Value Management

CONCEPT OF VALUE

The concept of value can be defined as the relationship between satisfying

an organization’s many conflicting needs and the resources required

to meet those needs.

Value can be added to projects in several ways. These include providing

greater levels of client satisfaction, maintaining acceptable levels of

satisfaction while lowering resource expenditures, or some combination of

the two. It is also possible to improve value by simultaneously increasing

satisfaction and resources, provided that satisfaction increases more than

the resources used to achieve it.

When managing projects for value, five fundamental concepts must be

embraced.

Concept #1: Projects derive their value from the benefits the organization

accrues by achieving its stated goals—Remember that projects are typically

initiated as a perceived solution to a goal, need, or opportunity.

Thus, when we want to determine the degree to which a project is being

managed for ‘‘value,’’ it is critical to first ensure that the project falls

in line with organizational goals. Projects that are being run counter to

a firm’s stated goals (e.g., customer satisfaction, commercial success, or

improving health and safety) already fail the first test of value.

Concept #2: Projects can be viewed as investments made by management—

Any investment comes with an expected return for the risk undertaken, and projects are no exception. Because they consume

resources and time, they are expected to yield acceptable returns, based

on internal requirements, along with associated benefits.

Concept #3: Project investors and sponsors tolerate risk—There are

inherent risks in projects, because there is considerable uncertainty

surrounding their outcomes. These risks may be technical (‘‘Does the

technology that is driving the project work?’’), they may be commercial

(‘‘Will the project succeed in the marketplace?’’), they may involve health

and safety issues (‘‘Can we manage the project within appropriate safety

parameters?’’), or some combination of all of the above. Accepting these

risks is recognition that each project is a unique endeavor with unique

unknowns. Investors may not be able to manage these risks, but they

do tolerate them because the potential rewards may far outweigh the

negative impact.

Concept #4: Project value is related to investment and risks—

This fourth concept defines project value as a function of the resources

committed (investment made) and the extent of risks taken. Goodpasture

puts it this way: ‘‘The traditional investment equation of ‘total return

equals principal plus gain’ is transformed into the project equation of

‘project value is delivered from resources committed and risks taken.’’’3

Using these terms, we can see that value will always walk a narrow

line between expected return on investment and risk. When the equation

gets out of balance; that is, when the perceptions of the organization are

that the expected return cannot make up for excessive levels of risk, the

project ceases to produce value. The implication of this concept is that different

projects require different levels of investment with varying levels

of risk. Consequently, the value delivered by each of these projects will

also vary.

Concept #5: Value is a balance among the three key project elements:

performance, resource usage, and risk—Again, if we employ a ‘‘ledger’’

mindset, we can add up the credit column to include drawbacks such

as expenditure (resource usage) and risk accepted. Balanced against

these ‘‘negatives’’ is the company’s expectation of project performance

and positive outcomes. Naturally, the higher the expected performance of

the project, the greater the resource usage and risk a company is willing

to commit.

For most project organizations, the objective measure of value is in

monetary terms. This is because projects consume time, and the longer

it takes to complete the project, the less valuable the money spent.

Therefore, when evaluating a project’s value, the concept of the time

value of money should be taken into account. In addition, monetary

measures allow project managers to acknowledge the future uncertainty

of outcomes by evaluating the financial impact of risk events.

The measures of net present value (NPV), economic value add, and

expected monetary value (EMV) take both of these factors into account.

Net present value, is significant in

that successful projects have a positive NPV over their life cycle. Both

NPV and economic value add employ the discounted cash flow concept;

however, economic value add is a financial measure of project performance

after the project becomes operational. It is defined as the difference between the present value of after-tax earnings from the project and the

benefits from the next-best investment alternative. The logic underlying

economic value add is that if the projected after-tax earnings are less than

the cost of the capital the project consumes, then some other, less-risky

investment alternative may be more attractive. Expected monetary value is also the most appropriate financial measure

when measuring future uncertainty, or when multiple project

outcomes are possible, each with a different cost and schedule. It is

defined as the summation of the value of each outcome in dollars ($),

weighted by the probability of that outcome. For example, consider a

project that needs to be redesigned, and assume that the new approach

involves some risk to accomplish this goal. One possible monetary outcome

is $200,000 with a 40 percent probability of achieving this outcome,

while anothermonetary outcome is $150,000 with a 60 percent probability

of occurrence. The EMV of this project is

EMV = $200,00 ∗ 0.4 + $150,000 ∗ 0.6 = $170,000

If the NPV for this project is also positive, and if all other considerations

are equal, it is worth taking the risk of adopting the new approach to

redesign this project.

Key Principles of VM

The value management approach hinges on three key principles4:

1. An unending quest for enhancing value for the organization, establishing

metrics or estimates of value, and monitoring and controlling

them

2. A focus on clear definition of objectives and identification of targets

before seeking solutions

3. A focus on function, pivotal to maximizing those outcomes that are

innovative, meaningful, and practical

THE VM PROCESS

The detailed VM process and the typical terms used at different stages

of a project are illustrated in the Figure 8.3. Because the elements of

the figure are straightforward, we will focus our discussion of the process

from a strategic perspective. The elements of value management can be

grouped into five major categories:14

• Needs assessment—This phase is concerned with arriving at a shared

understanding of the needs of various project stakeholders, the critical

success factors with the expected benefits defined qualitatively,

and the key performance indicators of time, cost, quality, or functionality,

defined through quantitative measures.

• Idea generation—In this phase, the cross-functional team focuses

on generating creative and innovative alternatives to complete the

project.

• Detailed evaluation—During this phase, the alternatives generated

in the previous phase are evaluated in detail in terms of their feasibility,

achievability, and potential contribution to expected project

benefits. At this stage, modifying alternatives to develop additional

options is also considered.

• Optimum choice—This phase prioritizes the various alternatives and

selects the best alternative.

• Feedback and control—This phase is the formal evaluation and

control process with feedback loops to improve the overallVMprocess.

During this phase, VM practitioners and users must obtain feedback

on its performance to ascertain whether the expected improvement

in value was realized, and to generate other good ideas that can be

adopted and implemented. During the feedback process, factors to

be assessed include the stakeholders’ judgment, involvement, and

support; the system’s appropriateness, use, and effectiveness; and

change management. Actions that can emerge from the feedback

stage include changes to personnel, approach, or the system, and

even repeating the VM exercise as a whole.