Project management as a core competency
Justin Reginato, P.E., Graduate Student Researcher, Department Engineering and Project Management, University of California, Berkeley
C.William Ibbs, Ph.D., P.E., Professor, Department Engineering and Project Management, University of California, Berkeley
The objective of this paper is to quantitatively display that, for firms with high project management maturity, project management may serve as a core competency. Our previous research demonstrated that companies with high project management maturity (PMM) benefit from a high return on their project management investment (PM/ROISM). During the course of that research, we have assembled scores of complementary quantitative data that also show that for some firms, project management can be a creator of competitive advantage by providing particular skills or unique capabilities that provide value to customers and are transferable to new opportunities.
Current research will expand upon that thread and aims to quantitatively demonstrate that high PMM companies not only reap the benefit of increased PM/ROISM,but their superior project management practices afford them a unique advantage in the marketplace (for more on PMM and PM/ROISM, refer to Ibbs and Reginato 2000). We contend that companies with high PMM leverage project management as a core competency or employ project management in the creation of core competencies. That is, high PMM companies tend to incubate capabilities that lead to the advancement of the organization’s strategy and make them industry leaders. We will provide quantitative insights into the aspects of project management possessed by such companies to determine which aspects lend themselves to core competencies. We will also present our findings in the context of the Virtuous Cycle of Project Management. This research will focus on the organizational benefits of reaching the low cost-high return quadrant of the Virtuous Cycle.
Definition of a Core Competency
The notion of core competencies has discussed in great depth in business strategy literature. A simple and well-accepted definition describes core competencies as “bundle(s) of skills and technologies that enable a company to provide a particular benefit to customers” (Hamel and Prahalad 1994). This definition eludes to the fact that core competencies exist as a portfolio of skills and cannot reside solely in one person or one team.
Another key aspect of core competencies is that they are sustained competitive advantages that must be continuously upgraded and developed in advance of competitors (Helleloid and Simonin 1994). This reflects the fact that core competencies only remain so as they are continuously improved to provide sustainable advantage. Once a particular set of skills becomes ubiquitous throughout an industry, it cannot be, by definition, a core competency within an individual firm.
Core competencies are also based upon knowledge assets. They reflect the specialized expertise of an organization resulting from collective learning. They respond to changing market and environmental conditions and allow for the efficient deployment of resources (Helleloid and Simonin 1994). Such knowledge can be (and most often is) developed internally and involves company culture. The knowledge involved with core competencies can be one of two types. The first type, tacit, is personal information passed from one person to another via word-of-mouth or by demonstration. The second type, explicit, is systematically codified and dispersed throughout the organization by various mediums of communications (Teece 2000).
Lastly, core competencies must be sustainable and create value. Not only do true core competencies lend themselves to the effective management of current operations, but they must also change to meet continuously shifting future demands (Turner and Crawford 1994). They incubate innovations that lead to corporate prosperity and a perceived customer value (Chiesa and Barbeschi 1994). In fact, the distinction between core and non-core competencies can be drawn from the presence of customer benefits (Hamel 1994).
The Virtuous Cycle of Project Management
From quantifiable observations and in depth interviews with many of the companies assessed, we have been able to create an effectiveness matrix that allows organizations to map their PMM and investments in project management to ensure they are progressing in a logical and sustainable manner.
Exhibit 1.The Virtuous Cycle of Project Management
As Exhibit 1 depicts, the axes of the matrix pit PM/ROISM and Project Management Cost Percentage against one another. The boundary between “good” and “bad” project management cost is approximately 5 percent to 7 percent; the PM/ROISM division is approximately 26 percent to 30 percent. Because PM/ROISM and PMM are tightly linked, substantial gains in both PMM and PM/ROISM can be achieved as an organization moves from left to right along the x-axis. Project management growth normally flows along the clockwise cycle depicted on this diagram.
The four quadrants are defined as follows:
• Companies in the lower left-hand quadrant, Quadrant I, are underinvested in project management and are earning low returns, if any.
• Quadrant II, the upper left-hand quadrant, is the next logical place to progress, but it is an area where no organization should reside for any prolonged duration. In this quadrant, project management investments have begun to increase, but benefits have not yet been fully realized.
• In Quadrant III, the upper right-hand quadrant, the benefits of improving project management are starting to be realized within the organization, but the cost of those improvements is still steep.
• The lower right-hand quadrant, Quadrant IV, is the ideal locale for company-wide project management practices. Companies in this category have best-of-class PMM and very high PM/ROISM.
After compiling the Virtuous Cycle of Project Management, we made some additional observations. Not only does the Virtuous Cycle of Project Management measure project management effectiveness, but many companies that reside in Quadrant IV also enjoy project management as a core competency. For many of these companies, project management is a competitive lever. It provides, either directly or indirectly, higher quality products to customers. Because there are competitive barriers to entry to Quadrant IV, those skills possessed by the best firms practicing project management are difficult to simply imitate. Also, the capabilities that allow firms to reach Quadrant IV are not flash-in-the-pan displays of competence; firms that arrive in that position have the most repeatable results of their peer groups. As the following cases will show, these benefits cannot only be identified, but many can also be quantified. One of the major benefits of the Virtuous Cycle of Project Management is that it provides a road map for those firms that desire to make project management a strong corporate competency.
Project Management as a Core Competence
As markets become more competitive, it is becoming increasingly important that firms be able to correctly identify the core competencies that they can leverage. Many companies attempt to identify the competencies that are central to their business model only to find that the process “becomes a feel good exercise that no one fails” (Collis and Montgomery 1995).
To stem this problem, we suggest that organizations apply quantitative techniques to their assessment of project management core competences. Our past research has centered on calculating Cost and Schedule Performance Indices (CPI and SPI, respectfully), as well as quantifying PMM. These data can be combined with standard deviations of CPI and SPI to measure predictability and repeatability, as well as other key performance indices to create a complete quantitative definition of project management competency.
To demonstrate this point, we will use cases from companies that we assessed in great detail from our past research. These companies include organizations that use construction and facilities excellence in the delivery of their products and others that leverage superior project management skills in the delivery of complex information technology systems. We will also use examples from other industries to demonstrate some of the pitfalls faced by project management when it is managing projects that are core to the company’s strategy.
As previously stated, the fine line between competence and core competence is whether or not customers receive a perceivable benefit or value proposition. We found in several cases where project management created tangible value that customers readily observed. Foremost among these benefits was the reduction in project costs good project management practices create. As the Virtuous Cycle of Project Management depicts, organizations in Quadrant IV have lower project management costs than other companies. While we originally viewed reducing project management cost as an internal benefit to the actual firm practicing project management, we were able to observe cases where these cost savings were passed along to customers and clients.
The clients of service organizations readily see these savings. In cases where companies are delivering projects as a service to other organizations, project management fees constitute a major portion of their overall fee (with materials typically being charged directly or indirectly to the client). From this scenario, it is easy to see that lower project management costs result in cost savings to the customer. Project management, in this case, is considered single layer—the correlation between project management as a core competency to the performance of a business is self-evident.
One organization we assessed is a Fortune 500 company that performs information technology (IT) outsourcing and consulting for other large global organizations (we will refer to this company as Company A). They have made a profitable existence out of making IT project management their core business strategy. Because IT is not a core competence for many of their clients, they can provide better IT services with greater quality than can many firms that have chosen to keep that work in-house. They further add to their value proposition by having lower project management costs (approximately 4.03 percent of total project costs) and deliver a higher PM/ROISM (32 percent).
The evidence of the value they provide is readily seen when you compare their project management capabilities against those of two financial companies that chose to perform IT projects in-house. One Fortune 500 financial company we observed, Company B, spends a similar percentage on project management as Company A (4.28 percent of project costs), but their PM/ROISM is a scant 18 percent. This means that, while spending relatively little on project management, they are receiving subsequently little benefit from it. Company B resides in Quadrant I of the Virtuous Cycle of Project Management matrix.
Compare this situation to another national financial institution, Company C, whose project management capabilities place them in Quadrant III of the Virtuous Cycle matrix. In this case, the company also chose to keep IT projects in-house, and they did an excellent job of ensuring a large PM/ROISM (32 percent). However, their project management costs were astronomical, consuming almost 22 percent of total project costs. While they benefited from high PMM and a high level of project success, they paid dearly for it. With project management costs of over $200 million per year, reducing their costs to 6 percent (enough to put them in Quadrant IV) would save this particular organization at least $32 million per year.
These results are not surprising in that new IT is rarely a core competency of financial institutions. As the finance industry becomes more and more dependent on IT, these firms may choose to make project management a core competence, in which case the Virtuous Cycle of Project Management can serve as a worthy blueprint. However, for companies unwilling to make project management a core competence, it may behoove them from a value standpoint to outsource their IT projects to a company where project management is a core competency.
Exhibit 2. Equations Determining CPI and SPI
IT consultants can also provide customer benefits beyond cost. Company A, the IT consultant mentioned above, has been able to meet 99 percent of customer performance requirements and accommodate 81 percent of customer directed changes over twenty-three projects we analyzed. Compare this to the consulting arm of one of the world’s largest software companies we also consulted, Company D, which resides in Quadrant III. This group was able to meet only 88 percent of customer performance requirements and 72 percent of customer-directed changes. Additionally, Company A had a product defect rate of 1.1 percent versus 20 percent for Company D. Clearly, Company A provided a greater value proposition than Company D while providing similar software integration services.
For manufacturing and production companies, the cost savings generated by project management that is passed to customers is more difficult to observe. These organizations tend to be integrity related and multilayered, and thus the value proposition they provide is less visible to customers. That is, project management certainly lends itself to the value of the products being created, but customers would not have the wherewithal to attribute value directly to project management. In these cases, project management core competencies tend to be a smaller portion of a greater meta-competency (Hamel 1994).
Take Company E, for example, a large worldwide maker of personal consumer goods with almost $40 billion in revenue. For customers, Company E provides value in terms of products with more features, higher quality, competitive cost, and consumer confidence. The project management team in charge of building production facilities uses these tenets as a benchmark for their work. To gauge their performance, they set up a series of key performance indicators (KPIs) to measure the value of their work.
Among those KPIs is the manufacturing cost to operate, which measures the manufacturing cost of delivered goods divided by the manufacturing cost promised. The project management team designs facilities to minimize the manufacturing cost to operate so that cost savings can be passed directly to consumers. For this company, the manufacturing cost to operate has remained constant over the past ten years despite inflation and rapidly raising labor costs. This same company has embarked upon an arduous mission to improve the quality of products delivered. Over the past ten years, they have improved product reliability from 50 percent to over 90 percent. As product reliability on the factory floor increased, so has the level of quality of products delivered to consumers.
Exhibit 3. CPI Variation versus PMM
Exhibit 4. SPI Variation versus PMM
The second attribute of project management core competences is sustainability and repeatability. Analysis of detailed project management assessments reveals that companies with higher PMM tend to deliver projects on time and on budget. Specifically, higher PMM corresponds to increased CPI and SPI. CPI and SPI are ratios of total original authorized duration or budget versus total final project duration or cost, respectfully. CPI and SPI are defined in Exhibit 2.
We have calculated two measures for determining project reliability: the first is the standard deviation of CPI results and the second is the standard deviation of SPI measurements. By taking the standard deviation of CPI and SPI, we can determine how project results deviate from overall averages. We found that for organizations with project management as a core competence, their CPI and SPI results tend to deviate much less than their less mature counterparts. As their project results deviate less, the reliability of their results increases. These organizations are much better equipped to estimate their project costs and schedules with a greater degree of confidence. Exhibit 3 displays the standard deviation of CPI versus PMM and Exhibit 4 displays SPI versus PMM.
In both figures, companies represented by squares are those organizations where project management is a core competence; other companies are represented by diamonds. As is depicted in Exhibits 3 and 4, companies where project management is a core competency tend to gravitate towards the lower right-hand corner of the histogram. In this region, PMM and reliability of project CPI and SPI results are both maximized. This is an extremely enviable place to reside.
Skills and technologies that comprise core competencies are typically knowledge based. They are not rooted in traditional assets in accounting terms. Because these skills are knowledge based, for companies to make project management a core competency, the proper organizational culture must exist. As previously stated, core competencies cannot reside in one person or even one team. The knowledge behind a core competence must be dispersed widely throughout the organization.
Company E, the consumer products company previously mentioned, provides a perfect example of knowledge and project management core competencies. They go to great lengths to establish clear channels of communication through which data is dispersed through a vast project database. More experienced project managers are tasked with mentoring their younger counterparts. Because so much of their expertise is developed internally, 98 percent of Company E’s project managers are groomed from within the organization. They also are very protective of their knowledge assets and protect them with secrecy. In fact, many accounts of this company have described their protection of knowledge as almost clandestine. The secrecy is understandable: this company has established a perch from which they have achieved superior frontline production competencies at a low cost and high quality via specialized expertise in manufacturing technology. The protection of their knowledge increases the difficulty of imitation by competitors.
Company A, the IT consultant previously discussed, also has project management expertise steeped in knowledge. For their part, they understand the complex world of melding multiple and disparate technologies, platforms, and people. Their knowledge has allowed them to integrate their clients as technology partners. This has afforded them with a forum to gain knowledge and link it with their clients, a value position that benefits all parties (Bates et al 2001). This ability to bring multiple groups together to exchange proprietary data and technical knowledge through deal flows is referred to as an insight/foresight competence (Coyne, Hall, and Clifford 1997).
We have observed that what generally differentiates companies that have project management as a core competency from those that do not is their treatment of project knowledge. Every company has the ability to quantifiably measure the results of their project management initiatives. Few do, and those that do rarely maximize the uses of that data to create a competitive edge. This became highly visible to us while completing our original research on quantifying project management’s value. Oftentimes, companies with low PMM neglected to compile project data. When knowledge is not being collected, it is almost impossible for it to be used to create competency. Organizations that leverage project management as a core competence go to great lengths to collect, analyze, and distribute project knowledge. As PMM increases, knowledge management increases. The most mature companies manage knowledge on a corporate-wide basis and become continuously learning institutions.
To underscore the notion of data mismanagement, let’s return to Company B, one of the large financial institutions previously mentioned. This organization was unable to accurately track cost and schedule data, and projects were considered completed once the budget had been exhausted, no matter how much of the original scope had been completed. Not only were they unable to track schedules accurately, but they had failed to collect data and conduct post-mortems in an effort to discover the underlying problems preventing projects from being completed on time or with the required scope. By not delivering projects as they were intended, such projects will routinely fail to provide the intended value. This was a common thread with many companies we observed with low PMM, and in cases like these, companies are using the Virtuous Cycle of Project Management to create a roadmap for project management improvement.
Continuous Improvement in Advance of the Competition
One of the great ironies of core competencies is that after time, they can cease to be competencies. On one hand, the knowledge behind a core competency can eventually become general knowledge. Once skills become ubiquitous throughout an industry, they cease to be a core competence for any one particular company. This became evident to many dot-coms that utilized e-commerce as a core competence. Once traditional retailers also set up e-commerce sites, their early mover competitive advantage ceased to exist.
On the other hand, core competences can also disappear. Companies that do not continuously improve may find that over time their competitive advantage has atrophied and no longer exists. Ford Motor Company provides a sad example. A few years ago, “Quality was Job 1.” Now, Ford is facing intense competition from higher quality foreign carmakers.
Not only must project management constantly improve to remain a core competency, but also it must do so ahead of the competition and respond to ever changing market conditions. Going back to our consumer products example, Company E, they improved their PMM by 6 percent (from 3.69 to 3.92), while the cost of project management, as a percentage of project costs, increased only 0.07 percent. Another key benefit of residing in Quadrant IV of the Virtuous Cycle is that project management becomes less expensive with subsequent improvements. Therefore, not only are companies improving their project management practices, but they are also spending proportionately less to do so, which provides an almost insurmountable competitive barrier.
However, solely improving project management ahead of competitors is not always enough. When markets get more competitive, companies are forced to go to drastic measures to remain competitive. Company E has been forced to close seventeen plants in the past ten years. To offset the loss of manufacturing capacity lost from the plant closures, the project management team has used its knowledge base to build new factories that operate more efficiently. Additionally, as their customer base shifts increasingly overseas, they have had to develop competencies in foreign markets. In these cases, not only must they develop competencies ahead of their domestic competition that is also moving abroad, but they must also develop competencies in project management faster that local companies in those foreign markets. To remain leaders, project management learning must be a continuous effort.
In numerical terms, Company E has improved both its cost and schedule performance by 10 percent in ten years, from 85 percent to 95 percent. These improvements have been achieved while the complexity of projects has increased. All told, the company estimates that these improvements alone have accounted for cost savings of between $150 and $200 million.
Service companies also face the same pressures to upgrade their technical competencies to respond to changing markets. Many older IT consultancies were facing tough competition from upstart consultancies during the heady days of the dot-com craze. The fear among start-ups was that these older companies didn’t understand the new economy and were too set in their ways to provide competitive solutions. However, as startups moved aside and corporations accounted for the largest share of server-to-server traffic, the larger, established companies were in prime position to capitalize (Lainee, Maged, and Roche 2001). Upgrading skills in the IT and software industries is, in most cases, a given for companies with any measurable track record because current skills are a necessary prerequisite for survival.
Lastly, a key indicator of whether or not project management is a core competency is the ability to resist imitation. As imitation erodes the attributes that make project management truly superior, one would think that competitors could simply mimic those skills. However, of the fifty-three companies we have assessed throughout the course of our research, only eight have demonstrated the ability to exist in Quadrant IV of the Virtuous Cycle of Project Management. Because the skills that make these companies great are continuously improving moving targets, imitation simply is not adequate to create project management core competence.
As our research has shown, companies within Quadrant IV of the Virtuous Cycle of Project Management not only benefit from extraordinarily high PM/ROISM and lower project management costs, but they also leverage project management as a core competency. To be a core competency, project management must create value and benefits for customers, be sustainable and repeatable, be knowledge based and be continuously upgraded to meet the challenges of evolving markets. Data from our past research regarding the value of project management also helps understand the quantifiable benefits of having project management as a core competence.
The next steps in our research will involve creating assessment programs to obtain more quantifiable data with regards to the benefits of project management, particularly with respect to knowledge management. With this data, we hope to further demonstrate the benefits of project management as a strategic asset that provides customer benefits and competitive advantage. Understanding the nature of project management as it affects core competencies can be extremely valuable to companies in competitive marketplaces. While our research has made strong headway in helping firms to internally quantify the value of their project management practices, this research will further provide firms with tools to measure how their project management practices create marketplace advantages that rival firms will find difficult to overcome.
The authors would like to thank the Project Management Institute (PMI®) and the University of California, Berkeley for their ongoing support of this research.
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Proceedings of PMI Research Conference 2002