The value of project management
why every 21st century company must have an effective project management culture
James S.Pennypacker,Director,Center for Business Practices
With the accelerating growth of project management initiatives in organizations, a quantitative demonstration of the value of project management is needed to help justify investment in those initiatives. In the past, that demonstration has been mostly anecdotal—project management success stories and case studies. It has been suggested that some sort of return on investment calculation is needed to support this business justification for project management implementation (Knutson, 1999; Ibbs & Kwak, 1997). We believe that ROI calculations are not good indicators of the value of project management—that many other, more intangible (yet quantifiable) benefits will accrue but not show up in ROI calculations. We argue that today’s executives have turned to a much broader view in valuing their organizations, many using a balanced scorecard approach, and that this approach should be used in studies to determine the value of project management to an organization. This paper will outline that approach. Preliminary findings of a comprehensive and exhaustive year 2000 study on the value of project management to an organization will be presented at the PMI 2000 Seminars & Symposium.
A Project Management Culture
The organizational environment needed for continued project success is ultimately created by upper management. The way that the managers of divisions, departments, and/or functions, define, structure, and act toward projects has an important effect on the success or failure of those projects, and consequently the success or failure of the organization. An effective project management culture is critical for effective project management.
So how do we develop a project management culture in our organizations? A culture is a shared set of beliefs, values, and expectations. This culture is embodied in the organization’s policies, practices, procedures, and routines. Effective cultural change occurs and will be sustained only by altering (or in some cases creating) these everyday policies, practices, procedures, and routines in order to impact the beliefs and values that guide employee actions. We can affect the culture by changing the work climate, by establishing and implementing project management methodology, by training to that methodology and to the PMBOK® Guide, and by reinforcing and rewarding the changed behavior that results.
Having an effective project management culture involves more than implementing the science of project management, however—it involves the art of applying project management skill. It also involves the organizational changes that truly integrate this management philosophy. These changes are sometimes structural, but they always involve a new approach to managing a business: projects are a natural outgrowth of the organization’s mission. They are the way in which the organization puts in place the processes that carry out the mission. They are the way in which changes will be effected that enable the organization to effectively compete in the marketplace.
What is your project management culture? One way to define your culture is to see where you fit in a project management maturity model.A project management maturity model defines levels of growth and development in appropriate organizational policies, practices, procedures, and routines. As such, a project management maturity level of your organization can be thought of as your project management culture. PM Solution’s Project Management Maturity Model defines eight levels of project management maturity: non-awareness; initial process (ad hoc awareness); basic process (summary project focus); repeatable process (detailed project focus); advanced process (standard program focus); well-defined process (integrated organizational focus); managed process (efficiency, effectiveness); and optimizing process (continuous improvement). This model can be used in assessing the maturity of your organization in managing projects enterprisewide—in other words, your project management culture (see Exhibit 1).
What to Measure
What should you measure to determine the benefits of implementing a project management culture? How do you measure the benefits of moving up the cultural ladder (the project management maturity model)?
In the past, and in some cases today as well, the measure most often used is return on investment. ROI is a measure of profitability computed by dividing the amount of operating income earned by the average investment in operating assets required to earn the income. ROI measures how effectively assets are used to earn income. Financial measures alone, however, don’t present a clear picture of the value. They are too unreliable as either a clear gauge of success or a clear sign of the future measures (Unlike financial measures, most operational measures are leading indicators. When they improve, an improvement in the fi-nancials follows, albeit often indirectly, and with a time lag). To drive success, financial measures must be supplemented with nonfinancial ones. Many, if not most, Fortune 1000 organizations are taking a balanced scorecard approach to measure and manage their organizations (Kaplan & Norton, 1996). Even for institutional investors, non-financial criteria constitute 35% of the investor’s decision (Christensen, 1999). And in one case, an innovative system provides for a specific Return on Management measure (see Exhibit 2) (Strassmann, 1996).
Research has shown that creating value for stakeholders is the key to organizational success. Companies that stress shareholders, customers, and employees outperform firms that do not. Over an 11-year period, the former increased revenues by an average of 682% versus 166% for the latter, expanded their workforces by 282% versus 36%, grew their stock prices by 901% versus 74%, and improved their net incomes by 756% versus 1% (Kotter & Heskett, 1992).
Since deriving advantage through stakeholders drives strategic success, the best way to create measures is to look at which key stakeholder groups most help drive the strategy and devise measures to fit these groups. For every organization, the stakeholders most responsible for helping it deliver on its strategy are shareholders, customers, employees, and communities.
What metrics should you use to determine the benefits of project management to your organization? The argument above suggests that simple financial measurements are not enough, that a balanced family of measures is needed to get an overall picture of the health of your organization and its project management practices. A balanced family of measures can evolve into a powerful system for executing strategy. The measures help to define the strategy, communicate it to the organization, and direct its implementation at every rung of the hierarchy, from the corporate level to the individual. They also keep everyone’s efforts aligned, because they link strategy to budgets, to resource-allocation systems, and to pay programs. Demonstrating how project management initiatives measure up using this balanced family of measures is critical to any business justification for a project management investment.
Below is a sample of the kinds of measures that would make up a balanced family of measures. The measures are a mix of financial, operational, and social measures that show value to stakeholders. Measures in these categories should also be a balanced mix of inputs (money and people put into a process), outputs (results achieved), and processes (performance of the systems that deliver the output). For example, a project management input measure could be R&D spending, the output measure could be the number of new products, and the process measure could be the number of change orders per product during development. The ultimate output measure is the contribution of these new products to corporate profitability.
A balanced family of measures would include the following (the exact measures would vary with each organization, depending on its strategy):
• For Shareholders: economic value added, earnings-per-share growth, cash flow per share, economic profit, total factor productivity, percentage of new-product sales, return on management
• For Customers: customer satisfaction, product quality index, repair incidence, customer loyalty
• For Employees: employee satisfaction, employee turnover, productivity, diversity in management, training time per year
• For Community: index of environmental impacts, safety record, community satisfaction, charitable and community contributions
Measures should also be input (money and people put into a process), output (results achieved) and process (performance of the systems that deliver the output). In R&D input would be R&D spending, output the number of new products, process the number of change orders per product during manufacturing. The ultimate output measure is the contribution of these new products to corporate profitability.
A subset of measures that focus on operational issues only would include the following:
• For Shareholders: productivity, cost reductions, defect level, cycle time, customer retention, employee turnover, percentage of new product sales, process errors
• For Customers: project success (time, cost, quality), repair incidence, product quality index, on-time shipping, customer satisfaction, customer retention, customer loyalty, new product inventions, share of wallet, market share
• For Employees: OSHA recordables, employee satisfaction, absenteeism, employee turnover, empowerment index, grievances, training time per year, competence levels, salary levels, benefit levels, family-support services, percentage of flexible schedules
• For Community: safety record, salary levels, community satisfaction, legal actions (Kotter & Heskett, 1992)
Effective metrics are leading indicators; they forecast future trends inside and outside the organization. They’re objective and unbiased, and they’re normalized so they can be benchmarked against other companies. They need to be inexpensive to collect as well as unobtrusive—they shouldn’t disrupt work or the trust of your employees. And they need to discriminate meaningful small changes. They should be appropriate (measure the right things) and efficient (so you can draw many conclusions out of your data set). They need to be comprehensive, showing all the significant features of the organization’s status. And of course they need to be quantifiable and statistically reliable. A balanced set of measures that follow these criteria would be the perfect measurement system to judge your project management effectiveness.
PM Solutions’ Center for Business Practices is surveying several hundred organizations who have implemented project management initiatives to determine the value of those implementations to their organizations based on a balanced family of measures as outlined above. Similar to the study done by Bill Ibbs and Young Hoon Kwak for PMI, this study hypothesizes that benefits accrue as an organization moves up the PMMM ladder. But, unlike the Ibbs-Kwak study, this study will move beyond simple ROI calculations. Different organizations get value in different ways, as shown by the discussion above on using a balanced family of measures. The Center for Business Practices is surveying these organizations to discover which of the many possible measures the different organizations use to evaluate their businesses and what the outcomes are given their organizations project management maturity. Organizations will first perform a self-assessment using the Project Management Maturity Model. Then organizations will answer a series of questions about the value generated by their project management initiatives. A sample of questions is presented in Exhibit 3. Preliminary results of the study will be presented at the PMI 2000 Seminars & Symposium.
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Drucker, Peter. (1993, 13 April). We need to measure, not count. Wall Street Journal.
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Ibbs, C.William, & Kwak, Young-Hoon. (1997). The benefits of project management: Financial and organizational rewards to corporations. Upper Darby, PA: Project Management Institute.
Kaplan, Robert S., & Norton, David P. (1996). The balanced scorecard: Translating strategy into action. Harvard Business School Press.
Knutson, Joan. (1999). Measurement of project management ROI: Making sense to making cents. Proceedings of the Project Management Institute Seminars & Symposium.
Kotter, John P., & Heskett, James L. (1992). Corporate culture and performance. The Free Press/Macmillan.
Strassmann, Paul. (1996). Introduction to ROM® analysis: Linking management productivity and information technology, www.strassmann.com.
Proceedings of the Project Management Institute Annual Seminars & Symposium
September 7–16, 2000 • Houston,Texas,USA