Value achievement — The final project phase

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PMCentersUSA

Abstract

Project closeout should not be considered the end of a project. What's needed is a final project phase called value achievement, with the purpose of making sure the project benefits are achieved and provide value to the client and customers. What's also needed is pre-project work to determine the business need, including expected benefits and the tie to the organization strategic plan. A suggested name for this pre-project work is the genesis phase.

This paper will discuss the project selection process, including business planning terminology, project alignment with strategic plans, and the project selection process. Financial analysis techniques used to establish quantitative project benefits will be reviewed. This paper will also explain how to establish product and project success criteria to ensure alignment on what defines success.

Specific steps of the value achievement project phase will be covered, along with the value achievement plan, including key elements and when it should be prepared. The responsibilities for value achievement will also be discussed along with actual project examples.

Introduction

Even if completed on time, under budget, and with all functionality delivered per the project requirements, a project is not successful unless the project benefits are realized by the business. Project closeout should not be considered the end of the project; what's needed is a final project phase called value achievement, with the purpose of making sure the project benefits are achieved and provide value to the client and customers.

What's also needed is pre-project work resulting in preparation of the project charter. Key inputs needed for the project charter are a business need, including expected benefits and a tie to the organization strategic plan. A suggested name for this pre-project work is the genesis phase (Lukas & Fulmer, 2006, p 2). Any project life cycle model, whether waterfall or agile, in reality includes both the genesis and value achievement phases as shown in Exhibit 1 (Lukas, 2013a, p 19).

Generic project life cycle showing genesis and value achievement phases

Exhibit 1 – Generic project life cycle showing genesis and value achievement phases

However, essentially all published project life cycle models neglect to show these two phases, and that's probably due to the lack of involvement by the project manager. Unfortunately, even with the use of project management and with active sponsors, 36% of projects do not meet their original goals and business intent (PMI, 2013a, p 12). Organizations will eventually realize more project management discipline is needed for the genesis and value achievement phases, and the expectation for project managers will grow from just delivering the project to delivering the project benefits. When this occurs the role of the project manager will expand to that of a business manager. This paper will discuss the importance of both the genesis and value achievement phases, along with suggestions for how the project manager can add value to the work done in these two phases.

This paper will start with a review of the project selection process, including business planning terminology, project alignment with strategic plans, and the project selection process. Financial analysis techniques using quantitative project benefits will be reviewed. This paper will also explain how to establish product and project success criteria at the beginning of the project, along with the use of a success criteria matrix to ensure alignment of all project participants on what defines project success and how to measure success. The value achievement project phase, including specific steps that should be done on all projects, will be covered in detail. The value achievement plan will also be covered, including key elements in the plan and when it should be prepared. The roles and responsibilities for value achievement will be discussed, including the project manager's role in making sure the business objective and business requirements are clearly defined. Project examples of success criteria and value achievement will be reviewed.

If you're looking to make sure your projects are adding value to the business, this paper will show you how to establish success criteria and implement value achievement on your projects.

Business Planning Terminology

Projects are done by organizations and companies as a result of business planning. This section of the paper will review key business terminology, and how it ties to the need for projects and project selection.

Organizations should have a documented mission statement, which is a concise purpose statement for the company or organization. For example, the mission statement of McDonald's is “to be our customers’ favorite place and way to eat and drink” (McDonald's, 2014, para 1). For a hypothetical environmental engineering firm headquartered in New Jersey with $20 million in revenues, the mission could be to provide New Jersey public and private clients with the highest value environmental engineering services that fully comply with all federal and state regulatory requirements.

Organizations should also have a documented vision statement, which is a vivid description of where the organization wants to be within a defined future time, typically three to five years. A good vision statement should focus on the future, stretch the organization's capabilities, and motivate members of the organization. For example, the vision for the Detroit Society for Human Resource Management (SHRM) is to be “an innovative and sought-after human resources association” (Detroit SHRM, 2014, para 1). The hypothetical environmental engineering firm's vision could be to become the largest environmental engineering firm in New Jersey with revenues doubling within three years.

With a mission and vision established, an organization needs to conduct strategic planning to determine how to move from current state to future vision. The output of strategic planning includes one or more strategy statements, which provide clear direction around the path towards the future vision. Other names for strategy statements include overarching goals, major goals, themes, and strategy. Good strategy statements should be SMART and easily broken down into discrete projects (steps) to move towards the vision. SMART is an acronym that stands for (SMART Criteria, 2004, para 4):

  • Specific: precise statement on what needs to be accomplished
  • Measurable: show progress in completing the strategy and moving towards the vision
  • Achievable: results that can be realistically achieved, given available resources
  • Relevant: to the future vision
  • Time-bound: specific planned dates for when results will be achieved

Think of strategy as the roadmap that shows how to get from current state to future vision. Projects are the specific steps taken in the move from current state to future vision, as shown in Exhibit 2. For our hypothetical environmental engineering firm with a vision of being the largest environmental engineering firm in New Jersey with revenues doubling from $20 to $40 million within three years, three specific strategy statements could be:

  • Strategy 1: Buy up to three smaller competitors to increase revenue by $12 million.
  • Strategy 2: Add two new engineering services to increase revenue by $5 million.
  • Strategy 3: Sell more services to existing clients to increase revenue by $3 million.
Strategy is the path from current state to future vision

Exhibit 2 – Strategy is the path from current state to future vision

For our hypothetical environmental engineering firm looking to implement strategy 1, buying up to three smaller competitors, the first project would be studying the potential firms to buy, including a financial analysis of the potential firms and a final product of which three firms to target. The next three projects for this strategy would be the actual work of buying each competitor.

For our hypothetical environmental engineering firm looking to implement strategy 2, adding two new engineering services, the first project would be studying potential new services to offer, including an analysis of potential customers and competitors, a financial analysis of adding each specific new service, and a final product of which two services to offer. The next two projects for this strategy would be the actual work of adding each new service, including finding a department head for each service, adding group members with applicable experience, securing infrastructure such as office space, and marketing the new services.

Project Selection

As explained in the prior section of this paper, projects are the specific steps taken to move from current state to future vision. Projects typically fall into the following categories (PMI, 2013b, p 69):

  1. Market Demand: This is a broad category that includes adding more production capacity for an existing product to meet market demand. It also includes developing new products such as the iPad by Apple to generate new business and revenue. Other examples include building more fuel-efficient cars or electric cars in response to high gasoline prices.
  2. Organizational Need: This category includes productivity-driven projects to increase efficiency and reduce costs. Examples include combining business units to reduce cost, automating an existing manual business process such as invoicing, or automating a manufacturing process to reduce labor costs. This category also includes capitalized maintenance, such as the replacement of an old heating, ventilating, and air conditioning system. The old, existing system may fail frequently, causing employee discomfort and reduced productivity.
  3. Customer Request: This category includes extensions of existing products or new products based on specific customer requests and/or feedback. For example, a bank may decide to add a brokerage service to its online banking services in response to customer feedback. Another example is an electrical company installing a new substation to serve a new industrial park.
  4. Technological Advances: This category includes replacement of obsolete software and/or computer hardware, the introduction of new technology such as the use of the iPad for many business functions, or an airline developing electronic tickets available on cell phones to replace paper tickets (note that this last example could be driven by customer requests).
  5. Legal Requirements: Projects in this category rarely tie directly to a strategy and future vision. This category is what needs to be done to meet legal requirements, avoid fines, and stay in business. An example is the Sarbanes-Oxley Act, which required many companies to invest money in financial reporting systems improvements. Another example is the Patriot Act, which required many banks to add business processes and upgrade software to meet reporting requirements.
  6. Ecological Impacts: Projects in this category are related to environmental considerations, and may not tie to a strategy and future vision. However, a company may have a vision that includes being a leader in environmental conservation, and in that case it would directly tie to strategy. Examples of projects include a storm water retention pond, a wildlife buffer area around an industrial park, or a project to install pre-treatment on waste water discharges from a factory to the city sanitary sewer system.
  7. Social Need: This is a broad category and can tie to employee needs such as a cafeteria, fitness center, or daycare facility at a pharmaceutical campus. The company may have a strategy around improving employee retention and projects like this would certainty help. This category can also include government projects such as a new bridge or park or repaving a road.

Unfortunately, for most organizations there are more potential projects than available resources, defined as money and/or resources. Therefore, a project selection process is needed to decide which projects will add the most value and help the organization move towards the vision. A detailed explanation of project selection is outside the scope of this paper, but project selection criteria can include financial return for the investment (covered in the next section of this paper), stakeholders’ perception, product/project risks, environmental impacts, and security. The goal of organizations is to pick the projects that will add the most value and have the highest probability of success.

Project Value Financial Analysis

As organizations recognize the critical importance of doing the genesis and value achievement project phases correctly, project managers will grow from just delivering the project to delivering the project benefits. When this occurs, the role of the project manager will expand to that of a business manager. As such, it will become important for project managers to assist the client in estimating quantitative project benefits and using financial analysis techniques to determine the business case for each project so sound decisions can be made on whether each project is worth the required investment.

Financial analysis looks at the future revenue and future expenses associated with an investment minus the initial cost of the investment. This concept of life-cycle cost analysis sums all recurring and one-time costs and revenue over a specified life span of a product or service. This includes the initial project cost, operating costs, maintenance and upgrade costs, revenues, and any remaining salvage value at the end of the product's or service's useful life.

Financial analysis also uses the time value of money, which recognizes that money received in the future is not worth the same amount as money received today. For example, if you want to know how much you need to invest today to have $1,000 in 20 years it will obviously depend on the interest rate you can earn. If your initial investment can earn 5% interest, you would need to invest $377 today. However, if you can earn 10% on your investment, you only need to invest $149 today. Therefore, the amount you need to invest today depends on the interest rate.

Using the life-cycle cost analysis and time value of money permits the evaluation of investments for money flows that occur at different points in time. A commonly used financial analysis formula is net present value (NPV), which calculates the present value of all current and future cash outflows and inflows for a given cost of money (the interest rate). The formula for NPV is (Net Present Value, 2002, para 2):

Formula for calculating net present value

Exhibit 3 – Formula for calculating net present value

In this formula:

  • Co = initial investment cost in year zero
  • n = number of interest periods (evaluation life for the product or service in years)
  • i = interest rate (cost of money)
  • Cn = future net cash flows in each future year

If the NPV is greater than zero the project will earn money (add value) for the organization based on the cost of money. If the NPV is less than zero the investment will lose money (decrease value) for the organization.

A related financial analysis formula also used is the internal rate of return (IRR), which is the interest rate an investment will earn (Lukas, 2013b, p 23). The IRR is calculated by setting the NPV in Exhibit 3 to zero and solving the equation for the interest rate, where the present value of all future cash flows equals the initial cost of the investment. The IRR must be greater than the cost of money in order for the project to be a good investment.

A simple financial analysis example is a one-day training course that will improve operator productivity on a packaging line by $20,000 per year. The training course will cost $10,000 and the cost for the operators to attend is $15,000. Financial analysis can be displayed on a timeline as shown in Exhibit 4. Using an analysis period of four years, 6% for the cost of money, and Excel formulas the calculated values are NPV = $44,302 and IRR = 70.5%. Based on the financial analysis, this project should be done.

Cash flows timeline example

Exhibit 4 – Cash flows timeline example

There are limitations in using financial analysis for making project selection decisions. First, the accuracy of financial analysis is dependent on the accuracy of the cost and benefit estimates. Ideally only quantitative benefits such as decrease in operating costs or increase in product sales should be considered since they are more easily estimated. Qualitative benefits such as software developers’ productivity increase with new computers or higher customer satisfaction are more subjective. Second, financial analysis can easily be done for projects such as expanding manufacturing capacity for existing products, introducing new products, and productivity projects. However, financial analysis is not helpful for legal and regulatory projects, social needs, environmental projects, and technology improvement projects. For example, Exhibit 5 shows part of a business case worksheet for a project that was done to meet new legal requirements issued by the government. Even though the NPV was -$212,000 and it had an IRR of less than 0%, the project had to be done to meet the new regulatory reporting requirements.

Cash flows timeline for a regulatory compliance project

Exhibit 5 – Cash flows timeline for a regulatory compliance project

Success Criteria

The project charter includes project purpose or justification, measurable project objectives and related success criteria, and project approval requirements—what constitutes project success (PMI, 2013b, p 72). This section of the paper will explore the importance of establishing success criteria and the use of a success criteria matrix. However, success criteria must tie back to the business need for the project, and the business need should be contained within the business case for the project. Examples of business need statements are:

  • The company needs to reduce costs in warehousing operations by 20%.
  • The plastics business unit needs to add one million pounds per year capacity to meet volume forecasts.
  • The financial reporting system must comply with the Sarbanes-Oxley Act.
  • The digital camera business unit needs to launch the new XP-350 model at the Las Vegas trade show.

Success criteria are quantitative measures related to the project and product that if met signify the project was successful. Success criteria should be defined for both the project and product. Project success criteria typically include cost and schedule but can also include functionality, safety violations (for a construction project), amount of construction rework, number of defects, number of scope changes, and even percent of action items completed on schedule. Product success criteria are related to the project's product and typically include criteria on achieving planned benefits, along with items such as user satisfaction and/or operational criteria such as availability, response time, or noise level (for manufacturing equipment).

Establishing success criteria is a negotiation with the client and other stakeholders, and unfortunately some stakeholders can have unrealistic expectations! Some clients are also reluctant to define success criteria. This can happen since it forces a discussion on what is the primary driver for the project— functionality, time, cost, or quality. Clients prefer to simply state that everything is equally important, but that's not normally the case. For example, as the year 2000 approached there were major concerns with the impacts on computers that resulted from the practice of abbreviating a four-digit year to two digits. This made the year 2000 indistinguishable from 1900. This became known as the Y2K problem (Year 2000 Problem, 2001, para 1), and the primary driver for these projects was time—projects had to be done before the year 2000 began. Clients may also be concerned that defining success criteria can expose projects with a marginal business case, or they may feel it takes too much time or it reduces their leverage over the team since expectations for success are now documented.

A good project practice is developing a success criteria matrix for the project. The matrix should include both product and project success criteria. Exhibit 6 shows an example of a pass/fail success criteria matrix for a call center project that included a renovated office area with new furniture and computers, along with new software for tracking and managing incoming calls.

Success criteria matrix for call center project

Exhibit 6 – Success criteria matrix for call center project

The project success criteria included finishing at or under the project budget of $2,550,000 and finishing the project by the scheduled completion date. Other project success criteria were no scope changes after the project baseline was established, and call center operator training on the new software completed before implementation. The product success criteria included software availability and response time for pulling up a client's account history. A major justification for this project was a 25% increase in call center productivity, which is measurable by looking at the number of calls handled per hour per operator. Other product success criteria were an average score of over 90% on the training class review test, and a score of 8.5 or higher (out of 10.0) from a survey of call center operators one month after project completion. The survey included 10 questions related to the ease of use of the software, computers, comfort of the new work stations, lighting, and temperature.

Exhibit 7 shows an example of a weighted success criteria matrix for a design/build project to install a new waste polyester shredder in a polyester recovery plant. The exhibit only shows the scoring columns for 60, 80, and 100; not shown are the 0, 20, and 40 scoring columns since none of the actual values fell in this lower range.

Success criteria for polyester shredder

Exhibit 7 – Success criteria for polyester shredder

For this project the engineering and construction were contracted and the success criteria were developed for the entire project. The project success criteria included the cost performance index, with a value of 1.0 finishing on budget, and a value of 0.9 meaning none of the project contingency was spent. The other project success criteria were project completion date and the length of time the plant needed to be shut down for installation and commissioning (Cx) of the new equipment. The product success criteria included the feed rate of polyester that could be handled measured in pounds per hour, the number of different streams of waste polyester that could be handled, and the noise level in the work area after equipment installation, which included sound proofing materials. The final product success criteria was a survey of the operators on use of the new equipment. Polyester recovery is a dirty, hot, and noisy operation, so getting an actual average survey score of 7 out of 10 for “satisfaction” was remarkable.

Exhibit 7 shows the final project results for the weighed success criteria matrix. The final score was used to adjust the profit for both the engineering and construction companies, which was done using a cost-plus-fixed-fee contract with a maximum cost cap. The profit was based on a baseline score of 70, so the actual profit earned by both companies was 1.23 (86/70) times the baseline amount.

The use of success criteria on projects helps ensure alignment of all project participants on what defines project success and how to measure success. It can be used for incentives and bonuses when working with contractors. When using a success matrix, keep it simple. There should be only three to five criteria each for the project and product success criteria. Also make sure each criterion is measurable soon after project completion.

Value Achievement Phase

Value achievement encompasses the actions taken during and after the project to ensure the project benefits are realized. Some publications call this benefits realization or benefits delivery. This paper advocates adding a phase called value achievement to the project life cycle model, which, as shown in Exhibit 1, occurs after project closeout. However, in reality the project life cycle phases can overlap, and the work of value achievement should start early in the project.

In order for value achievement to be possible, the quantitative project benefits need to be determined during preparation of the business case, which is done during the genesis phase. In the value achievement phase work is done to ensure all project benefits are obtained. Preliminary planning for value achievement should start at the same time project planning is being done. The preliminary plans for value achievement should include:

  • Product and project success criteria
  • Roles and responsibilities
  • Preliminary schedule and budget with resources needed
  • Risk register for risk events associated with value achievement
  • Measures to be tracked during value achievement

Final planning for value achievement should be done near the end of the project, ideally before implementation. The final plan expands on the preliminary plan and should include a detailed activities list showing the start and finish dates, resources needed, and responsible person for each activity. The final plan should also include a communications plan and the specific measures to show the benefits are being achieved. For example, a benefit of more efficiently handling customer orders could use a graph showing the number of orders handled per person per hour before and after implementation. Another example is the call center project discussed earlier in this paper. Note that one of the product success criteria for this project (shown in Exhibit 6) was a productivity increase of 25% more calls per person per hour. This was a product success criterion, but an unlisted benefit was that the increased productivity would allow the company to eliminate ten temporary contract employees. Measuring productivity of the call center operators during the value achievement phase is not sufficient! It is necessary to also measure the number of contract employees to ensure the project benefits are realized (higher productivity leading to lower costs). Exhibit 8 shows a graph of contract labor staffing by month with both plan and actual values.

Measuring a project benefit: Contract labor staffing at call center

Exhibit 8 – Measuring a project benefit: Contract labor staffing at call center

With a value achievement plan in place, it's simply a matter of executing the plan once the value achievement phase starts. The work done during the value achievement phase includes measuring to see if benefits are achieved, applying any corrective actions needed to achieve the planned benefits, managing risks and communications, and potentially conducting an audit on the final results. An audit is typically done for major projects by an independent group not associated with the project, such as corporate accounting or an outside agency. Information typically required for a project audit includes a summary report describing how the project benefits were achieved, updated financial information comparing the original baseline plan to actual results, and the scored success matrix. Exhibit 9 shows an example comparing the original plan to the actual project financial information.

Sample original plan versus actual project financial information

Exhibit 9 – Sample original plan versus actual project financial information

The client sponsor is accountable for achieving the project benefits. However, the project manager and project team should feel some shared responsibility for delivering the project benefits. The value achievement phase is typically led by the client organization, but in reality most clients lack project management skills. Therefore, the project manager and project team should support value achievement during the project. This includes helping the client develop the value achievement plan. The project manager and project team should also be available to support the client after the project during the value achievement phase.

Conclusion

Even if completed on time, under budget, and with all functionality delivered per the project requirements, a project is not successful unless the project benefits are realized by the business. Project closeout should not be considered the end of the project; what's needed is a final project phase called value achievement, with the purpose of making sure the project benefits are achieved and provide value to the client and customers. What's also needed is pre-project work to determine the business need, including expected benefits and the tie to the organization strategic plan. A suggested name for this pre-project work is the genesis phase.

This paper also stressed the importance of establishing product and project success criteria at the beginning of the project, along with the use of a success criteria matrix to ensure alignment of all project participants on what defines project success and how to measure success.

Even with the use of project management and with active sponsors, 36% of projects do not meet their original goals and business intent (PMI, 2013a, p 12). Organizations will eventually realize more project management discipline is needed for the genesis and value achievement phases, and the expectation for project managers will grow from just delivering the project to delivering the project benefits. When this occurs the role of the project manager will expand to that of a business manager. Are you ready for this transition?

References

Detroit Society for Human Resource Management. (2014). Retrieved from http://www.mishrm.org/members/group content view.asp?group=140420&id=430113

Lukas, J. (2013a, November). Value Achievement - The Final Project Phase. PMI Annual Symposium 2013, New York, NY, USA.

Lukas, J. (2013b, April 11). How elite project managers develop an effective business case [Webinar]. PMCentersUSA, Pittsburgh, PA.

Lukas, J. & Fulmer, K. (2006, October). On the Road to Success: Development of a Project Management Process, Procedures, Documents and Training for Sunoco's IT Organization. PMI Global Congress, North America 2006, Seattle, WA, USA.

McDonald's. (2014). Retrieved from http://www.aboutmcdonalds.com/mcd/our company/mission and values.html

Net Present Value. (2002). In Wikipedia, the free encyclopedia. Retrieved from http://en.wikipedia.org/wiki/Net_present_value

Project Management Institute. (2013a, September). PMI's Pulse of the Profession™ in-depth report: Navigating complexity. Newtown Square, PA: Author.

Project Management Institute. (2013b). A guide to the project management body of knowledge (PMBOK® guide) - Fifth edition. Newtown Square, PA: Author.

SMART Criteria. (2004). In Wikipedia, the free encyclopedia. Retrieved from http://en.wikipedia.org/wiki/SMART_criteria

Year 2000 Problem. (2001). In Wikipedia, the free encyclopedia. Retrieved from http://en.wikipedia.org/wiki/Year_2000_problem

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

© 2014, Joseph A. Lukas
Originally published as a part of the 2014 PMI Global Congress Proceedings – Phoenix, Arizona, USA

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