PROJECT MANAGEMENT

PROJECT SELECTION How to choose the right projects to meet

your objectives and resources?

PROJECT SELECTION

“Project selection is about how to choose the right projects to meet your objectives and resources”

PROJEC SELECTION

How to choose between projects?• Prioritize projects against objectives.• The better a project meets your objectives, the higher

priority it has.• Projects with higher priority have priority access to

budget. • The goal is to find portfolio that meets your budget

with the highest total priority of included projects.

PROJEC SELECTIONSelecting projects is not an exact science, but it is a critical part of the project management.

Many METHODS exist for selecting from among possible projects, including:

• Aligning projects with business strategy

• Focusing on broad organizational needs

• Performing Project Valuation

• Using a Weighted Scoring Model

• Addressing Problems, Opportunities and Directives

ALIGNING PROJECT WITH BUSINESS STRATEGY/ FOCUSING ON COMPETITIVE STRATEGY

– Project Selection is a process to assess each project and select the project with the highest priority that meet our budgets.

– An organization´s business strategy should guide the prioritization of those projects.

– Always look at the strategic goal to determine what project will provide the most value: Examples: A firm with competitive strategy on costs will select projects directly tied to such strategy.

PROJECT SELECTION

FOCUSING ON BROAD ORGANIZATIONAL NEEDS

• “We are a great place to work” Is that really true?

• What resources, skills, training and support must have staff in order to work effectively?– Examples:

• Improving software for administrative processes • Automatized repetitive manual processes

PROJECT SELECTION

PERFORMING PROJECT VALUATION

– It´s about measuring the financial value of projects.

– Remember that the financial value is created by positive cash flows.

– Benefits (Cash Inflows less Cash Outflows) are calculated and then compared to with other project to make a decision.

– Most common methods for determining the financial value of projects include:

• NET PRESENT VALUE• RETURN ON INVESTMENT• PAYBACK PERIOD

PROJECT SELECTION

NET PRESENT VALUE (NPV)

A method for calculating the expected gain or loss from a project by discounting all expected future cash flows to the present point in time.

An organization should consider only projects with positive NPV

A positive NPV means the return from a projects is higher than the opportunity cost of capital.

PROJECT SELECTION

RETURN ON INVESTEMENT (ROI)

Measure the profit for the project as a percentage of the investment.

If a firm invest $ 100 million today and next year its investment is worth $ 110 million, the firm´s ROI is ($110-$100)/$100 = 10%It is best to consider present or discounted value for projects longer than 1 year to determine ROI.

PROJECT SELECTION

RETURN ON INVESTEMENT (ROI)

The higher the ROI, the better

Many firms has a required rate of return for projects.

The required rate of return is the minimum acceptable rate of an investment.

PROJECT SELECTION

PAYBACK PERIOD

Payback period is the time required to recover the money invested in a project. How much time will take before cash inflows exceeds the cash outflows?

Assume a project cost $ 100 million up front with no additional investments. Also its annual benefits are of $ 10, $20, $25, $25 and $30 millions over the following years. Calculate the Payback Period for this project.

PROJECT SELECTION

PAYBACK PERIOD

Many firms have certain rules for the length of the Payback Period of an investment. For example, a firm may require all IT Projects to have a Payback Period of less than 2 years, regardless of the estimated NPV or ROI.

Q. Is it convenient to reduce the size of the teams to reduce and meet the Payback Period set by the firm? Why? Explain.

PROJECT SELECTION

USING A WEIGHTED SCORING MODEL

Each project is scored against the selection criteria and a score for each project is calculated.

By ranking the projects from the highest to the lowest we can identify which project has the highest priority.

These criteria include factors as: meeting strategic goals, broad organizational needs, financial performance of the projects, etc.

PROJECT SELECTION

USING A WEIGHTED SCORING MODEL

The first step in creating a weighted scoring model is to identify the relevant criteria for selection and then allocate weights.

It often takes time to develop and reach an agreement on those criteria and weights. Why?

Projects with highest scores are selected.

But what if the projects are sensitive to the criteria and weights.

PROJECT SELECTION

ADDRESSING PROBLEMS, OPPORTUNITIES AND DIRECTIVES

Another method for selecting projects is based on their response to a problem, opportunity or a directive.

Problems are undesirable situation that prevent an organization from achieving its goals.

Opportunities are chances to improve the organization

Directives are new requirements imposed by board of directors, senior managers, government or regulators.

PROJECT SELECTION