Your Projects May Be Robbing You Blind


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Did you ever stop to think that your projects, or rather the wat your organization is running your projects, are stealing money from your organization's bottom line? If your organization's projects are consistently running behind schedule, having issues, are undergoing numerous changes in scope, or if your project team is spending time fixing defects, this is exactly what's happening to your organization.

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Your Projects May Be Robbing You Blind

  1. 1. How Your Projects May Be Robbing You Blind Ed Kozak expenditures). It also lets the projectOne former client once remarked in a manager compute Percentage Completion of the project as well asworkshop I was giving about EarnedValue Analysis “This is powerful stuff if forecast what the final cost of the projectapplied correctly. I know our IT would be if spending rates continued atdepartment sure would benefit big time their current pace. The ability toby using EVA. I personally believe they correctly use EVA rests on the ability tointentionally do not want folks to correctly understand three variables, PV,measure the earned value of their EV, and AC (referred to as BCWS,projects for fear that top management BCWP, and ACWP in older texts) thatwill crack down on them. What they do the project manager has to derive. Allnot finish by year end is simply carried other numbers are calculated from theseover to the next year. They basically three variables using very simplehave an unlimited budget.” formulas.This is a powerful statement and, Planned Value, or PV, simply is theunfortunately, it isn’t rare to hear estimated cost of all of the worksomething of this nature. Many scheduled to have been done by aorganizations are unaware of the fact it’s specific date, known as Status Date. Forpossible to track and control costs example, if the project manager isfrequently and on a regular basis during preparing a monthly report to submit to aa project and not have to wait until some client the Status Date would coincidemajor milestone is reached months into with the most recent date reports werethe project to see how the budget is generated with the accounting system.faring. As that person mentioned to in Planned Value is obtained from thethe quote above, that process is known budget estimate for the project that wasas Earned Value Analysis. created and agreed to (i.e. Baselined) before the project began. This number it never changes unless the scope changesEarned Value Analysis and a new budget estimate is created and baselined. In Earned Value Analysis,Earned Value Analysis, or EVA, is a your original, baselined estimate ismethod that lets a project manager called the BAC, short for Budget Atcompare progress (work scheduled to be Completion.done versus work actually done) andcosts (budget estimates versus actual It is understood that there are probably going to be differences between what
  2. 2. you had set out to do by a certain date Status Date than you actually have done.and what has actually been done. This If SV is positive this means that PV isleads us to our second variable, called less than EV, meaning that you’ve doneEarned Value, or EV. EV represents the more work than you had planned to doestimated cost of the work that has been by the Status Date. If your cost variancedone, with that estimate obtained from is negative this means that AC exceedsthe baselined budget. It is very EV, meaning that you have expendedimportant that you have a good more costs to perform the work you haveunderstanding of this distinction. EV done than you had originally estimated.does not represent the actual cost of If CV is positive, then AC is less thanthat work that was done but rather EV and the work you performed has costhow much we assumed it would cost you less than you had originallywhen the budget estimate was first estimated. Obviously, if SV or CV iscrafted. zero then your project is right on track with your schedule estimate or your costThe last value needing to be derived is estimate, respectively. It is verythe most straightforward. This variable important to make note of one thingis AC, representing the Actual Costs, and regarding SV. The units of EV and PVcan be obtained from whatever cost are dollars since they both represent costaccounting system is being used to track values, not units of time, so the numberproject expenditures (note: project derived to represent the variance inexpenditures can even be tracked using schedule is not in time units, but rather,certain project management software in dollars. How then does this representpackages). AC represents the actual a schedule variance? Simply put, ifcumulative costs per date expended in negative, SV represents the dollar valuethe project since it started. of work that should have been done by the Status Date that hasn’t been done. IfThe remainder of the variables, which I positive, it represents the dollar value ofrefer to as the formulaic variables, are additional work that was performed thatgiven by the following formulas: hadn’t been planned to be done by the Status Date.• Schedule Variance (SV) = EV – PV• Cost Variance (CV) = EV – AC The two performance indices are SPI• Schedule Performance Index (SPI) = and CPI and can be viewed as efficiency EV/PV ratings, that is, how efficiently the• Cost Performance Index (CPI) = project team is moving through the EV/AC schedule (i.e. getting work done) and• % Completion = 100*BAC/EV how efficiently the team is spending• Estimate at Completion (EAC) = your money. A value of 1.0 for SPI BAC/CPI means that EV = PV and so the team is completing the project as planned. IfLet’s look at the two variances for the SPI is less than 1.0 then EV is less thanmoment, SV and CV. If your schedule PV, meaning that the project team isvariance is negative this means that PV behind schedule and things are beingexceeds EV, meaning that you had completed at a slower pace than hadplanned to perform more work by your been planned. If SPI is greater than 1.0,Are Your Projects Robbing You Blind? 2© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  3. 3. then EV exceeds PV and the team is development, having more confidence incompleting things at a faster pace than the project estimate leads to a morehad been planned. confident estimate of ROI for strategic purposes and project selection. Even ifPerhaps a better way to look at SPI and that isn’t the case, if the estimate isCPI is as types of returns on investment. grossly high, an organization will beSPI can be viewed as a return on forced to allocate and lock up dollars forinvested time in the project. If SPI is a project that won’t be used—dollarsless than 1.0 then you as the client are that could have been invested elsewhere.getting a fraction of an hour’s worth of Although a poor estimate might workwork for every hour spent on the project. out in our favor this time and we end upFor example, if SPI = .85 then you’re using less schedule time or less dollarsgetting 85% of an hour, or 51 minutes to complete a project, as evidenced by anworth of work for every hour spent SPI or CPI much greater than one, theworking on the project. Similarly, CPI next time that poor estimate might notcan be viewed as a financial ROI. If CPI work out in our favor. Do weis less than 1.0 then you’re getting that continually want to risk it?fraction of a dollar’s worth of work forevery dollar you invest in the project and There is a tendency amongif CPI is greater than 1.0, you’re getting inexperienced project managers to askmore than one dollar’s worth of work for team members during status meetings toevery project dollar invested. give an opinion regarding how complete each feels the tasks they’re responsibleShould we want SPI and CPI to be for are. At best this is an educatedgreater than one? By all means, but too guess. At worst, it’s simply pulling amuch of a good thing isn’t good either. number out of the air. Regardless, it’sAn SPI or CPI or 1.05 or 1.1 is fine but very subjective and the error associatedwhat about an SPI or CPI of 1.5 or 2.0? with it makes the number altogetherOne should be concerned with either worthless. Looking at some other metricvariable being greater than 1.1 because such as hours spent to date divided bythis implies that something is wrong total hours allocated to the project yieldswith either the respective schedule a better estimate but not the optimal one.estimate or the cost estimate. We want What happens if twice as many hoursto be able to have confidence in our were spent on a specific task thanschedule estimates whether we’re originally estimated? This metricsubmitting a proposal to a client or wouldn’t take that into account. On thedeveloping a product to bring to market. contrary, those additional hours wouldSimilarly, we want to be able to have make it seem that more progress hasconfidence in our cost estimates. If been made on the project and it’s closerwe’re writing a proposal to a prospective to being 100% complete. One couldclient, we need to walk that fine line argue to use dollars spent to date dividedbetween earning a profit and being by the budget for the project tocompetitive and an error in our estimates overcome that issue. Perhaps this might,could jeopardize both. If we’re perhaps this might not. What were tofinancing an internal project, whether it happen if, on a $750,000 project,be a software implementation or product $250,000 worth of equipment must beAre Your Projects Robbing You Blind? 3© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  4. 4. bought within the first week? If we budgeted costs not one month after asimply looked at dollars spent to date as project has begun but many monthsour metric for percent completion then after? In that time span the project couldwe would be 25% complete after the end have veered so far off budget or offof week 1! An exaggeration, certainly, schedule that it would be moot to try tobut the point is well-made. The solution get it to finish within its originaloffered by EVA is not subjective and estimates. This is why EVA should becompares work accomplished to date performed on a regular monthlyagainst the complete project in order to schedule.get its value, that is, it is a function ofboth time and cost.The last variable listed is Estimate At In summary, hopefully it is now clear why one shouldn’t to wait until hitting aCompletion, or EAC. This number gives major milestone, like the completion of athe project manager a re-estimation of prototype or assembly, to reach a pointthe project budget and tells the project in the project where a schedule and/ormanager what the total project would financial measurement can be made.cost if progress and spending continued The completion of a milestone is not aat the pace it’s currently going. If one logical point in a project to comparewants to know how much the remainder project actuals against estimates. Quiteof the project would cost, taking into the contrary, unless these measurementsaccount what has already been spent and are being made on a regular (e.g.the current spending and progress rates, monthly) basis, your projects could beone simply has to subtract AC from trending way off schedule and budgetEAC. The EAC is recalculated each (and possibly quality) and by the timereporting period and is essential for use this is realized it might be too late eitherin controlling the project. to take some type of meaningful corrective action or the cost of that corrective action that you’re forced toProject Managers Are Not Simply take might be excessive. Your projectsMessengers shouldn’t be managed blindly and shouldn’t rob you blind. ConsistentA project manager’s job simply isn’t to monitoring using Earned Value Analysiscompute these values and communicate prevents this from happening.them to the client (or Management if thisis a project being funded internally).The takeaway from this, however, is that About the Authorthere must be an expectation that theproject manager and team, now in Ed Kozak, M.S., M.B.A., PMP is thepossession of this forecast, will identify President and CEO of Successfuland implement some corrective action to Projects For Leaders, internationalbring the project back in line with the experts in project management processoriginal budget. Corrective action is improvement. The staff of Successfulperformed in small, discrete steps at best Projects For Leaders work withso what effect could it possibly have if companies along three main points ofactual costs were first compared against focus. First, they help companiesAre Your Projects Robbing You Blind? 4© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  5. 5. improve their profitability by cutting these two groups occurs, allowingwasteful project costs (upwards to 50% Management to determine if efforts areor more) and improve their overall efficient and effective, if projects aremanagement of projects in order to still the best ones to support strategicreduce risk, schedule slippage, and objectives, whether there areunnecessary spending on product performance issues associated withrework. As a result their clients are able meeting exert more control over their projects;improve target schedule performance; Ed is an accomplished professional withmonitor and control cost performance has over twenty-three years experiencebetter; increase their success at hitting as a consultant, manager, executive,budget estimates; improve quality and facilitator, and instructor that includessatisfaction; and recognize the project/program manager experience insubstantial financial benefits that come the private and Government sectorsalong with that. managing multi-year, multi-million dollar programs for his clients in fieldsSecond, Successful Projects For Leaders such as IT, healthcare, research,is hired as project turnaround experts development, and manufacturing. Heand is brought in on critical projects that brings his expertise to managementare in the midst of schedule, budget, teams in strategic planning, process re-and/or quality issues or projects that are engineering, program managementhaving continual setbacks. They analyze offices, and project management and is athe problems, set a new budget and frequent conference speaker.schedule, and work with the incumbentproject management team to bring themto completion.A third benefit that Successful ProjectsFor Leaders offers is their availability tobe out-sourced by Organizations to serveas the Chief Projects Officer. In thisrole, Successful Projects For Leadersonly develops standards and practicesdirected at the effective execution ofprojects and the attainment of schedule,cost, scope, and quality objectives, butalso communicates enterprise-levelobjectives to the respective projectgroups in the most-appropriate way forthem to follow and communicatesproject information to Management.This overcomes the problem common tomany organizations that no connectionbetween Operations and project groupsexists and no structured, consistent, andmeaningful flow of information betweenAre Your Projects Robbing You Blind? 5© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.