part i project initiation © 2012 john wiley & sons inc
TRANSCRIPT
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Problems With Multiple Projects
Delays in one project delays others Inefficient use of resources Bottlenecks in resource availability
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Project Results
30 Percent canceled midstreamOver half of completed projects came in
up to190 percent over budgetOver half of completed projects came in
up to 220 percent late
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Challenges
Making sure projects are closely tied to goals and strategy
How to handle the growing number of projects?
How to make these projects successful?
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Project Management Maturity
Project management maturity refers to the mastery of skills required to manage projects competently
Number of ways to measureMost organizations do not do well
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Project Selection and Criteria of Choice
Project selection…– Evaluating– Choosing– Implementing
Same process as other business decisions
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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
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The Nature of Project Selection Models
Models turn inputs into outputs Managers decide on the values for the inputs
and evaluate the outputs The inputs never fully describe the situation The outputs never fully describe the expected
results Models are tools Managers are the decision makers
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Nonnumeric Models
Models that do not return a numeric value for a project to be compared with other projects
These are really not “models” but rather justifications for projects
Just because they are not true models does not make them all “bad”
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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
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Types of Nonnumeric Models Continued
Product Line Extension– Often, projects to expand a product line are
evaluated on how well the new product meshes with the existing product line rather than on overall benefits
Comparative Benefit– Projects are subjectively rank ordered based
on their perceived benefit to the company
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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
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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
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Payback Period
The length of time until the original investment has been recouped by the project
A shorter payback period is better
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Payback Period Example
4000,25$
000,100$PeriodPayback
FlowCash Annual
CostProject PeriodPayback
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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)
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Discounted Cash Flow
The value of a stream of cash inflows and outflows in today’s dollars
Also know as discounted cash flow 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
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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
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NPV Formula Terms
A0 Initial cash investment
Ft Cash flow in time period t (negative for
outflows)
k The discount rate
t The number of years of lifeA higher NPV is betterHigher the discount rate lower the NPV
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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 “=IRR(Series,Guess)”
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Profitability Index
a k a Benefit cost ratioNPV divided by initial cash investmentRatios greater than 1.0 are good
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Advantages of Profitability Models
Easy to use and understand Based on accounting data and forecasts Familiar and well understood Gives a go/no-go indication Can be modified to include risk
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Disadvantages of Profitability Models
Ignore nonmonetary factors Some ignore time-value of money Biased toward the short-term Payback ignores cash flow after payback IRR can have multiple solutions All are sensitive to errors Nonlinear Dependent on determination of cash flows
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Unweighted 0-1 Factor Model
Factors selected– Listed on a preprinted form
Raters score the project on each factorEach project gets a total scoreMain advantage is that the model uses
multiple criteriaMajor disadvantages are that it assumes
all criteria are of equal importance
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Unweighted Factor Scoring Model
Replaces X’s with factor score– Typically a 1-5 scale
Column of scores is summedProjects with high scores are selected
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Unweighted Weighted Factor Model
Each factor is weighted the sameLess important factors are weighted the
same as important onesEasy to computeJust total or average the scores
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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
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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
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Disadvantages of Scoring Models
Relative measure Linear in form Can have large number of criteria Unweighted models assume equal
importance
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Risk Considerations in Project Selection
Both costs and benefits are uncertain– Benefits are more uncertain
There are many ways of dealing with risk Can make estimates about the probability of
outcomes– Subjective probabilities
Uncertainty about:– Timing– What will be accomplished?– Side effects
Pro forma documents
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The Project Portfolio Process (PPP)
Links projects directly to the goals and strategy of the organization
Means for monitoring and controlling projects
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Symptoms of a Misaligned Portfolio
More projects Inconsistent determination of benefits Projects that don’t contribute to the strategy Competing projects Costs exceed benefits No risk analysis of projects Lack of tracking against the plan No client for project
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Purpose of Project Portfolio Process
Identify nonprojectsPrioritize list of projectsLimit number of projects Identify the real options for each project Identify projects with good fit Identify co-dependent projects
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Purpose of Project Portfolio Process Continued
Eliminate risky projectsEliminate projects that skip the formal
selection processKeep from overloading the organizationTo balance the resources with needsTo balance returnsTo balance short-, medium-, and long-
term returns
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Project Portfolio Process Steps
1. Establish a project council2. Identify project categories and criteria3. Collect project data4. Assess resource availability5. Reduce the project and criteria set6. Prioritize the projects within categories7. Select the projects to be funded and held in
reserve8. Implement the process
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Step 1: Establish a Project Council
Senior managementThe project managers of major projectsThe head of the Project Management
OfficeParticularly relevant general managersThose who can identify key opportunities
and risks facing the organizationAnyone who can derail the PPP later on
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Step 2: Identify Project Categories and Criteria
Derivate projects Platform projects Breakthrough projects R&D projects
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Step 3: Collect Project Data
Assemble the dataDocument assumptionsScreen out weaker projectsThe fewer projects that need to be
compared and analyzed, the easier the work of the council
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Step 4: Assess Resource Availability
Assess both internal and external resources
Assess labor conservativelyTiming is particularly important
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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
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Step 6: Prioritize the Projects Within Categories
Apply the scores and criterion weightsConsider in terms of benefits first and
resource costs secondSummarize the returns from the projects
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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
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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