Key concepts
- Project portfolio management
- Programs
- Projects
- Sub projects
- Operations
- Relationship between projects, programs, sub-projects, portfolio management and business strategy
- Project selection methods
- Present value
- Future Value
- Net present value (NPV)
- Payback period
- Benefit cost ratio (BCR)
- Internal rate of return
- Project management office (PMO)
Projects fail at the beginning, not at the end. Organizations and individuals can venture into projects based on intuitions and fail miserably. While it is very difficult to forecast everything about a project before committing to it, ensuring a proper business case for the project, right at the start of the project will insulate the project from the financial risks. The first goal of this module is to introduce you to the basic project selection ratios like NPV, IRR, BCR and pay back period, so that you can have meaningful dialogue with other stakeholders like the sponsors, cost accountants etc, and ensure that your project has a sound business case, which will ensure it’s successful completion.
Very often, project managers can get bogged down to the triple constraints of the project (time, cost and scope) alone, without any understanding of the project to the customer’s business strategy. Understanding the project portfolio management concepts will help you to appreciate the significance of your project to the customer’s (internal/external) business strategy. This will help you to feel proud about your work, which is contagious. Helping you to get inspired about your project’s contribution to the customer’s success and then going around and motivating others is the second goal of this module.
Good luck, and happy reading!
Abrachan
#1 Understanding project portfolio management
Project portfolio management (PPM) is the management of the project portfolio, so as to maximize the contribution of projects to the overall welfare and success of the enterprise. This means that;
- Projects must be aligned with the firm’s strategy and goals.
- Projects must be consistent with the firm’s values and culture.
- Projects must contribute (directly or indirectly) to a positive cash flow for the enterprise.
- Projects must effectively use the firm’s resources – both people and other resources.
- Projects must not only provide for current contributions to the firms health but must help to position the firm for future success.
The case of Project Management Research Institute
After working for 6 companies over a period of 20 years, I decided to start my own company (after getting influenced by ‘Brand You’ by Tom Peters, ‘Rich Dad Poor Dad’ by Robert Kayasaki). So my company happened and we are doing well, even during the recession time. Our income is more than the expenditure and I am very happy about it.
What is your opinion?. Is it really successful? Some say ‘Yes’ and some say ‘No’. Now I realize that we have made amount ‘X’ where we could have made 2X. That way it is a disaster. The only plus point is that, we could control our expenses to a figure, which is lower than ‘X’. With this revelation, we decided to do ‘2X’, during the next financial year (Vision).
How to do this 2X? (Strategy)
When we really analyzed our revenue sources, major chunk of our revenues are from project management related activities (training, consulting, and research) and at the same time we have wasted enough money in developing some social networking sites, which were not in alignment to our core strengths. The BCG matrix helped us to do this exercise.
The projects falling into the ‘?’ mark quadrant ( low market share, high business growth) segment are the R&D projects, which may graduate into ‘*’ quadrant (high business growth, high market share) segment. From there they will graduate into ‘cash cow’ quadrant – (high market share, low business growth). From the ‘cash cow’ quadrant the projects fall into ‘dog’ category, which is end of life.
Based on this, project management certification training was our cash cow. It was bringing in 80% of the revenue. The remaining 20% was from our ‘Star’ projects – consulting, project management tools. Then we had the ‘Question mark’ projects, which were only consuming money without generating any income. Now decision making was easy.
- Kill all the projects falling under the ‘Question mark’ category, which did not have proper business cases.
- We are successful only because of our track record in the project management domain. So we will be doing projects related to the ‘project management domain’ only. We will resist all other temptations.
These steps helped us to clean up or project port folio. Still it did not address the question of scaling up from 1X to 2X. We had to further find out answers to the following questions,
- Focus on new markets with the existing products?
- Focus on new markets with new products?
- Focus on known markets with new products?
- Focus on known markets with existing products?
The Ansoff Product-Market Growth Matrix is a marketing tool created by Igor Ansoff and first published in his article “Strategies for Diversification” in the Harvard Business Review (1957). The matrix allows marketers to consider ways to grow the business via existing and/or new products, in existing and/or new markets – there are four possible product/market combinations. This matrix helps companies decide what course of action should be taken given current performance. The matrix consists of four strategies:
- Market penetration (existing markets, existing products): Market penetration occurs when a company enters/penetrates a market with current products. The best way to achieve this is by gaining competitors’ customers (part of their market share). Other ways include attracting non-users of your product or convincing current clients to use more of your product/service, with advertising or other promotions. Market penetration is the least risky way for a company to grow.
- Product development (existing markets, new products): A firm with a market for its current products might embark on a strategy of developing other products catering to the same market (although these new products need not be new to the market; the point is that the product is new to the company). For example, McDonald’s is always within the fast-food industry, but frequently markets new burgers. Frequently, when a firm creates new products, it can gain new customers for these products. Hence, new product development can be a crucial business development strategy for firms to stay competitive.
- Market development (new markets, existing products): An established product in the marketplace can be tweaked or targeted to a different customer segment, as a strategy to earn more revenue for the firm. For example, Lucozade was first marketed for sick children and then rebranded to target athletes. This is a good example of developing a new market for an existing product. Again, the market need not be new in itself, the point is that the market is new to the company.
- Diversification (new markets, new products): Virgin Cola, Virgin Megastores, Virgin Airlines, Virgin Telecommunications are examples of new products created by the Virgin Group of UK, to leverage the Virgin brand. This resulted in the company entering new markets where it had no presence before.
So we could firm up on the project portfolio, which supported the vision of doubling the revenue to 2X. Haaa….here comes the recession. During recession time, the first budget to be cut is the training budget…..and it’s time to re-look into the project portfolio again. It is a continuous process.
The whole process of picking up the right projects which are in true alignment to the organization’s business strategy and then monitoring the market conditions, the strategy and the continued alignment of the projects are collectively known as project portfolio management and involve;
- Picking up the best projects (business cases) in alignment to the organization’s business strategy.
- Continuous monitoring and optimization of the business strategy to dynamic market conditions (recession, depression, boom, mergers, acquisitions, globalization)
- Fine tuning the project portfolio to the ever optimizing business strategies against the highly volatile market conditions.
- Monitoring the achievement of the ‘business cases of the individual projects’ – killing the ineffective ones quickly and identifying those new projects which can make a big difference in the ever changing market scenario.
Even writing this book ( a project) is part of a larger strategy.
Suggested reading: “Project portfolio management” A practical guide to selecting projects, managing portfolios and maximizing benefits, by Harvey A. Levine
#2 Understanding Programs
“A program is a collection of inter-related projects, which when done together, gives you some added advantage than doing them one after the other”
Mr. Bali took me around in Dubai and he was showing me the Dubai internet city. I could not see any city there, except some big sign boards of ‘Microsoft’ and ‘Oracle’ kept on top of small buildings. So to the dismay of Bali, as a kid I was asking ‘Where is the internet city?’ Thanks to my exposure to the huge tech parks of Mumbai, Pune, Bangalore and even Kochi and Trivandrum. Comparing India to Dubai, I must say that Dubai is very good in program management, where as India as a country is very good in project management and program management is lacking there.
Dubai has this strong vision of ‘Becoming the best tourist destination of the world by 2015’, which is supported by the ruler of the country. It’s oil resources will dry up by 2015, and by that time it has to have alternate channels to attract money, and this vision is emanating from that necessity. First they created an airline called ‘Emirates’, which is known for it’s quality. Establishing an airline of this nature is the most time consuming project, so it started first, and Dubai became the hub of international air travel. So the number of people visiting Dubai increased and the revenue from tourism and business increased. I was told that the current airport (before the capacity expansion) was handling around 400 flights per day and it could not take any additional load. So two new projects were started, one to expand the capacity of the current airport and the new airport project. Then the tallest tower in the world ‘Burj Dubai’ started, followed by ‘Dubai word’ and the ‘Dubai Palm’, anticipating the additional demand for commercial space. With the increase in tourism and business, traffic jams posed a potential risk, so immediately the mass rapid transport project was kicked off. These are some of the key projects, which are part of the program ‘Dubai, the best tourist destination of the world by 2015’.
Take the case of India. India has 74 airports, where as Dubai and Singapore have[Abstract] just one each. Some of the Infosys (major IT player) campuses are bigger than the ‘Internet cities’ and ‘Knowledge Villages’. Chandrayan project (launching satellite to moon), proved that there is water in moon, then the missile projects, Delhi Metro, etc…..each project a goliath by themselves. Where is the program binding them all?. Of course, there are the five year plans and the APJ Abdul Kalam’s vision for India. Alignment of the so called programs and the individual projects happening along the length and breadth of the country is the issue, resulting in;
- Electronic city in Bangalore happened first, and then everyone waited for the traffic jams to happen, and then comes the 10 km fly over.
- Construction and commissioning of the new airport, when the roads connecting the city to the new airport are not yet ready, which makes the travelling time to the airport, more than the flight time J
- Immediately after the construction / maintenance work of the roads, they are dug by the telecom companies to lay cable.
We can blame it on the geographic spread, cultural diversity, democratic process..etc…, the crux of the matter is, we are poor in program management and we don’t have a compelling vision.
#3 Projects, Sub projects, Operations
So what is project?
- Projects should have definite start and end dates
- Temporary in nature (once this book is published, this project is over)
- Performed by people (Me!)
- Delivers unique products or services (Hopefully this book will be unique J )
- Progressive elaboration (When you start a project, you have very less information about the project and as you get into the project more and more, you gain more insight about the project. I will know the number of pages of this book only at the end J )
Sub Projects
For the ease of management, we can break the project into smaller modules (sub-projects). The Dubai metro project is broken down into Phase-1, and Phase-2. Phase-1 and Phase-2 are sub projects.
What about operations?
- They are repetitive and ongoing (manufacturing)
- Producing standard outputs
- Both operations and projects are also constrained by limited resources
- Both operations and projects are planned and executed
#4 Project selection methods
How do we select the right projects for execution? . A set of ratios comes in handy while picking up the right projects for execution. They are;
- Net present value (NPV)
- Payback period
- Benefit cost ratio (BCR)
- Internal rate of return (IRR)
The time value for money
Money has a time value. A rupee today is more valuable than a rupee year later. Why? There are several reasons
l Capital can be employed productively to generate positive returns
l In an inflationary period a rupee today represents a greater real purchasing power than a rupee a year later
Time lines and notations
When cash flows occur at different points in time, it is easier to deal with them using a time line. A time line shows the timing and the amount of each cash flow in a cash flow stream. Cash flows can be positive or negative. A positive cash flow is called as cash inflow and a negative cash flow is called a s cash outflow.
Future value of a single amount
Suppose you invest Rs.1000 for three years in a savings account that pays 10 percent interest / year. If you let your interest income be reinvested, your investment will grow as follows;
First year |
Principal at the beginning | 1,000 |
| Interest for the year (1000×0.10) | 100 | |
| Principal at the end | 1,100 | |
| Second year | Principal at the beginning | 1,100 |
| Interest for the year (1100*0.10) | 110 | |
| Principal at the end | 1,210 | |
| Third year | Principal at the beginning | 1,210 |
| Interest for the year (1210*0.10) | 121 | |
| Principal at the end | 1,331 |
The process of investing money as well as re-investing the interest earned thereon is called compounding. The future value, or compounded value of an investment after ‘n’ years, when the interest rate is ‘r’ percent is;
FV n = PV (1+r) ˆ n
In this equation, (1+r) ^ n is called future value factor
If we apply this formula;
FV n = 1000 (1+. 1)^3 = 1000 x 1.1 x 1.1 x 1.1 = 1331
Net present value
The net present value (NPV) of a project is the sum of the present values of all the cash flows , positive as well as negative , that are expected to occur over the life of the project. To illustrate the calculation of net present value, consider a project, which has the following cash flow stream;
| Year | Cash flow |
| 0 | Rs (1,000,000) |
| 1 | 200,000 |
| 2 | 200,000 |
| 3 | 300,000 |
| 4 | 300,000 |
| 5 | 350,000 |
The cost of capital, ‘r’ for the firm is 10 percent.
The net present value of the proposal is;
NPV = (200000/1.10^1) + (200000/1.10^2) + (300000/1.10^3) + (300000/1.10^4) + (350000/1.10^5) – 1000000 = – 5,273
The net present value represents the net benefit over and above the compensation for time and risk. Hence the decision rule associated with the net present value criterion is, accept the project if the net present value of the project is positive and reject the project if the net present value is negative.
The benefit cost ratio
Benefit cost ratio BCR = PVB / I where
PVB = present value of benefits and I = initial investment
To illustrate the calculation of these measures, let us consider a project, which is being evaluated by a firm that has a cost of capital of 12 percent.
| Initial investment | 100000 |
| Benefits Year 1 | 25000 |
| Benefits Year 2 | 40000 |
| Benefits Year 3 | 40000 |
| Benefits Year 4 | 50000 |
The benefit cost ratio measures for this project is;
BCR = ((25000/1.12) + 40000/1.12^2) + (40000/1.12^3) + (50000/1/12^4)) / 100000 = 1.145
Decision rules
When BCR > 1 accept the project
When BCR < 1 reject the project
IRR – internal rate of return
The internal rate of return (IRR) of a project is the discount rate, which makes its NPV equal to zero. To illustrate the calculation of IRR, consider the cash flows of a project being considered;
| Year | 0 | 1 | 2 | 3 | 4 |
| Cash flow | (100,000) | 30000 | 30000 | 40000 | 45000 |
The IRR is the value of ‘r’, which satisfies the following equation;
100,000 = 30000/(1+r)^1 + 30000/(1+r)^2 + 40000/(1+r)^3 + 45000/(1+r)^4
The calculation ‘r’ involves a process of trial and error. We try different values of ‘r’ till we find that the right hand side of the above equation is equal to 100,000. In this case, the value lies between 15 and 16 percent.
The decision rule for IRR is as follows;
Accept, if the IRR is greater than the cost of capital
Reject, if the IRR is less than the cost of capital
Payback period
The payback period is the length of time required to recover the initial cash outlay on the project. For example, if a project involves a cash outlay of RS. 600000 and generates cash inflows of Rs. 100000, 150000, 150000 and 200000 in the first, second, third and fourth years respectively, its pay back period is 4 years because the sum of cash flows during the four years is equal to the initial outlay. According to the payback criterion, the shorter the payback period, the more desirable the project.
Opportunity cost
Opportunity cost (opportunity lost) is the NPV of the next best project, you are not doing, because you have decided to invest in a project.
Let us assume that you have 100,000 rupees and you are investing this money in project ‘A’, whose NPV=200,000 and because of this you are unable to do project ‘B’, whose NPV=150,000 or project ‘C’, whose NPV = 120,000, then the opportunity cost is 150,000, which is the NPV of project ‘B’, which is the next best option after ‘A’.
In personal life, these concepts of NPV, payback period, BCR, IRR and opportunity cost are really helpful, to protect yourself from unwanted expenses like buying a new flat, car or even mobile phone. Before committing to buy, just think about these ratios, and most probably you will restrain from your impulse to buy unwanted stuff.
The project management body of knowledge says that ‘Projects fail at the beginning and not at the end’. A project which does not have a good business case is a bubble, which can burst at any time. So, before starting a project, please ensure that the project has a solid business case, and if the business case is not clear, please document it as a risk.
#5 Enterprise environmental factors
- Organizational culture, structure and processes
- Government or industry standards
- Infrastructure
- Existing human resources
- Personnel administration
- Company work authorization systems
- Market place conditions
- Stakeholder risk tolerances
- Political climate
- Project management information systems etc…
#6 Organizational process assets
- Plans
- Policies
- Procedures
- Guidelines
- Quality management systems
- Lessons learned
- Organizational metrics etc…
Let us summarize
- What is a project? – It’s characteristics
- What is a program?
- What is project portfolio management?
- What are the commonly used project selection methods?
- Recollect five examples of enterprise environmental factors
- Recollect five examples of organizational process assets
