zenrunner

Evaluating projects from a value perspective

In Project management on September 11, 2008 at 12:42 am

I am setting up a value framework and I have weekly musings over how to best identify, plan, and measure value. Then there is the implementation…

Here are some current thoughts on the topic…

When we assess the value of a project, we currently focus solely on the financial benefits that we expect to receive from this investment. There are a number of issues with this approach including:

  • Assumptions: All NPV and IRR type calculations are based on a set of assumptions, which leads to widely varying ‘values’. The presentation of assumptions is also often incomplete or ambiguous.
  • Precision: Single figure values (as a result of a NPV type calculation) imply a precision that sets unrealistic expectations.
  • Intangibles: These calculations do not account for intangibles like customer or employee satisfaction – these go in the too hard basket.
  • Risk: These value calculations do not include the risk profile of the investment or comparative results from similar projects; for example, if we often blow the budget by 20% on these types of projects should we elevate the expected cost to deliver this project?

Intel has created a Business Value Index that looks to resolve some these issues. It is IT focused but you can expand it to cover ‘business’ projects by combining it with Forrester’s Total Economic Impact methodology to include risk (I prefer to drop flexibility and IT efficiency to make things generic). Using this hybrid approach, you would consider three value components:

  • Business value: Covers tangible and intangible benefits using a set of weighted criteria to cover things like customer need, strategic alignment, revenue potential, etc. The idea is to focus on value elements specific to your organisation.
  • Financial attractiveness: NVP, IRR, payback period calculations.
  • Risk: Review the initial estimates for cost and benefit based on the project risk profile. In doing this you create a risk-adjusted costs and benefits.

You can present this information visually using three axis in an investment cube using three columns / rows for each axis (-ve, neutral, +ve; or low, medium, high). Presenting the information in this way, enables you to easily compare competing projects.

The goal here is to use a consistent approach for evaluating projects based on facts and within an apples versus apples environment. To be effective the ‘facts’ should include information on strategic alignment, expected value, and risk.

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  1. First things first, I found it very hard to read your article (dark color on dark background and extremely smaller fonts), or maybe I just need glasses.

    Maybe you can provide an example about the calculation of NPV and IRR in a later post.

    Btw, you might find this article aboutPMO Metrics interesting.

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