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.

Atlas holding up the world

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 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:

  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 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:
    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

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

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 5th 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.]

  1. 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.]
  2. 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.]
  3. 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 6th Edition]
  4. 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.]
  5. 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 7th or 8th]
  6. 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.]
  7. 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.]
  8. 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

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.

Phlogiston

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.

teach a man to fish

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

Why Won’t We Recognize the Value/Cost of Time on Projects?

A few weeks ago, I engaged in an Internet discussion with a very knowledgeable project management thought leader. Make no mistake – this is someone for whom I have a great deal of respect. But when the topic of the cost of time on projects came up, he was dismissive, stating that the value of early completion on most of the projects on which he consults is very small or non-existent.

Let’s think about this: for several years, he has been residing overseas and consulting on projects many thousands of miles from his home. And his consulting fee is definitely not cheap! How important would a project (or program, or portfolio) have to be in order to justify the fees of such a consultant? How large its budget? How great the expected value of the investment?

One of the fundamental aspects of any type of investment is that the length of time to “maturity” is a key variable. The return/benefit that any smart investor will demand is always based in part on how long the wait for that return is likely to be. (There’s an old Bajan saying: “Wait is a heavy load!”) The longer the wait, and the more money that will be “tied up” in that investment, the higher the rate of return that the investor will demand as justification for the project/investment.

One thing of which you may be sure: organizations do not engage expensive overseas consultants to work fulltime on a project with a million dollar budget. Whatever the projects/programs on which this consultant has been working, the budgets are almost certainly over $10 million, and likely over $50 million.

Let’s take conservative numbers: even at just 3% interest, the cost of tying up $10 million is $300,000 per year. That’s $25,000 per month. For a $50 million project, that would be $125,000 per month.

And that does not include:

  1. The opportunity cost of not having that money to invest elsewhere sooner.

  2. The risk of taking longer than planned, a risk that is retired immediately if the project finishes early. Almost everyone would agree that there is a significant cost to finishing most projects late. How much is it worth to eliminate that particular risk?

  3. The “marching army” costs of overhead and level-of-effort activities to support the project. These costs often add up to 10% – 20% of the total cost of a large project. These are costs that continue, week after week, until the project ends. Finishing earlier usually truncates these costs.

  4. The very large reduction in value if the project in question happens to be an enabler project. This is a topic I cover extensively in my book Managing Projects as Investments: Earned Value to Business Value. A delay on an enabler project means a postponement in the value delivery on all the other projects that it is enabling. For example, inkjet printers are often sold at break even or less – their profit comes from the ink cartridges whose sale they enable. Delay printer production and you delay cartridge revenues.

  5. The loss of flexibility that a shorter schedule would allow. Blake Sedore pointed this out to me in conversation: a shorter schedule can sometimes have value not so much by finishing earlier but by allowing the project (or manufacturing process) to start later! This delays committing to a specific strategy and maintains flexibility – perhaps the extra time will allow for better targeting of product scope, or even permit cancelling the project if a sudden change in market conditions makes it no longer a sound investment. (I plan to discuss this interesting idea further in an upcoming blog article.)

(I make no pretense that the above list includes every possible benefit that a shorter schedule would bring — but it’s a start! If you have any additional benefits to a shorter project schedule, please go to this discussion thread in the FORUM and list some of them. perhaps together we can create a useful checklist.)

So why did this very competent consultant not recognize the value of a shortened project duration? It’s simple – he wasn’t looking for it. The PMBOK Guide ® does not discuss the value of project acceleration. The vast majority of project management software provides no field that allows the user to enter a value/cost of time, either acceleration or delay. (And that omission combines with the almost universal failure of software to compute critical path drag to prevent the crucial calculation of the drag cost of critical path activities, a data item that can justify added resources.)

So is it possible, however unlikely, that on the consultant’s specific projects there was no value to the sponsor/customer of an earlier finish? Absolutely! There are indeed projects where there is no advantage to a shorter schedule. There are even projects where finishing earlier has a negative impact on the project investment! (This is particularly true if a project is not on the critical path of the program of which it is a part. For example, early completion of a satellite to be launched on a rocket does nothing to shorten the program if the critical path goes through the preparation of the rocket. The satellite project would have no drag on the program’s critical path, so that finishing it early would only increase its program float, as well as perhaps require additional storage.)

However, such projects are so unusual that it becomes all the more important to clearly identify these exceptions to the rule. It is critical to perform the necessary cost/benefit analysis for earlier completion, taking into account all of the issues I’ve mentioned above, and more. If after all that analysis there really is no advantage (or perhaps a disadvantage) to the sponsor/customer from an earlier completion, that fact should be made known to key team members: “This is one of those rare instances where we won’t be looking to shorten the project!”

But the rule should always be to analyze and quantify the value/cost of time and, if there is a contract involved and value to early delivery, to seek a win-win arrangement: an early completion incentive to the contractor based on a portion of the value to the customer of such a happy result.

Have a great weekend!

Fraternally in project management,

Steve the Bajan

Blake Sedore Blog on Drag Cost: Applying Critical Path Drag in Manufacturing

The first-ever Guest Blog is now up at the Total Project Control website, available for reading and discussion. It is by Blake Sedore, the manufacturing engineer whose recently published MIT thesis on using critical path drag analysis to accelerate semiconductor production and increase throughput has received a ton of attention. You can click on the Guest Blog here, and also make comments or ask questions of Mr. Sedore in the discussion FORUM on this site.

In this Guest Blog, Mr. Sedore explores the experience both for himself and his customer of recognizing the opportunities for improvement pointed about by the drag analysis:

“The results of my project were quite eye opening, both for me and for my client, and I believe that this effort shows that the critical path method and critical path drag have a strong application to the manufacturing industry.”

And he goes on to write:

“I have come to realize that the analysis has the potential to go much further. MUCH FURTHER. The analysis does not end with calculating the critical path drag – this is actually just the beginning. The drag is merely a stepping stone to get to drag cost, which is the metric that truly matters, as it allows you to determine the impact that the drag of a critical path item has on the bottom line.”

And he goes on to discuss how the drag cost savings opportunity offered by reducing Work in Progress:

“And in manufacturing, when you repeat the process again, and again, and again, and again, and again…that drag cost is going to add up. BIG TIME.”

Mr. Sedore’s thesis article  “Assembly lead time reduction in a semiconductor capital equipment plant through constraint based scheduling” can be downloaded from the MIT website here.

Read his entire Guest Blog and post questions for him in the FORUM thread.

Fraternally in project management,

Steve the Bajan

Answers to the May 22 Weekend Puzzler on Drag Cost

My recent Weekend Puzzler blog, to calculate drag and drag cost (in human lives) attracted quite a bit of attention. A total of 241 different readers viewed it over the weekend, generating a total of 288 views and pushing the total for the blog thus far this year to just over 6,900. This is sufficient encouragement to make me believe that there is a readership for relatively complex project management information, and therefore to keep doing this. This is despite the fact that only 5 people entered a total of 16 answers in the “poll” multiple choice selection format. Oh, well, perhaps many other people figured out their answers but just didn’t enter them into the poll. Of the 16 answers entered into the poll, 10 were correct (and I have a sneaking feeling that one person got them ALL correct, in which case congratulations to that person!). First, from the last article, the final network diagram schedule with all the schedule computations on which the drag cost questions were based: Fig 4 All FS network lives for blog Now here are the answers and explanations. *****

  1. If Activity B takes 10D longer than planned, how many more lives will it cost? A= 7 B= 10 C=26 D=40 E=50 (4 correct answers out of 5)

If Activity B takes 10D longer than planned, it will take 15D, use up all 8D of its float, and migrate to the critical path with 2D of drag. Those 2D will push the project duration to 69D and cost 2 * 5 lives, or 10 more lives lost.

  1. If we can shorten Activity D to 3D instead of 7D, how many more lives would that save? A= 0 B= 7 C=10 D=14 E=20 (1 correct answer out of 3)

If Activity D is shortened to 3D instead of 7D, the first 2D will be its drag and the next 2D will increase its float to 2D. Those first 2D will pull the project duration in to 65D and save 2 * 5 lives, or 10 more lives saved.

  1. If we take resources away from Activity P so that it takes 30D instead of 15D, how many more lives will it cost? A= 0 B= 5 C=10 D=12 E=75 (2 correct answers out of 3)

If Activity P’s duration is increased to 30D instead of 15D, that will be an increase of 15D. But P had float of 17D. Therefore the increase in P’s duration will only reduce its float to 2D and will not impact the critical path and the project duration. There will be no change in the number of lives saved/lost.

  1. If Activity P is now scheduled to take those 30D, AND we also shorten Activity K to 12D, how many more lives would it save OR cost? A= 0 B= 7 more lost C=10 more lost D=10 more saved E=50 more saved (2 correct answers out of 3)

With Activity P now having just 2D of float, it means that K’s drag has been reduced to 2D. Now if K is shortened by 10D, the first 2D will be drag and the next 8D will be float. Those first 2D will pull the project duration in to 65D and save 2 * 5 lives, or 10 more lives saved.

  1. With Activity K now planned to take 12D, if we now decide to give some resources back to Activity P so that it only takes 20D, how many more lives would be saved than in Question 4? A= 0 B=10 C=16 D=22 E=40 (1 correct answer out of 2)

With K now having 8D of float, Activity P is on the critical path with 8D of drag. If P is now reduced by 10D, the first 8D will be its drag and the next 2D will increase its float to 2D. The critical path will have changed and now will again go through Activities K and Q. This will also pull the project duration in by 8D, from 65D to 57D, and save 2 lives for each day or a total of 8 * 2 lives, or 16 more lives saved. ****** If you understand this whole process but find drag and drag cost difficult to compute, then please push the powers that be (i.e., PMI, IPMA, APM and all the software companies) to start incorporating these data in their critical path analysis computations. Because the calculations are dead easy for a computer, and this information is critical! Fraternally in project management, Steve the Bajan

Weekend Puzzler: Computing Critical Path Drag on a Project to Save Lives

There has been a lot of discussion of critical path drag and drag cost recently, both in this blog and elsewhere. Most salient was Blake Sedore’s MIT paper about using critical path drag to optimize manufacturing throughput, but there was also this very nice out-of-the-blue comment on LinkedIn, and a number of email conversations. Maybe the importance of these concepts is finally trickling into general awareness.

So with the weekend here (a long one in the US!), I decided it was time to provide another “Weekend Puzzler” of practice in computing drag and drag cost. So I’ve drawn a network diagram below, with all the dependencies finish-to-start (FS), just to make sure it isn’t too complicated. And if there is any step you feel is too complicated or tedious (perhaps like the forward and backward passes), just jump over it to the next diagram, which will have the answers.

To emphasize the importance of these computations, I’ve chosen a project that is intended to save lives: an immunization program, hospital construction, or medical device development, perhaps. But the calculations would be the same if the only benefits were monetary.

After the fourth diagram, there are some additional questions, with the “poll” function making it a multiple choice quiz. I’ll provide the answers and explain them on Tuesday.

And by the way, next week should be interesting in any case. I am hoping to launch a discussion forum, where readers can raise topics they want to discuss, or make general comments. Additionally, I believe the June issue of PMI’s PM Network magazine will become available on-line, and I have reason to believe there may be a very interesting article in this issue.

Have a great weekend, and the Puzzler is directly below.

Fraternally in project management,

Steve the Bajan

Weekend Puzzler

A.  Compute the forward and backward passes for early and late dates, identify the critical path and compute total float.

Fig 1 All FS network lives for blog

B.  These are the answers to A. Now compute the drags of the critical path activities.

Fig 2 All FS network lives for blog

C.  These are the answers to B. Now compute the drag cost in lives not saved for each of the critical path activities.

Fig 3 All FS network lives for blog

D.  These are the answers to C. Use them to answer the multiple choice questions in the “poll”.

Fig 4 All FS network lives for blog

What’s Costing Time? CPM vs. Critical Path Analysis

The most recent article on this blog, regarding the MIT paper about using critical path drag to optimize manufacturing throughput, generated a number of interesting reactions. First, it has been very popular, attracting well over 100 views per day and several “Likes” in the LinkedIn discussion forums where I mentioned it. However, some people seem to have negative views about the value of such a process. All these people seem to be conflating critical path analysis and CPM and they specifically reject CPM as a worthwhile scheduling technique, expressing a preference for critical chain scheduling or one of the flavors of agile methodologies.

So let me try to improve my communication technique: there is an important difference between CPM and critical path analysis!

  • The former is a technique for developing a schedule for a project, and is almost always performed upfront.
  • The latter is a technique to analyze the detailed aspects of any process (like manufacturing), project or program, upfront, during progress, or after completion, with the purpose of identifying, measuring and perhaps reducing the total duration of execution.

Why should we want to reduce the duration of a process or project? Because, to paraphrase what a really smart guy wrote over 260 years ago: “Time is a whole lot of benjamins!” If we start recognizing that all projects and programs are, as my book emphasizes, investments, then we will quickly conclude that two major factors that impact project investment value are:

  • Scope; and
  • Total duration.

Along with that important but often over-emphasized third constraint of cost, these are the parameters over which project teams have some control, and that project and program managers are paid to manage. And we control completion date through the critical path – of any process, project or program!

Whether a project is scheduled using “naked” CPM or resource leveling or critical chain or agile or darts at a dartboard, at the end it still will have an “as-built” longest path (comprised of activities, constraints, sprints, stumbles, dropped batons, feeding buffers, schedule reserve, hesitations, and any other delays) that always determines its total length. Surely if time has value (as it does on 99% or more of projects!), then it must be worthwhile analyzing:

  1. What items are extending the duration (i.e., have critical path drag)?

  2. By how much?

  3. How much is that extension reducing investment value?

  4. What might we be able to do to reduce that negative impact?

traffic jam

It doesn’t matter what method of scheduling we used! Even a serial string of sprints, if analyzed, will usually reveal a place where we can shorten the critical path by adding a resource, or dividing the process into parallel streams, or deciding not to include functionality whose value-added is worth less than the time it consumes (i.e., its drag cost). And if someone says that doesn’t happen, how do they know unless they do the analysis and determine which sprints/activities/resources/rework have how much critical path drag?

If some item that you need to perform your project is really expensive, wouldn’t you try to see if you could get it for less? Well, how is that any different from using critical path analysis to identify the big drag cost items and seeing if you can perform them for less?

That is part of the beauty of Blake Sedore’s analysis for his MIT Master’s thesis. It’s entirely possible that the manufacturing organization was comfortable with their process, and felt that it was optimized. Then he performed the critical path analysis, identified where the drag was, figured out how to reduce it, and voila! – throughput and value were increased!

Whatever the scheduling method, critical path analysis has always had value. I remember reading an article over 20 years ago about how Motorola used it to increase throughput on the shop floor of their pager division. But the enhancement of critical path drag computation puts the emphasis where it belongs: not on what can take longer without causing delays (i.e., float), but on what’s causing how much delay. The technique for computing it is straightforward, if somewhat brain-intensive in a complex process or project.

A process that is both brain-intensive and can add a lot of value – gee, that sounds like just the sort of thing software packages should compute!

Fraternally in project management,

Steve the Bajan