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.
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 5th 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:
- Reduce critical path drag;
- Accelerate the enabler project’s schedule; and thus
- 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 4th 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:
- The value breakdown structure, which ties the investment value of work packages and projects to the project/program investment value-added;
- Estimating the value/cost of time (especially on enabler projects);
- Critical path drag and drag cost analysis and optimization;
- The cost of leveling with unresolved bottlenecks (the CLUB), both single and multiproject for rightsizing staffing levels;
- 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