Project management harold kerzner

Importance of Project Management Project management effectively controls organizational change, allowing organizations to introduce new products, new processes, and new programs effe

Project Management a System approach to Planning

Scheduling &

Controlling

- Harold Kerzner

Chapter

Introduction to Project Management

History of Project Management

 One of the first examples of project

management was the construction of the

pyramids in Egypt

 Henry L Gantt (1861-1919) added an important visualization tool around 1917 with the Gantt Chart

 In the late 1950s, DuPont Company developed the Critical Path Method (CPM)

 Also in the late 1950s, Booz Allen Hamilton

developed the Program Evaluation and Review Technique (PERT), which models uncertainty in project management

Importance of Project Management

 Project management effectively controls

organizational change, allowing

organizations to introduce new products, new processes, and new programs

effectively.

 Projects are becoming more complex,

making them more difficult to control

without a formal management structure.

 Projects with substantially different

characteristics, especially in IT, are

emerging.

 Project management helps cross-functional teams to become more effective.

Comment on the Importance of Project Management

“At last we are beginning to see research which proves how important project management is without well- trained and capable project managers the percentage of GDP spent through projects is inflated due to many

exceeding their budget through poor management.”

Richard Pharro, author and consultant (2003)

Still, many organizations underappreciate the

What is a Project?

undertaken to create a unique product

or service” (PMBOK, 2000)

or activities that must all be

completed in order to meet the

project’s goals Two prevalent

characteristics:

 Each task may be started or stopped

independently of other tasks;

 Tasks are ordered such that they must be

performed in a technological sequence.

Examples of Projects

system

Project management spans both the

Manufacturing Perspective

operations is used to create each

product or service.

flows through centers which are

required to create it.

Characteristics of Flowshop, Job Shop and Project

Flowshop Job Shop Project

Labor Low skill High skill High skill

Project Management versus Process

Management

“Ultimately, the parallels between

process and project management give

way to a fundamental difference:

process management seeks to eliminate variability whereas project management must accept variability because each

project is unique.”

J Elton, J Roe 1998 Bringing Discipline to

Project Management Harvard Business Review

See coursepack article: Oltra, Maroto and Segura

“Lean” Principles in Project Management

 Focusing on customer needs

 Balancing work to ensure an even flow

 Using “customer pull” rather than

“supplier push” to initiate work

 Using principles of continuous

improvement

See coursepack article: Brown et al.

Measures of Project Success

projects in the organization

the problems that arose in the project

R.J Might and W.A Fischer (1985)

Question: Was the movie Titanic successful?

See coursepack article: The Chaos Report

Nine Factors Critical to

the Success of Many Projects

 Clearly defined goals

 Competent project manager

 Competent project team members

 Sufficient resource allocation

 Adequate communication channels

 Effective control mechanisms

 Use of feedback for improvement

 Responsiveness to clients

J Pinto and D Slevin (1987)

See coursepack article: Czuchry and Yasin

Famous Project Failures

5-year, $85m project to improve its information system Three years later, after spending $150m with nothing

to show for it, they cancelled the project and

eliminated 500 development jobs.

Denver International Airport delayed the opening of

the airport from March 1994 to February 1995 and

added $85 million to the original budget The baggage system continued to unload bags even though they

were jammed on the conveyor belt The system also loaded bags into telecarts that were already full

Hence, some bags fell onto the tracks, causing the

telecarts to jam The timing between the conveyor

belts and the moving telecarts was not properly

synchronized, causing bags to fall between the

conveyor belt and the telecarts Then the bags became wedged under the telecarts, which were bumping into each other near the load point

Famous Project Failures (cont.)

 Disney's shipbuilder was six months late in

delivering its new cruise ships in 1998 Thousands

of Disney customers who had purchased tickets

had to be compensated for making different plans

 In 1997-99, Universal Studios in Orlando, Florida, built a new restaurant and entertainment complex,

a two year project The opening was delayed by

three months.

 The “Big Dig” road construction project in Boston (1987-2007) was budgeted at $5.8b but cost over

$15b The project resulted in criminal arrests,

thousands of water leaks, death of a motorist from

a tunnel collapse, and hundreds of millions of

dollars in lawsuits

 In 2005, UK grocery chain J Sainsbury wrote off its

$526m investment in an automated supply chain management system They hired 3000 additional

Reasons why Projects Fail

system, e.g on low level details

management software

team

See coursepack article: Mulder

Common Excuses for Project Failures

 Unexpectedly poor weather delayed construction

 Unforeseeable poor performance by contractors

 Senior management imposed an

unrealistic schedule

 Instructions by senior management were unclear

 Many wasteful “synchronization”

meetings interrupted actual work

Management of IT Projects

 More than $250 billion is spent in the

US each year on approximately

175,000 information technology

projects.

 IT project management is an $850

million industry and is expected to

grow by as much as 20 percent per year

Gene Bounds, “The Last Word on Project

Management”, IIE Solutions, 1998.

IT Projects are Different

“[in IT projects], if you ask people what’s done and what remains to be done there is nothing to see In an IT project, you go from zero to 100

percent in the last second unlike building a brick wall where you can see when you’re halfway done.”

Engineering projects are measured by tasks completed

IT projects are measured by resources used

J Vowler (2001)

Example: building construction

IT Project Outcomes

Standish Group Survey, 1999

(from a survey of 8000 business systems projects)

Why do IT Projects Fail?

 Ill-defined or changing requirements

 Poor project planning/management

 Uncontrolled quality problems, e.g

software fails to complete computing task in time

 Unrealistic expectations/inaccurate

estimates

 Adoption of new technology without fully understanding it

Construx Software Builders, Inc., 2005.

Why are IT projects more difficult?

Wheelwright and Clark’s Classification

of Projects

Project Life Cycle

Design (Scope), Cost, Time Tradeoffs

Optimal Time-Cost Tradeoff

Required Performance

“You can have your job done cheap, quick, or

right; pick two.” [Sign in local copy center.]

Project Management Maturity Model

(PMMM)

 PMMM is a formal tool that can be

used to measure an organization's

project management maturity.

 Once the initial level of maturity and

areas for improvement are identified,

the PMMM outlines the steps to take

toward project management

excellence

 PMMM is based on extensive empirical

research that defines a “best practice”

database, as well as a plan for

improving the project management

process

Project Management Maturity Model

1 Ad-Hoc: The project management

process is disorganized or even

chaotic Systems and processes are

not defined Chronic cost and

schedule problems exist.

2 Abbreviated: Some project

management processes exist, but

underlying principles are not

consistently followed Project

success is largely unpredictable Cost

and schedule problems are common.

Project Management Maturity Model

3 Organized: Project management

processes and systems are documented and and integrated Project success

rates, and cost and schedule

performance, are improved

4 Managed: Projects are effectively

controlled by management Project

success is usually routine Cost and

schedule performance usually conform

to plan.

Project Management Maturity Model

5 Adaptive: Continuous improvement

of the project management process

occurs through feedback and testing

of innovative ideas and technologies Project success rates, and cost and

schedule performance, are

continuously improving

Source: The Project Management Institute PM Network

1997 Micro Frame Technologies, Inc and Project

Management Technologies, Inc.

Chapter

Project Initiation, Selection, and Planning

“There are two ways for a

business to succeed at new

products: doing projects right,

and doing the right projects.”

R.G Cooper, S Edgett, E Kleinschmidt 2000 Research and Technology Management.

Importance of Project Initiation &

Selection

Good project selection makes the later job of

running projects much easier

Also, some poorly selected projects are

doomed from the start

Project Selection - Overview

1 Strategic factors

Competitive necessity: keep a foothold in the market,

not get left behind Market expansion opportunities: not yet profitable,

but need to establish a presence Consistency: in line with overall organization’s

mission statement Image: potential impact of project on corporate image

Project Selection - Overview

2 Project portfolio factors

Diversification: reduce market and other risks by

maintaining a mix of projects

Cash flow constraints: balance available cash over

time and across projects

Resource constraints: plan available resources

(facility, personnel) over time

Analyzing Project Portfolios:

Bubble Diagram

Expected NPV

Prob of Commercial Success

High Zero

Low High

Bubble diagrams are useful for representing a set of projects

and visualizing a project portfolio.

Shapes Shading Color Size

Analyzing Project Portfolios:

Extent of Process Change

Source: S.C Wheelwright and K.B Clark, 1992,

Creating Project Plans to Focus, Harvard Business Review

Shape represents the production resource used

Size represents the resource requirement

Project Selection - Overview

3 Project risk factors

Probability of research being successful

Probability of development being successful

Probability of project success w.r.t scope

Probability of commercial success

Overall risk of project

Competitors in market and their reactions

Project Selection - Overview

4 Quantitative factors

Payback period

Net present value / internal rate of return

Expected commercial value

Real options

Multifactor scoring

Payback Period Analysis

Number of years needed for the project

to repay its initial fixed investment.

Example:

A project costs $100,000 and is

expected to save the company

$20,000 per year

Payback Period =

$100,000 / $20,000 = 5 years

Comments on Payback Period

 Easy to calculate and explain, and

sometimes can be used to achieve a common purpose throughout an

organization.

 Ignores the time value of money,

including interest rates and inflation.

 Ignores money earned after the

payback period.

Net Present Value (NPV)

cash investment at time t = 0 and

r = discount rate of return

Internal Rate of Return (IRR)

 Find a value of r such that NPV is

equal to 0 (but this value may not

be unique)

Example (with T = 2):

Find r such that

0)

1(

+

r

F r

F F

Note that, in a typical project, early cash flows are

negative.

NPV Example

 Phase I Research and Product

Development: $18 million annual

research cost for 2 years.

 Phase II Market Development: $10 million annual expenditure for 2 years to develop marketing and distribution channels.

 Phase III Sales: All cash flows are

after-tax and occur at year's end

NPV Example

The results of Phase II (available at the end of year 4) identify the product's market potential

as indicated below:

If the discount rate is 5 percent, the

discounted expected cash flow at the end of

the 4th year is $114.62m

NPV Example

The internal rate of return is 49.12%

Expected cash flows (with sale of product at end of year 4)

Cash Outflow Cash Inflow NPV

Criticisms of NPV Analysis

 Assumes that cash flow forecasts are

accurate; ignores the “human bias”

effect

 Does not take into account the possibility that decisions (and therefore cash flows) may adapt to changing circumstances

over time

 Ignores project portfolio issues

 Use of a single discount rate for the

entire project is problematic, since risk is typically reduced as the project evolves

See coursepack article: Hodder and Riggs

Expected Commercial Value (ECV)

Develop

New

Product

Technical Failure

Technical Success

Probability = p t

Probability = 1 - pt

Launch New Product Commercial

Failure (with net benefit = 0)

Commercial Success (with net benefit = NPV)

Probability = pc

Probability = 1 - pc

ECV is the expected NPV of the project, calculated by using

the probabilities of the various alternatives.

ECV Example

 The design of a new product is expected

to take 3 years, at a cost of $6m/year

 There is a 8 probability that the product will be technically feasible

 If feasible, the product can be launched

in year 4 with an estimated cost of $5.5M

 If launched, the product will be a

commercial success with probability 0.6, earning gross revenues of $15M per year for 5 years

 If it is a commercial failure, then the

revenue is only $2M per year for 5 years

 The discount rate is 10 percent

Development Fails Probability = 0.2

Launch New Product

One-time cost of $5.5M

3 Years

5 Years

Drop Product

Annual

Cost: $6M

Commercial Success Revenue $15M/yr

Probability = 0.6

Commercial Failure Revenue $2M/yr

Probability = 0.4

No Cost

ECV Example

Year What’s

Happening Commercial Success Commercial Failure Expected Annual

Cash Flow

Discounted Cash Flow

Criticisms of ECV Analysis

 The possibility of changing decisions in the future changes the risk

characteristics of the project.

 Consequently, the use of the same

discount rate may be inappropriate.

 However, it’s not clear what other

discount rate should be used.

 That’s where the idea of real options analysis can (possibly) help.

Real Options Analysis

 Based on the view that the evaluation of financial options can be applied to other investments.

 Implicitly finds the correct discount rate

by expressing the cash flows in the

project as a combination of flows whose cost of capital is supposedly known.

 In principle, this should give more

accurate evaluation of projects than ECV.

 However, the usefulness of real options analysis for evaluating projects is unclear.

Real Options Analysis

 A leader in the application of real options analysis is Hewlett-Packard But they mainly use it for

procurement and other low risk, contract-protected decisions, not to evaluate projects.

 Real options analysis is probably not useful in high risk industries, such as pharmaceuticals.

 Real options analysis may also not be useful if a

company lacks the discipline to end a project without delay if the initial investment doesn’t work out.

 Real options author N Kulatilaka says, “Although you can make any project look good if you build in

enough options, a real world approach must address two questions: when exactly do you shut it down,

and is there a good mechanism in sight to do that?”