First Amendment to Current PM Practice: All Projects are Investments

My recent blog article, “Ten Amendments to the Current Practice of Project Management,” has experienced such positive feedback that I’ve decided to follow it up with articles that explore each of the “amendments” in more detail. This article will explore my proposed:

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Amendment 1: Get agreement from everyone (team members to senior management and customers) that projects are investments.

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In Greek mythology, Athena sprang fully formed from the head of Zeus. However, few things come into existence fully formed, either from someone’s head or anywhere else. Philosophies, science and practices all tend to evolve over time, modified to meet changing conditions and needs.

How well I remember when the first edition of the PMBOK® Guide was published in 1996. I had been teaching corporate classes in project management for eight years. Occasionally an attendee would skeptically assert something like: “Who says we have to use this WBS thing?” (Or CPM thing or earned value thing.) “We do a task list and that seems just as good to me.” And then I’d have to explain why a hierarchical chart offered benefits a task list didn’t: summed data, templates, easy modification, etc. Sometimes they were persuaded and sometimes they weren’t.

The first PMBOK Guide changed all that. Suddenly I could point to an authoritative compendium of “best practices” and say: “Well, here is the way that many of the most experienced organizations are doing it.” Besides, it was now in a book, all beautifully bound – that fact alone carried much more authority than anything little Stevie might say!

Because something is not in a specific edition of the PMBOK Guide (for a current example, critical path drag and drag cost), it doesn’t mean that it won’t be in four or eight years. First, although so many people insist on calling it the PMBOK, it is the Guide to the project management body of knowledge! Second, even as a guide, it must evolve or risk obsolescence as the needs of the project world change.

Until that first edition of the PMBOK Guide was published, there was little agreement even on what a project is. What separates a project from other types of work (e.g., manufacturing, or retail, or hotel operations)? Thence came the two adjectives in the current definition of a project:

  1. Temporary”, as opposed to an effort that continued unchanged day after day and perhaps year after year; and
  2. Unique” to describe the output of a project, as opposed to manufacturing a million identical widgets.

But the real problem comes with defining a project as an endeavor. What exactly is an endeavor? The American Heritage Dictionary defines endeavor as: “1. A conscientious or concerted effort toward an end; an earnest attempt. 2. Purposeful or industrious activity; enterprise.”

So what does that mean? Endeavor is one of those nebulous words, applicable to many different types of activity. If I jump to touch the ceiling fan, that’s an endeavor. So too is trying to fall asleep at night, walking through the park, or getting a date with that attractive neighbor. But are all of these projects? And should we necessarily study the PMBOK Guide before approaching the neighbor?

Suppose we were trying to describe ice hockey to a visiting Alpha Centaurian. We might say: “It’s an endeavor we earthlings undertake that involves hitting a hard rubber disk with bent sticks across a surface of frozen water toward rectangular frames with nets while wearing boots with blades at the bottom.”

Nothing we have said above is untrue – but would our visitor have any sense of what ice hockey really is? Or why we undertake this “endeavor”? Until we use a more precise word like game or sport or contest (“game” is the second word in the American Heritage Dictionary’s definition), our Alpha Centaurian would have little idea of the essence of ice hockey or why so many Canadians love it.

What kind of endeavor is a project? It’s an investment. Every project is. No one ever funds a project unless they expect the eventual product, service or result to be worth more (to them!) than the expected invested amount. And while there may often be cost and time constraints on projects (we may only have so much money available to invest, and if we don’t finish it before New Year’s Day it will become worthless) and value drivers that seem less tangible (loss leaders, good publicity, enabler projects, etc.), the ultimate determinant of success is, as with every investment, a relative one: how much more (or less!) value did it generate than it actually cost, i.e., its profit.

When a project finishes, we rarely know its actual value – that may take years to determine. The same is true of many other investments. But we should manage all our investments in ways designed maximize their profits (i.e., their expected project profit, or EPP). And that should be based on quantified decision-making across the variables of:

  • Scope (which generates the value);
  • Time (which almost always impacts the value of the scope, positively or negatively);
  • Cost of resources (which drives the invested amount); and
  • Risk/opportunity (which can impact any or all of the other variables).

All this is discussed in this November blog article Turning Iron into Gold! and in much greater depth in my book Managing Projects as Investments.

But all the metrics, techniques and tools must necessarily follow from the understanding of the essence of a project. To do otherwise is to participate in ice hockey without understanding its essence as a game. Once the customer/sponsor starts to define their project as an investment (which, by the way, most understand intuitively if not explicitly), they will start to rely on typical investment metrics like ROI and profit. And those metrics should, in turn, drive the tools of project management: not just WBS and CPM and earned value, but their investment-based extensions: value breakdown structure (VBS), critical path drag and drag cost, the DIPP and DIPP Progress Index (DPI), and who knows what further advanced techniques that others may develop in the future?

I would love it if senior managers and sponsor/customers would suddenly become aware both of the importance of managing projects as investments and of the appropriate tools that can be used. But the most likely way for this to happen is through the project management community itself: those who “labor in the fields” to start marketing their services as customer-centric, benefits-based and investment-driven. After all, those are the things that customers want – they just don’t know how to get them!

But the project managers, and project management consultants and companies, who do comprehend them can work to reach that initial understanding with the potential client. Then they can win assignments and contracts that they otherwise mightn’t, because the client now understands the investment approach and wants this kind of “client-benefit-based” project management that is being offered. A persuasive enumeration might include:

  1. “We approach your projects as investments.”
  2. “We want to collaborate in determining the factors that drive your benefits and value.”
  3. “We will provide you with project progress metrics that are based in those factors.”
  4. “We will use our innovative techniques to maximize your ROI on the investment.”

From my own experience, I have found that an approach that starts with the MoSCoW method of prioritization and uses it to build a VBS for the customer’s values can be very impressive and persuasive.

And finally, the standing of the project manager, and of our whole discipline, will rise dramatically if projects are redefined as investments. Instead of being viewed as overhead on a cost center, the project manager will become a valued leader of a profit center, maximizing benefits-above-cost through their knowledge, experience and decision-making. And I think that’s a pretty good deal for us.

Fraternally in project management,

Steve the Bajan

Ten Amendments to the Current Practice of Project Management

I believe that project management is, in many ways, failing in what should be its purpose: to provide a valuable return to the investor(s) who provide the resources/money for the project effort and who hope to reap the benefits. But I don’t happen to feel that we need a whole new methodology. The basic tools in our toolbox (WBS, critical path analysis, resource leveling, activity-based resource assignments, earned value tracking) are wonderful techniques, and are being efficiently applied by many project managers.But in many other cases, projects are generating much less value than they should.

I do believe that some of the tools, as valuable as they are, need what I’d call “amendments”: sharpening, enhancing or re-shaping for wider utilization – such as the routine incorporation of the drag metric as a standard part of critical path analysis. But the major flaws, I believe, are not so much in the tools as in how they are being misunderstood and misapplied.

I‘ve been thinking for some time about preparing a list of “Amendments to Current Project Management Methods”. Below is a pretty barebones outline, without getting into a huge amount of explanation (because I just wrote a 255-page book that pretty much provides that!), which lays out some of the techniques and modifications that I feel would significantly improve the way we do projects.

This list will probably evolve over the months ahead (and I’m certainly willing to entertain other suggestions), but the Ten Amendments below ain’t bad for a start:

  1. Get agreement from everyone (team members to senior management and customers) that projects are investments.
  2. Get them to agree that investments should be undertaken for the value they are expected to generate.
  3. Get them to understand that the value/benefit they expect from the project will be based on its scope (mostly product scope) and that therefore the specifics of the product scope should designed with those benefits in mind. [This should lead to the creation of a value breakdown structure (VBS)].
  4. Get them to agree that the results of all investments are not guaranteed, but rather involve estimates, uncertainty and risk. Explain that “deadlines” and fixed cost caps (“budgets”) are arbitrary strictures that are far more likely to cause negative behaviors (e.g., Parkinson’s Law, or secretively cutting quality to meet deadline/budget, or simply taking unwarranted risks when pushed for time/cost adherence) than to have magically made an accurate prediction of what the project would really require. Suggest instead getting the organization used to the terms “target date” and “target cost”.
  5. Get everyone to agree that, the vast majority of the time, project delivery date has a big impact, positive or negative, on the expected value of that scope. This should lead NOT to a deadline, but to an estimate of the value/cost of each unit of time earlier OR later than the target date. And this quantified estimate should be a part of the initiation documentation of every project! And any contract for a project should include clauses establishing incentives (positive and negative) for schedule performance, aligning as much as possible the potential benefits to customer and contractor.
  6. Show everyone how, with the expected value of scope, the value/cost of time, and resource usage all quantified in monetary terms, the three sides of the “Iron Triangle” are now all integrated and monetized so that it has become the Golden Triangle. Any variance in any side will have a quantified impact on the integrated value of the project as measured by expected project profit (EPP) and the DIPP. Show how this now provides a single metric against which project performance can be tracked, with better performance being measured not just in schedule or cost terms, but in what should matter to everyone and particularly to those funding the project: investment value, or ROI, or expected project profit!
  7. Ensure that everyone understands that every project, no matter how it is scheduled, will be precisely as long as its longest path of activities, logical constraints, resource constraints, delays, rework, sprints, and stumbles! And therefore no matter how it has been scheduled, critical path analysis that includes drag, drag cost, and true cost (TC = drag cost plus resource costs) computation must be performed, seeking opportunities to reduce drag costs and thus accelerating the schedule where greater project profit can be generated. Everyone should also understand that the value/cost of time on enabler projects (i.e., those that enable other projects to generate value) go through a multiplier effect, and thus identify such enabler projects and their elevated value/cost of time.
  8. Ensure that both time-limited and resource-limited resource leveling is performed on each project, and on all projects (and especially prospective new projects!), within the portfolio of a multiproject organization. The data regarding the cost of delays caused by insufficient availability of each specific type of resource should be analyzed on an organizational basis at least quarterly, with Pareto charts assembled to identify and quantify the project delay costs to the organization of resource insufficiencies on the critical paths, and to improve efficient levels of staffing for each resource type and functional department.
  9. Ensure that everyone understands that earned value is not about project value, but about project cost, i.e., resource usage! The term has been the source of persistent confusion. Even to a contractor, project value almost always includes value drivers that are not part of the price/budget. On a medium sized project in an organization without robust financial tools, earned value planning and tracking can be performed adequately on the basis of planned and actual labor hours. (Indeed, CPI-Labor should be an important metric in any EVM system.) Everyone also should know that earned value is inadequate for schedule tracking, at least in the way it is customarily applied, and can lead to incentives for out-of-sequence and noncritical work. Schedule must be tracked through critical path tracking and/or by developing a separate earned value baseline for schedule tracking that takes into account the critical path by being scheduled on the late dates.
  10. Ensure that project postmortems are performed on all significant projects (not just on those that went badly!) and that the as-built critical path (ABCP) is presented as one of the key artifacts for lessons learned, particularly in identifying causes of project delay with their quantified costs. And that every postmortem sets a future date on which the data on the mature final product can be analyzed with greater knowledge and objectivity so that current assessments of quality, durability, and value (including revenues/savings) can be updated.

Okay, so at least that’s a start. And I think implementing these would make a huge difference. So anyone have additional suggestions?

Fraternally in project management,

Steve the Bajan

What is the DIPP? (Warning! Some wonky stuff)

There is a comment by Keith Burns at the end of the Why Do We Plan Projects? article:

“I see a term here that I have not seen previously. DIPP tracking. what is it and where can i learn more about it?”

First, Keith, thanks for following this blog and for taking the time to post a comment.

Insofar as I have become known in the project management world, it’s been for adding to scheduling metrics the concept of critical path drag and how to compute it. That’s largely my fault — drag is so important to scheduling, as well as glaringly obvious once one thinks about it, that it is the concept I have tried hardest to disseminate.

But I’d like to think that, over the course of the past quarter century, I have added some other concepts and metrics. In my opinion (and I admit that some may disagree), my most important contributions have been:

  1. The idea that projects are investments; and
  2. A metric called the DIPP for planning and tracking expected project profit (or, if you prefer, expected ROI).

Keith, honestly, the best place to get information on the DIPP (and, indeed, most of my other concepts including the value breakdown structure [VBS], the cost of leveling with unresolved bottleneck [the CLUB], the doubled resource estimated duration [the DRED], the ALAP schedule performance index, and several others) is my books. The new one especially, Managing Projects as Investments: Earned Value to Business Value, covers most of the above concepts in what I flatter myself is relatively painless to read.

The DIPP was my first idea in project management, and is the basis for my 1992 article “When the DIPP Dips: a P&L Index for Project Decisions” in Project Management Journal. If you are a PMI member, you can get the article for free. Also, it was reprinted by PMI in 1999 as a featured chapter in the book Essentials of Project Control. It’s an interesting book even apart from my article, and I believe used copies are available.

Or you can get several articles that discuss the DIPP and other stuff in a six-part series I did for ProjectsAtWork on-line magazine. Just do a search on the site under my name. The site is free, but requires registration.

Finally, to describe it in a nutshell, the DIPP was originally an index for determining when to cancel a project and when to keep funding it (a poorly understood concept). But it ultimately evolved into being a planning and tracking index that integrates all three sides of the Golden Triangle.

  1. Scope is measured as the expected monetary value (EMV) of the project if completed on a certain date;
  2. Schedule is a plus or minus dollar amount based on acceleration or delay; and
  3. Cost is the cost of resources and overhead.
  • The DIPP = ($EMV + or – $accel premium or delay cost) / $cost estimate-to-complete.

The DIPP can be planned as a baseline across the schedule, with the cost ETC as the complement of the planned value (PV or BCWS). This supports an index that allows tracking of the project’s expected project profit (EPP): the DIPP Progress Index (DPI), which is Actual DIPP divided by Planned DIPP.

Any change in scope, schedule, cost or risk from what was planned would be reflected in this index, including improvement of EPP. And this extends project tracking beyond the cost/schedule realm of earned value.

Finally, Dr. Tomoichi Sato of Tokyo University has done some work extending the DIPP into areas of risk management. This paper by him, Risk-based project value analysis – contributed value and procurement cost was published in 2006.

Keith (and anyone else who was wondering about the DIPP), I hope this helps. The DIPP is a complex topic and it really takes a book to cover all of its implications and potential benefits.

Fraternally in project management,

Steve the Bajan