Published by Soundview Executive Book Summaries, 10 LaCrue Avenue, Concordville, Pennsylvania 19331 USA ©2001 Soundview Executive Book Summaries • All rights reserved. Reproduction in whole or part is prohibited.
How to Translate Project Decisions into
Business Success
THE PROJECT
MANAGER’S MBA
THE SUMMARY IN BRIEF
Finishing a project on time and on budget is no longer a project manag-er’s sole criteria for success, according to authors Dennis J. Cohen and Robert J. Graham. You are also held accountable for your contributions to the company’s financial goals. As a project manager, however, you may not have the business knowledge necessary to make project-based decisions that lead to bottom-line success.
This summary presents the skills and knowledge you need to link project success to organizational success. Specifically, you will learn how to:
✓
Take an entrepreneurial approach to managing projects. You willlearn to view each project in light of its contribution to the overall prof-itability of the company and begin to run projects as if they were business start-ups.
✓
Understand the basics of accounting and finance. You need tounderstand the basics of balance sheets and profit and loss statements and know how to adapt them to measure the impact of your project on the com-pany’s profitability.
✓
Understand business strategy. Your projects must be compatiblewith your company’s overall business strategy, whether that strategy is to deliver world class service, provide leading-edge technology, or deliver operational excellence.
✓
Manage projects for maximum results. You will see what methodsyou should use to speed up the project.
✓
Understand the customer. Every project must be designed withwhat the customer and end-user want and need to solve a problem.
✓
Calculate project costs and measure project success. You willsoon see exactly what costs must be considered when setting up a project. You will learn to measure and apply the direct and indirect costs your com-pany invests in your project. You will also learn how to determine the life cycle of the end product of the project, and measure the value
created by the project against the cost of producing it.
Concentrated Knowledge™for the Busy Executive • www.summary.com Vol. 23, No. 5 (3 parts) Part 2, May 2001 • Order # 23-12
CONTENTS
An Entrepreneurial Approach To Managing Projects
Pages 2, 3
Accounting and Finance: You Must Know the Basics
Pages 3, 4
Corporate Strategy: It’s Your Business, Too
Page 4
Increase Speed, Quality and Value of Projects
Page 5
Understand the Customer and the Competition
Pages 5, 6, 7
Calculate the Project Costs
Pages 7, 8
Why Finance Matters for Project Managers
Page 8
The Project Venture Development Process
Page 8
By Dennis J. Cohen and Robert J. Graham FILE: Hands-On Mana g ement
®
An Entrepreneurial Approach
To Managing Projects
“Make it fast. Make it good. Make it cheap.” So goes the project management folklore about what senior managers always ask for. Traditionally, project man-agers would reply with, “Pick two.” And almost always, “Make it cheap” is one of the two project goals chosen.
It might not be the right answer. When project man-agement and senior manman-agement understand the wider implications, they both realize that “make it cheap” might not contribute to successful business results as often as they think. More important than reducing the costs of a project is increasing its value.
In other words, as a project manager you must devel-op a framework for thinking about projects based on business concepts such as increasing economic value, or Economic Value Added (EVA).
A successful project, for example, might mean creat-ing a high level of customer satisfaction, which produces more sales, which, in turn, creates enough cash flow to cover project and operating expenses, make a profit, and pay back the cost of the capital used to produce the prod-uct. At this point, the project begins to produce the eco-nomic value known as shareholder value.
Creating shareholder value requires project managers to act like entrepreneurs — treating projects like busi-nesses — and think like CEOs — viewing each project as part of a wider organization.
Act Like an Entrepreneur and Think Like a CEO
What does it mean to act like an entrepreneur and think like a CEO?
First and foremost, it means understanding how organizations create value for their stakeholders — shareholders, customers and the business team. For shareholders, the business creates value when it pro-vides a rate of return that meets their expectations for the level of risk they have taken. Cash flow is the fuel for this satisfaction. It is up to the business team to manage projects that deliver this necessary cash flow.
The problem is that many projects won’t directly impact a company’s bottom line. Project managers also need to consider the project’s overall impact on the company’s strategy to see where the project creates
value. For example, new product projects often impact profitability and create high levels of profit, while a project that focuses on breaking into a new geographic market might be lucky to break even. But both projects contribute to the execution of the company’s overall strategy.
A project’s contribution to overall business success can be diagrammed and looks something like the chart on the next page.
At the top of the diagram is the ultimate goal: the pro-ject’s contribution to business results. The boxes below
—
THE COMPLETE SUMMARY
The authors: Dennis J. Cohen is senior vice
presi-dent and managing director of the Project Management Practice at Strategic Management Group. Robert J. Graham has developed a consulting practice in project management and is the author of Project Management as if People Mattered and Creating an Environment for Successful Projects.
Copyright© 2001 by Jossey-Bass, Inc. Summarized by permission of the publisher, Jossey-Bass, Inc., A Wiley Company, 605 Third Avenue, New York, NY 10158-0012. 242 pages. $34.95. 0-7879-5256-7.
(continued on page 3)
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Project Categories
Most organizations that engage in project planning categorize these projects into three groups:
New product, service, or facility development projects. These projects provide something entirely new in the organization. These projects generate new or greater income for the organization.
Internal projects.These projects involve infra-structure development and improvement and include reorganizations, reengineering, and other change ini-tiatives as well as software and hardware iniini-tiatives. These projects generally don’t produce new income. Rather, they produce cost savings and create operat-ing efficiencies.
Client engagement projects. These projects ben-efit external customers or clients. Today, those clients expect more than they ever expected before and look for measures of increased economic value as proof of success.
the goal represent the business factors that go into pro-ducing economic value; the lines connecting the boxes represent interactions among those factors. The left side of the chart represents the strategic alignment of the proj-ect with the company’s overall strategy. The right side side shows the project’s contribution to economic value.
As you explore the flow chart, you will see that there is a new project management paradigm developing. Projects are conceived and executed with an understand-ing of the dynamics of competition, timed for maximum cash flow, and represent an investment in competitive advantage. ■
Accounting and Finance:
You Must Know the Basics
In the past, when project managers were given a proj-ect and a budget, they could afford to be ignorant of accounting and finance basics. Not today. To link proj-ect success to organizational success, projproj-ect manage-ment must understand at least the basics of finance and accounting. This article reviews some of the basics.
Cash Cycle
Each company has a cash cycle. The cycle involves acquiring cash, using that cash to grow and to operate, and returning any cash necessary to the creditors and owners. For example, a company’s cycle begins with a financing phase where the company must attract funds from financial institutions and investors to have the capital needed to start the business. It then invests the funds in labor and equipment required to develop the business (the investing phase.) In the operating phase, the company uses the funds to operate and adds funds gener-ated by the business to the pot. Finally, in the returning phase, creditors and investors are paid. This is their return on investment.
Projects are just like start-up businesses, fol-lowing the same cash cycle.
Financial Reports
Financial reports are required of all companies of any significant size. A company’s financial reports consists of at least three basic statements: a balance sheet, an income statement and a cash flow statement. Each serves a vital function.
A company’s balance sheet shows its assets and its liabilities. Assets, shown on the left side of the balance sheet, come in two kinds: cur-rent assets, which will be converted into cash in the next year or so, and long-term assets. The right hand side of the balance sheet tracks short-term and long-term liabilities as well as a liability called shareholder’s equity.
Shareholder’s equity consists of stock and retained earnings, which are profits that could have been distributed to shareholders as divi-dends but were kept by the company.
The sheet is called a balance sheet because the left hand side always equals the right hand side, and can be represented by the basic accounting formula: Assets = Liabilities + Shareholder’s Equity.
A company’s income statement attempts to match revenues with the expenses associated
The Project Manager’s MBA —
SUMMARY
An Entrepreneurial Approach
to Managing Projects
(continued from page 2)(continued on page 4) Business Systems Diagram
PROJECT CONTRIBUTION TO BUSINESS RESULTS
Project
Cost OutcomeProject
Cash Flow from Project Enterprise Project Contribution to Business Strategy Strategic Alignment Project Duration Project Management Practices Project Contribution to Economic Value EVA
Capital Charge
Depreciation OperatingExpenses Project Cost Project Outcome POL Revenue
Price Market Share(Volume)
Project Duration Project Outcome WACC Capital POL Expenses Investor’s Expectation Lender’s Expectation POL Use of Capital Project Use of Capital Project Outcome Project Duration Project Cost Project Management Practices Project Management Practices
with those revenues. A company’s revenue minus its expenses equals its net income. If the net income is posi-tive, the company has made a profit. If it is negaposi-tive, the company has suffered a loss. That’s why the income statement is also referred to as a profit and loss state-ment. Income statements are important for project man-agers because they match the cost of the project with the revenue or cost savings produced by the project.
A cash flow statement completes the basic financial statements. It tells someone examining the company from the outside where cash needed to run the business has come from and where it has gone. Internally, man-agement can use the cash flow statement to see how much cash is free for use in the business. This free cash flow is the net cash generated by the operations of the business minus the cash used for investment activities. If free cash flow is positive, the company does not need to obtain additional investments; if it is negative, the company must find additional investments in either stock or bank financing to continue operations. ■
Corporate Strategy:
It’s Your Business, Too
All organizations have a strategy, explicit or implied, that upper management uses to guide decision-making.
In the past, top management acted as if strategic ning was a ritual rain dance. Every year a strategic plan-ning process took place, with each upper manager
scouting out threats and opportunities. These were then analyzed and became part of the strategic plan to be locked in a drawer until next year.
Today, change is happening too fast to rely on old methods of strategic planning. Now strategic plans must change as rapidly as your company’s environment changes — which means everyone at the company must be aware of the strategic plan and take part in it. Project managers must understand their company’s strategy and how their projects fit into it.
In its most basic form, strategy is the way a company orients itself toward the market in which it operates, and toward other companies in that market. Strategy
answers the question of how the company will position itself in the market over the long run to secure a sustain-able competitive advantage.
Most project managers are too involved in the day-to-day management of their projects to pay much attention to that strategy. This is a mistake. Project managers need to align their projects with the strategic choices made by the company.
For example, if the company chooses to emphasize product leadership, projects to develop new products will focus on innovation and speed, not customer serv-ice. If project managers don’t buy into or understand company strategy, they might run the project with a focus inappropriate to the company’s strategy and thus miss making a significant contribution to the execution of that strategy and the creation of economic value. ■
Accounting and Finance:
You Must Know the Basics
(continued from page 3)Why Project Managers Need to
Understand Strategy
✓
Management is evaluating project managers on how well they implement company strategy.✓
Understanding company strategy will let you make decisions during the project that match strategy. If the strategy is to be first to market, that’s how you will manage your project, for example.✓
Understanding your company’s strategy will help you develop a team with common goals.✓
Aligning your project with company strategy will help protect it from being canceled, since you can demonstrate the project’s importance and rele-vance. And if the project does not match company strategy, you can understand why it is cancelled.✓
Understanding strategy lets your project stay focused and on track.Approaches to Company Strategy
Below are three basic approaches a company can take to developing a sustained competitive advantage. Choose one as your company’s strategic focus, but make sure that your practices in the other two at least meet the industry average.Customer Intimacy:Companies who choose this strategic focus aim to develop long-term relationships with their customers. Customers expect the best serv-ice and get it. Examples of companies taking this tack are Nordstrom’s and Home Depot.
Operational Excellence:Other companies build their strategies around high efficiency and high vol-ume. For example, a McDonald’s anywhere in the world is likely to be virtually identical to other loca-tions. Customers expect it, and McDonald’s delivers.
Product Leadership:Companies that practice prod-uct leadership must be creative because they are tar-geting the segment of the population that consists of early adopters. These want the latest and best prod-ucts and are willing to pay for them.
Increase Speed, Quality
and Value of Projects
Project cycle time, or how long it takes a project to go from idea to completion, is crucial. Proper project man-agement practices will shorten that time.
The sooner the project is completed, the sooner it can begin to produce its value and begin to pay back the investment used to produce it. Thus, reduced cycle time adds to cash flow, reduces the project’s capital require-ments, and increases economic value. Don’t reduce cycle time by increasing manpower and working people overtime until they drop (a common method). A better approach is to increase the budget for good management practices.
How to Reduce Cycle Time
The following six practices will decrease the duration of a project, increase quality and decrease total costs:
1. Have one well-trained project manager. He or
she should be enthusiastic and trained to manage proj-ects. Don’t appoint someone just because of technical expertise or availability. The designated project manager is the only person the team reports to; team members must know that he or she has the authority to make decisions and direct the project.
2. Develop a rapid prototyping process. Prototypes
need to be developed quickly, even if they are not per-fect. Presenting imperfect prototypes helps highlight problems and facilitates solutions to those problems. Customers have an opportunity to look at prototypes and offer suggestions for improvement. Today, prototypes are not specifications driven. Instead, prototypes drive specs.
3. Establish a core team for the duration of the project. Projects need an interdisciplinary core team of
people from important departments who stick with the
project from beginning to end. Core members typically come from engineering and information technology, marketing, production, customer and technical support, quality assurance, and the finance department. The team should also include customers or end users. A core team thus has access to a range of technical expertise, and can minimize handoff problems since every key depart-ment is involved.
4. Ensure that the team members work full time on one project. For the sake of speed, the core team —
and other team members who join in — should work exclusively on one project before moving on to other projects.
5. Co-locate core team and other team members, especially on new product development projects. The
more communication there is between team members, the better. Communication is easier if everyone is work-ing in the same location. Some organizations like Chrysler and General Motors have even constructed spe-cial development centers for that purpose.
6. Develop upper management support. Project
fail-ure is often caused by lack of upper-management sup-port. Once committed, upper management should con-tinue to support the project through completion.
To the degree that these practices are optimized, cycle time will be reduced. ■
Understand the Customer
and the Competition
No matter what type of project you are directing, the project outcome will end up in the marketplace. This holds true, obviously, for new product development projects. It also holds true for internal projects, as they ultimately benefit the end user. Perhaps, for example, the project leads to more efficient operations or better
The Project Manager’s MBA —
SUMMARY
(continued on page 6)
The Folly of Multitasking
Multitasking, which requires people to work on more than one project at a time, is a sure way to decrease focus, decrease output and increase cycle time. Despite this, many organizations have embraced multitasking. The problem: It doesn’t work. People are not so easily divisible. It takes time to shift from one project to another and back again. That time quickly adds up in a typical workweek, and can actually increase the amount of time it takes to complete proj-ects because the time required to switch between projects is non-productive. If two-way multitasking is a minor folly, asking people to work on three or more tasks borders on absurdity.Cost Overruns Aren’t Always Bad
Sometimes it makes sense to pour extra money into a project in order to finish it on time. According to a 1989 McKinsey and Company study, if a project is late for an amount of time equal to 10 percent of the projected life of the product, there will be a loss of about 30 percent of potential profit. But if the proj-ect budget is over by 50 percent, yet the product launched on time, there will be a loss of only about 3 percent of the potential profit. The advantage of being first to market offsets the additional cost. In other words, most companies will be better off pouring additional money into the project to get it out the door on time than they will be sticking to the old budget and finishing later.trained sales and service staff.
As a project manager, you must understand the cus-tomer and deliver a result he or she wants and will buy — thus generating revenue for the company. The key is to understand the competitive forces at work in the market.
Build It and They Still Might Not Come
The first step to generating revenue is to design prod-ucts, services and processes that help customers solve problems and meet or exceed customer expectations. Unfortunately, the traditional project manager’s thinking has been that selling the product was not his problem, but the marketing department’s. The implicit message was that, “if we build it, they will buy it.”
That approach has proven wrong. Consider the ill-fated Iridium project, which aimed to use satellite technology to provide global telephone service. It turned out there was no market for the service once it was developed.
One way to avoid this mistake is to try to get a mem-ber of the marketing department on the project team. Most important, however, is for you as a project director to have a clear understanding of market needs. You should be able to identify what the customer or end-user really wants, understand the competition, make trade-offs between features and price or cost, and determine the timing of the product introduction.
Understanding the Market
Project managers need to look at the market for their end product or service. That analysis must include:
Size. How big is the market? For new product
proj-ects, the size of the market is the total annual sales of this type of product to all market segments. For in-house projects, it is the total number of end-users who will be affected by the project results. For client engage-ment projects, it is the number of client customers who will be affected by the project outcome.
Segmentation. What part of the market is the target?
All markets are composed of segments, which are defined by customer attributes. For example, the cloth-ing market is divided into male or female, young and old, high fashion and casual, and so on. Select a seg-ment and stick with it. Companies that try to serve every segment tend to serve none well. Choose your cus-tomers, narrow your focus, and dominate your market segment.
Competition: Who is in pursuit of the same segment?
The relevant competition consists of organizations that are aiming at the same segment with a similar strategy
and with solutions to the same problems. You must know the competition, rate how your solution to cus-tomers’ problems compare, and figure out how to con-vey the superiority of your product to customers.
Understanding the Customer
Project managers and team members must take time to understand the customer so that they can provide what the customer wants.
A customer is the person who actually pays for the product or service you are developing. That customer might not be the end-user — the person who actually benefits from the product or service. For example, moth-ers might buy condensed soup to be eaten by a child. The mother is the customer, but the child ultimately ben-efits from the production of the soup. You must please the end-user, not just the customer. If the child refuses to eat the soup, the mother will not buy it again. More like-ly, she will buy the brand of soup the child will eat.
Both customers and end-users want you to solve prob-lems for them with your product or service. The best way to solve customer problems is to create a prototype and put it into customer and end-user hands. Never rely on market data alone.
Understand the Customer and the
Competition
(continued from page 5)
(continued on page 7)
Pinpointing the Competition
In order to compete, you have to know who your competitors are. That may sound obvious, but in practice it is harder than you think. Follow these steps to size up the competition:1. Draw up a list of competitors in the market you have defined for yourself.For example, Coke could list only Pepsi as a competitor if it defined its market as the cola drinking public. If it defined the market as soft drink buyers, the list of competitors grows. If that market is expanded further to include all beverages, the list of competitors grows even longer.
2. Next, the project team agrees on who should be on the competitor list and then assigns team members to monitor specific competitors.Keep up with your assigned competitor’s technological advances.
3. Finally, try to envision how new competitors might look and how likely they are to appear on the horizon.What are the barriers to entry? Are those barriers changing? You must also think like a new competitor. Whatever you could do to compete is probably what a potential competitor is doing out there right now.
The problem, of course, is that customers don’t always know what they want. In order to reach them, you may have to have technical members of the team sit down with them. Here are some practical ways to get customer and end-user involvement:
1. Put customers and end-users on the core team. 2. Directly observe end-users’ problems. Get out in
the field and see the problems from their point of view.
3. Develop focus groups to explain problems.
4. Develop prototypes to give end-users experience.
A good understanding of the market will help the core team set the price. For new product development projects, that price is a reflection of the features, the competition, and the time of market entry. Features that customers want and need add to the price, while unwanted or unneeded features don’t translate into a higher price. ■
Calculate the Project Costs
Cash flow, break-even analysis, and return to share-holders are important concepts for project managers. Profit equals revenue minus costs. Thus, the revenue from a project must exceed its development and produc-tion costs. Today, much more so than in the past, project managers are responsible for calculating the cost of their projects rather than being the victims of anassigned budget that may not be in the company’s long-term interest.
There are four types of costs that project managers need to be familiar with: variable direct costs, variable indirect costs, fixed direct costs and fixed indirect costs.
Variable direct costs are costs for the parts used to
make a product. They are direct costs because they go directly into the production of the product. They are variable because they increase or decrease depending on the volume of the product you produce.
Variable indirect costs also increase or decrease
depending on production levels, but they cannot be attributed directly to a product. For example, the plastic used to create a doll would be a variable direct cost, but the electricity used in the factory that makes the doll is a variable indirect cost because it cannot practically be assigned to a specific doll.
Fixed direct costs are incurred to run projects or
pro-duction. For example, the computer hardware needed to work on a project is a fixed direct cost. The cost is fixed because it does not matter whether the company is using the computer or not.
A fixed indirect cost also does not change with produc-tion levels, but remains the same. It also cannot be directly tied to a product. An example of a fixed indirect cost is
The Project Manager’s MBA —
SUMMARY
Understand the Customer and the
Competition
(continued from page 6)Concept Lifecycle
Each product or service a company produces to solve a problem has a concept lifecycle. For exam-ple, take putting words on paper. Words can be committed to paper with a pen, a printing press, a typewriter, a dot matrix printer, an inkjet printer and a laser printer. Each of these concepts for commit-ting words to paper has a lifecycle. If your company tried producing and selling a typewriter today, you would be too late in the product lifecycle to benefit. If you are selling a pen, you are probably still early enough in the lifecycle to make a profit.
Different customers will buy your product depend-ing on where the product or service is in the cycle. Some customers are innovators, buying up the product very early. Others are early adopters, part of the early majority, the late majority, or laggards. The innovators are the first to buy a new product, while the laggards wait until everyone else has one. The concept adoption life cycle looks like this:
(continued on page 8) Concept Adoption Curve
-3 -2 -1 0 1 2 3 Early Majority Early Adopters Innovators Late Majority Laggards Direct costs Indirect costs Types of Costs
1. Variable direct costs (example: cost of goods sold) 2. Variable indirect costs (example: depreciation)
3. Fixed direct costs (example: building rent) 4. Fixed indirect costs (example: SG&A)
the computer center a large company might make avail-able for its project managers. A fee is charged each month to the project managers according to the size of their proj-ect, but the amount of use does not change the charge.
Cost of Goods Sold
One set of costs that project managers should be familiar with are the “cost of goods sold.” To calculate the cost of goods, you must add the cost of materials needed to make the product, the direct manufacturing labor costs, and the manufacturing overhead cost. These costs could be assigned directly to a project, but it would be too costly to break them down enough to place with the right project. ■
Why Finance Matters
for Project Managers
Projects develop assets that produce a return to the company and its shareholders. Unless a business demonstrates its ability to return cash, it will not get the cash it needs to invest in and operate the business. No cash to invest means no new projects and no business. If projects are investments, managers need to under-stand how they are financed. Unfortunately, too many project managers ignore the cost of capital — that is, the cost of acquiring the cash that makes the project possible.
The money to finance a project can be acquired in two ways: through lenders or shareholders — those who buy the company’s stocks. Neither lets companies use their money for free. The cost of capital consists of the amount of money that companies have to pay their lenders or shareholders to compensate them for their investment and satisfy their expected return on that investment.
When companies turn to lenders for capital, they know exactly what the lender expects in return for the loan. The interest charges can readily be added to proj-ect cost. Shareholder expproj-ectations are not so easily con-verted into project cost because their specific expecta-tions are not stated. Nonetheless, managers should
attempt to estimate it when calculating project costs. Before a project launches, there should be a careful investment analysis made. A project must return at least the amount of capital invested in the project plus the cost of that capital. If it does not, it will not add value for shareholders. ■
The Project Venture
Development Process
Good projects don’t just happen; they are well planned and executed. If you want your project to add economic value to the company and further its strategic vision, you must plan accordingly. Here are the steps you need to take for each project:
Develop a Business Case. Begin by developing a
business case for each project. The business case process forces you to focus on the desired outcome. State where the numbers in your projections come from, including anticipated sales volumes, and the production and operating costs. Make sure the assumptions that drive the numbers are realistic. Clarify why this project is a sound investment for the company.
Think Strategically. Consider projects in their wider
context. How does the project fit into the company’s long-term strategy? Does it support an existing sustain-able competitive advantage, or does it create a new one? Describe the big picture and link the project to other projects for an overall view of how it all fits together.
Create a Business Plan. Before starting the project,
develop a business plan. Do market research and scope out the competition. Be sure to assemble the core team and include them in this stage. Identify major mile-stones at which you will stop and check your assump-tions and progress.
Execute and Control the Project through the Business Plan. Don’t put away the business plan once
the project has begun. Use it all along to guide the proj-ect and check your assumptions.
Transition Smoothly to the Project Outcome Lifecycle. The end of the project is the beginning of its
implementation. Core team members should be along as guides. The team should also produce a final report with numbers, projections and assumptions about the success of the product or service the project created. These can then be checked against what really happens as a learn-ing experience.
Operate and Evaluate. The project isn’t over until
the end of the project outcome lifecycle. Once the life-cycle is over, evaluate how well expectations were met. This serves as a way of celebrating success and learning from failure. ■
