the investors' perspective
Project Management in Action
From the Executive Suite
Ernest M. DeLugo, Jr., PMP, is a senior vice president of business development at Ridgewood Power Corporation, in Ridgewood, New Jersey, and has over 22 years of experience in energy and industrial projects. Ridgewood Power is an investment company that focuses on independent power and other infrastructure projects. Prior to joining Ridgewood Power, he was a vice president and project manager for General Electric Capital.
Mr. DeLugo has also held a variety of senior management and engineering positions with Bechtel Power Corporation, General Electric Company and Burns & Roe. He has been recognized by the government of South Korea for his project management work.
Mr. DeLugo has a bachelor of science degree in electrical engineering from Polytechnic Institute of New York and is presently completing his MBA in finance from the University of Connecticut. He is a certified Project Management and Cogeneration Professional, and is a member of the Southern New England PMI Chapter. Mr. DeLugo is planning a book on this subject. Project Management: Managing the Investors’ Perspective should be available late 1994.
Prior to the commitment of funding for a project, an investor will analyze the total project elements to determine investment desirability, risks and an appropriate return on investment. These project elements, shown in Figure 1, Project Investment Analysis Framework, consist of Marketing, Operations and Technology, Management/Organization, and Finance. The assessment of the elements in the Project Investment Analysis Framework forms the basis for the investor to invest. These elements are dynamic and must be managed and re-analyzed during the various phases of the project in order to maintain the investors’ risk profile and to ensure that the investment and business objectives will be met.
To an investor, therefore, project management is the constant monitoring and testing of the total project elements against unfolding reality from project concept to initial operation and production—in other words, management of the total project life cycle. Without this management function, investing in projects is like playing “Russian roulette”— place your bet, spin the wheel and hope!
The terms “investor” and “investment community” as used throughout this article shall include all sources of debt and equity including banks, private investors, public bonds, pension/ mutual funds and insurance companies.
The investors’ evaluation process for the project investment is represented by the framework shown in Figure 1. Only after analyzing the various elements can the investor validate the project's assumptions, generate and justify a relevant cash flow stream, calculate the reliability of the projections, and compare the return on investment to alternate investments.
The framework guides the investor in estimating the opportunity and risk involved with the project investment. At the end of the analysis the investor will have answered the following questions:
- What are the essential economic, technical and market characteristics in which the project participates?
- What trends suggesting future change are apparent? What impact will these trends have on the profitability of the project?
- What is the nature of competition both within the industry and across industries?
- What are the requirements for success in competition in the project's industry and does the project meet these requirements?
- How sound is the technology?
- Is the management team qualified? Does its members’ background and experience match the project's objectives?
- What are the underlying facts? What assumptions have been made? Are these assumptions valid?
- What is an appropriate return on investment?
This analysis, however, is a snapshot of conditions as they appear at the time of the investment. These conditions will change since the external environment (industry, technology and general business) is constantly changing. With these changes will come threats to the investors’ expectations.
The project manager, by understanding the investment assumptions and criteria, can provide total management of the project process to:
- Meet the investment and business objectives.
- Maintain or minimize the investors’ risk profile.
THE PM FUNCTION
Figure 2 shows an open system model of the project elements and the various external forces that may move the project away from its stated objectives. Although budget and schedule control during plant construction or implementation of a process is important, it is the total management of the project elements that safeguards and guarantees the investors stated or expected returns. Management of the project elements by the project manager acts as a control feedback loop in the open system model, constantly steering the project towards its stated objectives.
In Order to protect the project investment, the investor requires that the project management function be dynamic, proactive, strategic, and support communication.
Figure 1. Project Investment Analysis Framework
Project management is a dynamic function. The forces acting on any project are constantly changing, making the management of the project a dynamic process. The various project elements will also interact with one another so that a change in one element, in response to an external force, can impact a second element. An example of this maybe a change in regulatory law which will cause a change in project technology or equipment. This element change will also cause a change to the financing element as an increased cost for the new equipment or technology. The resultant effect will be a deteriorating change in the investors’ return on investment. Project management must constantly work to make changes or adjustments to the project elements in response to the project's environmental forces. The objectives of these adjustments is to minimize the investors’ risk.
Project management is a proactive function. For many project managers project evaluation is simply an appraisal of where the project is in regard to schedule and budget. Is it on budget? Is in on schedule? If the answers to these questions are affirmative, it is argued that the project must be sound. Despite its unassailable simplicity, this line of reasoning misses the point—that the critical factors determining the quality of current results are often not directly observable or simply measured, and that by the time forces (opportunities or threats) do directly affect a project it may well be too late for an effective and cost saving response. Money will be lost in resources and time required to formulate corrective plans. Therefore project managers cannot wait for problems to occur and then react. A project manager must be disciplined to look beyond the obvious facts regarding the short-term health of a project and appraise instead those more fundamental factors and trends that govern a project meeting its stated objectives.
Project problems sometimes have a high inertial effect. The longer it takes to notice and address a problem the more money it will take to control and solve it. The project manager must therefore constantly monitor and anticipate changes. The project manager must constantly formulate alternative plans to potential scenarios and implement them in a timely manner. It is this proactive and controlled adjustment to the project elements that minimizes the investors’ risk and minimizes further capital involvement. Capital is not a free resource and must be paid back. Anytime a project problem requires additional investment of funds not only will the investors’ rate of return suffer but so will the project's ability to repay its debt from operations as the cost-to-benefits ratio diminishes. Money taken from a project's contingency fund is a project cost and it may bean expense that could have been avoided. The availability of a contingency fund is not a safety cover for poor planning and management.
Project management is a strategic function. Let me be the first to say this: A project manager must be a strategist given the degree of management and planning required to safeguard the investors’ returns. The word “strategy” can have many meanings. Its general meaning is the large-scale planning and direction of operations. In the project context, it pertains to a process by which the project manager searches and analyzes the project's environment and resources in order to:
- Select opportunities to minimize investor risk and capital exposure.
- Make discrete decisions to invest resources in order to achieve the identified objectives.
Figure 2. Project Management Scope of Concern
In this light, the project manager may benefit from understanding the classical formal planning techniques that are part of strategy formulation. An understanding of these techniques will:
- Provide a discipline, forcing the project manager to periodically take a careful look ahead.
- Require rigorous communications about project goals, strategic issues, and resource allocations.
- Stimulate longer term analyses than would otherwise be made.
- Generate a basis for evaluating and integrating short-term plans.
- View the project as a long-term investment.
- Create an information database that the project manager can use to implement and assess the impact of short-term or interim decisions.
In forming strategy and solutions, the project manager must avoid “cognitive rigidity,” i.e., approaching present problems with yesterday's methods. Cognitive rigidity can prevent the type of innovative thinking required to formulate strategies that yield quantum improvements in a project's profitability. To avoid this, project managers must keep their “intellectual saw” sharpened by taking refresher courses, expanding their knowledge of project management, networking in and out of their local PMI chapter, attending PMI lectures and conventions, and obtaining PMP certification.
project management is a communications function. An investor's perceived risk is largely a function of personal knowledge about a field. A project manager must update investors on the project's progress and must be willing to entertain questions and concerns on the project's technology. Wise project managers must have as an objective, in their formal project strategy and discussions with investors, the establishment of “comfort levels.” These “comfort levels” are needed in order for the investor to be confident with the project strategy and progress. Poor communications can lead to poor investor perceptions, which may cause an interruption of project funding.
The investment community requires management of expectations for the total life cycle of the product as well as the life cycle of the project. The project manager by managing the investors’ perspective will be providing valuable services to the investment community. This “total management” approach and the skills required therein, are congruent with the concepts, techniques and practices embraced by the Project Management Institute.
Project managers must therefore set their scope sights higher than just being involved with construction oversight, schedule and budget. Project managers who limit their participation are missing career opportunities and growth.