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Genius PMO: Tracking A Project’s Financial Benefit Is Pure Genius

January 24, 2012 | Author: PM Hut | Filed under: Cost Management

Genius PMO: Tracking A Project’s Financial Benefit Is Pure Genius
By Chris Niccolls

Recently, the NYC chapter of the Project Management Institute Marc Resch gave a compelling presentation on the importance of cash flow models. In a very short time, Mr. Resch managed to cover a lot of very important territory. While I don’t have the room to go into all of these ideas here, I did want to focus on a few ideas. Specifically this Blog is going to focus on a key question, “How do we track the benefits that are created through PMO projects?” Sounds simple right? Maybe not! Resch made a convincing argument that most PMO’s are missing the point. They are trying to track project value, but they have chosen to track the wrong metrics. Let’s dig and see what we find!

I: Track The Right PMO Metric: Generally, we track whether our projects are on time and on budget. Unfortunately, inexperienced PMO Directors stop at these two metrics, and miss what really counts… the successful delivery of the project! Even when you are on time and on budget, not all projects… perhaps the majority of projects… deliver the benefits they were intended to. Software fails, training doesn’t always improve performance, and of course the cost/benefit assumptions can be wrong. Because of the pressure to show tangible benefits, projects are often based on exaggerate benefits. For example: extending the payback period (for more than three years); omitting key costs; failing to allow for the cost of money; and benefits that don’t really translate into money. What’s the solution?

II: Cost It Correctly: You need to begin with the right cost assumptions, not just the assumptions that get the project approved. A PMO needs to challenge the assumptions of business units when they create a questionable cost-benefit analysis. Of course, many business unit managers may not know how to develop a comprehensive cost analysis. By pushing back, and explaining why the numbers are wrong, the PMO can spread knowledge about how to build better financial models for projects. When projects have accurately forecasted benefits, we can find and eliminate unprofitable projects earlier in the process. Projects that should go forward will have trackable benefits. Reporting to senior management that a $1 million project is 3% under budget is… OK. It is far better to report that a $1 million project will hit break even in 60 days, deliver $20,000 per month through 2012, and then $100,0000 per month for the 1st six months of 2013. When you talk in terms of the financial results of a project, you speak the same language as your management.

III: Verify The Benefits: The financial benefits of a project are the true “last deliverable” of every project. However, this deliverable, the justification for doing the project in the first place, often happen months or years after the project is closed… making it impossible to know at the time of the closing if the project actually succeeded. Which is a pretty strange concept. There are lots of things that could go wrong, or just go unmeasured. You could address this a couple of ways. You could keep the project open until the benefits are verified, but this wouldn’t work with the culture of most firms. The other option is to look at every project as two separate projects. The primary project is the traditional PMO work; you close by rating the budget and schedule (on-time, on-budget)and other qualities of the project management. The second project is follow up on the BENEFITS of the project; here, we have a checkup at set intervals, say every six months. For a project that runs one year past the project close, your PMO would check in once and then have a final closing that analyzes the benefits of the project. And the last item for you to consider…

IIII: Sort The Project Types: In the broadest sense a PMO manages two types of projects – projects you must do and projects that you choose to do. The projects you must do are “cost of doing business” projects. The rest are “improvement” projects that bring benefits to your firm… lower costs, higher volume improved quality, etc. The problem is that PMO’s are under pressure to show a financial benefit, and “must do” projects rarely show a benefit. Not if the accounting is honest. Senior management assumes that all projects deliver financial benefits, forcing both the line manager and the PMO director to waste a lot of time trying to show benefits that don’t exist. By looking at all projects as just two types, you can avoid this trap. Take a look…

  1. Cost of Doing Business: You must do this project. Perhaps this is because of a legal requirement, or it’s a necessary business function (ex. planning a move to a new office). There might be some financial benefit, but if there is it is accidental. And you can’t classify “avoiding a fine” as a financial benefit. Instead, the key project question is, “Do I design this project based on the lowest cost or the lowest risk of failure?” If your firm could be fined $50, you will probably choose the least-expensive option… which might be to do nothing and get a $50 fine every now and then. But if the risk is that your firm will be closed, then you probably want a “lowest risk” option.

  2. Improvement: An improvement project is driven by a need to improve… something. An improvement project may get combined with a “must do” project, but these are usually separate. The benefit of the project may not have a direct financial benefit, such as an improvement in customer satisfaction. Here the key project design question is, “Do I want to maximize the benefits of this project, or do I want to minimize the cost?” If you can scale up the project at a low cost, would you argue that it should be expanded so that greater financial benefits can be realized? ) Or are the benefits very marginal, in which case making it a very minimal project might improve the financial analysis.

Thanks again for Marc Resch for reminding us of the importance of realistic and truthful financial analysis in project management. While we don’t do project management just for the purpose of saving or generating money, PMOs are financed by our firms in order to further financial goals. Yet, we often get so caught up in the process of tracking our projects that we focus on tracking the project management and not the project itself. Cost and schedule matter, but project results matter more. And that’s my Niccolls worth for today!

Chris Niccolls is a Project Manager with process improvement expertise, who can drive change by driving communication. He has managed large, global operations; built Project Improvement Offices (PMOs) and been a hands-on project manager. He can identify why operations don’t work, and turn around poorly performing services. You can read more from Chris on his blog.

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This entry was posted on Tuesday, January 24th, 2012 and is filed under Cost Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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