Copyright 2009 John Wiley & Sons, Inc. Chapter 2 Selecting Projects Strategically Dr. Ayham Jaaron

Problems With Multiple Projects 1. Delays in one project delays others 2. Inefficient use of resources 3. Bottlenecks in resource availability

Project Results According to a global study by Thomas et al., 2001): 30 Percent of projects are canceled midstream. Over half of completed projects are 190 percent over budget Over half of completed projects are 220 percent late

Challenges Making sure projects closely tied to goals and strategy How to handle growing number of projects How to make projects successful

Project Management Maturity Project management maturity refers to mastery of skills required to manage project competently. Number of ways to measure maturity is developed based on five stages: ad- hoc, planned, managed, integrated, sustained. Most organizations do not do well

Class Task: Group Discussion (10 minutes) If you were a company CEO. What would you do to select your company’s projects? What criteria you would use to make sure that these projects is a necessity for the company? Please list all of the possible factors.

Project Selection and Criteria of Choice Same process as other business decisions Project selection: is the process of evaluating individual projects or groups of projects and then choosing to implement some set of them so that the objectives of the parent organization will be achieved.

Types of Companies Companies considering projects fall into two broad categories: 1. Companies whose core business is completing projects 2. Companies whose core business is something else They can also be broken down as: 1. Companies looking at projects to do for others 2. Companies looking at projects to do for themselves

Project Companies Must select which projects they will bid on Generally based on… – Their expertise – Resource they have availability – Their chance of winning bid Preparing a bid is expensive They do not want to waste that effort on bids where they are unlikely to be successful

Non-Project Companies Must decide which potential projects they will pursue Available capital is the major constraint Profitability is often the major criteria Must evaluate approaches when there is more than one project that can accomplish a goal

Different Factors Affecting Outcome of a project. Many factors affect the outcome of a project – Some are one-time factors The cost of an item – Others are reoccurring Maintenance Not all factors are equally important Critical factors on one project may be trivial on another project

Types of Project Selection Models Nonnumeric models Numeric models

Nonnumeric Models Models that do not return a numeric value for a project that can be compared with other projects These are really not “models” but rather justifications for projects Just because they are not true models does not make them all “bad”

Types of Nonnumeric Models Sacred Cow – A project, often suggested by top management, that has taken on a life of its own. It continues, not due to any justification, but “just because.” Example: new product. Operating Necessity – A project that is required in order to protect lives or property or to keep the company in operation. Example: a project to build a protective dam. Competitive Necessity – A project that is required in order to maintain the company’s position in the marketplace. Example: building new plant to enhance competitiveness.

Types of Nonnumeric Models Continued Product Line Extension – Often, projects to expand a product line are evaluated and judged on how well the new product meshes with the existing product line rather than on overall benefits. Comparative Benefit – Projects are subjectively rank ordered based on their perceived benefit to the company.

Numeric Models Models that return a numeric value for a project that can be easily compared with other projects Two major categories: 1. Profit/profitability 2. Scoring

Profit/Profitability Models Models that look at costs and revenues – Payback period – Profitability Other engineering economy methods are used here to evaluate profitability of different projects.

Payback Period The length of time until the original investment has been recouped by the project A shorter payback period is better

Payback Period Example

Advantages of Profitability Models Easy to use and understand Based on accounting data and forecasts Familiar and well understood Give a go/no-go indication

Disadvantages of Profitability Models Ignore non-monetary factors Some ignore time value of money Payback models ignore cash flow after payback

Scoring Models Unweighted factor model Weighted factor model

Unweighted Factor Model Each factor is weighted the same Less important factors are weighted the same as important ones Easy to compute Just total or average the scores

Unweighted Factor Model Example Figure 2-2

Weighted Factor Model Each factor is weighted relative to its importance – Weighting allows important factors to stand out A good way to include non-numeric data in the analysis Factors need to sum to one All weights must be set up so higher values mean more desirable Small differences in totals are not meaningful

Weighted Factor Model Example Assume that we have the following criterion for purchasing automobile: Purchase Relative importance (1-10) weights appearance4.10 braking30.07 Comfort70.17 Cost, operating50.12 Cost, original Handling70.17 reliability50.12 Total411.00

Weighted Factor Model Example There are 5 types of cars (projects) that we can choose from. We can estimate performance measures for each car/project on the criterion chosen on scale of (1-5) as shown in the table below:

Weighted Factor Model Example Figure B

Project Portfolio Process (PPP) Links projects directly to the goals and strategy of the organization. This occurs throughout the life of a project; from initiation to termination. Means for monitoring and controlling projects. When a project becomes a burden, then it deflects from the strategy.

PPP Steps 1. Establish a project council: who is responsible for arranging funds for strategy supporting projects. Usually joint venture/inter departmental projects. 2. Identify project categories and criteria 3. Collect project data 4. Assess resource availability 5. Reduce the project and criteria set: reduce competing projects. 6. Prioritize the projects within categories 7. Select projects to be funded and held in reserve 8. Implement the process

Step 1: Establish a Project Council Senior management The project managers of major projects The head of the Project Management Office Particularly relevant general managers Those who can identify key opportunities and risks facing the organization Anyone who can derail the PPP later on

Step 2: Identify Project Categories and Criteria 1. Derivative projects: add extension to current offerings. e.g. lower priced product. 2. Platform projects: major offerings. e.g. new type of automobile. 3. Breakthrough projects: newer technology. e.g. new technology use (fiber-optics for data) 4. R&D projects: e.g. using existing technologies in new manner.

Step 3: Collect Project Data Assemble the data for proposed projects. Document assumptions Screen out weaker projects The fewer projects that need to be compared and analyzed, the easier the work

Step 4: Assess Resource Availability Assess both internal and external resources Assess labor conservatively Timing is particularly important

Step 5: Reduce the Project and Criteria Set Market for offering Potential partner Resources Good tech./knowledge fit Narrow down the number of competing projects. Possible screens might be:

Step 6: Prioritize the Projects Within Categories Apply the scores and criterion weights (numeric, non-numeric) Consider in terms of benefits first, resource costs second Summarize the returns from the projects

Step 7: Select the Projects to be Funded and Held in Reserve Determine the mix of projects across the categories Leave some resources free for new opportunities Allocate the categorized projects in rank order

Step 8: Implement the Process Communicate results Repeat regularly Improve process

Project Proposals The project proposal is essentially a project bid Putting together a project proposal requires a detailed analysis of the project Project proposals can take weeks or months to complete A more detailed analysis may result in not bidding on the project

Project Proposal Contents Cover letter Executive summary The technical approach The implementation plan The plan for logistic support and administration Past experience