Management of value as PPM driver
There is a general consensus in the field of Organizational Project Management (OPM) that programs and projects, whether organized and managed in portfolios or not, are means rather than ends to realizing business strategy. (PMI, 2008 and OGC, 2009)
Their primary aim is to create value for organizations that undertake them. However, the focus of program and project managers, as well as the PMO staff that gives them support and guidance, is to explicitly deliver products, services, and results within a scope, cost, and deadline previously established, following the expected quality requirements that also involve, implicitly, benefits and “value for money” considerations.
The analysis of the results obtained, however, demonstrates that undertaking projects framed by the above-mentioned explicit aspects does not guarantee a consistent generation of value.
In the organizational context, we can define this “value” as being the relationship between benefits, costs, and risks that are incurred for conducting a business activity; these can be temporary—for programs or projects—or routine—for day to day operations. The project must integrate seamlessly in the users areas, and align itself to the interests of stakeholders, some of who are beneficiaries and/or decision-makers, to obtain optimal value.
Such integration is not the responsibility of project and program managers alone. There are other actors and governance processes involved.
The PMO structures should also adapt themselves, incorporating new services and functions, and change the focus-of efficiency (scope, time, cost, and quality) to effectiveness (relation between benefit and cost under uncertainty), thus becoming effective support structures of value creation. In other words, the PMO (with its focus on internal factors, such as scope, time, cost, quality, resources, and risks management) should evolve into the Value Management Office (VMO), which focuses on the business case, benefits, and value realization (Williams, 2009).
The CURRENT PARADIGM
There are various perspectives and approaches to organizational project management. Different institutions of various countries deal with the subject. Among them are:
1. PMI (Project Management Institute)
Initially the purpose of this institution was to create protocols and standards of project management with a view to increasing the professionalism of individuals within organizations who were practicing in this field. However, over the course of the four decades of its existence, PMI has been broadening its focus, and currently aspires to make the practice of project management more comprehensive and organizational, as mentioned in its envisioned goal (PMI Board of Directors, 2011, p.7): “Worldwide, organizations will embrace, value, and utilize project management and attribute their success to it.”
In many countries, besides the United States, PMI guides, standards, and models are either officially (such as ANSI in the U.S.) or informally adopted by governments and private initiatives, as well as Non Governmental Organizations, as a reference for organizational project management in their activities.
2. Office of Government Office (OGC) — a Cabinet Office as of 2010.
The British Government has been developing and disseminating best management practices through the Office of Government Commerce (OGC), an autonomous body of the Ministry of Finance. This entity and its functions were moved into the Cabinet Office, to become part of Her Majesty's Government since 2010 (see www.cabinetoffice.gov.uk). The goal of the Cabinet Office is to promote qualification, training, and professional maturity of services provided by suppliers and other governmental or private organizations.
With this end in mind, Her Majesty's Government has an extensive portfolio of maturity models, best practices guides, and portfolio, program, project, and risk management (P3RM) methodologies and offices models.
What fundamentally distinguishes the OGC approach of PMI from the IPMA approaches is its pragmatism in terms of business, explicitly reflected in its methodology orientation, and not just by the standards of best practice. So while the PMI guides and standards describe a series of best practices or “what to do,” the British references teach us “how to do” them to obtain optimum results.
Regardless of the chosen reference, there seems to be a clear consensus on some generally accepted principles. All agree that organizations perform temporary and routine activities to maintain, enhance, or create new values for their stakeholders based on strategic considerations.
Exhibit 1 summarizes the general paradigm of organizational management of projects.
Exhibit 1. Organizational Project Management Model and Value Chain Source: adapted from OPM3® (PMI, 2008, p. 12)
Organizations act according to external and internal stimuli and trace strategies that supposedly would be aligned with the philosophical values, vision, and mission statement of the owners or managers of these organizations. General business objectives are broken down into more specific goals and objectives, which should be measurable and verifiable using appropriate key performance indicators. To achieve these goals, the organization's leadership defines strategic initiatives that are later deployed following action plans.
These plans contain not only temporary initiatives—programs and projects—but also day-to-day operations. These operations should sustain the organization, while programs and projects provide the transformation or the creation of new value-generating perspectives aligned with the nature and purposes of the organization. The business drivers may be motivated by public interest (Government), private interest (companies) or causes of the not-for-profit organizations (NGOs).
A performance management system can set goals for both costs and resources required, and the benefits (both tangible and intangible) that strategic initiatives should generate. In addition, the organization should establish an investment budget, funding systems, and cost control systems for the purpose of monitoring and control. Based on budget, functional areas or business units propose programs and projects that, if approved and undertaken, will provide the capabilities and outputs necessary to achieve organizational goals and objectives.
For this purpose to be feasible, the organization must choose projects and programs correctly and run them in a proper manner and integrate them into operations, i.e. deploy them, so that the desired benefits are obtained. Exhibit 2 shows the business goals and its tactical, operational-level deployment.
Exibit 2. The conceptual framework for project strategic alignment components
Source: Shenhar et al. (2007, p.8)
Business success indicators measure the benefits realized through the use of the capability or product created by projects. It is assumed that strategic objectives are set and that there is a causal relationship between deliverables of projects, on one hand, and the results and benefits achieved, on the other. In addition, aspects of change management and operational readiness should also be contemplated so as to maximize results.
Exhibit 3 exemplifies these aspects in a hypothetical project of an e-commerce system for a manufacturing company that has not yet used this channel to sell its products. It is obvious that the system deployment alone is not enough to achieve the goal. Without training of sales administration department staff, or without receiving requests from clients and without operational logistics to meet these requests in any case, there will be no increase in sales or profits that can achieve the return on investment made in the project.
Exhibit 3. Outputs, Outcomes, Benefits, and Business Value Causal Relationship
Source: adapted from PRINCE2 manual (OGC, 2009)
In the same example, the project team's responsibility will end, in most cases, after the transition and training of users of the new system. But the generation of value occurs only if there is effective service of electronic applications. Therefore, there is a need for operational readiness to meet these additional infrastructure and capacity requirements.
Portfolios, programs, and project management maturity models, such as OGC P3M3®, or PMI's OPM3®, as well as process improvement methodologies, such as Lean and Six Sigma, could be used to increase the effectiveness of organizations in performing their routine and, especially, temporary endeavors.
At this point, the question that arises is: Why do most projects fail totally, or partially, to meet the expectations of stakeholders? In their research, Shenhar et al. (2007, p.13) listed a number of reasons why this paradigm doesn't work.
- Most projects are not managed strategically. Initially, a project is justified by a business case, but, throughout its life cycle, the justification of the project is no longer checked (nor is the benefit realization confirmed).
- Alignment must be achieved through the establishment of a hierarchical relationship between: strategy, spirit (project culture), organization, processes, and tools. The emphasis is often placed only on the last three and, as a result, the strategy and culture needed to accomplish the task are forgotten or underestimated. In order to align activities and motivate project teams, each project needs to create its own team spirit.
- Strategic alignment is a two-way process: Business strategy impacts the projects, and the results of the projects may cause a positive impact on business strategies. Project performance indicators rarely monitor business indicators, however, and therefore, the misalignment is not detected in a timely manner.
- Each project can have its own strategy. This derives from the perspectives, positions, and plans that provide better results for the project. Different business strategies require different project strategies;, in addition, the project context requires specific strategic consideration for the project itself.
- Success in projects is a multidimensional strategic concept. We must go beyond the scope-time-cost triangle to consider a project to be successful.
- The most effective driver is called strategic focus, based on strategic alignment for value generation as a result of integrating the correct strategy, operational efficiency and effective leadership.
- The most successful projects have a few things in common. Beyond strategic alignment, they enjoy total support by senior management, rely on existing knowledge within or outside the organization, and have highly motivated and excited teams.
The above-mentioned findings validate the hypothesis that value should be the main driver for project, program, and portfolio governance and management.
Concept of Enterprise Value
We mentioned in the general paradigm of management that the focus should be on the generation of value. However, what is the concept of value that we should adopt in the context of organizational management of projects?
Value is a measure of relative worth, importance or utility that one attributes to a required good or service. Although value is normally expressed in monetary terms, price and value may not be synonyms.
Value is established purely arbitrarily through preset convention. In other words, value is a highly relative and subjective concept; it depends entirely on the point of view of whoever evaluates that value, and on the objectives and interests of whomever make decisions or influence the processes as subject matter expert or advisor.
Value is closely associated with other economic concepts, such as theories of subjective expectations and usefulness. The multi-attribute conceptualization theory (Saaty, 1980) permits evaluating and comparing both tangible and intangible benefits, and calculating a composite optimization metric that helps to reach a consensus when evaluating options. This theory applies to portfolio management, specifically in selecting, prioritizing and balancing the portfolio with value as an optimization criteria; it can also be applied to a wide range of decision-making and prioritization processes in the context of programs and projects, covering areas such as scope (value engineering of the solution), risk evaluation and procurement options.
In an organizational context, we can define value as being the relationship between benefits, costs, and risks that are incurred for conducting a business activity, which can be temporary (program or project) or routine (day to day operations).
In Exhibit 4, the satisfaction of needs also incorporates wishes and expectations. However, we must distinguish between the needs and satisfaction of desires, because, although these desires may be perceived as advantageous to some stakeholders, they should not necessarily be satisfied since they don't necessarily generate something useful for all the stakeholders involved.
Exhibit 4. Triple Balance: Stakeholders Benefits, Resource Efficiency and “Value for Money”
Source: OGC (2010, p. 39)
Another important point is to consider not just (1) the benefit/cost, but also (2) the balance of meeting the interests of various stakeholders and (3) use of scarce resources, all of which require a prioritization of the benefits to be generated. In other words, which of these three areas of concern maximizes business benefits? The value is maximized when all three balances are achieved.
Benefit is defined as “a measurable improvement resulting from an outcome perceived as an advantage by one or more stakeholders, and which contributes towards one or more organizational objectives” (2011, OGC Glossary p. 283).
Historically (Bouillet, 1878, p. 209), the idea of a benefit is linked to the reward given to someone for something that was well done. The term comes from Latin—benefice (bene facere)—and came into use after the establishment of the barbarians in the Roman Empire. Originally, the term was applied to land that the Goths and Lombard Kings donated to their leudes (“vassals or followers of the king”), as a reward to those who had distinguished or “done well” in battle. This practice is the originator of the feudal system.
In the organizational context, however, the benefit might be defined as a measure of value, either tangible or intangible.
Exhibit 5. Types of Value
Source: MSP ® (OGC, 2007 p. 71)
Exhibit 5 presents some examples of benefits associated with tangible or intangible values, which, if identified, planned, and monitored, can justify the launch of programs and projects or maintain certain operations.
Regarding the resources of organizations, given that these are almost always limited, efficiency in use is a metric for increasing value. However, one needs to decide between generating more benefits with the same resources or employing fewer resources to generate the same benefits through more efficient solutions. There is, therefore, an efficient frontier (see Exhibit 6), based on generating the most value per unit of money spent (Value for Money) that can guide the decisions to be taken.
Exhibit 6. Optimizing portfolio by using efficient frontier concept
Source: Merkhoffer, 2012
Value management is a process that seeks to maximize value through the alignment of goals of programs and projects to the requirements of key stakeholders. It involves a “systematic method to define what is ‘value’ for the Organization, communicating it, clearly through portfolios, programs, projects and operations” (OGC, 2010). The concept of value, as defined in MoV™ (OGC, 2010), applies to all kinds of organizations.
The Role of Value in Decision Making
According to the PMBOK® Guide (PMI, 2008), organizations start projects motivated primarily by three types of needs:
• Business opportunity, i.e., potential market demand, customer RFP/RFQ, etc.;
• Problems to be solved, such as bottlenecks in production, uncompetitive cost, or technological change;
• Mandatory – compliance to internal (such as new corporate governance guidelines or adoption of sustainability practices) or external (security, health, environmental, and legal requirements, for example) needs.
The criteria for project selection are usually defined based on the merits of the products or capabilities resulting from the project, in terms of business value generation. These criteria can include all possible interests of the company (financial return, market share, public perception, etc.) but also the risks, including those inherent in the business itself and those arising from the implementation (or non-execution) of the project. It is generally accepted that organizations tend not to approve projects whose benefits do not outweigh their costs, considering that the benefits can be measured in non-financial or financial terms.
Value is the criterion for decision-making, not only during the authorization phase of the project, but also throughout the project life cycle; value is also the basis for confirming the resulting benefits, which is usually done when the product is delivered and the benefits are realized.
These benefits can be generated long after project delivery, particularly intangible benefits. Therefore one should check the expected value generated long after the project is officially closed. Figure 7 describes the manner in which the expected value is conceived, its use in decision-making and, finally, its use as a criterion for validating the decision. This figure also shows how benefits and results are produced and confirmed.
Exhibit 7. Value as a Decision-Making Driver
Source: the author
In the pre-project phase (see Exhibit 7), the project manager may not be present. So it is up to other collaborators involved in the portfolio management process to prepare the business case and make the analyses that will facilitate decision-making by executives or project sponsors. A business case is a recommendation to decision-makers to choose a particular course of action for the organization, supported by an analysis of its benefits, costs, and risks, compared to realistic alternatives, and an explanation of how best deploy the action (Gambles, 2009). According to the same author, a business case is not a neutral document, since it defends a certain course of action. And, in order to be convincing, it needs to be well substantiated based on reliable estimates of costs and benefits and a good management scheme for risks.
In the case of projects with multiple stages, the business case can be reviewed periodically to ensure that the project is going in the right direction to deliver the business benefits. In the early stages of the project life cycle, the use of periodic reviews of the business case by the sponsoring organization also helps in confirming that it is necessary for the organization (PMBOK® Guide, PMI, 2008 p.76, see also OGC, 2009 Business Case theme).
Exhibit 8. The Role of a Business Case in the Project Life Cycle.
Exhibit 8 shows how the role of the business case changes throughout its lifecycle. At the design stage (1), it justifies its approval, establishing its merits in terms of attractiveness (relationship between benefit and cost), but also technical feasibility and the possibility of realizing its benefits given the resource constraints vis-à-vis the existence of other ongoing projects in the organization.
In the development phase of the solution (2), the business case is validated against detailed plans, and integrates the baseline performance benchmark for the project, which consists of schedule, budget and resource plan, as well as the benefit realization plan.
During implementation of the solution (3), change requests and progress variations are evaluated to verify that the business case benefits still outweigh the costs, and the business case still maintains a tolerable risk exposure to realize those benefits. At the end of the project (4) or sometime after the closure (5), the benefits are accounted for, comparing the business benefits realized and total costs incurred to meet the baselines, which reveals whether the original business case was realistic and if the decisions taken throughout the project life cycle were the right ones.
Principles an Processes of Value Management
The OGC (2011) has defined seven universal principles of value management, compliance with which ensures the optimization of value:
1. Align with organizational goals.
All activities performed in an organization, whether programs/projects or routine transactions, should be aligned with organizational goals. Programs and projects are approved and deployed to create, enhance, or maintain the value of the organization, so they should contribute directly or indirectly to the achievement of organizational goals. The activities of each of these initiatives (and also the operational routines) must add value; otherwise, they should not be performed.
This principle can be even more effective if the strategic management is able to clearly define the organizational goals and objectives in order to maximize what Garfein (2009) calls “strategic throughput” when referring to the organizational capacity to generate value (see Exhibit 9). According to the author, you must optimize the strategic management and the management of the portfolio of programs and projects, but also the management of day-to-day operations—aligning all three together to maximize the enterprise value.
Exhibit 9 – Strategic Throughput
Source: Garfein, 2009.
2. Focus on the roles and the required results.
Before proposing a solution, you need to check what are the goals to be achieved, i.e., what are the benefits that you want to achieve based on the strategic objectives of the organization. This approach clarifies the expectations and stimulates innovation.
These requirements are best expressed by well-defined business functions that refer to purpose, usefulness, and required capacity—and not to the deliverable itself (solution). Functions do not apply only to physical products, but also to abstract concepts. For example, the function of the doorknob of a door is to permit the opening of that door; the function of project management methodology is to facilitate planning and controlling projects and hence reducing their risk exposure.
The functions are organized hierarchically. Those related directly to the objectives of the program or projects are called primary functions, while those related to other functions are called secondary, tertiary, etc.
According to MoV™ (OGC, 2010), primary functions area also called “value drivers” that connect the generation of value to the strategic objectives of the organization. These drivers constitute criteria for assessing the success of the project, because, if they are fully served, they will satisfy stakeholders’ needs and expectations.
Since not all drivers have the same value, importance tree construction obeys a weighting principle, according to their driving contribution to maximize the overall value of the project. Consequently, a hierarchy named “value profile” makes it possible to visualize the benefits of the project, bearing in mind the strategic objectives of the organization.
3. Balancing variables to maximize value.
Basically, three balancing exercises are required to maximize value:
a. Reconcile needs and viewpoints of the various stakeholders to maximize the benefits, creating a consensus about expectations, that are sometimes divergent, around which the project products are delivered;
b. Balance the resources based on their availability and the priorities of the organization, distributing them among the value drivers according to their relative importance;
c. Balance the aggregate net benefits to be achieved, using resources in such a way as to optimize the benefit/cost ratio.
It is important to highlight that the load balancing of these variables requires the active engagement of stakeholders. In addition, when evaluating the benefits, you must reduce subjectivity to the most possible minimum—taking into consideration that the delivery of products or capacities, as well as the realization of benefits, demands time, energy, and resources of the organization.
4. Apply to investment decision-making.
As shown in Exhibit 7, the best instrument for decision-making is the business case. During each phase and, above all, at the end of each major step in a project or program, the business case must be reviewed, updated, validated, and used actively to support decisions.
5. Adapt the procedure to each case.
For each program or project, value management must be adapted to business type, to level of complexity, and to the strategic importance of the project to the organization. You need, therefore, to choose the techniques and procedures for making eventual adjustments, and use the appropriate tools for each case— avoiding, for example, to over-kill or, on the contrary, underestimate the need for a more robust and compliant tool.
6. Learn with the experience and improve.
Value management is an ongoing key process in organizations and as such can be improved, both through benchmarking as well as through the use of knowledge management methods. The organization should establish structured processes of capture and re-use of lessons learned.
7. Assign clear roles and responsibilities and create the culture of support.
The management of value requires clear definition of roles and responsibilities for decision-makers, tactical staff, operational, and support groups.
A solution to ensure good practices in a systematic way is to create an organizational structure to support and audit the preparation of business cases and other value-improving practices (VIP), such as constructability analysis, simplification of processes, and value engineering and waste minimization, to increase potential value.
This role can be played by the corporate PMO, which may extend its functions and processes to support the management of value, as will be explained later.
Tools and Techniques of Management of Value
Among the three dimensions that constitute the business case—benefits, costs and risks—in this paper, our focus is on benefits modeling, describing new techniques and tools of managing costs and risks that integrate with benefit management.
Basically, benefits are related to the demand (needs, desires, and expectations) expressed into functional requirements (features and capabilities required) of stakeholders, while costs relate to the provision of goods, services, and the solution (supply) to be designed in response to the demand. Risks affect both (demand and supply), with benefit reduction or cost overruns that can change the balance between benefit and cost and turn the ratio unacceptable.
First, you need to define indicators that can help model and measure the benefits of projects as objectively as possible. Then, we must integrate these indicators within the general monitoring and control framework (dashboard) as a part of project management information system (PMIS), completing the efficiency and risk metrics.
The performance-based earned value (PBEV) approach, developed by Solomon and Young (2007), can be adopted for this purpose. This framework is an enhancement to earned value management (EVM), since it connects technical performance to efficiency of use of resources. PBEV incorporates product requirements baseline, quality standards, and risks into the performance measurement baseline.
In order to apply the method, Solomon and Young (2007) recommend that the plan and, consequently, the measurement of progress should be linked to product requirements instead of work requirements. The calculation of earned value must be based on technical maturity in addition to quality of work completed. The concept can also be applied to benefit measurements, as well as the capabilities needed to realize them.
Technical performance must be determined by meeting success criteria through technical reviews. These criteria should permit measurement of benefits realization, not just scope, time, cost, and quality targets.
The method requires additional considerations to the management model as defined in the PMBOK ® Guide (PMI, 2008). Indeed, the project charter must be based on a solid business case that permits to define the benefit profile. The requirements must also be raised in value driver functions. Already, the project plan should have a WBS dictionary containing acceptance criteria based on business value. Earned value curves must be based both on resources usage (costs) and in terms of returns/gains (benefits).
Value Management Office-VMO
The management of value cannot be regarded as a part of project or program management accountability for one simple reason: Programs and projects are temporary and its organizational structure is also temporary. Certain considerations around value, especially about advantages, should be conducted in pre-and post-project phases, when the project and program managers have not yet been designated or have already been dismissed.
That said, the Enterprise PMO or a VMO can support value management at the enterprise level and can provide technical assistance in the preparation and post-project follow-up of business cases and projects after these initiatives are closed but continue to account for the remaining benefit realization. If your organization has a center of excellence, this area can also create value metrics, research-based benchmarking and VIP.
Exhibit 10 describes the participation of VMO in portfolio, program and project life cycles.
Exhibit 10 – VMO: evolution and integration with the PMO
Source: Adapted from MSP™ (OGC, 2011)
Value management is the link between strategic management and organizational project management. Given that projects are the means to accomplish the organization's strategies, we can no longer accept project deliverables as the only goals of project management, because there is no way to ensure that these deliverables will be useful and meet the organization's needs without a verification and validation of the benefits to be obtained.
Organizations increasingly seek to improve their governance processes, under the assumption that decision-making is based on more transparent and objective business criteria. Thus, the management of value becomes essential to the success of organizations.
As mentioned in this paper, there is a clear tendency to move from the current emphasis on efficiency towards a greater focus on effectiveness (efficiency and efficacy).
In fact, seeking only the cost and schedule efficiency of projects, without considering the benefits to be realized, can lead organizations to allocate resources to initiatives that do not maximize value.
It is necessary to enhance organizational structures and processes in order to provide the capabilities of supporting the general model of management of value. Consequently, the idea of VMO arises as a natural evolution of PMO, and translates into management effectiveness for the organizational project.
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© 2012, Farhad Abdollahyan
Originally published as a part of 2012 PMI Global Congress Proceedings – Marseille, France