Why Upper Management Doesn’t Trust Project TCO and ROI Analyses, and How to Fix the Problem.
A Discussion with the Senior VP
In late 2002, I was meeting with a Senior VP of a Fortune 100 corporation about a proposed project. During the first part of the meeting, he paused and said,
“In general, Upper Management Does Not
Believe the Forecasts of Projects’ Business
Impact for Project Justifications. They also do
not feel that they receive the promised benefits.
They do not receive reports tracking the business
benefits of projects to see if they actually met their
Needless to say, I was surprised, and asked why? He responded,
There is a Fundamental Flaw in the Way Most Companies Create Their Business Impact, TCO and ROI Analyses for Proposed Projects
Fortunately, with the economy improving, this particular company has recently started several new projects, but the basic problem has not been addressed. Upper Management still does not believe that their project managers can forecast the business impact of their project with confidence. And when a project goes into production, they still do not feel they get the promised benefit or that the project’s business impact can be measured.
Having been involved in many companies, it appears that the root cause of this concern is due to the different views of upper management and project management caused by their different roles in an organization. The flaw is that almost all organizations create project-centric analyses and in doing so, have not linked these projections to their organization’s overall budgets and headcount.
Upper management focuses on overall budgets, resource requirements and performance. Project managers focus on their specific project, and its benefits. In order to solve this problem, an organization needs to provide the project managers with the information needed to bridge these two different viewpoints. In this way, they will be able to express their projects goals and benefits in terms that are useful and credible to upper management.
New activity-based budgeting and planning tools are addressing these concerns of upper management. They enable Program, or Project, Management Offices (PMOs) to create much better business impact estimates and to track the benefits of projects. They do this by enabling the PMO to create a business-unit centric model that captures the demand on their businesses, links this to the work activities that need to be done to support the demand, and automatically create forecasts of budgets and resource requirements.
These systems are optimized for doing Scenarios. They enable the user to change a wide range of personnel, technology, business demand, customer life cycle and other factors. As such, they provide the foundation for empowering PMOs to analyze, forecast and track the business impact of multiple, simultaneous, projects beJune 27, 2005 approach, Practice Knowledge, to gathering data and measuring the work that is being done by an organization. This approach makes it possible to quickly and accurately support the goal of understanding and measuring the business impact of the multiple projects that affect an organization.
What are the Two Approaches to Determining Business Impact, TCO and ROI Analyses Typically Created?
Upper management and project managers have two different views of their organization. Upper management focuses on overall budgets, resource requirements and performance. Project managers focus on the benefits and costs of their specific areas of responsibility. The Business Unit-Centric Approach to managing an organization’s projects is designed to bridge these two different viewpoints.
If we focus on the project productivity portion of a business impact analysis, almost all project funding requests are based upon what I will call Project-Centric Analysis. Project-centric analysis takes the viewpoint of the project, and asks, “What will change if this project is approved?”
To address the credibility and tracking problem, it is necessary to use a Business Unit-Centric Approach. This approach takes the viewpoint of the business unit, whether it is a department, division, or the entire business unit. A business has a budget, personnel and other resources, such as facilities, technology or manufacturing capacity. This approach asks, “How will this project change the way my business does work, therefore resulting in an alternative overall budget, headcount and other resource forecasts?”
An Example of the Project-Centric Approach
The two tables in this section provide an example of the approach that is typically used for creating the TCO and ROI portion of project justifications in businesses. As can be seen, the viewpoint of this analysis is from the standpoint of the project. It stands ‘in the center of the world’ and asks, “What will change because of this project?” As such:
The table captures an example of this approach.
The data in the above table leads to a cash flow analysis, as shown in the next table, which provides the TCO and ROI of this project.
So why doesn’t this approach provide upper management with the confidence they need to justify funding? Let us answer this by referring to the response provided by the Senior VP of the large company.
The Baseline – the Foundation of Business Unit-Centric Approach
To obtain credibility with Upper Management, project proposals need to be presented in terms that are relevant to this group and make it easy for them to understand and evaluate the benefits of each proposed project. The term Business Unit Baseline will be used to describe this model of the business unit. It is designed for determining the impact of proposed projects on a business and supporting the ability to track their performance as they go in production.
The Baseline captures the volume of work that is done and how it is done. This data is required because projects affect these factors – they change how much work needs to be done and they change how work is done. In particular, the Baseline captures:
With this data, the Baseline can be created. It holds all of the information needed to forecast the business unit’s budgets and total resource requirements.
It is a portrait of the entire business unit – which is exactly what upper management focuses on in making its decisions. In addition, the data it holds (demand, work and resources) is the data that projects change when implemented, so it holds the information to evaluate a project proposal, and if approved, determine its success by measuring how demand and work activities change due to the project.
Comparing the Results of Project-centric and Business Unit-centric Analyses
A simple example shows the different results of the two approaches. Our example business unit has five separate projects, in different parts of its operation, being presented to upper management. Five different project managers, all of who are experts in their fields, independently created their business impact analyses. The table below shows a summary of the five proposals, as well as the 3-year TCO and anticipated ROI, when each manager makes their independent project-centric analysis of their opportunity.
At first appearance, these are relatively independent projects which all show a solid business case justifying project funding.
However, when one takes the Business-Unit Centric approach, the story changes. The reason is that, even though these appear to be independent solutions, there is a high degree of cross-elasticity between the projects. In particular:
The net of these cross-elastic factors is that the productivity opportunities from all of the projects are significantly lower than if management simply picked one and implemented it. The following table shows the results when the Business Unit-centric view is used to determine the financial justification for the project proposals.
This table would lead to a very different set of decisions by upper management. In fact, they would pick two, or perhaps three, of the projects and not fund the others.
With Practice Knowledge and Tools, Creating Accurate Baselines is Fast, and Will take Between Several Weeks to a Few Months Depending on the Complexity of the Business
With the proper activity-based, integrated planning and budgeting tools, it takes surprisingly little effort to create a Business Unit Baseline that is highly accurate and enables upper management to understand the business opportunities from multiple, simultaneous project opportunities. It also enables each project to track its success, so that both of the concerns of upper management are addressed.
In terms of time, for a typical mid-size organization, creating the Baseline will take between 1 and 3 person months. Initially, a simple Baseline may be created, which may only take several days. This starts the process and can support a single project analysis, showing its impact on the overall business unit.
The reason that Baselines can be created quickly is that, with the proper software tools supporting the process, the effort is a top-down data gathering process. This means that one starts by capturing high level data, for instance a high level view of demand and work activities, then ensuring that it provides results that reproduce current budgets and resources within 1% - 3% of actuals. This process ensures that the Baseline is providing accurate results and projections.
For projects that are being considered, one dives into more detail about the specific work activities and demand being done by the business unit that are relevant only to the specific project. Therefore, detail is not captured unless it is needed for considering a particular business question. In this manner, over time, the Baseline becomes more and more granular, based on the most important questions that are being addressed by Project Management and Upper Management. Time is not spent on detailing activities that are not being considered for change.
By using this process, creating an initial Baseline to consider a single project may take only a few weeks of effort, therefore enabling the business to obtain benefits quickly from introducing the Business Unit-centric approach to modeling business impact.
In Conclusion, Using a Business Unit Centric Approach to Estimating Project Business Impact will Significantly Increase the Credibility of TCO and ROI Analyses, and will Help Bridge the Gap Between Upper Management and Project Management
Using a Business Unit Centric approach to creating project business impact analyses will increase the credibility of TCO and ROI analyses, make obvious multi-project cross-elasticities, and help bridge the gab between Upper and Project Management. An activity-based, integrated planning and budgeting solution mixed with practice knowledge will enable a business to quickly capture the relevant information for its Baseline and such an environment automatically creates the budgets and total resource requirements needed to meet the demand on the business.
In particular, such a solution provides several major benefits:
Use of a solution also requires Practice Knowledge. There is a way of approaching the collection of Baseline data and structuring the Baseline Model so that it supports the project and strategic questions being asked by the management group.
With the combination of such tools and the practice knowledge, the bridge between Upper Management and Project Managers will be created, leading to a better process for evaluating and tracking projects.
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