Identifying project benefits and estimating an accurate return on investment (ROI) can be very challenging for most organizations. There are several possible reasons why ROI often goes unmeasured. First, some organizations are satisfied with the general improvement in their financial statements after implementing a Business Improvement methodology, such as Lean Six Sigma, and have not deemed it necessary to reconcile the benefits to the company financials because the company is holistically performing better. Secondly, some companies focus intensely on training resources and executing projects in the early stages of a process improvement initiative, and place secondary emphasis on measuring ROI, believing that the benefits will come. Lastly, some companies attempt to measure ROI, yet they are unsure how to quantify project benefits, especially if their business is focused more in a services industry. In any case, it is evident that even after 35+ years after Motorola introduced Six Sigma to the world, there is still a significant knowledge gap in how to quantify project benefits and truly link them to a company’s financial performance.
As Business Improvement efforts have matured and become more commonplace over the last few decades, many companies assume that simply learning the tools and driving the project to completion will deliver the desired benefits. The well-reported results of industry pioneers, such as General Electric, Honeywell and DuPont, as well as the pressing need to reduce costs and improve productivity, have encouraged company leaders to push their teams to undertake process improvement initiatives. Sometimes, after an initial burst of enthusiasm, these efforts languish over time, because benefits have not been accurately estimated or verified as impacting the bottom line. When it comes time to reduce costs quickly, the process improvement initiative may give way to immediate cost cutting pressures. Sadly, in many of these cases, the process improvement team has missed an opportunity to bring true credibility to the Business Improvement effort by implementing a process that directly reconciles project benefits to the company’s accounting and reporting systems.
In some cases, benefits can be reconciled as tangible contributions to the income statement; but in others, benefits may not be so evident during a reconciliation process. In any event, establishing a rigorous project benefit validation process is a critical factor in the success of the initiative, ensuring that there is no question as to the financial impact and effectiveness of the process improvement program.
Project Selection and Overall Governance
It is widely understood that a strong project governance process is key to the successful execution of projects. An overall project governance process is how projects are identified, selected, executed and reported. However, in most project governance processes, a key element is often forgotten, especially in the early stages, which typically represents how projects are selected. That key element is Benefit Estimation.
Figure 1 below represents a Project Selection Process, which is the front-end of an overall governance process, where we incorporate the critical step of Benefit Estimation:
While most organizations recognize the value of properly vetting project ideas and opportunities prior to launching a project, many fail to follow the process for every project. Some may launch projects before a proper prioritization effort has taken place, or others may spend too much time in the idea generation phase. Often, organizations fail to estimate potential benefit prior to project chartering or prioritization of projects.
Experience has shown that the pressures to get started, or to drive quick results, pushes teams to launch projects without taking the time to adequately plan or determine probable benefits. This ineffective approach to project selection and prioritization means that projects are often executed without being fully linked to the organization’s overall strategic goals, and as a result, too many projects are chartered, and few are completed to the company’s expectations.2
To understand the value of benefit estimation in initial project selection process, we should consider the value of a strong benefit validation process throughout the rest of the governance process. Figure 2 illustrates an end-to-end governance process, from project selection through execution and post-project reporting:
The circled steps in the process are where a project benefit validation process adds incremental value. Not only does a project benefit validation process help with initial benefit estimation during project selection, it adds rigor during project execution by defining project benefits with more accuracy and clarity. This facilitates credible benefit reporting, and establishes a foundation for post-project benefit reconciliation, where benefits can actually be reconciled to the organization’s financial statements. Simply stated, the benefits driven by the Business Improvement effort can now be fully understood as to their impact to the business.
While the quick implementation of projects may create energy and short-term gains, the long-term impact is usually negligible, at best, without a benefit validation process. The “quick hits” and “low-hanging fruit” produce rapid, easy results for the organization, but without having implemented a true benefit validation process, it becomes more difficult to quantify more challenging or complicated project efforts.
A strong project benefit validation infrastructure can support the business improvement initiative as it matures and takes on more challenging aspects of the business. It can provide not only the basis for identifying and approving projects, but serve as a way to maintain the momentum of the initiative and retain ongoing management and stakeholder support.
An Approach to Project Benefit Validation
In order for organizations to properly address the challenges with measuring project benefit ROI, it behooves them to develop and hone a process and set of principles to address those challenges. A best practice is to design end-to-end financial tracking and reconciliation process that delivers the following results in order to better understand and quantify the benefits that their projects are delivering:
- Ability to customize project benefit financial rules, regardless of the type of project (Six Sigma, Lean, Business Improvement or otherwise) in accordance with specific company financial policies and guidelines;
- Integration with the company’s general ledger and financial reporting system;
- Utilization of value stream mapping or high level process mapping that directly links process improvements to the financial statements;
- Reconciliation of calculated savings with actual financial movements and transactions within the general ledger and reporting system;
- Integration and comparison with the company’s financials, as included in the project governance process, with the real financial transactions going through the accounting system;
- Output reporting for key schedules for Management Accounts relating to the improvement program;
- Ability to quantify and measure benefits that are often regarded as “un-measurable”, which are often critical measurements in terms of productivity gains, and can, in some cases, be quantified as tangible, reconcilable benefits; and,
- Direct control and governance of the Business Improvement program; including more accurate project benefit ROI, in a way that directly and auditably reconciles to the company’s accounting and reporting systems.
If a process is developed considering the above elements, then an integration of guidelines, tools and templates can be folded into an existing project governance process, as illustrated in Figure 3:
In our next segment of this article, we will explore each success element of a properly implemented project benefit validation infrastructure.
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