Five Elements of Project Po

8/2/2019 Five Elements of Project Po

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FIVE ELEMENTS OF PROJECT PORTFOLIO

MANAGEMENT FOR FINANCE EXECUTIVES

Projects are undertaken for a variety of business and operational reasons, so when its time to

decide whether to invest in one initiative versus another, organizations need to rely on

standardized assessment criteria based on their business goals.

By Nicole Scarlett, CMA

While having lunch with the vice-presidentof finance from a large Canadian financialinstitution, the conversation turned to thefindings from a recent audit of the

organizations project portfolio. The realcosts of most of the initiatives were not wellunderstood, and for many projects, theexpected business benefits were unlikely tomaterialize. As a result, the organization wasfaced with the possibility of millions ofdollars in write downs. The vice-presidentwas at a loss to pinpoint exactly how thishappened and more importantly, how toprevent it in the future. According to arecent Deloitte survey

i, 50 per cent of

Fortune 1000 CFOs oversee informationtechnology. With annual budgets averaging$33.3 millionii and 71 per cent of projectschallenged or failed

iii, it is increasingly

important for finance executives to be in theforefront of effective project portfoliomanagement. The following summaryoutlines five key elements that CFOs andother executives can leverage to improvereturns and reduce the risk associated withtheir portfolio of projects.

Element 1: Universal evaluation criteria

Projects are undertaken for a variety ofbusiness and operational reasons, so whenits time to decide whether to invest in one

initiative versus another, organizations needto rely on standardized assessment criteriabased on the goals of the business. Effectivecriteria should include a mix of financial andnon-financial indicators or value drivers,which can be applied universally to differenttypes of projects such as revenue building,operational efficiency, or improving internalcapabilities. Once the value drivers areidentified, scoring metrics and category

weightings are applied to create anevaluation matrix (see Table 1).

For example, assume Dynamic Corporationdevelops and manufactures computer games.Revenue generation is the top priority of thecompany, but production efficiency andinnovation are also critical to its long-termsuccess. The industry is highly competitiveand Dynamic is determined to be the lowestcost, highest volume provider of games.

Dynamics evaluation matrix may look

something like Table 1.


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Table 1

Value Driver Scoring (1 is poor, 3 is high) Weight

Estimated return on

investment

1. ROI < 10 per cent

2. ROI between 10 25 per cent

3. ROI > 25 per cent

30 per

cent

Time to market

1. Product launch > 1 year

2. Product launch between 6 months and 1 year

3. Product launch < 6 months

25 per

cent

Code leverage

1. Production uses 30 per cent or less of current

gaming code

2. Production uses up to 60 per cent of current gamin

code

3. More than 60 per cent of current gaming code can

be used in production

20 per

cent

Contribution to

innovation

1. Product not eligible for patent protection

2. Some aspects of the product may be patented

3. Product eligible for patent protection

15 per

cent

Operational

effectiveness

1. Project delivers less than 10 per cent savings from

current state

2. Project delivers between 10 30 per cent savingsfrom current state

3. Project delivers more than 30 per cent savings from

current state

10 percent

Notice that the value drivers include non-revenue categories, however, these have alower weighting which reflects Dynamics

revenue generation priority. Value categoriesshould be limited to 1015 drivers that takeinto consideration such things as customers,financials, processes, capital, and internaloperations (people and technology). Mostimportantly, the scoring should adhere to theSMART principles (specific, measurable,agreed upon, relevant and time based). A well-thought-out evaluation matrix facilitatesobjective assessment and reduces thelikelihood of funding based on intuition orinfluence. CFOs can play a key role inestablishing appropriate value criteria based

on the companys goals, helping to determine

the scoring approach, and applying weightingsby which investments can be assessed.

At the completion of a project, the sameassessment criteria used for evaluation andapproval can be applied to tracking benefitsrealization. This enables a consistency ofevaluation and provides insights that support

decisions and investment optimization in thefuture.

Element 2: Full costing

There is an alarming trend in many companiesto cherrypick components of project costswhen evaluating what initiatives shouldreceive funding. For example:


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Including Excluding

Contractor or consulting costs.

One-time or build costs.

Technology costs.

Internal resources (business and/ortechnical).

Licensing and ongoing maintenancefees.

Marketing, customer service andsupport, or legal costs.

This practice compromises the investmentevaluation and ROI as well as how theproject may be managed.

Compromised ROI

Cherry-picking project costs during

evaluation can put the organization at risk ofselecting projects which do not produce theexpected or maximum returns. At worst, thecompany could be funding initiatives thatactually reduce overall profitability andvalue.

For illustration purposes, lets assume

Dynamic Corporation is evaluating twoprojects. Their current practice is to includeonly one-time direct and incremental (net-new to the company) project related costs,excluding internal resources and anyongoing support or maintenance. Bothprojects are expected to generate $60,000 inrevenues. Under the current evaluationpractices, Project B will be selected becauseit generates $10,000 more profit than ProjectA, which requires the use of contractors.

Project A Project B

Revenues $60,000 $60,000

Software ($4,000) ($4,000)

Contractors ($10,000) $000

Total $46,000 $56,000

Now lets assume all the costs associated

with these two opportunities are included inthe assessment. Although Project A includescontractor costs, Project B carries higher

maintenance fees and is more dependent oninternal resources. Project A results in$8,000 more return than Project B when allthe costs are taken into consideration.

Project A Project B

Revenues $60,000 $60,000

Software ($4,000) ($4,000)

Contractors ($10,000) $0

Internal IT Resources ($10,000) ($25,000)

NPV of 5 Yr.

Maintenance ($3,000) ($6,000)

Total $33,000 $25,000

Compromised project performance

Selective costing can also impact the actualperformance of the project if the mix of

costs or assumptions changes. Going back tothe original example, Dynamic accountedonly for external resource, and as a result,they selected Project B. Two months into theinitiative, the project manager finds thatinternal resources planned for are notavailable and many dont contain the rightskills. The project manager must nowchoose to:

a. Hire contractors and exceed theapproved budgets.

b. Delay the project until the rightresources can be attained internally.

c. Reduce functionality or compromisethe quality of the deliverables.

If full costing had been used, the mix ofcosts would change, but the impact to the


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overall budgets would be less. This results inmore effective decision making and reducessome of the risk of project performance.CFOs need to ensure that all the costs,benefits and risks associated with a project

are taken into consideration when makinginvestment decisions. For companieswishing to differentiate expenses, this can beaccommodated through supporting analysisand summaries.

Element 3: Iterative release of funds

For most organizations, funding decisions aremade when the business case is presented forapproval. Once passing this gate, the project ismonitored against the budgets. Projects

however, are not static and as they movethrough the cycles of initiating, planning,developing, controlling, and closing, moreinformation is learned which impacts thebudgets, scope, timelines and resources.

To reduce the likelihood of over-runs andother risks, the business case should be revisedand funding approved in a phased approachthat matches the project life cycle. Therecommended key milestones for businesscase updates and funding reviews include:

Initiation: The original business casepresented before the project hasstarted.

Business requirements: Oncerequirements have been signed-off bythe sponsor.

Detailed design: Once the solutiondesign has been completed by theappropriate areas and presented to the

sponsor.Incorporating an iterative approach tofunding allows the project manager, sponsorand finance to work together in makingdecisions based on the best available data atthe time, and as a result, reduce risk.

Element 4: Sponsorship effectiveness

A sponsor is the individual who is 100 percent accountable for ensuring the projectdelivers the business benefits it sets out toachieve. Effective sponsors have the power

and authority to lead change and are activemembers of the project throughout itslifecycle.

CFOs need to work closely with sponsorsfor two main reasons:

1. Compliance with accounting regulations:Many projects and their costs arecapitalized. Capitalization is dependentupon the likelihood of future benefits,which is the responsibility of the project

sponsor. Furthermore, only certaincomponents of project costs are eligiblefor amortization. Most sponsors andproject managers are not experts inaccounting practices so collaborationwith finance is critical to ensurecompliance.

2. Optimizing tax credits: Canada has oneof the most robust tax credit programs inthe world, with recoveries ranging from

2035 per cent of eligible R&D costs(iv). There is a common misperceptionthat these benefits are available only tocompanies whose business is R&Dintensive; however, many projectswithin the banking, manufacturing andretail sector also qualify for tax creditssuch as SR&ED. Finance is uniquelypositioned to help identify eligibleprojects and their costs, and manage thedata gathering and application process to

maximize tax credit opportunities.If a sponsor cannot be clearly identified, CFOsshould consider that there is a good chance theproject will fail to meet its objectives and thecosts treated in accordance with this risk.


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