Managing Project Success

1. Managing Project Success Vladimir Liberzon Spider Management Technologies spider@mail.cnt.ru

2. Part 1 Project Success Criteria

3. Project Success Criteria • Setting project targets is a key task that defines the process of project decision making and project performance analysis. • The usual approach of triple constraints is very complicated, yet it does not include all the necessary considerations for determining if a project is successful.

4. Project Success Criteria • Is Sydney Opera construction an example of successful project? • No, because actual expenses exceeded the planned budget by several times. • Yes, because it became one of the most famous Sydney attractions, bringing many tourists and a lot of money.

5. Project Success Criteria • The Motorola Iridium Project was finished on time and within budget. Can it be considered a successful project? • No! • Iridium, backed by Motorola Inc. (MOT), sought bankruptcy-court protection in 1999 after its $5 billion low-Earth orbit satellite (LEOS) fleet failed to attract customers or provide the quality service its backers had hoped for.

6. Project Success Criteria • If project success criteria are set as finishing project on time and under budget then proper decision making will be complicated. • It does not allow us to interpret the significance if the project exceeds the planned budget but is finished earlier than expected or if it is finished late but saves some money. • It fails to evaluate the consequences if the project was on time and within planned budget but expected revenues were not achieved.

7. Project Success Criteria • We suggest to set one single project success criterion that integrates project schedule, cost and business goals. • Establishing this single criterion is complex since it must include project scheduling, project budgeting, estimating of the future business benefits from the project product delivery, and risk analysis and simulation.

8. Project Success Criteria • If a project is business oriented then this project must have business targets and criteria of its success or failure. • The natural choice – setting target Internal Rate of Return (IRR). • Con: • The Product Life Cycle may be too long for reliable IRR estimation, • Uncertainties may be too great for proper IRR management.

9. Project Success Criteria • One of the potential alternative options – to set a target profit that should be achieved at some point in time based on the forecast of the revenues to be realized after the project results are delivered. • If the project profit meets or exceeds the target profit then performance is successful. • Such success criterion will permit weighting and balancing of time and money to make reasonable managerial decisions.

10. Project Success Criteria • On the next slide we will see the project schedule that is calculated without allowing for project financing and supply restrictions. • There are periods when the project has no money to proceed.

11. Project Success Criteria • But, if project manager can find enough money and materials then the project total profit on the imposed date will be close to $219,000.

12. Project Success Criteria • If we calculate the project schedule that accounts for financing, supply, and resource constraints then the total profit will be more than $25,000 lower.

13. Project Success Criteria • Maybe it is reasonable to borrow money or to find some other solution? • To be able to weight options and to choose the best it is necessary to look beyond the project results delivery date. It is necessary to simulate not only expenses but also revenues and resource constraints. This approach is especially important for portfolio management.

14. Project Success Criteria • For setting project success criterion it is necessary to incorporate the following data: • Target finish that may be achieved with reasonable probability, • Target budget that may be achieved with reasonable probability, • Forecast of the probable future benefits (for an example – future profit or revenue curve). • The target finish and target budget shall be calculated, taking into account all project constraints (including resource, financing and supply constraints) and using risk simulation.

15. Project Success Target • The next step is to define a specific point in time for measuring project success. • Let’s suppose that probable project NPV at this moment is a defined number of dollars. This date and amount can then be used as the project target defining the single project success criterion for the project management team. • It will, therefore, influence the project manager’s decision making processes.

16. Project Success Target • Now management decisions will be made by estimating their full business consequences. Project managers may decide to spend additional money to accelerate project performance if the NPV at the targeted date will rise as a result of this action. • At any time project performance may be measured by the forecasted NPV – if it exceeds the target then total project performance is successful. The current value of the forecasted NPV defines project status.

17. Project Success Target • NPV forecast depends not only on project performance results but also on the market conditions and other project environmental parameters. So project managers will analyze not only project performance but also revenue/profit forecasts. Their objective will be trying to improve everything.

18. Project Success Targets • But this target value is not a single value. • We recommend setting the following success targets: • optimistic project target that is set for the project team, • project management team target that includes contingency reserve, • management target that includes contingency and management reserves, • failure target that defines conditions under which project execution will be terminated.

19. Project Success Targets • Project Team Target • Project Management Team Target • Management Target • Failure Contingency Reserve Management Reserve Still Profitable Project Failure Target Date

20. Part 2 Setting Project Targets (deterministic approach)

21. Necessary Steps • 1) Develop corporate databases • 2) Develop typical fragnet library, • 3) Create project model, • 4) Define constraints, • 5) Create project schedule, • 6) Forecast future benefits, • 7) Define project targets.

22. Step 1. Develop corporate databases • Corporate project management has to be based on corporate standards. These standards must include not only processes and document templates but also estimates of the typical activity and assignment parameters. • Activities, resources and assignments belong to the same type if they share the same characteristics like unit costs, material consumption per work volume (quantity) unit, resource productivity, etc.

23. Step 1. Develop corporate databases • Corporate databases (Reference-books) should include at least: • Activity cost and material requirements per activity type volume unit, • Resource assignment cost and material requirements per assignment type volume unit, • Resource assignment productivity, • Assignment work load.

24. Step 2. Develop typical fragnet library • Project fragnets usually describe typical processes and technologies that are used more than once. • Creating project computer models using the corporate library of typical fragnets will help to avoid inconsistencies and assures that the project model follows corporate standards. • A library of typical fragnets is a very important tool for the development of corporate culture and management standards.

25. Step 3. Create project model • Project model will be developed using typical fragnet library with project parameter estimations based on the corporate reference-books. • This approach helps to create reliable project models that correspond with the corporate standards for technologies to be used and parameter (activity duration, costs, resource productivities, etc.) values.

26. Step 4. Define constraints • Project constraints include • time constraints, • resource constraints, • financing constraints (financing schedule), • supply constraints (supply schedule), • calendar constraints.

27. Step 5. Create project schedule • The problem of project schedule development without allowing for resource constraints has a correct mathematical solution (Critical Path Method), which would be the same for all PM packages, provided that the initial data are identical. All other problems are solved using different approaches and yielding different results.

28. Step 5. Create project schedule • Traditional notion of Critical Path works only in case of unlimited resources availability. • Let us consider a simple project consisting of five activities, presented at the next slide.

29. Step 5. Create project schedule • Activities 2 and 5 are performed by the same resource.

30. Step 5. Create project schedule • Please pay attention to activities that became critical. Now delaying each of the activities 1, 2 and 5 will delay the project finish date. We call these activities Resource Critical and their sequence comprises Resource Critical Path.

31. Step 5. Create project schedule • In many projects it is necessary to simulate financing and production, and calculate project schedules taking into account all limitations (including availability of renewable resources, material supply and financing schedules). True critical path should account for all schedule constraints including resource and financial limitations.

32. Step 5. Create project schedule • We call it Resource Critical Path (RCP) to distinguish it from the traditional interpretation of the critical path definition. • The calculation of RCP is similar to the calculation of the traditional critical path with the exception thatboth early and late dates (and corresponding activity floats) are calculated during forward and backward resource (and material, and cost) leveling.

33. Step 5. Create project schedule • This technique permits us to identify resource constrained floats. • Activity resource constrained float shows the period for which activity execution may be postponed within the current schedule with the set of resources available in this project. • It appears that by adding financial and supply constraints to the Critical Chain definition as well as the method of the Critical Chain calculation, we will obtain something very similar to RCP.

34. Step 6. Forecast future benefits • Usually a project is considered to be finished when the project result is delivered and starts to bring benefits. • Without forecast of these benefits it is impossible to evaluate the consequences of management decisions made during project execution. • That is why the forecast of the future benefits must be included in the project model.

35. Step 7. Define project target • Future benefits depend on time. • By defining the target date we restrict the horizon of benefit forecasting and will be able to calculate the cash flow value to that moment. • This value can be set as the project success criterion – if the cash flow forecast meets or exceeds this value then project performance may be considered to be successful.

36. Step 7. Define project target • Separate management target cash flow values may be defined for the same project. This target includes management reserve set for unknown unknowns. In deterministic approach to project planning this management reserve can be estimated based on past experience and expert judgements. • The probabilistic approach allows us to calculate necessary contingency and management reserves.

37. Part 3 Setting Project Targets (probabilistic approach)

38. Necessary Steps • 8) Analyze risks, • 9) Define target success probability for project management team, • 10) Define target success probability for the organization (management), • 11) Calculate target values for PM team and top management, • 12) Define failure value.

39. Risk Simulation • Risk simulation may be based on: • Monte Carlo simulation • Three scenarios approach

40. Risk Simulation – three scenarios approach • A project planner obtains three estimates (optimistic, most probable and pessimistic) for all initial project data (duration, volumes, productivity, calendars, costs, etc.). • Risk events are selected and ranked using the usual approach to risk qualitative analysis. Usually we recommend including negative risk events with probability • exceeding 90% in the optimistic scenario, • exceeding 50% in the most probable scenario, • all selected risks in the pessimistic scenario. • Selection of positive risk events is opposite.

41. Risk Simulation – three scenarios approach • The most probable and pessimistic project scenarios may contain additional activities and costs due to corresponding risk events and may employ additional resources and different calendars than the optimistic project scenario. • As a result the project planner obtains three expected finish dates, costs and material consumptions for all major milestones.

42. Recommended Parameters • They are used to rebuild probability curves for the dates, costs and material requirements. • Defining desired probabilities of meeting project targets a project planner obtains recommended finish dates, costs and material requirements for any project deliverable.

43. Success Probabilities • If different targets were approved then it is necessary to calculate the probabilities of meeting these targets. If they are reasonable then they may be accepted. • Probabilities to meet approved project targets we call Success Probabilities. • These targets may be set for all project parameters that will be controlled (profit, expenses, duration, material consumption).

44. Baseline • Target dates do not belong to any schedule. Usually they are between most probable and pessimistic dates. A set of target dates and costs (analogue of milestone schedule) is the real project baseline. • But, the baseline scheduledoes not exist!

45. Buffers • We recommend using the optimistic scenario for setting task objectives for project implementers and managing project reserves at the management level. • The difference between scheduled and target finish dates shows current schedule contingency reserve (buffer), • Cost buffer is the difference between targeted and calculated cost.

46. Buffers • As we discussed earlier there are several targets for each parameter and corresponding buffers (PM team targets, top management targets, contract targets, failure targets). • Each target has its own initial probability of successful achievement. • Example: • Project team target profit can be achieved with 65% probability, • Management target profit has 80% probability of success, • Failure profit will be exceeded with 95% initial probability.

47. Risk Analysis Sample • There are time, cost and material buffers that show contingency reserves not only for a project as a whole (analogue of Critical Chain project buffer) but also for any activity in the optimistic project schedule.

48. Management by Trends Part 4

49. Trend Analysis • Project Performance Management will be based on trend analysis. • It is necessary to discover problems as soon as possible and, by analyzing trends of the major project parameters, the project manager can quickly understand if there are problems with project performance.

50. Trend Analysis (Deterministic approach) • If risks were not analyzed and simulated it is reasonable to analyze trends of the forecasts for data that were used in success criteria definition. • If we defined that the project performance will be considered as successful if NPV forecast for the specified date exceeds the target value then we will analyze if this forecast is growing or not. • Negative trend shows problems in project performance and requires consideration of corrective actions.