Determining the Mathematical ROI of a Project Management Office (PMO) Implementation

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Slides from the white paper which objective is to present, discuss and apply a mathematical model based on the use of Monte Carlo simulation in conjunction with researches on project success/failure rates of projects to develop a 10 step model to calculate the mathematical return on investment (ROI) for the Project Office implementation.

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Determining the Mathematical ROI of a Project Management Office (PMO) Implementation

  1. 1. Determining the Mathematical ROI of a Project Management Office Implementation Ricardo Viana Vargas United Nations Office for Project Services (UNOPS) “PMI” is a registered trade and service mark of the Project Management Institute, Inc. ©2013 Permission is granted to PMI for PMI® Marketplace use only.
  2. 2. Imagine hearing this Our project office estimates a result of With a ROI of $2.512.244,15 90,68% Get the white paper at http://rvarg.as/roipmo 2
  3. 3. ROI Calculation Process Get the white paper at http://rvarg.as/roipmo 3
  4. 4. ROI - Key benefits of a numerical calculation •  Price is a proxy for value. •  Makes it easier to align and integrate with financial systems performance. •  Supports the identification of critical sources of value. •  Promotes communication and makes results quantitatively tangible. Get the white paper at http://rvarg.as/roipmo 4
  5. 5. What about the Challenges? •  It is a simplification of the possible scenarios. •  Plenty of cultural, social and moral aspects. •  Benefits can be questionable since the perceptions of value can be different. Get the white paper at http://rvarg.as/roipmo 5
  6. 6. Process Overview INVESTMENTS IN PMO PROJECT PORTFOLIO RESULTS SIMULATION DATA DISTRIBUTION PROFILE INFLUENCE OF THE PMO ON RESULTS Get the white paper at http://rvarg.as/roipmo 6
  7. 7. DATA DISTRIBUTION PROFILE PROJECT PORTFOLIO 1 CREATE PORTFOLIO OF PROJECTS INPUTS 1. Potential Projects 2 TOOLS AND TECHNIQUES 1. Working Groups 2. Expert Judgment OUTPUTS 1. Project Portfolio 2. Preliminary Project Information (Objectives, Schedule and Budget) 4 INPUTS 1. Market Research 2. Benchmark of Project Results 3. Historical Information 3 TOOLS AND TECHNIQUES 1. Financial Calculations 2. Bayesian Estimate 3. Analytic Hierarchy Process (AHP) 4. Expert Judgment OUTPUTS 1. Project Portfolio (Updated) 2. Financial Results Calculated for Projects CATEGORIZE PROJECTS (OPTIONAL) INPUTS 1. Project Portfolio OUTPUTS 1. Probabilistic Distribution Profile for Schedule, Investment and Results TOOLS AND TECHNIQUES 1. Description of the Categories 2. Working Groups 3. Expert Judgment OUTPUTS 1. Projects Grouped in “Categories” SIMULATION 5 INVESTMENT IN THE PMO CALCULATE INVESTMENT AND OPERATIONAL COSTS OF THE PMO/PROJECT STRUCTURE INPUTS 1. Direct Costs 2. Indirect Costs 3. Investment in Consultancy 4. Investment in Training 5. Procurement 6. Other Information on Costs and Investment TOOLS AND TECHNIQUES 1. Financial Calculations 2. Budget Structure 3. Negotiation 4. Expert Judgment OUTPUTS 1. Structure of Investment/ Cost of the PMO TOOLS AND TECHNIQUES 1. Monte Carlo Software Simulation OUTPUTS 1. Probabilistic Distribution of Schedule Gains 2. Probabilistic Distribution of Investment Savings 3. Probabilistic Distribution of Improvements of Financial Results IDENTIFY GAINS IN SCHEDULE, INVESTMENT AND RESULTS WITH THE IMPLEMENTATION OF THE PMO INPUTS 1. Probabilistic Distribution of Schedule gains 2. Probabilistic Distribution of Investment saving 3. Probabilistic Distribution of Improvements of Financial Results 4. Organizational Tolerance Level TOOLS AND TECHNIQUES 1. Negotiation 2. Expert Judgment OUTPUTS 1. Schedule Gains 2. Savings on Investment 3. Improvement of Financial Results Process Flow RESULTS 9 INFLUENCE OF THE PMO ON RESULTS DETERMINE THE INFLUENCE OF THE PMO ON RESULTS (OPTIONAL) INPUTS 1. Success Factors 2. Failure Factors 3. Market Research 4. Benchmark of Project Results 5. Historical Information SIMULATE PORTFOLIO OF PROJECTS INPUTS 1. Projects Grouped in Categories 2. Project Portfolio 3. Probabilistic Distribution Profile for Schedule, Investment and Results 6 8 TOOLS AND TECHNIQUES 1. Working Groups 2. Negotiation 3. Expert Judgment CALCULATE FINANCIAL RETURN OF PROJECTS IN PORTFOLIO INPUTS 1. Project Portfolio 2. Preliminary Project Information (Objectives, Schedule and Budget) 7 DETERMINE OPTIMISTIC, MOST LIKELY AND PESSIMISTIC PROFILE FOR SCHEDULE, INVESTMENT AND RESULTS TOOLS AND TECHNIQUES 1. Analytical Hierarchy Process (AHP) 2. Expert Judgment OUTPUTS 1. Percentage of Results Attributable to the PMO CALCULATE THE RETURN ON INVESTMENT (ROI) OF THE PMO INPUTS 1. Schedule Gains 2. Savings on Investment 3. Improvement of Financial Results 4. Structure of Investment/ Cost of the PMO 5. Percentage of Results Attributable to the PMO 10 INPUTS 1. Final ROI Report TOOLS AND TECHNIQUES 1. Financial Calculations OUTPUTS 1. Return on Investment (ROI) of the PMO 2. Complementary Information 3. Calculation Report 4. Final ROI Report ANALYZE FINAL RESULTS TOOLS AND TECHNIQUES 1. Working Groups 2. Negotiation OUTPUTS 1. Decision Making 2. Lessons Learned 3. Agreement on Results This flowchart is part of the article “Calculating the Return on Investment on a Project Management Office (PMO)” developed by Ricardo Viana Vargas. © Macrosolutions SA. All rights reserved. Reproduction prohibited. ricardo-vargas.com Get the white paper at http://rvarg.as/roipmo 7
  8. 8. Step by Step Process: Tiger Screws Case Get the white paper at http://rvarg.as/roipmo 8
  9. 9. Tiger Screws Company S DA EMPRESA •  Founded in 1961 •  Third largest screw A Tiger Screws foi fundada em 1961 e é manufacturer in the country a terceira maior fabricante de parafusos do país.Produces 4200 tons per month •  Tem capacidade para produzir 4,2 mil •  12,000 products comprising toneladas/mês e um portfólio de 12 mil produtos em 280 diferentes linhas. 280 different lines Com faturamento de R$48.000.000.00 no último ano, a Tiger Screws •  Revenues of $48,000,000.00 tem crescido em média 21% ao ano. Outra empresa, a líder nesse last year segmento, tem faturamento de R$79.000.000.00 e uma média de crescimento de 15% ao ano. 70% das vendas da Tiger Screws são feitas no mercado nacional e 30% em outros 6 países dos continentes americano at http://rvarg.as/roipmo Get the white paper e africano. 9
  10. 10. IN THE COUNTRY WITH A STRONG INTERNATIONAL PRESENCE INCREASE REVENUE WITH THE RIGHT MIX OF PRODUCTS LEARNING AND GROWTH INTERNAL PROCESSES MARKET FINANCE MAP IMPROVE FINANCIAL RETURNS BE A LEADER IN THE DOMESTIC MARKET REDUCE PRODUCTION COSTS INCREASE INTERNATIONAL MARKET SHARE CUSTOMER RELATIONSHIP INTERNATIONALIZATION IMPROVE CUSTOMER SERVICE DEVELOP INTERNATIONAL MARKETS INCREASE PROJECTS RESULTS REDUCE LOST-TIME ACCIDENTS OPTIMIZE THE PRODUCT MIX REDUCE CUSTOMER COMPLAINTS MONITOR CUSTOMERS' NEEDS IN OTHER COUNTRIES REDUCE OPERATING LOSS CONTROL MAINTENANCE COSTS REDUCE MACHINERY PROGRAMMING TIME DEVELOP HUMAN RESOURCES OPERATIONAL EXCELLENCE STRENGTHEN INTERNAL COMMUNICATION BETWEEN AREAS DEVELOP INFORMATION MANAGEMENT SYSTEMS © 2012 - Macrosolutions SA and e Symnetics Consultoria Empresarial Ltda. All rights reserved. Reproduction is prohibited. Get the white paper at http://rvarg.as/roipmo 10
  11. 11. Project Portfolio Get the white paper at http://rvarg.as/roipmo 11
  12. 12. Get the white paper at http://rvarg.as/roipmo 12
  13. 13. Medium nology Medium Low es Medium Modernization of the Instrumentation System Medium E-commerce Tiger Screws’ Project List Low PROJECT High Corporate Office Projects High Review of Low Mix Low Product Zero elopmentAccidents High High New Markets es Internationalization of Production Units Very High High Modernization of the Instrumentation System High High Import Finished Products es E-commerce Low Very None Corporate High Projects High Office nology New Markets Medium Medium University Tiger Screws New Line for the Oil Industry Opening of Capital Social Media ERP System New Maintenance Policy University Tiger Screws New Line for the Oil Industry Import Finished Products Opening of Capital Get the white paper at http://rvarg.as/roipmo 13
  14. 14. Example of Preliminary Information Get the white paper at http://rvarg.as/roipmo 14
  15. 15. Tiger Screws Portfolio Consolidated Information Get the white paper at http://rvarg.as/roipmo 15
  16. 16. Tiger Screws Portfolio Consolidated Information Get the white paper at http://rvarg.as/roipmo 16
  17. 17. Tiger Screws Portfolio Consolidated Information Get the white paper at http://rvarg.as/roipmo 17
  18. 18. Tiger Screws Portfolio Consolidated Information Get the white paper at http://rvarg.as/roipmo 18
  19. 19. Get the white paper at http://rvarg.as/roipmo 19
  20. 20. Monetizing Intangibles Get the white paper at http://rvarg.as/roipmo 20
  21. 21. Example: Corporate University •  Q: Why is there interest in the implementation of the Corporate University? –  A: So that we can prepare new talents •  Q: Why is there interest in preparing new talents? –  A: To have in the future a greater allegiance in our executive level professionals. Get the white paper at http://rvarg.as/roipmo 21
  22. 22. Example: Corporate University •  Q: Why do you want higher allegiance in the future? –  A: To lessen the turnover that generates additional costs Then it can be concluded that one of the main objectives of the Corporate University is to reduce additional costs of hiring. Imagine that the Tiger Screws’ cost of hiring is $8,716,704 over the next 5 years and that there is a likelihood that they are reduced in the coming years because of the corporate university. Get the white paper at http://rvarg.as/roipmo 22
  23. 23. AHP and Bayesian Estimate: University Tiger Screws Get the white paper at http://rvarg.as/roipmo 23
  24. 24. Example of Results University Tiger Screws •  Result: $608,110.28 •  Investment: $350,000.00 •  Benefit: 258,110.28 •  Project ROI: 74% NOTE: Assuming the values are already brought to their present values. Get the white paper at http://rvarg.as/roipmo 24
  25. 25. Tiger Screws Portfolio Consolidated Information Get the white paper at http://rvarg.as/roipmo 25
  26. 26. Tiger Screws Portfolio Consolidated Information The Total duration is used only to determine the approximate total workload in projects. The term may be replaced by man/hour or other measures of effort. Get the white paper at http://rvarg.as/roipmo 26
  27. 27. Tiger Screws Portfolio Consolidated Information Get the white paper at http://rvarg.as/roipmo 27
  28. 28. Get the white paper at http://rvarg.as/roipmo 28
  29. 29. Get the white paper at http://rvarg.as/roipmo 29
  30. 30. Get the white paper at http://rvarg.as/roipmo 30
  31. 31. Get the white paper at http://rvarg.as/roipmo 31
  32. 32. Data Distribution Profile Get the white paper at http://rvarg.as/roipmo 32
  33. 33. Get the white paper at http://rvarg.as/roipmo 33
  34. 34. Standish Group Report Get the white paper at http://rvarg.as/roipmo 34
  35. 35. FEL and Investment Projects Get the white paper at http://rvarg.as/roipmo 35
  36. 36. PMI Pulse Report 2012 Get the white paper at http://rvarg.as/roipmo 36
  37. 37. PwC Report Get the white paper at http://rvarg.as/roipmo 37
  38. 38. Chosen Profile: Tiger Screws - Conservative Get the white paper at http://rvarg.as/roipmo 38
  39. 39. Simulation Get the white paper at http://rvarg.as/roipmo 39
  40. 40. Get the white paper at http://rvarg.as/roipmo 40
  41. 41. Get the white paper at http://rvarg.as/roipmo 41
  42. 42. Get the white paper at http://rvarg.as/roipmo 42
  43. 43. Get the white paper at http://rvarg.as/roipmo 43
  44. 44. Get the white paper at http://rvarg.as/roipmo 44
  45. 45. Get the white paper at http://rvarg.as/roipmo 45
  46. 46. Investments in PMO Get the white paper at http://rvarg.as/roipmo 46
  47. 47. Get the white paper at http://rvarg.as/roipmo 47
  48. 48. PMO Tiger Screws PMO Investments Get the white paper at http://rvarg.as/roipmo 48
  49. 49. Influence of the PMO on Results Get the white paper at http://rvarg.as/roipmo 49
  50. 50. Get the white paper at http://rvarg.as/roipmo 50
  51. 51. Get the white paper at http://rvarg.as/roipmo 51
  52. 52. Results Get the white paper at http://rvarg.as/roipmo 52
  53. 53. Get the white paper at http://rvarg.as/roipmo 53
  54. 54. Tiger Screws PMO ROI Calculation Get the white paper at http://rvarg.as/roipmo 54
  55. 55. Tiger Screws PMO ROI Calculation Get the white paper at http://rvarg.as/roipmo 55
  56. 56. Tiger Screws PMO ROI Calculation Get the white paper at http://rvarg.as/roipmo 56
  57. 57. Get the white paper at http://rvarg.as/roipmo 57
  58. 58. Key Points and Conclusions •  The model is a "master line” of the value calculation and can thus be customized. •  The entire process is to be performed in teams. •  Any mathematical model is a simplification of the real process. •  The result of the PMO is achieved by simulating imagined future scenarios (a risk inherent to the process). Get the white paper at http://rvarg.as/roipmo 58
  59. 59. Ace in the hole Get the white paper at http://rvarg.as/roipmo 59
  60. 60. Conclusions •  It is impossible to determine ROI without knowing which projects are selected and the strategy that goes behind them. •  If the PMO will manage projects with no calculable benefits (mathematically intangible), it is essential that the calculation process (step 2) is carried out with great care and attention. •  This is a laborious process but much more effective to determine/prove the value of the PMO. Get the white paper at http://rvarg.as/roipmo 60
  61. 61. Contact Information Ricardo Viana Vargas ricardov@unops.org / ricardo@ricardo-vargas.com www.unops.org Twitter: @rvvargas Get the white paper at http://rvarg.as/roipmo Get the white paper at http://rvarg.as/roipmo 61

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