Reward Management on Projects: Shouldn’t Critical Path Workers Be Better Compensated?

Sorry for the silence the past several weeks – first ,family visitors for a month. Then selling our house and moving back into the city, into a rental apartment. A big project and lots of hard work: getting the house ready for “showing”, then moving. Still lots of boxes to unpack, but at leastthe furniture is in, if not all in the right spot. The P&S agreement on the sale should be signed today.

So I should be back on a regular basis hereafter.

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There is a sense that, in addition to basic productivity, every worker’s compensation should be based on three primary factors:

1. How rare, expensive and/or irreplaceable are the skills of the worker?
2. What value do they add to the endeavor/organization?
3. How hard/conscientiously did they work to provide that value?

A is the factor that is largely determined outside the organization that provides the employment. It depends on things like economic conditions, lagging response of labor markets in the form of educational trends and programs, and migratory flexibility. It is also the factor that is most easily understood by the corporate HR Departments that set compensation levels.

I well remember how in Boston from about 1997 to 2000, at any given moment there could be 10,000 jobs unfilled for computer programmers. Growing Internet usage, the dot-com bubble and the Y2K problem all combined to allow anyone who could qualify as a programmer to command a far greater salary than expert programmers could have done just a couple of years earlier, or would be able to do just a couple of years later. Companies and project teams were pleading with HR to boost salary offers to prospective new hires, and to give “stay” bonuses to programmers as incentives to not look elsewhere until their project was complete.

HR departments were often quite resistant to offering what they felt were exorbitant incentives. They knew what salary levels for programmers had been shortly before (and although they couldn’t know it, soon would be again!) and did not want to blow the whole organization’s wage structure out of the water.

But this reluctance (part of the phenomenon in economics that is known as wage-price stickiness) was hugely frustrating for project managers who needed new programmers to meet deadlines. They dreaded losing halfway through the project the specific programmer who had written the initial 50% of the code for a module. Yet Factor B above, the value the programmer was adding (or that would walk out the door with them if they left) was something that the folks in HR were not fully trained to comprehend. This is particularly the case regarding the disastrous consequences of delaying the critical path, especially in the charged atmosphere of product delivery in the high tech boom years!

This all brings us back to the crucial item that is explained in depth in my book Managing Projects as Investments and is discussed in many of these blog articles (you can find them by searching under the tags “value/cost of time” and “delay cost”): the fact that on the vast majority of projects, the value/cost of time is being left as an unquantified externality. It is not enough to quantify time simply in units of days or weeks. Nor is it sufficient to say: “Time is very important,” or “We can’t be late!” A project team has to know what the impact of duration, shorter or longer, is on the expected value of the project investment. That way, decisions that maximize ROI can be analyzed and made across the Golden Triangle of scope, cost and schedule.

The fact that must be recognized is that the refusal by HR to increase the offer to a new systems engineer by $20,000, or to provide a stay bonus of $15,000 to our current programmer, will result in an elongation of our critical path. At a drag cost due to reduced expected project value of, say, $100,000 per week!

Those who frequently work on the critical path of projects or programs usually have a lot of pressure on them. And they should – their work carries great value to the organization and significant drag cost for the time they take. But failure of an organization to recognize the value of such resources and to provide adequate remuneration to keep the project skipping on down the critical path often results in a lose-lose for all concerned.

Enabler Projects: Exploring More about Their Value and Opportunities

My previous blog article “How to Determine the Expected Value of Those Crucial Enabler Projects!” generated quite a bit of interest and discussion. I wish that the discussion had taken place in the Discussion FORUM on this site, where everyone who read the article could also have participated and responded to comments. However, the comments were posted on a couple of LinkedIn discussion groups, so that is where I responded. If you want, you can read the comments in the Managing Benefits group.

I think there was some confusion, for which I accept the blame for not being sufficiently clear. But these concepts are truly important. Understanding and identifying the nature and multiplied value of enabler projects on the program critical path offers opportunities to maximize investment value through acceleration of the entire program. Small increases in resource costs on the right activities on an enabler project can accelerate revenue or savings generation on the projects that are enabled.

Below, I have expanded portions of my responses from the discussion groups. I hope they will help clarify the concepts for readers here.

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One of the interesting points in the discussion group was that the bridge project actually had no benefits without the rest of the program (i.e., the resort) and therefore no financial value.

It all depends on how one defines “financial value”, doesn’t it? A very narrow, but not necessarily incorrect, definition would limit apply the term only to revenue producers. But even if one accepts that definition, it should be noted that I don’t use the term “financial value” at all in the blog article.

“Financial value” in the narrow sense may all come from the revenue generators. But clearly there is lots of “business value” generated by the bridge — and indeed, all other program work, or why would it be included in the program?

Both the gods and the devils are in the details. It’s the “business value” (to use the PMBOK® Guide 5^th Edition term) that the projects within the program add. Business value can be more than simply revenue:

• It can be savings, such as through improved efficiency.
• It can be value of a type that may not directly lead to revenues: lives saved through an immunization or manufacturing safety program, or an improved corporate image through a PR program.
• It can be the enabling or enhancing of revenue-producing work, such as through quality or marketing efforts.

All of the above clearly have value. If corporate accounting methods choose to define them as having no “financial value”, that’s fine — accountants often don’t understand project management. But program and project managers certainly need to recognize the full value of all the above efforts and consider ways of increasing that value!

By optimizing the business value of a project, one also optimizes the value of the program. And, if identified as such, an enabler project that is on the critical path of the program often represents an opportunity to greatly increase value (through the multiplier effect) by adding resources at just the right place and time to:

1. Reduce critical path drag;
2. Accelerate the enabler project’s schedule; and thus
3. Accelerate the delivery of the benefits thus enabled.

This is the case in the Paradise Island program, where accelerating the bridge allows the revenue producers to start producing their weekly revenues faster.

The business value estimate, and the impact of scope detail AND project duration on that value, is CRUCIAL information for decisions regarding a project within a program. That is the topic of that previous blog article (and indeed of the whole Total Project Control (TPC) methodology!). The project team cannot make optimum decisions unless it is aware of the impact on the program. That information should come from the program manager, who must understand it and inform the project team of the value/cost of time on the enabler project so that they can compute the drag cost of activities and identify critical path opportunities where they can “spend money to make money” for the program.

In the Paradise Island example, the bridge project team must know:

#1. That the bridge is an enabler for all the other (financial value) projects.

#2. That it is the direct predecessor of the other projects and is ON the program’s critical path.

#3. That its drag cost is therefore based not just on how much NOT delaying the collection of tolls is worth, but ALSO on NOT delaying the revenues from the hotels, shops, etc. All the activities on the bridge project that have critical path drag have a drag cost equal to the sum of the impacts on all the other projects! If we can save a week by spending $1M to accelerate the paving (if it is on the CP), that week saved would have had a drag cost of just over $3.5M. Spend $1M to save $3.5M? That’s what an opportunity looks like!

That is why it is so important to identify enabler projects — because of the huge opportunity offered by their drag costs, which can result in millions of dollars of added BUSINESS value, which can be turned into what may be defined as FINANCIAL value, e.g. revenues.

To re-emphasize, from an accounting viewpoint, the “financial value” distinction may have validity. But from an investment (i.e., program) point of view, this is not only a distinction without a difference – it’s a dangerous distinction if it prevents the program from taking steps to maximize the business value! Indeed, is this accounting distinction a part of the reason that projects and programs are not generating the benefits they should? If so, how tragic!

Of course, by this narrow definition of “financial value”, the hotels, restaurants, golf course, etc. in the Paradise Island program should also be of no financial value! The ONLY things of financial value are those “projects” where the hotel clerks, waiters, etc. run the guests’ credit cards!

Of course, those clerks’ projects are worth only a few dollars. The hotel project enables them, and therefore has a business value of $2M/week plus (the plus coming by kindling the value of the golf course and marina, which would likely generate less revenue without the availability of the hotels).

The bridge project enables everything else, and therefore has a much greater business value. And it also has lots of project management opportunity for increasing the program’s financial value!

The value impact is based in the completion of the program — but the TIME impact is the drag on every critical path activity, constraint, or other delay that contributes to the project duration. Critical path analysis clearly shows that it is not just the last activity or two in the project that delay completion – it is every activity (and bottleneck, constraint or other delay) on the ACTUAL (or as-built) critical path that delays project completion by the amount of its drag. Even the very first critical path activity in a large and long program delays completion!

The flow of projects within the program and its tranches of projects needs to be laid out showing the importance of each. But also the value of each, in monetary terms (because resources cost money), should then be entered into the program’s value breakdown structure (VBS). This can then be used by the project teams on the program’s critical path to compute project drag cost, seek opportunities for trading resource dollars for drag dollars, and thus to optimize the program.

The fortunate thing is that, as I wrote in my blog article of March 4^th titled “Educating the Boss!”, senior management usually understands these investment concepts very well. What they often don’t understand is (1) the detailed technical aspects of IT, manufacturing, plant maintenance, immunization, or whatever the project’s work is; and (2) the detailed aspects of project management: critical path analysis, resource bottleneck identification, resource leveling, and earned value tracking (benefits and distortions).

Unfortunately, the project-level personnel often don’t understand the language of investment! They have been trained in technical stuff that’s very complex and valuable: engineering, programming, sales, manufacturing, immunology, etc., but usually not in investments and investment analysis. If I had ten dollars for every project-level person I have taught over the past quarter century who did not understand even a simple investment concept like sunk cost, I’d have a lot more money!

Are there project managers who understand investment? Sure, just as some senior managers understand PM concepts like critical path analysis. Those folks who are strong in both areas are extremely valuable to an organization. But they are also rare!

This disconnect between the knowledge base of senior and project managers is something I have addressed several times here in my blog, and bridging(!) this gap is the main purpose of my book Managing Projects as Investments: Earned Value to Business Value. In that book, I do so by:

• Educating senior managers about those specific project-level techniques of which they need to have at least a moderate understanding (without getting into the weeds!), and how to implement them and encourage their use in their organizations.
• Educating project and functional managers and engineers of the investment aspects of these techniques.
• Explaining these techniques of the Total Project Control (TPC) methodology, which are simply enhancements to the standard toolbox of project managers intended to meld such techniques with an investment approach and metrics:
  1. The value breakdown structure, which ties the investment value of work packages and projects to the project/program investment value-added;
  2. Estimating the value/cost of time (especially on enabler projects);
  3. Critical path drag and drag cost analysis and optimization;
  4. The cost of leveling with unresolved bottlenecks (the CLUB), both single and multiproject for rightsizing staffing levels;
  5. The DIPP and DPI as scope/schedule/cost/risk-integrated indices for tracking and optimizing the expected value of the project/program investment.

The key is that ALL programs and projects ARE investments, and decision-making at any level WITHOUT reference to investment impact is doomed to (a) usually be less than optimal, and (b) sometimes be downright disastrous!

Fraternally in project management,

Steve the Bajan

How to Determine the Expected Value of Those Crucial Enabler Projects!

Every investment decision – stock purchase, real estate development, commodity options, new product development, poker hand – must be based on analysis that estimates the value that the investment will generate at some specified point in the future. That is one reason why the redefinition of projects as “investments in work” is so important. As most project and program professionals are keenly aware, a key area of disappointment with the way that projects are currently executed is their frequent failure to produce benefits. Defining them as investments will enforce renewed emphasis on the expected benefits—not just by listing them but also by:

1. Estimating the expected value of such benefits if delivered on a specific date;
2. Estimating how a change in that delivery date, later or earlier, might change that expected value;
3. Tying those benefits to specific items of product and project scope (via the value breakdown structure, or VBS);
4. Tying the items of project scope to the project duration and budget through critical path drag, drag cost and true cost (TC of a critical path activity = resource costs + drag cost); and
5. Making every project and program decision with the impact on expected value (and the DIPP) in view.

One of the crucial types of projects to deal with as an investment is the sort that in my book Managing Projects as Investments: Earned Value to Business Value is referred to as an enabler project.

• An enabler project is usually part of a larger overall program.
• Its value comes from its role in increasing the value of the overall program by enabling the other projects (and perhaps non-project work) in the program.
• In that role, its value is enlarged by the value of the projects it enables.
• Its acceleration or delay value/cost is therefore also often increased because of its impact in delaying or accelerating the schedules and value generation of the other projects.

There are many, many examples of this type of enabler project. But a concrete example is that of the development of a luxury vacation resort:

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Paradise Island Luxury Resort will provide luxury vacation time for the whole family!

• Five-star hotels and restaurants, as well as boutiques for the rich-and-famous. These are expected to generate an average of $2 million per week above operating costs, or $520M over 5 years after the Grand Opening.
• A championship-quality golf course, where the greens fees are expected to generate $1 million per week above operating costs, or $260M over 5 years after the Grand Opening.
• A marina for luxury yachts, expected to generate $0.5 million per week above operating costs, or $130M over 5 years after the Grand Opening.

One of the great attractions of the resort is its guaranteed privacy. This is due to the fact that it is located on Paradise Island. Although only a short distance from land, the cliffs that comprise the island’s perimeter make it completely inaccessible. We therefore have to build the Garden of Eden Bridge to the island in order to:

• Transport the heavy construction equipment and materials needed for the development, and
• To allow the guests to reach the island once the resort is opened.

It is planned to take 52 weeks to make the bridge ready for the transportation of equipment and materials. Only after that point can work start on the hotels, restaurants, boutiques, golf course and marina. The Grand Opening of the entire resort with all its features is intended for 104 weeks after transportation across the bridge becomes possible.

When the resort opens, a tollbooth will be placed on the bridge. It is expected that tolls will amount to $1,000 per week above operating costs, or $260,000 over five years.

QUESTIONS:

1. What is the expected value of the entire resort over five years?
2. What is the expected value of Garden of Eden Bridge over five years?
3. What is the value/cost of time on the Garden of Eden Bridge project?
4. Based on the information above, how much would it be worth if we could shorten the bridge project by six weeks?
5. If the Garden of Eden Bridge is being built by a contractor on a fixed price contract, what should the customer insert into the contract?

Scroll down for the answers.

ANSWERS:

1. What is the expected value of the entire resort over five years? Combined, the Paradise Island Resort is expected to generate $3.5M per week above operating expenses, or $910M over five years, plus $260,000 in tolls from the Garden of Eden Bridge.
2. What is the expected value of Garden of Eden Bridge over five years? $910.2M over five years! There is no value unless we build the bridge – it enables the entire project! So the value-added of the bridge project is equal to the value of the entire luxury development program.
3. What is the value/cost of time on the Garden of Eden Bridge project? Any delays on the bridge delay all the other projects, and the resort opening, on a one-to-one basis. Therefore the value/cost of time on the bridge project is $3.5M per week (+ $1,000 per week for the bridge tolls). In other words, that is the drag cost per week for every activity on the bridge project’s critical path.
4. Based on the information above, how much would it be worth if we could shorten the bridge project by six weeks? Each week that we can shorten the bridge project is worth $3.5M per week + $1,000. That means that the expense for additional resources that cost up to $21M (+$6,000 for the bridge tolls!) would be justified.
5. If the Garden of Eden Bridge is being built by a contractor on a fixed price contract, what should the customer insert into the contract? Substantial monetary incentives for each week earlier that the contractor completes the bridge. Unless the contractor is incentivized, he likely will not even seek opportunities to accelerate the schedule, costing the customer $3.5M per week for every opportunity overlooked. And if the customer doesn’t do this but the contractor recognizes the project as an enabler project, the contractor should:

• Approach the customer;
• Explain the situation;
• Point out that he might be able to accelerate the schedule by spending more money; and
• Suggest amending the contract to include time-based incentives that would maximize the customer’s value.

This is a very simple — but easy to understand — example of an enabler project and the importance of identifying it as such and of computing its multiplied value/cost of time. What are some other examples of enabler projects in the real world? Have you worked on any? Were their unique value aspects, as shown in this example, understood and exploited? If you have other examples from your experience, please describe them in this website’s Discussion FORUM here.

Fraternally in project management,

Steve the Bajan

Collaboration Across Time: All in All, Just Some New Bricks in PM Innovation

I recently engaged in an email discussion with a friend and colleague on the topic of innovation and new ideas in project management. My friend pointed out, correctly in my opinion, that there can be very few worthwhile techniques in project management that someone hasn’t thought of and used in the past. I think there is much truth to this. Ancient Egyptians surely must have been using some version of CPM, and even resource leveling, for the pyramids – after all, such methods are largely common sense even if a computer is not available.

I’ve been reading Walter Isaacson’s book The Innovators, which I enthusiastically recommend to all. One of his themes is that “collaboration” is often over different periods of time, and new ideas are almost always tweaks of previous ideas: enhancements or creation of new contexts.

Filippo Brunelleschi was not the first person to discover the principles of linear perspective – the ancient Greeks knew all about it. But it was Brunelleschi whose rediscovery underpinned the Renaissance and led directly to the great works of Raphael, Michelangelo, Leonardo and the rest of the Turtles. Perhaps there are PM ideas that the pharaohs used that are waiting to be rediscovered…

Sometimes an idea just appears before the appropriate context for it is ready. Leonardo da Vinci and other Renaissance thinkers designed the parachute, but it would be centuries before the internal combustion engine and the Wright brothers would lead the way to make it a practical and life-saving (not to mention military) contraption. This was truly a “temporal” collaboration, stretching across the centuries.

Project management’s traditional techniques and metrics like WBS, critical path analysis, resource leveling and earned value are not going to go away and be replaced by something else. Rather, they will be improved, enhanced, and perhaps narrowed to specific areas where their applicability is best fitted.

Many people ask me about my book Managing Projects as Investments: “Is it just another project management book with the same techniques as in all the others?”

I never know quite how to answer. Because no, I do not think any reader will have read the new concepts and techniques elsewhere (unless it’s in a different article or book by me). Yet these ideas all either sit atop the edifice of standard and venerable project management techniques, or are concepts that are so obvious that they must have been used by others previously, perhaps dating back as far as the pharaohs. (One of my corporate seminar attendees once said: “Steve, you have an amazing grasp of the glaringly obvious!” But I’m not unique in that.)

The concepts in my book are quite different from standard PM fare, as the title should indicate. They lay out a different overall approach, with enhanced techniques and metrics that aren’t found in books by other authors. So I do feel that, as a coherent methodology which includes these specific technical and metrical innovations, my approach is new. But in no way do I believe that each is not the product of a temporal collaboration, with my ideas being bricks that add to the work of those true giants who developed the WBS and CPM and resource leveling and earned value.

I feel sure that most of my specific techniques have been thought of and applied on specific projects before – how could something as obvious and valuable as critical path drag not have been previously calculated by schedulers, not just once but many times? It’s just that the concept and the method for doing the calculations have not made it into PM software or the various PM standards of the different national and international organizations.

To list some of these specific concepts:

• Projects are investments. Of course they are! Every project sponsor/customer in history has known this, whether or not they have stated it or incorporated metrics for tracking investment value. The fact that today this approach seems “different” is due to:

1. The failure to include the word “investment” in that definition of “project” which the 1996 PMBOK® Guide encoded and that now every PMP Prep class teaches by rote, and
2. The omission of ROI-based user input fields in PM software that would allow planning, tracking and optimizing of a project’s investment value.

• The creation of a method for measuring and indexing, in integration, the three sides of the Iron Triangle of scope, cost and schedule. This is what the DIPP and the DIPP Progress Index (DPI) do. But again, the knowledge that the project investment is impacted by scope, cost and schedule has been well known for decades, if not centuries. The DIPP metric simply extends earned value metrics and analysis to a project’s investment value.
• The idea that project time must be measured in monetary units goes back at least to the year 1748 and Advice to a Young Tradesman, by an Old One: “Time is a whole bunch of Benjamins!”
• The value breakdown structure (VBS) is simply an extension of the work breakdown structure that can be used to itemize scope’s value, set priorities, and ensure that the value-added of work is greater than its true cost.
• Critical path drag is just an extension of critical path theory; drag cost just combines it with the value of project time; and true cost (TC) just combines drag cost and budgetary cost.
• The cost of leveling with unresolved bottlenecks (the CLUB) for a specific resource is simply a way of combining the reduced investment value due to a delay with the specific resource causing that delay, on a single project, across a multiproject portfolio, and across an entire organization. But it rests on old techniques such as critical path analysis and resource leveling.
• The doubled resource estimated duration (the DRED) is simply a technique for measuring something every project manager understands and tries to deal with subjectively, but has not previously had a quantified way of estimating and managing: the varying resource elasticity of different activities in terms of the sensitivity of their durations to increased resource availability.

Other topics in the book point out how some of the inadequate metrics and techniques that we use are distorting our analysis of projects and introducing potential for the gaming of metrics and moral hazard, and how they could be improved to eliminate these problems:

• Deadline-based contracts that suffer from both the principal-agent problem and Parkinson’s Law;
• The schedule performance index (SPI) that ignores the all-important critical path and provides incentives for doing non-critical but large-budget work and even out-of-sequence work items;
• The measuring and incentivizing of functional manager performance on the basis of departmental utilization rate metrics which encourage functional managers to use counter-productive techniques like understaffing and multitasking to maximize “billable time.”

I believe that all of the new concepts in my book are valuable, or I wouldn’t have written a book about them. But they are merely enhancements to the core techniques of which others conceived and then “worked out the bugs”.

I know that I will never forget my reaction the first time (in 1987) I learned of critical path analysis (albeit without drag): “It’s so obvious – yet I’d never in a million years have thought of this!”

Fraternally in project management,

Steve the Bajan

Interesting Comments from a Reader: Please Add Your Thoughts to the Discussion

Reader Jim Ward posted an interesting comment at the end of my last article, about the PMBOK® Guide Sixth Edition Wish List. Among other points, Jim suggested that material should be deleted from the Guide, rather than added. He also suggested that much of the material that I recommend adding would be way beyond the abilities of most project managers.

I urge you to read what Jim wrote, and then to click here to go to the Discussion FORUM and to weigh in with your opinion. I’ve already expressed some thoughts, but I’d love to hear yours. Are the abilities of PMs really so lacking? If so,what should be done?

Fraternally in project management,

Steve the Bajan

PMBOK® Guide Sixth Edition: What Would You Like to See Added?

Sometime in 2016, the next edition of the PMBOK® Guide should be published by the Project Management Institute. We could wait until too late and then complain about how the hard-working folks who author the “bible” haven’t seen fit to include our pet terms, techniques, metrics and ideas. Or we could start now by developing a list of items that we feel it should include, and perhaps either someone will notice it or we can summarize it and email it to PMI for consideration.

Toward this goal, I am starting a “PMBOK® Guide Sixth Edition Wish List” thread in the Discussion FORUM attached to this blog. I hope that readers will weigh in with their own suggestions/nominations, as well as comment on the suggestions of others. And periodically I will compile a summary of them.

For starters, here are ten items that I personally think should be included in the next edition, listed in descending order of how valuable I feel the inclusion of each would be. I will follow each with a brief explanation or descriptive link and a five-scale rating, running from VL (for Very Likely) to L to M to U to VU (for Very Unlikely), of my estimate of the probability of each being included.

1. Change in the definition of “project” to eliminate the weasel word ”endeavor” and replace it with “investment in work”. My preferred redefinition would be: “An investment in work to create a unique product, service or result.” (No need for “temporary” either, until someone can show me something that isn’t temporary!) [U, even though this would have great benefit for the project management profession by recognizing our important role in utilizing the resources and funds with which we are entrusted to maximize value and ROI.)
2. Expand the section on “Business Value” that was introduced in the 5^th edition and that currently occupies most of pages 15-16, as well as being mentioned in the Glossary. The current description starts: “Business value is a concept that is unique to each organization.” That is indisputable. But it is also such a crucial concept (the raison d’etre of every project and/or program!) that surely it needs to be expanded to far more than two pages. Deserving of exploration are:

• What are the commonalities of business value across any and all organizations?
• How should it be measured? (Value is usually measured in monetary units.)
• What generates the business value? (Answer: the product scope, with occasional contribution from the project scope if just doing the work adds value {e.g., a more experienced workforce}.)
• What project documentation/technique should be used to define the business value? (Answer: the value breakdown structure (VBS) – which should definitely be included, and I think will be!)
• How should business value be used to manage the other aspects of the project? (Through optimizing it in integration with schedule and cost, and using it to justify additional resources where their cost is less than the value they add.)

[VL. Business value is an obvious concept that lots of people have been writing about for a while. Whether any of the information mentioned above is included in the expanded treatment of the topic is much more doubtful. But almost any expansion would be useful.]

3. Change the EVM term from planned value (PV) to planned cost (PC). It is cost, as the original earned value terms (that are still used in US Department of Defense contracting) BCWS, BCWP and ACWP emphasized: notice the “C” as the second letter in each of those. Yes, using two letters instead of four for each term made the metrics more accessible, and PMI has done a great job in spreading the use of the technique. However, the word “value” instead of “cost” in PV and (and in EV!) confuses people over the concept of business value. (For a great illustration of this, read Mike Hannon’s review of my book Managing Projects as Investment: Earned Value to Business Value.) [U. Okay, maybe I’m too optimistic and it should be VU. But if PMI wants (as it should!) to expand the concept of business value, it has to start clearly distinguishing between cost and value.]
4. Include critical path drag as a scheduling metric. Wikipedia definition here. Every item on the critical path of a project or program has drag (unless two parallel paths are both critical, in which case neither has either drag or float but both, in combination, have drag compared to the next longest path). Why does the PMBOK® Guide include the non-critical float (slack) metrics but not the always-critical drag that costs the project time and money? Knowledgeable project managers are now computing drag “manually” – but drag analysis would be done so much more routinely if all the software did the calculation. That will happen someday – but much faster if the next PMBOK® Guide recognizes it. Besides, it’ll stimulate a lot of additional opportunity for PMP Exam questions! [L. Again, maybe I’m being overly optimistic — but it’s just hard to see how knowledgeable people could think that drag doesn’t belong in the Time Management section.]
5. Stress the importance of a clear estimate of the value/cost of time as part of the charter or project business case or other initiation documentation. [U. It’s an obvious idea which would help tie PMBOK® Guide methods to the shutdown and turnaround discipline, where such estimates are standard and hugely important. I think it will happen eventually, but probably not in the 6^th Edition]
6. Include drag cost as either a Time Management or Integration Management metric, or both. Wikipedia definition here. On more than 98% of projects (by my estimation) extra duration (i.e., time on the critical path) reduces the expected value-over-cost (expected project profit (EPP?) of a project. And on those few exceptions, it’s important to know that they are exceptions! If critical path drag is included, it would be hard to understand a rationale for not mentioning drag cost. [M. Less likely to be included than plain naked drag, but still a good chance. If it is included, it would increase the chances for inclusion of #5, stressing the importance of a clear estimate of the value/cost of time.  But #5, recognition and quantification of the value/cost of time, is more important than just the act of tying it to an activity’s drag.]
7. Mention and discuss the DIPP formula (DIPP = {$EMV of Scope ± $Acceleration or $Delay} ÷ Cost ETC} for planning, optimization and tracking. [VU. A rephrasing of the definition of “project” to include the word “investment” (see #1) would obviously make this more likely. But the “enabler” (see below) has to be recognition of projects as investments. Maybe this important metric will be included in the 7^th or 8^th]
8. Recognize and discuss the multiplier effect on the value of “enabler” projects within a program, as well as the multiplier effect on an enabler’s acceleration premium and/or delay cost. The failure to recognize the special nature of enabler projects and to designate them as such leads to many bad decisions in terms of resource targeting. [U. Again, it’s an obvious and important concept. Some of the PMBOK® Guide authors are very smart people, so I hold out some hope.]
9. Discuss/mention the doubled resource estimated duration (the DRED) as a technique for estimating the resource elasticity of an activity’s duration in response to additional resources. The DRED is an estimate of what an activity’s duration would become (shorter, longer or stay the same) if its assigned resources were doubled. [VU. Too bad, it’s a useful little tool for identifying where additional budget would help the most.]
10. Discuss/explore the cost of leveling with unresolved bottlenecks (the CLUB). We know that resource insufficiencies cause delays. If we start measuring the value/cost of time, we will be able to quantify that cost and attach it to the specific bottleneck causing the delay. This metric is extremely valuable on a single project basis, and even more when compiled for an entire resource type or functional department across all the projects it supports – in other words, this is a toll that can move us toward right-sized staffing levels. [VU. But the CLUB is SO valuable to project and functional managers! I’m allowed to dream, ain’t I?]

Well, here are ten to start the ball rolling. C’mon, now, you must have some ideas too, don’t you? CCPM folks? Agile expansion suggestions? Add them to the list.

Fraternally in project management,

Steve the Bajan

A New Book Review by a Critical Chain Aficionado, and What Does Each of My Books Offer?

A lot happened this past week: a trip to DC to present to the PMIWDC Chapter wound up leading to a meeting with a very bright and knowledgeable CCPM aficionada and author named Mike Hannon of Fortezza Consulting. Mike had recently read my book Managing Projects as Investments: Earned Value to Business Value, and had some very interesting questions and comments. He and I wound up in complete agreement that the Total Project Control (TPC) ideas, innovations and metrics described in that book offer great value to project management in any flavor: agile, CCPM or traditional.

Yesterday, I received an email from Mike with a link to his blog where he had gone ahead and posted an extremely complimentary (but also insightful!) review of Managing Projects as Investments. Mike thoroughly “gets it”, expanding on one of the book’s examples regarding a life-saving immunization program to further illustrate the importance of a project’s “business value”. And with his CCPM background, he is able to summarize:

	1. The binary “success-or-failure” thinking that prevails in assessing project performance is shortsighted, as is the singular emphasis on delivering within planning constraints. 2. We PMs need much more than heroism to deliver outcomes that maximize value—we need to understand how every activity on the critical chain¹ affects the value that the project is expected to deliver.

I urge all readers, but especially those CCPM or agile fans who have often been resistant to the new techniques I’ve suggested in various Internet discussion groups to, first, read Mike’s review and then consider reading the entire book. None of us is helped by shutting our eyes to new ideas in any discipline, but particularly in one that is still young and growing and clearly in need of improved practice.

Indeed, on the flight back from Washington, I began reading Mike’s (et al.) book The CIO’s Guide to Breakthrough Project Portfolio Performance: Applying the Best of Critical Chain, Agile, and Lean, and I am finding it most interesting! I plan to post a review here when I finish it, not simply to return Mike’s courtesy but because distribution of good new ideas is something that all of project management needs!

By the way, again in Internet discussions, one person expressed doubt that any of these ideas could really be new and worthwhile. The one guarantee I will give is that if you are concerned that Managing Projects as Investments may be the “same old, same old” in terms of project management books, I promise you that it isn’t! There are many, many new ideas and techniques in it that you will not have come across before. And if you don’t believe me (or Mike’s review), here are two other reviews you can read:

• In the June issue of PMI’s PM Review.
• From Ten Six Consulting’s blog.

After my presentation to PMIWDC, several attendees bought copies of both my books from the Chapter bookstore. However, some only wanted to buy one copy, and were uncertain which one they should purchase. So let me take a moment just to explain the differences:

1. Managing Projects as Investments: Earned Value to Business Value is written for an audience of project managers on up the hierarchy, to functional managers, program managers, project sponsors and customers and, especially, senior management. It describes many of the destructive aspects to current approaches (arbitrary deadlines, misunderstood and misapplied metrics, failure to quantify and track both the expected project value and the value/cost of time’s impact on that value) and provides simple fixes for these flaws. It provides simple examples of the value and application of critical path analysis and critical path drag, but does not “get into the weeds” of the sort of detail where a PM or professional scheduler should be comfortable. Finally, I believe the final two chapters provide one of the most succinct yet thorough descriptions and analyses of earned value management (EVM), both basic and advanced, both distortions and fixes.
2. Total Project Control: A Practitioner’s Guide to Managing Projects as Investments is the book for PMs, schedulers and project team members. It does “get into the weeds” of how to:

• Define product and project scope;
• Develop and use both a WBS and a value breakdown structure;
• Create a critical path network using complex dependencies and lags;
• Avoid pitfalls like the reverse critical path anomaly that can invisibly add time to the schedule;
• Compute drag and drag cost with all the different kinds of dependencies;
• Use such analysis to justify additional resources and optimize project value;
• Understand the different types of resource leveling and use them to improve project efficiency and avoid surprises;
• Use drag analysis to recover a slipping schedule during execution.

As far as uses as textbooks in graduate courses is concerned, I believe that Total Project Control is the best one for a basic text in a Master’s of Project Management degree program. It will teach serious PMs and schedulers all of the rudiments as well as many advanced techniques. A project manager who has mastered these concepts is one that I would hire.

By contrast, Managing Projects as Investments is a text I would recommend in almost any MBA program! Our MBAs desperately need to be, but frequently aren’t, able to understand, analyze, sponsor and control project performance, as well as to create organizational structures and processes that will stem the ubiquitous bleeding of both value and funding that is the current state of things. And I would also recommend it as an auxiliary text in an MPM program course to augment and enrich one of the 700 page tomes in project operations that are so often used to teach the basic techniques, but do so in a rather lifeless fashion.

In addition, if any instructor assigns either of my books and then has their students critique them, I would be delighted to engage in a dialogue with the students on the topic(s) of their comments.

Those are my feelings about my books. If you have any further comments or questions, please do not hesitate to raise them in the discussion FORUM.

Fraternally in project management,

Steve the Bajan

New Weekend Puzzler: Earned Value and DIPP Analysis on the Phlogiston Mining Project

After a cold spring, weather in Boston is finally nice and so I’ve decided to offer readers another little Weekend Puzzler, this time on earned value and DIPP analysis.

But before I explain the puzzle, I want to mention that I was interviewed on Blog Talk Radio by Elaine Jackson (a fellow Bajan!) of Holistic Consulting Project Management. The topic, which you can listen to here, was “Financial Success of Projects Using the Critical Path Drag Method.” It runs about half an hour.

Earned Value and DIPP Puzzler

First, let me say that, as a teacher, it has always been my belief that every exercise, quiz and test should teach as well as evaluate. So that is how this Puzzler is intended.

Next, here are the earned value and DIPP terms and their formulas that you will need in answering the questions.

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PV (also known as BCWS) is Planned Value and is the earned value baseline (and should be called PC for planned cost). It is the cumulative budgets for the activities as scheduled.

EV (also known as BCWP) is Earned Value, the cumulative budgets for the activities that have been performed at any given point of project progress.

AC (also known as ACWP) is Actual Cost, what it actually cost to perform the work that has been performed.

CPI is the Cost Performance Index or EV ÷ AC, the ratio between the budgets and the actual cost for work performed. It is used for trend analysis in estimating the project’s Cost Estimate-at-Completion (Cost EAC).

Cost EAC is Cost Estimate-at-Completion, or what the project will cost if current spending trends continue. It is calculated using the formula: Cost EAC = Budget at completion ÷ CPI.

Cost ETC is Cost Estimate-to-Complete, or how much more the project will cost from any given point onwards, subtracting sunk costs. It is calculated using the formula: Cost EAC = (Budget at completion ÷ CPI) – AC.

SPI is the Schedule Performance Index or EV ÷ PV, the ratio between the budgets for the work actually performed so far and the budgets for the work scheduled to have been performed to this point. It is used for trend analysis in forecasting the project’s Estimated Duration. (NOTE: The way SPI is currently used, it is often distorted due to float and other factors. These, along with corrective procedures are described in detail in my book Managing Projects as Investments: Earned Value to Business Value. But for purposes of this Puzzler, we will assume the SPI to be an accurate index.)

EMV is the expected monetary value of the project if completed on a specific date.

Acceleration premium is increase in EMV if a project is completed early.

Delay cost is the reduction in EMV if a project is completed late.

The Planned DIPP (DIPP stands for Devaux’s Index of Project Performance) is the baseline for the ratio between a project’s EMV and its Cost ETC (ignoring sunk costs). It is calculated using the formula: Planned DIPP = $EMV ÷ Planned Cost ETC.

Actual DIPP is the project EMV plus or minus an Acceleration Premium of Delay Cost if it is ahead or behind schedule (usually generated through the SPI), all divided by the Actual Cost ETC (usually generated through the SPI). It is calculated using the formula: DIPP = ($EMV ± $Acceleration Premium OR Delay Cost) ÷ Planned Cost ETC.

DPI stands for DIPP Progress Index. It is the ratio between the actual expected profitability of a project at any given point of progress (taking into account schedule acceleration or delay, but factoring out sunk costs) and the planned expected profitability at that point. It is calculated using the formula: DPI = Actual DIPP ÷ Planned DIPP.

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The Phlogiston Mining Project

Our geologists have just discovered that beneath a piece of real estate that we happen to own lies a rich pocket of phlogiston. They have performed tests which show that we should be able to recover 10,000 kilograms of the substance.

Our commodities analysts have informed us phlogiston is currently selling for $10,000 per kilogram on world markets. However, that price is currently trending down at an average rate of $100 each week. Additionally, the Tierra del Fuego Megamine is due to start producing in 50 weeks. That is expected to so increase the availability of phlogiston for industrial use that starting at Week 51, the price of phlogiston is estimated to start falling at $200 per week.

We begin a 50-week project, with a budget of $10 million, to recover the phlogiston and sell it.

Q1.      What is the expected value of the 20,000 kg. of phlogiston if we could get it right now?

Q2.      What is the EMV of the project with its 50-week schedule?

Q3.      What is the EPP of the project with its 50-week schedule and $10M budget?

Q4.      What is the Starting DIPP of the project?

Q5.      What would be the acceleration premium for each week less than 50 if we could speed up the project?

Q6.      What would be the delay cost for every week more than 50 if the project takes longer?

We are now 20 weeks into the project and we have had some problems. We receive the following earned value report:

PV= $4M

EV = $3M

AC = $5M

Q7.      What is our current CPI?

Q8.      What is our current Cost EAC based on the CPI?

Q9.      What is our current Cost ETC based on the CPI and AC?

Q10.    What is our current SPI?

Q11.    What is our current Estimated Duration based on the SPI?

Q12.    What is our current estimated schedule delay based on the SPI?

Q13.    What is our current expected delay cost based on the SPI?

Q14.    What was our project’s Week 20 Planned DIPP?

Q14.    What is our project’s Week 20 Actual DIPP?

Q15.    What is our project’s current DPI?

Q16.    What is our project’s current EPP?

Q17.    If we have all this data (including EMV and the value/cost of time!), what are some of the things we might do to improve the situation?

Q18. If there is nothing we can do to pull in the schedule, but there are also no other issues such as opportunity costs, project termination costs, salvage value, etc., should we terminate the project at Week 20?

Scroll down below my sig for the answers.

Fraternally in project management,

Steve the Bajan

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ANSWERS

Q1.      What is the value of the 20,000 kg. phlogiston if we could get it right now? [$10,000 * 10,000kg. = $100M]

Q2.      What is the EMV of the project with its 50-week schedule? [$100M – (10,000kg * 50W * $100) = $100M – $50M = $50M]

Q3.      What is the EPP of the project with its 50-week schedule and $10M budget? [$50M – $10M = $40M]

Q4.      What is the Starting DIPP of the project? [$50M ÷ $10M = 5.00]

Q5.      What would be the acceleration premium for each week less than 50 if we could speed up the project? [10,000kg * $100 = $1M]

Q6.      What would be the delay cost for every week more than 50 if the project takes longer? [10,000kg * $200 = $2M]

We are now 20 weeks into the project and we have had some problems. We receive the following earned value report:

PV= $4M

EV = $3M

AC = $5M

Q7.      What is our current CPI? [$3M ÷ $5M = .60]

Q8.      What is our current Cost EAC based on the CPI? [$10M ÷ .60 = $16.67M]

Q9.      What is our current Cost ETC based on the CPI and AC? [$16.67M – $5M = $11.67M]

Q10.    What is our current SPI? [$3M ÷ $4M = .75]

Q11.    What is our current Estimated Duration based on the SPI? [50W ÷ .75 = 66.67W]

Q12.    What is our current estimated schedule delay based on the SPI? [66.67W – 50W = 16.67W]

Q13.    What is our current expected delay cost based on the SPI? [16.67W * ($200 * 20,000kg) = 16.67W * $2M = $33.33M]

Q14.    What was our project’s Week 20 Planned DIPP? [$50M ÷ ($10M – $4M) = $50M ÷ $6M = 8.33]

Q14.    What is our project’s Week 20 Actual DIPP? [$16.67M ÷ $11.67M = 1.43]

Q15.    What is our project’s current DPI? [1.43 ÷ 8.33 = .17]

Q16.    What is our project’s current EPP? [$50M – $33.33M – $16.67M = $0]

Q17.    If we have all this data (including EMV and the value/cost of time!), what are some of the things we might do to improve the situation? [A. Crash or fast track activities with lots of drag to pull in the schedule and gain $2M/week. B. Prune optional activities with low value-added and lots of drag and gain $2M/week. As the critical path migrates through other activities, repeat this process until the DIPP is as high as you can get it.]

Q18. If there is nothing we can do to pull in the schedule, but there are also no other issues such as opportunity costs, project termination costs, salvage value, etc., should we terminate the project at Week 20? [NO! Our project investment has gone very badly, as the DPI of 17% of expectations at this point tells us. However, the $5M of actual cost we have already spent is GONE, sunk, no matter what. This project now requires investment of $11.67M more with an EMV of $16.67M. If we finish the project, we will be $5M better off than if we cancel it. What this means is that any time the Actual DIPP is well above 1.00 (and it’s currently 1.43), we are better off finishing it than cancelling it UNLESS there are other factors that would offset a DIPP that suggests a return of 43% in 30 weeks on every future dollar invested.]      

Project Management and Senior Management: Reconciling Their Needs

I’ve been developing and teaching techniques and metrics for managing the business value of projects for over 20 years. My first major article was “When the DIPP Dips: A P&L Index for Project Decisions”, published in the Sep/Oct 1992 issue of Project Management Journal. And the first edition of my Total Project Control book included techniques such the DIPP Tracking Index, the value breakdown structure (VBS), drag cost and the cost of leveling with unresolved bottlenecks (the CLUB): all techniques for managing and tracking projects for optimum value.

But something was missing. I would explain these techniques to experienced project managers in corporate classes and PMI seminars, and from time to time I’d be hired as a consultant to help plan a big project or pull in a slipped schedule. And then I’d leave and realize that I’d only handed the organization a fish. Despite my efforts, I had failed to teach them how to implement the processes to catch it themselves.

About five years ago, during the fourth day of a corporate class on the TPC methodology, an attendee said:

“Steve, these concepts and techniques that you’ve been teaching us are great – but we’re the wrong audience. We’re just the master sergeants. You need to be teaching the colonels and generals in this company. Because they don’t understand any of this!”

I started thinking: what is it that I’m missing? Why is it that senior managers have almost no interest in learning about the techniques of something that so clearly impacts an organization’s bottom line?

And so it finally hit me: the concept that I had been talking all around for two decades, the magic word that would make senior managers sit up and take notice. Investment! The thing that senior managers do understand! Not just understand, but respect and study and believe in planning and tracking and optimizing.

Project managers are subject matter experts. They are engineers and chemists and programmers and biologists and doctors and geologists and… They know a lot! They have not only extensive education, but experience in things that it is very important to know!

Where they often don’t have a great deal of knowledge is in terms of what some would call “business skills”: investment and economics and marketing. And you know what? That’s okay! Knowing how to make sure that the building doesn’t collapse, or the airplane crash, or the software consume the hard drive, or the pharmaceutical compound kill someone, or the ground water get polluted… That’s hard and that’s important! Yes, it would be nice if these smart and conscientious folks also had business knowledge and skills – but if we want those skills, they are going to have to be “add-ons”, because these people have been busy all their lives putting their energy into other very valuable knowledge. And that’s why corporations bring in people like me to teach their SMEs project management.

Executives have learned an awful lot as well: about investment and economics and marketing and taxes and interests rates and corporate bonds and organizational structures and behavior… and that’s all important stuff too. What they don’t know about is project management. And most of the time, they are not willing to attend project management classes.

Now, I’ve met some senior managers who seem to think that project management is somehow “beneath” them. (After all, what’s the big deal about delivering a mall or a jet fighter or an oil well or a cure for depression by an arbitrary deadline for an arbitrary budget, right?) But actually most senior managers I have met are bright and conscientious people, too! It’s just that no one has explained to them why knowledge of project (and program!) management – its techniques, metrics, and governance — is importance to what they do: especially investment!

This is where both sides have to learn! They have to learn a common language. They have to institute and use common metrics that are based in the investment information that senior management respects. But those metrics must then guide the project teams in making the right decisions, and senior management must know that this is occurring.

This is the approach that I took in my book Managing Projects as Investments: Earned Value to Business Value that came out last September. It was intended to provide the “common ground”, the knowledge and understanding that both senior managers and project managers need to share. And that is why it was so rewarding for me when the June issue of PM Network included that very nice review of the book by Gary Heerkens, himself the author of The Business-Savvy Project Manager, which I strongly recommend.

Gary’s review said: “But what about during the project? Luckily, in his book,… Stephen Devaux makes solid points about what can be done to maximize ROI during project execution, and it reveals a large void in my perspective on the business of projects.”

Do not be fooled by Gary’s humility! His own book and his regular writings in his PM Network column have taught me a great deal that I didn’t know. Both of us (and let me emphasize that I have never met Gary!) share a love for project management, a desire to learn and, most important, a willingness to admit when we don’t know something. But what makes me happiest is that he identified, without any assistance from me, the deepest intention of the book: to create, define and explore that crucial nexus between the project management discipline and its techniques and the senior management interest in, and concerns about, business value and investment.

I believe project managers must say that word again and again – investment, investment, INVESTMENT! – to project sponsors and customers and all of senior management (especially, when possible, to the Chief Financial Officer!) to establish that we understand why we are doing these projects. (And then, of course, we must be sure to manage them as investments!)

By the way, I have seen this work in a slightly different arena: job interviewing. I often mentor former students through the interview process, and I always urge them to say, at an appropriate point: “Of course, all projects are investments and really need to be managed as such.” They invariably report back to me that the hiring manager’s face lights up. The next former student that tries this technique and later reports that they didn’t either get the job or at least get another interview will be the first!

This territory is also where this blog will continue to cultivate and nourish the improved status of and respect for project management. I believe it is where project/program management and business management must come together for the sake of organizational progress and efficiency.

Fraternally in project management,

Steve the Bajan

Scheduling (squared) Notes

Yes, this is about my schedule to talk about scheduling.

1. CHANGED!! NOW SCHEDULED FOR THURSDAY, JUNE 11, AT 2:00 PM US East Coast Time!  (Was  scheduled for Wednesday, June 10^th). I will be interviewed on radio by Elaine Jackson of HolisticPMC on the topic of “Financial Success of Projects using the Critical Path Drag Method.” Elaine is the possessor of a sharp intellect who I am assuming will ask some great questions.

The interview can be found by tuning in here, and listeners can call in to the host at (US) 718-508-9748.

2. A week from today, Tuesday, June 16^th, I will be at the Fairview Park Marriott in Falls Church, Virginia, at 5:30 pm to make a presentation for the PMIWDC Chapter in its continuing series on PM Tools.

My presentation is titled Managing Projects as Investments: The Benefits of Computing Critical Path Drag and Drag Cost. You can find details here.

3. My third note is just to point out a very interesting thread started by Thomas Boyle over in the Software Discussion FORUM. Apparently Mr. Boyle has enhanced his company’s software tool called BPC Logic Filter, an add-on to Microsoft Project, so that it computes critical path drag. Of course, this is very exciting to me because all PM software should have the functionality to compute this critical(!) schedule analysis metric.

Mr.Boyle is asking for input. If you use MS Project and would like to be able to compute drag, post a comment over there.

I hope to post another article later today.

Fraternally in project management,

Steve the Bajan