Good results yield ... resistance?
A study proving that project management pays is met with denial at one Fortune 500 company
Why would a company resist changes that could yield improved performance, higher profits, and a competitive edge? Because that's what companies do—just ask Dilbert.
Frank Toney, PMP
Picture this cartoon in your mind: Frame 1 shows the leader of the project management group saying to the functional vice president: “Wow! I think I can show how the project management group has generated over $4 billion in incremental revenues!”
Now, in real life, one would expect a pragmatic boss to get up and dance on the desk. However, in Frame 2 of Cartoon World, the VP responds as follows: “Oh goodness me! We had better keep this quiet; it will upset everyone. In fact, you better have your group cut back its efforts!”
Sound bizarre? Unfortunately, this is a characterization of a real-life episode in a Fortune 500 company. The company, whose name is understandably confidential, implemented projectized functional management. To measure the financial benefits of the corporate project management group, a momentum analysis was later conducted. The analysis compared and evaluated lead time to market before and after the implementation of project management.
The results? Time to market was reduced from 52 months to approximately 18 months. New products now enter the market faster, generate sales sooner, establish a stronger competitive position, and produce higher profits. The response within the company?
It's a Funny World. Shakespeare's view of life in As You Like It was “All the world's a stage, and all the men and women merely players.” Shakespeare, however, was not a project manager in a large functional organization. If he had been, he would have known that life is not a stage and the project team members and people around them are not actors. The fact is, all the world is a cartoon strip and we are but cartoon characters in the strip! In most large companies, the daily political maneuvering, manipulations, and reactionary responses form a rich field of irony and sardonic humor. Often our bosses and senior managers assume the role of cartoon characters, with all the associated exaggerated behavior characteristics.
Thus, although the results achieved by the corporate project management group were impressive—as was their method of measuring the project group's performance—the response of senior management and the group's peers shows that one's achievements may not always be welcomed with open arms. In fact, the project group is often perceived as a threat to existing functional and hierarchical groups.
Resistance to Innovation. Companies are recognizing the value of using multifunctional project management teams, empowered with executive-based authority, to perform large, cross-functional projects, a process known as projectized functional management. This process combines the expertise of traditional functional organizations with the speed, efficiency, performance measurement advantages, and entrepreneurial approach of professionally managed project groups. The bottom-line successes of the project approach have been the stimulus for the development of projectized functional organizations. For people within the industry, there are clear advantages and synergies in combining project formats with traditional functional organizational structures.
Unfortunately, others do not see the same picture. A study of project management groups in Fortune 500 companies, conducted at the Fortune 500 Benchmarking Forum in Anaheim, Calif., last year, indicates that communicating the financial benefits of project management to senior management and other corporate areas is the major project management-related challenge.
Figure 1. Project Management Momentum Study: Dollar Value of Reduced Time to Market
Figure 2. Financial Benefits of Reducing Lead Time to Market
The director of corporate project management at the company analyzed in this article sums up the situation: “Sometimes I feel like Snoopy standing out in the desert talking to the cactuses. The advantages seem clear; but the message is not always heard.” Then in a more pragmatic fashion, the director elaborates: “Most senior executives of corporations are driven by company profitability. Their immediate question often is, What's the bottom line? How can applying project management in my organization make the company more money?” Occasionally, the resistance is closer to home. The director adds: “Even when dealing with peer groups within my own functional area, project management is often perceived as a threat to existing work groups and functional hierarchies.”
This may sound like typical employee venting of frustrations. However, other project executives surveyed at the Forum supported the conclusion that running successful projects does not always enhance one's popularity within the organization.
The Need for Bottom-Line Measures. The situation is accentuated because, historically, project management groups have not always quantified and measured the bottom-line benefits of implementing cross-functional project management groups in their organizations. That's why numerous project management groups are recognizing the need to develop measurement methods. For example, the corporate project group described by this study manages over 100 freestanding projects that generate approximately $1.4 billion in sales per year. An examination was conducted of the group, competition, other industry leaders, alternative future organizational scenarios, and the internal and external operating environment. (Documentation and supporting data for this study is maintained by the author.)
The Momentum Analysis. A cornerstone of the analytical approach has been a “Momentum Analysis” of the profit-related results of the project management approach. The momentum analysis consists of establishing a benchmark of measurement and then comparing later results and efforts against this effort. This is done by examining several projects and determining when the projects began and when they ended. Key unambiguous milestones are established. The milestones can be defined carefully and compared with the benchmark of performance.
The benchmark was set at the point the group was inaugurated. Measurements were made of the amount of time taken to get a new product or service to market. Although the method of investigation is not precise, it does tend to give quantitative numbers for evaluating the effectiveness of an action.
As can be seen in Figure 1, the corporate project management group coordinated and participated in activities that dramatically reduced cycle time to market. Two years ago, time to market was 52 months. It currently runs at 18 months! The dollar value of projects the group is directly responsible for is approximately $1.4 billion per year. Added to this are several projects of an intangible nature and harder to measure. Many of these projects are integrated into larger groups of activities. Others are nonrevenue-producing, such as responding to regulatory dictates and building infrastructure for future organizational strategic moves.
Benefits of Reducing Lead Time to Market. The value of reducing time to market by even one day is phenomenal. Each day that time to market is reduced adds one more day of sales. By shortening lead time from 52 to 18 months, sales occur nearly three years earlier than they would have without the project approach. A quick calculation indicates that if the company obtained incremental sales of approximately $1.4 billion per year, this would amount to $4 billion for the 34-month lead time reduction!
As outlined in Figure 2, benefits accrue to the company in other ways. By generating sales sooner, money is made available for other investments. The time value of money is maximized. Furthermore, shortened time to market means that market position is established earlier. Incremental sales are obtained and higher profits occur by applying pricing techniques to capitalize on the market niche, limited competition, and initial high demand for the new product. Finally, marginal products are identified earlier in the design process.
- Time Value of Money. If one considers solely the impact of the time value of money, the results are dramatic. The money generated by the product sales can be invested in other income-producing opportunities. At a 10 percent interest rate and on a compounded basis, the incremental interest revenue available to the company would amount to approximately $597 million over the 34-month period.
- Improved Project Cycle Times. Reducing lead time to market offers other, more subtle benefits. Its effects are similar to increasing inventory turnover. A high inventory turnover means that the investment in inventory is small compared to the amount of resultant sales. By reducing time to market, the same number of people can complete more projects. Where previously a person might be involved in a project for, say, a year or so, now they will complete one in a few months and then move on to another. The cash investment in each project is reduced. Savings occur from (a) making project managers and team members available for other, higher-potential projects, and (b) eliminating the investment associated with the project development expenses for the extra months of development time.
- Faster Reaction Time. Reducing lead time to market gives the company capability to react faster to market changes. The organization has the confidence of knowing they can respond to market changes faster than their competitors and consistently be the first in the market.
- Marginal Projects Identified Sooner. Another unexpected but noteworthy advantage of the projectized functional management approach is that marginal or failing projects are identified and culled much earlier in the development process. The corporate project management group identifies and terminates projects in an average of three months. At the inception of the momentum study it took one year to terminate a clearly losing project.
Figure 3. Product Life Cycle: Impact of Project Management and Reduction of Time to Market
Truly Incremental Sales? Now back to cartoon world. One would think that such dramatic results would be greeted with great rejoicing. ‘Fraid not! In Frame 1 of the next cartoon, Project Director says to Functional VP: “So! Pretty good results, right? What do you think?” In Frame 2, Functional VP responds: “These claims represent a radical departure from tradition. I can only assume they are not valid!”
One response to the momentum study is the assertion that the sales are not incremental. The critics contend that all that has happened is that the sales occurred three years sooner than they would have otherwise. This logic is based on the assumption that competitors would not rush in to fill the marketing void. In other words, everyone would wait around while the slower companies took time to develop their product.
Of course, the consensus is that competition would supply the product demand. Hence, reducing lead time to market does generate incremental sales. Companies that are first to market obtain those prime sales that are only available early in a product's life cycle. Higher profits and market share are achieved as depicted in Figure 3.
The first products to be introduced enjoy the benefits of high demand and low supply or scarcity of the product. Consequently, an astute pricing policy will capitalize on this set of circumstances and maximize profits. Pricing becomes more competitive and profit margins decline as the market matures and competition arrives.
Products that are early in the market also have potential to carve out a niche and establish a stronger competitive position. Latecomers are relegated to the reduced and declining profits reflective of the maturity and obsolescence stages of the product life cycle.
It is important to note that the profits and market dominance just described are available only once in a typical product life cycle. The company that is first into the market achieves the benefit of strategic life cycle positioning.
Project Management: Just One Factor in the Equation. The final imaginary cartoon in our series shows the project director speaking to the VP of public relations: “Wow! Don't you think we should publicize the results of projectized functional management?” The VP of public relations responds, “Goodness, no! That would amount to singling out one group for credit in deference to all the other hardworking folks in the organization!”
When relating this incident, the director of the project management group chuckled and said that this was the one response that had a kernel of validity. The director stressed that in a large, complex functional organization, any reductions in cycle time and quick reaction to marginal products are the result of many factors besides the project approach. There is no way the project management group can take sole credit for the results. Nevertheless, the projectized functional management approach is a major force that ties many of these efforts together.
The results of the momentum analysis support the conclusion that the project management approach generates a broad venue of financial gains for corporations and organizations. However, to communicate the benefits to senior management, other corporate areas, and the general management public, project managers need to be cognizant of the political forces at work. Project management represents a threat to many existing organizational systems and structures. When dealing with senior management, project managers need to evaluate and promote the financial results of their efforts. It isn't enough to simply say that the project was satisfactorily completed: project managers must demonstrate how project management performance is superior to the traditional approach to conducting business in functional organizations.
Frank Toney, Ph.D., PMP, is a professor of strategic management at the University of Phoenix, and director of the nonprofit Executive Initiative Institute. He also administers the Fortune 500 Project Management Benchmarking Forum.
PM Network • October 1996