Main Project Management in Practice
Project Management in PracticeJack R. Meredith, Scott M. Shafer, Samuel J. Mantel, Jr.
Offering streamlined coverage with an applied approach, Project Management in Practice, 6th Edition focuses on the essentials of project management. This concise, hands-on text is ideal for a one semester project management course, or as a module on project management. This textbook is organized around the project management life cycle, and provides students with essential project management concepts while addressing an important area of industry growth: the use of projects to achieve the strategic goals of organizations.
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Project ManageMent in Practice Sixth edition jack r. Meredith Broyhill Distinguished Scholar and Chair in Operations, Wake Forest University Scott M. Shafer Associate Dean and Professor of Management, Wake Forest University Samuel j. Mantel, jr. (deceased) University of Cincinnati Mantel_ffirs.indd 1 9/2/2016 9:07:08 PM EXECUTIVE EDITOR Lise Johnson SPONSORING EDITOR Jennifer Manias PROJECT MANAGER Gladys Soto PROJECT SPECIALIST Nichole Urban CONTENT MANAGEMENT DIRECTOR Lisa Wojcik SENIOR CONTENT SPECIALIST Nicole Repasky PRODUCTION EDITOR Ezhilan Vikraman COVER PHOTO CREDIT © Alvov/Shutterstock This book was set in 10.5/12 GoudyStd by SPi Global and printed and bound by Lightning Source Inc. The cover was printed by Lightning Source Inc. Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations. 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Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at: www.wiley.com/go/returnlabel. If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy. Outside of the United States, please contact your local sales representative. ISBN: 978-1-119-29885-4 (PBK) ISBN: 978-1-119-29867-0 (EVALC) Library of Congress Cataloging in Publication Data: Names: Meredith, Jack R., author. | Shafer, Scott M., author. | Mantel, Samuel J., author. Title: Project management in practice / Jack R. Meredith, Broyhill Distinguished Scholar and Chair in Operations, Wake Forest University, Scott M. Shafer, Associate Dean and Professor of Management, Wake Forest University, Samuel J. Mantel, Jr. (deceased), University of Cincinnati. Other titles: Project management in practice. Description: Sixth edition. | Hoboken, NJ : John Wiley & Sons, Inc.,  | Includes index. Identifiers: LCCN 2016034810 (print) | LCCN 2016038655 (ebook) | ISBN 9781119298854 (pbk.) | ISBN 9781119298632 (pdf) | ISBN 9781119298601 (epub) Subjects: LCSH: Project management. Classification: LCC HD69.P75 P7288 2017 (print) | LCC HD69.P75 (ebook) | DDC 658.4/04—dc23 LC record available at https://lccn.loc.gov/2016034810 Printing identification and country of origin will either be included on this page and/or the end of the book. In addition, if the ISBN on this page and the back cover do not match, the ISBN on the back cover should be considered the correct ISBN. Printed in the United States of America Mantel_fcopy.indd 2 9/6/2016 7:11:50 PM To Kiersten, Brandon, and Jeremy, my most successful projects. J. R. M. To Brianna and Sammy and Kacy, my most important and rewarding projects. S. M. S. To the memory of Sam Mantel, Jr.: Scholar, author, mentor, friend. J. R. M. and S. M. S. Mantel_fded.indd 3 9/2/2016 9:07:31 PM v C o n t e n t s 1 The World of ProjecT ManageMenT 1 1.1 What Is a Project? 1 Trends in Project Management 3 1.2 Project Management vs. general Management 4 Major differences 4 negotiation 5 1.3 What Is Managed? The Three goals of a Project 7 1.4 The life cycles of Projects 10 1.5 Selecting Projects To Meet organizational objectives 11 nonnumeric Selection Methods 12 numeric Selection Methods 13 1.6 The Project Portfolio Process 21 1.7 The Materials in this Text 25 review Questions 27 discussion Questions 27 exercises 28 Incident for discussion 28 case: friendly assisted living facility—1 29 case: handstar Inc. 30 Bibliography 32 2 The Manager, The organIzaTIon, and The TeaM 33 2.1 The PM’s roles 34 facilitator 34 communicator 36 Virtual Project Manager 39 Meetings, convener and chair 40 2.2 The PM’s responsibilities to the Project 41 acquiring resources 41 fighting fires and obstacles 42 leadership 42 negotiation, conflict resolution, and Persuasion 44 2.3 Selection of a Project Manager 46 credibility 47 Sensitivity 47 leadership, Style, ethics 47 ability to handle Stress 48 2.4 Project Management as a Profession 50 2.5 fitting Projects into the Parent organization 51 Pure Project organization 52 functional Project organization 53 Mantel_ftoc.indd 5 9/6/2016 4:37:16 PM vi • Contents Matrix Project organization 54 Mixed organizational Systems 57 The Project Management office and Project Maturity 57 2.6 The Project Team 59 Matrix Team Problems 61 Intrateam conflict 62 Integration Management 64 review Questions 66 discussion Questions 66 Incidents for discussion 67 case: friendly assisted living facility—2 68 case: The Quantum Bank 68 case: Southern care hospital 69 Bibliography 71 3 ProjecT acTIVITy and rISk PlannIng 74 3.1 from the Project charter to the Project Plan 74 3.2 The Planning Process—overview 76 3.3 The Planning Process—nuts and Bolts 77 The launch Meeting—and Subsequent Meetings 77 Sorting out the Project—The Work Breakdown Structure (WBS) 80 extensions of the everyday WBS 83 3.4 More on the Work Breakdown Structure and other aids 86 The racI Matrix 86 a Whole‐Brain approach to Project Planning 88 The design Structure Matrix 91 agile Project Management 92 3.5 risk Management 94 review Questions 101 discussion Questions 101 exercises 102 Incidents for discussion 103 case: friendly assisted living facility—3 104 case: john Wiley & Sons 105 case: Samson University 106 Bibliography 107 4 BUdgeTIng The ProjecT 109 4.1 Methods of Budgeting 110 Top‐down Budgeting 112 Bottom‐Up Budgeting 113 4.2 cost estimating 113 Work element costing 114 The Impact of Budget cuts 114 an aside 116 activity versus Program Budgeting 118 4.3 Improving cost estimates 119 Mantel_ftoc.indd 6 9/6/2016 4:37:16 PM Contents • vi i forms 119 learning curves 119 other factors 123 4.4 Budget Uncertainty and Project risk Management 125 Budget Uncertainty 125 Project Budgeting in Practice 128 4.5 Project risk Simulation with crystal Ball® 129 considering disaster 136 review Questions 137 discussion Questions 137 exercises 138 Incidents for discussion 139 case: friendly assisted living facility Project Budget development—4 140 case: Photstat Inc. 142 case: Building the geddy’s dream house 143 Bibliography 144 5 SchedUlIng The ProjecT 145 5.1 Pert and cPM networks 146 The language of PerT/cPM 146 Building the network 147 finding the critical Path and critical Time 149 calculating activity Slack 151 doing It the easy Way—Microsoft Project (MSP) 152 5.2 Project Uncertainty and risk Management 155 calculating Probabilistic activity Times 155 The Probabilistic network, an example 156 once More the easy Way 158 The Probability of completing the Project on Time 159 Selecting risk and finding d 162 The case of the Unreasonable Boss 162 a Potential Problem: Path Mergers 163 5.3 Simulation 164 Incorporating costs into the Simulation analysis 166 Traditional Statistics versus Simulation 167 5.4 The gantt chart 170 The chart 170 5.5 extensions to PerT/cPM 172 Precedence diagramming 173 final Thoughts on the Use of These Tools 174 review Questions 175 discussion Questions 176 exercises 176 discussion exercise 179 Incidents for discussion 179 case: friendly assisted living facility Program Plan—5 180 case: nutriStar 182 case: launching e‐collar 184 Bibliography 185 Mantel_ftoc.indd 7 9/6/2016 4:37:16 PM vi i i • Contents 6 allocaTIng reSoUrceS To The ProjecT 186 6.1 expediting a Project 187 The critical Path Method 187 crashing a Project with excel 191 fast‐Tracking a Project 195 Project expediting in Practice 195 6.2 resource loading 196 The charismatic VP 202 6.3 resource leveling 202 resource loading/leveling and Uncertainty 209 6.4 allocating Scarce resources to Projects 211 Some comments about constrained resources 211 Some Priority rules 211 6.5 allocating Scarce resources to Several Projects 213 criteria of Priority rules 214 The Basic approach 215 resource allocation and the Project life cycle 215 6.6 goldratt’s Critical Chain 216 estimating Task Times 219 The effect of not reporting early activity completion 220 Multitasking 221 common chain of events 223 The critical chain 224 review Questions 225 discussion Questions 226 exercises 226 Incidents for discussion 228 case: friendly assisted living facility resource Usage—6 229 case: charter financial Bank 231 case: rand contractors 232 Bibliography 233 7 MonITorIng and conTrollIng The ProjecT 234 7.1 The Plan‐Monitor‐control cycle 234 designing the Monitoring System 236 7.2 data collection and reporting 237 data analysis 237 reporting and report Types 238 Meetings 240 Virtual Meetings, reports, and Project Management 241 7.3 earned Value 242 7.4 Project control 249 Purposes of control 249 7.5 designing the control System 251 Types of control Systems 252 Tools for control 254 Burnup and Burndown charts 257 7.6 Scope creep and change control 257 review Questions 259 Mantel_ftoc.indd 8 9/6/2016 4:37:17 PM Contents • ix discussion Questions 260 exercises 260 Incidents for discussion 261 case: friendly assisted living facility case—7 263 friendly assisted living facility construction coordination meeting 4/11/X8 acTIon ITeM lIST 265 case: Palmstar enterprises, Inc. 266 case: Peak lighting, Inc. 266 Bibliography 267 8 eValUaTIng and cloSIng The ProjecT 269 8.1 evaluation 269 evaluation criteria 270 Measurement 271 8.2 Project auditing 272 The audit Process 272 The audit report 274 8.3 Project closure 277 When to close a Project 277 Types of Project closure 278 The closure Process 279 The Project final report 281 review Questions 283 discussion Questions 283 Incidents for discussion 284 case: friendly assisted living facility case—8 284 case: datatech 287 case: Ivory Tower Systems 288 Bibliography 290 aPPendIX: ProBaBIlITy and STaTISTIc 291 a.1 Probability 291 Subjective Probability 292 logical Probability 292 experimental Probability 292 a.2 event relationships and Probability laws 292 The Multiplication rule 293 The addition rule 294 a.3 Statistics 294 descriptive versus Inferential Statistics 295 Measures of central Tendency 296 Measures of dispersion 297 Inferential Statistics 298 Standard Probability distributions 299 Bibliography 300 IndeX 301 Mantel_ftoc.indd 9 9/6/2016 4:37:17 PM ftoc.indd 10 9/21/2016 2:02:09 PM xi ApproAch Amazingly, the use of projects and project management continues to accelerate in our global societies. With the addition of Agile, project management is now also being used for dynamic, “quasi” projects: initiatives where the scope, budget, and deadline are changing constantly. One of the more interesting areas of growth, however, has been in the use of projects for achieving the strategic goals of organizations through the use of sponsors, portfolio management, project management offices, and program managers. The exponential growth of membership in the Project Management Institute (PMI) is further convincing evidence, as are the sales of computer software devoted to project management. Several societal forces are driving this growth, and many economic factors are reinforcing it. We describe all these in Chapter 1 of this book. A secondary effect has also been a major contributor to the use of project manage- ment. As the use of projects has grown, its very success as a way of getting all kinds of activities carried out successfully has become well established, especially when a tight budget or timeline, or both, were involved. The result has been a striking increase in the use of projects to accomplish jobs that in the past would simply have been turned over to someone with the comment, “Take care of it.” What happened then was that some individual undertook to carry out the job with little or no planning, minimal assistance, few resources, and often with only a vague notion of what was really wanted. Some of these projects were large, but most were quite small. Some were complex, but most were relatively straightforward. Some required the full panoply of project management techniques, but most did not. All of them, however, had to be managed and thus required a great many people to take on the role of project manager in spite of little or no education in project management. One result was rising demand for education in project management. The number of college courses grew apace, as did the number of consulting firms offering seminars and workshops. Perhaps most striking was the growth in educational opportunities through post‐secondary schools offering “short courses”—schools such as DeVry Institute, and ITT. In addition, short courses were offered by colleges, such as the University of Phoenix, and community colleges concentrating on both part‐time and full‐time educa- tion for individuals already in the work force. Communications from some instructors in these institutions told us that they would like a textbook that was shorter and focused more directly on the “technical” aspects of project management than those currently available. They were willing to forego most of the theoretical aspects of management, particularly if such were not directly tied to practice. Their students, who were not apt to take advanced course work in project management, had little use for understanding the historical development of the field nor the latest academic research. Finally, instruc- tors asked for increased use of project management application software, though they added that they did not want a replacement for the many excellent “step‐by‐step” and “computing‐for‐dummies” types of books that were readily available. They wanted the emphasis to be on managing projects, and not on managing project management software. These requests sounded sensible to us, and we have tried to write such a book. P r e f a c e Mantel_fpref.indd 11 9/2/2016 8:56:28 PM xi i • Preface orgAnizAtion And content With few exceptions, both readers and instructors are most comfortable with project management texts that are organized around the project life cycle, and this book is so organized. In Chapter 1 we start by defining a project and differentiating project manage- ment from general management. After discussing the project life cycle, we cover project selection, the project management office, and the project portfolio. We feel strongly that project managers who understand why a project was selected by senior management also understand the firm’s objectives for the project. Understanding those things, we know, will be of value in making the inevitable trade‐offs between time, budget, and the speci- fied output of the project, as well as how to handle the inevitable risks that will arise to threaten the project. Chapter 2 is devoted to the various roles the project manager must play and to the skills required to play them effectively. In addition, we cover the various ways in which projects can be organized. The nature of project teams, including multidisciplinary teams, and the behavioral aspects of projects are also discussed. Project and risk planning, budgeting, and scheduling are covered in Chapters 3 to 5. Planning the project initiates our discussion in Chapter 3, where we introduce the work breakdown structure and other planning aids such as the RACI matrix, and end with a thorough discussion and illustration of risk management planning. Project budgeting is then described in Chapter 4 where we introduce the use of simulation through software such as Crystal Ball® to analyze financial risk. Risk analysis using Oracle’s Crystal Ball® (CB) simulations is demonstrated in several chapters with detailed instructions on build- ing and solving simulation models. Software is used throughout the book, where rele- vant, to illustrate the use and power of such software to aid in managing projects. Chapter 5 initially uses standard manual methods for building project schedules, and Microsoft Project® (MSP) is then demonstrated for doing the same thing. Chapter 6 deals with resource allocation problems in a multiproject setting. A major section of this chapter is devoted to the insights of E. Goldratt in his book Critical Chain.* Chapter 7 concerns monitoring and controlling the project, especially through the use of earned value analysis, which is covered in detail. The final chapter deals with auditing, evaluating, and closing the project. Interest in risk management has grown rapidly in recent years, but the subject gets only minimal attention in most introductory level project management textbooks. We deal with risk throughout this book, introducing methods of risk management and analy- sis where relevant to the subject at hand. For example, simulation is used in Chapter 4 for solving a project budgeting problem, in Chapter 5 on a scheduling problem, and in Chapter 6 for examining the impact of a generally accepted assumption about probabil- istic project schedules that is usually false, and also to test the usually false assumption that multitasking is an efficient way to improve productivity. We are certainly aware that no text on project management could be structured to reflect the chaos that seems to surround some projects throughout their lives, and a vast majority of projects now and then. The organization of this book reflects a tidiness and sense of order that is nonexistent in reality. Nonetheless, we make repeated references to the technical, interpersonal, and organizational glitches that impact the true day‐to‐day life of the project manager. *Goldratt, E. M. Critical Chain. Great Barrington, MA: North River, 1997. Mantel_fpref.indd 12 9/2/2016 8:56:28 PM Preface • xi i i pedAgogy The book includes several pedagogical aids. The end‐of‐chapter material includes Review Questions that focus on the textual material. Discussion Questions emphasize the implica- tions and applications of ideas and techniques covered in the text. Where appropriate, there are Exercises that are primarily directed at developing skills in the technical areas of project management as well as familiarizing the student with the use of relevant software. In addition to the above, we have included Incidents for Discussion in the form of caselettes. In the main, these caselettes focus on one or more elements of the chapter to which they are appended. Several of them, however, require the application of concepts and techniques covered in earlier chapters so that they also serve an integrative function. More comprehensive Cases are also appended to each chapter. A special set of these, beginning in Chapter 1, is associated with the same project—the planning, building, and marketing of an assisted living facility—which continues on through the following chap- ters. That is, each chapter is followed by a continuation of this case calling upon the ideas and methods covered in that chapter. With all these cases, integration with mate- rial in previous chapters is apt to be required. We include Learning Objectives for each chapter but instead of putting them at the beginning of the chapter, we have added them to the Instructors’ Manual. Many teachers feel that their students should have the Learning Objectives as they begin each chapter. Many don’t. Many teachers like to use their own LOs. Many do not like to use LOs because they feel that students focus solely on the listed objectives and ignore everything else. Given our LOs in the Instructor’s Manual, each teacher may opt for his/her own notion on the matter. We have used Excel® spreadsheets where appropriate throughout the book. Microsoft Office® is widely available, and with few exceptions students and professional project managers are familiar with its operation. Each copy of the text also comes packaged with a registration card, which professors and students can use to download a free trial edition of Oracle’s Crystal Ball®. Crystal Ball was chosen because it works seamlessly with Excel® and is user friendly. For those professors using an e‐book version of the text, instructions for accessing Crystal Ball (CB) are posted on the instructor companion website for the text. If you have questions, please contact your local Wiley sales rep. We have demonstrated in Chapters 4–6 some of the problems where the use of statistical decision models and simulation can be very helpful in understanding and managing risk. In addition, a number of the end‐of‐chapter problems have been rewritten to adapt them for solution by Microsoft Project and Crystal Ball. The solutions can be found in the Instructor’s Manual along with added instructions for use of the software. As we have noted elsewhere, projects have often failed because the project manager attempted to manage the software rather than the project. We feel strongly that students and professionals should learn to use the basic project management techniques by hand— and only then turn to software for relief from their manual efforts. As is true with any textbook, we have made some assumptions about both the stu- dents and professionals who will be reading this book. We assume that they have all had some elementary training in management, or have had equivalent experience. We also assume that, as managers, they have some slight acquaintance with the fundamentals of accounting, behavioral science, finance, and statistics. We even assume that they have forgotten most of the statistics they once learned and have therefore included an Appendix on relevant elementary statistics and probability as a memory refresher. Mantel_fpref.indd 13 9/2/2016 8:56:28 PM xiv • Preface WhAt’s neW Both students and instructors have been generous and kind with their comments on the earlier editions of this book. They have given us very useful suggestions and feedback, which we appreciate. To further improve the student’s perspective of project manage- ment from the view of project managers in actual practice, we describe project manage- ment from the perspective of the two primary roles of the project manager: 1) the need to constantly manage trade‐offs between the three main goals of scope, time, and cost, and 2) managing risk. To highlight these areas where we talk about trade‐offs and risk, we have added icons to the book margins where important discussion on these topics appear. We also use an icon to indicate areas of discussion that we believe exemplify “best practice” in the project management field. And we have expanded our references to locations in PMBOK® that discuss the topic at hand for those who are also studying for the Project Management Professional® (PMP) or other certification exams offered by the Project Management Institute. Specific additions and changes are listed below: • Throughout the chapters, we have added more review questions, discussion ques- tions, and problems (which we now call “exercises,” to avoid any pejorative implications). We have also added a running Microsoft Project exercise in Chapters 3, 5, and 6. • Similarly, we have extended the running medical center case to now begin in Chapter 1, and simultaneously changed the formerly dismal name to Friendly Medical Center. • We now identified managing trade‐offs and risk management as the two primary duties of the project manager, and rewrote other discussions throughout the book to reflect this perspective. • We enhanced many discussions throughout the book, such as emotional intelli- gence, team development, conflict, stakeholder management, project planning, simulation, etc. • We also cut back on some discussions, such as the project portfolio process due to its currently wide recognition (Chapter 1), multidisciplinary teams, interface management, and simultaneous engineering (Chapter 2), and tracking signals (Chapter 4). • Project governance is currently a major trend in project management, involving the new roles of the project manager, the program manager, the project office, the portfolio manager, the sponsor, the client, the customer, the project owner, and other internal and external stakeholders in the project. This is discussed in terms of a recent trend in Chapter 1 and then elaborated on in Chapter 2. • We have added an expanded discussion of Agile project management in Chapter 3 due to its continuing proliferation among public and private organizations for handling dynamically changing projects such as R&D, innovation, and especially information technology. • Based on reviewer requests, we added a short discussion on using Excel’s Solver for crashing a network in Chapter 6. PMBOK Guide Risk Trade-Offs Best Practice Mantel_fpref.indd 14 9/2/2016 8:56:29 PM Preface • xv • In Chapter 7 we added a brief description of burnup and burndown charts. • Last, again based on reviewer requests, we rewrote portions of Chapter 8 to end the project discussion on a high, optimistic note, including replacing the term “termination” with the more pleasant “closeout” throughout the book, as used in PMBOK. supplements The Instructor’s Manual will provide assistance to the project management instructor in the form of answers/solutions to the questions, problems, incidents for discussion, and end‐of‐chapter cases. This guide will also reference relevant Harvard Business School type cases and readings, teaching tips, and other pedagogically helpful material. Wiley maintains a website for this and other books. The address is www.wiley.com/ college/meredith. The site contains an electronic version of the Instructor’s Manual, an extensive set of PowerPoint slides, and test questions to test student understanding. AcknoWledgments There is no possible way to repay the scores of project managers and students who have contributed to this book, often unknowingly. The professionals have given us ideas about how to manage projects, and students have taught us how to teach project management. We are immensely grateful. For this edition we thank the following reviewers: Above all, we thank Suzanne Ingrao, Ingrao Associates, whose help in production was invaluable. Our gratitude is also extended to Wiley Editor Gladys Soto who did her best to keep the book on track and on time. Finally, we owe a massive debt to those col- leagues who contributed ideas or reviewed earlier editions: Kwasi Amoako‐Gyampah, University of North Carolina at Greenboro; James M. Buckingham, United States Military Academy, West Point; Michael J. Casey, George Mason University; James Cochran, Louisiana Tech University; Larry Crowley, Auburn University; Catherine Crummett, James Madison University; George R. Dean, DeVry Institute of Technology, DuPage; James Evans, University of Cincinnati; Geraldo Ferrer, University of North Carolina at Chapel Hill; Byron Finch, Miami University, Ohio; Linda Fried, University of Colorado, Denver; Karen Garrison, Dayton Power & Light Co.; William C. Giauque, Brigham Young University; Bertie Greer, Northern Kentucky University; David Harris, University of New Mexico; Jesus Jimeniz, Texas State University; H. Khamooshi, George Washington University; Timothy Kloppenborg, Xavier University, Ohio; Bill Leban, Keller Graduate School of Management; Leonardo Legorreta, California State University, Sacramento; Steve MacQueen, Midlands Technical College; Samuel J. Mantel, III, RadioShack, Inc.; William E. Matthews, William Patterson University; Jim McCarthy, McCarthy Technologies, Inc.; Sara McComb, University of Massachusetts Amherst; Al Morelli, University of Southern California; J. Wayne Patterson, Clemson University; Ann Paulson, Edmonds Community College; Patrick Philipoom, University of South Carolina; Dee Piziak, Concordia University, Wisconsin; Arthur C. Rogers, City University; Dean T. Scott, DeVry Institute of Technology, Pomona; Richard V. Sheng, DeVry Institute of Technology, Long Beach; William A. Sherrard, San Diego State University; Kimberlee Snyder, Winona University; Margaret M. Sutton, Sutton Associates, Cincinnati, OH; James Szot, The University of Texas at Mantel_fpref.indd 15 9/2/2016 8:56:29 PM xvi • Preface Dallas; Louis C. Terminello, Stevens Institute of Technology; Malee Walton, Iowa State University; Stephen Wearne, University of Manchester, Institute of Science and Technology; Richard Wendell, University of Pittsburgh; and Jeffrey L. Williams, University of Phoenix. While we give these reviewers our thanks, we absolve each and all of blame for our errors, omissions, and wrong‐headed notions. Jack R. Meredith Broyhill Distinguished Scholar and Chair of Operations Schools of Business Wake Forest University Winston Salem, NC 27109 email@example.com (336) 758‐4467 http://business.wfu.edu/apps/facprofiles. cfm?id=jack.meredith Scott M. Shafer Professor of Management and Associate Dean of Fulltime MBA ProgramSchools of Business Wake Forest University P.O. Box 7659 Winston Salem, NC 27109 shafersm@ wfu.edu (336) 758‐3687 http://business.wfu.edu/apps/facprofiles. cfm?id=scott.shafer Mantel_fpref.indd 16 9/2/2016 8:56:29 PM http://business.wfu.edu/apps/facprofiles.cfm?id=jack.meredith http://business.wfu.edu/apps/facprofiles.cfm?id=scott.shafer c • h • a • p • t • e • r 1 1 The World of Project Management Once upon a time there was a heroine project manager. Her projects were never late. They never ran over budget. They always met contract specifications and invariably satisfied the expectations of her clients. And you know as well as we do, anything that begins with “Once upon a time . . .” is just a fairy tale. This book is not about fairy tales. Throughout these pages we will be as realistic as we know how to be. We will explain project management practices that we know will work. We will describe project management tools that we know can help the project manager come as close as Mother Nature and Lady Luck will allow to meeting the expectations of all who have a stake in the outcome of the project. 1.1 WHAT IS A PROJECT? The accomplishment of important tasks and goals in organizations today is being achieved increasingly through the use of projects. As a result, a new kind of organization is emerging to deal with the accelerating growth in the number of multiple, simultane- ously ongoing, and often interrelated projects in organizations. This project oriented organization, often called “enterprise project management” (Levine, 1998), “manage- ment by projects” (Boznak, 1996), and similar names, was created to tie projects more closely to the organization’s goals and strategy and to integrate and centralize manage- ment methods for the growing number of ongoing projects. Why this emphasis on project management? The answer is simple: Daily, organiza- tions are asked to accomplish work activities that do not fit neatly into business-as-usual. A software group may be asked to develop an application program that will access U.S. government data on certain commodity prices and generate records on the value of commodity inventories held by a firm; the software must be available for use on April 1. The Illinois State Bureau for Children’s Services may require an annually updated Mantel_c01.indd 1 9/6/2016 4:41:20 PM 2 • Chapter 1 / the World of projeCt ManageMent census of all Illinois resident children, aged 17 years or younger, living with an illiterate single parent; the census must begin in 18 months. A manufacturer initiates a process improvement project to offset higher energy costs. Note that each work activity is unique with a specific deliverable aimed at meeting a specific need or purpose. These are projects. The routine issuance of reports on the value of commodity inventories, the routine counseling of single parents on nurturing their off- spring, the day-to-day activities associated with running a machine in a factory—these are not projects. The difference between a project and a nonproject is not always crystal clear. For almost any precise definition, we can point to exceptions. At base, however, projects are unique, have a specific deliverable, and have a specific due date. Note that our examples have all those characteristics. The Project Management Institute (PMI) defines in its Project Management Body of Knowledge (PMBOK Guide), 5th edition, a project as “A temporary endeavor undertaken to create a unique product, service, or result” (Project Management Institute, 2013). Projects vary widely in size and type. The writing of this book is a project. The reor- ganization of Procter & Gamble (P&G) into a global enterprise is a project, or more accurately a program, a large integrated set of projects. The construction of a fly-in fish- ing lodge in Manitoba, Canada, is a project. The organization of “Cat-in-the-Hat Day” so that Mrs. Payne’s third grade class can celebrate Dr. Suess’s birthday is also a project. Both the hypothetical projects we mentioned earlier and the real-world projects listed just above have the same characteristics. They are unique, specific, and have desired completion dates. They all qualify as projects under the PMI’s definition. They have an additional characteristic in common—they are multidisciplinary. They require input from people with different kinds of knowledge and expertise. This multidiscipli- nary nature of projects means that they tend to be complex, that is, composed of many interconnected elements and requiring input from groups outside the project. The vari- ous areas of knowledge required for the construction of the fly-in fishing lodge are not difficult to imagine. The knowledge needed for globalization of a large conglomerate like P&G is quite beyond the imagination of any one individual and requires input from a diversified group of specialists. Working as a team, the specialists investigate the problem to discover what information, skills, and knowledge are needed to accomplish the overall task. It may take weeks, months, or even years to find the correct inputs and understand how they fit together. A secondary effect of using multidisciplinary teams to deal with complex problems is conflict. Projects are characterized by conflict. As we will see in later chapters, the pro- ject schedule, budget, and specifications conflict with each other. The needs and desires of the client conflict with those of the project team, the senior management of the organization conducting the project and others who may have a less direct stake in the project. Some of the most intense conflicts are those between members of the project team. Much more will be said about this in later chapters. For the moment, it is sufficient to recognize that projects and conflict are often inseparable companions, an environ- ment that is unsuitable and uncomfortable for conflict avoiders. It is also important to note that projects do not exist in isolation. They are often parts of a larger entity or program, just as projects to develop a new engine and an improved suspension system are parts of the program to develop a new automobile. The overall activity is called a program. Projects are subdivisions of programs. Likewise, pro- jects are composed of tasks, which can be further divided into subtasks that can be broken down further still. The purpose of these subdivisions is to allow the project to be viewed at various levels of detail. The fact that projects are typically parts of larger organizational programs is important for another reason, as is explained in Section (1.5). PMBOK Guide Mantel_c01.indd 2 9/6/2016 4:41:20 PM 1.1 What IS a projeCt • 3 Finally, it is appropriate to ask, “Why projects?” The reason is simple. We form projects in order to fix the responsibility and authority for the achievement of an organi- zational goal on an individual or small group when the job does not clearly fall within the definition of routine work. Trends in Project Management Many recent developments in project management are being driven by quickly changing global markets, technology, and education. Global competition is putting pressure on prices, response times, and product/service innovation. Computer and telecommunica- tion technology, along with rapidly expanding higher education across the world allows the use of project management for types of projects and in regions where these sophisti- cated tools had never been considered before. The most important of these recent devel- opments are covered in this book. Achieving Strategic Goals There has been a growing use of projects to achieve an organization’s strategic goals, and a new role has arisen to help attain the target benefits desired by the funder of the project: a project “owner” (Section 1.5). Additionally, exist- ing major projects are screened to make sure that their objectives support the organiza- tion’s strategy and mission. Projects that do not have clear ties to the strategy and mission are not approved. A discussion of this is given in Section 1.6, where the Project Portfolio Process is described. PMOs for Improving Project Effectiveness A variety of efforts are being pursued to improve the process and results of project management, whether strategic or routine. These efforts are typically now being led by a formal Project Management Office (PMO, Section 2.5) that provides training in project management skills and techniques such as the use of phase gates and agile (Section 3.4), earned value (Section 7.3), critical ratios (Section 7.4), and other such approaches; continually evaluates and helps improve the organization’s project management “maturity” (Section 7.5); educates project managers about the evolving ancillary goals of the organization (Section 8.1); and generally helps oversee the organization’s portfolio of programs and projects (Section 1.6). Virtual Projects With the rapid increase in globalization of industry, many projects now involve global teams whose members operate in different countries and different time zones, each bringing a unique set of talents to the project. These are known as vir- tual projects because the team members may never physically meet before the team is disbanded and another team reconstituted. Advanced telecommunications and com- puter technology allow such virtual projects to be created, do their work, and complete their project successfully (see Section 2.1). Quasi-Projects Led by the demands of the information technology/systems depart- ments, project management is now being extended into areas where the project’s objectives are not well understood, time deadlines unknown, and/or budgets undeter- mined. This ill-defined type of project is extremely difficult to conduct and to date has often resulted in setting an artificial due date and budget, and then specifying project objectives to meet those limits. However, new tools for these quasi-projects are now being developed—agile management, prototyping, phase-gating, and others—to help these projects achieve results that satisfy the customer in spite of the unknowns. Best Practice Mantel_c01.indd 3 9/6/2016 4:41:20 PM 4 • Chapter 1 / the World of projeCt ManageMent 1.2 PROJECT MANAGEMENT VS. GENERAL MANAGEMENT As is shown in Table 1-1, project management differs from general management largely because projects differ from what we have referred to as “nonprojects.” The naturally high level of conflict present in projects means that the project manager (PM) must have special skills in conflict resolution. The fact that projects are unique means that the PM must be creative and flexible, and have the ability to adjust rapidly to changes. When managing nonprojects, the general manager tries to “manage by exception.” In other words, for nonprojects almost everything is routine and is handled routinely by subordi- nates. The manager deals only with the exceptions. For the PM, almost everything is an exception. Major Differences Certainly, general management’s success is dependent on good planning. For projects, however, planning is much more carefully detailed and project success is absolutely dependent on such planning. The project plan is the result of integrating all informa- tion about a project’s deliverables, generally referred to as the “scope” of the project, and its targeted date of completion. “Scope” has two meanings. One is “product scope,” which defines the performance requirements of a project, and “project scope,” which details the work required to deliver the product scope (see Chapter 5, p. 105 of PMBOK, 2013). To avoid confusion, we will use the term scope to mean “product scope” and will allow the work, resources, and time needed by the project to deliver the product scope to the customer to be defined by the project’s plan (discussed in detail in Chapter 3). Therefore, the scope and due date of the project determine its plan, that is, its budget, schedule, control, and evaluation. Detailed planning is criti- cally important. One should not, of course, take so much time planning that nothing ever gets done, but careful planning is a major contributor to project success. Project planning is discussed in Chapter 3 and is amplified throughout the rest of this book. A project, then, is a temporary endeavor undertaken to create a unique product or service. It is specific, timely, usually multidisciplinary, and typically conflict ridden. Projects are parts of overall programs and may be broken down into tasks, subtasks, and further if desired. Current trends in project management include achieving stra- tegic goals, achieving routine goals, improving project effectiveness, virtual projects, and quasi-projects. PMBOK Guide Table 1-1 Comparison of Project Management and General Management Dimension Project Management General Management Type of Work Activity Unique Routine Management Approach Ability to adapt to change Manage by exception Planning Critical Important Budgeting Start from scratch, multiple budget periods Modify budget from previous budget period Sequence of Activities Must be determined Often predetermined Location of Work Crosses organizational units Within an organizational unit Reporting Relationships Informal Well defined Mantel_c01.indd 4 9/6/2016 4:41:21 PM 1.2 projeCt ManageMent VS. general ManageMent • 5 Project budgeting differs from standard budgeting, not in accounting techniques, but in the way budgets are constructed. Budgets for nonprojects are primarily modifications of budgets for the same activity in the previous period. Project budgets are newly created for each project and often cover several “budget periods” in the future. The project budget is derived directly from the project plan that calls for specific activities. These activities require resources, and such resources are the heart of the project budget. Similarly, the project schedule is also derived from the project plan. In a nonproject manufacturing line, the sequence in which various things are done is set when the production line is designed. The sequence of activities often is not altered when new models are produced. On the other hand, each project has a schedule of its own. Previous projects with deliverables similar to the one at hand may provide a rough template for the current project, but its specific schedule will be determined by the time required for a specific set of resources to do the specific work that must be done to achieve each project’s specific scope by the specific date on which the project is due for delivery to the client. As we will see in later chapters, the special requirements associated with projects have led to the creation of special managerial tools for budgeting and scheduling. The routine work of most organizations takes place within a well-defined structure of divisions, departments, areas, and similar subdivisions of the total enterprise. The typical project cannot thrive under such restrictions. The need for technical knowledge, informa- tion, and special skills almost always requires that departmental lines be crossed. This is simply another way of describing the multidisciplinary character of projects. When pro- jects are conducted side-by-side with routine activities, chaos tends to result—the non- projects rarely crossing organizational boundaries and the projects crossing them freely. These problems and recommended actions are discussed at greater length in Chapter 2. Even when large firms establish manufacturing plants or distribution centers in dif- ferent countries, a management team is established on site. For projects, “globalization” has a different meaning. Individual members of project teams may be spread across coun- tries, continents, and oceans, and speak several different languages. Some project team members may never even have a face-to-face meeting with the project manager, though transcontinental and intercontinental video meetings combining telephone and com- puter are common. The discussion of structure leads to consideration of another difference between project and general management. In general management, there are reasonably well- defined reporting relationships. Superior-subordinate relationships are known, and lines of authority are clear. In project management this is rarely true. The PM may be relatively low in the hierarchical chain of command. This does not, however, reduce his or her responsibility of completing a project successfully. Responsibility without the authority of rank or position is so common in project management as to be the rule, not the exception. Negotiation With little legitimate authority, the PM depends on negotiation skills to gain the coop- eration of the many departments in the organization that may be asked to supply tech- nology, information, resources, and personnel to the project. The parent organization’s standard departments have their own objectives, priorities, and personnel. The project is not their responsibility, and the project tends to get the leftovers, if any, after the depart- ments have satisfied their own need for resources. Without any real command authority, the PM must negotiate for almost everything the project needs. It is important to note that there are three different types of negotiation, win-win negotiation, win-lose negotiation, and lose-lose negotiation. When you negotiate the Mantel_c01.indd 5 9/6/2016 4:41:21 PM 6 • Chapter 1 / the World of projeCt ManageMent purchase of a car or a home, you are usually engaging in win-lose negotiation. The less you pay for a home or car, the less profit the seller makes. Your savings are the other party’s losses—win-lose negotiation. This type of negotiation is never appropriate when dealing with other members of your organization. If you manage to “defeat” a department head and get resources or commitments that the department head did not wish to give you, imagine what will happen the next time you need something from this individual. The PM simply cannot risk win-lose situations when negotiating with other members of the organization. Lose-lose negotiation occurs when one party is unwilling to assert his or her position aggressively while at the same time resists cooperating with the other party. This often occurs in situations where one or both of the parties are conflict avoiders. When one party is not willing to help the other party achieve his or her objective and at the same time is unwilling to pursue his or her own objectives, the end result is that both parties lose. Within the organization, win-win negotiation is mandatory. In essence, in win-win negotiation both parties must try to understand what the other party needs. The problem you face as a negotiator is how to help other parties meet their needs in return for their help in meeting the needs of your project. When negotiation takes place repeatedly between the same individuals, win-win negotiation is the only sensible procedure. PMs spend a great deal of their time negotiating. General managers spend relatively little. Skill at win-win negotiating is a requirement for successful project managing (see Fisher and Ury, 1983; Jandt, 1987; and Raiffa, 1982). One final point about negotiating: Successful win-win negotiation often involves taking a synergistic approach by searching for the “third alternative.” For example, con- sider a product development project focusing on the development of a new printer. A design engineer working on the project suggests adding more memory to the printer. The PM initially opposes this suggestion, feeling that the added memory will make the printer too costly. Rather than rejecting the suggestion, however, the PM tries to gain a better understanding of the design engineer’s concern. Based on their discussion, the PM learns that the engineer’s purpose in requesting additional memory is to increase the printer’s speed. After benchmarking the competi- tion, the design engineer feels the printer will not be competitive as it is currently con- figured. The PM explains his fear that adding the extra memory will increase the cost of the printer to the point that it also will no longer be cost competitive. Based on this discussion the design engineer and PM agree that they need to search for another (third) alternative that will increase the printer’s speed without increasing its costs. A couple of days later, the design engineer identifies a new ink that can simultaneously increase the printer’s speed and actually lower its total and operating costs. Project management differs greatly from general management. Every project is planned, budgeted, scheduled, and controlled as a unique task. Unlike nonprojects, projects are often multidisciplinary and usually have considerable need to cross departmental boundaries for technology, information, resources, and personnel. Crossing these boundaries tends to lead to intergroup conflict. The development of a detailed project plan based on the scope and due date of the project is critical to the project’s success. Unlike their general management counterparts, project managers have respon- sibility for accomplishing a project, but little or no legitimate authority to command the required resources from the functional departments. The PM must be skilled at win-win negotiation to obtain these resources. Mantel_c01.indd 6 9/6/2016 4:41:21 PM 1.3 What IS Managed? the three goalS of a projeCt • 7 1.3 WHAT IS MANAGED? THE THREE GOALS OF A PROJECT The performance of a project, commonly called its “efficiency,” is assessed on the basis of three criteria, variously known as the “triple constraints,” the “iron triangle,” the “golden constraints,” and so on. Is the project on time or early? Is the project on or under budget? Does the project deliver the scope to the agreed-upon specification? Figure 1-1 shows the three goals of a project specifications. The performance of the project and the PM is measured by the degree to which these goals are achieved. A recent issue, however, has arisen: meeting a project’s triple constraints often does not achieve the aims of the pro- ject for the client, known as the project’s “effectiveness;” that is, the project didn’t deliver the benefits the client was hoping to gain. However, not meeting the project’s triple constraint usually dooms the project to failure. This issue is discussed further in Section 1.5. One of these goals, the project’s specifications or “scope,” is set primarily by the cli- ent (although the client agrees to all three when contracting for the project). It is the client who must decide what capabilities are required of the project’s deliverables—and this is what makes the project unique. Some writers insist that “quality” is a separate and distinct goal of the project along with time, cost, and scope. We do not agree because we consider quality an inherent part of the project scope. If we did not live in an uncertain world in which best made plans often go awry, managing projects would be relatively simple, requiring only careful planning. Unfortunately, we do not live in a predictable (deterministic) world, but one characterized by chance events (uncertainty). This ensures that projects travel a rough road. Murphy’s law seems as universal as death and taxes, and the result is that the most skilled planning is upset by uncertainty. Thus, the PM spends a great deal of time adapting to unpredicted change. The primary method of adapting is to trade off one objective for another. If a construction project falls behind schedule because of bad weather, it may be possible to get back on schedule by adding resources—in this case, probably labor using overtime and perhaps some additional equipment. If the budget cannot be raised to cover the additional resources, the PM may have to negotiate with the client for a later delivery Trade-Offs Required scope Budget limit Due date Performance targets Time (“schedule”) Cost Scope Figure 1-1 Scope, cost, and time project performance targets. Mantel_c01.indd 7 9/6/2016 4:41:21 PM 8 • Chapter 1 / the World of projeCt ManageMent date of the building. If neither cost nor schedule can be negotiated, the client may be willing to cut back on some of the features in the building in order to allow the project to finish on time and budget (e.g., substituting carpet for tile in some of the spaces). As a final alternative, the contractor may have to “swallow” the added costs (or pay a penalty for late delivery) and accept lower profits. This example illustrates a fundamental point. Namely, managing the trade-offs among the three project goals is in fact one of the primary roles of the project manager. Furthermore, managing these trade-offs in the most effective manner requires that the project manager have a clear understanding of how the project supports broader organi- zational goals. Thus, the organization’s overall strategy is the most important considera- tion for managing the trade-offs that will be required among the three project goals. All projects are always carried out under conditions of uncertainty. Well-tested soft- ware routines may not perform properly when integrated with other well-tested routines. A chemical compound may destroy cancer cells in a test tube—and even in the bodies of test animals—but may kill the host as well as the cancer. Where one cannot find an acceptable way to deal with a problem, the only alternative may be to stop the project and start afresh to achieve the desired deliverables. As we note throughout this book, projects are all about uncertainty. Therefore, in addition to effectively managing trade-offs, the second major role of the project manager is dealing with uncertainty, that is, managing risks. The time required to complete a project, the availability and costs of key resources, the timing of solutions to technologi- cal problems, a wide variety of macroeconomic variables, the whims of a client, the actions taken by competitors, even the likelihood that the output of a project will per- form as expected, all these exemplify the uncertainties encountered when managing projects. While there are actions that may be taken to reduce the uncertainty, no actions of a PM can ever eliminate it. As Hatfield (2008) points out, projects are complex and include interfaces, interde- pendencies, and many assumptions, any or all of which may turn out to be wrong. Also, projects are managed by people, which adds to the uncertainty. Gale (2008a) reminds us that the uncertainties include everything from legislation that can change how we do business, to earthquakes and other “acts of God.” Therefore, in today’s turbulent business environment, effective decision making is predicated on an ability to manage the ambi- guity that arises while we operate in a world characterized by uncertain information. (Risk management is discussed in Chapter 11 of the PMBOK, 5th ed., 2013.) The first step in managing risk is to identify these potentially uncertain events and the likelihood that any or all may occur. This is called risk analysis. Different managers and organizations approach this problem in different ways. Gale advises expecting the unexpected; some managers suggest considering those things that keep one awake at night. Many organizations keep formal lists, a “risk register,” and use their Project Management Office (PMO, discussed in Chapter 2) to maintain and update the list of risks and approaches that have been successful in the past in dealing with specific risks. This information is then incorporated into the firm’s business-continuity and disaster- recovery plans. Every organization should have a well-defined process for dealing with risk, and we will discuss this issue at greater length in Section 3.5. At this point we simply overview risk analysis. The essence of risk analysis is to make estimates or assumptions about the probability distributions associated with key parameters and variables and to use analytic decision models or Monte Carlo simulation models based on these distributions to evaluate the desirability of certain managerial decisions. Real-world problems are usually large enough that the use of analytic models is very difficult and time consuming. With modern computer software, simulation is not difficult. Trade-Offs PMBOK Guide Risk Best Practice Mantel_c01.indd 8 9/6/2016 4:41:22 PM 1.3 What IS Managed? the three goalS of a projeCt • 9 A mathematical model of the situation is constructed that models the relationship between unknown input variables and important outcomes. The model is run (or repli- cated) repeatedly, starting from a different point each time based on random choices of values from the probability distributions of the input variables. Outputs of the model are used to construct statistical distributions of outcomes of interest to decision makers, such as costs, profits, completion dates, or return on investment. These distributions are the risk profiles of the outcomes associated with a decision. Risk profiles can be analyzed by the manager when considering a decision, along with many other factors such as strategic concerns, behavioral issues, fit with the organization, cost and scheduling issues, and so on. Thus in this book, we adopt the point of view that the two primary roles of the pro- ject manager are managing trade-offs and managing risks. Because these two roles are fundamental to the work of the project manager, icons are displayed throughout the book in the left margin when these topics are discussed. It is also important to point out that these two roles are highly integrated with one another. Indeed, managing risk is actually tightly coupled with managing the three traditional goals of project management. For example, the more uncertainty the project manager faces, the greater the risk that the project will go over budget, finish late, and/or not meet its original scope. However, beyond these rather obvious relationships, there is also a more subtle connection. In particular, project risk can actually be thought of as a fourth trade-off opportunity at the project manager’s disposal. For example, the project’s budget can be increased in order to collect additional data that in turn will reduce the uncertainty related to how long it will take to complete the project. Likewise, the project’s deadline can be reduced, but this will increase the uncertainty about whether it will be completed on time. Most of the trade-offs PMs make are reasonably straightforward if the organization’s strategy is well understood and trade-offs are discussed during the planning, budgeting, and scheduling phases of the project. Usually they involve trading time and cost, but if we cannot alter either the schedule or the budget, the scope of the project may be altered or additional risk accepted. Frills on the finished product may be foregone, capabilities not badly needed may be compromised. From the early stages of the project, it is the PM’s duty to know which elements of project performance are sacrosanct. One final comment on this subject: Projects must have some flexibility. Again, this is because we do not live in a deterministic world. Occasionally, a senior manager (who does not have to manage the project) presents the PM with a document precisely listing a set of deliverables, a fixed budget, and a firm schedule. This is failure in the making for the PM. Unless the budget is overly generous, the schedule overlong, and the delivera- bles easily accomplished, the system is, as mathematicians say, “overdetermined.” If Mother Nature so much as hiccups, the project will fail to meet its rigid parameters. A PM cannot be successful without flexibility to manage the trade-offs. Risk Trade-Offs The two primary roles of the project manager are to manage trade-offs among three interrelated objectives and to manage risks. The three interrelated objectives are: to (1) meet the budget, (2) finish on schedule, and (3) generate deliverables that satisfy the client. Because we live in an uncertain world, as work on the project proceeds, unexpected problems are bound to arise. These chance events will threaten the pro- ject’s schedule or budget or scope. The PM must now decide how to trade off one project goal against another (e.g., to stay on schedule by assigning extra resources to the project may mean it will run over the predetermined budget). If the schedule, budget, and scope are rigidly predetermined, the project is probably doomed to failure unless the preset schedule and budget are overly generous or the difficulty in meeting the specifications has been seriously overestimated. Mantel_c01.indd 9 9/6/2016 4:41:22 PM 10 • Chapter 1 / the World of projeCt ManageMent 1.4 THE LIFE CYCLES OF PROJECTS All organisms have a life cycle. They are born, grow, wane, and die. This is true for all living things, for stars and planets, for the products we buy and sell, for our organizations, and for our projects as well. A project’s life cycle measures project completion as a func- tion of either time (schedule) or resources (budget). The subject of project life cycles is discussed in PMBOK’s Chapter 2 on Organizational Influences and Project Life Cycle. This life cycle must be understood because the PM’s managerial focus subtly shifts at dif- ferent stages of the cycle (Adams and Barndt, 1983; Kloppenborg and Mantel, 1990). During the early stages, the PM must make sure that the project plan really reflects the wishes of the client as well as the abilities of the project team and is designed to be consistent with the goals and objectives of the parent organization. As the project goes into the implementation stage of its life cycle, the PM’s atten- tion turns to the job of keeping the project on budget and schedule—or, when chance interferes with progress, to negotiating the appropriate trade-offs to correct or minimize the damage. At the end of the project, the PM turns into a “fuss-budget” to assure that the specifications of the project are truly met, handling all the details of closing out the books on the project, making sure there are no loose ends, and that every “i” is dotted and “t” crossed. Many projects are like building a house. A house-building project starts slowly with a lot of discussion and planning. Then construction begins, and progress is rapid. When the house is built, but not finished inside, progress appears to slow down and it seemingly takes forever to paint everything, to finish all the trim, and to assemble and install the built-in appliances. Progress is slow-fast-slow, as shown in Figure 1-2. It used to be thought that the S-shaped curve of Figure 1-2 represented the life cycle for all projects. While this is true of many projects, there are important exceptions. Anyone who has baked a cake has dealt with a project that approaches completion by a very different route than the traditional S-curve, as shown in Figure 1-3. PMBOK Guide Trade-Offs 100 Time Pe rc en t p ro je ct c om pl et io n 0 Slow start Slow �nish Quick momentum Figure 1-2 The project life cycle. Pe rc en t p ro je ct c om pl et io n 0 Time 100 Slow start Rapid �nish Figure 1-3 An alternate project life cycle. Mantel_c01.indd 10 9/6/2016 4:41:22 PM 1.5 SeleCtIng projeCtS to Meet organIZatIonal oBjeCtIVeS • 11 The process of baking a cake is straightforward. The ingredients are mixed while the oven is preheated, usually to 350°F. The mixture (technically called “goop”) is placed in a greased pan, inserted in the oven, and the baking process begins. Assume that the entire process from assembling the ingredients to finished cake requires about 45 minutes—15 minutes for assembling the materials and mixing, and 30 minutes for baking. At the end of 15 minutes we have goop. Even after 40 minutes, having baked for 25 minutes, it may look like cake but, as any baker knows, it is still partly goop inside. If a toothpick (our grand- mothers used a broom straw) is inserted into the middle of the “cake” and then removed, it does not come out clean. In the last few minutes of the process, the goop in the middle becomes cake. If left a few minutes too long in the oven, the cake will begin to burn on the bottom. Project Cake follows a J-shaped path to completion much like Figure 1-3. There are many projects that are similar to cake—the development of computer software, and many chemical engineering projects, for instance. In these cases the PM’s job begins with great attention to having all the correct project resources at hand or guar- anteed to be available when needed. Once the “baking” process is underway—the inte- gration of various sets of code or chemicals—one can usually not add missing ingredients. As the process continues, the PM must concentrate on determining when the project is complete—“done” in the case of cake, or a fully debugged program in the case of software. In later chapters, we will also see the importance of the shape of the project’s life cycle on how management allocates resources or reacts to potential delays in a project. Management does not need to know the precise shape of the life cycle, but merely whether its completion phase is concave (Figure 1-2) or convex (Figure 1-3) to the baseline. 1.5 SELECTING PROJECTS TO MEET ORGANIZATIONAL OBJECTIVES As noted earlier, a major trend occurring in organizations is the use of project management to implement the organization’s strategic objectives, especially organizational change. Organizations spend about $100 billion a year on creating competitive strategies (Morgan et al., 2007, p. 1), yet 90 percent of them (thousands) fail due to poor execution of these projects. This has stimulated a variety of new research into why these projects, even when successful, often don’t attain the strategic benefits the organization desired. Some of these research streams are called “change management,” “benefit realization management,” and other such terms. One new approach gaining attention has been the creation of a new position in the project governance structure called the “project owner,” an agent of the funding organization with the responsibility of ensuring that the project results in the stra- tegic benefits desired by the funder (Zwikael et al., 2015). The project owner works closely with the project manager and the executive “sponsor” (champion) of the project in the project manager’s organization, as well as all project stakeholders, to ensure that the strategic benefits are realized when the project is eventually implemented and operationalized. Not all of an organization’s projects will be strategy implementation or organiza- tional change projects, but all of the projects in the organization’s portfolio should be There are two different paths (life cycles) along which projects progress from start to completion. One is S-shaped, and the other is J-shaped. It is an important distinc- tion because identifying the different life cycles helps the PM to focus attention on appropriate matters to ensure successful project completion. Best Practice Mantel_c01.indd 11 9/6/2016 4:41:22 PM 12 • Chapter 1 / the World of projeCt ManageMent consistent with the organization’s strategic goals. In what follows, we first discuss a vari- ety of common project selection methods. We then describe the process of strategically selecting the best set of projects for implementation, called the Project Portfolio Process. Project selection is the process of evaluating individual projects or groups of projects and then choosing to implement a set of them so that the objectives of the parent organi- zation are achieved. Before a project begins its life cycle, it must have been selected for funding by the parent organization. Whether the project was proposed by someone within the organization or an outside client, it is subject to approval by a more or less formal selection process. Often conducted by a committee of senior managers, the major function of the selection process is to ensure that several conditions are considered before a commitment is made to undertake any project. These conditions vary widely from firm to firm, but several are quite common: (1) Is the project potentially profitable? Does it have a chance of meeting our return-on-investment hurdle rate? (2) Is the project required by law or the rules of an industrial association; i.e., a “mandate?” (3) Does the firm have, or can it easily acquire, the knowledge and skills to carry out the project suc- cessfully? (4) Does the project involve building competencies that are considered con- sistent with our firm’s strategic plan? (5) Does the organization currently have the capacity to carry out the project on its proposed schedule? (6) In the case of R&D pro- jects, if the project is technically successful, does it meet all requirements to make it economically successful? This list could be greatly extended. The selection process is often complete before a PM is appointed to the project. Why, then, should the PM be concerned? Quite simply, the PM should know exactly why the organization selected the specific project because this sheds considerable light on what the project (and hence the PM) is expected to accomplish, from senior manage- ment’s point of view, with the project. The project may have been selected because it appeared to be profitable, or was a way of entering a new area of business, or a way of building a reputation of competency with a new client or in a new market. This knowl- edge can be very helpful to the PM by indicating senior management’s goals for the pro- ject, which will point to the desirability of some trade-offs and the undesirability of others. There are many different methods for selecting projects, but they may be grouped into two fundamental types, nonnumeric and numeric. The former does not use numbers for evaluation; the latter does. At this point it is important to note that many firms select projects before a detailed project plan has been developed. Clearly, if the potential pro- ject’s scope, budget, and due dates have not been determined, it will be quite impossible to derive a reasonably accurate estimate of the project’s success. Rough estimations may have to suffice in such cases, but specific plans should be developed prior to final project selection. Obviously, mandated projects are an exception. For mandates, budget esti- mates do not matter but scope and due dates are still important. Mandates must be selected. We will deal further with the selection problem when we consider the Project Management Office in Chapter 2. Nonnumeric Selection Methods The Sacred Cow At times, the organization’s Chief Executive Officer (CEO) or other senior executive either formally or casually suggests a potential product or service that the organization might offer to its customers. The suggestion often starts, “You know, I was thinking that we might . . .” and concludes with “. . . Take a look at it and see if it looks sensible. If not, we’ll drop the whole thing.” Whatever the selection process, the aforementioned project will be approved. It becomes a “Sacred Cow” and will be shown to be technically, if not economically, feasible. This may seem irrational to new students of project management, but such a judgment Trade-Offs Mantel_c01.indd 12 9/6/2016 4:41:22 PM 1.5 SeleCtIng projeCtS to Meet organIZatIonal oBjeCtIVeS • 13 ignores senior management’s intelligence and valuable years of experience—as well as the subordinate’s desire for long-run employment. It also overlooks the value of support from the top of the organization, a condition that is necessary for project success (Green, 1995). The Operating/Competitive Necessity This method selects any project that is necessary for continued operation of a group, facility, or the firm itself. A “mandated” project obviously must be selected. If the answer to the “Is it necessary . . . ?” question is “yes,” and if we wish to continue using the facility or system to stay in business, the pro- ject is selected. The Investment Committee of a large manufacturing company started to debate the advisability of purchasing and installing pumps to remove 18 inches of flood water from the floor of a small, but critical production facility. The debate stopped imme- diately when one officer pointed out that without the pumps the firm was out of business. The same questions can be directed toward the maintenance of a competitive posi- tion. Some years ago, General Electric almost decided to sell a facility that manufactured the large mercury vapor light bulbs used for streetlights and lighting large parking lots. The lighting industry had considerable excess capacity for this type of bulb and the resulting depressed prices meant they could not be sold profitably. GE, however, felt that if they dropped these bulbs from their line of lighting products, they might lose a signifi- cant portion of all light bulb sales to municipalities. The profits from such sales were far in excess of the losses on the mercury vapor bulbs. Comparative Benefits Many organizations have to select from a list of projects that are complex, difficult to assess, and often noncomparable, for example, United Way organ- izations and R&D organizations. Such institutions often appoint a selection committee made up of knowledgeable individuals. Each person is asked to arrange a set of potential projects into a rank-ordered set. Typically, each individual judge may use whatever criteria he or she wishes to evaluate projects. Some may use carefully determined technical criteria, but others may try to estimate the project’s probable impact on the ability of the organiza- tion to meet its goals. While the use of various criteria by different judges may trouble some, it results from a purposeful attempt to get as broad a set of evaluations as possible. Rank-ordering a small number of projects is not inherently difficult, but when the number of projects exceeds 15 or 20, the difficulty of ordering the group rises rapidly. A Q-sort* is a convenient way to handle the task. First, separate the projects into three subsets, “good,” “fair,” and “poor,” using whatever criteria you have chosen—or been instructed to use. If there are more than seven or eight members in any one classification, divide the group into two subsets, for instance, “good-plus” and “good-minus.” Continue subdividing until no set has more than seven or eight members. Now, rank-order the items in each subset. Arrange the subsets in order of rank, and the entire list will be in order. Last, review the stack and shift any cards that seem out of place until the classifications are satisfactory. The committee can make a composite ranking from the individual lists any way it chooses. One way would be to number the items on each individual list in order of rank, and then add the ranks given to each project by each of the judges. Projects may then be approved in the order of their composite ranks, at least until the organization runs out of available funds. Numeric Selection Methods Financial Assessment Methods Most firms select projects on the basis of their expected economic value to the firm. Although there are many economic assessment *The Q-sort is a handy, useful, and easy-to-use technique. See Helin and Souder (1974). Mantel_c01.indd 13 9/6/2016 4:41:22 PM 14 • Chapter 1 / the World of projeCt ManageMent methods available—payback period, average annual rate of return, internal rate of return, and so on—we will describe here two of the most widely used methods: payback period and discounted cash flow.* The payback period for a project is the initial fixed investment in the project divid- ed by the estimated annual net cash inflows from the project (which include the cash inflows from depreciation of the investment). The ratio of these quantities is the number of years required for the project to return its initial investment. Because of this perspec- tive, the payback period is often considered a surrogate measure of risk to the firm: the longer the payback period, the greater the risk. To illustrate, if a project requires an investment of $100,000 and is expected to return a net cash inflow of $25,000 each year, then the payback period is simply 100,000/25,000 = 4 years, assuming the $25,000 annual inflow continues at least 4 years. Although this is a popular financial assessment method, it ignores the time value of money as well as any returns beyond the payback period. For these reasons, it is not recommended as a project selection method, though it is valuable for cash budgeting. Of the financial assessment methods, the discounted cash flow method discussed next is recommended instead. The discounted cash flow method considers the time value of money, the inflation rate, and the firm’s return-on-investment (ROI) hurdle rate for projects. The annual cash inflows and outflows are collected and discounted to their net present value (NPV) using the organization’s required rate of return (a.k.a. the hurdle rate or cutoff rate). NPV project I F ko t n t t 1 1/ where I0 the initial investment, which will be negative because iit is an outflow the net cash flow in period the requ F t k t iired rate of return or hurdle rate number of periods in n llife of project If one wishes to include the potential effects of inflation or deflation in the calcula- tion, it is quite easily done. The discounting term, (1 + k)t, simply becomes (1 + k + pt) t, where pt is the estimated rate of inflation or deflation for period t. If the required rate of return is 10 percent and we expect the rate of inflation will be 3 percent, then the discount term becomes (1 + .10 + .03)t = (1.13)t for that period. In the early years of a project when outflows usually exceed inflows, the NPV of the project for those years will be negative. If the project becomes profitable, inflows become larger than outflows and the NPV for those later years will be positive. If we calculate the present value of the net cash flows for all years, we have the NPV of the project. If this sum is positive, the project may be accepted because it earns more than the required rate of return. The following boxed example illustrates these calculations. For clarity and convenience in the analysis, we have chosen to illustrate the calculations using Excel®’s NPV function rather than using the NPV formula. Risk *Explanations of the theory and methods of calculating the net present value of cash inflows are beyond the scope of this book. We recommend that the reader who could benefit from an explanation turn to any standard col- lege textbook on finance. Mantel_c01.indd 14 9/6/2016 4:41:22 PM 1.5 SeleCtIng projeCtS to Meet organIZatIonal oBjeCtIVeS • 15 Perhaps the most difficult aspect related to the proper use of discounted cash flow is determining the appropriate discount rate to use. While this determination is made by senior management, it has a major impact on project selection, and therefore, on the life of the PM. For most projects the hurdle rate selected is the organization’s cost of capital, though it is often arbitrarily set too high as a general allowance for risk. In the case of particularly risky projects, a higher hurdle rate may be justified, but it is not a good gen- eral practice. If a project is competing for funds with alternative investments, the hurdle Ceramic Sciences, Inc.* Ceramic Sciences, Inc. (CSI) is a large producer of decorative ceramic pots. The firm is considering the installation of a new manufacturing line that will, it is hoped, improve the quality of its pots as well as their vases designed to hold artificial flowers. The plant engineering department has submitted a project proposal that esti- mates the following investment requirements: an initial investment of $125,000 to be paid up-front to the Pocketa Machine Corporation, an additional investment of $100,000 to install the machines, and another $90,000 to add new material han- dling systems and integrate the new equipment into the overall production system. Delivery and installation is estimated to take 1 year, and integrating the entire system should require an additional year. Thereafter, the engineers predict that scheduled machine overhauls will require further expenditures of about $15,000 every second year, beginning in the fourth year. They will not, however, overhaul the machinery in the last year of its life. The project schedule calls for the line to begin production in the third year, and to be up-to-speed by the end of that year. Projected manufacturing cost savings and added profits resulting from higher quality are estimated to be $50,000 in the first year of operation and are expected to peak at $120,000 in the second year of operation, and then to follow the gradually declining pattern shown in Table A. Project life is expected to be 10 years from project inception, at which time the proposed system will be obsolete and will have to be replaced. It is estimated that the machinery will have a salvage value of $35,000. CSI has a 13 percent hurdle rate for capital investments and expects the rate of inflation to be about 2 percent per year over the life of the project. Assuming that the initial expenditure occurs at the begin- ning of the year and that all other receipts and expenditures occur as lump sums at the end of the year, we can prepare the Net Present Value analysis for the project as shown in Table A. Note that Excel’s built in Net Present Value function NPV was used to facilitate the analysis. The NPV function has two arguments: the discount rate and the range that contains the cash flows to be discounted. Because the first cash flow of – $125,000 occurs at the beginning of the first period, there is no need to discount it as it is already in present value terms. The remaining cash flows are assumed to occur at the end of their respective periods. For example, the $115,000 cash flow associated with 20X4 is assumed to occur at the end of the fifth period. According to the results, the Net Present Value of the project is positive and, thus, the project can be accepted. (The project would have been rejected if the hurdle rate had been 15 percent or if the inflation rate was 4 percent, either one resulting in a discount rate of 17 percent.) Risk *The authors thank John Wiley & Sons for permission to adapt material from Meredith J. R., Mantel, S. J., and Shafer, S. M., Project Management: A Managerial Approach, 9th ed. New York, John Wiley & Sons, 2015 for use in this section and in Section 1.6. Mantel_c01.indd 15 9/6/2016 4:41:22 PM 16 • Chapter 1 / the World of projeCt ManageMent rate may be the opportunity cost of capital, that is, the rate of return the firm must forego if it invests in the project instead of making an alternative investment. Another common, but misguided practice is to set the hurdle rate high as an allowance for resource cost increases. Neither risk nor inflation should be treated so casually. Specific corrections for each should be made if the firm’s management feels it is required. We recommend strongly a careful risk analysis, which we will discuss in further detail throughout this book. Because the present value of future returns decreases as the discount rate rises, a high hurdle rate biases the analysis strongly in favor of short-run projects. For example, given a rate of 20 percent, a dollar 10 years from now has a present value of only $.16, (1/1.20)10 = 0.16. The critical feature of long-run projects is that costs associated with them are spent early in the project and have high present values while revenues are delayed for several years and have low present values. This effect may have far-reaching implications. The high interest rates during the 1970s and 1980s, and again in the 2000s, forced many firms to focus on short-run projects. The resulting disregard for long-term technological advancement led to a deterioration in the ability of some U.S. firms to compete in world markets (Hayes and Abernathy, 1980). The discounted cash flow methods of calculation are simple and straightforward. Like the other financial assessment methods, it has a serious defect. First, it ignores all nonmonetary factors except risk. Second, because of the nature of discounting, all the discounted methods bias the selection system by favoring short-run projects. Let us now examine a selection method that goes beyond assessing only financial profitability. Financial Options and Opportunity Costs A more recent approach to project selection employs financial analysis that recognizes the value of positioning the organ- ization to capitalize on future opportunities. It is based on the financial options Table A =B5−C5 [Copy to D6:D15] =$65,000 cost savings + $35,000 salvage value =D5+NPV(B1+B2,D6:D15) A B C D 4 Year In�ow Out�ow Net Flow 5 20X0* $0 $1,25,000 −$1,25,000 6 20X0 $0 $1,00,000 −$1,00,000 7 1 2 3 20X1 $0 $90,000 −$90,000 8 20X2 $50,000 $0 $50,000 9 20X3 $1,20,000 $15,000 $105,000 10 20X4 $1,15,000 $0 $1,15,000 11 20X5 $1,05,000 $15,000 $90,000 12 20X6 $97,000 $0 $97,000 13 20X7 $90,000 $15,000 $75,000 14 20X8 $82,000 $0 $82,000 15 16 17 20X9 $1,00,000 $0 $1,00,000 Total $7,59,000 $3,60,000 $3,99,000 NPV $17,997 *t = 0 at the beginning of 20X0 Hurdle Rate 13.0% In�ation Rate 2.0% Mantel_c01.indd 16 9/6/2016 7:43:43 PM 1.5 SeleCtIng projeCtS to Meet organIZatIonal oBjeCtIVeS • 17 approach to valuing prospective capital investment opportunities. Through a financial option an organization or individual acquires the right to do something but is not required to exercise that right. For example, you may be familiar with stock options. When a person or organization purchases a stock option, they acquire the right to pur- chase a specific number of shares of a particular stock at a specified price within a specified time frame. If the market price of the stock moves above the specified option price within the specified time frame, the entity holding the option can exercise its right and thereby purchase the stock below the fair market price. If the market price of the stock remains below the specified option price, the entity can choose not to exer- cise its right to buy the stock. To illustrate the analogy of financial options to project selection, consider a young biotech firm that is ready to begin clinical trials to test a new pharmaceutical product in humans. A key issue the company has to address is how to produce the drug both now in the low volumes needed for the clinical trials and in the mass quantities that will be needed in the future should the new drug succeed in the clinical trial phase. Its options for producing the drug in low volumes for the clinical trials are to invest in an in-house pilot plant or to immediately license the drug to another company. If it invests in an in-house pilot plan, it then has two future options for mass producing the drug: (1) invest in a commercial scale plant or (2) license the manufacturing rights. In effect then, investing now in the pilot plant provides the pharmaceutical company with the option of building a commercial scale plant in the future, an option it would not have if it chooses to license the drug right from the start. Thus by building the in-house pilot plant the pharmaceutical company is in a sense acquiring the right to build a commer- cial plant in the future. While beyond the scope of this book, we point out to the reader that in addition to the traditional approaches to project selection, the decision to build the pilot plant can also be analyzed using valuation techniques from financial options theory. In this case the value of having the option to build a commercial plant can be estimated. In addition to considering the value of future opportunities a project may provide, the cost of not doing a project should also be considered. This approach to project selec- tion is based on the well-known economic concept of “opportunity cost.” Consider the problem of making an investment in one of only two projects. An investment in Project A will force us to forgo investing in Project B, and vice versa. If the return on A is 12 percent, making an investment in B will have an opportunity cost of 12 percent, the cost of the opportunity forgone. If the return on B is greater than 12 percent, it may be preferred over selecting Project A. The same selection principle can be applied to timing the investment in a given project. R&D projects or projects involving the adoption of new technologies, for example, have values that may vary considerably with time. It is common for the passage of time to reduce uncertainties involved in both technological and commer- cial projects. The value of investing now may be higher (or lower) than investing later. If a project is delayed, the values of its costs and revenues at a later period should be discounted to their present value when compared to an investment not delayed. Occasionally, organizations will approve projects that are forecast to lose money when fully costed and sometimes even when only direct costed. Such decisions by upper management are not necessarily foolish because there may be other, more important reasons for proceeding with a project, such as to: • Acquire knowledge concerning a specific or new technology • Get the organization’s “foot in the door” Mantel_c01.indd 17 9/6/2016 4:41:23 PM 18 • Chapter 1 / the World of projeCt ManageMent • Obtain the parts, service, or maintenance portion of the work • Allow them to bid on a lucrative, follow-on contract • Improve their competitive position • Broaden a product line or line of business Of course, such decisions are expected to lose money in the short term only. Over the longer term they are expected to bring extra profits to the organization. It should be understood that “lowball” or “buy-in” bids (bidding low with the intent of cutting cor- ners on work and material, or forcing subsequent contract changes) are unethical prac- tices, violate the PMI Code of Ethics for Project Managers (see PMBOK, p. 2, 2013), and are clearly dishonest. Scoring Methods Scoring methods were developed to overcome some of the disad- vantages of the simple financial profitability methods, especially their focus on a single criterion. The simplest scoring approach, the unweighted 0–1 factor method, lists multiple criteria of significant interest to management. Given a list of the organization’s goals, a selection committee, usually senior managers familiar with both the organization’s crite- ria and potential project portfolio, check off, for each project, which of the criteria would be satisfied; for example, see Figure 1-4. Those projects that exceed a certain number of check-marks may be selected for funding. PMBOK Guide Project ________________________________________________________________________ Rater _____________________________Date ________________________________________ Qualifies Does Not Qualify No increase in energy requirements x Potential market size, dollars x Potential market share, percent x No new facility required x No new technical expertise required x No decrease in quality of final product x Ability to manage project with current personnel x No requirement for reorganization x Impact on work force safety x Impact on environmental standards x Profitability Rate of return more than 15% after tax x Estimated annual profits more than $250,000 x Time to break-even less than 3 years x No need for external consultants x Consistency with current line of business x Impact on company image With customers x With our industry x Totals 12 5 Figure 1-4 A sample project selection form, an unweighted 0–1 scoring model. Mantel_c01.indd 18 9/6/2016 4:41:23 PM 1.5 SeleCtIng projeCtS to Meet organIZatIonal oBjeCtIVeS • 19 All the criteria, however, may not be equally important and the various projects may satisfy each criterion to different degrees. To correct for these drawbacks, the weighted factor scoring method was developed. In this method, a number of criteria, n, are considered for evaluating each project, and their relative importance weights, wj, are estimated. The sum of the weights over all the j criteria is usually set arbitrarily at 1.00, though this is not mandatory. It is helpful to limit the criteria to just the major factors and not include criteria that are only marginal to the decision, such as representing only 2 or 3 percent importance. A rule of thumb is to keep n less than eight factors because the more important factors with weights of, say 20 percent or more force the weights of the less important factors to be insignificant. The impor- tance weights, wj, can be determined in any of a number of ways: a particular indi- vidual’s subjective belief, available objective factors such as surveys or reports, group composite beliefs such as simple averaging among the group members, and so on. In addition, a score, sij, must be determined for how well each project i satisfies each criterion j. Each score is multiplied by its category weight, and the set of scores is summed to give the total weighted score, Si = Σj sij wj for each project, i, from which the best project is then selected. Typically, a 5-point scale is used to ascertain these scores, though 3-, 7-, and even 9-point scales are sometimes used. The top score, such as 5, is reserved for excellent performance on that criterion such as a return on investment (ROI) of 50 percent or more, or a reliability rating of “superior.” The bottom score of 1 is for “poor performance,” such as an ROI of 5 percent or less, or a reliability rating of “poor.” The middle score of 3 is usually for average or nominal performance (e.g., 15–20% ROI), and 4 is “above average” (21–49% ROI) while 2 is “below average” (6–14% ROI). Notice that the bottom score, 1, on one category may be offset by very high scores on other categories. Any condition that is so bad that it makes a project unacceptable, irrespective of how good it may be on other criteria, is a constraint. If a project violates a constraint, it is removed from the set and not scored. Note two characteristics in these descriptions. First, the categories for each scale need not be in equal intervals—though they should correspond to the subjective beliefs about what constitutes excellent, below average, and so on. Second, the five- point scales can be based on either quantitative or qualitative data, thus allowing the inclusion of financial and other “hard” data (cash flows, net present value, mar- ket share growth, costs) as well as “soft” subjective data (fit with the organization’s goals, personal preferences, attractiveness, comfort). And again, the soft data also need not be of equal intervals. For example, “superior” may rate a 5 but “OK” may rate only a 2. The general mathematical form of the weighted factor scoring method is S s wi j n ij j 1 where S s i ij the total weighted score of the th project the score i of the th project on the th criterion the weight or im i j wj pportance of the th criterionj Best Practice Mantel_c01.indd 19 9/6/2016 4:41:23 PM 20 • Chapter 1 / the World of projeCt ManageMent Using a Weighted Scoring Model for an Election Campaign Project As the campaign manager to elect Jennifer Allison to the city council, you have determined that winning the election is largely dependent on Jennifer’s name recog- nition. One idea for increasing Jennifer’s name recognition is to distribute car bumper stickers with her name on them. In selecting a vendor to design and print the bumper stickers, you have two primary criteria of equal importance, cost and the reliability of the printer to complete the work on time. You have a limited budget for the bumper stickers and would like to spend no more than $4,200. Beyond cost and reliability, the reputation of the vendor for developing bold and aesthetically pleasing designs is also an important consideration. Upon further reflection and since this is only a bumper sticker, you determine that the reputation of the vendor is only half as important as either cost or reliability. Table B shows a set of scales you created for the three criteria, converted into quantitative scores. Table B Criteria Scales and Equivalent Scores Scores Criterion 1 2 3 4 5 Cost >$5,000 $4,000–5,000 $3,000–4,000 2,000–3,000 <$2,000 Reliability Poor Mediocre Ok Good Great Reputation Poor Fair Satisfactory Good Excellent You have identified three possible vendors to design and print the bumper stick- ers. In Table C, you have scored each of the vendors on each of the criteria, calcu- lated their weighted scores, and summed them to get a total. The weights for the criteria were obtained from the following logic: If Y is the importance weight for Cost, then Y is also the importance for Reliability and ½Y is the importance for Reputation. This results in the formula Y Y Y or Y½ . .1 00 0 4 Thus, Cost has 0.4 importance weight, as does Reliability, and Reputation has 0.2 importance. Table C Weighted Total Scores for Each Vendor Criteria (and Weights) Alternative Vendor Cost (0.4) Reliability (0.4) Reputation (0.2) Total Vendor 1 3 × 0.4 = 1.2 2 × 0.4 = 0.8 4 × 0.2 = 0.8 2.8 Vendor 2 2 × 0.4 = 0.8 4 × 0.4 = 1.6 1 × 0.2 = 0.2 2.6 Vendor 3 4 × 0.4 = 1.6 3 × 0.4 = 1.2 1 × 0.2 = 0.2 3.0 Based on this assessment, it appears that the Vendor 3 with a total weighted score of 3.0 may best satisfy your need for bumper stickers. As shown in Table D, spreadsheets are a particularly useful tool for comparing options using a weighted scoring model. Mantel_c01.indd 20 9/6/2016 4:41:23 PM 1.6 the projeCt portfolIo proCeSS • 21 Project selection is an inherently risky process. Throughout this section we have treated risk by “making allowance” for it. Managing and analyzing risk can be handled in a more straightforward manner. By estimating the highest, lowest, and most likely values that costs, revenues, and other relevant variables may have, and by making some other assumptions about the world, we can estimate outcomes for the projects among which we are trying to make selections. This is accomplished by simulating project outcomes. In Section 4.5, we will demonstrate how to do this using Crystal Ball® (CB) on a sample selection problem. 1.6 THE PROJECT PORTFOLIO PROCESS The Project Portfolio Process (PPP) attempts to link the organization’s projects directly to the goals and strategy of the organization. This occurs not only in the project’s initia- tion and planning p