The Last Profit Frontier

After all of the cost cutting, downsizing and outsourcing, there remains one last frontier that has continued to impact profits PROJECTS!

Projects cost too much, take too long and deliver too little. Their poor performance impacts both short and long term profitability. It is time to fix this problem once and for all.

There are now only two types of projects
Totally optimized or sub-optimized.

You have a choice.
The question is:How much money can you afford to lose or waste through project sub-optimization?

Volume 1 - The Profitability of Total Optimization

Preamble

Do these sad stories sound familiar?

A major bank was trying, for the third time, to implement a new internet-based institutional banking service.

The initial implementation was to be the foundation for many other products. The original estimates were 18 months duration, $70m in cost, with a return of $40m in benefits as well as the reestablishment of its competitiveness so that it did not lose major customers and further revenue. It was managed by the organization’s top Program Director. The project staggered over the line in just short of three years at a cost of $185m – implementing a solution that realized less than half of the $40m. Most importantly, the project did not provide a foundation for future planned products (which then had to commission their own, separate projects at additional cost).

A utility was implementing a mandatory project to an unmovable deadline

The project was to automate many transactions and, therefore, allow the reduction of six staff. The project was delivered on the required date, met the required transaction specifications and was only 10% over budget. However, it actually increased the workload in the operational areas because it did not support the transaction exceptions and queries (which had now increased) and it took six months to stabilize the system. Instead of reducing staff, the department had to recruit four additional staff.

A finance company was replacing its 30 year-old systems

These old systems were costing it millions a year to maintain even though much of the functionality had been superseded. The project was abandoned after an expenditure of $44m (of an originally approved budget of $24m). A subsequent project to just ‘front end’ the old system also failed.

An equipment hire company implemented an Enterprise Resource Planning (ERP) system.

The budget was $26m but the delivery cost was $72m — a cost that very nearly put them out of business.

A distribution company spent $24m on a new ERP system

It failed to process standard business transactions when implemented. After huge operational disruption, it was withdrawn after one month and the previous system reinstalled. Later, a new project implemented a replacement system at an additional cost of $52m.

A manufacturing company turned down a quote of $35m for an ERP system implementation

It instead accepted one of $14m. The implementer put on his ‘D’ team and the project crashed 15 months later. The vendor stepped in to rescue the project and delivered it for an additional $43m. By the end, the CEO’s only measure of success was that the project never again appeared on the front page of the financial press!

A bank was implementing a new Human Resources Management System (HRMS)

It employed a top-flight, HRMS-experienced Project Director. The project was cancelled when it had spent $17m of the $12m budget and was found to still be in the ‘requirements definition’ stage.

If you learn some basic principles, you will know why these sale stories occurred and know to ensure your organization never suffers a disaster like these.

Why should a business manager read this book?

Projects are the concern of project specialists, not business managers, right? Wrong!

We want you to learn a new, simpler way of thinking about projects that will put you back in control and enable you to direct projects to create what you need and then lead them till you get the business results you desire.

Every day, for most of our respective careers (41 years for Jed and 34 for Alex), we have worked with senior business managers who focussed on making their business more profitable, more effective and simpler. As we all know, if you are not moving forward, you are going backwards.

During our collective time (which goes back to the IT dinosaur era of punched cards), we have seen projects deliver stunningly successful results for the business and act as a springboard to long-term growth. We have also seen projects which have failed - a few even to the extent of putting the company out of business. Unfortunately, we have seen far more failures rather than successes.

Every time we are asked to health-check projects, we see business managers frustrated with the results being produced, annoyed at the waste, demoralized at their efforts not being rewarded and uncertain about what can be done to improve things. The good news is - it doesn’t have to be this way.

It is true that occasionally projects may need to be big, complicated and costly. But that shouldn’t prevent a project from delivering what the business needs, values and desires. More importantly, it is possible for every business manager in every organization to learn how to get projects to deliver what is desired, crystalize the value quickly and for a fair cost. Our experience has shown it is possible to deliver totally optimized projects.

This book outlines the models and thinking processes that we have developed over years, honed on projects in organizations of all sizes, capabilities and levels of sophistication across multiple industries and countries. Many organizations have contributed to the case studies which you see throughout the book. Business managers have critiqued, tested, refined and proven the material and principles, “ironed out the kinks”, and given us feedback on how to make the techniques, tools and processes more practical and useable.

We would love to be able to provide “over the shoulder” guidance and advice to you all but that is not practical. So this book gives you the expert thinking that will allow you to look at projects, see what is really happening and be empowered to make the big decisions right.

Some of the material in this book will directly conflict with orthodox views about project delivery. That’s our point. Looking at projects from the business perspective creates a very different viewpoint.

When you adopt these ideas, tools and techniques, your organization can build its capability to deliver Totally Optimized Projects.

Jed Simms and Alexandra Chapman,

August 2011

What is TOP™ — Totally Optimized Projects™

TOP is the strategy-based, business-driven approach to delivering Totally Optimized Projects.

Totally completely, without the process gaps and deficiencies or the value losses and destruction prevalent in current projects.
Optimized the best, most practical value out of the options and resources available, with maximum efficiency.
Projects any change/development activity done outside of business-as-usual to create a new business end state.

You can view TOP from several dimensions – as a philosophy, a doctrine, a process, a mindset, a toolset.

We describe TOP is as:

A step-by-step approach
to successfully delivering Totally Optimized Projects,
based on a set of proven principles
that underpin a complete, integrated and optimized set of processes
that equip business staff and project professionals
to simply, effectively and consistently
deliver their desired business outcomes, associated benefits and value
in full, in less time and for less cost.

(TOP is the most complete, yet simple, approach to projects yet devised.)

Importantly, TOP builds on the project approaches you may already have. These do not need to be thrown out or replaced. Rather, they can be realigned and simplified to be more optimal and to enable the business to more effectively lead, direct and govern projects.

TOP is more than just a methodology or body of knowledge — it is the first complete end-to-end and top-to-bottom project delivery approach which incorporates business value delivery, organizational leadership and project/technical management TOPologies.

TOP does not create extra work. On the contrary it is designed to eliminate steps and reduce the overall project workload, time and cost. It especially helps eliminate a large element of the 30% plus of rework that is typical with orthodox project methodology approaches.
TOP brings a different thinking process to projects, a simpler approach that that focuses on business value optimization and delivery.
TOP starts when the business plan, concept, idea or project is initiated and ends when the business value has been realized.
TOP focuses on the layers above project management – the business value delivery and organization leadership layers. It fills the gaps and addresses the deficiencies that exist in how projects are delivered today.
TOP supports and enables all project roles, from the board to the front line staff: from sponsor to subject matter experts.

(A TOPology = An integrated network of beliefs, processes, tools, techniques, templates and training.)

Any worthwhile project delivery approach needs to be integrated, well founded, practical, effective and proven. TOP is:

an integrated, systematic approach based on extensive research (well founded)
with a range of practical processes, tools, templates and techniques (practical)
that cover all areas of project delivery, end-to-end and top-to-bottom (complete).
And, although each element individually increases delivered value, cumulatively they have been proven to optimize project results (effective and proven).

How is this book organised?

This book comprises three volumes - Volume 1.

Volume 1 The Profitability of Total Optimization
The cost of sub-optimization and the prize (and achievability) of total optimization. sets out the problems with projects and the existing “solutions” and outlines how to find a real and enduring solution
Volume 2 Establishing a foundation for profitable projects
A new strategy-based and business-driven perspective, foundation and set of models to establish a new set of beliefs compatible with profitable, optimized project delivery.
Volume 3 How projects should be delivered
A description of how the project delivery approaches should be adjusted to totally optimize the results and why the current approaches lead to sub-optimization.

The detailed TOP “How to ...” booklets and associated guides are available at www.totallyoptimizedprojects.com

Chapter 1: The invisible problem with projects

“The problem with projects is much bigger than you think”

In this chapter we quantify how big the problem with business projects is, introduce the concept of optimizing a project’s value-delivered against the time and cost-of-delivery, spell out how much value destruction is really costing organizations and explain why practically nothing seems to have been done to fix the vast problem of value destruction.

How big is the problem with projects?

Ask most business managers and they will tell you:

“Projects cost too much, take too long and deliver too little.”

And they are right. We are all familiar with the obvious problems — projects that run late and/or over-budget, or provide no benefits at all.

But the problem is much bigger than this. Projects are sub-optimized, and the scale and cost of this sub-optimization is massive.

Most projects miss, lose or destroy more value than they deliver.

Your immediate reaction to this statement might be:

“We may not be great at delivering projects but surely we’re not that bad”, or;

“If things are truly that bad, why has this situation been allowed to continue unaddressed?”

So why do we say this? Because there is a hidden loss that is not tracked, measured, or reported.

It is hidden in:

Time and delivery costs being over-estimated in an attempt to avoid projects ever having to ask for more time or money (even though they do);
Benefits and business value being under-identified to reduce the obligations to be delivered from the project;
Alternative lower-cost options not being identified, because from the beginning, pre-identified ‘solutions’ are pursued as the only alternative to ‘doing nothing’.
Projects being approved that never can deliver the promised value.
Project controls being institutionalized that undermine value and frustrate project improvement.

These value losses directly impact future profits.

Here are some real-life examples of how this sub-optimization impacts profits and cash flow:

A project is approved and delivered for a cost of $82 million – great, it is on budget
But what if this project could (and should) have been completed for $35 million? Is this still great?
A project’s benefits are valued at $32 million and are fully realized – great, all the benefits achieved.
But what if the real available benefits from this project were more than $100 million? Does that seem so great now?
A project is scheduled to be delivered in eight months, and it is – great, it was on time!
But if the same result could have been achieved in two and half months, perhaps this is not so great after all?A project is costed for delivery at $5 million.
But what if it is found to have an alternative solution available for $17,000? Which would you rather have?

As you can see, the value loss from sub-optimization is real and it is huge – usually greater than 50% of the net value—and is too great to ignore. At this level of value destruction, “doing nothing” is not an option.

What do we mean by project optimization?

Project optimization starts by standing in the shoes of the business manager and asking the key question:

“What are we really trying to do here and what is the best way that will deliver the optimal value?”

Optimization seeks practical, sensible, clever ways to balance the value to be delivered to the business against the cost, time and resources required to deliver - seeking ways of increasing the value side of the equation while reducing the cost side.

(Optimized: the best most practical value out of the options and resources available, with maximum project efficiency)

Perhaps we had best start by showing you some examples of how projects have been optimized to reduce costs and increase value.

Case example 1: An optimized approach to project cost.

The project was originally estimated and the business case approved to cost $82 million to deliver benefits of $45 million. After optimization principles and techniques were applied, it was actually delivered for $35 million with all of the benefits preserved. How was this done?

One module was deleted – it added no value.
67 superficially different transactions were simplified to 11 core transactions with 14 variants which both improved customer service, made it easier for staff to do an excellent job and reduced the configuration workload for the project.
Internal staff were equipped with the knowledge and skills to replace external expensive consultants and ‘experts’.
The clarity of the desired business outcomes and the detailed process-based requirements minimized the time, effort and cost normally wasted on project rework (rework is often more than 30% of a project’s workload)
The whole project and all of its activities were oriented to realizing the planned benefits (not just delivering a solution). This ensured the technical solution supported the full realization of the benefits without workarounds, last-minute fixes or the need for supplementary projects.

In this example the unnecessary cost avoided was $47 million with no reduction in benefits. You might be puzzled:

“I thought this is what we look at when we assess alternatives for the business case?”

It should be, but unfortunately, not usually. By the time most business cases are written, the project is already focussed on a set solution to a defined “problem”. Optimization is neither considered nor, in most cases, even possible with orthodox project approaches.

(Desired business outcome:A very precisely and specifically engineered written definition of the business end-states which describes exactly what the future business-as-usual looks like when everything is “working just right” and which includes everything that is important to the business.)

Case example 2: An optimized approach to project value

How was a project originally approved with benefits of $32 million subsequently discovered to have benefits of more than $100 million?

The desired business outcomes for the project were clearly defined for the first time. These outcomes specified what the project would do for the business, as distinct from what the system itself would deliver.
As well as the financial benefits, a more rigorous and holistic approach was used to identify customer, competitive, capability, productivity and risk-reduction benefits. Many of these initially non-financial benefits were then found to provide additional financial benefits.
Many of the benefits were immediately available as their realization did not need to wait for the new system. Nearly $80 million in benefits was, therefore, realized before the system was implemented.

In this case the project was being undertaken in a division of an organization that was being sold. Sadly for the old owners, the additional benefits were realized by the new owners of the business who, in effect, received a multi-million dollar discount on their purchase price with no increase to the project delivery costs.

The examples above show how projects miss, lose or destroy more value than they deliver.

They also prove what can be done to dramatically increase project results when you know how. Optimization enables more value to be gained for less cost, a “win-win” solution.

How do we miss, lose or destroy value in projects?

When we analyzed project results in over 180 major, well resourced organizations around the globe, across a portfolio of projects, we found there was a pattern to the value destruction.

The massive loss of value is caused by gaps and deficiencies in most orthodox approaches to projects, which focus on projects and their costs but pay little attention to the business and its value.

Value Loss Drivers

When we analyzed the drivers and destroyers of value we found that orthodox project approaches:

(Only three of the nine major ways in which value is destroyed are routinely measured and therefore managed.)

I. Miss 25% or more of a project’s potential value in the business case—simply because they fail to identify the true business outcomes and all of their associated benefits. This a quarter of the potential value gone before you even start.
II. Lose value by ‘adjusting’ the project’s scope to fit the agreed project timeframe or budget to the detriment of the business’s post implementation needs, resulting in the loss of yet more business value. As few projects actually align their project activities to the planned benefits, any scope change is usually done with little-to-no knowledge of its impact on value.
III. Lose value by not planning, tracking, or governing the full delivery of benefits pre and post-implementation, thus allowing them to ‘fall by the wayside’. Post-project benefits can represent more than 50% of potential benefits, much of which is lost through neglect.
IV. Destroy value by not actively sustaining achieved benefits, and allowing old habits, old processes and unnecessary extra steps to resurface. At least 5% of the value gained initially can be lost as people revert back to the old ways of doing things.
V. Destroy value by delivering the projects late thus delaying the start of benefits realization.

Drivers of value loss measured across a project portfolio

Drivers of value loss measured across a project portfolio

Cost Increase Drivers

VI. Increase costs over budgeted costs reducing the net value of the benefits. (Research consistently finds that around 60% to 70% of projects fail on one or both of drivers V and VI).
VII. Lose value because they lack specificity at all levels of the project, requiring up to 35% or so of project time to be spent on rework. Although you don’t expect rework time to be zero, an acceptable level is around 15%. Reducing the need for rework releases time and effort for more productive work and faster, lower-cost delivery.
VIII. Increase delivery costs by retaining unnecessary solution complexity by failing to first define and simplify the business processes and requirements. This missed opportunity not only results in higher solution and project costs (20%), but also higher ongoing operational costs.
IX. Destroy all of the value when projects fail, vaporize, are cancelled or otherwise deliver nothing for the time, effort and costs involved. 10% of projects fall into this category.

Cost increases over the optimal costs, and value decreases from the total available value, occurring together, combine to deliver substantially sub-optimal results across a project portfolio.

(Only three of the nine major ways in which value is destroyed (items V, VI, IX) are typically measured. The rest, because they impact operational business-as-usual rather than the project, are effectively invisible and are not measured when we assess project results.)

But there is more. These nine drivers of value destruction do not take into account the impacts and value loss beyond individual projects such as poor portfolio planning, the misalignment of projects to business strategy and the cost of failing to successfully execute planned business strategies.

Key to this vast value loss is poor business alignment. From the outset, every activity and aspect of the project should be aligned to deliver the desired business outcomes and benefits. Yet more than 90% of projects never identify their true desired business outcomes at all in clear, specific, measurable terms that everyone, from senior managers to junior staffers can understand. This lack of business alignment then allows a large gap to exist between what the business desires and what the project delivers, through which between 20% and 50% of the targeted value can fall.

When we add the visible and invisible value losses together, we have a much bigger problem than you think. All of these sad project statistics just emphasize that the orthodox way is very expensive. They also quantify the size of the prize available (50% or more).

To improve project performance we need to fix both the visible and the invisible drivers of value destruction.

To systematically eliminate all of the visible and invisible drivers of value loss we need to rethink how we approach and deliver projects

What does project value destruction cost organizations?

Discussions on project performance often highlight the waste of money on projects, the overspending vis-à-vis the budgets, that the project was late and did not deliver the results expected. These are all evaluations of the specific project and its specific performance.

However, we also need to look at the broader organizational level and the more strategic view of why we invest capital.

Investment doctrine says: we invest capital to get risk-adjusted future returns which are greater than the cost of that capital. Returns can be linked in one step directly to the investment e.g. increased cash flow; or can be multiple steps removed from the investment e.g. improvements in the customer service that lead to market share increases which then increase cash flow.

If you cannot invest capital well, investment doctrine advises that you should return it to the shareholders. Many organizations are so poor at project investments that they would be better off not doing projects at all, leaving the money in the bank, where it would at least be earning interest.

What are the costs and impacts of project sub-optimization?

We destroy capital

When we use more capital than is needed to achieve the same or worse ends from a project, or if the project investment fails altogether, then we destroy an asset - the capital of the business.

We also lose real benefits, the cash flow and profit expected from the investment now and in the future. But the total loss is worse than that. It is not only the capital wasted on the specific project, but also the loss of returns from alternative projects that did not get funded. A simple way of getting a sense of scale of this loss is to acknowledge that if your organization is typical of most, you are likely wasting at least one dollar in every four of your existing capital budget. The real amount of waste is probably higher, but a 25% capital loss is bad enough. Burning capital is a bit like burning dollar bills to keep warm. It may achieve a result, but it is not sensible.

Poor project investment results can eventually lead to the destruction of the organization altogether.

Case example: The project that killed the bank

A bank which had been in existence since 1866, embarked on a project to replace its branch banking systems. The project was managed by one of the world’s most trusted technology consultancies. After two years, the spend on the project was growing larger and larger and the delivery schedule was getting longer and longer.

Meanwhile, the board was worried because the massive spend meant the share price was going down. Unflattering press reports were creating unease in the market. In the wings, a twice rejected suitor was waiting to pounce. When the share price got low enough, that was the end of the bank. The project destroyed a 120-year-old institution and delivered nothing.

Future profits are reduced

Sub-optimized projects extend the time taken to achieve anything and increase the cost of delivery, while simultaneously reducing the value of the results. Not a good combination.

Sometimes this loss of benefits occurs because of inadequate effort by the business to realize the benefits. More often the loss is caused by project design and delivery decisions that prevent the available benefits being realized; they have been designed or scope-changed out of the realm of realization.

The benefits expected and available from projects can be missed, lost or destroyed, before, during and after the implementation of a project. The loss of these benefits reduces future performance by the value lost and by the cost of additional spending on the original project and then on further “fix-its” to fix the problems created by earlier projects.

Reduced revenues - because revenue benefits are missed, not realized or not sustained;
Reduced cost savings - because cost saving benefits are missed, not realized or not sustained;
Increased depreciation charges in following years because projects cost more than they needed to;
Strategic outcomes not delivered which impact on longer term competitiveness and thus profitability;
Delayed benefits - foregone value for the time period of the delay.

Even though much project spending is categorized as capital, and hence does not impact profits during the project life, poor investment results affect future profits.

Long-run operational costs can increase instead of decreasing

Almost worse than failure, projects which partly succeed can cause even more problems as they can lock the business into long-run cost structures which are higher than the previous environment - due to, for example, the acquisition and implementation of new expensive equipment and high cost software licenses (which are often on top of the extension of current costs).

So not only does the business not get the benefits that they had hoped for, but also their costs go up and profitability actually gets worse.

This can then lead to a doom loop where the inflexible high cost base forces the business to seek cost savings in any flexible areas even though these are not solutions that the organization would have otherwise chosen. For example, we have seen organizations reducing staff costs by off-shoring jobs that are not really suitable for off-shoring, and forcing other areas of the organization onto a poor system just to spread the fixed cost-base across a larger population of users.

Case example 3: The project that failed and saved the business

A major tele-sales office supplies company was implementing a new system to take customer orders. The project was late and over budget. Luckily so, as we health-checked it and found that if implemented, it would have put the company out of business.

In the new system, the time taken to capture each customer order would increase from 2m35s to 3m25s. This seemingly small increase of 50 seconds in a business with such slim margins and large order volumes, required a 22% increase in staff to take customer orders. This was enough to make the company inherently unprofitable. The damage to the service levels till things were fixed (at extra cost) would have caused the company to permanently lose customers to the major competitor reducing revenue. A lose-lose situation.

Locked-in higher long-run cost structures can permanently damage an organization.

Cash flow is negatively impacted

Large organizations tend not to assess the cash flow impacts of a project - the money in and out of the bank account - until things go badly wrong.

When projects perform poorly after implementation, the cash flow impacts can be significant. All too commonly businesses are unable to take customer orders or raise invoices or pay suppliers. Payrolls are unable to be paid correctly, accounts are unreliable. And where is the project team? Long gone.

Case example 4: A public transport ticketing system unable to collect fares

A troubled new ticketing system for a public transport network costing in excess of four times its original estimate was unable to reliably collect passenger fares. This caused a shortfall during its first year of operation of more than $60 million compared to the forecast income.

Unfortunately the government was committed to pay the transport operator $262 million dollars in guaranteed ticketing revenue during the period while the new ticketing system was introduced. To meet its commitments it had to then find another $60 million.

This list of the negative consequences of poor projects is not an exhaustive one. This is a topic that no doubt could form the basis for a whole semester by itself for a business school.

Critical business strategies fail

Business strategy and business plans are (mostly) executed by and through projects. Whatever your strategy, it is only as good as your capability to deliver it.

(Excellent execution is a viable strategy in itself)

Organizations invest millions with strategy consulting firms to analyze and identify competitive opportunities. Most strategy consulting companies may be masters of the “Big Idea”, but execution of strategy is not their area of interest or expertise. And if they do “do implementation”, in most cases they want to do it for you, not to teach your staff hour to do it. At the end of the assignment they walk off with the knowledge. Not good value for your organization.

Thus, if you are “no good at projects” (as many business managers concede) then you will also be “no good” at implementing your strategy. A brilliant strategy, poorly executed, which leaves shortfalls and ongoing workarounds, can be outshone by an average strategy superbly executed.

Organizations can also miss strategic opportunities when the funds and resources, especially key expert staff, are tied up by other projects and they cannot respond.

Sub-optimal project delivery leads directly to sub-optimal strategy delivery.

This list of the negative consequences of poor projects is not an exhaustive one. This is a topic that no doubt could form the basis for a whole semester by itself for a business school.

Project value destruction costs more than just the amount invested in the project it destroys future profits too. Failed projects are failed investments which have financial consequences and strategic consequences, both actual and opportunity which can occur immediately and over the longer term.

Why has poor project performance not been fixed?

We have seen that poor results are widespread, that the scale of the waste is enormous and the actual and opportunity costs are huge. At the beginning of this chapter we asked:

“If things are truly that bad, why has this situation been allowed to continue unaddressed?”

Why does it seem that this is not getting management attention to fix it once and for all?

To fix the problem, firstly organizations have to recognize they have a problem. Then they must be sufficiently motived to tackle it. And they must act to remove the factors which passively or actively encourage the waste to continue. Otherwise things do not improve.

The reasons why poor project performance has been allowed to continue fall into a number of categories, which are consistent with the organization’s project delivery capability. There are five levels of project delivery capability

which range from “complacent”; “confused”; “confident”, and “competent” to “capable”.

If the organization is “complacent” it will not recognize that the problem exists and thus will lack the motivation to fix it. In the “what problem?” category, we have seen:

“We make so much money that this is not a priority”;

“It’s capital spending, not expense”;

“No one is complaining”;

“You win some, you lose some”.

If “confused” then the organization will be keen to tackle the problem but the fixes applied will either not work or make things worse or frustratingly, only work occasionally. In confused organizations, we see:

Ineffectual benefits management processes;

and its twin - no accountability for value;

the blame game;

uninformed governance of the project;

the project and business-as-usual working to conflicting agendas.

If “confident”, the organization will most likely be getting reasonable results on the visible drivers of value loss and thus may lack the motivation to take action or not believe that further improvement is warranted. Confident organizations, will say “We are pretty good at delivering projects”.

How many of these do you recognize?

“We make so much money that this is not a priority”

Complacency can survive for a long time when a business is profitable and the business environment benign. Large corporations that make billions in profits and have a capital investment budgets in the billions or hundreds of millions tend to be less sensitive to waste than those organizations for whom margins are tight, profits are hard won and capital is scarce.

Capital expenditure without effective investment management is like trying to fill an bath when the plug is out. It can be done, but far less effectively then when you “put the plug in” and stop the wastage. Even small projects can quickly add up to a large spend. As tough business times reduce the amount of captial pouring into the unplugged bath, this attitude will need to change.

As tough business times reduce the amount of captial pouring into the unplugged bath, this attitude will need to change.

“It’s capital spending, not expense ”

In many organizations, spending which is categorized as capital expenditure (CapEx), is less tightly scrutinized than spending categorized as expense (OpEx) because it does not have an immediate ‘bottom-line’ impact on profitability.

CapEx is the last great slush fund for spending. Managers can be allocated millions of dollars for which their accountability is often vague or non-existent. If they fail to deliver the expected result—well that is seen, not as a failure by the manager, but rather as normal for projects. As one executive commented to us recently,

“The costs always go up and the benefits go down.”

Capital waste leads directly to future profit loss.

“No one is complaining”

Perplexingly, shareholders and investment analysts, who should be concerned about wasted investment, have not been vocal when faced with projects that burn rather than return capital. Annual shareholder meetings have big announcements of major new projects, but failed ones rarely get questioned.

When a major financial institution announced that its core systems upgrade had doubled in cost to over a billion dollars there was not a squeak of negative commentary. Imagine the reaction if reported profits had fallen by half.

“You win some, you lose some”

Business managers allocate capital across a “portfolio” of projects. The trouble is that the word “portfolio” has very different characteristics when you apply it to a portfolio of say, new products compared to a portfolio of project investments. This is another example of how words can confuse and lead us astray.

With a portfolio of new product investments, even with research and careful planning, some will pay-off hugely and some will not. The investment aim for a product portfolio is to have more winners than losers, and to invest in the product commensurate with where it is in the product life-cycle eg “cash cows” get investment to extend their life and investment is rationed for end-of-life products.

Transferring this same mindset that “you win some, you lose some” to project investments - especially to projects which have a high technology or software spend - implies that a certain level of failure is expected and acceptable. It ignores the interrelationships between projects and the impact of one projects’s failure on the subsequent dependent projects. It can lead investment committees to cherry pick project investments at the approval stage which seem to offer the highest return; and, perversely, encourage them to tolerate poor performance in projects during delivery.

This win some/lose some attitude perpetuates poor project performance. Yet the consequences and costs of undoing and redoing a failed major project can be enormous. Optimal project performance cannot be left to chance.

There are some projects that are so fundamental to the future of the organization that they are simply too important to fail.

Ineffectual benefits management processes

Poor benefits measurement and management processes can make the waste invisible. Few organizations even try to track realization of benefits and where they do, often rely on Post Implementation Reviews (PIRs) conducted too late and measured against a business case that is so poorly articulated or where the financial justification was creatively define6, that no one could ever assess “did we deliver?”

Or, organizations take the lazy approach of just deducting projected benefits out of future budgets on the basis that this will impose a discipline for managers to achieve them. This approach has two inadvertent negative consequences. The project benefits in the business case will be reduced to the minimum the project needs to get approved, missing many financial and non-financial benefits available, which in turn reduces the likely benefits to be realized (not a great start). Secondly, the measure of success used is whether or not the future budget figure is met, not whether or not the project delivered what it was supposed to—the business results and realized benefits; these are two very different measures. The budget figure can often be achieved by tactics other than the successful delivery of the project; and these short term “achieve the budget” tactics can be very damaging long-term. Providing investment money with no effective measurement inevitably leads to waste.

Case example 5: The missing benefits spreadsheet

One of the world’s largest manufacturing organizations wanted to check whether the new financial system had delivered the planned benefits.

Unfortunately, the spreadsheet which was used to support the numbers in the business case had gone missing. Therefore no one could recalculate the benefits’ value at time of realization. So it was not possible to assess whether the project had achieved the results planned or whether the investment had delivered the return expected.

No accountability for the value

The consequence of poor benefits measurement processes is that there can be no tracking of whether the organization received the returns expected. Thus it is also impossible to hold anyone accountable for achieving them.

Giving people money for projects with no measurement is not a recipe for good investment.

The blame game

Should a project be ‘failing’ – by whatever measure you want to use – the easiest approach is to blame “incompetent staff” fire them and get a replacement. The preferred culprit is the project manager - as the business sees the project manager as accountable for the successful delivery of the project.

However, if you review the Sad Familiar Stories in the preamble of this book, you will see that a “hero” project manager would not have prevented these failures. These are not single points of failure. Yet in confused organizations it is easier to find a scapegoat than to fix the real causes of value loss.

Blame is not an effective method of resolving project problems.

Uninformed governance of the project

However, if we should wish to allocate blame, there is another party than the project manager, with greater accountability for project success or failure, who can very easily undermine the success of a project with minimal work and effort — that is the project sponsor.

In all the projects that we have seen, there have been very a few occasions where the sponsor has worn the blame for a failed project (usually only where they have misled senior management as to the status of their project and are therefore deemed untrustworthy or incompetent). Yet, poor governance is a significant contributor to project failure.

The project sponsor is the executive who should be accountable for the return on investment - delivering on the commitments in the business case. Poor governance on average contributes 10% of the value loss. Yet most business managers have no idea what their role on a Steering Committee should achieve and are about as effectual as the officers on the bridge of The Titanic.

Mean time executives sit on governing committees giving a semblance of oversight and control while capital is burned, lost and wasted. Every major project failure in the past 25 years has been ‘governed’ by an executive committee who oversaw the loss.

Their continued presence hides the need to fix the problem.

Project with poor governance are misdirected and misled.

The project and business-as-usual working to conflicting agendas

Project teams, by their nature are usually resourced outside of the business-as-usual headcount with contractors or consultants who are engaged just for the life of the project. Project teams have a vested interest in project longevity as this provides job and income security.

The long term pain of failure is not felt by the project team, who get paid regardless and who, when the team is disbanded at project end, go on to new projects and thus do not live with the consequences of any failings. Rather it is felt by the business managers and long term employees who inherit the mess and then must live with the consequences, operating without the improvement in business-as-usual that they had hoped for.

Of these two parties, which is advocating additional capital expenditure? The project team.

The project team are rewarded and motivated by delivering an ‘on time/ on budget’ result, the business is motivated by the desire for a new improved operational environment. These are two conflicting agendas.

Case example 5: A tale of three projects

Project A was over budget by 15% which which caused delivered value to reduce by $1.36 million. The project manager got got fired!

Project B was late - over time by about 50%, which caused the loss of benefits of $1.9 million. That project manager was congratulated for delivering to budget!

Project C was delivered on time and on budget. However the benefits that could be realized were reduced due to a range of causes - most notably de-scoping what was delivered. The total loss of value was $3.2 million.

This project manager was “decorated” for being on time and budget, even though he destroyed the most business value!

In fact, we even reward project managers for destroying value, so long as they deliver on time / on budget even if is clear that this will sub-optimize the business results in the longer term.

Project and business staff activities must be aligned to the same agenda.

“We are pretty good at delivering projects”

There is an evolutionary point where an organization is able to get projects started and finished in a reasonably workmanlike manner. Occasionally a project pays off brilliantly and these successes are seen to outweigh the failures. The perception is that this haphazard level of project performance is “as good as it gets”. This view lessens the perceived pressure to improve because, even though there is much hidden destruction of value, the impetus to improve is lacking.

However, if you ask managers who say, “We are pretty good at delivering projects” if they are happy with the results and benefits, they always respond,

“Ah, that is a different question and the answer is no”.

Projects which do not deliver a better operational environment are failures.

Finally

There are the business managers who are motivated to improve but are discouraged and who admit, “We don’t know how to fix it”

Too many business managers have become resigned to having problems with projects and discouraged believing that there are no real practical solutions. All the obvious fixes seem to have been applied and things are no better. Expensive consultants provide conflicting advice and “improvements” seem to make the project processes even more unwieldy and complicated. Project practitioners tell business managers to expect problems and compromises. They call this “managing the business’ expectations”. So business managers have come to believe that project problems are inevitable and simply are too complicated to fix.

But this is no longer the case. Three is a solution that consistently improved project performance, strategic delivery and profitability. It is called Totally Optimized Projects™

Well then - read on. That is why you are here.

Improving your organizations ability to reap value from its project investments will pay off handsomely in immediate and long term profitability. The project performance problem is now solvable and, after you have tried all the cost cutting and other profit-enhancing initiatives, solving this project problem is a major potential contributor to lower costs and higher profits.

That is why we call improved project investment “The Last Profit Frontier”.

In this chapter we have learned that improve project performance we need to:

Understand how big the value destruction problem is
Learn how to optimize value-delivered against time-and-cost-to deliver
Address the main drivers of value destruction
Realize that value destruction has broader consequences than just the project dollars lost
Decide to solve the problem “once and for all”.

The First Optimization Lever: Decide that you are not happy with the present poor project results, believe that they can be exponentially improved and be motivated to do something to improve them.

NOTE to Readers

This book is still in Draft status and is being revised and improved in response to your feedback. We welcome your queries, feedback and suggestions for further improvements, which can be send to us at  jed@totallyoptimizedprojects.com or alex@totallyoptimizedprojects.com

If we amend the book as a result of your input, we will be delighted to acknowledge your contribution in the final published version. Please feel free to circulate or forward this book (in its present form) so that as many people as possible can benefit from learning about TOP™, the only business-led business-driven approach to projects. Volumes 2 and 3, which complete the book, will be available at the TOP website soon.

If you would like to pre-order the published hardcopy of the book when it is available, please register at the TOP website.

If you have received a copy of the book from a colleague and would like to get updates as they are issued, register at the website and you will get the revisions “hot off the press”.

"The Last Profit Frontier is coming"

Volume I - The Last Profit Frontier will be published in Jan 2012 and will be available at all online booksellers.

But you can get an advance copy of the UNEDITED STILL-IN DEVELOPMENT manuscript now.

All we ask in return is that you email us your questions and comments so that we can improve the book to make it the most useable, helpful and informative guide there is for ensuring that YOUR projects deliver value.

Any comments which we consider to be particularly influential, will be credited in the acknowledgements section of Volume I

Download Chapter 1 for free (additional chapter will be sent to your registered email as they become available)

And please - feel free to forward Chapter 1 to any of your colleagues who might find it useful

Part II and III (220 pages approximateely) will be available shortly in manuscript form for a small charge and you will receive an email notification when it is available for download

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