Tuesday, 28 October 2014 00:00

Business Acumen as an Integral Part of Project Management, Part I

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Project management’s conventional wisdom leaves substantial opportunities to deliver business value.

The project management profession has gone through a tremendous evolution over the last three decades. Major trends, such as globalization, access to resources across the planet and the sheer complexity of projects, have pushed project managers to a level of sophistication never seen before. To adapt, project managers have developed new methodologies, standards, processes, and generally accepted best practices. While extremely important and required for success, these new norms are not sufficient to ensure projects remain relevant to the organization through their life cycle. In fact, recent studies performed by Gartner and other analysis firms are consistent in their reports that more than half of the projects do not meet expectations of the business. Why?

The answer is relatively simple. The missing ingredient in the standard project management practice is the systematic understanding and adjustment of actual value creation as the project is executed.

Why is managing the triple constraint not good enough?

Most of the tools that project managers (PMs) employ in their daily activities are designed to balance the project’s classic triple constraint: cost, scope and time. Typical project management metrics include comparing estimates created during the planning phase against the actuals incurred during execution. None of these metrics provide an accurate representation of the actual value the company is gaining in the execution of the project. They are a mere compilation of tactical numbers that, while very important, they do not paint the whole picture of value creation.

Metric Answers the following question(s)

Schedule variation (estimated duration - actual duration)

  • What is the duration of a particular activity?
  • Are we executing faster, slower or at the same pace as we had planned?

Percent completion (planned completion - actual completion)

  • What percentage of the work has already been completed?
  • Are tasks taking more, less or the same effort to complete as we had planned?

Cost variation (estimated cost - actual cost)

  • Is the project on budget?
  • If not, which areas contribute to the highest variation of in costs? 

For instance, consider the following two scenarios:

  • A project is “on budget” and “on schedule”, but the product it intends to build has been rendered obsolete by a competitor. Are the efforts and investments of this project of real value?
  • A project is 20% over budget. This project included additional functionality that is expected to increase the project’s ROI by 50%. Should the project be flagged as mismanaged?

Does the triple constraint ensure that the day-to-day decisions are made following the true spirit of what the project is intended to deliver?

Bridging the Gap

Project managers are responsible for initiatives that are critical to the business. Therefore, project managers should have a solid foundation built on business acumen. Business acumen can be simplified as one’s ability to deliver tangible business value (i.e. make money). This is not the same thing as just managing costs - any mediocre project manager can do that. Making money requires additional fundamental skills. In his bestseller book “What the CEO Wants You to Know”, Ram Charan provides a simple, yet powerful framework for creating the building blocks of business acumen.

Here are some of the fundamental business acumen questions every project manager should be able to answer:

  1. Cash
    1. Does the execution of the project increase or decrease the company’s cash position? Is there a difference in time between the receipt of additional cash created by the project and the payment of its costs?
    2. If the project is burning cash (decreasing the cash position), what is the criticality of this cash to the organization and how can it be optimized? Is there a possibility to negotiate contracts that are aligned?
    3. What is the difference between the project costs and their net result to the company’s cash flow on a monthly basis? Is this causing a problem or an opportunity for the CFO?
  2. Margins
    1. What is the direct impact of the project toward the margins of the company’s products or services?
    2. My project can reduce the cost of producing a widget, but can it increase the revenue (price) it brings to the company?
  3. Velocity.
    1. How will the project enable the organization to increase its speed to market and therefore increase the company’s return on assets?
    2. By how much? (Yes, a PM should be able to calculate this number).
  4. Growth
    1. Is your project going to increase the quantity of products or services that the company offers?
    2. How are the project’s contributions aligned to enable such growth?
  5. Customer
    1. Everything around customer service: What are the major sources of client dissatisfaction? Is the project addressing them by reducing opportunities for failure, automating lengthy manual processes?
    2. Now the hard question: Is your project aligned to increase the customer base for your company? For instance, can I take an existing product or service that works well in an industry and use it in a similar industry?

      As important, are you willing to be accountable for moving the needle in any or all of these five areas?

The job of the organization?

Projects are typically preceded by a business case, project charter, project concepts and similar artifacts, where executives document the business decisions that affect the 5 business levers described above. These artifacts generally do a good job to baseline the spirit for initiating the project and are expected to serve as the compass to move forward. However, this approach has a fundamental flaw: a business case is already outdated the date after its release. We live in a world that is moving too fast for static business plans. A business case may be irrelevant 6 months into a 2-year project, but the triple constraint must not be disturbed to ensure good project management. Nonsense!

Therefore, whether formally charged with this task or not, project managers have to make daily, tactical decisions that will have a direct impact on the company’s bottom line. Why not equip them with the right knowledge and skills to make the right decisions as the projects get executed?

Business acumen skills can be learned.

In my many years executing projects and training project managers, I have found that business acumen skills can be learned in a systematic manner, just like you would learn the mechanics of building a Gantt chart. It starts with the awareness that business acumen is an integral part of project management and the open mind to learn about the exciting world of business. As a first step in this journey, I recommend you to read Ram Charan’s book (please see above), but there is no substitute for practicing. If you are currently managing a project, actively find ways to improve the business levers by tweaking the triple constraint. If you are working for a public company, read the annual report (10-K) in detail and find opportunities to improve its business fundamentals – maybe even by sponsoring and leading new projects. Practice will make your very comfortable linking business to project management and will increase your relevance to the organization exponentially.

Conclusions

  • Managing time, cost and scope is just the basic. To excel, project managers must go beyond the current project management practices and ensure that their projects bring full business alignment.
  • Project managers must have a solid understanding of the fundamentals of the money making machine. They must be able to make relevant business decisions as the project gets executed.
  • Business acumen is a skill that can be learned and subsequently applied systematically across projects.
  • Project managers must be comfortable with accountability beyond ‘the triple constraint’ that reflects the actual business value delivered
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Erich Kreidler

Erich Kreidler is a Managing Partner at KRE Consulting, where he is a key contributor to the company’s service offerings and solutions, including its Project Management Practice. In addition to his responsibilities at KRE, Erich is committed to giving back to community by serving as an industry professor at the University of Southern California, where he lectures in Engineering Project Management and Business Engineering at the graduate level.

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