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Tag Archives: PDC

Stakeholder Risk Tolerance

Posted on April 3, 2012 by | 3 comments

Managing the inherent risk associated with undertaking any project, anywhere, in any industry is a critical organisational capability. Within the organisations overall Project Delivery Capability (PDC) the maturity of its risk management approaches is central to the organisation’s ability to generate value (see more on PDC Maturity).

Only very immature or deluded organisations seek or expect to run ‘risk free’ projects. To quote Suzanne Finnamore: “Delusion detests focus and romance provides the veil.” Any sensible analysis of any business activity will indicate levels of risk; effective organisations understand and manage those risks better then ineffective organisation.

The skills that a mature organisation brings to the art of ‘risk management’ is to focus effort on managing risks that can be managed, providing adequate contingencies for those risks that cannot be controlled and deciding how much residual risk is sensible. The balance that has to be struck is between the cost and time needed to reduce the risk exposure further (the pay-back diminishes rapidly), the impact of the risk if it occurs and the profit to be made or value created as a result of the total expenditure on a project.

The sums are superficially simple; adding another $100,000 to the cost of a project to reduce its risk exposure by $10,000 reduces the value of the project by $90,000. In competitive bids, increase your bid price too much and the value drops to $Zero because the organisation fails to win the work! However, the situation is more complex; the nature of the risk may require the expenditure regardless of the potential saving (particularly in areas of safety and quality) and whilst expenditures are reasonably quantifiable, the actual cost of a risk event and the probability of it occurring are variable and cannot be precisely defined for a unique project. Our paper ‘The Meaning of Risk in an Uncertain World’ discusses these issues in more depth.

To develop a mature approach to risk management, each layer of management has a role to play:

  • The organisation’s governing body (typically a Board of Directors) is responsible for developing an appropriate risk taking policy and defining the organisations ‘risk appetite’.
  • The Executive are responsible for creating the culture and framework that approached the management of risk within the parameters set by the Board in a capable and effective way.
  • Senior management are responsible for implementing the risk management system.

The mark of a mature organisation is the recognition at all levels of management that having implemented these systems, the organisation still has to expect failure! Every single project has an associated risk and properly managed, these risks are at an acceptable level for the organisation. But if there is a probability for success, there has to be a corresponding probability of failure!

Assuming the organisation is very conservative and requires budgets to be set with appropriate contingencies to offer a 90% certainty of being achieved, and this setting is applied to all projects consistently, the direct consequence is an expectation that 1 in 10 projects will overrun cost. Certainly 9 out of 10 projects will equal or underrun cost but there is always the remaining 10%. Mature organisations expect the profits and un-spent contingencies on the ‘9 underruns’ to more then offset the ‘1 overrun’. However, these ‘expected failures’ tend to be totally ignored by immature executives who want to pretend there is ‘no risk’ and then blame the PM for the failure.

There are two aspects of dealing with the ‘expected failures’ implicit in any realistic risk assessment. The first is setting the boundaries of accepted risk at an appropriate level of the organisation. Aggressive ‘risk seeking’ organisations will set a lower threshold for acceptability and experience more failures that conservative organisations. But the conservative organisations will achieve far less.

Source: Full Monte Risk Analysis

Looking at the cost aspect of risk for the project above, the most likely cost for this project is $17,500 but this is optimistic with a less then 50% chance of being achieved. The range of sensible options are to set the budget at:

  • The Mean (50% probability of being achieved) is $17,770.
  • Add one standard deviation to the Mean increases the probability of achieving the project to 84%, but the budget is now $18,520.
  • Add two standard deviations to the Mean and the probability of achieving the budget increases to 97% but the budget is now up to $19,270.

From this point, the pay-back diminishes rapidly, to move from 97% to 99.99% (six sigma), an additional $3,000 would be required in contingencies making a total contingency of $4,770 to effectively guaranteed there will be no cost overruns. Because of this very high cost for a very limited change in the probability of achieving the objective most projects focus on either the 80% or the 90% probabilities.

However, even within these relatively sensible ranges, making an appropriate allowance for risk has consequences. Assuming all projects have a similar cost distribution and the organisations total budget for all projects is $10 million the consequences are:

  • To achieve a 50%/50% probability of projects achieving budget, approximately 1.6% of the budget will need to be allocated to contingencies: $160,000
  • To achieve an 84% probability of projects meeting the allocated budget, approximately 5.8% of the budget will need to be allocated to contingencies: $580,000
  • To achieve a 97% probability of projects meeting the allocated budget, approximately 10.1% of the budget will need to be allocated to contingencies: $1,010,000

Whilst the mathematics used above are highly simplified, the consequences of risk decisions are demonstrated sufficiently for the purpose of this post (for more on probability see: WP1037 – Probability). To be 97% sure there will be no cost overruns, more than 10% of the available budget to undertake projects will be tied up in contingencies that may or may not be needed, the consequence is less than 90% of the possible project work will be undertaken by the organisation in a year. The projects ‘not done’ are opportunities foregone to be ‘safe’.

In a competitive bidding market, adding 10% to your estimate to be 90% sure there will be no cost overruns is likely to have a more dramatic effect and price the organisation out of the market resulting in no work. In either situation a careful balance has to be struck between accepted risk and work accomplished, this is a governance decision that needs input from the executive and a decision by the Board.

The governance challenge is getting the balance ‘right’:

  • The higher the safety margin the more likely most projects will underrun and the greater the probability some of the contingent reserves will not be used and therefore opportunities to use the funds elsewhere are foregone.
  • However, reducing the reserves increases the probability that more projects will overrun (ie, ‘fail’) and this increases the probability that in aggregate the whole project budget will be exceeded.

The challenge for the rest of management is making sure the data being used is as reliable as possible.

The second key feature of mature organisations is the existence of efficient scanning systems to see problems emerging backed up with effective support systems to proactively help the project team achieve the best outcome. The key words here are ‘proactive’ and ‘help’. The future is not set in concrete and timely interventions to help overcome emerging problems can pay dividends. This requires a culture of openness and supportiveness within the organisation so that the root cause of the emerging issue can be quickly defined and appropriate support provided, promptly and effectively. This approach is the antithesis of the approach adopted by immature organisations where the ‘blame game’ is played out and the project team ‘blamed’ for every project failure.

In summary, the organisation’s directors and executive managers need to determine the appropriate risk tolerance levels for their organisation and then set up systems that have the capability of keeping most projects within these accepted boundaries. Understanding and managing risk is a key element of PDC. But having done all of this, mature risk organisations know there are still ‘Black Swans’  lurking in the environment and remain vigilant and responsive to unexpected and unforeseen events.

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Management -v- Governance

Posted on March 27, 2012 by | 4 comments

Some areas of business seem to be confusing the concepts of organisational governance and effective management to the detriment of both processes. One of the important aspects of ‘good governance’ is to create the environment that allows ‘good management’ to be practiced and to require systems that ensure ‘good management’ is practiced at all levels of the organisation’s management, but governance and management are quite different processes undertaken by different groups of people.

As a basic starting point, Governance is the exclusive responsibility of the Board of Directors, or their equivalent, not management – the governing body (typically Directors) directs and governs; managers manage at various levels.

The three primary levels of involvement are:

  • Governance. The governing Board sets the organisation’s objectives, agrees the strategy to achieve the objectives, define policies and rules for the organisation, requires effective management systems, and also requires processes to be in place to ensure these are implemented by management and to provide effective oversight to the governing body. This is the exclusive non-transferable responsibility of the Board.
     
  • Executive management. The executive’s role is creating the organisation capable of achieving these requirements and providing input and advice to assist the governing body’s decision making processes. Developing an effective culture of openness and accountability is a core executive responsibility.
     
  • General management. Senior and operational management’s roles are to develop and maintain the systems and processes needed to make the organisation effective within the parameters set by the executive. This includes supporting middle and lower management so they can effectively manage the work needed to implement the strategy set by the Board.

For some reason, these different roles are being confused in some business domains, including IT and project management to the detriment of the organisation and the respective disciplines. When a group of managers start referring to ‘normal good management’ practices as ‘governance’, they simply create excuses for bad management practice.

A good example is a project steering committee failing to support a project manager by refusing to make a difficult decision. This lack of support can be defined in two different ways:

  • By claiming the committee is a governance body responsible for ‘governing’ the project, usually interpreted as making sure the project does not do ‘wrong things’, the imperative for a timely decision is removed or hidden, the requirement is no wrong doing which translates into not making a wrong decision. If the project fails as a consequence of the lack of decision, it is called a ‘project failure’ not a governance failure.
     
  • Change the description of the same steering committee to the management entity responsible for the overall creation of value within the organisation based on the work of the project they are overseeing, the situation changes. As the management group responsible for implementing and managing the overall Project Delivery Capability (PDC) needed by the organisation to achieve a positive ROI on its investment in the project, the same failure to make a decision can be seen to have a direct impact on the ROI the managers in the steering committee are personally responsible for achieving. This is a management failure and the managers in the steering committee are directly accountable for the delays caused to the project.

Similar issues to the project management obfuscation described above also attach to calling pragmatic and effective management of IT processes ‘governance’ – data security, backups and recovery capabilities, other IT functions and managing the projects needed to enhance IT are not IT governance issues, they are IT management responsibilities.

My personal view is that if the project and IT management practices described above are determined to be a ‘governance’ function, almost everything in management is ‘governance’, fortunately:

  • No one claims the processes used to make sure the accounts department pay the right people the right amount of money at the right time is a ‘governance’ process – it is seen to be a prudent accounting requirement.
     
  • Similarly no one claims the processes used by the stock department to fill orders with the right goods, and ship them to the right customers is ‘governance’; it is simply a customer service process.

IT and project management should be no different!

The art of good governance is for the Directors to ask the right questions of the executive and have sufficient skills to understand the answers. I do not know of a good resource to help in this respect for IT, however, a really useful (and free) guide to help Board’s ask the right questions of their executive about PDC has been published by the Association for Project Management in the UK, it can be downloaded from: http://www.mosaicprojects.com.au/PDF/APM%20GoPM%20booklet.pdf

Once the Board starts asking the ‘right questions’ and sets a strategic framework my feeling is any executive manager worthy of his/her role will start taking appropriate actions and adapting their organisation. If they don’t the Board probably needs to start asking other questions about the suitability of the executive. However, changing the organisation to achieve effective PDC is a major change program in itself and will need time to be effective……

One short term solution that can be used to kick-start the cultural and organisational changes needed to move to an effective PDC is already in the hands of the governing body and executive. If the organisation cannot find a committed senior manager prepared to take personal responsibility for delivering the value promised by a project do not start the work! We know the lack of effective sponsorship is closely aligned to project failure, so it will be far cheaper and preserve shareholder value if projects without effective sponsors are not started. Conversely, if senior managers are responsible for the delivery of value from the projects they are sponsoring, the key people needed to create effective change in an organisation are already involved and have a vested interest in succeeding.

The important thing to remember is the realisation of value from effective benefits management is very much the end of a process. The overall capability to realise value from an investment in a project starts with selecting the right project to do for the right strategic reasons, then doing the work of the project effectively and efficiently before the organisation can implement the changes and generate value. The project manager is only responsible for the bit in the middle – the ‘doing the project right’, a steering committee, sponsor or other management entity is responsible for the beginning and end parts of the overall process as well as supporting the project team. Therefore PDC has to be seen as a general management responsibility.

The management concepts and framework needed to develop an effective PDC within an organisation have been discussed in earlier posts:

  • The concept of ‘project failure’ -v- ‘management failure’ is discussed in our post ‘Project or Management Failures?’.
     
  • Similarly, PDC and the organisational aspects of change have been discussed in length in a series of earlier posts, see:
  • An overview of the management framework needed to achieve effective PDC is in our White Paper: PDC Taxonomy – this White Paper is a conceptual framework not a methodology and is evolving, but should still be helpful in separating ‘governance’ from ‘management’.

These ideas are not new, work by the Boston Group in the 1990s reported in our latest blog, the PDC Value Proposition shows the significant increase in ROI when an effective project delivery capability level is achieved by an organisation.

The governance requirement is to ensure management accepts this responsibility and excel in creating value for the organisation.

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PDC Value Proposition

Posted on March 17, 2012 by | 2 comments

The only reason for undertaking a project or program is to create value through the realisation of benefits. Some projects generate significant intangible benefits such as reduced risk, enhanced prestige or in the case of regulatory requirements, the simple ability to keep trading; others are focused on generating a positive financial return, most generate a combination of financial and intangible returns.

A key element in Project Delivery Capability (PDC) is understanding the value proposition the project or program has been created to generate. Regardless of the way the ‘return’ is measured, no project should destroy value, unfortunately as discussed in Disappearing into the Zone far too many do!

The value proposition for developing an effective PDC (itself a business change program) is compelling. World-wide research undertaken by Jed Simms at the Boston Consulting Group in the 1990s defined five levels of PDC, and found that the return on investment (ROI) from projects increased substantially at each level*. These findings have been developed into a project delivery capability model by TOP – Totally Optimized Projects Pty Ltd. 

  • Level 1 capability is represented by executive complacency, project teams doing their own thing, no benefits management, and on average projects typically show a small negative ROI but results are wildly variable with some successes (which are always highlighted).
     
  • Level 2 capability sees the imposition of process focused on measuring activity rather than outcomes. The business imposes forms, requirements and check lists; ‘methodology police’ enforce a one-size-fits-all policy. The process of developing ‘approvable’ businesses cases and standardised project reporting creates more uniform outcomes but there’s little understanding of risk -v- reward and virtually no follow through to implementation and benefits realisation. As a consequence there is typically a neutral ROI – the value created eventually covers the costs despite the glowing promises in the business case.
     
  • Level 3 capability sees the organisation gaining sufficient experience and confidence to allow measured flexibility into its processes for managing projects. The basic disciplines are retained, but the way they are implemented is adjusted to suit the needs of the project. The executive view moves from imposing ‘controls’ towards an outcome focus using elements of portfolio management. However, project success still tends to be measured in terms of time, cost and scope at the end of the project rather than the benefits gained by the organisation; an output focus rather than an outcome focus. Organisations at this level generate a reasonable ROI measured at the project level but largely miss the potential for substantially enhanced business outcomes.
     
  • Level 4 capability introduces a paradigm shift in executive thinking. Rather than focusing on project outputs, the work of the project is seen as a key enabler of valuable business outcomes. This requires an integrated flow from the identification of a need or opportunity within the business through to implementing the changes required to deliver of the expected business outcomes to meet the need or exploit the opportunity. Ownership of this value chain is vested in the business, the role of projects and project management is to support this overall effort by delivering the outputs best suited to achieving the business objective. The model defined in PDC = Project Delivery Capability represents the PDC framework needed to support this level. Simms’ research suggests there is an increase in ROI to 2 to 3 times that achieved at Level 3 once the focus of organisation’s executives shift to achieving business related outcomes, measuring the benefits actually realised and the value achieved.
     
  • Level 5 capability expands on Level 4 with the whole PDC system focused on efficiently supporting the strategic objectives of the business. Effective strategic alignment linked to pragmatic risk management and simple but effective processes generates another significant increase in ROI!

Based on observation rather then measurement, it seems the majority of organisations in both the public and private sectors are currently operating at Level 2, typically with the PMO fulfilling the role of ‘methodology policeman’, a few more mature organisations, mainly private sector, are achieving Level 3 maturity whilst others remain at Level 1.

Very few have taken the step to Level 4 where the executive hold their business managers accountable for achieving the outcomes defined in the business case and invest in the PDC capability required to properly support their business managers.

Doing projects ‘right’ is a Level 2 phenomena, doing the ‘right projects, right’ is Level 3; the optimum is Levels 4 and 5 where the right projects are done for the right strategic reasons. PDC was forecast by Simms as the next competitive battleground in 2005 – I would suggest it is the competitive battleground in 2012!

* Source, Project Delivery Capability – the next competitive battleground, Jed Simms, TOP – Totally Optimized Projects Pty Ltd.

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PDC = Project Delivery Capability

Posted on March 11, 2012 by | 1 comment

My last couple of posts have identified a gap in the overall management of projects and programs that is present in most organisations. This ‘Zone’ covers a range of organisational capabilities from the innovation and assessment of ideas that may develop into projects through to achieving the value the project was created to enable; see: Disappearing into the Zone.

Effective project or program management cannot save a project that has been set up to fail by the organisation. Doing the wrong project ‘right’ or doing the right project as ‘right as possible’ with inadequate funding, resources, skills and management support may reduce the extent of the disaster but cannot prevent failure; see: Cobb’s Paradox is alive and well.

The solution to this perennial problem, first identified by Cobb in 1995, is for the organisation’s leadership to demand that their executive create an effective project delivery capability (PDC). This name is suggested to place focus on the delivery of value to the organisation as a result of doing the ‘right’ projects ‘right’. Managing the selected projects effectively is just one step in this overall value chain.

PDC includes all of the aspects of project delivery discussed in our White paper PPP Taxonomy and outlined above, with a focus on realising value for the organisation.

Implementing an effective and rigorous PDC structure will require a major change effort in many organisations and will challenge existing cultures, particularly the tendency to focus on ‘project failure’ rather than ‘organisational failure’ when the organisation fails to adequately manage the management of its projects. The extent of this challenge is outlined in our White Paper Organisational Change Management.

The three layers of PDC are defined above:

  • Governance – the organisations directors / leaders have to set the right strategy, ask the right questions and require the right answers from their executive.
  • Executive management (Purple) are responsible for creating the capability and culture of accountability needed to deliver projects successfully and realise the intended benefits. A key element in this is developing a rigorous portfolio management capability to select the best projects to fulfil the organisation’s strategy, based on consideration of each project’s feasibility and viability, within the organisational constraints of capability and capacity.
  • Organisational support processes (Orange) including opportunity identification and assessment, plus developing and enhancing the organisation’s project delivery capability including: organisational enablers, support systems, oversight systems, change management systems and value realisation.

Program management can fulfil some of these support functions where several projects are being managed in an integrated way to maximise benefits. However, where programs are used by the organisation, the organisation’s overarching support processes need to be capable of supporting and overseeing the work of the programs as well as other independent projects.

PDC reframes the project delivery/success paradigm. Change is needed, the approaches currently used in many organisations are generating project failure rates in excess of 50% and to keep doing the same thing, expecting different outcomes is, to quote Einstein, ‘the definition of insanity’!

Focusing on developing an effective PDC will enable organisations to improve the way they manage the ‘doing of their projects’ and as a consequence increase the success rate resulting in increased value for their stakeholders. The ROI from improving an organisation’s PDC should be significant!

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