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The Project Balance Sheet

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The project balance sheet is like its accounting cousin: a double-entry two-side view of the project. It reflects the sponsor's view and the PMO view and the gap in between

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Page 1: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Risk analysis and the Project

Balance Sheet

John C. Goodpasture Square Peg Consulting

[email protected]

Page 2: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Sponsor’s & PMs

Sponsors have expectations [scope, payoff] and make resource commitments [time and money]

PMs calculate capabilities and capacity for the specified scope and resources

What happens if the former and the latter don’t equate?

Page 3: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Somebody has to take a risk!

Page 4: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Every Project is a

balance….

Quality

Resources: time,

$s, staff, facilities

Function

Feature

Convenience

Conformance to “requirements”

Value: Needs for

which

stakeholders pay

Benefits, Investment

Risk

Page 5: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Balancing the Project

Investor

Desired outcomes are

business driven

Deterministic, limited,

resources

Risk proportional to

expected reward

Unknowing of

implementation

details

Project Manager

Outcomes specified

in charter

Resources are

estimates

Risks arise from

internal & external

sources

Details drive risk and

resource estimates

Project Equation: Resources committed =

Resources Estimated + Project Risks

Page 6: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Project Value from

the Top Down

Project Estimate from

the Bottom Up

Investor’s

Resource

Commitment

Management’s Expected

Return on Investment

Risk

Scope

Time

Resources

Project’s Employment

of Investment

“Risk balances Value with Capacity”

Page 7: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Sponsor’s view of the

project

Business case of

customer needs

and wants

Financial

measures &

imperatives

Milestones for

operations

Organizational

assets committed

Project capacity

and capability

respond to value

Features

Functions

Benefits

Resources

Business Risks

Page 8: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

PMs view of the project

Project

values from

goals and

strategy Risk As much risk as is

necessary to close

any “gaps”

Scope & Quality

Time Cost &

Resources

Page 9: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Risk begins with business case

translation to specification

Requirements

Specification has

“sampling errors”

Project Business

Case

Sample business case via

elicitation and analysis to

develop specification

Validate Specification with

business case to discover

sampling errors

Verify deliverables with

business case

Correct errors and baseline

Manage Requirements

•Identify change

•Evaluate Impact

•Approve and apply change

Requirements baseline Sampled points of the

business case

Page 10: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Project Balance Sheet

Project Value Project Implementation

Risk from requirements translation error

between business case and project plan

Risk from misalignment between resources

offered in the business case and the

implementation estimates

Risk from the uncertainty that

requirements may change during the course

of the project

Vision state: Describes the state of the

organization when the business case is

satisfied

Business Case Baseline: Specifies the

required benefits, scope of functionality

and performance, resource input, and

timeline for performance and payback

Business rules: Specifies the context,

constraints, and imposed rules that govern

the project

Requirements Baseline as translated from

the business case into an actionable

requirements specification

Functional releases: sequence the

satisfaction of the business case

Implementation estimates of scope and

quality, resources, and time

Page 11: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

PM’s risk impact chart

Project Sponsor’s

expectation

Face Value of Impact of risky

outcome

Probability of Occurrence [0-100%]

Expected Impact

[Face Value x Probability]

EMV of Impact @

$15K per day

Deliverables

will be on time

and within

budget

60 days delay 5% 3 days $45K

10 days early 15% (1.5 days) ($22.5K)

On-time

delivery 80% 0 days $0K

Expected Impact of identified

Risk 1.5 days $22.5K

Schedule Example

Page 12: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Distribution for Schedule Example

On-time 10 days

Early

60 days late

0.15

0.80

0.05 Expected Outcome

+1.5 days

Pro

babili

ty o

f O

ccurr

ence

Page 13: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

Balance Sheet view

On time

delivery,

within cost Risk

Manage to avoid 60

days x $15K = $900

Scope & Quality

Time Cost &

Resources

Negotiate

for 1.5 days

&

$22.K

Page 14: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

What’s been learned?

Every project employs risk to balance

sponsor expectation with PM estimates

Project balance sheet is a tool for

capturing the sponsor and PM view of

the same project

Translating the sponsor view to the

project view is a sampling process that

has sample error. This is a risk source

Page 15: The Project Balance Sheet

Square Peg Consulting

Copyright 2001, all rights reserved

[email protected]

www.sqpegconsulting.com

johngoodpasture.com

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