Tuesday, 24 November 2009 23:00

Measuring the Business Value of a Project

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How do we measure project success? Do we measure budget and schedule or do we measure net value delivered to the organization? Today, we tend to measure the former. But it is the latter, delivered value, which is the truer measure. This is the way projects will be evaluated in the future. The current Triple Constraint focuses on the delivery portion of a project, rather than its business value. It focuses on a single project, and is primarily based on a cost view.

The Value Triple Constraint is an evolution of the Triple Constraint. It is a framework for measuring the on-going value delivered through projects and for bringing to light the "value left behind". It is pictured below

measuring-the-value1
Exhibit 1 - Value Triple Constraint

The Value Triple Constraint states:

Value delivered is a function of the Scope of the business opportunity and of our Capability to identify, decide and deliver to the opportunity.

From a business perspective, a project is aimed at taking an organization from one level of measured performance to a higher level of measured performance. To determine if we have achieved that objective we need good methods of measurement.

The Value Triple Constraint: Tracking Four Distinct Phases

The Value Triple Constraint (VTC) tracks an opportunity through each of four distinct phases as follows, from last to first:

  • Realization Phase. This is where we implement the output product or service and begin to harvest the results. Naturally, we want to deliver a positive value. In reality, this may be considered mostly outside the project, since it occurs after the project is complete.
  • Delivery Phase. This is our current focus of attention. It consumes most of the effort, attention and costs of the project. It is the phase where we apply the classical triple constraint. However, the conditions for business success are largely set before this phase, outside the actual project. Also, while the project is being delivered, the eventual benefits are being delayed and so speed of delivery is important.
  • Decision Phase. This is the phase where we select among the many to decide which projects will go forward and when. Although this phase doesn't consume significant costs or effort, it does often consume significant calendar time. It focuses on cost-benefit, not value delivered.
  • Identification Phase. This is not a phase with which many organizations are even familiar. There is a point at which we recognize that there is an opportunity. However, that opportunity may have existed for many months or many years. Just because we didn't see it until now, doesn't mean it didn't exist.

We tend to focus on the delivery phase. That's where our budget lives. The decision and identification phases contain very little budget costs. But they represent significant opportunity costs. However, opportunity costs don't show up on any P& L statements. There are no statements that present us with value that did not show up. The Value Triple ConstraintTM measures both value delivered, and value not delivered that could have been delivered. This is largely ignored, yet represents a significant opportunity. To understand how the VTC approaches measurement, we need to understand the major value components in the VTC and how they are related.

Project Value - Measuring the Outcome at the Project Level

The four major components that affect long term value delivery are:

  • Realized Value
  • Project Cost
  • Decision Opportunity Cost
  • Identification Opportunity Cost

Let us explore each of these in turn.

Realized Value. This is the actual benefit experienced after implementaion. The realized value is delivered, over time, across organizational boundaries. Because of this and other reasons, it is often not tracked for any meaningful period of time. And yet, it is the single most important measure that can tell us how well we are doing overall, across all projects. Why is it important to measure the value delivered across the entire benefit projection period? Business processes have a way of deteriorating. So we need to know, over the entire benefit projection period, what the value delivered was. It is not unlikely that organizations have a tendency to select a "sampling period" that is favorable rather than representative.

Project Cost. This is the familiar budget portion of any project. Under the Value Triple ConstraintTM, it is divided into two separate components:

  1. Delivery Cost. This is the usual cost component which is reflected in the budget. This represents money actually spent, whether capital or expense.
  2. Schedule Opportunity Cost. Under the Triple Constraint we track the schedule in terms of time. In the VTC, we track schedule in terms of its benefit equivalent. This is both new and different. To convert schedule time into schedule cost, we need a formula. It is calculated as:

Schedule Opportunity Cost = Monthly Net Benefit x Schedule Months

For example, a project with a projected monthly net benefit of $50,000 and expected schedule of 10 months, would have a Schedule Opportunity Cost of $500,000 ($50k x 10 months). The Schedule Opportunity Cost provides a better mechanism for choosing among alternative schedule options, because it reflects the time cost of delivery - time is money.

Decision Opportunity Cost. While an organization waits to decide, no benefits can be delivered. And so, there is a real cost to the time it takes to make a decision. The quicker we decide, the quicker we begin to realize benefits.

Identification Opportunity Cost. We may recognize that we have an opportunity today. However, an opportunity begins when the conditions that gave rise to it, came to be. So there is virtually always a gap between the time an opportunity arises and when someone in the organization acknowledges it. That gap has an opportunity cost

Identification and Decision Opportunity Costs reflect our capability with respect to those two functions. In many organizations a focus on those two would result in the delivery of much more value to the organization than would a focus on project delivery skills, which might already be quite high.

If project managers wish to be more successful, then the projects need to be more successful from a business perspective. They need to think outside the project because that's where success begins. A project that will, in the end, deliver very little Realized Benefit is not going to be a business success. Such a project is born handicapped.

Some Uses of Value Triple Constraint

The VTC has these major uses:

  1. Quantify the business value of a project
  2. Select from alternative schedules.
  3. Look for opportunities to deliver more value through speed along the entire opportunity chain.

To reduce risk on a single project, we should continuously update the Value Profile, not just the costs. This would include:

  1. Projected Realized Value
  2. Projected Delivery Cost
  3. Projected Schedule Opportunity Cost

By tracking and projecting all three, we could detect some important things that we don't currently manage. For example, if the projected Realized Value begins to decline and the Delivery Cost begins to increase, we know there is the risk that the project will be cancelled. And perhaps it should. Also, if the Realized Value after completion shows a tendency to be less than predicted then perhaps projects are being oversold.

On the other hand, when the projected Realized Value increases, then our projected Schedule Opportunity Cost will also increase. This should tell us to revisit the schedule because time has become more valuable.

What about scope management? When an increase in scope results in an increase in the schedule, we should take the additional Schedule Opportunity Cost into consideration. For example, an increase in scope may result in an increase in the Realized Value of $100,000, an increase in cost of only $30,000, and an additional two months of schedule.

Without looking at the schedule impact this seems like a simple decision. But it the benefit was $50,000 per month, then we would incur an additional $100,000 (2 months) of Schedule Opportunity Cost in addition to the $30,000 Delivery Cost. This changes the equation. The organization would be paying $130,000 of value to gain only $100,000. Suddenly it doesn't make sense any more.

Another example is a change request which is in budget but does not increase the projected realized value. This should be declined because the net Value would decrease and should be declined. Today, the tendency is to accept a change which is in budget, even if it adds no value. Projects exist to capitalize on opportunities. Therefore, we need to measure lost opportunity just as much as measuring adherence to an estimate, which may not even be correct.

Enterprise Value - Measuring the Outcome at the Enterprise Level

How do we determine what the optimal sequence is for projects? Look at the following example. We have two projects requiring the same resources. So which do we do first?

measuring-the-value2
Exhibit 2 - Comparing ROIs

From an ROI perspective, Project A appears more attractive and so we might be tempted to do it first. But, by including the schedule cost, we can compare the two alternatives.

The total Realized Value and the total Delivery Cost are the same regardless of order. However, the total Schedule Cost is different for each alternative.

If we do A first, then the Schedule Costs will be:

  • Schedule cost for A is 12 months at $50,000 per month or $600,000
  • Schedule cost for B is 12 months waiting for A to finish, plus 12 months to complete B for a total of 24 months. Each month is worth $75,000 (benefit from B) for a total of $1.8 million.
  • Total Schedule Cost for this alternative is $600,000 + $1.8million = $2.4 million

If we do B first, then the Schedule Costs will be:

  • Schedule cost for B is 12 months at $75,000 per month or $900,000
  • Schedule cost for A is 12 months waiting for B to finish, plus 12 months to complete A for a total of 24 months. Each month is worth $50,000 (benefit from A) for a total of $1.2 million.
  • Total Schedule Cost for this alternative is $900,000 + $1.2 million = $2.1 million

Clearly option B is has the least opportunity cost and, therefore, the highest value, which may not be the intuitive choice.

Program, Project, Portfolio and PMO

How do projects, programs and portfolios relate? First, we begin with a quantifiable business opportunity, and designate a program for it. Then, as we determine all the projects required to deliver to the business opportunity, they become part of the program. Beginning at the opportunity/program level provides us with a way to pull necessary projects into the measurable program, rather than trying to group projects after the fact. The VTC can be used to determine the best way to organize and schedule projects within the program and also helps determine sequencing for programs. Once we apply the VTC to a program, we can determine what criteria we wish to use to develop portfolios.

measuring-the-value3
Exhibit 3 - How Projects. Programs and Portfolios Relate

Summary

The Value Triple Constraint moves the focus from the project manager to project

management as a whole. It requires the business to take responsibility for establishing and confirming the benefit and focuses attention on the opportunities of identification and decision in addition to delivery. It requires the quantification and validation of actual project benefits. This will discourage any practice of overstating benefits to get approval and then abandoning that metric. The proposed VTC model gives us a better way to evaluate project success. It also allows us to focus our attention on where the true opportunities lie. If most of the value lost is in the identification and selection, then there may be more opportunity in improving how we identify opportunities and how quickly we make decisions rather than improving our delivery capability.

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Angelo Baratta, PMP, CMC is dedicated to significantly raising organizational capabilities. His ePPMTM framework goes beyond best practices. It is a scientifically engineered system for raising the effectiveness of project, process and requirements management - key competences for all organizations.
Web: www.PerformanceInnovation.com Email: ABaratta@PerformanceInnovation.com
Tel: 905-270-7591

Value Triple ConstraintTM is a registered trademark

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Angelo Baratta

Angelo Baratta is a business process designer, researcher and author with more than thirty years of experience in business process engineering and project management. He led more than a hundred projects for more than fifty organizations that gave him great insight on business processes and critical success factors of project success.

He is the author of the book “More Perfect by Design: The Science of Designing More Perfect Business Processes.” He is a frequent speaker at PMI’s events. He hopes to help businesses and professionals better design their business processes. He lives in Ontario, Canada, with his wife and three daughters.

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