From making sense to making cents
measuring project management ROI -- part 1
by Joan Knutson, Contributing Editor
ONE OF THE HOTTEST topics today is how to measure the success (or lack thereof) of the project management discipline within an organization. In my view, there are four plateaus that allow us to measure the return on investment that companies are making in the implementation and maintenance of project management.
Measurement Plateau 1 – Comprehension and Acceptance. Often evaluated by seeing, hearing/talking, feeling, smelling (the five senses) that project management is being used.
Does investment in project management pay off? That can be—quite literally— the $64,000 question.
Measurement Plateau 2 – Application. Judged by the frequency and accuracy with which the technical and socio-components of project management are applied.
Measurement Plateau 3 – Influence on the Business. Assessed by quantifying the business results that have been produced by the existence of the discipline of project management.
Measurement Plateau 4 – Return on Investment (ROI). Appraised through the use of a standard return on investment series of calculations.
Measurement Plateau 1 is the least quantifiable and relies more upon subjective observation, while Measurement Plateau 4 is derived from solid mathematical calculations of the return on investment based on credible, quantifiable data. In other words, as one moves from Measurement Plateau 1 to Measurement Plateau 4, one moves from measuring how the environment “senses” the success or failure of project management to how the environment can be shown the additional “cents” (and dollars) attained through the use of the discipline of project management.
This month, I'll focus on the fourth plateau, Return on Investment. Next month, for those folks who do not have an environment in which they can effectively use a highly quantifiable return on investment approach, we will share techniques to employ Plateaus 1, 2, and 3, with almost as much power and credibility.
Joan Knutson is founder and president of Project Mentors, a San Francisco-based project management training and consulting firm. She can be reached at 415/955-5777. Send your comments to firstname.lastname@example.org.
Plateau 4: Return on Investment. Generically, return on investment evaluates the earnings derived from a venture as compared to the investment expended to complete the venture. Obviously, in order to make the venture viable, earnings need to be equal to or (preferably) greater than the investment.
In the project management realm, the objective is still the same: to determine the benefits (expressed in monetary terms) of employing the project management discipline as compared to the monetary costs of implementing and/or maintaining that discipline.
Let's address this by looking at (1) a review of the return on investment series of calculations; (2) consideration of the categories of success upon which the discipline of project management might be evaluated; (3) consideration of the categories of benefits and the categories of costs that could be used to complete the ROI calculation; and (4) an example (as explained in the sidebar).
ROI Calculations. There are two ways to prove that monies spent to sustain project management in an organization are generating a positive return.
ROI Worked Example
Success Criterion: There is a documented project management process, and it is being applied.
Benefits (Suggested Metrics): Appropriate project management outputs are generated. Target value: 70 percent of projects have the project management documents in the appropriate phase, which will reduce the number of status review meetings required.
Costs: Expenditure of core team salaries and benefits to develop and roll out the project management process.
Monetary benefits from status review meeting reduction:
Value of one meeting = $1,000
Annual number of meetings for one project = 50 (one per week); half of the meetings will not be required because we are following a standard process; therefore total number of meetings required per project = 25
70 percent of the total number of projects = 10
Reduced number of meetings = 250
Savings are $1,000 X 250 = $250,000
Monetary costs to develop a project management process:
Labor (indirect; i.e. internal staff) $100,000
Labor (direct; i.e. outside consultant) $50,000
Materials (binders, repro) $5,000
Monetary costs to maintain a project management process:
Labor (indirect; i.e. internal staff per year) $20,000
Benefit-Cost Ratio (BCR):
For every dollar invested, $1.25 has been returned.
Return on Investment (ROI):
In other words, the process has generated a 25 percent return on the investment.
The first option is a dollar evaluation called Benefit-to-Cost Ratio. This calculation determines dollars returned for every dollar invested. If the number is a positive, the venture is pulling its weight. If the result is a negative, the venture is not returning its investment. The specific formula is:
Example. If the $ Benefits were $100 and the $ Costs were $50, the Benefit-Cost Ratio would be $2.00. This would mean that for every one dollar invested, there were two dollars returned. Not bad, getting double one's money back for an investment!
The second option is presented as a percentage. This calculation determines the percentage return for every dollar involved. A result of 0 percent means that the investment has reached breakeven; in other words, the dollars spent have just been recouped, no more and no less. If the result is less than 0 percent, the investment has not yet paid off. If the result is greater than 0 percent, the investment has paid itself off, and even more. There are two steps involved in this calculation:
First, determine the Net Benefits (NB), which indicates whether the costs are more or less than the benefits expressed in monetary terms.
$ Benefits – $ Costs = Net Benefits (NB)
Second, compute the ratio of the net benefits as compared to the dollars (cost) which were expended in order to attain those net benefits.
Example: Taking the example above in which the $ Benefits was $100 and the $ Cost was $50, the Net Benefit would be $50 and the ROI % would be 100 percent. In other words, not only has the venture broken even (reached the 0 percent mark), but it has returned 100 percent on its investment.
Either of these calculations, presenting a dollar return or a ratio or percentage return, should be acceptable to convince interested parties that the project management discipline is making “a positive difference” within the organization.
Categories of Success for Project Management Evaluation. There are six possible criteria upon which the discipline of project management might be evaluated:
Documented project management exists and is being applied
Project customers are more satisfied with project performance
Improved accuracy of project planning
Improved ability to monitor project status
Effective mechanism in place for collecting and disseminating lessons learned (which equals improving project performance)
Effective process for documenting change of scope/requirements and their impact on the project (which equals reducing the number or requests and, for those received, assuring payment for additional work requests [effort]).
Categories of Benefits and Costs to Compute ROI. The goal is to place a value on each unit of data that can be collected to measure project management success or failure. This data can relate to single projects or to specific project management initiatives, which will ultimately be rolled up to a composite figure. This composite figure defines the success of the project management discipline as a whole. We can either evaluate the quantifiable success (or failure) of each project that is performed and ultimately roll up the varied Dollar Returns or Percentage Returns into a composite figure. Or we can isolate varied project management initiatives similarly in order to determine their dollar or percentage return and roll those figures up to a final proof of success. Examples of project management initiatives are efforts such as a project management methodology, an organizational infrastructure, an automated support suite.
Because each of us work in such different industries, here's a generic list of sources from which both $ Benefits and $ Costs can be ascertained.
Sources of Generic $ Benefits. The list of generic dollar benefits ranges from very tangible dollar benefits to more subjective, yet valid, units of measure:
Contribution to profit
Savings of costs
Increase in quantity of output converted to a dollar value
Quality improvements translated into the three bulleted items above.
Value of time; reduced employee effort interpreted into loaded labor dollars (salary plus benefits)
Comparison to various benchmarks: your organization's historical database(s); similar organization's history; professional trade organizations; government statistics
Evaluation gathered through questionnaires from project sponsors, customers, management steering committee, project managers, project team members, and internal or external subject matter experts.
Sources of Generic $ Costs. This list is much more tangible and includes less subjective data than the $ Benefits list.
Cost to design and develop, preferably prorated over the expected life of the program
Recurring costs to maintain the program
Cost of materials
Cost of quality
Cost of travel and expenses
Cost of facilities
Cost of management
Cost to train—loaded labor budget (salary and benefits) of the participants
Administration and overhead costs.
BENEFIT COST AND/OR return on investment analysis take time, effort and some ingenuity. However, if they are necessary to convince the powers-that-be to approve or continue funding the project management initiative, it will be worth every moment, and every cent.
Next month we'll look at the other three Measurement Plateaus: Comprehension and Acceptance; Application; and Influence on Business. We'll also propose a process to gather, analyze and report this data
Reader Service Number 5027
JANUARY 1999 PM NETWORK