The value of project management
proof at last
James S. Pennypacker
Implementing project management adds significant value to organizations. This conclusion is the result of a survey of more than 100 senior-level project management practitioners by PM Solutions’ research arm, the Center for Business Practices. More than 94% of the respondents stated that implementing project management added value to their organizations (see Exhibit 1). Organizations cited significant improvements in financial measures, customer measures, project/process measures, and learning and growth measures. All size organizations in all industries reported improvement (Center for Business Practices Research Report 2001).
What should organizations expect when implementing project management initiatives? Average improvements on the order of 50% in project/process execution, 54% in financial performance, 36% in customer satisfaction, and 30% in employee satisfaction were noted by the companies surveyed. Those organizations that do not implement project management will be at a competitive disadvantage to those who do.
Measuring Value—Why and How
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 (ROI) calculation is needed to support this business justification for project management implementation (Knutson 1999; Ibbs & Kwak 1997).We believe that ROI calculations are, by themselves, 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. Today's executives have turned to a much broader view in valuing their organizations; many using a balanced scorecard approach, and this approach should be used in studies to determine the value of project management to an organization.
What Should You Measure
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 financials 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, nonfinancial criteria constitute 35% of the investor's decision (Christensen 1999).
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, and employees.
Exhibit 1. The Value of Project Management
Exhibit 2. What Should You Measure to Show Value?
The PM Value Model
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.
Exhibit 2 shows a list of measures that were used in our PM Value Model. The balanced family of measures is a mix of financial, operational, and growth measures that show value to stakeholders. Measures in these categories were also 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.
Results of the Study
The CBP surveyed senior practitioners with knowledge of their organizations’ project management practices and their organizations’ business results. In every measurement category, organizations reported positive results in implementing project management improvement initiatives. The survey revealed that most companies strategically rely on multiple coordinated project management improvement initiatives rather than just one or two. Organizational initiatives included implementing a project office, a project management methodology, project management software, integrating project management into key company processes, training staff in project management tools and techniques, and deploying a development program for project staff. Over 70% of the organizations implemented three or more initiatives within the past three years. A list of selected results of the Value of Project Management survey is shown in Exhibit 3.
Exhibit 3. Selected Survey Results
Exhibit 4. Project Budget Performance
The survey showed clearly that organizations often don't collect the kinds of metrics needed to justify the implementation of project management within their organizations. The most responses were related to project/process measures, as one would expect. The information on changes in budget performance, schedule performance, and requirements performance (see Exhibits 4, 5, and 6) show clear value to project performance with the implementation of project management improvement initiatives. It's clear that project management improves project performance. What is needed to justify the strategic implementation of project management—managing your organization by projects—is improved data gathering on measures that show improvements in other areas that support the organization's strategies.
The study also makes it clear that organizations do not gather the exact same metrics within a category, making strict comparisons impossible. For example, to show improvements in requirements performance, organizations used a large variety of measures (see Exhibit 7). They differ because organizations have differing values, differing cultures, and differing data collection possibilities. The key to this study, however, is that, no matter what measures were used, significant improvement in requirements performance occurred because of the implementation of project management improvement initiatives.
Exhibit 5. Project Schedule Performance
This Value of Project Management study is another important step in developing quantified data to use in support of selling project management within organizations. The PM Value Model can also be used by organizations as a model for collecting the kinds of measures used by senior executives to make the critical business decisions that lead to the success of their organizations.
Christensen, Chris. 1999. Measures that Matter. Earnst & Young website: www.ey.com.
Ibbs, C. William, and Kwak, Young-Hoon. 1997. The Benefits of Project Management: Financial and Organizational Rewards to Corporations. Upper Darby, PA: Project Management Institute.
Kaplan, Robert S., and Norton, David P. 1996. The Balanced Scorecard: Translating Strategy Into Action. Harvard Business School Press.
Knutson, Joan. 1999. Measurement of Project Management ROI. Project Management Institute Seminars & Symposium Proceedings.
Kotter, John P., and Heskett, James L. 1992. Corporate Culture and Performance. The Free Press/Macmillan.
PM Solutions. 2001, January. The Value of Project Management. Center for Business Practices Research Report.
Exhibit 6. Project Requirements Performance
Exhibit 7. Requirements Performance Criteria
Proceedings of the Project Management Institute Annual Seminars & Symposium
November 1–10, 2001 • Nashville, Tenn., USA