Ten Consequences of NOT Regarding Projects as Investment!

By Steve the Bajan

My last article was titled “The Benefits of Recognizing Projects as Investments,” and explored both the resistance of some people to this re-definition and the advantages that such an approach would generate. This article will explore some of major consequences of ignoring this essential nature of all projects.

This is a list of ten problems we might expect to encounter due to trying to manage projects in terms other than as investments. And remember, this lack of recognition is the current state of the project management discipline – so as you read this, see if many of the issues I describe sound familiar!

And after each one is a question. I’d appreciate your letting me know, one by one, if you’ve run into any of these situations.

1.      There would be much debate/discussion about how to judge project results.

Terms like “success” and “failure” would be thrown around, with little agreement about their precise definitions. Some would argue that finishing later than some arbitrary deadline and/or over some equally arbitrary budget automatically equals failure, while others would point out that the extra time and money may have helped produce a far more valuable product. (Three classic examples of this are the Sydney Opera House and the movies Titanic and Avatar, but there are plenty of others.) And there would be no accepted metric for determining who is correct.

2.   Projects would be completed to the original specifications and parameters, but after the project is over, the sponsor/customer organizations would realize that they will not benefit nearly as much as they had hoped.

Scope components (work packages and activities, but also projects within programs) are routinely planned and developed without being specifically tied to the benefits and value they are designed to generate. And thus the sponsor/customer does not get the desired benefits. Indeed, this whole problem area is being addressed in the U.K. by the development of benefits realisation management, the discussion topic in this LinkedIn group.

3.   The important value drivers of project investments would not be mapped to projects’ scope, both product and work scope. The result would not only be omission of key elements as mentioned in #2, but also the inclusion of work that should have been jettisoned at some point: scope that adds time and cost but with little or no added value.

With recognition of the investment nature of projects, there is a Total Project Control (TPC) technique for addressing this within the framework of project management: the value breakdown structure (VBS). The VBS estimates the value-added of optional scope components. But when tied to drag cost, it also helps to ensure that scope is limited to those components and work items whose true cost (TC = drag cost plus resource costs) is more than their added value, and that those that do not achieve that threshold can be identified for modification or elimination. (For more, see this blog article “How to Use the VBS and Critical Path Drag to Ensure Maximum Project/Program Benefits.”)

4.   During execution, project performance would be judged only on the basis of tangential metrics, such as time and cost, that do not directly quantify value decay nor show how value might be increased.

Earned value metrics are, in most cases, pretty good for cost management. However, they incorporate huge distortions when used for schedule management (primarily due to the failure to incorporate the most important schedule information, critical vs. non-critical path progress). This can be ameliorated through techniques explored in my book Managing Projects as Investments: Earned Value to Business Value. But almost no organization is using these techniques, leaving EVM schedule tracking at best a guess and at worst a metric that institutionalizes moral hazard and encourages gaming the numbers. And these cost/schedule metrics are unrelated to the expected value for which the scope is undertaken.

5.   If, as often happens during projects, the expected value ofthe scope either increases or decreases (or even disappears!), that information would not be incorporated in progress metrics and reports.

A change in the expected value of any investment should always trigger analysis of where we stand and if the planned future course needs to be altered. This is particularly true for a project if it becomes clear that the value terms on which the current plan was developed have changed. An adjustment in scope or schedule might restore or even increase value. But the formal incorporation of project value analysis as part of the reported project progress data is so rare as to be almost non-existent. This would change in a hurry if the expected value of a project investment became recognized as an important variable and thus a standard progress metric.

6.   Basic investment theory emphasizes quantification of all factors that might impact expected value. Not recognizing this essence of every project would mean that significant factors such as the impact of time on a project’s expected return are left as an externality, and are not be used for project decisions and resource justification.

The best project scheduling in any project management discipline takes place in the energy generation industry such as maintenance shutdowns of power plants and refineries. Great effort is invested in developing those schedules largely due to the fact that the value/cost of time is (a) large, (b) analyzed and quantified, and (c) well known to planners and to just about every member of the project team. But on most other types of projects, the value/cost of time is usually unquantified (‘But, oh, it’s really important!”), making it very difficult to justify the cost of additional resources that, if the numbers were known, would be repaid many times over through the search for opportunities for a shorter schedule. (Note that the resulting inefficiency is often repeated and multiplied many times over in multiproject organizations where the staffing levels of functional departments are not driven, as they should be, by the impact of resource shortages on the critical paths of projects.)

7.   During project execution, if the discovery is made that the addition of specific resources can increase the project’s value either by adding valuable quality or accelerating (or avoiding delay of) the schedule, it would very difficult or impossible to make the case for the added expense of those resources. The result would be that project value is often greatly reduced when it could have been rescued by going a little over budget.

Enhancing work scope and improving schedule almost always require increasing resource usage. Project resources always cost money, and the amount of money is carefully tracked. Thus the only way to justify those resources is to show the increased value of the investment. This is impossible if the expected value of scope and time arenot estimated, planned and tracked.

8.   There would be no way (and there should be!) to base project prioritization and resource targeting on investment value, either between individual projects or across the entire multiproject portfolio.

When more than one project needs a specific resource at a given time, which should get it? The initial (and correct) answer is the one that needs it on the critical path. But what if two or more projects need the resource on the critical path? The fact that one project would be delayed by four weeks while the others would only be delayed by one week each is not sufficient information. What is the cost of time (i.e., the impact of time on the project’s expected value) if each project is delayed? The four week delay might only reduce the portfolio value by $20,000, while two one-week delays on the other projects might reduce it by $100,000. Only investment analysis combined with drag cost computation can generate the correct answer.

9.   Projects would often be cancelled that should continue to be funded, and other projects that have their funding renewed should be cancelled.

Cutting the funding flow on any project is clearly an investment decision! Yet the lack of investment data makes the continue/terminate decision process fraught with angst, anger and arbitrary adjudication. Although other metrics play a role, the two most important numbers to consider are expected value and cost estimate-to-complete (factoring out sunk costs). But the lack of defining a project as an investment means that expected value is rarely estimated and even less often tracked. The basic index for this sort of decision is the DIPP, based on my article “When the DIPP Dips: A P&L Index for Project Decisions” published in Project Management Journal in September, 1992. Yet almost twenty-three years later, the most fundamental metric of that formula can seldom be produced when such a decision is necessary, and thus the wrong decision is often made.

10. Project managers would not be appreciated for what they genuinely are (i.e., investment managers entrusted with funds and responsible for ensuring maximum return through their knowledge and skills) but instead would often be regarded as “overhead on a cost center”.

The only way that our project management discipline will get the respect it deserves is by showing its value in clear monetary terms. And that means dealing with projects as investments.

There are actually many other unfortunate things that can happen due to projects not being managed as investments. But the ten listed above provide a strong foundation for the case that we need a new definition for “project”.

Fraternally in project management,

Steve the Bajan

 

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