2-*Project Management

Copyright 2012 John Wiley & Sons, Inc.

Chapter 2Strategic Management and Project Selection

2-*Problems With Multiple ProjectsDelays in one project delays othersInefficient use of resourcesBottlenecks in resource availability

2-*Project Results30 Percent canceled midstreamOver half of completed projects came in up to190 percent over budgetOver half of completed projects came in up to 220 percent late

2-*ChallengesMaking sure projects are closely tied to goals and strategyHow to handle the growing number of projects?How to make these projects successful?

2-*Project Management MaturityProject management maturity refers to the mastery of skills required to manage projects competentlyNumber of ways to measureMost organizations do not do well

2-*Project Selection and Criteria of ChoiceProject selectionEvaluatingChoosingImplementingSame process as other business decisions

2-*Types of CompaniesCompanies considering projects fall into two broad categories:Companies whose core business is completing projectsCompanies whose core business is something elseThey can also be broken down as:Companies looking at projects to do for othersCompanies looking at projects to do for themselves

2-*Model CriteriaRealismCapabilityFlexibilityEase of useCostEasy computerization

2-*The Nature of Project Selection ModelsModels turn inputs into outputsManagers decide on the values for the inputs and evaluate the outputsThe inputs never fully describe the situationThe outputs never fully describe the expected resultsModels are toolsManagers are the decision makers

2-*Types of Project Selection ModelsNonnumeric modelsNumeric models

2-*Nonnumeric ModelsModels that do not return a numeric value for a project to be compared with other projectsThese are really not models but rather justifications for projectsJust because they are not true models does not make them all bad

2-*Types of Nonnumeric ModelsSacred CowA project, often suggested by the top management, that has taken on a life of its ownOperating NecessityA project that is required in order to protect lives or property or to keep the company in operationCompetitive NecessityA project that is required in order to maintain the companys position in the marketplace

2-*Types of Nonnumeric Models ContinuedProduct Line ExtensionOften, projects to expand a product line are evaluated on how well the new product meshes with the existing product line rather than on overall benefitsComparative BenefitProjects are subjectively rank ordered based on their perceived benefit to the company

2-*Numeric ModelsModels that return a numeric value for a project that can be easily compared with other projectsTwo major categories:Profit/profitabilityScoring

2-*Profit/Profitability ModelsModels that look at costs and revenuesPayback periodDiscounted cash flow (NPV)Internal rate of return (IRR)Profitability indexNPV and IRR are the more common methods

2-*Payback PeriodThe length of time until the original investment has been recouped by the projectA shorter payback period is better

2-*Payback Period Example

2-*Payback Period DrawbacksDoes not consider time value of moneyMore difficult to use when cash flows change over timeLess meaningful for longer periods of time (due to time value of money)

2-*Discounted Cash FlowThe value of a stream of cash inflows and outflows in todays dollarsAlso know as discounted cash flow or just discountingWidely used to evaluate projectsIncludes the time value of moneyIncludes all inflows and outflows, not just the ones through payback point

2-*Discounted Cash Flow ContinuedRequires a percentage to use to reduce future cash flowsThis is known as the discount rateThe discount rate may also be known as a hurdle rate or cutoff rateThere will usually be one overall discount rate for the company

2-*NPV Formula

2-*NPV Formula TermsA0Initial cash investmentFtCash flow in time period t (negative for outflows)kThe discount ratetThe number of years of lifeA higher NPV is betterHigher the discount rate lower the NPV

2-*NPV Example

2-*Internal Rate of Return [IRR]The discount rate (k) that causes the NPV to be equal to zeroThe higher the IRR, the betterWhile it is technically possible for a series to have multiple IRRs, this is not a practical issueFinding the IRR requires a financial calculator or computerIn Excel =IRR(Series,Guess)

2-*Profitability Indexa k a Benefit cost ratioNPV divided by initial cash investmentRatios greater than 1.0 are good

2-*Advantages of Profitability ModelsEasy to use and understandBased on accounting data and forecastsFamiliar and well understoodGives a go/no-go indicationCan be modified to include risk

2-*Disadvantages of Profitability ModelsIgnore nonmonetary factorsSome ignore time-value of moneyBiased toward the short-termPayback ignores cash flow after paybackIRR can have multiple solutionsAll are sensitive to errorsNonlinearDependent on determination of cash flows

2-*Scoring ModelsUnweighted 01 factor modelUnweighted factor modelWeighted factor model

2-*Unweighted 0-1 Factor ModelFactors selectedListed on a preprinted formRaters score the project on each factorEach project gets a total scoreMain advantage is that the model uses multiple criteriaMajor disadvantages are that it assumes all criteria are of equal importance

2-*Unweighted 0-1 Factor Model ExampleFigure 2-2

2-*Unweighted Factor Scoring ModelReplaces Xs with factor scoreTypically a 1-5 scaleColumn of scores is summedProjects with high scores are selected

2-*Unweighted Weighted Factor ModelEach factor is weighted the sameLess important factors are weighted the same as important onesEasy to computeJust total or average the scores

2-*Weighted Factor ModelEach factor is weighted relative to its importanceWeighting allows important factors to stand outA good way to include nonnumeric data in the analysisFactors need to sum to oneAll weights must be set up, so higher values mean more desirableSmall differences in totals are not meaningful

2-*Weighted Factor Model ExampleFigure B Page 60

2-*Advantages of Scoring ModelsAllow multiple criteriaStructurally simpleDirect reflection of managerial policyEasily alteredAllow for more important factorsAllow easy sensitivity analysis

2-*Disadvantages of Scoring ModelsRelative measureLinear in formCan have large number of criteriaUnweighted models assume equal importance

2-*Risk Considerations in Project SelectionBoth costs and benefits are uncertainBenefits are more uncertainThere are many ways of dealing with riskCan make estimates about the probability of outcomesSubjective probabilitiesUncertainty about:TimingWhat will be accomplished?Side effectsPro forma documents

2-*The Project Portfolio Process (PPP)Links projects directly to the goals and strategy of the organizationMeans for monitoring and controlling projects

2-*Symptoms of a Misaligned PortfolioMore projectsInconsistent determination of benefitsProjects that dont contribute to the strategyCompeting projectsCosts exceed benefitsNo risk analysis of projectsLack of tracking against the planNo client for project

2-*Purpose of Project Portfolio ProcessIdentify nonprojectsPrioritize list of projectsLimit number of projectsIdentify the real options for each projectIdentify projects with good fitIdentify co-dependent projects

2-*Purpose of Project Portfolio Process ContinuedEliminate risky projectsEliminate projects that skip the formal selection processKeep from overloading the organizationTo balance the resources with needsTo balance returnsTo balance short-, medium-, and long-term returns

2-*Project Portfolio Process StepsEstablish a project councilIdentify project categories and criteriaCollect project dataAssess resource availabilityReduce the project and criteria setPrioritize the projects within categoriesSelect the projects to be funded and held in reserveImplement the process

2-*Step 1: Establish a Project CouncilSenior managementThe project managers of major projectsThe head of the Project Management OfficeParticularly relevant general managersThose who can identify key opportunities and risks facing the organizationAnyone who can derail the PPP later on

2-*Step 2: Identify Project Categories and CriteriaDerivate projectsPlatform projectsBreakthrough projectsR&D projects

2-*Step 3: Collect Project DataAssemble the dataDocument assumptionsScreen out weaker projectsThe fewer projects that need to be compared and analyzed, the easier the work of the council

2-*Step 4: Assess Resource AvailabilityAssess both internal and external resourcesAssess labor conservativelyTiming is particularly important

2-*Step 5: Reduce the Project and Criteria SetOrganizations goalsHave competenceMarket for offeringHow risky the project isPotential partnerRight resourcesGood fitUse strengthsSynergisticDominated by anotherHas slipped in desirability

2-*Step 6: Prioritize the Projects Within CategoriesApply the scores and criterion weightsConsider in terms of benefits first and resource costs secondSummarize the returns from the projects

2-*Step 7: Select the Projects to be Funded and Held in ReserveDetermine the mix of projects across the categoriesLeave some resources free for new opportunitiesAllocate the categorized projects in rank order

2-*Step 8: Implement the ProcessCommunicate resultsRepeat regularlyImprove process

2-*Project ProposalsThe project proposal is essentially a project bidPutting together a project proposal requires a detailed analysis of the projectProject proposals can take weeks or months to completeA more detailed analysis may result in not bidding on the project

2-*Project Proposal ContentsCover letterExecutive summaryThe technical approachThe implementation planThe plan for logistic support and administrationPast experience