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.
