Friday, February 24, 2012

Value and costs in Project Management

A man passes by a boy who is selling a dog for 1.000.000 USD. He's humored by the boy's innocence and passes him by. Sometime later he sees the boy again, but this time the boy doesn't have the dog with him. The man can't resist his own curiosity and asks the boy:
- Did you get to sell your dog?
- Sure.
- For how much did you sell him?
- 1.000.000 USD.
- I can't believe it! How did you do it?
- Easy, I traded the dog for these 2 turtles, 500.000 USD each.

This joke makes the first point in this article: value and cost don't always go together and in this case they're very, very different.

Where are the costs in Project Management
This one is pretty straight forward as costs are always prices: an hourly rate, the rent of an office, the price of some software or the price of a full page ad space on a magazine. There are all examples of costs that you can come across in Project Management.

What about the value?
Value, as used in this article, is always measured in terms of business value and in the context of Project Management. And business value translates to the well-being of the organization in the long-run. Now this is the tricky part as it's always subjective: what is the well-being of an organization? I may think that it's most valuable to finish the project fast to put it's result product in the market before our competitors do and you may think that as it's a break-through product we should learn from the mistakes that our competitors will make so we keep the image the organization has on the market for reliable products. We are both right to some extent but on the other hand we're not even close to get an objective measure of how much each option is worth in terms of business value. So the question is: what tools are there for you to measure value?

Cost benefit analysis
One tool available is Cost Benefit Analysis (some more detail on the Beginners Guide to Project Management), but... it's only half way between costs and value. On the costs side of a cost benefit analysis, you basically get together all the prices of the stuff you'll have to buy, rent or somehow use in your project. But you can also estimate costs that you'll incur for more intangible stuff. It could be that your project will damage the organization's image or a brand - and this is clearly on the value side of the equation.
On the benefits side you'll find intangible stuff more often such as increased brand recognition but you can also find costs such as the estimated sales of your project's result product.
In short, although cost benefit analysis is focused primarily on prices it doesn't usually stop there. It's not a value measurement tool, but it's close to it - or at least around it.

Earned Value Management
Earned Value Management (EVM) measures efficiency: imagine you planned to spend 100.000 USD to install 10 racks on a data center and you have spent already 55.000 USD and you have 6 racks in place, how good are you? This is the kind of questions that EVM tries to answer, questions related to efficiency. What some project managers do is to reduce business value to efficiency. If you do so, the faster and cheaper you get things done the more efficient you are and so the more value you are delivering. This is OK but it's just part of business value. Again, you have a tool close to measure value.
It doesn't occur to me any more Project Management tools to help you measure value, in case you do please let me know. But the fact is that sponsors don't really care about measuring value (to my experience anyway).

What sponsors want first and foremost... business value delivered. But particularly in these times of economic crises, they also want the lowest costs possible. This leaves you, the project manager, in a tight spot and in a context where costs and value are used interchangeably. If it isn't the easiest thing to do to tell costs and value apart in a regular context, it's even harder now in the middle of this economic crisis.
So my advice on this topic is:
  1. Always make a clear distinction yourself when you talk about costs and value; and in particular
  2. don't ever let people use costs and value interchangeably: always ask what they mean when it's not clear,
  3. And finally, if the project justifies it, measure both the costs of the project and the value it delivers.

As a project manager you should go beyond getting things done and keep an eye on the business your in and your organization. This may seem a lot to ask for but in the end it will probably save you from a lot of problems and their respective headaches. It may be just the edge you need.
Managers will see you on their side as you not only speak their language but also share their concerns. And this can only be of advantage to you, right?

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