The Importance of Knowing When to Stop
We have all read the headlines about Crossrail’s overspend and now the spiralling financial projections for HS2.
These situations are the norm rather than the exception. When managing a portfolio of capital projects, it is inconceivably complex to try staying on track without the tools and organisational culture to make rapid, informed decisions.
A PwC analysis has found that these so called ‘mega-projects’ – investments of $1bn upwards – often exceed their budgets by 50% or more. But what about other capital projects? New plant constructions, offshore explorations, new product developments? They may have a lower public profile, but they are no less important for their investors and they are also at risk. According to a 3 year study by KPMG, just 31% of all capital projects came within 10% of initial budgets and as the complexity of projects increases, so do the risks. In the construction sector, a further analysis by the Construction Industry Institute into the performance of 975 light and heavy industrial projects in its benchmarking database, found that only 5.4% met its measures for “best in class” predictability in terms of cost and schedule.
Project issues leading to reduced share value
Taking the obvious financial implications out of the equation, a PwC analysis of capital project issues at public companies highlights the bigger strategic risks of project failures. This revealed that after a public announcement of a capital project delay or shutdown, the majority of companies experience a steady decline in share price. By the three-month mark following the announcement, the decline in share price averaged 15 percent and in the most severe cases, it rose to a 90 percent decline. These are the real repercussions of poor project and portfolio decision making and shareholders are now extra sensitive to failure given the global economic situation. Early warnings of possible conflicts have risen up the corporate agenda.
Capital projects require high levels of governance and control to support investment decision making and ensure they do not fail. Portfolio managers are responsible for ensuring the right decisions are being made, or a lot of money can be wasted. The challenge is less about making sure that the day’s ‘to do’ items get done, and rather, about getting immediate answers to questions like: ‘How are we progressing overall on the project?’, ‘Are we managing the significant risks that could derail the project?’ or ‘Are we managing over runs on the budget?’
Appreciate an early warning
The organisation as a whole may also need to develop a culture of greater transparency to support people in the PMO if they need to report that a project is ‘in trouble’. It’s a classic case of not blaming the messenger and instead focusing on appreciating that although the news might not be positive, getting an early warning provides an opportunity to take corrective action.
However, many PMOs don’t have the tools to establish the right portfolio monitoring procedures and lack the visibility to spot these issues early enough. They don’t have an aggregate level view of what is going on and whether projects will indeed deliver the right business objectives as expected. Most importantly, they don’t have the visibility to quickly terminate floundering initiatives and save their resources for where they are best applied. This is always critical for new product developments, but an important issue for all capital projects. In the end, every initiative has an opportunity cost. If a project is not performing in line with projected value to justify the ongoing investment, it should be terminated. Being able to do this quickly requires strong governance and control, the ability to evaluate all aspects of a project and its position within an entire portfolio on regular – ideally quarterly- basis.
Quarterly management accounts
Many organisations can’t do this because although they have the day to day project tasks well under control, they rely on spreadsheets and disparate systems for their aggregated portfolio intelligence. They can’t collate the information easily and end up performing an annual review. That’s too infrequent, PMOs need the equivalent of quarterly management accounts to keep their projects on track and to be able to make quick decisions about whether they are meeting the requirements of the original business case, need to adjust the case to reflect events, or, at the worst case, terminate the project and recoup any losses.
A capital project is rarely derailed by a single problem; it usually takes a series of failed steps along the way. Providing visibility at all levels is a key part of the value to be derived from a PPM solution – helping to inform the strategic decisions business leaders need to make in order to avoid costly or at worst, failed and terminated projects.