major benefit of the Virtuous Cycle of Project Management is that it provides a road map for those firms that desire to make project management a strong corporate competency. While PM/ROIsm and PM Cost define the axes of the Virtuous Cycle of Project Management, each quadrant is also defined by complementary quantitative and qualitative measures. Not only does the Virtuous Cycle of Project Management measure project management effectiveness, but also many companies that reside in Quadrant IV also enjoy project management as a core competency that provides, either directly or indirectly, higher quality products to customers. Also, the capabilities that allow firms to reach Quadrant IV result in best-of-class cost and schedule reliability.
Exhibit 3. Schematic Representation of PM Cost-PM/ROIsm Ratio vs. PMM
To demonstrate how good project management practices cost less than those of less mature organizations, we present some brief examples from our research. The point of these cases is to demonstrate how we have used our data to help organizations to understand how to PM Cost correlates to improvements in PMM and PM/ROIsm.
To aid in this demonstration, we have created a schematic diagram that represents how improvements in PMM typically correspond to PM Cost and PM/ROIsm. PMM is represented by the x-axis, and the ratio of PM Cost to PM/ROIsm is represented by the y-axis. The goal of organizations should be to increase PMM while decreasing the ratio of PM Cost to PM/ROIsm. The ratio can be decreased three ways: by increasing PM/ROIsm, decreasing PM Cost, or some combination of the two.
Each of the zones within the diagram roughly correlates to the similarly numbered quadrant on the Virtuous Cycle of Project Management diagram (i.e., Zone I relates to Quadrant I, etc.). As Exhibit 3 depicts, PM spending and PM/ROIsm increase as PMM increases in Zone I, but all are relatively low. This was exactly the case of a large financial company we observed. This company spent approximately 4.3% of project costs on project management and had a PMM of only 2.90, which corresponds to a PM/ROIsm of only 18%. Many of this company's difficulties were rooted in management's inability to complete projects with the original scope. These problems were directly related to senior management's reluctance to provide more resources to project staff to adequately manage projects (and hence the low PM Cost percentage). Until more resources are allocated, this organization's project success record will remain spotty.
Many of the companies in Zone II tend to be information systems organizations. We observed that these companies often understand the need to develop project management practices, but the costs to create them far outweigh the PM/ROIsm delivered, as Exhibit 3 displays. For one company in particular, project management processes had been implemented but their results were highly erratic. This company had established a project management practice that improved its PMM. However, the benefits of the improvements had not become regular occurrences because project management was still in its infancy within this organization. The resulting situation left the company with a relatively high PM Cost of 12% and low PM/ROIsm of 26%.
In Zone III, PM Costs are still high relative to PM/ROIsm, but project management effectiveness is increasing positively. Companies in this region are typically fully committed to building sound project management practices, and their efforts show, but their PM Cost is still high. One company we assessed had a PMM of 3.69 and a PM/ROIsm of 32%—values that would cause envy at most of the companies we observed. However, this financial services company was spending approximately 22% of its project costs on project management, an amount that is more than its peers and far more than the companies in Zone IV. Our data helped this company to see that it is overspending for its level of PMM, and the data garnered from the assessment process will allow this firm to corral its project management in such a manner that they can cut costs while preserving its high PMM level.
Lastly, companies in Zone IV have the best of both worlds: High PMM at a low PM Cost. These companies tend to have the most mature project management practices. One company we assessed had a project management group that was responsible for managing the construction of its own petroleum refineries. This company had the most mature project management practices, logging a PMM of 4.6. Not only was its PMM high, but it also spent only 1% of its project costs on management while receiving a PM/ROIsm of 35%.
While many of the companies in Zone IV are construction-related firms, we also observed companies in the information technology industry that had reached project management nirvana. One of these companies, a large Fortune 500 company specializing in IT outsourcing had attained a PMM of 3.8 while spending only 4% of its project costs on management, yielding a 32% PM/ROIsm. The key takeaway is that the companies in Zone IV have developed a favorable spread between the amount of money they spend on project management and the PM/ROIsm they receive. For these organizations, best project management practices are less expansive than they are for peer organizations.
As our research has shown, for companies that have attained high levels of PMM, project management costs less than it does for less mature peer organizations. The relationship is not linear—companies with low PMM also tend to have low PM Cost, but those firms gain very little from their relatively ad-hoc practices. However, once organizations reach a certain level of PMM, incremental PM Costs tend to decrease with subsequent PMM gains. We have also demonstrated the Virtuous Cycle of Project Management, which maps changes in PM Cost and PM/ROIsm as PMM improves. This cycle displays the path that many firms take as their project management practices improve, with those firms that make it to Quadrant IV having the best project management practices at the lowest cost.
The next steps in our research will involve creating assessment programs to obtain more quantifiable data with regards to the benefits of project management as a function of project management cost. In particular, we aim to reassess many of the organizations in our database to observe how project management costs change over time as PMM changes. Understanding the nature of project management costs as PMM increases can be extremely valuable to companies developing project management practices with the hopes of making their organizations more competitive in their respective markets. While our research has made strong headway in helping firms to internally quantify the value of their project management practices, this research will further provide firms with tools to measure how their project management practices create marketplace advantages.
The authors wish to thank PMI and the University of California, Berkeley for their ongoing sponsorship of this research.
Ibbs, C.W., & Kwak, Young-Hoon. 2000, June. Calculating Project Management's Return on Investment. Project Management Journal, 31 (2), pp. 38–47.
Ibbs, C. William, Reginato, Justin M., & Morris, Peter W.G. 2001. “Calculating the Value of Project Management.” PMI 2001 Annual Seminar and Symposium. Upper Darby, PA: Project Management Institute.
Proceedings of the Project Management Institute Annual Seminars & Symposium
October 3–10, 2002 • San Antonio, Texas, USA