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9 Project Benefits: ROI

Contributors and Value Enablers

Don’t be seduced into thinking that that which does not make a profit is without value.

—Arthur Miller

Benefits Must Outweigh the Costs As important as it is to understand all of a project’s costs, it’s just as important to understand the different types of business benefits that can occur as a result of a project. These business benefits can be numerous and diverse and, as with costs, are sometimes hidden or misunderstood. Project teams need to explore all of the possible benefits and analyze the most relevant ones to determine the viability of a project investment. The aggregation of all of the business benefits must outweigh all of the project costs for a project investment to be worthwhile. Project costs outweighing business benefits is a sure red flag and a sign that re-evaluation may be required.

A cost-benefit analysis helps to determine how well, or how poorly, a project will deliver value to an organization. In simple terms, this analysis adds up positive factors (business benefits) and then subtracts the negative ones (project costs) to determine if the project is a worthy investment. The chal- lenge is not only identifying all of the costs and benefits, but properly quanti- fying them in business terms that show an accurate side-by-side comparison

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that stakeholders can understand. Of course other factors must be considered, such as the time value of money, discount rates, risks, sensitivity analysis, and other factors. But the first step is identifying and evaluating all costs and ben- efits that are applicable to a given project.

Comparing the business benefits to the project costs helps decision makers determine whether to go forward with a proposed project. Executive stake- holders are responsible to their companies for ensuring that selected projects within their purview represent the best use of company funds, can pay for themselves as quickly as possible, and will improve the companies’ overall financial position. The identification of the possible business benefits that a project may or may not deliver is an essential step in determining if the project will produce beneficial, lasting change. To paint an accurate picture for the potential of a project, project teams must carefully weigh the project costs to the business benefits, as shown in Figure 9.1.

We now delve into the various types of business benefits that may result from project investments. Understanding all of the business benefits is often necessary to tip the scale in concluding that project benefits outweigh the costs and, therefore, is a good project investment.

Re-defining Project Benefits The debate over hard vs. soft benefits has been going on for decades and simply won’t go away. Business leaders, especially CFOs, are reluctant to ap- prove projects without the benefits expressed in hard, tangible financial num- bers. Oftentimes these senior leaders don’t even want to hear about the soft

Project costs

• Equipment • Installation • Software • Project team • Maintenance • System upgrade • Training

• Items produced • Items sold • Reduced headcount • ROI, NPV, IRR • Break-even point • Employee productivity • Employee morale • Customer loyalty • Collaboration and innovation

Figure 9.1 Weighing the costs and benefits

ject Pro ben itsef

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Project Benefits: ROI Contributors and Value Enablers 139

(intangible) benefits that a project may deliver. What is my return on invest- ment (ROI)? The tangibles only mentality is pervasive across industries and continues to cause heartache for project sponsors and managers around the world who are responsible for crafting business cases to show financial justi- fication for their projects. It’s time to set the record straight on hard vs. soft benefits once and for all!

To begin, the terms hard, soft, tangible, and intangible—as they relate to project benefits—are misleading, confusing, and frequently used inappro- priately and interchangeably. Most projects produce the misunderstood soft benefits that, unfortunately, many professionals feel don’t add any value or contribute to the company’s bottom line. These benefits are often dismissed entirely, leaving project professionals at a disadvantage in telling a complete business story about their projects. Most of the soft benefits that projects can deliver are focused primarily on people, behaviors, customer satisfaction, em- ployee morale, or product branding. That is challenging for most project teams to quantify in monetary terms, especially given time and resource constraints. Even though these benefits may be challenging to quantify monetarily, that doesn’t mean they don’t add value to the business, aren’t tangible, or don’t contribute to a company’s bottom line. Additionally, it doesn’t mean that they can’t be quantified in monetary terms, but given project scope, timelines, and resource limitations, it’s usually not practical to do so. Soft benefits are often critical to an organization’s competitiveness, but they are usually eschewed for the easier to measure, objectively-based hard benefits and then dismissed from business cases altogether.

Project professionals usually understand the importance of the so-called in- tangible benefits that their projects will deliver, but leave them out of business cases to avoid the difficult task of quantifying them monetarily. This leads to an incomplete business case. A business case should tell a complete and com- pelling story. Dismissing important business benefits from this important doc- ument does a disservice to the potential project investment, as well as to the stakeholder teams impacted by the potential project. The soft, intangible ben- efits are more subjective and may appear to be less credible project measure- ments than the more tangible, hard benefits, but ignoring them altogether is not an option. Soft benefits not only complete the picture that project teams are painting for the stakeholders, but they can sometimes be the items that push a project over the top.

Managers typically focus on hard benefits, also called direct benefits, since they are easily understood and can be converted relatively easily to monetary units. Common examples of hard benefits include the number of units sold or the amount of units produced. It’s fairly straightforward to determine project ROIs from benefits such as increased sales and improved production output. Soft benefits—or intangibles—are more challenging to quantify and present in

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tangible, monetary terms. Improvements to employee morale or enhance- ments to the corporate image are often cited as examples for soft benefits.

To set the record straight on the proper use and application of hard and soft benefits for our projects, we begin by replacing the terms altogether! These terms have been confusing and frustrating project teams for far too long for myriad reasons. First of all, both hard and soft benefits are indeed tangible and can both be quantified, measured, and managed. Some ben- efits may be more difficult than others to quantify and express in financial terms, but nevertheless, all of them can be. The notion that certain benefits should be excluded from analysis because they can’t be readily converted to financial metrics and, therefore, don’t produce or enable business value is preposterous. Business benefits that result from projects are beneficial to organizations or they wouldn’t be considered benefits. We need to eliminate the use of the ambiguous terms hard, soft, tangible, and intangible when re- ferring to benefits and replace them with terms that are appropriate for our projects. These terms are ROI contributors and value enablers and are defined as:

• ROI contributors—can be reasonably and appropriately quantified and expressed monetarily and contribute directly to a project’s ROI.

• Value enablers—enable the achievement of business value, but are determined to be unreasonable and inappropriate to be expressed monetarily for inclusion in a project’s ROI analysis, given project re- quirements. Although these benefits will not contribute directly to a project’s ROI forecast, they can be quantified, measured, and managed to bring about significant business value in other ways.

Many project deployments will deliver value-enabling benefits, such as im- provement to employee morale, but stakeholders most likely won’t want to spend the money and resources necessary to forecast this value metric in mon- etary terms as part of the ROI study. Project teams should not dismiss certain benefits from their analysis, however, even though assigning monetary mea- surements to them is neither appropriate nor practical for their projects. All projects will have many benefits associated with them, some more important than others. Efforts should be made to quantify as much as feasibly possible in monetary terms to determine the overall financial returns of the project investments. Quantifying all of the benefits in hard, financial numbers, how- ever, certainly isn’t appropriate for most projects since this endeavor could create scope creep, timeline extensions, and cost overruns. Table 9.1 shows some comparisons between the various attributes of ROI contributors and value enablers.

ROI contributors are those benefits that should be included in project ROI studies and usually include value metrics relating to output, time, costs, and

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Project Benefits: ROI Contributors and Value Enablers 141

quality. These benefits are objectively based and can be easily quantified in financial terms. Examples of these ROI-contributing benefits are:

• Loans approved • Deliveries made • Equipment downtime • Time savings • Work stoppages • Overhead costs • Unit costs • Amount of re-work • Amount of scrap • Units produced • Unit defects • Service availability

When it’s not reasonable and appropriate, given project requirements, to quan- tify benefits in monetary terms and to include them in the ROI analysis, these benefits should be classified as value enablers. Examples of these benefits are:

• Job satisfaction • Employee efficiency

Table 9.1 Benefit comparisons

Project benefits

ROI contributors Value enablers

Objectively based Subjectively based (mostly)

Easy to understand, measure, and quantify More difficult to understand, measure, and quantify

Easy to gain project approval from execu- tive and steering committees with their use

More difficult to gain project approval from executive and steering committees with their use

Can be easily converted to monetary units Not as easy to convert to monetary units

Common business measurements that are universal

Specific measurements to a company that are usually behaviorally oriented

Easy to incorporate into cost models using common formulas and assumptions

More difficult to incorporate into cost models and require creative formulas and often con- fusing assumptions

Generally straightforward and feasible May be confusing and not totally believable

Can be monitored easily Not as easy to monitor

Do not require excessive estimating in forecasting results

Require estimating techniques in forecasting results

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• Customer satisfaction • Employee motivation • Employee knowledge base • Employee stress reduction • Time savings • Organizational commitment • Employee complaints • Work climate • Innovation • Community image • Investor image • Customer loyalty • Brand recognition • Teamwork • Communication • Internal conflict

In comparing these project benefit examples, it’s clear that the ROI contribu- tors are more straightforward and easier to quantify monetarily than the value enablers, but don’t think for a second that value-enabling benefits can’t be expressed this way as well. Everything, and I do mean everything, can be fore- casted, measured, and converted to quantitative, financial terms. Is it easy? Certainly not. Is it possible? Absolutely. For instance, employee morale is an often-cited benefit that many professionals feel is impossible to quantify. A company that specializes in human resources, employee development, and morale improvement, however, will tell you that it’s not only possible to quan- tify this important workforce metric, but necessary for a company’s long-term survival. This is not to say, however, that this is an easy task for everyday project professionals. For this reason, project teams, more often than not, will classify employee morale as a value-enabling benefit and not as an ROI contributor.

Scope, timelines, cost, and management intent are key factors that should be considered when determining whether a benefit is an ROI contributor or a value enabler. Based on the project requirements, project teams can col- lectively determine which benefits can be reasonably and appropriately con- verted to monetary units to contribute to the overall ROI study. All other benefits should then be considered as value enablers and expressed in other quantitative and qualitative terms that demonstrate their value to the business.

With this new categorization of benefits, project teams can now deter- mine, based on their distinct project requirements, which benefits should be incorporated into the overall ROI analysis and which ones should not. By in- corporating both ROI contributors and value enablers in the business case, project teams can tell the complete business story tailored around their spe- cific project requirements without excluding important business benefits.

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Project Benefits: ROI Contributors and Value Enablers 143

Even though certain benefits may not be included in the ROI evaluation, these benefits can still be quantified in other ways and managed to achieve targeted objectives. These benefits can be crucial to the success of a project and to the overall competitiveness of a company.

For certain projects it may not be such a good idea to expend resources on quantifying certain benefits in monetary terms to contribute to the overall project ROI. But for other projects it may make business sense to do so. It’s important to note, however, that even though some benefits will be classi- fied as value enablers and won’t be included in the overall ROI analysis, it’s still advisable to express them in other quantitative terms so that they can be measured and, therefore, managed throughout the course of a project. Quanti- tative analysis of value-enabling benefits can be extremely valuable to making key decisions that affect the business and in managing projects toward their targeted outcomes.

In using the employee morale example, if baseline measurements indicate that employees are at an average level of 2 out of 5 for morale (5 = highest, 1 = lowest), and at the conclusion of a project the average level increased to 4, important conclusions can be drawn. The management and project teams can say with certainty that the project was a success and should consider other types of initiatives to further improve morale or improve morale for other departments. Conversely, if the average score dropped to 1.5 at the conclusion of the project, key conclusions and lessons learned can also be made about the project; mainly that the project was detrimental to the workforce and, there- fore, damaging to the business.

Although simple, this example shows how a value-enabling benefit can be quantified to measure project success. This example can be explored even further with quantitative methods. Other tangible benefits of employee mo- rale could also be easily measured to provide management with important information about their businesses, such as employee turnover and absentee- ism. Increases in turnover and absenteeism can certainly be quantified and can indicate negative trends within the business that warrants management attention.

Labeling a benefit as a value enabler doesn’t necessarily mean that a hard ROI payoff doesn’t exist. It only means that the project team determined it cannot be reasonably or appropriately expressed in financial terms for the project at hand. Oftentimes, only specialized personnel would have to be en- gaged to determine the tangible benefits and express them in monetary terms. For instance, only a team of human resource experts may be qualified to cap- ture the hard-dollar benefits of improved employee morale. A project team may not find it cost-justifiable to bring such a team on board and will keep the employee morale benefit separate from the project ROI analysis. Value- enabling benefits should never be dismissed from a business case simply be- cause they aren’t included in the ROI analysis. They enable other benefits that

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Project Benefits: ROI Contributors and Value Enablers 145

may be even more important than those that contribute directly to the project ROI. Project investments that are difficult to measure certainly don’t auto- matically mean that they are bad investments.

Value-enabling benefits can be converted to monetary terms with the right expertise and analysis but more often than not, they aren’t. They are kept separate from the ROI analysis and this is fine for most projects. Attempts should still be made to show the importance of value-enabling benefits and how they can bring about beneficial change for an organization. These benefits must be presented in the business case to tell the complete business story and to accurately weigh all of the benefits the project will deliver. Some of the most important strategic benefits that a project can deliver are often the most difficult to quantify. These benefits can’t be omitted from the business case or the overall project approach. Project teams must strike a balance between those benefits that contribute directly to a project’s ROI and those benefits that enable business value in other ways. These benefits must be presented collectively to management teams to convey the complete business story. Fig- ure 9.2 shows an illustrative example of how both ROI contributors and value enablers should be evaluated in determining the viability of projects.

For many projects, nonmonetary benefits are just as valuable and have as much influence in the organization as the monetary benefits. But if these ben- efits aren’t included in the business case, it may be difficult to justify a project investment. Figure 9.3 illustrates an example of a business case that includes just those benefits that contribute to the project’s ROI. By not including all of the project benefits, the costs and risks outweigh the monetary benefits and is considered to be a bad investment.

Project costs

Project benefits

• Hardware/Software • Consultants/Vendors • Project team • Relocation • System upgrades • Training • Project risks

ROI contributors expressed monetarily • Units produced • Units sold • Defects reduced • NPV — $110,000 • ROI — 1.4% • IRR — 0.05% • Break-even — 2.6 years

Figure 9.3 Project costs vs. benefits (value-enabling benefits excluded)

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146 Strategic Project Management Transformation

When included in the business case, the value-enabling benefits may tip the scale to provide the necessary justification for a project. These benefits should not be considered less important than the benefits contributing to the ROI. Project teams need to evaluate all relevant benefits carefully to present a com- pelling story to the management team. Figure 9.4 shows how a project can be considered a good investment when all benefits are evaluated. As can be seen, adding the value enablers to the previous example tips the scale in favor of the project investment being considered a good one.

In a perfect world, all of the right decisions could be made by simply look- ing at the numbers. There would be clear monetary values for projects and the extent of our analysis would be choosing the projects and solutions with the best numbers. But alas, we’re not in a perfect business world and we need to do more analysis than simply making decisions based on the best numbers. But this is a good thing, too, because that would make managers and many project professionals obsolete! So we must still strive to assign monetary value to as many benefits as possible and strategically analyze the potential for the value enablers while having the vision to determine what value can be extracted from them and what actions will be required.

Cost Avoidance and Revenue Protection: ROI Contributors or Value Enablers? Many projects are implemented to avoid future costs or to protect future rev- enue streams as a result of unplanned events. As with all project investments,

Project costs

Project benefits • Hardware/Software • Consultants/Vendors • Project team • Relocation • System upgrades • Training • Project risks

ROI contributors expressed monetarily • 10% more units produced • 7.5% more units sold • 12.5% reduction in defects • NPV — $910,000 • ROI — 22.4% • IRR — 11.5% • Break-even — 1.6 years

Value-enabling benefits • Employee efficiency gains — 4.5% • Customer satisfaction improvement • Corporate image enhancement

Figure 9.4 Project costs vs. benefits (value-enabling benefits included)

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Project Benefits: ROI Contributors and Value Enablers 147

stakeholders want to see detailed business cases and financial justification for these cost avoidance and revenue protection projects. Project teams know the importance of these projects and the possible consequences that may occur if they are not implemented, but they often struggle with demonstrating positive ROIs, because cost avoidance and revenue protection can be rather nebulous when trying to quantify them. Quite often these struggles lead to contentious debates between project teams and stakeholders. Project teams, who possess the most knowledge of the situation at hand, often feel that the potential loss of revenue or increased costs due to an unplanned event is justification enough for these projects. Stakeholders, on the other hand, who are more re- moved from the situation want to see business and financial justification for these project investments.

Companies often implement cost avoidance/revenue protection projects to replace aging, but important, technical systems that are on their last legs. It’s common for companies to continue using systems and equipment long af- ter their depreciable lives. Why spend money replacing things that still work? Well, they won’t work forever and at some point they do need to be replaced. Operations personnel responsible for maintaining these systems, and the ones constantly applying bandages to keep them running, are usually the ones jumping up and down begging for a replacement. They know the time is near and they know the impact to the business could be significant when the time does come.

Those old, private branch exchanges (PBXs), or phone systems, tucked away in phone closets are classic examples of systems that companies continue us- ing long after their depreciable lives. Those things seem to last for an eternity! When the PBX administrator recognizes that the system is about to make its final phone call and recommends a replacement system, the typical response from stakeholders with budgeting responsibilities is, “Why? My phone works fine. Show me financial justification.” The PBX administrator, therefore, would rather keep applying bandages to the aging system than to take on the near- impossible task of showing a positive ROI. But it’s only a matter of time before the old PBX does indeed make its final phone call and results in the inability to receive customer orders and inquiries; the inability to correspond with cus- tomers, vendors, suppliers, and other business partners; decreased employee productivity and morale; and a tarnished reputation. You either pay now or you pay later, and most stakeholders don’t want to pay now for a project that doesn’t demonstrate a positive ROI, and they certainly don’t want to pay later with increased costs or decreased revenue. It’s no wonder operations personnel keep applying all of those bandages!

Stakeholders are responsible for maintaining budgets and don’t like to spend money unless it is absolutely necessary. When they are advised to spend money on a project to protect the business from an event that may or may not occur at some point in the future, they can become rather defensive and appre- hensive. They don’t want to unnecessarily spend money on a project to protect

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themselves from an unforeseen event that may not even occur, and they cer- tainly don’t want to be responsible for the consequences of such an event should it occur. Talk about a Catch-22! This is what keeps business leaders up at night. Let’s see how we can alleviate some of their anxieties by structuring these types of project proposals in a way that provides enough information so that business leaders are more comfortable in making these tough decisions. But when it comes to uncertainties, risks, negative ROIs, potential revenue losses, or potential cost increases, some anxiety will always remain. That’s just business. Nobody said it was going to be easy!

Let’s begin by looking at cost avoidance and revenue protection within the context of the business case. See if you can answer these two important questions:

1. Are the costs that are avoided due to a project implementation direct cost savings that contribute to a company’s bottom line and to an in- creased project ROI?

2. Are the future revenue streams that are protected, that is, maintained, due to a project implementation additional revenue streams for a com- pany that contribute to the bottom line and to an increased project ROI? Think about these questions for a while; close the book if you have to. This may come as a surprise, especially for those who have been treating these situations as direct cost savings and additional rev- enue streams in business cases, but the answer is a loud and resound- ing NO! Cost avoidance and revenue protection do not contribute to the bottom line nor do they increase project ROIs. I’ve seen project team members try six ways to Sunday to come up with ways to show positive ROIs for cost avoidance and revenue protection in the con- text of the business case, but, invariably, they fall terribly short. Let’s see why.

When a project team deploys a solution that enables the business to avoid unplanned future costs, they do a tremendous job and the business certainly benefits, but the business doesn’t realize direct cost savings as a result of those avoided costs. The costs that were avoided aren’t recorded anywhere in the accounting books as direct cost savings. Profit margins, therefore, do not in- crease. When a project team deploys a solution that enables the business to protect future revenue streams from decreasing, the project team once again did a super job and the business benefits greatly by not losing any revenue, but the business doesn’t generate additional revenue. The revenue that was pro- tected isn’t recorded anywhere in the accounting books as additional revenue. The business did not make any more money. Project teams must build their financial cost models to reflect the true nature of the business and not sim- ply in hypothetical situations. This is yet another reason why it’s imperative to include value-enabling benefits in the business case, such as uninterrupted

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Project Benefits: ROI Contributors and Value Enablers 149

service, untarnished reputation, and adherence to regulatory mandates, and not merely the ROI contributing benefits.

No matter how one tries to slice it, if a project investment doesn’t generate enough money to cover the costs, it won’t have a positive ROI in the business case. It doesn’t mean the project is a bad one or shouldn’t be implemented; it simply means that other factors must be carefully analyzed, such as the risk factors, to make this determination. If it is determined that the project should be implemented because the risks of not implementing it are too great, that project, then, is simply the cost of doing business. A company may not make money on the project, but they won’t lose any money or incur additional costs when, and if, an adverse future event does occur. When your mechanic tells you that your car needs new brakes, for instance, do you fork out the cash to buy them? Of course you do. It’s the price you have to pay for owning a car. By paying for new brakes now you avoid paying much more in the future when they inevitably fail. Companies often have to pay for projects that don’t deliver positive financial returns, but protect them from future events. It’s the price of doing business.

With the incessant desire to constantly show positive ROI measurements and with the confusion surrounding cost avoidance and revenue protection initiatives, many project teams do end up producing positive ROIs in their business cases. This is easy to do, albeit inaccurate, when cost avoidance is treated as direct cost savings and when revenue protection is treated as ad- ditional revenue. Business cases developed in this manner are laden with bo- gus assumptions, faulty logic, inaccurate cash flows, exaggerated forecasts, and crafty number crunching. That is not to say that project teams developed these business cases with deceptive motives, simply that they did not fully under- stand how to treat the cash flows surrounding these projects. This also does not mean that the projects weren’t worthwhile investments! It merely means that the business cases were produced incorrectly and inaccurately. Avoided costs are not direct cost savings and protected revenue is not additional rev- enue. Period.

So how do we approach the business case for cost avoidance and revenue protection projects? Like every other project; carefully, thoroughly, and with- out cutting corners or sugar-coating the results. All costs and benefits, to in- clude both ROI contributors and value enablers, must be clearly presented. Project teams still calculate ROI measurements, even if they are going to be negative. Stakeholders still need to know how much the project is going to cost them. Plus, there will always be several different options, solutions, and even risk mitigation plans to address business issues and unplanned events, each with its own cost and benefit structure. Businesses need to carefully compare the technical feasibility and financial attractiveness for the various options and solutions. Some solutions may require a total replacement or forklift upgrade, while others may only call for certain maintenance procedures or incremental

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upgrades. By mandating business cases for all project investments, employees are encouraged and empowered to be creative and to use their business acu- men to identify and present the most optimal solutions to address business obstacles and unplanned events.

Not all cost avoidance or revenue protection projects have to be absolute money losers. There will nearly always be some ROI contributing benefits when implementing new projects, deploying new technologies, or enhancing business processes. Investments in newer technologies, for instance, may pro- duce employee efficiency gains, enhance product quality, allow quicker access to vital information, or enable faster delivery times. These benefits must be accounted for in the business case. They may not cover the total costs of the project investment, but they will certainly make the project solution less ex- pensive and more attractive. This is especially useful when comparing compet- ing project solutions.

Unexpected and unplanned events are not predictable and are difficult to plan for in the budgeting process. Money is typically not set aside for such events. Events that occur on a fairly recurring basis, however, are more predict- able and can be proactively planned for and included in the budgets. Examples include routine maintenance, inventory overhead, and seasonal-related costs. When businesses discover that unplanned events may occur in the relatively near future, management and project teams must assess the risks of these po- tential events thoroughly to make the best business decisions and to take the most appropriate actions. Some of the questions that must be addressed in- clude: Is it absolutely necessary that we invest in a project to address these risks? Are the risks low enough where we don’t have to take any action? How much time can we deal with the risks before taking action? Project teams can greatly assist with these difficult decisions by gathering the necessary infor- mation, performing detailed analyses, and presenting their overall recommen- dations in the business case.

Project teams and stakeholders need to assess all of the risks involved with unplanned events carefully to make smart business decisions and to avoid overreacting and making poor decisions. Quite often it’s not always as doom and gloom as everyone initially thinks. Does Y2K come to mind? Many com- panies spent a ton of money on Y2K (year 2000) projects to prevent their systems from crashing at the turn of the millennium, as was alleged and even hyped. It’s essential for project teams to acquire a full understanding of two key aspects of potential future events, the probability and the impact. Probabil- ity is the possibility that the event will occur, and impact is the overall effect the event will have on the organization. Businesses may be able to avoid costly project investments by finding ways to reduce the probability or impact, or both. By reducing the probability and/or impact of an event, decision makers may be more comfortable with tolerating that new risk posture. Figure 9.5 is a graphical illustration of a probability and impact matrix. Low probability,

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Project Benefits: ROI Contributors and Value Enablers 151

low impact events can usually be tolerated. High probability and high impact events must be addressed. The ones in between pose more challenges for deci- sion makers.

Project managers may be familiar with these terms since they are frequently used in the development of project risk management plans. They often assess the probability and impact of certain project risks as high, medium, or low and monitor these risks throughout the project lifecycle. With cost avoidance and revenue protection analysis, however, project teams must get much more spe- cific than high, medium, or low when assessing the probability and impact of a potential event. Critical and costly business decisions are made based on these assessments, so it’s imperative that project teams achieve a level of detail and accuracy in their risk assessments so that business leaders can confidently take the best courses of action. Decision makers need to know the probabilities of certain events, expressed as percentages, with as much accuracy as possible to determine what actions, if any, are necessary. Additionally, if unplanned events are going to impact organizations by increasing costs or reducing revenue streams, management needs to know, with precision, the extent of the addi- tional costs incurred and how much revenue will be lost.

Figure 9.5 Probability and impact matrix

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152 Strategic Project Management Transformation

Corporate leaders certainly don’t want to pay for projects that have nega- tive ROIs, but if accurate probabilities and impacts of unplanned events are presented that clearly demonstrate the business justification for certain project initiatives, they will reach into the corporate coffers. These leaders, addition- ally, will not only approve these projects but will embrace them wholeheart- edly because they know that the projects will prevent their businesses from suffering major setbacks. Project teams need to articulate the probabilities and impacts of future events in a clear and concise way, with sufficient background information, to gain that confidence from the business leaders. The following example shows how the probability and impact of a certain event can be pre- sented in a business case:

• Based on business growth, customer demand, the age of the system, the warning indicators, and vendor expert judgment, the probability that the customer order system will exceed its data storage and operating capacity within the next six-to-twelve months is 15 to 20%. The impact of this event will be a forced system shutdown resulting in the inability to process customer orders for a minimum of 6 hours. The vendor costs to restore and upgrade the system will be $3.2MM and the revenue lost will be 5.3MM.

There are advanced statistical, scientific, and mathematical methods of deter- mining near-exact probabilities of occurrences and other risk-related elements, which is beyond the scope of this book. More power to those who have these tools at their disposal to assess risks and potential events. But for most project professionals in the trenches such tools aren’t readily available and they will have to rely on more conventional methods of estimating risk factors. Deter- mining the probabilities and impacts of future events to an acceptable degree of accuracy requires the input and information from stakeholders, subject mat- ter experts, vendors, consultants, trade journals, industry publications, and past experiences. Project teams need to gather and evaluate all risk elements by conducting interviews, brainstorming sessions, and focus groups; distributing data request forms and surveys; analyzing historical records and past trends; and by employing other methods that may be available to them.

A project team’s ability to forecast accurate risk profiles is greatly enhanced when a structured, proven approach is undertaken. In Chapter 7 we described the value-metrics framework that is a repeatable, reliable, and proven method that takes a data-driven approach to accurately identify and solidify value metrics. As project teams leverage this framework, they must also capture all of the risk elements associated with their projects. In using this framework to gather important business information, project teams will be able to de- termine, fairly accurately, the probabilities and impacts for certain business events since they will be tapping into expert judgment, prior experiences, a vast knowledge pool, historical records, and performance trends.

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Project Benefits: ROI Contributors and Value Enablers 153

Evaluating All Possible Outcomes to Determine the Best Project Solution I’d like to present a case study to drive home a point on choosing and managing a project toward the big picture and not merely a specific measure like ROI. Our example is outside of the business realm, but projects are similar to choosing and making life choice changes. When evaluating important life matters such as where to invest your money, where to send the kids to school, or in which neighborhood to buy a house, you have to analyze and evaluate all of the pros and cons of the various options and determine which one best satisfies your needs and requirements. Sound familiar? Let’s jump into our example:

Bill decides, with the encouragement of his wife and physician, to improve his overall health and wellness. Although Bill’s wife is primarily concerned with his weight loss, his doctor recommends embarking on a well-rounded fit- ness and nutrition program to attain the following health benefits:

• Weight loss • Improved cardio fitness • Increased strength • Increased energy level • Improved mood • Reduced cholesterol level

Bill researches several fitness and nutrition programs that may help him attain these health benefits. He does a thorough analysis of the costs and benefits of each of the programs and presents them to his wife, who happens to be the project sponsor for this initiative since she feels strongly that Bill needs to drop some pounds and, perhaps more importantly, the cost comes out of the family finances that she manages. She interrupts Bill’s detailed presentation of the pro- grams and exclaims, “I am concerned about bottom-line results. Show me the program where you will lose the most weight in the shortest amount of time at the lowest cost.” In other words, what is the return on my investment!?

Realizing that all of his research efforts were in vain, Bill then presents the least expensive program that promises significant weight loss in the shortest period of time. Without getting into the details of the program, Bill’s wife instructs him to embark on this program. She heard the numbers and liked what she heard. The project sponsor is encouraged by this program because she won’t have to spend too much money and is confident she can get a good return on her investment quickly in the form of weight loss. What she does not understand, however, is that this program calls for doing nothing but eat- ing a processed lab concoction once a day that has no proven nutritional value whatsoever. The concoction is specifically designed to curb the appetite with one dosage a day. Bill’s wife was so engrossed with the bottom-line results that

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154 Strategic Project Management Transformation

she did not take into account the details, risks, and long-term consequences of the program.

After starving for several weeks and ingesting nothing but this processed lab experiment, Bill did indeed lose weight—a lot of it. The project sponsor was happy because she achieved her project goals. She saved a ton of money by choosing the cheapest program and now feels that she has money at her disposal to spend elsewhere. Or does she? As one might imagine, the health implications from this cheap lab solution start to surface. Bill’s energy level dissipates, he has become frail and fragile, his heart barely beats, and his crank- iness is driving his wife up the wall. Bill’s wife, once the chief advocate for this inexpensive fitness and nutrition program, second guesses her decision and wishes she had never sponsored such a program.

To rectify the situation she sends Bill to see a specialist. I think we all know where this is going. The specialist’s treatment ends up costing more, much more, than the most expensive fitness and nutrition program that was initially presented. In fact, the specialist, the therapy sessions, the referrals, and other related costs end up costing more than all of the original programs combined! Can you think of any disastrous projects that had similar results? All of the extra money, time, frustration, and adverse health effects could have been avoided if more than simply cheap weight loss was considered and evaluated in the program selection process.

That was a fun and somewhat hyperbolic example of what could happen when only one attribute is assessed for competing initiatives. Similar results can occur and have occurred for projects when they are chosen and imple- mented based solely on ROI. When projects are selected based only on the numbers and nothing else, companies may end up paying more in the long run, much like Bill’s wife. As project professionals, we need to be careful and wary of project solutions that come at the lowest cost but promise the great- est returns. This doesn’t mean that inexpensive solutions with high returns are always dangerous, but they can be if all of their attributes aren’t evalu- ated carefully against business requirements and objectives. With low costs, quite often low quality ensues. When quality suffers, customer satisfaction decreases. When customer satisfaction decreases, sales suffer. And when sales suffer, corporations lose money. So much for just ROI!

Financial considerations should always be given top priority in assessing, prioritizing, and choosing projects. Every attempt should be made to convert all project data to monetary value and include them in the ROI study. After all, business is business and money must be made. But basing project decisions solely on ROI doesn’t account for the complete picture. All important project attributes should be taken into consideration to choose the best project solu- tion option. The best way to assess competing project proposals is to evaluate how each of them satisfies all of the identified value metrics, or business ben- efits, that the project is striving to achieve. These value metrics include both

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Project Benefits: ROI Contributors and Value Enablers 155

ROI contributing and value-enabling benefits. It’s worth reviewing the defini- tions of these important benefits again:

• ROI contributors—benefits that can be reasonably and appropriately quantified and expressed monetarily and that contribute directly to a project’s ROI.

• Value enablers—benefits that enable the achievement of business value but are determined to be unreasonable and inappropriate to be expressed monetarily for inclusion in a project’s ROI analysis, given project requirements. Although these benefits will not contribute di- rectly to a project’s ROI forecast, they can be quantified, measured, and managed to bring about significant business value in other ways.

It’s certainly not a crime to classify project benefits as value enablers and to keep them separate from the ROI analysis. It would be bad business practice, however, to cram certain benefits into ROI financial models using inaccurate assumptions, bad business logic, and lofty estimates. A project’s true ROI will never match the ROI of the business case if these ill-advised procedures are employed.

Stakeholders are accountable to the business for project results. They make the tough, strategic decisions that can either make or break their companies. Project teams can recommend certain projects or project solutions but, at the end of the day, it’s the stakeholders, especially the project sponsors, account- able to the business for the results. Project teams need to discern and recom- mend when it makes business sense to keep some of the benefits separate from the ROI analysis. Project sponsors will eventually have to prove the ROI numbers down the road and will have a lot of explaining to do when the fore- casted ROI returns weren’t realized for their project investments.

In defense of the ROI only, show me the money folks, they were probably never presented with a solid business case that clearly delineated the ROI con- tributing benefits from the value-enabling ones. They were probably presented with a laundry list of the so called soft benefits with no business context or quantifiable value measurements. As project professionals, we need to stop this bad business process and start helping business leaders make those dif- ficult project decisions by clearly conveying ROI numbers and other value- enabling benefits in quantitative, measurable terms. Stakeholders and other business leaders are under pressure and time constraints every single business day. Of course they are going to demand projects that make their companies money, as they should. But let’s show them there are other, more effective ways to make project decisions that are better suited for their organizations and better aligned with their business requirements.

Project teams must first begin by prioritizing the business benefits. What does the organization need to achieve? What are the nice to haves? What ben- efits aren’t necessary? In most cases, ROI will be the top priority. With the

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156 Strategic Project Management Transformation

priorities established, project teams can quickly determine if certain project so- lutions are even worth pursuing and can then narrow down the options. For in- stance, if voice recognition technology is a high priority for a company and certain vendors don’t offer this feature, project teams may be able to dismiss them from the running, saving valuable time and energy in the vendor selection process.

Once the benefits have been prioritized, project teams can determine how important they are to the organization by assigning a magnitude of importance to them. By assigning each benefit a weight of importance, project teams can better determine the most effective project solution to satisfy business priori- ties and requirements. There will always be several competing project options and solutions from which to choose. The challenge is choosing and implement- ing the best one for the organization. By prioritizing the project attributes and assigning weights to them, project teams can make informed decisions about which project solutions are best for their organization. The weighted attribute scoring approach, which is discussed in the next section, is an effective way to make an informed business decision on your project solution.

The Weighted Attribute Scoring Approach to Evaluating Project Solutions Bill and his wife would not have encountered such horrid results if they had chosen a fitness and nutrition program that not only addressed weight loss at a low cost, but satisfied all of the doctor’s requirements to some degree. But with inexpensive weight loss being the only attribute in which the project sponsor was concerned, the processed lab concoction diet made some business sense. After all, the ultimate goal of quick, inexpensive weight loss was indeed achieved. But we saw the ultimate results of the program. What would hap- pen if a financial services firm entrusted an untested, unproven, start-up se- curity vendor with all of its security needs because their solution had the best ROI? This solution may be cheap in the short term, but as security breaches arise and the integrity of the company’s confidential data is compromised, this cheap solution becomes quite expensive rather quickly when the risk reme- diation, lawsuits, and damage to their brand kicks in.

If Bill’s wife listened to the doctor and determined that weight loss was an important attribute, but not the only attribute, results could have been drastically different. Based on the doctor’s recommendations, Bill and his wife could have realistically prioritized and assigned weights of importance to each of the attributes and used these rankings to determine the most appropriate program. Let’s say they prioritized these attributes and assigned weights of importance to them in percentages:

1. Weight loss—20% 2. Increased energy level—15% 3. Improved cardio levels—15%C

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2 01 0. J . Ro ss P ub li sh in g. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d un de r

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Project Benefits: ROI Contributors and Value Enablers 157

4. Increased strength—10% 5. Improved mood—10% 6. Reduced cholesterol levels—10% 7. Program costs—20%

As with any good attribute weighting exercise, the totals equal 100%. Aligned with their initial plan, Bill’s wife still had weight loss and program costs as top priorities, but they also included several other key factors in the decision making process. It’s starting to become clear that the processed lab concoction diet could have been eliminated as a viable option early on in the process, but let’s dive deeper into the weighted attribute scoring approach to definitively determine the best program for Bill.

The weighted attribute scoring approach is a systematic way of selecting the most appropriate project investments based on business priorities and require- ments. The approach involves identifying all of the relevant project attributes and allocating weights to each of them to reflect their relative importance.We then assign scores to them for each project option to reflect how each option performs in relation to each attribute. The result is a single-weighted score for each project option that is then used to compare the overall performance of the various project options. This is an effective method because it shows both the financial and nonfinancial benefits of various project options.

With the weighted attribute scoring approach, project teams and stake- holders can attain a better comprehension of the big picture and can evaluate all of the possible outcomes of various project solutions. We can still prioritize the financial ROI benefits of our projects, but this approach allows for other attributes to be included in the project decision making process as well. The diligence of evaluating numerous and various business attributes reduces the risk associated with a project. If you drop the basket with all of your eggs in it, what are you cooking for breakfast? Evaluate all of the project attributes carefully.

Typically, you’ll be faced with numerous solutions initially that can satisfy project and business requirements to some degree. The key is choosing the best project solution investment, hence our reliance on the weighted attribute scoring approach to quantify the various project attributes for each project option.

The weighted attribute scoring matrix is easy to develop and understand. As with other important project activities, key stakeholders should be in- volved in determining the priorities and weightings of the various project at- tributes. Once the team is assembled, they begin the process by weighting each attribute by its relative contribution and importance to the organization’s goals and strategic plan. The team then evaluates each project option or ven- dor solution by its relative contribution to each of the project attributes. The project team then assigns a range of values for each attribute ranging from low (0) to high (5). These values represent a project solution’s ability to satisfy Co

py ri gh t © 2 01 0. J . Ro ss P ub li sh in g. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d un de r

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158 Strategic Project Management Transformation

the project attribute. For instance, a 0 ranking for a certain attribute means that a project solution does not satisfy the attribute at all, whereas a 5 ranking indicates that the project solution completely satisfies the attribute. A 3 rank- ing means the project attribute is somewhat, or moderately, satisfied. Then it’s simple multiplication and addition. First, multiply each attribute’s weight by the assigned ranking. This gives the overall score for that specific attribute. Then, add up all of the attributes scores to obtain the total score for a project solution. The project proposal with the highest score is the best project.

An added benefit to this approach is that it is collaborative and drives team buy-in for the solution by allowing all key stakeholders to agree on the value of each benefit that will cause the best solutions to rise to the top. Let’s apply the weighted attribute scoring approach to the various fitness and nutrition programs that Bill researched. Table 9.2 shows the four programs and the as- sociated rankings and scores that Bill and his wife collectively determined for each of the attributes.

As can be seen, each of the four programs has specific rankings for each of the attributes based on their abilities to satisfy the attribute. For instance, the heart- healthy program has a 5 ranking for the increased cardio-level attribute because this particular program focuses intently on cardiovascular health and fully satisfies this particular project attribute. The strength program has a 5 ranking for increased strength because it completely satisfies this attribute, but only a 1.5 ranking for weight loss, since this program focuses more on bulking up muscles rather than losing weight. The processed lab concoction has a 5 ranking for weight loss and program costs, but low rankings for all of the other attributes for obvious reasons. The general fitness program has consistently high rankings for all of the attributes and has an overall score of 3.85. Bill and his wife should have chosen this program.

As noted, the weighted attribute scoring approach takes into account the big picture and includes analysis of all of the relevant project attributes. All of the project value metrics that were identified should be used as attributes for the weighted attributes scoring matrix, to include ROI contributing and value-enabling benefits. There may be instances in which stakeholders want to include other attributes in addition to these value metrics, usually to account for additional risk. Common attributes that stakeholders frequently include when evaluating project solutions are:

• Implementation risk • Employee acceptance • Impact on existing operations • Equipment or service downtime • Impact on safety • Customer acceptance • Compliance with government or other regulations • Alignment with strategic intent and corporate objectives

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Project Benefits: ROI Contributors and Value Enablers 159

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160 Strategic Project Management Transformation

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Project Benefits: ROI Contributors and Value Enablers 161

These attributes can be classified simply as other project attributes in the weighted attribute scoring matrix. Table 9.3 shows an example weighted at- tribute scoring matrix for four competing project proposals.

As can be seen in the matrix, the project team determined that the ROI contributing benefits were the most important attributes to consider in the evaluation process and, thus, has the highest overall weight of 55%. The value- enabling benefits are important, but not as important as the ROI contributing ones, and have an overall weight of 25%. The other project attributes equal a weighting of 20%. In assigning values for each of the value attributes for each of the project options, we see that Project Beta is the best project solution based on its overall score of 4.15.

There may be cases in which some of the overall scores are the same or too close to determine which project solution has the advantage. In baseball, whenever there is a close play, umpires rely on the unofficial rule of a tie goes to the runner. In the weighted attribute scoring matrix, whenever there is a tie, or whenever the numbers are too close to make a definitive decision, priority always goes to the project with the best financial ROI metrics. All things being equal, money trumps all other attributes and the project solutions with the best financial returns should be given top priority. Additionally, whenever the scores are too close and the ROI metrics are similar, projects with less inherent risks should be given priority over those that have more risks. Business leaders strive to minimize their risk exposure as much as possible. With all else being equal, projects that have fewer risks should be chosen over those that have more.

Professional Development Game Plan for Success 1. If you’re like most professionals, the terms tangible, intangible, hard

and soft, in the context of project and business benefits, have been haunting you for years. How do you deal with these confusing and ambiguous terms? How do you apply them to your business cases? Do you quantify everything in monetary terms? How accurate do you think you’ve been? In other words, did your company receive the money that you forecasted and record it in the books? Do you dismiss those benefits that are difficult to quantify monetarily? Could these dismissed benefits have been quantified and managed in other ways to bring about value to the business?

Action Plan

a. Evaluate and analyze your approach to categorizing, quantifying, and presenting project and business benefits in your business cases. Revisit two or three of your prior projects and carefully examine

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162 Strategic Project Management Transformation

the forecasted benefits and how you presented them. Was there a clear delineation between those benefits that contribute directly to the ROI and those that do not? Do all of the benefits in the ROI analysis truly and directly contribute to the company’s bottom- line results? How did you handle the so-called soft benefits? Did you quantify them in other ways to show the value they can de- liver? For each of these projects, analyze the forecasted benefits (value metrics) and write down all of the mistakes, faulty logic, erroneous assumptions, omissions, inaccurate categorizations, and improper conversions to monetary units that you can find. Try to find five to eight of these missteps for each of your projects.

b. Now think about your current or future projects. How will you categorize and incorporate project and business benefits into the business case? Consider how we defined benefits in this chapter as ROI contributors and value enablers. Write down three to five strategies you will initiate to properly and accu- rately incorporate project benefits into your project proposals. Assume that you are accountable to the business for your ROI forecasts and at the end of the project your executives will compare your ROI forecasts to actual business results. With this in mind, how will you approach quantifying and presenting the benefits in your business case?

2. Companies will always have many solutions to any given business problem. The challenge is choosing and implementing the best solu- tion. How do you ensure that the best project solutions are always chosen and implemented? How do you prioritize project attributes and evaluate competing project solutions? Do you even embark on such endeavors?

Action Plan

a. How did you formally evaluate your last two or three project solution options? On review, can you identify any factors that weren’t identified that should have been included? How would these additional factors have affected the solution choice? Make sure you review the number of vendors chosen, technologies that were assessed, how far you reached out to gain baseline data and industry best practices. Was there a better solution that wasn’t evaluated?

b. What will you do to ensure that all of the business priorities are firmly established and that the best solutions to address those priorities are implemented? Write down three to five strategies you will take to ensure that the best project is chosen to address

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Project Benefits: ROI Contributors and Value Enablers 163

business issues and satisfy management requirements. Leverage the weighted attribute scoring methodology that was discussed in this chapter. Be creative!

Reference 1. Keen, Jack M., and Bonnie Digrius. 2003. Making Technology Investments

Profitable. Hoboken, NJ: John Wiley.

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