Project investments require more rigorous financial evaluation to avoid a poor track record of project selection and mismanagement.
Project management has been a career path and discipline for many years, but recently, many companies seem to be elevating the role of the project manager and describing it as a critical element to achievement of business objectives. While this doesn’t surprise me, something that I hear quite frequently from those leading project and portfolio management operations does.
I routinely speak with companies about areas they wish to improve. At the execution level, I hear how improvements are needed in the areas of scope and schedule management. At the strategy level, I hear how the enterprise needs to identify business drivers and select the right mix of projects that support these. Most conversations eventually wander into the area of cost management, estimating and benefit realization where I am taken aback by the following comment that I have paraphrased below:
“We’re not ready to focus on financial management at this time. We don’t do a great job of estimating effort and cost on the front end. Sometimes we develop business cases, but we don’t revisit the planned business benefits when the project is complete. We should be doing a better job at this, but this needs to come later.”
While I understand that return on investment is not the measurement for all projects, we still need to think of the project portfolio as an investment portfolio. Time resources and money are invested with the expectation that there will be a positive financial return on the backend. UMT Consulting Group conducted a survey a few years ago with leading U.S. companies that showed that almost 80 percent of those polled felt some level of dissatisfaction with their current financial management methods. The key obstacles were knowledge deficiencies, lack of management support and use of ineffective software.
Intangible benefits are oftentimes used as a metric for success, however it is becoming more the case that the majority of investments require a more rigorous financial evaluation to avoid a poor track record of project selection and mismanagement of company investments. When it comes to projects, companies can elevate their performance by improving their Project Financial Intelligence (PFI).
PFI integrates Project Management, Financial Management and Business Intelligence to provide valuable insight into project financials that significantly improves decision-making and insight throughout the project lifecycle. It is the union of these different types of information that represents a major departure from Project Financial Management (PFM) principles, processes and practices. Strategic planning, capital budgeting, project management, cost accounting and variance analysis, and ROI all fall within the PFI classification.
Standish Group’s famous CHAOS Summary 2009 report revealed many inadequacies including the correlation between rising cost and lower success rate. With proper use of PFI, organizations have a better chance of selecting optimum projects and realizing the anticipated benefits by doing the following:
- Developing project estimates top down or bottom up
- Assigning cost and benefits to cost and profit centers
- Creating financial metrics such as NPV or ROI
- Linking strategic benefits to financials
- Optimizing investments based on financial and strategic benefits
Governance is the key ingredient to enable this improved performance as it promotes individual creativity within defined limits of freedom by using structural safeguards that ensure clear definition of authority for individuals handling budgets, optimum processes and workflows, and effective standards for managing cost and benefits as well as well as control safeguards that measure and ensure compliance and process effectiveness.
While PFI is not perfect, it’s a huge improvement over unreliable alternatives. The combination of people and computational power presents unlimited opportunities. The quality of the project financials depends upon the sum of all project and portfolio financial decisions made by stakeholders. The good news is that the quality of these decisions depends not only on the intelligence of the decision makers, but on project financial processes and methodology that can be improved and successfully deployed in your organization.