Project Estimating

As Project Managers we are involved in providing project estimates almost all the time. I have recently been working on a lot of project estimates.

While reading some of my favorite authors articles I found this article, “What Causes Bad Estimates…And What You Can Do About It” by Dr. James T. Brown both relevant and timely.

I would love to hear what others think about the practice of providing estimates.

Do you give in to the pressure to underestimate the project so the project is either sold or moves forward or do you stand your ground and communicate what it actually takes to make the project successful?

Al Senzamici, PMP
Program Manager
ImageSource, Inc.

   

Catch Dr. James Brown at Nexus

Just a quick note for PM’s in the Pacific Northwest.  Dr. James Brown is conducting a class on conflict management at the Nexus conference in Seattle (Bellevue, WA) on Wednesday, November 2^nd.  I’ve been doing project and program management all over the world for the better part of 15 years and this guy is worth checking out.  Yes he has a PhD, is a published author, worked for NASA and all of that, but more importantly, he knows his subject matter as good or better than anyone in the business.  His teaching methodology and project management philosophy achieve the right balance between ‘the book’, best practices and common sense.  He also has a strong focus on human behavior and what that means in the context of project management. There are teachers and speakers, and then there are the people that you make sure to see every time they are in town.  Dr. Brown is one of the latter.  I encourage you to take the opportunity to go see him and take his class at the Nexus conference.

 

Gene Echkart
Program Manager
ImageSource Inc.

Nexus is Coming!

The ImageSource NEXUS ECM conference is fast approaching.  NEXUS is a unique opportunity for you to discover:

• How companies lever ECM beyond traditional Account Payable Invoice processes
• Lean about Enterprise Content Management industry trends (Cloud, Mobile Technologies, Social Media, to name a few)
• Invaluable opportunities to meeting and collaborate with industry peers
• Attend certified educational seminars
• View current ECM related technologies
• Participate in one on one sessions with industry technical and business experts
• Hear about using ECM as a tactical advantage is solving today’s business issues

All this as well as the ability to earn industry accreditations:

1. Project Management Professionals (up to 20 PDU’s)
2. Certified Records Managers (10 ICRM CMP Credits)
3. Healthcare Professionals (16 AHIMA Credits)
4. Accounts Payable Processionals (IAPP Credits)
5. Business Analysts (IIBA Credits)
6. American Payroll Association (3.5 RCHs)

NEXUS is a conference you can’t afford to miss!

Hope to see you there.

 

NEXUS 2011
November 3 – 4, 2011
Meydenbauer Convention Center, Bellevue Washington
To learn more: www.nexusecm.com

 

David MacWatters
ImageSource, Inc

 

Exciting BPM Workflow Discovery Workshop

If you have a Business Process Management (BPM) workflow project coming up soon, don’t miss the Nexus 2011 conference in Bellevue, Washington on November 3^rd and 4^th.  One of our teams is conducting a BPM workflow discovery workshop that is built entirely on audience participation.  It’s the Business Process Management – Discovery & Problem Resolution Strategy Workshop scheduled for Friday morning (4^th).  It’s a two session workshop and we’re going to take audience members (PM’s, SE’s and BA’s) to form a project team.  We’ll provide them with a business case scenario with BPM workflow requirements and then facilitate them working through the discovery process.  We’ll make sure that they run into lots of the common challenges we see on BPM workflow projects and then watch to see how they sort it out.  It’s a serious subject and we will share best practices approaches to solving these common problems, but we intend to have as much fun as we can in the process!  We look forward to seeing you there and having you participating as part of our workshop project team.  Don’t miss it!

Gene Eckhart
Program Manager
ImageSource, Inc

Part II – Evaluating ECM Projects

In Part I – ECM Project Costs and Benefits (April 12th 2010), I talked about the different types of costs and benefits – and which of those costs and benefits were applicable in evaluating an ECM project.  This is a continuation of that article – and hopefully the information provided will be of benefit when trying to get your ECM project funded.

When a company decides to undertake your ECM project, they’re consciously deciding not to fund some other project, not to offer their employee’s a larger raise, not to return the money to their shareholders or not to invest in a new business venture or launch a new marketing campaign.  Instead they’re trusting that the ECM project under your project management direction will provide more value to the company then these or other investment options.

Today – we’re going to talk about how an organization makes that choice and how they analyze various investment options and arrive at a decision on which projects to fund, which to reject, and which to defer.  To begin the conversation we need to understand the common types of evaluation measures such as NPV, ROI, IRR, payback period, etc.

Any elective project undertaken should provide greater benefits than the costs associated with implementing the project.  If such isn’t the case, then other factors are at play, such as the project is not elective, but required to meet legal requirements or new business needs.  In 2002, the Sarbanes-Oxley Act provided a legal mandate for many companies to invest in content management solutions thus bypassing the cost-benefit scrutiny we’re discussing here.

There are a number of  underlying assumptions in play behind the various evaluation measures:

1. Companies are risk averse – and other things being equal will choose to fund a project viewed as ‘less’ risky.
2. The future is uncertain, and no one can accurately predict how new requirements or technology will affect today’s business.
3. Because of inflationary pressures and personal preferences- we will normally view having a dollar today as being better than having a dollar tomorrow.

There are strengths and weaknesses associated with each of the common measures of a projects value.  We’ll talk about some of those differences.   I like tools – and my wife is pretty much sure that I have every tool known to man (which isn’t the case).  When discussing a new tool purchase with her - she applies a fairly unique methodology that I call COG where she evaluates 3 criteria:

1. How much does the tool cost?
2. How long does it last?
3. How many days a year will I use the tool?

A few months ago I ‘needed’ a new pressure washer (cost $300, minimum lifespan of 3 years,  and a use rate of twice per year – as moss grows fast in Seattle).  The purchase was approved  easily because the daily use rate of the pressure washer of $50 was less than the corresponding COG (cost of golf) for that day.  Any tool purchase generally gets approved if the cost involved in using the tool stops me from spending the day on the golf course.   As an added non-measurable benefit – the driveway and sidewalks are now moss free.

Excluding the COG measure - normal measures of evaluating a project or purchase such as NPV, ROI, IRR, payback period, and discounted payback period will summarize the cash flows from your project into a single number.  The thought is that by comparing these numbers for various projects or investment alternatives - you can make a more informed decision on which projects to undertake.

Your ECM project will generate a set of cash flows. Typically for an ECM project  the cash will be flowing out (negative cash flow) as you invest in hardware, software, installation, configuration, etc.  At some point in time the cash flows will become positive as your project realizes benefits from your ECM implementation.  In Part I – we talked about these benefits, and which costs/benefits could be applied to our measure of choice.

Let’s now take a more in depth look at the measurements most in use.

Payback  Period

This is a pretty common way to value a project.  The simplest way is to lay out a timeline (generally by month), and total for each month the net benefits received in that month.  When you reach the month on the timeline where the sum of all the benefits exceeds the upfront costs – then you have found the payback period.  In times of uncertainty, most organizations might restrict projects to those with paybacks of less than 1 year.    Remember our assumptions about uncertainty and risk?  In general a project with a shorter payback period is assumed to be less risky.  Projects with longer payback periods are more likely to incur scope change, cost overruns, delays, etc.  One of the negatives in using payback period is there is no way to evaluate longer term – more strategic projects as the measure focuses your team on projects with quick paybacks.    I would hope that your company considers an ECM implementation to be a strategic project!  On a personal note – I’d like to hear from any organization that realized a payback of less than 1 year on an ECM implementation.

Discounted Payback Period

Remember our assumption that people prefer a dollar today over a dollor tomorrow?    With a discounted payback period, you make the same calculations as in the payback period, but the future  benefits of your project are discounted each period.  This rate of discount is sometimes called the hurdle rate.  This rate usually includes two components:

1) the return on  a non-risky investment option such as putting your  money into a savings account.  If you can get a 3% return on your money by leaving it in a savings account – then at a minimum you would want your ECM project to return 3%.  If your project doesn’t return 3% then you would  better off leaving your money in the bank.

2) some discount factor to accomodate risk/uncertainty.  This might be an additional 5-10%

If your company is focused on projects with a short payback period of a year - then the discounted payback period won’t be significantly different than the payback period value.

ROI – Return on Investment

If you invest $1 on your ECM project today, and end up with future benefits of $2.50 you will have a calculated return on investment of 150%.  ROI is simply the ratio of net benefits to costs (net benefits divided by costs or in our case $2.50 – $1.00 divided by $1.00) expressed as a percentage.    The higher the number the better the investment or the better the return on your ECM project.

In the real world  you will most likely have to discount your future benefits by some discount percentage for the same reasons we have previously discussed ($1 in the future isn’t worth as much as $1 today,  the future is uncertain, unknown risks might arise, etc.)

The other important question that will arise is how far in the future you can use to calculate benefits?  You could reasonably expect to see benefits from your ECM project many years into the future, but you may be restricted to only using 3-5 years in your ROI calculation.  Unfortunately this will undervalue the true benefits of your ECM project when compared to a project where 100% of the benefits are realized during the evaluation period.

NPV – Net Present Value

NPV measures a project and tells you how much that project is worth to you in today’s dollars.  The calculation restates all future benefits into today’s or ‘present’ value. Let’s look at a simple project:

Today: We spent $100 on the ECM project

Year 1:  Because of implementation timing we only saw benefits the latter part of the year, – let’s say $10

Year 2: rollout to remainder of organization at beginning of year 2 - let’s say benefits of $50 realized

Year 3,4,5  - full year of extended benefits  of $60 per year

We’re going to simplify the calculation by assuming that all benefits are realized at year-end – and not throughout the year as is really the case.  Also we’ll use a discount rate of 10%

NPV = Year 1 net benefits discounted by 10% + Year 2 benefits discounted by 10% compounded for 2 years + Year 3 benefits discounted by 10% compounded for 3 years, etc, or

NPV = -100 + 9.09 (year 1) + 41.32 (year 2) + 45.07 (year 3) + $40.98 (year 4) + 37.26 (year 5)

NPV = $73.72

Note how the exact same benefits in years 3,4 and 5 are worth corresponding less when expressed in present (today’s) value.  The nice thing about NPV is that it provides a way of measuring total impact to a company.  Two projects with exactly the same ROI might have vastly different NPVs.  One of the strenghts of NPV is that it gives an indication of the ‘size’ of the project’s value to an organization.

IRR – Internal Rate of Return

One of the things that I don’t like about most measures discussed above is that they utilize some ‘artificial’ discount or hurdle rate set by company policy.  The IRR eliminates this somewhat arbitrary number and instead provides the actual rate of return on  your project’s investment.   Essentially, the IRR is the interest rate that your project will return to your company if they invested in your ECM project.   Excel or most business calculators can make this calculation – simply providing you with what kind of return you would get if you invested $X today and received $Y in the future.  Since the IRR is essentially a return on your investment – you can easily compare this number against any other project or non-project investment options.  (On a side note, if you used the IRR as your discount rate in the NPV calculation – you would end up with a NPV equal to zero.)  The problems with using IRR is that  IRR doesn’t give any idea about how large an investment is being made, or of how quickly the payback is realized.

There is no perfect measure to use in evaluating or comparing your ECM project with other potential projects – but I hope that you now have the ability to use multiple measures, and to be able to understand the differences, strengths and weaknesses involved in each.  Good luck!

Steve Kissinger

ImageSource

Sad Day in the World of Project Management

 

It is a sad day in the world of project management. Rita Mulcahy passed away after a long battle with breast cancer.

To those of us who studied for the PMP exam using her exam prep tools and books she will be missed.

 Her contributions to Project Management, and the PM community are and will continue to be  immense.

Al Senzamici, PMP
Program Manager
ImageSource, Inc.

  

Interesting Article on Working in Today’s Lean Environment

This is an article I read on the PMI website. Found it to be very informative, timely and accurate in today’s business climate..

Al Senzamici, PMP
Program Manager
ImageSource, Inc.

  

Working In Today’s Lean Environment

Despite the first glimmers of an economic recovery on the horizon, many executives are keeping a tight lid on resources.

Lean teams, it seems, are here to stay, at least for the foreseeable future. “We as project managers should be prepared to work like this for the next six months,” says Cynthia West, PhD., vice president, sales and marketing, Metafuse Inc., Irvine, California, USA.

Even in stabilizing industries, executives may still be hesitant to add new hires. The last thing organizations want to do is hire people only to let them go a few months down the line, she says. And many companies have adopted the “do more with less” mantra simply because they now know they can.  “Companies have been taking advantage of the economic downturn,” Dr. West says. They save money by having the excuse of “bad times” to explain layoffs or the postponement of new hires. 

Here are some tips on how project managers can work with today’s lean reality—and come out stronger for it.  

Be Graphical, and Be Honest

As resources are cut, remaining employees often have to step up and work harder. Dr. West says that project managers should speak up if they think the project will suffer as a consequence.  

She recommends that you run a visual report to show how heavily each team member is booked, to help you establish priorities. A graphic representation of all the projects in the portfolio that shows the impact of extra work also goes a long way in helping management understand how to prioritize initiatives.  “If you take on the jobs of three people, you’ll most likely fail,” she says. “Create an agreement with management and be honest that you can’t complete all these tasks.” 

Plan Your Projects into the Future

Although many organizations are thinking short-term right now and are waiting for the economy to completely recover, Dr. West stresses that long-term planning is always essential in project management, no matter the economy’s status.  

The “long-term” thought process usually depends on the culture, but she recommends having at least a three- to five-year plan. Map out all the projects in your portfolio in terms of crystal-clear strategies, objectives and goals, Dr. West explains.  

Part of the planning process should address the economic realities—organizations want ways to cut back. Project managers should map out a complete budget. These days, a rough estimate of won’t suffice, says Pablo Lledó, PMP, director, MasConsulting, Mendoza, Argentina.  “Now, it is not enough to be effective at only doing the project right,” he says. “You need to be efficient at doing the right project at the minimum cost.”  

Prioritize Responsibilities

If there was ever a time to know your priorities, it’s now. “You have to decide which clients are most important and most profitable,” says Dr. West. Prioritization takes considerable analysis because it might reveal that the client who spends the most money with you might not necessarily be the most profitable.  

Dr. West says tracking time and billing hours will reveal which clients should be your top priority. Project Insight, for example, assigns a weighted score to each project in the portfolio so that both the team and the leaders know which projects are the most important. 

But no matter how the order of projects fall, project managers and their teams should take this time to master the art of “working thin,” says Mr. Lledó. “The downward economy was a great signal to watch out for efficient projects,” he says. “Project teams should become stronger after all these lessons learned regarding how to keep managing projects under the crisis.”

*This article was originally published on 9 September 2009 on PMI.org. © 2009 Project Management Institute. All rights reserved.*

Putting Together an ECM Project Team

Part 3 – The Project Team

In previous blogs on this same subject, we have discussed the role of Executive Management in the overall Project Team effort.  And what elements from the  internal organization would likely comprise an effective team.   In summary, vibrant and effective executive leadership is likely to be critical in solidifying the vision for the project.  The target of effort to achieve project acceptance and enthusiasm is cascading in that the focus of executive leadership is middle management.  The components of a project team may be different for each organization or type of organization – whatever best suites the particular organizational structure, and what special considerations there might be in the project (i.e. does it involve web content, collaboration, integration with ERP or SharePoint environments, etc.).

The Role of Line of Business Managers in the Project Team

As your project will likely either be addressing a limited requirement of a single department or two, or will be the start of an enterprise wide implementation of ECM, it is always recommended that it focus on a manageable quantity of work – normally one or two Departmental or workgroup solutions.  Enterprise wide ECM, ERM, and Business Process Management implementations usually start with one or two departments.   The Department(s) chosen for the Project are normally those where enthusiasm for improvements is high, cooperation is supportive, and where the business entity will benefit highly from the application of ECM technologies.

Starting with one or two areas that have been carefully selected based on their high potential for success and strong need for improvement, permits the rapid and clear demonstration of  ECM technology benefits – and that strong example can assist in the acceptance of the larger project to come across the enterprise.

Departmental management and supervisory involvement and strong support is crucial.  The organization’s line-of-business (LOB) managers understand the routine and cyclical “problems and challenges” of business operations.  They are operational experts within their areas of responsbilbity, know the character of the staff resources they have to work with, entity strengths and weaknesses, the potential to accept change, and what “change management” efforts should be implemented.   These LOB Managers and supervisors routinely “concentrate on organizational effectiveness through current processes” they will become the bridges that will carry the success of the ECM project forward into routine of daily work production.

The LOB Managers and other key supervisory or lead personnel need to be considered for the Project Team for either full involvement, or participation in the development of specific new process or workflow designs.

• They are most cognizent of what is done in their departments and why, what documents are received and how they are processed, the various sources of data (paper from internal and mail sources, voice mails, emails, internet provided input, etc.).
• They understand the decision criteria in the flow of work, the point where specific processes are needed, risks to successful processing, exception processing, and all the rest of the challenges that will need to be considered in a process design.
• They also know which other business areas need access to their documents and data.
• They usually have the only available insight into key details regarding operational systems, processes, and policies that support their organization’s mission.

When you apply ECM and BPM technology to an organization’s routine processes, you must have input and significant levels of planning participation from the managers and key personnel who are most familiar with operations so they can ensure that the new system will be successful in meeting objectives at all meaningful levels.  These people are needed to allow the project team to reach all objectives through consistent operational production.

From time to time this blog will continue with the subject of project team challenges, some considerations to remember, use of supporting vendor resources, and some recommended methods for implementation.

Neil W. Lindsey, ECMm, CDIA+

Project Manager / Senior Business Analyst
ImageSource, Inc.

Part I – ECM Project Costs and Benefits

 

ECM technology has been maturing for the past few years – and with this maturation comes a wider range of price points and expertise allowing for the benefits of ECM to be utilized by smaller companies and to truly encompass ever smaller business processes and departments within an enterprise.  Regardless of the size of the ECM project, each will be scrutinized by some type of cost/benefit analysis to determine whether to proceed with the project. 

Today, we’re going to talk specifically about costs and the flip side of the coin – benefits or cost reductions.  More specifically, I hope that the following information will increase your comfort level in dealing with ‘he/she who holds the purse strings’ – from RFP stage through negotiations that ensue regarding the trade-offs between scope, resources (costs)  and timeframe on your project.

The expectation of an ECM project manager is that he/she is knowledgeable about CM technology and can communicate with all levels of IT people.  Additionally we’re also now expected to be able to understand business processes within AP, AR, HR and effectively manage projects merging technology into business solutions and/or process improvements.  What we’re not doing and in most cases not expected to do – is to be able to communicate in finance speak with ‘he/she who holds the purse strings’.  Essentially this means that we lose control of our RFP or project change requests – and rely on others because we’re not expected to be able to talk dollars and cents.

Again, I hope the following will allow you to feel more comfortable in talking dollars and cents.

So what do the words variable, fixed, average, and marginal all have in common?   Perhaps you recognize these as a few of the myriad adjectives describing different types of costs.  Let’s wade into the types of costs that CFOs look at when they’re evaluating your project and determining whether the $1 of benefits you’ve promised really equates to 4 quarters to their bottom line.

Variable cost – there is an old saying in economics that all costs are fixed in the short-term and variable in the long term.  A good example of a variable cost would be postage.  There is a perfect relationship between how many documents you mail and how much postage you have to pay. A variable cost is any cost that varies directly with an activity. 

Fixed cost – these are costs that are fixed at least in the short term.  The key question here is how long is short term?  The answer will differ from company to company, and project to project.  Most likely you’ll need to meet with someone in the finance or accounting department to determine how projects are evaluated.  Let’s assume the CFO tells you that all projects must have a payback period of less than two years.  (In Part II – we’ll talk about different ways companies evaluate projects.)  So we can use this information to determine what costs are fixed/variable in the two year period.  Union labor contracts, real-estate leases, etc., lock in costs – making them fixed perhaps for the entire project payback period.   If you can’t break a lease or sublet freed storage space in the two year payback period – then it is unlikely the CFO will allow you to include any benefits from reducing storage costs.

Looking at many of the costs in your life – you recognize that many have both a fixed and a variable component.  For example if you budget for food costs – there is some minimal level that you can’t fall below without risk to your health or well being.  This fixed component will vary depending on whether you can maintain your happiness with Budweiser or require 20 year old scotch.   When you own a car there are fixed cost components such as insurance or your car payment, and variable components such as gasoline, tire wear, depreciation or even maintenance.   Just remember that in the short-term our ECM project can only provide savings that fall in the variable cost category.  

Average cost – You’re working on an ECM project for an AP department – and a typical question you would ask during discovery would be, ‘How much does it cost your company to process an invoice?’  The well-informed AP manager will proudly come back and give you a figure somewhere between $20 and  $50.  What you’ve just been given is an average cost.  The AP manager took all costs associated with the AP department including salaries, benefits, rent, postage,  AP’s portion of  utilities, janitorial costs, perhaps IT support, license costs for their payables system etc., and divided this number by the number of invoices processed.  By now you recognize that these costs include both fixed and variable components.  If your ECM project successfully eliminated all manual invoice costs – do you think the CFO believes that the benefits you’ve penciled in are true savings?  Of course not.

Marginal cost – Let’s go back to the AP department one more time to understand marginal costs, and ask the AP manager a slightly different question, “How much would it cost for you to process 1 more invoice today?”  The AP manager will most likely give you a blank look and repeat the same answer of $20-$50.   So, you sit down with the AP clerk and time them on how long it takes to process an invoice, you then add time/costs for invoice approval, for creating a payment document, and perhaps for postage, mailing, invoice retention – and for some reason your cost comes in at a fraction of the $20-$50.  What you’ve just done is determined the marginal cost of processing one more invoice or conversely the cost savings associated with the elimination of manual processing for one invoice.  Look carefully at the costs you’ve included – you should recognize these as the sum of all the variable cost components associated with invoice processing.

So if average cost is incorrect – is marginal cost the correct figure to use when calculating ECM benefits?  From the scenario above – does this mean marginal cost is the same as variable cost? The answer to both questions is no.  The reason is that we’re making an assumption if we extrapolate the savings/costs associated with one invoice to many invoices.  If an AP clerk can process 100 invoices per day then potentially we can reduce the salary costs associated with one AP clerk if we can eliminate manual processing for 100 invoices per day.    If we’re able to replace a number of AP clerks, perhaps next year when the AP manager retires – we can replace him/her with an AP supervisor.   If the number of AP users decline significantly – then next year we can negotiate a lower license cost with our AP software vendor.

What margin really means is that all costs are variable.  At some point in the AP process we run into constraints where fixed costs are impacted.  For example, if every single AP clerk is working as hard and efficiently as possible and working all the overtime allowed by the company – then adding one more invoice would force the company to hire one more AP clerk.  In such a case the marginal cost of that one invoice could be $2000 and not $2.  What if there wasn’t any room in the AP department for one more desk/person?  In such a case the AP department might be forced to add a new shift of workers.  Adding in the cost of a shift manager and other restructuring necessary – the marginal cost of that one invoice may now be in the $100,000 range.

The point is that over the life of your ECM projects benefit period – you can expect to convert some of the fixed costs to variable costs that can then be reduced or eliminated.  If any part of this benefit period fits within the payback period of your project then you could and should include those benefits as project benefits.

My final point in understanding these costs is credibility with your customer’s ultimate decision maker. 

As an ECM project manager, you’ve easily won over the IT department with your technical expertise in ECM hardware/software.   You’ve wowed the business users with a list of successful implementations.  What you don’t want to do is diminish your credibility with the CFO when they’re evaluating your project on a cost/benefit basis.   Spend time understanding your customer’s cost structure; how they evaluate projects – and present accurate numbers that truly depict realistic benefits.   If you do – you will have won over the most important person in the decision making process.

Part II in a few weeks will look at different financial methods that companies use to evaluate projects – and how to structure your project within those methodologies.

Steve Kissinger

ImageSource, Inc

  

Don’t Think That Certifications Make a Difference for Your Career or Success?

More Organizations are requiring PMP Certification for their employees.

Read the latest news on why the PMP^® is a leading certification companies are requiring their project managers to have.

Take a look at this Wall Street Journal journal article if you don’t think they make a difference.

Al Senzamici, PMP
Program Manager
ImageSource, Inc.