Winning in a world of limited project spending
In the 30-month period ending 31 December 2002, the US stock market, as measured by the S&P 500, plunged 40%. The so-called tech stocks fared even worse. The tech heavy NASDAQ plummeted 66% in the same period, from 3966 to 1336. Even the giants stumbled. IBM‘s shares dropped 36% during calendar year 2002, while Citibank, in the normally less volatile banking industry, lost 25%. EDS saw 73% of its valuation evaporate in 2002, 33% in June 2002 alone. EDS investors lost over $24 billion in the 12-month period ending 31 December 2002.
Predictably, the corporate response has been to cut costs. In many cases, corporations have reduced spending by scaling back discretionary projects. Corporations that once focused on successfully managing individual projects, and then on successfully managing a portfolio of projects, have now turned their attention to selecting the right portfolio to achieve their strategic objectives. This approach appears to be working, at least for investors. At the end of the second quarter, profits for the Fortune 500 are up 9-10% versus a year ago, even while non-energy revenue has grown just 1% (Racanelli, 2003). But the impact on project managers has not been as positive, resulting, in many cases, in unemployment.
In some respects, this instability is inherent in the project management profession. Project managers are not only subject to the inherent fluctuations in the economy, but face potential unemployment at the conclusion of every project. But do we need to continue to accept this risk? Is there anything the average project manager can do to insulate against the effects of declining project spending? To explore this question, we need to look more broadly at today's business environment and the project context.
Today's Business Environment
The decline in project spending is not just anecdotal or limited to a few high-profile companies. The U.S. Census Bureau (2003) reports that in 2001 (the most recent year for which data is available), business investment declined 4.1%, the first decrease since it began compiling the data nine years ago. Some sectors were especially hard hit, including manufacturing (down 10.4%), information (down 8.7%), and professional, scientific and professional services (down 10.5%).
Simultaneously, unemployment has risen. The U.S. unemployment rate was 6.1% in July 2003 (Bureau of Labor Statistics, 2003), after dipping below 4.0% in the second half of 2000. The underemployment statistics are even more disturbing. The labor underutilization rate, which includes “total unemployed, all marginally attached workers and total employed on a part-time basis for economic reasons”, is currently in the range of 10-11%, up from 6-7% in the second half of 2000 (Murray, 2003).
It is not clear how quickly project spending will rebound. While it is tempting to think of it as cyclical, there are indications corporations are now applying a discipline that will last for many years. Certainly, those senior executives who have found themselves making painful cuts to correct for the excesses of the past will be reluctant to loosen the purse strings without being assured of an adequate return on investment.
In spite of this gloomy scenario, it is also worth noting that project spending will not decline beyond certain minimums. Projects are the engine of change, and no corporation can survive in today's marketplace without constantly adjusting to the competitive pressures in the environment. As Sivy (2003) points out, growing companies tend to be those that invest heavily in R&D.
The Project Context
In today's corporate environment, projects are implemented because they further the strategic goals of the corporation. A well-developed strategic planning process resembles the cycle shown in exhibit 1. The process begins with the establishment of broad, corporate objectives. For a new or struggling organization, the objective may simply be “survival”. For most for-profit organizations, the objectives will be related to profit or growth, or perhaps some measure of shareholder value. The wide use of stock options in the past decade has raised the importance of share price as a corporate objective, whether or not it appears in official corporate documents.
Exhibit 1: Typical corporate strategic planning cycle
Management then formulates a strategic plan to achieve these broad corporate objectives. This plan may take a variety of forms, but generally articulates a set of choices and priorities. For example, a corporation may choose to concentrate in certain industry segments or geographic regions, or to emphasize certain brands or customers. Some choose a specific “value discipline” (Treacy & Wiersma, 1995), while others simply seek to maintain a competitive advantage through superior market research, innovation, or low-cost delivery. In some corporations, this strategic plan is well documented and communicated to every employee. In others, it is largely unstated, and discernable only by observing the actions of top management. But every corporation, whether large or small, operates under a set of goals and strategies that top management believes will best achieve the overriding corporate objectives.
The corporate strategic plan drives the selection of projects. When money is abundant, corporations can take a shotgun approach to project selection, choosing to do anything with a reasonable chance of success. In extreme cases, projected return on investment is the only criteria. On a broad scale, this is reflected in the tendency of large companies to diversify into businesses that have almost no discernable relationship to their core operations. But when money is tight, corporations are necessarily much more selective, choosing projects that are clearly aligned with their key strategies. On a corporate scale, this approach is exemplified by the divestiture of “non-core” businesses and the outsourcing of “non-core” operations.
The implementation of the corporate strategic plan, through execution of the project portfolio as well as the ongoing operations, leads to certain results. These results may be deemed satisfactory or unsatisfactory, but irrespective, they are the fodder for assessments that allow management to make adjustments at several points in the process (exhibit 2). The shortest feedback loop simply measures the effectiveness of the execution. It addresses the question: “Were our projects implemented effectively?” and typically involves the traditional project effectiveness measures: cost, schedule, and conformance to the specifications.
But to a corporate strategist, the longer feedback loops are much more important. The next level of assessment in this model addresses the question: “Did we choose the right projects?” or more specifically, “Did our project portfolio achieve the goals we established in our strategic planning process?” The measures for this assessment are broader, and may include: revenue, productivity, operating costs, and product availability. The next level assesses the effectiveness of the strategic plan and answers the question: “Do we have the right strategic plan to achieve our corporate objectives?” Typically, it involves measures like net outside sales, profitability, and customer satisfaction. Finally the corporation must occasionally examine its fundamental corporate objectives, answering the question: “Do we have the appropriate corporate objectives?” By definition, this assessment must be done in the context of the owners’ expectations.
Exhibit 2: Typical corporate feedback loops
For the purposes of this paper, it is important to note that this process exists in every organization, from the simplest single-employee business to giant multi-national corporations. In many cases, the components are not systemized or documented, but undeniably, every discrete business organization has one or more owners with specific objectives, is managed within a set of choices designed to achieve those objectives, and is producing measurable results.
The Project Manager's Role
Within this model, the role of a project manager has typically been confined to the “execution” step. PMI‘s Guide to the Project Management Body of Knowledge (2000, p.205) defines project management to be “the application of knowledge, skills, tools, and techniques to project activities to meet project requirements”. Other authors agree. Whitten (1999, p.3) states that the project manager “directs the planning and execution of the project and is held personally accountable for the success of the project.”
Perhaps the best way to understand the traditional role of a project manager is to look at how success is defined. Kerzner (1998, p.25) asserts, “The definition of success is stated in terms of five factors:
- Completed on time
- Completed within budget
- Completed at the desired level of quality
- Accepted by the customer
- Resulted in customer allowing contractor to use customer as a reference.”
Similarly, Pinto and Slevin (1998, p.67) note, “Projects are often rated successful because they have come in on or near budget and schedule and achieved a successful level of performance.” In other words, project success is usually formulated in terms of short-term results and delivery, often summarized as cost, schedule, and conformance to specifications.
In contrast, it is instructive to think about some of the adjacent process steps, for example, project portfolio. How does a corporation go about selecting the projects that constitute its portfolio? Meredith and Mantel (2003, pp.78-85) describe an eight-step process:
- Step 1: Establish a project council
- Step 2: Identify project categories and criteria
- Step 3: Collect project data
- Step 4: Assess resource availability
- Step 5: Reduce the project and criteria set
- Step 6: Prioritize the projects within categories
- Step 7: Select the projects to be funded and held in reserve
- Step 8: Implement the process
While this is clearly not the process used to plan and implement a project, some elements are strikingly similar. For example, the portfolio development process has a defined beginning and a defined end, and requires a cross-functional team. It also involves the development of “scope”, an assessment of resources, and a prioritization of activities. Clearly, many of the tools of project management apply equally to portfolio development, and the skills exhibited by effective project leaders are just as important in this environment. A similar argument can be made for the development of the corporate strategic plan.
And so the obvious solution for the project management profession facing declining employment demand is not to argue for more project spending, but to assume responsibility for more of the work. Effective project managers clearly have the necessary skills to play a larger role in the corporate strategic planning cycle. Portfolio development and other parts of the cycle may not require sophisticated earned value analysis, but they do require scope management, cost management, human resource management, communications management, and integration management. And they certainly require the five general management skills the Guide to the Project Management Body of Knowledge (2000, p.21) describes as “often essential for the project manager”: leading, communicating, negotiating, problem solving, and influencing the organization.
It is interesting to note that other researchers have reached this same conclusion, but from different approaches. Shenhar (2002) proposes a new project management framework he entitles “Strategic Project Leadership”. He asserts that in today's dynamic business environment, corporations must find new ways “to make projects into powerful, competitive weapons”, and urges project managers to focus “projects on creating competitive advantage and winning in the market place.” Morris (2003), in a keynote address to 17th World Congress on Project Management, concludes: “The result is that while project management has historically been seen within a well-defined context of executing a task ‘on time, in budget, to scope’ it is increasingly being seen that it has to operate within a much broader, and subtler environment.”
One of the key differences between execution and other phases of the strategic planning cycle is the performance measures. Projects are typically evaluated by cost, schedule and conformance to specifications. But these are not important to the other steps in the cycle, and it is even questionable as to whether they deserve their prominence in project management. Certainly, the general public, in its historical assessment, discounts the importance of cost and schedule entirely.
Kodak's Project Orion was reputedly a very well managed project, incorporating a variety of innovative techniques to develop the new Advantix photographic system released in 1996 (Adams, 1998). PMI recognized it as the 1997 International Project of the Year, and Business Week selected the system itself as one of the best new products of 1996. But Kodak's stock price has fallen 67% since the introduction of the Advantix system, in part because it failed to anticipate the accelerating switch to digital photography (Bandler, 2003).
In contrast, the Sydney Opera House, which dominates Sydney Harbor with its graceful sails, is arguably one of the most recognizable buildings in the world. Yet, from a project management perspective, it was a spectacular failure. When construction started in 1957, it was estimated to cost $7 million, and take four years to build. It was finally completed in 1973 for over $100 million (Architecture Week, 2003).
It is also arguable that cost and schedule performance are not strategically important to the corporation. Even when time to market and cost pressures are present, these measures are only short-term goals designed to achieve a broader objective. Shenhar, Levy and Dvir (1997) propose a multidimensional framework of project success, incorporating four success dimensions:
- Project efficiency
- Impact on customer
- Business success
- Preparing for the future
Unfortunately, of these four dimensions, only project efficiency can be measured during project execution and right after completion, which is why it has been so universally adopted. But it is also the least important, generally having little impact on the long-term success of the corporation.
Project managers would be well advised, therefore, to broaden their focus to higher-level measures in the strategic planning cycle. This is not only important to furthering the goals of the corporation, but it is a critical first step to positioning project management to assume a larger role in the strategic planning cycle. At the very least, project managers should be incorporating the measures driving the development of the project portfolio: revenue, productivity, operating costs, and product availability.
The Path Forward
While assuming responsibility for more of the strategic planning cycle is a logical step for project managers, it is not necessarily easy. Others are competing for the same work. Nevertheless, there are some obvious tactics that will move us in that direction, especially if we work together in partnership with PMI and other professional associations.
First and foremost, project managers seeking broader responsibilities must accomplish their current responsibilities with excellence. The fundamental importance of this cannot be overstated. But in addition, it is also important to demonstrate both the aptitude and the interest in leading other parts of the strategic planning cycle. The way we accomplish this is somewhat organization dependent, but the following actions are almost certainly critical components:
- Concentrate on developing and demonstrating the necessary skills, especially the five general management skills: leading, communicating, negotiating, problem solving, and influencing the organization.
- Manage individual projects in their strategic context. This implies we identify the objectives assumed when the project was selected, and concentrate on achieving those objectives. This may require actions contrary to our traditional notions about cost and schedule. For example, there may be times when it is appropriate to recommend delaying a project, or even canceling it. There will likely be instances when it is appropriate to change the scope to address changing business conditions. But project managers who consistently come forward with such recommendations pertaining to their own projects, will soon be asked for advice on other people's projects too.
- Identify the broader measures of success, and structure the project goals accordingly. Project managers who successfully satisfy the real needs of corporate management will soon be entrusted with responsibility for other business activities.
PMI, and other professional associations, also have a role to play, by positioning the profession more broadly. To date, the emphasis has been on the management of individual projects. Fortunately, this narrow focus is slowly being addressed with such efforts as PMI‘s Organizational PM Maturity Model and the proposed standard on Program/Portfolio Management. Hopefully, PMI will continue, and even accelerate this work, while being careful to position project management, not just as a way to efficiently execute projects, but as a critical component of the strategic planning cycle.
As project managers, we need not fear the inevitable declines in project spending. We can survive, and even thrive. Working together, we can position ourselves, and the project management profession, as part of the solution, not the problem. We already have the skills. With careful planning, we can win in a world of limited project spending.
Adams, C. (1998, January). A Kodak moment: Advantix named 1997 international project of the year. PM Network, 12 (1), pp. 21-27.
Architecture Week. (2003, April 16). Jørn Utzon Pritzker prize. Architecture Week, (142) N1.1.
Bandler, J. (2003, July 24). Kodak's net falls 61%, hurt by switch to digital. The Wall Street Journal, 242(17) B86
Bureau of Labor Statistics. (2003). The employment situation: July 2003. Washington, DC: U.S. Department of Labor.
Kerzner, H. (1997). In search of excellence in project management. New York: Van Nostrand Reinhold.
Meredith, J. & Mantel, S. (2003). Project management: a managerial approach. New York: John Wiley & Sons.
Morris, P. (2003). The irrelevance of project management as a professional discipline. Proceedings of the 17th World Congress on Project Management (Moscow, Russia). Moscow: Russian Project Management Association.
Murray, M. (2003, August 13). After long boom, workers confront downward mobility. The Wall Street Journal, 242(31), A1
Pinto, J.K. & Slevin, D.P. (1988, September). Project success: definitions and measurement techniques. Project Management Journal, 19 (3), pp. 67-73.
Project Management Institute. (2000). A guide to the project management body of knowledge (PMBOK®) (2000 ed.). Newtown Square, Pennsylvania: Project Management Institute.
Racanelli, V. (2003, August 18). The trader: out of the dark and into the black. Barron's. Retrieved from http://online.wsj.com/public/barrons
Shenhar, A. (2002). Strategic project leadership: focusing your projects on business success. Proceedings of the Project Management Institute Annual Seminars & Symposium (San Antonio, Texas). Newtown Square, Pennsylvania: Project Management Institute.
Shenhar, A., Levy, O. & Dvir, D. (1997, June). Mapping the dimensions of project success. Project Management Journal, 28 (2), pp. 5-13.
Sivy, M. (2003, June). The big payoff from R&D. Money, 23(6) 63-64.
Treacy, Michael & Wiersma, Fred. (1995). The discipline of market leaders. Reading, Massachusetts: Addison-Wesley Publishing Company.
U.S. Census Bureau. (2003). Annual capital expenditures: 2001. Washington, DC: U.S. Department of Commerce.
Whitten, Neal. (1999). The enterprize organization. Newtown Square, Pennsylvania: Project Management Institute.
Proceedings of PMI® Global Congress 2003 – North America
Baltimore, Maryland, USA ● 20-23 September 2003