To stay ahead of the game, companies need to follow socioeconomic shifts. And that may mean monitoring events halfway around the world.
by Sarah Fister Gale | photos by Bert Bostelmann
Social, economic, cultural and political events happening all around the world can have a profound effect on a company's project portfolio. Globalization means a government's decision in Asia can translate to more project work in South America, or a downturn in the euro may result in a U.S. project being cut. The effect of these events—whether positive or negative—largely depends on how quickly an organization adjusts its portfolio in response.
“Most companies don't consider external issues as much or as intensively as they should, and that's a mistake,” says Lee Merkhofer, president of Lee Merkhofer Consulting, Cupertino, Calif., USA. “They tend to focus on what they know best—their business—not on the external environment.”
Ralf Schweighoefer, DHL IS, Bonn, Germany
That myopic viewpoint can cause organizations to lose sight of how the outside world affects their projects. For example, companies may miss opportunities to capitalize on changing customer tastes. “If your goal is to increase revenue by selling products that are attractive to consumers, you have to pay attention to shifts in the marketplace that may change what they find attractive,” Mr. Merkhofer says.
To keep up, organizations should establish a formal system for monitoring current and impending marketplace issues. Energy Northwest (EN), Richland, Wash., USA, takes a long-term approach to tracking trends as it pitches, launches and monitors projects providing electricity to public power utilities and municipalities in the Northwest United States.
With large complex projects, it can take EN seven or more years to build a new power source. That means the company has to forecast consumer needs nearly a decade in advance and balance raw energy needs with economic, social, cultural, political, environmental, geographic and climatic influences.
“When we decide to put together a new project, we start with a business plan that takes into account financial aspects, market conditions, infrastructure needs, public policy, environmental concerns and community impact,” says Thomas Krueger, manager of generation resource development for EN. “This upfront evaluation helps take the uncertainty and some of the risk out of the project.”
EN's process begins with economics. History has shown that demand for power grows in direct proportion to economic growth. “Even an anemic two percent increase in economic growth translates to a two percent increase in demand for power,” says Brad Peck, a retired U.S. Air Force colonel who serves as an adviser to EN's senior leadership. That translates to roughly 400 megawatts of power per year in the Pacific Northwest, or close to half the output of a nuclear power plant.
The company works to predict economic cycles by monitoring housing and business development. Growth is only part of the picture, though. Knowing that a community needs more energy and choosing a facility that's environmentally friendly, cost-effective, socially acceptable and politically workable is a project in itself. And the balance can tip dramatically if the forecasts are off. Three years ago, for example, natural gas was a reasonable $3 to $4 per therm, but recently shot up to a cost-prohibitive $14 per therm. “Many natural gas plants went unfinished because of that,” Mr. Peck says.
Assessing trends and
identifying risks becomes much more
complex when projects cross global lines,
especially if companies are investing in
emerging markets or unstable economies.
—Nouriel Roubini, Ph.D., New York University, New York, N.Y., USA
When we decide to put together a new
project, we start with a business plan that takes
into account financial aspects, market
conditions, infrastructure needs, public policy,
environmental concerns and community impact.
—Thomas Krueger, Energy Northwest, Richland, Wash., USA
EN tries to avoid such risks by diversifying its portfolio, developing everything from hydroelectric to nuclear power.
The company's generation project department is responsible for forecasting growth and planning and developing projects. Much of the early project development is about education, Mr. Krueger says. For example, the company tries to help community members understand the benefits and limits of sustainable energy projects, which have little environmental impact but don't produce enough power to meet their needs.
This process is also about recognizing consumer trends. Although nuclear energy plants have shown to be safe and have zero emissions, for instance, lack of public support for additional nuclear power in the state of Washington makes them a difficult choice—at least for now. “We don't have any nuclear power plants on the drawing board, but I would not be surprised if that changes by 2018,” Mr. Peck says. “Today, many [U.S. residents] support nuclear power, and we will use that data as we look to the future.”
Staying connected to the desires and needs of external stakeholders and consumers gives organizations the third-party perspective they need to effectively manage their project portfolios in relation to socioeconomic trends, says J. Kent Crawford, PMI Fellow, PMP, CEO of PM Solutions, Havertown, Pa., USA. But tracking what's happening in the outside world is only half of the process, he adds. Companies must also develop systems to funnel that data back to the key decision-makers. “The executive team must establish a process to prioritize projects, determine which external factors are going to have an impact and define the quantitative value of those factors,” he says.
Tracking changes in laws governing the use of consumer information is a top priority for the project office at Transunion LLC, a credit and information management provider in Chicago, Ill., USA. These laws can have a tremendous impact on which projects the company moves forward with, which get changed and which are deemed not worth pursuing, says Carol Bobbe, PMP, senior manager of the project office. “When a new law comes out, we've got to interpret what it means and how it will result in changes to our system,” she says. “That is seldom simple.”
Transunion's project office keeps in close contact with the company's legal department. It not only determines how a new state law will affect current products, but also predicts how likely it is for other states to pass the same or similar laws, and how these changes will be accommodated in the company's software. For example, 25 U.S. states recently passed laws placing freezes on releasing a consumer's financial information, but each state has a different response time. That means Transunion has to decide how and when to customize a national product for local use.
We use research to determine whether we need to change our product portfolio or revise investments because of changes in the marketplace.
The project office meets multiple times each year with all of its corporate groups to discuss upcoming new projects. The meetings keep the office up to date with project needs and can change the way Transunion focuses its portfolio. For example, identifying the growing proliferation of consumer fraud prompted the introduction of projects to address the issue.
As part of its portfolio management process, each project undergoes a formal evaluation. Members of the legal, research and marketing groups assess a project's merits based on their core business and determine its likelihood for success. “In the past, projects were owned by the product group, but now, it's a more open dialogue,” Ms. Bobbe says. “Today, if you want to get a big project going, you have to convince management with quantifiable proof and market research that it's going to be successful.”
Transunion also reevaluates projects throughout their life cycles, monitoring internal milestones as well as whether the original goals and expectations of the project continue to be valid in the marketplace. “It's all kept in a database so we can prove that we continue to stay on track,” she says. “It's about accountability.”
Assessing trends and identifying risks becomes much more complex when projects cross global lines, especially if companies are investing in emerging markets or unstable economies, says Nouriel Roubini, Ph.D., professor of economics at the Stern School of Business at New York University and chairman of Roubini Global Economics, both located in New York, N.Y., USA.
“Emerging economies have fast growth and a lot of potential, but they also hold a lot more risk.
Whenever there is political change, such as elections or war, policy becomes uncertain, and that can make investors risk-averse,” he says. “The reality is that you can try to find the best sector to invest in, but if there is a crisis and the economy goes ‘belly up,’ you can lose your assets.”
To balance potential with risk, Dr. Roubini encourages companies to geographically diversify their portfolios for more flexibility. They should also identify what level of risk they're prepared to handle, based on issues such as expected financial returns or annual goals.
DHL, which transports goods, information and payments through a global network, found a low-risk solution for investing in emerging markets. The company merged its application management centers into three core offices scattered around the globe, in Phoenix, Ariz., USA; Kuala Lumpur, Malaysia; and Prague, the Czech Republic. By consolidating, DHL can provide services in unstable economies while maintaining core infrastructure investment in more stable regions, says Ralf Schweighoefer, senior vice president of IT program management at DHL IS Germany in Bonn, Germany.
DHL tries to avoid investing in customized IT products for specific markets or customers. Instead, it creates global IT products that meet the majority of customers' needs, further balancing its portfolio. “It is better to say no to one big customer than 20 small ones,” he says.
To ensure DHL's projects are in line with global trends, the company conducts market research in conjunction with its portfolio management to assess its customers' short- and long-term needs. “We use the research to determine whether we need to change our product portfolio or revise investments because of changes in the marketplace,” he says.
The market research department works directly with the sales team on new products, and everyone in the company is encouraged to bring ideas to the table. Any reasonable suggestion for a new product is funneled through a cross-functional governance board for portfolios in each region. “We have 285,000 employees all over the world,” Mr. Schweighoefer says. “We can't afford to concentrate only on ideas from product directors.”
Representatives from IT, product development, operations, customer service, sales and marketing evaluate the benefits and risks of the ideas. Further market research is then conducted on those concepts that show the most potential. The group also looks at whether an idea meets the need for a specific company or region, or if it is part of a larger trend that can benefit customers worldwide.
This process has resulted in more than one successful product, including the launch of an interface for web-based catalog sales several years ago in response to companies transitioning away from mailorder businesses.
“The idea came from an account manager who had a little customer named amazon.com that had just invested in a lot of warehouse space, which suggested it anticipated a lot of growth,” Mr. Schweighoefer says. “We did the research and became aware that more companies were doing the same thing.” As a result, DHL invested early on in tools to support the emerging needs of Internet-based catalog sales, and its sales team was able to meet the changing needs of its clients head-on.
The process of adapting portfolios to socioeconomic shifts in the marketplace should be linked to an organization's strategic planning process. If the project portfolio management model is working properly, the strategic planning process will recognize and respond to the socioeconomic shifts. This in turn influences the selection criteria used in considering projects for the portfolio. Of course, companies must keep such policy data up-to-date and re-visit it frequently, says Harvey A. Levine, PMI Fellow, author of Project Portfolio Management: A Practical Guide to Selecting Projects, Managing Portfolios and Maximizing Benefits [Jossey-Bass, 2005] and principal of The Project Knowledge Group in San Diego, Calif., and Saratoga Springs, N.Y., USA.
That system should be directed by a multi-function governance council in conjunction with the project management office. “The biggest threat to portfolio management are the barriers that prevent people from sharing their knowledge with others,” he says. “When all functions are regularly involved in the decision-making process, you can respond to socioeconomic shifts and make the most of your investments.” PM
Sarah Fister Gale is a business journalist based in Chicago, Ill., USA.
PM NETWORK | FEBRUARY 2007 | WWW.PMI.ORG