Wednesday, November 13, 2019

What Is the Real Cost of Delay of Your Project?

What Is the Real Cost of Delay of Your Project?
One challenge that every organization faces is deciding which project should be prioritized. Would it be in a company’s best interest to embark on a $1 million project that would take three months to finish or a two-year project that would cost $30 million?

And if you want to do both, which one should be done first? Or is parallel the best option? Does it makes sense to speed up or slow down an existing project?

All these questions center around the economic impact of the project's delivery time on it's business value.

Starting what date can we expect value to be delivered? And what happens when we don't deliver on that date?

Cost of delay (CoD) is a key metric that represents the economic impact of a delay in project delivery. It is a way of communicating the impact of time on the outcomes we hope to achieve. More formally, it is the partial derivative of the total expected value with respect to time.

Although the word "delay" implies this only applies to ongoing projects, exactly the same metric can be used for projects that have not started yet.

CoD combines urgency and value — two things that humans are not very good at distinguishing between. To make good decisions, we need to understand not just how valuable something is, but also how urgent it is.

Unfortunately, many organizations don’t use CoD in their decision-making process — mostly because they do not know why it's important and how to do it. This can be a very expensive missed opportunity as delays may cost millions depending on the scale your organization operates on.

In my opinion, every organization needs to understand what CoD is, how to calculate it, and how to optimize your project portfolio to reduce CoD.

Estimating cost of delay

As stated before, CoD is the economic impact of a delay in project delivery. Before we start with estimating this economic impact, here are some examples of possible CoD:

Product development – the amount of money you will lose if the launch of your new product will be two months later.

Software development – the amount of money you will lose if the release of an essential feature causes a big client to move to a competitor.

Solution implementation – the amount of money you will lose if you fail to replace the existing ERP system by the end of this year.

IT operations – the fines you have to pay if your systems do not comply with new regulations on time (GDPR, FATCA, etc.).

To estimate these potential costs of delay for your project, start with estimating the benefits that you will receive per week after you deliver anything to the market or to your organization.

These benefits typically take the form of:

1) Increased Revenue
2) Protected Revenue
3) Reduced Costs
4) Avoided Costs
5) Positive Impacts

See my article “What Are the Real Benefits of Your Technology Project?” for details on estimating your project's benefits.

For example, if you are selling a software-as-a-service (SaaS) product and you plan to deliver a new add-on feature that you anticipate will bring you $20,000 per week, every week that you postpone the release will cost your company this sum in missed revenue.

After you've estimated the benefits per week you can estimate the costs of the project per week. After all, when you are not starting a project the costs are zero, but when you do start the project you will have costs.

See my article “What Are the Real Costs of Your Technology Project?” for details on estimating your project's costs.

In order to estimate the real cost of delay per week you have to subtract these costs from the benefits. Not doing this is unfortunately a mistake many organizations make when using CoD.

Always remember that CoD is the partial derivative of the total expected value with respect to time.

Value = Benefits - Costs

When your project has a duration longer than six months you can estimate the benefits and costs per month instead of per week.

Types of cost of delay

Before you start estimating the CoD of your project it's important to understand that there are different types of CoD. Remember CoD combines value and urgency. Where value is depending on your project and your business, urgency takes usually one of four forms. These can be described with so called urgency profiles. Each of these profiles will lead to a different type of CoD.

In order to understand the urgency of projects, we need to understand the life cycle of benefits, and the effect of being late. The effect of delay can be different depending on what the type of benefits are, and whether there is any influence from the wider market.

The two main variables to consider are a) the length of the lifecycle of the benefits (how quickly the benefits ramp up and down) and b) whether the peak is affected by delay or not.

Profile 1: Short life-cycle; peak affected by delay

In some cases the life cycle of benefits is relatively short. Benefits ramp up to a peak and quickly decline again. Sometimes this is because the value-add quickly becomes standard for customers.

This is for example common for mobile phones. What is hip and differentiating today will be bargain-basement stuff in months rather than years. In other examples, the market is always creating new alternatives, moving on quickly to the new “new thing.”

The fashion industry is also a good example of this, which is why Zara competes by having very short lead-time from spotting the new look on the catwalk, to selling it on the hangers in the store.

With these types of benefits, if you are late, the peak benefits are affected, as shown below.
What Is the Real Cost of Delay of Your Project?
Profile 2: Long life-cycle; peak affected by delay

Another urgency profile is where there is a first-mover advantage, making it difficult for latecomers to recover position. This can be due to barriers to entry or the advantage that scale can bring.

A good example of this is cloud computing services. Offering something similar to Google Cloud Platform, Amazon Web Services, or Microsoft Azure can only be done with huge investments, and even then your chances are slim. This urgency profile is typical for services for which the market consolidates down to two or three major players. These products benefit from some form of preferential attachment mechanism or “network effect.”
What Is the Real Cost of Delay of Your Project?
Profile 3: Long life-cycle; peak unaffected by delay

A third urgency profile is where the lifecycle benefits are long-lived. Benefits ramp up to a peak and are sustained over a long period. In most established organizations this is the most common urgency profile you will find.

A typical example is where we are automating a process or improving efficiency, reducing time or cost. The ramp-up and peak of benefits is effectively the same whether the solution is late or not. This is also the easiest urgency profile for which to calculate the cost of delay, as it approximates nicely with a simple parallelogram.
What Is the Real Cost of Delay of Your Project?
Profile 4: Impact of an external deadline

Where requirements have a specific deadline the urgency profile is slightly different. The benefits profile itself can look like any of the above three, but the benefits only ramp up around a certain date.

As a result, the cost of delay is zero until the point where you need to start development — to avoid incurring any delay cost. To calculate the point at which the CoD kicks in, we need to consider the likely lead time, ensuring that the solution is delivered just-in-time, rather than too early or too late.

Let’s take for example a new regulation that will be effective from the 1st of January 2021. As of that date, front-office staff will need to prepare extra documentation in order to meet this regulation. The requirement is to automate the new documentation process so that the front-office employees can produce the documentation automatically.

The requirement will avoid the additional manual processing resource, which is estimated to cost about 10 full-time equivalents (FTEs) at $52K per FTE. The benefit type is categorized as “Avoided Cost.”

10 FTEs x $52K = $520,000 per year = $10,000 per week

Let’s say it is the 1st of March 2020 right now, which means we have 10 months to do something about this requirement. It’s going to take about 20 weeks to deliver this new feature. If we start developing the solution now it will be delivered in August 2020, but we don’t need it until December 31.

We deal with this by calculating when we need to start developing the solution by subtracting the duration from the external deadline. In this case we need to start development by the 1st of August at the latest (20 weeks before the external deadline of January 1st).

Before the 1st of August: cost of delay is $0 per week.

After the 1st of August: cost of delay is $10,000 per week.

In a nutshell: It’s vital for companies to understand what cost of delay (CoD) is and how to calculate it. Knowing the impact CoD will have on a business will give management greater insight on the projects in the pipeline and help them determine which ones should be prioritized.

You can buy my eBook The Project Valuation Model ™ by clicking here or on the image.

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Tuesday, November 12, 2019

Interview With Carole Ackermann (CEO, Diamond Scull) on Project Sponsorship

Interview With Carole Ackermann (CEO, Diamond Scull) on Project Sponsorship
For the last decade I have dedicated myself to helping C-level executives recovering troubled projects. If there's one thing I've learned in the process, it's that executive project support is priceless.

Engaged executive sponsors help organizations to bridge the communication gap between influencers and implementers, thereby increasing collaboration and support, boosting project success rates, and reducing collective risk.

Carole Ackermann is an example of such an engaged project sponsor. I met Carole for the first time at an event held by Business Angels Switzerland; at the time, Carole was the club's president. She is heavily involved in the startup scene of Switzerland, is an experienced corporate board member, and CEO and co-owner of Diamond Scull.

«Diamond Scull» is the leading rowing event of the «Henley Royal Regatta» on the river Thames. It’s where the best scullers meet to race. ― the spirit of going for the best especially under harsh conditions is what guides Carole.
I asked Carole for her insights on project sponsorship because of this highly interesting mix of experiences.

Tell us a little bit about yourself.

Passion for innovation — that's what drives me. I hold a PhD in business administration and have more than 20 years of leadership experience in SMEs and large organizations. I invest in startup companies, and I support various companies such as Allianz, BKW, BVZ Holding and Plaston as a non-executive board member.

Participating in a management buy-out and building up businesses led me to my current engagements as a member of the board of be-advanced, as a jury/investment committee member of different startup initiatives, and as a senior lecturer at the University of St. Gallen and other universities.

Can you tell us something about your experience as a project sponsor?

Through all of my career I have been sponsoring different projects. I started as a consultant with Arthur Anderson, where I launched the EMEA Branding initiative together with colleagues from the UK. The core team consisted of eight people involving all regional heads.

During my time at Saurer and Ionbond I often brought up special topics worth digging into; many times, this led to projects with several members. Depending on the project, the budget started from several thousand dollars to millions of dollars, and the duration was from several weeks up to two years.

Today I am also engaged in projects with the aim to increase the number of female entrepreneurs. I support talented women in their careers and partly secure the financing of their startups.

What do you think is the single most effective thing a project sponsor can do to positively influence a project?

There are a number of highly effective things a sponsor can do.

> Be clear about what is to be achieve and what success means
> Involve the right people
> Show passion for the project
> Trust people and give them decision power

But if I had to pick only one, it would be to make sure that the right people are in charge and strengthen their confidence in themselves.

What do you think is the single most effective thing a project sponsor can do to negatively influence a project?

Here I find it also hard to limit myself to one.

> Distributing information selectively
> No skin in the game, i.e., not taking responsibility
> Withdrawing important resources mid-project
> No milestones, organization, and success criteria

But the one thing that guarantees a negative influence on the whole project and each of its members is to sponsor a project without believing in it. People will notice and feel this.

When you don’t care and don't believe in it, why should they?

What was your biggest success as a project sponsor, and why?

Leading without power and budget. During a vacation in China i realized how big this market is and saw new business opportunities for the company I worked for. When I pitched the idea to my boss he said, “Go for it, but you will have a very limited budget." So, I commuted intensively to China, and using just a very small budget of the marketing division, I evolved the idea to a project that resulted in a substantial business with three production sites.

I was by myself far away from home, started without a budget, had very limited China experience, and finally created a strong result. This was a very satisfying and empowering experience.

What was your biggest challenge as a project sponsor?

The post-merger integration of marketing departments from six previously independent business units.

As Head of Corporate Marketing I was responsible for aligning all the marketing people of these business units. But none of them asked for this integration or for alignment. They all wanted to stay independent, and the last thing on their agenda was an integrated marketing program.

What was your biggest failure as a project sponsor, and why?

As a longtime investor and sponsor of a startup in ophthalmology I recognized too late that the first technology was not attractive enough for the market, and the second technology could principally not work.

I took decisions without fully understanding the technology and depended on blind trust in our “specialists” and “academic advisors.” Since that experience I recognized how important it is for a sponsor to have a judgement about the key matters of a project or startup.

How do you determine a project is really necessary and valuable?

As a project sponsor you need to see a purpose in the project; it must have a reasonable chance to be doable; and, if successful, it must have an impact.

This can be something that increases the value of a company or a person or does something good for the society. Today organizations are expected to create more than profits. Moreover, they are expected to focus on creating positive values for clients, employees, and society. Activities that create societal value are more likely to remain profitable in the long run.

The Integrated Profit & Loss (IP&L) approach provides all you need to report and steer your total value creation objectively and transparently. IP&L enables a better understanding of value creation per capital and stakeholder. In the IP&L, value is distributed across different stakeholders. Examples of stakeholders are investors, clients, employees, suppliers, governments, local communities, and society as a whole.

As a board member I address the importance of Corporate Social Responsibility for a sustainable business and I hope more and more organizations start seriously addressing challenges such as decarbonizing the business to name one.

How do you recognize your project is in trouble?

If people involved in the project lose faith and fun, you know you are in trouble. And you will only notice this if you spend time with these people and start listening in order to understand. This way, you will notice (potential) issues before they appear on your status dashboards.

What advice would you give to a first-time project sponsor?

There are two types of project sponsorship: casino sponsoring and project sponsoring. The second is more promising. You should only sponsor a project if you are experienced with projects and if you understand its content. Otherwise it’s just gambling.

There are very few projects you can do alone. One of the most basic success factors is to be able to work in teams or even better to love it. If you do not want to do everything by yourself, you have to win their heads, their hearts, and their hands — also known as the 3 Hs.

I am convinced that the more you know about how to work with people, how to involve people, how to lead people, how to listen to people, and how to support people, the more successful you become as a project sponsor. If you are not born with these qualities, you can cultivate them. Learn how to work with people, gain experience, and reflect on what was good and what could be done better.

What are you looking for when selecting a project manager for your project?

The fundamental task of a project manager is to deliver a project on time and at cost. So he definitely needs a good understanding of project management and must understand or at least have a judgment on the substance of the project.

But this is not enough. Project managers should also have experience and interest in the project and enough emotional intelligence to lead people. Finally, they should be passionate about the project.

What are you looking for when selecting a steering committee member for your project?

Very simple. I'm looking for E, N and K — experience, network and knowledge in a specific field. The same holds for strategic advisors.

What is/are your most important lesson(s) learned as a project sponsor?

Everything is about people. It’s about passion, persistence, knowledge and teamwork.

This is the second in a series of interviews with executive project sponsors. The interviews will be part of my upcoming book “The Art of Project Sponsorship.”

The first interview was with Urs Monstein (COO, VP Bank).

To read more about the book just click on the image.

The Art of Project Sponsorship

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Tuesday, November 05, 2019

What Are the Real Benefits of Your Technology Project?

What Are the Real Benefits of Your Technology Project?
The benefits of a project.

Everyone talks about it, and there is no lack of opinions about what they are, but when it comes to project benefits it’s often hard to reach consensus on what people actually mean.

Additional revenue, higher profit margin, happy employees, satisfied customers, new clients, less pollution, less waste, operational efficiency. They are all benefits.

Most dictionaries define a benefit as something like “a helpful or good effect.” But good effects are very hard to measure, compare, and understand.

Therefore, in my opinion ALL benefits of a technology project should be expressed in dollars (or any other currency).

Using dollars is helpful for a number of reasons. The key advantage is that, with the benefits being expressed in a uniform way, you can compare projects immediately between business areas, across delivery streams, and in the whole project portfolio.

Another reason for assigning dollars to benefits is to prevent determining the benefits of a project by measuring “who shouts the loudest,” something many organizations suffer from.

And given that most of the costs of a project are already measured in dollars, you can easily compare the costs and benefits of a project to determine it’s overall value.

While estimating a number for costs is generally easy to do, assigning a dollar value to the benefits is more of a challenge. Getting to data and assumptions that make estimating benefits in dollars possible is difficult, but it can be done.

And it pays off: You'll gain a clear idea about what the expected benefits are, and what assumptions you need to test, in a way that all project stakeholders will be able to understand.

Focus on Economic Benefits

Many projects have objectives like “delighting the customer,” “improving time to market,” “happy employees,” or “operational efficiency.” But hardly any project will be blessed with unlimited resources to invest, and there’s just no getting around the fundamental challenge that all organizations face: sustaining themselves.

At some point the projects you invest your limited resources in should help the organization to sustain itself and possibly even grow. So the question becomes “How do these benefits impact the economics of your organization?”.

The risk of placing too much focus on the economic benefits is relatively small and one can argue that lately it's largely been ignored by many organizations (just have a look at the number of Silicon Valley unicorns that are currently imploding). It is of no help having happy customers and no revenue.

The biggest risk of focusing on the economic benefits of projects is when organizations find opportunities to reduce costs that may ultimately have a negative impact on the customer experience. This is particularly problematic for service organizations, where a more efficient operation often translates to less happy customers.

To make estimating the benefits of a project easier and more realistic, I use a simple model to assess the economic benefits of a project. It consists of five benefit types (or buckets).

1) Increased Revenue
2) Protected Revenue
3) Reduced Costs
4) Avoided Costs
5) Positive Impacts

Each project must contribute to one or more of these; if it doesn't, it has no benefits at all.

Increased Revenue

Increased revenue is the revenue associated with either increasing sales to existing customers or gaining new customers. It may involve increasing share of wallet, market share or even the size of the market itself. It can be done by making changes that add value to existing products or services that customers are willing to pay for, or adding new products or services that either existing or new customers are willing to pay for.

The projects in this area are likely to be “delighting” features for either current customers or new ones. This is also where innovation occurs, enabling new business models and increasing the size of the market by serving new markets and undercutting others.

Protected Revenue

Protected revenue is the revenue that is currently being received from existing customers who are paying for the products and services you already sell. Sustaining and protecting this revenue often requires ongoing improvements to at least keep up with competitors and maintain existing market share.

The projects in this area are more defensive in nature, making processes faster and easier to use and removing any pain that might drive customers to consider switching to a competing product or service. The changes made here are usually not considered valuable enough for existing customers to pay extra, though. This is the basic maintenance of existing products and services that can be described as “sustaining innovations.”

Reduced Costs

All those ideas about how to be more efficient contribute to this bucket. The projects that add to this bucket will reduce the costs that you are currently incurring. A typical example of this can be changes that speed up or automate processes, reducing the number of people required. It can also result in savings in overhead, equipment or other costs.

Avoided Costs

Avoided costs are costs you are not currently incurring but there is some likelihood that you will in the future, unless some action is taken. Some examples of these might be the need to hire additional people to handle a new process, fines you may have to pay, or loss of reputation that impacts goodwill or brand value.

This category typically includes a lot of things that many organizations might consider to be operational or strategic risks — often with an estimate of the probability of an event occurring.

Positive Impacts

Positive impacts are benefits that cannot be translated to one of the above but are important enough for your organization to take into account when evaluating a project. For example, creating less pollution and waste, or helping the family of a deceased colleague, or working for free for a non-profit.

When such benefits are important for you and your organization you will give them a disproportionate dollar amount as value. This way projects with such benefits will always be part of the short list of projects to be selected for implementation.

When these benefits are not so important, make the dollar value of the benefits equal to the costs, and projects like these will only be part of the short list if they have additional economic benefits.

And when the importance of these benefits are just lip service just give them a zero dollar value and you will see them almost never in your shortlist.

Make Assumptions Transparent

Once you have identified the benefit types of your project, getting to a dollar figure typically requires some assumptions about the effects of the change or the cost of alternatives. The reality of technology projects is that they involve many risks, unknowns and uncertainties. In order to calculate the dollar benefits, you will often have to make assumptions or educated guesses and apply probability where necessary.

The goal of these estimations and assumptions is accuracy, not precision. Accuracy is how close an estimate is to the true value. Precision is the number of significant figures you give in your estimate. These are two different things.

The initial process of estimating the benefits of projects needs to be fast — less than one week. Over time you will get better information to improve your assumptions or replace them with facts. You can then update your estimations and re-evaluate.

By making assumptions transparent you prevent blatant gaming of the benefits and cost figures. This means all assumptions are part of the document that estimates the benefits. Transparency of assumptions also allows others to scrutinize and improve those assumptions. And better assumptions will lead to more reliable estimations.

In some cases, the same assumptions are used again and again. It can be helpful to use the same numbers for particular project benefits and even start building a repository of assumptions and key data points that are shared and built on over time.

And Now What?

Now that you've arrived at an estimate of your project benefits expressed in dollars, and you already estimated the real costs of your project in dollars you are now ready to determine the real value of your project.  This will be the topic of my next article.

In a nutshell: Estimating the benefits of your project in dollars is essential for making good decisions, comparing projects, and aligning stakeholders.

You can buy my eBook The Project Valuation Model ™ by clicking here or on the image.

Read more…