Six Benefits of Good Project Management

The good project management will provide many benefits, including:

• Happy customers. Whether a project is for outside customers or groups within your organization, customers like to get what they want when they want it. Because the first step in project management is finding out what your stakeholders and customers want to accomplish with the project, your customers are more likely to get the results they expect. And by keeping the project under control, you’re also more likely to deliver those results on time and at the right price.
• Objectives achieved. Without a plan, projects tend to cultivate their own agendas and people forget the point of their work. A project plan ties a project to specific objectives, so everyone stays focused on those goals. Documented objectives also help you rein in the renegades who try to expand the scope of the project.
• Timely completion. Finishing a project on time is important for more than just morale. As work goes on for a longer duration, costs increase and budgets blow to bits. In addition, you may lose the resources you need or prevent other projects from starting. Sometimes time is the ultimate objective, like when you’re trying to get a product to market before the competition.
• Flexibility. Contrary to many people’s beliefs, project management makes teams more flexible. Project management doesn’t prevent every problem, but it makes the problems that occur easier to resolve. When something goes wrong, you can evaluate your plan to quickly develop alternatives—now that’s flexibility! More importantly, keeping track of progress means you learn about bad news when you still have time to recover.
• Better financial performance. Most executives are obsessed with financial performance, so many projects have financial objectives - increasing sales, lowering costs, reducing expensive recalls, and so on. Project management is an executive crowd-pleaser because it can produce more satisfying financial results.
• More productive, happier workers. Skilled workers are hard to come by and usually cost a bundle. People get more done when they can work without drama, stress, and painfully long hours. Moreover, they don’t abandon ship, so you spend less on recruiting and training replacements.

Internal Rate of Return (IRR)

The internal rate of return (IRR) is the most difficult equation to calculate of all the cash flow techniques. It is a complicated formula and should be performed on a financial calculator or computer. IRR can be figured manually, but it’s a trial-and-error approach to get to the answer.

Technically speaking, IRR is the discount rate when the present value of the cash inflows equals the original investment. When choosing between projects or when choosing alternative methods of doing the project, projects with higher IRR values are generally considered better than projects with low IRR values.

Three facts concerning IRR:

• IRR is the discount r NN ate when NPV equals zero.
• IRR assumes that cash inflows are reinvested at the IRR value.
• You should choose projects with the highest IRR value.

Net Present Value (NPV)

The benefit measurement methods involve a variety of cash flow analysis techniques including net present value.

Projects might begin with a company investing some amount of money into the project to complete and accomplish its goals. In return, the company expects to receive revenues, or cash inflows, from the resulting project. Net present value (NPV) allows you to calculate an accurate value for the project in today’s dollars.


Net present value works like discounted cash flows in that you bring the value of future monies received into today’s dollars. With NPV, you evaluate the cash inflows using the discounted cash flow technique applied to each period the inflows are expected instead of in one sum. The total present value of the cash flows is then deducted from your initial investment to determine NPV. NPV assumes that cash inflows are reinvested at the cost of capital.

Here’s the rule: If the NPV calculation is greater than zero, accept the project. If the NPV calculation is less than zero, reject the project.

Look at the two project examples. Project A and Project B have total cash inflows that are the same at the end of the project, but the amount of inflows at each period differs for each project. We’ll stick with a 12 percent cost of capital. Note that the PV calculations were rounded to two decimal places. Project A has an NPV greater than zero and should be accepted. Project B has a NPV less than zero and should be rejected. When you get a positive value for NPV, it means that the project will earn a return at least equal to or greater than the cost of capital.

Another note on NPV calculations: projects with high returns early in the project are better projects than projects with lower returns early in the project. In the preceding examples, Project A fits this criterion also.

Discounted Cash Flows

The benefit measurement methods involve a variety of cash flow analysis techniques including discounted cash flows. Money received in the future is worth less than money received today. The reason for that is the time value of money.

If I borrowed $2,000 from you today and promised to pay it back in three years, you would expect me to pay interest in addition to the original amount borrowed. If you were a family member or a really close friend, maybe you wouldn’t, but ordinarily this is the way it works. You would have had the use of the $2,000 had you not lent it to me. If you had invested the money (does this bring back memories of your mom telling you to save your money?), you’d receive a return on it. Therefore, the future value of the $2,000 you lent me today is $2,315.25 in three years from now at 5 percent interest per year. Here’s the formula for future value calculations:

• FV = PV(1 + i)ⁿ

In English, this formula says the future value (FV) of the investment equals the present value (PV) times (1 plus the interest rate) raised to the value of the number of time periods (n) the interest is paid. Let’s plug in the numbers:

• FV = 2,000(1.05)³
• FV = 2,000(1.157625)
• FV = $2,315.25

The discounted cash flow technique compares the value of the future cash flows of the project to today’s dollars. In order to calculate discounted cash flows, you need to know the value of the investment in today’s terms, or the PV. PV is calculated as follows:

• PV = FV / (1 + i)ⁿ

This is the reverse of the FV formula talked about earlier. So, if you ask the question, “What is $2,315.25 in three years from now worth today given a 5 percent interest rate?” you’d use the preceding formula. Let’s try it:

• PV = $2,315.25 / (1 + .05)³
• PV = $2,315.25 / 1.157625
• PV = $2,000
  $2,315.25 in three years from now is worth $2,000 today.

Discounted cash flow is calculated just like this for the projects you’re comparing for selection purposes or when considering alternative ways of doing the project. Apply the PV formula to the projects you’re considering, and then compare the discounted cash flows of all the projects against each other to make a selection. Here is an example comparison of two projects using this technique:

• Project A is expected to make $100,000 in two years.
• Project B is expected to make $120,000 in three years.
• If the cost of capital is 12 percent, which project should you choose?

Using the PV formula used previously, calculate each project’s worth:

• The PV of Project A = $79,719.
• The PV of Project B = $85,414.

Project B is the project that will return the highest investment to the company and should be chosen over Project A.

Payback Period

The benefit measurement methods involve a variety of cash flow analysis techniques. One famous technique in the cash flow analysis is payback period.

The payback period is the length of time it takes the company to recoup the initial costs of producing the product, service, or result of the project. This method compares the initial investment to the cash inflows expected over the life of the product, service, or result.

For example, say the initial investment on a project is $200,000, with expected cash inflows of $25,000 per quarter every quarter for the first two years and $50,000 per quarter from then on. The payback period is two years and can be calculated as follows:

• Initial investment = $200,000
• Cash inflows = $25,000 * 4 (quarters in a year) = $100,000 per year total inflow
• Initial investment ($200,000) – year 1 inflows ($100,000) = $100,000 remaining balance
• Year 1 inflows remaining balance – year 2 inflows = $0
• Total cash flow year 1 and year 2 = $200,000
• The payback is reached in two years.

The fact that inflows are $50,000 per quarter starting in year 3 makes no difference because payback is reached in two years.

The payback period is the least precise of all the cash flow calculations. That’s because the payback period does not consider the value of the cash inflows made in later years, commonly called the time value of money. For example, if you have a project with a five-year payback period, the cash inflows in year 5 are worth less than they are if you received them today.

Several limitations of the payback period are as follows:

• It assumes enough earnings to pay back the cost. If your company stops selling the product that the warranty repair project supports, the monthly savings may not continue for the calculated payback period, which ends up costing money.
• It ignores cash flows after the payback period ends. Projects that generate money early beat out projects that generate more money over a longer period. Consider two projects, each costing $100,000. Project #1 saves $20,000 each month for only 5 months. Project #2 saves $10,000 each month for 24 months. Project #1’s payback period is 5 months compared to Project #2’s 10 months. However, Project #2 saves $240,000, whereas Project #1 saves only $100,000.
• It ignores the time value of money. There’s a price to pay for using money over a period of time, just like the interest you pay on the mortgage on your house. Payback period doesn’t account for the time value of money, because it uses the project cost as a lump sum, regardless how long the project takes and when you spend the money. The measures explained in the next sections are more accurate when a project spends and receives money over time.

What factors that trigger a project

A project is started with key business objectives that are considered during the project selection process. The project with the best benefits will be selected. You can read more detail in the the project selection methods.

The following are the most factors that trigger a project:

• Satisfy regulations or compliance.
• Increase productivity.
• Increase revenue
• Improve profitability
• Increase market share
• Increase customer satisfaction
• Increase product quality or safety
• Reduce price to stay competitive
• Reduce time to market
• Reduce costs
• Reduce risk
• Reduce waste

Needs and Demands that drive Projects

Projects are usually come as result from business requirements, opportunities, or problems. Most of the projects will fit one of the following needs and demands:

• Market demand. The demands of the marketplace can drive the need for a project. For example, a bank initiates a project to offer customers the ability to apply for mortgage loans over the Internet because of a drop in interest rates and an increase in demand for refinancing and new home loans.
• Strategic opportunity/business need. The new phone system that was announced at the quarterly meeting came about as a result of a business need. The CEO, on advice from his staff, was advised that call volumes were maxed on the existing system. Without a new system, customer service response times would suffer, and that would eventually affect the bottom line.
• Customer request. Most companies have customers, and their requests can drive new projects. Customers can be internal or external to the organization. Government agencies don’t have external customers, but there are internal customers within departments and across agencies. Perhaps you work for a company that sells remittance-processing equipment and you’ve just landed a contract with a local utility company. This project is driven by the need of the utility company to automate its process or upgrade its existing process. The utility company’s request to purchase your equipment and consulting services is the project driver.
• Technological advance. Many of us own a multifunction cell phone that keeps names and addresses handy along with a calendar and a to-do list of some kind. I couldn’t live without mine. However, a newer, better version is always coming to market. Satellite communications now allows these devices to also act as GPS units. The introduction of satellite communications is an example of a technological advance. Because of this introduction, electronics manufacturers revamped their products to take advantage of this new technology.
• Legal requirement. Private industry and government agencies both generate new projects as a result of laws passed during every legislative season. For example, new sales tax laws might require new programming to the existing sales tax system. The requirement that food labels appear on every package describing the ingredients and the recommended daily allowances is another example of legal requirements that drive a project.
• Ecological impacts. Many organizations today are undergoing a “greening” effort to reduce energy consumption, save fuel, reduce their carbon footprint, and so on. These are examples of ecological impacts that result in projects.
• Social need. The last need is a result of social demands. For example, perhaps a developing country is experiencing a fast-spreading disease that’s infecting large portions of the population. Medical supplies and facilities are needed to vaccinate and treat those infected with the disease. Another example might include manufacturing or processing plants that voluntarily remove their waste products from water prior to putting the water back into a local river or stream to prevent contamination.

All of these needs and demands represent opportunities, business requirements, or problems that need to be solved. Management must decide how to respond to these needs and demands, which will more often than not initiate new projects.

Project Selection Method

Most organizations have a formal, or at least semi-formal, process for selecting and prioritizing projects. Selection methods measure the value of what the product, service, or result of the project will produce and how it will benefit the organization. Selection methods involve the types of concerns executive managers are typically thinking about. This includes factors such as market share, financial benefits, return on investment, customer retention and loyalty, and public perceptions.

There are generally two categories of selection methods: mathematical models (also known
as calculation methods) and benefit measurement methods (also known as decision models).
Decision models examine different criteria used in making decisions regarding project selection,
while calculation methods provide a way to calculate the value of the project, which is
then used in project selection decision making.

Mathematical Models
Mathematical models uses linear, dynamic, integer, nonlinear, and/or multi-objective programming in the form of algorithms or in other words, a specific set of steps to solve a particular problem. Organizations considering undertaking projects of enormous complexity might use mathematical modeling techniques to make decisions regarding these projects.

Benefit Measurement Methods
Benefit measurement methods employ various forms of analysis and comparative approaches to make project decisions.

The following are different types of the benefit measurement methods:

   Comparative Approaches 

• Cost-Benefit Analysis, compares the cost to produce the product, service, or result of the project to the benefit that the organization will receive as a result of executing the project.
• Scoring Models, decides on the criteria for example, profit potential, marketability of the product or service, ability of the company to quickly and easily produce the product or service, and so on. Each of these criteria is assigned a weight depending on its importance to the project committee. More important criteria should carry a higher weight than less important criteria.

   Benefit Contribution Methods

• Cash Flow Analysis Techniques
• Payback Period
  Payback period is the length of time it takes the company to recoup the initial costs of producing the product, service, or result of the project. This method compares the initial investment to the cash inflows expected over the life of the product, service, or result.
• Discounted Cash Flows
  Discounted cash flow uses Present Value (PV) formula for selection purposes or when considering alternative ways of doing the project. It will select project with the highest investment to the company.
• Net Present Value (NPV)
  The company expects to receive revenues, or cash inflows, from the resulting project. NPV allows you to calculate an accurate value for the project in today’s dollars. Projects with high returns early in the project are better projects than projects with lower returns early in the project.
• Internal Rate of Return (IRR)
  IRR is the discount rate when the present value of the cash inflows equals the original investment. When choosing between projects or when choosing alternative methods of doing the project, projects with higher IRR values are generally considered better than projects with low IRR values.
• Economic Models.
  Project selection based on the economic value among the projects.

Project Charter

The project charter is the document that formally authorizes a project. The project initiator or sponsor issues the project charter. The project charter provides the project manager with the authority to apply organizational resources to project activities. A project manager is identified and assigned as early in the project as is feasible. The project manager should always be assigned prior to the start of planning, and preferably while the project is being developed.

The project charter, either directly or by reference to other documents, should address the following information:

• Requirements that satisfy customer, sponsor, and other stakeholder needs, wants, and expectations 
• Business needs, high-level project description, or product requirements that the project is undertaken to address 
• Project purpose or justification 
• Assigned project manager and authority level 
• Summary of milestone schedule 
• Stakeholder influences 
• Functional organizations and their participation 
• Organization, environmental, and external assumptions and constraints 
• Business case justifying the project, including return on investment 
• Summary of budget

Stakeholder Analysis

Stakeholder Analysis is a technique of systematically gathering and analyzing quantitative and qualitative information to determine whose interests should be taken into account throughout the project. It identifies the interests, expectations, and influence of the stakeholders and relates them to the purpose of the project. It also helps identify stakeholder relationships that can be leveraged to build coalitions and potential partnership to enhance the project's chance of success.

According to Project Management Body of Knowledge (PMBOK), the stakeholder analysis generally follows the steps described below:

• Step 1: Identify all potential project stakeholders and relevant information, such as their roles, departments, interests, knowledge levels, expectations, and influence levels. Key stakeholders are usually easy to identify. They include anyone in a decision-making or management role who is impacted by the project outcome, such as the sponsor, project manager, and the primary customer.
• Identifying other stakeholders is usually done by interviewing identified stakeholders and expanding the list until all potential stakeholders are included.
• Step 2: Identify the potential impact or support each stakeholder could generate, and classify them so as to define an approach strategy. In large stakeholder communities, it is important to prioritize the key stakeholders to ensure the efficient use of effort to communicate and manage their expectations. There are multiple classification models available including, but not limited to:
• Power/interest grid, grouping the stakeholder based on their level of authority ("power") and their level or concern ("interest") regarding the project outcomes;
• Power/influence grid, grouping the stakeholders based on their level of authority ("power") and their active involvement ("influence") in the project;
• Influence/impact grid,  grouping the stakeholders based on their active involvement ("influence") in the project and their ability to effect changes to the project's planning or execution ("impact"); and
• Salience model, describing classes of stakeholders based on their power (ability to impose their will), urgency (need for immediate attention), and legitimacy (their involvement is appropriate).
• Step 3: Assess how stakeholders are likely to react or respond in various situations, in order to plan how to influence them to enhance their support and mitigate potential negative impacts.

Advantages and Disadvantages of Functional Organization

Organizations have their own styles and cultures that influence how project work is performed. The functional organizations is probably the oldest style of organization and is therefore known as the traditional approach to organizing business.

Functional organizations are centered on specialties and grouped by function. As an example, the organization might have a human resource department, finance department, marketing department, information technology department, and so on. The work in these department is specialized and requires people who have the skill sets and experiences in these specialized functions to perform specific duties for the department.

Advantages

• There is an enduring organizational structure.
• There is a clear career path with separation of functions, allowing specialty skills to flourish.
• Employee have one supervisor with a clear chain of command.

Disadvantages

• Project managers have little to no formal authority.
• Multiple projects compete for limited resources and priority.
• Project team members are loyal to the functional manager.

Characteristics of Projectized Organization

Projectized organization is an organization that focus on project. In this type of organization, the staffs report directly the project manager.

Six characteristics of a projectized organization are:

1. Project managers have ultimate authority over the project.
2. The focus of the organization is the project.
3. The organization's resources are focuses on projects and project work.
4. Team members are co-located.
5. Loyalties are formed to the project, not to a functional manager.
6. Project team are dissolved at the conclusion of the project.

Organizational Structure in Project Management

Organizational structure is an enterprise environmental factor which can affect the availability of resources and influence how projects are conducted. Organizational structures range from functional to projectized, with a variety of matrix structures between them. The table below shows key project-related characteristics of the major types of organizational structures.



1. Functional organization, is a hierarchy where each employee has one clear superior. Staff members are grouped by specialty, such as production, marketing, engineering, and accounting at the top level. Specialties may be further subdivided into functional organizations, such as mechanical and electrical engineering. Each department in a functional organization will do its project work independent of other departments.

2. Matrix organization, is a blend of functional and projectized characteristics.

• Weak matrices maintain many of the characteristics of a functional organization, and the project manager role is more of a coordinator or expediter than that of a true project manager. 
• Strong matrices have many of the characteristics of the projectized organization, and can have full-time project managers with considerable authority and full-time project administrative staff. 
• Balanced matrix organization recognizes the need for a project manager, it does not provide the project manager with the full authority over the project and project funding.

3. Projectized organization, is a hierarchy where team members are often co-located, most of the organization's resources are involved in project work, and project managers have a great deal of independence and authority. Projectized organizations often have organizational units called departments, but these groups either report directly to the project manager or provide support services to the various projects.

Many organizations involve all these structures at various levels. For example, even a fundamentally functional organization may create a special project team to handle a critical project. Such a team may have many of the characteristics of a project team in a projectized organization. The team may include full-time staff from different functional departments, may develop its own set of operating procedures, and may operate outside the standard, formalized reporting structure.

Source: Project Management Body of Knowledge (PMBOK® Guide)