Project Management in Practice

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Tag Archives: Cost

Building PMO metrics

The Christmas and New Year is always a good time to take some time off the hurly burly of daily grind and reflect on how things are going. Towards the end of the year I did some work on what metrics would help us run our PMO more efficiently. Metrics are always difficult to establish, especially as they only tell a story once you have a baseline to measure against. This is probably a heavy topic for the first post of the year. Apologies for that.


While I see a pressing need for making decisions on evidence, I am also cautious against spurious interpretations of metrics, which can easily happen if taken out of context. You only have to look at statistics driven sports such as baseball or cricket where fans and officials will take diametrically opposing views of players or tactics using different statistics. Numbers are just that. What you interpret from them is what gives them meaning.

The first task was to explore what type of metrics would be useful for our business. I work for a IT professional services firm. It has unique challenges from other types of businesses. I did some research on what other similar organisations are doing. I found this compilation from OpenAir and excellent resource. There are three articles in this and the first one by Thomas Loh is by far the best. This was an excellent start. The key is not to go chasing every metric under the sun, but the ones that you need to measure. That is even more crucial when your PMO is lean and you are in the process of building its maturity. Capturing metrics and analysing them takes effort and time. You cannot afford to be spending either frivolously.

The standard metrics of utilisation, profitability, billing rate etc are quite easy to measure after the effect. We were looking at getting at least one forward looking metric that can help validate our decision making. We decided to invest in our effort in an area that is most challenging for a services business like ours – that is the pull between resource and demand.

Resource-vs-DemandIn services business you either have too much work or too many people. It is crucial to have a good handle of this to maximise profitability. The cycle of winning new business always takes time. If you have left your efforts to bring in new work too late, you will inevitably have periods of low revenue. Unlike products which you can sell at a later time and recoup some revenue, if not all, lost consulting time cannot be archived and sold. That is effectively lost.

To ensure an optimum work pipeline, we can use the charge rate to either stick to our margins, because work is plentiful or use discounting effectively to be more competitive than usual in tough market times. We want to be making a decision on them at the correct times (i.e., not stick to higher margins when market is tough or give away margins when not necessary). We are looking at using Backlog (total value of contracts yet to be executed) as a forward measurement for that.

The aim is to look at recording the backlog value three months out and updating the actuals at the end of the month. As we currently do not have a baseline, I do not expect us to be able to use this effectively in the next year. However, once we have built a picture, we should be able to predict with some confidence what it means to be at a certain point in our backlog and what that is likely to mean in terms of likely actual income.

Because we are looking at it three months out, we’re likely to have enough time to win new business to fill up the pipeline if it is looking less than promising. If pipeline is strong, we know we do not need to compromise on margins. There is likely a follow up on this topic this time next year on how this measurement plays out. Hopefully my challenge is not unique to me and the process is helpful for others to reflect on.

I am keen to understand what predictive measurements you have successfully implemented.

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Competing with cheap opposition

Competing with cheap oppositionThe saying if you pay peanuts, you get monkeys used to be quite a true one. In traditional business models where all suppliers came from the same market that extended to projects as well. Today services are not necessarily procured from the market they are delivered. Competition is much wide ranging to different countries and even continents. Exchange rates can artificially put companies in an advantageous position. A reasonable salary in India or China will be significantly less than in the United States, Europe, Australia or New Zealand. This pits companies providing services in their own markets into a challenging situation. How can they compete?

Some companies have taken the route of your “local” as the reason to do business with them. Unfortunately, the world is a more savvy place today than some years ago … mostly. This tactic does not work as well today as once it did. The scenario is not limited to services being offered from cheap offshore companies. The response of many companies in these jurisdictions that seek to be competitive is to eliminate overheads by cutting training, limiting remuneration and benefits, removing office locations etc. to provide services on the cheap. Challenges are even higher competing against such organisations.

If you wish to maintain a semblance of quality, retain capable staff and intellectual property and seek to provide job satisfaction then there is a cost to that. The organisation cannot absorb all the cost. They are in it to make a profit at the end of the day. This cost has to be passed on to the client to make it work. Is this a futile exercise? It may seem the only way to compete is to trim expenditure at the cost of everything else.

I was having a conversation with a former colleague, who was of the opinion that he would seek quality every time. While an excellent idea in principle, it rarely works in practice when money is involved. We as human beings are programmed to look out for the best “deal” out there. You only have to look at the roaring trade retailers do around festive season. It is the appearance of value for money that attracts many. Think yourself … if you can stay at a 5 star hotel for 2 nights and for the same cost stay 7 nights at a 3 star hotel, which one would you choose? Maybe you choose a 4 star accommodation for 4 nights instead as a compromise? Companies are constantly balancing quality against cost.

A look at the car industry can help us take a guide in the IT world. Tata manufactures the cheapest car – Nano in India. It is not even marketed outside of India because cheap itself will not sell. There are quality criteria for entry into other markets. US manufacturers have for years relied on being the home brand to trade. As the petrol prices rise consumers have become more aware of better value for money with Japanese cars. At the same time many German manufacturers remain as premium brands that trade less on quantity and more on quality.

What IT companies need to do is to focus on showing value to the customer rather than trying to be cheap. There will be a set of customers that will equate cheap with value. In some cases companies will need to evaluate whether those customers are worth servicing. Some customers will go for cheaper option from an incumbent supplier, rather than an innovative and higher quality option, not because it is cheaper but because they are averse to change. These are customers that you need to keep in touch with if you believe you can offer a higher quality. They may one day develop the courage to change. Focus more on the end of the market that will recognise quality.

How do you communicate this quality? Change emphasis. You are local. What value is in it for the customer? You can respond quicker, have coverage for the full business hours, speak the same language, aware of business processes and local legislations. Trumpet your retention rates and certifications or technical skills of your staff. Build a relationship with your clients outside business – social or sport. You actually have selling points that cheaper ones do not or cannot have.

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How much do you think it’ll cost?

How many times have you heard that? “Oh, I’m not going to hold you to this, but just a ball park figure?” Sounds even more familiar? And now the clincher, “You know our systems, surely you have an idea.” Trying to answer this sort of question from the client too soon causes enormous headaches in projects.

Cost is something that is never a black and white answer. Cost of the same project will differ markedly depending on what technology and process choices you make, what functional and non-functional standards you sign up to, how much of the subject matter expertise your clients are willing to provide to the project team and even some mundane things like what time of year you want the project to be implemented. A cost estimate therefore must accompany the scope, assumptions and conditions that it is based upon.

Many times you will have technical staff working with clients that will be put on the spot by these kinds of questions. They will have the best interest of the client and their own organisations by trying to answer the question. Unfortunately, this sets the expectation of cost from the client’s point of view. Some of the technical staff may be very skilled in their own responsibilities, but may lack the full project life cycle knowledge. Therefore the risk of underestimating or completely missing required activities is high.

In all likelihood the client has not had the time to frame what it is that they want. If they have a figure to go by, they will form the scope in due course and wrap that around the figure. This happens inevitably, even if there is significant gap between any cost figures you may have provided and when they had the time to form scope. There may not be any malice involved at all. This is how we as human beings operate – piece together bits of information to build the picture.

If you try to reset the expectations of the client at this point, it is tricky. There is always a chance to give the impression that now that they are interested, you are trying to squeeze them. Chance to set the correct expectation has long gone. By trying to be helpful, you have a situation on your hands.

You may come up with the same situation with your sales staff as well. They may be the ones that are responsible for communicating costs to your customers. Your challenges will be equally as pronounced if they miss the caveats. There is a fine balance between the cost appetite a customer has and the benefits they wish to gain from a project. In the quest of landing a sale you should not set a project up for failure. If the project is a keenly desired one for which your organisation is happy to make a loss on, then your management must be in a position to knowingly take the risk on. This should not come as a surprise during the project.

How can you go about ensuring the correct expectations at the outset? The first thing I make a policy on is to never provide estimates on the spot. I have only seen bad outcomes in trying to do that. Have standard estimating methodologies that you follow. The methodology may be different depending on the type of project you are managing – i.e. software development, construction, policy development etc. But there must be a methodology. Document the risks, assumptions and constraints that accompany the particular estimate. This way once the customer has had the time to think of the whole solution and the cost is different than the first one you provided, you can have an open and honest discussion on why that has transpired. This must extend to the whole team. Train them to tell the client that they will take the information back and follow up with an estimate.

First impressions do last long with customers – especially when costs and timelines are involved.

How do I trade off between cost and capacity?

In every organisation that I have worked in there has never been any argument that additional capacity can help better delivery of projects. But seldom are organisations in a position of luxury to have additional resources, which may not be contributing to the bottom line. For every staff hire, there is an expectation of revenue if it is a professional services organisation. Even for organisations where staff are not required to bring in income, like a ministry or a state services organisation, they add to the headcount the top brass are often under pressure to reduce. How then can we look to get a good balance of capacity and cost? Is this a pipe dream?

Let us explore that. Take the example of a professional services organisation. Cashflow is a key consideration for such organisations. Every staff you have that is not engaged in a fee earning work is contributing to an eroding bottom line. There is the temptation to therefore engage just in time sub-contract resourcing to minimise such risk. Because your sub-contractors are cheaper than the rate you are charging, your cashflow looks great and it looks like you are making a profit in markup as well. Why then bother about making any effort to have your own resources?

By relying more on sub-contractors, you are reliant on third party resources. Once the project is complete, hardly any intellectual property remain in your organisation. There may also be key customers that you do not want to expose to your sub-contractors. What is to stop them going directly to them the next time. You are also compromised in your ability to take on key projects that you want to, because you are operating little or no ability to be agile due to resource constraint. Then there is the challenge of getting time out for your key staff to up-skill, get certifications, do some research and development to keep your competitive edge. When you are resource constrained these are activities that go by the wayside.

Even though the cashflow looks good from month to month by having contract resources. If you do any analysis at the end of the year, you will inevitably find you would have made more of a profit over the course of the year by hiring your own resources. A particular month or two may have looked worse, but over the course of the year, your costs are so much lower because you are not having to pay premium contractor rates. In the bargain, you can also retain the intellectual property. Effectively the rate you have paid is to transfer the risk of potentially not having won this piece of work.

There is an alternative way of thinking. When we’re looking at resourcing, we always look at the right level of skill to apply to that. I have been thinking of ways to communicate the capacity challenge with dollar values, so I can make an effective business case for additional resources. For the cost of one senior staff, I can hire three graduates or at least two with some experience. And I have to get them only half (or a third) productive to have earned the same fee. After some months, whatever additional productivity they can provide actually adds to the capacity of my team. This is an approach that can only succeed if you have enough senior staff to mentor them.

If I get 120 billable hours from my senior staff, and I already have some, I would rather get three graduates and attempt at getting around 40 billable hours off them. My senior staff’s billable rate will suffer as he may end up mentoring them for 10 hours each. But even that requires me to get 50 billable hours each from the three new hires. Even taking into account the different rates I can charge for them would require me to be able to get 60 billable hours. Whatever I can get beyond 60 hours from these three new hires, is adding to the capacity of my team, despite the additional effort to integrate them and lower rates. And it is costing me little or no extra money.

What approaches have you tried? What has worked for you to make your case? If I have gone off the tangent and barking off the wrong tree let me know.

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How do I know if my project is going well?

Cost Variance

What is the main job as a project manager? If you go by the PRINCE2 manual, it will tell you my job is to control the 6 parameters in a project – time, cost, quality, scope, risk and benefit. Let’s look a bit deeper.

Schedule Variance

In most cases, unless you are part of a portfolio of projects, most likely you as a project manager won’t be responsible for the benefits realisation. This is there to ensure the project is always concerned with delivering to the business case as closely as possible. With risks you can plan and have management strategies and specific budgets. If it is outside your tolerance levels, you have the project board to get direction from. You can tightly control scope through the mechanism set out for your project – either the project board itself or a designated change authority. Quality management is one area where PRINCE2 is quite prescriptive and actually provides a mechanism.

When you think about it closely, the two things that will set you apart as a project manager is on time, on budget delivery. Usually most project boards are willing to consider some amount of off-specification or compromise on quality. When time is impacted, you cannot bring the project back to equilibrium without compromising one of cost, quality, scope or quality.

Cost Performance Indicator (CPI)

Schedule Performance Indicator (SPI)

Where you or the project board may need to compromise may depend on how far the project is likely to be delayed and what the projected cost will be under the current scope and quality. It is very easy to know that the project is 2 weeks behind. Does that mean that the project will be delivered only 2 weeks later than scheduled? If you delve down into the reasons for the delay, the most likely causes are underestimating efforts or risks. It is more likely rest of the project will follow the delay pattern you’re seeing than what you had originally planned. So how do you measure the most likely completion date and cost?

Project Health

This is where Earned Value Analysis (EVA) plays a huge role. In your role in monitoring project progress, reviewing this pattern is critical. Say you are part of the way through a project. So far you have completed work that you had planned 758.55 hours to complete. In fact it has taken you an additional 34.70 hours to achieve this. This is your schedule variance. It is obvious that you’re spending more than what you planned. This on its own does not necessarily indicate the project is in trouble. In fact, the reason you may be producing the additional output may be because you are significantly ahead of schedule. Using less hours is also not necessarily an indication of being on track. You may be burning less hours than planned and as a result falling further behind in your project.

Project Health Over Time

To get a better sense of this, compare how much of the schedule you expected to be through at the current date. In the project I am using to illustrate, I had expected to complete about 786 hours of earned value (completed tasks). This tells me I am also behind on schedule. How far ahead or behind schedule and cost I am can easily be calculated by calculating the SPI and CPI indicators. If you multiply the two, you get an accurate reflection of where your project is. In my case here, I’m slightly behind on both cost and schedule.

CPI is critical to forecast what your likely final cost would be, based on current status of the projects. The fact that the estimates in the project so far has been slightly less than what it has taken to implement them, means the other estimates are also out. Plot the project health indicators each time you monitor progress. It will very quickly give you a feel for the status. Any single week’s assessment may not give you an accurate reflection of where you are.

Estimated Final Cost

Project estimates, especially in software development, is an art rather than science. If you get within 5% of time and cost, I think you have been successful. Therefore, I consider anything around 0.95 x 0.95 = 0.9 to be around the low side of acceptable result. Ideally you are not out by 5% on both counts. A project health score of 0.95 would be an outstanding achievement. How do I calculate what the likely final cost is? Divide the original planned cost by the current CPI. Based on current rate, this is what the final cost will be. Estimating final scheduled delivery is slightly more complex, as you have to consider the critical path. If the progress is ahead of schedule in tasks outside the critical path, in reality you won’t gain any schedule reduction.

The most crucial part of a project manager’s job is to ensure professional management of the project itself. The key to achieving this is ensuring anyone responsible for making decisions about the project is fully aware of how the project is progressing. Something running behind schedule and cost should not come as a surprise near the end of the project.

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