Projected Results: Sound project management practices, combined with a complete technology platform, have an immediate and lasting impact on an organization’s bottom line.
by Alan Joch
It’s no secret that complex, large-scale projects need close management controls to ensure that they’re delivered on time and on budget. But now there’s growing evidence that failing to meet these goals can have far-reaching consequences, not only for the reputations and value of individual organizations but also for the tenure of their top executives.
Government watchdogs forced one large contractor to suspend a multibillion-dollar defense program—and delay payment receipts—until a better management system was launched to more accurately track spending, project milestones, and other fundamental metrics.
Significant delays in the opening of the £4.3 billion Terminal 5 at Heathrow Airport impaired an airline’s operations and contributed to a drop in its share prices.
These real-world examples are noteworthy because of the huge financial risks they created. They’re also far from being isolated cases. Research by the Economist Intelligence Unit found that only 11 percent of companies claimed they delivered expected ROI on major capital projects 90 percent of the time or more. In addition, 12 percent of respondents said they achieved planned ROI less than half the time. According to Phil Thornton, lead consultant at the analyst firm Clarity Economics, the numbers demonstrate obvious challenges related to managing risks, accurately predicting ROI, and consistently delivering bottom-line growth for major capital investments.
For these reasons, many organizations are taking a new look at how they manage key projects, says Dan Stover, senior vice president of PetroSaudi International, a privately owned energy company with investments in developing countries. Key factors include the financial size of the deal, how much time will likely pass from the start of investments to when revenues will be generated, risks in currency markets, and risk inherent in the scale and complexity of a project.
Portfolio management is a path to improve your organization’s competitive advantage. It helps make sure your organization is investing in the right things and not spending its time on things that are not delivering the intended results for the firm.
“The impact of an individual project takes on a new significance,” Stover says. “We need a balanced portfolio, with a mixture of reasonably short time frame investments with moderate risk to multibillion-dollar exposures working five or more years out.” That’s why veterans of project management in industry and academia say the need is greater than ever for management to develop a strategy that combines effective enterprise project portfolio management (EPPM) technology and modern governance policies to ensure that project information is accurate and can be acted upon quickly and effectively.
And large projects aren’t the only targets of these efforts. Over time, a series of delays and cost overruns in smaller projects can also create negative consequences for enterprises. But with the right policies and frameworks in place, organizations will be positioned to achieve three important business benefits.
New research shows how the ripple effects of inadequate project management affect more than just the individual projects that fall behind schedule or exceed their budgets. A combined study by Emory University; the College of Business in Atlanta, Georgia; and the Stockholm School of Economics found that investors pay particular attention to project failures and act accordingly.
For example, investors responded more negatively to an organization’s implementation failures compared to operating failures, while those with a poor track record for delivering IT projects suffered the most. The result is that poor performance in delivering projects can result in double-digit drops in share prices, delays that spread over years, and ultimately losses in the billions of dollars, Thornton says. All of this can create long-term damage to the enterprise’s reputation and dilute profits.
By contrast, Thornton points out that effective EPPM performance can be a competitive differentiator, helping companies win large contracts and deliver faster ROI. “Senior executives need to begin looking at effective project delivery not as a bonus but as an essential facet of business success,” he says.
To protect an organization’s value against high-profile breakdowns, business leaders must create a balanced portfolio with a mix of projects. To offset big-ticket, high-return projects, managers should also target investments and management controls on endeavors that are relatively easy to deliver on time and on budget, but still support overall strategic objectives.
There’s a direct correlation between organizations with senior executives who actively participate in new programs and those with a history of achieving the expected benefits of their project portfolios, according to the Project Management Institute. “Our data actually showed that the low performers put nine times more project dollars at risk than the high performers. The high performers always have the executive stakeholder support,” says Ralph Zingle, director of corporate and government relations for the institute, a professional association that focuses on training, research, and best practices for project, program, and portfolio management.
Survey respondents who achieved expected project ROI less than half the time (Source: Economist Intelligence Unit)
According to Zingle, successful organizations have executives who realize that project management is not something just for middle management, but needs to be embraced at the highest level of the organization. Unfortunately, not all senior executives strive for this level of engagement—and even if they do, the culture of the organization and its business processes and reporting infrastructures often don’t provide the necessary support.
The result: executives don’t intervene when their help can make a difference in keeping a project on track, or they don’t hear about emerging problems even when issues are apparent to lower-level managers.
The underlying reasons for these breakdowns are varied. For example, complex and convoluted reporting structures common at many large enterprises make it difficult for program managers to quickly send warnings up the chain of command. Another breakdown occurs because some senior executives don’t encourage managers to freely communicate the potential risks a new project may face. “When people go through the process of risk management, the more they expose risk the more they may be seen as doomsayers,” says Dr. Elmar Kutsch, a lecturer in project management at Cranfield University in the United Kingdom.
Organizations need a multipronged approach to address these potential problem areas. First, leaders must build direct lines of communication between program managers and members of the C suite. A steady stream of information will help executives understand the cost and delivery status of key projects. Indeed, a report compiled by the EPPM Board, a group of industry executives, academics, and analysts, found that C-level involvement with EPPM should be in place before work commences. This ensures full visibility into the risks and benefits of a planned investment, allowing executives to compare expected results with corporate strategy.”
Second, executives must have the right metrics about program performance and alignment with overall business goals. Project managers must be able to show that both cost and risk are being managed and reduced, and demonstrate that the rate of change within project tasks and milestones are within an acceptable range. Such metrics reveal the relative stability of projects within a portfolio—which are likely to come in on time and on budget versus those that have potential to experience overruns.
Third, executives must cultivate what EPPM experts call a culture of accountability. “People may disengage from the process of highlighting a truth unless they’re in a safe environment based on an appreciation of uncertainty,” says Kutsch. “Organizations need to incentivize people to acknowledge that things can go wrong and embrace that uncertainty rather than ignore it.”
That may require some rethinking by senior staff members. “The key is getting executives to understand that getting bad news early is a good thing, getting bad news late is a bad thing, and not getting bad news until it’s too late to recover is catastrophic,” says Mike Sicilia, senior vice president and general manager of the Oracle Primavera Global Business Unit.
Financially, much is riding on programs launched at project-intensive industries. For example, the consulting firm PwC estimates that capital spending in the telecommunications industry is on pace to hit US$320 billion this year, while Deloitte pegs mining industry CapEx spending at US$113 billion. Numbers like these show why spending controls are so important. “The number one consideration is a project’s effect on cash flow,” Sicilia says. “At the end of the day, it’s all about the money.”
The reason is that the more closely enterprises manage capital, the more financial resources they have for pursuing new high-return projects and using their operational cash reserves for the biggest impact, the EPPM Board points out.
To optimize capital spending, business leaders must build contingencies into the overall portfolio. This gives executives greater flexibility in how and when to spend money, says Clarity Economics’ Thornton. Managers also have more options if they’re forced to respond to an unexpected crisis.
It’s no longer good enough just to be on time, on budget, and within scope.
In addition, portfolios balanced to reduce risk will also pay off for capital management. To achieve that balance, an organization’s EPPM strategy should include constant reappraisal of long-term investments and current cash flow as both project and business conditions evolve, Thornton says. “Executives are then able to consider investment risks both across the portfolio and within individual projects, and to stop any activities not delivering sufficient benefit,” he explains.
Proven, enterprise-class EPPM technologies can help program managers better control projects and develop the lines of communication required to keep C-level executives sufficiently involved in planning and oversight capacities.
“The right EPPM solution can help organizations see all the projects across their entire portfolio,” Sicilia says. “If there’s any piece that a manager or executive is concerned about, he or she should have the ability to drill into it and study the individual metrics that are in danger of causing things to go off the rails.”
When evaluating EPPM solutions, organizations should look for a handful of essential capabilities. First, the platform should be enterprise in scope to provide a clear view of all projects, not just pockets of activities. “The value of EPPM is not just in its ability to run a single project,” says Sicilia. “It’s in being able to run all of your projects at the same time and in a consolidated system.”
The solution should also provide safeguards and auditing trails to protect project data. Sicilia points out that Oracle’s Primavera Portfolio Management is one of the only systems whose data is often admitted as evidence in construction claims proceedings across the world. “It doesn’t allow people to fake the data,” he says. “It acts as the source of truth.”
Finally, look for a comprehensive set of management modules. The solution should offer enterprises basic capabilities to help get EPPM strategies underway quickly. But the application should also offer advanced features to support organizations as their EPPM efforts become more mature. “Solutions should scale at both ends of the maturity cycle—from very complex industrial planning, manufacturing, construction, and oil and gas projects down to lightweight IT projects,” Sicilia explains. “Many enterprises have use for all of those types of activities.”
An effective EPPM solution, combined with the necessary communications, governance, and management policies, will help an organization meet the new demands of today’s complex project rollouts. “It’s no longer good enough just to be on time, on budget, and within scope,” Zingle says. He then ticks off the essential questions that sophisticated program managers and senior executives are asking today: What can you do to bring more value? Did the program deliver the intended benefits? Can you accelerate on the delivery of those net benefits?
“Portfolio management is a path to improve your organization’s competitive advantage,” he says. “It helps make sure your organization is investing in the right things and not spending its time on things that are not delivering the intended results for the firm.”
Alan Joch is a business and technology writer who specializes in enterprise applications, cloud computing, mobile computing, and the Web.