A recent (late 2010) “Linkedin” discussion started with: “I was at a live project manager networking event the other night and someone said, ‘Project Managers are Risk adverse by nature.’ Is risk adversion a quality of a successful project manager?” What are they really talking about? The discussion seems to conclude project managers are not anymore risk adverse or averse than any other person. What they do is manage their risk. I thought I would write this article about risk in projects, how risk is planned for (in the project plan) and how risk is managed during project implementation.
4. Front End Loading (FEL), Project Estimation
Management generally wants to know the economics (or financial impact) of a project before they authorize it. Understandable because most of the time projects, apparently at least, do not deliver on their promises.
Investment projects are justified by the investment made (early, negative cash flow) and the profit that will be generated (delivered later, after project money is already spent). Project expenditures are monitored and accounted for, but how often are the actual profits generated measured after the fact. The project may take a year to implement, another year to reach a normal level of income and several years before the initial investment is paid back. By that time the original project is forgotten and nobody analyses what was said and what was achieved. Many times the managers that proposed and authorised the project have moved to a new job. Analysis seems pointless and a waste of time.
Not only does analysis seem pointless and a waste of time but current reality is much more important to be dealt with. Post mortems will not change history and probably will not have much influence on the future – the Wold changes so quickly.
Management of course knows all this and therefore reacts accordingly – they put a lot of pressure on project planning to get an accurate estimate of scope, time and budget. In an FEL process the accuracy of the plan is fine tuned until (at least this is the target) an accuracy of say ±5% is achieved. My question: Is it a wise thing to do all this work to get to a ±5% level of accuracy?
Project estimate accuracy – whatever is being estimated – is subject to diminishing returns. The more accuracy we desire the greater amount of effort (time) and money will be required to achieve it. At what point do we decide the view is no longer worth the climb? Do business and project
managers invest too much time and money to get the accuracy they need? The more time and money spent the more risk averse the manager is – or seems to be. But, what is the impact on the value of the project?
What should a manager consider when estimating his project in terms of scope, time and cost? Here is my list:
- Is the scope of the project complete enough? Are the specifications complete enough?
- What is the estimated cost of the project – including project estimation?
- How long will the project take – from the point in time we decide it has a good chance of being a profitable project?
- What is the expected cash outflow including timing from this project?
- What is the expected cash inflow for this project – including timing?
As everyone realizes we have three parameters that are important – cost (investment), income and TIME.
I believe TIME is the parameter that is neglected. The impact of TIME on a project’s payback, net-present-value or other such valuation is misunderstood and often not taken into consideration – at least not correctly or sufficiently.
Most of the time a project is valued from the moment it is decided to invest in it – after a lot of time has already been ‘lost’ to prepare an accurate (±5%) estimate. To determine the real value of a project look at what would have been the payback had you made the decision much earlier, but with significantly less accuracy? The impact of this lost time can be very significant – this lost time postpones both expenditure and income. If you include the expenditures made during estimation then the impact increases. Even more importantly the market is continually changing so that the information used to launch the estimation becomes less and less valid as time goes on. There is a chance that at least a part of a market opportunity will be missed.
The impact of TIME becomes important if the project is shortened (from the decision point to go for it) and if the market is volatile enough that a delay might cost market share and sales (new product development is almost always in this situation as is investment in production facilities to expand supply capability. Many companies have lost market share because investment took too long).
TIME is an extremely important factor in projects – the faster you are the more market share you can capture – or the longer you can delay a decision for a project. This statement is generally true – and yet projects often take longer than they should (multi-tasking).
Consider the difference between ±5% and ±20% estimate accuracy. If I decide to accept the less accurate estimate I am able to the start the project much earlier and finish it much sooner too. My product will be earning back the investment much sooner – and I have saved some estimation costs.
If I have a ±20% estimate will I waste money? I do not see why this should be so, my purchasing people can still do a good job of obtaining the best possible value for my business. The best value may also NOT be the lowest price. TIME will again be the essence – it will be profitable for me (usually) to allow my suppliers to earn a better return in exchange for speed (and quality). Speed (TIME) will pay back much more than I will have to spend for value.
You can test what I am claiming by building your own project model to show the impact of TIME and much shorter estimation periods on the payback and profitability of your projects. Be sure that you consider all aspects – including the impact of less accurate estimate on both investment and future returns.
If TIME is s important, and multi-tasking is another TIME waster – what could be the impact on a company if much less TIME is wasted?
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