Copyright 2012 John Wiley & Sons, Inc. Part I Project Initiation

2-2 Project Management

Copyright 2012 John Wiley & Sons, Inc. Chapter 2 Strategic Management and Project Selection

The PMBOK Five Process Groups Initiating Planning Executing Monitoring & Controlling Closing

The PMBOK Nine Knowledge Areas (put Management after any) Integration Scope Time Cost Quality Communications Human Resources Risk Procurement

Definitions Program: a group of related projects requiring coordinated management because of shared resources Portfolio: a group of programs related by common strategic goals the distinction may be blurry 2-6

2-7 Problems With Multiple Projects Delays in one project delays others Inefficient use of resources Bottlenecks in resource availability

2-8 Project Management Maturity Project management maturity refers to the mastery of skills required to manage projects competently Number of ways to measure Most organizations do not do well

2-9 Types of Companies Companies considering projects fall into two broad categories: – Companies whose core business is completing projects – Companies whose core business is something else They can also be broken down as: – Companies looking at projects to do for others – Companies looking at projects to do for themselves

2-10 Types of Nonnumeric Models Sacred Cow – A project, often suggested by the top management, that has taken on a life of its own Operating Necessity – A project that is required in order to protect lives or property or to keep the company in operation Competitive Necessity – A project that is required in order to maintain the company’s position in the marketplace

2-11 Numeric Models Models that return a numeric value for a project that can be easily compared with other projects Two major categories: – Profit/profitability – Scoring

2-12 Profit/Profitability Models Models that look at costs and revenues – Payback period – Discounted cash flow (NPV) – Internal rate of return (IRR) – Profitability index NPV and IRR are the more common methods

2-13 Payback Period The length of time until the original investment has been recouped by the project A shorter payback period is better

2-14 Payback Period Example

2-15 Payback Period Drawbacks Does not consider time value of money More difficult to use when cash flows change over time Less meaningful for longer periods of time (due to time value of money)

2-16 Discounted Cash Flow The value of a stream of cash inflows and outflows in today’s dollars Also known as Net Present Value or just discounting Widely used to evaluate projects Includes the time value of money Includes all inflows and outflows, not just the ones through payback point

2-17 Discounted Cash Flow Continued Requires a percentage to use to reduce future cash flows – This is known as the discount rate The discount rate may also be known as a hurdle rate or cutoff rate There will usually be one overall discount rate for the company

2-18 NPV Formula

2-19 NPV Formula Terms A 0 Initial cash investment (usually < 0) F t Cash flow in time period t (negative for outflows) kThe discount rate tThe number of years of life A higher NPV is better Higher the discount rate lower the NPV Excel function NPV starts at Y1 not Y0

2-20 NPV Example

2-21 Internal Rate of Return [IRR] The discount rate (k) that causes the NPV to be equal to zero The higher the IRR, the better – While it is technically possible for a series to have multiple IRR’s, this is not a practical issue Finding the IRR requires a financial calculator or computer In Excel, use goal seek or IRR function.

2-22 Profitability Index a k a Benefit cost ratio NPV divided by initial cash investment Ratios greater than 1.0 are good Easy to use and understand Based on accounting data and forecasts Familiar and well understood Gives a go/no-go indication

2-23 Scoring Models Unweighted 0–1 factor model Unweighted factor model Weighted factor model

2-24 Unweighted 0-1 Factor Model Factors selected – Listed on a preprinted form Raters score the project on each factor Each project gets a total score Main advantage is that the model uses multiple criteria Major disadvantages are that it assumes all criteria are of equal importance

2-25 Unweighted 0-1 Factor Model Example Figure 2-2

2-26 Unweighted Factor Scoring Model Replaces X’s with factor score – Typically a 1-5 scale Column of scores is summed Projects with high scores are selected

2-27 Unweighted Weighted Factor Model Each factor is weighted the same Less important factors are weighted the same as important ones Easy to compute Just total or average the scores

2-28 Weighted Factor Model Each factor is weighted relative to its importance – Weighting allows important factors to stand out A good way to include nonnumeric data in the analysis Factors need to sum to one All weights must be set up, so higher values mean more desirable Small differences in totals are not meaningful

2-29 Weighted Factor Model Example Figure B Page 60

2-30 Advantages of Scoring Models Allow multiple criteria Structurally simple Direct reflection of managerial policy Easily altered Allow for more important factors Allow easy sensitivity analysis

2-31 Disadvantages of Scoring Models Relative measure Linear in form Can have large number of criteria Unweighted models assume equal importance

2-32 The Project Portfolio Process (PPP) Links projects directly to the goals and strategy of the organization Means for monitoring and controlling projects

2-33 Purpose of Project Portfolio Process Identify nonprojects Prioritize list of projects Limit number of projects Identify the real options for each project Identify projects with good fit Identify co-dependent projects

2-34 Purpose of Project Portfolio Process Continued Eliminate risky projects Eliminate projects that skip the formal selection process Keep from overloading the organization To balance the resources with needs To balance returns To balance short-, medium-, and long- term returns

2-35 Project Portfolio Process Steps 1. Establish a project council 2. Identify project categories and criteria 3. Collect project data 4. Assess resource availability 5. Reduce the project and criteria set 6. Prioritize the projects within categories 7. Select the projects to be funded and held in reserve 8. Implement the process

2-36 Step 1: Establish a Project Council Senior management The project managers of major projects The head of the Project Management Office Particularly relevant general managers Those who can identify key opportunities and risks facing the organization Anyone who can derail the PPP later on

2-37 Step 2: Identify Project Categories and Criteria Derivative projects – Projects that are only incrementally different from previous efforts. Platform projects – Projects that impact organization outputs or the processes that create them. Breakthrough projects – Projects that involve implementing new, sometimes “disruptive” technology. R&D projects – Projects used to acquire new knowledge or create new technology.

2-38 Step 3: Collect Project Data Assemble the data Document assumptions Screen out weaker projects The fewer projects that need to be compared and analyzed, the easier the work of the council

2-39 Step 4: Assess Resource Availability Assess both internal and external resources Assess labor conservatively Timing is particularly important

2-40 Step 5: Reduce the Project and Criteria Set Organization’s goals Have competence Market for offering How risky the project is Potential partner Right resources Good fit Use strengths Synergistic Dominated by another Has slipped in desirability

2-41 Step 6: Prioritize the Projects Within Categories Apply the scores and criterion weights Consider in terms of benefits first and resource costs second Summarize the returns from the projects

2-42 Step 7: Select the Projects to be Funded and Held in Reserve Determine the mix of projects across the categories Leave some resources free for new opportunities Allocate the categorized projects in rank order

2-43 Step 8: Implement the Process Communicate results Repeat regularly Improve process

2-44 Project Proposals The project proposal is essentially a project bid Putting together a project proposal requires a detailed analysis of the project Project proposals can take weeks or months to complete A more detailed analysis may result in not bidding on the project

2-45 Project Proposal Contents Cover letter Executive summary The technical approach The implementation plan The plan for logistic support and administration Past experience