Measuring organizational value in the new economy
You will be introduced to a powerful new concept that takes the traditional close out and makes it more relevant to today's business environment. We will begin by setting the stage and discussing the factors that make our economy different today than yesterday: competitive pressures, globalization, technology and an ever increasing demand by the stakeholders for ROI.
Next we will present the concepts around strategy development, business case components, and introduce Jack Marchewka's concept of MOV (Measurable Organizational Value). We will take this one step further and discuss MOV (Measurable Organizational Value) as part of strategy development, portfolio management, and project execution. We will present the view that the traditional close out is not sufficient, given today's business environment, and more importantly, that this concept is critical to organizations that want to ensure their projects are delivering value to the organization.
The paper draws a parallel between MOV and the gap that exists in organizations today (the inability organizations have to take strategy and translate it into action that delivers expected business benefits). This discussion will include how MOV assists organizations to determine if strategy was truly translated into action (i.e. Projects aligned with the vision of the organization), as well as whether or not these projects delivered the bottom line impact needed – value for the organization and for the stakeholders.
Introduction – Setting the Stage
Makes sense – in fact a no-brainer that after putting all the time and effort to see if an investment will produce a worthwhile return and deliver expected benefits, you would want to determine if you've actually received those after the project is over.
A huge amount of business investment is spent on the execution of projects. In the US, for example, roughly $2.3 trillion is spent per year. Still, the vast majority of organizations don't have a strategy for managing projects to ensure they match the needs of the organization and capture full value. This creates a high probability of underperforming results and even worse, many organizations do not even know which investments are paying dividends and which are losing money.
This situation is all too common among organizations of all sizes, both here in North America and worldwide, although it doesn't need to be. According to a 2004 Kennedy Information Report (Daw, 2004), 70 per cent of organizations grapple with the inability to act on their strategy. The gap between strategy and execution appears to remain significant – evidenced by the expanding focus on trends such as portfolio management, business case development, benefits realization, and different approaches to strategy development such as balanced scorecard.
The 2004 Chaos Chronicles report from the Standish Group (2004) on IT project investments shows that the average project cost overrun was 43 percent, and there is a 15 percent overall project failure rate. The same report shows that more than half of projects were considered challenged, meaning they went over on cost, took too much time or missed on their product deliverables, or a combination of all three. The evidence of these challenges and especially cost overruns shows a number of compounding problems. First, few companies are actually reserving funds as a contingency for projects that exceed their budgets, though there is a compelling need to do so. Also, overly optimistic business case planning, unforeseen risks, and poor process execution are key reasons cited for not achieving targets.
So the pressure is on. As companies increasingly launch a wider range of project types and have a far higher number of projects than in previous decades, there is a need to rein in and give focus to an ever more disparate array of projects. Ensuring that we not only focus on justifying why we undertake a particular initiative and execute it correctly but ensuring we are achieving the value that needs to be realized.
This paper will present an overview of the tie-in from strategy to execution and back to strategy through effective tools, techniques, and processes which can help drive value realization.
The Gap between Strategy and Execution
One of the challenges that we at SPM Group have seen with our clients is the gap between strategy and execution. Today, strategy development is not what has been in the past. There is an increasing need for speed, agility and quick thinking. Developing strategy is no longer linear nor a one time annual event – it needs to be flexible and adaptable to the changing environment and global economy. We also have discovered that real strategies are rarely made in conference rooms, but more likely to be cooked up in hallway conversations, casual working groups or quiet moments of reflection on long airplane flights.
On the other side, in execution it became increasingly apparent that the process of developing strategy could not be disconnect from planning execution. And we need recognize to that execution is as important as strategy formulation. A strategy is as good or as bad as its execution. In the book Execution: The Discipline of Getting Things Done by Bossidy and Charan (2002) they believe that EXECUTION is the great unaddressed issue in the business world today.
Kaplan and Norton undertook a study in 2002 looking at two key divisions – IT and HR. They discovered that 2/3 of organizations are not achieving alignment between their HR and IT activities and enterprise strategy: From their point of view strategic alignment is critical and is the foundation of value creation in the new economy.
So what is misalignment between these two key components? We believe there are a number of enablers that help to fulfill the gap. Exhibit 1 shows the connection and suggests that there are number of enablers required to fill that gap.
Exhibit 1 – The Strategy Execution Enabler™
The enablers ensure the connection of strategy to execution and in particular drive out portfolio management which includes prioritization of initiatives (through a series of measures, metrics and strategy statements), risk and capacity management. This paper will focus on the connections to measuring value from strategy through to execution and back.
Balanced Scorecard Foundation
A new approach to strategic management was developed in the early 1990's by Drs. Robert Kaplan and David Norton(Kaplan & Norton, 2004, 1996). They named this system the ‘balanced scorecard' (BSC). Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance' the financial perspective.
The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.
Exhibit 2: Balanced Scorecard Quadrants
This approach to strategy development has been embraced by a growing number of organizations and reflects the trend of managing the growth, development and direction of organizations through strategic initiatives – projects. Exhibit 2 outlines the 4 key quadrants.
From the perspective of measuring organizational value the Balanced Scorecard becomes the foundation. It recognizes at the highest level what value, measures, metrics, and targets the corporation expects to achieve. This then leads into scorecards that can be created at the portfolio, projects, operation, and individual levels.
Because the Balanced Scorecard requires every action to answer to established corporate goals, using the Scorecard will help promote alignment and eliminate projects that contribute little or no strategic value. Implementing an established valuation program like the Balanced Scorecard is a significant change in the way business cases are created and tracked post project completion.
The output from the BSC becomes key input to the process of portfolio management where initiatives are screened, prioritized, registered, and then moved into execution.
Business Case and Value Realization
During Strategy Development a list of potential initiatives to meet the documented objectives would have been created. This becomes a list of projects that will need to be put through the portfolio management framework to screen, prioritize, and register projects to join into the existing portfolio and determine their place in delivering on strategic objectives.
To conceptualize and initialize a project, the first step would be to create a business case. The business cases for projects will be further input to the screening and selection process. A business case provides an analysis of organizational value, feasibility, costs, benefits, and risks of several proposed alternatives or options. The purpose is to provide senior management with information needed to make an informed decision.
Exhibit 3: Business Case Process
Exhibit 3 outlines the overall process for business case development. For the purpose of this paper we will be focusing on Step 1 which is defining the measurable organizational value (MOV). To provide real value to an organization projects must align and support the organization's strategy and objectives. In Jack Marchewka's book: Information Technology Project Management: Providing Measurable Organizational Value (2003)he presents the MOV concept as the first step in any business case and its need to clearly tie back to the organization's goal and strategy. As the name implies the development of the MOV must:
- be measurable: measurement will give focus for the project not only in terms of its actions but how success will be measured during and at the end of the project as well once deployed and in operation.
- provide value to the organization: resources and time should not be spent against any project unless it can assure that value will be provided
- be agreed upon: the MOV must set expectations for stakeholders. While it is not easy to agree to goals so early in the process it will be time well spent.
- verifiable: at the end of the project (closeout) the MOV should be used to determine if the project was a success.
The strength of this approach ensures a link back to supporting the organization's strategy. I would further push the approach to tie back to measures, metrics, and targets of the BSC and, in essence, view the MOV as a Benefits Realization Scorecard. This becomes the way to measure the project's success not only at the end of the project but, as it is deployed and operational.
Marchewka presents a six step process to develop a project's MOV:
Step 1: Identify the desired area of impact. One way would be to adapt criteria from the BSC as well as issues around risk and return.
Step 2: Identify desired value of the project. Answer 4 questions to help determine value:
a. Better: what does the organization want to do better?
b. Faster: what does the organization want to do faster?
c. Cheaper: what does the organization want to do cheaper?
d. Do More:what does the organization want to do more than it is currently?
Step 3: Develop an appropriate metric. Develop metric(s) that provides the team with directives, set expectations, and provides a means for evaluating the project is a success later on
Step 4: Set a time frame for achieving the MOV. Keep in mind that the scheduled completion is not the same thing as agreed upon timeframe for achieving the MOV.
Step 5: Verify and get agreement from the stakeholders. This is a litmus test to ensure that the MOV is accurate and realistic.
Step 6: Summarize the MOV in a clear, concise, statement or table. This will help to get final agreement and verification, provide directive to the team, and set explicit expectations.
The MOV as a core component of the business case document will form the basis for the screening process within a Portfolio Management framework (Exhibit 4).
While many organizations are getting better in producing business cases, there is still a need to put process during, at project close out and during deployment/operational execution to measure and communicate how well the projected benefit of key initiatives are achieved.
The organization's strategy and BSC acts as a key foundation component of Portfolio Management and makes the identifiable connection of projects to strategic initiatives. This is also where the business case and in particular the MOV plays a significant role.
Exhibit 4 demonstrates an overall framework for Portfolio Management. The business case and MOV along with the BSC or other measures/metrics will be used in Stage 2: Screening. The criteria for screening a set of projects are very similar to the analysis and selection of project alternatives undertaken in the business case process. Selection criteria will be the same across all projects going through the screening process – against the organization's strategy statements (in case of BSC this would be against metrics for the four core quadrants; finance, customer, internal process and learning and growth, as well as other criteria including levels of risk, complexity, size and return. Today there are many software tools that allow you to be much more objective in making the selection as well as effectively managing the entire portfolio.
Exhibit 4: Project Portfolio Management Framework
Putting it all together
While we have focused on the importance of putting a project in context of the organization's strategy, and ensuring that measurable organization value (MOV) is created for each project, in order to help select projects for execution the real work begins during project execution, closing out the project, and then once project deliverables are in operations. This is where we can truly measure, track and ensure value realization.
The MOV created during the business case and, once approved, becomes cast in stone – not to be altered, but be used to monitor, review, and evaluate. Exhibit 5 shows the connection of the MOV – Benefits Scorecard to the various stages from strategy to execution and back to strategy.
Project Planning & Execution
The MOV also plays a key role during project planning and execution. It becomes an input to a number of planning components and a decision making tool for managing risk, contingencies, and change requests. It remains as a constant or focal point to manage projects with success criteria in mind.
Scope Verification: When building the project plan, defining project scope is a key component to ensure the work to be done as well as ensuring it delivers the expected results and value to the organization. Verification provides a means to ensure project deliverables are completed to standards of the deliverables definition. It should ask: are the project's MOV clearly defined and agreed to, are the deliverables tangible, verifiable and do they support the project's MOV.
Exhibit 5: Connecting MOV from Strategy to Execution
Developing the WBS: The WBS provides the framework for developing the tactical plan to structure the project work. It should be a deliverable oriented hierarchy while supporting the project's MOV. This is different from the traditional view. By confirming the MOV inclusion we are ensuring the WBS includes only tasks/activities that allow for the delivery of the project deliverables.
Risk Management: The core of the project risk framework is the MOV. As a measure and definition of project success it provides the basis of examining all possible risks.
Project Execution: During project execution decision making, change management, and go-no go decisions should take the MOV into account. This helps to put choices in context as well as allowing project teams to make choices perhaps not considered in the past. A good example is the development and use of project contingency funding to allow for overage when value is assured of being delivered.
Closing out the Project
As the project comes to closure and makes the transition to operational deployment MOV continues to play a significant role. The typical approach is conducting a number of different project evaluations and reviews – individual performance, postmortem review and project audit. The new addition is the evaluation of the project's MOV.
The MOV was defined at the beginning of the project and played a significant input to the screening process in the portfolio management framework. It also supported the detailed project planning and decision making points during execution.
The close of the project is at the official hand off of the deliverables to the operational side of the business. Often, MOV cannot be readily determined at this point. Many benefits may require weeks, months before they are realized.
An initial review of the MOV at close out would be useful to put the completion of the project in context and to develop a plan for tracking MOV and its value realization during deployment and ongoing operations. By putting a tracking regime in place it will ensure that the organization is aware of what information needs to be collected, who will do it, who has responsibility to ensure it is done, and how and when the information needs to be collected. This ensures that a mechanism is in place to realize and track the MOV.
Deployment and Realizing the Benefits
Since most benefits and organizational value expected will not start to materialize until after the completion of the project, it will be necessary to conduct a review or a series of reviews to check that the expected benefits and value targets to the organization are being achieved. Auditing of benefits achieved against targets should be initiated immediately after the latest target time recorded in MOV. Typically, reviews would start 6-12 months after completion of the projects when evidence of benefits is available.
Using the tracking regime established during close out and MOV in scorecard style as discussed earlier in this paper serves as the core monitoring and management tool and provides continuity from initiation to operations. Beyond ensuring value measures are realized there is an opportunity to identify areas for additional value which may not have been originally identified. This provides opportunities for additional initiatives - in other words, back to strategy for confirmation against business objectives and BSC measures and metrics. This completes the circle.
In today's new economy and business environment the need for value realization on strategic initiatives is a critical success factor for organizations. It is essential to use all key enablers that will close the gap between strategy and execution. This paper presented the concept of the MOV as originally presented in Jack Marchewka's book and developed it further. It included concepts and discussion in how MOV assists organizations to determine if strategy was translated into action, and linking back to strategy, through further opportunity evaluation during the post implementation review process.
The challenge is for organizations who truly want to be great, to implement the rigor involved in these concepts, and reap the benefits that can be realized with this approach.
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© 2005, Bryan A. Vermander
Originally published as a part of 2005 PMI Global Congress Proceedings – Toronto, Canada