Techniques for selecting projects Project Selection Techniques for selecting projects

Learning Objectives Understand basic evaluation models for selecting projects Understand various techniques and approaches to evaluating potential projects Understand the utility of computer tools in project selection Be able to evaluate your organization’s techniques and suggest improvements

Why is Project Selection Important? The FIRST STEP in successful projects Wasted resources with starts and stops, high-risk, high-cost projects Lost opportunity costs of not doing the “right” projects Completion of projects that do not contribute to the organization’s strategic direction (throw-aways)

Overview of PS Issues Project Management Office (PMO): What role should it play? How can it help? Project Proposals: How is the list of potential projects built? Strategically selecting best Projects: What global criteria should be used? Project Selection: What local, individual criteria are important Dealing with Uncertainty: How important is risk analysis at this stage?

Project Management Office What role should it play?

Potential Roles for the PMO Define proposal formats and requirements Collect proposals Do preliminary screening based on criteria (local and global) Convene Strategic Board (Decision makers) Recommend and provide details to decision making board Follow-up on getting project approved, funded, organized, and initiated.

How to document a potential project Project Proposals How to document a potential project

Project Proposal: Content Executive summary Statement of need and business benefits of project Nature of problem to be solved and general approach to a solution Approach for implementation and support for the project Description and experience of potential project team

Project Proposal: Statement of need and Business Benefit Description of the need in general terms (non-technical) Why it is a need now – urgency Business Benefits Tangibles and intangibles

Project Proposal: Technical Approach More detailed description of problem to be addressed or project to be undertaken Major subsystems of problem or project Methodology or approach of solving the problem Possibly alternative analysis Special client requirements

Project Proposal: Implementation and support approach Rough Order of Magnitude of effort and cost Impacts on equipment, facilities, staff In-house resource capability versus out-sourcing potentiality Termination success statement Potential logistic support needed Other “success” needs

Project Proposal: In-house staff and skills requirement Key project staff required Estimate of skills required Availability of required project staff Impacts on organization departments and personnel

Project Selection Models Global and Local Criteria

Models – Benefits Real world problems are much too complex to analyze in their entirety A Model is an attempt to identify and isolate the “essential” elements of the real world problem in order to simplify enough for analysis Models can provide valuable “insight” into the elements of a problem

Types of Models Numeric versus Non-numeric Stochastic versus Deterministic Analytical versus Descriptive Diagrammatic versus Textual Complex, multifaceted versus Simple, single dimension

Characteristics of “Good” Model Realistic – Should include all “important” variables of the real problem Capable – Should be able to integrate the variables into the algorithm Flexible – Should handle various combinations of variables, including new ones Easy to use – Should be intuitive, not requiring a long or steep learning curve Computerized – To alleviate the workload of using it

Non-numeric Selection Models Sacred Cow (The boss wants it) Mandatory due to operations Mandatory due to competition Mandatory due to legislation (legal) Extension of existing activities, projects, products, or processes Comparative Benefits (Opinion based) Discussion Delphi Q-Sort

Q-Sort

Numeric PS Models: Profit / Profitability Payback Period (PB) Average Rate of Return Discounted Cash Flow (NPV) Internal Rate of Return Profitability Index

Numeric PS Models: Scoring Unweighted 0-1 Factor Model Unweighted Factor Scoring Model Weighted Factor Scoring Model Constrained Weighted Factor Scoring Model S = ∑(x), x=0,1 S = ∑(s), s=score S = ∑(s·w), w=weight S = ∑(s·w) ∏(c), c=constraint

Benefits of Scoring Models Structurally simple Multiple decision criteria Easy to modify Easy to do “what if” or sensitivity analysis Weights provide flexibility

Drawbacks of Scoring Models It is a “ranking” method, but does NOT necessarily represent “true” value Quantitative value may cause decisions without “judgment” Assigning values sometimes is haphazard Input value changes (assumptions) may cause large swings in results

Choosing the PS Model Firms with outside funding often chose scoring PS models Firms without outside funding often chose profit / profitability PS models 80% of Fortune 500 firms also use “nonnumeric” PS models

Risk Analysis with Crystal Ball

Including Risk Analysis – Stochastic Models Instead of assigning a fixed value to a raw score, assign a range of values and a probability. Probability is usually more “realistic” It may also be more “correct”

Areas of Uncertainty Project timing & expected cash flow. Direct outcome of project, i.e. what exactly will the project accomplish Side effects and unforeseen consequences of project

Introduction to Monte Carlo Technique Outputs are a result of an algorithmic combination of inputs if the inputs cannot be determined with confidence, then provide a probability range Monte Carlo Simulation picks an input value, based on the probability function, for each variable and calculates the result from the algorithm This is done numerous times (500 or 1000) and the results are plotted

Crystal Ball A Monte Carlo Tool that plugs into Excel Any formula or calculation that can be done in Excel can be modified to use probabilities and Monte Carlo Simulation

Probability Distributions for Inputs

Risk Analysis: Output

Self Assessment What are some of the roles of the PMO in project selection? What should be included in a project proposal? How does a Q-Sort work? How does a Scoring Model work? What is a Monte Carlo technique? What is Crystal Ball? How does it work?

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