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PROJECT MANAGEMENT

THE MANAGERIAL PROCESS 7E

ERIK W. LARSON CLIFFORD F. GRAY

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Project Management:

The Managerial Process Seventh Edition

Erik W. Larson

Clifford F. Gray Oregon State University

PROJECT MANAGEMENT: THE MANAGERIAL PROCESS, SEVENTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014 and 2011. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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Library of Congress Cataloging-in-Publication Data

Names: Gray, Clifford F., author. | Larson, Erik W., 1952 author. Title: Project management : the managerial process / Erik W. Larson, Oregon State University, Clifford F. Gray, Oregon State University. Description: Seventh edition. | New York, NY : McGraw-Hill Education, [2018] | Clifford F. Gray is the first named author on the earlier editions. Identifiers: LCCN 2016040029 | ISBN 9781259666094 | ISBN 1259666093 (alk. paper) Subjects: LCSH: Project management. | Time management. | Risk management. Classification: LCC HD69.P75 G72 2018 | DDC 658.4/04—dc23 LC record available at https://lccn.loc.gov/

2016040029

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

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Erik W. Larson ERIK W. LARSON is professor of project management at the College of Business, Oregon State University. He teaches executive, graduate, and undergraduate courses on project management and leadership. His research and consulting activities focus on project management. He has published numerous articles on matrix management, product development, and project partnering. He has been honored with teaching awards from both the Oregon State University MBA program and the University of Oregon Executive MBA program. He has been a member of the Portland, Oregon, chapter of the Project Management Institute since 1984. In 1995 he worked as a Ful- bright scholar with faculty at the Krakow Academy of Economics on modernizing Polish business education. He was a visiting professor at Chulalongkorn University in Bangkok, Thailand, and at Baden-Wuerttemberg Cooperative State University in Bad Mergentheim, Germany. He received a B.A. in psychology from Claremont McKenna College and a Ph.D. in management from State University of New York at Buffalo. He is a certified project management professional (PMP) and Scrum Master.

Clifford F. Gray CLIFFORD F. GRAY is professor emeritus of management at the College of Busi- ness, Oregon State University. He has personally taught more than 100 executive development seminars and workshops. Cliff has been a member of the Project Man- agement Institute since 1976 and was one of the founders of the Portland, Oregon, chapter. He was a visiting professor at Kasetsart University in Bangkok, Thailand, in 2005. He was the president of Project Management International, Inc. (a training and consulting firm specializing in project management) 1977–2005. He received his B.A. in economics and management from Millikin University, M.B.A. from Indiana Univer- sity, and doctorate in operations management from the College of Business, University of Oregon. He is certified Scrum Master.

About the Authors

vii

“Man’s mind, once stretched by a new idea, never regains its original dimensions.”

Oliver Wendell Holmes, Jr.

To my family, who have always encircled me with love and encouragement—my parents (Samuel and Charlotte), my wife (Mary), my sons and their wives (Kevin and Dawn, Robert and Sally) and their children (Ryan, Carly, Connor and Lauren).

C.F.G.

“We must not cease from exploration and the end of all exploring will be to arrive where we began and to know the place for the first time.”

T. S. Eliot

To Ann, whose love and support have brought out the best in me. To our girls Mary, Rachel, and Tor-Tor for the joy and pride they give me. And to our grandkids, Mr. B, Livvy, and Xmo, whose future depends upon effective project management. Finally, to my muse, Neil—Walk on!

E.W.L

viii

Our motivation in writing this text continues to be to provide a realistic, socio-technical view of project management. In the past, textbooks on project management focused almost exclusively on the tools and processes used to manage projects and not the human dimension. This baffled us since people not tools complete projects! While we firmly believe that mastering tools and processes is essential to successful project management, we also believe that the effectiveness of these tools and methods is shaped and determined by the prevailing culture of the organization and interpersonal dynamics of the people involved. Thus, we try to provide a holistic view that focuses on both of these dimensions and how they interact to determine the fate of projects. The role of projects in organizations is receiving increasing attention. Projects are the major tool for implementing and achieving the strategic goals of the organization. In the face of intense, worldwide competition, many organizations have reorganized around a philosophy of innovation, renewal, and organizational learning to survive. This philosophy suggests an organization that is flexible and project driven. Project management has developed to the point where it is a professional discipline having its own body of knowledge and skills. Today it is nearly impossible to imagine anyone at any level in the organization who would not benefit from some degree of expertise in the process of managing projects.

Audience

This text is written for a wide audience. It covers concepts and skills that are used by managers to propose, plan, secure resources, budget, and lead project teams to suc- cessful completions of their projects. The text should prove useful to students and prospective project managers in helping them understand why organizations have developed a formal project management process to gain a competitive advantage. Readers will find the concepts and techniques discussed in enough detail to be imme- diately useful in new-project situations. Practicing project managers will find the text to be a valuable guide and reference when dealing with typical problems that arise in the course of a project. Managers will also find the text useful in understanding the role of projects in the missions of their organizations. Analysts will find the text useful in helping to explain the data needed for project implementation as well as the opera- tions of inherited or purchased software. Members of the Project Management Insti- tute will find the text is well structured to meet the needs of those wishing to prepare for PMP (Project Management Professional) or CAPM (Certified Associate in Project Management) certification exams. The text has in-depth coverage of the most critical topics found in PMI’s Project Management Body of Knowledge (PMBOK). People at all levels in the organization assigned to work on projects will find the text useful not only in providing them with a rationale for the use of project management processes but also because of the insights they will gain on how to enhance their contributions to project success. Our emphasis is not only on how the management process works, but more impor- tantly, on why it works. The concepts, principles, and techniques are universally

Preface

x Preface

applicable. That is, the text does not specialize by industry type or project scope. Instead, the text is written for the individual who will be required to manage a variety of projects in a variety of different organizational settings. In the case of some small projects, a few of the steps of the techniques can be omitted, but the conceptual frame- work applies to all organizations in which projects are important to survival. The approach can be used in pure project organizations such as construction, research orga- nizations, and engineering consultancy firms. At the same time, this approach will benefit organizations that carry out many small projects while the daily effort of deliv- ering products or services continues.

Content

In this and other editions we continue to try to resist the forces that engender scope creep and focus only on essential tools and concepts that are being used in the real world. We have been guided by feedback from practitioners, teachers, and students. Some changes are minor and incremental, designed to clarify and reduce confusion. Other changes are significant. They represent new developments in the field or better ways of teaching project management principles. Below are major changes to the seventh edition. ∙ Learning objectives have been established for each chapter and the corresponding

segment has been marked in the text. ∙ Chapter 16 Oversight has been eliminated and critical information on project matu-

rity models is now part of Chapter 14. ∙ Chapter 18 Project Management Career Paths has been eliminated and essential

information from this chapter is now in Chapter 1. ∙ A new set of network exercises have been developed for Chapter 6. ∙ A new set of crashing exercises have been developed for Chapter 9 which introduce

crashing concepts in a developmental way. ∙ The Chapter 2 Appendix on Request for Proposal is now part of Chapter 12. ∙ Terms and concepts have been updated to be consistent with the sixth edition of the

Project Management Body of Knowledge (2015). ∙ New student exercises and cases have been added to chapters. ∙ The Snapshot from Practice boxes feature a number of new examples of project

management in action as well as new Research Highlights that continue to promote practical application of project management.

∙ The Instructor’s Manual contains a listing of current YouTube videos that corre- spond to key concepts and Snapshots from Practice.

Overall the text addresses the major questions and challenges the authors have encountered over their 60 combined years of teaching project management and con- sulting with practicing project managers in domestic and foreign environments. These questions include: What is the strategic role of projects in contemporary organiza- tions? How are projects prioritized? What organizational and managerial styles will improve chances of project success? How do project managers orchestrate the complex network of relationships involving vendors, subcontractors, project team members, senior management, functional managers, and customers that affect project success? What factors contribute to the development of a high-performance project team? What project management system can be set up to gain some measure of control? How do managers prepare for a new international project in a foreign culture?

Preface xi

Project managers must deal with all these concerns to be effective. All of these issues and problems represent linkages to an integrative project management view. The chapter content of the text has been placed within an overall framework that inte- grates these topics in a holistic manner. Cases and snapshots are included from the experiences of practicing managers. The future for project managers appears to be promising. Careers will be determined by success in managing projects.

Student Learning Aids

Student resources include study outlines, online quizzes, PowerPoint slides, videos, Microsoft Project Video Tutorials and web links. These can be found in Connect.

Acknowledgments

We would like to thank Scott Bailey for building the end-of-chapter exercises for Connect and Tracie Lee for reviewing them; Pinyarat Sirisomboonsuk for revising the PowerPoint slides; Oliver F. Lehmann for providing access to PMBOK study questions; Ronny Richardson for updating the Instructor’s Manual; Angelo Serra for updating the Test Bank; and Pinyarat Sirisomboonsuk for providing new Snapshot from Practice questions. Next, it is important to note that the text includes contributions from numerous stu- dents, colleagues, friends, and managers gleaned from professional conversations. We want them to know we sincerely appreciate their counsel and suggestions. Almost every exercise, case, and example in the text is drawn from a real-world project. Special thanks to managers who graciously shared their current project as ideas for exercises, subjects for cases, and examples for the text. Shlomo Cohen, John A. Drexler, Jim Moran, John Sloan, Pat Taylor, and John Wold, whose work is printed, are gratefully acknowledged. Special gratitude is due Robert Breitbarth of Interact Management, who shared invaluable insights on prioritizing projects. University stu- dents and managers deserve special accolades for identifying problems with earlier drafts of the text and exercises. We are indebted to the reviewers of past editions who shared our commitment to elevating the instruction of project management. The reviewers include Paul S. Allen, Rice University; Denis F. Cioffi, George Washington University; Joseph D. DeVoss, DeVry University; Edward J. Glantz, Pennsylvania State University; Michael Godfrey, University of Wisconsin–Oshkosh; Robert Key, University of Phoenix; Dennis Krum- wiede, Idaho State University; Nicholas C. Petruzzi, University of Illinois–Urbana/ Champaign; William R. Sherrard, San Diego State University; S. Narayan Bodapati, Southern Illinois University at Edwardsville; Warren J. Boe, University of Iowa; Burton Dean, San Jose State University; Kwasi Amoako-Gyampah, University of North Carolina–Greensboro; Owen P. Hall, Pepperdine University; Bruce C. Hartman, University of Arizona; Richard Irving, York University; Robert T. Jones, DePaul University; Richard L. Luebbe, Miami University of Ohio; William Moylan, Lawrence Technological College of Business; Edward Pascal, University of Ottawa; James H. Patterson, Indiana University; Art Rogers, City University; Christy Strbiak, U.S. Air Force Academy; David A. Vaughan, City University; and Ronald W. Witzel, Keller Graduate School of Management. Nabil Bedewi, Georgetown University; Scott Bailey, Troy University; Michael Ensby, Clarkson University; Eldon Larsen, Marshall University; Steve Machon, DeVry University–Tinley Park; William Matthews, William Patterson

xii Preface

University; Erin Sims, DeVry University–Pomona; Kenneth Solheim, DeVry University–Federal Way; and Oya Tukel, Cleveland State University. Gregory Anderson, Weber State University; Dana Bachman, Colorado Christian University; Alan Cannon, University of Texas, Arlington; Susan Cholette, San Francisco State; Michael Ensby, Clarkson University; Charles Franz, University of Missouri, Columbia; Raouf Ghattas, DeVry University; Robert Groff, Westwood College; Raffael Guidone, New York City College of Technology; George Kenyon, Lamar University; Elias Konwufine, Keiser University; Rafael Landaeta, Old Dominion University; Muhammad Obeidat, Southern Polytechnic State University; Linda Rose, Westwood College; Oya Tukel, Cleveland State University; and Mahmoud Watad, William Paterson University. Victor Allen, Lawrence Technological University; Mark Angolia, East Carolina University; Alan Cannon, University of Texas at Arlington; Robert Cope, Southeastern Louisiana University; Kenneth DaRin, Clarkson University; Ron Darnell, Amberton University; Jay Goldberg, Marquette University; Mark Huber, University of Georgia; Marshall Issen, Clarkson University; Charles Lesko, East Carolina University; Lacey McNeely, Oregon State University; Donald Smith, Texas A&M University; Peter Sutanto, Prairie View A&M University; Jon Tomlinson, University of Northwestern Ohio. We thank you for your many thoughtful suggestions and for making our book better. Of course we accept responsibility for the final version of the text. In addition, we would like to thank our colleagues in the College of Business at Oregon State University for their support and help in completing this project. In par- ticular, we recognize Lacey McNeely, Prem Mathew, Keith Leavitt and Pauline Schlip- zand for their helpful advice and suggestions. We also wish to thank the many students who helped us at different stages of this project, most notably Neil Young, Saajan Patel, Katherine Knox, Dat Nguyen, and David Dempsey. Mary Gray deserves special credit for editing and working under tight deadlines on earlier editions. Special thanks go to Pinyarat (“Minkster”) Sirisomboonsuk for her help in preparing the last four editions. Finally, we want to extend our thanks to all the people at McGraw-Hill Education for their efforts and support. First, we would like to thank Dolly Womack, and Christina Holt, for providing editorial direction, guidance, and management of the book’s devel- opment for the seventh edition. And we would also like to thank Melissa Leick, Jennifer Pickel, Egzon Shaqiri, Bruce Gin, and Karen Jozefowicz for managing the final production, design, supplement, and media phases of the seventh edition.

Erik W. Larson

Clifford F. Gray

xiii

Guided Tour Established Learning Objectives Learning objectives have been added to this edition to help stu- dents target key areas of learning. Learning objectives are listed both at the beginning of each chapter and are called out as mar- ginal elements throughout the narrative in each chapter.

End-of-Chapter Content Both static and algorithmic end-of-chapter content, including Review Questions and Exercises, are now assignable in Connect.

SmartBook The SmartBook has been updated with new highlights and probes for optimal student learning.

Snapshots The Snapshot from Practice boxes have been updated to include a number of new exam- ples of project management in action. New questions based on the Snapshots are also now assignable in Connect.

New and Updated Cases Included at the end of each chapter are between one and five cases which demonstrate key ideas from the text and help students understand how Project Management comes into play in the real world. New cases have been added across several chapters in the 7th edition.

Organization Strategy and Project Selection2

LEARNING OBJECTIVES After reading this chapter you should be able to:

2-1 Explain why it is important for project managers to understand their organization’s strategy.

2-2 Identify the significant role projects contribute to the strategic direction of the organization.

2-3 Understand the need for a project priority system.

2-4 Apply financial and nonfinancial criteria to assess the value of projects.

2-5 Understand how multi-criteria models can be used to select projects.

2-6 Apply an objective priority system to project selection.

2-7 Understand the need to manage the project portfolio.

OUTLINE 2.1 The Strategic Management Process: An

Overview

2.2 The Need for a Project Priority System

2.3 A Portfolio Management System

2.4 Selection Criteria

2.5 Applying a Selection Model

2.6 Managing the Portfolio System

Summary

C H A P T E R T W O

Lar66093_ch02_026-065.indd 26 10/4/16 4:52 PM

28 Chapter 2 Organization Strategy and Project Selection

alignment even more essential for success. Ensuring a strong link between the strategic plan and projects is a difficult task that demands constant attention from top and mid- dle management. The larger and more diverse an organization, the more difficult it is to create and maintain this strong link. Companies today are under enormous pressure to manage a process that clearly aligns projects to organization strategy. Ample evidence still sug- gests that many organizations have not developed a process that clearly aligns project selection to the strategic plan. The result is poor utilization of the organization’s resources—people, money, equipment, and core competencies. Conversely, organiza- tions that have a coherent link of projects to strategy have more cooperation across the organization, perform better on projects, and have fewer projects. How can an organization ensure this link and alignment? The answer requires inte- gration of projects with the strategic plan. Integration assumes the existence of a stra- tegic plan and a process for prioritizing projects by their contribution to the plan. A crucial factor to ensure the success of integrating the plan with projects lies in the creation of a process that is open and transparent for all participants to review. This chapter presents an overview of the importance of strategic planning and the process for developing a strategic plan. Typical problems encountered when strategy and proj- ects are not linked are noted. A generic methodology that ensures integration by creat- ing very strong linkages of project selection and priority to the strategic plan is then discussed. The intended outcomes are clear organization focus, best use of scarce orga- nization resources (people, equipment, capital), and improved communication across projects and departments.

Why Project Managers Need to Understand Strategy Project management historically has been preoccupied solely with the planning and exe- cution of projects. Strategy was considered to be under the purview of senior manage- ment. This is old-school thinking. New-school thinking recognizes that project management is at the apex of strategy and operations. Aaron Shenhar speaks to this issue when he states, “. . . it is time to expand the traditional role of the project manager from an operational to a more strategic perspective. In the modern evolving organization, proj- ect managers will be focused on business aspects, and their role will expand from getting the job done to achieving the business results and winning in the marketplace.”1 There are two main reasons why project managers need to understand their organiza- tion’s mission and strategy. The first reason is so they can make appropriate decisions and adjustments. For example, how a project manager would respond to a suggestion to modify the design of a product to enhance performance will vary depending upon whether his company strives to be a product leader through innovation or to achieve operational excellence through low cost solutions. Similarly, how a project manager would respond to delays may vary depending upon strategic concerns. A project man- ager will authorize overtime if her firm places a premium on getting to the market first. Another project manager will accept the delay if speed is not essential. The second reason project managers need to understand their organization’s strat- egy is so they can be effective project advocates. Project managers have to be able to demonstrate to senior management how their project contributes to their firm’s mis- sion. Protection and continued support come from being aligned with corporate objec- tives. Project managers also need to be able to explain to team members and other

Explain why it is impor- tant for project managers to understand their orga- nization’s strategy.

2-1LO

1 Shenhar, A., and Dov Dvie, Reinventing Project Management (Harvard Business School, 2007), p. 5.

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84 Chapter 3 Organization: Structure and Culture

In 2016 Google Inc. topped Fortune magazine’s list of best companies to work at for the seventh time in the past ten years. When one enters the 24-hour Googleplex located in

Mountain View, California, you feel that you are walking through a new-age college campus rather than the corporate office of a billion-dollar business. The collection of interconnected low-rise buildings with colorful, glass-encased offices feature upscale trappings—free gourmet meals three times a day, free use of an outdoor wave pool, indoor gym and large child care facility, private shuttle bus service to and from San Francisco and other residential areas— that are the envy of workers across the Bay area. These perks and others reflect Google’s culture of keeping people happy and thinking in unconven- tional ways. The importance of corporate culture is no more evi- dent than in the fact that the head of Human Resources, Stacy Savides Sullivan, also has the title of Chief Cul- ture Officer. Her task is to try to preserve the innovative culture of a start-up as Google quickly evolves into a mammoth international corporation. Sullivan character- izes Google culture as “team-oriented, very collabora- tive and encouraging people to think nontraditionally, different from where they ever worked before—work with integrity and for the good of the company and for the good of the world, which is tied to our overall mis- sion of making information accessible to the world.” Google goes to great lengths to screen new employees to not only make sure that they have outstanding tech- nical capabilities but also that they are going to fit Google’s culture. Sullivan goes on to define a Google-y employee as somebody who is “flexible, adaptable, and not focusing on titles and hierarchy, and just gets stuff done.” Google’s culture is rich with customs and traditions not found in corporate America. For example, project

S N A P S H O T F R O M P R A C T I C E 3 . 4 Google-y*

teams typically have daily “stand-up” meetings seven min- utes after the hour. Why seven minutes after the hour? Because Google cofounder Sergey Brin once estimated that it took seven minutes to walk across the Google cam- pus. Everybody stands to make sure no one gets too com- fortable and no time is wasted during the rapid-fire update. As one manager noted, “The whole concept of the stand-up is to talk through what everyone’s doing, so if someone is working on what you’re working on, you can discover and collaborate not duplicate.” Another custom is “dogfooding.” This is when a project team releases the functional prototype of a future product to Google employees for them to test drive. There is a strong norm within Google to test new products and provide feedback to the developers. The project team receives feedback from thousands of Google-ys. The internal focus group can log bugs or simply comment on design or functionality. Fellow Google-ys do not hold back on their feedback and are quick to point out things they don’t like. This often leads to significant product improvements.

simply rely on what people report about their culture. The physical environment in which people work, as well as how people act and respond to different events that occur, must be examined. Figure 3.6 contains a worksheet for diagnosing the culture of an organization. Although by no means exhaustive, the checklist often yields clues about the norms, customs, and values of an organization: 1. Study the physical characteristics of an organization. What does the external

architecture look like? What image does it convey? Is it unique? Are the buildings

* Walters, H., “How Google Got Its New Look,” BusinessWeek, May 10, 2010; Goo, S. K., “Building a ‘Googley’ Workforce,“ Washington Post, October 21, 2006; Mills, E., “Meet Google’s Culture Czar,” CNET News.com, April 27, 2007.

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xiv

Note to Student You will find the content of this text highly practical, relevant, and current. The con- cepts discussed are relatively simple and intuitive. As you study each chapter we sug- gest you try to grasp not only how things work, but why things work. You are encouraged to use the text as a handbook as you move through the three levels of competency:

I know. I can do. I can adapt to new situations.

Project management is both people and technical oriented. Project management involves understanding the cause-effect relationships and interactions among the sociotechnical dimensions of projects. Improved competency in these dimensions will greatly enhance your competitive edge as a project manager. The field of project management is growing in importance and at an exponential rate. It is nearly impossible to imagine a future management career that does not include management of projects. Résumés of managers will soon be primarily a description of the individual’s participation in and contributions to projects. Good luck on your journey through the text and on your future projects.

Chapter-by-Chapter Revisions for the Seventh Edition Chapter 1: Modern Project Management

∙ New Snapshot: Project Management in Action 2016. ∙ Information updated. ∙ New Snapshot: Ron Parker replaced Research Highlight: Works well with others. ∙ New case: The Hokie Lunch Group.

Chapter 2: Organization Strategy and Project Selection

∙ New Snapshot: Project Code Names replaced HP’s Strategy Revision.

Chapter 3: Organization: Structure and Culture

∙ Learning objectives established. ∙ Snapshot: Google-y updated. ∙ Snapshot: Skunk Works at Lockheed Martin updated.

Chapter 4: Defining the Project

∙ Learning objectives established. ∙ New case: Home Improvement Project.

Note to Student xv

Chapter 5: Estimating Project Times and Costs

∙ Learning objectives established. ∙ New Snapshot: London 2012 Olympics: Avoiding White Elephant curse. ∙ Expanded discussion of Mega Projects including the emergence of white

elephants.

Chapter 6: Developing a Project Schedule

∙ Learning objectives established. ∙ New Exercises 2-15 and Lag Exercises 18-21. ∙ Shoreline Stadium case replaces Greendale Stadium case.

Chapter 7: Managing Risk

∙ Learning objectives established.

Chapter 8 Appendix 1: The Critical-Chain Approach

∙ Learning objectives established.

Chapter 9: Reducing Project Duration

∙ Learning objectives established. ∙ Snapshot: Smartphone Wars updated. ∙ New exercises 1-7.

Chapter 10: Leadership: Being an Effective Project Manager

∙ Learning objectives established. ∙ New Research Highlight: Give and Take. ∙ Ethics discussion expanded.

Chapter 11: Managing Project Teams

∙ Learning objectives established. ∙ Expanded discussion on project vision.

Chapter 12: Outsourcing: Managing Interorganizational Relations

∙ Learning objectives established. ∙ Discussion of RFP process. ∙ New Snapshot: U.S. Department of Defense’s Value Engineering Awards 2015.

Chapter 13 Progress and Performance Measurement and Evaluation

∙ Learning Objectives established. ∙ Discussion of milestone schedules. ∙ New Snapshot: Guidelines for Setting Milestones. ∙ Discussion of Management Reserve Index. ∙ New case: Shoreline Stadium Status Report.

xvi Note to Student

Chapter 14: Project Closure

∙ Major Revision of chapter with more attention to project audit and closing activities.

∙ New Snapshot: The Wake. ∙ New Snapshot: 2015 PMO of the Year. ∙ New Snapshot: Operation Eagle Claw. ∙ Project Management Maturity model introduced.

Chapter 15: International Projects

∙ Learning Objectives established.

Chapter 16: An Introduction to Agile Project Management

∙ Learning Objectives established. ∙ New Snapshot: Kanban.

xvii

Preface ix

1. Modern Project Management 2

2. Organization Strategy and Project Selection 26

3. Organization: Structure and Culture 66

4. Defining the Project 100

5. Estimating Project Times and Costs 128

6. Developing a Project Plan 162

7. Managing Risk 206

8. Scheduling Resources and Costs 250

9. Reducing Project Duration 304

10. Being an Effective Project Manager 338

11. Managing Project Teams 374

12. Outsourcing: Managing Interorganizational Relations 418

Brief Contents 13. Progress and Performance Measurement

and Evaluation 458

14. Project Closure 514

15. International Projects 544

16. An Introduction to Agile Project Management 578

APPENDIX One Solutions to Selected Exercises 603 Two Computer Project Exercises 616

GLOSSARY 633 ACRONYMS 640 PROJECT MANAGEMENT EQUATIONS 641 CROSS REFERENCE OF PROJECT MANAGEMENT 642 SOCIO-TECHNICAL APPROACH TO PROJECT MANAGEMENT 643 INDEX 644

xviii

Contents Preface ix

Chapter 1 Modern Project Management 2 1.1 What Is a Project? 6

What a Project Is Not 7 Program versus Project 7 The Project Life Cycle 8 The Project Manager 9 Being Part of a Project Team 11

1.2 Current Drivers of Project Management 12 Compression of the Product Life Cycle 12 Knowledge Explosion 12 Triple Bottom Line (Planet, People, Profit) 12 Increased Customer Focus 12 Small Projects Represent Big Problems 15

1.3 Project Governance 15 Alignment of Projects with Organizational Strategy 16

1.4 Project Management Today: A Socio-Technical Approach 17

Summary 18

Chapter 2 Organization Strategy and Project Selection 26 2.1 The Strategic Management Process:

An Overview 29 Four Activities of the Strategic Management Process 29

2.2 The Need for a Project Priority System 34 Problem 1: The Implementation Gap 34 Problem 2: Organization Politics 35 Problem 3: Resource Conflicts and Multitasking 36

2.3 A Portfolio Management System 37 Classification of the Project 37

2.4 Selection Criteria 38 Financial Criteria 38 Nonfinancial Criteria 40

2.5 Applying a Selection Model 43 Project Classification 43 Sources and Solicitation of Project Proposals 44 Ranking Proposals and Selection of Projects 46

2.6 Managing the Portfolio System 48 Senior Management Input 48 The Governance Team Responsibilities 49 Balancing the Portfolio for Risks and Types of Projects 50

Summary 51

Chapter 3 Organization: Structure and Culture 66 3.1 Project Management Structures 68

Organizing Projects within the Functional Organization 68 Organizing Projects as Dedicated Teams 71 Organizing Projects within a Matrix Arrangement 75 Different Matrix Forms 76

3.2 What Is the Right Project Management Structure? 79 Organization Considerations 79 Project Considerations 79

3.3 Organizational Culture 81 What Is Organizational Culture? 81 Identifying Cultural Characteristics 83

3.4 Implications of Organizational Culture for Organizing Projects 86

Summary 89

Chapter 4 Defining the Project 100 4.1 Step 1: Defining the Project Scope 102

Employing a Project Scope Checklist 103 4.2 Step 2: Establishing Project Priorities 106 4.3 Step 3: Creating the Work Breakdown

Structure 108 Major Groupings Found in a WBS 108 How WBS Helps the Project Manager 108 A Simple WBS Development 109

4.4 Step 4: Integrating the WBS with the Organization 113

4.5 Step 5: Coding the WBS for the Information System 113

4.6 Process Breakdown Structure 116

Contents xix

4.7 Responsibility Matrices 117 4.8 Project Communication Plan 119 Summary 121

Chapter 5 Estimating Project Times and Costs 128 5.1 Factors Influencing the Quality of

Estimates 130 Planning Horizon 130 Project Complexity 130 People 131 Project Structure and Organization 131 Padding Estimates 131 Organization Culture 131 Other Factors 131

5.2 Estimating Guidelines for Times, Costs, and Resources 132

5.3 Top-Down versus Bottom-Up Estimating 134

5.4 Methods for Estimating Project Times and Costs 136 Top-Down Approaches for Estimating Project Times and Costs 136 Bottom-Up Approaches for Estimating Project Times and Costs 140 A Hybrid: Phase Estimating 141

5.5 Level of Detail 143 5.6 Types of Costs 144

Direct Costs 145 Direct Project Overhead Costs 145 General and Administrative (G&A) Overhead Costs 145

5.7 Refining Estimates 146 5.8 Creating a Database for Estimating 148 5.9 Mega Projects: A Special Case 149 Summary 151 Appendix 5.1: Learning Curves for Estimating 157

Chapter 6 Developing a Project Plan 162 6.1 Developing the Project Network 163 6.2 From Work Package to Network 164 6.3 Constructing a Project Network 166

Terminology 166 Basic Rules to Follow in Developing Project Networks 166

6.4 Activity-on-Node (AON) Fundamentals 167 6.5 Network Computation Process 171

Forward Pass—Earliest Times 171 Backward Pass—Latest Times 173 Determining Slack (or Float) 175

6.6 Using the Forward and Backward Pass Information 177

6.7 Level of Detail for Activities 178 6.8 Practical Considerations 178

Network Logic Errors 178 Activity Numbering 179 Use of Computers to Develop Networks 179 Calendar Dates 182 Multiple Starts and Multiple Projects 182

6.9 Extended Network Techniques to Come Closer to Reality 182 Laddering 182 Use of Lags to Reduce Schedule Detail and Project Duration 183 An Example Using Lag Relationships—The Forward and Backward Pass 186 Hammock Activities 188

Summary 189

Chapter 7 Managing Risk 206 7.1 Risk Management Process 208 7.2 Step 1: Risk Identification 210 7.3 Step 2: Risk Assessment 212

Probability Analysis 215 7.4 Step 3: Risk Response Development 216

Mitigating Risk 216 Avoiding Risk 217 Transferring Risk 217 Accept Risk 218

7.5 Contingency Planning 219 Technical Risks 220 Schedule Risks 222 Cost Risks 222 Funding Risks 222

7.6 Opportunity Management 223 7.7 Contingency Funding and Time Buffers 223

Budget Reserves 224 Management Reserves 224 Time Buffers 225

7.8 Step 4: Risk Response Control 225 7.9 Change Control Management 226 Summary 230 Appendix 7.1: PERT and PERT Simulation 240

xx Contents

Chapter 8 Scheduling Resources and Costs 250 8.1 Overview of the Resource Scheduling

Problem 252 8.2 Types of Resource Constraints 254 8.3 Classification of a Scheduling

Problem 255 8.4 Resource Allocation Methods 255

Assumptions 255 Time-Constrained Project: Smoothing Resource Demand 256 Resource-Constrained Projects 257

8.5 Computer Demonstration of Resource- Constrained Scheduling 262 The Impacts of Resource-Constrained Scheduling 266

8.6 Splitting Activities 269 8.7 Benefits of Scheduling Resources 270 8.8 Assigning Project Work 271 8.9 Multiproject Resource Schedules 272 8.10 Using the Resource Schedule to Develop a

Project Cost Baseline 273 Why a Time-Phased Budget Baseline Is Needed 273 Creating a Time-Phased Budget 274

Summary 279 Appendix 8.1: The Critical-Chain Approach 294

Chapter 9 Reducing Project Duration 304 9.1 Rationale for Reducing Project

Duration 306 9.2 Options for Accelerating Project

Completion 307 Options When Resources Are Not Constrained 308 Options When Resources Are Constrained 310

9.3 Project Cost–Duration Graph 313 Explanation of Project Costs 313

9.4 Constructing a Project Cost–Duration Graph 314 Determining the Activities to Shorten 314 A Simplified Example 316

9.5 Practical Considerations 318 Using the Project Cost–Duration Graph 318 Crash Times 319 Linearity Assumption 319 Choice of Activities to Crash Revisited 319 Time Reduction Decisions and Sensitivity 320

9.6 What If Cost, Not Time, Is the Issue? 321 Reduce Project Scope 322 Have Owner Take on More Responsibility 322 Outsourcing Project Activities or Even the Entire Project 322 Brainstorming Cost Savings Options 322

Summary 323

Chapter 10 Being an Effective Project Manager 338 10.1 Managing versus Leading a Project 340 10.2 Managing Project Stakeholders 341 10.3 Influence as Exchange 345

Task-Related Currencies 345 Position-Related Currencies 346 Inspiration-Related Currencies 347 Relationship-Related Currencies 347 Personal-Related Currencies 348

10.4 Social Network Building 348 Mapping Stakeholder Dependencies 348 Management by Wandering Around (MBWA) 350 Managing Upward Relations 351 Leading by Example 353

10.5 Ethics and Project Management 356 10.6 Building Trust: The Key to Exercising

Influence 357 10.7 Qualities of an Effective Project Manager 359 Summary 362

Chapter 11 Managing Project Teams 374 11.1 The Five-Stage Team Development Model 377 11.2 Situational Factors Affecting Team

Development 379 11.3 Building High-Performance Project Teams 381

Recruiting Project Members 381 Conducting Project Meetings 383 Establishing Team Norms 385 Establishing a Team Identity 387 Creating a Shared Vision 388 Managing Project Reward Systems 391 Orchestrating the Decision-Making Process 392 Managing Conflict within the Project 394 Rejuvenating the Project Team 398

11.4 Managing Virtual Project Teams 399 11.5 Project Team Pitfalls 403

Groupthink 403 Bureaucratic Bypass Syndrome 404

Contents xxi

Team Spirit Becomes Team Infatuation 404 Going Native 404

Summary 405

Chapter 12 Outsourcing: Managing Interorganizational Relations 418 12.1 Outsourcing Project Work 420 12.2 Request for Proposal (RFP) 424

Selection of Contractor from Bid Proposals 425 12.3 Best Practices in Outsourcing Project Work 426

Well-Defined Requirements and Procedures 426 Extensive Training and Team-Building Activities 428 Well-Established Conflict Management Processes in Place 429 Frequent Review and Status Updates 431 Co-Location When Needed 432 Fair and Incentive-Laden Contracts 432 Long-Term Outsourcing Relationships 433

12.4 The Art of Negotiating 434 1. Separate the People from the Problem 435 2. Focus on Interests, Not Positions 436 3. Invent Options for Mutual Gain 437 4. When Possible, Use Objective Criteria 138 Dealing with Unreasonable People 438

12.5 A Note on Managing Customer Relations 439 Summary 442 Appendix 12.1: Contract Management 451

Chapter 13 Progress and Performance Measurement and Evaluation 458 13.1 Structure of a Project Monitoring Information

System 460 What Data Are Collected? 460 Collecting Data and Analysis 460 Reports and Reporting 460

13.2 The Project Control Process 461 Step 1: Setting a Baseline Plan 461 Step 2: Measuring Progress and Performance 461 Step 3: Comparing Plan against Actual 462 Step 4: Taking Action 462

13.3 Monitoring Time Performance 462 Tracking Gantt Chart 463 Control Chart 463 Milestone Schedules 464

13.4 Development of an Earned Value Cost/Schedule System 467

Percent Complete Rule 467 What Costs Are Included in Baselines? 467 Methods of Variance Analysis 468

13.5 Developing a Status Report: A Hypothetical Example 470 Assumptions 470 Baseline Development 470 Development of the Status Report 471

13.6 Indexes to Monitor Progress 475 Performance Indexes 477 Project Percent Complete Indexes 474 Software for Project Cost/Schedule Systems 477 Additional Earned Value Rules 478

13.7 Forecasting Final Project Cost 476 13.8 Other Control Issues 481

Technical Performance Measurement 481 Scope Creep 483 Baseline Changes 483 The Costs and Problems of Data Acquisition 485

Summary 486 Appendix 13.1: The Application of Additional Earned Value Rules 505 Appendix 13.2: Obtaining Project Performance Information from MS Project 2010 or 2015 511

Chapter 14 Project Closure 514 14.1 Types of Project Closure 516 14.2 Wrap-up Closure Activities 518 14.3 Project Audits 521

The Project Audit Process 522 Project Retrospectives 525 Project Audits: The Bigger Picture 529

14.4 Post-Implementation Evaluation 532 Team Evaluation 532 Individual, Team Member, and Project Manager Performance Reviews 534

Summary 537 Appendix 14.1: Project Closeout Checklist 539 Appendix 14.2: Euro Conversion—Project Closure Checklist 541

Chapter 15 International Projects 544 15.1 Environmental Factors 546

Legal/Political 546 Security 547 Geography 548

xxii Contents

Economic 549 Infrastructure 550 Culture 551

15.2 Project Site Selection 553 15.3 Cross-Cultural Considerations:

A Closer Look 554 Adjustments 555 Working in Mexico 556 Working in France 559 Working in Saudi Arabia 560 Working in China 562 Working in the United States 563 Summary Comments about Working in Different Cultures 565 Culture Shock 565 Coping with Culture Shock 567

15.4 Selection and Training for International Projects 568

Summary 571

Chapter 16 An Introduction to Agile Project Management 578 16.1 Traditional versus Agile Methods 580 16.2 Agile PM 582

16.3 Agile PM in Action: Scrum 585 Roles and Responsibilities 586 Scrum Meetings 587 Product and Sprint Backlogs 588 Sprint and Release Burndown Charts 589

16.4 Applying Agile PM to Large Projects 592 16.5 Limitations and Concerns 593 Summary 595

Appendix One: Solutions to Selected Exercise 603

Appendix Two: Computer Project Exercises 616

Glossary 633 Acronyms 640 Project Management Equations 641 Cross Reference of Project Management 642 Socio-Technical Approach to Project Management 643 Index 644

Project Management:

The Managerial Process

Modern Project Management1 LEARNING OBJECTIVES After reading this chapter you should be able to:

1-1 Understand why project management is crucial in today’s world.

1-2 Distinguish a project from routine operations.

1-3 Identify the different stages of project life cycle.

1-4 Understand the importance of projects in implementing organization strategy.

1-5 Understand that managing projects involves balancing the technical and sociocultural dimensions of the project.

OUTLINE 1.1 What Is a Project?

1.2 Current Drivers of Project Management

1.3 Project Governance

1.4 Project Management Today—A Socio-Technical Approach

Summary

Text Overview

C H A P T E R O N E

All of mankind’s greatest accomplishments—from building the great pyra- mids to discovering a cure for polio to putting a man on the moon—began as a project.

This is a good time to be reading a book about project management. Business leaders and experts have proclaimed that project management is critical to sustainable eco- nomic growth. New jobs and competitive advantage are achieved by constant innova- tion, developing new products and services, and improving both productivity and quality of work. This is the world of project management. Project management pro- vides people with a powerful set of tools that improves their ability to plan, implement, and manage activities to accomplish specific objectives. But project management is more than just a set of tools; it is a results-oriented management style that places a premium on building collaborative relationships among a diverse cast of characters. Exciting opportunities await people skilled in project management. The project approach has long been the style of doing business in the construction industry, U.S. Department of Defense contracts, and Hollywood, as well as big con- sulting firms. Now project management has spread to all avenues of work. Today,

Understand why project management is crucial in today’s world.

1-1LO

Project networks

Managing risk 7

Monitoring progress

Teams 11

Outsourcing 12

Project manager

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

Inter natio

nal

proje cts

Agile PM 16

Project closure

Estimate 5

Reducing duration

Define project

4 Chapter 1 Modern Project Management

project teams carry out everything from port expansions to hospital restructuring to upgrading information systems. They are creating next-generation fuel-efficient vehi- cles, developing sustainable sources of energy, and exploring the farthest reaches of outer space. The impact of project management is most profound in the electronics industry, where the new folk heroes are young professionals whose Herculean efforts lead to the constant flow of new hardware and software products. Project management is not limited to the private sector. Project management is also a vehicle for doing good deeds and solving social problems. Endeavors such as provid- ing emergency aid to areas hit by natural disasters, devising a strategy for reducing crime and drug abuse within a city, or organizing a community effort to renovate a public playground would and do benefit from the application of modern project man- agement skills and techniques. Perhaps the best indicator of demand for project management can be seen in the rapid expansion of the Project Management Institute (PMI), a professional organiza- tion for project managers. PMI membership has grown from 93,000 in 2002 to more than 478,000 currently. See Snapshot from Practice 1.1 for information regarding pro- fessional certification in project management. It’s nearly impossible to pick up a newspaper or business periodical and not find something about projects. This is no surprise! Approximately $2.5 trillion (about 25 per- cent of the U.S. gross national product) is spent on projects each year in the United States alone. Other countries are increasingly spending more on projects. Millions of people around the world consider project management the major task in their profession. Most of the people who excel at managing projects never have the title of project manager. They include accountants, lawyers, administrators, scientists, contractors, pub- lic health officials, teachers, and community advocates whose success depends upon being able to lead and manage project work. For some, the very nature of their work is project driven. Projects may be cases for lawyers, audits for accountants, events for

The Project Management Institute (PMI) was founded in 1969 as an international society for project managers. Today PMI has members from more than 180 coun- tries and more than 478,500 members.

PMI professionals come from virtually every major indus- try, including aerospace, automotive, business manage- ment, construction, engineering, financial services, information technology, pharmaceuticals, health care, and telecommunications. PMI provides certification as a Project Management Professional (PMP)—someone who has documented sufficient project experience, agreed to follow the PMI code of professional conduct, and demonstrated mas- tery of the field of project management by passing a comprehensive examination. The number of people earning PMP status has grown dramatically in recent years. In 1996 there were fewer than 3,000 certified project management professionals. By 2016 there were more than 695,000 Professional credential holders.

S N A P S H O T F R O M P R A C T I C E 1 . 1 The Project Management Institute*

Just as the CPA exam is a standard for accountants, passing the PMP exam may become the standard for project managers. Some companies are requiring that all their project managers be PMP certified. Moreover, many job postings are restricted to PMPs. Job seekers, in general, are finding that being PMP certified is an advantage in the marketplace. PMI added a certification as a Certified Associate in Project Management (CAPM). CAPM is designed for project team members and entry-level project manag- ers, as well as qualified undergraduate and graduate students who want a credential to recognize their mas- tery of the project management body of knowledge. CAPM does not require the extensive project manage- ment experience associated with the PMP. For more details on PMP and CAPM, google PMI to find the cur- rent website for the Project Management Institute.

*PMI Today, March 2016, p. 4.

Chapter 1 Modern Project Management 5

artists, and renovations for contractors. For others, projects may be a small, but critical part of their work. For example, a high school teacher who teaches four classes a day is responsible for coaching a group of students to compete in a national debate competition. A store manager who oversees daily operations is charged with developing an employee retention program. A sales account executive is given the additional assignment of team lead to launch daily deals into a new city. A public health official who manages a clinic is also responsible for organizing a Homeless Youth Connect event. For these and others, project management is not a title, but a critical job requirement. It is hard to think of a profession or a career path that would not benefit from being good at managing projects. Not only is project management critical to most careers, the skill set is transferable across most businesses and professions. At its core, project management fundamentals are universal. The same project management methodology that is used to develop a new prod- uct can be adapted to create new services, organize events, refurbish aging operations, and so forth. In a world where it is estimated that each person is likely to experience three to four career changes, managing projects is a talent worthy of development. The significance of project management can also be seen in the classroom. Twenty years ago major universities offered one or two classes in project management, primarily for engineers. Today, most universities offer multiple sections of project man- agement classes, with the core group of engineers being supplemented by business stu- dents majoring in marketing, management information systems (MIS), and finance, as well as students from other disciplines such as oceanography, health sciences, computer sciences, and liberal arts. These students are finding that their exposure to project man- agement is providing them with distinct advantages when it comes time to look for jobs. More and more employers are looking for graduates with project management skills.

1. Business information: Join a proj- ect team charged with installing new data security system.

2. Physical education: Design and develop a new fitness program for

senior citizens that combines principles of yoga and aerobics.

3. Marketing: Execute a sales program for new home air purifier.

4. Industrial engineering: Manage a team to create a value chain report for every aspect of key product from design to customer delivery.

5. Chemistry: Develop a quality control program for organization’s drug production facilities.

6. Management: Implement a new store layout design.

7. Pre-med neurology student: Join project team link- ing mind mapping to an imbedded prosthetic that will allow blind people to function near normally.

8. Sports communication: Join Olympic project team that will promote women’s sports products for the 2016 Games in Rio de Janeiro, Brazil.

""9. Systems engineer: Become a project team member of a project to develop data mining of medical pa- pers and studies related to drug efficacy.

10. Accounting: Work on an audit of a major client.

11. Public health: Research and design a medical mari- juana educational program.

12. English: Create a web-based user manual for new electronics product.

S N A P S H O T F R O M P R A C T I C E 1 . 2 A Dozen Examples of Projects Given to Recent College Graduates

6 Chapter 1 Modern Project Management

See the nearby Snapshot from Practice 1.2 for examples of projects given to recent col- lege graduates. The logical starting point for developing these skills is understanding the uniqueness of a project and of project managers.

1.1 What Is a Project? What do the following headlines have in common?

Millions watch Olympic Opening Ceremony Citywide WiFi System Set to Go Live Hospitals Respond to New Healthcare Reforms Apple’s New iPhone Hits the Market City Receives Stimulus Funds to Expand Light Rail System

All of these events represent projects.

The Project Management Institute provides the following definition of a project: A project is a temporary endeavor undertaken to create a unique product, service, or result.

Like most organizational efforts, the major goal of a project is to satisfy a customer’s need. Beyond this fundamental similarity, the characteristics of a project help

Distinguish a project from routine operations.

1-2LO

Chapter 1 Modern Project Management 7

differentiate it from other endeavors of the organization. The major characteristics of a project are as follows: 1. An established objective. 2. A defined life span with a beginning and an end. 3. Usually, the involvement of several departments and professionals. 4. Typically, doing something that has never been done before. 5. Specific time, cost, and performance requirements. First, projects have a defined objective—whether it is constructing a 12-story apart- ment complex by January 1 or releasing version 2.0 of a specific software package as quickly as possible. This singular purpose is often lacking in daily organizational life in which workers perform repetitive operations each day. Second, because there is a specified objective, projects have a defined endpoint, which is contrary to the ongoing duties and responsibilities of traditional jobs. In many cases, individuals move from one project to the next as opposed to staying in one job. After helping to install a security system, an IT engineer may be assigned to develop a database for a different client. Third, unlike much organizational work that is segmented according to functional specialty, projects typically require the combined efforts of a variety of specialists. Instead of working in separate offices under separate managers, project participants, whether they be engineers, financial analysts, marketing professionals, or quality con- trol specialists, work closely together under the guidance of a project manager to com- plete a project. The fourth characteristic of a project is that it is nonroutine and has some unique elements. This is not an either/or issue but a matter of degree. Obviously, accomplish- ing something that has never been done before, such as building an electric automobile or landing two mechanical rovers on Mars, requires solving previously unsolved prob- lems and using breakthrough technology. On the other hand, even basic construction projects that involve established sets of routines and procedures require some degree of customization that makes them unique. Finally, specific time, cost, and performance requirements bind projects. Projects are evaluated according to accomplishment, cost, and time spent. These triple con- straints impose a higher degree of accountability than you typically find in most jobs. These three also highlight one of the primary functions of project management, which is balancing the trade-offs among time, cost, and performance while ultimately satisfy- ing the customer.

What a Project Is Not Projects should not be confused with everyday work. A project is not routine, repeti- tive work! Ordinary daily work typically requires doing the same or similar work over and over, while a project is done only once; a new product or service exists when the project is completed. Examine the list in Table 1.1 that compares routine, repetitive work and projects. Recognizing the difference is important because too often resources can be used up on daily operations which may not contribute to longer range organiza- tion strategies that require innovative new products.

Program versus Project In practice the terms project and program cause confusion. They are often used syn- onymously. A program is a group of related projects designed to accomplish a

8 Chapter 1 Modern Project Management

common goal over an extended period of time. Each project within a program has a project manager. The major differences lie in scale and time span. Program management is the process of managing a group of ongoing, interdepen- dent, related projects in a coordinated way to achieve strategic objectives. For example, a pharmaceutical organization could have a program for curing cancer. The cancer pro- gram includes and coordinates all cancer projects that continue over an extended time horizon (Gray, 2011). Coordinating all cancer projects under the oversight of a cancer team provides benefits not available from managing them individually. This cancer team also oversees the selection and prioritizing of cancer projects that are included in their special “Cancer” portfolio. Although each project retains its own goals and scope, the project manager and team are also motivated by the higher program goal. Program goals are closely related to broad strategic organization goals.

The Project Life Cycle Another way of illustrating the unique nature of project work is in terms of the project life cycle. Some project managers find it useful to use the project life cycle as the cor- nerstone for managing projects. The life cycle recognizes that projects have a limited life span and that there are predictable changes in level of effort and focus over the life of the project. There are a number of different life-cycle models in project management literature. Many are unique to a specific industry or type of project. For example, a new software development project may consist of five phases: definition, design, code, inte- gration/test, and maintenance. A generic cycle is depicted in Figure 1.1. The project life cycle typically passes sequentially through four stages: defining, planning, executing, and delivering. The starting point begins the moment the project is given the go-ahead. Project effort starts slowly, builds to a peak, and then declines to delivery of the project to the customer. 1. Defining stage: Specifications of the project are defined; project objectives are

established; teams are formed; major responsibilities are assigned. 2. Planning stage: The level of effort increases, and plans are developed to determine

what the project will entail, when it will be scheduled, whom it will benefit, what quality level should be maintained, and what the budget will be.

3. Executing stage: A major portion of the project work takes place—both physical and mental. The physical product is produced (a bridge, a report, a software pro- gram). Time, cost, and specification measures are used for control. Is the project on schedule, on budget, and meeting specifications? What are the forecasts of each of these measures? What revisions/changes are necessary?

4. Closing stage: Closing includes three activities: delivering the project product to the customer, redeploying project resources, and post-project review. Delivery of

Identify the different stages of project life cycle.

1-3LO

TABLE 1.1 Comparison of Routine Work with Projects

Routine, Repetitive Work Projects Taking class notes Writing a term paper Daily entering sales receipts into the Setting up a sales kiosk for a professional accounting accounting ledger meeting Responding to a supply-chain request Developing a supply-chain information system Practicing scales on the piano Writing a new piano piece Routine manufacture of an Apple iPod Designing an iPod that is approximately 2 × 4 inches,

interfaces with PC, and stores 10,000 songs Attaching tags on a manufactured product Wire-tag projects for GE and Walmart

Chapter 1 Modern Project Management 9

the project might include customer training and transferring documents. Redeploy- ment usually involves releasing project equipment/materials to other projects and finding new assignments for team members. Post-project reviews include not only assessing performance but also capturing lessons learned.

In practice, the project life cycle is used by some project groups to depict the timing of major tasks over the life of the project. For example, the design team might plan a major commitment of resources in the defining stage, while the quality team would expect their major effort to increase in the latter stages of the project life cycle. Because most organizations have a portfolio of projects going on concurrently, each at a differ- ent stage of each project’s life cycle, careful planning and management at the organiza- tion and project levels are imperative.

The Project Manager At first glance project managers perform the same functions as other managers. That is, they plan, schedule, motivate, and control. However, what makes them unique is that they manage temporary, nonrepetitive activities, to complete a fixed life project. Unlike functional managers, who take over existing operations, project managers cre- ate a project team and organization where none existed before. They must decide what and how things should be done instead of simply managing set processes. They must meet the challenges of each phase of the project life cycle, and even oversee the dis- solution of their operation when the project is completed. Project managers must work with a diverse troupe of characters to complete proj- ects. They are typically the direct link to the customer and must manage the tension between customer expectations and what is feasible and reasonable. Project managers provide direction, coordination, and integration to the project team, which is often made up of part-time participants loyal to their functional departments. They often must work with a cadre of outsiders—vendors, suppliers, subcontractors—who do not necessarily share their project allegience.

Le ve

l o f

eff o

1. Goals 2. Specifications 3. Tasks 4. Responsibilities

1. Schedules 2. Budgets 3. Resources 4. Risks 5. Staffing

1. Status reports 2. Changes 3. Quality 4. Forecasts

1. Train customer 2. Transfer documents 3. Release resources 4. Evaluation 5. Lessons learned

Defining

Start Time End

Planning

Executing

Closing

FIGURE 1.1 Project Life Cycle

10 Chapter 1 Modern Project Management

Project managers are ultimately responsible for performance (frequently with too little authority). They must ensure that appropriate trade-offs are made among the time, cost, and performance requirements of the project. At the same time, unlike their functional counterparts, project managers generally possess only rudimentary techni- cal knowledge to make such decisions. Instead, they must orchestrate the completion of the project by inducing the right people, at the right time, to address the right issues and make the right decisions. While project management is not for the timid, working on projects can be an extremely rewarding experience. Life on projects is rarely boring; each day is different from the last. Since most projects are directed at solving some tangible problem or pursuing some useful opportunity, project managers find their work personally mean- ingful and satisfying. They enjoy the act of creating something new and innovative. Project managers and team members can feel immense pride in their accomplishment, whether it is a new bridge, a new product, or needed service. Project managers are often stars in their organization and well compensated. Good project managers are always in demand. Every industry is looking for effective people who can get the right things done on time. See Snapshot from Practice 1.3: Ron Parker for an example of a former student who leveraged his ability to manage

1986 B.S. Business Administration–Oregon State University

1986–1990 Food Products Manufacturing

1990–1994 Wood Products Manufacturing 1994–Current Glass Products Manufacturing

Upon completion of my business degree at OSU, I was recruited by a Fortune 100 food products company for a first line production supervisor position. In that role, an opportunity came up for me to manage a project that involved rolling out a new statistical package-weight- control program throughout the factory. Successfully completing that project was instrumental in accelerating my career within the company, advancing from supervi- sor to product manager in less than three years. After four years in food products I accepted an offer to join a wood products manufacturing company. Initially my role in this company was Human Resources Manager. My HR responsibilities included managing several projects to improve safety and employee retention. Successful com- pletion of these projects led to a promotion to Plant Man- ager. In the Plant Manager role, I was tasked with building and managing a new wood door manufacturing factory. After successfully taking that factory to full production, I was promoted again to Corporate Manager of Continuous Improvement. This “culture change” project involved

S N A P S H O T F R O M P R A C T I C E 1 . 3 Ron Parker

implementing Total Quality Management throughout 13 different manufacturing factories as well as all the indirect and support functions within the corporation. Shortly after we successfully ingrained this new culture in the company, the owner passed away, leading me to look for other employment. I was able to leverage my previous experience and success to convince the owner of a struggling glass fab- rication company to hire me. In this new role as General Manager, I was tasked with turning the company around. This was my largest project yet. Turning a com- pany around involves a myriad of smaller improvement projects spanning from facilities and equipment improvements to product line additions and deletions to sales and marketing strategy and everything in between. In four years, we successfully turned the com- pany around to the extent that the owner was able to sell the company and comfortably retire. Successfully turning that glass company around got the attention of a much larger competitor of ours, resulting in an offer of employment. This new offer involved the start-up of a $30M high-tech glass manufacturing facility in another state. We were able to take that facility from a dirt field to the highest volume manufacturing facility of its kind in the world in just three years. After building and operating this factory at a world-class benchmark level for eight years, I came across a new and exciting opportunity to help expand a strong glass fabrication company in

Chapter 1 Modern Project Management 11

Canada. I spent four years successfully transitioning this Canadian company from a medium-size glass fabrication facility to one of the largest and most successful of its kind in North America. After tiring of the “Great White North,” I found an opportunity to tackle the largest and most impactful project of my career. I’m currently VP of Operations in a venture-funded high-tech start-up company. In this role, I’m overseeing the construction and start-up of the first full-scale, high-volume electrochromic glass fabrication factory in the world. This new project

involves building a company from the ground up and taking an exciting new technology from the lab to full- scale commercialization. Success in this role, although still far from being certain, will eventually revolutionize the glass industry through the introduction of a product that dramatically improves the energy efficiency and occupant comfort of buildings around the world. Looking back on my career, it is apparent that my degree of success has largely been the result of taking on and successfully completing successively larger and increasingly impactful projects. There’s a saying that’s always resonated with me: “If your only tool is a hammer, all your problems look like nails.” Good tools are hard to come by and heavy to carry around. I like my tool bag filled with generalist tools; things like communication skills, leadership, common sense, judgment, reasoning, logic and a strong sense of urgency. I often wonder how much more I could have accomplished had I actually studied project management and had more of that toolset in my bag. With a bag full of strong generalist tools, you can tackle any problem in any business. Project man- agement is clearly one of those skills where the better you are at it, the higher your chances of success in any business environment. Having the tools is only part of the equation though. To be successful, you must also be willing to run at problems/opportunities when every- one else is running away from them.

projects to build a successful career in the glass products industry. Clearly, project man- agement is a challenging and exciting profession. This text is intended to provide the necessary knowledge, perspective, and tools to enable students to accept the challenge.

Being Part of a Project Team Most people’s first exposure to project management occurs while working as part of a team assigned to complete a specific project. Sometimes this work is full-time, but in most cases, people work part-time on one or more projects. They must learn how to juggle their day-to- day commitments with additional project responsibilities. They may join a team with a long history of working together, in which case roles and norms are firmly established. Alternatively, their team may consist of strangers from different departments and organiza- tions. As such, they endure the growing pains of a group evolving into a team. They need to be a positive force in helping the team coalesce into an effective project team. Not only are there people issues, but project members are also expected to use proj- ect management tools and concepts. They develop or are given a project charter or scope statement that defines the objectives and parameters of the project. They work with others to create a project schedule and budget that will guide project execution. They need to understand project priorities so they can make independent decisions.

Courtesy of Ron Parker

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They must know how to monitor and report project progress. Although much of this book is written from the perspective of a project manager, the tools, concepts, and methods are critical to everyone working on a project. Project members need to know how to avoid the dangers of scope creep, manage the critical path, engage in timely risk management, negotiate, and utilize virtual tools to communicate.

1.2 Current Drivers of Project Management Project management is no longer a special-need management. It is rapidly becoming a standard way of doing business. See Snapshot from Practice 1.4: Project Management in Action: 2016. An increasing percentage of the typical firm’s effort is being devoted to projects. The future promises an increase in the importance and the role of projects in contributing to the strategic direction of organizations. Several reasons why this is the case are briefly discussed below.

Compression of the Product Life Cycle One of the most significant driving forces behind the demand for project management is the shortening of the product life cycle. For example, today in high-tech industries the product life cycle is averaging six months to three years. Only 30 years ago, life cycles of 10 to 15 years were not uncommon. Time to market for new products with short life cycles has become increasingly important. A common rule of thumb in the world of high-tech product development is that a six-month project delay can result in a 33 percent loss in product revenue share. Speed, therefore, becomes a competitive advantage; more and more organizations are relying on cross-functional project teams to get new products and services to the market as quickly as possible.

Knowledge Explosion The growth in new knowledge has increased the complexity of projects because proj- ects encompass the latest advances. For example, building a road 30 years ago was a somewhat simple process. Today, each area has increased in complexity, including materials, specifications, codes, aesthetics, equipment, and required specialists. Simi- larly, in today’s digital, electronic age it is becoming hard to find a new product that does not contain at least one microchip. Product complexity has increased the need to integrate divergent technologies. Project management has emerged as an important discipline for achieving this task.

Triple Bottom Line (Planet, People, Profit) The threat of global warming has brought sustainable business practices to the fore- front. Businesses can no longer simply focus on maximizing profit to the detriment of the environment and society. Efforts to reduce carbon imprint and utilize renewable resources are realized through effective project management. The impact of this move- ment toward sustainability can be seen in changes in the objectives and techniques used to complete projects. See Snapshot from Practice 1.5: Dell Children’s Becomes World’s First “Green” Hospital.

Increased Customer Focus Increased competition has placed a premium on customer satisfaction. Customers no longer simply settle for generic products and services. They want customized products

Understand the impor- tance of projects in im- plementing organization strategy.

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Businesses thrive and survive based on their ability to manage projects that produce pro-

ducts and services that meet mar- ket needs. Below is a small sample of projects that are important to their company’s future.

Panama: The Third Set of Locks Project The expansion of the Panama Canal is scheduled to be operational in 2016. The project doubles the capac- ity of the Panama Canal by creating a new lane of traffic and allowing more and larger ships, the new Panamax size, which are about one and a half times bigger than the current size and can carry over twice as much cargo. With the third sets of locks, the canal will be able to manage traffic demand beyond 2025 with a predicted inflationary adjusted revenue of over $6.2 billion per year.

Molinski, D., “Panama Canal, Consortium Reach Deal to Complete Work,” The Wall Street Journal, February 28, 2014.

Google: Autonomous-Vehicle Project Google has contracted Roush Enterprises of Detroit, Michigan, to build 150 self-driving car prototypes. With more than 90 percent of U.S. road collisions caused by human error, self-driving cars could prevent over $190 billion in annual damages and health costs as well as greatly reduce fuel consumption.

Parsi, N., “No Driver Necessary,” PM Network, August 2015, pp. 7–9.

Studio Roosegaarde: Smog Free Tower The Smog Free tower, which stands 23 feet tall, sucks and cleans 1 million cubic feet of polluted air an hour. Innovator Daan Roosegaarde began working on out- door air purification after a particularly smoggy 2013 trip to China.

Karif, O., “Innovation: Smog Eater,” Bloomberg Business- Week, October 15, 2015, p. 22.

Facebook: Oculus Rift Virtual Reality Project Facebook paid over $2 billion for virtual-reality start-up Oculus, which will release its Rift virtual reality headset

in 2016. Video games will spur early sales of Rift, but mass adoption is likely to depend upon Hollywood. Lions Gate Entertainment and 21st Century Fox have agreed to sell movies via Oculus’s online store and Netflix will make its streaming service available on VR headsets.

Shaw, L., “Virtual Reality Goes to the Movies,” Bloom- berg BusinessWeek, Special Issue: Year Ahead 2016, p. 74.

CogniToys: Dino Project Rather than repeating catchphrases, as “talking” toys have done in the past, this dinosaur taps IBM’s Watson technology to engage kids ages 5 to 9 in a more mean- ingful way. The wi-fi-enabled figurine talks back and learns from kids’ responses, helping them hone their math skills by asking harder questions. The trick, according to CogniToys CEO Donald Coolidge, is to make education seem like a “cool, fun experience.”

“The Toy That Talks Back,” Time, November 30/Decem- ber 7, 2015, p. 81.

Coca-Cola Co.: Replenish Africa Initiative (RAIN) The global beverage company aims to provide at least 2 million people with safe water by the end of 2020. The firm is investing over $30 million in community- based water projects across Africa. Greg Koch, senior director of global water stewardship says, “We know that to do business we need water. And when commu- nities have access to safe water, you have the founda- tion of a thriving community, which is a better place for everyone to do business.”

“Water Works,” PMNetwork, September, 2015, p. 53.

S N A P S H O T F R O M P R A C T I C E 1 . 4 Project Management in Action: 2016

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Dateline 1/7/2009, Austin Texas: Dell Children’s Medical Center becomes the first hospital in the world to receive platinum LEED (Leadership in Energy & Environmental Design) certi-

fication. Platinum certification is the highest award granted by the U.S. Green Building Council. Dell Children’s occupies nearly one-half-million square feet on 32 acres that were once part of Austin’s old Mueller Airport. Its environmentally sensitive design not only conserves water and electricity, but positively impacts the hospital’s clinical environment by improv- ing air quality, making natural sunlight readily avail- able, and reducing a wide range of pollutants. In order to receive LEED certification, buildings are rated in five key areas: sustainable site development, water savings, energy efficiency, materials selection, and environmental quality. Listed below are some of the accomplishments in each LEED category:

Sustainable Site

47,000 tons of Mueller Airport runway material was reused on site.

About 40 percent fly ash instead of Portland cement in concrete yields a drop in carbon dioxide emissions equivalent to taking 450 cars off the road.

925 tons of construction waste was recycled on site.

Water Efficiency and Water Conservation

Reclaimed water is used for irrigation; xeriscaped landscaping uses native plants, which require less water.

Low-flow plumbing fixtures.

S N A P S H O T F R O M P R A C T I C E 1 . 5 Dell Children’s Becomes World’s First “Green” Hospital*

Energy Efficiency and Energy Conservation

An on-site natural gas turbine supplies all electric- ity, which is 75 percent more efficient than coal- fired plants.

Converted steam energy from a heating/cooling plant supplies all chilled water needs.

Indoor Environment Quality and Lighting

Most interior spaces are within 32 feet of a window.

Motion and natural light sensors shut off unneeded lights.

Conservation of Materials and Resources

Use of local and regional materials saves fuel for shipping.

Special paints and flooring emit low levels of vola- tile organic compounds (VOCs).

“Even before the first plans were drawn up, we set our sight on creating a world-class children’s hospital, and becoming the first LEED Platinum hospital in the world was definitely part of that,” said Robert Bonar, presi- dent and CEO, Dell Children’s Medical Center of Central Texas. “Our motivation to pursue LEED Platinum was not just environmental. Being a ‘green’ hospital has a profound, measurable effect on healing. What’s good for the environment and good for our neighbors is also good for our patients.”

and services that cater to their specific needs. This mandate requires a much closer working relationship between the provider and the receiver. Account executives and sales representatives are assuming more of a project manager’s role as they work with their organization to satisfy the unique needs and requests of clients. Increased customer attention has also prompted the development of customized products and services. For example, 15 years ago buying a set of golf clubs was a rela- tively simple process: You picked out a set based on price and feel. Today, there are golf clubs for tall players and short players, clubs for players who tend to slice the ball and clubs for those who hook the ball, high-tech clubs with the latest metallurgic dis- covery guaranteed to add distance, and so forth. Project management is critical both to development of customized products and services and to sustaining lucrative relation- ships with customers.

*Austin Business Journal, January 11, 2009, www.dellchildrens.net/about_us/news/2009/01/08.

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Small Projects Represent Big Problems The velocity of change required to remain competitive or simply keep up has created an organizational climate in which hundreds of projects are implemented concurrently. This climate has created a multiproject environment and a plethora of new problems. Sharing and prioritizing resources across a portfolio of projects is a major challenge for senior management. Many firms have no idea of the problems involved with inefficient man- agement of small projects. Small projects typically carry the same or more risk as do large projects. Small projects are perceived as having little impact on the bottom line because they do not demand large amounts of scarce resources and/or money. Because so many small projects are going on concurrently and because the perception of the inef- ficiency impact is small, measuring inefficiency is usually nonexistent. Unfortunately, many small projects soon add up to large sums of money. Many customers and millions of dollars are lost each year on small projects in product and service organizations. Small projects can represent hidden costs not measured in the accounting system. Organizations with many small projects going on concurrently face the most diffi- cult project management problems. A key question becomes one of how to create an organizational environment that supports multiproject management. A process is needed to prioritize and develop a portfolio of small projects that supports the mission of the organization. In summary, there are a variety of environmental forces interacting in today’s busi- ness world that contribute to the increased demand for good project management across all industries and sectors. Project management appears to be ideally suited for a business environment requiring accountability, flexibility, innovation, speed, and con- tinuous improvement. These environmental and other factors have created the neces- sity for major oversight of all organization projects.

1.3 Project Governance Competing in a global market influenced by rapid change, innovation, and time to market means organizations manage more and more projects. Some means for coordi- nating and managing projects in this changing environment is needed. Centralization of project management processes and practices has been the practical outcome. For example, Google, Apple, General Electric, and Sony all have over 1,000 projects being implemented concurrently every day of the year across borders and differing cultures. Questions: How do these organizations oversee the management of all these projects? How were these projects selected? How do they ensure performance measurement and accountability? How can project management continually improve? Centralization entails governance of all project processes and practices to improve project management. Governance is designed to improve project management in the whole organization over the long haul. The rationale for integration of project management was to provide senior management with: ∙ An overview of all project management activities; ∙ A big picture of how organizational resources are being used; ∙ An assessment of the risk their portfolio of projects represents; ∙ A rough metric for measuring the improvement of managing projects relative to

others in the industry; ∙ Linkages of senior management with actual project execution management.

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Full insight of all components of the organization is crucial for aligning internal busi- ness resources with the requirements of the changing environment. Governance enables management to have greater flexibility and better control of all project man- agement activities. Operationally, what does project management integration mean? It necessitates combining all of the major dimensions of project management under one umbrella. Each dimension is connected in one seamless, integrated domain. Governance means applying a set of knowledge, skills, tools, and techniques to a collection of projects in order to move the organization toward its strategic goals. This integrative movement represents a major thrust of project-driven organizations across all industries. See Fig- ure 1.2, Integrated Management of Projects.

Alignment of Projects with Organizational Strategy Today, projects are the modus operandi for implementing strategy. Yet in some organizations, selection and management of projects often fail to support the strate- gic plan of the organization. Strategic plans are written by one group of managers, projects selected by another group, and projects implemented by another. These independent decisions by different groups of managers create a set of conditions leading to conflict, confusion, and frequently an unsatisfied customer. Under these conditions, resources of the organization are wasted in non-value-added activities/ projects. Since projects are the modus operandi, strategic alignment of projects is of major importance to conserving and effective use of organization resources. Selection crite- ria need to ensure each project is prioritized and contributes to strategic goals. Any- thing less is a waste of scarce organizational resources—people, capital, and equipment. Ensuring alignment requires a selection process that is systematic, open, consistent, and balanced. All of the projects selected become part of a project portfolio that balances the total risk for the organization. Management of the project portfolio ensures that only the most valuable projects are approved and managed across the entire organization.

Organizational Culture Environment

Strategic Alignment

Portfolio Management

Project Management

FIGURE 1.2 Integrated Management of Projects

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1.4 Project Management Today: A Socio-Technical Approach Senior management is often involved in selecting projects but seldom involved in implementing them. Implementing the project is the challenge. Managing a project is a multidimensional process (see Figure 1.3, A Socio-Technical Approach to Project Management). The first dimension is the technical side of the management process, which consists of the formal, disciplined, purely logical parts of the process. This technical dimension includes planning, scheduling, and controlling projects. Clear project scope statements are written to link the project and customer and to facilitate planning and control. Creation of the deliverables and work break- down structures facilitates planning and monitoring the progress of the project. The work breakdown structure serves as a database that links all levels in the organization, major deliverables, and all work—right down to the tasks in a work package. Effects of project changes are documented and traceable. Thus, any change in one part of the project is traceable to the source by the integrated linkages of the system. This inte- grated information approach can provide all project managers and the customer with decision information appropriate to their level and needs. A successful project man- ager will be well trained in the technical side of managing projects. The second and opposing dimension is the sociocultural side of project manage- ment. In contrast to the orderly world of project planning, this dimension involves the much messier, often contradictory and paradoxical world of implementation. It centers on creating a temporary social system within a larger organizational environment that combines the talents of a divergent set of professionals working to complete the proj- ect. Project managers must shape a project culture that stimulates teamwork and high levels of personal motivation as well as a capacity to quickly identify and resolve prob- lems that threaten project work. Things rarely go as planned and project managers must be able to steer the project back on track or alter directions when necessary. The sociocultural dimension also involves managing the interface between the proj- ect and external environment. Project managers have to assuage and shape

Understand that manag- ing projects involves bal- ancing the technical and sociocultural dimensions of the project.

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FIGURE 1.3 A Socio-Technical Approach to Project Management

Technical

Scope WBS Schedules Resource allocation Baseline budgets Status reports

Sociocultural

Leadership Problem solving Teamwork Negotiation Politics Customer expectations

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expectations of customers, sustain the political support of top management, negotiate with their functional counterparts, monitor subcontractors, and so on. Overall, the manager must build a cooperative social network among a divergent set of allies with different standards, commitments, and perspectives. Some suggest that the technical dimension represents the “science” of project manage- ment while the sociocultural dimension represents the “art” of managing a project. To be successful, a manager must be a master of both. Unfortunately, some project managers become preoccupied with the planning and technical dimension of project management. Often their first real exposure to project management is through project management soft- ware, and they become infatuated with network charts, Gantt diagrams, and performance variances; they attempt to manage a project from a distance. Conversely, there are other managers who manage projects by the “seat of their pants,” relying heavily on team dynam- ics and organizational politics to complete a project. Good project managers balance their attention to both the technical and sociocultural aspects of project management.

Summary Project management is a critical skill set in today’s world. A project is defined as a non- routine, one-time effort limited by time, resources, and performance specifications de- signed to meet customer needs. One of the distinguishing characteristics of project management is that it has both a beginning and an end and typically consists of four phases: defining, planning, executing, and closing. Effective project management begins with selecting and prioritizing projects that support the firm’s mission and strategy. Suc- cessful implementation requires both technical and social skills. Project managers have to plan and budget projects as well as orchestrate the contributions of others.

Text Overview This text is written to provide the reader with a comprehensive, integrative under- standing of the project management process. The text focuses both on the science of project management and the art of managing projects. Following this introductory chapter, Chapter 2 focuses on how organizations go about evaluating and selecting projects. Special attention is devoted to the importance of aligning project selection to the mission and strategy of the firm. The organizational environment in which projects are implemented is the focus of Chapter 3. The discussion of matrix management and other organizational forms is augmented by a discussion of the role the culture of an organization plays in the implementation of projects. The next six chapters focus on developing a plan for the project; after all, project success begins with a good plan. Chapter 4 deals with defining the scope of the project and developing a work breakdown structure (WBS). The challenge of formulating cost and time estimates is the subject of Chapter 5. Chapter 6 focuses on utilizing the infor- mation from the WBS to create a project plan in the form of a timed and sequenced network of activities. Risks are a potential threat to every project, and Chapter 7 examines how organiza- tions and managers identify and manage risks associated with project work. Resource allocation is added to the plan in Chapter 8 with special attention devoted to how re- source limitations impact the project schedule. After a resource schedule is estab- lished, a project time-phased budget is developed. Finally, Chapter 9 examines strategies for reducing (“crashing”) project time either prior to the initiation of the project or in response to problems or new demands placed on the project. Chapters 10 through 12 focus on project implementation and the sociocultural side of project management, beginning with Chapter 10, which focuses on the role of the

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project manager as a leader and stresses the importance of managing project stake- holders within the organization. Chapter 11 focuses on the core project team; it com- bines the latest information on team dynamics with leadership skills/techniques for developing a high-performance project team. Chapter 12 continues the theme of man- aging project stakeholders by discussing how to outsource project work and negotiate with contractors, customers, and suppliers. Chapter 13 focuses on the kinds of information managers use to monitor project prog- ress, with special attention devoted to the key concept of earned value. The project life cycle is completed with Chapter 14, which covers closing out a project and the important assess- ment of performance and lessons learned. Two “supplemental” chapters are included to augment the project management core. Working on international projects across cultures is the focus of Chapter 15. Agile project management, a more flexible approach to managing projects where requirements cannot be clearly defined, is the subject of Chapter 16. Throughout this text you will be exposed to the major aspects of the project man- agement system. However, a true understanding of project management comes not from knowing what a scope statement is, or the critical path, or partnering with con- tractors, but from comprehending how the different elements of the project manage- ment system interact to determine the fate of a project. If, by the end of this text, you come to appreciate and begin to master both the technical and sociocultural dimen- sions of project management, you should have a distinct competitive advantage over others aspiring to work in the field of project management.

Key Terms Program, 7 Project, 6 Project life cycle, 8

Project Management Professional (PMP), 4

1. Define a project. What are five characteristics that help differentiate projects from other functions carried out in the daily operations of the organization?

2. What are some of the key environmental forces that have changed the way projects are managed? What has been the effect of these forces on the management of projects?

3. Why is the implementation of projects important to strategic planning and the proj- ect manager?

4. The technical and sociocultural dimensions of project management are two sides to the same coin. Explain.

5. What is the impact of governance on managing an individual project? Why is this approach important in today’s environment?

Review Questions

1. Review the front page of your local newspaper, and try to identify all the projects contained in the articles. How many were you able to find?

2. Individually, identify what you consider to be the greatest achievements of mankind in the last five decades. Now share your list with three to five other students in the class, and come up with an expanded list. Review these great achievements in terms of the definition of a project. What does your review suggest about the importance of project management?

3. Individually, identify projects assigned in previous terms. Were both sociocultural and technical elements factors in the success or difficulties in the projects?

Exercises

4. Check out the Project Management Institute’s home page at www.pmi.org. a. Review general information about PMI as well as membership information. b. See if there is a PMI chapter in your state. If not, where is the closest one? c. Use the search function at the PMI home page to find information on Project

Management Body of Knowledge (PMBOK). What are the major knowledge areas of PMBOK?

d. Explore other links that PMI provides. What do these links tell you about the nature and future of project management?

Note: If you have any difficulty accessing any of the Web addresses listed here or else- where in the text, you can find up-to-date addresses on the home page of Dr. Erik Larson, coauthor of this text: http://business.oregonstate.edu/faculty-and-staff-bios/erik-larson

Benko, C., and F. W. McFarlan, Connecting the Dots (Boston: HBS Press, 2003). Cohen, D. J., and R. J. Graham, The Project Manager’s MBA (San Francisco: Jossey-Bass, 2001). Darnell, R., “The Emerging Role of the Project Manager,” PM Network, vol. 11, no. 7 (1997). Derby, Charles, and Ofer Zwikael, “The Secret of (Defining) Success,” PM Network, vol. 26, no. 8 (August 2012), pp. 20–22. Gray, Clifford, “Program Management, A Primer,” PM World Today, vol. 13, no. 8 (August 2011), pp. 1–7. Jonas, D., “Empowering Project Portfolio Managers: How Management Involvement Impacts Project Management Performance,” International Journal of Project Man- agement, vol. 28, no. 8 (2010), pp. 818–831. Koh, Aileen, and Lynn Crawford, “Portfolio Management: The Australian Experience,” Project Management Journal, vol. 43, no. 6 (2012), pp. 33–41. Peters, T., PM Network, January 2004, vol. 18, no. 1, p. 19. Project Management Institute, Leadership in Project Management Annual (Newton Square, PA: PMI Publishing, 2006). Project Management Institute, A Guide to the Project Management Body of Knowledge (PMBOK), (Newton Square, PA: PMI Publishing, 2013). Project Management Institute, PMI Today, July 2011, p. 11. The Standish Group, CHAOS Summary 2009, pp. 1–4. Stewart, T. A., “The Corporate Jungle Spawns a New Species: The Project Manager,” Fortune, September 1996, pp. 14–15.

References

Case 1.1

A Day in the Life Rachel, the project manager of a large information systems project, arrives at her office early to get caught up with work before her co-workers and project team arrive. However, as she enters the office she meets Neil, one of her fellow project managers,

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Chapter 1 Modern Project Management 21

who also wants to get an early start on the day. Neil has just completed a project over- seas. They spend 10 minutes socializing and catching up on personal news. It takes Rachel 10 minutes to get to her office and settle in. She then checks her voice mail and turns on her computer. She was at her client’s site the day before until 7:30 p.m. and has not checked her e-mail or voice mail since 3:30 p.m. the previous day. There are 7 phone messages, 16 e-mails, and 4 notes left on her desk. She spends 15 minutes reviewing her schedule and “to do” lists for the day before responding to messages that require immediate attention. Rachel spends the next 25 minutes going over project reports and preparing for the weekly status meeting. Her boss, who just arrived at the office, interrupts her. They spend 20 minutes discussing the project. He shares a rumor that a team member is using stimulants on the job. She tells him that she has not seen anything suspicious but will keep an eye on the team member. The 9:00 a.m. project status meeting starts 15 minutes late because two of the team members have to finish a job for a client. Several people go to the cafeteria to get cof- fee and doughnuts while others discuss last night’s baseball game. The team members arrive, and the remaining 45 minutes of the progress review meeting surface project issues that have to be addressed and assigned for action. After the meeting Rachel goes down the hallway to meet with Victoria, another IS project manager. They spend 30 minutes reviewing project assignments since the two of them share personnel. Victoria’s project is behind schedule and in need of help. They broker a deal that should get Victoria’s project back on track. She returns to her office and makes several phone calls and returns several e-mails before walking downstairs to visit with members of her project team. Her intent is to follow up on an issue that had surfaced in the status report meeting. However, her simple, “Hi guys, how are things going?” elicits a stream of disgruntled responses from the “troops.” After listening patiently for over 20 minutes, she realizes that among other things several of the client’s managers are beginning to request features that were not in the original project scope statement. She tells her people that she will get on this right away. Returning to her office she tries to call her counterpart John at the client firm but is told that he is not expected back from lunch for another hour. At this time, Eddie drops by and says, “How about lunch?” Eddie works in the finance office and they spend the next half hour in the company cafeteria gossiping about internal politics. She is sur- prised to hear that Jonah Johnson, the director of systems projects, may join another firm. Jonah has always been a powerful ally. She returns to her office, answers a few more e-mails, and finally gets through to John. They spend 30 minutes going over the problem. The conversation ends with John promising to do some investigating and to get back to her as soon as possible. Rachel puts a “Do not disturb” sign on her door, and lies down in her office. She listens to the third and fourth movement of Ravel’s string quartet in F on headphones. Rachel then takes the elevator down to the third floor and talks to the purchasing agent assigned to her project. They spend the next 30 minutes exploring ways of get- ting necessary equipment to the project site earlier than planned. She finally authorizes express delivery. When she returns to her office, her calendar reminds her that she is scheduled to participate in a conference call at 2:30. It takes 15 minutes for everyone to get online. During this time, Rachel catches up on some e-mail. The next hour is spent exchang- ing information about the technical requirements associated with a new version of a software package they are using on systems projects like hers. Rachel decides to stretch her legs and goes on a walk down the hallway where she engages in brief conversations with various co-workers. She goes out of her way to thank

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Chandra for his thoughtful analysis at the status report meeting. She returns to find that John has left a message for her to call him back ASAP. She contacts John, who informs her that, according to his people, her firm’s marketing rep had made certain promises about specific features her system would provide. He doesn’t know how this communication breakdown occurred, but his people are pretty upset over the situation. Rachel thanks John for the information and immediately takes the stairs to where the marketing group resides. She asks to see Mary, a senior marketing manager. She waits 10 minutes before being invited into her office. After a heated discussion, she leaves 40 minutes later with Mary agreeing to talk to her people about what was promised and what was not promised. She goes downstairs to her people to give them an update on what is happening. They spend 30 minutes reviewing the impact the client’s requests could have on the project schedule. She also shares with them the schedule changes she and Victoria had agreed to. After she says good night to her team, she heads upstairs to her boss’s office and spends 20 minutes updating him on key events of the day. She returns to her office and spends 30 minutes reviewing e-mails and project documents. She logs on to the MS project schedule of her project and spends the next 30 minutes working with “what-if” scenarios. She reviews tomorrow’s schedule and writes some personal reminders before starting off on her 30-minute commute home. 1. How effectively do you think Rachel spent her day? 2. What does the case tell you about what it is like to be a project manager?

Case 1.2

The Hokies Lunch Group1

PART A Fatma settled down for lunch at the Yank Sing Chinese restaurant. She was early and took the time to catch up on her e-mail. Soon she would be joined by Jasper and Viktoria, two fellow 2014 grads from Virginia Tech in Blacksburg, Virginia. Jasper worked as a software engineer for a start-up company that wanted to expand the boundaries of sharing economy. Viktoria was an electrical engineer who worked for a German healthcare company in San Francisco. They had met each other at a Silicon Val- ley alumni reception hosted by Virginia Tech. Each of them felt a bit like a fish out of water on the West Coast, so they decided to have lunch together each month. The lunch evolved into a professional support group. A major part of each of their jobs was manag- ing projects, and they found it useful to share issues and seek advice from each other. Fatma worked for a very successful Internet company whose founders believed that everyone in the firm should devote three days a year to community service projects. The company was partnering with several companies in the construction industry to renovate abandoned buildings for low income families. The next project was the reno- vation of an empty warehouse into eight two-bedroom apartments. Fatma was part of the core team in charge of scheduling and managing work assignments. Viktoria and Jasper entered the restaurant together. Viktoria was the first to move to the Bay area. She was currently working on the next-generation neural

1 Hokies is the name associated with Virginia Tech athletic teams.

Chapter 1 Modern Project Management 23

stimulator (“PAX 2”). Neural stimulators are electronic devices that doctors implant in patients with wires connected to sources of pain in the patient’s spine. In the past, patients would have to have an operation to replace the stimulator bat- tery every 10 years. PAX 2 was being designed to take advantage of new battery technologies and use a rechargeable battery. In concept, this battery system would eliminate the need for replacement surgeries and allow the implanted battery to be recharged externally. Viktoria’s team had just completed the second prototype and was entering a critical testing phase. It had been tricky trying to predict the life span of the new rechargeable battery without testing it in real time. She was anx- ious to begin seeing the test results. Jasper was working for a start-up company after doing contract work for his first nine months in San Francisco. He was sworn to secrecy about the project and all Fatma and Viktoria knew was that the project had something to do with sharing economy. He was working with a small development team that included colleagues from Bangalore, India, and Malmo, Sweden. After ordering and chit-chatting a bit, Fatma started the discussion. “I will be glad when this week is over,” she said. “We’ve been struggling defining the scope of the project. At first glance our project seems relatively simple, build eight two-bedroom apartments in an old warehouse. But there are a lot of unanswered questions. What kind of community space do we want to have? How efficient should the energy system be? What kind of furniture? Everybody wants to do a good job, but when does low income housing morph into middle income housing?” Viktoria offered, “Scope defining is one of the things my company does very well. Before a project is authorized, a detailed scope statement is developed that clearly defines the project objectives, priorities, budget, requirements, limits, and exclusions. All of the key stakeholders sign off on it. It is really important to identify priorities up front. I know on the PAX 2 project that scope is the number one priority. I know no matter how long it takes it is imperative that my work is done right.” Fatma responded, “That’s exactly what my Project manager is preparing for Friday’s meeting. I guess that is one of the things you have to do as a project manager is end discussions. He is going to make the tough calls and finalize the project scope so we can begin planning.” Jasper interjected, “You guys are so lucky, for the most part your scope remains the same. In my work the scope is constantly changing. You show the founders a feature they wanted, and they say well if you can do that, can you do this? You know it’s going to happen, but you really can’t plan for it.” Jasper went on to say, “We do know what our number one priority is: time. There are a lot of players trying to move in to the ‘space’ we are working on. We have to demon- strate we are ahead of the pack if we are going to continue to get VC funding.”2 Jasper said that despite the pressure, his project had been a lot of fun. He especially liked working with his Swedish and Indian counterparts, Axel and Raja. They worked like a global tag team on their part of the project. Jasper would code and then pass his work onto Raja who would work on it and pass it on to Axel, who would eventually hand it off to Jasper. Given the time zones, they were able to have at least one person working on the code around the clock. Jasper said it was hard at first working with someone you never met personally other than on a video screen. Trust was an issue. Everyone was trying to prove them- selves. Eventually a friendly competition arose across the team. The programmers

2 New Venture Capital funding.

24 Chapter 1 Modern Project Management

exchanged funny cartoons and YouTube videos. He showed Fatma and Viktoria a You- Tube video about scope creep that got a chuckle from everyone. They made plans to meet next at the New Peruvian restaurant on SE 8th Street.

PART B The Peruvian cilantro/lime ceviche was a big hit at the next lunch. Viktoria began their discussion by reporting, “I have good and bad news. The bad news is that our first prototype failed its tests miserably. The good news is that I have a smart project man- ager. She knew this could happen, so she mitigated the risk by having us working on two alternative battery technologies. The alternative technology is passing all of the tests. Instead of falling behind months we are only days behind schedule.” This precipitated a discussion of risk management. Fatma reported that there had been a two-day session on risk management for the renovation project. They spent the first day brainstorming what could go wrong, and the second day coming up with strat- egies for dealing with risks. A big help was the risk report that was generated after the last project. The report detailed all of the problems that had occurred on the last reno- vation project as well as recommendations. Fatma said, “I couldn’t believe how much time and attention was devoted to safety, but as my project manager said, ‘all it takes is one bad accident to shut down a project for weeks, even months.’ ” Jasper reported that on his project they spent very little time on risk management. His project was driven by a build-test mentality. “Everybody assumes that daily testing eliminates problems, but when it’s time to integrate different features, that’s when the real bugs will emerge,” Jasper said. Jasper went on to say that things were not going well at work. They had missed their second straight milestone, and everyone was feeling the pressure to show results. “I even slept by my cubicle three nights ago,” Jasper confessed. Fatma asked, “How many hours are you working?” “I don’t know, at least 70, maybe 80 hours,” Jasper answered. He went on to say, “This is a high stakes project, with a BIG upside if suc- cessful. I am doing some of my best programming and we’ll just have to see what happens.” Jasper showed them a cartoon that was being circulated across his team. The cap- tion read: “When did you want it done? Yesterday.” Fatma turned to her friends and said, “I need some advice. As you know I’m respon- sible for scheduling work assignments. Well, some of my colleagues have been pretty aggressive lobbying for choice assignments. Everyone wants to work alongside Bruno or Ryan. Suddenly I am everyone’s friends, and certain people are going way out of their way to do favors for me. I am sure they think it will influence my decisions. It’s getting awkward and I am not sure what to do.” “Quid pro quo,” answered Jasper, “that’s how the business world works. You scratch my back and I’ll scratch yours. Within reason, I don’t have a problem with someone taking advantage of their position to garner favors and build relationships.” Viktoria said, “I disagree. You don’t want to be seen as someone whose influence can be bought. You need to think what’s best for the company. You need to ask your- self what would Bruno and Ryan want you to do? And if you don’t know, ask them.” After much discussion, Fatma left the restaurant leaning towards Viktoria’s advice, but she wasn’t sure what the guidelines should be.

PART C It took two months for the Hokie lunch group to get together again. Jasper had canceled the last meeting because of work, so Viktoria and Fatma saw a movie together instead.

Chapter 1 Modern Project Management 25

Jasper was the last person to arrive and it was clear from the look on his face that things were not going well. He sat down, avoided eye contact, before blurting, “I’m out of work.” “What do you mean?” Fatma and Viktoria cried. Jasper explained after months and months of work they had been unable to demonstrate a functional product. Jasper went on to say, “Despite our best efforts we couldn’t deliver. The founders couldn’t get an ounce of second round venture funding, so they decided to cut their losses and kill the project. I just spent the best six months of my programming life for nothing.” Fatma and Viktoria tried to comfort their friend. Fatma asked Jasper how the others were taking the news. Jasper said the Swedish programmer, Axel, took the news very hard. He went on to say, “I think he was burning a lot of bridges at home with the long work hours and now he has nothing to show for it. He started blaming us for mistakes we never made.” Raja, his Indian counterpart, was a different story. “Raja seemed to shrug his shoulders.” Jasper added, “He said, I know I am a good programmer. There are lots of opportunities here in Bangalore.” Fatma broke the silence that followed by saying to Jasper, “Send me your resume. My company is always looking for top notch programmers and it is a really great com- pany. Can you believe it, the two founders, Bruno and Ryan, are working side by side with everyone on renovating the warehouse? In fact, people were amazed at how good Bruno was with sheet rock. A big part of my job now is scheduling their time so they can work with as many different people as possible. They really want to use the project to get to know their employees. This hasn’t been easy. I have had to juggle their calen- dars, their abilities, and work opportunities.” Viktoria interjected, “You’re using Microsoft Project to do this?” “Not really,” responded Fatma. “At first I tried scheduling their work in Project, but it was too cum- bersome and time consuming. Now I just use the Project master schedule and each of their calendars to schedule their work. This seems to work best.” Viktoria added, “Yeah, Microsoft Project is a great program, but you can get lost trying to get it to do everything. Sometimes all you need is an Excel sheet and common sense.” Viktoria felt awkward, given what had happened to Jasper. She was just wrapping up the successful PAX 2 project. She was also getting ready for a well-deserved holi- day in Vietnam paid for by her project bonus. “I hate closing out a project,” Viktoria said. “It’s so boring. Document, document, document! I keep kicking myself for not tracking things when they happened. I am spending most of my time scouring my computer for files. I can’t wait to take off to Vietnam.” Viktoria went on to say, “The only thing I liked doing was the project retrospective.” Jasper asked, “What’s a project retrospective?” Viktoria answered, “It’s when the project team gets together and reviews what went well, what didn’t, and identifies lessons learned that we can apply to future projects. For example, one of the things we learned was that we needed to bring the manufacturing people on board a lot sooner in the design process. We focused on designing the very best product possible, regardless of cost. We found out later that there were ways for reducing production costs without compromising quality.” Fatma added, “We do that too at the end of our projects, but we call it an audit.” Fatma asked Viktoria, “Do you know what your next assignment will be?” “No,” she replied, “I will probably go back to my department and do some testing. I’m not worried. I did good work. I am sure someone will want me for their project.” Jasper chimed in, “I sure hope someone wants me for their next project.” Fatma and Viktoria immediately went into action trying to lift their friend’s spirits. A little while later, they walked out of the Tapa restaurant and gave each other hugs. Fatma reminded Jasper to send her his latest resume. 1. For each part (A, B, C), what phase of the project life cycle is each project in? Explain. 2. What are two important things you learned about working on projects from the

case? Why are they important?

Organization Strategy and Project Selection2

LEARNING OBJECTIVES After reading this chapter you should be able to:

2-1 Explain why it is important for project managers to understand their organization’s strategy.

2-2 Identify the significant role projects contribute to the strategic direction of the organization.

2-3 Understand the need for a project priority system.

2-4 Apply financial and nonfinancial criteria to assess the value of projects.

2-5 Understand how multi-criteria models can be used to select projects.

2-6 Apply an objective priority system to project selection.

2-7 Understand the need to manage the project portfolio.

OUTLINE 2.1 The Strategic Management Process: An

Overview

2.2 The Need for a Project Priority System

2.3 A Portfolio Management System

2.4 Selection Criteria

2.5 Applying a Selection Model

2.6 Managing the Portfolio System

Summary

C H A P T E R T W O

Strategy is implemented through projects. Every significant project should have a clear link to the organization’s strategy.

Strategy is fundamentally deciding how the organization will compete. Organizations use projects to convert strategy into new products, services, and processes needed for success. For example, Intel’s major strategy is one of differentiation. Its projects target innovation and time to market. Currently, Intel is directing its strategy toward specialty chips for products other than computers, such as autos, security, cell phones, and air controls. Another goal is to reduce project cycle times. Procter and Gamble, NEC, General Electric, and AT&T have reduced their cycle times by 20–50 percent. For example, Toyota and other auto manufacturers are now able to design and develop new cars in two to three years instead of five to seven. Projects and project management play the key role in supporting strategic goals. It is vital for project managers to think and act strategically. Aligning projects with the strategic goals of the organization is crucial for business success. Today’s economic climate is unprecedented by rapid changes in technology, global competition, and financial uncertainty. These conditions make strategy/project

Project networks

Managing risk 7

Monitoring progress

Teams 11

Outsourcing 12

Project manager

Strategy 2

Introduction 1

Organization 3

Schedule resources/costs

Inter natio

nal

proje cts

Agile PM 16

Project closure

Estimate 5

Reducing project duration

Define project

28 Chapter 2 Organization Strategy and Project Selection

Explain why it is impor- tant for project managers to understand their orga- nization’s strategy.

2-1LO

1 Shenhar, A., and Dov Dvie, Reinventing Project Management (Harvard Business School, 2007), p. 5.

Chapter 2 Organization Strategy and Project Selection 29

stakeholders why certain project objectives and priorities are critical. This is essential for getting buy-in on contentious trade-off decisions. For these reasons project managers will find it valuable to have a keen understand- ing of strategic management and project selection processes, which are discussed next.

2.1 The Strategic Management Process: An Overview Strategic management is the process of assessing “what we are” and deciding and imple- menting “what we intend to be and how we are going to get there.” Strategy describes how an organization intends to compete with the resources available in the existing and perceived future environment.

Two major dimensions of strategic management are responding to changes in the external environment and allocating scarce resources of the firm to improve its com- petitive position. Constant scanning of the external environment for changes is a major requirement for survival in a dynamic competitive environment. The second dimen- sion is the internal responses to new action programs aimed at enhancing the competi- tive position of the firm. The nature of the responses depends on the type of business, environment volatility, competition, and the organizational culture. Strategic management provides the theme and focus of the future direction of the organization. It supports consistency of action at every level of the organization. It encourages integration because effort and resources are committed to common goals and strategies. See Snapshot from Practice 2.1: Does IBM’s Watson’s Jeopardy Project Represent a Change in Strategy? It is a continuous, iterative process aimed at develop- ing an integrated and coordinated long-term plan of action. Strategic management posi- tions the organization to meet the needs and requirements of its customers for the long term. With the long-term position identified, objectives are set, and strategies are devel- oped to achieve objectives and then translated into actions by implementing projects. Strategy can decide the survival of an organization. Most organizations are successful in formulating strategies for what course(s) they should pursue. However, the problem in many organizations is implementing strategies—that is, making them happen. Inte- gration of strategy formulation and implementation often does not exist. The components of strategic management are closely linked, and all are directed toward the future success of the organization. Strategic management requires strong links among mission, goals, objectives, strategy, and implementation. The mission gives the general purpose of the organization. Goals give global targets within the mis- sion. Objectives give specific targets to goals. Objectives give rise to formulation of strategies to reach objectives. Finally, strategies require actions and tasks to be imple- mented. In most cases the actions to be taken represent projects. Figure 2.1 shows a schematic of the strategic management process and major activities required.

Four Activities of the Strategic Management Process The typical sequence of activities of the strategic management process is outlined here; a description of each activity then follows: 1. Review and define the organizational mission. 2. Analyze and formulate strategies. 3. Set objectives to achieve strategy. 4. Implement strategies through projects.

Identify the significant role projects contribute to the strategic direction of the organization.

2-2LO

30 Chapter 2 Organization Strategy and Project Selection

IBM’s investment in artificial intelligence paid off. In February 2010, millions of people were glued to their television sets to watch IBM’s Watson outclass two former champion contestants on

the Jeopardy quiz show. Watson performed at human expert levels in terms of precision, confidence, and speed during the Jeopardy quiz show. Does Watson represent a new strategic direction for IBM? Not really. The Watson project is simply a man- ifestation of the move from computer hardware to a service strategy over a decade ago.

WATSON PROJECT DESCRIPTION Artificial intelligence has advanced significantly in recent years. Watson goes beyond IBM’s chess-playing supercomputer of the late 1990s. Chess is finite, logical, and reduced easily to mathematics. Watson’s space is ill-defined and involves dealing with abstraction and the circumstantial nature of language. Since Watson’s sys- tem can understand natural language, it can extend the way people interact with computers. The IBM Watson project took three intense years of research and development by a core team of about 20. Eight university teams working on specific challenge areas augmented these researchers. Watson depends on over 200 million pages of structured and unstructured data and a program capable of running trillions of operations per second. With this information backup, it attacks a Jeopardy question by parsing the question into small pieces. With the question parsed, the program then searches for relevant data. Using hundreds of decision rules, the program generates possible answers. These answers are assigned a confidence score to decide if Watson should risk offering an answer and how much to bet.

WHAT’S NEXT? Now that the hype is over, IBM is pursuing their service strategy and applying the knowledge gained from the Watson project to real business applications. Watson’s artificial intelligence design is flexible and suggests a wide variety of opportunities in industries such as

S N A P S H O T F R O M P R A C T I C E 2 . 1 Does IBM’s Watson’s Jeopardy Project Represent a Change in Strategy?*

finance, medicine, law enforcement, and defense. Fur- ther extensions to handheld mobile applications that tap into Watson’s servers also hold great potential. IBM identified the obvious lowest hanging apples on the tree as providing healthcare solutions and has begun design of such a program. To create a “doctor’s consultant” program would likely follow a design platform similar to Watson’s. For example, it would be able to:

knowledge base.

data.

- nostic options.

Creating a doctor’s consultant solution will not replace doctors. Although the system holds tremendous poten- tial, it is man-made and depends on the database, data analytics, and decision rules to select options. Given the doctor’s consultant input, a trained doctor makes the final patient diagnosis to supplement physical examination and experience. The Watson project provides IBM with a flexible com- ponent to continue their decade-old strategy, moving IBM from computer hardware to service products.

*Ferrucci et al., “Building Watson,” AI Magazine, vol. 31, no. 3 (Fall 2010).

Chapter 2 Organization Strategy and Project Selection 31

Review and Define the Organizational Mission The mission identifies “what we want to become,” or the raison d’être. Mission state- ments identify the scope of the organization in terms of its product or service. A writ- ten mission statement provides focus for decision making when shared by organizational managers and employees. Everyone in the organization should be keenly aware of the organization’s mission. For example, at one large consulting firm, partners who fail to recite the mission statement on demand are required to buy lunch. The mission statement communicates and identifies the purpose of the organization to all stakeholders. Mission statements can be used for evaluating organization performance. Traditional components found in mission statements are major products and ser- vices, target customers and markets, and geographical domain. In addition, statements frequently include organizational philosophy, key technologies, public image, and con- tribution to society. Including such factors in mission statements relates directly to business success.

FIGURE 2.1 Strategic Management Process

Projects

What are we now?

What do we intend to be?

How are we going to get there?

Internal environment— strengths and weaknesses

Review/revise mission

External environment— opportunities and threats

Set strategy and objectives

Portfolio of strategic choices

Strategy implementation

Project selection

32 Chapter 2 Organization Strategy and Project Selection

Mission statements change infrequently. However, when the nature of the business changes or shifts, revised mission and strategy statements may be required. More specific mission statements tend to give better results because of a tighter focus. Mission statements decrease the chance of false directions by stakeholders. For example, compare the phrasing of the following mission statements:

Provide hospital design services. Provide data mining and analysis services. Provide information technology services. Provide high-value products to our customer.

Clearly, the first two statements leave less chance for misinterpretation than the others. A rule-of-thumb test for a mission statement is, if the statement can be anybody’s mis- sion statement, it will not provide the guidance and focus intended. The mission sets the parameters for developing objectives.

Analyze and Formulate Strategies Formulating strategy answers the question of what needs to be done to reach objec- tives. Strategy formulation includes determining and evaluating alternatives that sup- port the organization’s objectives and selecting the best alternative. The first step is a realistic evaluation of the past and current position of the enterprise. This step typi- cally includes an analysis of “who are the customers” and “what are their needs as they (the customers) see them.” The next step is an assessment of the internal and external environments. What are the internal strengths and weaknesses of the enterprise? Examples of internal strengths or weaknesses could be core competencies, such as technology, product quality, man- agement talent, low debt, and dealer networks. Managers can alter internal strengths and weaknesses. Opportunities and threats usually represent external forces for change such as technology, industry structure, and competition. Competitive benchmarking tools are sometimes used here to assess current and future directions. Opportunities and threats are the flip sides of each other. That is, a threat can be perceived as an opportu- nity, or vice versa. Examples of perceived external threats could be a slowing of the economy, a maturing life cycle, exchange rates, or government regulation. Typical opportunities are increasing demand, emerging markets, and demographics. Managers or individual firms have limited opportunities to influence such external environmental factors; however, in recent years notable exceptions have been new technologies such as Apple using the iPod to create a market to sell music. The keys are to attempt to forecast fundamental industry changes and stay in a proactive mode rather than a reactive one. This assessment of the external and internal environments is known as the SWOT anal- ysis (strengths, weaknesses, opportunities, and threats). From this analysis, critical issues and strategic alternatives are identified. Critical analysis of the strategies includes asking questions: Does the strategy take advantage of our core competencies? Does the strategy exploit our competitive advantage? Does the strategy maximize meeting customers’ needs? Does the strategy fit within our acceptable risk range? These strategic alternatives are winnowed down to a critical few that support the basic mission. Strategy formulation ends with cascading objectives or projects assigned to lower divisions, departments, or individuals. Formulating strategy might range around 20 percent of management’s effort, while determining how strategy will be imple- mented might consume 80 percent.

Chapter 2 Organization Strategy and Project Selection 33

Set Objectives to Achieve Strategies Objectives translate the organization strategy into specific, concrete, measurable terms. Organizational objectives set targets for all levels of the organization. Objec- tives pinpoint the direction managers believe the organization should move toward. Objectives answer in detail where a firm is headed and when it is going to get there. Typically, objectives for the organization cover markets, products, innovation, pro- ductivity, quality, finance, profitability, employees, and consumers. In every case, objectives should be as operational as possible. That is, objectives should include a time frame, be measurable, be an identifiable state, and be realistic. Doran created the memory device shown in Exhibit 2.1, which is useful when writing objectives.2 Each level below the organizational objectives should support the higher-level objectives in more detail; this is frequently called cascading of objectives. For exam- ple, if a firm making leather luggage sets an objective of achieving a 40 percent increase in sales through a research and development strategy, this charge is passed to the marketing, production, and R&D departments. The R&D department accepts the firm’s strategy as their objective, and their strategy becomes the design and develop- ment of a new “pull-type luggage with hidden retractable wheels.” At this point the objective becomes a project to be implemented—to develop the retractable wheel lug- gage for market within six months within a budget of $200,000. In summary, organi- zational objectives drive your projects.

Implement Strategies through Projects Implementation answers the question of how strategies will be realized, given avail- able resources. The conceptual framework for strategy implementation lacks the struc- ture and discipline found in strategy formulation. Implementation requires action and completing tasks; the latter frequently means mission-critical projects. Therefore, implementation must include attention to several key areas. First, completing tasks requires allocation of resources. Resources typically repre- sent funds, people, management talents, technological skills, and equipment. Fre- quently, implementation of projects is treated as an “addendum” rather than an integral part of the strategic management process. However, multiple objectives place conflict- ing demands on organizational resources. Second, implementation requires a formal and informal organization that complements and supports strategy and projects. Authority, responsibility, and performance all depend on organization structure and culture. Third, planning and control systems must be in place to be certain project activities necessary to ensure strategies are effectively performed. Fourth, motivating project contributors will be a major factor for achieving project success. Finally, areas receiving more attention in recent years are portfolio management and prioritizing

EXHIBIT 2.1 Characteristics of Objectives

S Specific Be specific in targeting an objective M Measurable Establish a measurable indicator(s) of progress A Assignable Make the objective assignable to one person for completion R Realistic State what can realistically be done with available resources T Time related State when the objective can be achieved, that is, duration

2 Doran, G. T., “There’s a Smart Way to Write Management Goals and Objectives,” Management Review, November 1981, pp. 35–36.

34 Chapter 2 Organization Strategy and Project Selection

projects. Although the strategy implementation process is not as clear as strategy for- mulation, all managers realize that, without implementation, success is impossible. Although the four major steps of the strategic management process have not been altered significantly over the years, the view of the time horizon in the strategy formu- lation process has been altered radically in the last two decades. Global competition and rapid innovation require being highly adaptive to short-run changes while being consistent in the longer run.

2.2 The Need for a Project Priority System Implementation of projects without a strong priority system linked to strategy creates problems. Three of the most obvious problems are discussed below. A priority driven project portfolio system can go a long way to reduce, or even eliminate, the impact of these problems.

Problem 1: The Implementation Gap In organizations with short product life cycles, it is interesting to note that frequently participation in strategic planning and implementation includes participants from all levels within the organization. However, in perhaps 80 percent of the remaining product and service organizations, top management pretty much formulates strategy and leaves strategy implementation to functional managers. Within these broad constraints, more detailed strategies and objectives are developed by the functional managers. The fact that these objectives and strategies are made independently at different levels by func- tional groups within the organization hierarchy causes manifold problems. Some symptoms of organizations struggling with strategy disconnect and unclear priorities are presented here. ∙ Conflicts frequently occur among functional managers and cause lack of trust. ∙ Frequent meetings are called to establish or renegotiate priorities. ∙ People frequently shift from one project to another, depending on current priority.

Employees are confused about which projects are important. ∙ People are working on multiple projects and feel inefficient. ∙ Resources are not adequate. Because clear linkages do not exist, the organizational environment becomes dysfunc- tional, confused, and ripe for ineffective implementation of organization strategy and, thus, of projects. The implementation gap refers to the lack of understanding and con- sensus of organization strategy among top and middle-level managers. A scenario the authors have seen repeated several times follows. Top management picks their top 20 projects for the next planning period, without priorities. Each functional department—marketing, finance, operations, engineering, information technology, and human resources—selects projects from the list. Unfortunately, independent department priorities across projects are not homogenous. A project that rates first in the IT department can rate 10th in the finance department. Imple- mentation of the projects represents conflicts of interest with animosities developing over organization resources. If this condition exists, how is it possible to effectively implement strategy? The problem is serious. One study found that only about 25 percent of Fortune 500 execu- tives believe there is a strong linkage, consistency, and/or agreement between the

Understand the need for a project priority system.

2-3LO

Chapter 2 Organization Strategy and Project Selection 35

strategies they formulate and implementation. In another study of Deloitte Consulting, Jeff MacIntyre reports, “Only 23 percent of nearly 150 global executives considered their project portfolios aligned with the core business.”3 Middle managers considered organizational strategy to be under the purview of oth- ers or not in their realm of influence. It is the responsibility of senior management to set policies that show a distinct link between organizational strategy and objectives and projects that implement those strategies. The research of Fusco suggests the imple- mentation gap and prioritizing projects are still overlooked by many organizations. He surveyed 280 project managers and found that 24 percent of their organizations did not even publish or circulate their objectives; in addition, 40 percent of the respondents reported that priorities among competing projects were not clear, while only 17 per- cent reported clear priorities.4

Problem 2: Organization Politics Politics exist in every organization and can have a significant influence on which proj- ects receive funding and high priority. This is especially true when the criteria and process for selecting projects are ill-defined and not aligned with the mission of the firm. Project selection may be based not so much on facts and sound reasoning as on the persuasiveness and power of people advocating projects. The term “sacred cow” is often used to denote a project that a powerful, high- ranking official is advocating. Case in point, a marketing consultant confided that he was once hired by the marketing director of a large firm to conduct an independent, external market analysis for a new product the firm was interested in developing. His extensive research indicated that there was insufficient demand to warrant the financ- ing of this new product. The marketing director chose to bury the report and made the consultant promise never to share this information with anyone. The director explained that this new product was the “pet idea” of the new CEO, who saw it as his legacy to the firm. He went on to describe the CEO’s irrational obsession with the project and how he referred to it as his “new baby.” Like a parent fiercely protecting his child, the marketing director believed that he would lose his job if such critical information ever became known. Project sponsors play a significant role in the selection and successful implemen- tation of product innovation projects. Project sponsors are typically high-ranking man- agers who endorse and lend political support for the completion of a specific project. They are instrumental in winning approval of the project and in protecting the project during the critical development stage. The importance of project sponsors should not be taken lightly. For example, a PMI global survey of over 1,000 project practitioners and leaders over a variety of industries found those organizations having active spon- sors on at least 80 percent of their projects/programs have a success rate of 75 percent, 11 percentage points above the survey average of 64 percent. Many promising projects have failed to succeed due to lack of strong sponsorship.5 The significance of corporate politics can be seen in the ill-fated ALTO computer project at Xerox during the mid-1970s.6 The project was a tremendous technological

3 MacIntyre, J., PM Network, vol. 20, no. 11 (November 2006), pp. 32–35. 4 Fusco, J. C., “Better Policies Provide the Key to Implementing Project Management,” Project Management Journal, vol. 28, no. 3 (1997), pp. 38–41. 5 PMI, “PMI’s Pulse of the Profession,” Project Management Institute, March 2012, p. 7. 6 Smith, D. K., and R. C. Alexander, Fumbling the Future: How Xerox Invented, Then Ignored the First Personal Computer (New York: Macmillan, 1988).

36 Chapter 2 Organization Strategy and Project Selection

success; it developed the first workable mouse, the first laser printer, the first user- friendly software, and the first local area network. All of these developments were five years ahead of their nearest competitor. Over the next five years this opportunity to dominate the nascent personal computer market was squandered because of internal in-fighting at Xerox and the absence of a strong project sponsor. (Apple’s MacIntosh computer was inspired by many of these developments.) Politics can play a role not only in project selection but also in the aspirations behind projects. Individuals can enhance their power within an organization by managing extraordinary and critical projects. Power and status naturally accrue to successful inno- vators and risk takers rather than to steady producers. Many ambitious managers pursue high-profile projects as a means for moving quickly up the corporate ladder. Many would argue that politics and project management should not mix. A more proactive response is that projects and politics invariably mix and that effective project managers recognize that any significant project has political ramifications. Likewise, top management needs to develop a system for identifying and selecting projects that reduces the impact of internal politics and fosters the selection of the best projects for achieving the mission and strategy of the firm.

Problem 3: Resource Conflicts and Multitasking Most project organizations exist in a multiproject environment. This environment cre- ates the problems of project interdependency and the need to share resources. For example, what would be the impact on the labor resource pool of a construction com- pany if it should win a contract it would like to bid on? Will existing labor be adequate to deal with the new project—given the completion date? Will current projects be delayed? Will subcontracting help? Which projects will have priority? Competition among project managers can be contentious. All project managers seek to have the best people for their projects. The problems of sharing resources and scheduling resources across projects grow exponentially as the number of projects rises. In multiproject envi- ronments the stakes are higher and the benefits or penalties for good or bad resource scheduling become even more significant than in most single projects. Resource sharing also leads to multitasking. Multitasking involves starting and stopping work on one task to go and work on another project, and then returning to the work on the original task. People working on several tasks concurrently are far less efficient, especially where conceptual or physical shutdown and start-up are signifi- cant. Multitasking adds to delays and costs. Changing priorities exacerbate the multi- tasking problems even more. Likewise, multitasking is more evident in organizations that have too many projects for the resources they command. The number of small and large projects in a portfolio almost always exceeds the available resources (typically by a factor of three to four times the available resources). This capacity overload inevitably leads to confusion and inefficient use of scarce orga- nizational resources. The presence of an implementation gap, of power politics, and of multitasking adds to the problem of which projects are allocated resources first. Employee morale and confidence suffer because it is difficult to make sense of an ambiguous system. A multiproject organization environment faces major problems without a priority system that is clearly linked to the strategic plan. In essence, to this point we have suggested that many organizations have no mean- ingful process for addressing the problems we have described. The first and most important change that will go a long way in addressing these and other problems is the development and use of a meaningful project priority process for project selection.

Chapter 2 Organization Strategy and Project Selection 37

How can the implementation gap be narrowed so that understanding and consensus of organizational strategies run through all levels of management? How can power politics be minimized? Can a process be developed in which projects are consistently prioritized to support organizational strategies? Can the prioritized projects be used to allocate scarce organizational resources—for example, people, equipment? Can the process encourage bottom-up initiation of projects that support clear organizational targets? What is needed is a set of integrative criteria and a process for evaluating and select- ing projects that support higher-level strategies and objectives. A single-project prior- ity system that ranks projects by their contribution to the strategic plan would make life easier. Easily said, but difficult to accomplish in practice. Organizations that man- aged independent projects and allocated resources ad hoc have shifted focus to select- ing the right portfolio of projects to achieve their strategic objectives. This is a quickening trend. The advantages of successful project portfolio systems are becoming well recognized in project-driven organizations. See Exhibit 2.2, which lists a few key benefits; the list could easily be extended. A project portfolio system is discussed next with emphasis on selection criteria, which is where the power of the portfolio system is established.

2.3 A Portfolio Management System Succinctly put, the aim of portfolio management is to ensure that projects are aligned with strategic goals and prioritized appropriately. As Foti points out, portfolio manage- ment asks “What is strategic to our organization?” (2002). Portfolio management pro- vides information that allows people to make better business decisions. Since projects clamoring for funding and people usually outnumber available resources, it is important to follow a logical and defined process for selecting the projects to implement. Design of a project portfolio system should include classification of a project, selec- tion criteria depending upon classification, sources of proposals, evaluating proposals, and managing the portfolio of projects.

Classification of the Project Many organizations find they have three basic kinds of projects in their portfolio: com- pliance (emergency—must do), operational, and strategic projects. (See Figure 2.2.) Compliance projects are typically those needed to meet regulatory conditions required to operate in a region; hence, they are called “must do” projects. Emergency projects, such as building an auto parts factory destroyed by tsunami, or recovering a crashed network, are examples of must do projects. Compliance and emergency projects usu- ally have penalties if they are not implemented. Operational projects are those that are needed to support current operations. These projects are designed to improve

EXHIBIT 2.2 Benefits of Project Portfolio Management

38 Chapter 2 Organization Strategy and Project Selection

efficiency of delivery systems, reduce product costs, and improve performance. Some of these projects, given their limited scope and cost, require only immediate manager approval, while bigger, more expensive projects need extensive review. Choosing to install a new piece of equipment would be an example of the latter while modifying a production process would be an example of the former. Total quality management (TQM) projects are examples of operational projects. Finally, strategic projects are those that directly support the organization’s long-run mission. They frequently are directed toward increasing revenue or market share. Examples of strategic projects are new products, research, and development. For a good, complete discussion on classifi- cation schemes found in practice, see Crawford, Hobbs, and Turne (2006). Frequently, these three classifications are further decomposed by product type, organization divisions, and functions that will require different criteria for project selection. For example, the same criteria for the finance or legal division would not apply to the IT (information technology) department. This often requires different project selection criteria within the basic three classifications of strategic, operational, and compliance projects.

2.4 Selection Criteria Although there are many criteria for selecting projects, selection criteria are typically identified as financial and nonfinancial. A short description of each is given next, fol- lowed by a discussion of their use in practice.

Financial Criteria Financial Models For most managers financial criteria are the preferred method to evaluate projects. These models are appropriate when there is a high level of confidence associated with estimates of future cash flows. Two models and examples are demonstrated here— payback and net present value (NPV).

Project A has an initial investment of $700,000 and projected cash inflows of $225,000 for 5 years. Project B has an initial investment of $400,000 and projected cash inflows of $110,000 for 5 years. 1. The payback model measures the time it will take to recover the project invest-

ment. Shorter paybacks are more desirable. Payback is the simplest and most widely

Apply financial and nonfinancial criteria to assess the value of projects.

2-4LO

Compliance (must do) projects

Operational projects

Strategic projects

FIGURE 2.2 Portfolio of Projects by Type

Chapter 2 Organization Strategy and Project Selection 39

used model. Payback emphasizes cash flows, a key factor in business. Some managers use the payback model to eliminate unusually risky projects (those with lengthy pay- back periods). The major limitations of payback are that it ignores the time value of money, assumes cash inflows for the investment period (and not beyond), and does not consider profitability. The payback formula is

Payback period (yrs) = Estimated Project Cost/Annual Savings Exhibit 2.3 compares the payback for Project A and Project B. The payback for Project A is 3.1 years and for Project B is 3.6 years. Using the payback method, both projects are acceptable since both return the initial investment in less than five years and have returns on the investment of 32.1 and 27.5 percent. Payback provides especially useful information for firms concerned with liquidity and having sufficient resources to man- age their financial obligations. Exhibit 2.3A presents the payback method.

2. The net present value (NPV) model uses management’s minimum desired rate- of-return (discount rate, for example, 20 percent) to compute the present value of all net cash inflows. If the result is positive (the project meets the minimum desired rate

EXHIBIT 2.3B Example Comparing Two Projects Using Net Present Value Method

EXHIBIT 2.3A Example Comparing Two Projects Using Payback Method

40 Chapter 2 Organization Strategy and Project Selection

of return), it is eligible for further consideration. If the result is negative, the project is rejected. Thus, higher positive NPVs are desirable. Excel uses this formula:

Project NPV = I0 + ∑ n

t = 1

Ft (1 + k)t

where I

0 = Initial investment (since it is an outflow, the number will be negative)

Ft = Net cash inflow for period t k = Required rate of return

Exhibit 2.3B presents the NPV model using Microsoft Excel software. The NPV model accepts Project A, which has a positive NPV of $54,235. Project B is rejected since the NPV is negative $31,263. Compare the NPV results with the payback results. The NPV model is more realistic because it considers the time value of money, cash flows, and profitability. When using the NPV model, the discount rate (return on investment hurdle rate) can differ for different projects. For example, the expected ROI on strategic projects is frequently set higher than operational projects. Similarly, ROIs can differ for riskier versus safer projects. The criteria for setting the ROI hurdle rate should be clear and applied consistently. Unfortunately, pure financial models fail to include many projects where financial return is impossible to measure and/or other factors are vital to the accept or reject decision. One research study by Foti showed that companies using predominantly financial models to prioritize projects yielded unbalanced portfolios and projects that aren’t strategically oriented (2003). Nonfinancial Criteria Financial return, while important, does not always reflect strategic importance. The past saw firms become overextended by diversifying too much. Now the prevailing thinking is that long-term survival is dependent upon developing and maintaining core competencies. Companies have to be disciplined in saying no to potentially profitable projects that are outside the realm of their core mission. This requires other criteria be considered beyond direct financial return. For example, a firm may support projects that do not have high profit margins for other strategic reasons including:

To capture larger market share To make it difficult for competitors to enter the market To develop an enabler product, which by its introduction will increase sales in more profitable products To develop core technology that will be used in next-generation products To reduce dependency on unreliable suppliers To prevent government intervention and regulation

Less tangible criteria may also apply. Organizations may support projects to restore corporate image or enhance brand recognition. Many organizations are committed to corporate citizenship and support community development projects. Two Multi-Criteria Selection Models Since no single criterion can reflect strategic significance, portfolio management requires multi-criteria screening models. Two models, the checklist and multi- weighted scoring models, are described next.

Chapter 2 Organization Strategy and Project Selection 41

Checklist Models The most frequently used method in selecting projects has been the checklist. This approach basically uses a list of questions to review potential proj- ects and to determine their acceptance or rejection. Several of the typical questions found in practice are listed in Exhibit 2.4. One large, multiproject organization has 250 different questions! A justification of checklist models is that they allow great flexibility in selecting among many different types of projects and are easily used across different divisions and locations. Although many projects are selected using some variation of the check- list approach, this approach has serious shortcomings. Major shortcomings of this approach are that it fails to answer the relative importance or value of a potential proj- ect to the organization and fails to allow for comparison with other potential projects. Each potential project will have a different set of positive and negative answers. How do you compare? Ranking and prioritizing projects by their importance is difficult, if not impossible. This approach also leaves the door open to the potential opportunity for power plays, politics, and other forms of manipulation. To overcome these serious shortcomings experts recommend the use of a multi-weighted scoring model to select projects, which is examined next.

Multi-Weighted Scoring Models A weighted scoring model typically uses several weighted selection criteria to evaluate project proposals. Weighted scoring models will generally include qualitative and/or quantitative criteria. Each selection criterion is assigned a weight. Scores are assigned to each criterion for the project, based on its importance to the project being evaluated. The weights and scores are multiplied to get a total weighted score for the project. Using these multiple screening criteria, projects can then be compared using the weighted score. Projects with higher weighted scores are considered better. Selection criteria need to mirror the critical success factors of an organization. For example, 3M set a target that 25 percent of the company’s sales would come from products fewer than four years old versus the old target of 20 percent. Their priority

Understand how multi- criteria models can be used to select projects.

2-5LO

EXHIBIT 2.4 Sample Selection Questions Used in Practice

Topic Question Strategy/alignment What specific organization strategy does this project align with? Driver What business problem does the project solve? Sponsorship Who is the project sponsor? Risk What is the impact of not doing this project? Risk What is the project risk to our organization? Benefits, value, ROI What is the value of the project to this organization? Benefits, value, ROI When will the project show results? Objectives What are the project objectives? Organization culture Is our organization culture right for this type of project? Resources Will internal resources be available for this project? Approach Will we build or buy? Schedule How long will this project take? Schedule Is the time line realistic? Training/resources Will staff training be required? Finance/portfolio What is the estimated cost of the project? Portfolio Is this a new initiative or part of an existing initiative? Portfolio How does this project interact with current projects? Technology Is the technology available or new?

42 Chapter 2 Organization Strategy and Project Selection

system for project selection strongly reflects this new target. On the other hand, failure to pick the right factors will render the screening process “useless” in short order. See Snapshot from Practice 2.2: Crisis IT. Figure 2.3 represents a project scoring matrix using some of the factors found in practice. The screening criteria selected are shown across the top of the matrix (e.g., stay within core competencies . . . ROI of 18 percent plus). Management weights each criterion (a value of 0 to a high of, say, 3) by its relative importance to the organiza- tion’s objectives and strategic plan. Project proposals are then submitted to a project priority team or project office. Each project proposal is then evaluated by its relative contribution/value added to the selected criteria. Values of 0 to a high of 10 are assigned to each criterion for each project. This value represents the project’s fit to the specific criterion. For example, project 1 appears to fit well with the strategy of the organization since it is given a value of 8. Conversely, project 1 does nothing to support reducing defects (its value is 0). Finally, this model applies the management weights to each criterion by impor- tance using a value of 1 to 3. For example, ROI and strategic fit have a weight of 3, while urgency and core competencies have weights of 2. Applying the weight to each

In May 2007, Frontier Airlines Hold- ings hired Gerry Coady as chief infor- mation officer (CIO). Nearly a year later the airline filed for bankruptcy under Chapter 11. In an interview Coady

describes how he managed IT projects during the bank- ruptcy and recession crisis of 2008–2009. Fundamentally, Coady faced a situation of too many projects and too few resources. Coady used a strategy of focusing on reducing the number of proj- ects in the portfolio. He put together a steering com- mittee of senior management that reviewed several hundred projects. The end result was a reduction to less than 30 projects remaining in the portfolio.

How Can You Get to a Backlog of over 100 Projects? “There are never enough resources to get everything done.” Backlogs build over time. Sacred cow projects get included in the selection system. Projects proposed from people who have left the airline still reside in the project portfolio. Non-value-added projects somehow make their way into the project portfolio. Soon the queue gets longer. With everyone in IT working on too many projects concurrently, project completion and productivity are slow.

Which Projects Remain? To cut the number of projects, the steering committee used a weighting scheme that reflected the airline’s pri- orities, which were: fly safe, generate revenue, reduce

S N A P S H O T F R O M P R A C T I C E 2 . 2 Crisis IT

costs, and customer service. The weighting scheme eas- ily weeded out the fluff. Coady noted that “by the time you get to the 20s the margin of differentiation gets nar- rower and narrower.” Of the remaining projects, project sponsors had to have solid justification why their project is important. Reduction of the number of projects places emphasis on high value projects.

What Advice Does Coady Have for Crisis Management? In times of crisis, it is easier to take bold steps to make changes. But you need to have a clear vision of what you should be focusing on with the resources available. Coady suggests, “It comes back to really having a good idea of what the initial business case for a project is and what resources it is consuming, both people and otherwise.”

Source: Worthen, B., “Crisis IT,” The Wall Street Journal, April 20, 2009, p. 6.

Chapter 2 Organization Strategy and Project Selection 43

criterion, the priority team derives the weighted total points for each project. For example, project 5 has the highest value of 102 [(2 × 1) + (3 × 10) + (2 × 5) + (2.5 × 10) + (1 × 0) + (1 × 8) + (3 × 9) = 102] and project 2 has a low value of 27. If the resources available create a cutoff threshold of 50 points, the priority team would elimi- nate projects 2 and 4. (Note: Project 4 appears to have some urgency, but it is not clas- sified as a “must” project. Therefore, it is screened with all other proposals.) Project 5 would receive first priority, project n second, and so on. In rare cases where resources are severely limited and project proposals are similar in weighted rank, it is prudent to pick the project placing less demand on resources. Weighted multiple criteria models similar to this one are rapidly becoming the dominant choice for prioritizing projects. At this point in the discussion it is wise to stop and put things into perspective. While selection models like the one above may yield numerical solutions to project selection decisions, models should not make the final decisions—the people using the models should. No model, no matter how sophisticated, can capture the total reality it is meant to represent. Models are tools for guiding the evaluation process so that the decision makers will consider relevant issues and reach a meeting of the minds as to which projects should be supported and not supported. This is a much more subjective process than calculations suggest.

2.5 Applying a Selection Model

Project Classification It is not necessary to have exactly the same criteria for the different types of projects discussed above (strategic and operations). However, experience shows most organiza- tions use similar criteria across all types of projects, with perhaps one or two criteria specific to the type of project—e.g., strategic breakthrough versus operational.

Apply an objective prior- ity system to project selection.

2-6LO

Project 1

CriteriaW eight

Project 2

Project 3

Project 4

Project 5

Project 6 ...

Project n

2.0

St ay

w ith

co re

co mp

et en

cie s

Ur ge

nc y

25 %

of sa

les

fro m

ne w

pr od

uc ts

Re du

de fe

cts to

les s t

ha n 1

% Im

pr ov

cu sto

me r

loy alt

y RO

I o f 1

plu s

W eig

ht ed

to ta

l St

ra te

gic

fit

3.0 2.0 2.5 1.0 1.0 3.0

102

FIGURE 2.3 Project Screening Matrix

44 Chapter 2 Organization Strategy and Project Selection

Regardless of criteria differences among different types of projects, the most important criterion for selection is the project’s fit to the organization strategy. Therefore, this criterion should be consistent across all types of projects and carry a high priority relative to other criteria. This uniformity across all priority models used can keep departments from suboptimizing the use of organization resources. Project proposals should be classified by type, so the appropriate criteria can be used to evaluate them.

Selecting a Model In the past, financial criteria were used almost to the exclusion of other criteria. However, in the last two decades we have witnessed a dramatic shift to include multiple criteria in project selection. Concisely put, profitability alone is simply not an adequate measure of contribution; however, it is still an important criterion, especially for projects that enhance revenue and market share such as breakthrough R&D projects. Today, senior management is interested in identifying the potential mix of projects that will yield the best use of human and capital resources to maximize return on investment in the long run. Factors such as researching new technology, public image, ethical position, protection of the environment, core competencies, and strategic fit might be important criteria for selecting projects. Weighted scoring criteria seem the best alternative to meet this need. Weighted scoring models result in bringing projects to closer alignment with stra- tegic goals. If the scoring model is published and available to everyone in the organi- zation, some discipline and credibility are attached to the selection of projects. The number of wasteful projects using resources is reduced. Politics and “sacred cow” projects are exposed. Project goals are more easily identified and communicated using the selection criteria as corroboration. Finally, using a weighted scoring approach helps project managers understand how their project was selected, how their project contributes to organization goals, and how it compares with other projects. Project selection is one of the most important decisions guiding the future success of an organization. Criteria for project selection are the area where the power of your portfolio starts to manifest itself. New projects are aligned with the strategic goals of the organization. With a clear method for selecting projects in place, project proposals can be solicited.

Sources and Solicitation of Project Proposals As you would guess, projects should come from anyone who believes his or her project will add value to the organization. However, many organizations restrict proposals from specific levels or groups within the organization. This could be an opportunity lost. Good ideas are not limited to certain types or classes of organiza- tion stakeholders. Encourage and keep solicitations open to all sources—internal and external sponsors. Figure 2.4A provides an example of a proposal form for an automatic vehicular tracking (Automatic Vehicle Location) public transportation project. Figure 2.4B pres- ents a preliminary risk analysis for a 500-acre wind farm. Many organizations use risk analysis templates to gain a quick insight of a project’s inherent risks. Risk factors depend on the organization and type of projects. This information is useful in balanc- ing the project portfolio and identifying major risks when executing the project. Proj- ect risk analysis is the subject of Chapter 7.

Chapter 2 Organization Strategy and Project Selection 45

In some cases organizations will solicit ideas for projects when the knowledge requirements for the project are not available in the organization. Typically, the organi- zation will issue an RFP (Request for Proposal) to contractors/vendors with adequate experience to implement the project. In one example, a hospital published an RFP that asked for a bid to design and build a new operating room that uses the latest technol- ogy. Several architecture firms submitted bids to the hospital. The bids for the project were evaluated internally against other potential projects. When the project was accepted as a go, other criteria were used to select the best qualified bidder.

Project Proposal Form

Project classification?

What business problem does the project solve?

Increase customer satisfaction through kiosk and Web site for bus, streetcar, and fast rail Enhance driver and traveler safety

Strategic Infrastructure Compliance

Date: Proposal # SponsorJan 22, 2xxx 11

J. Moran

Hyperlink to: AVL.tri-met.org

Increase customer ridership through better passenger travel planning & scheduling decisions Faster response to accidents

How does this project align with our organization strategy?

What are the major deliverables of the project?

What is the impact of not doing this project?

What are the three major risks for this project?

Increased ridership Customer satisfaction Meeting budget and schedule

How will we measure success?

What is the estimated cost of the project?

How long will this project take?

Oversight action:

Signature

XXXXXX Date: Feb. 7, 2xxx

Return

22 Weeks

$10 million

Will this project require internal resources? Available?

Yes No Yes

Not meeting ridership goals

Cost overruns Hacking system

Integration of fast rail, bus, and streetcar systems

GPS vehicle tracking system, Internet access, schedule screen

X X

FIGURE 2.4A A Proposal Form for an Automatic Vehicular Tracking (AVL) Public Transportation Project

46 Chapter 2 Organization Strategy and Project Selection

Ranking Proposals and Selection of Projects Culling through so many proposals to identify those that add the most value requires a structured process. Figure 2.5 shows a flow chart of a screening process beginning with the creation of an idea for a project. See Figure 12.3 for a template for evaluating contractors. Data and information are collected to assess the value of the proposed project to the organization and for future backup. If the sponsor decides to pursue the project on the basis of the collected data, it is forwarded to the project priority team (or the project office). Note that the sponsor knows which criteria will be used to accept or reject the project. Given the selection criteria and current portfolio of projects, the priority team rejects or accepts the project. If the project is accepted, the priority team sets imple- mentation in motion. Figure 2.6 is a partial example of an evaluation form used by a large company to pri- oritize and select new projects. The form distinguishes between must and want objec- tives. If a project does not meet designated “must” objectives, it is not considered and is removed from consideration. Organization (or division) objectives have been ranked and weighted by their relative importance—for example, “Improve external customer ser- vice” carries a relative weight of 83 when compared to other want objectives. The want objectives are directly linked to objectives found in the strategic plan.

FIGURE 2.4B Risk Analysis for a 500-Acre Wind Farm

Brief Risk Assessment

Risk Intensity Rating

Purpose: To draw attention to apparent project risks that will need management attention.

Rank risks above by “probability” and “impact” on the chart below by High, Medium or Low.

What are the four major risks of this project?

Government incentives curtailed

Land use injunction

Energy price decrease

4. New import tax

Risk Probability Impact

Government incentives curtailed

Land use injunction

Energy price decrease

4. New import tax

High

Medium

Low

High

Medium

High

Check other project risk factors: Complexity

Resource skills

Technology

Low

Good

Low

Average

Okay

Average

High

Lacking

High

Reviewed by Date

Rachel April 1, 2xxx

Chapter 2 Organization Strategy and Project Selection 47

Impact definitions represent a further refinement to the screening system. They are developed to gauge the predicted impact a specific project would have on meeting a particular objective. A numeric scheme is created and anchored by defining criteria. To illustrate how this works, let’s examine the $5 million in new sales objective. A “0” is assigned if the project will have no impact on sales or less than $100,000, a “1” is given if predicted sales are more than $100,000 but less than $500,000, a “2” if greater than $500,000. These impact assessments are combined with the relative importance of each objective to determine the predicted overall contribution of a project to strategic objec- tives. For example, project 26 creates an opportunity to fix field problems, has no effect on sales, and will have major impact on customer service. On these three objectives, project 26 would receive a score of 265 [99 + 0 + (2 × 83)]. Individual weighted scores are totaled for each project and are used to prioritize projects.

Responsibility for Prioritizing Prioritizing can be an uncomfortable exercise for managers. But prioritizing projects is a major responsibility for senior management. Prioritizing means discipline, account- ability, responsibility, constraints, reduced flexibility, and loss of power. Top manage- ment commitment means more than giving a blessing to the priority system; it means management will have to rank and weigh, in concrete terms, the objectives and strate- gies they believe to be most critical to the organization. This public declaration of commitment can be risky if the ranked objectives later prove to be poor choices, but setting the course for the organization is top management’s job. The good news is, if management is truly trying to direct the organization to a strong future position, a good project priority system supports their efforts and develops a culture in which everyone is contributing to the goals of the organization.

Periodic reassessment

of priorities

Return for more

information

Abandon

Reject Accept

Pursue

Project proposal

idea

Data collection

and backup

Self-evaluation of project by criteria

Priority team evaluates proposal

and reviews portfolio for risk balance

Need strategic fit

ROI/payback risk

Assign priority Assign resources

Assign project manager

Evaluate progress

Hold for resources

FIGURE 2.5 Project Screening Process

48 Chapter 2 Organization Strategy and Project Selection

2.6 Managing the Portfolio System Managing the portfolio takes the selection system one step higher in that the merits of a particular project are assessed within the context of existing projects. At the same time it involves monitoring and adjusting selection criteria to reflect the strategic focus of the organization. This requires constant effort. The priority system can be managed by a small group of key employees in a small organization. Or, in larger organizations, the priority system can be managed by the project office or a governance team of senior managers.

Senior Management Input Management of a portfolio system requires two major inputs from senior management. First, senior management must provide guidance in establishing selection criteria that

Understand the need to manage the project portfolio.

2-7LO

Must objectives

All activities meet current legal, safety, and environmental standards

All new products will have a complete market analysis

Want objectives Single project

impact definitions

Provides immediate response to field problems

Relative Importance

1-100

Weighted score

yes

n/a

166

0 Does not address 1 = Opportunity to fix 2 Urgent problem

0 < $100,000 1 = $100,000–500,000 2 > $500,000

0 Minor impact 1 = Significant impact 2 Major impact

Create $5 million in new sales by 20xx

Total weighted score

Priority

Improve external customer service

Yes-Meets objective No-Does not meet obj N/A-No impact

Must meet if impacts ...26 27 28 29

Project number FIGURE 2.6 Priority Screening Analysis

Chapter 2 Organization Strategy and Project Selection 49

strongly align with the current organization strategies. Second, senior management must annually decide how they wish to balance the available organizational resources (people and capital) among the different types of projects. A preliminary decision of balance must be made by top management (e.g., 20 percent compliance, 50 percent strategic, and 30 percent operational) before project selection takes place, although the balance may be changed when the projects submitted are reviewed. Given these inputs the priority team or project office can carry out its many responsibilities, which include supporting project sponsors and representing the interests of the total organization.

The Governance Team Responsibilities The governance team, or project office, is responsible for publishing the priority of every project and ensuring the process is open and free of power politics. For example, most organizations using a governance team or project office use an electronic bulletin board to disperse the current portfolio of projects, the current status of each project, and current issues. This open communication discourages power plays. Over time the governance team evaluates the progress of the projects in the portfolio. If this whole process is managed well, it can have a profound impact on the success of an organization. See Snapshot from Prac- tice 2.3: Project Code Names for the rationale behind titles given to projects.

What do Yangtze, Operation Iceberg, and Get Blue have in common? They are all code names given to projects. Project code names are used for sev- eral reasons:

organization.

Apple Corporation used to name major releases of MAC OS X after big cats such as Jaguar, Tiger, Panther, and Leopard, but now name them after national parks (i.e., Yosemite).

against rival concerns.

Oxcart was used by U.S. Department of Defense during the height of the cold war for the secret de- velopment of super sonic fighter jet.

- ect objectives

Operation Just Cause was the name given by U.S. government for the 1989 invasion of Panama, which ousted corrupt leader Manual Noriega.

Revolution was used by Nintendo for groundbreak- ing Wii video game console.

Often on small projects names convey a playful sense of humor. For example, a set of interrelated software projects were all named after Smurf Characters (Papa Smurf, Handy Smurf, Dreamy Smurf,…). Other times the project name reflects an inside joke, for example, one software project was named ALINA, which was an acronym for At Least It Is Not Access.

S N A P S H O T F R O M P R A C T I C E 2 . 3 Project Code Names*

*Sieminski, G. C., “The Art of Naming Operations,” Parame- ters, Autumn 1995, pp. 81-98; “Operation Know-It-All: The Indispensable Guide to Choosing Good Project Names,” articulatemarketing.com, accessed December 20, 2015.

50 Chapter 2 Organization Strategy and Project Selection

Constant scanning of the external environment to determine if organizational focus and/or selection criteria need to be changed is imperative! Periodic priority review and changes need to keep current with the changing environment and keep a unified vision of organization focus. Regardless of the criteria used for selection, each project should be evaluated by the same criteria. If projects are classified by must do, operation, and strategic, each project in its class should be evaluated by the same criteria. Enforcing the project priority system is crucial. Keeping the whole system open and aboveboard is important to maintaining the integrity of the system and keeping new, young execu- tives from going around the system. For example, communicating which projects are approved, project ranks, current status of in-process projects, and any changes in prior- ity criteria will discourage people from bypassing the system.

Balancing the Portfolio for Risks and Types of Projects A major responsibility of the priority team is to balance projects by type, risk, and resource demand. This requires a total organization perspective. Hence, a proposed project that ranks high on most criteria may not be selected because the organization portfolio already includes too many projects with the same characteristics—e.g., proj- ect risk level, use of key resources, high cost, nonrevenue producing, long durations. Balancing the portfolio of projects is as important as project selection. Organizations need to evaluate each new project in terms of what it adds to the project mix. Short- term needs need to be balanced with long-term potential. Resource usage needs to be optimized across all projects, not just the most important project. Two types of risk are associated with projects. First are risks associated with the total portfolio of projects, which should reflect the organization’s risk profile. Second are specific project risks that can inhibit the execution of a project, such as schedule, cost, and technical. In this chapter we look only to balancing the organizational risks inherent in the project portfolio, such as market risk, ability to execute, time to market, and technology advances. Project-specific risks will be covered in detail in Chapter 7. David and Jim Matheson studied R&D organizations and developed a classification scheme that could be used for assessing a project portfolio.7 They separated projects in terms of degree of difficulty and commercial value and came up with four basic types of projects:

Bread-and-butter projects are relatively easy to accomplish and produce modest commercial value. They typically involve evolutionary improvements to current products and services. Examples include software upgrades and manufacturing cost reduction efforts. Pearls are low risk development projects with high commercial payoffs. They represent revolutionary commercial advances using proven technology. Examples include next-generation integrated circuit chip and subsurface imaging to locate oil and gas. Oysters are high risk, high value projects. These projects involve technological breakthroughs with tremendous commercial potential. Examples include embry- onic DNA treatments and new kinds of metal alloys. White elephants are projects that at one time showed promise but are no longer viable. Examples include products for a saturated market or a potent energy source with toxic side-effects.

7 Matheson, D., and J. Matheson, The Smart Organization (Boston: Harvard Business School Press, 1998), pp. 203–209.

Chapter 2 Organization Strategy and Project Selection 51

The Mathesons report that organizations often have too many white elephants and too few pearls and oysters. To maintain strategic advantage they recommend that organiza- tions capitalize on pearls, eliminate or reposition white elephants, and balance resources devoted to bread-and-butter and oyster projects to achieve alignment with overall strategy. Although their research centers on R&D organizations, their observa- tions appear to hold true for all types of project organizations.

Summary Multiple competing projects, limited skilled resources, dispersed virtual teams, time to market pressures, and limited capital serve as forces for the emergence of project port- folio management that provides the infrastructure for managing multiple projects and linking business strategy with project selection. The most important element of this system is the creation of a ranking system that utilizes multiple criteria that reflect the mission and strategy of the firm. It is critical to communicate priority criteria to all organizational stakeholders so that the criteria can be the source of inspiration for new project ideas. Every significant project selected should be ranked and the results published. Se- nior management must take an active role in setting priorities and supporting the prior- ity system. Going around the priority system will destroy its effectiveness. The project governance team needs to consist of seasoned managers who are capable of asking tough questions and distinguishing facts from fiction. Resources (people, equipment, and capital) for major projects must be clearly allocated and not conflict with daily operations or become an overload task. The governance team needs to scrutinize significant projects in terms of not only their strategic value but also their fit with the portfolio of projects currently being im- plemented. Highly ranked projects may be deferred or even turned down if they upset the current balance among risks, resources, and strategic initiatives. Project selection must be based not only on the merits of the specific project but also on what it contrib- utes to the current project portfolio mix. This requires a holistic approach to aligning projects with organizational strategy and resources. The importance of aligning projects with organization strategy cannot be over- stated. We have discussed two types of models found in practice. Checklist models are easy to develop and are justified primarily on the basis of flexibility across different divisions and locations. Unfortunately, questionnaire checklist models do not allow comparison of the relative value (rank) of alternative projects in contributing toward organization strategy. The latter is the major reason the authors prefer multi-weighted scoring models. These models keep project selection highly focused on alignment with organization strategy. Weighted scoring models require major effort in establishing the criteria and weights.

Key Terms Implementation gap, 34 Net present value (NVP), 38 Organization politics, 35

Payback, 38 Priority system, 34 Priority team, 42 Project portfolio, 34

Project sponsor, 35 Sacred cow, 35 Strategic management, 29

52 Chapter 2 Organization Strategy and Project Selection

1. Describe the major components of the strategic management process. 2. Explain the role projects play in the strategic management process. 3. How are projects linked to the strategic plan? 4. The portfolio of projects is typically represented by compliance, strategic, and oper-

ations projects. What impact can this classification have on project selection? 5. Why does the priority system described in this chapter require that it be open and

published? Does the process encourage bottom-up initiation of projects? Does it discourage some projects? Why?

6. Why should an organization not rely only on ROI to select projects? 7. Discuss the pros and cons of the checklist versus the weighted factor method of

selecting projects.

1. You manage a hotel resort located on the South Beach on the Island of Kauai in Hawaii. You are shifting the focus of your resort from a traditional fun-in-the-sun destination to eco-tourism. (Eco-tourism focuses on environmental awareness and education.) How would you classify the following projects in terms of compliance, strategic, and operational? a. Convert the pool heating system from electrical to solar power. b. Build a four-mile nature hiking trail. c. Renovate the horse barn. d. Launch a new promotional campaign with Hawaii Airlines. e. Convert 12 adjacent acres into a wildlife preserve. f. Update all the bathrooms in condos that are 10 years old or older. g. Change hotel brochures to reflect eco-tourism image. h. Test and revise disaster response plan. i. Introduce wireless Internet service in café and lounge areas.

How easy was it to classify these projects? What made some projects more difficult than others? What do you think you now know that would be useful for managing projects at the hotel?

2.* Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?

3. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 20 percent, conduct a discounted cash flow calculation to determine the NPV.

4. You work for the 3T company, which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. The following chart shows the cash information for each project. Which of the two projects would you fund if the decision is based only on financial information? Why?

Exercises

Review Questions

*The solution to these exercises can be found in Appendix One.

Chapter 2 Organization Strategy and Project Selection 53

Omega Alpha Year Inflow Outflow Netflow Year Inflow Outflow Netflow Y0 0 $225,000 −225,000 Y0 0 $300,000 −300,000 Y1 0 190,000 −190,000 Y1 $ 50,000 100,000 −50,000 Y2 $ 150,000 0 150,000 Y2 150,000 0 150,000 Y3 220,000 30,000 190,000 Y3 250,000 50,000 200,000 Y4 215,000 0 215,000 Y4 250,000 0 250,000 Y5 205,000 30,000 175,000 Y5 200,000 50,000 150,000 Y6 197,000 0 197,000 Y6 180,000 0 180,000 Y7 100,000 30,000 70,000 Y7 120,000 30,000 90,000 Total 1,087,000 505,000 582,000 Total 1,200,000 530,000 670,000

5.* You are the head of the project selection team at SIMSOX. Your team is consider- ing three different projects. Based on past history, SIMSOX expects at least a rate of return of 20 percent.

Given the following information for each project, which one should be SIMSOX’s first priority? Should SIMSOX fund any of the other projects? If so, what should be the order of priority based on return on investment?

Project: Dust Devils

Year Investment Revenue Stream 0 $500,000 0 1 50,000 2 250,000 3 350,000

Project: Osprey

Year Investment Revenue Stream 0 $250,000 0 1 75,000 2 75,000 3 75,000 4 50,000

Project: Voyagers

Year Investment Revenue Stream 0 $75,000 0 1 15,000 2 25,000 3 50,000 4 50,000 5 150,000

*The solution to these exercises can be found in Appendix One.

54 Chapter 2 Organization Strategy and Project Selection

6. You are the head of the project selection team at Broken Arrow records. Your team is considering three different recording projects. Based on past history, Broken Arrow expects at least a rate of return of 20 percent.

Given the following information for each project, which one should be Broken Arrow’s first priority? Should Broken Arrow fund any of the other projects? If so, what should be the order of priority based on return on investment?

Recording Project: Time Fades Away

Year Investment Revenue Stream 0 $600,000 0 1 600,000 2 75,000 3 20,000 4 15,000 5 10,000

Recording Project: On the Beach

Year Investment Revenue Stream 0 $400,000 0 1 400,000 2 100,000 3 25,000 4 20,000 5 10,000

Recording Project: Tonight’s the Night

Year Investment Revenue Stream 0 $200,000 0 1 200,000 2 125,000 3 75,000 4 20,000 5 10,000

7. The Custom Bike Company has set up a weighted scoring matrix for evaluation of potential projects. Below are five projects under consideration.

a. Using the scoring matrix in the following chart, which project would you rate highest? Lowest?

b. If the weight for “Strong Sponsor” is changed from 2.0 to 5.0, will the project selection change? What are the three highest weighted project scores with this new weight?

c. Why is it important that the weights mirror critical strategic factors?

Chapter 2 Organization Strategy and Project Selection 55

Project Screening Matrix

Project 1

CriteriaW eight

Project 2

Project 3

Project 4

Project 5

2.0

St ro

sp on

so r

Ur ge

nc y

10 %

sa les

fr om

ne w

pr od

uc ts

Co mp

et itio

Fil l m

ar ke

ga pSu

pp or

bu sin

es s

str at

eg y

5.0 4.0 3.0 1.0 3.0

W eig

ht ed

to ta

Adler, P. S., et al., “Getting the Most Out of Your Product Development Process,” Harvard Business Review, vol. 74, no. 2, pp. 134–52. Benko, C., and F. W. McFarlan, Connecting the Dots: Aligning Projects With Objec- tives in Unpredictable Times (Boston: Harvard Business School Press, 2003). Bigelow, D., “Want to Ensure Quality? Think Project Portfolio Management,” PM Network, vol. 16, no. 1 (April 2002), pp. 16–17. Bloomberg Businessweek, “IBM Wants to Put Watson in Your Pocket,” September 17–23, 2012, pp. 41–42. Boyer, C., “Make Profit Your Priority,” PM Network, vol. 15, no. 10 (October 2003), pp. 37–42. Cohen, D., and R. Graham, The Project Manager’s MBA (San Francisco: Jossey- Bass, 2001), pp. 58–59. Crawford, L., B. Hobbs, and J. R. Turne, “Aligning Capability with Strategy: Catego- rizing of Projects to Do the Right Projects and Do Them Right,” Project Management Journal, vol. 37, no. 2 (June 2006), pp. 38–50. Descamps, J. P., “Mastering the Dance of Change: Innovation as a Way of Life,” Prism, Second Quarter, 1999, pp. 61–67. Doran, G. T., “There’s a Smart Way to Write Management Goals and Objectives,” Management Review, November 1981, pp. 35–36. Floyd, S. W., and B. Woolridge, “Managing Strategic Consensus: The Foundation of Effectiveness Implementation,” Academy of Management Executives, vol. 6, no. 4 (1992), pp. 27–39.

References

56 Chapter 2 Organization Strategy and Project Selection

Foti, R., “Louder Than Words,” PM Network, December 2002, pp. 22–29. Also see Foti, R., “Make Your Case, Not All Projects Are Equal,” PM Network, vol. 31, no. 7 (2003), pp. 35–43. Frank, L., “On Demand,” PM Network, vol. 18, no. 4 (April 2004), pp. 58–62. Friedman, Thomas L., Hot, Flat, and Crowded (New York: Farrar, Straus, and Giroux, 2008). Fusco, J. C., “Better Policies Provide the Key to Implementing Project Management,” Project Management Journal, vol. 28. no. 3 (1997), pp. 38–41. Helm, J., and K. Remington, “Effective Project Sponsorship: An Evaluation of the Executive Sponsor in Complex Infrastructure Projects by Senior Project Managers,” Project Management Journal, vol. 36, no. 1 (September 2005), pp. 51–61. Hutchens, G., “Doing the Numbers,” PM Network, vol. 16, no. 4 (March 2002), p. 20. Johnson, R. E., “Scrap Capital Project Evaluations,” Chief Financial Officer, May 1998, p. 14. Kaplan, R. S., and D. P. Norton, “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, pp. 73–79. Also see Kaplan, Robert, http;//balancedscorecard.org. Kenny, J., “Effective Project Management for Strategic Innovation and Change in an Organizational Context,” Project Management Journal, vol. 34, no. 1 (2003), pp. 45–53. Kharbanda, O. P., and J. K. Pinto, What Made Gertie Gallop: Learning from Project Failures (New York: Van Nostrand Reinhold, 1996), pp. 106–11, 263–83. Korte, R. F., and T. J. Chermack, “Changing Organizational Culture with Scenario Planning,” Futures, vol. 39, no. 6 (August 2007), pp. 645–56. Leifer, R., C. M. McDermott, G. C. O’Connor, L. S. Peters, M. Price, and R. W. Veryzer, Radical Innovation: How Mature Companies Can Outsmart Upstarts (Boston: Harvard Business School Press, 2000). MacIntyre, J., PM Network, vol. 20, no. 11 (November 2006), pp. 32–35. Magretta, Joan, Understanding Michael Porter: The Essential Guide to Competition and Strategy (Boston: Harvard Business Press Book, 2011). Matheson, D., and J. Matheson, The Smart Organization (Boston: Harvard Business School Press, 1998), pp. 203–9. Milosevic, D. Z., and S. Srivannaboon, “A Theoretical Framework for Aligning Proj- ect Management with Business Strategy,” Project Management Journal, vol. 37, no. 3 (August 2006), pp. 98–110. Morris, P. W., and A. Jamieson, “Moving from Corporate Strategy to Project Strategy,” Project Management Journal, vol. 36, no. 4 (December 2005), pp. 5–18. Motta, Silva, and Rogério Hermida Quintella, “Assessment of Non-Financial Criteria in the Selection of Investment Projects for Seed Capital Funding: The Contribution of Scientometrics and Patentometrics,” Journal of Technology Management Innovation, vol. 7, no. 3 (2012). PMI, “PMI’s Pulse of the Profession,” March 2012, Project Management Institute, p. 7.

Chapter 2 Organization Strategy and Project Selection 57

Raskin, P., et al., Great Transitions: The Promise and Lure of the Times Ahead, retrieved June 3, 2008, www.gtinitiative.org/documents/Great_Transitions.pdf Schwartz, Peter, and Doug Randall, “An Abrupt Climate Change Scenario and its Implications for United States National Security,” Global Business Network, Inc., October 2003. Shenhar, A., “Strategic Project Leadership: Focusing Your Project on Business Success,” Proceedings of the Project Management Institute Annual Seminars & Symposium, San Antonio, Texas, October 3–10, 2002, CD. Also see Shenhar, Aaron, Reinventing Project Management (Harvard Business School, 2007). Sieminski, G. C., “The Art of Naming Operations,” Parameters, Autumn 1995, pp. 81–98. Smith, D. K., and R. C. Alexander, Fumbling the Future: How Xerox Invented, Then Ignored the First Personal Computer (New York: Macmillan, 1988). Swanson, S., “All Things Considered,” PM Network, vol. 25, no. 2 (February 2011), pp. 36–40. Woodward, H., “Winning in a World of Limited Project Spending,” Proceedings of the Project Management Institute Global Congress North America, Baltimore, Maryland, September 18–12, 2003, CD.

Case 2.1

Hector Gaming Company Hector Gaming Company (HGC) is an educational gaming company specializing in young children’s educational games. HGC has just completed their fourth year of oper- ation. This year was a banner year for HGC. The company received a large influx of capital for growth by issuing stock privately through an investment banking firm. It appears the return on investment for this past year will be just over 25 percent with zero debt! The growth rate for the last two years has been approximately 80 percent each year. Parents and grandparents of young children have been buying HGC’s prod- ucts almost as fast as they are developed. Every member of the 56-person firm is enthusiastic and looking forward to helping the firm grow to be the largest and best educational gaming company in the world. The founder of the firm, Sally Peters, has been written up in Young Entrepreneurs as “the young entrepreneur to watch.” She has been able to develop an organization culture in which all stakeholders are committed to innovation, continuous improvement, and organization learning. Last year, 10 top managers of HGC worked with McKinley Consulting to develop the organization’s strategic plan. This year the same 10 managers had a retreat in Aruba to formulate next year’s strategic plan using the same process suggested by McKinley Consulting. Most executives seem to have a consensus of where the firm should go in the intermediate and long term. But there is little consensus on how this should be accomplished. Peters, now president of HGC, feels she may be losing con- trol. The frequency of conflicts seems to be increasing. Some individuals are always requested for any new project created. When resource conflicts occur among projects, each project manager believes his or her project is most important. More projects are

58 Chapter 2 Organization Strategy and Project Selection

not meeting deadlines and are coming in over budget. Yesterday’s management meet- ing revealed some top HGC talent have been working on an international business game for college students. This project does not fit the organization vision or market niche. At times it seems everyone is marching to his or her own drummer. Somehow more focus is needed to ensure everyone agrees on how strategy should be imple- mented, given the resources available to the organization. Yesterday’s meeting alarmed Peters. These emerging problems are coming at a bad time. Next week HGC is ramping up the size of the organization, number of new prod- ucts per year, and marketing efforts. Fifteen new people will join HGC next month. Peters is concerned that policies be in place that will ensure the new people are used most productively. An additional potential problem looms on the horizon. Other gam- ing companies have noticed the success HGC is having in their niche market; one com- pany tried to hire a key product development employee away from HGC. Peters wants HGC to be ready to meet any potential competition head on and to discourage any new entries into their market. Peters knows HGC is project driven; however, she is not as confident that she has a good handle on how such an organization should be managed— especially with such a fast growth rate and potential competition closer to becoming a reality. The magnitude of emerging problems demands quick attention and resolution. Peters has hired you as a consultant. She has suggested the following format for your consulting contract. You are free to use another format if it will improve the effectiveness of the consulting engagement. What is our major problem? Identify some symptoms of the problem. What is the major cause of the problem? Provide a detailed action plan that attacks the problem. Be specific and provide exam- ples that relate to HGC.

Case 2.2

Film Prioritization The purpose of this case is to give you experience in using a project priority system that ranks proposed projects by their contribution to the organization’s objectives and strategic plan.

COMPANY PROFILE The company is the film division for a large entertainment conglomerate. The main office is located in Anaheim, California. In addition to the feature film division, the conglomerate includes theme parks, home videos, a television channel, interactive games, and theatrical productions. The company has been enjoying steady growth over the past 10 years. Last year total revenues increased by 12 percent to $21.2 billion. The company is engaged in negotiations to expand its theme park empire to mainland China and Poland. The film division generated $274 million in revenues, which was an increase of 7 percent over the past year. Profit margin was down 3 percent to 16 per- cent because of the poor response to three of the five major film releases for the year.

Chapter 2 Organization Strategy and Project Selection 59

COMPANY MISSION The mission for the firm:

Our overriding objective is to create shareholder value by continuing to be the world’s pre- mier entertainment company from a creative, strategic, and financial standpoint.

The film division supports this mission by producing four to six high-quality, family entertainment films for mass distribution each year. In recent years, the CEO of the company has advocated that the firm take a leadership position in championing envi- ronmental concerns.

COMPANY “MUST” OBJECTIVES Every project must meet the must objectives as determined by executive management. It is important that selected film projects not violate such objectives of high strategic priority. There are three must objectives: 1. All projects meet current legal, safety, and environmental standards. 2. All film projects should receive a PG or lower advisory rating. 3. All projects should not have an adverse effect on current or planned operations

within the larger company.

COMPANY “WANT” OBJECTIVES Want objectives are assigned weights for their relative importance. Top management is responsible for formulating, ranking, and weighting objectives to ensure that projects support the company’s strategy and mission. The following is a list of the company’s want objectives: 1. Be nominated for and win an academy award for Best Animated Feature or Best

Picture of the Year. 2. Generate additional merchandise revenue (action figures, dolls, interactive games,

music CDs). 3. Raise public consciousness about environmental issues and concerns. 4. Generate profit in excess of 18 percent. 5. Advance the state of the art in film animation, and preserve the firm’s reputation. 6. Provide the basis for the development of a new ride at a company-owned theme park.

ASSIGNMENT You are a member of the priority team in charge of evaluating and selecting film pro- posals. Use the provided evaluation form to formally evaluate and rank each proposal. Be prepared to report your rankings and justify your decisions. Assume that all of the projects have passed the estimated hurdle rate of 14 percent ROI. In addition to the brief film synopsis, the proposals include the following finan- cial projections of theater and video sales: 80 percent chance of ROI, 50 percent chance of ROI, and 20 percent chance of ROI. For example, for proposal #1 (Dalai Lama) there is an 80 percent chance that it will earn at least 8 percent return on investment (ROI), a 50-50 chance the ROI will be 18 percent, and a 20 percent chance that the ROI will be 24 percent.

60 Chapter 2 Organization Strategy and Project Selection

FILM PROPOSALS PROJECT PROPOSAL 1: MY LIFE WITH DALAI LAMA An animated, biographical account of the Dalai Lama’s childhood in Tibet based on the popular children’s book Tales from Nepal. The Lama’s life is told through the eyes of “Guoda,” a field snake, and other local animals who befriend the Dalai and help him understand the principles of Buddhism.

Probability 80% 50% 20%

ROI 8% 18% 24%

PROJECT PROPOSAL 2: HEIDI A remake of the classic children’s story with music written by award-winning compos- ers Syskle and Obert. The big-budget film will feature top-name stars and breathtaking scenery of the Swiss Alps.

Probability 80% 50% 20%

ROI 2% 20% 30%

PROJECT PROPOSAL 3: THE YEAR OF THE ECHO A low-budget documentary that celebrates the career of one of the most influential bands in rock-and-roll history. The film will be directed by new-wave director Elliot Cznerzy and will combine concert footage and behind-the-scenes interviews spanning the 25-year history of the rock band the Echos. In addition to great music, the film will focus on the death of one of the founding members from a heroin overdose and reveal the underworld of sex, lies, and drugs in the music industry.

Probability 80% 50% 20%

ROI 12% 14% 18%

PROJECT PROPOSAL 4: ESCAPE FROM RIO JAPUNI An animated feature set in the Amazon rainforest. The story centers around Pablo, a young jaguar who attempts to convince warring jungle animals that they must unite and escape the devastation of local clear cutting.

Probability 80% 50% 20%

ROI 15% 20% 24%

PROJECT PROPOSAL 5: NADIA! The story of Nadia Comaneci, the famous Romanian gymnast who won three gold medals at the 1976 Summer Olympic Games. The low-budget film will document her life as a small child in Romania and how she was chosen by Romanian authorities to join their elite, state-run, athletic program. The film will highlight how Nadia main- tained her independent spirit and love for gymnastics despite a harsh, regimented training program.

Probability 80% 50% 20%

ROI 8% 15% 20%

Chapter 2 Organization Strategy and Project Selection 61

Must objectives

Meets all safety and environmental standards

No adverse effect on other operations

PG or G rating

Want objectives

Single project impact definitions

Win Best Picture of the Year

Relative Importance

1–100

Weighted Score

0 = No potential 1 = Low potential 2 = High potential

10 0 = No potential 1 = Low potential 2 = High potential

0 = No potential 1 = Low potential 2 = High potential

0 < 18% 1 = 18–22% 2 > 22%

0 = No impact 1 = Some impact 2 = Great impact

0 = No potential 1 = Low potential 2 = High potential

Total weighted score

Priority

Win Best Animated Feature Film

Generate additional merchandise

Raise environmental concerns

Generate profit greater than 18%

Y = yes N = no N/A = not applicable Y = yes N = no N/A = not applicable

Y = yes N = no N/A = not applicable

Must meet if impacts

1 2 3 4 5 6 7

Advance state of film animation

Provide basis for new theme ride

Project Priority Evaluation Form

PROJECT PROPOSAL 6: KEIKO—ONE WHALE OF A STORY The story of Keiko, the famous killer whale, will be told by an imaginary offspring Seiko, who in the distant future is telling her children about their famous grandfather. The big-budget film will integrate actual footage of the whale within a realistic ani- mated environment using state-of-the-art computer imagery. The story will reveal how Keiko responded to his treatment by humans.

Probability 80% 50% 20%

ROI 6% 18% 25%

62 Chapter 2 Organization Strategy and Project Selection

PROJECT PROPOSAL 7: GRAND ISLAND The true story of a group of junior-high biology students who discover that a fertilizer plant is dumping toxic wastes into a nearby river. The moderate-budget film depicts how students organize a grassroots campaign to fight local bureaucracy and ultimately force the fertilizer plant to restore the local ecosystem.

Probability 80% 50% 20%

ROI 9% 15% 20%

Case 2.3

Fund Raising Project Selection case The purpose of this “case exercise” is to provide you with experience in using a project selection process that ranks proposed projects by their contribution to an organiza- tion’s mission and strategy.

FUND RAISING PROJECT Assume you are a member of a class on project management. Each student will join a team of 5–7 students who will be responsible for creating, planning, and executing a fund raising project for a designated charity. The fund raising project has two goals: (1) raise money for a worthy cause and (2) provide an opportunity for all team mem- bers to practice project management skills and techniques. In addition to completing the project a number of deliverables are required to com- plete this assignment. These deliverables include: a. Project Proposal b. Implementation Plan c. Risk Management Plan d. Status Report e. Project Reflections Presentation f. Project Retrospective/Audit Approved projects will receive $250 seed money to be reimbursed upon completion of the project.

“MUST” OBJECTIVES Every project must meet the “must” objectives as determined by the instructor. There are four must objectives: 1. All projects must be safe, legal and comply with university policies. 2. All projects must be capable of earning at least $500. 3. All projects must be able to be completed within nine weeks. 4. All projects must provide an opportunity for every member of the project team to

experience and learn about project management. Among the factors to consider for the last objective would be the extent there is mean- ingful work for every member of the team, the degree of coordination required, the

Chapter 2 Organization Strategy and Project Selection 63

extent the team will have to work with external stakeholders, and the complexity of the project.

“WANT” OBJECTIVES In addition to the must objectives, there are “want” objectives that the instructor would like to achieve. The following is a list of these objectives: 1. Earn more than $500 for a charity 2. Increase public awareness of the charity 3. Provide a resume worthy experience for students 4. Be featured on local TV news 5. Be fun to do

ASSIGNMENT You are a member of the class priority team in charge of evaluating and approving fund raising projects. Use the provided proposal evaluation form to formally evaluate and rank each proposal. Be prepared to report your rankings and justify your decision. You should assume that these projects would be held at your university or college.

FUND RAISING PROPOSALS PROJECT PROPOSAL 1: HOOPS FOR HOPE The project is a three-on-three basketball tournament to raise money for the Down Syndrome Association. The tournament will consist of three brackets: Co-ed, Male, and Female teams. There will be a $40 entry fee per team and additional funds will be derived from the sale of commemorative T-shirts ($10). Winning teams will receive gift baskets consisting of donations from local businesses and restaurants. The event will be held at the university recreational center.

PROJECT PROPOSAL 2: SINGING FOR SMILES The project will hold a karaoke competition with celebrity judges at a popular campus night spot. Funds will be raised by $5 admission at the door and a raffle for prizes donated by local businesses. Funds will be donated to Smile Train, an international organization that performs cleft lip surgery at a cost of $250 per child. The event will feature pictures of children born with cleft lips and with every $50 earned a piece of a picture puzzle will be added until the original picture is covered with a smiling face.

PROJECT PROPOSAL 3: HALO FOR HEROES The project will be a Halo video game competition to be held over the weekend utiliz- ing the College’s big screen electronic classrooms. Teams of 4 players will play each other in a single elimination tournament with the grand prize being a Sony Play Sta- tion 3 donated by a local video game store. Entry fee is 24$ per team and individual players will be able to play in a loser’s bracket for 5$. All proceeds will go to the National Military Family Association.

PROJECT PROPOSAL 4: RAFFLE FOR LIFE Organize a raffle contest. Raffle tickets will be sold for 3$ apiece with the winning ticket worth $300. Each of the six team members will be responsible for selling 50 raffle tickets. All profits will go to the American Cancer Society.

64 Chapter 2 Organization Strategy and Project Selection

PROJECT PROPOSAL 5: HOLD’EM FOR HUNGER Organize a Texas Hold’em poker tournament at a campus dining facility. It will cost $20 to enter the tournament with a $15 buy-in in fee. Prizes include $300, $150, and $50 gift certificates to a large department store. Gift certificates purchased from entry fees. All players will be eligible to win two donated tickets to Men and Women basketball games. Funds raised will go to local county food shelter. PROJECT PROPOSAL 6: BUILD YOUR OWN BOX The purpose of this project is to raise awareness of plight of homeless. Students will donate 10 dollars to participate in building and living in a cardboard city on the univer- sity quad for one night. Building materials will be provided by local recycling centers and hardware stores. Hot soup will be provided by the team at midnight to all partici- pants. Proceeds go to the local homeless shelter.

Must objectives

Be safe, legal, & comply with University Policies

Can be completed within 9 weeks

Earn at least $500

Want objectives

Single project impact definitions

Earning potential

Relative Importance

1–100

0: 500–750 1 : 750–1500 2: >$1500 3: >$2000 0: None 1 : Some fun 2: A lot of fun

30 0: No potential 1 : Low potential 2: High potential

0: No potential 1 : Low potential 2: High potential

Total weighted score

Priority

Fun

Increase awareness of charity

Resume worthy

Be featured on local TV news

Y = yes N = no

Opportunity to learn Project Management

Y = yes N = no

Must meet if impacts

1 2 3 4 5 6 7

Project Priority Evaluation Form

Organization: Structure and Culture3

LEARNING OBJECTIVES After reading this chapter you should be able to:

3-1 Identify different project management structures and understand their strengths and weaknesses.

3-2 Distinguish three different types of matrix structures and understand their strengths and weaknesses.

3-3 Understand organizational and project consider- ations that should be considered in choosing an appropriate project management structure.

3-4 Appreciate the significant role that organizational culture plays in managing projects.

3-5 Interpret the culture of an organization.

3-6 Understand the interaction between project management structure and the culture of an organization.

OUTLINE 3.1 Project Management Structures

3.2 What Is the Right Project Management Structure?

3.3 Organizational Culture

3.4 Implications of Organizational Culture for Organizing Projects

Summary

C H A P T E R T H R E E

Matrix management works, but it sure is difficult at times. All matrix man- agers must keep up their health and take Stress-Tabs. —A Project Manager

Once management approves a project, then the question becomes, how will the project be implemented? This chapter examines three different project management structures used by firms to implement projects: functional organization, dedicated project teams, and matrix structure. Although not exhaustive, these structures and their variant forms represent the major approaches for organizing projects. The advantages and disadvan- tages of each of these structures are discussed as well as some of the critical factors that might lead a firm to choose one form over others. Whether a firm chooses to complete projects within the traditional functional organiza- tion or through some form of matrix arrangement is only part of the story. Anyone who has worked for more than one organization realizes that there are often considerable dif- ferences in how projects are managed within certain firms even with similar structures. Working in a matrix system at AT&T is different from working in a matrix environment at Hewlett-Packard. Many researchers attribute these differences to the organizational

Project networks

Managing risk 7

Monitoring progress

Teams 11

Outsourcing 12

Project manager

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

Inter natio

nal

proje cts

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Reducing duration

Define project

68 Chapter 3 Organization: Structure and Culture

culture at AT&T and Hewlett-Packard. A simple explanation of organizational culture is that it reflects the “personality” of an organization. Just as each individual has a unique personality, so each organization has a unique culture. Toward the end of this chapter, we examine in more detail what organizational culture is and the impact that the culture of the parent organization has on organizing and managing projects. Both the project management structure and the culture of the organization constitute major elements of the enterprise environment in which projects are implemented. It is important for project managers and participants to know the “lay of the land” so that they can avoid obstacles and take advantage of pathways to complete their projects.

3.1 Project Management Structures A project management system provides a framework for launching and implementing project activities within a parent organization. A good system appropriately balances the needs of both the parent organization and the project by defining the interface between the project and parent organization in terms of authority, allocation of resources, and eventual integration of project outcomes into mainstream operations. With this in mind, we will start the discussion of project management structures.

Organizing Projects within the Functional Organization One approach to organizing projects is to simply manage them within the existing func- tional hierarchy of the organization. Once management decides to implement a project, the different segments of the project are delegated to the respective functional units with each unit responsible for completing its segment of the project (see Figure 3.1). Coordi- nation is maintained through normal management channels. For example, a tool manu- facturing firm decides to differentiate its product line by offering a series of tools specially designed for left-handed individuals. Top management decides to implement the project, and different segments of the project are distributed to appropriate areas. The industrial design department is responsible for modifying specifications to conform

Identify different project management structures and understand their strengths and weaknesses.

3-1LO

Manufacturing Procurement

Purchasing Receiving and

inspection

Fabrication Assembly Testing Production scheduling

Delta Manufacturing, Inc. President

Human resources

Project coordination

Marketing Engineering

Electronics engineering

Software engineering

Mechanical engineering

Customer service

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International sales

Design

Finance and administration

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inspection

Fabrication Assembly Testing Production scheduling

Delta Manufacturing, Inc. President

Human resources

Project coordination

Marketing Engineering

Electronics engineering

Software engineering

Mechanical engineering

Customer service

Domestic sales

International sales

Design

Finance and administration

FIGURE 3.1 Functional Organizations

Chapter 3 Organization: Structure and Culture 69

to the needs of left-handed users. The production department is responsible for devising the means for producing new tools according to these new design specifications. The marketing department is responsible for gauging demand and price as well as identify- ing distribution outlets. The overall project will be managed within the normal hierar- chy, with the project being part of the working agenda of top management. The functional organization is also commonly used when, given the nature of the project, one functional area plays a dominant role in completing the project or has a dominant interest in the success of the project. Under these circumstances, a high- ranking manager in that area is given the responsibility of coordinating the project. For example, the transfer of equipment and personnel to a new office would be managed by a top-ranking manager in the firm’s facilities department. Likewise, a project involving the upgrading of the management information system would be managed by the information systems department. In both cases, most of the project work would be done within the specified department and coordination with other departments would occur through normal channels. There are advantages and disadvantages for using the existing functional organiza- tion to administer and complete projects (Larson, 2004). The major advantages are the following: 1. No Change. Projects are completed within the basic functional structure of the par-

ent organization. There is no radical alteration in the design and operation of the parent organization.

2. Flexibility. There is maximum flexibility in the use of staff. Appropriate specialists in different functional units can temporarily be assigned to work on the project and then return to their normal work. With a broad base of technical personnel available within each functional department, people can be switched among different projects with relative ease.

3. In-Depth Expertise. If the scope of the project is narrow and the proper functional unit is assigned primary responsibility, then in-depth expertise can be brought to bear on the most crucial aspects of the project.

Manufacturing Procurement

Purchasing Receiving and

inspection

Fabrication Assembly Testing Production scheduling

Delta Manufacturing, Inc. President

Human resources

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Electronics engineering

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Customer service

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inspection

Fabrication Assembly Testing Production scheduling

Delta Manufacturing, Inc. President

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70 Chapter 3 Organization: Structure and Culture

4. Easy Post-Project Transition. Normal career paths within a functional division are maintained. While specialists can make significant contributions to projects, their functional field is their professional home and the focus of their professional growth and advancement.

Just as there are advantages for organizing projects within the existing functional orga- nization, there are also disadvantages. These disadvantages are particularly pro- nounced when the scope of the project is broad and one functional department does not take the dominant technological and managerial lead on the project: 1. Lack of Focus. Each functional unit has its own core routine work to do; sometimes

project responsibilities get pushed aside to meet primary obligations. This difficulty is compounded when the project has different priorities for different units. For example, the marketing department may consider the project urgent while the oper- ations people consider it only of secondary importance. Imagine the tension if the marketing people have to wait for the operations people to complete their segment of the project before they proceed.

2. Poor Integration. There may be poor integration across functional units. Func- tional specialists tend to be concerned only with their segment of the project and not with what is best for the total project.

3. Slow. It generally takes longer to complete projects through this functional arrange- ment. This is in part attributable to slow response time—project information and

FIGURE 3.2 Dedicated Project Team

Zeus Electronics, Inc. President

Human resources

Finance and administration

Marketing Manufacturing

Project manager

Project team

ProcurementEngineering

Zeus Electronics, Inc. President

Human resources

Finance and administration

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Chapter 3 Organization: Structure and Culture 71

decisions have to be circulated through normal management channels. Furthermore, the lack of horizontal, direct communication among functional groups contributes to rework as specialists realize the implications of others’ actions after the fact.

4. Lack of Ownership. The motivation of people assigned to the project can be weak. The project may be seen as an additional burden that is not directly linked to their professional development or advancement. Furthermore, because they are working on only a segment of the project, professionals do not identify with the project.

Organizing Projects as Dedicated Teams At the other end of the structural spectrum is the creation of a dedicated project team. These teams operate as separate units from the rest of the parent organization. Usually a full-time project manager is designated to pull together a core group of specialists who work full time on the project. The project manager recruits necessary personnel from both within and outside the parent company. The subsequent team is physically separated from the parent organization and given marching orders to complete the proj- ect (see Figure 3.2). The interface between the parent organization and the project teams will vary. In some cases, the parent organization maintains a tight rein through financial controls. In other cases, firms grant the project manager maximum freedom to get the project done as he

Zeus Electronics, Inc. President

Human resources

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Project team

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Zeus Electronics, Inc. President

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ProcurementEngineering

72 Chapter 3 Organization: Structure and Culture

sees fit. Lockheed Martin has used this approach to develop next-generation jet airplanes. See Snapshot from Practice 3.1: Skunk Works. In the case of firms where projects are the dominant form of business, such as a con- struction firm or a consulting firm, the entire organization is designed to support project teams. Instead of one or two special projects, the organization consists of sets of quasi- independent teams working on specific projects. The main responsibility of traditional functional departments is to assist and support these project teams. For example, the marketing department is directed at generating new business that will lead to more proj- ects, while the human resource department is responsible for managing a variety of personnel issues as well as recruiting and training new employees. This type of organi- zation is referred to in the literature as a projectized organization and is graphically portrayed in Figure 3.3. It is important to note that not all projects are dedicated project teams; personnel can work part-time on several projects. As in the case of functional organization, the dedicated project team approach has strengths and weaknesses (Larson, 2004). The following are recognized as strengths: 1. Simple. Other than taking away resources in the form of specialists assigned to the

project, the functional organization remains intact with the project team operating independently.

2. Fast. Projects tend to get done more quickly when participants devote their full attention to the project and are not distracted by other obligations and duties. Fur- thermore, response time tends to be quicker under this arrangement because most decisions are made within the team and are not deferred up the hierarchy.

In project management folklore, skunk works is code for a small, dedicated team assigned to a breakthrough proj- ect. The first skunk works was created more than a half a century ago by

Clarence L. “Kelly” Johnson at Lockheed Aerospace Corporation. Kelly’s project had two objectives: (1) to create a jet fighter, the Shooting Star, and (2) to do it as fast as possible. Kelly and a small band of engineering mavericks operated as a dedicated team unencum- bered by red tape and the bureaucratic delays of the normal R&D process. The name was coined by team member Irvin Culver after the moonshine brewery deep in the forest in the popular cartoon strip Lil’Abner. The homemade whisky was euphemistically called kickapoo joy juice. The project was a spectacular success. In just 43 days, Johnson’s team of 23 engineers and teams of support personnel put together the first American fighter to fly at more than 500 miles per hour. Lockheed has continued to use skunk works to develop a string of high speed jets, including the F117 Nighthawk Stealth Fighter as well as jet drone prototypes. Lockheed Mar- tin has an official Skunk Works Division. Their charter is:

S N A P S H O T F R O M P R A C T I C E 3 . 1

The Skunk Works is a concentration of a few good people solving problems far in advance—and at a fraction of the cost—by applying the simplest, most straightforward methods possible to develop and produce new products.

Skunk Works at Lockheed Martin*

*J. Miller, Lockheed Martin’s Skunk Works (New York: Special- ity Publications, 1996); “Lockheed Martin Skunk Works,” www.lockheedmartin.com/us/aeronautics/skunkworks.html, accessed 1/22/2015.

Chapter 3 Organization: Structure and Culture 73

3. Cohesive. A high level of motivation and cohesiveness often emerges within the project team. Participants share a common goal and personal responsibility toward the project and the team.

4. Cross-Functional Integration. Specialists from different areas work closely together and, with proper guidance, become committed to optimizing the project, not their respective areas of expertise.

In many cases, the project team approach is the optimum approach for completing a project when you view it solely from the standpoint of what is best for completing the project. Its weaknesses become more evident when the needs of the parent organiza- tion are taken into account: 1. Expensive. Not only have you created a new management position (project man-

ager), but resources are also assigned on a full-time basis. This can result in dupli- cation of efforts across projects and a loss of economies of scale.

2. Internal Strife. Sometimes dedicated project teams become an entity in their own right and conflict emerges between the team and the remainder of the organization (see Snapshot from Practice 3.2: The Birth of the Mac). This divisiveness can undermine not only the integration of the eventual outcomes of the project into mainstream operations but also the assimilation of project team members back into their functional units once the project is completed.

3. Limited Technological Expertise. Creating self-contained teams inhibits maxi- mum technological expertise being brought to bear on problems. Technical

FIGURE 3.3 Projectized Organization Structure

Central Engineering Systems, Inc. President

Marketing

Alpha Project Project Manager

ManufacturingEngineering Procurement Engineering Subcontractors

Other projects

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Systems Hardware Software

Assembly Test

Electrical Mechanical Software

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74 Chapter 3 Organization: Structure and Culture

One of the advantages of creating ded- icated project teams is that project par- ticipants from different functional areas can develop into a highly cohesive work team that is strongly committed

to completing the project. While such teams often pro- duce Herculean efforts in pursuit of project completion, there is a negative dimension to this commitment that is often referred to in the literature as projectitis. A we– they attitude can emerge between project team mem- bers and the rest of the organization. The project team succumbs to hubris and develops a holier-than-thou atti- tude that antagonizes the parent organization. People not assigned to the project become jealous of the atten- tion and prestige being showered on the project team, especially when they believe that it is their hard work that is financing the endeavor. The tendency to assign project teams exotic titles such as “Silver Bullets” and “Tiger Teams,” as well as give them special perks, tends to intensify the gap between the project team and the parent organization. Such appears to have been the case with Apple’s highly successful Macintosh development team. Steve Jobs, who at the time was both the chairman of Apple and the project manager for the Mac team, pampered his team with perks including at-the-desk massages, coolers stocked with freshly squeezed orange juice, a Bosendorfer grand piano, and first-class plane tickets. No other employees at Apple got to travel first class. Jobs considered his team to be the elite of Apple and had a tendency to refer to everyone else as “Bozos” who “didn’t get it.” Engineers from the Apple II division, which was the bread and butter of Apple’s sales, became incensed with the special treatment their col- leagues were getting. One evening at Ely McFly’s, a local watering hole, the tensions between Apple II engineers seated at one table and those of a Mac team at another boiled over. Aaron Goldberg, a long-time industry consultant, watched from his barstool as the squabbling escalated. “The Mac guys were screaming, ‘We’re the future!’ The Apple II guys were screaming, ‘We’re the money!’ Then

S N A P S H O T F R O M P R A C T I C E 3 . 2

there was a geek brawl. Pocket protectors and pens were flying. I was waiting for a notebook to drop, so they would stop and pick up the papers.” Although comical from a distance, the discord between the Apple II and Mac groups severely hampered Apple’s performance during the 1980s. John Sculley, who replaced Steve Jobs as chairman of Apple, observed that Apple had evolved into two “warring companies” and referred to the street between the Apple II and Macintosh buildings as “the DMZ” (demilitarized zone).

expertise is limited somewhat to the talents and experience of the specialists assigned to the project. While nothing prevents specialists from consulting with others in the functional division, the we–they syndrome and the fact that such help is not formally sanctioned by the organization discourage this from happening.

The Birth of the Mac*

*J. Carlton, Apple: The Inside Story of Intrigue, Egomania, and Business Blunders (New York: Random House, 1997), pp. 13–14; J. Sculley, Odyssey: Pepsi to Apple . . . A Journey of Adventure, Ideas, and the Future (New York: Harper & Row, 1987), pp. 270–79.

Chapter 3 Organization: Structure and Culture 75

4. Difficult Post-Project Transition. Assigning full-time personnel to a project cre- ates the dilemma of what to do with personnel after the project is completed. If other project work is not available, then the transition back to their original func- tional departments may be difficult because of their prolonged absence and the need to catch up with recent developments in their functional area.

Organizing Projects within a Matrix Arrangement One of the biggest management innovations to emerge in the past 40 years has been the matrix organization. Matrix management is a hybrid organizational form in which a horizontal project management structure is “overlaid” on the normal functional hier- archy. In a matrix system, there are usually two chains of command, one along func- tional lines and the other along project lines. Instead of delegating segments of a project to different units or creating an autonomous team, project participants report simultaneously to both functional and project managers. Companies apply this matrix arrangement in a variety of different ways. Some orga- nizations set up temporary matrix systems to deal with specific projects, while “matrix” may be a permanent fixture in other organizations. Let us first look at its general application and then proceed to a more detailed discussion of finer points. Consider Figure 3.4. There are three projects currently under way: A, B, and C. All three project managers (PM A-C) report to a director of project management, who supervises all projects. Each project has an administrative assistant, although the one for project C is only part time. Project A involves the design and expansion of an existing production line to accommodate new metal alloys. To accomplish this objective, project A has assigned to it 3.5 people from manufacturing and 6 people from engineering. These individuals are assigned to the project on a part-time or full-time basis, depending on the project’s needs during various phases of the project. Project B involves the development of a new product that requires the heavy representation of engineering, manufacturing, and marketing. Project C involves forecasting changing needs of an existing customer base. While these three projects, as well as others, are being completed, the functional divi- sions continue performing their basic, core activities. The matrix structure is designed to optimally utilize resources by having individu- als work on multiple projects as well as being capable of performing normal func- tional duties. At the same time, the matrix approach attempts to achieve greater integration by creating and legitimizing the authority of a project manager. In theory, the matrix approach provides a dual focus between functional/technical expertise and project requirements that is missing in either the project team or functional approach to project management. This focus can most easily be seen in the relative input of functional managers and project managers over key project decisions (see Table 3.1).

TABLE 3.1 Division of Project Manager and Functional Manager Responsibilities in a Matrix Structure

Project Manager Negotiated Issues Functional Manager

What has to be done? Who will do the task? How will it be done? When should the task Where will the task be done? be done? How much money is available Why will the task be How will the project involvement to do the task? done? impact normal functional activities? How well has the total project Is the task satisfactorily How well has the functional input been done? completed? been integrated?

76 Chapter 3 Organization: Structure and Culture

Different Matrix Forms In practice there are really different kinds of matrix systems, depending on the relative authority of the project and functional managers (Larson & Gobeli, 1987; Bowen et al., 1994). Here is a thumbnail sketch of the three kinds of matrices: ∙ Weak matrix—This form is very similar to a functional approach with the excep-

tion that there is a formally designated project manager responsible for coordinating project activities. Functional managers are responsible for managing their segment of the project. The project manager basically acts as a staff assistant who draws the schedules and checklists, collects information on status of work, and facilitates project completion. The project manager has indirect authority to expedite and monitor the project. Functional managers call most of the shots and decide who does what and when the work is completed.

∙ Balanced matrix—This is the classic matrix in which the project manager is responsible for defining what needs to be accomplished while the functional man- agers are concerned with how it will be accomplished. More specifically, the proj- ect manager establishes the overall plan for completing the project, integrates the contribution of the different disciplines, sets schedules, and monitors progress. The functional managers are responsible for assigning personnel and executing their segment of the project according to the standards and schedules set by the project manager. The merger of “what and how” requires both parties to work closely together and jointly approve technical and operational decisions.

Distinguish three differ- ent types of matrix struc- tures and understand their strengths and weaknesses.

3-2LO

FIGURE 3.4 Matrix Organization Structure

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Chapter 3 Organization: Structure and Culture 77

∙ Strong matrix—This form attempts to create the “feel” of a project team within a matrix environment. The project manager controls most aspects of the project, includ- ing scope trade-offs and assignment of functional personnel. The project manager con- trols when and what specialists do and has final say on major project decisions. The functional manager has title over her people and is consulted on a need basis. In some situations a functional manager’s department may serve as a “subcontractor” for the project, in which case they have more control over specialized work. For example, the development of a new series of laptop computers may require a team of experts from different disciplines working on the basic design and performance requirements within a project matrix arrangement. Once the specifications have been determined, final design and production of certain components (i.e., power source) may be assigned to respective functional groups to complete.

Matrix management both in general and in its specific forms has unique strengths and weaknesses (Larson & Gobeli, 1987). The advantages and disadvantages of matrix organizations in general are noted below, while only briefly highlighting specifics con- cerning different forms: 1. Efficient. Resources can be shared across multiple projects as well as within func-

tional divisions. Individuals can divide their energy across multiple projects on an as-needed basis. This reduces duplication required in a projectized structure.

2. Strong Project Focus. A stronger project focus is provided by having a formally designated project manager who is responsible for coordinating and integrating

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78 Chapter 3 Organization: Structure and Culture

contributions of different units. This helps sustain a holistic approach to problem solving that is often missing in the functional organization.

3. Easier Post-Project Transition. Because the project organization is overlaid on the functional divisions, specialists maintain ties with their functional group, so they have a homeport to return to once the project is completed.

4. Flexible. Matrix arrangements provide for flexible utilization of resources and expertise within the firm. In some cases functional units may provide individuals who are managed by the project manager. In other cases the contributions are moni- tored by the functional manager.

The strengths of the matrix structure are considerable. Unfortunately, so are the poten- tial weaknesses. This is due in large part to the fact that a matrix structure is more complicated and the creation of multiple bosses represents a radical departure from the traditional hierarchical authority system. Furthermore, one does not install a matrix structure overnight. Experts argue that it takes 3–5 years for a matrix system to fully mature. So many of the problems described below represent growing pains.

1. Dysfunctional Conflict. The matrix approach is predicated on tension between func- tional managers and project managers who bring critical expertise and perspectives to the project. Such tension is viewed as a necessary mechanism for achieving an appro- priate balance between complex technical issues and unique project requirements. While the intent is noble, the effect is sometimes analogous to opening Pandora’s box. Legitimate conflict can spill over to a more personal level, resulting from conflicting agendas and accountabilities. Worthy discussions can degenerate into heated argu- ments that engender animosity among the managers involved.

2. Infighting. Any situation in which equipment, resources, and people are being shared across projects and functional activities lends itself to conflict and competi- tion for scarce resources. Infighting can occur among project managers, who are primarily interested in what is best for their project.

3. Stressful. Matrix management violates the management principle of unity of com- mand. Project participants have at least two bosses—their functional head and one or more project managers. Working in a matrix environment can be extremely stressful. Imagine what it would be like to work in an environment in which you are being told to do three conflicting things by three different managers.

4. Slow. In theory, the presence of a project manager to coordinate the project should accelerate the completion of the project. In practice, decision making can get bogged down as agreements have to be forged across multiple functional groups. This is especially true for the balanced matrix.

When the three variant forms of the matrix approach are considered, we can see that advantages and disadvantages are not necessarily true for all three forms of matrix. The Strong matrix is likely to enhance project integration, diminish internal power struggles, and ultimately improve control of project activities and costs. On the downside, technical quality may suffer because functional areas have less control over their contributions. Finally, projectitis may emerge as the members develop a strong team identity. The Weak matrix is likely to improve technical quality as well as provide a better system for managing conflict across projects because the functional manager assigns personnel to different projects. The problem is that functional control is often main- tained at the expense of poor project integration. The Balanced matrix can achieve

Chapter 3 Organization: Structure and Culture 79

better balance between technical and project requirements, but it is a very delicate system to manage and is more likely to succumb to many of the problems associated with the matrix approach.

3.2 What Is the Right Project Management Structure? There is empirical evidence that project success is directly linked to the amount of autonomy and authority project managers have over their projects (Gray et al., 1990; Larson & Gobeli, 1988; Larson & Gobeli, 1987). However, most of this research is based on what is best for managing specific projects. It is important to remember what was stated in the beginning of the chapter—that the best system balances the needs of the project with those of the parent organization. So what project structure should an organization use? This is a complicated question with no precise answers. A number of issues need to be considered at both the organization and project level.

Organization Considerations At the organization level, the first question that needs to be asked is how important is project management to the success of the firm? What percentage of core work involves projects? If over 75 percent of work involves projects, then an organization should consider a fully projectized organization. If an organization has both standard products and projects, then a matrix arrangement would appear to be appropriate. If an organi- zation has very few projects, then a less formal arrangement is probably all that is required. Dedicated teams could be created on an as-needed basis and the organization could outsource project work. A second key question is resource availability. Remember, matrix evolved out of the necessity to share resources across multiple projects and functional domains while at the same time creating legitimate project leadership. For organizations that cannot afford to tie up critical personnel on individual projects, a matrix system would appear to be appropriate. An alternative would be to create a dedicated team but outsource project work when resources are not available internally. Within the context of the first two questions, an organization needs to assess current practices and what changes are needed to more effectively manage projects. A strong project matrix is not installed overnight. The shift toward a greater emphasis on proj- ects has a host of political implications that need to be worked through, requiring time and strong leadership. For example, we have observed many companies that make the transition from a functional organization to a matrix organization begin with a weak functional matrix. This is due in part to resistance by functional and department man- agers toward transferring authority to project managers. With time, these matrix struc- tures eventually evolve into a project matrix. Many organizations have created Project Management Offices to support project management efforts. See Snapshot from Prac- tice 3.3: POs: Project Offices.

Project Considerations At the project level, the question is how much autonomy the project needs in order to be successfully completed. Hobbs and Ménard (1993) identify seven factors that should influence the choice of project management structure: ∙ Size of project. ∙ Strategic importance.

Understand organiza- tional and project con- siderations that should be considered in choos- ing an appropriate proj- ect management structure.

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80 Chapter 3 Organization: Structure and Culture

Project offices (POs) were originally developed as a response to the poor track record many companies had in completing projects on time, within budget, and according to plan. They

were often established to help matrix systems mature into more effective project delivery platforms. Today, POs come in many different shapes and forms. One interesting way of classifying POs was set forth by Casey and Peck, who describe certain POs in terms of being (1) a weather station, (2) a control tower, or (3) a resource pool. Each of these models performs a very different function for its organization.

Weather Station. The primary function of the weather station PO is to track and monitor project performance. It is typically created to satisfy top management’s need to stay on top of the portfolio of projects under way in the firm. Staff provides an independent forecast of project performance. The questions answered for specific projects include:

How are our projects progressing? Which ones are on track? Which ones are not?

S N A P S H O T F R O M P R A C T I C E 3 . 3 POs: Project Offices*

How are we doing in terms of cost? Which proj- ects are over or under budget?

What are the major problems confronting proj- ects? Are contingency plans in place? What can the organization do to help the project?

Control Tower. The primary function of the control tower PO is to improve project execution. It consid- ers project management as a profession to be pro- tected and advanced. Staff at the PO identify best practices and standards for project management ex- cellence. They work as consultants and trainers to support project managers and their teams.

Resource Pool. The goal of the resource pool PO is to provide the organization with a cadre of trained project managers and professionals. It operates like an academy for continually upgrading the skills of a firm’s project professionals. In addition to training, this kind of PO also serves to elevate the stature of project management within the organization.

* W. Casey and W. Peck, “Choosing the Right PMO Setup,” PM Network, vol. 15, no. 2 (2001), pp. 40–47.

∙ Novelty and need for innovation. ∙ Need for integration (number of departments involved). ∙ Environmental complexity (number of external interfaces). ∙ Budget and time constraints. ∙ Stability of resource requirements. The higher the levels of these seven factors, the more autonomy and authority the project manager and project team need to be successful.1 This translates into using either a dedi- cated project team or a project matrix structure. For example, these structures should be used for large projects that are strategically critical and are new to the company, thus requiring much innovation. These structures would also be appropriate for complex, multidisciplinary projects that require input from many departments, as well as for proj- ects that require constant contact with customers to assess their expectations. Dedicated project teams should also be used for urgent projects in which the nature of the work requires people working steadily from beginning to end. Many firms that are heavily involved in project management have created a flexible management system that organizes projects according to project requirements. For example, Chaparral Steel, a mini-mill that produces steel bars and beams from scrap

1 For a more sophisticated discussion of contingency factors related to managing specific projects see: A. J. Shenhar and D. Dvir, Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation (Boston: Harvard Press, 2007).

Chapter 3 Organization: Structure and Culture 81

metal, classifies projects into three categories: advanced development, platform, and incremental. Advanced development projects are high-risk endeavors involving the creation of a breakthrough product or process. Platform projects are medium-risk proj- ects involving system upgrades that yield new products and processes. Incremental projects are low-risk, short-term projects that involve minor adjustments in existing products and processes. At any point in time, Chaparral might have 40–50 projects under way, of which only one or two are advanced, three to five are platform projects, and the remainder are small, incremental projects. The incremental projects are almost all done within a weak matrix with the project manager coordinating the work of func- tional subgroups. A strong matrix is used to complete the platform projects, while dedicated project teams are typically created to complete the advanced development projects. More and more companies are using this “mix and match” approach to managing projects.

3.3 Organizational Culture The decision for combining a discussion of project management structures and orga- nizational cultures in this chapter can be traced to a conversation we, the authors, had with two project managers who work for a medium-sized information technology firm. The managers were developing a new operating platform that would be critical to the future success of their company. When they tried to describe how this project was organized, one manager began to sketch out on a napkin a complicated structure involving 52 different teams, each with a project leader and a technical leader! In response to our further probing to understand how this system worked, the manager stopped short and proclaimed, “The key to making this structure work is the culture in our company. This approach would never work at company Y, where I worked before. But because of our culture here we are able to pull it off.” This comment, our observations of other firms, and research suggest there is a strong connection between project management structure, organizational culture, and project success.2 We have observed organizations successfully manage projects within the traditional functional organization because the culture encouraged cross-functional integration. Conversely we have seen matrix structures break down because the culture of the organization did not support the division of authority between project managers and functional managers. We have also observed companies relying on independent project teams because the dominant culture would not support the innovation and speed necessary for success.

What Is Organizational Culture? Organizational culture refers to a system of shared norms, beliefs, values, and assumptions which binds people together, thereby creating shared meanings (Deal & Kennedy, 1982). This system is manifested by customs and habits that exemplify the values and beliefs of the organization. For example, egalitarianism may be expressed in the informal dress worn at a high-tech firm. Conversely, mandated uniforms at a department store reinforce respect for the hierarchy.

Appreciate the signifi- cant role that organiza- tional culture plays in managing projects.

3-4LO

Interpret the culture of an organization.

3-5LO

2 See, for example: Kerzner, H., In Search of Excellence in Project Management (New York: Von Nostrand Reinhold, 1997); Yazici, H. “The Role of Project Management Maturity and Organizational Culture in Perceived Performance”, Project Man- agement Journal, 2009.

82 Chapter 3 Organization: Structure and Culture

Culture reflects the personality of the organization and, similar to an individual’s personality, can enable us to predict attitudes and behaviors of organizational mem- bers. Culture is also one of the defining aspects of an organization that sets it apart from other organizations even in the same industry. Research suggests that there are 10 primary characteristics which, in aggregate, capture the essence of an organization’s culture:3

1. Member identity—the degree to which employees identify with the organization as a whole rather than with their type of job or field of professional expertise.

2. Team emphasis—the degree to which work activities are organized around groups rather than individuals.

3. Management focus—the degree to which management decisions take into account the effect of outcomes on people within the organization.

4. Unit integration—the degree to which units within the organization are encour- aged to operate in a coordinated or interdependent manner.

5. Control—the degree to which rules, policies, and direct supervision are used to oversee and control employee behavior.

6. Risk tolerance—the degree to which employees are encouraged to be aggressive, innovative, and risk seeking.

7. Reward criteria—the degree to which rewards such as promotion and salary increases are allocated according to employee performance rather than seniority, favoritism, or other nonperformance factors.

8. Conflict tolerance—the degree to which employees are encouraged to air con- flicts and criticisms openly.

9. Means versus end orientation—the degree to which management focuses on out- comes rather than on techniques and processes used to achieve those results.

10. Open-systems focus—the degree to which the organization monitors and responds to changes in the external environment.

As shown in Figure 3.5, each of these dimensions exists on a continuum. Assessing an organization according to these 10 dimensions provides a composite picture of the organization’s culture. This picture becomes the basis for feelings of shared under- standing that the members have about the organization, how things are done, and the way members are supposed to behave. Culture performs several important functions in organizations. An organization’s culture provides a sense of identity for its members. The more clearly an organiza- tion’s shared perceptions and values are stated, the more strongly people can iden- tify with their organization and feel a vital part of it. Identity generates commitment to the organization and reasons for members to devote energy and loyalty to the organization. A second important function is that culture helps legitimize the management sys- tem of the organization. Culture helps clarify authority relationships. It provides reasons why people are in a position of authority and why their authority should be respected.

3 Harrison, M. T., and J. M. Beyer, The Culture of Organizations (Englewood Cliffs, NJ: Prentice Hall, 1993); O’Reilly, C. A., J. Chatman, and D. F. Caldwell, “People and Organizational Culture: A Profile Comparison Approach to Assessing Person- Organization Fit,” Academy of Management Journal, vol. 34, no. 3 (September 1991), pp. 487–516; and Schein, E., Organi- zational Culture and Leadership: A Dynamic View (San Francisco, CA: Jossey-Bass, 2010).

Chapter 3 Organization: Structure and Culture 83

Most importantly, organizational culture clarifies and reinforces standards of behavior. Culture helps define what is permissible and inappropriate behavior. These standards span a wide range of behavior from dress code and working hours to chal- lenging the judgment of superiors and collaborating with other departments. Ulti- mately, culture helps create social order within an organization. Imagine what it would be like if members didn’t share similar beliefs, values, and assumptions—chaos! The customs, norms, and ideals conveyed by the culture of an organization provide the stability and predictability in behavior that is essential for an effective organization. See Snapshot from Practice 3.4: Google-y for an example of this. Although our discussion of organizational culture may appear to suggest one cul- ture dominates the entire organization, in reality this is rarely the case. “Strong” or “thick” are adjectives used to denote a culture in which the organization’s core values and customs are widely shared within the entire organization. Conversely, a “thin” or “weak” culture is one that is not widely shared or practiced within a firm. Even within a strong organizational culture, there are likely to be subcultures often aligned within specific departments or specialty areas. As noted earlier in our discus- sion of project management structures, it is not uncommon for norms, values, and customs to develop within a specific field or profession such as marketing, finance, or operations. People working in the marketing department may have a different set of norms and values than those working in finance. Countercultures sometimes emerge within organizations that embody a different set of values, beliefs, and customs—often in direct contradiction with the culture espoused by top management. How pervasive these subcultures and countercultures are affects the strength of the culture of the organization and the extent to which culture influ- ences members’ actions and responses.

Identifying Cultural Characteristics Deciphering an organization’s culture is a highly interpretative, subjective process that requires assessment of both current and past history. The student of culture cannot

Job

Individual

Task

Independent

Loose

Low

Performance

Low

Means

Internal

1. Member identity

2. Team emphasis

3. Management focus

4. Unit integration

5. Control

6. Risk tolerance

7. Reward criteria

8. Conflict tolerance

9. Means-ends orientation

10. Open-system focus

Organization

Group

People

Interdependent

Tight

High

Other

High

Ends

External

FIGURE 3.5 Key Dimensions Defining an Organization’s Culture

84 Chapter 3 Organization: Structure and Culture

In 2016 Google Inc. topped Fortune magazine’s list of best companies to work at for the seventh time in the past ten years. When one enters the 24-hour Googleplex located in

S N A P S H O T F R O M P R A C T I C E 3 . 4 Google-y*

architecture look like? What image does it convey? Is it unique? Are the buildings

Chapter 3 Organization: Structure and Culture 85

and offices the same quality for all employees? Or are modern buildings and fancier offices reserved for senior executives or managers from a specific department? What are the customs concerning dress? What symbols does the organization use to signal authority and status within the organization? These physical characteristics can shed light on who has real power within the organization, the extent to which the organization is internally differentiated, and how formal the organization is in its business dealings.

2. Read about the organization. Examine annual reports, mission statements, press releases, and internal newsletters. What do they describe? What principles are espoused in these documents? Do the reports emphasize the people who work for the organization and what they do or the financial performance of the firm? Each emphasis reflects a different culture. The first demonstrates concern for the people who make up the company. The second may suggest a concern for results and the bottom line.

3. Observe how people interact within the organization. What is their pace—is it slow and methodical or urgent and spontaneous? What rituals exist within the orga- nization? What values do they express? Meetings can often yield insightful infor- mation. Who are the people at the meetings? Who does the talking? To whom do they talk? How candid is the conversation? Do people speak for the organization or for the individual department? What is the focus of the meetings? How much time is spent on various issues? Issues that are discussed repeatedly and at length are clues about the values of the organization’s culture.

FIGURE 3.6 Organizational Culture Diagnosis Worksheet

Power Corp.

I. Physical Characteristics: Architecture, office layout, décor, attire

Corporate HQ is 20 story modern building—president on top floor. Offices are bigger in the top floors than lower floors. Formal business attire (white shirts, ties, power suits, . . . ). Power appears to increase the higher up you are.

II. Public Documents: Annual reports, internal newsletters, vision statements

At the heart of the Power Corp. way is our vision . . . to be the global energy company most admired for its people, partnership, and performance.

Integrity. We are honest with others and ourselves. We meet the highest ethical standards in all busi- ness dealings. We do what we say we will do.

III. Behavior: Pace, language, meetings, issues discussed, decision-making style, communication patterns, rituals

Hierarchical decision making, pace brisk but orderly, meetings start on time and end on time, subordi- nates choose their words very carefully when talking to superiors, people rarely work past 6:00 p.m., president takes top performing unit on a boat cruise each year . . .

IV. Folklore: Stories, anecdotes, heroines, heroes, villains

Young project manager was fired after going over his boss’s head to ask for additional funds.

Stephanie C. considered a hero for taking complete responsibility for a technical error.

Jack S. was labeled a traitor for joining chief competitor after working for Power Corp. for 15 years.

86 Chapter 3 Organization: Structure and Culture

4. Interpret stories and folklore surrounding the organization. Look for similari- ties among stories told by different people. The subjects highlighted in recurring stories often reflect what is important to an organization’s culture. For example, many of the stories that are repeated at Versatec, a Xerox subsidiary that makes graphic plotters for computers, involve their flamboyant cofounder, Renn Zaphi- ropoulos. According to company folklore, one of the very first things Renn did when the company was formed was to assemble the top management team at his home. They then devoted the weekend to handmaking a beautiful teak conference table around which all future decisions would be made. This table came to symbol- ize the importance of teamwork and maintaining high standards of performance, two essential qualities of the culture at Versatec. Try to identify who the heroes and villains are in company folklore. What do they suggest about the culture’s ideals? Returning to the Versatec story, when the company was eventually purchased by Xerox many employees expressed concern that Versatec’s informal, play hard/ work hard culture would be overwhelmed by the bureaucracy at Xerox. Renn rallied the employees to superior levels of performance by arguing that if they exceeded Xerox’s expectations they would be left alone. Autonomy has remained a fixture of Versatec’s culture long after Renn’s retirement.

It is also important to pay close attention to the basis for promotions and rewards. What do people see as the keys to getting ahead within the organization? What con- tributes to downfalls? These last two questions can yield important insights into the qualities and behaviors which the organization honors as well as the cultural taboos and behavioral land mines that can derail a career. For example, one project man- ager confided that a former colleague was sent to project management purgatory soon after publicly questioning the validity of a marketing report. From that point on, the project manager was extra careful to privately consult the marketing depart- ment whenever she had questions about their data.

With practice an observer can assess how strong the dominant culture of an organiza- tion is and the significance of subcultures and countercultures. Furthermore, learners can discern and identify where the culture of an organization stands on the 10 cultural dimensions presented earlier and, in essence, begin to build a cultural profile for a firm. Based on this profile, conclusions can be drawn about specific customs and norms that need to be adhered to as well as those behaviors and actions that violate the norms of a firm.

3.4 Implications of Organizational Culture for Organizing Projects Project managers have to be able to operate in several, potentially diverse, organiza- tional cultures. First, they have to interact with the culture of their parent organization as well as the subcultures of various departments (e.g., marketing, accounting). Sec- ond, they have to interact with the project’s client or customer organizations. Finally, they have to interact in varying degrees with a host of other organizations connected to the project. These organizations include suppliers and vendors, subcontractors, con- sulting firms, government and regulatory agencies, and, in many cases, community groups. Many of these organizations are likely to have very different cultures. Project managers have to be able to read and speak the culture they are working in to develop strategies, plans, and responses that are likely to be understood and accepted. Still, the emphasis of this chapter is on the relationship between organizational culture and proj- ect management structure, and it is necessary to defer further discussion of these

Understand the interac- tion between project management structure and the culture of an organization.

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Chapter 3 Organization: Structure and Culture 87

implications until Chapters 10–12, which focus on leadership, team building, and outsourcing. Earlier we stated that we believe there are strong relationships among project man- agement structure, organizational culture, and successful project management. To explore these relationships further, let us return to the dimensions that can be used to characterize the culture of an organization. When examining these dimensions we could hypothesize that certain aspects of the culture of an organization would support successful project management while other aspects would deter or interfere with effec- tive management. Figure 3.7 attempts to identify which cultural characteristics create an environment conducive to completing most complex projects involving people from different disciplines. Note that, in many cases, the ideal culture is not at either extreme. For example, a fertile project culture would likely be one in which management balances its focus on the needs of both the task and the people. An optimal culture would balance con- cern with output (ends) and processes to achieve those outcomes (means). In other cases, the ideal culture would be on one end of a dimension or the other. For exam- ple, because most projects require collaboration across disciplines, it would be desir- able that the culture of the organization emphasize working in teams and identifying with the organization, not just the professional domain. Likewise, it is important that the culture support a certain degree of risk taking and a tolerance for constructive conflict. One organization that appears to fit this ideal profile is 3M. 3M has received acclaim for creating an entrepreneurial culture within a large corporate framework. The essence of its culture is captured in phrases that have been chanted often by 3Mers throughout its history: “Encourage experimental doodling.” “Hire good people and leave them alone.” “If you put fences around people, you get sheep. Give people the room they need.” Freedom and autonomy to experiment are reflected in the “15 per- cent rule,” which encourages technical people to spend up to 15 percent of their time on projects of their own choosing and initiative. This fertile culture has contributed to

Job

Individual

Task

Independent

Loose

Low

Performance

Low

Means

Internal

1. Member identity

2. Team emphasis

3. People focus

4. Unit integration

5. Control

6. Risk tolerance

7. Reward criteria

8. Conflict tolerance

9. Means-ends orientation

10. Open-system focus

Organization

Group

People

Interdependent

Tight

High

Other

High

Ends

External

FIGURE 3.7 Cultural Dimensions of an Organization Supportive of Project Management

88 Chapter 3 Organization: Structure and Culture

3M’s branching out into more than 60,000 products and 35 separate business units (Collins & Porras, 1994). The metaphor we choose to describe the relationship between organizational culture and project management is that of a riverboat trip. Culture is the river and the project is the boat. Organizing and completing projects within an organization in which the culture is conducive to project management is like paddling downstream: much less effort is required. In many cases, the current can be so strong that steering is all that is required. Such is the case for projects that operate in a project-friendly environment where teamwork and cross-functional cooperation are the norms, where there is a deep commitment to excellence, and where healthy conflict is voiced and dealt with quickly and effectively. Conversely, trying to complete a project in a toxic culture is like paddling upstream: much more time, effort, and attention are needed to reach the destination. This would be the situation in cultures that discourage teamwork and cooperation, that have a low tolerance for conflict, and where getting ahead is based less on performance and more on cultivating favorable relationships with superiors. In such cases, the project man- ager and her people not only have to overcome the natural obstacles of the project but also have to overcome the prevailing negative forces inherent in the culture of the organization. The implications of this metaphor are important. Greater project authority and time are necessary to complete projects that encounter a strong, negative cultural current. Conversely, less formal authority and fewer dedicated resources are needed to com- plete projects in which the cultural currents generate behavior and cooperation essen- tial to project success. The key issue is the degree of interdependency between the parent organization and the project team. In cases where the prevalent organizational culture supports the behaviors essential to project completion, a weaker, more flexible project management structure can be effective. For example, one of the major reasons Chaparral Steel is able to use a functional matrix to successfully complete incremental projects is that its culture contains strong norms for cooperation (Bowen et al., 1994). See Research Highlight 3.1: The Secret of Success for another example of how culture supports suc- cessful project management. When the dominant organizational culture inhibits collaboration and innovation, it is advisable to insulate the project team from the dominant culture. Here it becomes necessary to create a self-sufficient project team. If a dedicated project team is impossible because of resource constraints, then at least a project matrix should be used where the project manager has dominant control over the project. In both cases, the managerial strategy is to create a distinct team subculture in which a new set of norms, customs, and values evolves that will be conducive to project completion. Under extreme circumstances this project culture could even represent a countercul- ture in that many of the norms and values are the antithesis of the dominant, parent culture. Such was the case when IBM decided to develop their personal computer quickly in 1980 (Smith & Reinertsen, 1995). They knew that the project could get bogged down by the overabundance of computer knowledge and bureaucracy in the company. They also realized that they would have to work closely with suppliers and make use of many non-IBM parts if they were to get to the market quickly. This was not the IBM way at the time, so IBM established the PC project team in a warehouse in Boca Raton, Florida, far from corporate headquarters and other corporate develop- ment facilities that existed within the organization.

In The Secret of Success: The Dou- ble Helix of Formal and Informal Structures in an R&D Laboratory Polly Rizova revealed the results of a year-long investigation into the in-

ner workings of a Fortune 500 R&D Lab. Through interviews with key participants and analysis of social networking data, Rizova assessed the efficacy of six high-tech development projects. Four critical success factors emerged from her research. One element that is crucial to success is a heavy reliance on open and unrestricted patterns of communication, coupled with a low degree of formal reporting. In other words, team members freely interacted with each other regardless of title, experience, or discipline. A second key is having individuals on the project who are highly respected across the laboratory for their exceptional technical skills and experience. Similarly, it is also vital to have individuals involved in the project who are highly respected for their organizational expertise and experience. Having both “technical stars” and “organizational stars” on the project team was es- sential to success. The final factor is a strong and sustained support for the project from the compa- ny’s corporate management. What’s more, her analysis revealed the interactive nature of the four conditions, namely, that no one condition was likely to produce successful outcomes on its own, but only when put together in a way in which they reinforce each other. Here the culture of the labo- ratory was seen as the key catalyst. Rizova describes a matrix system in which peo- ple work on multiple projects simultaneously but

with a different wrinkle. Individuals occupy differ- ent positions and play different roles depending upon the project. For example, it is common for a senior engineer to be the manager of one project and a researcher on another that is led by his or her subordinate. In essence one must “boss” his or her own boss. At first glance this formal structure should create destructive tensions. However, Rizova argues that the organizational culture of the lab is the glue that keeps things running smoothly. She describes a culture in which the social norms of cooperation, respect, and civility are up- held and reproduced. It is a culture characterized by trust and a strong drive toward superior individ- ual and organizational learning and achievement. The culture is captured in the comments of researchers:

That is one of the nicest things around here. Your opinions are listened to. Superiors consider our advice. You will find that most of the projects here are a team effort.

What I like most is the positive thinking and the “whatever it takes” attitude. Per- sonality conflicts can be devastating. Here everyone helps you and supports you. There is no “I” in the word team.

Very friendly environment. . . . I met new people and learned a lot from them. They do not mind sharing their expertise.

Research Highlight 3.1 The Secret of Success*

* Polly S. Rizova, The Secret of Success: The Double Helix of Formal and Informal Structures in an R&D Laboratory (Stan- ford, CA: Stanford University Press, 2007).

Summary This chapter examined two major characteristics of the parent organization that affect the implementation and completion of projects. The first is the formal structure of the organization and how it chooses to organize and manage projects. Although the indi- vidual project manager may have very little say as to how the firm chooses to manage projects, he or she must be able to recognize the options available as well as the inher- ent strengths and weaknesses of different approaches. Three basic project management structures were described and assessed as to their weaknesses and strengths. Only under unique circumstances can a case be made for managing a project within the normal functional hierarchy. When thinking only in terms of what is best for the project, the creation of an independent project team is clearly favored. However, the most effective project management system appropriately balances the needs of the project with those of the parent organization. Matrix

90 Chapter 3 Organization: Structure and Culture

structures emerged out of the parent organization’s need to share personnel and re- sources across multiple projects and operations while creating legitimate project focus. The matrix approach is a hybrid organizational form that combines elements of both the functional and project team forms in an attempt to realize the advantages of both. The second major characteristic of the parent organization that was discussed in this chapter is the concept of organizational culture. Organizational culture is the pattern of beliefs and expectations shared by an organization’s members. Culture includes the be- havioral norms, customs, shared values, and the “rules of the game” for getting along and getting ahead within the organization. It is important for project managers to be “culture sensitive” so that they can develop appropriate strategies and responses and avoid violat- ing key norms that would jeopardize their effectiveness within the organization. The interaction between project management structure and organizational culture is a complicated one. We have suggested that in certain organizations, culture encourages the implementation of projects. In this environment the project management structure used plays a less decisive role in the success of the project. Conversely, for other orga- nizations in which the culture stresses internal competition and differentiation, just the opposite may be true. The prevailing norms, customs, and attitudes inhibit effective project management, and the project management structure plays a more decisive role in the successful implementation of projects. At a minimum, under adverse cultural conditions, the project manager needs to have significant authority over the project team; under more extreme conditions firms should physically relocate dedicated proj- ect teams to complete critical projects. In both cases, the managerial strategy should be insulate project work from the dominant culture so that a more positive “subculture” can emerge among project participants. The project management structure of the organization and the culture of the organi- zation are major elements of the environment in which a project is initiated. Subse- quent chapters will examine how project managers and professionals work within this environment to successfully complete projects.

Key Terms Balanced matrix, 76 Dedicated project team, 71 Matrix, 75

Organizational culture, 81 Projectitis, 74 Projectized organization, 72

Project office, 80 Strong matrix, 77 Weak matrix, 76

1. What are the relative advantages and disadvantages of the functional, matrix, and dedicated team approaches to managing projects?

2. What distinguishes a weak matrix from a strong matrix? 3. Under what conditions would it be advisable to use a strong matrix instead of a

dedicated project team? 4. How can project management offices (POs) support effective project

management? 5. Why is it important to assess the culture of an organization before deciding what

project management structure should be used to complete a project? 6. Other than culture, what other organizational factors should be used to determine

which project management structure should be used? 7. What do you believe is more important for successfully completing a project—the

formal project management structure or the culture of the parent organization?

Review Questions

Chapter 3 Organization: Structure and Culture 91

1. Going to college is analogous to working in a matrix environment in that most stu- dents take more than one class and must distribute their time across multiple classes. What problems does this situation create for you? How does it affect your performance? How could the system be better managed to make your life less dif- ficult and more productive?

2. You work for LL Company, which manufactures high-end optical scopes for hunt- ing rifles. LL Company has been the market leader for the past 20 years and has decided to diversify by applying its technology to develop a top-quality binocular. What kind of project management structure would you recommend they use for this project? What information would you like to have to make this recommendation, and why?

3. You work for Barbata Electronics. Your R&D people believe they have come up with an affordable technology that will double the capacity of existing MP3 players and use audio format that is superior to MP3. The project is code named KYSO (Knock Your Socks Off). What kind of project management structure would you recommend they use for the KYSO project? What information would you like to have to make this recommendation and why?

4. This chapter discussed the role of values and beliefs in forming an organization’s culture. The topic of organizational culture is big business on the Internet. Many companies use their Web pages to describe their mission, vision, and corporate values and beliefs. There also are many consulting firms that advertise how they help organizations to change their culture. The purpose of this exercise is for you to obtain information pertaining to the organizational culture for two different compa- nies. You can go about this task by very simply searching on the key words “orga- nizational culture” or “corporate vision and values.” This search will identify numerous companies for you to use to answer the following questions. You may want to select companies that you would like to work for in the future.

a. What are the espoused values and beliefs of the companies? b. Use the worksheet in Figure 3.6 to assess the Web page. What does the Web

page reveal about the culture of this organization? Would this culture be condu- cive to effective project management?

5. Use the cultural dimensions listed in Figure 3.5 to assess the culture of your school. Instead of employees, consider students, and instead of management, use faculty. For example, member identity refers to the degree to which students identify with the school as a whole rather than their major or option. Either as individuals or in small groups rate the culture of your school on the 10 dimensions.

a. What dimensions were easy to evaluate and which ones were not? b. How strong is the culture of your school? c. What functions does the culture serve for your school? d. Do you think the culture of your school is best suited to maximizing your learn-

ing? Why or why not? e. What kind of projects would be easy to implement in your school and what kind

of projects would be difficult given the structure and culture of your school? Explain your answer.

6. You work as an analyst in the marketing department for Springfield International (SI). SI uses a weak matrix to develop new services. Management has created an extremely competitive organizational culture that places an emphasis upon achieving results above everything else. One of the project managers that you have been assigned to

Exercises

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help has been pressuring you to make his project your number one priority. He also wants you to expand the scope of your work on his project beyond what your market- ing manager believes is necessary or appropriate. The project manager is widely per- ceived as a rising star within SI. Up to now you have been resisting the project manager’s pressure and complying with your marketing manager’s directives. How- ever, your most recent interchange with the project manager ended by his saying, “I’m not happy with the level of help I am getting from you and I will remember this when I become VP of Marketing.” How would you respond and why?

Block, T. R., and J. D. Frame, The Project Office—A Key to Managing Projects Effectively (Menlo Park, CA: Crisp Publications, 1998). Block, T. R., and J. D. Frame, “Today’s Project Office: Gauging Attitudes,” PM Net- work, August 2001. Bowen, H. K., K. B. Clark, C. A. Holloway, and S. C. Wheelwright, The Perpetual Enterprise Machine (New York: Oxford University Press, 1994). Brown, S., and K. R. Eisenhardt, “Product Development: Past Research, Present Findings, and Future Directions,” Academy of Management Review, vol. 20, no. 2 (1995), pp. 343–78. Cameron, K. S., and R. E. Quinn, Diagnosing and Changing Organizational Culture: Based on the Competing Values Framework (Upper Saddle River, NJ: Prentice Hall, 2011). Carlton, J., Apple: The Inside Story of Intrigue, Egomania, and Business Blunders (New York: Random House, 1997), pp. 13–14. Casey, W., and W. Peck, “Choosing the Right PMO Setup,” PM Network, vol. 15, no. 2 (2001), pp. 40–47. Collins, J. C., and J. I. Porras, Built to Last: The Successful Habits of Visionary Com- panies (New York: HarperCollins, 1994), pp. 150–58. Deal, T. E., and A. A. Kennedy, Corporate Cultures: The Rites and Rituals of Corpo- rate Life (Reading, MA: Addison-Wesley, 1982). De Laat, P. B., “Matrix Management of Projects and Power Struggles: A Case Study of an R&D Laboratory,” IEEE Engineering Management Review, Winter 1995. Filipczak, B., “Beyond the Gates of Microsoft,” Training, September 1992, pp. 37–44. Gallagher, R. S., The Soul of an Organization: Understanding the Values That Drive Successful Corporate Cultures (Chicago: Dearborn Trade Publishing, 2002). Graham, R. J., and R. L. Englund, Creating an Environment for Successful Projects: The Quest to Manage Project Management (San Francisco: Jossey-Bass, 1997). Gray, C., S. Dworatschek, D. H. Gobeli, H. Knoepfel, and E. W. Larson, “International Comparison of Project Organization Structures: Use and Effectiveness,” International Journal of Project Management, vol. 8, no. 1 (February 1990), pp. 26–32. Harrison, M. T., and J. M. Beyer, The Culture of Organizations (Englewood Cliffs, NJ: Prentice Hall, 1993).

References

Hobbs, B., and P. Ménard, “Organizational Choices for Project Management,” in Paul Dinsmore (ed.), The AMA Handbook of Project Management (New York: AMACOM, 1993). Hobday, M., “The Project-Based Organization: An Ideal Form for Managing Com- plex Products and Systems?” Research Policy, vol. 29, no. 17 (2000). Jassawalla, A. R., and H. C. Sashittal, “Cultures that Support Product-Innovation Pro- cesses,” Academy of Management Executive, vol. 15, no. 3 (2002), pp. 42–54. Johnson, C. L., M. Smith, and L. K. Geary, More Than My Share in All (Washington, D.C.: Smithsonian Institute Publications, 1990). Kerzner, H., In Search of Excellence in Project Management (New York: Von Nostrand Reinhold, 1997). Kerzner, H., “Strategic Planning for the Project Office,” Project Management Jour- nal, vol. 34, no. 2 (2003), pp. 13–25. Larson, E. W., “Project Management Structures” in The Wiley Handbook for Manag- ing Projects, P. Morris & J. Pinto (eds.) (New York: Wiley, 2004), pp. 48–66. Larson, E. W., and D. H. Gobeli, “Matrix Management: Contradictions and Insights,” California Management Review, vol. 29, no. 4 (Summer 1987), p. 137. Larson, E. W., and D. H. Gobeli, “Organizing for Product Development Projects,” Journal of Product Innovation Management, vol. 5 (1988), pp. 180–90. Larsson, U. (ed.), Cultures of Creativity: The Centennial Exhibition of the Nobel Prize (Canton, MA: Science History Publications, 2001). Laslo, Z., and A. I. Goldberg, “Matrix Structures and Performance: The Search for Optimal Adjustments to Organizational Objectives?” IEEE Transactions in Engineer- ing Management, vol. 48, no. 12 (2001). Lawrence, P. R., and J. W. Lorsch, Organization and Environment (Homewood, IL: Irwin, 1969). Majchrzak, A., and Q. Wang, “Breaking the Functional Mind-Set in Process Organi- zations,” Harvard Business Review, September–October 1996, pp. 93–99. Miller, J., Lockheed Martin’s Skunk Works (New York: Speciality Publications, 1996). Olson, E. M., O. C. Walker, Jr., and R. W. Ruekert, “Organizing for Effective New Product Development: The Moderating Role of Product Innovativeness,” Journal of Marketing, vol. 59 (January 1995), pp. 48–62. O’Reilly, C. A., J. Chatman, and D. F. Caldwell, “People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit,” Academy of Management Journal, vol. 34, no. 3 (September 1991), pp. 487–516. Pettegrew, A. M., “On Studying Organizational Culture,” Administrative Science Quarterly, vol. 24, no. 4 (1979), pp. 570–81. Powell, M., and J. Young, “The Project Management Support Office” in The Wiley Handbook for Managing Projects, P. Morris and J. Pinto (eds.) (New York: Wiley, 2004), pp. 937–69. Rebello, K., “Inside Microsoft,” Business Weekly, July 15, 1996, pp. 56–67.

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Rizova, P., The Secret of Success: The Double Helix of Formal and Informal Struc- tures in an R&D Laboratory (Stanford, CA: Stanford University Press, 2007). Schein, E., Organizational Culture and Leadership: A Dynamic View (San Francisco, CA: Jossey-Bass, 2010). Sculley, J., Odyssey: Pepsi to Apple . . . A Journey of Adventure, Ideas, and the Future (New York: Harper & Row, 1987), pp. 270–79. Shenhar, A. J., “From Theory to Practice: Toward a Typology of Project Management Styles,” IEEE Transactions in Engineering Management, vol. 41, no. 1 (1998), pp. 33–48. Shenhar, A. J., D. Dvir, T. Lechler, and M. Poli, “One Size Does Not Fit All—True for Projects, True for Frameworks,” Frontiers of Project Management Research and Application, Proceedings of PMI Research Conference, Seattle, 2002, pp. 99–106. Smith, P. G., and D. G. Reinertsen, Developing Products in Half the Time (New York: Van Nostrand Reinhold, 1995). Stuckenbruck, L. C., Implementation of Project Management (Upper Darby, PA: Project Management Institute, 1981). Yazici, H., “The Role of Project Management Maturity and Organizational Culture in Perceived Performance,” Project Management Journal, vol. 40, no. 3 (2009), pp. 14–33. Youker, R., “Organizational Alternatives for Project Management,” Project Manage- ment Quarterly, vol. 8 (March 1977), pp. 24–33.

Case 3.1

Moss and McAdams Accounting Firm Bruce Palmer had worked for Moss and McAdams (M&M) for six years and was just promoted to account manager. His first assignment was to lead an audit of Johnson- ville Trucks. He was quite pleased with the five accountants who had been assigned to his team, especially Zeke Olds. Olds was an Army vet who returned to school to get a double major in accounting and computer sciences. He was on top of the latest devel- opments in financial information systems and had a reputation for coming up with innovative solutions to problems. M&M was a well-established regional accounting firm with 160 employees located across six offices in Minnesota and Wisconsin. The main office, where Palmer worked, was in Green Bay, Wisconsin. In fact, one of the founding members, Seth Moss, played briefly for the hometown NFL Packers during the late 1950s. M&M’s primary ser- vices were corporate audits and tax preparation. Over the last two years the partners decided to move more aggressively into the consulting business. M&M projected that consulting would represent 40 percent of their growth over the next five years. M&M operated within a matrix structure. As new clients were recruited, a manager was assigned to the account. A manager might be assigned to several accounts, depend- ing on the size and scope of the work. This was especially true in the case of tax

94 Chapter 3 Organization: Structure and Culture

Chapter 3 Organization: Structure and Culture 95

preparation projects, where it was not uncommon for a manager to be assigned to 8 to 12 clients. Likewise, senior and staff accountants were assigned to multiple account teams. Ruby Sands was the office manager responsible for assigning personnel to dif- ferent accounts at the Green Bay office. She did her best to assign staff to multiple projects under the same manager. This wasn’t always possible, and sometimes accoun- tants had to work on projects led by different managers. M&M, like most accounting firms, had a tiered promotion system. New CPAs entered as junior or staff accountants. Within two years, their performance was reviewed and they were either asked to leave or promoted to senior accountant. Sometime during their fifth or sixth year, a decision was made to promote them to account manager. Finally, after 10 to 12 years with the firm, the manager was considered for promotion to partner. This was a very competitive position. During the last five years, only 20 per- cent of account managers at M&M had been promoted to partner. However, once a partner, they were virtually guaranteed the position for life and enjoyed significant increases in salary, benefits, and prestige. M&M had a reputation for being a results- driven organization; partner promotions were based on meeting deadlines, retaining clients, and generating revenue. The promotion team based its decision on the relative performance of the account manager in comparison to his or her cohorts. One week into the Johnsonville audit, Palmer received a call from Sands to visit her office. There he was introduced to Ken Crosby, who recently joined M&M after work- ing nine years for a Big 5 accounting firm. Crosby was recruited to manage special consulting projects. Sands reported that Crosby had just secured a major consulting project with Springfield Metals. This was a major coup for the firm: M&M had com- peted against two Big 5 accounting firms for the project. Sands went on to explain that she was working with Crosby to put together his team. Crosby insisted that Zeke Olds be assigned to his team. Sands told him that this would be impossible because Olds was already assigned to work on the Johnsonville audit. Crosby persisted, arguing that Olds’s expertise was essential to the Springfield project. Sands decided to work out a compromise and have Olds split time across both projects. At this time Crosby turned to Palmer and said, “I believe in keeping things simple. Why don’t we agree that Olds works for me in the mornings and you in the afternoons. I’m sure we can work out any problems that come up. After all, we both work for the same firm.”

SIX WEEKS LATER Palmer could scream whenever he remembered Crosby’s words, “After all, we both work for the same firm.” The first sign of trouble came during the first week of the new arrangement when Crosby called, begging to have Olds work all of Thursday on his project. They were conducting an extensive client visit, and Olds was critical to the assessment. After Palmer reluctantly agreed, Crosby said he owed him one. The next week when Palmer called Crosby to request that he return the favor, Crosby flatly refused and said any other time but not this week. Palmer tried again a week later and got the same response. At first Olds showed up promptly at 1:00 p.m. at Palmer’s office to work on the audit. Soon it became a habit to show up 30 to 60 minutes late. There was always a good rea- son. He was in a meeting in Springfield and couldn’t just leave, or an urgent task took longer than planned. One time it was because Crosby took his entire team out to lunch at the new Thai restaurant—Olds was over an hour late because of slow service. In the beginning Olds would usually make up the time by working after hours, but Palmer could tell from conversations he overheard that this was creating tension at home.

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What probably bothered Palmer the most were the e-mails and telephone calls Olds received from Crosby and his team members during the afternoons when he was sup- posed to be working for Palmer. A couple of times Palmer could have sworn that Olds was working on Crosby’s project in his (Palmer’s) office. Palmer met with Crosby to talk about the problem and voice his complaints. Crosby acted surprised and even a little bit hurt. He promised things would change, but the pattern continued. Palmer was becoming paranoid about Crosby. He knew that Crosby played golf with Olds on the weekends and could just imagine him badmouthing the Johnsonville project and pointing out how boring auditing work was. The sad fact was that there probably was some truth to what he was saying. The Johnsonville project was getting bogged down, and the team was slipping behind schedule. One of the contributing factors was Olds’s performance. His work was not up to its usual standards. Palmer approached Olds about this, and Olds became defensive. Olds later apologized and confided that he found it dif- ficult switching his thinking from consulting to auditing and then back to consulting. He promised to do better, and there was a slight improvement in his performance. The last straw came when Olds asked to leave work early on Friday so that he could take his wife and kids to a Milwaukee Brewers baseball game. It turned out Springfield Metals had given Crosby their corporate tickets, and he decided to treat his team with box seats right behind the Brewers dugout. Palmer hated to do it, but he had to refuse the request. He felt guilty when he overheard Olds explaining to his son on the tele- phone why they couldn’t go to the game. Palmer finally decided to pick up the phone and request an urgent meeting with Sands to resolve the problem. He got up enough nerve and put in the call only to be told that Sands wouldn’t be back in the office until next week. As he put the receiver down, he thought maybe things would get better.

TWO WEEKS LATER Sands showed up unexpectedly at Palmer’s office and said they needed to talk about Olds. Palmer was delighted, thinking that now he could tell her what had been going on. But before he had a chance to speak, Sands told him that Olds had come to see her yesterday. She told him that Olds confessed that he was having a hard time working on both Crosby’s and Palmer’s projects. He was having difficulty concentrating on the auditing work in the afternoon because he was thinking about some of the consulting issues that had emerged during the morning. He was putting in extra hours to try to meet both of the projects’ dead- lines, and this was creating problems at home. The bottom line was that he was stressed out and couldn’t deal with the situation. He asked that he be assigned full-time to Crosby’s project. Sands went on to say that Olds didn’t blame Palmer, in fact he had a lot of nice things to say about him. He just enjoyed the consulting work more and found it more chal- lenging. Sands concluded by saying, “I told him I understood, and I would talk to you about the situation and see what could be done. Frankly, I think we should pull him from your project and have him work full-time on Crosby’s project. What do you think?” 1. If you were Palmer at the end of the case, how would you respond? 2. What, if anything, could Palmer have done to avoid losing Olds? 3. What advantages and disadvantages of a matrix type organization are apparent from

this case? 4. What could the management at M&M do to more effectively manage situations

like this?

Chapter 3 Organization: Structure and Culture 97

Case 3.2

Horizon Consulting Patti Smith looked up at the bright blue Carolina sky before she entered the offices of Horizon Consulting. Today was Friday, which meant she needed to prepare for the weekly status report meeting. Horizon Consulting is a custom software development company that offers fully integrated mobile application services for iPhoneTM, AndroidTM, Windows Mobile® and BlackBerry® platforms. Horizon was founded by James Thrasher, a former marketing executive, who quickly saw the potential for digi- tal marketing via smartphones. Horizon enjoyed initial success in sports marketing, but quickly expanded to other industries. A key to their success was the decline in cost for developing smartphone applications, which expanded the client base. The decline in cost was primarily due to learning curve and ability to build customized solutions on established platforms. Patti Smith was a late bloomer who went back to college after working in the res- taurant business for nine years. She and her former husband had tried unsuccessfully to operate a vegetarian restaurant in Golden, Colorado. After her divorce, she returned to University of Colorado where she majored in Management Information Systems with a minor in Marketing. While she enjoyed her marketing classes much more than her MIS classes, she felt the IT know-how acquired would give her an advantage in the job market. This turned out to be true as Horizon hired her to be an Account Manager soon after graduation. Patti Smith was hired to replace Stephen Stills who had started the restaurant side of the business at Horizon. Stephen was “let go” according to one Account Manager for being a prima donna and hoarding resources. Patti’s clients ranged from high-end restaurants to hole-in-wall mom and pop shops. She helped develop smartphone apps that let users make reservations, browse menus, receive alerts on daily specials, pro- vide customer feedback, order take-out, and in some cases order delivery. As an Account Manager she worked with clients to assess their needs, develop a plan, and create customized smartphone apps. Horizon appeared to be a good fit for Patti. She had enough technical training to be able to work with software engineers and help guide them to produce client-ready products. At the same time she could relate to the restaurateurs and enjoyed working with them on web design and digital marketing. Horizon was organized into three departments: Sales, Software Development, and Graphics, with Account Managers acting as project managers. Account Managers gen- erally came from Sales, and would divide their time between projects and making sales pitches to potential new clients. Horizon employed a core group of software engineers and designers, supplemented by contracted programmers when needed. The first step in developing a smartphone application involved the Account Manager meeting with the client to define the requirements and vision for the application. The Account Manager would then work with a Graphic User Interface (GUI) designer to come up with a preliminary story board of how the application would function and look. Once the initial concept and requirements were approved the Account Manager was assigned two pairs of software engineers. The first pair (app engineers) would work on the smartphone side of the application while the second pair would work on the client side of the application. Horizon preferred to have software engineers work in tandem so they could check each other’s work. The two app engineers would typically work full

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time on the application until it was completed while the other engineers would work on multiple projects as needed. Likewise, GUI designers would work on the project at cer- tain key stages in the product development cycle when their expertise was needed. The head of Graphics managed the GUI designers’ schedule while the head of Soft- ware managed the software engineer assignments. At the end of each project Account Managers submitted performance reviews of their team. The Director of Sales was responsible for the Account Managers’ performance reviews based on customer satis- faction, generation of sales, and project performance. Horizon believed in iterative development, and every two to three weeks Account Managers were expected to demonstrate the latest version of applications to clients. This led to useful feedback and in many cases redefining the scope of the project. Often clients wanted to add more functionality to their application once they realized what the software could do. Depending upon the complexity of the application and changes introduced once the project was under way, it typically took Horizon two to four months to deliver a finished product to a client. Patti was currently working on three projects. One was for Shanghai Wok, a busy Chi- nese mom and pop restaurant located in downtown Charlotte, North Carolina. The owners of Shanghai Wok wanted Horizon to create a smartphone app that would allow customers to order and pay in advance for meals they would simply pick up at a walk-up window. The second project was for Taste of India that operated in Kannapolis, North Carolina. They wanted Horizon to create a phone app that would allow staff at the nearby bio-tech firms to order food that would be delivered on-site during lunch and dinner hours. The last project was for Nearly Normal, a vegetarian restaurant which wanted to send out e-mail alerts to subscribers that would describe in detail their daily fresh specials. James Thrasher was an admirer of Google and encouraged a playful but focused environment at work. Employees were allowed to decorate their work spaces, bring pets to work, and play ping-pong or pool when they needed a break. Horizon paid its employees well but the big payoff was the annual Christmas bonus. This bonus was based on overall company profits, which were distributed proportionately based on pay grade and performance reviews. It was not uncommon for employees to receive a 10–15 percent boost in pay at the end of the year.

STATUS REPORT MEETING As was her habit Patti entered the status report meeting room early. David Briggs was in the midst of describing the game-winning catch John Lorsch had made in last night’s softball game. Horizon sponsored a co-ed city league softball team which most of the Account Managers played on. Patti had been coaxed to play to ensure that the requisite number of “females” were on the field. She balked at the idea at first; softball wasn’t really her sport, but she was glad she did. Not only was it fun, but it gave her a chance to get to know the other managers. James Thrasher entered the room and everyone settled down to business. He started off as he always did by asking if anybody had important news to bring to everyone’s attention. Jackson Browne slowly raised his hand and said, “I am afraid I do. I just received notification from Apple IOS that they have rejected our TAT app.” TAT was a phone app that Jackson was the project lead on that allowed subscribers to reserve and see in real time what swimming lanes were available at a prestigious athletic club. This announcement was followed by a collective groan. Before an Apple app could go operational it had to be submitted and approved by Apple. Usually this was not a prob- lem, but lately Apple had been rejecting apps for a variety of reasons. Jackson went on

Chapter 3 Organization: Structure and Culture 99

to circulate the list of changes that had to be made before Apple would approve the app. The group studied the list, and in some cases ridiculed the new requirements. Ultimately, James Thrasher asked Jackson how long it would take to make the nec- essary changes and resubmit the app for approval. Jackson felt it would probably take two to three weeks at most. Thrasher asked who the engineers that worked on this project were. Patti’s heart fell. One of the app engineers who had developed the TAT app was working on her Shanghai Wok project. She knew what was going to happen next. Thrasher announced, “OK everyone, it only makes sense that these engineers are the best ones to finish what they had started so they are all going to have to be reas- signed back to the TAT project. Those affected are going to have to get together after this meeting and figure how you are going to replace them.” The meeting then pro- ceeded as planned with all the account managers reporting the status of their projects, and sharing relevant issues with the group.

POST-MEETING As everyone filed out, Patti looked around to see who else was in her same boat. There were three other Account Managers as well as Jackson Browne. Resource assignments were a reoccurring issue at Horizon given the nature of their work. Horizon had devel- oped a policy where decisions were made based on project priority. Each project was assigned a Green, Blue or Purple designation based on the company priority. Priority status was based on the extent the project contributed to the mission of the firm. The Shanghai Wok project given its limited size and scope was a Purple project, which was the lowest ranking. The list of available software engineers was displayed on the big screen. Patti was only familiar with a few of the names. Leigh Taylor who had the only Green project immediately selected Jason Wheeler from the list. She had used him before and was confident in his work. Tom Watson and Samantha Stewart both had Blue Projects and both needed to replace a mobile app engi- neer. They both immediately jumped on the name of Prem Mathew, claiming he was the best person for their project. After some friendly jousting, Tom said, “OK, Sam, you can have him; I remember when you helped me out on the Argos project; besides my project is just beginning. I’ll take Shin Chen.” Everyone looked at Patti; she started by saying, “You know, I am only familiar with a few of these names; I guess I’ll go with Mike Thu.” Jackson interjected, “Hey everyone, I am really sorry this happened, and I am sure Mike is a good programmer, but I recommend you work with Axel Gerthoff. I have used him before, and he is a very quick study and a joy to work with.” This was a relief to Patti and she quickly took his advice. They left to submit a report to Thrasher detailing the decisions they each had made and the impact on their projects. 1. How successful was the post-meeting? 2. What factors contributed to the success or failure of this meeting? 3. What kind of project management structure does Horizon use? Is it the right struc-

ture? Explain.

100

Defining the Project4 LEARNING OBJECTIVES After reading this chapter you should be able to:

4-1 Identify key elements of a project scope state- ment and understand why a complete scope statement is critical to project success.

4-2 Understand why it is important to establish project priorities in terms of cost, time, and performance.

4-3 Demonstrate the importance of a work break- down structure (WBS) to the management of proj- ects and how it serves as a data base for planning and control.

4-4 Demonstrate how the organization breakdown structure (OBS) establishes accountability to organizational units.

4-5 Describe a process breakdown structure (PBS) and when to use it.

4-6 Create responsibility matrices for small projects.

4-7 Create a communication plan for a project.

OUTLINE 4.1 Step 1: Defining the Project Scope

4.2 Step 2: Establishing Project Priorities

4.3 Step 3: Creating the Work Breakdown Structure

4.4 Step 4: Integrating the WBS with the Organization

4.5 Step 5: Coding the WBS for the Information System

4.6 Process Breakdown Structure

4.7 Responsibility Matrices

4.8 Project Communication Plan

Summary

C H A P T E R F O U R

101

Select a dream Use your dream to set a goal Create a plan Consider resources Enhance skills and abilities Spend time wisely Start! Get organized and go . . . it is one of those acro-whatevers, said Pooh.*

Project managers in charge of a single small project can plan and schedule the project tasks without much formal planning and information. However, when the project man- ager must manage several small projects or a large complex project, a threshold is quickly reached in which the project manager can no longer cope with the detail.

Project networks

Managing risk 7

Monitoring progress

Teams 11

Outsourcing 12

Project manager

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

Inter natio

nal

proje cts

Agile PM 16

Project closure

Estimate 5

Reducing duration

Define project

* Roger E. Allen and Stephen D. Allen, Winnie-the-Pooh on Success (New York: Penguin, 1997), p. 10.

102 Chapter 4 Defining the Project

This chapter describes a disciplined, structured method for selectively collect- ing information to use through all phases of the project life cycle, to meet the needs of all stakeholders (e.g., customer, project manager), and to measure performance against the strategic plan of the organization. The method suggested is a selective outline of the project called the work breakdown structure. The early stages of developing the outline serve to ensure that all tasks are identified and that partici- pants of the project have an understanding of what is to be done. Once the outline and its detail are defined, an integrated information system can be developed to schedule work and allocate budgets. This baseline information is later used for control. In addition, the chapter presents a variant of the work breakdown structure called the process breakdown structure as well as responsibility matrices that are used for smaller, less complex projects. With the work of the project defined through the work breakdown structure, the chapter concludes with the process of creating a communica- tion plan used to help coordinate project activities and follow progress. The five generic steps described herein provide a structured approach for collect- ing the project information necessary for developing a work breakdown structure. These steps and the development of project networks found in the next chapters all take place concurrently, and several iterations are typically required to develop dates and budgets that can be used to manage the project. The old saying “We can control only what we have planned” is true; therefore, defining the project is the first step.

4.1 Step 1: Defining the Project Scope Defining the project scope sets the stage for developing a project plan. Project scope is a definition of the end result or mission of your project—a product or service for your client/customer. The primary purpose is to define as clearly as possible the deliverable(s) for the end user and to focus project plans. Research clearly shows that a poorly defined scope or mission is the most frequently mentioned barrier to project success. In a study involving more than 1,400 project managers in the United States and Canada, Gobeli and Larson (1990) found that approximately 50 percent of the planning problems relate to unclear definition of scope and goals. This and other studies suggest a strong correlation between project success and clear scope definition (Ashley et al., 1987; Pinto and Slevin, 1988; Standish Group, 2009). The scope document directs focus on the project purpose throughout the life of the project for the customer and project participants. The scope should be developed under the direction of the project manager, cus- tomer, and other significant stakeholders. The project manager is responsible for see- ing that there is agreement with the owner on project objectives, deliverables at each stage of the project, technical requirements, and so forth. For example, a deliverable in the early stage might be specifications; for the second stage, three prototypes for pro- duction; for the third, a sufficient quantity to introduce to market; and finally, market- ing promotion and training. Your project scope definition is a document that will be published and used by the project owner and project participants for planning and measuring project success. Scope describes what you expect to deliver to your customer when the project is com- plete. Your project scope should define the results to be achieved in specific, tangible, and measurable terms.

Identify key elements of a project scope state- ment and understand why a complete scope statement is critical to project success.

4-1LO

Chapter 4 Defining the Project 103

Employing a Project Scope Checklist Clearly, project scope is the keystone interlocking all elements of a project plan. To ensure that scope definition is complete, you may wish to use the following checklist:

Project Scope Checklist

1. Project objective 2. Deliverables 3. Milestones 4. Technical requirements 5. Limits and exclusions 6. Reviews with customer

1. Project objective. The first step of project scope definition is to define the overall objective to meet your customer’s need(s). For example, as a result of extensive market research a computer software company decides to develop a program that automatically translates verbal sentences in English to Russian. The project should be completed within three years at a cost not to exceed $1.5 million. Another exam- ple is to design and construct a portable, hazardous-waste thermal treatment system in 13 months at a cost not to exceed $13 million. The project objective answers the questions of what, when, how much, and at times, where.

2. Deliverables. The next step is to define major deliverables—the expected, measur- able outputs over the life of the project. For example, deliverables in the early design phase of a project might be a list of specifications. In the second phase deliverables could be software coding and a technical manual. The next phase could be the pro- totype. The final phase could be final tests and approved software. Note: Deliver- ables and requirements are often used interchangeably.

3. Milestones. A milestone is a significant event in a project that occurs at a point in time. The milestone schedule shows only major segments of work; it represents first, rough-cut estimates of time, cost, and resources for the project. The milestone schedule is built using the deliverables as a platform to identify major segments of work and an end date—for example, testing complete and finished by July 1 of the same year. Milestones should be natural, important control points in the project. Milestones should be easy for all project participants to recognize.

4. Technical requirements. More frequently than not, a product or service will have technical requirements to ensure proper performance. Technical requirements typi- cally clarify either the deliverables or define the performance specifications. For example, a technical requirement for a personal computer might be the ability to accept 120-volt alternating current or 240-volt direct current without any adapters or user switches. Another well-known example is the ability of 911 emergency sys- tems to identify the caller’s phone number and location of the phone. Examples from information systems projects include speed and capacity of database systems and connectivity with alternative systems. For understanding the importance of key requirements, see Snapshot from Practice 4.1: Big Bertha.

5. Limits and exclusions. The limits of scope should be defined. Failure to do so can lead to false expectations and to expending resources and time on the wrong problem. Examples of limits are: work on site is allowed only between the hours of 8:00 pm - 5:00 am; system maintenance and repair will be done only up to one month after final inspection; client will be billed for additional training beyond that

104 Chapter 4 Defining the Project

In 1991 Callaway Golf Equipment introduced their Big Bertha driver and revolutionized the golf equipment business. Big Bertha—named after the World War I Ger- man long-distance cannon—was much larger than con- ventional woods and lacked a hosel (the socket in the head of the club into which the shaft is inserted) so that the weight could be better distributed throughout the head. This innovative design gave the clubhead a larger sweet spot, which allowed a player to strike the golf ball off-center and not suffer much loss in distance or accuracy. Callaway has maintained its preeminent position in the golf industry by utilizing space-age tech- nology to extend the accuracy and distance of golf equipment. In 2000 Callaway introduced the Big Bertha ERC II forged titanium driver. The driver was technologically superior to any driver on the market. However, there was one big problem. The new version of Bertha did not conform to the coefficient of restitution (COR) requirement established by the United States Golf Association (USGA). As a result it was barred from use by golfers in North America who intended to play by the USGA’s Rules of Golf. The USGA believed that the rapid technological advances in golf equipment made by Callaway Golf and other golf manufacturers were threatening the integrity of the game. Players were hitting balls so much farther and straighter that golf courses around the world were

S N A P S H O T F R O M P R A C T I C E 4 . 1 Big Bertha II versus the USGA’s COR Requirement*

being redesigned to make them longer and more difficult. So in 1998 the USGA established performance thresholds for all new golf equipment. In order to pre- vent manufacturers from developing more powerful clubs, the USGA limited the COR of new golf equip- ment to 0.83. The COR was calculated by firing a golf ball at a driver out of a cannon-like machine at 109 miles per hour. The speed that the ball returned to the cannon could not exceed 83 percent of its initial speed (90.47 mph). The USGA called the ratio of incoming to outgoing velocity the coefficient of resti- tution (COR). The intent of the USGA COR threshold was to limit the distance that golf balls could be hit since studies indicated that 0.01 increase in COR resulted in two extra yards of carry. The Big Bertha ERC II’s COR was 0.86. After numerous efforts to get USGA to change its technical requirements, Callaway’s engineers went back to the drawing board and in 2002 introduced Great Big Bertha II, which conformed to USGA’s 0.83 COR restriction.

* John E. Gamble, “Callaway Golf Company: Sustaining Advantage in a Changing Industry,” in A. A. Thompson, J. E. Gamble, and A. J. Strickland, Strategy: Winning in the Marketplace (Boston: McGraw-Hill/Irwin, 2004), pp. C204–C228.

Chapter 4 Defining the Project 105

prescribed in the contract. Exclusions further define the boundary of the project by stating what is not included. Examples include: data will be collected by the client, not the contractor; a house will be built, but no landscaping or security devices added; software will be installed, but no training given.

6. Reviews with customer. Completion of the scope checklist ends with a review with your customer—internal or external. The main concern here is the understanding of and agreement to expectations. Is the customer getting what he or she desires in deliverables? Does the project definition identify key accomplishments, budgets, timing, and performance requirements? Are questions of limits and exclusions cov- ered? Clear communication in all these issues is imperative to avoid claims or misunderstanding.

Scope definition should be as brief as possible but complete; one or two pages are typical for small projects. See Snapshot from Practice 4.2: Scope Statement. The project scope checklist in Step 1 is generic. Different industries and companies will develop unique checklists and templates to fit their needs and specific kinds of projects. A few companies engaged in contracted work refer to scope statements as “statements of work” (SOW). Other organizations use the term project charter. How- ever, the term project charter has emerged to have a special meaning in the world of

PROJECT OBJECTIVE To construct a high-quality, custom home within five months at cost not to exceed $700,000 on lot 42A in Green- dale, Oregon.

DELIVERABLES

- ished home.

microwave, and dishwasher.

thermostat.

MILESTONES 1. Permits approved—March 5

2. Foundation poured—March 14

3. Drywall in. Framing, sheathing, plumbing, electri- cal, and mechanical inspections passed—May 25

4. Final inspection—June 7

TECHNICAL REQUIREMENTS 1. Home must meet local building codes.

2. All windows and doors must pass NFRC class 40 energy ratings.

3. Exterior wall insulation must meet an “R” factor of 21.

4. Ceiling insulation must meet an “R” factor of 38.

5. Floor insulation must meet an “R” factor of 25.

6. Garage will accommodate two large-size cars and one 20-foot Winnebago.

7. Structure must pass seismic stability codes.

LIMITS AND EXCLUSIONS 1. The home will be built to the specifications and

design of the original blueprints provided by the customer.

2. Owner is responsible for landscaping.

3. Refrigerator is not included among kitchen appliances.

4. Air conditioning is not included but prewiring is included.

5. Contractor reserves the right to contract out services.

6. Contractor is responsible for subcontracted work.

7. Site work limited to Monday through Friday, 8:00 a.m. to 6:00 p.m.

CUSTOMER REVIEW John and Joan Smith

S N A P S H O T F R O M P R A C T I C E 4 . 2 Scope Statement

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project management. A project charter refers to a document that authorizes the project manager to initiate and lead the project. This document is issued by upper management and provides the project manager with written authority to use organizational resources for project activities. Often the charter will include a brief scope description as well as such items as risk limits, business case, spending limits, and even team composition. Many projects suffer from scope creep, which is the tendency for the project scope to expand over time—usually by changing requirements, specifications, and priorities. Scope creep can be reduced by carefully writing your scope statement. A scope state- ment that is too broad is an invitation for scope creep. Scope creep can have a positive or negative effect on the project, but in most cases scope creep means added costs and possible project delays. Changes in requirements, specifications, and priorities fre- quently result in cost overruns and delays. Examples are abundant—Denver airport baggage handling system; Boston’s new freeway system (“The Big Dig”); Sochi Winter Olympics; and the list goes on. On software development projects, scope creep is mani- fested in bloated products in which added functionality undermines ease of use. If the project scope needs to change, it is critical to have a sound change control process in place that records the change and keeps a log of all project changes. The log identifies the change, impact, and those responsible for accepting or rejecting a pro- posed change. Change control is one of the topics of Chapter 7. Project managers in the field con- stantly suggest that dealing with changing requirements is one of their most challeng- ing problems.

4.2 Step 2: Establishing Project Priorities Quality and the ultimate success of a project are traditionally defined as meeting and/ or exceeding the expectations of the customer and/or upper management in terms of cost (budget), time (schedule), and performance (scope) of the project (see Figure 4.1). The interrelationship among these criteria varies. For example, sometimes it is neces- sary to compromise the performance and scope of the project to get the project done quickly or less expensively. Often the longer a project takes, the more expensive it becomes. However, a positive correlation between cost and schedule may not always be true. Other times project costs can be reduced by using cheaper, less efficient labor or equipment that extends the duration of the project. Likewise, as will be seen in Chapter 9, project managers are often forced to expedite or “crash” certain key activi- ties by adding additional labor, thereby raising the original cost of the project. One of the primary jobs of a project manager is to manage the trade-offs among time, cost, and performance. To do so, project managers must define and understand the nature of the priorities of the project. They need to have a candid discussion with the project customer and upper management to establish the relative importance of

Understand why it is important to establish project priorities in terms of cost, time, and performance.

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Quality

Cost Time

Scope FIGURE 4.1 Project Management Trade-offs

Chapter 4 Defining the Project 107

each criterion. For example, what happens when the customer keeps adding require- ments? Or if, midway through the project, a trade-off must be made between cost and expediting, which criterion has priority? One technique found in practice that is useful for this purpose is completing a prior- ity matrix for the project to identify which criterion is constrained, which should be enhanced, and which can be accepted:

Constrain. The original parameter is fixed. The project must meet the completion date, specifications and scope of the project, or budget. Enhance. Given the scope of the project, which criterion should be optimized? In the case of time and cost, this usually means taking advantage of opportunities to either reduce costs or shorten the schedule. Conversely, with regard to perfor- mance, enhancing means adding value to the project. Accept. For which criterion is it tolerable not to meet the original parameters? When trade-offs have to be made, is it permissible for the schedule to slip, to reduce the scope and performance of the project, or to go over budget?

Figure 4.2 displays the priority matrix for the development of a new wireless router. Because time to market is important to sales, the project manager is instructed to take advantage of every opportunity to reduce completion time. In doing so, going over budget is acceptable though not desirable. At the same time, the original performance specifications for the modem as well as reliability standards cannot be compromised. Priorities vary from project to project. For example, for many software projects time to market is critical, and companies like Microsoft may defer original scope require- ments to later versions in order to get to the market first. Alternatively, for special event projects (conferences, parades, tournaments) time is constrained once the date has been announced, and if the budget is tight, the project manager will compromise the scope of the project in order to complete the project on time. Some would argue that all three criteria are always constrained and that good proj- ect managers should seek to optimize each criterion. If everything goes well on a project and no major problems or setbacks are encountered, their argument may be valid. However, this situation is rare, and project managers are often forced to make tough decisions that benefit one criterion while compromising the other two. The pur- pose of this exercise is to define and agree on what the priorities and constraints of the project are so that when “push comes to shove,” the right decisions can be made.

Constrain

Enhance

Time Performance Cost FIGURE 4.2 Project Priority Matrix

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There are likely to be natural limits to the extent managers can constrain, optimize, or accept any one criterion. It may be acceptable for the project to slip one month behind schedule but no further or to exceed the planned budget by as much as $20,000. Likewise, it may be desirable to finish a project a month early, but after that cost con- servation should be the primary goal. Some project managers document these limits as part of creating the priority matrix. In summary, developing a priority matrix for a project before the project begins is a useful exercise. It provides a forum for clearly establishing priorities with customers and top management so as to create shared expectations and avoid misunderstandings. The priority information is essential to the planning process, where adjustments can be made in the scope, schedule, and budget allocation. Finally, the matrix is useful mid- way in the project for approaching a problem that must be solved. One caveat must be mentioned; during the course of a project, priorities may change. The customer may suddenly need the project completed one month sooner, or new directives from top management may emphasize cost saving initiatives. The project manager needs to be vigilant in order to anticipate and confirm changes in priorities and make appropriate adjustments.

4.3 Step 3: Creating the Work Breakdown Structure

Major Groupings Found in a WBS Once the scope and deliverables have been identified, the work of the project can be successively subdivided into smaller and smaller work elements. The outcome of this hierarchical process is called the work breakdown structure (WBS). Use of a WBS helps to assure project managers that all products and work elements are identified, to integrate the project with the current organization, and to establish a basis for control. Basically, the WBS is an outline of the project with different levels of detail. Figure 4.3 shows the major groupings commonly used in the field to develop a hier- archical WBS. The WBS begins with the project as the final deliverable. Major project work deliverables/systems are identified first; then the subdeliverables necessary to accomplish the larger deliverables are defined. The process is repeated until the subde- liverable detail is small enough to be manageable and where one person can be respon- sible. This subdeliverable is further divided into work packages. Because the lowest subdeliverable usually includes several work packages, the work packages are grouped by type of work—for example, design and testing. These groupings within a subdeliv- erable are called cost accounts. This grouping facilitates a system for monitoring proj- ect progress by work, cost, and responsibility.

How WBS Helps the Project Manager The WBS defines all the elements of the project in a hierarchical framework and establishes their relationships to the project end item(s). Think of the project as a large work package that is successively broken down into smaller work packages; the total project is the summation of all the smaller work packages. This hierarchical structure facilitates evaluation of cost, time, and technical performance at all levels in the organization over the life of the project. The WBS also provides management with information appropriate to each level. For example, top management deals primarily with major deliverables, while first-line supervisors deal with smaller subdeliverables and work packages.

Demonstrate the impor- tance of a work break- down structure (WBS) to the management of proj- ects and how it serves as a data base for planning and control.

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Each item in the WBS needs a time and cost estimate. With this information it is possible to plan, schedule, and budget your project. The WBS also serves as a frame- work for tracking cost and work performance. As the WBS is developed, organizational units and individuals are assigned respon- sibility for executing work packages. This integrates the work and the organization. In practice, this process is sometimes called the organization breakdown structure (OBS), which will be further discussed later in the chapter. Use of the WBS provides the opportunity to “roll up” (sum) the budget and actual costs of the smaller work packages into larger work elements so that performance can be measured by organizational units and work accomplishment. The WBS can also be used to define communication channels and assist in under- standing and coordinating many parts of the project. The structure shows the work and organizational units responsible and suggests where written communication should be directed. Problems can be quickly addressed and coordinated because the structure integrates work and responsibility.

A Simple WBS Development Figure 4.4 shows a simplified WBS to develop a new prototype tablet computer. At the top of the chart (level 1) is the project end item—the E-Slim Tablet x-13 Prototype. The subdeliverables levels (2–5) below level 1 represent further decomposition of work. The levels of the structure can also represent information for different levels of

FIGURE 4.3 Hierarchical Breakdown of the WBS

Cost account*

Work package

Subdeliverable

Deliverable

Lowest subdeliverable

Level Hierarchical breakdown Description

Complete project

Major deliverables

Supporting deliverables

Lowest management responsibility level

Grouping of work packages for monitoring progress and responsibility

Identifiable work activities

Project

* This breakdown groups work packages by type of work within a deliverable and allows assignment of responsibility to an organizational unit. This extra step facilitates a system for monitoring project progress (discussed in Chapter 13).

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management. For example, level 1 information represents the total project objective and is useful to top management; levels 2, 3, and 4 are suitable for middle manage- ment; and level 5 is for first-line managers. In Figure 4.4 level 2 indicates there are two major deliverables—Hardware and CPU, or central processing unit. (There are likely to be other major deliverables such as software, but for illustrative purposes we are limiting our focus to just two major deliverables.) At level 3, the CPU is connected to three deliverables—Power Supply, Flash ROM, and I/O Controller. The I/O Controller has three subdeliverables at level 4—USB Slots, Internet, and Touch Screen. The many subdeliverables for USB Slots and Internet have not been decomposed. The Touch Screen (shaded) has been decom- posed down to level 5 and to the work package level. Note that level 2, Hardware, skips levels 3 and 4 because the final subdeliverables can be pushed down to the lowest manageable level 5; skipping levels 3 and 4 suggests little coordination is needed and skilled team members are already familiar with the work needed to complete the level 5 subdeliverables. For example, Hardware requires four subdeliverables at level 5—Frame, Cameras, Speakers, and Antenna. Each subde- liverable includes work packages that will be completed by an assigned organizational unit. Observe that the Cameras subdeliverable includes four work packages—WP-C1, 2, 3, and 4. The Back Light, a subdeliverable of Touch Screen, includes three work packages—WP-L 1, 2, and 3. The lowest level of the WBS is called a work package. Work packages are short- duration tasks that have a definite start and stop point, consume resources, and represent cost. Each work package is a control point. A work package manager is responsible for seeing that the package is completed on time, within budget, and according to technical specifications. Practice suggests a work package should not exceed 10 workdays or one reporting period. If a work package has a duration exceeding 10 days, check or monitor- ing points should be established within the duration, say, every three to five days, so progress and problems can be identified before too much time has passed. Each work package of the WBS should be as independent of other packages of the project as pos- sible. No work package is described in more than one subdeliverable of the WBS. There is an important difference from start to finish between the last work break- down subdeliverable and a work package. Typically, a work breakdown subdeliverable includes the outcomes of more than one work package from perhaps two or three depart- ments. Therefore, the subdeliverable does not have a duration of its own and does not consume resources or cost money directly. (In a sense, of course, a duration for a par- ticular work breakdown element can be derived from identifying which work package must start first [earliest] and which package will be the latest to finish; the difference from start to finish becomes the duration for the subdeliverable.) The higher elements are used to identify deliverables at different phases in the project and to develop status reports during the execution stage of the project life cycle. Thus, the work package is the basic unit used for planning, scheduling, and controlling the project. To review, each work package in the WBS

1. Defines work (what). 2. Identifies time to complete a work package (how long). 3. Identifies a time-phased budget to complete a work package (cost). 4. Identifies resources needed to complete a work package (how much). 5. Identifies a single person responsible for units of work (who). 6. Identifies monitoring points for measuring progress (how well).

112 Chapter 4 Defining the Project

Creating a WBS from scratch can be a daunting task. Project managers should take advantage of relevant examples from previous projects to begin the process. WBSs are products of group efforts. If the project is small, the entire project team may be involved breaking down the project into its components. For large, complex projects, the people responsible for the major deliverables are likely to meet to establish the first two levels of deliverables. In turn, further detail would be delegated to the people respon- sible for the specific work. Collectively this information would be gathered and inte- grated into a formal WBS by a project support person. The final version would be reviewed by the inner echelon of the project team. Relevant stakeholders (most notably customers) would be consulted to confirm agreement and revise when appropriate. Project teams developing their first WBS frequently forget that the structure should be end-item, output oriented. First attempts often result in a WBS that follows the organization structure—design, marketing, production, finance. If a WBS follows the organization structure, the focus will be on the organization function and processes rather than the project output or deliverables. In addition, a WBS with a process focus will become an accounting tool that records costs by function rather than a tool for “output” management. Every effort should be made to develop a WBS that is output oriented in order to concentrate on concrete deliverables. See Snapshot from Prac- tice 4.3: Creating a WBS.

Figure 4.4 represents the classic WBS in which the project is broken down to the lowest manageable deliverable and subsequent work packages. Many situations do not require this level of

detail. This begs the question of how far you should break down the work. There is no set answer to this question. However, here are some tips given by project managers: Break down the work until you can do an estimate that is accurate enough for your purposes. If you are doing a ball-park estimate to see if the project is worthy of serious consideration, you probably do not need to break it down beyond major deliverables. On the other hand, if you are pricing a project to submit a competitive bid, then you are likely to go down to the work package level. The WBS should conform to how you are going to schedule work. For example, if assignments are made in terms of days, then tasks should be limited as best as possible to one day or more to complete. Conversely, if hours are the smallest unit for scheduling, then work can be broken down to one-hour increments. Final activities should have clearly defined start/ end events. Avoid open-ended tasks like “research” or “market analysis.” Take it down to the next level in which deliverables/outcomes are more clearly defined.

S N A P S H O T F R O M P R A C T I C E 4 . 3 Creating a WBS

Instead of ending with market analysis include items such as identify market share, list user requirements, or write a problem statement. If accountability and control are important, then break the work down so that one individual is clearly responsible for the work. For example, instead of stop- ping at product design, take it to the next level and identify specific components of the design (i.e., electri- cal schematics, power source, etc.) that different indi- viduals will be responsible for creating. The bottom line is that the WBS should provide the level of detail needed to manage the specific project successfully.

Chapter 4 Defining the Project 113

4.4 Step 4: Integrating the WBS with the Organization The WBS is used to link the organizational units responsible for performing the work. In practice, the outcome of this process is the organization breakdown structure (OBS). The OBS depicts how the firm has organized to discharge work responsibility. The purposes of the OBS are to provide a framework to summarize organization unit work performance, identify organization units responsible for work packages, and tie the organizational unit to cost control accounts. Recall, cost accounts group similar work packages (usually under the purview of a department). The OBS defines the organization subdeliverables in a hierarchical pattern in successively smaller and smaller units. Frequently, the traditional organization structure can be used. Even if the project is completely performed by a team, it is necessary to break down the team structure for assigning responsibility for budgets, time, and technical performance. As in the WBS, the OBS assigns the lowest organizational unit the responsibility for work packages within a cost account. Herein lies one major strength of using WBS and OBS; they can be integrated as shown in Figure 4.5. The intersection of work packages and the organizational unit creates a project control point (cost account) that integrates work and responsibility. For example, at level 5 Touch Sensors has three work pack- ages that have been assigned to the Design, Quality Control Test, and Production departments. The intersection of the WBS and OBS represents the set of work pack- ages necessary to complete the subdeliverable located immediately above and the organizational unit on the left responsible for accomplishing the packages at the inter- section. Note that the design department is responsible for five different work packages across the Hardware and Touch Screen deliverables. Later we will use the intersection as a cost account for management control of proj- ects. For example, the Cameras element requires completion of work packages whose primary responsibility will include the design, QC test, production, and outsourcing departments. Control can be checked from two directions—outcomes and responsibil- ity. In the execution phase of the project, progress can be tracked vertically on deliver- ables (client’s interest) and tracked horizontally by organization responsibility (own- er’s interest).

4.5 Step 5: Coding the WBS for the Information System Gaining the maximum usefulness of a breakdown structure depends on a coding sys- tem. The codes are used to define levels and elements in the WBS, organization ele- ments, work packages, and budget and cost information. The codes allow reports to be consolidated at any level in the structure. The most commonly used scheme in practice is numeric indention. A portion of the E-Slim Tablet x-13 Prototype project is pre- sented in Exhibit 4.1. Note the project identification is 1.0. Each successive indention represents a lower element or work package. Ultimately the numeric scheme reaches down to the work package level, and all tasks and elements in the structure have an identification code. The “cost account” is the focal point because all budgets, work assignments, time, cost, and technical performance come together at this point. This coding system can be extended to cover large projects. Additional schemes can be added for special reports. For example, adding a “23” after the code could indicate a site location, an elevation, or a special account such as labor. Some letters can be used as special identifiers such as “M” for materials or “E” for engineers. You are not

Demonstrate how the organization breakdown structure (OBS) estab- lishes accountability to organizational units.

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limited to only 10 subdivisions (0–9); you can extend each subdivision to large numbers—for example, .1−.99 or .1−.9999. If the project is small, you can use whole numbers. The following example is from a large, complex project:

3R−237A−P2−33.6 where 3R identifies the facility, 237A represents elevation and the area, P2 represents pipe two inches wide, and 33.6 represents the work package number. In practice most organizations are creative in combining letters and numbers to minimize the length of WBS codes. On larger projects, the WBS is further supported with a WBS dictionary that pro- vides detailed information about each element in the WBS. The dictionary typically includes the work package level (code), name, and functional description. In some cases the description is supported with specifications. The availability of detailed descriptions has an added benefit of dampening scope creep.

EXHIBIT 4.1 Coding the WBS

116 Chapter 4 Defining the Project

4.6 Process Breakdown Structure The WBS is best suited for design and build projects that have tangible outcomes such as an offshore mining facility or a new car prototype. The project can be decomposed or broken down into major deliverables, subdeliverables, further subdeliverables, and ultimately to work packages. It is more difficult to apply WBS to less tangible, pro- cess-oriented projects in which the final outcome is a product of a series of steps or phases. Here, the big difference is that the project evolves over time with each phase affecting the next phase. Information systems projects typically fall in this category— for example, creating an extranet website or an internal software database system. Process projects are driven by performance requirements, not by plans/blueprints. Some practitioners choose to utilize what we refer to as a process breakdown struc- ture (PBS) instead of the classic WBS. Figure 4.6 provides an example of a PBS for a software development project. Instead of being organized around deliverables, the project is organized around phases. Each of the five major phases can be broken down into more specific activities until a suf- ficient level of detail is achieved to communicate what needs to be done to complete that phase. People can be assigned to specific activities, and a complementary OBS can be created just as is done for the WBS. Deliverables are not ignored but are defined as outputs required to move to the next phase. The software industry often refers to PBS as the “waterfall method” since progress flows downward through each phase.1

Describe a process breakdown structure (PBS) and when to use it.

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FIGURE 4.6 PBS for Software Development Project

Software development project

Construct

Develop technical design

Define processing flow

Design logical database structure

Design system interfaces

Define application architecture

Develop detailed design

Establish quality requirements

Define user interface

DesignAnalysis Test Rollout

Design phase deliverables: Design document

1 Level Major phases:

2 Level Activities:

3 Level Activities:

Outputs:

User documentation outline

Application architecture Application flow Database design End user interface design Workflow diagram

1 The limitations of the waterfall method for software development have led to the emergence of Agile project manage- ment methods that are the subject of Chapter 17.

Chapter 4 Defining the Project 117

Checklists that contain the phase exit requirements are developed to manage project progress. These checklists provide the means to support phase walk-throughs and reviews. Checklists vary depending upon the project and activities involved but typi- cally include the following details: ∙ Deliverables needed to exit a phase and begin a new one. ∙ Quality checkpoints to ensure that deliverables are complete and accurate. ∙ Sign-offs by all responsible stakeholders to indicate that the phase has been success-

fully completed and that the project should move on to the next phase. As long as exit requirements are firmly established and deliverables for each phase are well defined, the PBS provides a suitable alternative to the standard WBS for projects that involve extensive development work.

4.7 Responsibility Matrices In many cases, the size and scope of the project do not warrant an elaborate WBS or OBS. One tool that is widely used by project managers and task force leaders of small projects is the responsibility matrix (RM). The RM (sometimes called a linear respon- sibility chart) summarizes the tasks to be accomplished and who is responsible for what on a project. In its simplest form an RM consists of a chart listing all the project activities and the participants responsible for each activity. For example, Figure 4.7 illustrates an RM for a market research study. In this matrix the R is used to identify the committee member who is responsible for coordinating the efforts of other team members assigned to the task and making sure that the task is completed. The S is used to identify members of the five-person team who will support and/or assist the individual responsible. Simple RMs like this one are useful not only for organizing and assigning responsibilities for small projects but also for subprojects of large, more complex projects. More complex RMs not only identify individual responsibilities but also clarify critical interfaces between units and individuals that require coordination. For

Create responsibility matrices for small projects.

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FIGURE 4.7 Responsibility Matrix for a Market Research Project

Identify target customers Develop draft questionnaire Pilot-test questionnaire Finalize questionnaire Print questionnaire Prepare mailing labels Mail questionnaires Receive and monitor returned questionnaires Input response data Analyze results Prepare draft of report Prepare final report

Task Richard

R R

S R

Dan

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Chapter 4 Defining the Project 119

example, Figure 4.8 is an RM for a larger, more complex project to develop a new piece of automated equipment. Notice that within each cell a numeric coding scheme is used to define the nature of involvement on that specific task. Such an RM extends the WBS/OBS and provides a clear and concise method for depicting responsibility, authority, and communication channels. Responsibility matrices provide a means for all participants in a project to view their responsibilities and agree on their assignments. They also help clarify the extent or type of authority exercised by each participant in performing an activity in which two or more parties have overlapping involvement. By using an RM and by defining authority, responsibility, and communications within its framework, the relationship between dif- ferent organizational units and the work content of the project is made clear.

4.8 Project Communication Plan Once the project deliverables and work are clearly identified, following up with an internal communication plan is vital. Stories abound of poor communication as a major contributor to project failure. Having a robust communications plan can go a long way toward mitigating project problems and can ensure that customers, team members, and other stakeholders have the information to do their jobs. The communication plan is usually created by the project manager and/or the proj- ect team in the early stage of project planning. Communication is a key component in coordinating and tracking project schedules, issues, and action items. The plan maps out the flow of information to different stake- holders and becomes an integral part of the overall project plan. The purpose of a project communication plan is to express what, who, how, and when information will be trans- mitted to project stakeholders so schedules, issues, and action items can be tracked. Project communication plans address the following core questions: ∙ What information needs to be collected and when? ∙ Who will receive the information? ∙ What methods will be used to gather and store information? ∙ What are the limits, if any, on who has access to certain kinds of information? ∙ When will the information be communicated? ∙ How will it be communicated? Developing a communication plan that answers these questions usually entails the fol- lowing basic steps: 1. Stakeholder analysis. Identify the target groups. Typical groups could be the cus-

tomer, sponsor, project team, project office, or anyone who needs project information to make decisions and/or contribute to project progress. A common tool found in practice to initially identify and analyze major project stakeholders’ communication needs is presented in Figure 4.9.2 How and what is communicated is influenced by the stakeholder interest and power. Some of these stakeholders may have the power either to block or enhance your project. By identifying stakeholders and prioritizing them on the “Power/Interest” map, you can plan the type and frequency of communications needed. (More on stakeholders will be discussed in Chapter 10.)

Create a communication plan for a project.

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2 For a more elaborate scheme for assessing stakeholders, see: Lynda Bourne, Stakeholder Relationship Management

120 Chapter 4 Defining the Project

For example, on a typical project you want to manage closely the professionals doing the work, while you want to satisfy senior management and project sponsor with periodic updates. Unions and operation managers interested in capacity would be someone you would want to keep informed, while you would only need to pro- vide general information to the legal, public relations, and other departments.

2. Information needs. What information is pertinent to stakeholders who contribute to the project’s progress? The simplest answer to this question can be obtained by asking the different people what information they need and when they need it. For example, top management needs to know how the project is progressing, whether it is encountering critical problems, and the extent to which project goals are being realized. This information is required so that they can make strategic decisions and manage the portfolio of projects. Project team members need to see schedules, task lists, specifications, and the like, so they know what needs to be done next. External groups need to know any changes in the schedule and performance requirements of the components they are providing. Frequent information needs found in communi- cation plans are:

Project status reports Deliverable issues Changes in scope Team status meetings Gating decisions Accepted request changes Action items Milestone reports

3. Sources of information. When the information needs are identified, the next step is to determine the sources of information. That is, where does the information reside? How will it be collected? For example, information relating to the milestone report, team meetings, and project status meetings would be found in the minutes and reports of various groups.

4. Dissemination modes. In today’s world, traditional status report meetings are being supplemented by e-mail, teleconferencing, SharePoint, and a variety of database shar- ing programs to circulate information. In particular, many companies are using the Web to create a “virtual project office” to store project information. Project manage- ment software feeds information directly to the website so that different people have immediate access to relevant project information. In some cases, appropriate informa- tion is routed automatically to key stakeholders. Backup paper hardcopy to specific stakeholders is still critical for many project changes and action items.

FIGURE 4.9 Stakeholder Communications

Interest

F H

High

HighLow

Power

Provide General Information

Manage Closely

Keep Informed

Low

Keep Satisfied

Chapter 4 Defining the Project 121

5. Responsibility and timing. Determine who will send out the information. For example, a common practice is to have secretaries of meetings forward the minutes or specific information to the appropriate stakeholders. In some cases the responsi- bility lies with the project manager or project office. Timing and frequency of dis- tribution appropriate to the information need to be established.

The advantage of establishing a communication plan is that instead of responding to information requests, you are controlling the flow of information. This reduces confu- sion and unnecessary interruptions, and it can provide project managers greater auton- omy. Why? By reporting on a regular basis how things are going and what is happening, you allow senior management to feel more comfortable about letting the team complete the project without interference. See Figure 4.10 for a sample Shale Oil Research Project Communication Plan. The importance of establishing up-front a plan for communicating important proj- ect information cannot be overstated. Many of the problems that plague a project can be traced back to insufficient time devoted to establishing a well-grounded internal communication plan.

What Information

Milestone report

Project status reports & agendas

Team status reports

Issues report

Escalation reports

Outsourcing performance

Accepted change requests

Oversight gate decisions

Senior management and project manager

Bimonthly

Weekly

E-mail and hardcopy

Project office

Project manager

Team recorder

Project manager

Design department

Oversight group or

project office

E-mail and hardcopy

E-mail meeting report

E-mail

Meeting and hardcopy

Meeting

Weekly

When needed

Bimonthly

Anytime

As required

Project office, senior mgmt., customer, staff,

and project mgr.

Staff and customer

Project manager and project office

Staff and customer

Target Audience

When? Method of

Communication Provider

FIGURE 4.10 Shale Oil Research Project Communication Plan

Summary The project scope definition, priorities, and breakdown structure are the keys to nearly every aspect of managing the project. The scope definition provides focus and emphasis on the end item(s) of the project. Establishing project priorities allows managers to make appropriate trade-off decisions. The WBS structure helps ensure all tasks of the project are identified and provides two views of the project—one on deliverables and one on

122 Chapter 4 Defining the Project

Key Terms Cost account, 113 Milestone, 103 Organization breakdown structure (OBS), 113 Priority matrix, 107

Process breakdown structure (PBS), 116 Project charter, 105 Responsibility matrix, 117 Scope creep, 106

Scope statement, 105 WBS dictionary, 115 Work breakdown structure (WBS), 108 Work package, 111

organization responsibility. The WBS avoids having the project driven by organization function or by a finance system. The structure forces attention to realistic requirements of personnel, hardware, and budgets. Use of the structure provides a powerful framework for project control that identifies deviations from plan, identifies responsibility, and spots areas for improved performance. No well-developed project plan or control system is possible without a disciplined, structured approach. The WBS, OBS, and cost account codes provide this discipline. The WBS will serve as the database for developing the project network which establishes the timing of work, people, equipment, and costs. PBS is often used for process-based projects with ill-defined deliverables. In small projects responsibility matrices may be used to clarify individual responsibility. Clearly defining your project is the first and most important step in planning. The absence of a clearly defined project plan consistently shows up as the major reason for project failures. Whether you use a WBS, PBS, or responsibility matrix will depend pri- marily on the size and nature of your project. Whatever method you use, definition of your project should be adequate to allow for good control as the project is being implemented. Follow-up with a clear communication plan for coordinating and tracking project prog- ress will help keep important stakeholders informed and avoid some potential problems.

1. What are the six elements of a typical scope statement? 2. What questions does a project objective answer? What would be an example of a

good project objective? 3. What does it mean if the priorities of a project include: Time-constrain, Scope-

accept, and Cost-enhance? 4. What kinds of information are included in a work package? 5. When would it be appropriate to create a responsibility matrix rather than a full-

blown WBS? 6. How does a communication plan benefit management of projects?

Review Questions

Exercises 1. You are in charge of organizing a dinner-dance concert for a local charity. You have reserved a hall that will seat 30 couples and have hired a jazz combo. a. Develop a scope statement for this project that contains examples of all the ele-

ments. Assume that the event will occur in four weeks and provide your best guess estimate of the dates for milestones.

b. What would the priorities likely be for this project? 2. In small groups, identify real life examples of a project that would fit each of the

following priority scenarios: a. Time-constrain, Scope-enhance, Cost-accept b. Time-accept, Scope-constrain, Cost-accept c. Time-constrain, Scope-accept, Cost-enhance

Chapter 4 Defining the Project 123

3. Develop a WBS for a project in which you are going to build a bicycle. Try to iden- tify all of the major components and provide three levels of detail.

4. You are the father or mother of a family of four (kids ages 13 and 15) planning a weekend camping trip. Develop a responsibility matrix for the work that needs to be done prior to starting your trip.

5. Develop a WBS for a local stage play. Be sure to identify the deliverables and orga- nizational units (people) responsible. How would you code your system? Give an example of the work packages in one of your cost accounts. Develop a correspond- ing OBS which identifies who is responsible for what.

6. Use an example of a project you are familiar with or are interested in. Identify the deliverables and organizational units (people) responsible. How would you code your system? Give an example of the work packages in one of your cost accounts.

7. Develop a communication plan for an airport security project. The project entails installing the hardware and software system that (1) scans a passenger’s eyes, (2) fingerprints the passenger, and (3) transmits the information to a central location for evaluation.

8. Go to an Internet search engine (e.g., Google) and type in “project communication plan.” Check three or four that have “.gov” as their source. How are they similar or dissimilar? What would be your conclusion concerning the importance of an inter- nal communication plan?

9. Your roommate is about to submit a scope statement for a spring concert sponsored by the entertainment council at Western Evergreen State University (WESU). WESU is a residential university with over 22,000 students. This will be the first time in six years since WESU sponsored a spring concert. The entertainment council has bud- geted $40,000 for the project. The event is to occur on June 5th. Since your room- mate knows you are taking a class on project management she has asked you to review her scope statement and make suggestions for improvement. She considers the concert a resume-building experience and wants to be as professional as possible. Below is a draft of her scope statement. What suggestions would you make and why?

WESU Spring Music Concert

Project Objective To organize and deliver a 6-hour music concert

Deliverables

Milestones

1. Secure all permissions and approvals 2. Sign big-name artist 3. Contact secondary artists 4. Secure vendor contracts

5. Advertising campaign 6. Plan set-up 7. Concert 8. Clean-up

Technical Requirements

1. Professional sound stage and system 2. At least five performing acts 3. Restroom facilities 4. Parking 5. Compliance with WESU and city requirements/ordinances

Limits and Exclusions

Customer Review: WESU

Ashley, D. B., et al., “Determinants of Construction Project Success,” Project Man- agement Journal, vol. 18, no. 2 (June 1987), p. 72. Chilmeran, A. H., “Keeping Costs on Track,” PM Network, vol. 19, no. 2 (2004), pp. 45–51. Gary, L. “Will Project Scope Cost You—Or Create Value?” Harvard Management Update, January 2005. Gobeli, D. H., and E. W. Larson, “Project Management Problems,” Engineering Management Journal, vol. 2 (1990), pp. 31–36. Ingebretsen, M., “Taming the Beast,” PM Network, July 2003, pp. 30–35. Katz, D. M., “Case Study: Beware ‘Scope Creep’ on ERP Projects,” CFO.com, March 27, 2001. Kerzner, H., Project Management: A Systems Approach to Planning, 8th ed. (New York: Van Nostrand Reinhold, 2003). Lewis, J. P., Project Planning, Scheduling and Controlling, 3rd ed. (Burr Ridge, IL: McGraw-Hill, 2000). Luby, R. E., D. Peel, and W. Swahl, “Component-Based Work Breakdown Structure,” Project Management Journal, vol. 26, no. 2 (December 1995), pp. 38–44. Murch, R., Project Management: Best Practices for IT Professionals (Upper Darby, NJ: Prentice Hall, 2001). Pinto, J. K., and D. P. Slevin, “Critical Success Factors Across the Project Life Cycle,” Project Management Journal, vol. 19, no. 3 (June 1988), p. 72. Pitagorsky, G., “Realistic Project Planning Promotes Success,” Engineer’s Digest, vol. 29, no. 1 (2001). PMI Standards Committee, Guide to the Project Management Body of Knowledge (Newton Square, PA: Project Management Institute, 2000).

References

124 Chapter 4 Defining the Project

Posner, B. Z., “What It Takes to Be a Good Project Manager,” Project Management Journal, vol. 18, no. 1 (March 1987), p. 52. Raz, T., and S. Globerson, “Effective Sizing and Content Definition of Work Packages,” Project Management Journal, vol. 29, no. 4 (1998), pp. 17–23. The Standish Group, CHAOS Summary 2009, pp. 1–4. Tate, K., and K. Hendrix, “Chartering IT Projects,” Proceedings, 30th Annual, Project Management Institute (Philadelphia, PA. 1999), CD.

Case 4.1

Manchester United Soccer Club Nicolette Larson was loading the dishwasher with her husband, Kevin, and telling him about the first meeting of the Manchester United Tournament Organizing Committee. Nicolette, a self-confessed “soccer mom,” had been elected tournament director and was responsible for organizing the club’s first summer tournament. Manchester United Soccer Club (MUSC), located in Manchester, New Hampshire, was formed in 1992 as a way of bringing recreational players to a higher level of com- petition and preparing them for the State Olympic Development Program and/or high school teams. The club currently has 24 boys and girls (ranging in age from under 9 to 16) on teams affiliated with the New Hampshire Soccer Association and the Granite State Girls Soccer League. The club’s board of directors decided in the fall to sponsor a summer invitational soccer tournament to generate revenue. Given the boom in youth soccer, hosting summer tournaments has become a popular method for raising funds. MUSC teams regularly compete in three to four tournaments each summer at different locales in New England. These tournaments have been reported to generate between $50,000 and $70,000 for the host club. MUSC needs additional revenue to refurbish and expand the number of soccer fields at the Rock Rimmon soccer complex. Funds would also be used to augment the club’s scholarship program, which provides financial aid to players who cannot afford the $450 annual club dues. Nicolette gave her husband a blow-by-blow account of what transpired during the first tournament committee meeting that night. She started the meeting by having everyone introduce themselves and by proclaiming how excited she was that the club was going to sponsor its own tournament. She then suggested that the committee brainstorm what needed to be done to pull off the event; she would record their ideas on a flipchart. What emerged was a free-for-all of ideas and suggestions. One member immedi- ately stressed the importance of having qualified referees and spent several minutes describing in detail how his son’s team was robbed in a poorly officiated championship game. This was followed by other stories of injustice on the soccer field. Another member suggested that they needed to quickly contact the local colleges to see if they could use their fields. The committee spent more than 30 minutes talking about how they should screen teams and how much they should charge as an entry fee. An argu- ment broke out over whether they should reward the winning teams in each age bracket with medals or trophies. Many members felt that medals were too cheap, while others thought the trophies would be too expensive. Someone suggested that they seek local

Chapter 4 Defining the Project 125

126 Chapter 4 Defining the Project

corporate sponsors to help fund the tournament. The proposed sale of tournament T-shirts and sweatshirts was followed by a general critique of the different shirts par- ents had acquired at different tournaments. One member advocated that they recruit an artist he knew to develop a unique silk-screen design for the tournament. The meeting adjourned 30 minutes late with only half of the members remaining until the end. Nicolette drove home with seven sheets of ideas and a headache. As Kevin poured a glass of water for the two aspirin Nicolette was about to take, he tried to comfort her by saying that organizing this tournament would be a big project not unlike the projects he worked on at his engineering and design firm. He offered to sit down with her the next night and help her plan the project. He suggested that the first thing they needed to do was to develop a WBS for the project. 1. Make a list of the major deliverables for the project and use them to develop a draft

of the work breakdown structure for the tournament that contains at least three lev- els of detail. What are the major deliverables associated with hosting an event such as a soccer tournament?

2. How would developing a WBS alleviate some of the problems that occurred during the first meeting and help Nicolette organize and plan the project?

3. Where can Nicolette find additional information to help her develop a WBS for the tournament?

4. How could Nicolette and her task force use the WBS to generate cost estimates for the tournament? Why would this be useful information?

Case 4.2

The Home Improvement Project Lukas Nelson and his wife, Anne, and their three daughters had been living in their house for over five years when they decided it was time to make some modest improvements. One area they both agreed needed an upgrade was the bathtub. Their current house had one standard shower bathtub combination. Lukas was 6 feet four, and could barely squeeze into it. In fact, he had taken only one bath since they moved in. He and Anne both missed soaking in the older, deep bathtubs they enjoyed when they lived back East. Fortunately, the previous owners that built the house had plumbed the corner of a large exercise room in the basement for a hot tub. They contacted a trusted remodeling contractor who assured them it would be relatively easy to install a new bathtub and it shouldn’t cost more than $1,500. They decided to go ahead with the project. First the Nelsons went to the local plumbing retailer to pick out a tub. They soon realized that for a few hundred dollars more they could buy a big tub with water jets (a Jacuzzi). With old age on the horizon a Jacuzzi seemed like a luxury that was worth the extra money. Originally the plan was to install the tub using the simple plastic frame the bath came with and install a splash guard around the tub. Once Anne saw the tub, frame, and splashguard in the room she balked. She did not like how it looked with the cedar paneling in the exercise room. After significant debate, Ann won out, and the Nelsons agreed to pay extra to have a cedar frame built for the tub and use attractive tile instead of the plastic splashguard. Lukas rationalized the changes would pay for themselves when they tried to sell the house.

Chapter 4 Defining the Project 127

The next hiccup occurred when it came time to address the flooring issue. The exer- cise room was carpeted, which wasn’t ideal when getting out of a bathtub. The original idea was to install relatively cheap laminated flooring in the drying and undressing area adjacent to the tub. However, the Nelsons couldn’t agree on the pattern to use. One of Anne’s friends said it would be a shame to put such cheap flooring in such a nice room. She felt they should consider using tile. The contractor agreed and said he knew a tile installer who needed work and would give them a good deal. Lukas reluctantly agreed that the laminated options just didn’t fit the style or quality of the exercise room. Unlike the laminated floor debate both Anne and Lukas immedi- ately liked a tile pattern that matched the tile used around the tub. Anxious not to delay the project, they agreed to pay for the tile flooring. Once the tub was installed and the framing was almost completed, Anne realized that something had to be done about the lighting. One of her favorite things to do was to read while soaking in the tub. The existing lights didn’t provide sufficient illumina- tion for doing so. Lukas knew this was “non-negotiable” and they hired an electrician to install additional lighting over the bathtub. While the lighting was being installed and the tile was being laid, another issue came up. The original plan was to tile only the exercise room and use remnant rugs to cover the area away from the tub where the Nelsons did their exercises. The Nelsons were very happy with how the tile looked and fit with the overall room. However, it clashed with the laminated flooring in the adjacent bathroom. Lukas agreed with Ann, that it really made the adjacent bathroom look cheap and ugly. He also felt the bath- room was so small it wouldn’t cost much more. After a week the work was completed. Both Lukas and Anne were quite pleased with how everything turned out. It cost much more than they had planned, but they planned to live in the house until the girls graduated from college so they felt it was a good long-term investment. Anne had the first turn using the bathtub followed by their three girls. Everyone enjoyed the Jacuzzi. It was 10:00 p.m. when Lukas began running water for his first bath. At first the water was steaming hot, but by the time he was about to get in, it was lukewarm at best. Lukas groaned, “After paying all of that money I still can’t enjoy a bath.” The Nelsons rationed bathing for a couple weeks, until they decided to find out what if anything could be done about the hot water problem. They asked a reputable heating contractor to assess the situation. The contractor reported that the hot water tank was insufficient to service a family of five. This had not been discovered before because baths were rarely taken in the past. The contractor said it would cost $2,200 to replace the existing water heater with a larger one that would meet their needs. The heating contractor also said if they wanted to do it right they should replace the existing furnace with a more energy efficient one. A new furnace would not only heat the house but also indirectly heat the water tank. Such a furnace would cost $7,500, but with the improved efficiency and savings in the gas bill, the furnace would pay for itself in 10 years. Besides, the Nelsons would likely receive tax credits for the more fuel-efficient furnace. Three weeks later, after the new furnace was installed, Lukas settled into the new bathtub. He looked around the room at all the changes that had been made and mut- tered to himself, “And to think that all I wanted was to soak in a nice, hot bath.”

1. What factors and forces contributed to scope creep in this case? 2. Is this an example of good or bad scope creep? Explain. 3. How could scope creep have been better managed by the Nelsons?

128

Estimating Project Times and Costs5

LEARNING OBJECTIVES After reading this chapter you should be able to:

5-1 Understand estimating project times and costs are the foundation for project planning and control.

5-2 Describe guidelines for estimating time, costs, and resources.

5-3 Describe the methods, uses, and advantages and disadvantages of top-down and bottom-up esti- mating methods.

5-4 Distinguish different kinds of costs associated with a project.

5-5 Suggest a scheme for developing an estimating database for future projects.

5-6 Understand the challenge of estimating mega projects and describe steps that lead to better informed decisions.

5-7 Define a “white elephant” in project management and provide examples.

OUTLINE 5.1 Factors Influencing the Quality of Estimates

5.2 Estimating Guidelines for Times, Costs, and Resources

5.3 Top-Down versus Bottom-Up Estimating

5.4 Methods for Estimating Project Times and Costs

5.5 Level of Detail

5.6 Types of Costs

5.7 Refining Estimates

5.8 Creating a Database for Estimating

5.9 Mega Projects: A Special Case

Summary

Appendix 5.1: Learning Curves for Estimating

C H A P T E R F I V E

129

Project estimation is indeed a yardstick for project cost control. And if the yardstick is faulty, you start on the “wrong foot.” . . . We exhort you not to underestimate the estimate.*

Given the urgency to start work on the project, managers sometimes minimize or avoid the effort to follow through on estimating project time and cost. This attitude is a huge mistake and costly. There are important reasons to make the effort and incur the cost of estimating for your project. Exhibit 5.1 summarizes some key reasons. Estimating is the process of forecasting or approximating the time and cost of com- pleting project deliverables. Estimating processes are frequently classified as top-down and bottom-up. Top-down estimates are usually done by senior management. Manage- ment will often derive estimates from analogy, group consensus, or mathematical relationships. Bottom-up estimates are typically performed by the people who are

Project networks

Managing risk 7

Monitoring progress

Teams 11

Outsourcing 12

Project manager

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

Inter natio

nal

proje cts

Agile PM 16

Project closure

Estimate 5

Reducing duration

Define project

* O. P. Kharbanda and J. K. Pinto, What Made Gertie Gallop: Learning from Project Failures (New York: Von Nostrand Rein- hold, 1996), p. 73.

Understand estimating project times and costs are the foundation for project planning and control.

5-1LO

130 Chapter 5 Estimating Project Times and Costs

doing the work. Their estimates are based on estimates of elements found in the work breakdown structure. All project stakeholders prefer accurate cost and time estimates, but they also under- stand the inherent uncertainty in all projects. Inaccurate estimates lead to false expec- tations and consumer dissatisfaction. Accuracy is improved with greater effort, but is it worth the time and cost?—estimating costs money! Project estimating becomes a trade-off, balancing the benefits of better accuracy against the costs for securing increased accuracy. Cost, time, and budget estimates are the lifeline for control; they serve as the stan- dard for comparison of actual and plan throughout the life of the project. Project status reports depend on reliable estimates as the major input for measuring variances and taking corrective action. Ideally, the project manager, and in most cases the customer, would prefer to have a database of detailed schedule and cost estimates for every work package in the project. Regrettably, such detailed data gathering is not always possible or practical and other methods are used to develop project estimates.

5.1 Factors Influencing the Quality of Estimates A typical statement in the field is the desire to “have a 95 percent probability of meet- ing time and cost estimates.” Past experience is a good starting point for developing time and cost estimates. But past experience estimates must almost always be refined by other considerations to reach the 95 percent probability level. Factors related to the uniqueness of the project will have a strong influence on the accuracy of estimates. Project, people, and external factors all need to be considered to improve quality of estimates for project times and costs.

Planning Horizon The quality of the estimate depends on the planning horizon; estimates of current events are close to 100 percent accurate but are reduced for more distant events. For example, cost estimates for a party you are organizing this weekend should be much more accurate than the estimates for a party that will take place in six months. The accuracy of time and cost estimates should improve as you move from the conceptual phase to the point where individual work packages are defined. Long-duration projects increase the uncertainty in estimates.

Project Complexity Time to implement new technology has a habit of expanding in an increasing, nonlin- ear fashion. Sometimes poorly written scope specifications for new technology result in errors in estimating times and costs.

Source: O. P. Kharbanda and J. K. Pinto, What Made Gertie Gallop: Learning from Project Failures (New York: Von Nostrand Reinhold, 1996), p. 73.

EXHIBIT 5.1 Why Estimating Time and Cost Is Important

Chapter 5 Estimating Project Times and Costs 131

People The people factor can influence the quality of time and cost estimates. For example, accuracy of estimates depends on the skills of the people making the estimates. How familiar are they with the task they are estimating?

Project Structure and Organization Which project structure is chosen to manage the project will influence time and cost estimates. One of the major advantages of a dedicated project team discussed earlier is the speed gained from concentrated focus and localized project decisions. This speed comes at an additional cost of tying up personnel full time. Conversely, projects operat- ing in a matrix environment may reduce costs by more efficiently sharing personnel across projects but may take longer to complete since attention is divided and coordi- nation demands are higher.

Padding Estimates In some cases people are inclined to pad estimates. For example, if you are asked how long it takes you to drive to the airport, you might give an average time of 30 minutes, assuming a 50/50 chance of getting there in 30 minutes. If you are asked the fastest you could possibly get there, you might reduce the driving time to 20 minutes. Finally, if you are asked how long the drive would take if you abso- lutely had to be there to meet with the president, it is likely you would increase the estimate to say 50 minutes to ensure not being late. In work situations where you are asked for time and cost estimates, most of us are inclined to add a little padding to increase the probability and reduce the risk of being late. If everyone at all levels of the project adds a little padding to reduce risk, the project duration and cost are seri- ously overstated. This phenomenon causes some managers or owners to call for a 10–15 percent cut in time and/or cost for the project. Of course the next time the game is played, the person estimating cost and/or time will pad the estimate to 20 percent or more. Clearly such games defeat chances for realistic estimates, which is what is needed to be competitive.

Organization Culture Organization culture can significantly influence project estimates. In some organiza- tions padding estimates is tolerated and even privately encouraged. Other organiza- tions place a premium on accuracy and strongly discourage estimating gamesmanship. Organizations vary in the importance they attach to estimates. The prevailing belief in some organizations is that detailed estimating takes too much time and is not worth the effort or that it’s impossible to predict the future. Other organizations subscribe to the belief that accurate estimates are the bedrock of effective project management. Orga- nization culture shapes every dimension of project management; estimating is not immune to this influence.

Other Factors Finally, nonproject factors can impact time and cost estimates. For example, equip- ment down-time can alter time estimates. National holidays, vacations, and legal limits can influence project estimates. Project priority can influence resource assignment and impact time and cost.

132 Chapter 5 Estimating Project Times and Costs

Project estimating is a complex process. The quality of time and cost estimates can be improved when these variables are considered in making the estimates. Estimates of time and cost together allow the manager to develop a time-phased budget, which is imperative for project control. Before discussing macro and micro estimating methods for times and costs, a review of estimating guidelines will remind us of some of the important “rules of the game” that can improve estimating.

5.2 Estimating Guidelines for Times, Costs, and Resources Managers recognize time, cost, and resource estimates must be accurate if project planning, scheduling, and controlling are to be effective. However, there is substan- tial evidence suggesting poor estimates are a major contributor to projects that have failed. Therefore, every effort should be made to see that initial estimates are as accurate as possible since the choice of no estimates leaves a great deal to luck and is not palatable to serious project managers. Even though a project has never been done before, a manager can follow seven guidelines to develop useful work package estimates.

1. Responsibility. At the work package level, estimates should be made by the person(s) most familiar with the task. Draw on their expertise! Except for supertech- nical tasks, those responsible for getting the job done on schedule and within budget are usually first-line supervisors or technicians who are experienced and familiar with the type of work involved. These people will not have some preconceived, imposed duration for a deliverable in mind. They will give an estimate based on experience and best judgment. A secondary benefit of using those responsible is the hope they will “buy in” to seeing that the estimate materializes when they imple- ment the work package. If those involved are not consulted, it will be difficult to hold them responsible for failure to achieve the estimated time. Finally, drawing on the expertise of team members who will be responsible helps to build communica- tion channels early.

2. Use several people to estimate. It is well known that a cost or time estimate usually has a better chance of being reasonable and realistic when several people with rel- evant experience and/or knowledge of the task are used (sometimes called “crowd- sourcing”). True, people bring different biases based on their experience. But dis- cussion of the individual differences in their estimate leads to consensus and tends to eliminate extreme estimate errors.

3. Normal conditions. When task time, cost, and resource estimates are determined, they are based on certain assumptions. Estimates should be based on normal condi- tions, efficient methods, and a normal level of resources. Normal conditions are sometimes difficult to discern, but it is necessary to have a consensus in the organi- zation as to what normal conditions mean in this project. If the normal workday is eight hours, the time estimate should be based on an eight-hour day. Similarly, if the normal workday is two shifts, the time estimate should be based on a two-shift workday. Any time estimate should reflect efficient methods for the resources nor- mally available. The time estimate should represent the normal level of resources— people or equipment. For example, if three programmers are available for coding or two road graders are available for road construction, time and cost estimates should be based on these normal levels of resources unless it is anticipated the project will

Describe guidelines for estimating time, costs, and resources.

5-2LO

Chapter 5 Estimating Project Times and Costs 133

change what is currently viewed as “normal.” In addition, possible conflicts in demand for resources on parallel or concurrent activities should not be considered at this stage. The need for adding resources will be examined when resource sched- uling is discussed in a later chapter.

4. Time units. Specific time units to use should be selected early in the development phase of the project network. All task time estimates need consistent time units. Estimates of time must consider whether normal time is represented by calendar days, workdays, workweeks, person days, single shift, hours, minutes, etc. In prac- tice the use of workdays is the dominant choice for expressing task duration. How- ever, in projects such as a heart transplant operation, minutes probably would be more appropriate as a time unit. One such project that used minutes as the time unit was the movement of patients from an old hospital to an elegant new one across town. Since there were several life-endangering moves, minutes were used to ensure patient safety so proper emergency life-support systems would be available if needed. The point is, network analysis requires a standard unit of time. When com- puter programs allow more than one option, some notation should be made of any variance from the standard unit of time. If the standard unit of time is a five-day workweek and the estimated activity duration is in calendar days, it must be con- verted to the normal workweek.

5. Independence. Estimators should treat each task as independent of other tasks that might be integrated by the WBS. Use of first-line managers usually results in considering tasks independently; this is good. Top managers are prone to aggregate many tasks into one time estimate and then deductively make the indi- vidual task time estimates add to the total. If tasks are in a chain and performed by the same group or department, it is best not to ask for all the time estimates in the sequence at once to avoid the tendency for a planner or a supervisor to look at the whole path and try to adjust individual task times in the sequence to meet an arbitrary imposed schedule or some rough “guesstimate” of the total time for the whole path or segment of the project. This tendency does not reflect the uncertainties of individual activities and generally results in optimistic task time estimates. In summary, each task time estimate should be considered inde- pendently of other activities.

6. Contingencies. Work package estimates should not include allowances for contin- gencies. The estimate should assume normal or average conditions even though every work package will not materialize as planned. For this reason top manage- ment needs to create an extra fund for contingencies that can be used to cover unforeseen events.

7. Adding risk assessment to the estimate helps to avoid surprises to stakeholders. It is obvious some tasks carry more time and cost risks than others. For example, a new technology usually carries more time and cost risks than a proven process. Simply identifying the degree of risk lets stakeholders consider alternative methods and alter process decisions. A simple breakdown by optimistic, most likely, and pes- simistic for task time could provide valuable information regarding time and cost. See Chapter 7 for further discussion of project risk.

Where applicable, these guidelines will greatly help to avoid many of the pitfalls found so often in practice. See Snapshot from Practice 5.1: Reducing Estimating Errors for a similar set of guidelines.

134 Chapter 5 Estimating Project Times and Costs

5.3 Top-Down versus Bottom-Up Estimating Since estimating efforts cost money, the time and detail devoted to estimating are important decisions. Yet, when estimating is considered, you as a project manager may hear statements such as these:

Rough order of magnitude is good enough. Spending time on detailed estimating wastes money. Time is everything; our survival depends on getting there first! Time and cost accuracy is not an issue. The project is internal. We don’t need to worry about cost. The project is so small, we don’t need to bother with estimates. Just do it.

However, there are sound reasons for using top-down or bottom-up estimates. Table 5.1 depicts conditions that suggest when one approach is preferred over another. Top-down estimates usually are derived from someone who uses experience and/ or information to determine the project duration and total cost. However, these esti- mates are sometimes made by top managers who have very little knowledge of the component activities used to complete the project. For example, a mayor of a major

Describe the methods, uses, and advantages and disadvantages of top-down and bottom-up estimating methods.

5-3LO

Complexity is the major source of esti- mating error, says Kerry Willis, Project Management Sr. Director at the health- care services organization Cigna, in Hartford, Connecticut. “Project manag-

ers cannot possibly be experts in all areas and therefore need to rely on the stakeholders for their expertise when estimating,” Willis notes. To minimize errors he recommends treating estimating as a living process and not a one-time event. He follows the same approach on all of his projects:

1. Identify all of the stakeholders based on the scope of the project and organizational history.

2. Involve the stakeholders when creating the estimates. “You can’t hold people accountable for estimates they didn’t help create,” Willis says.

S N A P S H O T F R O M P R A C T I C E 5 . 1 Reducing Estimating Errors*

3. Aggregate the estimates by comparing several models (resource based, parametric, etc.).

4. Manage the project against the estimates. This includes making adjustments based on changes in project scope.

5. Track projects closely using tools such as earned value to gauge progress toward estimates.

6. Track actual costs and time at a granular level to recalibrate the model for future projects.

“The initial estimate could be perfect, but if it is not managed, then the end result will be bad and people will point to the estimating process,” Wills argues.

* S. Swanson, “Estimating Errors,” PMNetwork, October 2011, pp. 62–66.

TABLE 5.1 Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates

Condition Top-Down Estimates Bottom-Up Estimates

Strategic decision making X Cost and time important X High uncertainty X Internal, small project X Fixed-price contract X Customer wants details X Unstable scope X

Chapter 5 Estimating Project Times and Costs 135

city making a speech noted that a new law building would be constructed at a cost of $23 million and would be ready for occupancy in two and one-half years. Although the mayor probably asked for an estimate from someone, the estimate could have come from a luncheon meeting with a local contractor who wrote an estimate (guesstimate) on a napkin. This is an extreme example, but in a relative sense this scenario is fre- quently played out in practice. See Snapshot from Practice 5.2: Council Fumes, for another example of this. The question actually is, do these estimates represent low- cost, efficient methods? Seldom. The fact that the estimate came from the top can influence people responsible to “do what it takes to make the estimate.” If possible and practical, you want to push the estimating process down to the work package level for bottom-up estimates that establish low-cost, efficient methods. This process can take place after the project has been defined in detail. Good sense suggests project estimates should come from the people most knowledgeable about the estimate needed. The use of several people with relevant experience with the task can improve the time and cost estimate. The bottom-up approach at the work package level can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables. Similarly, resource requirements can be checked. Later, the time, resource, and cost estimates from the work packages can be consolidated into time-phased networks, resource schedules, and budgets that are used for control. The bottom-up approach also provides the customer with an opportunity to compare the low-cost, efficient method approach with any imposed restrictions. For example, if the project completion duration is imposed at two years and your bottom-up analysis tells you the project will take two and one-half years, the client can now consider the trade-off of the low-cost method versus compressing the project to two years—or in

Portland, Oregon’s, Willamette riverfront development has exploded with seven condominium towers and a new health sciences center under construction. The health science complex is to be

linked with Oregon Health Sciences University (OHSU), which is high on a nearby hill, with an aerial cable tram. The aerial tram linking the waterfront district to OHSU is to support the university expansion, to increase biotech- nology research, and to become Portland’s icon equiva- lent to Seattle’s Space Needle. All of the hype turned south when news from a hearing suggested that the real budget for the tram construction, originally estimated at $15 million, is going to be about $55–$60 million, more than triple the original estimate. The estimate could even go higher. Commissioners want to find out why city staff knowingly relied on flawed estimates. Mike Lindberg, president of the nonprofit Aerial Transportation Inc., acknowledged “the $15 million number was not a good number. It was simply a guesstimate.” Commissioner

S N A P S H O T F R O M P R A C T I C E 5 . 2 Council Fumes as Tram Tale Unfolds*

* The Oregonian, January 13, 2006, by Frank Ryan, pages A1 and A14, and April 2, 2006, page A1.

Erik Sten said, “Those numbers were presented as much more firm than they appear to have been. . . . It appears the actual design wasn’t costed out. That’s pretty shoddy.”

136 Chapter 5 Estimating Project Times and Costs

rare cases canceling the project. Similar trade-offs can be compared for different levels of resources or increases in technical performance. The assumption is any movement away from the low-cost, efficient method will increase costs—e.g., overtime. The pre- ferred approach in defining the project is to make rough top-down estimates, develop the WBS/OBS, make bottom-up estimates, develop schedules and budgets, and recon- cile differences between top-down and bottom-up estimates. Hopefully, these steps will be done before final negotiation with either an internal or external customer. In conclusion, the ideal approach is for the project manager to allow enough time for both the top-down and bottom-up estimates to be worked out so a complete plan based on reliable estimates can be offered to the customer. In this way false expectations are minimized for all stakeholders and negotiation is reduced.

5.4 Methods for Estimating Project Times and Costs

Top-Down Approaches for Estimating Project Times and Costs At the strategic level top-down estimating methods are used to evaluate the project proposal. Sometimes much of the information needed to derive accurate time and cost estimates is not available in the initial phase of the project—for example, design is not finalized. In these situations top-down estimates are used until the tasks in the WBS are clearly defined.

Consensus Methods This method simply uses the pooled experience of senior and/or middle managers to estimate the total project duration and cost. This typically involves a meeting where experts discuss, argue, and ultimately reach a decision as to their best guess estimate. Firms seeking greater rigor will use the Delphi Method to make these macro estimates. See Snapshot from Practice 5.3: The Delphi Method.

Originally developed by the RAND Corporation in 1969 for technological forecasting, the Delphi Method is a group decision process about the like- lihood that certain events will occur.

The Delphi Method makes use of a panel of experts familiar with the kind of project in question. The notion is that well-informed individuals, calling on their insights and experience, are better equipped to esti- mate project costs/times than theoretical approaches or statistical methods. Their responses to estimate questionnaires are anonymous, and they are provided with a summary of opinions. Experts are then encouraged to reconsider, and if appropriate, to change their previous estimate in light of the replies of other experts. After two or three rounds it is believed that the group will converge toward the

S N A P S H O T F R O M P R A C T I C E 5 . 3 The Delphi Method

“best” response through this consensus process. The midpoint of responses is statistically categorized by the median score. In each succeeding round of question- naires, the range of responses by the panelists will pre- sumably decrease and the median will move toward what is deemed to be the “correct” estimate. One distinct advantage of the Delphi Method is that the experts never need to be brought together physi- cally. The process also does not require complete agreement by all panelists, since the majority opinion is represented by the median. Since the responses are anonymous, the pitfalls of ego, domineering personali- ties, and the “bandwagon or halo effect” in responses are all avoided. On the other hand, future develop- ments are not always predicted correctly by iterative consensus nor by experts, but at times by creative, “off the wall” thinking.

Chapter 5 Estimating Project Times and Costs 137

It is important to recognize that these first top-down estimates are only a rough cut and typically occur in the “conceptual” stage of the project. The top-down estimates are helpful in initial development of a complete plan. However, such estimates are sometimes significantly off the mark because little detailed information is gathered. At this level individual work items are not identified. Or, in a few cases, the top-down estimates are not realistic because top management “wants the project.” Nevertheless, the initial top-down estimates are helpful in determining whether the project warrants more formal planning, which would include more detailed estimates. Be careful that macro estimates made by senior managers are not dictated to lower level managers who might feel compelled to accept the estimates even if they believe resources are inadequate. Although your authors prefer to avoid the top-down approach if possible, we have witnessed surprising accuracy in estimating project duration and cost in isolated cases. Some examples are building a manufacturing plant, building a distribution warehouse, developing air control for skyscraper buildings, and road construction. However, we have also witnessed some horrendous miscalculations, usually in areas where the tech- nology is new and unproven. Top-down methods can be useful if experience and judg- ment have been accurate in the past.

Ratio Methods Top-down methods (sometimes called parametric) usually use ratios, or surrogates, to estimate project times or costs. Top-down approaches are often used in the concept or “need” phase of a project to get an initial duration and cost estimate for the project. For example, contractors frequently use number of square feet to estimate the cost and time to build a house; that is, a house of 2,700 square feet might cost $160 per square foot (2,700 feet × $160 per foot equals $432,000). Likewise, knowing the square feet and dollars per square foot, experience suggests it should take approximately 100 days to complete. Two other common examples of top-down cost estimates are the cost for a new plant estimated by capacity size, or a software product estimated by features and complexity.

Apportion Methods This method is an extension to the ratio method. Apportionment is used when proj- ects closely follow past projects in features and costs. Given good historical data, estimates can be made quickly with little effort and reasonable accuracy. This method is very common in projects that are relatively standard but have some small variation or customization. Anyone who has borrowed money from a bank to build a house has been exposed to this process. Given an estimated total cost for the house, banks and the FHA (Federal Housing Authority) authorize pay to the contractor by completion of specific segments of the house. For example, foundation might represent 3 percent of the total loan, fram- ing 25 percent, plumbing and heating 15 percent, etc. Payments are made as these items are completed. An analogous process is used by some companies that apportion costs to deliverables in the WBS—given average cost percentages from past projects. Figure 5.1 presents an example similar to one found in practice. Assuming the total project cost is estimated, using a top-down estimate, to be $500,000, the costs are apportioned as a percentage of the total cost. For example, the costs apportioned to the “Document” deliverable are 5 percent of the total, or $25,000. The subdeliverables “Doc-1 and Doc-2” are allocated 2 and 3 percent of the total—$10,000 and $15,000, respectively.

138 Chapter 5 Estimating Project Times and Costs

Function Point Methods for Software and System Projects In the software industry, software development projects are frequently estimated using weighted macro variables called “function points” or major parameters such as num- ber of inputs, number of outputs, number of inquiries, number of data files, and num- ber of interfaces. These weighted variables are adjusted for a complexity factor and added. The total adjusted count provides the basis for estimating the labor effort and cost for a project (usually using a regression formula derived from data of past proj- ects). This latter method assumes adequate historical data by type of software project for the industry—for example, MIS systems. In the U.S. software industry, one person- month represents on average five function points. A person working one month can generate on average (across all types of software projects) about five function points. Of course each organization needs to develop its own average for its specific type of work. Such historical data provide a basis for estimating the project duration. Varia- tions of this top-down approach are used by companies such as IBM, Bank of America, Sears Roebuck, HP, AT&T, Ford Motors, GE, DuPont, and many others. See Table 5.2 and Table 5.3 for a simplified example of function point count methodology. From historical data the organization developed the weighting scheme for complex- ity found in Table 5.2. Function points are derived from multiplying the number of kinds of elements by weighted complexity.

Total project cost $500,000

Design 20%

100,000

D-1 10%

50,000

D-2 10%

50,000

Program 30%

150,000

Test 40%

200,000

Document 5%

25,000

Produce CD 5%

25,000

Doc-1 2%

10,000

Doc-2 3%

15,000

CD-1 5%

25,000

P-1 20%

100,000

P-2 5%

25,000

P-3 5%

25,000

T-1 10%

50,000

T-2 10%

50,000

T-3 20%

100,000

FIGURE 5.1 Apportion Method of Allocating Project Costs Using the Work Breakdown Structure

TABLE 5.2 Simplified Basic Function Point Count Process for a Prospective Project or Deliverable

Complexity Weighting

Element Low Average High Total

Number of inputs _____ × 2 + _____ × 3 + _____ × 4 = _____ Number of outputs _____ × 3 + _____ × 6 + _____ × 9 = _____ Number of inquiries _____ × 2 + _____ × 4 + _____ × 6 = _____ Number of files _____ × 5 + _____ × 8 + _____ × 12 = _____ Number of interfaces _____ × 5 + _____ × 10 + _____ × 15 = _____

Chapter 5 Estimating Project Times and Costs 139

Table 5.3 shows the data collected for a specific task or deliverable: Patient Admit- ting and Billing—the number of inputs, outputs, inquiries, files, and interfaces along with the expected complexity rating. Finally, the application of the element count is applied and the function point count total is 660. Given this count and the fact that one person-month has historically been equal to 5 function points, the job will require 132 person-months (660/5 = 132). Assuming you have 10 programmers who can work on this task, the duration would be approximately 13 months. The cost is easily derived by multiplying the labor rate per month times 132 person-months. For example, if the monthly programmer rate is $4,000, then the estimated cost would be $528,000 (132 × 4,000). Although function point metrics are useful, their accuracy depends on adequate historical data, currency of data, and relevancy of the project/deliverable to past averages.

Learning Curves Some projects require that the same task, group of tasks, or product be repeated several times. Managers know intuitively that the time to perform a task improves with repeti- tion. This phenomenon is especially true of tasks that are labor intensive. In these cir- cumstances the pattern of improvement phenomenon can be used to predict the reduc- tion in time to perform the task. From empirical evidence across all industries, the pattern of this improvement has been quantified in the learning curve (also known as improvement curve, experience curve, and industrial progress curve), which is described by the following relationship: Each time the output quantity doubles, the unit labor hours are reduced at a constant rate.

In practice the improvement ratio may vary from 60 percent, representing very large improvement, to 100 percent, representing no improvement at all. Generally, as the difficulty of the work decreases the expected improvement also decreases and the improvement ratio that is used becomes greater. One significant factor to consider is the proportion of labor in the task in relation to machine-paced work. Obviously, a lower percentage of improvement can occur only in operations with high labor content. Appendix 5.1 at the end of the chapter provides a detailed example of how the improve- ment phenomenon can be used to estimate time and cost for repetitive tasks.

TABLE 5.3 Example: Function Point Count Method

Software Project 13: Patient Admitting and Billing

15 Inputs Rated complexity as low (2) 5 Outputs Rated complexity as average (6) 10 Inquiries Rated complexity as average (4) 30 Files Rated complexity as high ##(12) 20 Interfaces Rated complexity as average #(10)

Application of Complexity Factor

Element Count Low Average High Total

Inputs ####15 × 2 = 30 Outputs 5 × 6 = 30 Inquiries ###10 × 4 = 40 Files 30 × 12 = 360 Interfaces 20 × 10 = 200 Total 660

140 Chapter 5 Estimating Project Times and Costs

The main disadvantage of top-down approaches to estimating is simply that the time and cost for a specific task are not considered. Grouping many tasks into a common basket encourages errors of omission and the use of imposed times and costs. Micro estimating methods are usually more accurate than macro methods.

Bottom-Up Approaches for Estimating Project Times and Costs Template Methods If the project is similar to past projects, the costs from past projects can be used as a starting point for the new project. Differences in the new project can be noted and past times and costs adjusted to reflect these differences. For example, a ship repair dry- dock firm has a set of standard repair projects (i.e., templates for overhaul, electrical, mechanical) that are used as starting points for estimating the cost and duration of any new project. Differences from the appropriate standardized project are noted (for times, costs, and resources) and changes are made. This approach enables the firm to develop a potential schedule, estimate costs, and develop a budget in a very short time span. Development of such templates in a database can quickly reduce estimate errors.

Parametric Procedures Applied to Specific Tasks Just as parametric techniques such as cost per square foot can be the source of top- down estimates, the same technique can be applied to specific tasks. For example, as part of an MS Office conversion project, 36 different computer workstations needed to be converted. Based on past conversion projects, the project manager determined that on average one person could convert three workstations per day. Therefore the task of converting the 36 workstations would take three technicians four days [(36/3)/3]. Simi- larly, to estimate the wallpapering allowance on a house remodel, the contractor fig- ured a cost of $5 per square yard of wallpaper and $2 per yard to install it, for a total cost of $7. By measuring the length and height of all the walls she was able to calculate the total area in square yards and multiply it by $7.

Range Estimating When do you use range estimating? Range estimating works best when work packages have significant uncertainty associated with the time or cost to complete. If the work pack- age is routine and carries little uncertainty, using a person most familiar with the work package is usually the best approach. She is likely to know best how to estimate work packages durations and costs. However, when work packages have significant uncertainty associated with the time or cost to complete, it is a prudent policy to require three time estimates—low, average, and high (borrowed from PERT methodology that uses proba- bility distributions). The low to high give a range within which the average estimate will fall. Determining the low and high estimates for the activity is influenced by factors such as complexity, technology, newness, familiarity. How do you get the estimates? Since range estimating works best for work packages that have significant uncertainty, having a group determine the low, average, and high cost or duration gives best results. Group estimating tends to refine extremes by bringing more