Project Execution 2

COMPUTERWORLD April 3 , 2 0 0 6 MAIU6EMENT www.computerworld.com

Earned Value Management ^ " ^ " ••• ^ " ^ " ^ " • • " ^ ^ * ^ » ^ " ^ " • • ^ » ^ « ^ « ^ » mtt ••• ^m ^m mm mm ^m ^m • • MH ^ B ^ B ^M ^m ^m

What it is, how it works and why your projects need it. By Mary K. Pratt • ^ YOUR IT shop isn't using I ^l earned value management, I ^ P you may want to start thinking I I about it. EVM, which has its I I roots in the U.S. Department I I ofDefense, is moving into

private industry. More important, it's coming to IT.

When used properly, EVM helps team members, project managers and their bosses accurately gauge progress

against an established project plan. EVM also enables teams to accurately assess where they'll be in the future, allowing managers to make key deci- sions on resource allocation or revi- sions before projects unexpectedly spin out of control.

"When people report percent com- plete, you might get 'I'm 50% complete,' based on that person's intuitive knowl- edge. Earned value analysis takes that

guesswork out of it," says Robert Leto, director of the IT effectiveness prac- tice at PricewaterhouseCoopers Advi- sory Services LLP in New York.

The Defense Department has em- ployed EVM for years, requiring its contractors to use it for reporting on federal projects.

So, what exactly is EVM? "It eomes with a reputation for being complicated and difficult, hut I don't think anything could be farther from the truth," says John M. Nevison, president of Oak Associates Inc., a Maynard, Mass.- bascd firm that provides consulting and training services related to project management.

EVM is hased on several figures that are used in calculations to determine whether a project is adhering to sched- ule and budget. Results can be mea- sured in terms of money or time.

EVM is not about producing perfect scores. "It's accepted that you're going to vary from your plan," says Marilyn S. McCauley, owner of McManage- ment Group, an EVM consulting and training firm in Dayton, Ohio. "If I see [perfect scores] every time, someone's cooking the books, because that's not reality."

The point of EVM, she says, is "to see how close we are against what we planned, and when we're not close, to ask, 'Why aren't we there, and

what are we doing about it?'" This is where EVM offers much

of its value. If project managers and their executives can see early on that projects are falling behind schedule or going over budget, they can make key decisions about how to proceed, rather than reacting to problems after the fact.

"What earned value does is provide you navigational tools early to let you look ahead to see where you'll be if you do nothing," Nevison says.

Early Warning Earned value calculations can be done at various points during a project, but the numbers tend to stabilize when you're about 20% through, says Quen- tin W. Eleming, co-author of Earned Value Project Management (Project Management Institute, 2006) and a management instructor at the Univer- sity of California, Irvine.

"So the point is, if you're 20% through the project, you can predict what the final costs are going to be, plus or minus 10%," Fleming says. "It's a very powerful tool, and here's what's powerful: If you're 20% through a proj- ect and you've heen authorized $1 mil- lion, and your cost efficiency to date suggests you're going to need $2 mil- lion to finish the project, then manage- ment has decisions [to make]."

An EVM Primer Earned value management is based on several figures that are used to calculate a project's progress. Vou can measure in dollars or time.

Planned value (PV): This is the value of all resources needed to do the work to meet the project's ob- jective. Although most project man- agers calculate PV in dollar terms, some calculate it in terms of time - the number ot hours it's expected io take to complete the project.

Let's take a very basic example. We've budgeted $200 to buy, set up, network and test a new system. We've budgeted $50, $75, $50 and $25, respectively, in materials, labor and other costs for those four phases.

Keep in mind, though, that the $50 set aside to buy the system doesn't just cover the cost of the actual hardware and software. It also takes into account the value of time that will be required to find the right system, the time that will be needed to fill out the purchase or- ders, the time it will take to actually buy the system and so on.

"The basis for earned value management is worked performed, not money spent," says Marilyn S. McCauley, owner of McManage- ment Group, an EVM consulting and training firm. Our PVs are $50, $75, S50 and $25.

Budgeted (cost) at completion (BAC): This is the sum of all PVs - the total for all phases. In our

example, BAC is S200.

Earned value (EV): As our team completes portions of the planned work, we check off that work and the amount of money (or time) it should have taken to do it according to the project plan. Project managers caiculate EV at predetermined times based on the plan, typically at the end of the company's accounting period. McCauley says.

We've completed Phase 1 - buy- ing the system - within the planned time frame. Check that off as done. Our EV is S50.

Actual cost (AC): This can also be measured in dollars or time. In a perfectly executed project, EV and AC are the same. Bui in our example, let's say we actually used S60 in resources to buy that sys- tem. Our AC is S60.

Once you have these figures - PV, BAC. EV and AC - you can

calculate other numbers that tell you about your progress on a project. Here are some of those calculations:

Schedule performance index (SPI):EV divided by PV for a particular phase of a project. In our example, that's 50/50 = 1, a per- fect score for Phase 1, indicating that we're on target for schedule.

"I said I'd do $50 worth of work, and I did $50 worth of work," Mc- Cauley says.

Cost performance index (CPI): EV divided by AC. For our project that's 50/60 = 0.83, indicating that we're underperforming for our costs. "For every dollar I'm spend- ing, I'm oniy getting 83 cents worth of work," McCauley explains.

In a perfect project, the answer is 1. But most projects fall below that because most projects miss their targets.

Estimated (costs) at completion

(EAC): BAC divided by CPI. Tfie answer is a forecast value in either dollars or hours that indicates the projected final project costs or time. There are various formulas for EAC, McCauley says, but this is one of the easiest to use. In our exam- ple, that's 200/0.83 = 240.96. This indicates that at the rate we're go- ing, the final cost will be $240.96 rather than our planned $200,

Schedule variance (SV): Sub- tract PV from EV. In our example, our earned value is $50 because we've done the first of our four phases: We bought the system. The PV for that first phase was actually $50, So 5 0 - 5 0 = 0, That's a perfect score, so we're on schedule.

Cost variance (CV): Subtract AC from EV. In our exampie, that's 50 • 60 = -10, indicating that we've overspent by $10. If we were on target, CV would be zero.

-MARY K.PRATT

www.computerworld.com MANAGEMENT April 3 , 2 0 0 6 COMPUTERWORLD 49

Despite EVM's reputation for offer- ing insight into project progress, many IT executives aren't yet embracing the discipline, partly because the under- pinnings that make it work aren't in place.

"The concept of earned value is really elementary project management. But the problem with many IT organi- zations is that they don't use rigorous project management methodology," says Dan Gingras, a partner in the in- formation technology leadership prac- tice at Tatum LLC, a consulting firm in Atlanta.

"In order to do earned value man- agement, you have to have a good hud- get," he says. "In order to have a good budget, you have to back up one step further and follow a good project man- agement methodology."

Project managers and IT leaders need to accurately define a project's scope and requirements, develop spe- cific work packages and work break- down structures, and then establish

a good hudget, says Gingras, who also teaches technology strategy and system design as an adjunct faculty member at Boston University's Metro- politan College.

Moreover, Gingras and others say that employing EVM in projects takes plenty of training. There are books and multiday courses that teach the practice.

So, why go through all this upfront work? Gingras points to a well-known fact: "Significant numhers of projects aren't completed on time or on budget, or they don't deliver what they're sup- posed to deliver."

EVM can help improve your chances of project success, says McGauley. "The idea hehind earned value is see- ing what you need and when you need it. It's all about management, and it's all ahout control." •

Pratt is a Computerworld contributing writer in Waltham, Mass. Contact her at [email protected].

Whos Driving The EVM Bandwagon?

Earned value management is beginning to catch on, says Quentin W. Flaming, a management instructor at the Uni- versity of California, Irvine, but many in IT resist it because it would require changes in how they set up and manage projects. For example, IT shops would have to thoroughly define, scope and budget their projects in advance rather than employ incremental development, as many currently do, Fleming says.

Despite this reluctance, CtOs may find CEOs and CFOs asking them to use EVM as a way to bring more transpar- ency to projects, says Robert Leto, director of the IT effectiveness practice at PricewaterhiHiseCoopers Advisory Services. "Will the (T community em- brace it? t don't know if they will, or if they'll be mandated by the boards or the CFOs," he says.

Pressure to use EVM in IT is also coming from the federal govemment. Marilyn S. McCauley, owner of EVM consulting and training firm McManage- ment Group, says the Sarbanes-Oxley Act's requirements for greater financial transparency are becoming a driver for EVM. And the president's hscal 2 0 0 7 budget calls for IT departments at more government agencies and organizations to apply EVM.

"It's becoming a requirement in IT industries that deal with the govern- ment," says McCautey. And that, she says, wilt have a ripple effect that could spread well beyond federal departments and contractors.

Using EVM In IT, McCauley says, "is not a matter of if; it's a matter of when."

- MARY K. PRATT

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