Reengineering the triple constraint for global competitiveness

 

Abstract

How do we measure project success? Do we measure budget and schedule or do we measure net value delivered to the organization? Today, we tend to measure the former. But it is the latter, delivered value, which is the truer measure. And what about the value that was not delivered but could have been? Who measures that? What if the value left behind represents a greater opportunity that dwarfs any potential gain from improving individual project delivery?

That is essentially what this paper explores. First, it presents the Value Triple Constraint™ (VTC), which measures both the value delivered and the value left behind. Then, it explores some case examples that demonstrate how to use the Value Triple Constraint™ in making typical project decisions, such as sequencing and scope control. Last, it explores how the function of the PMO can be revitalized with the use of the VTC in identifying programs and portfolios that more accurately reflect strategic business intent.

The Value Triple Constraint™ helps us to truly use projects to deliver measurable value by thinking outside the project in addition to executing inside the project. The VTC expands the role of project thinking and connects projects directly to an organization's strategy. It provides a new role for the PMO as the “projects memory office,” an enabling role as compared to its current control and compliance role. The Value Triple Constraint™ is a valuable tool that can help elevate project management thinking closer to strategy.

Introduction

As George E. P. Box once remarked: “All models are wrong. Some are useful.” (1979, p. 202)

According to A Guide to the Project Management Body of Knowledge (PMBOK® Guide)—Fourth edition, the triple constraint is a framework for evaluating competing demands (Project Management Institute [PMI], 2008). Project managers often talk of a “triple constraint”—project scope, time and cost—in managing competing project requirements. The current model focuses on a single project, and is primarily based on a cost view. It doesn't help us to measure long-term, ongoing business value delivered through projects. And it completely ignores opportunity costs.

The Value Triple Constraint™ has evolved from the Triple Constraint. In his book Don't Park Your Brain Outside, Francis T. Hartman states that “the only truly effective benchmark for project success is the long-term return gained on the investment in the project” (2000, p. 13). In another book, “Mind Set!,” John Naisbitt points out: “You don't get results by solving problems but by exploiting opportunities” (2000, p. 77).

This paper explores the Value Triple Constraint™ as a framework for measuring the ongoing value delivered through projects and for bringing to light the “value left behind”—the opportunities that are only visible “from outside the project.”

The Value Triple Constraint™ is pictured in Exhibit 1.

:Value Triple Constraint™

Exhibit 1: Value Triple Constraint™.

The VTC measures the long-term contribution of projects in total, and the individual contribution of a single project. It also provides a measure of the value left behind as we pursue opportunities. VTC states (Baratta, 2006, p 3):

Value delivered is a function of the scope of the business opportunity and of our capability to identify, decide and deliver to the opportunity.

From a business perspective, a project is a limited time endeavor aimed at taking an organization from one level of measured performance to a higher level of measured performance. In order to determine if we have achieved the project objective, we need good methods of measurement. If we measure the wrong things, then our focus and attention will be diverted away from what is important.

The Value Triple Constraint ™

The VTC is a framework for evaluating both the project and the project management paradigm. Its genesis is described in a white paper by this author titled “The Triple Constraint, A Triple Illusion,” originally published in the 2006 PMI Global Congress Proceedings (Baratta, 2006).

We need to be able to measure the expected and actual business success of a project, not just the ability to meet a cost and budget target. We also need to measure how well and how quickly we are identifying and acting on business opportunities. We need a tool that measures the net value delivered by a project and by the project management process.

Our attention will be focused on understanding how to calculate the “value” portion of the constraint. From a business perspective, a project moves through four distinct phases. Let's explore them, beginning with the last phase and working backwards towards the first:

  • Realization Phase: This is the only phase in which value is delivered. This is where we implement the output product or service and begin to harvest the results. Naturally, we want all discretionary projects to deliver a positive value during this phase. In reality, this is normally considered outside the project, since it occurs after the project is complete.
  • Delivery Phase: This is the phase immediately before the realization phase. It is the one where we use most of our project management discipline and tools. It consumes much of the effort, attention, and costs of the project. It is the phase where we apply the classical triple constraint. Even though this is where failure happens, it is not necessarily where it begins. The conditions for success are largely set before this phase, outside the actual project. While the project is being delivered, the eventual benefits are being delayed; for this reason, speed of delivery is important in this phase.
  • Decision Phase: This is the phase where we select among the many to decide which projects will go forward and when. Although this phase doesn't consume significant costs or effort, it does often consume significant calendar time. It focuses on cost-benefit, not value delivered.
  • Identification Phase: This is not a phase with which many organizations are even familiar. There is a point at which we recognize that there is an opportunity. However, that opportunity may have existed for many months or many years. Just because we didn't see it until now, doesn't mean it didn't exist.

“I do not regret the things I've done, but rather those I did not do.”—Anonymous.

We have a tendency to focus our attention on the delivery phase, because that's where easily identifiable budget costs live. And, let's face it: managing budget costs is one of the most important factors on which managers are evaluated.

The decision and identification phases contain very few budget costs. They do, however, contain significant opportunity costs. But opportunity costs do not show up on any P&L statements. There are no statements that present us with value that did not show up. To discover those requires us to reflect on what “could have been.” The Value Triple Constraint™ measures both value delivered, and value not delivered that could have been delivered. We should continuously improve our delivery capability. But we should also focus on our capability to identify opportunities and to make decisions about those opportunities—and to do this more quickly. A single project manager can focus on delivery capability. But it requires a higher level of accountability and attention to address the other two capabilities.

With most organizations, there is no accountability for what was not done, and therefore, what was not done goes largely ignored. We need to begin to account for this by measuring it. To understand how the VTC approaches measurement, we need to understand the three major value components in the VTC and how they are related. This paper will focus on measuring the “value” component for a given scope. We will leave the discussion of how capability can affect value for another time.

Project Value: Measuring the Outcome at the Project Level

The four major components that affect long-term value delivery are:

  1. Realized Value
  2. Project Cost
  3. Decision Opportunity Cost
  4. Identification Opportunity Cost

Let us explore each of these components in turn.

Realized Value

Realized value is the actual benefit experienced once the solution has been implemented. The realized value is delivered, over time, across organizational boundaries. Because of this and other reasons, it is often not tracked for any meaningful period of time. And yet it is the single most important measure for telling us how well we are doing overall, across all projects. This is a system measure that provides valuable enterprise level information in much the same way as retained earnings is a system measure for the overall business. Retained earnings are not associated with any particular person, or department. Similarly, realized value needs to be tracked across time and organization space, as well.

Why is it important to measure the value delivered across the entire benefit projection period? Business processes have a way of deteriorating once attention is removed. So we need to know, over the entire benefit projection period, what the value delivered was. It is not unlikely that organizations have a tendency to select a “sampling period” that is favorable rather than representative. To remove this bias, the measurement needs to be done independently.

Project Cost

Project cost is the familiar budget portion of any project. Under the VTC, it is divided into two separate components:

  1. Delivery Cost: This is the usual cost component that is reflected in the budget. This represents money actually spent, whether capital or expense.
  2. Schedule Opportunity Cost: Under the triple constraint we track the schedule in terms of time. In the VTC, we track schedule in terms of its dollar value. This is both new and different. To convert schedule time into schedule cost, we need a formula. It is calculated as:

Schedule Cost = Monthly Net Benefit × Schedule Months

Of course, we can choose any period we want (weeks, months, years, etc.) For example, a project that is projected to have a monthly net benefit of US$50,000 and is expected to require 10 months to deliver would have a schedule opportunity cost of US$500,000 ($50,000 × 10 months). The schedule opportunity cost provides a better mechanism on which to base decisions when we have alternative schedule options, because it reflects the time cost of delivery. It really quantifies the expression “time is money.” The schedule opportunity cost can't be used to determine if a project is viable. But it can be used to evaluate scope changes that affect schedule, to evaluate alternative schedules for the same scope, and to determine optimal sequencing.

Decision Opportunity Cost

While an organization waits to decide, no benefits can be delivered. For this reason, there is a real cost to the time it takes to make a decision. Imagine two organizations faced with the exact same opportunity. One, however, acts on this opportunity 6 months before the other organization does. Let's further assume that both organizations are equally competent and, therefore, take the same time to deliver to the opportunity. The organization that acts first will begin to realize benefits 6 months earlier than the other organization. By the time the second organization begins to realize benefits, the first has already banked 6 months' worth of benefits. All other things being equal, the second organization would not be able to catch up to the first in most cases. There may be some exceptional cases where a project has a maximum total benefit that can be reached. In that case, the advantage of being quicker might be less. But it is never a disadvantage.

Identification Opportunity Cost

We may recognize that we have an opportunity today. However, an opportunity does not begin as soon as we see it. It begins whenever the conditions that gave rise to it first came to be. So there is virtually always a gap between the time an opportunity arises and when someone in the organization acknowledges it. Again, the time lost because an opportunity was not recognized is an opportunity that cannot be recaptured. An organization that is faster at recognizing opportunities will have an advantage over those that are not so fast.

Identification and decision opportunity costs reflect our capability with respect to those two functions. In many organizations, a focus on those functions would result in the delivery of much more value to the organization than would a focus on project delivery skills, which might already be quite high.

If project managers wish to be more successful, then the projects need to be more successful from a business perspective. They need to think outside the project, because that's where success begins. A project that will, in the end, deliver very little realized benefit is not going to be a business success. Such a project starts with a handicap.

Some Uses of Value Triple Constraint ™

The VTC has these major uses:

  1. Quantifies the business value of a project
  2. Selects from alternative schedules
  3. Is used to look for opportunities to deliver more value through speed along the entire opportunity chain.

Project managers track budget and schedule. They do not, however, track project value. In order to do that, they would need to update the value profile, not just the cost profile. The value profile for a project would include a projection for each of the following:

  1. Projected Realized Value
  2. Projected Delivery Cost
  3. Projected Schedule Opportunity Cost

By tracking and projecting these all the way through a project, we are able to detect some important things that we don't currently manage. For example, if the projected realized value begins to decline and the delivery cost begins to increase, we know there is the risk that the project will be cancelled. And perhaps it should be. Also, if the realized value after completion shows a tendency to be less than predicted, then perhaps projects are being oversold.

On the other hand, when the projected realized value increases, then our projected schedule opportunity cost will also increase. This should tell us that we ought to revisit the schedule because time has become more valuable.

Another use is for controlling project scope. When an increase in scope results in an increase in the schedule, we should take the additional schedule opportunity cost into consideration. For example, an increase in scope may result in both an increase in the realized value of, say, US$100,000 and an increase in cost of only US$30,000. Without looking at the schedule impact, this seems like a simple decision. But what if this caused a 2-month delay for a project that was going to deliver US$50,000 per month in benefits. Then we would be incurring an additional US$100,000 (2 months) of schedule opportunity cost in addition to the US$30,000 delivery cost. This changes the equation. The organization would be paying US$130,000 of value to gain only US$100,000. Suddenly it doesn't make sense any more.

This metric can be used to evaluate any change requests that cause a schedule delay or alternatives that would speed the project. In the current environment, it would be tough to sell an increase in the project delivery cost of, say, US$300,000 to gain 6 months. The VTC recognizes that months or time is a relative measure. The value of time depends on what you can get or lose when the schedule changes.

Projects exist to capitalize on opportunities. Therefore, we need to measure lost opportunity just as much as measuring adherence to an estimate (which may not even be correct).

Enterprise Value – Measuring the Outcome at the Enterprise Level

What about project sequencing? How do we determine what the optimal sequence is for projects? Let's look at the example shown in Exhibit 2. Here we have two projects that require the same resources. So which do we do first?

Two Projects Needing the Same Resources

Exhibit 2 – Two Projects Needing the Same Resources

From a strict ROI perspective, Project A appears more attractive and so we might be tempted to do that project first. But by including the schedule cost, we can compare the two alternatives of doing A followed by B, or B followed by A.

The total realized value and the total delivery cost is the same regardless of order. However, the total schedule cost is different for each alternative.

If we do A first, then the schedule costs will be as follows:

  • Schedule cost for A is 12 months at US$50,000 per month, or US$600,000
  • Schedule cost for B is 12 months while waiting for A to finish, plus 12 months to complete B, for a total of 24 months. Each month is worth US$75,000 (benefit from B), for a total of US$1.8 million.
  • Total schedule cost for this alternative is US$600,000 + US$1.8million = US$2.4 million

If we do B first, then the schedule costs will be as follows:

  • Schedule cost for B is 12 months at US$75,000 per month, or US$900,000
  • Schedule cost for A is 12 months waiting for B to finish, plus 12 months to complete A, for a total of 24 months. Each month is worth US$50,000 (benefit from A), for a total of US$1.2 million.
  • Total schedule cost for this alternative is US$900,000 + US$1.2 million = US$2.1 million

Clearly option B is the option with the least opportunity cost and, therefore, with the highest value, which may not be the intuitive choice.

But what if we could do both together by stretching the schedule? This is an often selected option. In order to please two competing groups, projects are sometimes advanced together. Of course, this causes both projects to be stretched out. Imagine if we did both of these projects together and as a result were able to deliver the two in 20 months and with a combined delivery cost that was US$100,000 less. So it looks as if we have reduced the schedule from 24 months to 20, and saved $100,000 in addition. Let's look at what happens to the schedule opportunity cost:

  • Project A Schedule Cost: 20 months × US$50,000/month = US$1.0 million
  • Project B Schedule Cost: 20 months × US$75,000/month = US$1.5 million
  • Total Schedule Cost = US$2.5 million (1.0 + 1.5)

So although we shortened the combined schedule by 4 months and reduced total delivery costs by US$100,000, we gave up an additional US$400,000 of value with this option. The net result is that this option will produce US$300,000 less in delivered value (US$400,000–US$100,000). This is definitely not intuitive. The part of the cost that we typically measure, the delivery cost, is less in this scenario. Also, the overall schedule is shorter, but the total value is not. Think of it this way: In the previous scenario, after the twelfth month, we begin to realize benefits (money in the bank). Those benefits can be used to finance the second project. By pushing that project to Month 20, we give up all the benefits from Month 13 to Month 20. This is 8 months of benefits that we never get back. The VTC helps us make these decisions more easily by adding additional quantification.

Program, Project, Portfolio, and PMO

How do projects, programs, and portfolios relate and how can we use the VTC to help us manage them? Contrary to general practice, we should begin with the quantifiable business opportunity, and designate a program for it. Then as we determine all the projects required to deliver to the business opportunity, they become part of the program. Beginning at the opportunity/program level provides us with a way to pull necessary projects into the measurable program, rather than trying to group projects after the fact. The VTC can be used to determine the best way to organize and schedule projects within the program and also helps determine sequencing for programs.

Once we apply the VTC to a program (Exhibit 3), we can determine what criteria we wish to use to develop portfolios. The criteria will depend on the specific circumstances of the organization. We can group programs based on maximizing value, or minimizing cash outflow, or risk or any other factor which the strategy calls for.

Applying VTC to a Program

Exhibit 3 – Applying VTC to a Program

Naturally, tracking VTC metrics, sequencing programs and projects, and developing portfolios is an enterprise-level activity. In addition, keeping track of decision opportunity costs and identification opportunity costs is also an enterprise-level activity. What we want is to reduce these, over time, in order to generate greater measurable value. The VTC implements accountability for each project as well as for the project paradigm over time. It allows us to see what value is being left behind and provides us with an opportunity to act on that information. This makes producing greater value an enterprise concern, not just a project management concern.

The PMO, if one exists, may be the ideal organizational unit to carry out this responsibility. A PMO can ensure that each project's VTC metrics are properly captured and verified and that they are used to improve all aspects of that organization's project management paradigm. Using the VTC requires a permanent long-term memory to be most effective. The PMO can become the organization's “Permanent Memory Office.”

Summary

The Value Triple Constraint™ model goes beyond the individual project and allows us to measure portfolios and even the project management process itself over time. We can compare how much value is generated during one year as compared to during another year. It allows us to measure not only the delivered value of each project, but also the delivered value against the predicted or budget value. In other words, it allows us to separate project success from estimating success. The current model only allows us to measure estimating success. After all, budget and schedule, on their own, have no meaning. But it also allows us to measure how much value we have left behind. This is a measure of how capable the organization is at finding opportunities and acting on them.

The VTC moves the focus away from the project manager to project management as a whole. It engages both management and subject matter experts because now identification and quantification of measurable benefits becomes a necessary component. The VTC allows the project manager to truly manage conflicting demands, because it provides a measurement which includes the total effects of cost, opportunity and schedule into a single value that is project-specific. In essence, we want to accept a change in scope if it raises the relevant value, and not to accept it if it reduces the value. Such a decision is often not made at all on many projects because we work primarily with cost and schedule as separate elements. A project manager sometimes lengthens the schedule to accommodate a scope change that on its own seems to be justified. This can lead to decisions that look correct but actually cost the organization because it has not considered schedule cost.

This model forces the business to take responsibility for establishing and confirming the benefit. It also focuses attention on the greater opportunity of identification and decision rather than solely on delivery. It provides us with the ability to attach a true cost to such things as user nonavailability and resource shortages because, rather than showing only simple schedule delays, we can now show how these events change the value delivered by the project. In addition, it allows us to identify high-risk, low-value projects up front. We can continue to focus on value throughout the project and monitor value changes rather than just budget and schedule changes.

Organizations actually only manage a small part of their true cost. The VTC highlights the importance of project identification and selection. It also stresses the importance of identifying, quantifying, and revising the project benefit throughout. Without that metric, only the project delivery cost can be determined, and this may be a small part of the true overall cost.

The VTC requires us to quantify and validate project benefits when the project is complete. This attacks the practice of overstating benefits to get project approval and then abandoning that metric. The proposed VTC model gives us a better way to evaluate project success. It also allows us to focus our attention on where the true opportunities lie. If most of the value lost is in the identification and selection, then there may be more opportunity in improving how we identify opportunities and how quickly we make decisions than in improving our delivery capability.

It allows us as project managers to engage management and subject matter experts more fully in the process and deliver greater benefits to the organization.

The VTC represents a true relationship among value, scope, and capability.

References

Baratta, A. (2006, October) The triple constraint, a triple illusion. 2006 PMI Global Congress Proceedings – Seattle, Washington, PDS01.

Box, G. E. P. (1979). Robustness is the strategy of scientific model building. In R. L.

Breyfogle III, F. W. (2003). Implementing Six Sigma (2nd ed.). Hoboken, NJ:John Wiley & Sons.

Hartman, F. T. (2000). Don't park your brain outside. Newtown Square, PA: Project Management Institute.

Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard. Boston: Harvard Business School Press.

Launer & G. N. Wilkinson (Eds.), Robustness in statistics. Burlington, MA: Academic Press.

Naisbitt, J. Mind set. New York: HarperCollins Publishers.

Project Management Institute. (2008). A guide to the project management body of knowledge (PMBOK® Guide)—Fourth edition. Newtown Square, PA: Author.

Stamatis, D. H. (2004). Six Sigma fundamentals. New York: Productivity Press.

© 2009, Angelo Baratta
Originally published as a part of 2009 PMI Global Congress Proceedings – Orlando, Florida

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