PROJECT MANAGEMENT

PROJECT MANAGEMENT

THE MANAGERIAL PROCESS 7E

ERIK W. LARSON CLIFFORD F. GRAY

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Project Management:

The Managerial Process Seventh Edition

Erik W. Larson

Clifford F. Gray Oregon State University

PROJECT MANAGEMENT: THE MANAGERIAL PROCESS, SEVENTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014 and 2011. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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Names: Gray, Clifford F., author. | Larson, Erik W., 1952 author. Title: Project management : the managerial process / Erik W. Larson, Oregon State University, Clifford F. Gray, Oregon State University. Description: Seventh edition. | New York, NY : McGraw-Hill Education, [2018] | Clifford F. Gray is the first named author on the earlier editions. Identifiers: LCCN 2016040029 | ISBN 9781259666094 | ISBN 1259666093 (alk. paper) Subjects: LCSH: Project management. | Time management. | Risk management. Classification: LCC HD69.P75 G72 2018 | DDC 658.4/04—dc23 LC record available at https://lccn.loc.gov/

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Erik W. Larson ERIK W. LARSON is professor of project management at the College of Business, Oregon State University. He teaches executive, graduate, and undergraduate courses on project management and leadership. His research and consulting activities focus on project management. He has published numerous articles on matrix management, product development, and project partnering. He has been honored with teaching awards from both the Oregon State University MBA program and the University of Oregon Executive MBA program. He has been a member of the Portland, Oregon, chapter of the Project Management Institute since 1984. In 1995 he worked as a Ful- bright scholar with faculty at the Krakow Academy of Economics on modernizing Polish business education. He was a visiting professor at Chulalongkorn University in Bangkok, Thailand, and at Baden-Wuerttemberg Cooperative State University in Bad Mergentheim, Germany. He received a B.A. in psychology from Claremont McKenna College and a Ph.D. in management from State University of New York at Buffalo. He is a certified project management professional (PMP) and Scrum Master.

Clifford F. Gray CLIFFORD F. GRAY is professor emeritus of management at the College of Busi- ness, Oregon State University. He has personally taught more than 100 executive development seminars and workshops. Cliff has been a member of the Project Man- agement Institute since 1976 and was one of the founders of the Portland, Oregon, chapter. He was a visiting professor at Kasetsart University in Bangkok, Thailand, in 2005. He was the president of Project Management International, Inc. (a training and consulting firm specializing in project management) 1977–2005. He received his B.A. in economics and management from Millikin University, M.B.A. from Indiana Univer- sity, and doctorate in operations management from the College of Business, University of Oregon. He is certified Scrum Master.

About the Authors

vii

“Man’s mind, once stretched by a new idea, never regains its original dimensions.”

Oliver Wendell Holmes, Jr.

To my family, who have always encircled me with love and encouragement—my parents (Samuel and Charlotte), my wife (Mary), my sons and their wives (Kevin and Dawn, Robert and Sally) and their children (Ryan, Carly, Connor and Lauren).

C.F.G.

“We must not cease from exploration and the end of all exploring will be to arrive where we began and to know the place for the first time.”

T. S. Eliot

To Ann, whose love and support have brought out the best in me. To our girls Mary, Rachel, and Tor-Tor for the joy and pride they give me. And to our grandkids, Mr. B, Livvy, and Xmo, whose future depends upon effective project management. Finally, to my muse, Neil—Walk on!

E.W.L

viii

Our motivation in writing this text continues to be to provide a realistic, socio-technical view of project management. In the past, textbooks on project management focused almost exclusively on the tools and processes used to manage projects and not the human dimension. This baffled us since people not tools complete projects! While we firmly believe that mastering tools and processes is essential to successful project management, we also believe that the effectiveness of these tools and methods is shaped and determined by the prevailing culture of the organization and interpersonal dynamics of the people involved. Thus, we try to provide a holistic view that focuses on both of these dimensions and how they interact to determine the fate of projects. The role of projects in organizations is receiving increasing attention. Projects are the major tool for implementing and achieving the strategic goals of the organization. In the face of intense, worldwide competition, many organizations have reorganized around a philosophy of innovation, renewal, and organizational learning to survive. This philosophy suggests an organization that is flexible and project driven. Project management has developed to the point where it is a professional discipline having its own body of knowledge and skills. Today it is nearly impossible to imagine anyone at any level in the organization who would not benefit from some degree of expertise in the process of managing projects.

Audience

This text is written for a wide audience. It covers concepts and skills that are used by managers to propose, plan, secure resources, budget, and lead project teams to suc- cessful completions of their projects. The text should prove useful to students and prospective project managers in helping them understand why organizations have developed a formal project management process to gain a competitive advantage. Readers will find the concepts and techniques discussed in enough detail to be imme- diately useful in new-project situations. Practicing project managers will find the text to be a valuable guide and reference when dealing with typical problems that arise in the course of a project. Managers will also find the text useful in understanding the role of projects in the missions of their organizations. Analysts will find the text useful in helping to explain the data needed for project implementation as well as the opera- tions of inherited or purchased software. Members of the Project Management Insti- tute will find the text is well structured to meet the needs of those wishing to prepare for PMP (Project Management Professional) or CAPM (Certified Associate in Project Management) certification exams. The text has in-depth coverage of the most critical topics found in PMI’s Project Management Body of Knowledge (PMBOK). People at all levels in the organization assigned to work on projects will find the text useful not only in providing them with a rationale for the use of project management processes but also because of the insights they will gain on how to enhance their contributions to project success. Our emphasis is not only on how the management process works, but more impor- tantly, on why it works. The concepts, principles, and techniques are universally

Preface

ix

x Preface

applicable. That is, the text does not specialize by industry type or project scope. Instead, the text is written for the individual who will be required to manage a variety of projects in a variety of different organizational settings. In the case of some small projects, a few of the steps of the techniques can be omitted, but the conceptual frame- work applies to all organizations in which projects are important to survival. The approach can be used in pure project organizations such as construction, research orga- nizations, and engineering consultancy firms. At the same time, this approach will benefit organizations that carry out many small projects while the daily effort of deliv- ering products or services continues.

Content

In this and other editions we continue to try to resist the forces that engender scope creep and focus only on essential tools and concepts that are being used in the real world. We have been guided by feedback from practitioners, teachers, and students. Some changes are minor and incremental, designed to clarify and reduce confusion. Other changes are significant. They represent new developments in the field or better ways of teaching project management principles. Below are major changes to the seventh edition. ∙ Learning objectives have been established for each chapter and the corresponding

segment has been marked in the text. ∙ Chapter 16 Oversight has been eliminated and critical information on project matu-

rity models is now part of Chapter 14. ∙ Chapter 18 Project Management Career Paths has been eliminated and essential

information from this chapter is now in Chapter 1. ∙ A new set of network exercises have been developed for Chapter 6. ∙ A new set of crashing exercises have been developed for Chapter 9 which introduce

crashing concepts in a developmental way. ∙ The Chapter 2 Appendix on Request for Proposal is now part of Chapter 12. ∙ Terms and concepts have been updated to be consistent with the sixth edition of the

Project Management Body of Knowledge (2015). ∙ New student exercises and cases have been added to chapters. ∙ The Snapshot from Practice boxes feature a number of new examples of project

management in action as well as new Research Highlights that continue to promote practical application of project management.

∙ The Instructor’s Manual contains a listing of current YouTube videos that corre- spond to key concepts and Snapshots from Practice.

Overall the text addresses the major questions and challenges the authors have encountered over their 60 combined years of teaching project management and con- sulting with practicing project managers in domestic and foreign environments. These questions include:  What is the strategic role of projects in contemporary organiza- tions? How are projects prioritized? What organizational and managerial styles will improve chances of project success? How do project managers orchestrate the complex network of relationships involving vendors, subcontractors, project team members, senior management, functional managers, and customers that affect project success? What factors contribute to the development of a high-performance project team? What project management system can be set up to gain some measure of control? How do managers prepare for a new international project in a foreign culture?

Preface xi

Project managers must deal with all these concerns to be effective. All of these issues and problems represent linkages to an integrative project management view. The chapter content of the text has been placed within an overall framework that inte- grates these topics in a holistic manner. Cases and snapshots are included from the experiences of practicing managers. The future for project managers appears to be promising. Careers will be determined by success in managing projects.

Student Learning Aids

Student resources include study outlines, online quizzes, PowerPoint slides, videos, Microsoft Project Video Tutorials and web links. These can be found in Connect.

Acknowledgments

We would like to thank Scott Bailey for building the end-of-chapter exercises for Connect and Tracie Lee for reviewing them; Pinyarat Sirisomboonsuk for revising the PowerPoint slides; Oliver F. Lehmann for providing access to PMBOK study questions; Ronny Richardson for updating the Instructor’s Manual; Angelo Serra for updating the Test Bank; and Pinyarat Sirisomboonsuk for providing new Snapshot from Practice questions. Next, it is important to note that the text includes contributions from numerous stu- dents, colleagues, friends, and managers gleaned from professional conversations. We want them to know we sincerely appreciate their counsel and suggestions. Almost every exercise, case, and example in the text is drawn from a real-world project. Special thanks to managers who graciously shared their current project as ideas for exercises, subjects for cases, and examples for the text. Shlomo Cohen, John A. Drexler, Jim Moran, John Sloan, Pat Taylor, and John Wold, whose work is printed, are gratefully acknowledged. Special gratitude is due Robert Breitbarth of Interact Management, who shared invaluable insights on prioritizing projects. University stu- dents and managers deserve special accolades for identifying problems with earlier drafts of the text and exercises. We are indebted to the reviewers of past editions who shared our commitment to elevating the instruction of project management. The reviewers include Paul S. Allen, Rice University; Denis F. Cioffi, George Washington University; Joseph D. DeVoss, DeVry University; Edward J. Glantz, Pennsylvania State University; Michael Godfrey, University of Wisconsin–Oshkosh; Robert Key, University of Phoenix; Dennis Krum- wiede, Idaho State University; Nicholas C. Petruzzi, University of Illinois–Urbana/ Champaign; William R. Sherrard, San Diego State University; S. Narayan Bodapati, Southern Illinois University at Edwardsville; Warren J. Boe, University of Iowa; Burton Dean, San Jose State University; Kwasi Amoako-Gyampah, University of North Carolina–Greensboro; Owen P. Hall, Pepperdine University; Bruce C. Hartman, University of Arizona; Richard Irving, York University; Robert T. Jones, DePaul University; Richard L. Luebbe, Miami University of Ohio; William Moylan, Lawrence Technological College of Business; Edward Pascal, University of Ottawa; James H. Patterson, Indiana University; Art Rogers, City University; Christy Strbiak, U.S. Air Force Academy; David A. Vaughan, City University; and Ronald W. Witzel, Keller Graduate School of Management. Nabil Bedewi, Georgetown University; Scott Bailey, Troy University; Michael Ensby, Clarkson University; Eldon Larsen, Marshall University; Steve Machon, DeVry University–Tinley Park; William Matthews, William Patterson

xii Preface

University; Erin Sims, DeVry University–Pomona; Kenneth Solheim, DeVry University–Federal Way; and Oya Tukel, Cleveland State University. Gregory Anderson, Weber State University; Dana Bachman, Colorado Christian University; Alan Cannon, University of Texas, Arlington; Susan Cholette, San Francisco State; Michael Ensby, Clarkson University; Charles Franz, University of Missouri, Columbia; Raouf Ghattas, DeVry University; Robert Groff, Westwood College; Raffael Guidone, New York City College of Technology; George Kenyon, Lamar University; Elias Konwufine, Keiser University; Rafael Landaeta, Old Dominion University; Muhammad Obeidat, Southern Polytechnic State University; Linda Rose, Westwood College; Oya Tukel, Cleveland State University; and Mahmoud Watad, William Paterson University. Victor Allen, Lawrence Technological University; Mark Angolia, East Carolina University; Alan Cannon, University of Texas at Arlington; Robert Cope, Southeastern Louisiana University; Kenneth DaRin, Clarkson University; Ron Darnell, Amberton University; Jay Goldberg, Marquette University; Mark Huber, University of Georgia; Marshall Issen, Clarkson University; Charles Lesko, East Carolina University; Lacey McNeely, Oregon State University; Donald Smith, Texas A&M University; Peter Sutanto, Prairie View A&M University; Jon Tomlinson, University of Northwestern Ohio. We thank you for your many thoughtful suggestions and for making our book better. Of course we accept responsibility for the final version of the text. In addition, we would like to thank our colleagues in the College of Business at Oregon State University for their support and help in completing this project. In par- ticular, we recognize Lacey McNeely, Prem Mathew, Keith Leavitt and Pauline Schlip- zand for their helpful advice and suggestions. We also wish to thank the many students who helped us at different stages of this project, most notably Neil Young, Saajan Patel, Katherine Knox, Dat Nguyen, and David Dempsey. Mary Gray deserves special credit for editing and working under tight deadlines on earlier editions. Special thanks go to Pinyarat (“Minkster”) Sirisomboonsuk for her help in preparing the last four editions. Finally, we want to extend our thanks to all the people at McGraw-Hill Education for their efforts and support. First, we would like to thank Dolly Womack, and Christina Holt, for providing editorial direction, guidance, and management of the book’s devel- opment for the seventh edition. And we would also like to thank Melissa Leick, Jennifer Pickel, Egzon Shaqiri, Bruce Gin, and Karen Jozefowicz for managing the final production, design, supplement, and media phases of the seventh edition.

Erik W. Larson

Clifford F. Gray

xiii

Guided Tour Established Learning Objectives Learning objectives have been added to this edition to help stu- dents target key areas of learning. Learning objectives are listed both at the beginning of each chapter and are called out as mar- ginal elements throughout the narrative in each chapter.

End-of-Chapter Content Both static and algorithmic end-of-chapter content, including Review Questions and Exercises, are now assignable in Connect.

SmartBook The SmartBook has been updated with new highlights and probes for optimal student learning.

Snapshots The Snapshot from Practice boxes have been updated to include a number of new exam- ples of project management in action. New questions based on the Snapshots are also now assignable in Connect.

New and Updated Cases Included at the end of each chapter are between one and five cases which demonstrate key ideas from the text and help students understand how Project Management comes into play in the real world. New cases have been added across several chapters in the 7th edition.

26

Organization Strategy and Project Selection2

LEARNING OBJECTIVES After reading this chapter you should be able to:

2-1 Explain why it is important for project managers to understand their organization’s strategy.

2-2 Identify the significant role projects contribute to the strategic direction of the organization.

2-3 Understand the need for a project priority system.

2-4 Apply financial and nonfinancial criteria to assess the value of projects.

2-5 Understand how multi-criteria models can be used to select projects.

2-6 Apply an objective priority system to project selection.

2-7 Understand the need to manage the project portfolio.

OUTLINE 2.1 The Strategic Management Process: An

Overview

2.2 The Need for a Project Priority System

2.3 A Portfolio Management System

2.4 Selection Criteria

2.5 Applying a Selection Model

2.6 Managing the Portfolio System

Summary

C H A P T E R T W O

Lar66093_ch02_026-065.indd 26 10/4/16 4:52 PM

28 Chapter 2 Organization Strategy and Project Selection

alignment even more essential for success. Ensuring a strong link between the strategic plan and projects is a difficult task that demands constant attention from top and mid- dle management. The larger and more diverse an organization, the more difficult it is to create and maintain this strong link. Companies today are under enormous pressure to manage a process that clearly aligns projects to organization strategy. Ample evidence still sug- gests that many organizations have not developed a process that clearly aligns project selection to the strategic plan. The result is poor utilization of the organization’s resources—people, money, equipment, and core competencies. Conversely, organiza- tions that have a coherent link of projects to strategy have more cooperation across the organization, perform better on projects, and have fewer projects. How can an organization ensure this link and alignment? The answer requires inte- gration of projects with the strategic plan. Integration assumes the existence of a stra- tegic plan and a process for prioritizing projects by their contribution to the plan. A crucial factor to ensure the success of integrating the plan with projects lies in the creation of a process that is open and transparent for all participants to review. This chapter presents an overview of the importance of strategic planning and the process for developing a strategic plan. Typical problems encountered when strategy and proj- ects are not linked are noted. A generic methodology that ensures integration by creat- ing very strong linkages of project selection and priority to the strategic plan is then discussed. The intended outcomes are clear organization focus, best use of scarce orga- nization resources (people, equipment, capital), and improved communication across projects and departments.

Why Project Managers Need to Understand Strategy Project management historically has been preoccupied solely with the planning and exe- cution of projects. Strategy was considered to be under the purview of senior manage- ment. This is old-school thinking. New-school thinking recognizes that project management is at the apex of strategy and operations. Aaron Shenhar speaks to this issue when he states, “. . . it is time to expand the traditional role of the project manager from an operational to a more strategic perspective. In the modern evolving organization, proj- ect managers will be focused on business aspects, and their role will expand from getting the job done to achieving the business results and winning in the marketplace.”1 There are two main reasons why project managers need to understand their organiza- tion’s mission and strategy. The first reason is so they can make appropriate decisions and adjustments. For example, how a project manager would respond to a suggestion to modify the design of a product to enhance performance will vary depending upon whether his company strives to be a product leader through innovation or to achieve operational excellence through low cost solutions. Similarly, how a project manager would respond to delays may vary depending upon strategic concerns. A project man- ager will authorize overtime if her firm places a premium on getting to the market first. Another project manager will accept the delay if speed is not essential. The second reason project managers need to understand their organization’s strat- egy is so they can be effective project advocates. Project managers have to be able to demonstrate to senior management how their project contributes to their firm’s mis- sion. Protection and continued support come from being aligned with corporate objec- tives. Project managers also need to be able to explain to team members and other

Explain why it is impor- tant for project managers to understand their orga- nization’s strategy.

2-1LO

1 Shenhar, A., and Dov Dvie, Reinventing Project Management (Harvard Business School, 2007), p. 5.

Lar66093_ch02_026-065.indd 28 10/4/16 4:52 PM

84 Chapter 3 Organization: Structure and Culture

In 2016 Google Inc. topped Fortune magazine’s list of best companies to work at for the seventh time in the past ten years. When one enters the 24-hour Googleplex located in

Mountain View, California, you feel that you are walking through a new-age college campus rather than the corporate office of a billion-dollar business. The collection of interconnected low-rise buildings with colorful, glass-encased offices feature upscale trappings—free gourmet meals three times a day, free use of an outdoor wave pool, indoor gym and large child care facility, private shuttle bus service to and from San Francisco and other residential areas— that are the envy of workers across the Bay area. These perks and others reflect Google’s culture of keeping people happy and thinking in unconven- tional ways. The importance of corporate culture is no more evi- dent than in the fact that the head of Human Resources, Stacy Savides Sullivan, also has the title of Chief Cul- ture Officer. Her task is to try to preserve the innovative culture of a start-up as Google quickly evolves into a mammoth international corporation. Sullivan character- izes Google culture as “team-oriented, very collabora- tive and encouraging people to think nontraditionally, different from where they ever worked before—work with integrity and for the good of the company and for the good of the world, which is tied to our overall mis- sion of making information accessible to the world.” Google goes to great lengths to screen new employees to not only make sure that they have outstanding tech- nical capabilities but also that they are going to fit Google’s culture. Sullivan goes on to define a Google-y employee as somebody who is “flexible, adaptable, and not focusing on titles and hierarchy, and just gets stuff done.” Google’s culture is rich with customs and traditions not found in corporate America. For example, project

S N A P S H O T F R O M P R A C T I C E 3 . 4 Google-y*

teams typically have daily “stand-up” meetings seven min- utes after the hour. Why seven minutes after the hour? Because Google cofounder Sergey Brin once estimated that it took seven minutes to walk across the Google cam- pus. Everybody stands to make sure no one gets too com- fortable and no time is wasted during the rapid-fire update. As one manager noted, “The whole concept of the stand-up is to talk through what everyone’s doing, so if someone is working on what you’re working on, you can discover and collaborate not duplicate.” Another custom is “dogfooding.” This is when a project team releases the functional prototype of a future product to Google employees for them to test drive. There is a strong norm within Google to test new products and provide feedback to the developers. The project team receives feedback from thousands of Google-ys. The internal focus group can log bugs or simply comment on design or functionality. Fellow Google-ys do not hold back on their feedback and are quick to point out things they don’t like. This often leads to significant product improvements.

© Caiaimage/Glow Images

simply rely on what people report about their culture. The physical environment in which people work, as well as how people act and respond to different events that occur, must be examined. Figure 3.6 contains a worksheet for diagnosing the culture of an organization. Although by no means exhaustive, the checklist often yields clues about the norms, customs, and values of an organization: 1. Study the physical characteristics of an organization. What does the external

architecture look like? What image does it convey? Is it unique? Are the buildings

* Walters, H., “How Google Got Its New Look,” BusinessWeek, May 10, 2010; Goo, S. K., “Building a ‘Googley’ Workforce,“ Washington Post, October 21, 2006; Mills, E., “Meet Google’s Culture Czar,” CNET News.com, April 27, 2007.

Lar66093_ch03_066-099.indd 84 10/4/16 5:10 PM

xiv

Note to Student You will find the content of this text highly practical, relevant, and current. The con- cepts discussed are relatively simple and intuitive. As you study each chapter we sug- gest you try to grasp not only how things work, but why things work. You are encouraged to use the text as a handbook as you move through the three levels of competency:

I know. I can do. I can adapt to new situations.

Project management is both people and technical oriented. Project management involves understanding the cause-effect relationships and interactions among the sociotechnical dimensions of projects. Improved competency in these dimensions will greatly enhance your competitive edge as a project manager. The field of project management is growing in importance and at an exponential rate. It is nearly impossible to imagine a future management career that does not include management of projects. Résumés of managers will soon be primarily a description of the individual’s participation in and contributions to projects. Good luck on your journey through the text and on your future projects.

Chapter-by-Chapter Revisions for the Seventh Edition Chapter 1: Modern Project Management

∙ New Snapshot: Project Management in Action 2016. ∙ Information updated. ∙ New Snapshot: Ron Parker replaced Research Highlight: Works well with others. ∙ New case: The Hokie Lunch Group.

Chapter 2: Organization Strategy and Project Selection

∙ New Snapshot: Project Code Names replaced HP’s Strategy Revision.

Chapter 3: Organization: Structure and Culture

∙ Learning objectives established. ∙ Snapshot: Google-y updated. ∙ Snapshot: Skunk Works at Lockheed Martin updated.

Chapter 4: Defining the Project

∙ Learning objectives established. ∙ New case: Home Improvement Project.

Note to Student xv

Chapter 5: Estimating Project Times and Costs

∙ Learning objectives established. ∙ New Snapshot: London 2012 Olympics: Avoiding White Elephant curse. ∙ Expanded discussion of Mega Projects including the emergence of white

elephants.

Chapter 6: Developing a Project Schedule

∙ Learning objectives established. ∙ New Exercises 2-15 and Lag Exercises 18-21. ∙ Shoreline Stadium case replaces Greendale Stadium case.

Chapter 7: Managing Risk

∙ Learning objectives established.

Chapter 8 Appendix 1: The Critical-Chain Approach

∙ Learning objectives established.

Chapter 9: Reducing Project Duration

∙ Learning objectives established. ∙ Snapshot: Smartphone Wars updated. ∙ New exercises 1-7.

Chapter 10: Leadership: Being an Effective Project Manager

∙ Learning objectives established. ∙ New Research Highlight: Give and Take. ∙ Ethics discussion expanded.

Chapter 11: Managing Project Teams

∙ Learning objectives established. ∙ Expanded discussion on project vision.

Chapter 12: Outsourcing: Managing Interorganizational Relations

∙ Learning objectives established. ∙ Discussion of RFP process. ∙ New Snapshot: U.S. Department of Defense’s Value Engineering Awards 2015.

Chapter 13 Progress and Performance Measurement and Evaluation

∙ Learning Objectives established. ∙ Discussion of milestone schedules. ∙ New Snapshot: Guidelines for Setting Milestones. ∙ Discussion of Management Reserve Index. ∙ New case: Shoreline Stadium Status Report.

xvi Note to Student

Chapter 14: Project Closure

∙ Major Revision of chapter with more attention to project audit and closing activities.

∙ New Snapshot: The Wake. ∙ New Snapshot: 2015 PMO of the Year. ∙ New Snapshot: Operation Eagle Claw. ∙ Project Management Maturity model introduced.

Chapter 15: International Projects

∙ Learning Objectives established.

Chapter 16: An Introduction to Agile Project Management

∙ Learning Objectives established. ∙ New Snapshot: Kanban.

xvii

Preface ix

1. Modern Project Management 2

2. Organization Strategy and Project Selection 26

3. Organization: Structure and Culture 66

4. Defining the Project 100

5. Estimating Project Times and Costs 128

6. Developing a Project Plan 162

7. Managing Risk 206

8. Scheduling Resources and Costs 250

9. Reducing Project Duration 304

10. Being an Effective Project Manager 338

11. Managing Project Teams 374

12. Outsourcing: Managing Interorganizational Relations 418

Brief Contents 13. Progress and Performance Measurement

and Evaluation 458

14. Project Closure 514

15. International Projects 544

16. An Introduction to Agile Project Management 578

APPENDIX One Solutions to Selected Exercises 603 Two Computer Project Exercises 616

GLOSSARY 633 ACRONYMS 640 PROJECT MANAGEMENT EQUATIONS 641 CROSS REFERENCE OF PROJECT MANAGEMENT 642 SOCIO-TECHNICAL APPROACH TO PROJECT MANAGEMENT 643 INDEX 644

xviii

Contents Preface ix

Chapter 1 Modern Project Management 2 1.1 What Is a Project? 6

What a Project Is Not 7 Program versus Project 7 The Project Life Cycle 8 The Project Manager 9 Being Part of a Project Team 11

1.2 Current Drivers of Project Management 12 Compression of the Product Life Cycle 12 Knowledge Explosion 12 Triple Bottom Line (Planet, People, Profit) 12 Increased Customer Focus 12 Small Projects Represent Big Problems 15

1.3 Project Governance 15 Alignment of Projects with Organizational Strategy 16

1.4 Project Management Today: A Socio-Technical Approach 17

Summary 18

Chapter 2 Organization Strategy and Project Selection 26 2.1 The Strategic Management Process:

An Overview 29 Four Activities of the Strategic Management Process 29

2.2 The Need for a Project Priority System 34 Problem 1: The Implementation Gap 34 Problem 2: Organization Politics 35 Problem 3: Resource Conflicts and Multitasking 36

2.3 A Portfolio Management System 37 Classification of the Project 37

2.4 Selection Criteria 38 Financial Criteria 38 Nonfinancial Criteria 40

2.5 Applying a Selection Model 43 Project Classification 43 Sources and Solicitation of Project Proposals 44 Ranking Proposals and Selection of Projects 46

2.6 Managing the Portfolio System 48 Senior Management Input 48 The Governance Team Responsibilities 49 Balancing the Portfolio for Risks and Types of Projects 50

Summary 51

Chapter 3 Organization: Structure and Culture 66 3.1 Project Management Structures 68

Organizing Projects within the Functional Organization 68 Organizing Projects as Dedicated Teams 71 Organizing Projects within a Matrix Arrangement 75 Different Matrix Forms 76

3.2 What Is the Right Project Management Structure? 79 Organization Considerations 79 Project Considerations 79

3.3 Organizational Culture 81 What Is Organizational Culture? 81 Identifying Cultural Characteristics 83

3.4 Implications of Organizational Culture for Organizing Projects 86

Summary 89

Chapter 4 Defining the Project 100 4.1 Step 1: Defining the Project Scope 102

Employing a Project Scope Checklist 103 4.2 Step 2: Establishing Project Priorities 106 4.3 Step 3: Creating the Work Breakdown

Structure 108 Major Groupings Found in a WBS 108 How WBS Helps the Project Manager 108 A Simple WBS Development 109

4.4 Step 4: Integrating the WBS with the Organization 113

4.5 Step 5: Coding the WBS for the Information System 113

4.6 Process Breakdown Structure 116

Contents xix

4.7 Responsibility Matrices 117 4.8 Project Communication Plan 119 Summary 121

Chapter 5 Estimating Project Times and Costs 128 5.1 Factors Influencing the Quality of

Estimates 130 Planning Horizon 130 Project Complexity 130 People 131 Project Structure and Organization 131 Padding Estimates 131 Organization Culture 131 Other Factors 131

5.2 Estimating Guidelines for Times, Costs, and Resources 132

5.3 Top-Down versus Bottom-Up Estimating 134

5.4 Methods for Estimating Project Times and Costs 136 Top-Down Approaches for Estimating Project Times and Costs 136 Bottom-Up Approaches for Estimating Project Times and Costs 140 A Hybrid: Phase Estimating 141

5.5 Level of Detail 143 5.6 Types of Costs 144

Direct Costs 145 Direct Project Overhead Costs 145 General and Administrative (G&A) Overhead Costs 145

5.7 Refining Estimates 146 5.8 Creating a Database for Estimating 148 5.9 Mega Projects: A Special Case 149 Summary 151 Appendix 5.1: Learning Curves for Estimating 157

Chapter 6 Developing a Project Plan 162 6.1 Developing the Project Network 163 6.2 From Work Package to Network 164 6.3 Constructing a Project Network 166

Terminology 166 Basic Rules to Follow in Developing Project Networks 166

6.4 Activity-on-Node (AON) Fundamentals 167 6.5 Network Computation Process 171

Forward Pass—Earliest Times 171 Backward Pass—Latest Times 173 Determining Slack (or Float) 175

6.6 Using the Forward and Backward Pass Information 177

6.7 Level of Detail for Activities 178 6.8 Practical Considerations 178

Network Logic Errors 178 Activity Numbering 179 Use of Computers to Develop Networks 179 Calendar Dates 182 Multiple Starts and Multiple Projects 182

6.9 Extended Network Techniques to Come Closer to Reality 182 Laddering 182 Use of Lags to Reduce Schedule Detail and Project Duration 183 An Example Using Lag Relationships—The Forward and Backward Pass 186 Hammock Activities 188

Summary 189

Chapter 7 Managing Risk 206 7.1 Risk Management Process 208 7.2 Step 1: Risk Identification 210 7.3 Step 2: Risk Assessment 212

Probability Analysis 215 7.4 Step 3: Risk Response Development 216

Mitigating Risk 216 Avoiding Risk 217 Transferring Risk 217 Accept Risk 218

7.5 Contingency Planning 219 Technical Risks 220 Schedule Risks 222 Cost Risks 222 Funding Risks 222

7.6 Opportunity Management 223 7.7 Contingency Funding and Time Buffers 223

Budget Reserves 224 Management Reserves 224 Time Buffers 225

7.8 Step 4: Risk Response Control 225 7.9 Change Control Management 226 Summary 230 Appendix 7.1: PERT and PERT Simulation 240

xx Contents

Chapter 8 Scheduling Resources and Costs 250 8.1 Overview of the Resource Scheduling

Problem 252 8.2 Types of Resource Constraints 254 8.3 Classification of a Scheduling

Problem 255 8.4 Resource Allocation Methods 255

Assumptions 255 Time-Constrained Project: Smoothing Resource Demand 256 Resource-Constrained Projects 257

8.5 Computer Demonstration of Resource- Constrained Scheduling 262 The Impacts of Resource-Constrained Scheduling 266

8.6 Splitting Activities 269 8.7 Benefits of Scheduling Resources 270 8.8 Assigning Project Work 271 8.9 Multiproject Resource Schedules 272 8.10 Using the Resource Schedule to Develop a

Project Cost Baseline 273 Why a Time-Phased Budget Baseline Is Needed 273 Creating a Time-Phased Budget 274

Summary 279 Appendix 8.1: The Critical-Chain Approach 294

Chapter 9 Reducing Project Duration 304 9.1 Rationale for Reducing Project

Duration 306 9.2 Options for Accelerating Project

Completion 307 Options When Resources Are Not Constrained 308 Options When Resources Are Constrained 310

9.3 Project Cost–Duration Graph 313 Explanation of Project Costs 313

9.4 Constructing a Project Cost–Duration Graph 314 Determining the Activities to Shorten 314 A Simplified Example 316

9.5 Practical Considerations 318 Using the Project Cost–Duration Graph 318 Crash Times 319 Linearity Assumption 319 Choice of Activities to Crash Revisited 319 Time Reduction Decisions and Sensitivity 320

9.6 What If Cost, Not Time, Is the Issue? 321 Reduce Project Scope 322 Have Owner Take on More Responsibility 322 Outsourcing Project Activities or Even the Entire Project 322 Brainstorming Cost Savings Options 322

Summary 323

Chapter 10 Being an Effective Project Manager 338 10.1 Managing versus Leading a Project 340 10.2 Managing Project Stakeholders 341 10.3 Influence as Exchange 345

Task-Related Currencies 345 Position-Related Currencies 346 Inspiration-Related Currencies 347 Relationship-Related Currencies 347 Personal-Related Currencies 348

10.4 Social Network Building 348 Mapping Stakeholder Dependencies 348 Management by Wandering Around (MBWA) 350 Managing Upward Relations 351 Leading by Example 353

10.5 Ethics and Project Management 356 10.6 Building Trust: The Key to Exercising

Influence 357 10.7 Qualities of an Effective Project Manager 359 Summary 362

Chapter 11 Managing Project Teams 374 11.1 The Five-Stage Team Development Model 377 11.2 Situational Factors Affecting Team

Development 379 11.3 Building High-Performance Project Teams 381

Recruiting Project Members 381 Conducting Project Meetings 383 Establishing Team Norms 385 Establishing a Team Identity 387 Creating a Shared Vision 388 Managing Project Reward Systems 391 Orchestrating the Decision-Making Process 392 Managing Conflict within the Project 394 Rejuvenating the Project Team 398

11.4 Managing Virtual Project Teams 399 11.5 Project Team Pitfalls 403

Groupthink 403 Bureaucratic Bypass Syndrome 404

Contents xxi

Team Spirit Becomes Team Infatuation 404 Going Native 404

Summary 405

Chapter 12 Outsourcing: Managing Interorganizational Relations 418 12.1 Outsourcing Project Work 420 12.2 Request for Proposal (RFP) 424

Selection of Contractor from Bid Proposals 425 12.3 Best Practices in Outsourcing Project Work 426

Well-Defined Requirements and Procedures 426 Extensive Training and Team-Building Activities 428 Well-Established Conflict Management Processes in Place 429 Frequent Review and Status Updates 431 Co-Location When Needed 432 Fair and Incentive-Laden Contracts 432 Long-Term Outsourcing Relationships 433

12.4 The Art of Negotiating 434 1. Separate the People from the Problem 435 2. Focus on Interests, Not Positions 436 3. Invent Options for Mutual Gain 437 4. When Possible, Use Objective Criteria 138 Dealing with Unreasonable People 438

12.5 A Note on Managing Customer Relations 439 Summary 442 Appendix 12.1: Contract Management 451

Chapter 13 Progress and Performance Measurement and Evaluation 458 13.1 Structure of a Project Monitoring Information

System 460 What Data Are Collected? 460 Collecting Data and Analysis 460 Reports and Reporting 460

13.2 The Project Control Process 461 Step 1: Setting a Baseline Plan 461 Step 2: Measuring Progress and Performance 461 Step 3: Comparing Plan against Actual 462 Step 4: Taking Action 462

13.3 Monitoring Time Performance 462 Tracking Gantt Chart 463 Control Chart 463 Milestone Schedules 464

13.4 Development of an Earned Value Cost/Schedule System 467

Percent Complete Rule 467 What Costs Are Included in Baselines? 467 Methods of Variance Analysis 468

13.5 Developing a Status Report: A Hypothetical Example 470 Assumptions 470 Baseline Development 470 Development of the Status Report 471

13.6 Indexes to Monitor Progress 475 Performance Indexes 477 Project Percent Complete Indexes 474 Software for Project Cost/Schedule Systems 477 Additional Earned Value Rules 478

13.7 Forecasting Final Project Cost 476 13.8 Other Control Issues 481

Technical Performance Measurement 481 Scope Creep 483 Baseline Changes 483 The Costs and Problems of Data Acquisition 485

Summary 486 Appendix 13.1: The Application of Additional Earned Value Rules 505 Appendix 13.2: Obtaining Project Performance Information from MS Project 2010 or 2015 511

Chapter 14 Project Closure 514 14.1 Types of Project Closure 516 14.2 Wrap-up Closure Activities 518 14.3 Project Audits 521

The Project Audit Process 522 Project Retrospectives 525 Project Audits: The Bigger Picture 529

14.4 Post-Implementation Evaluation 532 Team Evaluation 532 Individual, Team Member, and Project Manager Performance Reviews 534

Summary 537 Appendix 14.1: Project Closeout Checklist 539 Appendix 14.2: Euro Conversion—Project Closure Checklist 541

Chapter 15 International Projects 544 15.1 Environmental Factors 546

Legal/Political 546 Security 547 Geography 548

xxii Contents

Economic 549 Infrastructure 550 Culture 551

15.2 Project Site Selection 553 15.3 Cross-Cultural Considerations:

A Closer Look 554 Adjustments 555 Working in Mexico 556 Working in France 559 Working in Saudi Arabia 560 Working in China 562 Working in the United States 563 Summary Comments about Working in Different Cultures 565 Culture Shock 565 Coping with Culture Shock 567

15.4 Selection and Training for International Projects 568

Summary 571

Chapter 16 An Introduction to Agile Project Management 578 16.1 Traditional versus Agile Methods 580 16.2 Agile PM 582

16.3 Agile PM in Action: Scrum 585 Roles and Responsibilities 586 Scrum Meetings 587 Product and Sprint Backlogs 588 Sprint and Release Burndown Charts 589

16.4 Applying Agile PM to Large Projects 592 16.5 Limitations and Concerns 593 Summary 595

Appendix One: Solutions to Selected Exercise 603

Appendix Two: Computer Project Exercises 616

Glossary 633 Acronyms 640 Project Management Equations 641 Cross Reference of Project Management 642 Socio-Technical Approach to Project Management 643 Index 644

Project Management:

The Managerial Process

2

Modern Project Management1 LEARNING OBJECTIVES After reading this chapter you should be able to:

1-1 Understand why project management is crucial in today’s world.

1-2 Distinguish a project from routine operations.

1-3 Identify the different stages of project life cycle.

1-4 Understand the importance of projects in implementing organization strategy.

1-5 Understand that managing projects involves balancing the technical and sociocultural dimensions of the project.

OUTLINE 1.1 What Is a Project?

1.2 Current Drivers of Project Management

1.3 Project Governance

1.4 Project Management Today—A Socio-Technical Approach

Summary

Text Overview

C H A P T E R O N E

3

All of mankind’s greatest accomplishments—from building the great pyra- mids to discovering a cure for polio to putting a man on the moon—began as a project.

This is a good time to be reading a book about project management. Business leaders and experts have proclaimed that project management is critical to sustainable eco- nomic growth. New jobs and competitive advantage are achieved by constant innova- tion, developing new products and services, and improving both productivity and quality of work. This is the world of project management. Project management pro- vides people with a powerful set of tools that improves their ability to plan, implement, and manage activities to accomplish specific objectives. But project management is more than just a set of tools; it is a results-oriented management style that places a premium on building collaborative relationships among a diverse cast of characters. Exciting opportunities await people skilled in project management. The project approach has long been the style of doing business in the construction industry, U.S. Department of Defense contracts, and Hollywood, as well as big con- sulting firms. Now project management has spread to all avenues of work. Today,

Understand why project management is crucial in today’s world.

1-1LO

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

4 Chapter 1 Modern Project Management

project teams carry out everything from port expansions to hospital restructuring to upgrading information systems. They are creating next-generation fuel-efficient vehi- cles, developing sustainable sources of energy, and exploring the farthest reaches of outer space. The impact of project management is most profound in the electronics industry, where the new folk heroes are young professionals whose Herculean efforts lead to the constant flow of new hardware and software products. Project management is not limited to the private sector. Project management is also a vehicle for doing good deeds and solving social problems. Endeavors such as provid- ing emergency aid to areas hit by natural disasters, devising a strategy for reducing crime and drug abuse within a city, or organizing a community effort to renovate a public playground would and do benefit from the application of modern project man- agement skills and techniques. Perhaps the best indicator of demand for project management can be seen in the rapid expansion of the Project Management Institute (PMI), a professional organiza- tion for project managers. PMI membership has grown from 93,000 in 2002 to more than 478,000 currently. See Snapshot from Practice 1.1 for information regarding pro- fessional certification in project management. It’s nearly impossible to pick up a newspaper or business periodical and not find something about projects. This is no surprise! Approximately $2.5 trillion (about 25 per- cent of the U.S. gross national product) is spent on projects each year in the United States alone. Other countries are increasingly spending more on projects. Millions of people around the world consider project management the major task in their profession. Most of the people who excel at managing projects never have the title of project manager. They include accountants, lawyers, administrators, scientists, contractors, pub- lic health officials, teachers, and community advocates whose success depends upon being able to lead and manage project work. For some, the very nature of their work is project driven. Projects may be cases for lawyers, audits for accountants, events for

The Project Management Institute (PMI) was founded in 1969 as an international society for project managers. Today PMI has members from more than 180 coun- tries and more than 478,500 members.

PMI professionals come from virtually every major indus- try, including aerospace, automotive, business manage- ment, construction, engineering, financial services, information technology, pharmaceuticals, health care, and telecommunications. PMI provides certification as a Project Management Professional (PMP)—someone who has documented sufficient project experience, agreed to follow the PMI code of professional conduct, and demonstrated mas- tery of the field of project management by passing a comprehensive examination. The number of people earning PMP status has grown dramatically in recent years. In 1996 there were fewer than 3,000 certified project management professionals. By 2016 there were more than 695,000 Professional credential holders.

S N A P S H O T F R O M P R A C T I C E 1 . 1 The Project Management Institute*

Just as the CPA exam is a standard for accountants, passing the PMP exam may become the standard for project managers. Some companies are requiring that all their project managers be PMP certified. Moreover, many job postings are restricted to PMPs. Job seekers, in general, are finding that being PMP certified is an advantage in the marketplace. PMI added a certification as a Certified Associate in Project Management (CAPM). CAPM is designed for project team members and entry-level project manag- ers, as well as qualified undergraduate and graduate students who want a credential to recognize their mas- tery of the project management body of knowledge. CAPM does not require the extensive project manage- ment experience associated with the PMP. For more details on PMP and CAPM, google PMI to find the cur- rent website for the Project Management Institute.

*PMI Today, March 2016, p. 4.

Chapter 1 Modern Project Management 5

artists, and renovations for contractors. For others, projects may be a small, but critical part of their work. For example, a high school teacher who teaches four classes a day is responsible for coaching a group of students to compete in a national debate competition. A store manager who oversees daily operations is charged with developing an employee retention program. A sales account executive is given the additional assignment of team lead to launch daily deals into a new city. A public health official who manages a clinic is also responsible for organizing a Homeless Youth Connect event. For these and others, project management is not a title, but a critical job requirement. It is hard to think of a profession or a career path that would not benefit from being good at managing projects. Not only is project management critical to most careers, the skill set is transferable across most businesses and professions. At its core, project management fundamentals are universal. The same project management methodology that is used to develop a new prod- uct can be adapted to create new services, organize events, refurbish aging operations, and so forth. In a world where it is estimated that each person is likely to experience three to four career changes, managing projects is a talent worthy of development. The significance of project management can also be seen in the classroom. Twenty years ago major universities offered one or two classes in project management, primarily for engineers. Today, most universities offer multiple sections of project man- agement classes, with the core group of engineers being supplemented by business stu- dents majoring in marketing, management information systems (MIS), and finance, as well as students from other disciplines such as oceanography, health sciences, computer sciences, and liberal arts. These students are finding that their exposure to project man- agement is providing them with distinct advantages when it comes time to look for jobs. More and more employers are looking for graduates with project management skills.

1. Business information: Join a proj- ect team charged with installing new data security system.

2. Physical education: Design and develop a new fitness program for

senior citizens that combines principles of yoga and aerobics.

3. Marketing: Execute a sales program for new home air purifier.

4. Industrial engineering: Manage a team to create a value chain report for every aspect of key product from design to customer delivery.

5. Chemistry: Develop a quality control program for organization’s drug production facilities.

6. Management: Implement a new store layout design.

7. Pre-med neurology student: Join project team link- ing mind mapping to an imbedded prosthetic that will allow blind people to function near normally.

8. Sports communication: Join Olympic project team that will promote women’s sports products for the 2016 Games in Rio de Janeiro, Brazil.

“”9. Systems engineer: Become a project team member of a project to develop data mining of medical pa- pers and studies related to drug efficacy.

10. Accounting: Work on an audit of a major client.

11. Public health: Research and design a medical mari- juana educational program.

12. English: Create a web-based user manual for new electronics product.

S N A P S H O T F R O M P R A C T I C E 1 . 2 A Dozen Examples of Projects Given to Recent College Graduates

© John Fedele/Blend Images LLC, RF

6 Chapter 1 Modern Project Management

See the nearby Snapshot from Practice 1.2 for examples of projects given to recent col- lege graduates. The logical starting point for developing these skills is understanding the uniqueness of a project and of project managers.

1.1 What Is a Project? What do the following headlines have in common?

Millions watch Olympic Opening Ceremony Citywide WiFi System Set to Go Live Hospitals Respond to New Healthcare Reforms Apple’s New iPhone Hits the Market City Receives Stimulus Funds to Expand Light Rail System

All of these events represent projects.

© McGraw-Hill Education

The Project Management Institute provides the following definition of a project: A project is a temporary endeavor undertaken to create a unique product, service, or result.

Like most organizational efforts, the major goal of a project is to satisfy a customer’s need. Beyond this fundamental similarity, the characteristics of a project help

Distinguish a project from routine operations.

1-2LO

Chapter 1 Modern Project Management 7

differentiate it from other endeavors of the organization. The major characteristics of a project are as follows: 1. An established objective. 2. A defined life span with a beginning and an end. 3. Usually, the involvement of several departments and professionals. 4. Typically, doing something that has never been done before. 5. Specific time, cost, and performance requirements. First, projects have a defined objective—whether it is constructing a 12-story apart- ment complex by January 1 or releasing version 2.0 of a specific software package as quickly as possible. This singular purpose is often lacking in daily organizational life in which workers perform repetitive operations each day. Second, because there is a specified objective, projects have a defined endpoint, which is contrary to the ongoing duties and responsibilities of traditional jobs. In many cases, individuals move from one project to the next as opposed to staying in one job. After helping to install a security system, an IT engineer may be assigned to develop a database for a different client. Third, unlike much organizational work that is segmented according to functional specialty, projects typically require the combined efforts of a variety of specialists. Instead of working in separate offices under separate managers, project participants, whether they be engineers, financial analysts, marketing professionals, or quality con- trol specialists, work closely together under the guidance of a project manager to com- plete a project. The fourth characteristic of a project is that it is nonroutine and has some unique elements. This is not an either/or issue but a matter of degree. Obviously, accomplish- ing something that has never been done before, such as building an electric automobile or landing two mechanical rovers on Mars, requires solving previously unsolved prob- lems and using breakthrough technology. On the other hand, even basic construction projects that involve established sets of routines and procedures require some degree of customization that makes them unique. Finally, specific time, cost, and performance requirements bind projects. Projects are evaluated according to accomplishment, cost, and time spent. These triple con- straints impose a higher degree of accountability than you typically find in most jobs. These three also highlight one of the primary functions of project management, which is balancing the trade-offs among time, cost, and performance while ultimately satisfy- ing the customer.

What a Project Is Not Projects should not be confused with everyday work. A project is not routine, repeti- tive work! Ordinary daily work typically requires doing the same or similar work over and over, while a project is done only once; a new product or service exists when the project is completed. Examine the list in Table 1.1 that compares routine, repetitive work and projects. Recognizing the difference is important because too often resources can be used up on daily operations which may not contribute to longer range organiza- tion strategies that require innovative new products.

Program versus Project In practice the terms project and program cause confusion. They are often used syn- onymously. A program is a group of related projects designed to accomplish a

8 Chapter 1 Modern Project Management

common goal over an extended period of time. Each project within a program has a project manager. The major differences lie in scale and time span. Program management is the process of managing a group of ongoing, interdepen- dent, related projects in a coordinated way to achieve strategic objectives. For example, a pharmaceutical organization could have a program for curing cancer. The cancer pro- gram includes and coordinates all cancer projects that continue over an extended time horizon (Gray, 2011). Coordinating all cancer projects under the oversight of a cancer team provides benefits not available from managing them individually. This cancer team also oversees the selection and prioritizing of cancer projects that are included in their special “Cancer” portfolio. Although each project retains its own goals and scope, the project manager and team are also motivated by the higher program goal. Program goals are closely related to broad strategic organization goals.

The Project Life Cycle Another way of illustrating the unique nature of project work is in terms of the project life cycle. Some project managers find it useful to use the project life cycle as the cor- nerstone for managing projects. The life cycle recognizes that projects have a limited life span and that there are predictable changes in level of effort and focus over the life of the project. There are a number of different life-cycle models in project management literature. Many are unique to a specific industry or type of project. For example, a new software development project may consist of five phases: definition, design, code, inte- gration/test, and maintenance. A generic cycle is depicted in Figure 1.1. The project life cycle typically passes sequentially through four stages: defining, planning, executing, and delivering. The starting point begins the moment the project is given the go-ahead. Project effort starts slowly, builds to a peak, and then declines to delivery of the project to the customer. 1. Defining stage: Specifications of the project are defined; project objectives are

established; teams are formed; major responsibilities are assigned. 2. Planning stage: The level of effort increases, and plans are developed to determine

what the project will entail, when it will be scheduled, whom it will benefit, what quality level should be maintained, and what the budget will be.

3. Executing stage: A major portion of the project work takes place—both physical and mental. The physical product is produced (a bridge, a report, a software pro- gram). Time, cost, and specification measures are used for control. Is the project on schedule, on budget, and meeting specifications? What are the forecasts of each of these measures? What revisions/changes are necessary?

4. Closing stage: Closing includes three activities: delivering the project product to the customer, redeploying project resources, and post-project review. Delivery of

Identify the different stages of project life cycle.

1-3LO

TABLE 1.1 Comparison of Routine Work with Projects

Routine, Repetitive Work Projects Taking class notes Writing a term paper Daily entering sales receipts into the Setting up a sales kiosk for a professional accounting accounting ledger meeting Responding to a supply-chain request Developing a supply-chain information system Practicing scales on the piano Writing a new piano piece Routine manufacture of an Apple iPod Designing an iPod that is approximately 2 × 4 inches,

interfaces with PC, and stores 10,000 songs Attaching tags on a manufactured product Wire-tag projects for GE and Walmart

Chapter 1 Modern Project Management 9

the project might include customer training and transferring documents. Redeploy- ment usually involves releasing project equipment/materials to other projects and finding new assignments for team members. Post-project reviews include not only assessing performance but also capturing lessons learned.

In practice, the project life cycle is used by some project groups to depict the timing of major tasks over the life of the project. For example, the design team might plan a major commitment of resources in the defining stage, while the quality team would expect their major effort to increase in the latter stages of the project life cycle. Because most organizations have a portfolio of projects going on concurrently, each at a differ- ent stage of each project’s life cycle, careful planning and management at the organiza- tion and project levels are imperative.

The Project Manager At first glance project managers perform the same functions as other managers. That is, they plan, schedule, motivate, and control. However, what makes them unique is that they manage temporary, nonrepetitive activities, to complete a fixed life project. Unlike functional managers, who take over existing operations, project managers cre- ate a project team and organization where none existed before. They must decide what and how things should be done instead of simply managing set processes. They must meet the challenges of each phase of the project life cycle, and even oversee the dis- solution of their operation when the project is completed. Project managers must work with a diverse troupe of characters to complete proj- ects. They are typically the direct link to the customer and must manage the tension between customer expectations and what is feasible and reasonable. Project managers provide direction, coordination, and integration to the project team, which is often made up of part-time participants loyal to their functional departments. They often must work with a cadre of outsiders—vendors, suppliers, subcontractors—who do not necessarily share their project allegience.

Le ve

l o f e

ff or

t

1. Goals 2. Specifications 3. Tasks 4. Responsibilities

1. Schedules 2. Budgets 3. Resources 4. Risks 5. Staffing

1. Status reports 2. Changes 3. Quality 4. Forecasts

1. Train customer 2. Transfer documents 3. Release resources 4. Evaluation 5. Lessons learned

Defining

Defining

Start Time End

Planning

Planning

Executing

Executing

Closing

Closing

FIGURE 1.1 Project Life Cycle

10 Chapter 1 Modern Project Management

Project managers are ultimately responsible for performance (frequently with too little authority). They must ensure that appropriate trade-offs are made among the time, cost, and performance requirements of the project. At the same time, unlike their functional counterparts, project managers generally possess only rudimentary techni- cal knowledge to make such decisions. Instead, they must orchestrate the completion of the project by inducing the right people, at the right time, to address the right issues and make the right decisions. While project management is not for the timid, working on projects can be an extremely rewarding experience. Life on projects is rarely boring; each day is different from the last. Since most projects are directed at solving some tangible problem or pursuing some useful opportunity, project managers find their work personally mean- ingful and satisfying. They enjoy the act of creating something new and innovative. Project managers and team members can feel immense pride in their accomplishment, whether it is a new bridge, a new product, or needed service. Project managers are often stars in their organization and well compensated. Good project managers are always in demand. Every industry is looking for effective people who can get the right things done on time. See Snapshot from Practice 1.3: Ron Parker for an example of a former student who leveraged his ability to manage

1986 B.S. Business Administration–Oregon State University

1986–1990 Food Products Manufacturing

1990–1994 Wood Products Manufacturing 1994–Current Glass Products Manufacturing

Upon completion of my business degree at OSU, I was recruited by a Fortune 100 food products company for a first line production supervisor position. In that role, an opportunity came up for me to manage a project that involved rolling out a new statistical package-weight- control program throughout the factory. Successfully completing that project was instrumental in accelerating my career within the company, advancing from supervi- sor to product manager in less than three years. After four years in food products I accepted an offer to join a wood products manufacturing company. Initially my role in this company was Human Resources Manager. My HR responsibilities included managing several projects to improve safety and employee retention. Successful com- pletion of these projects led to a promotion to Plant Man- ager. In the Plant Manager role, I was tasked with building and managing a new wood door manufacturing factory. After successfully taking that factory to full production, I was promoted again to Corporate Manager of Continuous Improvement. This “culture change” project involved

S N A P S H O T F R O M P R A C T I C E 1 . 3 Ron Parker

implementing Total Quality Management throughout 13 different manufacturing factories as well as all the indirect and support functions within the corporation. Shortly after we successfully ingrained this new culture in the company, the owner passed away, leading me to look for other employment. I was able to leverage my previous experience and success to convince the owner of a struggling glass fab- rication company to hire me. In this new role as General Manager, I was tasked with turning the company around. This was my largest project yet. Turning a com- pany around involves a myriad of smaller improvement projects spanning from facilities and equipment improvements to product line additions and deletions to sales and marketing strategy and everything in between. In four years, we successfully turned the com- pany around to the extent that the owner was able to sell the company and comfortably retire. Successfully turning that glass company around got the attention of a much larger competitor of ours, resulting in an offer of employment. This new offer involved the start-up of a $30M high-tech glass manufacturing facility in another state. We were able to take that facility from a dirt field to the highest volume manufacturing facility of its kind in the world in just three years. After building and operating this factory at a world-class benchmark level for eight years, I came across a new and exciting opportunity to help expand a strong glass fabrication company in

Chapter 1 Modern Project Management 11

Canada. I spent four years successfully transitioning this Canadian company from a medium-size glass fabrication facility to one of the largest and most successful of its kind in North America. After tiring of the “Great White North,” I found an opportunity to tackle the largest and most impactful project of my career. I’m currently VP of Operations in a venture-funded high-tech start-up company. In this role, I’m overseeing the construction and start-up of the first full-scale, high-volume electrochromic glass fabrication factory in the world. This new project

involves building a company from the ground up and taking an exciting new technology from the lab to full- scale commercialization. Success in this role, although still far from being certain, will eventually revolutionize the glass industry through the introduction of a product that dramatically improves the energy efficiency and occupant comfort of buildings around the world. Looking back on my career, it is apparent that my degree of success has largely been the result of taking on and successfully completing successively larger and increasingly impactful projects. There’s a saying that’s always resonated with me: “If your only tool is a hammer, all your problems look like nails.” Good tools are hard to come by and heavy to carry around. I like my tool bag filled with generalist tools; things like communication skills, leadership, common sense, judgment, reasoning, logic and a strong sense of urgency. I often wonder how much more I could have accomplished had I actually studied project management and had more of that toolset in my bag. With a bag full of strong generalist tools, you can tackle any problem in any business. Project man- agement is clearly one of those skills where the better you are at it, the higher your chances of success in any business environment. Having the tools is only part of the equation though. To be successful, you must also be willing to run at problems/opportunities when every- one else is running away from them.

projects to build a successful career in the glass products industry. Clearly, project man- agement is a challenging and exciting profession. This text is intended to provide the necessary knowledge, perspective, and tools to enable students to accept the challenge.

Being Part of a Project Team Most people’s first exposure to project management occurs while working as part of a team assigned to complete a specific project. Sometimes this work is full-time, but in most cases, people work part-time on one or more projects. They must learn how to juggle their day-to- day commitments with additional project responsibilities. They may join a team with a long history of working together, in which case roles and norms are firmly established. Alternatively, their team may consist of strangers from different departments and organiza- tions. As such, they endure the growing pains of a group evolving into a team. They need to be a positive force in helping the team coalesce into an effective project team. Not only are there people issues, but project members are also expected to use proj- ect management tools and concepts. They develop or are given a project charter or scope statement that defines the objectives and parameters of the project. They work with others to create a project schedule and budget that will guide project execution. They need to understand project priorities so they can make independent decisions.

Courtesy of Ron Parker

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They must know how to monitor and report project progress. Although much of this book is written from the perspective of a project manager, the tools, concepts, and methods are critical to everyone working on a project. Project members need to know how to avoid the dangers of scope creep, manage the critical path, engage in timely risk management, negotiate, and utilize virtual tools to communicate.

1.2 Current Drivers of Project Management Project management is no longer a special-need management. It is rapidly becoming a standard way of doing business. See Snapshot from Practice 1.4: Project Management in Action: 2016. An increasing percentage of the typical firm’s effort is being devoted to projects. The future promises an increase in the importance and the role of projects in contributing to the strategic direction of organizations. Several reasons why this is the case are briefly discussed below.

Compression of the Product Life Cycle One of the most significant driving forces behind the demand for project management is the shortening of the product life cycle. For example, today in high-tech industries the product life cycle is averaging six months to three years. Only 30 years ago, life cycles of 10 to 15 years were not uncommon. Time to market for new products with short life cycles has become increasingly important. A common rule of thumb in the world of high-tech product development is that a six-month project delay can result in a 33 percent loss in product revenue share. Speed, therefore, becomes a competitive advantage; more and more organizations are relying on cross-functional project teams to get new products and services to the market as quickly as possible.

Knowledge Explosion The growth in new knowledge has increased the complexity of projects because proj- ects encompass the latest advances. For example, building a road 30 years ago was a somewhat simple process. Today, each area has increased in complexity, including materials, specifications, codes, aesthetics, equipment, and required specialists. Simi- larly, in today’s digital, electronic age it is becoming hard to find a new product that does not contain at least one microchip. Product complexity has increased the need to integrate divergent technologies. Project management has emerged as an important discipline for achieving this task.

Triple Bottom Line (Planet, People, Profit) The threat of global warming has brought sustainable business practices to the fore- front. Businesses can no longer simply focus on maximizing profit to the detriment of the environment and society. Efforts to reduce carbon imprint and utilize renewable resources are realized through effective project management. The impact of this move- ment toward sustainability can be seen in changes in the objectives and techniques used to complete projects. See Snapshot from Practice 1.5: Dell Children’s Becomes World’s First “Green” Hospital.

Increased Customer Focus Increased competition has placed a premium on customer satisfaction. Customers no longer simply settle for generic products and services. They want customized products

Understand the impor- tance of projects in im- plementing organization strategy.

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Businesses thrive and survive based on their ability to manage projects that produce pro-

ducts and services that meet mar- ket needs. Below is a small sample of projects that are important to their company’s future.

Panama: The Third Set of Locks Project The expansion of the Panama Canal is scheduled to be operational in 2016. The project doubles the capac- ity of the Panama Canal by creating a new lane of traffic and allowing more and larger ships, the new Panamax size, which are about one and a half times bigger than the current size and can carry over twice as much cargo. With the third sets of locks, the canal will be able to manage traffic demand beyond 2025 with a predicted inflationary adjusted revenue of over $6.2 billion per year.

Molinski, D., “Panama Canal, Consortium Reach Deal to Complete Work,” The Wall Street Journal, February 28, 2014.

Google: Autonomous-Vehicle Project Google has contracted Roush Enterprises of Detroit, Michigan, to build 150 self-driving car prototypes. With more than 90 percent of U.S. road collisions caused by human error, self-driving cars could prevent over $190 billion in annual damages and health costs as well as greatly reduce fuel consumption.

Parsi, N., “No Driver Necessary,” PM Network, August 2015, pp. 7–9.

Studio Roosegaarde: Smog Free Tower The Smog Free tower, which stands 23 feet tall, sucks and cleans 1 million cubic feet of polluted air an hour. Innovator Daan Roosegaarde began working on out- door air purification after a particularly smoggy 2013 trip to China.

Karif, O., “Innovation: Smog Eater,” Bloomberg Business- Week, October 15, 2015, p. 22.

Facebook: Oculus Rift Virtual Reality Project Facebook paid over $2 billion for virtual-reality start-up Oculus, which will release its Rift virtual reality headset

in 2016. Video games will spur early sales of Rift, but mass adoption is likely to depend upon Hollywood. Lions Gate Entertainment and 21st Century Fox have agreed to sell movies via Oculus’s online store and Netflix will make its streaming service available on VR headsets.

Shaw, L., “Virtual Reality Goes to the Movies,” Bloom- berg BusinessWeek, Special Issue: Year Ahead 2016, p. 74.

CogniToys: Dino Project Rather than repeating catchphrases, as “talking” toys have done in the past, this dinosaur taps IBM’s Watson technology to engage kids ages 5 to 9 in a more mean- ingful way. The wi-fi-enabled figurine talks back and learns from kids’ responses, helping them hone their math skills by asking harder questions. The trick, according to CogniToys CEO Donald Coolidge, is to make education seem like a “cool, fun experience.”

“The Toy That Talks Back,” Time, November 30/Decem- ber 7, 2015, p. 81.

Coca-Cola Co.: Replenish Africa Initiative (RAIN) The global beverage company aims to provide at least 2 million people with safe water by the end of 2020. The firm is investing over $30 million in community- based water projects across Africa. Greg Koch, senior director of global water stewardship says, “We know that to do business we need water. And when commu- nities have access to safe water, you have the founda- tion of a thriving community, which is a better place for everyone to do business.”

“Water Works,” PMNetwork, September, 2015, p. 53.

S N A P S H O T F R O M P R A C T I C E 1 . 4 Project Management in Action: 2016

© Asif Islam/Shutterstock

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Dateline 1/7/2009, Austin Texas: Dell Children’s Medical Center becomes the first hospital in the world to receive platinum LEED (Leadership in Energy & Environmental Design) certi-

fication. Platinum certification is the highest award granted by the U.S. Green Building Council. Dell Children’s occupies nearly one-half-million square feet on 32 acres that were once part of Austin’s old Mueller Airport. Its environmentally sensitive design not only conserves water and electricity, but positively impacts the hospital’s clinical environment by improv- ing air quality, making natural sunlight readily avail- able, and reducing a wide range of pollutants. In order to receive LEED certification, buildings are rated in five key areas: sustainable site development, water savings, energy efficiency, materials selection, and environmental quality. Listed below are some of the accomplishments in each LEED category:

Sustainable Site

47,000 tons of Mueller Airport runway material was reused on site.

About 40 percent fly ash instead of Portland cement in concrete yields a drop in carbon dioxide emissions equivalent to taking 450 cars off the road.

925 tons of construction waste was recycled on site.

Water Efficiency and Water Conservation

Reclaimed water is used for irrigation; xeriscaped landscaping uses native plants, which require less water.

Low-flow plumbing fixtures.

S N A P S H O T F R O M P R A C T I C E 1 . 5 Dell Children’s Becomes World’s First “Green” Hospital*

Energy Efficiency and Energy Conservation

An on-site natural gas turbine supplies all electric- ity, which is 75 percent more efficient than coal- fired plants.

Converted steam energy from a heating/cooling plant supplies all chilled water needs.

Indoor Environment Quality and Lighting

Most interior spaces are within 32 feet of a window.

Motion and natural light sensors shut off unneeded lights.

Conservation of Materials and Resources

Use of local and regional materials saves fuel for shipping.

Special paints and flooring emit low levels of vola- tile organic compounds (VOCs).

“Even before the first plans were drawn up, we set our sight on creating a world-class children’s hospital, and becoming the first LEED Platinum hospital in the world was definitely part of that,” said Robert Bonar, presi- dent and CEO, Dell Children’s Medical Center of Central Texas. “Our motivation to pursue LEED Platinum was not just environmental. Being a ‘green’ hospital has a profound, measurable effect on healing. What’s good for the environment and good for our neighbors is also good for our patients.”

and services that cater to their specific needs. This mandate requires a much closer working relationship between the provider and the receiver. Account executives and sales representatives are assuming more of a project manager’s role as they work with their organization to satisfy the unique needs and requests of clients. Increased customer attention has also prompted the development of customized products and services. For example, 15 years ago buying a set of golf clubs was a rela- tively simple process: You picked out a set based on price and feel. Today, there are golf clubs for tall players and short players, clubs for players who tend to slice the ball and clubs for those who hook the ball, high-tech clubs with the latest metallurgic dis- covery guaranteed to add distance, and so forth. Project management is critical both to development of customized products and services and to sustaining lucrative relation- ships with customers.

*Austin Business Journal, January 11, 2009, www.dellchildrens.net/about_us/news/2009/01/08.

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Small Projects Represent Big Problems The velocity of change required to remain competitive or simply keep up has created an organizational climate in which hundreds of projects are implemented concurrently. This climate has created a multiproject environment and a plethora of new problems. Sharing and prioritizing resources across a portfolio of projects is a major challenge for senior management. Many firms have no idea of the problems involved with inefficient man- agement of small projects. Small projects typically carry the same or more risk as do large projects. Small projects are perceived as having little impact on the bottom line because they do not demand large amounts of scarce resources and/or money. Because so many small projects are going on concurrently and because the perception of the inef- ficiency impact is small, measuring inefficiency is usually nonexistent. Unfortunately, many small projects soon add up to large sums of money. Many customers and millions of dollars are lost each year on small projects in product and service organizations. Small projects can represent hidden costs not measured in the accounting system. Organizations with many small projects going on concurrently face the most diffi- cult project management problems. A key question becomes one of how to create an organizational environment that supports multiproject management. A process is needed to prioritize and develop a portfolio of small projects that supports the mission of the organization. In summary, there are a variety of environmental forces interacting in today’s busi- ness world that contribute to the increased demand for good project management across all industries and sectors. Project management appears to be ideally suited for a business environment requiring accountability, flexibility, innovation, speed, and con- tinuous improvement. These environmental and other factors have created the neces- sity for major oversight of all organization projects.

1.3 Project Governance Competing in a global market influenced by rapid change, innovation, and time to market means organizations manage more and more projects. Some means for coordi- nating and managing projects in this changing environment is needed. Centralization of project management processes and practices has been the practical outcome. For example, Google, Apple, General Electric, and Sony all have over 1,000 projects being implemented concurrently every day of the year across borders and differing cultures. Questions: How do these organizations oversee the management of all these projects? How were these projects selected? How do they ensure performance measurement and accountability? How can project management continually improve? Centralization entails governance of all project processes and practices to improve project management. Governance is designed to improve project management in the whole organization over the long haul. The rationale for integration of project management was to provide senior management with: ∙ An overview of all project management activities; ∙ A big picture of how organizational resources are being used; ∙ An assessment of the risk their portfolio of projects represents; ∙ A rough metric for measuring the improvement of managing projects relative to

others in the industry; ∙ Linkages of senior management with actual project execution management.

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Full insight of all components of the organization is crucial for aligning internal busi- ness resources with the requirements of the changing environment. Governance enables management to have greater flexibility and better control of all project man- agement activities. Operationally, what does project management integration mean? It necessitates combining all of the major dimensions of project management under one umbrella. Each dimension is connected in one seamless, integrated domain. Governance means applying a set of knowledge, skills, tools, and techniques to a collection of projects in order to move the organization toward its strategic goals. This integrative movement represents a major thrust of project-driven organizations across all industries. See Fig- ure 1.2, Integrated Management of Projects.

Alignment of Projects with Organizational Strategy Today, projects are the modus operandi for implementing strategy. Yet in some organizations, selection and management of projects often fail to support the strate- gic plan of the organization. Strategic plans are written by one group of managers, projects selected by another group, and projects implemented by another. These independent decisions by different groups of managers create a set of conditions leading to conflict, confusion, and frequently an unsatisfied customer. Under these conditions, resources of the organization are wasted in non-value-added activities/ projects. Since projects are the modus operandi, strategic alignment of projects is of major importance to conserving and effective use of organization resources. Selection crite- ria need to ensure each project is prioritized and contributes to strategic goals. Any- thing less is a waste of scarce organizational resources—people, capital, and equipment. Ensuring alignment requires a selection process that is systematic, open, consistent, and balanced. All of the projects selected become part of a project portfolio that balances the total risk for the organization. Management of the project portfolio ensures that only the most valuable projects are approved and managed across the entire organization.

Organizational Culture Environment

Strategic Alignment

Portfolio Management

Project Management

FIGURE 1.2 Integrated Management of Projects

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1.4 Project Management Today: A Socio-Technical Approach Senior management is often involved in selecting projects but seldom involved in implementing them. Implementing the project is the challenge. Managing a project is a multidimensional process (see Figure 1.3, A Socio-Technical Approach to Project Management). The first dimension is the technical side of the management process, which consists of the formal, disciplined, purely logical parts of the process. This technical dimension includes planning, scheduling, and controlling projects. Clear project scope statements are written to link the project and customer and to facilitate planning and control. Creation of the deliverables and work break- down structures facilitates planning and monitoring the progress of the project. The work breakdown structure serves as a database that links all levels in the organization, major deliverables, and all work—right down to the tasks in a work package. Effects of project changes are documented and traceable. Thus, any change in one part of the project is traceable to the source by the integrated linkages of the system. This inte- grated information approach can provide all project managers and the customer with decision information appropriate to their level and needs. A successful project man- ager will be well trained in the technical side of managing projects. The second and opposing dimension is the sociocultural side of project manage- ment. In contrast to the orderly world of project planning, this dimension involves the much messier, often contradictory and paradoxical world of implementation. It centers on creating a temporary social system within a larger organizational environment that combines the talents of a divergent set of professionals working to complete the proj- ect. Project managers must shape a project culture that stimulates teamwork and high levels of personal motivation as well as a capacity to quickly identify and resolve prob- lems that threaten project work. Things rarely go as planned and project managers must be able to steer the project back on track or alter directions when necessary. The sociocultural dimension also involves managing the interface between the proj- ect and external environment. Project managers have to assuage and shape

Understand that manag- ing projects involves bal- ancing the technical and sociocultural dimensions of the project.

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FIGURE 1.3 A Socio-Technical Approach to Project Management

Technical

Scope WBS Schedules Resource allocation Baseline budgets Status reports

Sociocultural

Leadership Problem solving Teamwork Negotiation Politics Customer expectations

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expectations of customers, sustain the political support of top management, negotiate with their functional counterparts, monitor subcontractors, and so on. Overall, the manager must build a cooperative social network among a divergent set of allies with different standards, commitments, and perspectives. Some suggest that the technical dimension represents the “science” of project manage- ment while the sociocultural dimension represents the “art” of managing a project. To be successful, a manager must be a master of both. Unfortunately, some project managers become preoccupied with the planning and technical dimension of project management. Often their first real exposure to project management is through project management soft- ware, and they become infatuated with network charts, Gantt diagrams, and performance variances; they attempt to manage a project from a distance. Conversely, there are other managers who manage projects by the “seat of their pants,” relying heavily on team dynam- ics and organizational politics to complete a project. Good project managers balance their attention to both the technical and sociocultural aspects of project management.

Summary Project management is a critical skill set in today’s world. A project is defined as a non- routine, one-time effort limited by time, resources, and performance specifications de- signed to meet customer needs. One of the distinguishing characteristics of project management is that it has both a beginning and an end and typically consists of four phases: defining, planning, executing, and closing. Effective project management begins with selecting and prioritizing projects that support the firm’s mission and strategy. Suc- cessful implementation requires both technical and social skills. Project managers have to plan and budget projects as well as orchestrate the contributions of others.

Text Overview This text is written to provide the reader with a comprehensive, integrative under- standing of the project management process. The text focuses both on the science of project management and the art of managing projects. Following this introductory chapter, Chapter 2 focuses on how organizations go about evaluating and selecting projects. Special attention is devoted to the importance of aligning project selection to the mission and strategy of the firm. The organizational environment in which projects are implemented is the focus of Chapter 3. The discussion of matrix management and other organizational forms is augmented by a discussion of the role the culture of an organization plays in the implementation of projects. The next six chapters focus on developing a plan for the project; after all, project success begins with a good plan. Chapter 4 deals with defining the scope of the project and developing a work breakdown structure (WBS). The challenge of formulating cost and time estimates is the subject of Chapter 5. Chapter 6 focuses on utilizing the infor- mation from the WBS to create a project plan in the form of a timed and sequenced network of activities. Risks are a potential threat to every project, and Chapter 7 examines how organiza- tions and managers identify and manage risks associated with project work. Resource allocation is added to the plan in Chapter 8 with special attention devoted to how re- source limitations impact the project schedule. After a resource schedule is estab- lished, a project time-phased budget is developed. Finally, Chapter 9 examines strategies for reducing (“crashing”) project time either prior to the initiation of the project or in response to problems or new demands placed on the project. Chapters 10 through 12 focus on project implementation and the sociocultural side of project management, beginning with Chapter 10, which focuses on the role of the

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project manager as a leader and stresses the importance of managing project stake- holders within the organization. Chapter 11 focuses on the core project team; it com- bines the latest information on team dynamics with leadership skills/techniques for developing a high-performance project team. Chapter 12 continues the theme of man- aging project stakeholders by discussing how to outsource project work and negotiate with contractors, customers, and suppliers. Chapter 13 focuses on the kinds of information managers use to monitor project prog- ress, with special attention devoted to the key concept of earned value. The project life cycle is completed with Chapter 14, which covers closing out a project and the important assess- ment of performance and lessons learned. Two “supplemental” chapters are included to augment the project management core. Working on international projects across cultures is the focus of Chapter 15. Agile project management, a more flexible approach to managing projects where requirements cannot be clearly defined, is the subject of Chapter 16. Throughout this text you will be exposed to the major aspects of the project man- agement system. However, a true understanding of project management comes not from knowing what a scope statement is, or the critical path, or partnering with con- tractors, but from comprehending how the different elements of the project manage- ment system interact to determine the fate of a project. If, by the end of this text, you come to appreciate and begin to master both the technical and sociocultural dimen- sions of project management, you should have a distinct competitive advantage over others aspiring to work in the field of project management.

Key Terms Program, 7 Project, 6 Project life cycle, 8

Project Management Professional (PMP), 4

1. Define a project. What are five characteristics that help differentiate projects from other functions carried out in the daily operations of the organization?

2. What are some of the key environmental forces that have changed the way projects are managed? What has been the effect of these forces on the management of projects?

3. Why is the implementation of projects important to strategic planning and the proj- ect manager?

4. The technical and sociocultural dimensions of project management are two sides to the same coin. Explain.

5. What is the impact of governance on managing an individual project? Why is this approach important in today’s environment?

Review Questions

1. Review the front page of your local newspaper, and try to identify all the projects contained in the articles. How many were you able to find?

2. Individually, identify what you consider to be the greatest achievements of mankind in the last five decades. Now share your list with three to five other students in the class, and come up with an expanded list. Review these great achievements in terms of the definition of a project. What does your review suggest about the importance of project management?

3. Individually, identify projects assigned in previous terms. Were both sociocultural and technical elements factors in the success or difficulties in the projects?

Exercises

4. Check out the Project Management Institute’s home page at www.pmi.org. a. Review general information about PMI as well as membership information. b. See if there is a PMI chapter in your state. If not, where is the closest one? c. Use the search function at the PMI home page to find information on Project

Management Body of Knowledge (PMBOK). What are the major knowledge areas of PMBOK?

d. Explore other links that PMI provides. What do these links tell you about the nature and future of project management?

Note: If you have any difficulty accessing any of the Web addresses listed here or else- where in the text, you can find up-to-date addresses on the home page of Dr. Erik Larson, coauthor of this text: http://business.oregonstate.edu/faculty-and-staff-bios/erik-larson

Benko, C., and F. W. McFarlan, Connecting the Dots (Boston: HBS Press, 2003). Cohen, D. J., and R. J. Graham, The Project Manager’s MBA (San Francisco: Jossey-Bass, 2001). Darnell, R., “The Emerging Role of the Project Manager,” PM Network, vol. 11, no. 7 (1997). Derby, Charles, and Ofer Zwikael, “The Secret of (Defining) Success,” PM Network, vol. 26, no. 8 (August 2012), pp. 20–22. Gray, Clifford, “Program Management, A Primer,” PM World Today, vol. 13, no. 8 (August 2011), pp. 1–7. Jonas, D., “Empowering Project Portfolio Managers: How Management Involvement Impacts Project Management Performance,” International Journal of Project Man- agement, vol. 28, no. 8 (2010), pp. 818–831. Koh, Aileen, and Lynn Crawford, “Portfolio Management: The Australian Experience,” Project Management Journal, vol. 43, no. 6 (2012), pp. 33–41. Peters, T., PM Network, January 2004, vol. 18, no. 1, p. 19. Project Management Institute, Leadership in Project Management Annual (Newton Square, PA: PMI Publishing, 2006). Project Management Institute, A Guide to the Project Management Body of Knowledge (PMBOK), (Newton Square, PA: PMI Publishing, 2013). Project Management Institute, PMI Today, July 2011, p. 11. The Standish Group, CHAOS Summary 2009, pp. 1–4. Stewart, T. A., “The Corporate Jungle Spawns a New Species: The Project Manager,” Fortune, September 1996, pp. 14–15.

References

Case 1.1

A Day in the Life Rachel, the project manager of a large information systems project, arrives at her office early to get caught up with work before her co-workers and project team arrive. However, as she enters the office she meets Neil, one of her fellow project managers,

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Chapter 1 Modern Project Management 21

who also wants to get an early start on the day. Neil has just completed a project over- seas. They spend 10 minutes socializing and catching up on personal news. It takes Rachel 10 minutes to get to her office and settle in. She then checks her voice mail and turns on her computer. She was at her client’s site the day before until 7:30 p.m. and has not checked her e-mail or voice mail since 3:30 p.m. the previous day. There are 7 phone messages, 16 e-mails, and 4 notes left on her desk. She spends 15 minutes reviewing her schedule and “to do” lists for the day before responding to messages that require immediate attention. Rachel spends the next 25 minutes going over project reports and preparing for the weekly status meeting. Her boss, who just arrived at the office, interrupts her. They spend 20 minutes discussing the project. He shares a rumor that a team member is using stimulants on the job. She tells him that she has not seen anything suspicious but will keep an eye on the team member. The 9:00 a.m. project status meeting starts 15 minutes late because two of the team members have to finish a job for a client. Several people go to the cafeteria to get cof- fee and doughnuts while others discuss last night’s baseball game. The team members arrive, and the remaining 45 minutes of the progress review meeting surface project issues that have to be addressed and assigned for action. After the meeting Rachel goes down the hallway to meet with Victoria, another IS project manager. They spend 30 minutes reviewing project assignments since the two of them share personnel. Victoria’s project is behind schedule and in need of help. They broker a deal that should get Victoria’s project back on track. She returns to her office and makes several phone calls and returns several e-mails before walking downstairs to visit with members of her project team. Her intent is to follow up on an issue that had surfaced in the status report meeting. However, her simple, “Hi guys, how are things going?” elicits a stream of disgruntled responses from the “troops.” After listening patiently for over 20 minutes, she realizes that among other things several of the client’s managers are beginning to request features that were not in the original project scope statement. She tells her people that she will get on this right away. Returning to her office she tries to call her counterpart John at the client firm but is told that he is not expected back from lunch for another hour. At this time, Eddie drops by and says, “How about lunch?” Eddie works in the finance office and they spend the next half hour in the company cafeteria gossiping about internal politics. She is sur- prised to hear that Jonah Johnson, the director of systems projects, may join another firm. Jonah has always been a powerful ally. She returns to her office, answers a few more e-mails, and finally gets through to John. They spend 30 minutes going over the problem. The conversation ends with John promising to do some investigating and to get back to her as soon as possible. Rachel puts a “Do not disturb” sign on her door, and lies down in her office. She listens to the third and fourth movement of Ravel’s string quartet in F on headphones. Rachel then takes the elevator down to the third floor and talks to the purchasing agent assigned to her project. They spend the next 30 minutes exploring ways of get- ting necessary equipment to the project site earlier than planned. She finally authorizes express delivery. When she returns to her office, her calendar reminds her that she is scheduled to participate in a conference call at 2:30. It takes 15 minutes for everyone to get online. During this time, Rachel catches up on some e-mail. The next hour is spent exchang- ing information about the technical requirements associated with a new version of a software package they are using on systems projects like hers. Rachel decides to stretch her legs and goes on a walk down the hallway where she engages in brief conversations with various co-workers. She goes out of her way to thank

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Chandra for his thoughtful analysis at the status report meeting. She returns to find that John has left a message for her to call him back ASAP. She contacts John, who informs her that, according to his people, her firm’s marketing rep had made certain promises about specific features her system would provide. He doesn’t know how this communication breakdown occurred, but his people are pretty upset over the situation. Rachel thanks John for the information and immediately takes the stairs to where the marketing group resides. She asks to see Mary, a senior marketing manager. She waits 10 minutes before being invited into her office. After a heated discussion, she leaves 40 minutes later with Mary agreeing to talk to her people about what was promised and what was not promised. She goes downstairs to her people to give them an update on what is happening. They spend 30 minutes reviewing the impact the client’s requests could have on the project schedule. She also shares with them the schedule changes she and Victoria had agreed to. After she says good night to her team, she heads upstairs to her boss’s office and spends 20 minutes updating him on key events of the day. She returns to her office and spends 30 minutes reviewing e-mails and project documents. She logs on to the MS project schedule of her project and spends the next 30 minutes working with “what-if” scenarios. She reviews tomorrow’s schedule and writes some personal reminders before starting off on her 30-minute commute home. 1. How effectively do you think Rachel spent her day? 2. What does the case tell you about what it is like to be a project manager?

Case 1.2

The Hokies Lunch Group1

PART A Fatma settled down for lunch at the Yank Sing Chinese restaurant. She was early and took the time to catch up on her e-mail. Soon she would be joined by Jasper and Viktoria, two fellow 2014 grads from Virginia Tech in Blacksburg, Virginia. Jasper worked as a software engineer for a start-up company that wanted to expand the boundaries of sharing economy. Viktoria was an electrical engineer who worked for a German healthcare company in San Francisco. They had met each other at a Silicon Val- ley alumni reception hosted by Virginia Tech. Each of them felt a bit like a fish out of water on the West Coast, so they decided to have lunch together each month. The lunch evolved into a professional support group. A major part of each of their jobs was manag- ing projects, and they found it useful to share issues and seek advice from each other. Fatma worked for a very successful Internet company whose founders believed that everyone in the firm should devote three days a year to community service projects. The company was partnering with several companies in the construction industry to renovate abandoned buildings for low income families. The next project was the reno- vation of an empty warehouse into eight two-bedroom apartments. Fatma was part of the core team in charge of scheduling and managing work assignments. Viktoria and Jasper entered the restaurant together. Viktoria was the first to move to the Bay area. She was currently working on the next-generation neural

1 Hokies is the name associated with Virginia Tech athletic teams.

Chapter 1 Modern Project Management 23

stimulator (“PAX 2”). Neural stimulators are electronic devices that doctors implant in patients with wires connected to sources of pain in the patient’s spine. In the past, patients would have to have an operation to replace the stimulator bat- tery every 10 years. PAX 2 was being designed to take advantage of new battery technologies and use a rechargeable battery. In concept, this battery system would eliminate the need for replacement surgeries and allow the implanted battery to be recharged externally. Viktoria’s team had just completed the second prototype and was entering a critical testing phase. It had been tricky trying to predict the life span of the new rechargeable battery without testing it in real time. She was anx- ious to begin seeing the test results. Jasper was working for a start-up company after doing contract work for his first nine months in San Francisco. He was sworn to secrecy about the project and all Fatma and Viktoria knew was that the project had something to do with sharing economy. He was working with a small development team that included colleagues from Bangalore, India, and Malmo, Sweden. After ordering and chit-chatting a bit, Fatma started the discussion. “I will be glad when this week is over,” she said. “We’ve been struggling defining the scope of the project. At first glance our project seems relatively simple, build eight two-bedroom apartments in an old warehouse. But there are a lot of unanswered questions. What kind of community space do we want to have? How efficient should the energy system be? What kind of furniture? Everybody wants to do a good job, but when does low income housing morph into middle income housing?” Viktoria offered, “Scope defining is one of the things my company does very well. Before a project is authorized, a detailed scope statement is developed that clearly defines the project objectives, priorities, budget, requirements, limits, and exclusions. All of the key stakeholders sign off on it. It is really important to identify priorities up front. I know on the PAX 2 project that scope is the number one priority. I know no matter how long it takes it is imperative that my work is done right.” Fatma responded, “That’s exactly what my Project manager is preparing for Friday’s meeting. I guess that is one of the things you have to do as a project manager is end discussions. He is going to make the tough calls and finalize the project scope so we can begin planning.” Jasper interjected, “You guys are so lucky, for the most part your scope remains the same. In my work the scope is constantly changing. You show the founders a feature they wanted, and they say well if you can do that, can you do this? You know it’s going to happen, but you really can’t plan for it.” Jasper went on to say, “We do know what our number one priority is: time. There are a lot of players trying to move in to the ‘space’ we are working on. We have to demon- strate we are ahead of the pack if we are going to continue to get VC funding.”2 Jasper said that despite the pressure, his project had been a lot of fun. He especially liked working with his Swedish and Indian counterparts, Axel and Raja. They worked like a global tag team on their part of the project. Jasper would code and then pass his work onto Raja who would work on it and pass it on to Axel, who would eventually hand it off to Jasper. Given the time zones, they were able to have at least one person working on the code around the clock. Jasper said it was hard at first working with someone you never met personally other than on a video screen. Trust was an issue. Everyone was trying to prove them- selves. Eventually a friendly competition arose across the team. The programmers

2 New Venture Capital funding.

24 Chapter 1 Modern Project Management

exchanged funny cartoons and YouTube videos. He showed Fatma and Viktoria a You- Tube video about scope creep that got a chuckle from everyone. They made plans to meet next at the New Peruvian restaurant on SE 8th Street.

PART B The Peruvian cilantro/lime ceviche was a big hit at the next lunch. Viktoria began their discussion by reporting, “I have good and bad news. The bad news is that our first prototype failed its tests miserably. The good news is that I have a smart project man- ager. She knew this could happen, so she mitigated the risk by having us working on two alternative battery technologies. The alternative technology is passing all of the tests. Instead of falling behind months we are only days behind schedule.” This precipitated a discussion of risk management. Fatma reported that there had been a two-day session on risk management for the renovation project. They spent the first day brainstorming what could go wrong, and the second day coming up with strat- egies for dealing with risks. A big help was the risk report that was generated after the last project. The report detailed all of the problems that had occurred on the last reno- vation project as well as recommendations. Fatma said, “I couldn’t believe how much time and attention was devoted to safety, but as my project manager said, ‘all it takes is one bad accident to shut down a project for weeks, even months.’ ” Jasper reported that on his project they spent very little time on risk management. His project was driven by a build-test mentality. “Everybody assumes that daily testing eliminates problems, but when it’s time to integrate different features, that’s when the real bugs will emerge,” Jasper said. Jasper went on to say that things were not going well at work. They had missed their second straight milestone, and everyone was feeling the pressure to show results. “I even slept by my cubicle three nights ago,” Jasper confessed. Fatma asked, “How many hours are you working?” “I don’t know, at least 70, maybe 80 hours,” Jasper answered. He went on to say, “This is a high stakes project, with a BIG upside if suc- cessful. I am doing some of my best programming and we’ll just have to see what happens.” Jasper showed them a cartoon that was being circulated across his team. The cap- tion read: “When did you want it done? Yesterday.” Fatma turned to her friends and said, “I need some advice. As you know I’m respon- sible for scheduling work assignments. Well, some of my colleagues have been pretty aggressive lobbying for choice assignments. Everyone wants to work alongside Bruno or Ryan. Suddenly I am everyone’s friends, and certain people are going way out of their way to do favors for me. I am sure they think it will influence my decisions. It’s getting awkward and I am not sure what to do.” “Quid pro quo,” answered Jasper, “that’s how the business world works. You scratch my back and I’ll scratch yours. Within reason, I don’t have a problem with someone taking advantage of their position to garner favors and build relationships.” Viktoria said, “I disagree. You don’t want to be seen as someone whose influence can be bought. You need to think what’s best for the company. You need to ask your- self what would Bruno and Ryan want you to do? And if you don’t know, ask them.” After much discussion, Fatma left the restaurant leaning towards Viktoria’s advice, but she wasn’t sure what the guidelines should be.

PART C It took two months for the Hokie lunch group to get together again. Jasper had canceled the last meeting because of work, so Viktoria and Fatma saw a movie together instead.

Chapter 1 Modern Project Management 25

Jasper was the last person to arrive and it was clear from the look on his face that things were not going well. He sat down, avoided eye contact, before blurting, “I’m out of work.” “What do you mean?” Fatma and Viktoria cried. Jasper explained after months and months of work they had been unable to demonstrate a functional product. Jasper went on to say, “Despite our best efforts we couldn’t deliver. The founders couldn’t get an ounce of second round venture funding, so they decided to cut their losses and kill the project. I just spent the best six months of my programming life for nothing.” Fatma and Viktoria tried to comfort their friend. Fatma asked Jasper how the others were taking the news. Jasper said the Swedish programmer, Axel, took the news very hard. He went on to say, “I think he was burning a lot of bridges at home with the long work hours and now he has nothing to show for it. He started blaming us for mistakes we never made.” Raja, his Indian counterpart, was a different story. “Raja seemed to shrug his shoulders.” Jasper added, “He said, I know I am a good programmer. There are lots of opportunities here in Bangalore.” Fatma broke the silence that followed by saying to Jasper, “Send me your resume. My company is always looking for top notch programmers and it is a really great com- pany. Can you believe it, the two founders, Bruno and Ryan, are working side by side with everyone on renovating the warehouse? In fact, people were amazed at how good Bruno was with sheet rock. A big part of my job now is scheduling their time so they can work with as many different people as possible. They really want to use the project to get to know their employees. This hasn’t been easy. I have had to juggle their calen- dars, their abilities, and work opportunities.” Viktoria interjected, “You’re using Microsoft Project to do this?” “Not really,” responded Fatma. “At first I tried scheduling their work in Project, but it was too cum- bersome and time consuming. Now I just use the Project master schedule and each of their calendars to schedule their work. This seems to work best.” Viktoria added, “Yeah, Microsoft Project is a great program, but you can get lost trying to get it to do everything. Sometimes all you need is an Excel sheet and common sense.” Viktoria felt awkward, given what had happened to Jasper. She was just wrapping up the successful PAX 2 project. She was also getting ready for a well-deserved holi- day in Vietnam paid for by her project bonus. “I hate closing out a project,” Viktoria said. “It’s so boring. Document, document, document! I keep kicking myself for not tracking things when they happened. I am spending most of my time scouring my computer for files. I can’t wait to take off to Vietnam.” Viktoria went on to say, “The only thing I liked doing was the project retrospective.” Jasper asked, “What’s a project retrospective?” Viktoria answered, “It’s when the project team gets together and reviews what went well, what didn’t, and identifies lessons learned that we can apply to future projects. For example, one of the things we learned was that we needed to bring the manufacturing people on board a lot sooner in the design process. We focused on designing the very best product possible, regardless of cost. We found out later that there were ways for reducing production costs without compromising quality.” Fatma added, “We do that too at the end of our projects, but we call it an audit.” Fatma asked Viktoria, “Do you know what your next assignment will be?” “No,” she replied, “I will probably go back to my department and do some testing. I’m not worried. I did good work. I am sure someone will want me for their project.” Jasper chimed in, “I sure hope someone wants me for their next project.” Fatma and Viktoria immediately went into action trying to lift their friend’s spirits. A little while later, they walked out of the Tapa restaurant and gave each other hugs. Fatma reminded Jasper to send her his latest resume. 1. For each part (A, B, C), what phase of the project life cycle is each project in? Explain. 2. What are two important things you learned about working on projects from the

case? Why are they important?

26

Organization Strategy and Project Selection2

LEARNING OBJECTIVES After reading this chapter you should be able to:

2-1 Explain why it is important for project managers to understand their organization’s strategy.

2-2 Identify the significant role projects contribute to the strategic direction of the organization.

2-3 Understand the need for a project priority system.

2-4 Apply financial and nonfinancial criteria to assess the value of projects.

2-5 Understand how multi-criteria models can be used to select projects.

2-6 Apply an objective priority system to project selection.

2-7 Understand the need to manage the project portfolio.

OUTLINE 2.1 The Strategic Management Process: An

Overview

2.2 The Need for a Project Priority System

2.3 A Portfolio Management System

2.4 Selection Criteria

2.5 Applying a Selection Model

2.6 Managing the Portfolio System

Summary

C H A P T E R T W O

27

Strategy is implemented through projects. Every significant project should have a clear link to the organization’s strategy.

Strategy is fundamentally deciding how the organization will compete. Organizations use projects to convert strategy into new products, services, and processes needed for success. For example, Intel’s major strategy is one of differentiation. Its projects target innovation and time to market. Currently, Intel is directing its strategy toward specialty chips for products other than computers, such as autos, security, cell phones, and air controls. Another goal is to reduce project cycle times. Procter and Gamble, NEC, General Electric, and AT&T have reduced their cycle times by 20–50 percent. For example, Toyota and other auto manufacturers are now able to design and develop new cars in two to three years instead of five to seven. Projects and project management play the key role in supporting strategic goals. It is vital for project managers to think and act strategically. Aligning projects with the strategic goals of the organization is crucial for business success. Today’s economic climate is unprecedented by rapid changes in technology, global competition, and financial uncertainty. These conditions make strategy/project

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources/costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing project duration

9

Define project

4

28 Chapter 2 Organization Strategy and Project Selection

alignment even more essential for success. Ensuring a strong link between the strategic plan and projects is a difficult task that demands constant attention from top and mid- dle management. The larger and more diverse an organization, the more difficult it is to create and maintain this strong link. Companies today are under enormous pressure to manage a process that clearly aligns projects to organization strategy. Ample evidence still sug- gests that many organizations have not developed a process that clearly aligns project selection to the strategic plan. The result is poor utilization of the organization’s resources—people, money, equipment, and core competencies. Conversely, organiza- tions that have a coherent link of projects to strategy have more cooperation across the organization, perform better on projects, and have fewer projects. How can an organization ensure this link and alignment? The answer requires inte- gration of projects with the strategic plan. Integration assumes the existence of a stra- tegic plan and a process for prioritizing projects by their contribution to the plan. A crucial factor to ensure the success of integrating the plan with projects lies in the creation of a process that is open and transparent for all participants to review. This chapter presents an overview of the importance of strategic planning and the process for developing a strategic plan. Typical problems encountered when strategy and proj- ects are not linked are noted. A generic methodology that ensures integration by creat- ing very strong linkages of project selection and priority to the strategic plan is then discussed. The intended outcomes are clear organization focus, best use of scarce orga- nization resources (people, equipment, capital), and improved communication across projects and departments.

Why Project Managers Need to Understand Strategy Project management historically has been preoccupied solely with the planning and exe- cution of projects. Strategy was considered to be under the purview of senior manage- ment. This is old-school thinking. New-school thinking recognizes that project management is at the apex of strategy and operations. Aaron Shenhar speaks to this issue when he states, “. . . it is time to expand the traditional role of the project manager from an operational to a more strategic perspective. In the modern evolving organization, proj- ect managers will be focused on business aspects, and their role will expand from getting the job done to achieving the business results and winning in the marketplace.”1 There are two main reasons why project managers need to understand their organiza- tion’s mission and strategy. The first reason is so they can make appropriate decisions and adjustments. For example, how a project manager would respond to a suggestion to modify the design of a product to enhance performance will vary depending upon whether his company strives to be a product leader through innovation or to achieve operational excellence through low cost solutions. Similarly, how a project manager would respond to delays may vary depending upon strategic concerns. A project man- ager will authorize overtime if her firm places a premium on getting to the market first. Another project manager will accept the delay if speed is not essential. The second reason project managers need to understand their organization’s strat- egy is so they can be effective project advocates. Project managers have to be able to demonstrate to senior management how their project contributes to their firm’s mis- sion. Protection and continued support come from being aligned with corporate objec- tives. Project managers also need to be able to explain to team members and other

Explain why it is impor- tant for project managers to understand their orga- nization’s strategy.

2-1LO

1 Shenhar, A., and Dov Dvie, Reinventing Project Management (Harvard Business School, 2007), p. 5.

Chapter 2 Organization Strategy and Project Selection 29

stakeholders why certain project objectives and priorities are critical. This is essential for getting buy-in on contentious trade-off decisions. For these reasons project managers will find it valuable to have a keen understand- ing of strategic management and project selection processes, which are discussed next.

2.1 The Strategic Management Process: An Overview Strategic management is the process of assessing “what we are” and deciding and imple- menting “what we intend to be and how we are going to get there.” Strategy describes how an organization intends to compete with the resources available in the existing and perceived future environment.

Two major dimensions of strategic management are responding to changes in the external environment and allocating scarce resources of the firm to improve its com- petitive position. Constant scanning of the external environment for changes is a major requirement for survival in a dynamic competitive environment. The second dimen- sion is the internal responses to new action programs aimed at enhancing the competi- tive position of the firm. The nature of the responses depends on the type of business, environment volatility, competition, and the organizational culture. Strategic management provides the theme and focus of the future direction of the organization. It supports consistency of action at every level of the organization. It encourages integration because effort and resources are committed to common goals and strategies. See Snapshot from Practice 2.1: Does IBM’s Watson’s Jeopardy Project Represent a Change in Strategy? It is a continuous, iterative process aimed at develop- ing an integrated and coordinated long-term plan of action. Strategic management posi- tions the organization to meet the needs and requirements of its customers for the long term. With the long-term position identified, objectives are set, and strategies are devel- oped to achieve objectives and then translated into actions by implementing projects. Strategy can decide the survival of an organization. Most organizations are successful in formulating strategies for what course(s) they should pursue. However, the problem in many organizations is implementing strategies—that is, making them happen. Inte- gration of strategy formulation and implementation often does not exist. The components of strategic management are closely linked, and all are directed toward the future success of the organization. Strategic management requires strong links among mission, goals, objectives, strategy, and implementation. The mission gives the general purpose of the organization. Goals give global targets within the mis- sion. Objectives give specific targets to goals. Objectives give rise to formulation of strategies to reach objectives. Finally, strategies require actions and tasks to be imple- mented. In most cases the actions to be taken represent projects. Figure 2.1 shows a schematic of the strategic management process and major activities required.

Four Activities of the Strategic Management Process The typical sequence of activities of the strategic management process is outlined here; a description of each activity then follows: 1. Review and define the organizational mission. 2. Analyze and formulate strategies. 3. Set objectives to achieve strategy. 4. Implement strategies through projects.

Identify the significant role projects contribute to the strategic direction of the organization.

2-2LO

30 Chapter 2 Organization Strategy and Project Selection

IBM’s investment in artificial intelligence paid off. In February 2010, millions of people were glued to their television sets to watch IBM’s Watson outclass two former champion contestants on

the Jeopardy quiz show. Watson performed at human expert levels in terms of precision, confidence, and speed during the Jeopardy quiz show. Does Watson represent a new strategic direction for IBM? Not really. The Watson project is simply a man- ifestation of the move from computer hardware to a service strategy over a decade ago.

WATSON PROJECT DESCRIPTION Artificial intelligence has advanced significantly in recent years. Watson goes beyond IBM’s chess-playing supercomputer of the late 1990s. Chess is finite, logical, and reduced easily to mathematics. Watson’s space is ill-defined and involves dealing with abstraction and the circumstantial nature of language. Since Watson’s sys- tem can understand natural language, it can extend the way people interact with computers. The IBM Watson project took three intense years of research and development by a core team of about 20. Eight university teams working on specific challenge areas augmented these researchers. Watson depends on over 200 million pages of structured and unstructured data and a program capable of running trillions of operations per second. With this information backup, it attacks a Jeopardy question by parsing the question into small pieces. With the question parsed, the program then searches for relevant data. Using hundreds of decision rules, the program generates possible answers. These answers are assigned a confidence score to decide if Watson should risk offering an answer and how much to bet.

WHAT’S NEXT? Now that the hype is over, IBM is pursuing their service strategy and applying the knowledge gained from the Watson project to real business applications. Watson’s artificial intelligence design is flexible and suggests a wide variety of opportunities in industries such as

S N A P S H O T F R O M P R A C T I C E 2 . 1 Does IBM’s Watson’s Jeopardy Project Represent a Change in Strategy?*

finance, medicine, law enforcement, and defense. Fur- ther extensions to handheld mobile applications that tap into Watson’s servers also hold great potential. IBM identified the obvious lowest hanging apples on the tree as providing healthcare solutions and has begun design of such a program. To create a “doctor’s consultant” program would likely follow a design platform similar to Watson’s. For example, it would be able to:

knowledge base.

data.

– nostic options.

Creating a doctor’s consultant solution will not replace doctors. Although the system holds tremendous poten- tial, it is man-made and depends on the database, data analytics, and decision rules to select options. Given the doctor’s consultant input, a trained doctor makes the final patient diagnosis to supplement physical examination and experience. The Watson project provides IBM with a flexible com- ponent to continue their decade-old strategy, moving IBM from computer hardware to service products.

© Sean Gallup/Getty

*Ferrucci et al., “Building Watson,” AI Magazine, vol. 31, no. 3 (Fall 2010).

Chapter 2 Organization Strategy and Project Selection 31

Review and Define the Organizational Mission The mission identifies “what we want to become,” or the raison d’être. Mission state- ments identify the scope of the organization in terms of its product or service. A writ- ten mission statement provides focus for decision making when shared by organizational managers and employees. Everyone in the organization should be keenly aware of the organization’s mission. For example, at one large consulting firm, partners who fail to recite the mission statement on demand are required to buy lunch. The mission statement communicates and identifies the purpose of the organization to all stakeholders. Mission statements can be used for evaluating organization performance. Traditional components found in mission statements are major products and ser- vices, target customers and markets, and geographical domain. In addition, statements frequently include organizational philosophy, key technologies, public image, and con- tribution to society. Including such factors in mission statements relates directly to business success.

FIGURE 2.1 Strategic Management Process

Projects

1

2

3

4

What are we now?

What do we intend to be?

How are we going to get there?

Internal environment— strengths and weaknesses

Review/revise mission

Review/revise mission

External environment— opportunities and threats

Set strategy and objectives

Portfolio of strategic choices

Strategy implementation

Project selection

32 Chapter 2 Organization Strategy and Project Selection

Mission statements change infrequently. However, when the nature of the business changes or shifts, revised mission and strategy statements may be required. More specific mission statements tend to give better results because of a tighter focus. Mission statements decrease the chance of false directions by stakeholders. For example, compare the phrasing of the following mission statements:

Provide hospital design services. Provide data mining and analysis services. Provide information technology services. Provide high-value products to our customer.

Clearly, the first two statements leave less chance for misinterpretation than the others. A rule-of-thumb test for a mission statement is, if the statement can be anybody’s mis- sion statement, it will not provide the guidance and focus intended. The mission sets the parameters for developing objectives.

Analyze and Formulate Strategies Formulating strategy answers the question of what needs to be done to reach objec- tives. Strategy formulation includes determining and evaluating alternatives that sup- port the organization’s objectives and selecting the best alternative. The first step is a realistic evaluation of the past and current position of the enterprise. This step typi- cally includes an analysis of “who are the customers” and “what are their needs as they (the customers) see them.” The next step is an assessment of the internal and external environments. What are the internal strengths and weaknesses of the enterprise? Examples of internal strengths or weaknesses could be core competencies, such as technology, product quality, man- agement talent, low debt, and dealer networks. Managers can alter internal strengths and weaknesses. Opportunities and threats usually represent external forces for change such as technology, industry structure, and competition. Competitive benchmarking tools are sometimes used here to assess current and future directions. Opportunities and threats are the flip sides of each other. That is, a threat can be perceived as an opportu- nity, or vice versa. Examples of perceived external threats could be a slowing of the economy, a maturing life cycle, exchange rates, or government regulation. Typical opportunities are increasing demand, emerging markets, and demographics. Managers or individual firms have limited opportunities to influence such external environmental factors; however, in recent years notable exceptions have been new technologies such as Apple using the iPod to create a market to sell music. The keys are to attempt to forecast fundamental industry changes and stay in a proactive mode rather than a reactive one. This assessment of the external and internal environments is known as the SWOT anal- ysis (strengths, weaknesses, opportunities, and threats). From this analysis, critical issues and strategic alternatives are identified. Critical analysis of the strategies includes asking questions: Does the strategy take advantage of our core competencies? Does the strategy exploit our competitive advantage? Does the strategy maximize meeting customers’ needs? Does the strategy fit within our acceptable risk range? These strategic alternatives are winnowed down to a critical few that support the basic mission. Strategy formulation ends with cascading objectives or projects assigned to lower divisions, departments, or individuals. Formulating strategy might range around 20 percent of management’s effort, while determining how strategy will be imple- mented might consume 80 percent.

Chapter 2 Organization Strategy and Project Selection 33

Set Objectives to Achieve Strategies Objectives translate the organization strategy into specific, concrete, measurable terms. Organizational objectives set targets for all levels of the organization. Objec- tives pinpoint the direction managers believe the organization should move toward. Objectives answer in detail where a firm is headed and when it is going to get there. Typically, objectives for the organization cover markets, products, innovation, pro- ductivity, quality, finance, profitability, employees, and consumers. In every case, objectives should be as operational as possible. That is, objectives should include a time frame, be measurable, be an identifiable state, and be realistic. Doran created the memory device shown in Exhibit 2.1, which is useful when writing objectives.2 Each level below the organizational objectives should support the higher-level objectives in more detail; this is frequently called cascading of objectives. For exam- ple, if a firm making leather luggage sets an objective of achieving a 40 percent increase in sales through a research and development strategy, this charge is passed to the marketing, production, and R&D departments. The R&D department accepts the firm’s strategy as their objective, and their strategy becomes the design and develop- ment of a new “pull-type luggage with hidden retractable wheels.” At this point the objective becomes a project to be implemented—to develop the retractable wheel lug- gage for market within six months within a budget of $200,000. In summary, organi- zational objectives drive your projects.

Implement Strategies through Projects Implementation answers the question of how strategies will be realized, given avail- able resources. The conceptual framework for strategy implementation lacks the struc- ture and discipline found in strategy formulation. Implementation requires action and completing tasks; the latter frequently means mission-critical projects. Therefore, implementation must include attention to several key areas. First, completing tasks requires allocation of resources. Resources typically repre- sent funds, people, management talents, technological skills, and equipment. Fre- quently, implementation of projects is treated as an “addendum” rather than an integral part of the strategic management process. However, multiple objectives place conflict- ing demands on organizational resources. Second, implementation requires a formal and informal organization that complements and supports strategy and projects. Authority, responsibility, and performance all depend on organization structure and culture. Third, planning and control systems must be in place to be certain project activities necessary to ensure strategies are effectively performed. Fourth, motivating project contributors will be a major factor for achieving project success. Finally, areas receiving more attention in recent years are portfolio management and prioritizing

EXHIBIT 2.1 Characteristics of Objectives

S Specific Be specific in targeting an objective M Measurable Establish a measurable indicator(s) of progress A Assignable Make the objective assignable to one person for completion R Realistic State what can realistically be done with available resources T Time related State when the objective can be achieved, that is, duration

2 Doran, G. T., “There’s a Smart Way to Write Management Goals and Objectives,” Management Review, November 1981, pp. 35–36.

34 Chapter 2 Organization Strategy and Project Selection

projects. Although the strategy implementation process is not as clear as strategy for- mulation, all managers realize that, without implementation, success is impossible. Although the four major steps of the strategic management process have not been altered significantly over the years, the view of the time horizon in the strategy formu- lation process has been altered radically in the last two decades. Global competition and rapid innovation require being highly adaptive to short-run changes while being consistent in the longer run.

2.2 The Need for a Project Priority System Implementation of projects without a strong priority system linked to strategy creates problems. Three of the most obvious problems are discussed below. A priority driven project portfolio system can go a long way to reduce, or even eliminate, the impact of these problems.

Problem 1: The Implementation Gap In organizations with short product life cycles, it is interesting to note that frequently participation in strategic planning and implementation includes participants from all levels within the organization. However, in perhaps 80 percent of the remaining product and service organizations, top management pretty much formulates strategy and leaves strategy implementation to functional managers. Within these broad constraints, more detailed strategies and objectives are developed by the functional managers. The fact that these objectives and strategies are made independently at different levels by func- tional groups within the organization hierarchy causes manifold problems. Some symptoms of organizations struggling with strategy disconnect and unclear priorities are presented here. ∙ Conflicts frequently occur among functional managers and cause lack of trust. ∙ Frequent meetings are called to establish or renegotiate priorities. ∙ People frequently shift from one project to another, depending on current priority.

Employees are confused about which projects are important. ∙ People are working on multiple projects and feel inefficient. ∙ Resources are not adequate. Because clear linkages do not exist, the organizational environment becomes dysfunc- tional, confused, and ripe for ineffective implementation of organization strategy and, thus, of projects. The implementation gap refers to the lack of understanding and con- sensus of organization strategy among top and middle-level managers. A scenario the authors have seen repeated several times follows. Top management picks their top 20 projects for the next planning period, without priorities. Each functional department—marketing, finance, operations, engineering, information technology, and human resources—selects projects from the list. Unfortunately, independent department priorities across projects are not homogenous. A project that rates first in the IT department can rate 10th in the finance department. Imple- mentation of the projects represents conflicts of interest with animosities developing over organization resources. If this condition exists, how is it possible to effectively implement strategy? The problem is serious. One study found that only about 25 percent of Fortune 500 execu- tives believe there is a strong linkage, consistency, and/or agreement between the

Understand the need for a project priority system.

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Chapter 2 Organization Strategy and Project Selection 35

strategies they formulate and implementation. In another study of Deloitte Consulting, Jeff MacIntyre reports, “Only 23 percent of nearly 150 global executives considered their project portfolios aligned with the core business.”3  Middle managers considered organizational strategy to be under the purview of oth- ers or not in their realm of influence. It is the responsibility of senior management to set policies that show a distinct link between organizational strategy and objectives and projects that implement those strategies. The research of Fusco suggests the imple- mentation gap and prioritizing projects are still overlooked by many organizations. He surveyed 280 project managers and found that 24 percent of their organizations did not even publish or circulate their objectives; in addition, 40 percent of the respondents reported that priorities among competing projects were not clear, while only 17 per- cent reported clear priorities.4

Problem 2: Organization Politics Politics exist in every organization and can have a significant influence on which proj- ects receive funding and high priority. This is especially true when the criteria and process for selecting projects are ill-defined and not aligned with the mission of the firm. Project selection may be based not so much on facts and sound reasoning as on the persuasiveness and power of people advocating projects. The term “sacred cow” is often used to denote a project that a powerful, high- ranking official is advocating. Case in point, a marketing consultant confided that he was once hired by the marketing director of a large firm to conduct an independent, external market analysis for a new product the firm was interested in developing. His extensive research indicated that there was insufficient demand to warrant the financ- ing of this new product. The marketing director chose to bury the report and made the consultant promise never to share this information with anyone. The director explained that this new product was the “pet idea” of the new CEO, who saw it as his legacy to the firm. He went on to describe the CEO’s irrational obsession with the project and how he referred to it as his “new baby.” Like a parent fiercely protecting his child, the marketing director believed that he would lose his job if such critical information ever became known. Project sponsors play a significant role in the selection and successful implemen- tation of product innovation projects. Project sponsors are typically high-ranking man- agers who endorse and lend political support for the completion of a specific project. They are instrumental in winning approval of the project and in protecting the project during the critical development stage. The importance of project sponsors should not be taken lightly. For example, a PMI global survey of over 1,000 project practitioners and leaders over a variety of industries found those organizations having active spon- sors on at least 80 percent of their projects/programs have a success rate of 75 percent, 11 percentage points above the survey average of 64 percent. Many promising projects have failed to succeed due to lack of strong sponsorship.5 The significance of corporate politics can be seen in the ill-fated ALTO computer project at Xerox during the mid-1970s.6 The project was a tremendous technological

3 MacIntyre, J., PM Network, vol. 20, no. 11 (November 2006), pp. 32–35. 4 Fusco, J. C., “Better Policies Provide the Key to Implementing Project Management,” Project Management Journal, vol. 28, no. 3 (1997), pp. 38–41. 5 PMI, “PMI’s Pulse of the Profession,” Project Management Institute, March 2012, p. 7. 6 Smith, D. K., and R. C. Alexander, Fumbling the Future: How Xerox Invented, Then Ignored the First Personal Computer (New York: Macmillan, 1988).

36 Chapter 2 Organization Strategy and Project Selection

success; it developed the first workable mouse, the first laser printer, the first user- friendly software, and the first local area network. All of these developments were five years ahead of their nearest competitor. Over the next five years this opportunity to dominate the nascent personal computer market was squandered because of internal in-fighting at Xerox and the absence of a strong project sponsor. (Apple’s MacIntosh computer was inspired by many of these developments.) Politics can play a role not only in project selection but also in the aspirations behind projects. Individuals can enhance their power within an organization by managing extraordinary and critical projects. Power and status naturally accrue to successful inno- vators and risk takers rather than to steady producers. Many ambitious managers pursue high-profile projects as a means for moving quickly up the corporate ladder. Many would argue that politics and project management should not mix. A more proactive response is that projects and politics invariably mix and that effective project managers recognize that any significant project has political ramifications. Likewise, top management needs to develop a system for identifying and selecting projects that reduces the impact of internal politics and fosters the selection of the best projects for achieving the mission and strategy of the firm.

Problem 3: Resource Conflicts and Multitasking Most project organizations exist in a multiproject environment. This environment cre- ates the problems of project interdependency and the need to share resources. For example, what would be the impact on the labor resource pool of a construction com- pany if it should win a contract it would like to bid on? Will existing labor be adequate to deal with the new project—given the completion date? Will current projects be delayed? Will subcontracting help? Which projects will have priority? Competition among project managers can be contentious. All project managers seek to have the best people for their projects. The problems of sharing resources and scheduling resources across projects grow exponentially as the number of projects rises. In multiproject envi- ronments the stakes are higher and the benefits or penalties for good or bad resource scheduling become even more significant than in most single projects. Resource sharing also leads to multitasking. Multitasking involves starting and stopping work on one task to go and work on another project, and then returning to the work on the original task. People working on several tasks concurrently are far less efficient, especially where conceptual or physical shutdown and start-up are signifi- cant. Multitasking adds to delays and costs. Changing priorities exacerbate the multi- tasking problems even more. Likewise, multitasking is more evident in organizations that have too many projects for the resources they command. The number of small and large projects in a portfolio almost always exceeds the available resources (typically by a factor of three to four times the available resources). This capacity overload inevitably leads to confusion and inefficient use of scarce orga- nizational resources. The presence of an implementation gap, of power politics, and of multitasking adds to the problem of which projects are allocated resources first. Employee morale and confidence suffer because it is difficult to make sense of an ambiguous system. A multiproject organization environment faces major problems without a priority system that is clearly linked to the strategic plan. In essence, to this point we have suggested that many organizations have no mean- ingful process for addressing the problems we have described. The first and most important change that will go a long way in addressing these and other problems is the development and use of a meaningful project priority process for project selection.

Chapter 2 Organization Strategy and Project Selection 37

How can the implementation gap be narrowed so that understanding and consensus of organizational strategies run through all levels of management? How can power politics be minimized? Can a process be developed in which projects are consistently prioritized to support organizational strategies? Can the prioritized projects be used to allocate scarce organizational resources—for example, people, equipment? Can the process encourage bottom-up initiation of projects that support clear organizational targets? What is needed is a set of integrative criteria and a process for evaluating and select- ing projects that support higher-level strategies and objectives. A single-project prior- ity system that ranks projects by their contribution to the strategic plan would make life easier. Easily said, but difficult to accomplish in practice. Organizations that man- aged independent projects and allocated resources ad hoc have shifted focus to select- ing the right portfolio of projects to achieve their strategic objectives. This is a quickening trend. The advantages of successful project portfolio systems are becoming well recognized in project-driven organizations. See Exhibit 2.2, which lists a few key benefits; the list could easily be extended. A project portfolio system is discussed next with emphasis on selection criteria, which is where the power of the portfolio system is established.

2.3 A Portfolio Management System Succinctly put, the aim of portfolio management is to ensure that projects are aligned with strategic goals and prioritized appropriately. As Foti points out, portfolio manage- ment asks “What is strategic to our organization?” (2002). Portfolio management pro- vides information that allows people to make better business decisions. Since projects clamoring for funding and people usually outnumber available resources, it is important to follow a logical and defined process for selecting the projects to implement. Design of a project portfolio system should include classification of a project, selec- tion criteria depending upon classification, sources of proposals, evaluating proposals, and managing the portfolio of projects.

Classification of the Project Many organizations find they have three basic kinds of projects in their portfolio: com- pliance (emergency—must do), operational, and strategic projects. (See Figure 2.2.) Compliance projects are typically those needed to meet regulatory conditions required to operate in a region; hence, they are called “must do” projects. Emergency projects, such as building an auto parts factory destroyed by tsunami, or recovering a crashed network, are examples of must do projects. Compliance and emergency projects usu- ally have penalties if they are not implemented. Operational projects are those that are needed to support current operations. These projects are designed to improve

EXHIBIT 2.2 Benefits of Project Portfolio Management

38 Chapter 2 Organization Strategy and Project Selection

efficiency of delivery systems, reduce product costs, and improve performance. Some of these projects, given their limited scope and cost, require only immediate manager approval, while bigger, more expensive projects need extensive review. Choosing to install a new piece of equipment would be an example of the latter while modifying a production process would be an example of the former. Total quality management (TQM) projects are examples of operational projects. Finally, strategic projects are those that directly support the organization’s long-run mission. They frequently are directed toward increasing revenue or market share. Examples of strategic projects are new products, research, and development. For a good, complete discussion on classifi- cation schemes found in practice, see Crawford, Hobbs, and Turne (2006). Frequently, these three classifications are further decomposed by product type, organization divisions, and functions that will require different criteria for project selection. For example, the same criteria for the finance or legal division would not apply to the IT (information technology) department. This often requires different project selection criteria within the basic three classifications of strategic, operational, and compliance projects.

2.4 Selection Criteria Although there are many criteria for selecting projects, selection criteria are typically identified as financial and nonfinancial. A short description of each is given next, fol- lowed by a discussion of their use in practice.

Financial Criteria Financial Models    For most managers financial criteria are the preferred method to evaluate projects. These models are appropriate when there is a high level of confidence associated with estimates of future cash flows. Two models and examples are demonstrated here— payback and net present value (NPV).

Project A has an initial investment of $700,000 and projected cash inflows of $225,000 for 5 years. Project B has an initial investment of $400,000 and projected cash inflows of $110,000 for 5 years. 1. The payback model measures the time it will take to recover the project invest-

ment. Shorter paybacks are more desirable. Payback is the simplest and most widely

Apply financial and nonfinancial criteria to assess the value of projects.

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Compliance (must do) projects

Operational projects

Strategic projects

FIGURE 2.2 Portfolio of Projects by Type

Chapter 2 Organization Strategy and Project Selection 39

used model. Payback emphasizes cash flows, a key factor in business. Some managers use the payback model to eliminate unusually risky projects (those with lengthy pay- back periods). The major limitations of payback are that it ignores the time value of money, assumes cash inflows for the investment period (and not beyond), and does not consider profitability. The payback formula is

Payback period (yrs) = Estimated Project Cost/Annual Savings Exhibit 2.3 compares the payback for Project A and Project B. The payback for Project A is 3.1 years and for Project B is 3.6 years. Using the payback method, both projects are acceptable since both return the initial investment in less than five years and have returns on the investment of 32.1 and 27.5 percent. Payback provides especially useful information for firms concerned with liquidity and having sufficient resources to man- age their financial obligations. Exhibit 2.3A presents the payback method.

2. The net present value (NPV) model uses management’s minimum desired rate- of-return (discount rate, for example, 20 percent) to compute the present value of all net cash inflows. If the result is positive (the project meets the minimum desired rate

EXHIBIT 2.3B Example Comparing Two Projects Using Net Present Value Method

EXHIBIT 2.3A Example Comparing Two Projects Using Payback Method

40 Chapter 2 Organization Strategy and Project Selection

of return), it is eligible for further consideration. If the result is negative, the project is rejected. Thus, higher positive NPVs are desirable. Excel uses this formula:

Project NPV = I0 + ∑ n

t=1

Ft (1 + k)t

where I0 = Initial investment (since it is an outflow, the number will be negative) Ft = Net cash inflow for period t k = Required rate of return

Exhibit 2.3B presents the NPV model using Microsoft Excel software. The NPV model accepts Project A, which has a positive NPV of $54,235. Project B is rejected since the NPV is negative $31,263. Compare the NPV results with the payback results. The NPV model is more realistic because it considers the time value of money, cash flows, and profitability. When using the NPV model, the discount rate (return on investment hurdle rate) can differ for different projects. For example, the expected ROI on strategic projects is frequently set higher than operational projects. Similarly, ROIs can differ for riskier versus safer projects. The criteria for setting the ROI hurdle rate should be clear and applied consistently. Unfortunately, pure financial models fail to include many projects where financial return is impossible to measure and/or other factors are vital to the accept or reject decision. One research study by Foti showed that companies using predominantly financial models to prioritize projects yielded unbalanced portfolios and projects that aren’t strategically oriented (2003). Nonfinancial Criteria Financial return, while important, does not always reflect strategic importance. The past saw firms become overextended by diversifying too much. Now the prevailing thinking is that long-term survival is dependent upon developing and maintaining core competencies. Companies have to be disciplined in saying no to potentially profitable projects that are outside the realm of their core mission. This requires other criteria be considered beyond direct financial return. For example, a firm may support projects that do not have high profit margins for other strategic reasons including:

To capture larger market share To make it difficult for competitors to enter the market To develop an enabler product, which by its introduction will increase sales in more profitable products To develop core technology that will be used in next-generation products To reduce dependency on unreliable suppliers To prevent government intervention and regulation

Less tangible criteria may also apply. Organizations may support projects to restore corporate image or enhance brand recognition. Many organizations are committed to corporate citizenship and support community development projects. Two Multi-Criteria Selection Models Since no single criterion can reflect strategic significance, portfolio management requires multi-criteria screening models. Two models, the checklist and multi- weighted scoring models, are described next.

Chapter 2 Organization Strategy and Project Selection 41

Checklist Models The most frequently used method in selecting projects has been the checklist. This approach basically uses a list of questions to review potential proj- ects and to determine their acceptance or rejection. Several of the typical questions found in practice are listed in Exhibit 2.4. One large, multiproject organization has 250 different questions! A justification of checklist models is that they allow great flexibility in selecting among many different types of projects and are easily used across different divisions and locations. Although many projects are selected using some variation of the check- list approach, this approach has serious shortcomings. Major shortcomings of this approach are that it fails to answer the relative importance or value of a potential proj- ect to the organization and fails to allow for comparison with other potential projects. Each potential project will have a different set of positive and negative answers. How do you compare? Ranking and prioritizing projects by their importance is difficult, if not impossible. This approach also leaves the door open to the potential opportunity for power plays, politics, and other forms of manipulation. To overcome these serious shortcomings experts recommend the use of a multi-weighted scoring model to select projects, which is examined next.

Multi-Weighted Scoring Models A weighted scoring model typically uses several weighted selection criteria to evaluate project proposals. Weighted scoring models will generally include qualitative and/or quantitative criteria. Each selection criterion is assigned a weight. Scores are assigned to each criterion for the project, based on its importance to the project being evaluated. The weights and scores are multiplied to get a total weighted score for the project. Using these multiple screening criteria, projects can then be compared using the weighted score. Projects with higher weighted scores are considered better. Selection criteria need to mirror the critical success factors of an organization. For example, 3M set a target that 25 percent of the company’s sales would come from products fewer than four years old versus the old target of 20 percent. Their priority

Understand how multi- criteria models can be used to select projects.

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EXHIBIT 2.4 Sample Selection Questions Used in Practice

Topic Question Strategy/alignment What specific organization strategy does this project align with? Driver What business problem does the project solve? Sponsorship Who is the project sponsor? Risk What is the impact of not doing this project? Risk What is the project risk to our organization? Benefits, value, ROI What is the value of the project to this organization? Benefits, value, ROI When will the project show results? Objectives What are the project objectives? Organization culture Is our organization culture right for this type of project? Resources Will internal resources be available for this project? Approach Will we build or buy? Schedule How long will this project take? Schedule Is the time line realistic? Training/resources Will staff training be required? Finance/portfolio What is the estimated cost of the project? Portfolio Is this a new initiative or part of an existing initiative? Portfolio How does this project interact with current projects? Technology Is the technology available or new?

42 Chapter 2 Organization Strategy and Project Selection

system for project selection strongly reflects this new target. On the other hand, failure to pick the right factors will render the screening process “useless” in short order. See Snapshot from Practice 2.2: Crisis IT. Figure 2.3 represents a project scoring matrix using some of the factors found in practice. The screening criteria selected are shown across the top of the matrix (e.g., stay within core competencies . . . ROI of 18 percent plus). Management weights each criterion (a value of 0 to a high of, say, 3) by its relative importance to the organiza- tion’s objectives and strategic plan. Project proposals are then submitted to a project priority team or project office. Each project proposal is then evaluated by its relative contribution/value added to the selected criteria. Values of 0 to a high of 10 are assigned to each criterion for each project. This value represents the project’s fit to the specific criterion. For example, project 1 appears to fit well with the strategy of the organization since it is given a value of 8. Conversely, project 1 does nothing to support reducing defects (its value is 0). Finally, this model applies the management weights to each criterion by impor- tance using a value of 1 to 3. For example, ROI and strategic fit have a weight of 3, while urgency and core competencies have weights of 2. Applying the weight to each

In May 2007, Frontier Airlines Hold- ings hired Gerry Coady as chief infor- mation officer (CIO). Nearly a year later the airline filed for bankruptcy under Chapter 11. In an interview Coady

describes how he managed IT projects during the bank- ruptcy and recession crisis of 2008–2009. Fundamentally, Coady faced a situation of too many projects and too few resources. Coady used a strategy of focusing on reducing the number of proj- ects in the portfolio. He put together a steering com- mittee of senior management that reviewed several hundred projects. The end result was a reduction to less than 30 projects remaining in the portfolio.

How Can You Get to a Backlog of over 100 Projects? “There are never enough resources to get everything done.” Backlogs build over time. Sacred cow projects get included in the selection system. Projects proposed from people who have left the airline still reside in the project portfolio. Non-value-added projects somehow make their way into the project portfolio. Soon the queue gets longer. With everyone in IT working on too many projects concurrently, project completion and productivity are slow.

Which Projects Remain? To cut the number of projects, the steering committee used a weighting scheme that reflected the airline’s pri- orities, which were: fly safe, generate revenue, reduce

S N A P S H O T F R O M P R A C T I C E 2 . 2 Crisis IT

costs, and customer service. The weighting scheme eas- ily weeded out the fluff. Coady noted that “by the time you get to the 20s the margin of differentiation gets nar- rower and narrower.” Of the remaining projects, project sponsors had to have solid justification why their project is important. Reduction of the number of projects places emphasis on high value projects.

What Advice Does Coady Have for Crisis Management? In times of crisis, it is easier to take bold steps to make changes. But you need to have a clear vision of what you should be focusing on with the resources available. Coady suggests, “It comes back to really having a good idea of what the initial business case for a project is and what resources it is consuming, both people and otherwise.”

Source: Worthen, B., “Crisis IT,” The Wall Street Journal, April 20, 2009, p. 6.

© PRNewsFoto/Genesis, Inc.

Chapter 2 Organization Strategy and Project Selection 43

criterion, the priority team derives the weighted total points for each project. For example, project 5 has the highest value of 102 [(2 × 1) + (3 × 10) + (2 × 5) + (2.5 × 10) + (1 × 0) + (1 × 8) + (3 × 9) = 102] and project 2 has a low value of 27. If the resources available create a cutoff threshold of 50 points, the priority team would elimi- nate projects 2 and 4. (Note: Project 4 appears to have some urgency, but it is not clas- sified as a “must” project. Therefore, it is screened with all other proposals.) Project 5 would receive first priority, project n second, and so on. In rare cases where resources are severely limited and project proposals are similar in weighted rank, it is prudent to pick the project placing less demand on resources. Weighted multiple criteria models similar to this one are rapidly becoming the dominant choice for prioritizing projects. At this point in the discussion it is wise to stop and put things into perspective. While selection models like the one above may yield numerical solutions to project selection decisions, models should not make the final decisions—the people using the models should. No model, no matter how sophisticated, can capture the total reality it is meant to represent. Models are tools for guiding the evaluation process so that the decision makers will consider relevant issues and reach a meeting of the minds as to which projects should be supported and not supported. This is a much more subjective process than calculations suggest.

2.5 Applying a Selection Model

Project Classification    It is not necessary to have exactly the same criteria for the different types of projects discussed above (strategic and operations). However, experience shows most organiza- tions use similar criteria across all types of projects, with perhaps one or two criteria specific to the type of project—e.g., strategic breakthrough versus operational.

Apply an objective prior- ity system to project selection.

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Project 1

CriteriaW eight

Project 2

Project 3

Project 4

Project 5

Project 6 …

Project n

1

3

9

3

1

6

5

8

3

5

0

10

5

5

2

2

2

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0

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2

0

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9

7

8

66

2.0

Sta y w

ith in

co re

co mp

ete nc

ies

Ur ge

nc y

25 %

of sa

les

fro m

ne w

pr od

uc ts

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ce

de fec

ts to

les s t

ha n 1

% Im

pr ov

e

cu sto

me r

loy alt

y RO

I o f 18

%

plu s

We igh

ted

tot al

Str ate

gic

fit

3.0 2.0 2.5 1.0 1.0 3.0

27

56

32

102

55

83

FIGURE 2.3 Project Screening Matrix

44 Chapter 2 Organization Strategy and Project Selection

Regardless of criteria differences among different types of projects, the most important criterion for selection is the project’s fit to the organization strategy. Therefore, this criterion should be consistent across all types of projects and carry a high priority relative to other criteria. This uniformity across all priority models used can keep departments from suboptimizing the use of organization resources. Project proposals should be classified by type, so the appropriate criteria can be used to evaluate them.

Selecting a Model In the past, financial criteria were used almost to the exclusion of other criteria. However, in the last two decades we have witnessed a dramatic shift to include multiple criteria in project selection. Concisely put, profitability alone is simply not an adequate measure of contribution; however, it is still an important criterion, especially for projects that enhance revenue and market share such as breakthrough R&D projects. Today, senior management is interested in identifying the potential mix of projects that will yield the best use of human and capital resources to maximize return on investment in the long run. Factors such as researching new technology, public image, ethical position, protection of the environment, core competencies, and strategic fit might be important criteria for selecting projects. Weighted scoring criteria seem the best alternative to meet this need. Weighted scoring models result in bringing projects to closer alignment with stra- tegic goals. If the scoring model is published and available to everyone in the organi- zation, some discipline and credibility are attached to the selection of projects. The number of wasteful projects using resources is reduced. Politics and “sacred cow” projects are exposed. Project goals are more easily identified and communicated using the selection criteria as corroboration. Finally, using a weighted scoring approach helps project managers understand how their project was selected, how their project contributes to organization goals, and how it compares with other projects. Project selection is one of the most important decisions guiding the future success of an organization. Criteria for project selection are the area where the power of your portfolio starts to manifest itself. New projects are aligned with the strategic goals of the organization. With a clear method for selecting projects in place, project proposals can be solicited.

Sources and Solicitation of Project Proposals As you would guess, projects should come from anyone who believes his or her project will add value to the organization. However, many organizations restrict proposals from specific levels or groups within the organization. This could be an opportunity lost. Good ideas are not limited to certain types or classes of organiza- tion stakeholders. Encourage and keep solicitations open to all sources—internal and external sponsors. Figure 2.4A provides an example of a proposal form for an automatic vehicular tracking (Automatic Vehicle Location) public transportation project. Figure 2.4B pres- ents a preliminary risk analysis for a 500-acre wind farm. Many organizations use risk analysis templates to gain a quick insight of a project’s inherent risks. Risk factors depend on the organization and type of projects. This information is useful in balanc- ing the project portfolio and identifying major risks when executing the project. Proj- ect risk analysis is the subject of Chapter 7.

Chapter 2 Organization Strategy and Project Selection 45

In some cases organizations will solicit ideas for projects when the knowledge requirements for the project are not available in the organization. Typically, the organi- zation will issue an RFP (Request for Proposal) to contractors/vendors with adequate experience to implement the project. In one example, a hospital published an RFP that asked for a bid to design and build a new operating room that uses the latest technol- ogy. Several architecture firms submitted bids to the hospital. The bids for the project were evaluated internally against other potential projects. When the project was accepted as a go, other criteria were used to select the best qualified bidder.

Project Proposal Form

Project classification?

What business problem does the project solve?

Increase customer satisfaction through kiosk and Web site for bus, streetcar, and fast rail Enhance driver and traveler safety

Strategic Infrastructure Compliance

Date: Proposal # SponsorJan 22, 2xxx 11

X

J. Moran

Hyperlink to: AVL.tri-met.org

Increase customer ridership through better passenger travel planning & scheduling decisions Faster response to accidents

How does this project align with our organization strategy?

What are the major deliverables of the project?

What is the impact of not doing this project?

What are the three major risks for this project?

Increased ridership Customer satisfaction Meeting budget and schedule

How will we measure success?

What is the estimated cost of the project?

How long will this project take?

Oversight action:

Signature

Accept

XXXXXX Date: Feb. 7, 2xxx

Return

22 Weeks

$10 million

Will this project require internal resources? Available?

Yes No Yes

Not meeting ridership goals

Cost overruns Hacking system

Integration of fast rail, bus, and streetcar systems

GPS vehicle tracking system, Internet access, schedule screen

No

X

X X

FIGURE 2.4A A Proposal Form for an Automatic Vehicular Tracking (AVL) Public Transportation Project

46 Chapter 2 Organization Strategy and Project Selection

Ranking Proposals and Selection of Projects Culling through so many proposals to identify those that add the most value requires a structured process. Figure 2.5 shows a flow chart of a screening process beginning with the creation of an idea for a project. See Figure 12.3 for a template for evaluating contractors. Data and information are collected to assess the value of the proposed project to the organization and for future backup. If the sponsor decides to pursue the project on the basis of the collected data, it is forwarded to the project priority team (or the project office). Note that the sponsor knows which criteria will be used to accept or reject the project. Given the selection criteria and current portfolio of projects, the priority team rejects or accepts the project. If the project is accepted, the priority team sets imple- mentation in motion. Figure 2.6 is a partial example of an evaluation form used by a large company to pri- oritize and select new projects. The form distinguishes between must and want objec- tives. If a project does not meet designated “must” objectives, it is not considered and is removed from consideration. Organization (or division) objectives have been ranked and weighted by their relative importance—for example, “Improve external customer ser- vice” carries a relative weight of 83 when compared to other want objectives. The want objectives are directly linked to objectives found in the strategic plan.

FIGURE 2.4B Risk Analysis for a 500-Acre Wind Farm

Brief Risk Assessment

Risk Intensity Rating

Purpose: To draw attention to apparent project risks that will need management attention.

Rank risks above by “probability” and “impact” on the chart below by High, Medium or Low.

What are the four major risks of this project?

1.

2.

3.

Government incentives curtailed

Land use injunction

Energy price decrease

4. New import tax

Risk Probability Impact

1.

2.

3.

Government incentives curtailed

Land use injunction

Energy price decrease

4. New import tax

High

Medium

Medium

Low

High

High

Medium

High

Check other project risk factors: Complexity

Resource skills

Technology

Low

Good

Low

Average

Okay

Average

High

Lacking

High

Reviewed by Date

X

Rachel April 1, 2xxx

X

X

Chapter 2 Organization Strategy and Project Selection 47

Impact definitions represent a further refinement to the screening system. They are developed to gauge the predicted impact a specific project would have on meeting a particular objective. A numeric scheme is created and anchored by defining criteria. To illustrate how this works, let’s examine the $5 million in new sales objective. A “0” is assigned if the project will have no impact on sales or less than $100,000, a “1” is given if predicted sales are more than $100,000 but less than $500,000, a “2” if greater than $500,000. These impact assessments are combined with the relative importance of each objective to determine the predicted overall contribution of a project to strategic objec- tives. For example, project 26 creates an opportunity to fix field problems, has no effect on sales, and will have major impact on customer service. On these three objectives, project 26 would receive a score of 265 [99 + 0 + (2 × 83)]. Individual weighted scores are totaled for each project and are used to prioritize projects.

Responsibility for Prioritizing Prioritizing can be an uncomfortable exercise for managers. But prioritizing projects is a major responsibility for senior management. Prioritizing means discipline, account- ability, responsibility, constraints, reduced flexibility, and loss of power. Top manage- ment commitment means more than giving a blessing to the priority system; it means management will have to rank and weigh, in concrete terms, the objectives and strate- gies they believe to be most critical to the organization. This public declaration of commitment can be risky if the ranked objectives later prove to be poor choices, but setting the course for the organization is top management’s job. The good news is, if management is truly trying to direct the organization to a strong future position, a good project priority system supports their efforts and develops a culture in which everyone is contributing to the goals of the organization.

Periodic reassessment

of priorities

Return for more

information

Abandon

Reject Accept

Pursue

Project proposal

idea

Data collection

and backup

Self-evaluation of project by criteria

Priority team evaluates proposal

and reviews portfolio for risk balance

Need strategic fit

ROI/payback risk

Assign priority Assign resources

Assign project manager

Evaluate progress

Hold for resources

FIGURE 2.5 Project Screening Process

48 Chapter 2 Organization Strategy and Project Selection

2.6 Managing the Portfolio System Managing the portfolio takes the selection system one step higher in that the merits of a particular project are assessed within the context of existing projects. At the same time it involves monitoring and adjusting selection criteria to reflect the strategic focus of the organization. This requires constant effort. The priority system can be managed by a small group of key employees in a small organization. Or, in larger organizations, the priority system can be managed by the project office or a governance team of senior managers.

Senior Management Input Management of a portfolio system requires two major inputs from senior management. First, senior management must provide guidance in establishing selection criteria that

Understand the need to manage the project portfolio.

2-7LO

Must objectives

All activities meet current legal, safety, and environmental standards

All new products will have a complete market analysis

Want objectives Single projectimpact definitions

Provides immediate response to field problems

Relative Importance

1-100

Weighted score

Weighted score

Weighted score

Weighted score

99

88

83

99

yes

n/a

0

166

0 Does not address 1 = Opportunity to fix 2 Urgent problem

0 < $100,000 1 = $100,000–500,000 2 > $500,000

0 Minor impact 1 = Significant impact 2 Major impact

Create $5 million in new sales by 20xx

Total weighted score

Priority

Improve external customer service

Yes-Meets objective No-Does not meet obj N/A-No impact

Yes-Meets objective No-Does not meet obj N/A-No impact

Must meet if impacts …26 27 28 29

Project number FIGURE 2.6 Priority Screening Analysis

Chapter 2 Organization Strategy and Project Selection 49

strongly align with the current organization strategies. Second, senior management must annually decide how they wish to balance the available organizational resources (people and capital) among the different types of projects. A preliminary decision of balance must be made by top management (e.g., 20 percent compliance, 50 percent strategic, and 30 percent operational) before project selection takes place, although the balance may be changed when the projects submitted are reviewed. Given these inputs the priority team or project office can carry out its many responsibilities, which include supporting project sponsors and representing the interests of the total organization.

The Governance Team Responsibilities The governance team, or project office, is responsible for publishing the priority of every project and ensuring the process is open and free of power politics. For example, most organizations using a governance team or project office use an electronic bulletin board to disperse the current portfolio of projects, the current status of each project, and current issues. This open communication discourages power plays. Over time the governance team evaluates the progress of the projects in the portfolio. If this whole process is managed well, it can have a profound impact on the success of an organization. See Snapshot from Prac- tice 2.3: Project Code Names for the rationale behind titles given to projects.

What do Yangtze, Operation Iceberg, and Get Blue have in common? They are all code names given to projects. Project code names are used for sev- eral reasons:

organization.

Apple Corporation used to name major releases of MAC OS X after big cats such as Jaguar, Tiger, Panther, and Leopard, but now name them after national parks (i.e., Yosemite).

against rival concerns.

Oxcart was used by U.S. Department of Defense during the height of the cold war for the secret de- velopment of super sonic fighter jet.

– ect objectives

Operation Just Cause was the name given by U.S. government for the 1989 invasion of Panama, which ousted corrupt leader Manual Noriega.

Revolution was used by Nintendo for groundbreak- ing Wii video game console.

Often on small projects names convey a playful sense of humor. For example, a set of interrelated software projects were all named after Smurf Characters (Papa Smurf, Handy Smurf, Dreamy Smurf,…). Other times the project name reflects an inside joke, for example, one software project was named ALINA, which was an acronym for At Least It Is Not Access.

S N A P S H O T F R O M P R A C T I C E 2 . 3 Project Code Names*

© McGraw-Hill Education/Jill Braaten, photographer

*Sieminski, G. C., “The Art of Naming Operations,” Parame- ters, Autumn 1995, pp. 81-98; “Operation Know-It-All: The Indispensable Guide to Choosing Good Project Names,” articulatemarketing.com, accessed December 20, 2015.

50 Chapter 2 Organization Strategy and Project Selection

Constant scanning of the external environment to determine if organizational focus and/or selection criteria need to be changed is imperative! Periodic priority review and changes need to keep current with the changing environment and keep a unified vision of organization focus. Regardless of the criteria used for selection, each project should be evaluated by the same criteria. If projects are classified by must do, operation, and strategic, each project in its class should be evaluated by the same criteria. Enforcing the project priority system is crucial. Keeping the whole system open and aboveboard is important to maintaining the integrity of the system and keeping new, young execu- tives from going around the system. For example, communicating which projects are approved, project ranks, current status of in-process projects, and any changes in prior- ity criteria will discourage people from bypassing the system.

Balancing the Portfolio for Risks and Types of Projects A major responsibility of the priority team is to balance projects by type, risk, and resource demand. This requires a total organization perspective. Hence, a proposed project that ranks high on most criteria may not be selected because the organization portfolio already includes too many projects with the same characteristics—e.g., proj- ect risk level, use of key resources, high cost, nonrevenue producing, long durations. Balancing the portfolio of projects is as important as project selection. Organizations need to evaluate each new project in terms of what it adds to the project mix. Short- term needs need to be balanced with long-term potential. Resource usage needs to be optimized across all projects, not just the most important project. Two types of risk are associated with projects. First are risks associated with the total portfolio of projects, which should reflect the organization’s risk profile. Second are specific project risks that can inhibit the execution of a project, such as schedule, cost, and technical. In this chapter we look only to balancing the organizational risks inherent in the project portfolio, such as market risk, ability to execute, time to market, and technology advances. Project-specific risks will be covered in detail in Chapter 7. David and Jim Matheson studied R&D organizations and developed a classification scheme that could be used for assessing a project portfolio.7 They separated projects in terms of degree of difficulty and commercial value and came up with four basic types of projects:

Bread-and-butter projects are relatively easy to accomplish and produce modest commercial value. They typically involve evolutionary improvements to current products and services. Examples include software upgrades and manufacturing cost reduction efforts. Pearls are low risk development projects with high commercial payoffs. They represent revolutionary commercial advances using proven technology. Examples include next-generation integrated circuit chip and subsurface imaging to locate oil and gas. Oysters are high risk, high value projects. These projects involve technological breakthroughs with tremendous commercial potential. Examples include embry- onic DNA treatments and new kinds of metal alloys. White elephants are projects that at one time showed promise but are no longer viable. Examples include products for a saturated market or a potent energy source with toxic side-effects.

7 Matheson, D., and J. Matheson, The Smart Organization (Boston: Harvard Business School Press, 1998), pp. 203–209.

Chapter 2 Organization Strategy and Project Selection 51

The Mathesons report that organizations often have too many white elephants and too few pearls and oysters. To maintain strategic advantage they recommend that organiza- tions capitalize on pearls, eliminate or reposition white elephants, and balance resources devoted to bread-and-butter and oyster projects to achieve alignment with overall strategy. Although their research centers on R&D organizations, their observa- tions appear to hold true for all types of project organizations.

Summary Multiple competing projects, limited skilled resources, dispersed virtual teams, time to market pressures, and limited capital serve as forces for the emergence of project port- folio management that provides the infrastructure for managing multiple projects and linking business strategy with project selection. The most important element of this system is the creation of a ranking system that utilizes multiple criteria that reflect the mission and strategy of the firm. It is critical to communicate priority criteria to all organizational stakeholders so that the criteria can be the source of inspiration for new project ideas. Every significant project selected should be ranked and the results published. Se- nior management must take an active role in setting priorities and supporting the prior- ity system. Going around the priority system will destroy its effectiveness. The project governance team needs to consist of seasoned managers who are capable of asking tough questions and distinguishing facts from fiction. Resources (people, equipment, and capital) for major projects must be clearly allocated and not conflict with daily operations or become an overload task. The governance team needs to scrutinize significant projects in terms of not only their strategic value but also their fit with the portfolio of projects currently being im- plemented. Highly ranked projects may be deferred or even turned down if they upset the current balance among risks, resources, and strategic initiatives. Project selection must be based not only on the merits of the specific project but also on what it contrib- utes to the current project portfolio mix. This requires a holistic approach to aligning projects with organizational strategy and resources. The importance of aligning projects with organization strategy cannot be over- stated. We have discussed two types of models found in practice. Checklist models are easy to develop and are justified primarily on the basis of flexibility across different divisions and locations. Unfortunately, questionnaire checklist models do not allow comparison of the relative value (rank) of alternative projects in contributing toward organization strategy. The latter is the major reason the authors prefer multi-weighted scoring models. These models keep project selection highly focused on alignment with organization strategy. Weighted scoring models require major effort in establishing the criteria and weights.

Key Terms Implementation gap, 34 Net present value (NVP), 38 Organization politics, 35

Payback, 38 Priority system, 34 Priority team, 42 Project portfolio, 34

Project sponsor, 35 Sacred cow, 35 Strategic management, 29

52 Chapter 2 Organization Strategy and Project Selection

1. Describe the major components of the strategic management process. 2. Explain the role projects play in the strategic management process. 3. How are projects linked to the strategic plan? 4. The portfolio of projects is typically represented by compliance, strategic, and oper-

ations projects. What impact can this classification have on project selection? 5. Why does the priority system described in this chapter require that it be open and

published? Does the process encourage bottom-up initiation of projects? Does it discourage some projects? Why?

6. Why should an organization not rely only on ROI to select projects? 7. Discuss the pros and cons of the checklist versus the weighted factor method of

selecting projects.

1. You manage a hotel resort located on the South Beach on the Island of Kauai in Hawaii. You are shifting the focus of your resort from a traditional fun-in-the-sun destination to eco-tourism. (Eco-tourism focuses on environmental awareness and education.) How would you classify the following projects in terms of compliance, strategic, and operational? a. Convert the pool heating system from electrical to solar power. b. Build a four-mile nature hiking trail. c. Renovate the horse barn. d. Launch a new promotional campaign with Hawaii Airlines. e. Convert 12 adjacent acres into a wildlife preserve. f. Update all the bathrooms in condos that are 10 years old or older. g. Change hotel brochures to reflect eco-tourism image. h. Test and revise disaster response plan. i. Introduce wireless Internet service in café and lounge areas.

How easy was it to classify these projects? What made some projects more difficult than others? What do you think you now know that would be useful for managing projects at the hotel?

2.* Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?

3. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 20 percent, conduct a discounted cash flow calculation to determine the NPV.

4. You work for the 3T company, which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. The following chart shows the cash information for each project. Which of the two projects would you fund if the decision is based only on financial information? Why?

Exercises

Review Questions

*The solution to these exercises can be found in Appendix One.

Chapter 2 Organization Strategy and Project Selection 53

Omega Alpha Year Inflow Outflow Netflow Year Inflow Outflow Netflow Y0              0 $225,000 −225,000 Y0              0 $300,000 −300,000 Y1              0  190,000 −190,000 Y1   $ 50,000   100,000   −50,000 Y2 $ 150,000            0   150,000 Y2    150,000             0    150,000 Y3    220,000    30,000   190,000 Y3    250,000    50,000    200,000 Y4    215,000            0   215,000 Y4    250,000            0    250,000 Y5    205,000    30,000   175,000 Y5    200,000    50,000    150,000 Y6   197,000            0   197,000 Y6    180,000             0    180,000 Y7    100,000    30,000     70,000 Y7    120,000    30,000      90,000 Total 1,087,000  505,000   582,000 Total 1,200,000   530,000    670,000

5.* You are the head of the project selection team at SIMSOX. Your team is consider- ing three different projects. Based on past history, SIMSOX expects at least a rate of return of 20 percent.

Given the following information for each project, which one should be SIMSOX’s first priority? Should SIMSOX fund any of the other projects? If so, what should be the order of priority based on return on investment?

Project: Dust Devils

Year Investment Revenue Stream 0 $500,000 0 1 50,000 2 250,000 3 350,000

Project: Osprey

Year Investment Revenue Stream 0 $250,000 0 1 75,000 2 75,000 3 75,000 4 50,000

Project: Voyagers

Year Investment Revenue Stream 0 $75,000 0 1 15,000 2 25,000 3 50,000 4 50,000 5 150,000

*The solution to these exercises can be found in Appendix One.

54 Chapter 2 Organization Strategy and Project Selection

6. You are the head of the project selection team at Broken Arrow records. Your team is considering three different recording projects. Based on past history, Broken Arrow expects at least a rate of return of 20 percent.

Given the following information for each project, which one should be Broken Arrow’s first priority? Should Broken Arrow fund any of the other projects? If so, what should be the order of priority based on return on investment?

Recording Project: Time Fades Away

Year Investment Revenue Stream 0 $600,000 0 1 600,000 2 75,000 3 20,000 4 15,000 5 10,000

Recording Project: On the Beach

Year Investment Revenue Stream 0 $400,000 0 1 400,000 2 100,000 3 25,000 4 20,000 5 10,000

Recording Project: Tonight’s the Night

Year Investment Revenue Stream 0 $200,000 0 1 200,000            2 125,000            3 75,000          4 20,000          5 10,000

7. The Custom Bike Company has set up a weighted scoring matrix for evaluation of potential projects. Below are five projects under consideration.

a. Using the scoring matrix in the following chart, which project would you rate highest? Lowest?

b. If the weight for “Strong Sponsor” is changed from 2.0 to 5.0, will the project selection change? What are the three highest weighted project scores with this new weight?

c. Why is it important that the weights mirror critical strategic factors?

Chapter 2 Organization Strategy and Project Selection 55

Project Screening Matrix

Project 1

CriteriaW eight

Project 2

Project 3

Project 4

Project 5

9

3

6

1

3

5

7

8

0

10

2

2

2

5

10

0

0

3

10

1

2

5

6

6

8

5

1

8

9

0

2.0

Str on

g

sp on

so r

Ur ge

nc y

10 %

of

sa les

fro m

ne w

pro du

cts

Co mp

eti tio

n

Fil l m

ark et

ga pSu

pp ort

s

bu sin

es s

str ate

gy

5.0 4.0 3.0 1.0 3.0

We igh

ted

tot al

Adler, P. S., et al., “Getting the Most Out of Your Product Development Process,” Harvard Business Review, vol. 74, no. 2, pp. 134–52. Benko, C., and F. W. McFarlan, Connecting the Dots: Aligning Projects With Objec- tives in Unpredictable Times (Boston: Harvard Business School Press, 2003). Bigelow, D., “Want to Ensure Quality? Think Project Portfolio Management,” PM Network, vol. 16, no. 1 (April 2002), pp. 16–17. Bloomberg Businessweek, “IBM Wants to Put Watson in Your Pocket,” September 17–23, 2012, pp. 41–42. Boyer, C., “Make Profit Your Priority,” PM Network, vol. 15, no. 10 (October 2003), pp. 37–42. Cohen, D., and R. Graham, The Project Manager’s MBA (San Francisco: Jossey- Bass, 2001), pp. 58–59. Crawford, L., B. Hobbs, and J. R. Turne, “Aligning Capability with Strategy: Catego- rizing of Projects to Do the Right Projects and Do Them Right,” Project Management Journal, vol. 37, no. 2 (June 2006), pp. 38–50. Descamps, J. P., “Mastering the Dance of Change: Innovation as a Way of Life,” Prism, Second Quarter, 1999, pp. 61–67. Doran, G. T., “There’s a Smart Way to Write Management Goals and Objectives,” Management Review, November 1981, pp. 35–36. Floyd, S. W., and B. Woolridge, “Managing Strategic Consensus: The Foundation of Effectiveness Implementation,” Academy of Management Executives, vol. 6, no. 4  (1992), pp. 27–39.

References

56 Chapter 2 Organization Strategy and Project Selection

Foti, R., “Louder Than Words,” PM Network, December 2002, pp. 22–29. Also see Foti, R., “Make Your Case, Not All Projects Are Equal,” PM Network, vol. 31, no. 7 (2003), pp. 35–43. Frank, L., “On Demand,” PM Network, vol. 18, no. 4 (April 2004), pp. 58–62. Friedman, Thomas L., Hot, Flat, and Crowded (New York: Farrar, Straus, and Giroux, 2008). Fusco, J. C., “Better Policies Provide the Key to Implementing Project Management,” Project Management Journal, vol. 28. no. 3 (1997), pp. 38–41. Helm, J., and K. Remington, “Effective Project Sponsorship: An Evaluation of the Executive Sponsor in Complex Infrastructure Projects by Senior Project Managers,” Project Management Journal, vol. 36, no. 1 (September 2005), pp. 51–61. Hutchens, G., “Doing the Numbers,” PM Network, vol. 16, no. 4 (March 2002), p. 20. Johnson, R. E., “Scrap Capital Project Evaluations,” Chief Financial Officer, May 1998, p. 14. Kaplan, R. S., and D. P. Norton, “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, pp. 73–79. Also see Kaplan, Robert, http;//balancedscorecard.org. Kenny, J., “Effective Project Management for Strategic Innovation and Change in an Organizational Context,” Project Management Journal, vol. 34, no. 1 (2003), pp. 45–53. Kharbanda, O. P., and J. K. Pinto, What Made Gertie Gallop: Learning from Project Failures (New York: Van Nostrand Reinhold, 1996), pp. 106–11, 263–83. Korte, R. F., and T. J. Chermack, “Changing Organizational Culture with Scenario Planning,” Futures, vol. 39, no. 6 (August 2007), pp. 645–56. Leifer, R., C. M. McDermott, G. C. O’Connor, L. S. Peters, M. Price, and R. W. Veryzer, Radical Innovation: How Mature Companies Can Outsmart Upstarts (Boston: Harvard Business School Press, 2000). MacIntyre, J., PM Network, vol. 20, no. 11 (November 2006), pp. 32–35. Magretta, Joan, Understanding Michael Porter: The Essential Guide to Competition and Strategy (Boston: Harvard Business Press Book, 2011). Matheson, D., and J. Matheson, The Smart Organization (Boston: Harvard Business School Press, 1998), pp. 203–9. Milosevic, D. Z., and S. Srivannaboon, “A Theoretical Framework for Aligning Proj- ect Management with Business Strategy,” Project Management Journal, vol. 37, no. 3 (August 2006), pp. 98–110. Morris, P. W., and A. Jamieson, “Moving from Corporate Strategy to Project Strategy,” Project Management Journal, vol. 36, no. 4 (December 2005), pp. 5–18. Motta, Silva, and Rogério Hermida Quintella, “Assessment of Non-Financial Criteria in the Selection of Investment Projects for Seed Capital Funding: The Contribution of Scientometrics and Patentometrics,” Journal of Technology Management Innovation, vol. 7, no. 3 (2012). PMI, “PMI’s Pulse of the Profession,” March 2012, Project Management Institute, p. 7.

Chapter 2 Organization Strategy and Project Selection 57

Raskin, P., et al., Great Transitions: The Promise and Lure of the Times Ahead, retrieved June 3, 2008, www.gtinitiative.org/documents/Great_Transitions.pdf Schwartz, Peter, and Doug Randall, “An Abrupt Climate Change Scenario and its Implications for United States National Security,” Global Business Network, Inc., October 2003. Shenhar, A., “Strategic Project Leadership: Focusing Your Project on Business Success,” Proceedings of the Project Management Institute Annual Seminars & Symposium, San Antonio, Texas, October 3–10, 2002, CD. Also see Shenhar, Aaron, Reinventing Project Management (Harvard Business School, 2007). Sieminski, G. C., “The Art of Naming Operations,” Parameters, Autumn 1995, pp. 81–98. Smith, D. K., and R. C. Alexander, Fumbling the Future: How Xerox Invented, Then Ignored the First Personal Computer (New York: Macmillan, 1988). Swanson, S., “All Things Considered,” PM Network, vol. 25, no. 2 (February 2011), pp. 36–40. Woodward, H., “Winning in a World of Limited Project Spending,” Proceedings of the Project Management Institute Global Congress North America, Baltimore, Maryland, September 18–12, 2003, CD.

Case 2.1

Hector Gaming Company Hector Gaming Company (HGC) is an educational gaming company specializing in young children’s educational games. HGC has just completed their fourth year of oper- ation. This year was a banner year for HGC. The company received a large influx of capital for growth by issuing stock privately through an investment banking firm. It appears the return on investment for this past year will be just over 25 percent with zero debt! The growth rate for the last two years has been approximately 80 percent each year. Parents and grandparents of young children have been buying HGC’s prod- ucts almost as fast as they are developed. Every member of the 56-person firm is enthusiastic and looking forward to helping the firm grow to be the largest and best educational gaming company in the world. The founder of the firm, Sally Peters, has been written up in Young Entrepreneurs as “the young entrepreneur to watch.” She has been able to develop an organization culture in which all stakeholders are committed to innovation, continuous improvement, and organization learning. Last year, 10 top managers of HGC worked with McKinley Consulting to develop the organization’s strategic plan. This year the same 10 managers had a retreat in Aruba to formulate next year’s strategic plan using the same process suggested by McKinley Consulting. Most executives seem to have a consensus of where the firm should go in the intermediate and long term. But there is little consensus on how this should be accomplished. Peters, now president of HGC, feels she may be losing con- trol. The frequency of conflicts seems to be increasing. Some individuals are always requested for any new project created. When resource conflicts occur among projects, each project manager believes his or her project is most important. More projects are

58 Chapter 2 Organization Strategy and Project Selection

not meeting deadlines and are coming in over budget. Yesterday’s management meet- ing revealed some top HGC talent have been working on an international business game for college students. This project does not fit the organization vision or market niche. At times it seems everyone is marching to his or her own drummer. Somehow more focus is needed to ensure everyone agrees on how strategy should be imple- mented, given the resources available to the organization. Yesterday’s meeting alarmed Peters. These emerging problems are coming at a bad time. Next week HGC is ramping up the size of the organization, number of new prod- ucts per year, and marketing efforts. Fifteen new people will join HGC next month. Peters is concerned that policies be in place that will ensure the new people are used most productively. An additional potential problem looms on the horizon. Other gam- ing companies have noticed the success HGC is having in their niche market; one com- pany tried to hire a key product development employee away from HGC. Peters wants HGC to be ready to meet any potential competition head on and to discourage any new entries into their market. Peters knows HGC is project driven; however, she is not as confident that she has a good handle on how such an organization should be managed— especially with such a fast growth rate and potential competition closer to becoming a reality. The magnitude of emerging problems demands quick attention and resolution. Peters has hired you as a consultant. She has suggested the following format for your consulting contract. You are free to use another format if it will improve the effectiveness of the consulting engagement. What is our major problem? Identify some symptoms of the problem. What is the major cause of the problem? Provide a detailed action plan that attacks the problem. Be specific and provide exam- ples that relate to HGC.

Case 2.2

Film Prioritization The purpose of this case is to give you experience in using a project priority system that ranks proposed projects by their contribution to the organization’s objectives and strategic plan.

COMPANY PROFILE The company is the film division for a large entertainment conglomerate. The main office is located in Anaheim, California. In addition to the feature film division, the conglomerate includes theme parks, home videos, a television channel, interactive games, and theatrical productions. The company has been enjoying steady growth over the past 10 years. Last year total revenues increased by 12 percent to $21.2 billion. The company is engaged in negotiations to expand its theme park empire to mainland China and Poland. The film division generated $274 million in revenues, which was an increase of 7 percent over the past year. Profit margin was down 3 percent to 16 per- cent because of the poor response to three of the five major film releases for the year.

Chapter 2 Organization Strategy and Project Selection 59

COMPANY MISSION The mission for the firm:

Our overriding objective is to create shareholder value by continuing to be the world’s pre- mier entertainment company from a creative, strategic, and financial standpoint.

The film division supports this mission by producing four to six high-quality, family entertainment films for mass distribution each year. In recent years, the CEO of the company has advocated that the firm take a leadership position in championing envi- ronmental concerns.

COMPANY “MUST” OBJECTIVES Every project must meet the must objectives as determined by executive management. It is important that selected film projects not violate such objectives of high strategic priority. There are three must objectives: 1. All projects meet current legal, safety, and environmental standards. 2. All film projects should receive a PG or lower advisory rating. 3. All projects should not have an adverse effect on current or planned operations

within the larger company.

COMPANY “WANT” OBJECTIVES Want objectives are assigned weights for their relative importance. Top management is responsible for formulating, ranking, and weighting objectives to ensure that projects support the company’s strategy and mission. The following is a list of the company’s want objectives: 1. Be nominated for and win an academy award for Best Animated Feature or Best

Picture of the Year. 2. Generate additional merchandise revenue (action figures, dolls, interactive games,

music CDs). 3. Raise public consciousness about environmental issues and concerns. 4. Generate profit in excess of 18 percent. 5. Advance the state of the art in film animation, and preserve the firm’s reputation. 6. Provide the basis for the development of a new ride at a company-owned theme park.

ASSIGNMENT You are a member of the priority team in charge of evaluating and selecting film pro- posals. Use the provided evaluation form to formally evaluate and rank each proposal. Be prepared to report your rankings and justify your decisions. Assume that all of the projects have passed the estimated hurdle rate of 14 percent ROI. In addition to the brief film synopsis, the proposals include the following finan- cial projections of theater and video sales: 80 percent chance of ROI, 50 percent chance of ROI, and 20 percent chance of ROI. For example, for proposal #1 (Dalai Lama) there is an 80 percent chance that it will earn at least 8 percent return on investment (ROI), a 50-50 chance the ROI will be 18 percent, and a 20 percent chance that the ROI will be 24 percent.

60 Chapter 2 Organization Strategy and Project Selection

FILM PROPOSALS PROJECT PROPOSAL 1: MY LIFE WITH DALAI LAMA An animated, biographical account of the Dalai Lama’s childhood in Tibet based on the popular children’s book Tales from Nepal. The Lama’s life is told through the eyes of “Guoda,” a field snake, and other local animals who befriend the Dalai and help him understand the principles of Buddhism.

Probability 80% 50% 20%

ROI   8% 18% 24%

PROJECT PROPOSAL 2: HEIDI  A remake of the classic children’s story with music written by award-winning compos- ers Syskle and Obert. The big-budget film will feature top-name stars and breathtaking scenery of the Swiss Alps.

Probability 80% 50% 20%

ROI   2% 20% 30%

PROJECT PROPOSAL 3: THE YEAR OF THE ECHO A low-budget documentary that celebrates the career of one of the most influential bands in rock-and-roll history. The film will be directed by new-wave director Elliot Cznerzy and will combine concert footage and behind-the-scenes interviews spanning the 25-year history of the rock band the Echos. In addition to great music, the film will focus on the death of one of the founding members from a heroin overdose and reveal the underworld of sex, lies, and drugs in the music industry.

Probability 80% 50% 20%

ROI 12% 14% 18%

PROJECT PROPOSAL 4: ESCAPE FROM RIO JAPUNI An animated feature set in the Amazon rainforest. The story centers around Pablo, a young jaguar who attempts to convince warring jungle animals that they must unite and escape the devastation of local clear cutting.

Probability 80% 50% 20%

ROI 15% 20% 24%

PROJECT PROPOSAL 5: NADIA!  The story of Nadia Comaneci, the famous Romanian gymnast who won three gold medals at the 1976 Summer Olympic Games. The low-budget film will document her life as a small child in Romania and how she was chosen by Romanian authorities to join their elite, state-run, athletic program. The film will highlight how Nadia main- tained her independent spirit and love for gymnastics despite a harsh, regimented training program.

Probability 80% 50% 20%

ROI 8% 15% 20%

Chapter 2 Organization Strategy and Project Selection 61

Must objectives

Meets all safety and environmental standards

No adverse effect on other operations

PG or G rating

Want objectives

Single project impact definitions

Win Best Picture of the Year

Relative Importance

1–100

Weighted Score

Weighted Score

Weighted Score

Weighted Score

Weighted Score

Weighted Score

Weighted Score

70

60

55

70

40

10

0 = No potential 1 = Low potential 2 = High potential

0 = No potential 1 = Low potential 2 = High potential

10 0 = No potential 1 = Low potential 2 = High potential

0 = No potential 1 = Low potential 2 = High potential

0 < 18% 1 = 18–22% 2 > 22%

0 = No impact 1 = Some impact 2 = Great impact

0 = No potential 1 = Low potential 2 = High potential

Total weighted score

Priority

Win Best Animated Feature Film

Generate additional merchandise

Raise environmental concerns

Generate profit greater than 18%

Y = yes N = no N/A = not applicable Y = yes N = no N/A = not applicable

Y = yes N = no N/A = not applicable

Must meet if impacts

1 2 3 4 5 6 7

Advance state of film animation

Provide basis for new theme ride

Project Priority Evaluation Form

PROJECT PROPOSAL 6: KEIKO—ONE WHALE OF A STORY The story of Keiko, the famous killer whale, will be told by an imaginary offspring Seiko, who in the distant future is telling her children about their famous grandfather. The big-budget film will integrate actual footage of the whale within a realistic ani- mated environment using state-of-the-art computer imagery. The story will reveal how Keiko responded to his treatment by humans.

Probability 80% 50% 20%

ROI   6% 18% 25%

62 Chapter 2 Organization Strategy and Project Selection

PROJECT PROPOSAL 7: GRAND ISLAND  The true story of a group of junior-high biology students who discover that a fertilizer plant is dumping toxic wastes into a nearby river. The moderate-budget film depicts how students organize a grassroots campaign to fight local bureaucracy and ultimately force the fertilizer plant to restore the local ecosystem.

Probability 80% 50% 20%

ROI   9% 15% 20%

Case 2.3

Fund Raising Project Selection case The purpose of this “case exercise” is to provide you with experience in using a project selection process that ranks proposed projects by their contribution to an organiza- tion’s mission and strategy.

FUND RAISING PROJECT Assume you are a member of a class on project management. Each student will join a team of 5–7 students who will be responsible for creating, planning, and executing a fund raising project for a designated charity. The fund raising project has two goals: (1) raise money for a worthy cause and (2) provide an opportunity for all team mem- bers to practice project management skills and techniques. In addition to completing the project a number of deliverables are required to com- plete this assignment. These deliverables include: a. Project Proposal b. Implementation Plan c. Risk Management Plan d. Status Report e. Project Reflections Presentation f. Project Retrospective/Audit Approved projects will receive $250 seed money to be reimbursed upon completion of the project.

“MUST” OBJECTIVES Every project must meet the “must” objectives as determined by the instructor. There are four must objectives: 1. All projects must be safe, legal and comply with university policies. 2. All projects must be capable of earning at least $500. 3. All projects must be able to be completed within nine weeks. 4. All projects must provide an opportunity for every member of the project team to

experience and learn about project management. Among the factors to consider for the last objective would be the extent there is mean- ingful work for every member of the team, the degree of coordination required, the

Chapter 2 Organization Strategy and Project Selection 63

extent the team will have to work with external stakeholders, and the complexity of the project.

“WANT” OBJECTIVES In addition to the must objectives, there are “want” objectives that the instructor would like to achieve. The following is a list of these objectives: 1. Earn more than $500 for a charity 2. Increase public awareness of the charity 3. Provide a resume worthy experience for students 4. Be featured on local TV news 5. Be fun to do

ASSIGNMENT You are a member of the class priority team in charge of evaluating and approving fund raising projects. Use the provided proposal evaluation form to formally evaluate and rank each proposal. Be prepared to report your rankings and justify your decision. You should assume that these projects would be held at your university or college.

FUND RAISING PROPOSALS PROJECT PROPOSAL 1: HOOPS FOR HOPE The project is a three-on-three basketball tournament to raise money for the Down Syndrome Association. The tournament will consist of three brackets: Co-ed, Male, and Female teams. There will be a $40 entry fee per team and additional funds will be derived from the sale of commemorative T-shirts ($10). Winning teams will receive gift baskets consisting of donations from local businesses and restaurants. The event will be held at the university recreational center.

PROJECT PROPOSAL 2: SINGING FOR SMILES The project will hold a karaoke competition with celebrity judges at a popular campus night spot. Funds will be raised by $5 admission at the door and a raffle for prizes donated by local businesses. Funds will be donated to Smile Train, an international organization that performs cleft lip surgery at a cost of $250 per child. The event will feature pictures of children born with cleft lips and with every $50 earned a piece of a picture puzzle will be added until the original picture is covered with a smiling face.

PROJECT PROPOSAL 3: HALO FOR HEROES The project will be a Halo video game competition to be held over the weekend utiliz- ing the College’s big screen electronic classrooms. Teams of 4 players will play each other in a single elimination tournament with the grand prize being a Sony Play Sta- tion 3 donated by a local video game store. Entry fee is 24$ per team and individual players will be able to play in a loser’s bracket for 5$. All proceeds will go to the National Military Family Association.

PROJECT PROPOSAL 4: RAFFLE FOR LIFE Organize a raffle contest. Raffle tickets will be sold for 3$ apiece with the winning ticket worth $300. Each of the six team members will be responsible for selling 50 raffle tickets. All profits will go to the American Cancer Society.

64 Chapter 2 Organization Strategy and Project Selection

PROJECT PROPOSAL 5: HOLD’EM FOR HUNGER  Organize a Texas Hold’em poker tournament at a campus dining facility. It will cost $20 to enter the tournament with a $15 buy-in in fee. Prizes include $300, $150, and $50 gift certificates to a large department store. Gift certificates purchased from entry fees. All players will be eligible to win two donated tickets to Men and Women basketball games. Funds raised will go to local county food shelter. PROJECT PROPOSAL 6: BUILD YOUR OWN BOX The purpose of this project is to raise awareness of plight of homeless. Students will donate 10 dollars to participate in building and living in a cardboard city on the univer- sity quad for one night. Building materials will be provided by local recycling centers and hardware stores. Hot soup will be provided by the team at midnight to all partici- pants. Proceeds go to the local homeless shelter.

Must objectives

Be safe, legal, & comply with University Policies

Can be completed within 9 weeks

Earn at least $500

Want objectives

Single project impact definitions

Earning potential

Relative Importance

1–100

90

30

40

40

0: 500–750 1 : 750–1500 2: >$1500 3: >$2000 0: None 1 : Some fun 2: A lot of fun

30 0: No potential 1 : Low potential 2: High potential

0: No potential 1 : Low potential 2: High potential

0: No potential 1 : Low potential 2: High potential

Total weighted score

Priority

Fun

Increase awareness of charity

Resume worthy

Be featured on local TV news

Y = yes N = no

Y = yes N = no

Y = yes N = no

Opportunity to learn Project Management

Y = yes N = no

Must meet if impacts

1 2 3 4 5 6 7

Project Priority Evaluation Form

66

Organization: Structure and Culture3

LEARNING OBJECTIVES After reading this chapter you should be able to:

3-1 Identify different project management structures and understand their strengths and weaknesses.

3-2 Distinguish three different types of matrix structures and understand their strengths and weaknesses.

3-3 Understand organizational and project consider- ations that should be considered in choosing an appropriate project management structure.

3-4 Appreciate the significant role that organizational culture plays in managing projects.

3-5 Interpret the culture of an organization.

3-6 Understand the interaction between project management structure and the culture of an organization.

OUTLINE 3.1 Project Management Structures

3.2 What Is the Right Project Management Structure?

3.3 Organizational Culture

3.4 Implications of Organizational Culture for Organizing Projects

Summary

C H A P T E R T H R E E

67

Matrix management works, but it sure is difficult at times. All matrix man- agers must keep up their health and take Stress-Tabs. —A Project Manager

Once management approves a project, then the question becomes, how will the project be implemented? This chapter examines three different project management structures used by firms to implement projects: functional organization, dedicated project teams, and matrix structure. Although not exhaustive, these structures and their variant forms represent the major approaches for organizing projects. The advantages and disadvan- tages of each of these structures are discussed as well as some of the critical factors that might lead a firm to choose one form over others. Whether a firm chooses to complete projects within the traditional functional organiza- tion or through some form of matrix arrangement is only part of the story. Anyone who has worked for more than one organization realizes that there are often considerable dif- ferences in how projects are managed within certain firms even with similar structures. Working in a matrix system at AT&T is different from working in a matrix environment at Hewlett-Packard. Many researchers attribute these differences to the organizational

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

68 Chapter 3 Organization: Structure and Culture

culture at AT&T and Hewlett-Packard. A simple explanation of organizational culture is that it reflects the “personality” of an organization. Just as each individual has a unique personality, so each organization has a unique culture. Toward the end of this chapter, we examine in more detail what organizational culture is and the impact that the culture of the parent organization has on organizing and managing projects. Both the project management structure and the culture of the organization constitute major elements of the enterprise environment in which projects are implemented. It is important for project managers and participants to know the “lay of the land” so that they can avoid obstacles and take advantage of pathways to complete their projects.

3.1 Project Management Structures A project management system provides a framework for launching and implementing project activities within a parent organization. A good system appropriately balances the needs of both the parent organization and the project by defining the interface between the project and parent organization in terms of authority, allocation of resources, and eventual integration of project outcomes into mainstream operations. With this in mind, we will start the discussion of project management structures.

Organizing Projects within the Functional Organization One approach to organizing projects is to simply manage them within the existing func- tional hierarchy of the organization. Once management decides to implement a project, the different segments of the project are delegated to the respective functional units with each unit responsible for completing its segment of the project (see Figure 3.1). Coordi- nation is maintained through normal management channels. For example, a tool manu- facturing firm decides to differentiate its product line by offering a series of tools specially designed for left-handed individuals. Top management decides to implement the project, and different segments of the project are distributed to appropriate areas. The industrial design department is responsible for modifying specifications to conform

Identify different project management structures and understand their strengths and weaknesses.

3-1LO

Manufacturing Procurement

Purchasing Receiving andinspection

Fabrication Assembly Testing Productionscheduling

Delta Manufacturing, Inc. President

Human resources

Project coordination

Marketing Engineering

Electronics engineering

Software engineering

Mechanical engineering

Customer service

Domestic sales

International sales

Design

Finance and administration

Manufacturing Procurement

Purchasing Receiving andinspection

Fabrication Assembly Testing Productionscheduling

Delta Manufacturing, Inc. President

Human resources

Project coordination

Marketing Engineering

Electronics engineering

Software engineering

Mechanical engineering

Customer service

Domestic sales

International sales

Design

Finance and administration

FIGURE 3.1 Functional Organizations

Chapter 3 Organization: Structure and Culture 69

to the needs of left-handed users. The production department is responsible for devising the means for producing new tools according to these new design specifications. The marketing department is responsible for gauging demand and price as well as identify- ing distribution outlets. The overall project will be managed within the normal hierar- chy, with the project being part of the working agenda of top management. The functional organization is also commonly used when, given the nature of the project, one functional area plays a dominant role in completing the project or has a dominant interest in the success of the project. Under these circumstances, a high- ranking manager in that area is given the responsibility of coordinating the project. For example, the transfer of equipment and personnel to a new office would be managed by a top-ranking manager in the firm’s facilities department. Likewise, a project involving the upgrading of the management information system would be managed by the information systems department. In both cases, most of the project work would be done within the specified department and coordination with other departments would occur through normal channels. There are advantages and disadvantages for using the existing functional organiza- tion to administer and complete projects (Larson, 2004). The major advantages are the following: 1. No Change. Projects are completed within the basic functional structure of the par-

ent organization. There is no radical alteration in the design and operation of the parent organization.

2. Flexibility. There is maximum flexibility in the use of staff. Appropriate specialists in different functional units can temporarily be assigned to work on the project and then return to their normal work. With a broad base of technical personnel available within each functional department, people can be switched among different projects with relative ease.

3. In-Depth Expertise. If the scope of the project is narrow and the proper functional unit is assigned primary responsibility, then in-depth expertise can be brought to bear on the most crucial aspects of the project.

Manufacturing Procurement

Purchasing Receiving andinspection

Fabrication Assembly Testing Productionscheduling

Delta Manufacturing, Inc. President

Human resources

Project coordination

Marketing Engineering

Electronics engineering

Software engineering

Mechanical engineering

Customer service

Domestic sales

International sales

Design

Finance and administration

Manufacturing Procurement

Purchasing Receiving andinspection

Fabrication Assembly Testing Productionscheduling

Delta Manufacturing, Inc. President

Human resources

Project coordination

Marketing Engineering

Electronics engineering

Software engineering

Mechanical engineering

Customer service

Domestic sales

International sales

Design

Finance and administration

70 Chapter 3 Organization: Structure and Culture

4. Easy Post-Project Transition. Normal career paths within a functional division are maintained. While specialists can make significant contributions to projects, their functional field is their professional home and the focus of their professional growth and advancement.

Just as there are advantages for organizing projects within the existing functional orga- nization, there are also disadvantages. These disadvantages are particularly pro- nounced when the scope of the project is broad and one functional department does not take the dominant technological and managerial lead on the project: 1. Lack of Focus. Each functional unit has its own core routine work to do; sometimes

project responsibilities get pushed aside to meet primary obligations. This difficulty is compounded when the project has different priorities for different units. For example, the marketing department may consider the project urgent while the oper- ations people consider it only of secondary importance. Imagine the tension if the marketing people have to wait for the operations people to complete their segment of the project before they proceed.

2. Poor Integration. There may be poor integration across functional units. Func- tional specialists tend to be concerned only with their segment of the project and not with what is best for the total project.

3. Slow. It generally takes longer to complete projects through this functional arrange- ment. This is in part attributable to slow response time—project information and

FIGURE 3.2 Dedicated Project Team

Zeus Electronics, Inc. President

Human resources

Finance and administration

Marketing Manufacturing

Project manager

Project team

ProcurementEngineering

Zeus Electronics, Inc. President

Human resources

Finance and administration

Marketing Manufacturing

Project manager

Project team

ProcurementEngineering

Chapter 3 Organization: Structure and Culture 71

decisions have to be circulated through normal management channels. Furthermore, the lack of horizontal, direct communication among functional groups contributes to rework as specialists realize the implications of others’ actions after the fact.

4. Lack of Ownership. The motivation of people assigned to the project can be weak. The project may be seen as an additional burden that is not directly linked to their professional development or advancement. Furthermore, because they are working on only a segment of the project, professionals do not identify with the project.

Organizing Projects as Dedicated Teams At the other end of the structural spectrum is the creation of a dedicated project team. These teams operate as separate units from the rest of the parent organization. Usually a full-time project manager is designated to pull together a core group of specialists who work full time on the project. The project manager recruits necessary personnel from both within and outside the parent company. The subsequent team is physically separated from the parent organization and given marching orders to complete the proj- ect (see Figure 3.2). The interface between the parent organization and the project teams will vary. In some cases, the parent organization maintains a tight rein through financial controls. In other cases, firms grant the project manager maximum freedom to get the project done as he

Zeus Electronics, Inc. President

Human resources

Finance and administration

Marketing Manufacturing

Project manager

Project team

ProcurementEngineering

Zeus Electronics, Inc. President

Human resources

Finance and administration

Marketing Manufacturing

Project manager

Project team

ProcurementEngineering

72 Chapter 3 Organization: Structure and Culture

sees fit. Lockheed Martin has used this approach to develop next-generation jet airplanes. See Snapshot from Practice 3.1: Skunk Works. In the case of firms where projects are the dominant form of business, such as a con- struction firm or a consulting firm, the entire organization is designed to support project teams. Instead of one or two special projects, the organization consists of sets of quasi- independent teams working on specific projects. The main responsibility of traditional functional departments is to assist and support these project teams. For example, the marketing department is directed at generating new business that will lead to more proj- ects, while the human resource department is responsible for managing a variety of personnel issues as well as recruiting and training new employees. This type of organi- zation is referred to in the literature as a projectized organization and is graphically portrayed in Figure 3.3. It is important to note that not all projects are dedicated project teams; personnel can work part-time on several projects. As in the case of functional organization, the dedicated project team approach has strengths and weaknesses (Larson, 2004). The following are recognized as strengths: 1. Simple. Other than taking away resources in the form of specialists assigned to the

project, the functional organization remains intact with the project team operating independently.

2. Fast. Projects tend to get done more quickly when participants devote their full attention to the project and are not distracted by other obligations and duties. Fur- thermore, response time tends to be quicker under this arrangement because most decisions are made within the team and are not deferred up the hierarchy.

In project management folklore, skunk works is code for a small, dedicated team assigned to a breakthrough proj- ect. The first skunk works was created more than a half a century ago by

Clarence L. “Kelly” Johnson at Lockheed Aerospace Corporation. Kelly’s project had two objectives: (1) to create a jet fighter, the Shooting Star, and (2) to do it as fast as possible. Kelly and a small band of engineering mavericks operated as a dedicated team unencum- bered by red tape and the bureaucratic delays of the normal R&D process. The name was coined by team member Irvin Culver after the moonshine brewery deep in the forest in the popular cartoon strip Lil’Abner. The homemade whisky was euphemistically called kickapoo joy juice. The project was a spectacular success. In just 43 days, Johnson’s team of 23 engineers and teams of support personnel put together the first American fighter to fly at more than 500 miles per hour. Lockheed has continued to use skunk works to develop a string of high speed jets, including the F117 Nighthawk Stealth Fighter as well as jet drone prototypes. Lockheed Mar- tin has an official Skunk Works Division. Their charter is:

S N A P S H O T F R O M P R A C T I C E 3 . 1

The Skunk Works is a concentration of a few good people solving problems far in advance—and at a fraction of the cost—by applying the simplest, most straightforward methods possible to develop and produce new products.

© Monty Rakusen/Getty Images

Skunk Works at Lockheed Martin*

*J. Miller, Lockheed Martin’s Skunk Works (New York: Special- ity Publications, 1996); “Lockheed Martin Skunk Works,” www.lockheedmartin.com/us/aeronautics/skunkworks.html, accessed 1/22/2015.

Chapter 3 Organization: Structure and Culture 73

3. Cohesive. A high level of motivation and cohesiveness often emerges within the project team. Participants share a common goal and personal responsibility toward the project and the team.

4. Cross-Functional Integration. Specialists from different areas work closely together and, with proper guidance, become committed to optimizing the project, not their respective areas of expertise.

In many cases, the project team approach is the optimum approach for completing a project when you view it solely from the standpoint of what is best for completing the project. Its weaknesses become more evident when the needs of the parent organiza- tion are taken into account: 1. Expensive. Not only have you created a new management position (project man-

ager), but resources are also assigned on a full-time basis. This can result in dupli- cation of efforts across projects and a loss of economies of scale.

2. Internal Strife. Sometimes dedicated project teams become an entity in their own right and conflict emerges between the team and the remainder of the organization (see Snapshot from Practice 3.2: The Birth of the Mac). This divisiveness can undermine not only the integration of the eventual outcomes of the project into mainstream operations but also the assimilation of project team members back into their functional units once the project is completed.

3. Limited Technological Expertise. Creating self-contained teams inhibits maxi- mum technological expertise being brought to bear on problems. Technical

FIGURE 3.3 Projectized Organization Structure

Central Engineering Systems, Inc. President

Marketing

Alpha Project Project Manager

ManufacturingEngineering Procurement Engineering Subcontractors

Other projects

Other projects

Manufacturing Procurement

Systems Hardware Software

Assembly Test

Electrical Mechanical Software

Fabrication Assembly Test

Subcontractor X Subcontractor Y Subcontractor Z

Beta Project Project Manager

Human resources

Finance and administration Legal

74 Chapter 3 Organization: Structure and Culture

One of the advantages of creating ded- icated project teams is that project par- ticipants from different functional areas can develop into a highly cohesive work team that is strongly committed

to completing the project. While such teams often pro- duce Herculean efforts in pursuit of project completion, there is a negative dimension to this commitment that is often referred to in the literature as projectitis. A we– they attitude can emerge between project team mem- bers and the rest of the organization. The project team succumbs to hubris and develops a holier-than-thou atti- tude that antagonizes the parent organization. People not assigned to the project become jealous of the atten- tion and prestige being showered on the project team, especially when they believe that it is their hard work that is financing the endeavor. The tendency to assign project teams exotic titles such as “Silver Bullets” and “Tiger Teams,” as well as give them special perks, tends to intensify the gap between the project team and the parent organization. Such appears to have been the case with Apple’s highly successful Macintosh development team. Steve Jobs, who at the time was both the chairman of Apple and the project manager for the Mac team, pampered his team with perks including at-the-desk massages, coolers stocked with freshly squeezed orange juice, a Bosendorfer grand piano, and first-class plane tickets. No other employees at Apple got to travel first class. Jobs considered his team to be the elite of Apple and had a tendency to refer to everyone else as “Bozos” who “didn’t get it.” Engineers from the Apple II division, which was the bread and butter of Apple’s sales, became incensed with the special treatment their col- leagues were getting. One evening at Ely McFly’s, a local watering hole, the tensions between Apple II engineers seated at one table and those of a Mac team at another boiled over. Aaron Goldberg, a long-time industry consultant, watched from his barstool as the squabbling escalated. “The Mac guys were screaming, ‘We’re the future!’ The Apple II guys were screaming, ‘We’re the money!’ Then

S N A P S H O T F R O M P R A C T I C E 3 . 2

there was a geek brawl. Pocket protectors and pens were flying. I was waiting for a notebook to drop, so they would stop and pick up the papers.” Although comical from a distance, the discord between the Apple II and Mac groups severely hampered Apple’s performance during the 1980s. John Sculley, who replaced Steve Jobs as chairman of Apple, observed that Apple had evolved into two “warring companies” and referred to the street between the Apple II and Macintosh buildings as “the DMZ” (demilitarized zone).

© McGraw-Hill Education/Jill Braaten

expertise is limited somewhat to the talents and experience of the specialists assigned to the project. While nothing prevents specialists from consulting with others in the functional division, the we–they syndrome and the fact that such help is not formally sanctioned by the organization discourage this from happening.

The Birth of the Mac*

*J. Carlton, Apple: The Inside Story of Intrigue, Egomania, and Business Blunders (New York: Random House, 1997), pp. 13–14; J. Sculley, Odyssey: Pepsi to Apple . . . A Journey of Adventure, Ideas, and the Future (New York: Harper & Row, 1987), pp. 270–79.

Chapter 3 Organization: Structure and Culture 75

4. Difficult Post-Project Transition. Assigning full-time personnel to a project cre- ates the dilemma of what to do with personnel after the project is completed. If other project work is not available, then the transition back to their original func- tional departments may be difficult because of their prolonged absence and the need to catch up with recent developments in their functional area.

Organizing Projects within a Matrix Arrangement One of the biggest management innovations to emerge in the past 40 years has been the matrix organization. Matrix management is a hybrid organizational form in which a horizontal project management structure is “overlaid” on the normal functional hier- archy. In a matrix system, there are usually two chains of command, one along func- tional lines and the other along project lines. Instead of delegating segments of a project to different units or creating an autonomous team, project participants report simultaneously to both functional and project managers. Companies apply this matrix arrangement in a variety of different ways. Some orga- nizations set up temporary matrix systems to deal with specific projects, while “matrix” may be a permanent fixture in other organizations. Let us first look at its general application and then proceed to a more detailed discussion of finer points. Consider Figure 3.4. There are three projects currently under way: A, B, and C. All three project managers (PM A-C) report to a director of project management, who supervises all projects. Each project has an administrative assistant, although the one for project C is only part time. Project A involves the design and expansion of an existing production line to accommodate new metal alloys. To accomplish this objective, project A has assigned to it 3.5 people from manufacturing and 6 people from engineering. These individuals are assigned to the project on a part-time or full-time basis, depending on the project’s needs during various phases of the project. Project B involves the development of a new product that requires the heavy representation of engineering, manufacturing, and marketing. Project C involves forecasting changing needs of an existing customer base. While these three projects, as well as others, are being completed, the functional divi- sions continue performing their basic, core activities. The matrix structure is designed to optimally utilize resources by having individu- als work on multiple projects as well as being capable of performing normal func- tional duties. At the same time, the matrix approach attempts to achieve greater integration by creating and legitimizing the authority of a project manager. In theory, the matrix approach provides a dual focus between functional/technical expertise and project requirements that is missing in either the project team or functional approach to project management. This focus can most easily be seen in the relative input of functional managers and project managers over key project decisions (see Table 3.1).

TABLE 3.1 Division of Project Manager and Functional Manager Responsibilities in a Matrix Structure

Project Manager Negotiated Issues Functional Manager

What has to be done? Who will do the task? How will it be done? When should the task Where will the task be done? be done? How much money is available Why will the task be How will the project involvement to do the task? done? impact normal functional activities? How well has the total project Is the task satisfactorily How well has the functional input been done? completed? been integrated?

76 Chapter 3 Organization: Structure and Culture

Different Matrix Forms In practice there are really different kinds of matrix systems, depending on the relative authority of the project and functional managers (Larson & Gobeli, 1987; Bowen et al., 1994). Here is a thumbnail sketch of the three kinds of matrices: ∙ Weak matrix—This form is very similar to a functional approach with the excep-

tion that there is a formally designated project manager responsible for coordinating project activities. Functional managers are responsible for managing their segment of the project. The project manager basically acts as a staff assistant who draws the schedules and checklists, collects information on status of work, and facilitates project completion. The project manager has indirect authority to expedite and monitor the project. Functional managers call most of the shots and decide who does what and when the work is completed.

∙ Balanced matrix—This is the classic matrix in which the project manager is responsible for defining what needs to be accomplished while the functional man- agers are concerned with how it will be accomplished. More specifically, the proj- ect manager establishes the overall plan for completing the project, integrates the contribution of the different disciplines, sets schedules, and monitors progress. The functional managers are responsible for assigning personnel and executing their segment of the project according to the standards and schedules set by the project manager. The merger of “what and how” requires both parties to work closely together and jointly approve technical and operational decisions.

Distinguish three differ- ent types of matrix struc- tures and understand their strengths and weaknesses.

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FIGURE 3.4 Matrix Organization Structure

Testing

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Director of projects Engineering

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manager Project A team

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manager

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Zeta Manufacturing, Inc. President

Chapter 3 Organization: Structure and Culture 77

∙ Strong matrix—This form attempts to create the “feel” of a project team within a matrix environment. The project manager controls most aspects of the project, includ- ing scope trade-offs and assignment of functional personnel. The project manager con- trols when and what specialists do and has final say on major project decisions. The functional manager has title over her people and is consulted on a need basis. In some situations a functional manager’s department may serve as a “subcontractor” for the project, in which case they have more control over specialized work. For example, the development of a new series of laptop computers may require a team of experts from different disciplines working on the basic design and performance requirements within a project matrix arrangement. Once the specifications have been determined, final design and production of certain components (i.e., power source) may be assigned to respective functional groups to complete.

Matrix management both in general and in its specific forms has unique strengths and weaknesses (Larson & Gobeli, 1987). The advantages and disadvantages of matrix organizations in general are noted below, while only briefly highlighting specifics con- cerning different forms: 1. Efficient. Resources can be shared across multiple projects as well as within func-

tional divisions. Individuals can divide their energy across multiple projects on an as-needed basis. This reduces duplication required in a projectized structure.

2. Strong Project Focus. A stronger project focus is provided by having a formally designated project manager who is responsible for coordinating and integrating

Testing

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manager Project A team

Project B team

Project C team

Project administration

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manager

Project C project

manager

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Zeta Manufacturing, Inc. President

Testing

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Director of projects Engineering

Project A project

manager Project A team

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Project administration

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manager

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Customer service

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International sales

1

2

Zeta Manufacturing, Inc. President

78 Chapter 3 Organization: Structure and Culture

contributions of different units. This helps sustain a holistic approach to problem solving that is often missing in the functional organization.

3. Easier Post-Project Transition. Because the project organization is overlaid on the functional divisions, specialists maintain ties with their functional group, so they have a homeport to return to once the project is completed.

4. Flexible. Matrix arrangements provide for flexible utilization of resources and expertise within the firm. In some cases functional units may provide individuals who are managed by the project manager. In other cases the contributions are moni- tored by the functional manager.

The strengths of the matrix structure are considerable. Unfortunately, so are the poten- tial weaknesses. This is due in large part to the fact that a matrix structure is more complicated and the creation of multiple bosses represents a radical departure from the traditional hierarchical authority system. Furthermore, one does not install a matrix structure overnight. Experts argue that it takes 3–5 years for a matrix system to fully mature. So many of the problems described below represent growing pains.

1. Dysfunctional Conflict. The matrix approach is predicated on tension between func- tional managers and project managers who bring critical expertise and perspectives to the project. Such tension is viewed as a necessary mechanism for achieving an appro- priate balance between complex technical issues and unique project requirements. While the intent is noble, the effect is sometimes analogous to opening Pandora’s box. Legitimate conflict can spill over to a more personal level, resulting from conflicting agendas and accountabilities. Worthy discussions can degenerate into heated argu- ments that engender animosity among the managers involved.

2. Infighting. Any situation in which equipment, resources, and people are being shared across projects and functional activities lends itself to conflict and competi- tion for scarce resources. Infighting can occur among project managers, who are primarily interested in what is best for their project.

3. Stressful. Matrix management violates the management principle of unity of com- mand. Project participants have at least two bosses—their functional head and one or more project managers. Working in a matrix environment can be extremely stressful. Imagine what it would be like to work in an environment in which you are being told to do three conflicting things by three different managers.

4. Slow. In theory, the presence of a project manager to coordinate the project should accelerate the completion of the project. In practice, decision making can get bogged down as agreements have to be forged across multiple functional groups. This is especially true for the balanced matrix.

When the three variant forms of the matrix approach are considered, we can see that advantages and disadvantages are not necessarily true for all three forms of matrix. The Strong matrix is likely to enhance project integration, diminish internal power struggles, and ultimately improve control of project activities and costs. On the downside, technical quality may suffer because functional areas have less control over their contributions. Finally, projectitis may emerge as the members develop a strong team identity. The Weak matrix is likely to improve technical quality as well as provide a better system for managing conflict across projects because the functional manager assigns personnel to different projects. The problem is that functional control is often main- tained at the expense of poor project integration. The Balanced matrix can achieve

Chapter 3 Organization: Structure and Culture 79

better balance between technical and project requirements, but it is a very delicate system to manage and is more likely to succumb to many of the problems associated with the matrix approach.

3.2 What Is the Right Project Management Structure? There is empirical evidence that project success is directly linked to the amount of autonomy and authority project managers have over their projects (Gray et al., 1990; Larson & Gobeli, 1988; Larson & Gobeli, 1987). However, most of this research is based on what is best for managing specific projects. It is important to remember what was stated in the beginning of the chapter—that the best system balances the needs of the project with those of the parent organization. So what project structure should an organization use? This is a complicated question with no precise answers. A number of issues need to be considered at both the organization and project level.

Organization Considerations At the organization level, the first question that needs to be asked is how important is project management to the success of the firm? What percentage of core work involves projects? If over 75 percent of work involves projects, then an organization should consider a fully projectized organization. If an organization has both standard products and projects, then a matrix arrangement would appear to be appropriate. If an organi- zation has very few projects, then a less formal arrangement is probably all that is required. Dedicated teams could be created on an as-needed basis and the organization could outsource project work. A second key question is resource availability. Remember, matrix evolved out of the necessity to share resources across multiple projects and functional domains while at the same time creating legitimate project leadership. For organizations that cannot afford to tie up critical personnel on individual projects, a matrix system would appear to be appropriate. An alternative would be to create a dedicated team but outsource project work when resources are not available internally. Within the context of the first two questions, an organization needs to assess current practices and what changes are needed to more effectively manage projects. A strong project matrix is not installed overnight. The shift toward a greater emphasis on proj- ects has a host of political implications that need to be worked through, requiring time and strong leadership. For example, we have observed many companies that make the transition from a functional organization to a matrix organization begin with a weak functional matrix. This is due in part to resistance by functional and department man- agers toward transferring authority to project managers. With time, these matrix struc- tures eventually evolve into a project matrix. Many organizations have created Project Management Offices to support project management efforts. See Snapshot from Prac- tice 3.3: POs: Project Offices.

Project Considerations At the project level, the question is how much autonomy the project needs in order to be successfully completed. Hobbs and Ménard (1993) identify seven factors that should influence the choice of project management structure: ∙ Size of project. ∙ Strategic importance.

Understand organiza- tional and project con- siderations that should be considered in choos- ing an appropriate proj- ect management structure.

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80 Chapter 3 Organization: Structure and Culture

Project offices (POs) were originally developed as a response to the poor track record many companies had in completing projects on time, within budget, and according to plan. They

were often established to help matrix systems mature into more effective project delivery platforms. Today, POs come in many different shapes and forms. One interesting way of classifying POs was set forth by Casey and Peck, who describe certain POs in terms of being (1) a weather station, (2) a control tower, or (3) a resource pool. Each of these models performs a very different function for its organization.

Weather Station. The primary function of the weather station PO is to track and monitor project performance. It is typically created to satisfy top management’s need to stay on top of the portfolio of projects under way in the firm. Staff provides an independent forecast of project performance. The questions answered for specific projects include:

How are our projects progressing? Which ones are on track? Which ones are not?

S N A P S H O T F R O M P R A C T I C E 3 . 3 POs: Project Offices*

How are we doing in terms of cost? Which proj- ects are over or under budget?

What are the major problems confronting proj- ects? Are contingency plans in place? What can the organization do to help the project?

Control Tower. The primary function of the control tower PO is to improve project execution. It consid- ers project management as a profession to be pro- tected and advanced. Staff at the PO identify best practices and standards for project management ex- cellence. They work as consultants and trainers to support project managers and their teams.

Resource Pool. The goal of the resource pool PO is to provide the organization with a cadre of trained project managers and professionals. It operates like an academy for continually upgrading the skills of a firm’s project professionals. In addition to training, this kind of PO also serves to elevate the stature of project management within the organization.

* W. Casey and W. Peck, “Choosing the Right PMO Setup,” PM Network, vol. 15, no. 2 (2001), pp. 40–47.

∙ Novelty and need for innovation. ∙ Need for integration (number of departments involved). ∙ Environmental complexity (number of external interfaces). ∙ Budget and time constraints. ∙ Stability of resource requirements. The higher the levels of these seven factors, the more autonomy and authority the project manager and project team need to be successful.1 This translates into using either a dedi- cated project team or a project matrix structure. For example, these structures should be used for large projects that are strategically critical and are new to the company, thus requiring much innovation. These structures would also be appropriate for complex, multidisciplinary projects that require input from many departments, as well as for proj- ects that require constant contact with customers to assess their expectations. Dedicated project teams should also be used for urgent projects in which the nature of the work requires people working steadily from beginning to end. Many firms that are heavily involved in project management have created a flexible management system that organizes projects according to project requirements. For example, Chaparral Steel, a mini-mill that produces steel bars and beams from scrap

1 For a more sophisticated discussion of contingency factors related to managing specific projects see: A. J. Shenhar and D. Dvir, Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation (Boston: Harvard Press, 2007).

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metal, classifies projects into three categories: advanced development, platform, and incremental. Advanced development projects are high-risk endeavors involving the creation of a breakthrough product or process. Platform projects are medium-risk proj- ects involving system upgrades that yield new products and processes. Incremental projects are low-risk, short-term projects that involve minor adjustments in existing products and processes. At any point in time, Chaparral might have 40–50 projects under way, of which only one or two are advanced, three to five are platform projects, and the remainder are small, incremental projects. The incremental projects are almost all done within a weak matrix with the project manager coordinating the work of func- tional subgroups. A strong matrix is used to complete the platform projects, while dedicated project teams are typically created to complete the advanced development projects. More and more companies are using this “mix and match” approach to managing projects.

3.3 Organizational Culture The decision for combining a discussion of project management structures and orga- nizational cultures in this chapter can be traced to a conversation we, the authors, had with two project managers who work for a medium-sized information technology firm. The managers were developing a new operating platform that would be critical to the future success of their company. When they tried to describe how this project was organized, one manager began to sketch out on a napkin a complicated structure involving 52 different teams, each with a project leader and a technical leader! In response to our further probing to understand how this system worked, the manager stopped short and proclaimed, “The key to making this structure work is the culture in our company. This approach would never work at company Y, where I worked before. But because of our culture here we are able to pull it off.” This comment, our observations of other firms, and research suggest there is a strong connection between project management structure, organizational culture, and project success.2 We have observed organizations successfully manage projects within the traditional functional organization because the culture encouraged cross-functional integration. Conversely we have seen matrix structures break down because the culture of the organization did not support the division of authority between project managers and functional managers. We have also observed companies relying on independent project teams because the dominant culture would not support the innovation and speed necessary for success.

What Is Organizational Culture? Organizational culture refers to a system of shared norms, beliefs, values, and assumptions which binds people together, thereby creating shared meanings (Deal & Kennedy, 1982). This system is manifested by customs and habits that exemplify the values and beliefs of the organization. For example, egalitarianism may be expressed in the informal dress worn at a high-tech firm. Conversely, mandated uniforms at a department store reinforce respect for the hierarchy.

Appreciate the signifi- cant role that organiza- tional culture plays in managing projects.

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Interpret the culture of an organization.

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2 See, for example: Kerzner, H., In Search of Excellence in Project Management (New York: Von Nostrand Reinhold, 1997); Yazici, H. “The Role of Project Management Maturity and Organizational Culture in Perceived Performance”, Project Man- agement Journal, 2009.

82 Chapter 3 Organization: Structure and Culture

Culture reflects the personality of the organization and, similar to an individual’s personality, can enable us to predict attitudes and behaviors of organizational mem- bers. Culture is also one of the defining aspects of an organization that sets it apart from other organizations even in the same industry. Research suggests that there are 10 primary characteristics which, in aggregate, capture the essence of an organization’s culture:3

1. Member identity—the degree to which employees identify with the organization as a whole rather than with their type of job or field of professional expertise.

2. Team emphasis—the degree to which work activities are organized around groups rather than individuals.

3. Management focus—the degree to which management decisions take into account the effect of outcomes on people within the organization.

4. Unit integration—the degree to which units within the organization are encour- aged to operate in a coordinated or interdependent manner.

5. Control—the degree to which rules, policies, and direct supervision are used to oversee and control employee behavior.

6. Risk tolerance—the degree to which employees are encouraged to be aggressive, innovative, and risk seeking.

7. Reward criteria—the degree to which rewards such as promotion and salary increases are allocated according to employee performance rather than seniority, favoritism, or other nonperformance factors.

8. Conflict tolerance—the degree to which employees are encouraged to air con- flicts and criticisms openly.

9. Means versus end orientation—the degree to which management focuses on out- comes rather than on techniques and processes used to achieve those results.

10. Open-systems focus—the degree to which the organization monitors and responds to changes in the external environment.

As shown in Figure 3.5, each of these dimensions exists on a continuum. Assessing an organization according to these 10 dimensions provides a composite picture of the organization’s culture. This picture becomes the basis for feelings of shared under- standing that the members have about the organization, how things are done, and the way members are supposed to behave. Culture performs several important functions in organizations. An organization’s culture provides a sense of identity for its members. The more clearly an organiza- tion’s shared perceptions and values are stated, the more strongly people can iden- tify with their organization and feel a vital part of it. Identity generates commitment to the organization and reasons for members to devote energy and loyalty to the organization. A second important function is that culture helps legitimize the management sys- tem of the organization. Culture helps clarify authority relationships. It provides reasons why people are in a position of authority and why their authority should be respected.

3 Harrison, M. T., and J. M. Beyer, The Culture of Organizations (Englewood Cliffs, NJ: Prentice Hall, 1993); O’Reilly, C. A., J. Chatman, and D. F. Caldwell, “People and Organizational Culture: A Profile Comparison Approach to Assessing Person- Organization Fit,” Academy of Management Journal, vol. 34, no. 3 (September 1991), pp. 487–516; and Schein, E., Organi- zational Culture and Leadership: A Dynamic View (San Francisco, CA: Jossey-Bass, 2010).

Chapter 3 Organization: Structure and Culture 83

Most importantly, organizational culture clarifies and reinforces standards of behavior. Culture helps define what is permissible and inappropriate behavior. These standards span a wide range of behavior from dress code and working hours to chal- lenging the judgment of superiors and collaborating with other departments. Ulti- mately, culture helps create social order within an organization. Imagine what it would be like if members didn’t share similar beliefs, values, and assumptions—chaos! The customs, norms, and ideals conveyed by the culture of an organization provide the stability and predictability in behavior that is essential for an effective organization. See Snapshot from Practice 3.4: Google-y for an example of this. Although our discussion of organizational culture may appear to suggest one cul- ture dominates the entire organization, in reality this is rarely the case. “Strong” or “thick” are adjectives used to denote a culture in which the organization’s core values and customs are widely shared within the entire organization. Conversely, a “thin” or “weak” culture is one that is not widely shared or practiced within a firm. Even within a strong organizational culture, there are likely to be subcultures often aligned within specific departments or specialty areas. As noted earlier in our discus- sion of project management structures, it is not uncommon for norms, values, and customs to develop within a specific field or profession such as marketing, finance, or operations. People working in the marketing department may have a different set of norms and values than those working in finance. Countercultures sometimes emerge within organizations that embody a different set of values, beliefs, and customs—often in direct contradiction with the culture espoused by top management. How pervasive these subcultures and countercultures are affects the strength of the culture of the organization and the extent to which culture influ- ences members’ actions and responses.

Identifying Cultural Characteristics Deciphering an organization’s culture is a highly interpretative, subjective process that requires assessment of both current and past history. The student of culture cannot

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FIGURE 3.5 Key Dimensions Defining an Organization’s Culture

84 Chapter 3 Organization: Structure and Culture

In 2016 Google Inc. topped Fortune magazine’s list of best companies to work at for the seventh time in the past ten years. When one enters the 24-hour Googleplex located in

Mountain View, California, you feel that you are walking through a new-age college campus rather than the corporate office of a billion-dollar business. The collection of interconnected low-rise buildings with colorful, glass-encased offices feature upscale trappings—free gourmet meals three times a day, free use of an outdoor wave pool, indoor gym and large child care facility, private shuttle bus service to and from San Francisco and other residential areas— that are the envy of workers across the Bay area. These perks and others reflect Google’s culture of keeping people happy and thinking in unconven- tional ways. The importance of corporate culture is no more evi- dent than in the fact that the head of Human Resources, Stacy Savides Sullivan, also has the title of Chief Cul- ture Officer. Her task is to try to preserve the innovative culture of a start-up as Google quickly evolves into a mammoth international corporation. Sullivan character- izes Google culture as “team-oriented, very collabora- tive and encouraging people to think nontraditionally, different from where they ever worked before—work with integrity and for the good of the company and for the good of the world, which is tied to our overall mis- sion of making information accessible to the world.” Google goes to great lengths to screen new employees to not only make sure that they have outstanding tech- nical capabilities but also that they are going to fit Google’s culture. Sullivan goes on to define a Google-y employee as somebody who is “flexible, adaptable, and not focusing on titles and hierarchy, and just gets stuff done.” Google’s culture is rich with customs and traditions not found in corporate America. For example, project

S N A P S H O T F R O M P R A C T I C E 3 . 4 Google-y*

teams typically have daily “stand-up” meetings seven min- utes after the hour. Why seven minutes after the hour? Because Google cofounder Sergey Brin once estimated that it took seven minutes to walk across the Google cam- pus. Everybody stands to make sure no one gets too com- fortable and no time is wasted during the rapid-fire update. As one manager noted, “The whole concept of the stand-up is to talk through what everyone’s doing, so if someone is working on what you’re working on, you can discover and collaborate not duplicate.” Another custom is “dogfooding.” This is when a project team releases the functional prototype of a future product to Google employees for them to test drive. There is a strong norm within Google to test new products and provide feedback to the developers. The project team receives feedback from thousands of Google-ys. The internal focus group can log bugs or simply comment on design or functionality. Fellow Google-ys do not hold back on their feedback and are quick to point out things they don’t like. This often leads to significant product improvements.

© Caiaimage/Glow Images

simply rely on what people report about their culture. The physical environment in which people work, as well as how people act and respond to different events that occur, must be examined. Figure 3.6 contains a worksheet for diagnosing the culture of an organization. Although by no means exhaustive, the checklist often yields clues about the norms, customs, and values of an organization: 1. Study the physical characteristics of an organization. What does the external

architecture look like? What image does it convey? Is it unique? Are the buildings

* Walters, H., “How Google Got Its New Look,” BusinessWeek, May 10, 2010; Goo, S. K., “Building a ‘Googley’ Workforce,“ Washington Post, October 21, 2006; Mills, E., “Meet Google’s Culture Czar,” CNET News.com, April 27, 2007.

Chapter 3 Organization: Structure and Culture 85

and offices the same quality for all employees? Or are modern buildings and fancier offices reserved for senior executives or managers from a specific department? What are the customs concerning dress? What symbols does the organization use to signal authority and status within the organization? These physical characteristics can shed light on who has real power within the organization, the extent to which the organization is internally differentiated, and how formal the organization is in its business dealings.

2. Read about the organization. Examine annual reports, mission statements, press releases, and internal newsletters. What do they describe? What principles are espoused in these documents? Do the reports emphasize the people who work for the organization and what they do or the financial performance of the firm? Each emphasis reflects a different culture. The first demonstrates concern for the people who make up the company. The second may suggest a concern for results and the bottom line.

3. Observe how people interact within the organization. What is their pace—is it slow and methodical or urgent and spontaneous? What rituals exist within the orga- nization? What values do they express? Meetings can often yield insightful infor- mation. Who are the people at the meetings? Who does the talking? To whom do they talk? How candid is the conversation? Do people speak for the organization or for the individual department? What is the focus of the meetings? How much time is spent on various issues? Issues that are discussed repeatedly and at length are clues about the values of the organization’s culture.

FIGURE 3.6 Organizational Culture Diagnosis Worksheet

Power Corp.

I. Physical Characteristics: Architecture, office layout, décor, attire

Corporate HQ is 20 story modern building—president on top floor. Offices are bigger in the top floors than lower floors. Formal business attire (white shirts, ties, power suits, . . . ). Power appears to increase the higher up you are.

II. Public Documents: Annual reports, internal newsletters, vision statements

At the heart of the Power Corp. way is our vision . . . to be the global energy company most admired for its people, partnership, and performance.

Integrity. We are honest with others and ourselves. We meet the highest ethical standards in all busi- ness dealings. We do what we say we will do.

III. Behavior: Pace, language, meetings, issues discussed, decision-making style, communication patterns, rituals

Hierarchical decision making, pace brisk but orderly, meetings start on time and end on time, subordi- nates choose their words very carefully when talking to superiors, people rarely work past 6:00 p.m., president takes top performing unit on a boat cruise each year . . .

IV. Folklore: Stories, anecdotes, heroines, heroes, villains

Young project manager was fired after going over his boss’s head to ask for additional funds.

Stephanie C. considered a hero for taking complete responsibility for a technical error.

Jack S. was labeled a traitor for joining chief competitor after working for Power Corp. for 15 years.

86 Chapter 3 Organization: Structure and Culture

4. Interpret stories and folklore surrounding the organization. Look for similari- ties among stories told by different people. The subjects highlighted in recurring stories often reflect what is important to an organization’s culture. For example, many of the stories that are repeated at Versatec, a Xerox subsidiary that makes graphic plotters for computers, involve their flamboyant cofounder, Renn Zaphi- ropoulos. According to company folklore, one of the very first things Renn did when the company was formed was to assemble the top management team at his home. They then devoted the weekend to handmaking a beautiful teak conference table around which all future decisions would be made. This table came to symbol- ize the importance of teamwork and maintaining high standards of performance, two essential qualities of the culture at Versatec. Try to identify who the heroes and villains are in company folklore. What do they suggest about the culture’s ideals? Returning to the Versatec story, when the company was eventually purchased by Xerox many employees expressed concern that Versatec’s informal, play hard/ work hard culture would be overwhelmed by the bureaucracy at Xerox. Renn rallied the employees to superior levels of performance by arguing that if they exceeded Xerox’s expectations they would be left alone. Autonomy has remained a fixture of Versatec’s culture long after Renn’s retirement.

It is also important to pay close attention to the basis for promotions and rewards. What do people see as the keys to getting ahead within the organization? What con- tributes to downfalls? These last two questions can yield important insights into the qualities and behaviors which the organization honors as well as the cultural taboos and behavioral land mines that can derail a career. For example, one project man- ager confided that a former colleague was sent to project management purgatory soon after publicly questioning the validity of a marketing report. From that point on, the project manager was extra careful to privately consult the marketing depart- ment whenever she had questions about their data.

With practice an observer can assess how strong the dominant culture of an organiza- tion is and the significance of subcultures and countercultures. Furthermore, learners can discern and identify where the culture of an organization stands on the 10 cultural dimensions presented earlier and, in essence, begin to build a cultural profile for a firm. Based on this profile, conclusions can be drawn about specific customs and norms that need to be adhered to as well as those behaviors and actions that violate the norms of a firm.

3.4 Implications of Organizational Culture for Organizing Projects Project managers have to be able to operate in several, potentially diverse, organiza- tional cultures. First, they have to interact with the culture of their parent organization as well as the subcultures of various departments (e.g., marketing, accounting). Sec- ond, they have to interact with the project’s client or customer organizations. Finally, they have to interact in varying degrees with a host of other organizations connected to the project. These organizations include suppliers and vendors, subcontractors, con- sulting firms, government and regulatory agencies, and, in many cases, community groups. Many of these organizations are likely to have very different cultures. Project managers have to be able to read and speak the culture they are working in to develop strategies, plans, and responses that are likely to be understood and accepted. Still, the emphasis of this chapter is on the relationship between organizational culture and proj- ect management structure, and it is necessary to defer further discussion of these

Understand the interac- tion between project management structure and the culture of an organization.

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Chapter 3 Organization: Structure and Culture 87

implications until Chapters 10–12, which focus on leadership, team building, and outsourcing. Earlier we stated that we believe there are strong relationships among project man- agement structure, organizational culture, and successful project management. To explore these relationships further, let us return to the dimensions that can be used to characterize the culture of an organization. When examining these dimensions we could hypothesize that certain aspects of the culture of an organization would support successful project management while other aspects would deter or interfere with effec- tive management. Figure 3.7 attempts to identify which cultural characteristics create an environment conducive to completing most complex projects involving people from different disciplines. Note that, in many cases, the ideal culture is not at either extreme. For example, a fertile project culture would likely be one in which management balances its focus on the needs of both the task and the people. An optimal culture would balance con- cern with output (ends) and processes to achieve those outcomes (means). In other cases, the ideal culture would be on one end of a dimension or the other. For exam- ple, because most projects require collaboration across disciplines, it would be desir- able that the culture of the organization emphasize working in teams and identifying with the organization, not just the professional domain. Likewise, it is important that the culture support a certain degree of risk taking and a tolerance for constructive conflict. One organization that appears to fit this ideal profile is 3M. 3M has received acclaim for creating an entrepreneurial culture within a large corporate framework. The essence of its culture is captured in phrases that have been chanted often by 3Mers throughout its history: “Encourage experimental doodling.” “Hire good people and leave them alone.” “If you put fences around people, you get sheep. Give people the room they need.” Freedom and autonomy to experiment are reflected in the “15 per- cent rule,” which encourages technical people to spend up to 15 percent of their time on projects of their own choosing and initiative. This fertile culture has contributed to

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7. Reward criteria

8. Conflict tolerance

9. Means-ends orientation

10. Open-system focus

Organization

Group

People

Interdependent

Tight

High

Other

High

Ends

External

FIGURE 3.7 Cultural Dimensions of an Organization Supportive of Project Management

88 Chapter 3 Organization: Structure and Culture

3M’s branching out into more than 60,000 products and 35 separate business units (Collins & Porras, 1994). The metaphor we choose to describe the relationship between organizational culture and project management is that of a riverboat trip. Culture is the river and the project is the boat. Organizing and completing projects within an organization in which the culture is conducive to project management is like paddling downstream: much less effort is required. In many cases, the current can be so strong that steering is all that is required. Such is the case for projects that operate in a project-friendly environment where teamwork and cross-functional cooperation are the norms, where there is a deep commitment to excellence, and where healthy conflict is voiced and dealt with quickly and effectively. Conversely, trying to complete a project in a toxic culture is like paddling upstream: much more time, effort, and attention are needed to reach the destination. This would be the situation in cultures that discourage teamwork and cooperation, that have a low tolerance for conflict, and where getting ahead is based less on performance and more on cultivating favorable relationships with superiors. In such cases, the project man- ager and her people not only have to overcome the natural obstacles of the project but also have to overcome the prevailing negative forces inherent in the culture of the organization. The implications of this metaphor are important. Greater project authority and time are necessary to complete projects that encounter a strong, negative cultural current. Conversely, less formal authority and fewer dedicated resources are needed to com- plete projects in which the cultural currents generate behavior and cooperation essen- tial to project success. The key issue is the degree of interdependency between the parent organization and the project team. In cases where the prevalent organizational culture supports the behaviors essential to project completion, a weaker, more flexible project management structure can be effective. For example, one of the major reasons Chaparral Steel is able to use a functional matrix to successfully complete incremental projects is that its culture contains strong norms for cooperation (Bowen et al., 1994). See Research Highlight 3.1: The Secret of Success for another example of how culture supports suc- cessful project management. When the dominant organizational culture inhibits collaboration and innovation, it is advisable to insulate the project team from the dominant culture. Here it becomes necessary to create a self-sufficient project team. If a dedicated project team is impossible because of resource constraints, then at least a project matrix should be used where the project manager has dominant control over the project. In both cases, the managerial strategy is to create a distinct team subculture in which a new set of norms, customs, and values evolves that will be conducive to project completion. Under extreme circumstances this project culture could even represent a countercul- ture in that many of the norms and values are the antithesis of the dominant, parent culture. Such was the case when IBM decided to develop their personal computer quickly in 1980 (Smith & Reinertsen, 1995). They knew that the project could get bogged down by the overabundance of computer knowledge and bureaucracy in the company. They also realized that they would have to work closely with suppliers and make use of many non-IBM parts if they were to get to the market quickly. This was not the IBM way at the time, so IBM established the PC project team in a warehouse in Boca Raton, Florida, far from corporate headquarters and other corporate develop- ment facilities that existed within the organization.

In The Secret of Success: The Dou- ble Helix of Formal and Informal Structures in an R&D Laboratory Polly Rizova revealed the results of a year-long investigation into the in-

ner workings of a Fortune 500 R&D Lab. Through interviews with key participants and analysis of social networking data, Rizova assessed the efficacy of six high-tech development projects. Four critical success factors emerged from her research. One element that is crucial to success is a heavy reliance on open and unrestricted patterns of communication, coupled with a low degree of formal reporting. In other words, team members freely interacted with each other regardless of title, experience, or discipline. A second key is having individuals on the project who are highly respected across the laboratory for their exceptional technical skills and experience. Similarly, it is also vital to have individuals involved in the project who are highly respected for their organizational expertise and experience. Having both “technical stars” and “organizational stars” on the project team was es- sential to success. The final factor is a strong and sustained support for the project from the compa- ny’s corporate management. What’s more, her analysis revealed the interactive nature of the four conditions, namely, that no one condition was likely to produce successful outcomes on its own, but only when put together in a way in which they reinforce each other. Here the culture of the labo- ratory was seen as the key catalyst. Rizova describes a matrix system in which peo- ple work on multiple projects simultaneously but

with a different wrinkle. Individuals occupy differ- ent positions and play different roles depending upon the project. For example, it is common for a senior engineer to be the manager of one project and a researcher on another that is led by his or her subordinate. In essence one must “boss” his or her own boss. At first glance this formal structure should create destructive tensions. However, Rizova argues that the organizational culture of the lab is the glue that keeps things running smoothly. She describes a culture in which the social norms of cooperation, respect, and civility are up- held and reproduced. It is a culture characterized by trust and a strong drive toward superior individ- ual and organizational learning and achievement. The culture is captured in the comments of researchers:

That is one of the nicest things around here. Your opinions are listened to. Superiors consider our advice. You will find that most of the projects here are a team effort.

What I like most is the positive thinking and the “whatever it takes” attitude. Per- sonality conflicts can be devastating. Here everyone helps you and supports you. There is no “I” in the word team.

Very friendly environment. . . . I met new people and learned a lot from them. They do not mind sharing their expertise.

Research Highlight 3.1 The Secret of Success*

* Polly S. Rizova, The Secret of Success: The Double Helix of Formal and Informal Structures in an R&D Laboratory (Stan- ford, CA: Stanford University Press, 2007).

Summary This chapter examined two major characteristics of the parent organization that affect the implementation and completion of projects. The first is the formal structure of the organization and how it chooses to organize and manage projects. Although the indi- vidual project manager may have very little say as to how the firm chooses to manage projects, he or she must be able to recognize the options available as well as the inher- ent strengths and weaknesses of different approaches. Three basic project management structures were described and assessed as to their weaknesses and strengths. Only under unique circumstances can a case be made for managing a project within the normal functional hierarchy. When thinking only in terms of what is best for the project, the creation of an independent project team is clearly favored. However, the most effective project management system appropriately balances the needs of the project with those of the parent organization. Matrix

89

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structures emerged out of the parent organization’s need to share personnel and re- sources across multiple projects and operations while creating legitimate project focus. The matrix approach is a hybrid organizational form that combines elements of both the functional and project team forms in an attempt to realize the advantages of both. The second major characteristic of the parent organization that was discussed in this chapter is the concept of organizational culture. Organizational culture is the pattern of beliefs and expectations shared by an organization’s members. Culture includes the be- havioral norms, customs, shared values, and the “rules of the game” for getting along and getting ahead within the organization. It is important for project managers to be “culture sensitive” so that they can develop appropriate strategies and responses and avoid violat- ing key norms that would jeopardize their effectiveness within the organization. The interaction between project management structure and organizational culture is a complicated one. We have suggested that in certain organizations, culture encourages the implementation of projects. In this environment the project management structure used plays a less decisive role in the success of the project. Conversely, for other orga- nizations in which the culture stresses internal competition and differentiation, just the opposite may be true. The prevailing norms, customs, and attitudes inhibit effective project management, and the project management structure plays a more decisive role in the successful implementation of projects. At a minimum, under adverse cultural conditions, the project manager needs to have significant authority over the project team; under more extreme conditions firms should physically relocate dedicated proj- ect teams to complete critical projects. In both cases, the managerial strategy should be insulate project work from the dominant culture so that a more positive “subculture” can emerge among project participants. The project management structure of the organization and the culture of the organi- zation are major elements of the environment in which a project is initiated. Subse- quent chapters will examine how project managers and professionals work within this environment to successfully complete projects.

Key Terms Balanced matrix, 76 Dedicated project team, 71 Matrix, 75

Organizational culture, 81 Projectitis, 74 Projectized organization, 72

Project office, 80 Strong matrix, 77 Weak matrix, 76

1. What are the relative advantages and disadvantages of the functional, matrix, and dedicated team approaches to managing projects?

2. What distinguishes a weak matrix from a strong matrix? 3. Under what conditions would it be advisable to use a strong matrix instead of a

dedicated project team? 4. How can project management offices (POs) support effective project

management? 5. Why is it important to assess the culture of an organization before deciding what

project management structure should be used to complete a project? 6. Other than culture, what other organizational factors should be used to determine

which project management structure should be used? 7. What do you believe is more important for successfully completing a project—the

formal project management structure or the culture of the parent organization?

Review Questions

Chapter 3 Organization: Structure and Culture 91

1. Going to college is analogous to working in a matrix environment in that most stu- dents take more than one class and must distribute their time across multiple classes. What problems does this situation create for you? How does it affect your performance? How could the system be better managed to make your life less dif- ficult and more productive?

2. You work for LL Company, which manufactures high-end optical scopes for hunt- ing rifles. LL Company has been the market leader for the past 20 years and has decided to diversify by applying its technology to develop a top-quality binocular. What kind of project management structure would you recommend they use for this project? What information would you like to have to make this recommendation, and why?

3. You work for Barbata Electronics. Your R&D people believe they have come up with an affordable technology that will double the capacity of existing MP3 players and use audio format that is superior to MP3. The project is code named KYSO (Knock Your Socks Off). What kind of project management structure would you recommend they use for the KYSO project? What information would you like to have to make this recommendation and why?

4. This chapter discussed the role of values and beliefs in forming an organization’s culture. The topic of organizational culture is big business on the Internet. Many companies use their Web pages to describe their mission, vision, and corporate values and beliefs. There also are many consulting firms that advertise how they help organizations to change their culture. The purpose of this exercise is for you to obtain information pertaining to the organizational culture for two different compa- nies. You can go about this task by very simply searching on the key words “orga- nizational culture” or “corporate vision and values.” This search will identify numerous companies for you to use to answer the following questions. You may want to select companies that you would like to work for in the future.

a. What are the espoused values and beliefs of the companies? b. Use the worksheet in Figure 3.6 to assess the Web page. What does the Web

page reveal about the culture of this organization? Would this culture be condu- cive to effective project management?

5. Use the cultural dimensions listed in Figure 3.5 to assess the culture of your school. Instead of employees, consider students, and instead of management, use faculty. For example, member identity refers to the degree to which students identify with the school as a whole rather than their major or option. Either as individuals or in small groups rate the culture of your school on the 10 dimensions.

a. What dimensions were easy to evaluate and which ones were not? b. How strong is the culture of your school? c. What functions does the culture serve for your school? d. Do you think the culture of your school is best suited to maximizing your learn-

ing? Why or why not? e. What kind of projects would be easy to implement in your school and what kind

of projects would be difficult given the structure and culture of your school? Explain your answer.

6. You work as an analyst in the marketing department for Springfield International (SI). SI uses a weak matrix to develop new services. Management has created an extremely competitive organizational culture that places an emphasis upon achieving results above everything else. One of the project managers that you have been assigned to

Exercises

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help has been pressuring you to make his project your number one priority. He also wants you to expand the scope of your work on his project beyond what your market- ing manager believes is necessary or appropriate. The project manager is widely per- ceived as a rising star within SI. Up to now you have been resisting the project manager’s pressure and complying with your marketing manager’s directives. How- ever, your most recent interchange with the project manager ended by his saying, “I’m not happy with the level of help I am getting from you and I will remember this when I become VP of Marketing.” How would you respond and why?

Block, T. R., and J. D. Frame, The Project Office—A Key to Managing Projects Effectively (Menlo Park, CA: Crisp Publications, 1998). Block, T. R., and J. D. Frame, “Today’s Project Office: Gauging Attitudes,” PM Net- work, August 2001. Bowen, H. K., K. B. Clark, C. A. Holloway, and S. C. Wheelwright, The Perpetual Enterprise Machine (New York: Oxford University Press, 1994). Brown, S., and K. R. Eisenhardt, “Product Development: Past Research, Present Findings, and Future Directions,” Academy of Management Review, vol. 20, no. 2 (1995), pp. 343–78. Cameron, K. S., and R. E. Quinn, Diagnosing and Changing Organizational Culture: Based on the Competing Values Framework (Upper Saddle River, NJ: Prentice Hall, 2011). Carlton, J., Apple: The Inside Story of Intrigue, Egomania, and Business Blunders (New York: Random House, 1997), pp. 13–14. Casey, W., and W. Peck, “Choosing the Right PMO Setup,” PM Network, vol. 15, no. 2 (2001), pp. 40–47. Collins, J. C., and J. I. Porras, Built to Last: The Successful Habits of Visionary Com- panies (New York: HarperCollins, 1994), pp. 150–58. Deal, T. E., and A. A. Kennedy, Corporate Cultures: The Rites and Rituals of Corpo- rate Life (Reading, MA: Addison-Wesley, 1982). De Laat, P. B., “Matrix Management of Projects and Power Struggles: A Case Study of an R&D Laboratory,” IEEE Engineering Management Review, Winter 1995. Filipczak, B., “Beyond the Gates of Microsoft,” Training, September 1992, pp. 37–44. Gallagher, R. S., The Soul of an Organization: Understanding the Values That Drive Successful Corporate Cultures (Chicago: Dearborn Trade Publishing, 2002). Graham, R. J., and R. L. Englund, Creating an Environment for Successful Projects: The Quest to Manage Project Management (San Francisco: Jossey-Bass, 1997). Gray, C., S. Dworatschek, D. H. Gobeli, H. Knoepfel, and E. W. Larson, “International Comparison of Project Organization Structures: Use and Effectiveness,” International Journal of Project Management, vol. 8, no. 1 (February 1990), pp. 26–32. Harrison, M. T., and J. M. Beyer, The Culture of Organizations (Englewood Cliffs, NJ: Prentice Hall, 1993).

References

Hobbs, B., and P. Ménard, “Organizational Choices for Project Management,” in Paul Dinsmore (ed.), The AMA Handbook of Project Management (New York: AMACOM, 1993). Hobday, M., “The Project-Based Organization: An Ideal Form for Managing Com- plex Products and Systems?” Research Policy, vol. 29, no. 17 (2000). Jassawalla, A. R., and H. C. Sashittal, “Cultures that Support Product-Innovation Pro- cesses,” Academy of Management Executive, vol. 15, no. 3 (2002), pp. 42–54. Johnson, C. L., M. Smith, and L. K. Geary, More Than My Share in All (Washington, D.C.: Smithsonian Institute Publications, 1990). Kerzner, H., In Search of Excellence in Project Management (New York: Von Nostrand Reinhold, 1997). Kerzner, H., “Strategic Planning for the Project Office,” Project Management Jour- nal, vol. 34, no. 2 (2003), pp. 13–25. Larson, E. W., “Project Management Structures” in The Wiley Handbook for Manag- ing Projects, P. Morris & J. Pinto (eds.) (New York: Wiley, 2004), pp. 48–66. Larson, E. W., and D. H. Gobeli, “Matrix Management: Contradictions and Insights,” California Management Review, vol. 29, no. 4 (Summer 1987), p. 137. Larson, E. W., and D. H. Gobeli, “Organizing for Product Development Projects,” Journal of Product Innovation Management, vol. 5 (1988), pp. 180–90. Larsson, U. (ed.), Cultures of Creativity: The Centennial Exhibition of the Nobel Prize (Canton, MA: Science History Publications, 2001). Laslo, Z., and A. I. Goldberg, “Matrix Structures and Performance: The Search for Optimal Adjustments to Organizational Objectives?” IEEE Transactions in Engineer- ing Management, vol. 48, no. 12 (2001). Lawrence, P. R., and J. W. Lorsch, Organization and Environment (Homewood, IL: Irwin, 1969). Majchrzak, A., and Q. Wang, “Breaking the Functional Mind-Set in Process Organi- zations,” Harvard Business Review, September–October 1996, pp. 93–99. Miller, J., Lockheed Martin’s Skunk Works (New York: Speciality Publications, 1996). Olson, E. M., O. C. Walker, Jr., and R. W. Ruekert, “Organizing for Effective New Product Development: The Moderating Role of Product Innovativeness,” Journal of Marketing, vol. 59 (January 1995), pp. 48–62. O’Reilly, C. A., J. Chatman, and D. F. Caldwell, “People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit,” Academy of Management Journal, vol. 34, no. 3 (September 1991), pp. 487–516. Pettegrew, A. M., “On Studying Organizational Culture,” Administrative Science Quarterly, vol. 24, no. 4 (1979), pp. 570–81. Powell, M., and J. Young, “The Project Management Support Office” in The Wiley Handbook for Managing Projects, P. Morris and J. Pinto (eds.) (New York: Wiley, 2004), pp. 937–69. Rebello, K., “Inside Microsoft,” Business Weekly, July 15, 1996, pp. 56–67.

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Rizova, P., The Secret of Success: The Double Helix of Formal and Informal Struc- tures in an R&D Laboratory (Stanford, CA: Stanford University Press, 2007). Schein, E., Organizational Culture and Leadership: A Dynamic View (San Francisco, CA: Jossey-Bass, 2010). Sculley, J., Odyssey: Pepsi to Apple . . . A Journey of Adventure, Ideas, and the Future (New York: Harper & Row, 1987), pp. 270–79. Shenhar, A. J., “From Theory to Practice: Toward a Typology of Project Management Styles,” IEEE Transactions in Engineering Management, vol. 41, no. 1 (1998), pp. 33–48. Shenhar, A. J., D. Dvir, T. Lechler, and M. Poli, “One Size Does Not Fit All—True for Projects, True for Frameworks,” Frontiers of Project Management Research and Application, Proceedings of PMI Research Conference, Seattle, 2002, pp. 99–106. Smith, P. G., and D. G. Reinertsen, Developing Products in Half the Time (New York: Van Nostrand Reinhold, 1995). Stuckenbruck, L. C., Implementation of Project Management (Upper Darby, PA: Project Management Institute, 1981). Yazici, H., “The Role of Project Management Maturity and Organizational Culture in Perceived Performance,” Project Management Journal, vol. 40, no. 3 (2009), pp. 14–33. Youker, R., “Organizational Alternatives for Project Management,” Project Manage- ment Quarterly, vol. 8 (March 1977), pp. 24–33.

Case 3.1

Moss and McAdams Accounting Firm Bruce Palmer had worked for Moss and McAdams (M&M) for six years and was just promoted to account manager. His first assignment was to lead an audit of Johnson- ville Trucks. He was quite pleased with the five accountants who had been assigned to his team, especially Zeke Olds. Olds was an Army vet who returned to school to get a double major in accounting and computer sciences. He was on top of the latest devel- opments in financial information systems and had a reputation for coming up with innovative solutions to problems. M&M was a well-established regional accounting firm with 160 employees located across six offices in Minnesota and Wisconsin. The main office, where Palmer worked, was in Green Bay, Wisconsin. In fact, one of the founding members, Seth Moss, played briefly for the hometown NFL Packers during the late 1950s. M&M’s primary ser- vices were corporate audits and tax preparation. Over the last two years the partners decided to move more aggressively into the consulting business. M&M projected that consulting would represent 40 percent of their growth over the next five years. M&M operated within a matrix structure. As new clients were recruited, a manager was assigned to the account. A manager might be assigned to several accounts, depend- ing on the size and scope of the work. This was especially true in the case of tax

94 Chapter 3 Organization: Structure and Culture

Chapter 3 Organization: Structure and Culture 95

preparation projects, where it was not uncommon for a manager to be assigned to 8 to 12 clients. Likewise, senior and staff accountants were assigned to multiple account teams. Ruby Sands was the office manager responsible for assigning personnel to dif- ferent accounts at the Green Bay office. She did her best to assign staff to multiple projects under the same manager. This wasn’t always possible, and sometimes accoun- tants had to work on projects led by different managers. M&M, like most accounting firms, had a tiered promotion system. New CPAs entered as junior or staff accountants. Within two years, their performance was reviewed and they were either asked to leave or promoted to senior accountant. Sometime during their fifth or sixth year, a decision was made to promote them to account manager. Finally, after 10 to 12 years with the firm, the manager was considered for promotion to partner. This was a very competitive position. During the last five years, only 20 per- cent of account managers at M&M had been promoted to partner. However, once a partner, they were virtually guaranteed the position for life and enjoyed significant increases in salary, benefits, and prestige. M&M had a reputation for being a results- driven organization; partner promotions were based on meeting deadlines, retaining clients, and generating revenue. The promotion team based its decision on the relative performance of the account manager in comparison to his or her cohorts. One week into the Johnsonville audit, Palmer received a call from Sands to visit her office. There he was introduced to Ken Crosby, who recently joined M&M after work- ing nine years for a Big 5 accounting firm. Crosby was recruited to manage special consulting projects. Sands reported that Crosby had just secured a major consulting project with Springfield Metals. This was a major coup for the firm: M&M had com- peted against two Big 5 accounting firms for the project. Sands went on to explain that she was working with Crosby to put together his team. Crosby insisted that Zeke Olds be assigned to his team. Sands told him that this would be impossible because Olds was already assigned to work on the Johnsonville audit. Crosby persisted, arguing that Olds’s expertise was essential to the Springfield project. Sands decided to work out a compromise and have Olds split time across both projects. At this time Crosby turned to Palmer and said, “I believe in keeping things simple. Why don’t we agree that Olds works for me in the mornings and you in the afternoons. I’m sure we can work out any problems that come up. After all, we both work for the same firm.”

SIX WEEKS LATER Palmer could scream whenever he remembered Crosby’s words, “After all, we both work for the same firm.” The first sign of trouble came during the first week of the new arrangement when Crosby called, begging to have Olds work all of Thursday on his project. They were conducting an extensive client visit, and Olds was critical to the assessment. After Palmer reluctantly agreed, Crosby said he owed him one. The next week when Palmer called Crosby to request that he return the favor, Crosby flatly refused and said any other time but not this week. Palmer tried again a week later and got the same response. At first Olds showed up promptly at 1:00 p.m. at Palmer’s office to work on the audit. Soon it became a habit to show up 30 to 60 minutes late. There was always a good rea- son. He was in a meeting in Springfield and couldn’t just leave, or an urgent task took longer than planned. One time it was because Crosby took his entire team out to lunch at the new Thai restaurant—Olds was over an hour late because of slow service. In the beginning Olds would usually make up the time by working after hours, but Palmer could tell from conversations he overheard that this was creating tension at home.

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What probably bothered Palmer the most were the e-mails and telephone calls Olds received from Crosby and his team members during the afternoons when he was sup- posed to be working for Palmer. A couple of times Palmer could have sworn that Olds was working on Crosby’s project in his (Palmer’s) office. Palmer met with Crosby to talk about the problem and voice his complaints. Crosby acted surprised and even a little bit hurt. He promised things would change, but the pattern continued. Palmer was becoming paranoid about Crosby. He knew that Crosby played golf with Olds on the weekends and could just imagine him badmouthing the Johnsonville project and pointing out how boring auditing work was. The sad fact was that there probably was some truth to what he was saying. The Johnsonville project was getting bogged down, and the team was slipping behind schedule. One of the contributing factors was Olds’s performance. His work was not up to its usual standards. Palmer approached Olds about this, and Olds became defensive. Olds later apologized and confided that he found it dif- ficult switching his thinking from consulting to auditing and then back to consulting. He promised to do better, and there was a slight improvement in his performance. The last straw came when Olds asked to leave work early on Friday so that he could take his wife and kids to a Milwaukee Brewers baseball game. It turned out Springfield Metals had given Crosby their corporate tickets, and he decided to treat his team with box seats right behind the Brewers dugout. Palmer hated to do it, but he had to refuse the request. He felt guilty when he overheard Olds explaining to his son on the tele- phone why they couldn’t go to the game. Palmer finally decided to pick up the phone and request an urgent meeting with Sands to resolve the problem. He got up enough nerve and put in the call only to be told that Sands wouldn’t be back in the office until next week. As he put the receiver down, he thought maybe things would get better.

TWO WEEKS LATER Sands showed up unexpectedly at Palmer’s office and said they needed to talk about Olds. Palmer was delighted, thinking that now he could tell her what had been going on. But before he had a chance to speak, Sands told him that Olds had come to see her yesterday. She told him that Olds confessed that he was having a hard time working on both Crosby’s and Palmer’s projects. He was having difficulty concentrating on the auditing work in the afternoon because he was thinking about some of the consulting issues that had emerged during the morning. He was putting in extra hours to try to meet both of the projects’ dead- lines, and this was creating problems at home. The bottom line was that he was stressed out and couldn’t deal with the situation. He asked that he be assigned full-time to Crosby’s project. Sands went on to say that Olds didn’t blame Palmer, in fact he had a lot of nice things to say about him. He just enjoyed the consulting work more and found it more chal- lenging. Sands concluded by saying, “I told him I understood, and I would talk to you about the situation and see what could be done. Frankly, I think we should pull him from your project and have him work full-time on Crosby’s project. What do you think?” 1. If you were Palmer at the end of the case, how would you respond? 2. What, if anything, could Palmer have done to avoid losing Olds? 3. What advantages and disadvantages of a matrix type organization are apparent from

this case? 4. What could the management at M&M do to more effectively manage situations

like this?

Chapter 3 Organization: Structure and Culture 97

Case 3.2

Horizon Consulting Patti Smith looked up at the bright blue Carolina sky before she entered the offices of Horizon Consulting. Today was Friday, which meant she needed to prepare for the weekly status report meeting. Horizon Consulting is a custom software development company that offers fully integrated mobile application services for iPhoneTM, AndroidTM, Windows Mobile® and BlackBerry® platforms. Horizon was founded by James Thrasher, a former marketing executive, who quickly saw the potential for digi- tal marketing via smartphones. Horizon enjoyed initial success in sports marketing, but quickly expanded to other industries. A key to their success was the decline in cost for developing smartphone applications, which expanded the client base. The decline in cost was primarily due to learning curve and ability to build customized solutions on established platforms. Patti Smith was a late bloomer who went back to college after working in the res- taurant business for nine years. She and her former husband had tried unsuccessfully to operate a vegetarian restaurant in Golden, Colorado. After her divorce, she returned to University of Colorado where she majored in Management Information Systems with a minor in Marketing. While she enjoyed her marketing classes much more than her MIS classes, she felt the IT know-how acquired would give her an advantage in the job market. This turned out to be true as Horizon hired her to be an Account Manager soon after graduation. Patti Smith was hired to replace Stephen Stills who had started the restaurant side of the business at Horizon. Stephen was “let go” according to one Account Manager for being a prima donna and hoarding resources. Patti’s clients ranged from high-end restaurants to hole-in-wall mom and pop shops. She helped develop smartphone apps that let users make reservations, browse menus, receive alerts on daily specials, pro- vide customer feedback, order take-out, and in some cases order delivery. As an Account Manager she worked with clients to assess their needs, develop a plan, and create customized smartphone apps. Horizon appeared to be a good fit for Patti. She had enough technical training to be able to work with software engineers and help guide them to produce client-ready products. At the same time she could relate to the restaurateurs and enjoyed working with them on web design and digital marketing. Horizon was organized into three departments: Sales, Software Development, and Graphics, with Account Managers acting as project managers. Account Managers gen- erally came from Sales, and would divide their time between projects and making sales pitches to potential new clients. Horizon employed a core group of software engineers and designers, supplemented by contracted programmers when needed. The first step in developing a smartphone application involved the Account Manager meeting with the client to define the requirements and vision for the application. The Account Manager would then work with a Graphic User Interface (GUI) designer to come up with a preliminary story board of how the application would function and look. Once the initial concept and requirements were approved the Account Manager was assigned two pairs of software engineers. The first pair (app engineers) would work on the smartphone side of the application while the second pair would work on the client side of the application. Horizon preferred to have software engineers work in tandem so they could check each other’s work. The two app engineers would typically work full

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time on the application until it was completed while the other engineers would work on multiple projects as needed. Likewise, GUI designers would work on the project at cer- tain key stages in the product development cycle when their expertise was needed. The head of Graphics managed the GUI designers’ schedule while the head of Soft- ware managed the software engineer assignments. At the end of each project Account Managers submitted performance reviews of their team. The Director of Sales was responsible for the Account Managers’ performance reviews based on customer satis- faction, generation of sales, and project performance. Horizon believed in iterative development, and every two to three weeks Account Managers were expected to demonstrate the latest version of applications to clients. This led to useful feedback and in many cases redefining the scope of the project. Often clients wanted to add more functionality to their application once they realized what the software could do. Depending upon the complexity of the application and changes introduced once the project was under way, it typically took Horizon two to four months to deliver a finished product to a client. Patti was currently working on three projects. One was for Shanghai Wok, a busy Chi- nese mom and pop restaurant located in downtown Charlotte, North Carolina. The owners of Shanghai Wok wanted Horizon to create a smartphone app that would allow customers to order and pay in advance for meals they would simply pick up at a walk-up window. The second project was for Taste of India that operated in Kannapolis, North Carolina. They wanted Horizon to create a phone app that would allow staff at the nearby bio-tech firms to order food that would be delivered on-site during lunch and dinner hours. The last project was for Nearly Normal, a vegetarian restaurant which wanted to send out e-mail alerts to subscribers that would describe in detail their daily fresh specials. James Thrasher was an admirer of Google and encouraged a playful but focused environment at work. Employees were allowed to decorate their work spaces, bring pets to work, and play ping-pong or pool when they needed a break. Horizon paid its employees well but the big payoff was the annual Christmas bonus. This bonus was based on overall company profits, which were distributed proportionately based on pay grade and performance reviews. It was not uncommon for employees to receive a 10–15 percent boost in pay at the end of the year.

STATUS REPORT MEETING As was her habit Patti entered the status report meeting room early. David Briggs was in the midst of describing the game-winning catch John Lorsch had made in last night’s softball game. Horizon sponsored a co-ed city league softball team which most of the Account Managers played on. Patti had been coaxed to play to ensure that the requisite number of “females” were on the field. She balked at the idea at first; softball wasn’t really her sport, but she was glad she did. Not only was it fun, but it gave her a chance to get to know the other managers. James Thrasher entered the room and everyone settled down to business. He started off as he always did by asking if anybody had important news to bring to everyone’s attention. Jackson Browne slowly raised his hand and said, “I am afraid I do. I just received notification from Apple IOS that they have rejected our TAT app.” TAT was a phone app that Jackson was the project lead on that allowed subscribers to reserve and see in real time what swimming lanes were available at a prestigious athletic club. This announcement was followed by a collective groan. Before an Apple app could go operational it had to be submitted and approved by Apple. Usually this was not a prob- lem, but lately Apple had been rejecting apps for a variety of reasons. Jackson went on

Chapter 3 Organization: Structure and Culture 99

to circulate the list of changes that had to be made before Apple would approve the app. The group studied the list, and in some cases ridiculed the new requirements. Ultimately, James Thrasher asked Jackson how long it would take to make the nec- essary changes and resubmit the app for approval. Jackson felt it would probably take two to three weeks at most. Thrasher asked who the engineers that worked on this project were. Patti’s heart fell. One of the app engineers who had developed the TAT app was working on her Shanghai Wok project. She knew what was going to happen next. Thrasher announced, “OK everyone, it only makes sense that these engineers are the best ones to finish what they had started so they are all going to have to be reas- signed back to the TAT project. Those affected are going to have to get together after this meeting and figure how you are going to replace them.” The meeting then pro- ceeded as planned with all the account managers reporting the status of their projects, and sharing relevant issues with the group.

POST-MEETING As everyone filed out, Patti looked around to see who else was in her same boat. There were three other Account Managers as well as Jackson Browne. Resource assignments were a reoccurring issue at Horizon given the nature of their work. Horizon had devel- oped a policy where decisions were made based on project priority. Each project was assigned a Green, Blue or Purple designation based on the company priority. Priority status was based on the extent the project contributed to the mission of the firm. The Shanghai Wok project given its limited size and scope was a Purple project, which was the lowest ranking. The list of available software engineers was displayed on the big screen. Patti was only familiar with a few of the names. Leigh Taylor who had the only Green project immediately selected Jason Wheeler from the list. She had used him before and was confident in his work. Tom Watson and Samantha Stewart both had Blue Projects and both needed to replace a mobile app engi- neer. They both immediately jumped on the name of Prem Mathew, claiming he was the best person for their project. After some friendly jousting, Tom said, “OK, Sam, you can have him; I remember when you helped me out on the Argos project; besides my project is just beginning. I’ll take Shin Chen.” Everyone looked at Patti; she started by saying, “You know, I am only familiar with a few of these names; I guess I’ll go with Mike Thu.” Jackson interjected, “Hey everyone, I am really sorry this happened, and I am sure Mike is a good programmer, but I recommend you work with Axel Gerthoff. I have used him before, and he is a very quick study and a joy to work with.” This was a relief to Patti and she quickly took his advice. They left to submit a report to Thrasher detailing the decisions they each had made and the impact on their projects. 1. How successful was the post-meeting? 2. What factors contributed to the success or failure of this meeting? 3. What kind of project management structure does Horizon use? Is it the right struc-

ture? Explain.

100

Defining the Project4 LEARNING OBJECTIVES After reading this chapter you should be able to:

4-1 Identify key elements of a project scope state- ment and understand why a complete scope statement is critical to project success.

4-2 Understand why it is important to establish project priorities in terms of cost, time, and performance.

4-3 Demonstrate the importance of a work break- down structure (WBS) to the management of proj- ects and how it serves as a data base for planning and control.

4-4 Demonstrate how the organization breakdown structure (OBS) establishes accountability to organizational units.

4-5 Describe a process breakdown structure (PBS) and when to use it.

4-6 Create responsibility matrices for small projects.

4-7 Create a communication plan for a project.

OUTLINE 4.1 Step 1: Defining the Project Scope

4.2 Step 2: Establishing Project Priorities

4.3 Step 3: Creating the Work Breakdown Structure

4.4 Step 4: Integrating the WBS with the Organization

4.5 Step 5: Coding the WBS for the Information System

4.6 Process Breakdown Structure

4.7 Responsibility Matrices

4.8 Project Communication Plan

Summary

C H A P T E R F O U R

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Select a dream Use your dream to set a goal Create a plan Consider resources Enhance skills and abilities Spend time wisely Start! Get organized and go . . . it is one of those acro-whatevers, said Pooh.*

Project managers in charge of a single small project can plan and schedule the project tasks without much formal planning and information. However, when the project man- ager must manage several small projects or a large complex project, a threshold is quickly reached in which the project manager can no longer cope with the detail.

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

* Roger E. Allen and Stephen D. Allen, Winnie-the-Pooh on Success (New York: Penguin, 1997), p. 10.

102 Chapter 4 Defining the Project

This chapter describes a disciplined, structured method for selectively collect- ing information to use through all phases of the project life cycle, to meet the needs of all stakeholders (e.g., customer, project manager), and to measure performance against the strategic plan of the organization. The method suggested is a selective outline of the project called the work breakdown structure. The early stages of developing the outline serve to ensure that all tasks are identified and that partici- pants of the project have an understanding of what is to be done. Once the outline and its detail are defined, an integrated information system can be developed to schedule work and allocate budgets. This baseline information is later used for control. In addition, the chapter presents a variant of the work breakdown structure called the process breakdown structure as well as responsibility matrices that are used for smaller, less complex projects. With the work of the project defined through the work breakdown structure, the chapter concludes with the process of creating a communica- tion plan used to help coordinate project activities and follow progress. The five generic steps described herein provide a structured approach for collect- ing the project information necessary for developing a work breakdown structure. These steps and the development of project networks found in the next chapters all take place concurrently, and several iterations are typically required to develop dates and budgets that can be used to manage the project. The old saying “We can control only what we have planned” is true; therefore, defining the project is the first step.

4.1 Step 1: Defining the Project Scope Defining the project scope sets the stage for developing a project plan. Project scope is a definition of the end result or mission of your project—a product or service for your client/customer. The primary purpose is to define as clearly as possible the deliverable(s) for the end user and to focus project plans. Research clearly shows that a poorly defined scope or mission is the most frequently mentioned barrier to project success. In a study involving more than 1,400 project managers in the United States and Canada, Gobeli and Larson (1990) found that approximately 50 percent of the planning problems relate to unclear definition of scope and goals. This and other studies suggest a strong correlation between project success and clear scope definition (Ashley et al., 1987; Pinto and Slevin, 1988; Standish Group, 2009). The scope document directs focus on the project purpose throughout the life of the project for the customer and project participants. The scope should be developed under the direction of the project manager, cus- tomer, and other significant stakeholders. The project manager is responsible for see- ing that there is agreement with the owner on project objectives, deliverables at each stage of the project, technical requirements, and so forth. For example, a deliverable in the early stage might be specifications; for the second stage, three prototypes for pro- duction; for the third, a sufficient quantity to introduce to market; and finally, market- ing promotion and training. Your project scope definition is a document that will be published and used by the project owner and project participants for planning and measuring project success. Scope describes what you expect to deliver to your customer when the project is com- plete. Your project scope should define the results to be achieved in specific, tangible, and measurable terms.

Identify key elements of a project scope state- ment and understand why a complete scope statement is critical to project success.

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Employing a Project Scope Checklist Clearly, project scope is the keystone interlocking all elements of a project plan. To ensure that scope definition is complete, you may wish to use the following checklist:

Project Scope Checklist

1. Project objective 2. Deliverables 3. Milestones 4. Technical requirements 5. Limits and exclusions 6. Reviews with customer

1. Project objective. The first step of project scope definition is to define the overall objective to meet your customer’s need(s). For example, as a result of extensive market research a computer software company decides to develop a program that automatically translates verbal sentences in English to Russian. The project should be completed within three years at a cost not to exceed $1.5 million. Another exam- ple is to design and construct a portable, hazardous-waste thermal treatment system in 13 months at a cost not to exceed $13 million. The project objective answers the questions of what, when, how much, and at times, where.

2. Deliverables. The next step is to define major deliverables—the expected, measur- able outputs over the life of the project. For example, deliverables in the early design phase of a project might be a list of specifications. In the second phase deliverables could be software coding and a technical manual. The next phase could be the pro- totype. The final phase could be final tests and approved software. Note: Deliver- ables and requirements are often used interchangeably.

3. Milestones. A milestone is a significant event in a project that occurs at a point in time. The milestone schedule shows only major segments of work; it represents first, rough-cut estimates of time, cost, and resources for the project. The milestone schedule is built using the deliverables as a platform to identify major segments of work and an end date—for example, testing complete and finished by July 1 of the same year. Milestones should be natural, important control points in the project. Milestones should be easy for all project participants to recognize.

4. Technical requirements. More frequently than not, a product or service will have technical requirements to ensure proper performance. Technical requirements typi- cally clarify either the deliverables or define the performance specifications. For example, a technical requirement for a personal computer might be the ability to accept 120-volt alternating current or 240-volt direct current without any adapters or user switches. Another well-known example is the ability of 911 emergency sys- tems to identify the caller’s phone number and location of the phone. Examples from information systems projects include speed and capacity of database systems and connectivity with alternative systems. For understanding the importance of key requirements, see Snapshot from Practice 4.1: Big Bertha.

5. Limits and exclusions. The limits of scope should be defined. Failure to do so can lead to false expectations and to expending resources and time on the wrong problem. Examples of limits are: work on site is allowed only between the hours of 8:00 pm – 5:00 am; system maintenance and repair will be done only up to one month after final inspection; client will be billed for additional training beyond that

104 Chapter 4 Defining the Project

In 1991 Callaway Golf Equipment introduced their Big Bertha driver and revolutionized the golf equipment business. Big Bertha—named after the World War I Ger- man long-distance cannon—was much larger than con- ventional woods and lacked a hosel (the socket in the head of the club into which the shaft is inserted) so that the weight could be better distributed throughout the head. This innovative design gave the clubhead a larger sweet spot, which allowed a player to strike the golf ball off-center and not suffer much loss in distance or accuracy. Callaway has maintained its preeminent position in the golf industry by utilizing space-age tech- nology to extend the accuracy and distance of golf equipment. In 2000 Callaway introduced the Big Bertha ERC II forged titanium driver. The driver was technologically superior to any driver on the market. However, there was one big problem. The new version of Bertha did not conform to the coefficient of restitution (COR) requirement established by the United States Golf Association (USGA). As a result it was barred from use by golfers in North America who intended to play by the USGA’s Rules of Golf. The USGA believed that the rapid technological advances in golf equipment made by Callaway Golf and other golf manufacturers were threatening the integrity of the game. Players were hitting balls so much farther and straighter that golf courses around the world were

S N A P S H O T F R O M P R A C T I C E 4 . 1 Big Bertha II versus the USGA’s COR Requirement*

being redesigned to make them longer and more difficult. So in 1998 the USGA established performance thresholds for all new golf equipment. In order to pre- vent manufacturers from developing more powerful clubs, the USGA limited the COR of new golf equip- ment to 0.83. The COR was calculated by firing a golf ball at a driver out of a cannon-like machine at 109 miles per hour. The speed that the ball returned to the cannon could not exceed 83 percent of its initial speed (90.47 mph). The USGA called the ratio of incoming to outgoing velocity the coefficient of resti- tution (COR). The intent of the USGA COR threshold was to limit the distance that golf balls could be hit since studies indicated that 0.01 increase in COR resulted in two extra yards of carry. The Big Bertha ERC II’s COR was 0.86. After numerous efforts to get USGA to change its technical requirements, Callaway’s engineers went back to the drawing board and in 2002 introduced Great Big Bertha II, which conformed to USGA’s 0.83 COR restriction.

* John E. Gamble, “Callaway Golf Company: Sustaining Advantage in a Changing Industry,” in A. A. Thompson, J. E. Gamble, and A. J. Strickland, Strategy: Winning in the Marketplace (Boston: McGraw-Hill/Irwin, 2004), pp. C204–C228.

© Les Jorgensen/Getty

Chapter 4 Defining the Project 105

prescribed in the contract. Exclusions further define the boundary of the project by stating what is not included. Examples include: data will be collected by the client, not the contractor; a house will be built, but no landscaping or security devices added; software will be installed, but no training given.

6. Reviews with customer. Completion of the scope checklist ends with a review with your customer—internal or external. The main concern here is the understanding of and agreement to expectations. Is the customer getting what he or she desires in deliverables? Does the project definition identify key accomplishments, budgets, timing, and performance requirements? Are questions of limits and exclusions cov- ered? Clear communication in all these issues is imperative to avoid claims or misunderstanding.

Scope definition should be as brief as possible but complete; one or two pages are typical for small projects. See Snapshot from Practice 4.2: Scope Statement. The project scope checklist in Step 1 is generic. Different industries and companies will develop unique checklists and templates to fit their needs and specific kinds of projects. A few companies engaged in contracted work refer to scope statements as “statements of work” (SOW). Other organizations use the term project charter. How- ever, the term project charter has emerged to have a special meaning in the world of

PROJECT OBJECTIVE To construct a high-quality, custom home within five months at cost not to exceed $700,000 on lot 42A in Green- dale, Oregon.

DELIVERABLES

– ished home.

microwave, and dishwasher.

thermostat.

MILESTONES 1. Permits approved—March 5

2. Foundation poured—March 14

3. Drywall in. Framing, sheathing, plumbing, electri- cal, and mechanical inspections passed—May 25

4. Final inspection—June 7

TECHNICAL REQUIREMENTS 1. Home must meet local building codes.

2. All windows and doors must pass NFRC class 40 energy ratings.

3. Exterior wall insulation must meet an “R” factor of 21.

4. Ceiling insulation must meet an “R” factor of 38.

5. Floor insulation must meet an “R” factor of 25.

6. Garage will accommodate two large-size cars and one 20-foot Winnebago.

7. Structure must pass seismic stability codes.

LIMITS AND EXCLUSIONS 1. The home will be built to the specifications and

design of the original blueprints provided by the customer.

2. Owner is responsible for landscaping.

3. Refrigerator is not included among kitchen appliances.

4. Air conditioning is not included but prewiring is included.

5. Contractor reserves the right to contract out services.

6. Contractor is responsible for subcontracted work.

7. Site work limited to Monday through Friday, 8:00 a.m. to 6:00 p.m.

CUSTOMER REVIEW John and Joan Smith

S N A P S H O T F R O M P R A C T I C E 4 . 2 Scope Statement

106 Chapter 4 Defining the Project

project management. A project charter refers to a document that authorizes the project manager to initiate and lead the project. This document is issued by upper management and provides the project manager with written authority to use organizational resources for project activities. Often the charter will include a brief scope description as well as such items as risk limits, business case, spending limits, and even team composition. Many projects suffer from scope creep, which is the tendency for the project scope to expand over time—usually by changing requirements, specifications, and priorities. Scope creep can be reduced by carefully writing your scope statement. A scope state- ment that is too broad is an invitation for scope creep. Scope creep can have a positive or negative effect on the project, but in most cases scope creep means added costs and possible project delays. Changes in requirements, specifications, and priorities fre- quently result in cost overruns and delays. Examples are abundant—Denver airport baggage handling system; Boston’s new freeway system (“The Big Dig”); Sochi Winter Olympics; and the list goes on. On software development projects, scope creep is mani- fested in bloated products in which added functionality undermines ease of use. If the project scope needs to change, it is critical to have a sound change control process in place that records the change and keeps a log of all project changes. The log identifies the change, impact, and those responsible for accepting or rejecting a pro- posed change. Change control is one of the topics of Chapter 7. Project managers in the field con- stantly suggest that dealing with changing requirements is one of their most challeng- ing problems.

4.2 Step 2: Establishing Project Priorities Quality and the ultimate success of a project are traditionally defined as meeting and/ or exceeding the expectations of the customer and/or upper management in terms of cost (budget), time (schedule), and performance (scope) of the project (see Figure 4.1). The interrelationship among these criteria varies. For example, sometimes it is neces- sary to compromise the performance and scope of the project to get the project done quickly or less expensively. Often the longer a project takes, the more expensive it becomes. However, a positive correlation between cost and schedule may not always be true. Other times project costs can be reduced by using cheaper, less efficient labor or equipment that extends the duration of the project. Likewise, as will be seen in Chapter 9, project managers are often forced to expedite or “crash” certain key activi- ties by adding additional labor, thereby raising the original cost of the project. One of the primary jobs of a project manager is to manage the trade-offs among time, cost, and performance. To do so, project managers must define and understand the nature of the priorities of the project. They need to have a candid discussion with the project customer and upper management to establish the relative importance of

Understand why it is important to establish project priorities in terms of cost, time, and performance.

4-2LO

Quality

Cost Time

Scope FIGURE 4.1 Project Management Trade-offs

Chapter 4 Defining the Project 107

each criterion. For example, what happens when the customer keeps adding require- ments? Or if, midway through the project, a trade-off must be made between cost and expediting, which criterion has priority? One technique found in practice that is useful for this purpose is completing a prior- ity matrix for the project to identify which criterion is constrained, which should be enhanced, and which can be accepted:

Constrain. The original parameter is fixed. The project must meet the completion date, specifications and scope of the project, or budget. Enhance. Given the scope of the project, which criterion should be optimized? In the case of time and cost, this usually means taking advantage of opportunities to either reduce costs or shorten the schedule. Conversely, with regard to perfor- mance, enhancing means adding value to the project. Accept. For which criterion is it tolerable not to meet the original parameters? When trade-offs have to be made, is it permissible for the schedule to slip, to reduce the scope and performance of the project, or to go over budget?

Figure 4.2 displays the priority matrix for the development of a new wireless router. Because time to market is important to sales, the project manager is instructed to take advantage of every opportunity to reduce completion time. In doing so, going over budget is acceptable though not desirable. At the same time, the original performance specifications for the modem as well as reliability standards cannot be compromised. Priorities vary from project to project. For example, for many software projects time to market is critical, and companies like Microsoft may defer original scope require- ments to later versions in order to get to the market first. Alternatively, for special event projects (conferences, parades, tournaments) time is constrained once the date has been announced, and if the budget is tight, the project manager will compromise the scope of the project in order to complete the project on time. Some would argue that all three criteria are always constrained and that good proj- ect managers should seek to optimize each criterion. If everything goes well on a project and no major problems or setbacks are encountered, their argument may be valid. However, this situation is rare, and project managers are often forced to make tough decisions that benefit one criterion while compromising the other two. The pur- pose of this exercise is to define and agree on what the priorities and constraints of the project are so that when “push comes to shove,” the right decisions can be made.

Constrain

Enhance

Accept

Time Performance Cost FIGURE 4.2 Project Priority Matrix

108 Chapter 4 Defining the Project

There are likely to be natural limits to the extent managers can constrain, optimize, or accept any one criterion. It may be acceptable for the project to slip one month behind schedule but no further or to exceed the planned budget by as much as $20,000. Likewise, it may be desirable to finish a project a month early, but after that cost con- servation should be the primary goal. Some project managers document these limits as part of creating the priority matrix. In summary, developing a priority matrix for a project before the project begins is a useful exercise. It provides a forum for clearly establishing priorities with customers and top management so as to create shared expectations and avoid misunderstandings. The priority information is essential to the planning process, where adjustments can be made in the scope, schedule, and budget allocation. Finally, the matrix is useful mid- way in the project for approaching a problem that must be solved. One caveat must be mentioned; during the course of a project, priorities may change. The customer may suddenly need the project completed one month sooner, or new directives from top management may emphasize cost saving initiatives. The project manager needs to be vigilant in order to anticipate and confirm changes in priorities and make appropriate adjustments.

4.3 Step 3: Creating the Work Breakdown Structure

Major Groupings Found in a WBS Once the scope and deliverables have been identified, the work of the project can be successively subdivided into smaller and smaller work elements. The outcome of this hierarchical process is called the work breakdown structure (WBS). Use of a WBS helps to assure project managers that all products and work elements are identified, to integrate the project with the current organization, and to establish a basis for control. Basically, the WBS is an outline of the project with different levels of detail. Figure 4.3 shows the major groupings commonly used in the field to develop a hier- archical WBS. The WBS begins with the project as the final deliverable. Major project work deliverables/systems are identified first; then the subdeliverables necessary to accomplish the larger deliverables are defined. The process is repeated until the subde- liverable detail is small enough to be manageable and where one person can be respon- sible. This subdeliverable is further divided into work packages. Because the lowest subdeliverable usually includes several work packages, the work packages are grouped by type of work—for example, design and testing. These groupings within a subdeliv- erable are called cost accounts. This grouping facilitates a system for monitoring proj- ect progress by work, cost, and responsibility.

How WBS Helps the Project Manager The WBS defines all the elements of the project in a hierarchical framework and establishes their relationships to the project end item(s). Think of the project as a large work package that is successively broken down into smaller work packages; the total project is the summation of all the smaller work packages. This hierarchical structure facilitates evaluation of cost, time, and technical performance at all levels in the organization over the life of the project. The WBS also provides management with information appropriate to each level. For example, top management deals primarily with major deliverables, while first-line supervisors deal with smaller subdeliverables and work packages.

Demonstrate the impor- tance of a work break- down structure (WBS) to the management of proj- ects and how it serves as a data base for planning and control.

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Chapter 4 Defining the Project 109

Each item in the WBS needs a time and cost estimate. With this information it is possible to plan, schedule, and budget your project. The WBS also serves as a frame- work for tracking cost and work performance. As the WBS is developed, organizational units and individuals are assigned respon- sibility for executing work packages. This integrates the work and the organization. In practice, this process is sometimes called the organization breakdown structure (OBS), which will be further discussed later in the chapter. Use of the WBS provides the opportunity to “roll up” (sum) the budget and actual costs of the smaller work packages into larger work elements so that performance can be measured by organizational units and work accomplishment. The WBS can also be used to define communication channels and assist in under- standing and coordinating many parts of the project. The structure shows the work and organizational units responsible and suggests where written communication should be directed. Problems can be quickly addressed and coordinated because the structure integrates work and responsibility.

A Simple WBS Development Figure 4.4 shows a simplified WBS to develop a new prototype tablet computer. At the top of the chart (level 1) is the project end item—the E-Slim Tablet x-13 Prototype. The subdeliverables levels (2–5) below level 1 represent further decomposition of work. The levels of the structure can also represent information for different levels of

FIGURE 4.3 Hierarchical Breakdown of the WBS

Cost account*

Work package

Subdeliverable

Deliverable

Lowest subdeliverable

Level Hierarchical breakdown Description

Complete project

Major deliverables

Supporting deliverables

Lowest management responsibility level

Grouping of work packages for monitoring progress and responsibility

Identifiable work activities

1

2

3

4

5

Project

* This breakdown groups work packages by type of work within a deliverable and allows assignment of responsibility to an organizational unit. This extra step facilitates a system for monitoring project progress (discussed in Chapter 13).

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management. For example, level 1 information represents the total project objective and is useful to top management; levels 2, 3, and 4 are suitable for middle manage- ment; and level 5 is for first-line managers. In Figure 4.4 level 2 indicates there are two major deliverables—Hardware and CPU, or central processing unit. (There are likely to be other major deliverables such as software, but for illustrative purposes we are limiting our focus to just two major deliverables.) At level 3, the CPU is connected to three deliverables—Power Supply, Flash ROM, and I/O Controller. The I/O Controller has three subdeliverables at level 4—USB Slots, Internet, and Touch Screen. The many subdeliverables for USB Slots and Internet have not been decomposed. The Touch Screen (shaded) has been decom- posed down to level 5 and to the work package level. Note that level 2, Hardware, skips levels 3 and 4 because the final subdeliverables can be pushed down to the lowest manageable level 5; skipping levels 3 and 4 suggests little coordination is needed and skilled team members are already familiar with the work needed to complete the level 5 subdeliverables. For example, Hardware requires four subdeliverables at level 5—Frame, Cameras, Speakers, and Antenna. Each subde- liverable includes work packages that will be completed by an assigned organizational unit. Observe that the Cameras subdeliverable includes four work packages—WP-C1, 2, 3, and 4. The Back Light, a subdeliverable of Touch Screen, includes three work packages—WP-L 1, 2, and 3. The lowest level of the WBS is called a work package. Work packages are short- duration tasks that have a definite start and stop point, consume resources, and represent cost. Each work package is a control point. A work package manager is responsible for seeing that the package is completed on time, within budget, and according to technical specifications. Practice suggests a work package should not exceed 10 workdays or one reporting period. If a work package has a duration exceeding 10 days, check or monitor- ing points should be established within the duration, say, every three to five days, so progress and problems can be identified before too much time has passed. Each work package of the WBS should be as independent of other packages of the project as pos- sible. No work package is described in more than one subdeliverable of the WBS. There is an important difference from start to finish between the last work break- down subdeliverable and a work package. Typically, a work breakdown subdeliverable includes the outcomes of more than one work package from perhaps two or three depart- ments. Therefore, the subdeliverable does not have a duration of its own and does not consume resources or cost money directly. (In a sense, of course, a duration for a par- ticular work breakdown element can be derived from identifying which work package must start first [earliest] and which package will be the latest to finish; the difference from start to finish becomes the duration for the subdeliverable.) The higher elements are used to identify deliverables at different phases in the project and to develop status reports during the execution stage of the project life cycle. Thus, the work package is the basic unit used for planning, scheduling, and controlling the project. To review, each work package in the WBS

1. Defines work (what). 2. Identifies time to complete a work package (how long). 3. Identifies a time-phased budget to complete a work package (cost). 4. Identifies resources needed to complete a work package (how much). 5. Identifies a single person responsible for units of work (who). 6. Identifies monitoring points for measuring progress (how well).

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Creating a WBS from scratch can be a daunting task. Project managers should take advantage of relevant examples from previous projects to begin the process. WBSs are products of group efforts. If the project is small, the entire project team may be involved breaking down the project into its components. For large, complex projects, the people responsible for the major deliverables are likely to meet to establish the first two levels of deliverables. In turn, further detail would be delegated to the people respon- sible for the specific work. Collectively this information would be gathered and inte- grated into a formal WBS by a project support person. The final version would be reviewed by the inner echelon of the project team. Relevant stakeholders (most notably customers) would be consulted to confirm agreement and revise when appropriate. Project teams developing their first WBS frequently forget that the structure should be end-item, output oriented. First attempts often result in a WBS that follows the organization structure—design, marketing, production, finance. If a WBS follows the organization structure, the focus will be on the organization function and processes rather than the project output or deliverables. In addition, a WBS with a process focus will become an accounting tool that records costs by function rather than a tool for “output” management. Every effort should be made to develop a WBS that is output oriented in order to concentrate on concrete deliverables. See Snapshot from Prac- tice 4.3: Creating a WBS.

Figure 4.4 represents the classic WBS in which the project is broken down to the lowest manageable deliverable and subsequent work packages. Many situations do not require this level of

detail. This begs the question of how far you should break down the work. There is no set answer to this question. However, here are some tips given by project managers: Break down the work until you can do an estimate that is accurate enough for your purposes. If you are doing a ball-park estimate to see if the project is worthy of serious consideration, you probably do not need to break it down beyond major deliverables. On the other hand, if you are pricing a project to submit a competitive bid, then you are likely to go down to the work package level. The WBS should conform to how you are going to schedule work. For example, if assignments are made in terms of days, then tasks should be limited as best as possible to one day or more to complete. Conversely, if hours are the smallest unit for scheduling, then work can be broken down to one-hour increments. Final activities should have clearly defined start/ end events. Avoid open-ended tasks like “research” or “market analysis.” Take it down to the next level in which deliverables/outcomes are more clearly defined.

S N A P S H O T F R O M P R A C T I C E 4 . 3 Creating a WBS

Instead of ending with market analysis include items such as identify market share, list user requirements, or write a problem statement. If accountability and control are important, then break the work down so that one individual is clearly responsible for the work. For example, instead of stop- ping at product design, take it to the next level and identify specific components of the design (i.e., electri- cal schematics, power source, etc.) that different indi- viduals will be responsible for creating. The bottom line is that the WBS should provide the level of detail needed to manage the specific project successfully.

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4.4 Step 4: Integrating the WBS with the Organization The WBS is used to link the organizational units responsible for performing the work. In practice, the outcome of this process is the organization breakdown structure (OBS). The OBS depicts how the firm has organized to discharge work responsibility. The purposes of the OBS are to provide a framework to summarize organization unit work performance, identify organization units responsible for work packages, and tie the organizational unit to cost control accounts. Recall, cost accounts group similar work packages (usually under the purview of a department). The OBS defines the organization subdeliverables in a hierarchical pattern in successively smaller and smaller units. Frequently, the traditional organization structure can be used. Even if the project is completely performed by a team, it is necessary to break down the team structure for assigning responsibility for budgets, time, and technical performance. As in the WBS, the OBS assigns the lowest organizational unit the responsibility for work packages within a cost account. Herein lies one major strength of using WBS and OBS; they can be integrated as shown in Figure 4.5. The intersection of work packages and the organizational unit creates a project control point (cost account) that integrates work and responsibility. For example, at level 5 Touch Sensors has three work pack- ages that have been assigned to the Design, Quality Control Test, and Production departments. The intersection of the WBS and OBS represents the set of work pack- ages necessary to complete the subdeliverable located immediately above and the organizational unit on the left responsible for accomplishing the packages at the inter- section. Note that the design department is responsible for five different work packages across the Hardware and Touch Screen deliverables. Later we will use the intersection as a cost account for management control of proj- ects. For example, the Cameras element requires completion of work packages whose primary responsibility will include the design, QC test, production, and outsourcing departments. Control can be checked from two directions—outcomes and responsibil- ity. In the execution phase of the project, progress can be tracked vertically on deliver- ables (client’s interest) and tracked horizontally by organization responsibility (own- er’s interest).

4.5 Step 5: Coding the WBS for the Information System Gaining the maximum usefulness of a breakdown structure depends on a coding sys- tem. The codes are used to define levels and elements in the WBS, organization ele- ments, work packages, and budget and cost information. The codes allow reports to be consolidated at any level in the structure. The most commonly used scheme in practice is numeric indention. A portion of the E-Slim Tablet x-13 Prototype project is pre- sented in Exhibit 4.1. Note the project identification is 1.0. Each successive indention represents a lower element or work package. Ultimately the numeric scheme reaches down to the work package level, and all tasks and elements in the structure have an identification code. The “cost account” is the focal point because all budgets, work assignments, time, cost, and technical performance come together at this point. This coding system can be extended to cover large projects. Additional schemes can be added for special reports. For example, adding a “23” after the code could indicate a site location, an elevation, or a special account such as labor. Some letters can be used as special identifiers such as “M” for materials or “E” for engineers. You are not

Demonstrate how the organization breakdown structure (OBS) estab- lishes accountability to organizational units.

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limited to only 10 subdivisions (0–9); you can extend each subdivision to large numbers—for example, .1−.99 or .1−.9999. If the project is small, you can use whole numbers. The following example is from a large, complex project:

3R−237A−P2−33.6 where 3R identifies the facility, 237A represents elevation and the area, P2 represents pipe two inches wide, and 33.6 represents the work package number. In practice most organizations are creative in combining letters and numbers to minimize the length of WBS codes. On larger projects, the WBS is further supported with a WBS dictionary that pro- vides detailed information about each element in the WBS. The dictionary typically includes the work package level (code), name, and functional description. In some cases the description is supported with specifications. The availability of detailed descriptions has an added benefit of dampening scope creep.

EXHIBIT 4.1 Coding the WBS

116 Chapter 4 Defining the Project

4.6 Process Breakdown Structure The WBS is best suited for design and build projects that have tangible outcomes such as an offshore mining facility or a new car prototype. The project can be decomposed or broken down into major deliverables, subdeliverables, further subdeliverables, and ultimately to work packages. It is more difficult to apply WBS to less tangible, pro- cess-oriented projects in which the final outcome is a product of a series of steps or phases. Here, the big difference is that the project evolves over time with each phase affecting the next phase. Information systems projects typically fall in this category— for example, creating an extranet website or an internal software database system. Process projects are driven by performance requirements, not by plans/blueprints. Some practitioners choose to utilize what we refer to as a process breakdown struc- ture (PBS) instead of the classic WBS. Figure 4.6 provides an example of a PBS for a software development project. Instead of being organized around deliverables, the project is organized around phases. Each of the five major phases can be broken down into more specific activities until a suf- ficient level of detail is achieved to communicate what needs to be done to complete that phase. People can be assigned to specific activities, and a complementary OBS can be created just as is done for the WBS. Deliverables are not ignored but are defined as outputs required to move to the next phase. The software industry often refers to PBS as the “waterfall method” since progress flows downward through each phase.1

Describe a process breakdown structure (PBS) and when to use it.

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FIGURE 4.6 PBS for Software Development Project

Software development project

Construct

Develop technical design

Define processing flow

Design logical database structure

Design system interfaces

Define application architecture

Develop detailed design

Establish quality requirements

Define user interface

DesignAnalysis Test Rollout

Design phase deliverables: Design document

1 Level Major phases:

2 Level Activities:

3 Level Activities:

Outputs:

User documentation outline

Application architecture Application flow Database design End user interface design Workflow diagram

1 The limitations of the waterfall method for software development have led to the emergence of Agile project manage- ment methods that are the subject of Chapter 17.

Chapter 4 Defining the Project 117

Checklists that contain the phase exit requirements are developed to manage project progress. These checklists provide the means to support phase walk-throughs and reviews. Checklists vary depending upon the project and activities involved but typi- cally include the following details: ∙ Deliverables needed to exit a phase and begin a new one. ∙ Quality checkpoints to ensure that deliverables are complete and accurate. ∙ Sign-offs by all responsible stakeholders to indicate that the phase has been success-

fully completed and that the project should move on to the next phase. As long as exit requirements are firmly established and deliverables for each phase are well defined, the PBS provides a suitable alternative to the standard WBS for projects that involve extensive development work.

4.7 Responsibility Matrices In many cases, the size and scope of the project do not warrant an elaborate WBS or OBS. One tool that is widely used by project managers and task force leaders of small projects is the responsibility matrix (RM). The RM (sometimes called a linear respon- sibility chart) summarizes the tasks to be accomplished and who is responsible for what on a project. In its simplest form an RM consists of a chart listing all the project activities and the participants responsible for each activity. For example, Figure 4.7 illustrates an RM for a market research study. In this matrix the R is used to identify the committee member who is responsible for coordinating the efforts of other team members assigned to the task and making sure that the task is completed. The S is used to identify members of the five-person team who will support and/or assist the individual responsible. Simple RMs like this one are useful not only for organizing and assigning responsibilities for small projects but also for subprojects of large, more complex projects. More complex RMs not only identify individual responsibilities but also clarify critical interfaces between units and individuals that require coordination. For

Create responsibility matrices for small projects.

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FIGURE 4.7 Responsibility Matrix for a Market Research Project

Identify target customers Develop draft questionnaire Pilot-test questionnaire Finalize questionnaire Print questionnaire Prepare mailing labels Mail questionnaires Receive and monitor returned questionnaires Input response data Analyze results Prepare draft of report Prepare final report

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example, Figure 4.8 is an RM for a larger, more complex project to develop a new piece of automated equipment. Notice that within each cell a numeric coding scheme is used to define the nature of involvement on that specific task. Such an RM extends the WBS/OBS and provides a clear and concise method for depicting responsibility, authority, and communication channels. Responsibility matrices provide a means for all participants in a project to view their responsibilities and agree on their assignments. They also help clarify the extent or type of authority exercised by each participant in performing an activity in which two or more parties have overlapping involvement. By using an RM and by defining authority, responsibility, and communications within its framework, the relationship between dif- ferent organizational units and the work content of the project is made clear.

4.8 Project Communication Plan Once the project deliverables and work are clearly identified, following up with an internal communication plan is vital. Stories abound of poor communication as a major contributor to project failure. Having a robust communications plan can go a long way toward mitigating project problems and can ensure that customers, team members, and other stakeholders have the information to do their jobs. The communication plan is usually created by the project manager and/or the proj- ect team in the early stage of project planning. Communication is a key component in coordinating and tracking project schedules, issues, and action items. The plan maps out the flow of information to different stake- holders and becomes an integral part of the overall project plan. The purpose of a project communication plan is to express what, who, how, and when information will be trans- mitted to project stakeholders so schedules, issues, and action items can be tracked. Project communication plans address the following core questions: ∙ What information needs to be collected and when? ∙ Who will receive the information? ∙ What methods will be used to gather and store information? ∙ What are the limits, if any, on who has access to certain kinds of information? ∙ When will the information be communicated? ∙ How will it be communicated? Developing a communication plan that answers these questions usually entails the fol- lowing basic steps: 1. Stakeholder analysis. Identify the target groups. Typical groups could be the cus-

tomer, sponsor, project team, project office, or anyone who needs project information to make decisions and/or contribute to project progress. A common tool found in practice to initially identify and analyze major project stakeholders’ communication needs is presented in Figure 4.9.2 How and what is communicated is influenced by the stakeholder interest and power. Some of these stakeholders may have the power either to block or enhance your project. By identifying stakeholders and prioritizing them on the “Power/Interest” map, you can plan the type and frequency of communications needed. (More on stakeholders will be discussed in Chapter 10.)

Create a communication plan for a project.

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2 For a more elaborate scheme for assessing stakeholders, see: Lynda Bourne, Stakeholder Relationship Management

120 Chapter 4 Defining the Project

For example, on a typical project you want to manage closely the professionals doing the work, while you want to satisfy senior management and project sponsor with periodic updates. Unions and operation managers interested in capacity would be someone you would want to keep informed, while you would only need to pro- vide general information to the legal, public relations, and other departments.

2. Information needs. What information is pertinent to stakeholders who contribute to the project’s progress? The simplest answer to this question can be obtained by asking the different people what information they need and when they need it. For example, top management needs to know how the project is progressing, whether it is encountering critical problems, and the extent to which project goals are being realized. This information is required so that they can make strategic decisions and manage the portfolio of projects. Project team members need to see schedules, task lists, specifications, and the like, so they know what needs to be done next. External groups need to know any changes in the schedule and performance requirements of the components they are providing. Frequent information needs found in communi- cation plans are:

Project status reports Deliverable issues Changes in scope Team status meetings Gating decisions Accepted request changes Action items Milestone reports

3. Sources of information. When the information needs are identified, the next step is to determine the sources of information. That is, where does the information reside? How will it be collected? For example, information relating to the milestone report, team meetings, and project status meetings would be found in the minutes and reports of various groups.

4. Dissemination modes. In today’s world, traditional status report meetings are being supplemented by e-mail, teleconferencing, SharePoint, and a variety of database shar- ing programs to circulate information. In particular, many companies are using the Web to create a “virtual project office” to store project information. Project manage- ment software feeds information directly to the website so that different people have immediate access to relevant project information. In some cases, appropriate informa- tion is routed automatically to key stakeholders. Backup paper hardcopy to specific stakeholders is still critical for many project changes and action items.

FIGURE 4.9 Stakeholder Communications

Interest

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Manage Closely

Keep Informed

Low

Keep Satisfied

Chapter 4 Defining the Project 121

5. Responsibility and timing. Determine who will send out the information. For example, a common practice is to have secretaries of meetings forward the minutes or specific information to the appropriate stakeholders. In some cases the responsi- bility lies with the project manager or project office. Timing and frequency of dis- tribution appropriate to the information need to be established.

The advantage of establishing a communication plan is that instead of responding to information requests, you are controlling the flow of information. This reduces confu- sion and unnecessary interruptions, and it can provide project managers greater auton- omy. Why? By reporting on a regular basis how things are going and what is happening, you allow senior management to feel more comfortable about letting the team complete the project without interference. See Figure 4.10 for a sample Shale Oil Research Project Communication Plan. The importance of establishing up-front a plan for communicating important proj- ect information cannot be overstated. Many of the problems that plague a project can be traced back to insufficient time devoted to establishing a well-grounded internal communication plan.

What Information

Milestone report

Project status reports & agendas

Team status reports

Issues report

Escalation reports

Outsourcing performance

Accepted change requests

Oversight gate decisions

Senior management and project manager

Senior management and project manager Bimonthly

Weekly

E-mail and hardcopy Project office

Project manager

Team recorder

Team recorder

Project manager

Project manager

Design department

Oversight group or

project office

E-mail and hardcopy

E-mail and hardcopy

E-mail meeting report

E-mail

E-mail

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Meeting

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Weekly

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Bimonthly

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and project mgr.

Staff and customer

Staff and customer

Staff and customer

Project manager and project office

Staff and customer

Target Audience When?

Method of Communication Provider

FIGURE 4.10 Shale Oil Research Project Communication Plan

Summary The project scope definition, priorities, and breakdown structure are the keys to nearly every aspect of managing the project. The scope definition provides focus and emphasis on the end item(s) of the project. Establishing project priorities allows managers to make appropriate trade-off decisions. The WBS structure helps ensure all tasks of the project are identified and provides two views of the project—one on deliverables and one on

122 Chapter 4 Defining the Project

Key Terms Cost account, 113 Milestone, 103 Organization breakdown structure (OBS), 113 Priority matrix, 107

Process breakdown structure (PBS), 116 Project charter, 105 Responsibility matrix, 117 Scope creep, 106

Scope statement, 105 WBS dictionary, 115 Work breakdown structure (WBS), 108 Work package, 111

organization responsibility. The WBS avoids having the project driven by organization function or by a finance system. The structure forces attention to realistic requirements of personnel, hardware, and budgets. Use of the structure provides a powerful framework for project control that identifies deviations from plan, identifies responsibility, and spots areas for improved performance. No well-developed project plan or control system is possible without a disciplined, structured approach. The WBS, OBS, and cost account codes provide this discipline. The WBS will serve as the database for developing the project network which establishes the timing of work, people, equipment, and costs. PBS is often used for process-based projects with ill-defined deliverables. In small projects responsibility matrices may be used to clarify individual responsibility. Clearly defining your project is the first and most important step in planning. The absence of a clearly defined project plan consistently shows up as the major reason for project failures. Whether you use a WBS, PBS, or responsibility matrix will depend pri- marily on the size and nature of your project. Whatever method you use, definition of your project should be adequate to allow for good control as the project is being implemented. Follow-up with a clear communication plan for coordinating and tracking project prog- ress will help keep important stakeholders informed and avoid some potential problems.

1. What are the six elements of a typical scope statement? 2. What questions does a project objective answer? What would be an example of a

good project objective? 3. What does it mean if the priorities of a project include: Time-constrain, Scope-

accept, and Cost-enhance? 4. What kinds of information are included in a work package? 5. When would it be appropriate to create a responsibility matrix rather than a full-

blown WBS? 6. How does a communication plan benefit management of projects?

Review Questions

Exercises 1. You are in charge of organizing a dinner-dance concert for a local charity. You have reserved a hall that will seat 30 couples and have hired a jazz combo. a. Develop a scope statement for this project that contains examples of all the ele-

ments. Assume that the event will occur in four weeks and provide your best guess estimate of the dates for milestones.

b. What would the priorities likely be for this project? 2. In small groups, identify real life examples of a project that would fit each of the

following priority scenarios: a. Time-constrain, Scope-enhance, Cost-accept b. Time-accept, Scope-constrain, Cost-accept c. Time-constrain, Scope-accept, Cost-enhance

Chapter 4 Defining the Project 123

3. Develop a WBS for a project in which you are going to build a bicycle. Try to iden- tify all of the major components and provide three levels of detail.

4. You are the father or mother of a family of four (kids ages 13 and 15) planning a weekend camping trip. Develop a responsibility matrix for the work that needs to be done prior to starting your trip.

5. Develop a WBS for a local stage play. Be sure to identify the deliverables and orga- nizational units (people) responsible. How would you code your system? Give an example of the work packages in one of your cost accounts. Develop a correspond- ing OBS which identifies who is responsible for what.

6. Use an example of a project you are familiar with or are interested in. Identify the deliverables and organizational units (people) responsible. How would you code your system? Give an example of the work packages in one of your cost accounts.

7. Develop a communication plan for an airport security project. The project entails installing the hardware and software system that (1) scans a passenger’s eyes, (2) fingerprints the passenger, and (3) transmits the information to a central location for evaluation.

8. Go to an Internet search engine (e.g., Google) and type in “project communication plan.” Check three or four that have “.gov” as their source. How are they similar or dissimilar? What would be your conclusion concerning the importance of an inter- nal communication plan?

9. Your roommate is about to submit a scope statement for a spring concert sponsored by the entertainment council at Western Evergreen State University (WESU). WESU is a residential university with over 22,000 students. This will be the first time in six years since WESU sponsored a spring concert. The entertainment council has bud- geted $40,000 for the project. The event is to occur on June 5th. Since your room- mate knows you are taking a class on project management she has asked you to review her scope statement and make suggestions for improvement. She considers the concert a resume-building experience and wants to be as professional as possible. Below is a draft of her scope statement. What suggestions would you make and why?

WESU Spring Music Concert

Project Objective To organize and deliver a 6-hour music concert

Deliverables

Milestones

1. Secure all permissions and approvals 2. Sign big-name artist 3. Contact secondary artists 4. Secure vendor contracts

5. Advertising campaign 6. Plan set-up 7. Concert 8. Clean-up

Technical Requirements

1. Professional sound stage and system 2. At least five performing acts 3. Restroom facilities 4. Parking 5. Compliance with WESU and city requirements/ordinances

Limits and Exclusions

Customer Review: WESU

Ashley, D. B., et al., “Determinants of Construction Project Success,” Project Man- agement Journal, vol. 18, no. 2 (June 1987), p. 72. Chilmeran, A. H., “Keeping Costs on Track,” PM Network, vol. 19, no. 2 (2004), pp. 45–51. Gary, L. “Will Project Scope Cost You—Or Create Value?” Harvard Management Update, January 2005. Gobeli, D. H., and E. W. Larson, “Project Management Problems,” Engineering Management Journal, vol. 2 (1990), pp. 31–36. Ingebretsen, M., “Taming the Beast,” PM Network, July 2003, pp. 30–35. Katz, D. M., “Case Study: Beware ‘Scope Creep’ on ERP Projects,” CFO.com, March 27, 2001. Kerzner, H., Project Management: A Systems Approach to Planning, 8th ed. (New York: Van Nostrand Reinhold, 2003). Lewis, J. P., Project Planning, Scheduling and Controlling, 3rd ed. (Burr Ridge, IL: McGraw-Hill, 2000). Luby, R. E., D. Peel, and W. Swahl, “Component-Based Work Breakdown Structure,” Project Management Journal, vol. 26, no. 2 (December 1995), pp. 38–44. Murch, R., Project Management: Best Practices for IT Professionals (Upper Darby, NJ: Prentice Hall, 2001). Pinto, J. K., and D. P. Slevin, “Critical Success Factors Across the Project Life Cycle,” Project Management Journal, vol. 19, no. 3 (June 1988), p. 72. Pitagorsky, G., “Realistic Project Planning Promotes Success,” Engineer’s Digest, vol. 29, no. 1 (2001). PMI Standards Committee, Guide to the Project Management Body of Knowledge (Newton Square, PA: Project Management Institute, 2000).

References

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Posner, B. Z., “What It Takes to Be a Good Project Manager,” Project Management Journal, vol. 18, no. 1 (March 1987), p. 52. Raz, T., and S. Globerson, “Effective Sizing and Content Definition of Work Packages,” Project Management Journal, vol. 29, no. 4 (1998), pp. 17–23. The Standish Group, CHAOS Summary 2009, pp. 1–4. Tate, K., and K. Hendrix, “Chartering IT Projects,” Proceedings, 30th Annual, Project Management Institute (Philadelphia, PA. 1999), CD.

Case 4.1

Manchester United Soccer Club Nicolette Larson was loading the dishwasher with her husband, Kevin, and telling him about the first meeting of the Manchester United Tournament Organizing Committee. Nicolette, a self-confessed “soccer mom,” had been elected tournament director and was responsible for organizing the club’s first summer tournament. Manchester United Soccer Club (MUSC), located in Manchester, New Hampshire, was formed in 1992 as a way of bringing recreational players to a higher level of com- petition and preparing them for the State Olympic Development Program and/or high school teams. The club currently has 24 boys and girls (ranging in age from under 9 to 16) on teams affiliated with the New Hampshire Soccer Association and the Granite State Girls Soccer League. The club’s board of directors decided in the fall to sponsor a summer invitational soccer tournament to generate revenue. Given the boom in youth soccer, hosting summer tournaments has become a popular method for raising funds. MUSC teams regularly compete in three to four tournaments each summer at different locales in New England. These tournaments have been reported to generate between $50,000 and $70,000 for the host club. MUSC needs additional revenue to refurbish and expand the number of soccer fields at the Rock Rimmon soccer complex. Funds would also be used to augment the club’s scholarship program, which provides financial aid to players who cannot afford the $450 annual club dues. Nicolette gave her husband a blow-by-blow account of what transpired during the first tournament committee meeting that night. She started the meeting by having everyone introduce themselves and by proclaiming how excited she was that the club was going to sponsor its own tournament. She then suggested that the committee brainstorm what needed to be done to pull off the event; she would record their ideas on a flipchart. What emerged was a free-for-all of ideas and suggestions. One member immedi- ately stressed the importance of having qualified referees and spent several minutes describing in detail how his son’s team was robbed in a poorly officiated championship game. This was followed by other stories of injustice on the soccer field. Another member suggested that they needed to quickly contact the local colleges to see if they could use their fields. The committee spent more than 30 minutes talking about how they should screen teams and how much they should charge as an entry fee. An argu- ment broke out over whether they should reward the winning teams in each age bracket with medals or trophies. Many members felt that medals were too cheap, while others thought the trophies would be too expensive. Someone suggested that they seek local

Chapter 4 Defining the Project 125

126 Chapter 4 Defining the Project

corporate sponsors to help fund the tournament. The proposed sale of tournament T-shirts and sweatshirts was followed by a general critique of the different shirts par- ents had acquired at different tournaments. One member advocated that they recruit an artist he knew to develop a unique silk-screen design for the tournament. The meeting adjourned 30 minutes late with only half of the members remaining until the end. Nicolette drove home with seven sheets of ideas and a headache. As Kevin poured a glass of water for the two aspirin Nicolette was about to take, he tried to comfort her by saying that organizing this tournament would be a big project not unlike the projects he worked on at his engineering and design firm. He offered to sit down with her the next night and help her plan the project. He suggested that the first thing they needed to do was to develop a WBS for the project. 1. Make a list of the major deliverables for the project and use them to develop a draft

of the work breakdown structure for the tournament that contains at least three lev- els of detail. What are the major deliverables associated with hosting an event such as a soccer tournament?

2. How would developing a WBS alleviate some of the problems that occurred during the first meeting and help Nicolette organize and plan the project?

3. Where can Nicolette find additional information to help her develop a WBS for the tournament?

4. How could Nicolette and her task force use the WBS to generate cost estimates for the tournament? Why would this be useful information?

Case 4.2

The Home Improvement Project Lukas Nelson and his wife, Anne, and their three daughters had been living in their house for over five years when they decided it was time to make some modest improvements. One area they both agreed needed an upgrade was the bathtub. Their current house had one standard shower bathtub combination. Lukas was 6 feet four, and could barely squeeze into it. In fact, he had taken only one bath since they moved in. He and Anne both missed soaking in the older, deep bathtubs they enjoyed when they lived back East. Fortunately, the previous owners that built the house had plumbed the corner of a large exercise room in the basement for a hot tub. They contacted a trusted remodeling contractor who assured them it would be relatively easy to install a new bathtub and it shouldn’t cost more than $1,500. They decided to go ahead with the project. First the Nelsons went to the local plumbing retailer to pick out a tub. They soon realized that for a few hundred dollars more they could buy a big tub with water jets (a Jacuzzi). With old age on the horizon a Jacuzzi seemed like a luxury that was worth the extra money. Originally the plan was to install the tub using the simple plastic frame the bath came with and install a splash guard around the tub. Once Anne saw the tub, frame, and splashguard in the room she balked. She did not like how it looked with the cedar paneling in the exercise room. After significant debate, Ann won out, and the Nelsons agreed to pay extra to have a cedar frame built for the tub and use attractive tile instead of the plastic splashguard. Lukas rationalized the changes would pay for themselves when they tried to sell the house.

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The next hiccup occurred when it came time to address the flooring issue. The exer- cise room was carpeted, which wasn’t ideal when getting out of a bathtub. The original idea was to install relatively cheap laminated flooring in the drying and undressing area adjacent to the tub. However, the Nelsons couldn’t agree on the pattern to use. One of Anne’s friends said it would be a shame to put such cheap flooring in such a nice room. She felt they should consider using tile. The contractor agreed and said he knew a tile installer who needed work and would give them a good deal. Lukas reluctantly agreed that the laminated options just didn’t fit the style or quality of the exercise room. Unlike the laminated floor debate both Anne and Lukas immedi- ately liked a tile pattern that matched the tile used around the tub. Anxious not to delay the project, they agreed to pay for the tile flooring. Once the tub was installed and the framing was almost completed, Anne realized that something had to be done about the lighting. One of her favorite things to do was to read while soaking in the tub. The existing lights didn’t provide sufficient illumina- tion for doing so. Lukas knew this was “non-negotiable” and they hired an electrician to install additional lighting over the bathtub. While the lighting was being installed and the tile was being laid, another issue came up. The original plan was to tile only the exercise room and use remnant rugs to cover the area away from the tub where the Nelsons did their exercises. The Nelsons were very happy with how the tile looked and fit with the overall room. However, it clashed with the laminated flooring in the adjacent bathroom. Lukas agreed with Ann, that it really made the adjacent bathroom look cheap and ugly. He also felt the bath- room was so small it wouldn’t cost much more. After a week the work was completed. Both Lukas and Anne were quite pleased with how everything turned out. It cost much more than they had planned, but they planned to live in the house until the girls graduated from college so they felt it was a good long-term investment. Anne had the first turn using the bathtub followed by their three girls. Everyone enjoyed the Jacuzzi. It was 10:00 p.m. when Lukas began running water for his first bath. At first the water was steaming hot, but by the time he was about to get in, it was lukewarm at best. Lukas groaned, “After paying all of that money I still can’t enjoy a bath.” The Nelsons rationed bathing for a couple weeks, until they decided to find out what if anything could be done about the hot water problem. They asked a reputable heating contractor to assess the situation. The contractor reported that the hot water tank was insufficient to service a family of five. This had not been discovered before because baths were rarely taken in the past. The contractor said it would cost $2,200 to replace the existing water heater with a larger one that would meet their needs. The heating contractor also said if they wanted to do it right they should replace the existing furnace with a more energy efficient one. A new furnace would not only heat the house but also indirectly heat the water tank. Such a furnace would cost $7,500, but with the improved efficiency and savings in the gas bill, the furnace would pay for itself in 10 years. Besides, the Nelsons would likely receive tax credits for the more fuel-efficient furnace. Three weeks later, after the new furnace was installed, Lukas settled into the new bathtub. He looked around the room at all the changes that had been made and mut- tered to himself, “And to think that all I wanted was to soak in a nice, hot bath.”

1. What factors and forces contributed to scope creep in this case? 2. Is this an example of good or bad scope creep? Explain. 3. How could scope creep have been better managed by the Nelsons?

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Estimating Project Times and Costs5

LEARNING OBJECTIVES After reading this chapter you should be able to:

5-1 Understand estimating project times and costs are the foundation for project planning and control.

5-2 Describe guidelines for estimating time, costs, and resources.

5-3 Describe the methods, uses, and advantages and disadvantages of top-down and bottom-up esti- mating methods.

5-4 Distinguish different kinds of costs associated with a project.

5-5 Suggest a scheme for developing an estimating database for future projects.

5-6 Understand the challenge of estimating mega projects and describe steps that lead to better informed decisions.

5-7 Define a “white elephant” in project management and provide examples.

OUTLINE 5.1 Factors Influencing the Quality of Estimates

5.2 Estimating Guidelines for Times, Costs, and Resources

5.3 Top-Down versus Bottom-Up Estimating

5.4 Methods for Estimating Project Times and Costs

5.5 Level of Detail

5.6 Types of Costs

5.7 Refining Estimates

5.8 Creating a Database for Estimating

5.9 Mega Projects: A Special Case

Summary

Appendix 5.1: Learning Curves for Estimating

C H A P T E R F I V E

129

Project estimation is indeed a yardstick for project cost control. And if the yardstick is faulty, you start on the “wrong foot.” . . . We exhort you not to underestimate the estimate.*

Given the urgency to start work on the project, managers sometimes minimize or avoid the effort to follow through on estimating project time and cost. This attitude is a huge mistake and costly. There are important reasons to make the effort and incur the cost of estimating for your project. Exhibit 5.1 summarizes some key reasons. Estimating is the process of forecasting or approximating the time and cost of com- pleting project deliverables. Estimating processes are frequently classified as top-down and bottom-up. Top-down estimates are usually done by senior management. Manage- ment will often derive estimates from analogy, group consensus, or mathematical relationships. Bottom-up estimates are typically performed by the people who are

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

* O. P. Kharbanda and J. K. Pinto, What Made Gertie Gallop: Learning from Project Failures (New York: Von Nostrand Rein- hold, 1996), p. 73.

Understand estimating project times and costs are the foundation for project planning and control.

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130 Chapter 5 Estimating Project Times and Costs

doing the work. Their estimates are based on estimates of elements found in the work breakdown structure. All project stakeholders prefer accurate cost and time estimates, but they also under- stand the inherent uncertainty in all projects. Inaccurate estimates lead to false expec- tations and consumer dissatisfaction. Accuracy is improved with greater effort, but is it worth the time and cost?—estimating costs money! Project estimating becomes a trade-off, balancing the benefits of better accuracy against the costs for securing increased accuracy. Cost, time, and budget estimates are the lifeline for control; they serve as the stan- dard for comparison of actual and plan throughout the life of the project. Project status reports depend on reliable estimates as the major input for measuring variances and taking corrective action. Ideally, the project manager, and in most cases the customer, would prefer to have a database of detailed schedule and cost estimates for every work package in the project. Regrettably, such detailed data gathering is not always possible or practical and other methods are used to develop project estimates.

5.1 Factors Influencing the Quality of Estimates A typical statement in the field is the desire to “have a 95 percent probability of meet- ing time and cost estimates.” Past experience is a good starting point for developing time and cost estimates. But past experience estimates must almost always be refined by other considerations to reach the 95 percent probability level. Factors related to the uniqueness of the project will have a strong influence on the accuracy of estimates. Project, people, and external factors all need to be considered to improve quality of estimates for project times and costs.

Planning Horizon  The quality of the estimate depends on the planning horizon; estimates of current events are close to 100 percent accurate but are reduced for more distant events. For example, cost estimates for a party you are organizing this weekend should be much more accurate than the estimates for a party that will take place in six months. The accuracy of time and cost estimates should improve as you move from the conceptual phase to the point where individual work packages are defined. Long-duration projects increase the uncertainty in estimates.

Project Complexity  Time to implement new technology has a habit of expanding in an increasing, nonlin- ear fashion. Sometimes poorly written scope specifications for new technology result in errors in estimating times and costs.

Source: O. P. Kharbanda and J. K. Pinto, What Made Gertie Gallop: Learning from Project Failures (New York: Von Nostrand Reinhold, 1996), p. 73.

EXHIBIT 5.1 Why Estimating Time and Cost Is Important

Chapter 5 Estimating Project Times and Costs 131

People  The people factor can influence the quality of time and cost estimates. For example, accuracy of estimates depends on the skills of the people making the estimates. How familiar are they with the task they are estimating?

Project Structure and Organization  Which project structure is chosen to manage the project will influence time and cost estimates. One of the major advantages of a dedicated project team discussed earlier is the speed gained from concentrated focus and localized project decisions. This speed comes at an additional cost of tying up personnel full time. Conversely, projects operat- ing in a matrix environment may reduce costs by more efficiently sharing personnel across projects but may take longer to complete since attention is divided and coordi- nation demands are higher.

Padding Estimates  In some cases people are inclined to pad estimates. For example, if you are asked how long it takes you to drive to the airport, you might give an average time of 30  minutes, assuming a 50/50 chance of getting there in 30 minutes. If you are asked the fastest you could possibly get there, you might reduce the driving time to 20 minutes. Finally, if you are asked how long the drive would take if you abso- lutely had to be there to meet with the president, it is likely you would increase the estimate to say 50 minutes to ensure not being late. In work situations where you are asked for time and cost estimates, most of us are inclined to add a little padding to increase the probability and reduce the risk of being late. If everyone at all levels of the project adds a little padding to reduce risk, the project duration and cost are seri- ously overstated. This phenomenon causes some managers or owners to call for a 10–15 percent cut in time and/or cost for the project. Of course the next time the game is played, the person estimating cost and/or time will pad the estimate to 20 percent or more. Clearly such games defeat chances for realistic estimates, which is what is needed to be competitive.

Organization Culture  Organization culture can significantly influence project estimates. In some organiza- tions padding estimates is tolerated and even privately encouraged. Other organiza- tions place a premium on accuracy and strongly discourage estimating gamesmanship. Organizations vary in the importance they attach to estimates. The prevailing belief in some organizations is that detailed estimating takes too much time and is not worth the effort or that it’s impossible to predict the future. Other organizations subscribe to the belief that accurate estimates are the bedrock of effective project management. Orga- nization culture shapes every dimension of project management; estimating is not immune to this influence.

Other Factors  Finally, nonproject factors can impact time and cost estimates. For example, equip- ment down-time can alter time estimates. National holidays, vacations, and legal limits can influence project estimates. Project priority can influence resource assignment and impact time and cost.

132 Chapter 5 Estimating Project Times and Costs

Project estimating is a complex process. The quality of time and cost estimates can be improved when these variables are considered in making the estimates. Estimates of time and cost together allow the manager to develop a time-phased budget, which is imperative for project control. Before discussing macro and micro estimating methods for times and costs, a review of estimating guidelines will remind us of some of the important “rules of the game” that can improve estimating.

5.2 Estimating Guidelines for Times, Costs, and Resources Managers recognize time, cost, and resource estimates must be accurate if project planning, scheduling, and controlling are to be effective. However, there is substan- tial evidence suggesting poor estimates are a major contributor to projects that have failed. Therefore, every effort should be made to see that initial estimates are as accurate as possible since the choice of no estimates leaves a great deal to luck and is not palatable to serious project managers. Even though a project has never been done before, a manager can follow seven guidelines to develop useful work package estimates.

1. Responsibility. At the work package level, estimates should be made by the person(s) most familiar with the task. Draw on their expertise! Except for supertech- nical tasks, those responsible for getting the job done on schedule and within budget are usually first-line supervisors or technicians who are experienced and familiar with the type of work involved. These people will not have some preconceived, imposed duration for a deliverable in mind. They will give an estimate based on experience and best judgment. A secondary benefit of using those responsible is the hope they will “buy in” to seeing that the estimate materializes when they imple- ment the work package. If those involved are not consulted, it will be difficult to hold them responsible for failure to achieve the estimated time. Finally, drawing on the expertise of team members who will be responsible helps to build communica- tion channels early.

2. Use several people to estimate. It is well known that a cost or time estimate usually has a better chance of being reasonable and realistic when several people with rel- evant experience and/or knowledge of the task are used (sometimes called “crowd- sourcing”). True, people bring different biases based on their experience. But dis- cussion of the individual differences in their estimate leads to consensus and tends to eliminate extreme estimate errors.

3. Normal conditions. When task time, cost, and resource estimates are determined, they are based on certain assumptions. Estimates should be based on normal condi- tions, efficient methods, and a normal level of resources. Normal conditions are sometimes difficult to discern, but it is necessary to have a consensus in the organi- zation as to what normal conditions mean in this project. If the normal workday is eight hours, the time estimate should be based on an eight-hour day. Similarly, if the normal workday is two shifts, the time estimate should be based on a two-shift workday. Any time estimate should reflect efficient methods for the resources nor- mally available. The time estimate should represent the normal level of resources— people or equipment. For example, if three programmers are available for coding or two road graders are available for road construction, time and cost estimates should be based on these normal levels of resources unless it is anticipated the project will

Describe guidelines for estimating time, costs, and resources.

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Chapter 5 Estimating Project Times and Costs 133

change what is currently viewed as “normal.” In addition, possible conflicts in demand for resources on parallel or concurrent activities should not be considered at this stage. The need for adding resources will be examined when resource sched- uling is discussed in a later chapter.

4. Time units. Specific time units to use should be selected early in the development phase of the project network. All task time estimates need consistent time units. Estimates of time must consider whether normal time is represented by calendar days, workdays, workweeks, person days, single shift, hours, minutes, etc. In prac- tice the use of workdays is the dominant choice for expressing task duration. How- ever, in projects such as a heart transplant operation, minutes probably would be more appropriate as a time unit. One such project that used minutes as the time unit was the movement of patients from an old hospital to an elegant new one across town. Since there were several life-endangering moves, minutes were used to ensure patient safety so proper emergency life-support systems would be available if needed. The point is, network analysis requires a standard unit of time. When com- puter programs allow more than one option, some notation should be made of any variance from the standard unit of time. If the standard unit of time is a five-day workweek and the estimated activity duration is in calendar days, it must be con- verted to the normal workweek.

5. Independence. Estimators should treat each task as independent of other tasks that might be integrated by the WBS. Use of first-line managers usually results in considering tasks independently; this is good. Top managers are prone to aggregate many tasks into one time estimate and then deductively make the indi- vidual task time estimates add to the total. If tasks are in a chain and performed by the same group or department, it is best not to ask for all the time estimates in the sequence at once to avoid the tendency for a planner or a supervisor to look at the whole path and try to adjust individual task times in the sequence to meet an arbitrary imposed schedule or some rough “guesstimate” of the total time for the whole path or segment of the project. This tendency does not reflect the uncertainties of individual activities and generally results in optimistic task time estimates. In summary, each task time estimate should be considered inde- pendently of other activities.

6. Contingencies. Work package estimates should not include allowances for contin- gencies. The estimate should assume normal or average conditions even though every work package will not materialize as planned. For this reason top manage- ment needs to create an extra fund for contingencies that can be used to cover unforeseen events.

7. Adding risk assessment to the estimate helps to avoid surprises to stakeholders. It is obvious some tasks carry more time and cost risks than others. For example, a new technology usually carries more time and cost risks than a proven process. Simply identifying the degree of risk lets stakeholders consider alternative methods and alter process decisions. A simple breakdown by optimistic, most likely, and pes- simistic for task time could provide valuable information regarding time and cost. See Chapter 7 for further discussion of project risk.

Where applicable, these guidelines will greatly help to avoid many of the pitfalls found so often in practice. See Snapshot from Practice 5.1: Reducing Estimating Errors for a similar set of guidelines.

134 Chapter 5 Estimating Project Times and Costs

5.3 Top-Down versus Bottom-Up Estimating Since estimating efforts cost money, the time and detail devoted to estimating are important decisions. Yet, when estimating is considered, you as a project manager may hear statements such as these:

Rough order of magnitude is good enough. Spending time on detailed estimating wastes money. Time is everything; our survival depends on getting there first! Time and cost accuracy is not an issue. The project is internal. We don’t need to worry about cost. The project is so small, we don’t need to bother with estimates. Just do it.

However, there are sound reasons for using top-down or bottom-up estimates. Table 5.1 depicts conditions that suggest when one approach is preferred over another. Top-down estimates usually are derived from someone who uses experience and/ or information to determine the project duration and total cost. However, these esti- mates are sometimes made by top managers who have very little knowledge of the component activities used to complete the project. For example, a mayor of a major

Describe the methods, uses, and advantages and disadvantages of top-down and bottom-up estimating methods.

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Complexity is the major source of esti- mating error, says Kerry Willis, Project Management Sr. Director at the health- care services organization Cigna, in Hartford, Connecticut. “Project manag-

ers cannot possibly be experts in all areas and therefore need to rely on the stakeholders for their expertise when estimating,” Willis notes. To minimize errors he recommends treating estimating as a living process and not a one-time event. He follows the same approach on all of his projects:

1. Identify all of the stakeholders based on the scope of the project and organizational history.

2. Involve the stakeholders when creating the estimates. “You can’t hold people accountable for estimates they didn’t help create,” Willis says.

S N A P S H O T F R O M P R A C T I C E 5 . 1 Reducing Estimating Errors*

3. Aggregate the estimates by comparing several models (resource based, parametric, etc.).

4. Manage the project against the estimates. This includes making adjustments based on changes in project scope.

5. Track projects closely using tools such as earned value to gauge progress toward estimates.

6. Track actual costs and time at a granular level to recalibrate the model for future projects.

“The initial estimate could be perfect, but if it is not managed, then the end result will be bad and people will point to the estimating process,” Wills argues.

* S. Swanson, “Estimating Errors,” PMNetwork, October 2011, pp. 62–66.

TABLE 5.1 Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates

Condition Top-Down Estimates Bottom-Up Estimates

Strategic decision making X Cost and time important X High uncertainty X Internal, small project X Fixed-price contract X Customer wants details X Unstable scope X

Chapter 5 Estimating Project Times and Costs 135

city making a speech noted that a new law building would be constructed at a cost of $23 million and would be ready for occupancy in two and one-half years. Although the mayor probably asked for an estimate from someone, the estimate could have come from a luncheon meeting with a local contractor who wrote an estimate (guesstimate) on a napkin. This is an extreme example, but in a relative sense this scenario is fre- quently played out in practice. See Snapshot from Practice 5.2: Council Fumes, for another example of this. The question actually is, do these estimates represent low- cost, efficient methods? Seldom. The fact that the estimate came from the top can influence people responsible to “do what it takes to make the estimate.” If possible and practical, you want to push the estimating process down to the work package level for bottom-up estimates that establish low-cost, efficient methods. This process can take place after the project has been defined in detail. Good sense suggests project estimates should come from the people most knowledgeable about the estimate needed. The use of several people with relevant experience with the task can improve the time and cost estimate. The bottom-up approach at the work package level can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables. Similarly, resource requirements can be checked. Later, the time, resource, and cost estimates from the work packages can be consolidated into time-phased networks, resource schedules, and budgets that are used for control. The bottom-up approach also provides the customer with an opportunity to compare the low-cost, efficient method approach with any imposed restrictions. For example, if the project completion duration is imposed at two years and your bottom-up analysis tells you the project will take two and one-half years, the client can now consider the trade-off of the low-cost method versus compressing the project to two years—or in

Portland, Oregon’s, Willamette riverfront development has exploded with seven condominium towers and a new health sciences center under construction. The health science complex is to be

linked with Oregon Health Sciences University (OHSU), which is high on a nearby hill, with an aerial cable tram. The aerial tram linking the waterfront district to OHSU is to support the university expansion, to increase biotech- nology research, and to become Portland’s icon equiva- lent to Seattle’s Space Needle. All of the hype turned south when news from a hearing suggested that the real budget for the tram construction, originally estimated at $15 million, is going to be about $55–$60 million, more than triple the original estimate. The estimate could even go higher.  Commissioners want to find out why city staff knowingly relied on flawed estimates. Mike Lindberg, president of the nonprofit Aerial Transportation Inc., acknowledged “the $15 million number was not a good number. It was simply a guesstimate.” Commissioner

S N A P S H O T F R O M P R A C T I C E 5 . 2 Council Fumes as Tram Tale Unfolds*

© Spaces Images/Blend Images LLC

* The Oregonian, January 13, 2006, by Frank Ryan, pages A1 and A14, and April 2, 2006, page A1.

Erik Sten said, “Those numbers were presented as much more firm than they appear to have been. . . . It appears the actual design wasn’t costed out. That’s pretty shoddy.”

136 Chapter 5 Estimating Project Times and Costs

rare cases canceling the project. Similar trade-offs can be compared for different levels of resources or increases in technical performance. The assumption is any movement away from the low-cost, efficient method will increase costs—e.g., overtime. The pre- ferred approach in defining the project is to make rough top-down estimates, develop the WBS/OBS, make bottom-up estimates, develop schedules and budgets, and recon- cile differences between top-down and bottom-up estimates. Hopefully, these steps will be done before final negotiation with either an internal or external customer. In conclusion, the ideal approach is for the project manager to allow enough time for both the top-down and bottom-up estimates to be worked out so a complete plan based on reliable estimates can be offered to the customer. In this way false expectations are minimized for all stakeholders and negotiation is reduced.

5.4 Methods for Estimating Project Times and Costs

Top-Down Approaches for Estimating Project Times and Costs At the strategic level top-down estimating methods are used to evaluate the project proposal. Sometimes much of the information needed to derive accurate time and cost estimates is not available in the initial phase of the project—for example, design is not finalized. In these situations top-down estimates are used until the tasks in the WBS are clearly defined.

Consensus Methods  This method simply uses the pooled experience of senior and/or middle managers to estimate the total project duration and cost. This typically involves a meeting where experts discuss, argue, and ultimately reach a decision as to their best guess estimate. Firms seeking greater rigor will use the Delphi Method to make these macro estimates. See Snapshot from Practice 5.3: The Delphi Method.

Originally developed by the RAND Corporation in 1969 for technological forecasting, the Delphi Method is a group decision process about the like- lihood that certain events will occur.

The Delphi Method makes use of a panel of experts familiar with the kind of project in question. The notion is that well-informed individuals, calling on their insights and experience, are better equipped to esti- mate project costs/times than theoretical approaches or statistical methods. Their responses to estimate questionnaires are anonymous, and they are provided with a summary of opinions. Experts are then encouraged to reconsider, and if appropriate, to change their previous estimate in light of the replies of other experts. After two or three rounds it is believed that the group will converge toward the

S N A P S H O T F R O M P R A C T I C E 5 . 3 The Delphi Method

“best” response through this consensus process. The midpoint of responses is statistically categorized by the median score. In each succeeding round of question- naires, the range of responses by the panelists will pre- sumably decrease and the median will move toward what is deemed to be the “correct” estimate. One distinct advantage of the Delphi Method is that the experts never need to be brought together physi- cally. The process also does not require complete agreement by all panelists, since the majority opinion is represented by the median. Since the responses are anonymous, the pitfalls of ego, domineering personali- ties, and the “bandwagon or halo effect” in responses are all avoided. On the other hand, future develop- ments are not always predicted correctly by iterative consensus nor by experts, but at times by creative, “off the wall” thinking.

Chapter 5 Estimating Project Times and Costs 137

It is important to recognize that these first top-down estimates are only a rough cut and typically occur in the “conceptual” stage of the project. The top-down estimates are helpful in initial development of a complete plan. However, such estimates are sometimes significantly off the mark because little detailed information is gathered. At this level individual work items are not identified. Or, in a few cases, the top-down estimates are not realistic because top management “wants the project.” Nevertheless, the initial top-down estimates are helpful in determining whether the project warrants more formal planning, which would include more detailed estimates. Be careful that macro estimates made by senior managers are not dictated to lower level managers who might feel compelled to accept the estimates even if they believe resources are inadequate. Although your authors prefer to avoid the top-down approach if possible, we have witnessed surprising accuracy in estimating project duration and cost in isolated cases. Some examples are building a manufacturing plant, building a distribution warehouse, developing air control for skyscraper buildings, and road construction. However, we have also witnessed some horrendous miscalculations, usually in areas where the tech- nology is new and unproven. Top-down methods can be useful if experience and judg- ment have been accurate in the past.

Ratio Methods  Top-down methods (sometimes called parametric) usually use ratios, or surrogates, to estimate project times or costs. Top-down approaches are often used in the concept or “need” phase of a project to get an initial duration and cost estimate for the project. For example, contractors frequently use number of square feet to estimate the cost and time to build a house; that is, a house of 2,700 square feet might cost $160 per square foot (2,700 feet × $160 per foot equals $432,000). Likewise, knowing the square feet and dollars per square foot, experience suggests it should take approximately 100 days to complete. Two other common examples of top-down cost estimates are the cost for a new plant estimated by capacity size, or a software product estimated by features and complexity.

Apportion Methods  This method is an extension to the ratio method. Apportionment is used when proj- ects closely follow past projects in features and costs. Given good historical data, estimates can be made quickly with little effort and reasonable accuracy. This method is very common in projects that are relatively standard but have some small variation or customization. Anyone who has borrowed money from a bank to build a house has been exposed to this process. Given an estimated total cost for the house, banks and the FHA (Federal Housing Authority) authorize pay to the contractor by completion of specific segments of the house. For example, foundation might represent 3 percent of the total loan, fram- ing 25 percent, plumbing and heating 15 percent, etc. Payments are made as these items are completed. An analogous process is used by some companies that apportion costs to deliverables in the WBS—given average cost percentages from past projects. Figure 5.1 presents an example similar to one found in practice. Assuming the total project cost is estimated, using a top-down estimate, to be $500,000, the costs are apportioned as a percentage of the total cost. For example, the costs apportioned to the “Document” deliverable are 5 percent of the total, or $25,000. The subdeliverables “Doc-1 and Doc-2” are allocated 2 and 3 percent of the total—$10,000 and $15,000, respectively.

138 Chapter 5 Estimating Project Times and Costs

Function Point Methods for Software and System Projects  In the software industry, software development projects are frequently estimated using weighted macro variables called “function points” or major parameters such as num- ber of inputs, number of outputs, number of inquiries, number of data files, and num- ber of interfaces. These weighted variables are adjusted for a complexity factor and added. The total adjusted count provides the basis for estimating the labor effort and cost for a project (usually using a regression formula derived from data of past proj- ects). This latter method assumes adequate historical data by type of software project for the industry—for example, MIS systems. In the U.S. software industry, one person- month represents on average five function points. A person working one month can generate on average (across all types of software projects) about five function points. Of course each organization needs to develop its own average for its specific type of work. Such historical data provide a basis for estimating the project duration. Varia- tions of this top-down approach are used by companies such as IBM, Bank of America, Sears Roebuck, HP, AT&T, Ford Motors, GE, DuPont, and many others. See Table 5.2 and Table 5.3 for a simplified example of function point count methodology. From historical data the organization developed the weighting scheme for complex- ity found in Table 5.2. Function points are derived from multiplying the number of kinds of elements by weighted complexity.

Total project cost $500,000

Design 20%

100,000

D-1 10%

50,000

D-2 10%

50,000

Program 30%

150,000

Test 40%

200,000

Document 5%

25,000

Produce CD 5%

25,000

Doc-1 2%

10,000

Doc-2 3%

15,000

CD-1 5%

25,000

P-1 20%

100,000

P-2 5%

25,000

P-3 5%

25,000

T-1 10%

50,000

T-2 10%

50,000

T-3 20%

100,000

FIGURE 5.1 Apportion Method of Allocating Project Costs Using the Work Breakdown Structure

TABLE 5.2 Simplified Basic Function Point Count Process for a Prospective Project or Deliverable

Complexity Weighting

Element Low Average High Total

Number of inputs _____ × 2 + _____ × 3 + _____ × 4 = _____ Number of outputs _____ × 3 + _____ × 6 + _____ × 9 = _____ Number of inquiries _____ × 2 + _____ × 4 + _____ × 6 = _____ Number of files _____ × 5 + _____ × 8 + _____ × 12 = _____ Number of interfaces _____ × 5 + _____ × 10 + _____ × 15 = _____

Chapter 5 Estimating Project Times and Costs 139

Table 5.3 shows the data collected for a specific task or deliverable: Patient Admit- ting and Billing—the number of inputs, outputs, inquiries, files, and interfaces along with the expected complexity rating. Finally, the application of the element count is applied and the function point count total is 660. Given this count and the fact that one person-month has historically been equal to 5 function points, the job will require 132 person-months (660/5 = 132). Assuming you have 10 programmers who can work on this task, the duration would be approximately 13 months. The cost is easily derived by multiplying the labor rate per month times 132 person-months. For example, if the monthly programmer rate is $4,000, then the estimated cost would be $528,000 (132 × 4,000). Although function point metrics are useful, their accuracy depends on adequate historical data, currency of data, and relevancy of the project/deliverable to past averages.

Learning Curves  Some projects require that the same task, group of tasks, or product be repeated several times. Managers know intuitively that the time to perform a task improves with repeti- tion. This phenomenon is especially true of tasks that are labor intensive. In these cir- cumstances the pattern of improvement phenomenon can be used to predict the reduc- tion in time to perform the task. From empirical evidence across all industries, the pattern of this improvement has been quantified in the learning curve (also known as improvement curve, experience curve, and industrial progress curve), which is described by the following relationship: Each time the output quantity doubles, the unit labor hours are reduced at a constant rate.

In practice the improvement ratio may vary from 60 percent, representing very large improvement, to 100 percent, representing no improvement at all. Generally, as the difficulty of the work decreases the expected improvement also decreases and the improvement ratio that is used becomes greater. One significant factor to consider is the proportion of labor in the task in relation to machine-paced work. Obviously, a lower percentage of improvement can occur only in operations with high labor content. Appendix 5.1 at the end of the chapter provides a detailed example of how the improve- ment phenomenon can be used to estimate time and cost for repetitive tasks.

TABLE 5.3 Example: Function Point Count Method

Software Project 13: Patient Admitting and Billing

15 Inputs Rated complexity as low (2) 5 Outputs Rated complexity as average (6) 10 Inquiries Rated complexity as average (4) 30 Files Rated complexity as high ##(12) 20 Interfaces Rated complexity as average #(10)

Application of Complexity Factor

Element Count Low Average High Total

Inputs ####15 × 2 = 30 Outputs 5 ×  6 = 30 Inquiries ###10 ×  4 = 40 Files 30 × 12 = 360 Interfaces 20 × 10 = 200 Total 660

140 Chapter 5 Estimating Project Times and Costs

The main disadvantage of top-down approaches to estimating is simply that the time and cost for a specific task are not considered. Grouping many tasks into a common basket encourages errors of omission and the use of imposed times and costs. Micro estimating methods are usually more accurate than macro methods.

Bottom-Up Approaches for Estimating Project Times and Costs Template Methods  If the project is similar to past projects, the costs from past projects can be used as a starting point for the new project. Differences in the new project can be noted and past times and costs adjusted to reflect these differences. For example, a ship repair dry- dock firm has a set of standard repair projects (i.e., templates for overhaul, electrical, mechanical) that are used as starting points for estimating the cost and duration of any new project. Differences from the appropriate standardized project are noted (for times, costs, and resources) and changes are made. This approach enables the firm to develop a potential schedule, estimate costs, and develop a budget in a very short time span. Development of such templates in a database can quickly reduce estimate errors.

Parametric Procedures Applied to Specific Tasks  Just as parametric techniques such as cost per square foot can be the source of top- down estimates, the same technique can be applied to specific tasks. For example, as part of an MS Office conversion project, 36 different computer workstations needed to be converted. Based on past conversion projects, the project manager determined that on average one person could convert three workstations per day. Therefore the task of converting the 36 workstations would take three technicians four days [(36/3)/3]. Simi- larly, to estimate the wallpapering allowance on a house remodel, the contractor fig- ured a cost of $5 per square yard of wallpaper and $2 per yard to install it, for a total cost of $7. By measuring the length and height of all the walls she was able to calculate the total area in square yards and multiply it by $7.

Range Estimating  When do you use range estimating? Range estimating works best when work packages have significant uncertainty associated with the time or cost to complete. If the work pack- age is routine and carries little uncertainty, using a person most familiar with the work package is usually the best approach. She is likely to know best how to estimate work packages durations and costs. However, when work packages have significant uncertainty associated with the time or cost to complete, it is a prudent policy to require three time estimates—low, average, and high (borrowed from PERT methodology that uses proba- bility distributions). The low to high give a range within which the average estimate will fall. Determining the low and high estimates for the activity is influenced by factors such as complexity, technology, newness, familiarity. How do you get the estimates? Since range estimating works best for work packages that have significant uncertainty, having a group determine the low, average, and high cost or duration gives best results. Group estimating tends to refine extremes by bringing more evaluative judgments to the estimate and potential risks. The judgment of others in a group helps to moderate extreme perceived risks associated with a time or cost estimate. Involving others in making activity estimates gains buy-in and credibility to the estimate. Figure 5.2 presents an abridged estimating template using three time estimates for work packages developed by a cross functional group(s) of project stakeholders. The group estimates show the low, average, and high for each work package. The Risk

Chapter 5 Estimating Project Times and Costs 141

Level column is the group’s independent assessment of the degree of confidence that the actual time will be very close to the estimate. In a sense this number represents the group’s evaluation of many factors (e.g., complexity, technology) that might impact the average time estimate. In our example, the group feels work packages 104, 108, 110, 111, and 114 have a high chance that the average time may vary from expected. Likewise, the group’s confidence feels the risk of work packages 102, 105, and 112 not materializing as expected is low. How do you use the estimate? Group range estimating gives the project manager and owner an opportunity to assess the confidence associated with project times (and/or costs). For example, a contractor responsible for building a high rise apartment building can tell the owner that the project will cost between 3.5 and 4.1 million dollars and take between six and nine months to complete. The approach helps to reduce surprises as the project progresses. The range estimating method also provides a basis for assessing risk, managing resources, and determining the project contingency fund. (See Chapter 7 for a discussion of contingency funds.) Range estimating is popular in software and new product projects where up-front requirements are fuzzy and not well known. Group range estimating is often used with phase estimating, which is discussed next.

A Hybrid: Phase Estimating This approach begins with a top-down estimate for the project and then refines esti- mates for phases of the project as it is implemented. Some projects by their nature cannot be rigorously defined because of the uncertainty of design or the final product. Although rare, such projects do exist. These projects are often found in aerospace proj- ects, IT projects, new technology projects, and construction projects where design is incomplete. In these projects, phase or life-cycle estimating is frequently used. Phase estimating is used when an unusual amount of uncertainty surrounds a proj- ect and it is impractical to estimate times and costs for the entire project. Phase estimat- ing uses a two-estimate system over the life of the project. A detailed estimate is developed for the immediate phase and a macro estimate is made for the remaining phases of the project. Figure 5.3 depicts the phases of a project and the progression of estimates over its life.

FIGURE 5.2 Range Estimating Template

142 Chapter 5 Estimating Project Times and Costs

For example, when the project need is determined, a macro estimate of the project cost and duration is made so analysis and decisions can be made. Simultaneously a detailed estimate is made for deriving project specifications and a macro estimate for the remainder of the project. As the project progresses and specifications are solidi- fied, a detailed estimate for design is made and a macro estimate for the remainder of the project is computed. Clearly, as the project progresses through its life cycle and more information is available, the reliability of the estimates should be improving. See Snapshot from Practice 5.4: Estimate Accuracy. Phase estimating is preferred by those working on projects where the final product is not known and the uncertainty is very large—for example, the integration of wireless phones and computers. The commitment to cost and schedule is only necessary over the next phase of the project and commitment to unrealistic future schedules and costs based on poor information is avoided. This progressive macro/micro method provides a stron- ger basis for using schedule and cost estimates to manage progress during the next phase.

FIGURE 5.3 Phase Estimating over Project Life Cycle

Phase

1

Need 1

Specifications 2

Detailed estimate

Design 3

Produce 4

Deliver 5

Detailed estimate

Detailed estimate

Detailed estimate

2

3

4

5

Macro estimate

Macro estimate

Macro estimate

Macro estimate

The smaller the element of a work package, the more accurate the over- all estimate is likely to be. The extent of this improvement varies by type of project. The table below is developed

to reflect this observation. For example, information technology projects that determine their time and cost estimates in the conceptual stage can expect their “actuals” to err up to 200 percent over cost and

S N A P S H O T F R O M P R A C T I C E 5 . 4 Estimate Accuracy

duration and, perhaps, as much as 30 percent under estimates. Conversely, estimates for buildings, roads, etc., made after the work packages are clearly defined, have a smaller error in actual costs and times of 15 per- cent over estimate and 5 percent less than estimate. Although these estimates vary by project, they can serve as ballpark numbers for project stakeholders selecting how project time and cost estimates will be derived.

Time and Cost Estimate Accuracy by Type of Project

Bricks and Mortar Information Technology

Conceptual stage +60% to −30% +200% to −30% Deliverables defined +30% to − 15% + 100% to − 15% Work packages defined + 15% to − 5% + 50% to − 5%

Chapter 5 Estimating Project Times and Costs 143

Unfortunately your customer—internal or external—will want an accurate estimate of schedule and cost the moment the decision is made to implement the project. Addi- tionally, the customer who is paying for the project often perceives phase estimating as a blank check because costs and schedules are not firm over most of the project life cycle. Even though the reasons for phase estimating are sound and legitimate, most customers have to be sold on its legitimacy. A major advantage for the customer is the opportunity to change features, re-evaluate, or even cancel the project in each new phase. In conclusion, phase estimating is very useful in projects that possess huge uncertainties concerning the final nature (shape, size, features) of the project. See Figure 5.4 for a summary of the differences between top-down and bottom-up estimates. Obtaining accurate estimates is a challenge. Committed organizations accept the challenge of coming up with meaningful estimates and invest heavily in developing their capacity to do so. Accurate estimates reduce uncertainty and support a discipline for effectively managing projects.

5.5 Level of Detail Level of detail is different for different levels of management. At any level the detail should be no more than is necessary and sufficient. Top management interests usually center on the total project and major milestone events that mark major accomplishments—e.g., “Build Oil Platform in the North Sea” or “Complete Proto- type.” Middle management might center on one segment of the project or one mile- stone. First-line managers’ interests may be limited to one task or work package. One of the beauties of WBS is the ability to aggregate network information so each level of management can have the kind of information necessary to make decisions. Getting the level of detail in the WBS to match management needs for effective implementation is crucial, but the delicate balance is difficult to find. See Snapshot from Practice 5.5: Level of Detail. The level of detail in the WBS varies with the

Top-Down Estimates

Bottom-Up Estimates

Intended Use Feasibility/conceptual phase

Rough time/cost estimate Fund requirements

Resource capacity planning

Intended Use Budgeting Scheduling

Resource requirements Fund timing

Preparation Cost 1/10 to 3/10 of a percent

of total project cost

Preparation Cost 3/10 of a percent

to 1.0 percent of total project cost

Accuracy Minus 20%, to plus 60%

Accuracy Minus 10%, to plus 30%

Method Consensus

Ratio Apportion

Function point Learning curves

Method Template

Parametric WBS packages

Range estimates

FIGURE 5.4 Top-Down and Bottom-Up Estimates

144 Chapter 5 Estimating Project Times and Costs

complexity of the project; the need for control; the project size, cost, duration; and other factors. If the structure reflects excessive detail, there is a tendency to break the work effort into department assignments. This tendency can become a barrier to suc- cess, since the emphasis will be on departmental outcomes rather than on deliverable outcomes. Excessive detail also means more unproductive paperwork. Note that if the level of the WBS is increased by one, the number of cost accounts may increase geo- metrically. On the other hand, if the level of detail is not adequate, an organization unit may find the structure falls short of meeting its needs. Fortunately, the WBS has built- in flexibility. Participating organization units may expand their portion of the structure to meet their special needs. For example, the engineering department may wish to further break their work on a deliverable into smaller packages by electrical, civil, and mechanical. Similarly, the marketing department may wish to break their new product promotion into TV, radio, periodicals, and newspapers.

5.6 Types of Costs Assuming work packages are defined, detailed cost estimates can be made. Here are typical kinds of costs found in a project: 1. Direct costs

a. Labor c. Equipment b. Materials d. Other

2. Direct project overhead costs 3. General and administrative (G&A) overhead costs

Distinguish different kinds of costs associated with a project.

5-4LO

Practicing project managers advocate keeping the level of detail to a mini- mum. But there are limits to this sug- gestion. One of the most frequent errors of new project managers is to

forget that the task time estimate will be used to control schedule and cost performance. A frequent rule of thumb used by practicing project managers says that a task duration should not exceed 5 workdays or at the most 10 workdays, if workdays are the time units used for the project. Such a rule probably will result in a more detailed network, but the additional detail pays off in controlling schedule and cost as the project progresses. Suppose the task is “build prototype computer- controlled conveyor belt,” the time estimate is 40 work- days, and the budget $300,000. It may be better to divide the task into seven or eight smaller tasks for control purposes. If one of the smaller tasks gets behind because of problems or a poor time estimate, it will be possible to take corrective action quickly and avoid delaying successive tasks and the project. If the

S N A P S H O T F R O M P R A C T I C E 5 . 5 Level of Detail—Rule of Thumb

single task of 40 workdays is used, it is possible that no corrective action would be taken until day 40, since many people have a tendency to “wait and see” or avoid admitting they are behind or passing on bad news; the result may mean far more than 5 days behind schedule. The 5- to 10-day rule of thumb applies to cost and performance goals. If using the rule of thumb sug- gested above results in too many network tasks, an alternative is available, but it has conditions. The activ- ity time can be extended beyond the 5- to 10-day rule only IF control monitoring checkpoints for segments of the task can be established so clear measures of prog- ress can be identified by a specific percent complete. This information is invaluable to the control process of measuring schedule and cost performance—for example, payments for contract work are paid on “per- cent complete” basis. Defining a task with clear defin- able start and end points and intermediate points enhances the chances of early detection of problems, corrective action, and on-time project completion.

Chapter 5 Estimating Project Times and Costs 145

The total project cost estimate is broken down in this fashion to sharpen the control process and improve decision making.

Direct Costs  These costs are clearly chargeable to a specific work package. Direct costs can be influenced by the project manager, project team, and individuals implementing the work package. These costs represent real cash outflows and must be paid as the project progresses; therefore, direct costs are usually separated from overhead costs. Lower- level project rollups frequently include only direct costs.

Direct Project Overhead Costs  Direct overhead rates more closely pinpoint which resources of the organization are being used in the project. Direct project overhead costs can be tied to project deliver- ables or work packages. Examples include the salary of the project manager and tem- porary rental space for the project team. Although overhead is not an immediate out- of-pocket expense, it is real and must be covered in the long run if the firm is to remain viable. These rates are usually a ratio of the dollar value of the resources used—e.g., direct labor, materials, equipment. For example, a direct labor burden rate of 20 per- cent would add a direct overhead charge of 20 percent to the direct labor cost estimate. A direct charge rate of 50 percent for materials would carry an additional 50 percent charge to the material cost estimate. Selective direct overhead charges provide a more accurate project (job or work package) cost, rather than using a blanket overhead rate for the whole project.

General and Administrative (G&A) Overhead Costs  These represent organization costs that are not directly linked to a specific project. These costs are carried for the duration of the project. Examples include organization costs across all products and projects such as advertising, accounting, and senior man- agement above the project level. Allocation of G&A costs varies from organization to organization. However, G&A costs are usually allocated as a percent of total direct cost, or a percent of the total of a specific direct cost such as labor, materials, or equipment. Given the totals of direct and overhead costs for individual work packages, it is pos- sible to cumulate the costs for any deliverable or for the entire project. A percentage can be added for profit if you are a contractor. A breakdown of costs for a proposed contract bid is presented in Figure 5.5. Perceptions of costs and budgets vary depending on their users. The project manager must be very aware of these differences when setting up the project budget and when communicating these differences to others. Figure 5.6 depicts these different

FIGURE 5.5 Contract Bid Summary Costs

Direct costs $80,000 Direct overhead  ###$20,000 Total direct costs $100,000 G&A overhead (20%)  ###$20,000 Total costs $120,000 Profit (20%)  ###$24,000 Total bid $144,000

146 Chapter 5 Estimating Project Times and Costs

perceptions. The project manager can commit costs months before the resource is used. This information is useful to the financial officer of the organization in forecasting future cash outflows. The project manager is interested in when the budgeted cost is expected to occur, and when the budgeted cost actually is charged (earned); the respective timings of these two cost figures are used to measure project schedule and cost variances.

5.7 Refining Estimates As described earlier in Chapter 4, detailed work package estimates are aggregated and “rolled up” by deliverable to estimate the total direct cost of the project. Similarly, esti- mated durations are entered into the project network to establish the project schedule and determine the overall duration of the project. Experience tells us that for many projects the total estimates do not materialize and the actual costs and schedule of some projects significantly exceed original work package–based estimates. In order to compensate for the problem of actual cost and schedule exceeding estimates, some project managers adjust total costs by some multiplier (i.e., total estimated costs × 1.20). The practice of adjusting original estimates by 20 percent or even 100 percent begs the question of why, after investing so much time and energy on detailed estimates, the numbers could be so far off. There are a number of reasons for this, most of which can be traced to the estimating process and the inherent uncertainty of predicting the future. Some of these reasons are discussed below. ∙ Interaction costs are hidden in estimates. According to the guidelines, each task

estimate is supposed to be done independently. However, tasks are rarely completed in a vacuum. Work on one task is dependent upon prior tasks, and the hand-offs between tasks require time and attention. For example, people working on prototype development need to interact with design engineers after the design is completed, whether to simply ask clarifying questions or to make adjustments in the original design. Similarly, the time necessary to coordinate activities is typically not reflected in independent estimates. Coordination is reflected in meetings and briefings as

Committed

Actual cost

Scheduled budget

$6,000

5,000

4,000

3,000

2,000

1,000

Project duration

C os

ts

FIGURE 5.6 Three Views of Cost

Chapter 5 Estimating Project Times and Costs 147

well as time necessary to resolve disconnects between tasks. Time, and therefore cost, devoted to managing interactions rises exponentially as the number of people and different disciplines involved increases on a project.

∙ Normal conditions do not apply. Estimates are supposed to be based on normal conditions. While this is a good starting point, it rarely holds true in real life. This is especially true when it comes to the availability of resources. Resource shortages, whether in the form of people, equipment, or materials, can extend original estimates. For example, under normal conditions four bulldozers are typically used to clear a certain site size in five days, but the availability of only three bulldozers would extend the task duration to eight days. Similarly, the decision to outsource certain tasks can increase costs as well as extend task durations since time is added to acclimating out- siders to the particulars of the project and the culture of the organization.

∙ Things go wrong on projects. Design flaws are revealed after the fact, extreme weather conditions occur, accidents happen, and so forth. Although you shouldn’t plan for these risks to happen when estimating a particular task, the likelihood and impact of such events need to be considered.

∙ Changes in project scope and plans. As one gets further and further into the proj- ect, a manager obtains a better understanding of what needs to be done to accom- plish the project. This may lead to major changes in project plans and costs. Like- wise, if the project is a commercial project, changes often have to be made midstream to respond to new demands by the customer and/or competition. Unstable project scopes are a major source of cost overruns. While every effort should be made up front to nail down the project scope, it is becoming increasingly difficult to do so in our rapidly changing world.

∙ Overly optimistic. There is solid research indicating that there is a tendency in people to overestimate how quickly they can get things done and underestimate how long it will take them to complete tasks (Lovallo, D., and D. Kahneman, 2003; Buehler, R., D. Griffin, and M. Ross, 1994).

∙ Strategic misrepresentation. There is growing evidence that some project promot- ers underestimate the costs of projects and overestimate project benefits in order to win approval. This appears to be particularly true for large-scale public works proj- ects which have a notorious habit of coming in way over budget (remember the earlier Snapshot from Practice 5.2: Council Fumes).

The reality is that for many projects not all of the information needed to make accu- rate estimates is available, and it is impossible to predict the future. The challenge is further compounded by human nature and the political dynamics associated with gain- ing project approval. The dilemma is that without solid estimates, the credibility of the project plan is eroded. Deadlines become meaningless, budgets become rubbery, and accountability becomes problematic. Challenges similar to those described above will influence the final time and cost estimates. Even with the best estimating efforts, it may be necessary to revise estimates based on relevant information prior to establishing a baseline schedule and budget. Effective organizations adjust estimates of specific tasks once risks, resources, and particulars of the situation have been more clearly defined. They recognize that the rolled- up estimates generated from a detailed estimate based on the WBS are just the starting point. As they delve further into the project-planning process, they make appropriate revi- sions both in the time and cost of specific activities. They factor the final assignment of resources into the project budget and schedule. For example, when they realize that only

148 Chapter 5 Estimating Project Times and Costs

three instead of four bulldozers are available to clear a site, they adjust both the time and cost of that activity. They adjust estimates to account for specific actions to mitigate poten- tial risks on the project. For example, to reduce the chances of design code errors, they would add the cost of independent testers to the schedule and budget. Finally, organizations adjust estimates to take into account abnormal conditions. For example, if soil samples reveal excessive ground water, then they adjust foundation costs and times. There will always be some mistakes, omissions, and adjustments that will require addi- tional changes in estimates. Fortunately every project should have a change management system in place to accommodate these situations and any impact on the project baseline. Change management and contingency funds will be discussed later in Chapter 7.

5.8 Creating a Database for Estimating The best way to improve estimates is to collect and archive data on past project esti- mates and actuals. Saving historical data—estimates and actuals—provides a knowl- edge base for improving project time and cost estimating. Creating an estimating data- base is a “best practice” among leading project management organizations. Some organizations have large estimating departments of professional estimators— e.g., Boeing, IBM—that have developed large time and cost databases. Others collect these data through the project office. This database approach allows the project estima- tor to select a specific work package item from the database for inclusion. The estima- tor then makes any necessary adjustments concerning the materials, labor, and equip- ment. Of course any items not found in the database can be added to the project—and ultimately to the database if desired. Again, the quality of the database estimates depends on the experience of the estimators, but over time the data quality should improve. Such structured databases serve as feedback for estimators and as bench- marks for cost and time for each project. In addition, comparison of estimate and actual for different projects can suggest the degree of risk inherent in estimates. See Figure 5.7 for the structure of a database similar to those found in practice.

Suggest a scheme for developing an estimating database for future projects.

5-5LO

FIGURE 5.7 Estimating Database Templates

Estimating database

Operation processes

Risk analysis

Documentation

Hardware MIS

EXAMPLE

1. Estimated & actuals on A. Labor B. Materials C. Equipment 2. Benchmarking ratios 3. Code of accounts

Product production

Programming

Chapter 5 Estimating Project Times and Costs 149

5.9 Mega Projects: A Special Case Mega projects are large-scale, complex ventures that typically cost $1 billion or more, take many years to complete, and involve multiple private and public stakeholders. They are often transformational, and impact millions of people (Flyvbjerg, 2014). Examples include high-speed rail lines, airports, healthcare reform, the Olympics, development of new aircraft, and so forth. What do these projects have in common beyond scope and complexity? They all tend to go way over budget and fall behind schedule. For example, the new Denver airport that opened in 1995 had cost overrun of 200 percent and was completed two years later than planned. The “Chunnel,” the 31-mile-plus tunnel that connects France with England, was 80 percent over budget. These are but two examples of many public works and other large-scale projects in which costs came in way over than planned. In a study of government infrastructure projects, Flyvbjerg found costs for bridges and tunnels, road, and rail to be underesti- mated 34 percent, 20 percent, and 45 percent, respectively, from baseline estimates (Flyvbjerg, Bruzelius, and Rothengatter, 2003)! Mega projects often involve a double whammy. Not only did they cost much more than expected, but they underdelivered on benefits they were to provide. The Denver Airport realized only 55 percent of forecasted traffic during its first year of operation. The Chunnel traffic revenues have been one-half of what was predicted with internal rate of return of −14.5 percent! Again Flyvbjerg’s study revealed a consistent pattern of underusage on most infrastructure projects (Flyvbjerg et al., 2003), including only a 5 percent forecasted usage for the Kolkata metro! So why does there appear to be a consistent pattern of overestimating benefits and underestimating costs? Many argue the sheer complexity and long time horizon make it impossible to accurately estimate costs and benefits. While this is certainly true, Flyvbjerg and his colleagues’ research suggests that other factors come in to play. They concluded that in most cases project promoters use deception to promote projects not for public good but for personal gain, political or economic. Deception may be delib- erate, or may be the product of overzealousness, optimism, and ignorance (Flyvbjerg et al., 2003). In some cases, promoters rationalize that nothing great would ever get built if people knew in advance what the real costs and challenges involved were (Hirschman, 1967). On some mega projects, there is a triple whammy. Not only are they over budget and under value, but the cost of maintaining them exceeds the benefits received. These kinds of projects are called white elephants. A “white elephant” suggests a valuable, but burdensome, possession which the owner cannot easily dispose of and whose cost (particularly upkeep) is out of propor- tion with its usefulness. The term derives from the story that the Kings of Siam (now Thailand) would often make a present of a white elephant to courtiers who had fallen out of favor with the king. At first glance, it was a great honor to receive such a revered beast from the king. However, the true intent was to ruin the recipient by forcing him to absorb the costs of taking care of the animal. Examples of white elephants abound. While traveling across southern China one of the authors was struck by the palatial stature of the Trade Expo buildings each city had. It was as if each city tried to outdo its neighbor in terms of grandeur. When asked how often they were used, city officials would say once or twice a year. The 2015 FIFA scandal brought attention to the hidden costs of hosting the World Cup. South Africa built six new world class stadiums for the 2010 competition. None of the post-World Cup revenue generated from these stadiums exceeds their maintenance cost (Molloy and Chetty, 2015).

Understand the chal- lenge of estimating mega projects and describe steps that lead to better informed decisions.

5-6LO

Define a “white ele- phant” in project man- agement and provide examples.

5-7LO

150 Chapter 5 Estimating Project Times and Costs

White elephants are not limited to buildings and stadiums. Air France had to moth- ball the Concorde, the world’s fastest commercial airline, because maintenance costs and noise restrictions did not justify a three-flights-a-week schedule. It is not uncom- mon in our personal lives to acquire white elephants, such as underutilized vacation homes or yachts. Flyvbjerg and others argue that cost overrun is not the price of doing big things and that we are capable of making better informed decisions on mega projects. The first step is to assume there is optimism bias and even deception on the part of promoters. Propos- als should require a thorough review by impartial observers who do not have vested inter- est in the project. Some if not all financial risk should be absorbed by promoters and those who benefit financially from the project. Sustainable business practices should be used and maintenance costs be integrated into the forecasted cost/benefit analyses of projects. See Snapshot from Practice 5.6: London 2012 Olympics to see how British organizers tried to avoid the curse of the white elephant in the 2012 Olympic games.

Once hosting the Olympics was consid- ered the crown prize and a tremendous source of national and local pride. Seven cities competed to host the 1992 Winter Olympics. For the 2022 Winter

Olympics only Beijing and Almaty (Kazakhstan) submit- ted bids. Oslo (Norway), the favorite, withdrew applica- tion due to a lack of public support. Likewise, Boston withdrew application for the 2024 Summer Olympics in the face of public outcry. Why the outcry? Because of the legacy of exorbitant cost overruns and draining mainte- nance costs. The Olympics has a long history of expen- sive white elephants. For example, the Beijing National Stadium, nicknamed the Bird’s Nest, built at cost of $480 million for the 2008 Olympic games, requires over $10 million each year to maintain, and has no regular tenant. Some have attributed the Greek economic melt- down to exorbitant debt accrued from hosting the 2004 summer games (Flyvbjerg, 2014). Perhaps the most infa- mous example is the “Big Owe,” Montreal’s Olympic Stadium, which took Canadian taxpayers over thirty years to pay off and was not even finished in time for the 1976 Olympics! The London 2012 organizers were committed to turning this around. In particular, they were well aware of hidden post-Olympic maintenance costs of buildings that were no longer in demand. One advantage they had over less developed countries is that the infrastructure and many of the arenas were already in place and the Olympics provided a necessary upgrade. They built tem- porary arenas for less popular sports. For example, after the games the water polo arena was deconstructed and

© Sophie Vigneault /123RF

S N A P S H O T F R O M P R A C T I C E 5 . 6 London 2012 Olympics: Avoiding White Elephant Curse*

materials recycled. The 12,000-seat basketball arena was designed to be portable so it could be used in future Olympics. Scalability was another key consideration. For example, during the Olympics over 17,000 people watched swimming events in the newly constructed aquatic center. The aquatic center was downsized to a 2,500-person capacity after the Olympics and is now open to the public. In recognition of its achievements, London 2012 Olympics won Gold in the Environmental and Sustain- ability category of the 6th International Sports Events awards. “We set out with a huge promise to the world, to deliver the most sustainable Olympic Games of mod- ern times,” says David Stubbs, London 2012’s Head of Sustainability. “Seven years, nine million visitors, and 2,484 medals later, that’s exactly what we achieved.”

* “London 2012’s Sustainability Legacy Lives On,” Olympic .org, accessed October 10, 2015.

Chapter 5 Estimating Project Times and Costs 151

In particular, Flyvbjerg advocates an external view based on the outcome of similar projects completed in the past. It is called reference class forecasting (RCF) and involves three major steps: 1. Select a reference class of projects similar to your potential project, for example,

cargo ships or bridges. 2. Collect and arrange outcome data as a distribution. Create a distribution of cost

overruns as a percentage of the original project estimate (low to high). 3. Use the distribution data to arrive at a realistic forecast. Compare the original cost

estimate for the project with the reference class projects. (For example, ask an advo- cate of rail tunnel what strong evidence do you have that your project will not follow the tunnel projects in the reference class?)

The benefits of RCF are compelling: ∙ Outside empirical data mitigates human bias. ∙ Political, strategic, and promoter forces have difficulty ignoring outside RCF

information. ∙ Serves as reality check for funding large projects. ∙ Helps executives avoid unsound optimism. ∙ Leads to improved accountability. ∙ Provides basis for project contingency funds. The use of RCF is increasing as governments and organizations require this method be used to temper project promoters’ estimates and reduce cost/benefit inaccuracies.

Summary Quality time and cost estimates are the bedrock of project control. Past experience is the best starting point for these estimates. The quality of estimates is influenced by other factors such as people, technology, and downtimes. The key for getting estimates that represent realistic average times and costs is to have an organization culture that allows errors in estimates without incriminations. If times represent average time, we should expect that 50 percent will be less than the estimate and 50 percent will exceed the estimate. The use of teams that are highly motivated can help in keeping task times and costs near the average. For this reason, it is crucial to get the team to buy into time and cost estimates. Using top-down estimates is good for initial and strategic decision making or in situations where the costs associated with developing better estimates have little ben- efit. However, in most cases the bottom-up approach to estimating is preferred and more reliable because it assesses each work package, rather than the whole project, section, or deliverable of a project. Estimating time and costs for each work package facilitates development of the project schedule and a time-phased budget, which are needed to control the project as it is implemented. Using the estimating guidelines will help eliminate many common mistakes made by those unacquainted with estimating times and costs for project control. Establishing a time and cost estimating database fits well with the learning organization philosophy. The level of time and cost detail should follow the old saying of “no more than is necessary and sufficient.” Managers must remember to differentiate between commit- ted outlays, actual costs, and scheduled costs. It is well known that up-front efforts in

152 Chapter 5 Estimating Project Times and Costs

clearly defining project objectives, scope, and specifications vastly improve time and cost estimate accuracy. How estimates are gathered and how they are used can affect their usefulness for planning and control. The team climate, organization culture, and organization struc- ture can strongly influence the importance attached to time and cost estimates and how they are used in managing projects. Finally, large-scale mega projects like subway systems or football stadiums often suffer from underestimated costs and overestimated benefits. They also can evolve into “white elephants” in which the cost of maintenance exceeds benefits. Steps must be taken to remove bias and compare mega project estimates with similar projects that have been done in the past.

Key Terms Apportionment, 137 Bottom-up estimates, 135 Delphi Method, 136 Direct costs, 145 Function points, 138 Learning curve, 139

Overhead costs, 145 Phase estimating, 141 Range estimating, 140 Ratio methods, 137 Reference class forecasting (RCF), 151

Template method, 140 Time and cost databases, 148 Top-down estimates, 134 White elephant, 149

1. Why are accurate estimates critical to effective project management? 2. How does the culture of an organization influence the quality of estimates? 3. What are the differences between bottom-up and top-down estimating approaches?

Under what conditions would you prefer one over the other? 4. What are the major types of costs? Which costs are controllable by the project

manager? 5. Why is it difficult to estimate mega project (e.g., airports, stadiums, etc.) costs and

benefits? 6. Define what a “white elephant” is in project management. Provide a real-life

example.

Review Questions

1. Calculate the direct cost of labor for a project team member using the following data:

Hourly rate: $40/hr Hours needed: 80 Overhead rate: 40%

2. Mrs. Tolstoy and her husband, Serge, are planning their dream house. The lot for the house sits high on a hill with a beautiful view of the Appalachian Mountains. The plans show the size of the house to be 2,900 square feet. The average price for a lot and house similar to this one has been $120 per square foot. Fortunately, Serge is a retired plumber and feels he can save money by installing the plumbing him- self. Mrs. Tolstoy feels she can take care of the interior decorating.

Exercises

The following average cost information is available from a local bank that makes loans to local contractors and dispenses progress payments to contractors when spe- cific tasks are verified as complete.

24% Excavation and framing complete   8% Roof and fireplace complete   3% Wiring roughed in   6% Plumbing roughed in   5% Siding on 17% Windows, insulation, walks, plaster, and garage complete   9% Furnace installed   4% Plumbing fixtures installed 10% Exterior paint, light fixtures installed, finish hardware installed   6% Carpet and trim installed   4% Interior decorating   4% Floors laid and finished

a. What is the estimated cost for the Tolstoys’ house if they use contractors to com- plete all of the house?

b. Estimate what the cost of the house would be if the Tolstoys use their talents to do some of the work themselves.

3. Exercise Figure 5.1 is a project WBS with cost apportioned by percentages. If the total project cost is estimated to be $600,000, what are the estimated costs for the following deliverables? a. Design b. Programming c. In-house testing

What weaknesses are inherent in this estimating approach?

Router systems project Cost: $600,000

Definition

10%

Design

40%

Implementation

50%

Objectives

4%

Requirements

6%

Inputs

3%

Outputs

3%

Files

4%

Interfaces

10%

Programming

20%

In-house testing

40%

Customer testing & review

10%

EXERCISE FIGURE 5.1  WBS Figure

Chapter 5 Estimating Project Times and Costs 153

4. Firewall Project XT. Using the “complexity weighting” scheme shown in Table 5.3 and the function point complexity weight table shown below, estimate the total function point count. Assume historical data suggest five function points equal one person a month and six people can work on the project.

Complexity Weight Table

Number of inputs ####10 Rated complexity low Number of outputs 20 Rated complexity average Number of inquiries ####10 Rated complexity average Number of files 30 Rated complexity high Number of interfaces 50 Rated complexity high

a. What is the estimated project duration? b. If 20 people are available for the project, what is the estimated project duration? c. If the project must be completed in six months, how many people will be needed

for the project?

References Buehler, R., D. Griffin, and M. Ross, “Exploring the ‘Planning Fallacy’: Why People Underestimate Their Task Completion Times,” Journal of Personality and Social Psychology, vol. 67, no. 3 (1994), pp. 366–81. Dalkey, N. C., D. L. Rourke, R. Lewis, and D. Snyder, Studies in the Quality of Life: Delphi and Decision Making (Lexington, MA: Lexington Books, 1972). Flyvbjerg, Bent, “From Nobel Prize to Project Management: Getting Risks Right,” Project Management Journal, August 2006, pp. 5–15. Flyvbjerg, Bent, “Curbing Optimism Bias and Strategic Misrepresentation in Plan- ning: Reference Class Forecasting in Practice,” European Planning Studies, vol. 16, no. 1 (January 2008), pp. 3–21. Flyvbjerg, Bent, N. Bruzelius, and W. Rothengatter, Mega Projects and Risk: An Anatomy of Ambition (Cambridge Press, 2003). Flyvbjerg, B., “What You Should Know about Megaprojects and Why: An Over- view,” Project Management Journal, vol. 45, no. 2 (April/May 2014), pp. 6–19. Gray, N. S., “Secrets to Creating the Elusive ‘Accurate Estimate,’” PM Network, vol. 15, no. 8 (August 2001), p. 56. Hirschman. A. O., “The Principle of the Hiding Hand,” The Public Interest, Winter 1967, pp. 10–23. Jeffery, R., G. C. Low, and M. Barnes, “A Comparison of Function Point Counting Techniques,” IEEE Transactions on Software Engineering, vol. 19, no. 5 (1993), pp. 529–32. Jones, C., Applied Software Measurement (New York: McGraw-Hill, 1991). Jones, C., Estimating Software Costs (New York: McGraw-Hill, 1998). Kharbanda, O. P., and J. K. Pinto, What Made Gertie Gallop: Learning from Project Failures (New York: Von Nostrand Reinhold, 1996).

154 Chapter 5 Estimating Project Times and Costs

Lovallo, D., and D. Kahneman, “Delusions of Success: How Optimism Undermines Executives’ Decisions,” Harvard Business Review, July 2003, pp. 56–63. Magne, E., K. Emhjellenm, and P. Osmundsen, “Cost Estimation Overruns in the North Sea,” Project Management Journal, vol. 34, no. 1 (2003), pp. 23–29. McLeod, G., and D. Smith, Managing Information Technology Projects (Cambridge, MA: Course Technology, 1996). Molloy, E., and T. Chetty, “The Rocky Road to Legacy: Lessons from the 2010 FIFA World Cup South Africa Stadium Program,” Project Management Journal, vol. 46, no. 3 (June/July 2015), pp. 88–107. Milosevic, D. Z., Project Management ToolBox (Upper Saddle River, NJ: John Wiley, 2003), p. 229. Pressman, R. S., Software Engineering: A Practitioner’s Approach, 4th ed. (New York: McGraw-Hill, 1997). Symons, C. R., “Function Point Analysis: Difficulties and Improvements,” IEEE Transactions on Software Engineering, vol. 14, no. 1 (1988), pp. 2–11.

Case 5.1

Sharp Printing, AG Three years ago the Sharp Printing (SP) strategic management group set a goal of hav- ing a color laser printer available for the consumer and small business market for less than $200. A few months later the senior management met off-site to discuss the new product. The results of this meeting were a set of general technical specifications along with major deliverables, a product launch date, and a cost estimate based on prior experience. Shortly afterward, a meeting was arranged for middle management explaining the project goals, major responsibilities, the project start date, and importance of meeting the product launch date within the cost estimate. Members of all departments involved attended the meeting. Excitement was high. Although everyone saw the risks as high, the promised rewards for the company and the personnel were emblazoned in their minds. A few participants questioned the legitimacy of the project duration and cost estimates. A couple of R&D people were worried about the technology required to produce the high-quality product for less than $200. But given the excitement of the moment, everyone agreed the project was worth doing and doable. The color laser printer project was to have the highest project priority in the company. Lauren was selected to be the project manager. She had 15 years of experience in printer design and manufacture, which included successful management of several projects related to printers for commercial markets. Since she was one of those uncom- fortable with the project cost and time estimates, she felt getting good bottom-up time and cost estimates for the deliverables was her first concern. She quickly had a meeting with the significant stakeholders to create a WBS identifying the work packages and organizational unit responsible for implementing the work packages. Lauren stressed

Chapter 5 Estimating Project Times and Costs 155

156 Chapter 5 Estimating Project Times and Costs

she wanted time and cost estimates from those who would do the work or were the most knowledgeable, if possible. Getting estimates from more than one source was encouraged. Estimates were due in two weeks. The compiled estimates were placed in the WBS/OBS. The corresponding cost esti- mate seemed to be in error. The cost estimate was $1,250,000 over the top-down senior management estimate; this represented about a 20 percent overrun! Furthermore the bottom-up time estimate based on the project network was four months longer than the top management time estimate. Another meeting was scheduled with the significant stakeholders to check the estimates and to brainstorm for alternative solutions. At this meeting everyone agreed the bottom-up cost and time estimates appeared to be accu- rate. Some of the suggestions for the brainstorming session are listed below. ∙ Change scope. ∙ Outsource technology design. ∙ Use the priority matrix (found in Chapter 4) to get top management to clarify their

priorities. ∙ Partner with another organization or build a research consortium to share costs and

to share the newly developed technology and production methods. ∙ Cancel the project. ∙ Commission a break-even study for the laser printer. Very little in the way of concrete savings was identified, although there was consen- sus that time could be compressed to the market launch date, but at additional costs. Lauren met with the marketing (Connor), production (Kim), and design (Gage) man- agers who yielded some ideas for cutting costs, but nothing significant enough to have a large impact. Gage remarked, “I wouldn’t want to be the one to deliver the message to top management that their cost estimate is $1,250,000 off! Good luck, Lauren.” 1. At this point, what would you do if you were the project manager? 2. Was top management acting correctly in developing an estimate? 3. What estimating techniques should be used for a mission critical project such as this?

Case 5.2

Post Graduation Adventure Josh and Mike met each other as roommates during freshman year at MacAlister Col- lege in St. Paul, Minnesota. Despite a rocky start they became best friends. They are planning on going on a two-week adventure together to celebrate their graduation in June. Josh has never been to Europe and wants to visit France or Spain. Mike spent a semester abroad in Aarhus, Denmark, and traveled extensively in northern Europe. Even though he never went to France or Spain, Mike wants to go to someplace more exotic like South Africa or Vietnam. For the past week they have been arguing back and forth over where they should go. Josh argues that it will cost too much to fly to South Africa or Vietnam, while Mike counters that it will be much cheaper to travel in Vietnam or South Africa once they are there. Each of them agreed that they can spend no more than $3,500 each on the trip and could be gone for only two weeks. One evening when they were arguing with each other over beers with friends, Sara said, “Why don’t you use what you learned in your project management class

Chapter 5 Estimating Project Times and Costs 157

to decide what to do?” Josh and Mike looked at each other and agreed that made perfect sense. 1. Assume you are either Mike or Josh; how would you go about making a decision

using project management methodology? 2. Looking first at only cost, what decision would you make? 3. After cost, what other factors should be considered before making a decision?

Appendix 5.1

LEARNING OBJECTIVES After reading this appendix you should be able to:

A5-1 Use learning curves to improve task estimates.

Learning Curves for Estimating A forecast estimate of the time required to perform a work package or task is a basic necessity for scheduling the project. In some cases, the manager simply uses judgment and past experience to estimate work package time, or may use historical records of similar tasks. Most managers and workers intuitively know that improvement in the amount of time required to perform a task or group of tasks occurs with repetition. A worker can perform a task better/quicker the second time and each succeeding time she/he per- forms it (without any technological change). It is this pattern of improvement that is important to the project manager and project scheduler. This improvement from repetition generally results in a reduction of labor hours for the accomplishment of tasks and results in lower project costs. From empirical evi- dence across all industries, the pattern of this improvement has been quantified in the learning curve (also known as improvement curve, experience curve, and industrial progress curve), which is described by the following relationship:

Each time the output quantity doubles, the unit labor hours are reduced at a constant rate.

For example, assume that a manufacturer has a new contract for 16 prototype units and a total of 800 labor hours were required for the first unit. Past experience has indi- cated that on similar types of units the improvement rate was 80 percent. This relation- ship of improvement in labor hours is shown below:

Unit Labor Hours    1 800   2 800 × .80 = 640   4 640 × .80 = 512   8 512 × .80 = 410 16 410 × .80 = 328

By using Table A5.1 unit values, similar labor hours per unit can be determined. Looking across the 16 unit level and down the 80 percent column, we find a ratio

Use learning curves to improve task estimates.

A5-1LO

158 Chapter 5 Estimating Project Times and Costs

TABLE A5.1 Learning Curves Unit Values

Units 60% 65% 70% 75% 80% 85% 90% 95%

1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 2 .6000 .6500 .7000 .7500 .8000 .8500 .9000 .9500 3 .4450 .5052 .5682 .6338 .7021 .7729 .8462 .9219 4 .3600 .4225 .4900 .5625 .6400 .7225 .8100 .9025 5 .3054 .3678 .4368 .5127 .5956 .6857 .7830 .8877 6 .2670 .3284 .3977 .4754 .5617 .6570 .7616 .8758 7 .2383 .2984 .3674 .4459 .5345 .6337 .7439 .8659 8 .2160 .2746 .3430 .4219 .5120 .6141 .7290 .8574 9 .1980 .2552 .3228 .4017 .4930 .5974 .7161 .8499 10 .1832 .2391 .3058 .3846 .4765 .5828 .7047 .8433 12 .1602 .2135 .2784 .3565 .4493 .5584 .6854 .8320 14 .1430 .1940 .2572 .3344 .4276 .5386 .6696 .8226 16 .1296 .1785 .2401 .3164 .4096 .5220 .6561 .8145 18 .1188 .1659 .2260 .3013 .3944 .5078 .6445 .8074 20 .1099 .1554 .2141 .2884 .3812 .4954 .6342 .8012 22 .1025 .1465 .2038 .2772 .3697 .4844 .6251 .7955 24 .0961 .1387 .1949 .2674 .3595 .4747 .6169 .7904 25 .0933 .1353 .1908 .2629 .3548 .4701 .6131 .7880 30 .0815 .1208 .1737 .2437 .3346 .4505 .5963 .7775 35 .0728 .1097 .1605 .2286 .3184 .4345 .5825 .7687 40 .0660 .1010 .1498 .2163 .3050 .4211 .5708 .7611 45 .0605 .0939 .1410 .2060 .2936 .4096 .5607 .7545 50 .0560 .0879 .1336 .1972 .2838 .3996 .5518 .7486 60 .0489 .0785 .1216 .1828 .2676 .3829 .5367 .7386 70 .0437 .0713 .1123 .1715 .2547 .3693 .5243 .7302 80 .0396 .0657 .1049 .1622 .2440 .3579 .5137 .7231 90 .0363 .0610 .0987 .1545 .2349 .3482 .5046 .7168 100 .0336 .0572 .0935 .1479 .2271 .3397 .4966 .7112 120 .0294 .0510 .0851 .1371 .2141 .3255 .4830 .7017 140 .0262 .0464 .0786 .1287 .2038 .3139 .4718 .6937 160 .0237 .0427 .0734 .1217 .1952 .3042 .4623 .6869 180 .0218 .0397 .0691 .1159 .1879 .2959 .4541 .6809 200 .0201 .0371 .0655 .1109 .1816 .2887 .4469 .6757 250 .0171 .0323 .0584 .1011 .1691 .2740 .4320 .6646 300 .0149 .0289 .0531 .0937 .1594 .2625 .4202 .5557 350 .0133 .0262 .0491 .0879 .1517 .2532 .4105 .6482 400 .0121 .0241 .0458 .0832 .1453 .2454 .4022 .6419 450 .0111 .0224 .0431 .0792 .1399 .2387 .3951 .6363 500 .0103 .0210 .0408 .0758 .1352 .2329 .3888 .6314 600 .0090 .0188 .0372 .0703 .1275 .2232 .3782 .6229 700 .0080 .0171 .0344 .0659 .1214 .2152 .3694 .6158 800 .0073 .0157 .0321 .0624 .1163 .2086 .3620 .6098 900 .0067 .0146 .0302 .0594 .1119 .2029 .3556 .6045 1,000 .0062 .0137 .0286 .0569 .1082 .1980 .3499 .5998 1,200 .0054 .0122 .0260 .0527 .1020 .1897 .3404 .5918 1,400 .0048 .0111 .0240 .0495 .0971 .1830 .3325 .5850 1,600 .0044 .0102 .0225 .0468 .0930 .1773 .3258 .5793 1,800 .0040 .0095 .0211 .0446 .0895 .1725 .3200 .5743 2,000 .0037 .0089 .0200 .0427 .0866 .1683 .3149 .5698 2,500 .0031 .0077 .0178 .0389 .0606 .1597 .3044 .5605 3,000 .0027 .0069 .0162 .0360 .0760 .1530 .2961 .5530

Chapter 5 Estimating Project Times and Costs 159

of .4096. By multiplying this ratio times the labor hours for the first unit, we obtain the per unit value:

.4096 × 800 = 328 hours or 327.68 That is, the 16th unit should require close to 328 labor hours, assuming an 80 percent improvement ratio. Obviously, a project manager may need more than a single unit value for estimating the time for some work packages. The cumulative values in Table A5.2 provide factors for computing the cumulative total labor hours of all units. In the previous example, for the first 16 units, the total labor hours required would be

800 × 8.920 = 7,136 hours By dividing the total cumulative hours (7,136) by the units, the average unit labor hours can be obtained:

7,136 labor hours/16 units = 446 average labor hours per unit Note how the labor hours for the 16th unit (328) differs from the average for all 16 units (446). The project manager, knowing the average labor costs and processing costs, could estimate the total prototype costs. (The mathematical derivation of factors found in Tables A5.1 and A5.2 can be found in Jelen, F. C., and J. H. Black, Cost and Optimization Engineering, 2nd ed. (New York: McGraw-Hill, 1983.)

FOLLOW-ON CONTRACT EXAMPLE Assume the project manager gets a follow-on order of 74 units; how should she esti- mate labor hours and cost? Going to the cumulative Table A5.2 we find at the 80 per- cent ratio and 90 total units intersection—a 30.35 ratio.

800 × 30.35 = 24,280 labor hours for 90 units Less previous 16 units =   7,136 Total follow-on order = 17,144 labor hours 17,144/74 equals 232 average labor hours per unit

Labor hours for the 90th unit can be obtained from Table A5.1: .2349 × 800 = 187.9 labor hours. (For ratios between given values, simply estimate.) Exercise A5.1

Norwegian Satellite Development Company Cost Estimates for World Satellite Telephone Exchange Project

NSDC has a contract to produce eight satellites to support a worldwide telephone sys- tem (for Alaska Telecom, Inc.) that allows individuals to use a single, portable tele- phone in any location on earth to call in and out. NSDC will develop and produce the eight units. NSDC has estimated that the R&D costs will be NOK (Norwegian Krone) 12,000,000. Material costs are expected to be NOK 6,000,000. They have estimated the design and production of the first satellite will require 100,000 labor hours and an

160 Chapter 5 Estimating Project Times and Costs

TABLE A5.2 Learning Curves Cumulative Values

Units 60% 65% 70% 75% 80% 85% 90% 95%

1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2 1.600 1.650 1.700 1.750 1.800 1.850 1.900 1.950 3 2.045 2.155 2.268 2.384 2.502 2.623 2.746 2.872 4 2.405 2.578 2.758 2.946 3.142 3.345 3.556 3.774 5 2.710 2.946 3.195 3.459 3.738 4.031 4.339 4.662 6 2.977 3.274 3.593 3.934 4.299 4.688 5.101 5.538 7 3.216 3.572 3.960 4.380 4.834 5.322 5.845 6.404 8 3.432 3.847 4.303 4.802 5.346 5.936 6.574 7.261 9 3.630 4.102 4.626 5.204 5.839 6.533 7.290 8.111 10 3.813 4.341 4.931 5.589 6.315 7.116 7.994 8.955 12 4.144 4.780 5.501 6.315 7.227 8.244 9.374 10.62 14 4.438 5.177 6.026 6.994 8.092 9.331 10.72 12.27 16 4.704 5.541 6.514 7.635 8.920 10.38 12.04 13.91 18 4.946 5.879 6.972 8.245 9.716 11.41 13.33 15.52 20 5.171 6.195 7.407 8.828 10.48 12.40 14.64 17.13 22 5.379 6.492 7.819 9.388 11.23 13.38 15.86 18.72 24 5.574 6.773 8.213 9.928 11.95 14.33 17.10 20.31 25 5.668 6.909 8.404 10.19 12.31 14.80 17.71 21.10 30 6.097 7.540 9.305 11.45 14.02 17.09 20.73 25.00 35 6.478 8.109 10.13 12.72 15.64 19.29 23.67 28.86 40 6.821 8.631 10.90 13.72 17.19 21.43 26.54 32.68 45 7.134 9.114 11.62 14.77 18.68 23.50 29.37 36.47 50 7.422 9.565 12.31 15.78 20.12 25.51 32.14 40.22 60 7.941 10.39 13.57 17.67 22.87 29.41 37.57 47.65 70 8.401 11.13 14.74 19.43 25.47 33.17 42.87 54.99 80 8.814 11.82 15.82 21.09 27.96 36.80 48.05 62.25 90 9.191 12.45 16.83 22.67 30.35 40.32 53.14 69.45 100 9.539 13.03 17.79 24.18 32.65 43.75 58.14 76.59 120 10.16 14.16 19.57 27.02 37.05 50.39 67.93 90.71 140 10.72 15.08 21.20 29.67 41.22 56.78 77.46 104.7 160 11.21 15.97 22.72 32.17 45.20 62.95 86.80 118.5 180 11.67 16.79 24.14 34.54 49.03 68.95 95.96 132.1 200 12.09 17.55 25.48 36.80 52.72 74.79 105.0 145.7 250 13.01 19.28 28.56 42.08 61.47 88.83 126.9 179.2 300 13.81 20.81 31.34 46.94 69.66 102.2 148.2 212.2 350 14.51 22.18 33.89 51.48 77.43 115.1 169.0 244.8 400 15.14 23.44 36.26 55.75 84.85 127.6 189.3 277.0 450 15.72 24.60 38.48 59.80 91.97 139.7 209.2 309.0 500 16.26 25.68 40.58 63.68 98.85 151.5 228.8 340.6 600 17.21 27.67 44.47 70.97 112.0 174.2 267.1 403.3 700 18.06 29.45 48.04 77.77 124.4 196.1 304.5 465.3 800 18.82 31.09 51.36 84.18 136.3 217.3 341.0 526.5 900 19.51 32.60 54.46 90.26 147.7 237.9 376.9 587.2 1,000 20.15 34.01 57.40 96.07 158.7 257.9 412.2 647.4 1,200 21.30 36.59 62.85 107.0 179.7 296.6 481.2 766.6 1,400 22.32 38.92 67.85 117.2 199.6 333.9 548.4 884.2 1,600 23.23 41.04 72.49 126.8 218.6 369.9 614.2 1001. 1,800 24.06 43.00 76.85 135.9 236.8 404.9 678.8 1116. 2,000 24.83 44.84 80.96 144.7 254.4 438.9 742.3 1230. 2,500 26.53 48.97 90.39 165.0 296.1 520.8 897.0 1513. 3,000 27.99 52.62 98.90 183.7 335.2 598.9 1047. 1791.

Chapter 5 Estimating Project Times and Costs 161

80 percent improvement curve is expected. Skilled labor cost is NOK 300 per hour. Desired profit for all projects is 25 percent of total costs. A. How many labor hours should the eighth satellite require? B. How many labor hours for the whole project of eight satellites? C. What price would you ask for the project? Why? D. Midway through the project your design and production people realize that a

75 percent improvement curve is more appropriate. What impact does this have on the project?

E. Near the end of the project, Deutsch Telefon AG has requested a cost estimate for four satellites identical to those you have already produced. What price will you quote them? Justify your price.

162

Developing a Project Plan6 LEARNING OBJECTIVES After reading this chapter you should be able to:

6-1 Understand the linkage between WBS and the project network.

6-2 Diagram a project network using AON methods.

6-3 Calculate early, late, and slack activity times.

6-4 Identify and understand the importance of managing the critical path.

6-5 Distinguish free slack from total slack.

6-6 Demonstrate understanding and application of lags in compressing projects or constraining the start or finish of an activity.

OUTLINE 6.1 Developing the Project Network

6.2 From Work Package to Network

6.3 Constructing a Project Network

6.4 Activity-on-Node (AON) Fundamentals

6.5 Network Computation Process

6.6 Using the Forward and Backward Pass Information

6.7 Level of Detail for Activities

6.8 Practical Considerations

6.9 Extended Network Techniques to Come Closer to Reality

Summary

C H A P T E R S I X

163

I keep six honest serving-men (they taught me all I knew); their names are What and Why and When and How and Where and Who. —Rudyard Kipling

6.1 Developing the Project Network The project network is the tool used for planning, scheduling, and monitoring project progress. The network is developed from the information collected for the WBS and is a graphic flow chart of the project job plan. The network depicts the project activities that must be completed, the logical sequences, the interdependencies of the activities to be completed, and in most cases the times for the activities to start and finish along with the longest path(s) through the network—the critical path. The network is the framework for the project information system that will be used by the project managers to make decisions concerning project time, cost, and performance. Developing the project networks takes time for someone or some group to develop; therefore, they cost money! Are networks really worth the struggle? The answer is

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

164 Chapter 6 Developing a Project Plan

definitely yes, except in cases where the project is considered trivial or very short in duration.1 The network is easily understood by others because the network presents a graphic display of the flow and sequence of work through the project. Once the net- work is developed, it is very easy to modify or change when unexpected events occur as the project progresses. For example, if materials for an activity are delayed, the impact can be quickly assessed and the whole project revised in only a few minutes with the computer. These revisions can be communicated to all project participants quickly (for example, via e-mail or project website). The project network provides other invaluable information and insights. It provides the basis for scheduling labor and equipment. It enhances communication that melds all managers and groups together in meeting the time, cost, and performance objectives of the project. It provides an estimate of project duration rather than picking a project completion date from a hat or someone’s preferred date. The network gives the times when activities can start and finish and when they can be delayed. It provides the basis for budgeting the cash flow of the project. It identifies which activities are “critical” and, therefore, should not be delayed if the project is to be completed as planned. It highlights which activities to consider if the project needs to be compressed to meet a deadline. There are other reasons project networks are worth their weight in gold. Basically, project networks minimize surprises by getting the plan out early and allowing correc- tive feedback. A commonly heard statement from practitioners is that the project net- work represents three-quarters of the planning process. Perhaps this is an exaggeration, but it signals the perceived importance of the network to project managers in the field.

6.2 From Work Package to Network Project networks are developed from the WBS. The project network is a visual flow diagram of the sequence, interrelationships, and dependencies of all the activities that must be accomplished to complete the project. An activity is an element in the project that consumes time—for example, work or waiting. Work packages from the WBS are used to build the activities found in the project network. An activity can include one or more work packages. The activities are placed in a sequence that provides for orderly completion of the project. Networks are built using nodes (boxes) and arrows (lines). Integrating the work packages and the network represents a point where the man- agement process often fails in practice. The primary explanations for this failure are that (1) different groups (people) are used to define work packages and activities and (2) the WBS is poorly constructed and not deliverable/output oriented. Integration of the WBS and project network is crucial to effective project management. The project manager must be careful to guarantee continuity by having some of the same people who defined the WBS and work packages develop the network activities. Networks provide the project schedule by identifying dependencies, sequencing, and timing of activities, which the WBS is not designed to do. The primary inputs for devel- oping a project network plan are work packages. Remember, a work package is defined independently of other work packages, has definite start and finish points, requires spe- cific resources, includes technical specifications, and has cost estimates for the package. However, dependency, sequencing, and timing of each of these factors are not included in the work package. A network activity can include one or more work packages.

Understand the linkage between WBS and the project network.

6-1LO

1 This process could be clarified and improved by using a simple responsibility matrix (see Chapter 4).

Chapter 6 Developing a Project Plan 165

FIGURE 6.1 WBS/Work Packages to Network

Circuit board

Lowest element

Design cost

account

O r g a n i z a t i o n

U n i t s

Production cost

account

Test cost

account

Software cost

account

A

D -1-1 D -1-2

Design WP D-1-1 Specifications WP D-1-2 Documentation

Production WP P-10-1 Proto 1 WP P-10-2 Final Proto 2

Test systems WP T-13-1 Test

Software WP S-22-1 Software preliminary WP S-22-2 Software final version

B

P -10-1

C

S -22-1

D

P -10-2

Activity network for circuit board work packages

F

S -22-2

K

T -13-1

A

Specifications and documentation

2

B

Proto 1 5

C

Software preliminary

3

D

Final proto 2

4

F

Final software

2

K

Test 3

Figure 6.1 shows a segment of the WBS example and how the information is used to develop a project network. The lowest level deliverable in Figure 6.1 is “circuit board.” The cost accounts (design, production, test, software) denote project work, organiza- tion unit responsible, and time-phased budgets for the work packages. Each cost account represents one or more work packages. For example, the design cost account has two work packages (D-1-1 and D-1-2)—specifications and documentation. The software and production accounts also have two work packages. Developing a network requires sequencing tasks from all work packages that have measurable work. Figure 6.1 traces how work packages are used to develop a project network. You can trace the use of work packages by the coding scheme. For example, activity A uses work packages D-1-1 and D-1-2 (specifications and documentation), while activity C

166 Chapter 6 Developing a Project Plan

uses work package S-22-1. This methodology of selecting work packages to describe activities is used to develop the project network, which sequences and times project activities. Care must be taken to include all work packages. The manager derives activ- ity time estimates from the task times in the work package. For example, activity B (proto 1) requires five weeks to complete; activity K (test) requires three weeks to complete. After computing the activity early times and late times, the manager can schedule resources and time-phase budgets (with dates).

6.3 Constructing a Project Network

Terminology Every field has its jargon that allows colleagues to communicate comfortably with each other about the techniques they use. Project managers are no exception. Here are some terms used in building project networks.

Activity. For project managers, an activity is an element of the project that requires time. It may or may not require resources. Typically an activity consumes time—either while people work or while people wait. Examples of the latter are time waiting for contracts to be signed, materials to arrive, drug approval by the government, budget clearance, etc. Activities usually represent one or more tasks from a work package. Descriptions of activities should use a verb/noun format: for example, develop product specifications. Merge Activity. This is an activity that has more than one activity immediately preceding it (more than one dependency arrow flowing to it). Parallel Activities. These are activities that can take place at the same time, if the manager wishes. However, the manager may choose to have parallel activities not occur simultaneously. Path. A sequence of connected, dependent activities. Critical Path. When this term is used, it means the path(s) with the longest dura- tion through the network; if an activity on the path is delayed, the project is delayed the same amount of time. Burst Activity. This activity has more than one activity immediately following it (more than one dependency arrow flowing from it).

Basic Rules to Follow in Developing Project Networks The following eight rules apply in general when developing a project network: 1. Networks flow typically from left to right. 2. An activity cannot begin until all preceding connected activities have been completed. 3. Arrows on networks indicate precedence and flow. Arrows can cross over each other. 4. Each activity should have a unique identification number. 5. An activity identification number must be larger than that of any activities that precede it. 6. Looping is not allowed (in other words, recycling through a set of activities cannot

take place). 7. Conditional statements are not allowed (that is, this type of statement should not

appear: If successful, do something; if not, do nothing). 8. Experience suggests that when there are multiple starts, a common start node can be

used to indicate a clear project beginning on the network. Similarly, a single project end node can be used to indicate a clear ending.

Diagram a project network using AON methods.

6-2LO

Chapter 6 Developing a Project Plan 167

Read the Snapshot from Practice 6.1: The Yellow Sticky Approach to see how these rules are used to create project networks.

6.4 Activity-on-Node (AON) Fundamentals Historically, two methods have been used to develop project networks: Activity- on-node (AON) and Activity-on-arrow (AOA). Over time the availability of advanced computer graphics improved the clarity and visual appeal of the AON method. Today, the activity-on-node method has come to dominate nearly all project network plans. For this reason, we have limited our discussion to AON methods. Figure 6.2 shows a few typical uses of building blocks for the AON network

In practice small project networks (25 to 100 activities) are frequently devel- oped using yellow Post-it® stickers. The meeting requirements and process for the project team are described herein.

The following are the requirements for such a project:

1. Project team members and a facilitator.

2. One yellow sticker (3 × 4 inches or larger) for each activity with the description of the activity printed on the sticker.

3. Erasable whiteboard with marker pen (a long, 4-foot-wide piece of butcher paper can be used in place of the whiteboard).

All of the yellow stickers are placed in easy view of all team members. The team begins by identifying those activity stickers that have no predecessors. Each of these activity stickers is then attached to the white- board. A start node is drawn, and a dependency arrow is connected to each activity. Given the initial network start activities, each activ- ity is examined for immediate successor activities. These activities are attached to the whiteboard and dependency arrows drawn. This process is continued until all of the yellow stickers are attached to the white- board with dependency arrows. (Note: The process can be reversed, beginning with those activities that have no successor activities and connecting them to a proj- ect end node. The predecessor activities are selected for each activity and attached to the whiteboard with dependency arrows marked.) When the process is complete, the dependencies are recorded in the project software, which develops a

computer-designed network along with the critical path(s) and early, late, and slack times. This methodol- ogy sensitizes team members early to the interdepen- dencies among activities of the project. But more importantly, the methodology empowers team mem- bers by giving them input to the important decisions that they must implement later.

S N A P S H O T F R O M P R A C T I C E 6 . 1 The Yellow Sticky Approach (for Constructing a Project Network)

© Image Source/Alamy

168 Chapter 6 Developing a Project Plan

FIGURE 6.2 Activity-on-Node Network Fundamentals

A B C A is preceded by nothing B is preceded by A C is preceded by B

X

Z

Y Y and Z are preceded by X

Y and Z can begin at the same time, if you wish

(A)

(B) X is a burst activity

M is a merge activity(C)

(D)

K M

L

J J, K, & L can all begin at the same time, if you wish (they need not occur simultaneously)

but

All (J, K, L) must be completed before M can begin

X Z

Y AA

Z is preceded by X and Y

AA is preceded by X and Y

construction. An activity is represented by a node (box). The node can take many forms, but in recent years the node represented as a rectangle (box) has dominated. The dependencies among activities are depicted by arrows between the rectangles (boxes) on the AON network. The arrows indicate how the activities are related and the sequence in which things must be accomplished. The length and slope of the arrow are arbitrary and set for convenience of drawing the network. The letters in the boxes serve here to identify the activities while you learn the fundamentals of network construction and analysis. In practice, activities have identification num- bers and descriptions. There are three basic relationships that must be established for activities included in a project network. The relationships can be found by answering the following three questions for each activity: 1. Which activities must be completed immediately before this activity? These activi-

ties are called predecessor activities. 2. Which activities must immediately follow this activity? These activities are called

successor activities. 3. Which activities can occur while this activity is taking place? This is known as a

concurrent or parallel relationship.

Chapter 6 Developing a Project Plan 169

Sometimes a manager can use only questions 1 and 3 to establish relationships. This information allows the network analyst to construct a graphic flow chart of the sequence and logical interdependencies of project activities. Figure 6.2A is analogous to a list of things to do where you complete the task at the top of the list first and then move to the second task, etc. This figure tells the project manager that activity A must be completed before activity B can begin, and activity B must be completed before activity C can begin. Figure 6.2B tells us that activities Y and Z cannot begin until activity X is com- pleted. This figure also indicates that activities Y and Z can occur concurrently or simultaneously if the project manager wishes; however, it is not a necessary condition. For example, pouring a concrete driveway (activity Y) can take place while landscape planting (activity Z) is being accomplished, but land clearing (activity X) must be completed before activities Y and Z can start. Activities Y and Z are considered paral- lel activities. Parallel paths allow concurrent effort, which may shorten time to do a series of activities. Activity X is sometimes referred to as a burst activity because more than one arrow bursts from the node. The number of arrows indicates how many activi- ties immediately follow activity X. Figure 6.2C shows us activities J, K, and L can occur simultaneously if desired, and activity M cannot begin until activities J, K, and L are all completed. Activities J, K, and L are parallel activities. Activity M is called a merge activity because more than one activity must be completed before M can begin. Activity M could also be called a milestone—a significant accomplishment. In Figure 6.2D, activities X and Y are parallel activities that can take place at the same time; activities Z and AA are also parallel activities. But activities Z and AA cannot begin until activities X and Y are both completed. Given these fundamentals of AON, we can practice developing a simple network. Remember, the arrows can cross over each other (e.g., Figure 6.2D), be bent, or be any length or slope. Neatness is not a criterion for a valid, useful network—only accurate inclusion of all project activities, their dependencies, and time estimates. Information for a simplified project network is given in Table 6.1. This project rep- resents a new automated warehouse system for picking frozen food package orders and moving them to a staging area for delivery to stores. Figure 6.3 shows the first steps in constructing the AON project network from the information in Table 6.1. We see that activity A (define requirements) has nothing preceding it; therefore, it is the first node to be drawn. Next, we note that activities B and C (assign team and design hardware) are both preceded by activity A. We draw two arrows and connect them to activities B and C. This segment shows

TABLE 6.1 Network Information

AUTOMATED WAREHOUSE Order Picking System

Activity Description Preceding Activity

A Define Requirements None B Assign Team A C Design Hardware A D Code Software B E Build and Test Hardware C F Develop Patent Request C G Test Software D H Integrate Systems E, F, G

170 Chapter 6 Developing a Project Plan

the project manager that activity A must be completed before activities B and C can begin. After A is completed, B and C can take place concurrently, if desired. Figure 6.4 shows the completed network with all of the activities sequences and dependencies. The information in Figure 6.4 is tremendously valuable to those managing the proj- ect. However, estimating the duration for each activity will further increase the value of the network. A realistic project plan and schedule require reliable time estimates for project activities. The addition of time to the network allows us to estimate how long the project will take. When activities can or must start, when resources must be avail- able, which activities can be delayed, and when the project is estimated to be complete are all determined from the times assigned. Deriving an activity time estimate neces- sitates early assessment of resource needs in terms of material, equipment, and people. In essence the project network with activity time estimates links planning, scheduling, and controlling of projects.

Automated Warehouse Order Picking System

Define Requirements

Design Hardware

Assign Team

B

A C

FIGURE 6.3 Automated Warehouse—Partial Network

Automated Warehouse Order Picking System

A

F

Develop Patent Request

C E H

Define Requirements

Design Hardware

Build & Test Hardware

Integrate Systems

Assign Team

Code Software

D G

Test Software

B

FIGURE 6.4 Automated Warehouse—Completed Network

Chapter 6 Developing a Project Plan 171

Calculate early, late, and slack activity times.

6-3LO

6.5 Network Computation Process Drawing the project network places the activities in the right sequence for computing start and finish times of activities. Activity time estimates are taken from the task times in the work package and added to the network (review Figure 6.1). Performing a few simple computations allows the project manager to complete a process known as the forward and backward pass. Completion of the forward and backward pass will answer the following questions: Forward Pass—Earliest Times

1. How soon can the activity start? (early start—ES) 2. How soon can the activity finish? (early finish—EF) 3. How soon can the project be finished? (expected time—TE)

Backward Pass—Latest Times

1. How late can the activity start? (late start—LS) 2. How late can the activity finish? (late finish—LF) 3. Which activities represent the critical path (CP)? This is the longest path in the

network which, when delayed, will delay the project. 4. How long can the activity be delayed? (slack or float—SL) The terms in parentheses represent the acronyms used in most texts and computer pro- grams and by project managers. The forward and backward pass process is presented next.

Forward Pass—Earliest Times The forward pass starts with the first project activity(ies) and traces each path (chain of sequential activities) through the network to the last project activity(ies). As you trace along the path, you add the activity times. The longest path denotes the project completion time for the plan and is called the critical path (CP). Table 6.2 lists the activity times in workdays for the Automated Warehouse project example we used for drawing a network. Figure 6.5 shows the network with the activity time estimate found in the node (see “DUR” for duration in the legend). For example, activity A (define requirements) has an activity duration of 10 workdays, and activity E (build and test hardware) has a duration of 50 days. The forward pass begins with the project start time, which is usually time zero. (Note: Calendar times can be computed for the project later in the planning phase.)

AUTOMATED WAREHOUSE Order Picking System

Activity Description Preceding Activity Activity Time

A Define Requirements None    10 workdays B Assign Team A            5 C Design Hardware A          25 D Code Software B          20 E Build & Test Hardware C          50 F Develop Patent Request C          15 G Test Software D          35 H Integrate Systems E, F, G 15

TABLE 6.2 Network Information

172 Chapter 6 Developing a Project Plan

In our Automated Warehouse example, the early start time for the first activity (activity A) is zero. This time is found in the upper left corner of the activity A node in Figure 6.6. The early finish for activity A is 10 days (EF = ES + DUR or 0 + 10 = 10). Next, we see that activity A is the predecessor for activities B (assign team) and C (design hardware). Therefore, the earliest activities B and C can begin is the instant in time when activity A is completed; this time is 10 days. You can now see in Figure 6.6 that activities B and C have an early start (ES) of 10 days. Using the formula EF = ES + DUR, the early finish (EF) times for activities B and C are 15 and 35 days. Fol- lowing the same process of moving along each network path, the early start and finish times for selected activities are shown here:

Activity D: ES = 15 EF = 15 + 20 = 35 Activity F: ES = 35 EF = 35 + 15 = 50 Activity E: ES = 35 EF = 35 + 50 = 85 Activity G: ES = 35 EF = 35 + 35 = 70

Activity H (integrate system) is a merge activity because it is preceded by more than one activity. The early start (ES) of a merge activity depends on the early finish (EF) of all activities that merge to it. In this project activity H is preceded by activities E, F, and G. Which activity controls the ES of activity H? The answer is activity E. In Figure 6.6 the EF times are 85, 50, and 70. Since 85 days is the largest EF time, activ- ity E controls the ES for activity H, which is 85. If activity E is delayed, activity H will be delayed. The early finish for activity H or the project is 100 days (EF = ES + DUR or 85 + 15 = 100).

FIGURE 6.5 Activity-on-Node Network

Automated Warehouse Order Picking System

A

10

ID

Legend

DUR

ES

LS

EF

LF

SL

F

15

E

50

H

15

B

5

D

20

G

35

Define Requirements

Build & Test Hardware

Integrate Systems

Assign Team

Code Software

Test Software

Develop Patent Request

Design Hardware

C

25

Description

Chapter 6 Developing a Project Plan 173

The forward pass requires that you remember just three things when computing early activity times: 1. You add activity times along each path in the network (ES + DUR = EF). 2. You carry the early finish (EF) to the next activity where it becomes its early start

(ES), or 3. If the next succeeding activity is a merge activity, you select the largest early finish

number (EF) of all its immediate predecessor activities. The three questions derived from the forward pass have been answered; that is, early start (ES), early finish (EF), and the project expected duration (TE) times have been computed. The backward pass is the next process to learn.

Backward Pass—Latest Times The backward pass starts with the last project activity(ies) on the network. You trace backward on each path subtracting activity times to find the late start (LS) and late finish (LF) times for each activity. Before the backward pass can be computed, the late finish for the last project activity(ies) must be selected. In early planning stages, this time is usually set equal to the early finish (EF) of the last project activity (or in the case of multiple finish activities, the activity with the largest EF). In some cases an imposed project duration deadline exists, and this date will be used. Let us assume for planning purposes we can accept the EF project duration (TE) equal to 100 workdays. The LF for activity H becomes 100 days (EF = LF) (see Figure 6.7).

Automated Warehouse Order Picking System

A

10

100

F35 50

15

E

50

35 85 H85

85

50

70 100

15

B10 15

5

D15 35

20

G35 70

35

Build & Test Hardware

Integrate System

Assign Team

Code Software

Test Software

Develop Patent Request

Design Hardware

C

25

10 35

ID

Legend

DUR

Description

ES

LS

EF

LF

SL

Define Requirements

FIGURE 6.6 Activity-on-Node Network Forward Pass

174 Chapter 6 Developing a Project Plan

The backward pass is similar to the forward pass; you need to remember three things: 1. You subtract activity times along each path starting with the project end activity

(LF − DUR = LS). 2. You carry the LS to the preceding activity to establish its LF, or 3. If the next preceding activity is a burst activity; in this case you select the smallest

LS of all its immediate successor activities to establish its LF. Let’s apply these rules to our Automated Warehouse example. Beginning with activ- ity H (integrate systems) and a LF of 100 workdays, the LS for activity H is 85 days (LF − DUR = LS or 100 − 15 = 85). The LS for activity H becomes the LF for activi- ties E, F, and G. Moving backward on the network the late starts for E, F, and G are shown here (LS = LF − DUR):

Activity E: LS = 85 − 50 = 35 Activity G: 85 − 35 = 50 Activity F: LS = 85 − 15 = 70

At this point we see that activity C is a burst activity that ties to (precedes) activities E and F. The late finish for activity C is controlled by the LS of activities E and F. The smallest LS of activities E and F (LS’s = 35 and 70) is activity E. This establishes the LF for activity C. The LS for activity C becomes 10. Moving backward to the first project activity, we note it is also a burst activity that links to activities B and C. The

FIGURE 6.7 Activity-on-Node Network Backward Pass

B

525 30

Assign Team

C

2510 35

A

100 10

10

25

35

70 Define

Requirements

D

2030 50

Code Software

E

5035 85

Build & Test Hardware

F

1570 85

Develop Patent Request

H

1585 100

Integrate Systems

G

3550 85

Automated Warehouse Order Picking System

ID

Legend

DUR

Description

ES

LS

EF

LF

SL

Design Hardware

Test Software

Chapter 6 Developing a Project Plan 175

LF of activity A is controlled by activity C that has the smallest LS of 10 days. Given a LF of 10 days, the LS for activity is time period zero (LS = 10 − 10 = 0). The back- ward pass is complete, and the latest activity times are known. Figure 6.8 shows the completed network with all the early, late, and slack times included. Slack can be important to managing your project.

Determining Slack (or Float) Total Slack When the forward and backward passes have been computed, it is possible to deter- mine which activities can be delayed by computing “slack” or “float.” Total slack tells us the amount of time an activity can be delayed and not delay the project. Stated dif- ferently, total slack is the amount of time an activity can exceed its early finish date without affecting the project end date or an imposed completion date. Total slack or float for an activity is simply the difference between the LS and ES (LS − ES = SL) or between LF and EF (LF − EF = SL). For example, in Figure 6.8 the total slack for activity D is 15 workdays, for activity F is 35 days, and for activity E is zero. If total slack of one activity in a path is used, the ES for all activities that follow in the chain will be delayed and their slack reduced. Use of total slack must be coordinated with all participants in the activities that follow in the chain. After slack for each activity is computed, the critical path(s) is (are) easily identi- fied. When the LF = EF for the end project activity, the critical path can be identified

Identify and understand the importance of managing the critical path.

6-4LO

Automated Warehouse Order Picking System

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176 Chapter 6 Developing a Project Plan

as those activities that also have LF = EF or a slack of zero (LF − EF = 0 or LS − ES = 0). The critical path is the network path(s) that has (have) the least slack in com- mon. This awkward arrangement of words is necessary because a problem arises when the project finish activity has a LF that differs from the EF found in the forward pass— for example, an imposed duration date. If this is the case, the slack on the critical path will not be zero; it will be the difference between the project EF and the imposed LF of the last project activity. For example, if the EF for the project is 100 days, but the imposed LF or target date is set at 95 days, all activities on the critical path would have a slack of minus 5 days. Of course, this would result in a late start 5 days for the first project activity—a good trick if the project is to start now. Negative slack occurs in practice when the critical path is delayed. In Figure 6.8 the critical path is marked with dashed arrows—activities A, C, E, and H. Delay of any of these activities will delay the total project by the same num- ber of days. Since actual projects may have many critical activities with numerous preceding dependencies, coordination among those responsible for critical activi- ties is crucial. Critical activities typically represent about 10 percent of the activi- ties of the project. Therefore, project managers pay close attention to the critical path activities to be sure they are not delayed. See Snapshot from Practice 6.2: The Critical Path. We use the term sensitivity to reflect the likelihood the original critical path(s) will change once the project is initiated. Sensitivity is a function of the number of critical or near-critical paths. A network schedule that has only one critical path and noncritical activities that enjoy significant slack would be labeled insensitive.

The critical path method (CPM) has long been considered the “Holy Grail” of project management. Here are comments made by veteran project managers when asked about the sig-

nificance of the critical path in managing projects:

best people on critical activities or on those activities that stand the greatest chance of becoming critical.

identifying those risks that can impact the critical path, either directly or indirectly, by making a non- critical activity so late that it becomes critical. When I’ve got money to spend to reduce risks, it usually gets spent on critical tasks.

big project, but I make it a point to keep in touch with the people who are working on critical activi- ties. When I have the time, they are the ones I visit to find out firsthand how things are going. It’s amazing how much more I can find out from

S N A P S H O T F R O M P R A C T I C E 6 . 2 The Critical Path

talking to the rank and file who are doing the work and by reading the facial expressions of people— much more than I can gain from a number-driven status report.

“borrow” people or equipment, I’m much more generous when it involves resources from working on noncritical activities. For example, if another project manager needs an electrical engineer who is assigned to a task with five days of slack, I’m will- ing to share that engineer with another project manager for two to three days.

– tant is because these are the activities that impact completion time. If I suddenly get a call from above saying they need my project done two weeks ear- lier than planned, the critical path is where I sched- ule the overtime and add extra resources to get the project done more quickly. In the same way, if the project schedule begins to slip, it’s the critical activ- ities I focus on to get back on schedule.

Chapter 6 Developing a Project Plan 177

Conversely, a sensitive network would be one with more than one critical path and/ or noncritical activities with very little slack. Under these circumstances the original critical path is much more likely to change once work gets under way on the project. How sensitive is the Automated Warehouse schedule? Not very, since there is only one critical path and the two other noncritical paths have 15 and 35 days of slack, which suggests considerable flexibility. Project managers assess the sensitivity of their network schedules to determine how much attention they should devote to man- aging the critical path.

Free Slack (Float) Free slack (FS) is unique. It is the amount of time an activity can be delayed without delaying any immediately following (successor) activity. Or, free slack is the amount of time an activity can exceed its early finish date without affecting the early start date of any successor(s). Free slack can never be negative. Only activities that occur at the end of a chain of activities, where you have a merge activity, can have free slack. See Figure 6.8, the Automated Warehouse project. In Figure 6.8 activity G has free slack of 15 days, while activities B and D do not. In this case, activity G is the last activity in the upper path, and it merges to activity H. Hence, to delay activity G up to 15 days does not delay any following activities and requires no coordination with managers of other activities. Conversely, if either activ- ity B or D is delayed, the managers of following activities need to be notified that the slack has been used so they can adjust their start schedules. For example, if activity B is delayed 5 days, the manager of activity B should notify those in charge of the fol- lowing activities (D and G) that their slack has been reduced to 10 time units and their early start will be delayed 5 days. In this example, activity D cannot then start until day 20, which reduces activity D slack to 10 days (LS − ES = SL or 30 − 20 = 10). Free slack for activity G is also reduced to 10 days. Free slack occurs at the last activity in a chain of activities. In some situations the “chain” has only one link. Activity F in Figure 6.8 is an example. It has free slack of 35 days. Note that it needs no coordination with other activities—unless a delay exceeds the free slack of 35 days. (Note: The moment you exceed all free slack avail- able, you delay the project and must coordinate with others who are impacted.) The distinction between free and total slack at first glance seems trivial, but in real- ity it is very important. When you are responsible for a late activity that has zero free slack you impact the schedules of subsequent activities. You should notify the manag- ers of the remaining activities in the chain that you will be late. Again, note that total slack is shared across the whole path. Alternatively, if you are responsible for an activ- ity that has free slack when you start, you do not need to notify anyone as long as your work does not absorb all of the slack!

6.6 Using the Forward and Backward Pass Information Returning to the Automated Warehouse project network in Figure 6.8, what does a slack of 35 days for activity F (develop patent request) mean for the project manager? In this specific case it means activity F can be delayed 35 days. In a larger sense the project manager soon learns that free slack is important because it allows flexibility in scheduling scarce project resources—personnel and equipment—that are used on more than one parallel activity or another project.

6-5LO Distinguish free slack from total slack.

178 Chapter 6 Developing a Project Plan

Knowing the four activity times of ES, LS, EF, and LF is invaluable for the plan- ning, scheduling, and controlling phases of the project. The ES and LF tell the project manager the time interval in which the activity should be completed. For example, activity G (test software) must be completed within the time interval 35 and 85 days; the activity can start as early as day 35 or finish as late as day 85. Conversely, activity C (design hardware) must start on day 10, or the project will be delayed. When the critical path is known, it is possible to tightly manage the resources of the activities on the critical path so no mistakes are made that will result in delays. In addi- tion, if for some reason the project must be expedited to meet an earlier date, it is pos- sible to select those activities, or combination of activities, that will cost the least to shorten the project. Similarly, if the critical path is delayed and the time must be made up by shortening some activity or activities on the critical path to make up any negative slack, it is possible to identify the activities on the critical path that cost the least to shorten. If there are other paths with very little slack, it may be necessary to shorten activities on those paths also.

6.7 Level of Detail for Activities Time-phasing work and budgets of the project mandate careful definition of the activi- ties that make up the project network. Typically an activity represents one or more tasks from a work package. How many tasks you include in each activity sets the level of detail. In some cases it is possible to end up with too much information to manage, and this can result in increased overhead costs. Managers of small projects have been able to minimize the level of detail by eliminating some of the preliminary steps to drawing networks. Larger firms also recognize the cost of information overload and are working to cut down the level of detail in networks and in most other dimensions of the project.

6.8 Practical Considerations

Network Logic Errors Project network techniques have certain logic rules that must be followed. One rule is that conditional statements such as “if test successful build proto, if failure redesign” are not permitted. The network is not a decision tree; it is a project plan that we assume will materialize. If conditional statements were allowed, the forward and backward pass would make little sense. Although in reality a plan seldom materializes as we expect in every detail, it is a reasonable initial assumption. You shall see that once a network plan is developed, it is an easy step to make revisions to accommodate changes. Another rule that defeats the project network and computation process is looping. Looping is an attempt by the planner to return to an earlier activity. Recall that the activity identification numbers should always be higher for the activities following an activity in question; this rule helps to avoid the illogical precedence relationships among the activities. An activity should only occur once; if it is to occur again, the activity should have a new name and identification number and should be placed in the right sequence on the network. Figure 6.9 shows an illogical loop. If this loop were allowed to exist, this path would perpetually repeat itself. Many computer programs catch this type of logic error.

Chapter 6 Developing a Project Plan 179

Activity Numbering Each activity needs a unique identification code—a letter or a number. In practice very elegant schemes exist. Most schemes number activities in ascending order, that is, each succeeding activity has a larger number so that the flow of the project activities is toward project completion. It is customary to leave gaps between numbers (1, 5, 10, 15 . . .). Gaps are desirable so you can add missing or new activities later. Because it is nearly impossible to draw a project network perfectly, numbering networks is fre- quently not done until after the network is complete. In practice you will find computer programs that accept numeric, alphabetic, or a com- bination of activity designations. Combination designations are often used to identify cost, work skill, departments, and locations. As a general rule, activity numbering systems should be ascending and as simple as possible. The intent is to make it as easy as you can for project participants to follow work through the network and locate specific activities.

Use of Computers to Develop Networks All of the tools and techniques discussed in this chapter can be used with computer software currently available. Two examples are shown in Figures 6.10 and 6.11. Figure 6.10 presents a generic AON computer output for the Automated Warehouse Picking Sys- tem project. Observe that these computer outputs use numbers to identify activities. The critical path is identified by the nodes (activities) 2, 4, 6, and 9. The activity description is shown on the top line of the activity node. The activity start time and identification are on the second line. The finish time and duration are on the third line of the node. The project starts on January 1 and is planned to finish May 20. Note this sample computer network has included non-workdays of holidays and weekends. Figure 6.11 presents an early start Gantt chart.2 Bar charts are popular because they present an easy-to-understand, clear picture on a time-scaled horizon. They are used dur- ing planning, resource scheduling, and status reporting. The format is a two-dimensional representation of the project schedule, with activities down the rows and time across the horizontal axis. In this computer output the shaded bars represent the activity durations. The extended lines from the bars represent slack. For example, “test software” (ID # 8) has a duration of 35 days (shaded area of the bar) and 15 days slack (represented by the extended line). The bar also indicates test software has an early start of February 19 and would finish April 8, but can finish as late as April 29 because it has 15 days of slack. When calendar dates are used on the time axis, Gantt charts provide a clear overview of the project schedule and can often be found posted on the walls of project offices. Unfor- tunately, when projects have many dependency relationships, the dependency lines soon become overwhelming and defeat the simplicity of the Gantt chart. Project management software can be a tremendous help in the hands of those who understand and are familiar with the tools and techniques discussed in this text. How- ever, there is nothing more dangerous than someone using the software with little or no

FIGURE 6.9 Illogical Loop A

C

B

2 Gantt charts were introduced over 100 years ago by Henry Gantt.

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182 Chapter 6 Developing a Project Plan

knowledge of how the software derives its output. Mistakes in input are very common and require someone skilled in the concepts, tools, and information system to recog- nize that errors exist so false actions are avoided.

Calendar Dates Ultimately you will want to assign calendar dates to your project activities. If a com- puter program is not used, dates are assigned manually. Lay out a calendar of workdays (exclude non-workdays), and number them. Then relate the calendar workdays to the workdays on your project network. Most computer programs will assign calendar dates automatically after you identify start dates, time units, non-workdays, and other information.

Multiple Starts and Multiple Projects Some computer programs require a common start and finish event in the form of a node—usually a circle or rectangle—for a project network. Even if this is not a require- ment, it is a good idea because it avoids “dangler” paths. Dangler paths give the impression that the project does not have a clear beginning or ending. If a project has more than one activity that can begin when the project is to start, each path is a dangler path. The same is true if a project network ends with more than one activity; these unconnected paths are also called danglers. Danglers can be avoided by tying dangler activities to a common project start or finish node. When several projects are tied together in an organization, using a common start and end node helps to identify the total planning period of all projects. Use of pseudo or dummy wait activities from the common start node allows different start dates for each project.

6.9 Extended Network Techniques to Come Closer to Reality The method for showing relationships among activities in the last section is called the finish-to-start relationship because it assumes all immediate preceding connected activities must be completed before the next activity can begin. In an effort to come closer to the realities of projects, some useful extensions have been added. The use of laddering was the first obvious extension practitioners found very useful.

Laddering The assumption that all immediate preceding activities must be 100 percent complete is too restrictive for some situations found in practice. This restriction occurs most frequently when one activity overlaps the start of another and has a long duration. Under the standard finish-to-start relationship, when an activity has a long duration and will delay the start of an activity immediately following it, the activity can be bro- ken into segments and the network drawn using a laddering approach so the following activity can begin sooner and not delay the work. This segmenting of the larger activity gives the appearance of steps on a ladder on the network, thus the name. The classic example used in many texts and articles is laying pipe, because it is easy to visualize. The trench must be dug, pipe laid, and the trench refilled. If the pipeline is one mile long, it is not necessary to dig one mile of trench before the laying of pipe can begin or to lay one mile of pipe before refill can begin. Figure 6.12 shows how these overlap- ping activities might appear in an AON network using the standard finish-to-start approach.

6-6LO Demonstrate under- standing and application of lags in compressing projects or constraining the start or finish of an activity.

Chapter 6 Developing a Project Plan 183

Use of Lags to Reduce Schedule Detail and Project Duration The use of lags has been developed to offer greater flexibility in network construction. A lag is the minimum amount of time a dependent activity must be delayed to begin or end. The use of lags in project networks occurs for two primary reasons: 1. When activities of long duration delay the start or finish of successor activities, the

network designer normally breaks the activity into smaller activities to avoid the long delay of the successor activity. Use of lags can avoid such delays and reduce network detail.

2. Lags can be used to constrain the start and finish of an activity. The most commonly used relationship extensions are start-to-start, finish-to-finish, and combinations of these two. These relationship patterns are discussed in this section.

Finish-to-Start Relationship The finish-to-start relationship represents the typical, generic network style used in the early part of the chapter. However, there are situations in which the next activity in a sequence must be delayed even when the preceding activity is complete. For example, removing concrete forms cannot begin until the poured cement has cured for two time units. Figure 6.13 shows this lag relationship for AON networks. Finish-to-start lags are frequently used when ordering materials. For example, it may take 1 day to place orders but take 19 days to receive the goods. The use of finish-to-start allows the activity dura- tion to be only 1 day and the lag 19 days. This approach ensures the activity cost is tied to placing the order only rather than charging the activity for 20 days of work. This same finish-to-start lag relationship is useful to depict transportation, legal, and mail lags. The use of finish-to-start lags should be carefully checked to ensure their validity. Con- servative project managers or those responsible for completion of activities have been known to use lags as a means of building in a “slush” factor to reduce the risk of being late. A simple rule to follow is that the use of finish-to-start lags must be justified and approved by someone responsible for a large section of the project. The legitimacy of lags is not usually difficult to discern. The legitimate use of the additional relationship shown can greatly enhance the network by more closely representing the realities of the project.

Start-to-Start Relationship An alternative to segmenting the activities as we did earlier is to use a start-to-start relationship. Typical start-to-start relationships are shown in Figure 6.14. Figure 6.14A

FIGURE 6.12 Example of Laddering Using Finish-to-Start Relationship

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FIGURE 6.13 Finish-to-Start Relationship

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184 Chapter 6 Developing a Project Plan

shows the start-to-start relationship with zero lag, while Figure 6.14B shows the same relationship with a lag of five time units. It is important to note that the relationship may be used with or without a lag. If time is assigned, it is usually shown on the depen- dency arrow of an AON network. In Figure 6.14B, activity Q cannot begin until five time units after activity P begins. This type of relationship typically depicts a situation in which you can perform a por- tion of one activity and begin a following activity before completing the first. This relationship can be used on the pipe-laying project. Figure 6.15 shows the project using an AON network. The start-to-start relationship reduces network detail and project delays by using lag relationships. It is possible to find compression opportunities by changing finish-to-start relations to start-to-start relationships. A review of finish-to-start critical activities may point out opportunities that can be revised to be parallel by using start-to-start relationships. For example, in place of a finish-to-start activity “design house, then build foundation,” a start-to-start relationship could be used in which the foundation can be started, say, five days (lag) after design has started—assuming the design of the foundation is the first part of the total design activity. This start-to-start relationship with a small lag allows a sequential activity to be worked on in parallel and to compress the duration of the criti- cal path. This same concept is frequently found in projects in which concurrent engi- neering is used to speed completion of a project. Concurrent engineering, which is highlighted in the Snapshot from Practice 6.3: Concurrent Engineering, basically breaks activities into smaller segments so that work can be done in parallel and the project

FIGURE 6.14 Start-to-Start Relationship

Activity M

Activity N

Activity P

A

Activity Q

B

Lag 5

FIGURE 6.15 Use of Lags to Reduce Project Duration

Trench 1 mile

Lay pipe 1 mile

Lag 3

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Lag 3

Chapter 6 Developing a Project Plan 185

In the old days, when a new product development project was initiated by a firm, it would start its sequential journey in the research and develop- ment department. Concepts and

ideas would be worked out and the results passed to the engineering department, which sometimes reworked the whole product. This result would be passed to manufacturing, where it might be reworked once more in order to ensure the product could be manufactured using existing machinery and opera- tions. Quality improvements were initiated after the fact once defects and improvement opportunities were discovered during production. This sequential approach to product development required a great deal of time, and it was not uncommon for the final product to be totally unrecognizable when compared to original specifications. Given the emphasis on speed to the market, com- panies have abandoned the sequential approach to product development and have adopted a more

holistic approach titled concurrent engineering. In a nutshell, concurrent engineering entails the active involvement of all the relevant specialty areas throughout the design and development process. The traditional chainlike sequence of finish-to-start relationships is replaced by a series of start-to-start lag relationships as soon as meaningful work can be initiated for the next phase. Figure 6.16 summarizes the dramatic gains in time to market achieved by this approach. Within the world of project management this approach is also called Fast Tracking. General Motors used this approach to design the very first American hybrid car, the Chevy Volt. From the very beginning specialists from marketing, engineering, design, manufacturing, quality assurance, and other relevant departments were involved in every stage of the proj- ect. Not only did the project meet all of its objectives, it was completed ahead of schedule.

*“Chevrolet Volt Hits Road, Ahead of Schedule,” The New York Times, June 25, 2009; accessed online June 2, 2011.

S N A P S H O T F R O M P R A C T I C E 6 . 3 Concurrent Engineering*

Engineering design &

development

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Product planning

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Systems engineering

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FIGURE 6.16 New Product Development Process

186 Chapter 6 Developing a Project Plan

expedited (Turtle, 1994). Start-to-start relationships can depict the concurrent engineer- ing conditions and reduce network detail. Of course, the same result can be accom- plished by breaking an activity into small packages that can be implemented in parallel, but this latter approach increases the network and tracking detail significantly. Finish-to-Finish Relationship This relationship is found in Figure 6.17. The finish of one activity depends on the fin- ish of another activity. For example, testing cannot be completed any earlier than four days after the prototype is complete. Note that this is not a finish-to-start relationship because the testing of subcomponents can begin before the prototype is completed, but four days of “system” testing is required after the prototype is finished. Start-to-Finish Relationship This relationship represents situations in which the finish of an activity depends on the start of another activity. For example, system documentation cannot end until three days after testing has started (see Figure 6.18). Here all the relevant information to complete the system documentation is produced after the first three days of testing. Combinations of Lag Relationships More than one lag relationship can be attached to an activity. These relationships are usually start-to-start and finish-to-finish combinations tied to two activities. For exam- ple, debug cannot begin until two time units after coding has started. Coding must be finished four days before debug can be finished (see Figure 6.19).

An Example Using Lag Relationships—The Forward and Backward Pass The forward and backward pass procedures are the same as explained earlier in the chapter for finish-to-start relationships (without lags). The modifying technique lies in the need to check each new relationship to see if it alters the start or finish time of another activity.

FIGURE 6.17 Finish-to-Finish Relationship

Prototype

Testing

Lag 4

FIGURE 6.18 Start-to-Finish Relationship

Testing

System documentation

Lag 3

FIGURE 6.19 Combination Relationships

Debug Lag 2

Lag 4 Code

Chapter 6 Developing a Project Plan 187

An example of the outcome of the forward and backward pass is shown in Fig- ure 6.20. Order hardware depends upon the design of the system (start-to-start). Three days into the design of the system (activity A), it is possible to order the required hard- ware (activity B). It takes four days after the order is placed (activity B) for the hard- ware to arrive so it can begin to be installed (activity C). After two days of installing the software system (activity D), the testing of the system can begin (activity E). System testing (activity E) can be completed two days after the software is installed (activity D). Preparing system documentation (activity F) can begin once the design is com- pleted (activity A), but it cannot be completed until two days after testing the system (activity E). This final relationship is an example of a finish-to-finish lag. Note how an activity can have a critical finish and/or start. Activities E and F have critical finishes (zero slack), but their activity starts have 4 and 12 days of slack. It is only the finishes of activities E and F that are critical. Conversely, activity A has zero slack to start but has five days of slack to finish. The critical path follows activity start and finish constraints that occur due to the use of the additional relationships available and the imposed lags. You can identify the critical path in Figure 6.20 by following the dashed line on the network. If a lag relationship exists, each activity must be checked to see if the start or finish is constrained. For example, in the forward pass the EF of activity E (test system) (18) is controlled by the finish of activity D (install software) and the lag of two time units (16 + lag 2 = 18). Finally, in the backward pass, the LS of activity A (design system) is controlled by activity B (order hardware) and the lag relationship to activity A (3 − 3 = 0).

A

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04

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Test system

FIGURE 6.20 Network Using Lags

188 Chapter 6 Developing a Project Plan

Hammock Activities Another of the extended techniques uses a hammock activity. This type of activity derives its name because it spans over a segment of a project. The hammock activity duration is determined after the network plan is drawn. Hammock activities are fre- quently used to identify the use of fixed resources or costs over a segment of the project. Typical examples of hammock activities are inspection services, consultants, or con- struction management services. A hammock activity derives its duration from the time span between other activities. For example, a special color copy machine is needed for a segment of a tradeshow publication project. A hammock activity can be used to indi- cate the need for this resource and to apply costs over this segment of the project. This hammock is linked from the start of the first activity in the segment that uses the color copy machine to the end of the last activity that uses it. The hammock duration is simply the difference between the EF for the last activity and the ES of the first activity. The duration is computed after the forward pass and hence has no influence on other activity times. Figure 6.21 provides an example of a hammock activity used in a network. The duration for the hammock activity is derived from the early start of activity B and the early finish of activity F; that is, the difference between 13 and 5, or 8 time units. The hammock duration will change if any ES or EF in the chain-sequence changes. Hammock activities are very useful in assigning and controlling indirect project costs.3 Another major use of hammock activities is to aggregate sections of a project. This is similar to developing a subnetwork, but the precedence is still preserved. This approach is sometimes used to present a “macro network” for upper management lev- els. Using a hammock activity to group activities can facilitate getting the right level of detail for specific sections of a project.

FIGURE 6.21 Hammock Activity Example

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3 In order to designate G as a Hammock activity in MS Project 2012 you would copy and paste for activity G the start date of activity B and the finish date for activity F (http://support.microsoft.com/kb/141733).

Chapter 6 Developing a Project Plan 189

Key Terms Activity, 164, 166, 168 Activity-on-arrow (AOA), 167 Activity-on-node (AON), 167 Burst activity, 166 Concurrent engineering, 184

Critical path, 166 Early time, 166 Free slack (FS), 177 Gantt chart, 179 Hammock activity, 188 Lag relationship, 183

Late time, 166 Merge activity, 166 Parallel activity, 166 Path, 166 Sensitivity, 176 Total slack, 175

1. How does the WBS differ from the project network? 2. How are WBS and project networks linked? 3. Why bother creating a WBS? Why not go straight to a project network and forget

the WBS? 4. Why is slack important to the project manager? 5. What is the difference between free slack and total slack? 6. Why are lags used in developing project networks? 7. What is a hammock activity, and when is it used?

Review Questions

Many project managers feel the project network is their most valuable exercise and planning document. Project networks sequence and time-phase the project work, resources, and budgets. Work package tasks are used to develop activities for networks. Every project manager should feel comfortable working in an AON envi- ronment. The AON method uses nodes (boxes) for activities and arrows for dependencies. The forward and backward passes establish early and late times for activities. Although most project managers use computers to generate networks and activity times, they find a keen understanding of network development and the abil- ity to compute activity times is invaluable in the field. Computers break down; input errors give false information; some decisions must be made without computer “what if ” analysis. Project managers who are well acquainted with network development and AON methods and who are able to compute activity times will encounter fewer problems than project managers less well acquainted. Project networks help to ensure there are no surprises. Several extensions and modifications have been appended to the original AON method. Lags allow the project planner to more closely replicate the actual conditions found in practice. The use of lags can result in the start or finish of an activity becom- ing critical. Some computer software simply calls the whole activity critical rather than identifying the start or finish as being critical. Caution should be taken to ensure that lags are not used as a buffer for possible errors in estimating time. Finally, hammock activities are useful in tracking costs of resources used for a particular segment of a project. Hammock activities can also be used to reduce the size of a project network by grouping activities for simplification and clarity. All of the discussed refinements to the original AON methodology contribute toward better planning and control of projects.

Summary

190 Chapter 6 Developing a Project Plan

Creating a Project Network 1. Here is a partial work breakdown structure for a wedding. Use the method described

in the Snapshot from Practice 6.1: The Yellow Sticky Approach to create a network for this project.

Note: Do not include summary tasks in the network (i.e., 1.3, Ceremony, is a summary task; 1.2, Marriage license, is not a summary task). Do not consider who would be doing the task in building the network. For example, do not arrange “hiring a band” to occur after “florist” because the same person is responsible for doing both tasks. Focus only on technical dependencies between tasks. Hint: Start with the last activity (wedding reception), and work your way back to the start of the project. Build the logical sequence of tasks by asking the following ques- tion: In order to have or do this, what must be accomplished immediately before this? Once completed, check forward in time by asking this question: Is this task(s) the only thing that is needed immediately before the start of the next task? Work Breakdown Structure 1. Wedding project 1.1 Decide on date 1.2 Marriage license 1.3 Ceremony 1.3.1 Rent church

1.3.2 Florist

1.3.3 Create/print programs

1.3.4 Hire photographer

1.3.5 Wedding ceremony

1.4 Guests 1.4.1 Develop guest list

1.4.2 Order invitations

1.4.3 Address and mail invitations

1.4.4 Track RSVPs

1.5 Reception 1.5.1 Reserve reception hall

1.5.2 Food and beverage

1.5.2.1 Choose caterer

1.5.2.2 Decide on menu

1.5.2.3 Make final order

1.5.3 Hire DJ

1.5.4 Decorate reception hall

1.5.5 Wedding reception

Exercises

Chapter 6 Developing a Project Plan 191

Drawing AON Networks 2. Draw a project network from the following information. What activity(ies) is a burst

activity? What activity(ies) is a merge activity?

ID Description Predecessor

A Survey site None B Excavate site A C Install power lines B D Install drainage B E Pour foundation C, D

3.* Draw a project network from the following information. What activity(ies) is a burst activity? What activity(ies) is a merge activity?

ID Description Predecessor

A Identify topic None B Research topic A C Draft paper B D Edit paper C E Create graphics C F References C G Proof paper D, E, F H Submit paper G

4. Draw a project network from the following information. What activity(ies) is a burst activity? What activity(ies) is a merge activity?

ID Description Predecessor

A Contract signed None B Survey designed A C Target market identified B D Data collection B, C E Develop presentation B F Analyze results D G Demographics C H Presentation E, F, G

5. Draw a project network from the following information. What activity(ies) is a burst activity? What activity(ies) is a merge activity?

ID Description Predecessor

A Order review None B Order standard parts A C Produce standard parts A D Design custom parts A E Software development A F Manufacture custom parts C, D G Assemble B, F H Test E, G

* The solution to this exercise can be found in Appendix One.

192 Chapter 6 Developing a Project Plan

AON Network Times 6. From the following information, develop an AON project network. Complete the

forward and backward pass, compute activity slack, and identify the critical path. How many days will the project take?

ID Description Predecessor Time

A Survey site None 2 B Excavate site A       4 C Install power lines B       3 D Install drainage B     5 E Pour foundation C, D   3

7. The project information for the custom order project of the Air Control Company is presented here. Draw a project network for this project. Compute the early and late activity times and the slack times. Identify the critical path.

ID Description Predecessor Time

A Order review None 2 B Order standard parts A       3 C Produce standard parts A       10 D Design custom parts A       13 E Software development A       18 F Manufacture custom hardware C, D  15 G Assemble B, F  10 H Test E, G   5

8. You have signed a contract to build a garage for the Simpsons. You will receive a $500 bonus for completing the project within 17 working days. The contract also contains a penalty clause in which you will lose $100 for each day the project takes longer than 17 working days.

Draw a project network given the information below. Complete the forward and backward pass, compute the activity slack, and identify the critical path. Do you expect to receive a bonus or a penalty on this project?

ID Description Predecessor Time (days)

A Prepare site None 2 B Pour foundation B 3 C Erect frame C 4 D Roof C 4 E Windows C 1 Doors C 1 G Electrical D, E, F, G 3 H Rough-in frame F, G 2 I Door opener H, I 1 J Paint J 2 K Cleanup 1

9. You are creating a customer database for the Hillsboro Hops minor league baseball team. Draw a project network given the information in the table that follows. Complete the forward and backward pass, compute activity slack, and identify the critical path.

How long will this project take? How sensitive is the network schedule? Calcu- late the free slack and total slack for all noncritical activities.

Chapter 6 Developing a Project Plan 193

ID Description Predecessor Time (days)

A Systems design None 2 B Subsystem A design A 1 C Subsystem B design A 1 D Subsystem C design A 1 E Program A B 2 F Program B C 2 G Program C D 2 H Subsystem A test E 1 I Subsystem B test F 1 J Subsystem C test G 1 K Integration H, I, J 3 L Integration test K 1

10. K. Nelson, project manager of Print Software, Inc., wants you to prepare a project network; compute the early, late, and slack activity times; determine the planned project duration; and identify the critical path. His assistant has collected the fol- lowing information for the Color Printer Drivers Software Project:

ID Description Predecessor Time

A External specifications None 8 B Review design features A        2 C Document new features A        3 D Write software A      60 E Program and test B      40 F Edit and publish notes C        2 G Review manual D        2 H Alpha site E, F  20 I Print manual G      10 J Beta site H, I   10 K Manufacture J       12 L Release and ship K        3

11. * A large Southeast city is requesting federal funding for a park-and-ride project. One of the requirements in the request application is a network plan for the design phase of the project. Sophie Kim, the chief engineer, wants you to develop a proj- ect network plan to meet this requirement. She has gathered the activity time esti- mates and their dependencies shown here. Show your project network with the activity early, late, and slack times. Mark the critical path.

ID Description Predecessor Time

A Survey None 5 B Soils report A 20 C Traffic design A 30 D Lot layout A 5 E Approve design B, C, D 80 F Illumination E 15 G Drainage E 30 H Landscape E 25 I Signage E 15 J Bid proposal F, G, H, I 10

* The solution to this exercise can be found in Appendix One.

194 Chapter 6 Developing a Project Plan

12. You are creating a customer database for the Lehigh Valley IronPigs minor league baseball team. Draw a project network given the information below. Complete the forward and backward pass, compute activity slack, and identify the critical path.

How long will this project take? How sensitive is the network schedule? Calcu- late the free slack and total slack for all noncritical activities.

Time ID Description Predecessor (days)

A Systems design None 2 B Subsystem A design A 1 C Subsystem B design A 2 D Subsystem C design A 1 E Program A B 2 F Program B C 10 G Program C D 3 H Subsystem A test E 1 I Subsystem B test F 1 J Subsystem C test G 1 K Integration H, I, J 3 L Integration test K 1

13. * You are completing a group term paper. Given the project network that follows, complete the forward and backward pass, compute activity slack, and identify the critical path. Use this information to create a Gantt chart for the project. Be sure to show slack for noncritical activities.

* The solution to this exercise can be found in Appendix One.

ID

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Create graphics

References

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Chapter 6 Developing a Project Plan 195

ID

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Form Project Team

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Description

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Develop Mrkt Campaign

Product Upgrade Project

Project Team

Interview Users

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ID New Features

Acquire Materials

Dev Mrkt Campaign

Produce Prototypes

Design Graphics

Conduct Marketing

Perform Sales Calls

1 2 3 4 5 6 7 8 9 10 11 1312 14 15 16 17 18

Product Upgrade Project Gantt Chart

14. You are managing a product upgrade project for Bangkokagogo. Given the project network that follows, complete the forward and backward pass, compute activity slack, and identify the critical path. Use this information to create a Gantt chart for the project. Be sure to show slack for noncritical activities.

15. You are creating a database for the Oklahoma City Thunder NBA Basketball team. Given the project network that follows, complete the forward and backward pass, compute activity slack, and identify the critical path. Use this information to create a Gantt chart for the project.

196 Chapter 6 Developing a Project Plan

Computer Exercises 16. The planning department of an electronics firm has set up the activities for devel-

oping and production of a new MP3 Player. Given the information below, develop a project network using Microsoft Project. Assume a five-day workweek and the project starts on January 4, 2017.

Activity Description Activity Activity Time ID Predecessor (weeks)

1 Staff None 2 2 Develop market program 1          3 3 Select channels of distribution 1          8 4 Patent 1       12 5 Pilot production 1         4 6 Test market 5         4 7 Ad promotion 2         4 8 Set up for production 4, 6   16

The project team has requested that you create a network for the project, and deter- mine if the project can be completed in 45 weeks.

ID

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Problem Definition

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Develop Input Reports

Create Database

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10 2 3 4 5 6 7 8 9 10 11 1312 14 15 16 17 18 19 20 21 22 23 24 25

Chapter 6 Developing a Project Plan 197

17. Using Microsoft Project, set up the network and determine the critical path for Phase 1 of the Whistler Ski Resort project. The project workweek will be 5 days (M–F).

Whistler Ski Resort Project Given the fact that the number of skiing visitors to Whistler, B.C., Canada, has been increasing at an exciting rate, thanks to the 2010 Winter Olympics, the Whistler Ski Association has been considering construction of another ski lodge and ski complex. The results of an economic feasibility study just completed by members of the staff show that a winter resort complex near the base of Whistler Mountain could be a very profitable venture. The area is accessible by car, bus, train, and air. The board of directors has voted to build the 10-million-dollar complex recommended in the study. Unfortunately, due to the short summer season, the complex will have to be built in stages. The first stage (year 1) will contain a day lodge, chair lift, rope tow, generator house (for electricity), and a park- ing lot designed to accommodate 400 cars and 30 buses. The second and third stages will include a hotel, ice rink, pool, shops, two additional chair lifts, and other attractions. The board has decided that stage one should begin no later than April 1 and be completed by October 1, in time for the next skiing season. You have been assigned the task of project manager, and it is your job to coordinate the ordering of materials and construction activities to ensure the project’s completion by the required date. After looking into the possible sources of materials, you are confronted with the following time estimates. Materials for the chair lift and rope tow will take 30 days and 12 days, respectively, to arrive once the order is submitted. Lumber for the day lodge, generator hut, and foundations will take 9 days to arrive. The electrical and plumbing materials for the day lodge will take 12 days to arrive. The generator will take 12 days to arrive. Before actual construction can begin on the various facilities, a road to the site must be built; this will take 6 days. As soon as the road is in, clearing can begin concurrently on the sites of the day lodge, generator house, chair lift, and rope tow. It is estimated that the clearing task at each site will take 6 days, 3 days, 36 days, and 6 days, respectively. The clearing of the main ski slopes can begin after the area for the chair lift has been cleared; this will take 84 days. The foundation for the day lodge will take 12 days to complete. Construction of the main framework will take an additional 18 days. After the framework is completed, electrical wiring and plumbing can be installed concurrently. These should take 24 and 30 days, respectively. Finally, the finishing construction on the day lodge can begin; this will take 36 days. Installation of the chair lift towers (67 days) can begin once the site is cleared, lum- ber delivered, and the foundation completed (6 days). Also, when the chair lift site has been cleared, construction of a permanent road to the upper towers can be started; this will take 24 days. While the towers are being installed, the electric motor to drive the chair lift can be installed; the motor can be installed in 24 days. Once the towers are completed and the motor installed, it will take 3 days to install the cable and an addi- tional 12 days to install the chairs. Installation of the towers for the rope tow can begin once the site is cleared and the foundation is built and poured; it takes 4 days to build the foundation, pour the con- crete and let it cure, and 20 days to install the towers for the rope tow. While the towers are being erected, installation of the electric motor to drive the rope tow can begin; this activity will take 24 days. After the towers and motor are installed, the rope tow can be strung in 1 day. The parking lot can be cleared once the rope tow is finished; this task will take 18 days.

198 Chapter 6 Developing a Project Plan

The foundation for the generator house can begin at the same time as the foun- dation for the lodge; this will take 6 days. The main framework for the generator house can begin once the foundation is completed; framing will take 12 days. After the house is framed, the diesel generator can be installed in 18 days. Finish- ing construction on the generator house can now begin and will take 12 more days. Assignment: 1. Identify the critical path on your network. 2. Can the project be completed by October 1?

Optical Disk Preinstallation Project 18. The optical disk project team has started gathering the information necessary to

develop the project network—predecessor activities and activity times in weeks. The results of their meeting are found in the following table.

Activity Description Duration Predecessor

1 Define scope   6 None                     2 Define customer problems  3 1                            3 Define data records and relationships  5 1                            4 Mass storage requirements  5 2, 3                        5 Consultant needs analysis 10 2, 3                        6 Prepare installation network  3 4, 5                        7 Estimate costs and budget  2 4, 5                        8 Design section “point” system  1 4, 5                        9 Write request proposal  5 4, 5                      10 Compile vendor list  3 4, 5                      11 Prepare mgmt. control system  5 6, 7                      12 Prepare comparison report  5  9, 10                     13 Compare system “philosophies”  3 8, 12                    14 Compare total installation  2 8, 12                    15 Compare cost of support  3 8, 12                    16 Compare customer satisfaction level 10 8, 12                    17 Assign philosophies points  1 13                        18 Assign installation cost  1 14                        19 Assign support cost  1 15                        20 Assign customer satisfaction points  1 16                        21 Select best system  1 11, 17, 18, 19, 20 22 Order system  1 21

The project team has requested that you create a network for the project, and deter- mine if the project can be completed in 45 weeks.

Lag Exercises 19. From the following information, compute the early, late, and slack times for each

activity. Identify the critical path.

Chapter 6 Developing a Project Plan 199

20. Given the following information, compute the early, late, and slack times for the project network. Which activities on the critical path have only the start or finish of the activity on the critical path?

Lag 4

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Open Lot

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200 Chapter 6 Developing a Project Plan

Legend

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Lag 3

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Lag 3

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21. * Given the information in the following lag exercises, compute the early, late, and slack times for the project network. Which activities on the critical path have only the start or finish of the activity on the critical path?

* The solution to this exercise can be found in Appendix One.

22. Given the network below, compute the early, late, and slack time for each activity. Clearly identify the critical path.

Chapter 6 Developing a Project Plan 201

CyClon Project 23. The CyClon project team has started gathering information necessary to develop a

project network—predecessor activities and activity time in days. The results of their meeting are found in the following table:

Activity Description Duration Predecessor

1 CyClon Project  2 Design      10  3 Procure prototype parts      10            2  4 Fabricate parts       8            2  5 Assemble prototype       4            3, 4  6 Laboratory test       7            5  7 Field test      10            6  8 Adjust design       6            7  9 Order stock components      10            8 10 Order custom components      15            8 11 Assemble test production unit      10            9, 10 12 Test unit        5            11 13 Document results        3            12

Part A. Create a network based on the above information. How long will the project take? What is the critical path? Part B. Upon further review the team recognizes that they missed three finish-to-start lags. Procure prototype parts will involve only 2 days of work but it will take 8 days for the parts to be delivered. Likewise, Order stock components will take 2 days of work and 8 days for delivery and Order custom components 2 days of work and 13 days for delivery. Reconfigure the CyClon schedule by entering the three finish-to-start lags. What impact did these lags have on the original schedule? On the amount of work required to complete the project? Part C. Management is still not happy with the schedule and wants the project com- pleted as soon as possible. Unfortunately, they are not willing to approve additional resources. One team member pointed out that the network contained only finish-to- start relationships and that it might be possible to reduce project duration by creating start-to-start lags. After much deliberation the team concluded that the following rela- tionships could be converted into start-to-start lags:

∙ Procure prototype parts could start 6 days after the start of Design. ∙ Fabricate parts could start 9 days after the start of Design. ∙ Laboratory test could begin 1 day after the start of Assemble prototype. ∙ Field test could start 5 days after the start of Laboratory test. ∙ Adjust design could begin 7 days after the start of Field test. ∙ Order stock and Order custom components could begin 5 days after Adjust design. ∙ Test unit could begin 9 days after the start of Assemble test production unit. ∙ Document results could start 3 days after the start of Test unit.

Reconfigure the CyClon schedule by entering all nine start-to-start lags. What impact did these lags have on the original schedule (Part A)? How long will the project take? Is there a change in the critical path? Is there a change in the sensitivity of the network? Why would management like this solution?

Case 6.1

Advantage Energy Technology Data Center Migration*—Part A Brian Smith, network administrator at Advanced Energy Technology (AET), has been given the responsibility of implementing the migration of a large data center to a new office location. Careful planning is needed because AET operates in the highly com- petitive petroleum industry. AET is one of five national software companies that provide an accounting and business management package for oil jobbers and gasoline distributors. A few years ago, AET jumped into the “application service provider” world. Their large data center provides clients with remote access to AET’s complete suite of application software systems. Traditionally, one of AET’s primary competi- tive advantages has been the company’s trademark IT reliability. Due to the complex- ity of this project, Brian will have to use a parallel method of implementation. Although this will increase project costs, a parallel approach is essential if reliability is not to be compromised. Currently, AET’s data center is located on the second floor of a renovated old bank building in downtown Corvallis, Oregon. The company is moving to a new, one-level building located in the recently developed industrial complex at the Corvallis Interna- tional Airport. On February 1, Brian is formally assigned the task by the Vice Presi- dent of Operations, Dan Whitmore, with the following guidelines: ∙ From start to finish, it is anticipated the entire project will take three to four months

to complete. ∙ It is essential that AET’s 235 clients suffer no downtime. Whitmore advises Brian to come back to the Executive Committee on February 15, with a presentation on the scope of the project that includes costs, “first-cut” timeline, and proposed project team members. Brian had some preliminary discussions with some of AET’s managers and direc- tors from each of the functional departments and then arranged for a full-day scope

202 Chapter 6 Developing a Project Plan

References Gantt, H. L., Work, Wages and Profit, published by The Engineering Magazine, New York, 1910; republished as Work, Wages and Profits (Easton, PA: Hive Publishing Company, 1974). Kelly, J. E., “Critical Path Planning and Scheduling: Mathematical Basis,” Operations Research, vol. 9, no. 3 (May–June 1961), pp. 296–321. Levy, F. K., G. L. Thompson, and J. D. West, “The ABCs of the Critical Path Method,” Harvard Business Review, vol. 41, no. 5 (1963), pp. 98–108. Rosenblatt, A., and G. Watson, “Concurrent Engineering,” IEEE Spectrum, July 1991, pp. 22–37. Turtle, Q. C., Implementing Concurrent Project Management (Englewood Cliffs, NJ: Prentice Hall, 1994).

* Prepared by James Moran, a project management instructor at the College of Business, Oregon State University

Chapter 6 Developing a Project Plan 203

meeting on February 4 with a few of the managers and technical representatives from operations, systems, facilities, and applications. The scope team determined the following: ∙ Three to four months is a feasible project timeline and first-cut cost estimate is

$80,000–$90,000 (this includes the infrastructure upgrade of the new site). ∙ Critical to the “no-downtime” requirement is the need to completely rely on AET’s

remote disaster recovery “hot” site for full functionality. ∙ Brian will serve as project manager of a team consisting of one team member each

from facilities, operations/systems, operations/telecommunications, systems & applications, and customer service.

Brian’s Executive Committee report was positively received and, after a few modifica- tions and recommendations, he was formally charged with responsibility for the proj- ect. Brian recruited his team and scheduled their first team meeting (March 1) as the initial task of his project planning process. Once the initial meeting is conducted Brian can hire the contractors to renovate the new data center. During this time Brian will figure out how to design the net- work. Brian estimates that screening and hiring a contractor will take about one week and that the network design will take about two weeks. The new center requires a new ventilation system. The manufacturer’s requirements include an ambient tem- perature of 67 degrees to keep all of the data servers running at optimal speeds. The ventilation system has a lead time of three weeks. Brian will also need to order new racks to hold the servers, switches, and other network devices. The racks have a two- week delivery time. The data center supervisor requested that Brian replace all of the old power sup- plies and data cables. Brian will need to order these as well. Because Brian has a great relationship with the vendor, they guarantee that it will take only one week lead time for the power supplies and the data cables. Once the new ventilation system and racks arrive, Brian can begin installing them. It will take one week to install the ventilation system and three weeks to install the racks. The renovation of the new data center can begin as soon as the contractors have been hired. The contractors tell Brian that con- struction will take 20 days. Once the construction begins and after Brian installs the ventilation system and racks, the city inspector must approve the construction of the raised floor. The city inspector will take two days to approve the infrastructure. After the city inspection and after the new power supplies and cables have arrived, Brian can install the power supplies and run the cables. Brian estimates that it will take five days to install the power supplies and one week to run all of the data cables. Before Brian can assign an actual date for taking the network off line and switching to the hot remote site, he must get approval from each of the functional units (“Switchover Approval”). Meetings with each of the functional units will require one week. During this time he can initiate a power check to ensure that each of the racks has sufficient voltage. This will require only one day. Upon completion of the power check, he can take one week to install his test servers. The test servers will test all of the primary network functions and act as a safeguard before the network is taken off line. The batteries must be charged, ventilation installed, and test servers up and running before management can be assured that the new infra- structure is safe, which will take two days. Then they will sign off the Primary Systems check, taking one day of intense meetings. They will also set an official date for the network move.

204 Chapter 6 Developing a Project Plan

Brian is happy that everything has gone well thus far and is convinced that the move will go just as smoothly. Now that an official date is set, the network will be shut down for a day. Brian must move all of the network components to the new data center. Brian will do the move over the weekend—two days—when user traffic is at low point.

ASSIGNMENT

1. Generate a priority matrix for AET’s system move. 2. Develop a WBS for Brian’s project. Include duration (days) and predecessors. 3. Using a project planning tool, generate a network diagram for this project. Note: Base your plan on the following guidelines: eight-hour days, five-day weeks

except for when Brian moves the network components over a weekend, no holiday breaks, March 1, 2010, is the project start date. Ordering Ventilation System, New Racks, and Power Supplies/Cables takes only one actual day of work. The remain- ing days are the time necessary for the vendors to fill and ship the order to Brian. So use Finish to Start lags here. Assume that five days after the start of the Renova- tion of the Data Center that the raised floor will be ready for inspection (a Start-to- Start lag).

Case 6.2

Shoreline Stadium Case The G&E Company is preparing a bid to build the new 47,000-seat Shoreline baseball stadium. The construction must start on July 3, 2017, and be completed in time for the start of the 2020 season. A penalty clause of $250,000 per day of delay beyond April 3 is written into the contract. Percival Young, the president of the company, expressed optimism at obtaining the contract and revealed that the company could net as much as $3 million on the project. He also said if they were successful, the prospects of future projects are bright since there is a projected renaissance in building classic ball parks with modern luxury boxes.

ASSIGNMENT Given the information provided in Table 6.3, construct a network schedule for the sta- dium project and answer the following questions: 1. Will the project be able to be completed by the April 3 deadline? How long will it take? 2. What is the critical path for the project? 3. Based on the schedule would you recommend that G&E pursue this contact? Why?

Include a one-page Gantt chart for the stadium schedule.

Chapter 6 Developing a Project Plan 205

TABLE 6.3 Shoreline Stadium Case

ID Activity Duration Predecessor(s)

1 Baseball Stadium   2 Clear stadium site 70 days           —   3 Demolish building 30 days           2   4 Set up construction site 70 days           3   5 Drive support piling 120 days           4   6 Pour lower concrete bowl 120 days           5   7 Pour main concourse 120 days           6   8 Install playing field 90 days           6   9 Construct upper steel bowl 120 days           6 10 Install seats 140 days           9 11 Build luxury boxes 90 days           9 12 Install jumbotron 30 days           9 13 Stadium infrastructure 120 days           9 14 Construct steel canopy 75 days          10 15 Light installation 30 days          10 16 Build roof supports 90 days           4 17 Construct roof 180 days          16 18 Install roof tracks 90 days          14 19 Install roof 90 days      17, 18 20 Inspection 20 days 8, 11, 13, 15, 19

Case Appendix

Technical Details For The Shoreline Baseball Stadium For purposes of this case assume the following: 1. The following holidays are observed: January 1, Martin Luther King Day (third

Monday in January), Memorial Day (last Monday in May), July 4th, Labor Day (first Monday in September), Thanksgiving Day (4th Thursday in November), December 25 and 26.

2. If a holiday falls on a Saturday then Friday will be given as an extra day off, and if it falls on a Sunday then Monday will be given as a day off.

3. The construction crew work Monday through Friday.

206

Managing Risk7 OUTLINE 7.!1 Risk Management Process

7.2 Step 1: Risk Identification

7.3 Step 2: Risk Assessment

7.4 Step 3: Risk Response Development

7.5 Contingency Planning

7.6 Opportunity Management

7.7 Contingency Funding and Time Buffers

7.8 Step 4: Risk Response Control

7.9 Change Control Management

Summary

Appendix 7.1: PERT and PERT Simulation

LEARNING OBJECTIVES After reading this chapter you should be able to:

7-1 Describe the risk management process.

7-2 Understand how to identify project risks.

7-3 Assess the significance of different project risks.

7-4 Describe the four different responses to man- aging risks.

7-5 Understand the role contingency plans play in risk management process.

7-6 Understand opportunity management and describe the four different approaches to responding to opportunities in a project.

7-7 Understand how contingency funds and time buffers are used to manage risks on a project.

7-8 Recognize the need for risk management being an ongoing activity.

7-9 Describe the change control process.

C H A P T E R S E V E N

207

You’ve got to go out on a limb sometimes because that’s where the fruit is. —Will Rogers

Every project manager understands risks are inherent in projects, deliveries are delayed, accidents happen, people get sick, etc. No amount of planning can overcome risk, or the inability to control chance events. In the context of projects, risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on proj- ect objectives. A risk has a cause and, if it occurs, a consequence. For example, a cause may be a flu virus or change in scope requirements. The event is that team members get stricken with the flu or the product has to be redesigned. If either of these uncertain events occurs, it will impact the cost, schedule, and quality of the project. Some potential risk events can be identified before the project starts—such as equipment malfunction or change in technical requirements. Risks can be anticipated consequences, like schedule slippages or cost overruns. Risks can be beyond imagina- tion like the 2008 financial meltdown. While risks can have positive consequences such as unexpected price reduction in materials, the primary focus of this chapter is on what can go wrong and the risk man- agement process.

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

208 Chapter 7 Managing Risk

Risk management attempts to recognize and manage potential and unforeseen trou- ble spots that may occur when the project is implemented. Risk management identifies as many risk events as possible (what can go wrong), minimizes their impact (what can be done about the event before the project begins), manages responses to those events that do materialize (contingency plans), and provides contingency funds to cover risk events that actually materialize. For a humorous, but ultimately embarrassing example of poor risk management see Snapshot from Practice 7.1: Giant Popsicle Gone Wrong.

7.1 Risk Management Process Figure 7.1 presents a graphic model of the risk management challenge. The chances of a risk event occurring (e.g., an error in time estimates, cost estimates, or design tech- nology) are greatest during the early stages of a project. This is when uncertainty is highest and many questions remain unanswered. As the project progresses toward completion, risk declines as the answers to critical issues (Will the technology work? Is the timeline feasible?) are resolved. The cost impact of a risk event, however, increases over the life of the project. For example, the risk event of a design flaw occurring after a prototype has been made has a greater cost or time impact than if the flaw were discovered during the planning phase of the project. The cost of mismanaged risk control early on in the project is exemplified by the ill-fated 1999 NASA Mars Climate Orbiter. Investigations revealed that Lockheed Martin botched the design of critical navigation software. While flight computers on the ground did calculations based on pounds of thrust per second, the spacecraft’s

7-1LO Describe the risk management process.

An attempt to erect the World’s Larg- est Popsicle in New York City ended with a scene straight out of a disaster film, but much stickier.

The 25-foot-tall, 17½-ton treat of frozen juice melted faster than expected, flooding Union Square in downtown Manhattan with kiwi- strawberry–flavored fluid. Bicyclists wiped out in the stream of goo. Pedestri- ans slipped. Traffic was, well, frozen. Firefighters closed off several streets and used hoses to wash away the thick, sweet slime. The Snapple Company, a leading maker of soft beverages, had been trying to promote a new line of frozen treats by setting a record for the World’s Larg- est Popsicle, but called off the stunt before the fro- zen giant was pulled fully upright by a construction crane. Authorities said they were worried the 2½-story popsicle would collapse.

S N A P S H O T F R O M P R A C T I C E 7 . 1 Giant Popsicle Gone Wrong*

© Brian Smith/Zuma Press, Inc.

Organizers were not sure why it melted so quickly. “We planned for it. We just didn’t expect for it to hap- pen so fast,” said Snapple spokeswoman Lauren Rad- cliffe. She said the company would offer to pay the city for the clean-up costs.

* Associated Press, June 23, 2005.

Chapter 7 Managing Risk 209

computer software used metric units called newtons. A check to see if the values were compatible was never done. “Our check and balances processes did not catch an error like this that should have been caught,” said Ed Weiler, NASA’s associate administrator for space science. “That is the bottom line” (Orlando Sentinel, 1999). If the error had been discovered early the cor- rection would have been relatively simple and inexpensive. Instead the error was never discovered, and after the nine-month journey to the Red Planet, the $125-million probe approached Mars at too low an altitude and burned up in the planet’s atmosphere. Following the 1999 debacle, NASA instituted a more robust risk management sys- tem which has produced a string of successful missions to Mars, including the dra- matic landing of the Curiosity rover in August 2012.1 Risk management is a proactive approach rather than reactive. It is a preventive process designed to ensure that surprises are reduced and that negative consequences associated with undesirable events are minimized. It also prepares the project manager to take action when a time, cost, and/or technical advantage is possible. Successful management of project risk gives the project manager better control over the future and can significantly improve chances of reaching project objectives on time, within budget, and meeting required technical (functional) performance. The sources of project risks are unlimited. There are external sources, such as infla- tion, market acceptance, exchange rates, and government regulations. In practice, these risk events are often referred to as “threats” to differentiate them from those that are not within the project manager’s or team’s responsibility area. (Later we will see bud- gets for such risk events are placed in a “management reserve” contingency budget.) Since such external risks are usually considered before the decision to go ahead with the project, they will be excluded from the discussion of project risks. However, exter- nal risks are extremely important and must be addressed. The major components of the risk management process are depicted in Figure 7.2. Each step will be examined in more detail in the remainder of the chapter.

FIGURE 7.1 Risk Event Graph Risk

High

Low

High

Low

Cost

Chances of risks occurring

Project Life Cycle

Executing DeliveringDefining Planning

Cost to fix risk event

1 E. Landau, “Mars Landing Went ‘Flawlessly,’ Scientists Say,” CNN.com, accessed August 14, 2012.

210 Chapter 7 Managing Risk

7.2 Step 1: Risk Identification The risk management process begins by trying to generate a list of all the possible risks that could affect the project. Typically the project manager pulls together, during the planning phase, a risk management team consisting of core team members and other relevant stakeholders. Research has demonstrated that groups make more accu- rate judgments about risks than individuals do (Snizek and Henry, 1989). The team uses brainstorming and other problem identifying techniques to identify potential problems. Participants are encouraged to keep an open mind and generate as many probable risks as possible. More than one project has been bushwhacked by an event that members thought was preposterous in the beginning. Later during the assessment phase, participants will have a chance to analyze and filter out unreasonable risks. One common mistake that is made early in the risk identification process is to focus on objectives and not on the events that could produce consequences. For example, team members may identify failing to meet schedule as a major risk. What they need to focus on are the events that could cause this to happen (i.e., poor estimates, adverse weather, shipping delays, etc.). Only by focusing on actual events can potential solutions be found. Organizations use risk breakdown structures (RBSs) in conjunction with work breakdown structures (WBSs) to help management teams identify and eventually ana- lyze risks. Figure 7.3 provides a generic example of a RBS. The focus at the beginning should be on risks that can affect the whole project as opposed to a specific section of the project or network. For example, the discussion of funding may lead the team to identify the possibility of the project budget being cut after the project has started as a

FIGURE 7.2 The Risk Management Process

New risks

New risks

New risks

Assess risks in terms of: Severity of impact Likelihood of occurring Controllability

Develop a strategy to reduce possible damage

Develop contingency plans

Implement risk strategy Monitor and adjust plan for

new risks Change management

Analyze the project to identify sources of risk

Step 1 Risk Identification

Step 2 Risk Assessment

Known risks

Risk assessment

Risk management plan

Step 3 Risk Response Development

Step 4 Risk Response Control

7-2LO Understand how to identify project risks.

Chapter 7 Managing Risk 211

FIGURE 7.3 The Risk Breakdown Structure (RBS)

Project

Organizational

Project dependencies

Resources

Funding

Prioritization

External

Subcontractors and suppliers

Regulatory

Market

Customer

Weather

Technical

Requirements

Technology

Complexity and interfaces

Performances and reliability

Quality

Project Management

Estimating

Planning

Controlling

Communication

significant risk event. Likewise, when discussing the market the team may identify responding to new product releases by competitors as a risk event. After the macro risks have been identified, specific areas can be checked. An effec- tive tool for identifying specific risks is the work breakdown structure. Use of the RBS reduces the chance a risk event will be missed. On large projects multiple risk teams are organized around specific deliverables and submit their risk management reports to the project manager. A risk profile is another useful tool. A risk profile is a list of questions that address tra- ditional areas of uncertainty on a project. These questions have been developed and refined from previous, similar projects. Figure 7.4 provides a partial example of a risk profile. Good risk profiles, like RBSs, are tailored to the type of project in question. For exam- ple, building an information system is different from building a new car. They are organi- zation specific. Risk profiles recognize the unique strengths and weaknesses of the firm. Finally, risk profiles address both technical and management risks. For example, the pro- file shown in Figure 7.4 asks questions about design such as, Does the design depend upon unrealistic assumptions? The questions may lead the team to identify that the tech- nology will not work under extreme conditions as a risk. Similarly, questions about work environment (Do people cooperate across functional boundaries?) may lead to the identi- fication of potential communication breakdowns between marketing and R&D as a risk. Risk profiles are generated and maintained usually by personnel from the project office. They are updated and refined during the postproject audit (see Chapter 14). These profiles, when kept up to date, can be a powerful resource in the risk management process. The collective experience of the firm’s past projects resides in their questions. Historical records can complement or be used when formal risk profiles are not available. Project teams can investigate what happened on similar projects in the past to

212 Chapter 7 Managing Risk

identify potential risks. For example, a project manager can check the on-time perfor- mance of selected vendors to gauge the threat of shipping delays. IT project managers can access “best practices” papers detailing other companies’ experiences converting software systems. Inquiries should not be limited to recorded data. Savvy project man- agers tap the wisdom of others by seeking the advice of veteran project managers. The risk identification process should not be limited to just the core team. Input from customers, sponsors, subcontractors, vendors, and other stakeholders should be solicited. Relevant stakeholders can be formally interviewed or included on the risk management team. Not only do these players have a valuable perspective, but by involving them in the risk management process they also become more committed to project success.2 One of the keys to success in risk identification is attitude. While a “can do” atti- tude is essential during implementation, project managers have to encourage critical thinking when it comes to risk identification. The goal is to find potential problems before they happen. The RBS and risk profiles are useful tools for making sure no stones are left unturned. At the same time, when done well the number of risks identified can be overwhelming and a bit discouraging. Initial optimism can be replaced with griping and cries of “what have we gotten ourselves into?” It is important that project manag- ers set the right tone and complete the risk management process so members regain confidence in themselves and the project.

7.3 Step 2: Risk Assessment Step 1 produces a list of potential risks. Not all of these risks deserve attention. Some are trivial and can be ignored, while others pose serious threats to the welfare of the project. Managers have to develop methods for sifting through the list of risks, elimi- nating inconsequential or redundant ones and stratifying worthy ones in terms of importance and need for attention.

7-3LO Assess the significance of different project risks.

FIGURE 7.4 Partial Risk Profile for Product Development Project

Technical Requirements

Are the requirements stable?

Design

Does the design depend on unrealistic or optimistic assumptions?

Testing

Will testing equipment be available when needed?

Development

Is the development process supported by a com- patible set of procedures, methods, and tools?

Schedule

Is the schedule dependent upon the completion of other projects?

Budget

How reliable are the cost estimates?

Quality

Are quality considerations built into the design?

Management

Do people know who has authority for what?

Work Environment

Do people work cooperatively across functional boundaries?

Staffing

Is staff inexperienced or understaffed?

Customer

Does the customer understand what it will take to complete the project?

Contractors

Are there any ambiguities in contractor task definitions?

2 The Delphi Method (see Snapshot from Practice 5.3) is a popular technique for involving stakeholders.

Chapter 7 Managing Risk 213

Scenario analysis is the easiest and most commonly used technique for analyzing risks. Team members assess the significance of each risk event in terms of: ∙ Probability of the event. ∙ Impact of the event. Simply stated, risks need to be evaluated in terms of the likelihood the event is going to occur and the impact or consequences of its occurrence. The risk of a project manager being struck by lightning at a work site would have major negative impact on the project, but the likelihood is so low it is not worthy of consideration. Conversely, people do change jobs, so an event like the loss of key project personnel would have not only an adverse impact but also a high likelihood of occurring in some organiza- tions. If so, then it would be wise for that organization to be proactive and mitigate this risk by developing incentive schemes for retaining specialists and/or engaging in cross-training to reduce the impact of turnover. The quality and credibility of the risk analysis process require that different lev- els of risk probabilities and impacts be defined. These definitions vary and should be tailored to the specific nature and needs of the project. For example, a relatively simple scale ranging from “very unlikely” to “almost certainly” may suffice for one project, whereas another project may use more precise numerical probabilities (e.g., 0.1, 0.3, 0.5, . . .). Impact scales can be a bit more problematic since adverse risks affect project objec- tives differently. For example, a component failure may cause only a slight delay in project schedule but a major increase in project cost. If controlling cost is a high prior- ity, then the impact would be severe. If, on the other hand, time is more critical than cost, then the impact would be minor. Because impact ultimately needs to be assessed in terms of project priorities, differ- ent kinds of impact scales are used. Some scales may simply use rank-order descrip- tors, such as “low,” “moderate,” “high,” and “very high,” whereas others use numeric weights (e.g., 1–10). Some may focus on the project in general while others focus on specific project objectives. The risk management team needs to establish up front what distinguishes a 1 from a 3 or “moderate” impact from “severe” impact. Figure 7.5 pro- vides an example of how impact scales could be defined given the project objectives of cost, time, scope, and quality. Documentation of scenario analyses can be seen in various risk assessment forms used by companies. Figure 7.6 is a partial example of a risk assessment form used on an IS project involving the upgrade from Windows 10 to Windows 11. Notice that in addition to evaluating the severity and probability of risk events the team also assesses when the event might occur and its detection difficulty. Detection difficulty is a measure of how easy it would be to detect that the event was going to occur in time to take mitigating action, that is, how much warning would we have? So in the Windows 11 conversion example, the detection scale would range from 5 = no warning to 1 = lots of time to react. Often organizations find it useful to categorize the severity of different risks into some form of risk assessment matrix. The matrix is typically structured around the impact and likelihood of the risk event. For example, the risk matrix presented in Fig- ure 7.7 consists of a 5 × 5 array of elements with each element representing a different set of impact and likelihood values. The matrix is divided into red, yellow, and green zones representing major, moder- ate, and minor risks, respectively. The red zone is centered on the top right corner of the matrix (high impact/high likelihood), while the green zone is centered on the

214 Chapter 7 Managing Risk

bottom left corner (low impact/low likelihood). The moderate risk, yellow zone extends down the middle of the matrix. Since impact is generally considered more important than likelihood (a 10 percent chance of losing $1,000,000 is usually consid- ered a more severe risk than a 90 percent chance of losing $1,000), the red zone (major risk) extends farther down the high impact column. Using the Windows 11 project again as an example, interface problems and system freezing would be placed in the red zone (major risk), while user backlash and hard- ware malfunctioning would be placed in the yellow zone (moderate risk). The risk severity matrix provides a basis for prioritizing which risks to address. Red zone risks receive first priority followed by yellow zone risks. Green zone risks are typically considered inconsequential and ignored unless their status changes.

FIGURE 7.6 Risk Assessment Form Interface problems

System freezing

User backlash

Hardware malfunctioning

4

LikelihoodRisk Event Impact Detection Difficulty When

2

4

1

4

5

3

5

4

5

3

5

Conversion

Start-up

Postinstallation

Installation

Project Objective

Cost

Time

Scope

Quality

Relative or Numerical Scale

Insignificant cost increase

Insignificant time increase

Scope decrease barely noticeable

Quality degradation barely noticeable

1 Very Low

2 Low

< 10% cost increase

< 5% time increase

Minor areas of scope affected

Only very demanding applications are

affected

10–20% cost increase

5–10% time increase

Major areas of scope affected

Quality reduction requires sponsor

approval

20–40% cost increase

10–20% time increase

Scope reduction unacceptable to

sponsor

Quality reduction unacceptable

to sponsor

> 40% cost increase

> 20% time increase

Project end item is effectively

useless

Project end item is effectively

useless

3 Moderate

4 High

5 Very High

FIGURE 7.5 Defined Conditions for Impact Scales of a Risk on Major Project Objectives (examples for negative impacts only)

Chapter 7 Managing Risk 215

Failure Mode and Effects Analysis (FMEA) extends the risk severity matrix by including ease of detection in the equation:

Impact × Probability × Detection = Risk Value Each of the three dimensions is rated according to a five-point scale. For example, detection is defined as the ability of the project team to discern that the risk event is imminent. A score of 1 would be given if even a chimpanzee could spot the risk com- ing. The highest detection score of 5 would be given to events that could only be dis- covered after it is too late (i.e., system freezing). Similar anchored scales would be applied for severity of impact and the probability of the event occurring. The weight- ing of the risks is then based on their overall score. For example, a risk with an impact in the “1” zone with a very low probability and an easy detection score might score a 1 (1 × 1 × 1 = 1). Conversely, a high-impact risk with a high probability and impos- sible to detect would score 125 (5 × 5 × 5 = 125). This broad range of numerical scores allows for easy stratification of risk according to overall significance. No assessment scheme is absolutely foolproof. For example, the weakness of the FMEA approach is that a risk event rated Impact = 1, Probability = 5, and Detection = 5 would receive the same weighted score as an event rated Impact = 5, Probability = 5, and Detection = 1! This underscores the importance of not treating risk assessment as simply an exercise in mathematics. There is no substitute for thoughtful discussion of key risk events.

Probability Analysis There are many statistical techniques available to the project manager that can assist in assessing project risk. Decision trees have been used to assess alternative courses of action using expected values. Statistical variations of net present value (NPV) have been used to assess cash flow risks in projects. Correlations between past projects’ cash flow and S-curves (cumulative project cost curve—baseline—over the life of the project) have been used to assess cash flow risks.

FIGURE 7.7 Risk Severity Matrix

User backlash

Interface problems

System freezing

Hardware malfunc- tioning

5

5

4

4

3

3 Impact

2

2

1

1

Li ke

lih oo

d

Red zone (major risk)

Yellow zone (moderate risk)

Green zone (minor risk)

216 Chapter 7 Managing Risk

PERT (program evaluation and review technique) and PERT simulation can be used to review activity and project risk. PERT and related techniques take a more macro perspective by looking at overall cost and schedule risks. Here the focus is not on indi- vidual events but on the likelihood the project will be completed on time and within budget. These methods are useful in assessing the overall risk of the project and the need for such things as contingency funds, resources, and time. The use of PERT simulation is increasing because it uses the same data required for PERT, and software to perform the simulation is readily available. Basically PERT simulation assumes a statistical distribution (range between optimis- tic and pessimistic) for each activity duration; it then simulates the network (perhaps over 1,000 simulations) using a random number generator. The outcome is the relative probability, called a criticality index, of an activity becoming critical under the many different, possible activity durations for each activity. PERT simulation also provides a list of potential critical paths and their respective probabilities of occurring. Having this information available can greatly facilitate identifying and assessing schedule risk. (See Appendix 7.1 at the end of this chapter for a more detailed description and discussion.)

7.4 Step 3: Risk Response Development When a risk event is identified and assessed, a decision must be made concerning which response is appropriate for the specific event. Responses to risk can be classi- fied as mitigating, avoiding, transferring, or retaining.

Mitigating Risk Reducing risk is usually the first alternative considered. There are basically two strat- egies for mitigating risk: (1) reduce the likelihood that the event will occur and/or (2) reduce the impact that the adverse event would have on the project. Most risk teams focus first on reducing the likelihood of risk events since, if successful, this may eliminate the need to consider the potentially costly second strategy. Testing and prototyping are frequently used to prevent problems from surfacing later in a project. An example of testing can be found in an information systems proj- ect. The project team was responsible for installing a new operating system in their parent company. Before implementing the project, the team tested the new system on a smaller isolated network. By doing so they discovered a variety of problems and were able to come up with solutions prior to implementation. The team still encountered problems with the installation but the number and severity were greatly reduced. Often identifying the root causes of an event is useful. For example, the fear that a vendor will be unable to supply customized components on time may be attributable to (1) poor vendor relationships, (2) design miscommunication, and (3) lack of motiva- tion. As a result of this analysis the project manager may decide to take his counterpart to lunch to clear the air, invite the vendor to attend design meetings, and restructure the contract to include incentives for on-time delivery. Other examples of reducing the probability of risks occurring are scheduling out- door work during the summer months, investing in up-front safety training, and choos- ing high-quality materials and equipment. When the concerns are that duration and costs have been underestimated, managers will augment estimates to compensate for the uncertainties. It is common to use a ratio between old and new project to adjust time or cost. The ratio typically serves as a con- stant. For example, if past projects have taken 10 minutes per line of computer code, a

7-4 Describe the four different responses to managing risks.

LO

Chapter 7 Managing Risk 217

constant of 1.10 (which represents a 10 percent increase) would be used for the proposed project time estimates because the new project is more difficult than prior projects. An alternative mitigation strategy is to reduce the impact of the risk if it occurs. For example, a bridge-building project illustrates risk reduction. A new bridge project for a coastal port was to use an innovative, continuous cement-pouring process developed by an Australian firm to save large sums of money and time. The major risk was that the continuous pouring process for each major section of the bridge could not be inter- rupted. Any interruption would require that the whole cement section (hundreds of cubic yards) be torn down and started over. An assessment of possible risks centered on delivery of the cement from the cement factory. Trucks could be delayed, or the fac- tory could break down. Such risks would result in tremendous rework costs and delays. Risk was reduced by having two additional portable cement plants built nearby on dif- ferent highways within 20 miles of the bridge project in case the main factory supply was interrupted. These two portable plants carried raw materials for a whole bridge section, and extra trucks were on immediate standby each time continuous pouring was required. Similar risk reduction scenarios are apparent in system and software develop- ment projects where parallel innovation processes are used in case one fails. Snapshot from Practice 7.2: From Dome to Dust details the steps Controlled Demo- lition took to minimize damage when they imploded the Seattle Kingdome.

Avoiding Risk Risk avoidance is changing the project plan to eliminate the risk or condition. Although it is impossible to eliminate all risk events, some specific risks may be avoided before you launch the project. For example, adopting proven technology instead of experimental technology can eliminate technical failure. Choosing an Australian supplier as opposed to an Indonesian supplier would virtually eliminate the chance that political unrest would disrupt the supply of critical materials. Likewise, one could eliminate the risk of choos- ing the wrong software by developing web applications using both ASAP.NET and PHP. Choosing to move a concert indoors would eliminate the threat of inclement weather.

Transferring Risk Passing risk to another party is common; this transfer does not change risk. Passing risk to another party almost always results in paying a premium for this exemption. Fixed- price contracts are the classic example of transferring risk from an owner to a contractor. The contractor understands his or her firm will pay for any risk event that materializes; therefore, a monetary risk factor is added to the contract bid price. Before deciding to transfer risk, the owner should decide which party can best control activities that would lead to the risk occurring. Also, is the contractor capable of absorbing the risk? Clearly identifying and documenting responsibility for absorbing risk is imperative. Another more obvious way to transfer risk is insurance. However, in most cases this is impractical because defining the project risk event and conditions to an insurance broker who is unfamiliar with the project is difficult and usually expensive. Of course, low-probability and high-consequence risk events such as acts of God are more easily defined and insured. Performance bonds, warranties, and guarantees are other finan- cial instruments used to transfer risk. On large, international construction projects like petrochemical plants and oil refineries, host countries are insisting on contracts that enforce Build-Own-Operate- Transfer (BOOT) provisions. Here the prime project organization is expected not only to build the facility, but also to take over ownership until its operation capacity has been proven and all the debugging has occurred before final transfer of ownership to

218 Chapter 7 Managing Risk

the client. In such cases, the host country has transferred financial risk of ownership until the project has been completed and capabilities proven.

Accept Risk In some cases a conscious decision is made to accept the risk of an event occurring. Some risks are so large it is not feasible to consider transferring or reducing the event (e.g., an earthquake or flood). The project owner assumes the risk because the chance of such an event occurring is slim. In other cases risks identified in the budget reserve can simply be absorbed if they materialize. The risk is retained by developing a contin- gency plan to implement if the risk materializes. In a few cases a risk event can be ignored and a cost overrun accepted should the risk event occur.

On March 26, 2000, the largest con- crete domed structure in the world was reduced to a pile of rubble in a dramatic implosion lasting less than 20 seconds. According to Mark Loizeaux, whose Maryland-based Controlled Demolition

Inc. was hired to bring the 24-year-old Seattle Kingdome down, “We don’t blow things up. We use explosives as an engine, but gravity is the catalyst that will bring it down.” Destroying the Kingdome was the most complicated of the 7,000 demolitions Loizeaux’s company has under- taken. Nearly three months of preparations were needed to implode the dome at a total cost of $9 million. The King- dome was considered to be one of the strongest struc- tures in the world containing over 25,000 tons of concrete with each of its 40 vaulted ribs incorporating seven lengths of two-and-one-quarter-inch reinforcing steel bar. Strands of orange detonating cord—basically dyna- mite in a string that explodes at the lightning pace of 24,000 feet per second—connected six pielike divi- sions of the Kingdome to a nearby control center. Throughout each section, Controlled Demolition workers drilled nearly 1,000 holes and packed them with high-velocity gelatin explosives the size of hot dogs. Large charges were placed about one-third of the way up each dome rib; smaller charges were put farther up the ribs. When the detonation button was pushed, blasting caps set off a chain reaction of explo- sions in each section reducing the stadium to rubble. While the actual implosion was a technical tour- de-force, risk management was a critical part of the project’s success. To minimize damage to surrounding buildings, the explosive charges were wrapped in a layer of chain-link fencing covered with thick sheets of geotextile polypropylene fabric to contain flying con- crete. Nearby buildings were protected in various man- ners depending on the structure and proximity to the

Dome. Measures included sealing air-handling units, taping seams on doors and windows, covering floors and windows with plywood and draping reinforced polyethylene sheeting around the outside. To help absorb the impact, air-conditioning units removed from the interior were stacked with other material to create a barrier around the perimeter of the work area. Hundreds of police officers and security personnel were used to cordon off an area extending roughly 1,000 feet from the Dome from overzealous spectators. Traffic was closed for a larger area. Accommodations were provided for people and pets who lived within the restricted zone. Eight water trucks, eight sweeper units, and more than 100 workers were deployed immediately after the blast to control dust and begin the cleanup. As a side note, one-third of the concrete will be crushed and used in the foundation of a new $430-million outdoor football stadium which is being built in its place. The rest of the concrete will be carted away and used in roadbeds and foundations throughout the Seattle area.

© Tim Matsui/Getty Images

S N A P S H O T F R O M P R A C T I C E 7 . 2 From Dome to Dust*

* New York Times—Sunday Magazine (March 19, 2000); Seattle Times (March 27, 2000) website.

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The more effort given to risk response before the project begins, the better the chances are for minimizing project surprises. Knowing that the response to a risk event will be retained, transferred, or mitigated greatly reduces stress and uncertainty. Again, control is possible with this structured approach.

7.5 Contingency Planning A contingency plan is an alternative plan that will be used if a possible foreseen risk event becomes a reality. The contingency plan represents actions that will reduce or mitigate the negative impact of the risk event. A key distinction between a risk response and a contingency plan is that a response is part of the actual implementation plan and action is taken before the risk can materialize, while a contingency plan is not part of the initial implementation plan and only goes into effect after the risk is recognized. Like all plans, the contingency plan answers the questions of what, where, when, and how much action will take place. The absence of a contingency plan, when a risk event occurs, can cause a manager to delay or postpone the decision to implement a remedy. This postponement can lead to panic, and acceptance of the first remedy sug- gested. Such after-the-event decision making under pressure can be potentially danger- ous and costly. Contingency planning evaluates alternative remedies for possible foreseen events before the risk event occurs and selects the best plan among alterna- tives. This early contingency planning facilitates a smooth transition to the remedy or work-around plan. The availability of a contingency plan can significantly increase the chances for project success. Conditions for activating the implementation of the contingency plan should be decided and clearly documented. The plan should include a cost estimate and identify the source of funding. All parties affected should agree to the contingency plan and have authority to make commitments. Because implementation of a contingency plan embodies disruption in the sequence of work, all contingency plans should be com- municated to team members so that surprise and resistance are minimized. Here is an example: A high-tech niche computer company intends to introduce a new “platform” product at a very specific target date. The project’s 47 teams all agree delays will not be acceptable. Their contingency plans for two large component suppli- ers demonstrate how seriously risk management is viewed. One supplier’s plant sits on the San Andreas Fault, which is prone to earthquakes. The contingency plan has an alternative supplier, who is constantly updated, producing a replica of the component in another plant. Another key supplier in Toronto, Canada, presents a delivery risk on their due date because of potential bad weather. This contingency plan calls for a char- tered plane (already contracted to be on standby) if overland transportation presents a delay problem. To outsiders these plans must seem a bit extreme, but in high-tech industries where time to market is king, risks of identified events are taken seriously. Risk response matrices such as the one shown in Figure 7.8 are useful for summa- rizing how the project team plans to manage risks that have been identified. Again, the Windows 11 project is used to illustrate this kind of matrix. The first step is to identify whether to reduce, share, transfer, or accept the risk. The team decided to reduce the chances of the system freezing by experimenting with a prototype of the system. Pro- totype experimentation not only allows them to identify and fix conversion “bugs” before the actual installation, but it also yields information that could be useful in enhancing acceptance by end-users. The project team is then able to identify and docu- ment changes between the old and new system that will be incorporated in the training the users receive. The risk of equipment malfunctioning is transferred by choosing a reliable supplier with a strong warranty program.

Understand the role contingency plans play in risk management process.

7-5LO

220 Chapter 7 Managing Risk

FIGURE 7.8 Risk Response Matrix

Interface problems

System freezing

User backlash

Equipment malfunctions

Mitigate: Test prototype

ResponseRisk Event Contingency Plan Trigger Who Is Responsible

Mitigate: Test prototype

Mitigate: Prototype demonstration

Mitigate: Select reliable vendor Transfer: Warranty

Work around until help comes

Reinstall OS

Increase staff support

Order replacement

Not solved within 24 hours

Still frozen after one hour

Call from top management

Equipment fails

Nils

Emmylou

Eddie

Jim

The next step is to identify contingency plans in case the risk still occurs. For exam- ple, if interface problems prove insurmountable, then the team would attempt a work- around until vendor experts arrived to help solve the problem. If the system freezes after installation, the team will first try to reinstall the software. If user dissatisfaction is high, then the IS department will provide more staff support. If the team is unable to get reliable equipment from the original supplier, then it will order a different brand from a second dealer. The team also needs to discuss and agree what would “trigger” implementation of the contingency plan. In the case of the system freezing, the trigger is not being able to unfreeze the system within one hour or, in the case of user back- lash, an angry call from top management. Finally, the individual responsible for moni- toring the potential risk and initiating the contingency plan needs to be assigned. Smart project managers establish protocols for contingency responses before they are needed. For an example of the importance of establishing protocols see Snapshot from Practice 7.3: Risk Management at the Top of the World. Some of the most common methods for handling risk are discussed here.

Technical Risks Technical risks are problematic; they can often be the kind that cause the project to be shut down. What if the system or process does not work? Contingency or backup plans are made for those possibilities that are foreseen. For example, Carrier Transicold was involved in developing a new Phoenix refrigeration unit for truck-trailer applications. This new unit was to use rounded panels made of bonded metals, which at the time was new technology for Transicold. Furthermore, one of its competitors had tried unsuccessfully to incorporate similar bonded metals in their products. The project team was eager to make the new technology work, but it wasn’t until the very end of the project that they were able to get the new adhesives to bond adequately to complete the project. Throughout the project, the team maintained a welded-panel fabrication approach just in case they were unsuccessful. If this contingency approach had been needed, it would have increased production costs, but the project still would have been completed on time. In addition to backup strategies, project managers need to develop methods to quickly assess whether technical uncertainties can be resolved. The use of sophisti- cated CAD programs has greatly helped resolve design problems. At the same time, Smith and Reinertsen (1995), in their book Developing Products in Half the Time, argue that there is no substitute for making something and seeing how it works, feels, or looks. They suggest that one should first identify the high-risk technical areas, then

Chapter 7 Managing Risk 221

S N A P S H O T F R O M P R A C T I C E 7 . 3 Risk Management at the Top of the World*

The gripping account in the 2015 film Everest of an ill-fated attempt to climb Mount Everest in which six climbers died provides testimony to the risks of extreme mountain climbing. Accounts of Mount Everest expedi-

tions provide insights into project risk management. First, most climbers spend more than three weeks accli- mating their bodies to high-altitude conditions. Native Sherpas are used extensively to carry supplies and set up each of the four base camps that will be used during the final stages of the climb. To reduce the impact of hypoxia, lightheadness, and disorientation caused by shortage of oxygen, most climbers use oxygen masks and bottles during the final ascent. If lucky enough not to be one of the first expeditions of the season, the path to the summit should be staked out and roped by previ- ous climbers. Climbing guides receive last-minute weather reports by radio to confirm whether the weather conditions warrant the risk. Finally, for added insurance, most climbers join their Sherpas in an elabo- rate puja ritual intended to summon the divine support of the gods before beginning their ascent. All of these efforts pale next to the sheer physical and mental rigors of making the final climb from base camp IV to the summit. This is what climbers refer to as the “death zone” because beyond 26,000 feet the mind and body begin to quickly deteriorate despite supplemental oxy- gen. Under fair conditions it takes around 18 hours to make the round-trip to the top and back to the base camp. Climbers leave as early as 1:00 a.m. in order to make it back before night falls and total exhaustion sets in. The greatest danger in climbing Mount Everest is not in reaching the summit but in making it back to the base camp. One out of every five climbers who make it to the summit dies during their descent. The key is establishing a contingency plan in case the climbers encounter hard

© Bobby Model/National Geographic Stock/Getty Images

going or the weather changes. Guides establish a pre- determined turnaround time (i.e., 2:00 p.m.) to ensure a safe return no matter how close the climbers are to the summit. Many lives have been lost by failing to adhere to the turnaround time and pushing forward to the summit. As one climber put it, “With enough determi- nation, any bloody idiot can get to the top of the hill. The trick is to get back alive.” One climber who faced the 2:00 p.m. deadline was Goran Krupp. After cycling 8,000 miles from Stockholm to Katmandu he turned back 1,000 feet from the summit.

* Jon Krakauer, Into Thin Air (New York: Doubleday, 1997), p. 190; Broughton Coburn, Everest: Mountain without Mercy (New York: National Geographic Society, 1997).

build models or design experiments to resolve the risk as quickly as possible. Technol- ogy offers many methods for early testing and validation, ranging from 3-D printing and holographic imagery for model building to focus groups and early design usability testing for market testing (Thamhain, 2013). By isolating and testing the key technical questions early on in a project, project feasibility can be quickly determined and neces- sary adjustments made such as reworking the process or in some cases closing down the project.3

3 This is a key principle of Agile project management, which is discussed in Chapter 17.

222 Chapter 7 Managing Risk

Schedule Risks Often organizations will defer the threat of a project coming in late until it surfaces. Here contingency funds are set aside to expedite or “crash” the project to get it back on track. Crashing, or reducing project duration, is accomplished by shortening (com- pressing) one or more activities on the critical path. This comes with additional costs and risk. Techniques for managing this situation are discussed in Chapter 9. Some contingency plans can avoid costly procedures. For example, schedules can be altered by working activities in parallel or using start-to-start lag relationships. Also, using the best people for high-risk tasks can relieve or lessen the chance of some risk events occurring.

Cost Risks Projects of long duration need some contingency for price changes—which are usually upward. The important point to remember when reviewing price is to avoid the trap of using one lump sum to cover price risks. For example, if inflation has been running about 3 percent, some managers add 3 percent for all resources used in the project. This lump-sum approach does not address exactly where price protection is needed and fails to provide for tracking and control. On cost sensitive projects, price risks should be evaluated item by item. Some purchases and contracts will not change over the life of the project. Those that may change should be identified and estimates made of the magnitude of change. This approach ensures control of the contingency funds as the project is implemented.

Funding Risks What if the funding for the project is cut by 25 percent or completion projections indi- cate that costs will greatly exceed available funds? What are the chances of the project being canceled before completion? Seasoned project managers recognize that a com- plete risk assessment must include an evaluation of funding supply. This is especially true for publicly funded projects. Case in point was the ill-fated ARH-70 Arapaho helicopter which was being developed for the U.S. Army by BellAircraft. Over 300-million dollars had been invested to develop a new age combat and reconnais- sance helicopter, when in October 2008, the Defense Department recommended that the project be canceled. The cancellation reflected a need to cut costs and a switch toward using unmanned aircraft for surveillance as well as attack missions. Just as government projects are subject to changes in strategy and political agenda, business firms frequently undergo changes in priorities and top management. The pet projects of the new CEO replace the pet projects of the former CEO. Resources become tight and one way to fund new projects is to cancel other projects. Severe budget cuts or lack of adequate funding can have a devastating effect on a project. Typically, when such a fate occurs, there is a need to scale back the scope of the project to what is possible. “All-or-nothing projects” are ripe targets to budget cut- ters. This was the case of the Arapaho helicopter once the decision was made to move away from manned reconnaissance aircraft. Here the “chunkability” of the project can be an advantage. For example, freeway projects can fall short of the original intentions but still add value for each mile completed. On a much smaller scale, similar funding risks may exist for more mundane projects. For example, a building contractor may find that due to a sudden downturn in the stock market the owners can no longer afford to build their dream house. Or an IS consulting firm may be left empty handed when a client files for bankruptcy. In the former case the

Chapter 7 Managing Risk 223

contractor may have as a contingency selling the house on the open market, while unfortunately the consulting firm will have to join the long line of creditors.

7.6 Opportunity Management For the sake of brevity, this chapter has focused on negative risks—what can go wrong on a project. There is a flip side—what could go right on a project? This is commonly referred to as a positive risk or opportunity. An opportunity is an event that can have a positive impact on project objectives. For example, unusually favorable weather can accelerate construction work, or a drop in fuel prices may create savings that could be used to add value to a project. Essentially the same process that is used to manage nega- tive risks is applied to positive risks. Opportunities are identified, assessed in terms of likelihood and impact, responses are determined, and even contingency plans and funds can be established to take advantage of the opportunity if it occurs. The major exception between managing negative risks and opportunity is in the responses. The project man- agement profession has identified four different types of response to an opportunity:4

Exploit. This tactic seeks to eliminate the uncertainty associated with an opportu- nity to ensure that it definitely happens. Examples include assigning your best per- sonnel to a critical burst activity to reduce the time to completion or revising a design to enable a component to be purchased rather than developed internally.

Share. This strategy involves allocating some or all of the ownership of an oppor- tunity to another party who is best able to capture the opportunity for the benefit of the project. Examples include establishing continuous improvement incentives for external contractors or joint ventures.

Enhance. Enhance is the opposite of mitigation in that action is taken to increase the probability and/or the positive impact of an opportunity. Examples include choosing site location based on favorable weather patterns or choosing raw materi- als that are likely to decline in price.

Accept. Accepting an opportunity is being willing to take advantage of it if it occurs, but not taking action to pursue it.

While it is only natural to focus on negative risks, it is sound practice to engage in active opportunity management as well.

7.7 Contingency Funding and Time Buffers Contingency funds are established to cover project risks—identified and unknown. When, where, and how much money will be spent is not known until the risk event occurs. Proj- ect “owners” are often reluctant to set up project contingency funds that seem to imply the project plan might be a poor one. Some perceive the contingency fund as an add-on slush fund. Others say they will face the risk when it materializes. Usually such reluctance to establish contingency reserves can be overcome with documented risk identification, assessment, contingency plans, and plans for when and how funds will be disbursed. The size and amount of contingency reserves depend on uncertainty inherent in the project. Uncertainty is reflected in the “newness” of the project, inaccurate time and cost estimates, technical unknowns, unstable scope, and problems not anticipated. In practice, contingencies run from 1 to 10 percent in projects similar to past projects.

7-6LO Understand opportunity management and describe the four different approaches to responding to opportunities in a project.

7-7LO Understand how contingency funds and time buffers are used to manage risks on a project.

4 PMBOK, 5th ed. (Newton Square, PA: PMI, 2013), pp. 345-46.

224 Chapter 7 Managing Risk

However, in unique and high-technology projects it is not uncommon to find contin- gencies running in the 20 to 60 percent range. Use and rate of consumption of reserves must be closely monitored and controlled. Simply picking a percentage of the baseline, say, 5 percent, and calling it the contingency reserve is not a sound approach. Also, adding up all the identified contingency allotments and throwing them into one pot is not conducive to sound control of the reserve fund. In practice, the contingency reserve fund is typically divided into budget and man- agement reserve funds for control purposes. Budget reserves are set up to cover iden- tified risks; these reserves are those allocated to specific segments or deliverables of the project. Management reserves are set up to cover unidentified risks and are allo- cated to risks associated with the total project. The risks are separated because their use requires approval from different levels of project authority. Because all risks are probabilistic, the reserves are not included in the baseline for each work package or activity; they are only activated when a risk occurs. If an identified risk does not occur and its chance of occurring is past, the fund allocated to the risk should be deducted from the budget reserve. (This removes the temptation to use budget reserves for other issues or problems.) Of course if the risk does occur, funds are removed from the reserve and added to the cost baseline. It is important that contingency allowances be independent of the original time and cost estimates. These allowances need to be clearly distinguished to avoid time and budget game playing.

Budget Reserves These reserves are identified for specific work packages or segments of a project found in the baseline budget or work breakdown structure. For example, a reserve amount might be added to “computer coding” to cover the risk of “testing” showing a coding problem. The reserve amount is determined by costing out the accepted contingency or recovery plan. The budget reserve should be communicated to the project team. This openness suggests trust and encourages good cost performance. However, distributing budget reserves should be the responsibility of both the project manager and the team members responsible for implementing the specific segment of the project. If the risk does not materialize, the funds are removed from the budget reserve. Thus, budget reserves decrease as the project progresses.

Management Reserves These reserve funds are needed to cover major unforeseen risks and, hence, are applied to the total project. For example, a major scope change may appear necessary midway in the project. Because this change was not anticipated, it is covered from the management reserve. Management reserves are established after budget reserves are identified and funds established. These reserves are independent of budget reserves and are controlled by the project manager and the “owner” of the project. The “owner” can be internal (top management) or external to the project organization. Most management reserves are set using historical data and judgments concerning the uniqueness and complexity of the project. Placing technical contingencies in the management reserve is a special case. Identi- fying possible technical (functional) risks is often associated with a new, untried, inno- vative process or product. Because there is a chance the innovation may not work out, a fallback plan is necessary. This type of risk is beyond the control of the project man- ager. Hence, technical reserves are held in the management reserve and controlled by

Chapter 7 Managing Risk 225

the owner or top management. The owner and project manager decide when the con- tingency plan will be implemented and the reserve funds used. It is assumed there is a high probability these funds will never be used. Table 7.1 shows the development of a contingency fund estimate for a hypothetical project. Note how budget and management reserves are kept separate; control is easily tracked using this format.

Time Buffers Just as contingency funds are established to absorb unplanned costs, managers use time buffers to cushion against potential delays in the project. And like contingency funds, the amount of time is dependent upon the inherent uncertainty of the project. The more uncertain the project the more time should be reserved for the schedule. The strategy is to assign extra time at critical moments in the project. For example, buffers are added to A. Activities with severe risks. B. Merge activities that are prone to delays due to one or more preceding activities

being late. C. Noncritical activities to reduce the likelihood that they will create another critical

path. D. Activities that require scarce resources to ensure that the resources are available

when needed. In the face of overall schedule uncertainty, buffers are sometimes added to the end of the project. For example, a 300-working-day project may have a 30-day project buffer. While the extra 30 days would not appear on the schedule, it is available if needed. Like management reserves, this buffer typically requires the authorization of top man- agement. A more systematic approach to buffer management is discussed in the Chap- ter 8 appendix on critical chain project management.

7.8 Step 4: Risk Response Control Typically the results of the first three steps of the risk management process are sum- marized in a formal document often called the risk register. A risk register details all identified risks, including descriptions, category, and probability of occurring, impact, responses, contingency plans, owners, and current status. The register is the backbone for the last step in the risk management process: risk control. Risk control involves executing the risk response strategy, monitoring triggering events, initiating contin- gency plans, and watching for new risks. Establishing a change management system to deal with events that require formal changes in the scope, budget, and/or schedule of the project is an essential element of risk control.

Budget Budget Project Activity Baseline Reserve Budget

Design $500,000 $15,000 $515,000 Code 900,000 80,000 980,000 Test 20,000 2,000 22,000 Subtotal $1,420,000 $97,000 $1,517,000 Management reserve — — 50,000 Total $1,420,000 $97,000 $1,567,000

TABLE 7.1 Contingency Fund Estimate

226 Chapter 7 Managing Risk

Project managers need to monitor risks just like they track project progress. Risk assessment and updating needs to be part of every status meeting and progress report system. The project team needs to be on constant alert for new, unforeseen risks. Thamhain studied 35 major product development efforts and found that over half of contingencies that occurred were not anticipated (Thamhain, 2013)! Readiness to respond to the unexpected is a critical element of risk management. Management needs to be sensitive that others may not be forthright in acknowledg- ing new risks and problems. Admitting that there might be a bug in the design code or that different components are not compatible reflects poorly on individual perfor- mance. If the prevailing organizational culture is one where mistakes are punished severely, then it is only human nature to protect oneself. Similarly, if bad news is greeted harshly and there is a propensity to “kill the messenger,” then participants will be reluctant to speak freely. The tendency to suppress bad news is compounded when individual responsibility is vague and the project team is under extreme pressure from top management to get the project done quickly. Project managers need to establish an environment in which participants feel com- fortable raising concerns and admitting mistakes. The norm should be that mistakes are acceptable, hiding mistakes is intolerable. Problems should be embraced not denied. Participants should be encouraged to identify problems and new risks. Here a positive attitude by the project manager toward risks is a key. On large, complex projects it may be prudent to repeat the risk identification/ assessment exercise with fresh information. Risk profiles should be reviewed to test to see if the original responses held true. Relevant stakeholders should be brought into the discussion and the risk register needs to be updated. While this may not be practi- cal on an ongoing basis, project managers should touch base with them on a regular basis or hold special stakeholder meetings to review the status of risks on the project. A second key for controlling the cost of risks is documenting responsibility. This can be problematic in projects involving multiple organizations and contractors. Responsi- bility for risk is frequently passed on to others with the statement, “That is not my worry.” This mentality is dangerous. Each identified risk should be assigned (or shared) by mutual agreement of the owner, project manager, and the contractor or person hav- ing line responsibility for the work package or segment of the project. It is best to have the line person responsible approve the use of budget reserve funds and monitor their rate of usage. If management reserve funds are required, the line person should play an active role in estimating additional costs and funds needed to complete the project. Hav- ing line personnel participate in the process focuses attention on the management reserve, control of its rate of usage, and early warning of potential risk events. If risk management is not formalized, responsibility and responses to risk will be ignored—it is not my area. The bottom line is that project managers and team members need to be vigilant in monitoring potential risks and identify new land mines that could derail a project. Risk assessment has to be part of the working agenda of status meetings, and when new risks emerge they need to be analyzed and incorporated into the risk management process.

7.9 Change Control Management A major element of the risk control process is change management. Every detail of a project plan will not materialize as expected. Coping with and controlling project changes present a formidable challenge for most project managers. Changes come from many sources such as the project customer, owner, project

7-8LO Recognize the need for risk management being an ongoing activity.

7-9LO Describe the change control process.

Chapter 7 Managing Risk 227

manager, team members, and occurrence of risk events. Most changes easily fall into three categories: 1. Scope changes in the form of design or additions represent big changes; for exam-

ple, customer requests for a new feature or a redesign that will improve the product.

2. Implementation of contingency plans, when risk events occur, represent changes in baseline costs and schedules.

3. Improvement changes suggested by project team members represent another category.

Because change is inevitable, a well-defined change review and control process should be set up early in the project planning cycle. Change management systems involve reporting, controlling, and recording changes to the project baseline. (Note: Some organizations consider change control systems part of configuration management.) In practice most change management systems are designed to accomplish the following: 1. Identify proposed changes. 2. List expected effects of proposed change(s) on schedule and budget. 3. Review, evaluate, and approve or disapprove changes formally. 4. Negotiate and resolve conflicts of change, conditions, and cost. 5. Communicate changes to parties affected. 6. Assign responsibility for implementing change. 7. Adjust master schedule and budget. 8. Track all changes that are to be implemented. As part of the project communication plan, stakeholders define up front the com- munication and decision-making process that will be used to evaluate and accept changes. The process can be captured in a flow diagram like the one presented in Figure 7.9. On small projects this process may simply entail approval of a small group of stakeholders. On larger projects more elaborate decision-making processes are established, with different processes being used for different kinds of change. For example, changes in performance requirements may require multiple sign-offs, including the project sponsor and client, while switching suppliers may be autho- rized by the project manager. Regardless of the nature of the project, the goal is to establish the process for introducing necessary changes in the project in a timely and effective manner. Of particular importance is assessing the impact of the change on the project. Often solutions to immediate problems have adverse consequences on other aspects of a project. For example, in overcoming a problem with the exhaust system for a hybrid automobile, the design engineers contributed to the prototype exceeding weight parameters. It is important that the implications of changes are assessed by people with appropriate expertise and perspective. On construction projects this is often the responsibility of the architecture firm, while “software architects” perform a similar function on software development efforts. Organizations use change request forms and logs to track proposed changes. An example of a simplified change request form is depicted in Figure 7.10. Typically change request forms include a description of the change, the impact of not approving the change, the impact of the change on project scope/schedule/cost, and defined sig- nature paths for review as well as a tracking log number.

Distribute for

Action

No

Change Originates

Review Change Request

Yes

Change Request Submitted

Approved ?

Update Plan of Record

FIGURE 7.9 Change Control Process

228 Chapter 7 Managing Risk

An abridged version of a change request log for a construction project is presented in Figure 7.11. These logs are used to monitor change requests. They typically sum- marize the status of all outstanding change requests and include such useful informa- tion as source and date of the change, document codes for related information, cost estimates, and the current status of the request. Every approved change must be identified and integrated into the plan of record through changes in the project WBS and baseline schedule. The plan of record is the current official plan for the project in terms of scope, budget, and schedule. The plan of record serves as a change management benchmark for future change requests as well as the baseline for evaluating project progress. If the change control system is not integrated with the WBS and baseline, project plans and control will soon self-destruct. Thus, one of the keys to a successful change

FIGURE 7.10 Sample Change Request

Priority

Emergency

Urgent

Low

Disposition

Approve

Approve as amended

Disapprove

Deferred

Funding Source

Mgmt. reserve

Budget reserve

Customer

Other

Request number 12

Description of requested change

1. Request river dancers to replace small Irish dance group. 2. Request one combination dance with river dancers and China ballet group.

Reason for change

River dancers will enhance stature of event. The group is well known and loved by Chinese people.

Scope

Schedule

X X

X X

X

Cost

Risk

Other

Areas of impact of proposed change–describe each on separate sheet

Project name Irish/Chinese culture exchange

Jennifer McDonaldOriginator

Date June 6, 2xxx

Sign-off Approvals

Project manager

Project sponsor

Other

Project customer

William O’Mally

Kenneth Thompson

Hong Lee

Date June 12, 2xxx

Date June 13, 2xxx

Date June 18, 2xxx

Date

Project sponsor Irish embassy

Chinese culture office Change requested by

Chapter 7 Managing Risk 229

FIGURE 7.11 Change Request Log

Owner Requested Change Status Report—Open Items OSU—Weatherford

Reference Dates

Rc# Description Document Date Rec’d Date Submit Amount Status Comments

51 Sewer work –188,129 OPEN FUNDING offset FROM OTHER SOURCE 52 Stainless Plates ASI 56 1/5/2013 3/30/2013 9,308 APPROVED at restroom Shower Valves 53 Waterproofing ASI 77 1/13/2013 169,386 OPEN Options 54 Change Electrical RFI 113 12/5/2013 3/29/2013 2,544 SUBMIT floor box spec change 55 VE Option Door 1/14/2013 −20,000 ROM for Style and samples rail doors 56 Pressure Wash Owner 3/15/2013 3/30/2013 14,861 SUBMIT C tower request 57 Fire Lite glass Owner 8,000 QUOTE ROM BASED in stairs request ON FIRELITE NT 58 Cyber Café ASI 65 1/30/2013 3/29/2013 4,628 APPROVED added tele /OFOI equipment 59 Additional Dampers ASI 68 2/4/2013 3/29/2013 1,085 SUBMIT in C wing 60 Revise ASI 72 2/13/2013 3/31/2013 –3,755 SUBMIT Corridor ceilings

OPEN—Requires estimate SUBMIT—RC letter submitted ASI—Architect’s supplemental instructions ROM—Rough order magnitude APPROVED—RC letter approved RFI—Request for information QUOTE—Subcontractor quotes REVISE—RC letter to be reviewed

control process is document, document, document! The benefits derived from change control systems are the following: 1. Inconsequential changes are discouraged by the formal process. 2. Costs of changes are maintained in a log. 3. Integrity of the WBS and performance measures is maintained. 4. Allocation and use of budget and management reserve funds are tracked. 5. Responsibility for implementation is clarified. 6. Effect of changes is visible to all parties involved. 7. Implementation of change is monitored. 8. Scope changes will be quickly reflected in baseline and performance measures. Clearly, change control is important and requires that someone or some group be responsible for approving changes, keeping the process updated, and communicating changes to the project team and relevant stakeholders. Project control depends heavily on keeping the change control process current. This historical record can be used for satisfying customer inquiries, identifying problems in post-project audits, and estimat- ing future project costs.

230 Chapter 7 Managing Risk

To put the processes discussed in this chapter in proper perspective one should rec- ognize that the essence of project management is risk management. Every technique in this book is really a risk management technique. Each in its own way tries to pre- vent something bad from happening. Project selection systems try to reduce the like- lihood that projects will not contribute to the mission of the firm. Project scope statements, among other things, are designed to avoid costly misunderstandings and reduce scope creep. Work breakdown structures reduce the likelihood that some vital part of the project will be omitted or that the budget estimates are unrealistic. Teambuilding reduces the likelihood of dysfunctional conflict and breakdowns in coordination. All of the techniques try to increase stakeholder satisfaction and increase the chances of project success. From this perspective managers engage in risk management activities to compen- sate for the uncertainty inherent in project management and that things never go ac- cording to plan. Risk management is proactive not reactive. It reduces the number of surprises and prepares people for the unexpected. Although many managers believe that in the final analysis, risk assessment and contingency depend on subjective judgment, some standard method for identifying, assessing, and responding to risks should be included in all projects. The very process of identifying project risks forces some discipline at all levels of project management and improves project performance. Contingency plans increase the chance that the project can be completed on time and within budget. Contingency plans can be simple “work-arounds” or elaborate detailed plans. Responsibility for risks should be clearly identified and documented. It is desirable and prudent to keep a reserve as a hedge against project risks. Budget reserves are linked to the WBS and should be communicated to the project team. Con- trol of management reserves should remain with the owner, project manager, and line person responsible. Use of contingency reserves should be closely monitored, con- trolled, and reviewed throughout the project life cycle. Experience clearly indicates that using a formal, structured process to handle pos- sible foreseen and unforeseen project risk events minimizes surprises, costs, delays, stress, and misunderstandings. Risk management is an iterative process that occurs throughout the lifespan of the project. When risk events occur or changes are neces- sary, using an effective change control process to quickly approve and record changes will facilitate measuring performance against schedule and cost. Ultimately success- ful risk management requires a culture in which threats are embraced not denied and problems are identified not hidden.

Summary

Key Terms Accept risk, 218 Avoiding risk, 217 Budget reserve, 224 Change management system, 227 Contingency plan, 219 Management reserve, 224 Mitigating risk, 216

Opportunity, 223 Risk, 207 Risk breakdown structure (RBS), 210 Risk profile, 211 Risk register, 225 Risk severity matrix, 214 Scenario analysis, 213

Time buffer, 225 Transferring risk, 217

Chapter 7 Managing Risk 231

Review Questions

1. Project risks can/cannot be eliminated if the project is carefully planned. Explain. 2. The chances of risk events occurring and their respective costs increasing change

over the project life cycle. What is the significance of this phenomenon to a project manager?

3. What is the difference between avoiding a risk and accepting a risk? 4. What is the difference between mitigating a risk and contingency planning? 5. Explain the difference between budget reserves and management reserves. 6. How are the work breakdown structure and change control connected? 7. What are the likely outcomes if a change control process is not used? Why? 8. What are the major differences between managing negative risks versus positive

risks (opportunities)?

Exercises 1. Gather a small team of students. Think of a project most students would understand; the kinds of tasks involved should also be familiar. Identify and assess major and minor risks inherent to the project. Decide on a response type. Develop a contin- gency plan for two to four identified risks. Estimate costs. Assign contingency reserves. How much reserve would your team estimate for the whole project? Jus- tify your choices and estimates.

2. You have been assigned to a project risk team of five members. Because this is the first time your organization has formally set up a risk team for a project, it is hoped that your team will develop a process that can be used on all future projects. Your first team meeting is next Monday morning. Each team member has been asked to prepare for the meeting by developing, in as much detail as possible, an outline that describes how you believe the team should proceed in handling project risks. Each of the team members will hand out their proposed outline at the beginning of the meeting. Your outline should include but not be limited to the following information:

a. Team objectives. b. Process for handling risk events. c. Team activities. d. Team outputs. 3. The Manchester United Soccer Tournament project team (review the Manchester

United case at the end of Chapter 4) has identified the following potential risks to their project:

a. Referees failing to show up at designated games. b. Fighting between teams. c. Pivotal error committed by a referee that determines the outcome of a game. d. Abusive behavior along the sidelines by parents. e. Inadequate parking. f. Not enough teams sign up for different age brackets. g. Serious injury. How would you recommend that they respond (i.e., avoid, accept, . . .) to these risks

and why? 4. Search the Web using the key words: “best practices, project management.” What

did you find? How might this information be useful to a project manager?

232 Chapter 7 Managing Risk

References Atkinson, W., “Beyond the Basics,” PM Network, May 2003, pp. 38–43. Baker, B., and R. Menon, “Politics and Project Performance: The Fourth Dimension of Project Management,” PM Network, vol. 9, no. 11 (November 1995), pp. 16–21. Carr, M. J., S. L. Konda, I. Monarch, F. C. Ulrich, and C. F. Walker, “Taxonomy- Based Risk Identification,” Technical Report CMU/SEI-93-TR 6, Software Engineer- ing Institute, Carnegie Mellon University, Pittsburgh, 1993. Ford, E. C., J. Duncan, A. G. Bedeian, P. M. Ginter, M. D. Rousculp, and A. M. Adams, “Mitigating Risks, Visible Hands, Inevitable Disasters, and Soft Variables: Management Research That Matters to Managers,” Academy of Management Executive, vol. 19, no. 4 (November 2005), pp. 24–38. Gray, C. F., and R. Reinman, “PERT Simulation: A Dynamic Approach to the PERT Technique,” Journal of Systems Management, March 1969, pp. 18–23. Hamburger, D. H., “The Project Manager: Risk Taker and Contingency Planner,” Project Management Journal, vol. 21, no. 4 (1990), pp. 11–16. Hulett, D. T., “Project Schedule Risk Assessment,” Project Management Journal, 26 (1) 1995, pp. 21–31. Ingebretson, M., “In No Uncertain Terms,” PM Network, 2002, pp. 28–32. Meyer, A. D., C. H. Loch, and M. T. Pich, “Managing Project Uncertainty: From Variation to Chaos,” MIT Sloan Management Review, Winter 2002, pp. 60–67. Orlando Sentinel, “Math Mistake Proved Fatal to Mars Orbiter,” November 23, 1999. Pavlik, A., “Project Troubleshooting: Tiger Teams for Reactive Risk Management,” Project Management Journal, vol. 35, no. 4 (December 2004), pp. 5–14. Pinto, J. K., Project Management: Achieving Competitive Advantage (Upper Saddle River, NJ: Pearson, 2007). Project Management Body of Knowledge (Newton Square, PA: Project Management Institute, 2013). Schuler, J. R., “Decision Analysis in Projects: Monte Carlo Simulation,” PM Network, vol. 7, no. 1 (January 1994), pp. 30–36. Skelton, T. and H. Thamhain, “Managing Risk in New Product Development Projects: Beyond Analytical Methods,” Project Perspectives, vol. 27, no. 1 (2006), pp. 12–20. Skelton, T. and H. Thamhain, “Success Factors for Effective R&D Risk Management,” International Journal of Technology Intelligence and Planning, vol. 3, no. 4 (2007), pp. 376–386. Smith, P. G., and G. M. Merritt, Proactive Risk Management: Controlling Uncertainty in Product Development (New York: Productivity Press, 2002). Smith, P. G., and D. G. Reinertsen, Developing Products in Half the Time (New York: Van Nostrand Reinhold, 1995). Snizek, J. A., and R. A. Henry, “Accuracy and Confidence in Group Judgment,” Orga- nizational Behavior and Human Decision Processes, vol. 4, no. 3 (1989), pp. 1–28. Thamhain, H., “Managing Risks in Complex Projects,” Project Management Journal, vol. 44, no. 20 (2013), pp. 20–35.

Chapter 7 Managing Risk 233

Case 7.1

Alaska Fly-Fishing Expedition*

You are sitting around the fire at a lodge in Dillingham, Alaska, discussing a fishing expedition you are planning with your colleagues at Great Alaska Adventures (GAA). Earlier in the day you received a fax from the president of BlueNote, Inc. The presi- dent wants to reward her top management team by taking them on an all-expense-paid fly-fishing adventure in Alaska. She would like GAA to organize and lead the expedition. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. 1. Brainstorm potential risks associated with this project. Try to come up with at least

five different risks. 2. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. 3. Develop a risk response matrix similar to Figure 7.8 to outline how you would deal

with each of the risks.

PROJECT SCOPE STATEMENT PROJECT OBJECTIVE To organize and lead a five-day fly-fishing expedition down the Tikchik River system in Alaska from June 21 to 25 at a cost not to exceed $35,000.

DELIVERABLES ∙ Provide air transportation from Dillingham, Alaska, to Camp I and from Camp II

back to Dillingham. ∙ Provide river transportation consisting of two eight-man drift boats with outboard

motors. ∙ Provide three meals a day for the five days spent on the river. ∙ Provide four hours fly-fishing instruction. ∙ Provide overnight accommodations at the Dillingham lodge plus three four-man

tents with cots, bedding, and lanterns. ∙ Provide four experienced river guides who are also fly fishermen. ∙ Provide fishing licenses for all guests.

MILESTONES 1. Contract signed January 22. 2. Guests arrive in Dillingham June 20. 3. Depart by plane to Base Camp I June 21. 4. Depart by plane from Base Camp II to Dillingham June 25.

* This case was prepared with the assistance of Stuart Morigeau.

234 Chapter 7 Managing Risk

TECHNICAL REQUIREMENTS 1. Fly in air transportation to and from base camps. 2. Boat transportation within the Tikchik River system. 3. Digital cellular communication devices. 4. Camps and fishing conform to state of Alaska requirements.

LIMITS AND EXCLUSIONS 1. Guests are responsible for travel arrangements to and from Dillingham, Alaska. 2. Guests are responsible for their own fly-fishing equipment and clothing. 3. Local air transportation to and from base camps will be outsourced. 4. Tour guides are not responsible for the number of King Salmon caught by guests.

CUSTOMER REVIEW The president of BlueNote, Inc.

Case 7.2

Silver Fiddle Construction You are the president of Silver Fiddle Construction (SFC), which specializes in build- ing high-quality, customized homes in the Grand Junction, Colorado, area. You have just been hired by the Czopeks to build their dream home. You operate as a general contractor and employ only a part-time bookkeeper. You subcontract work to local trade professionals. Housing construction in Grand Junction is booming. You are ten- tatively scheduled to complete 11 houses this year. You have promised the Czopeks that the final costs will range from $450,000 to $500,000 and that it will take five months to complete the house once groundbreaking has begun. The Czopeks are will- ing to have the project delayed in order to save costs. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. 1. Identify potential risks associated with this project. Try to come up with at least

five different risks. 2. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. 3. Develop a risk response matrix similar to Figure 7.8 to outline how you would deal

with each of the risks.

PROJECT SCOPE STATEMENT PROJECT OBJECTIVE To construct a high-quality, custom home within five months at a cost not to exceed $500,000. DELIVERABLES ∙ A 2,500-square-foot, 2½-bath, 3-bedroom, finished home. ∙ A finished garage, insulated and sheetrocked.

Chapter 7 Managing Risk 235

∙ Kitchen appliances to include range, oven, microwave, and dishwasher. ∙ High-efficiency gas furnace with programmable thermostat.

MILESTONES 1. Permits approved July 5. 2. Foundation poured July 12. 3. “Dry in”—framing, sheathing, plumbing, electrical, and mechanical inspections—

passed September 25. 4. Final inspection November 7.

TECHNICAL REQUIREMENTS 1. Home must meet local building codes. 2. All windows and doors must pass NFRC class 40 energy ratings. 3. Exterior wall insulation must meet an “R” factor of 21. 4. Ceiling insulation must meet an “R” factor of 38. 5. Floor insulation must meet an “R” factor of 25. 6. Garage will accommodate two cars and one 28-foot-long Winnebago. 7. Structure must pass seismic stability codes.

LIMITS AND EXCLUSIONS 1. The home will be built to the specifications and design of the original blueprints

provided by the customer. 2. Owner is responsible for landscaping. 3. Refrigerator is not included among kitchen appliances. 4. Air conditioning is not included, but house is prewired for it. 5. SFC reserves the right to contract out services.

CUSTOMER REVIEW “Bolo” and Izabella Czopek.

Case 7.3

Trans LAN Project Trans Systems is a small information systems consulting firm located in Meridian, Louisiana. Trans has just been hired to design and install a local area network (LAN) for the city of Meridian’s social welfare agency. You are the manager for the project, which includes one Trans professional and two interns from a local university. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. 1. Identify potential risks associated with this project. Try to come up with at least

five different risks. 2. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. 3. Develop a risk response matrix similar to Figure 7.8 to outline how you would deal

with each of the risks.

236 Chapter 7 Managing Risk

PROJECT SCOPE STATEMENT PROJECT OBJECTIVE To design and install a new local area network (LAN) within one month with a budget not to exceed $90,000 for the Meridian Social Service Agency with minimum disrup- tion to ongoing operations.

DELIVERABLES ∙ Twenty workstations and twenty laptop computers. ∙ Server with dual-core processors. ∙ Two color laser printers. ∙ Windows R2 server and workstation operating system (Windows 10). ∙ Migration of existing databases and programs to new system. ∙ Four hours of introduction training for client’s personnel. ∙ Sixteen hours of training for client network administrator. ∙ Fully operational LAN system.

MILESTONES 1. Hardware January 22. 2. Setting users’ priority and authorization January 26. 3. In-house whole network test completed February 1. 4. Client site test completed February 2. 5. Training completed February 16.

TECHNICAL REQUIREMENTS 1. Workstations with 17-inch flat panel monitors, dual-core processors, 4 GB RAM,

8X DVD+RW, wireless card, Ethernet card, 500 GB hard drive. 2. Laptops with 12-inch display monitor, dual-core processors, 2GB RAM,

8X DVD+RW, wireless card, Ethernet card, 500 GB hard drive and weigh less than 4½ lbs.

3. Wireless network interface cards and Ethernet connections. 4. System must support Windows 11 platforms. 5. System must provide secure external access for field workers.

LIMITS AND EXCLUSIONS 1. On-site work to be done after 8:00 p.m. and before 7:00 a.m. Monday through

Saturday. 2. System maintenance and repair only up to one month after final inspection. 3. Warranties transferred to client. 4. Only responsible for installing software designated by the client two weeks before

the start of the project. 5. Client will be billed for additional training beyond that prescribed in the contract.

CUSTOMER REVIEW Director of the city of Meridian’s Social Service Agency.

Chapter 7 Managing Risk 237

Case 7.4

XSU Spring Concert You are a member of the X State University (XSU) student body entertainment com- mittee. Your committee has agreed to sponsor a spring concert. The motive behind this concert is to offer a safe alternative to Hasta Weekend. Hasta Weekend is a spring event in which students from XSU rent houseboats and engage in heavy partying. Tra- ditionally this occurs during the last weekend in May. Unfortunately, the partying has a long history of getting out of hand, sometimes leading to fatal accidents. After one such tragedy last spring, your committee wants to offer an alternative experience for those who are eager to celebrate the change in weather and the pending end of the school year. You have just finished a preliminary scope statement for the project (see below). You are now brainstorming potential risks associated with the project. 1. Identify potential risks associated with this project. Try to come up with at least

five different risks. 2. Use a risk assessment form similar to Figure 7.6 to analyze identified risks. 3. Develop a risk response matrix similar to Figure 7.8 to outline how you would deal

with each of the risks.

PROJECT SCOPE STATEMENT PROJECT OBJECTIVE To organize and deliver an eight-hour concert at Wahoo Stadium at a cost not to exceed $50,000 on the last Saturday in May.

DELIVERABLES ∙ Local advertising. ∙ Concert security. ∙ Separate Beer Garden. ∙ Eight hours of music and entertainment. ∙ Food venues. ∙ Souvenir concert T-shirts. ∙ Secure all licenses and approvals. ∙ Secure sponsors.

MILESTONES 1. Secure all permissions and approvals by January 15. 2. Sign big-name artist by February 15. 3. Complete artist roster by April 1. 4. Secure vendor contracts by April 15. 5. Setup completed on May 27. 6. Concert on May 28. 7. Cleanup completed by May 31.

238 Chapter 7 Managing Risk

Case 7.5

Sustaining Project Risk Management during Implementation

BACKGROUND Bill (Senior VP of product development): Carlos [project manager], we have to talk. I am concerned about the way we manage project risk here at Futuronics. I just came from an international “Future Mote Devices” meeting at UC Berkeley. [Note: A mote is a very small [e.g., 2–3mm square], wireless sensing pod that may be placed on land or in water to measure and communicate data.] The project management sessions receiving most attention addressed risk in product development projects. They described our management of project risk to the letter—failure to sustain risk manage- ment after the project gets rolling. It seems someone has to get burned before risk management is taken seriously. Much to my surprise, almost every project manager there admitted their firms have a problem sustaining team members’ interest in managing risk after the project is on its way. The old saying, “If you don’t manage risk, you pay the price later,” generated horror stories from a few who paid the price. We spent some time brainstorming ways to handle the problem at the project level, but there were very few concrete sugges- tions. The meeting gave me a wakeup call. Carlos, we need to tackle this problem or some new or known risk event could put us both out of a job. The similarities between their horror stories and some of our past mistakes are scary. Since here at Futuronics we only develop new products that are at least seven years beyond anything on the market, the level of both “known risk events and unknown risk” is far higher than in most other organizations. Managing project risk is important to every project, but here at Futuronics every new product project is loaded with risks. Carlos, I’m willing to work with you to improve our management of project risk at Futuronics.

TECHNICAL REQUIREMENTS 1. Professional sound stage and system. 2. At least one big-name artist. 3. At least seven performing acts. 4. Restroom facilities for 10,000 people. 5. Parking available for 1,000 cars. 6. Compliance with XSU and city requirements/ordinances.

LIMITS AND EXCLUSIONS 1. Performers responsible for travel arrangements to and from XSU. 2. Vendors contribute a set percentage of sales. 3. Concert must be over by 11:30 p.m.

CUSTOMER REVIEW The president of XSU student body.

Chapter 7 Managing Risk 239

Carlos: Bill, I am aware of the problem. The PMI Roundtables I attend also talk to the difficulty of keeping teams and other stakeholders willing to revisit risk once the proj- ect is on its way. [PMI Roundtables are monthly meetings of practicing PMs across industries designed to address project management problems.] I also heard war stories at a recent project management roundtable meeting. I have some notes from the meet- ing right here. It all started with the leader’s question: “How many project managers actually man- age risk over the complete project life cycle?”

PM 1: We all work through the risk management process well before the project begins. We have the process template of risk identification, assessment, response, control, risk register, and contingency down pat. We just don’t follow through after the project begins. I think interest dies. Have you ever tried to get project stakehold- ers to come to a risk meeting when the project is moving relatively well?

PM 2: A recent e-mail from one of our stakeholders said, “We’ll deal with it [risk] when it happens.”

PM 3: I agree. Interest seems to move from future oriented to reactionary. Also, risk management seems to degenerate into issue (concerns and problems) manage- ment versus real risk management.

PM 4: I ask team members, “What is the risk of not managing risk over the life of the project?” Sometimes this question nudges a few to respond positively, espe- cially if risks have changed or new ones are perceived. I use a failed project where a solid risk management process would have avoided the project failure. I explain all of the risk management processes that would have helped to improve the risk elements—risk identification, triggers, responsibility, transfer, accept, etc.

PM 5: Risk is not a line item in the budget or schedule. Maybe it is in the contin- gency budget to cover “unknowns of unknowns.” I have to watch that management doesn’t try to squeeze out the contingency budget for something else.

Carlos continued to share with his boss that there were many more comments, but very few gave much guidance. Carlos then shared his idea: Carlos: Colette is our best trainer, especially in transition management, and she would be a great choice for following through on this problem. Her training classes on upfront risk management are excellent. Should we ask her to present a session? Bill: You are right, Carlos, Colette is ideal. She is smart and a great team motivator. Ask her, but give her some kind of direction for focus. A few days later, Carlos sent out a memo: Colette, this is to follow up on our lunch conversation yesterday discussing sustaining risk management after the project is on its way. Given the nature of our futuristic com- pany, we should stress the point that our product development projects carry many more inherent risks than do traditional projects. I suggest the training classes should drill down on concrete actions and policies that will encourage interest of team mem- bers and other project stakeholders in sustaining risk management practices during project execution. Colette, we appreciate your taking on this project. When you have developed your training session, please give me a copy so I can schedule and support your efforts. Regards, Carlos

240 Chapter 7 Managing Risk

CHALLENGE Divide the class into teams of three or more participants. Colette needs your help to develop her training program. You may wish to consider the questions listed below to initiate ideas. ∙ Why do project stakeholders lose interest in project risk after the project is under

way? ∙ What are the dangers of not keeping on top of risk management during

implementation? ∙ What kind of business is Futuronics in? Brainstorm specific actions that will encourage project stakeholders to continue to scan and track the project environment for risk events. Suggest three concrete actions or scenarios that will encourage project stakeholders to change their behavior and truly support risk management while projects are being implemented. The following outline headings may be helpful in developing possible actions that would improve/enhance stakeholder support. ∙ Improving the risk management process ∙ Organization actions ∙ Motivating participation

Appendix 7.1

PERT and PERT Simulation LEARNING OBJECTIVES After reading this appendix you should be able to:

A7-1 Calculate basic Pert Simulation projections.

PERT—PROGRAM EVALUATION AND REVIEW TECHNIQUE In 1958 the Special Office of the Navy and the Booze, Allen, and Hamilton consulting firm developed PERT (program evaluation and review technique) to schedule the more than 3,300 contractors of the Polaris submarine project and to cover uncertainty of activity time estimates. PERT is almost identical to the critical path method (CPM) technique except it assumes each activity duration has a range that follows a statistical distribution. PERT uses three time estimates for each activity. Basically, this means each activity duration can range from an optimistic time to a pessimistic time, and a weighted average can be computed for each activity. Because project activities usually represent work, and because work tends to stay behind once it gets behind, the PERT developers chose an approximation of the beta distribution to represent activity durations. This distribution is known to be flexible and can accommodate empirical data that do not follow a nor- mal distribution. The activity durations can be skewed more toward the high or low end of the data range. Figure A7.1A depicts a beta distribution for activity durations that is skewed toward the right and is representative of work that tends to stay late once it is behind. The distribution for the project duration is represented by a normal

Calculate basic Pert Simulation projections.

A7-1LO

Chapter 7 Managing Risk 241

(symmetrical) distribution shown in Figure A7.1B. The project distribution represents the sum of the weighted averages of the activities on the critical path(s). Knowing the weighted average and variances for each activity allows the project planner to compute the probability of meeting different project durations. Follow the steps described in the hypothetical example given next. (The jargon is difficult for those not familiar with statistics, but the process is relatively simple after working through a couple of examples.) The weighted average activity time is computed by the following formula:

te = a + 4m + b

6 (7.1)

where te = weighted average activity time a = optimistic activity time (1 chance in 100 of completing the activity

earlier under normal conditions) b = pessimistic activity time (1 chance in 100 of completing the activity

later under normal conditions) m = most likely activity time When the three time estimates have been specified, this equation is used to compute the weighted average duration for each activity. The average (deterministic) value is placed on the project network as in the CPM method and the early, late, slack, and project completion times are computed as they are in the CPM method. The variability in the activity time estimates is approximated by the following equa- tions: Equation 7.2 represents the standard deviation for the activity. Equation 7.3 rep- resents the standard deviation for the project. Note the standard deviation of the activity is squared in this equation; this is also called variance. This sum includes only activities on the critical path(s) or path being reviewed.

σte = (b − a6 ) (7.2) σTE = √Σσte

2 (7.3)

Finally, the average project duration (TE) is the sum of all the average activity times along the critical path (sum of te), and it follows a normal distribution.

FIGURE A7.1 Activity and Project Frequency Distributions

a m

ACTIVITY

b

(A)

TE

PROJECT

(B)

242 Chapter 7 Managing Risk

Knowing the average project duration and the variances of activities allows the probability of completing the project (or segment of the project) by a specific time to be computed using standard statistical tables. The equation below (Equation 7.4) is used to compute the “Z” value found in statistical tables (Z = number of standard deviations from the mean), which, in turn, tells the probability of completing the proj- ect in the time specified.

Z = TS − TE √Σσte

2 (7.4)

where

TE = critical path duration TS = scheduled project duration Z = probability (of meeting scheduled duration) found in statistical Table A7.2

A HYPOTHETICAL EXAMPLE USING THE PERT TECHNIQUE The activity times and variances are given in Table A7.1. The project network is presented in Figure A7.2. This figure shows the project network as AOA and AON. The AON net- work is presented as a reminder that PERT can use AON networks as well as AOA. The expected project duration (TE) is 64 time units; the critical path is 1-2-3-5-6. With this information, the probability of completing the project by a specific date can easily be computed using standard statistical methods. For example, what is the prob- ability the project will be completed before a scheduled time (TS) of 67? The normal curve for the project would appear as shown in Figure A7.3. Using the formula for the Z value, the probability can be computed as follows:

Z = TS − TE √Σσte

2

= 67 − 64 √25 + 9 + 1 + 1

= +3 √36

= +0.50 P = 0.69

Reading from Table A7.2, a Z value of +0.5 gives a probability of 0.69, which is inter- preted to mean there is a 69 percent chance of completing the project on or before 67 time units.

Activity a m b te [(b – a)/6] 2

1–2 17 29 47 30 25 2–3 6 12 24 13 9 2–4 16 19 28 20 4 3–5 13 16 19 16 1 4–5 2 5 14 6 4 5–6 2 5 8 5 1

TABLE A7.1 Activity Times and Variances

Chapter 7 Managing Risk 243

FIGURE A7.2 Hypothetical Network

1 30

13 16

20 6

56 59

56 59

5 6

TE = 64

TE = 64

4

2 5

3

A0 30

30

B30

AON Network

AOA Network

43

13

D43 59

16

C30 50

20

E50 56

6

F59 64

645

FIGURE A7.3 Possible Project Durations

TE = 64

TS = 67

Conversely, the probability of completing the project by time period 60 is computed as follows:

Z = 60 − 64 √25 + 9 + 1 + 1

= −4 √36

= −0.67 P ≈ 0.26

244 Chapter 7 Managing Risk

From Table A7.2, a Z value of −0.67 gives an approximate probability of 0.26, which is interpreted to mean there is about a 26 percent chance of completing the project on or before 60 time units. Note that this same type of calculation can be made for any path or segment of a path in the network. When such probabilities are available to management, trade-off decisions can be made to accept or reduce the risk associated with a particular project duration. For example, if the project manager wishes to improve the chances of completing the proj- ect by 64 time units, at least two choices are available. First, management can spend money up front to change conditions that will reduce the duration of one or more activities on the critical path. A more prudent, second alternative would be to allocate money to a contingency fund and wait to see how the project is progressing as it is implemented.

EXERCISES

1. Given the project information below, what is the probability of completing the National Holiday Toy project in 93 time units?

2. The Global Tea and Organic Juice companies have merged. The following information has been collected for the “Consolidation Project.”

Act. ID Description Predecessor Optm. (a) Most likely (m) Pess. (b) Act time te Variance [(b − a)/6] 2 Critical

1 Design package None 6 12 24 2 Design product 1 16 19 28 3 Build package 1 4 7 10 4 Secure patent 2  24 27 36 5 Build product 2 17 29 47 6 Paint 3, 4, 5 4 7 10 7 Test market 6 13 16 19

Z Value Probability Z Value Probability

−3.0 .001 +0.0 .500 −2.8 .003 +0.2 .579 −2.6 .005 +0.4 .655 −2.4 .008 +0.6 .726 −2.2 .014 +0.8 .788 −2.0 .023 +1.0 .841 −1.8 .036 +1.2 .885 −1.6 .055 +1.4 .919 −1.4 .081 +1.6 .945 −1.2 .115 +1.8 .964 −1.0 .159 +2.0 .977 −0.8 .212 +2.2 .986 −0.6 .274 +2.4 .992 −0.4 .345 +2.6 .995 −0.2 .421 +2.8 .997

TABLE A7.2 Z Values and Probabilities

Chapter 7 Managing Risk 245

Variance ID Description Predecessor te [(b − a)/6]

2

1 Pilot production None 6 3 2 Select channels of distrib. None 7 4 3 Develop mktg. program None 4 2 4 Test market 1 4 2 5 Patent 1 10 5 6 Full production 4 16 10 7 Ad promotion 3 3 2 8 Release 2, 5, 6, 7 2 1

1. Compute the expected time for each activity. 2. Compute the variance for each activity. 3. Compute the expected project duration. 4. What is the probability of completing the project by day 112? Within 116 days? 5. What is the probability of completing “Negotiate with Unions” by day 90? 3. The expected times and variances for the project activities are given below. What is

the probability of completing the project in 25 periods?

Activity Description Predecessor a opt m ml b pess

1 Codify accounts None 16 19 28 2 File articles of unification None 30 30 30 3 Unify price and credit policy None 60 72 90 4 Unify personnel policies None 18 27 30 5 Unify data processing 1 17 29 47 6 Train accounting staff 1 4 7 10 7 Pilot run data processing 5 12 15 18 8 Calculate P & L and balance sheet 6, 7 6 12 24 9 Transfer real property 2 18 27 30 10 Train salesforce 3 20 35 50 11 Negotiate with unions 4 40 55 100 12 Determine capital needs 8 11 20 29 13 Explain personnel policies 11 14 23 26 14 Secure line of credit 9, 12 13 16 19 15 End 10, 13, 14 0 0 0

Case A7.1

International Capital, Inc.—Part A International Capital, Inc. (IC), is a small investment banking firm that special- izes in securing funds for small- to medium-sized firms. IC is able to use a stan- dardized project format for each engagement. Only activity times and unusual circumstances change the standard network. Beth Brown has been assigned to this

246 Chapter 7 Managing Risk

MANAGERIAL REPORT Brown and other broker partners have a policy of passing their plan through a project review committee of colleagues. This committee traditionally checks that all details are covered, times are realistic, and resources are available. Brown wishes you to develop a report that presents a planned schedule and expected project completion time in workdays. Include a project network in your report. The average duration for a sourcing capital project is 70 workdays. IC partners have agreed it is good business to set up projects with a 95 percent chance of attaining the plan. How does this project stack up with the average project? What would the average have to be to ensure a 95 percent chance of completing the project in 70 workdays?

Time in Workdays

Activity Optimistic Most Likely Pessimistic

A 4 7 10 B 2 4 8 C 2 5 8 D 16 19 28 E 6 9 24 F 1 7 13 G 4 10 28 H 2 5 14 I 5 8 17 J 2 5 8 K 17 29 45

Case A7.2

Advantage Energy Technology Data Center Migration— Part B In Chapter 6, Brian Smith, network administrator at Advanced Energy Technology (AET), was given the responsibility of implementing the migration of a large data center to a new office location.

Activity Description Immediate Predecessor

A Start story draft using template — B Research client firm — C Create “due diligence” rough draft A, B D Coordinate needs proposal with client C E Estimate future demand and cash flows C F Draft future plans for client company E G Create and approve legal documents C H Integrate all drafts into first-draft proposal D, F, G I Line up potential sources of capital G, F J Check, approve, and print final legal proposal H K Sign contracts and transfer funds I, J

client as project manager partner and has compiled the network information and activity times for the latest client as follows:

Chapter 7 Managing Risk 247

Time in Workdays

Optimistic Most Likely Pessimistic Immediate Task Name Dur. Dur. Dur. Predecessor Critical Path

1 AET DATA CENTER MIGRATION 54 68 92 2 Team meeting 0.5 1 1.5 ✓ 3 Hire contractors 6 7 8 2 4 Network design 12 14 16 2 5 Ventilation system — — — — 6 Order ventilation system 18 21 30 2 7 Install ventilation system 5 7 9 6 8 New racks — — — — 9 Order new racks 13 14 21 2 ✓ 10 Install racks 17 21 25 9 ✓ 11 Power supplies and cables — — — — 12 Order power supplies & cables 6 7 8 2 13 Install power supplies 5 5 11 12, 16 14 Install cables 6 8 10 12, 16 ✓ 15 Renovation of data center 19 20 27 3, 4 16 City inspection 1 2 3 3, 7, 10 ✓ 17 Switchover Meetings — — — — 18 Facilities 7 8 9 14 19 Operations/systems 5 7 9 14 20 Operations/telecommunications 6 7 8 14 21 Systems & applications 7 7 13 14 22 Customer service 5 6 13 14 ✓ 23 Power check 0.5 1 1.5 13, 14, 15 ✓ 24 Install test servers 5 7 9 18, 19, 20, 21, 22, 23 ✓ 25 Management safety check 1 2 3 7, 23, 24 ✓ 26 Primary systems check 1.5 2 2.5 25 ✓ 27 Set date for move 1 1 1 26 ✓ 28 Complete move 1 2 3 27 ✓

Careful planning was needed because AET operates in the highly competitive petroleum industry. AET is one of five national software companies that provide an accounting and business management package for oil jobbers and gasoline distribu- tors. A few years ago, AET jumped into the “application service provider” world. Their large data center provides clients with remote access to AET’s complete suite of application software systems. Traditionally, one of AET’s primary competitive advan- tages has been the company’s trademark IT reliability. Due to the complexity of this project, the Executive Committee insisted that preliminary analysis of the anticipated completion date be conducted. Brian compiled the following information, in preparation for some PERT analysis: 1. Based on these estimates and the resultant expected project duration of 69 days, the

executive committee wants to know what the probability is of completing the proj- ect before a scheduled time (TS) of 68 days.

2. The significance of this project has the executive committee very concerned. The com- mittee has decided that more analysis of the duration of each activity is needed. Prior to conducting that effort, they asked Brian to calculate what the expected project dura- tion would have to be to ensure a 93 percent chance of completion within 68 days.

248 Chapter 7 Managing Risk

ADVANTAGE ENERGY TECHNOLOGY (AET)—ACCOUNTS PAYABLE SYSTEM The AET sales department has been concerned about a new start-up company that is about to release an accounts payable system. Their investigation indicates that this new package will provide features which will seriously compete with AET’s current Accounts Payable system and in some cases exceed what AET offers. Tom Wright, senior applications developer at AET, has been given the responsibil- ity of analyzing, designing, developing, and delivering a new accounts payable system (A/P) for AET customers. Complicating the issue is the concern of the sales department about AET’s recent inability to meet promised delivery dates. They have convinced CEO (Larry Martain) that a significant marketing effort will have to be expended to convince the clients they should wait for the AET product rather than jump to a package provided by a new entry to the petroleum software business. Companion to this effort is the importance of the performance of the software development group. Consequently, Tom has decided to take the following action: tighten up the estimat- ing effort by his developers; incorporate some new estimating procedures; and use some PERT techniques to generate probabilities associated with his delivery dates. Tom’s planning team made a first-cut at the set of activities and associated durations:

Time in Workdays

Optimistic Most Likely Pessimistic Immediate Task Name Dur. Dur. Dur. Predecessor Critical Path

1 ACCOUNTS PAYABLE SYSTEM 2 Planning meeting 1 1 2 ✓ 3 Team assignments 3 4 5 2 ✓ 4 Program specification 5 Customer requirements 8 10 12 3 ✓ 6 Feasibility study 3 5 7 5 7 Systems analysis 6 8 10 5 ✓ 8 Prelim budget & schedule 1 2 3 7 ✓ 9 Functional specification 3 5 7 7 ✓ 10 Prelim design 10 12 14 9 ✓ 11 Configuration & perf needs 3 4 5 10 ✓ 12 Hardware requirements 4 6 8 11 ✓ 13 System specification 5 7 9 10 14 Detailed design 12 14 16 12, 13 ✓ 15 Program specification 8 10 12 14 ✓ 16 Programming—first phase 27 32 37 15 ✓ 17 Documentation 14 16 18 10 18 Prototype 19 Development 5 7 9 16 ✓ 20 User testing & feedback 12 14 16 19 ✓ 21 Programming—second phase 10 12 14 16 22 Beta testing 18 20 22 21 23 Final documentation pkg 9 10 11 17, 20 ✓ 24 Training pkg 4 5 6 21SS, 23 ✓ 25 Product release 3 5 7 22, 23, 24 ✓

SS = Start to Start lag

Chapter 7 Managing Risk 249

3. Based on these estimates and the critical path, the project duration is estimated at 149 days. But an AET salesperson in the Southeast Region has discovered that the competing A/P package (with significant improvements) is scheduled for delivery in approximately 145 days. The sales force is very anxious to beat that delivery time. The executive committee asks Tom for an estimated probability of reducing his expected project duration by two days.

4. The executive committee is advised by Tom that after all the estimating was com- pleted, he determined that one of his two critical systems analysts might have to move out of the area for critical family reasons. Tom is still very confident that with some staff rearrangements, assistance from a subcontractor, and some “hands on” activities on his part he can still meet the original delivery date, based on 149 days.

This news is very disconcerting to the committee and the sales staff. At this point, the committee decides that based on the most recent delivery performance of AET, a modified, comfortable delivery date should be communicated to AET cli- ents—one that Tom and his staff are very likely to meet. Consequently, Tom is asked to calculate what the expected project duration would have to be to ensure a 98 percent chance of completion within 160 days—that is a “published, drop dead date” that can be communicated to the clients.

250

Scheduling Resources and Costs

OUTLINE 8.1 Overview of the Resource Scheduling Problem

8.2 Types of Resource Constraints

8.3 Classification of a Scheduling Problem

8.4 Resource Allocation Methods

8.5 Computer Demonstration of Resource- Constrained Scheduling

8.6 Splitting Activities

8.7 Benefits of Scheduling Resources

8.8 Assigning Project Work

8.9 Multiproject Resource Schedules

8.10 Using the Resource Schedule to Develop a Project Cost Baseline

Summary

Appendix 8.1: The Critical-Chain Approach

LEARNING OBJECTIVES After reading this chapter you should be able to:

8-1 Understand the differences between time- constrained and resource-constrained schedules.

8-2 Identify different types of resource constraints.

8-3 Describe how the smoothing approach is used on time-constrained projects.

8-4 Describe how leveling approach is used for resource-constrained projects.

8-5 Understand how project management soft- ware creates resource-constrained schedules.

8-6 Understand when and why splitting tasks should be avoided.

8-7 Identify general guidelines for assigning people to specific tasks.

8-8 Identify common problems with multiproject resource scheduling.

8-9 Explain why a time-phased budget baseline is needed.

8-10 Create a time-phased project budget baseline.

C H A P T E R E I G H T

8

251

Project network times are not a schedule until resources have been assigned. Cost estimates are not a budget until they have been time-phased.

We have consistently stressed that up-front planning results in big payoffs. For those who have diligently worked through the earlier planning processes chapters, you are nearly ready to launch your project. This chapter completes the final two planning tasks that become the master plan for your project—resource and cost scheduling. (See Figure 8.1.) This process uses the resource schedule to assign time-phased costs that provide the project budget baseline. Given this time-phased baseline, comparisons can be made with actual and planned schedule and costs. This chapter first discusses the process for developing the project resource schedule. This resource schedule will be used to assign the time-phased budgeted values to create a project budget baseline. There are always more project proposals than there are available resources. The priority system needs to select projects that best contribute to the organization’s objec- tives, within the constraints of the resources available. If all projects and their respec- tive resources are computer scheduled, the feasibility and impact of adding a new project to those in process can be quickly assessed. With this information the project

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

252 Chapter 8 Scheduling Resources and Costs

priority team will add a new project only if resources are available. This chapter exam- ines methods of scheduling resources so the team can make realistic judgments of resource availability and project durations. The project manager uses the same sched- ule for implementing the project. If changes occur during project implementation, the computer schedule is easily updated and the effects easily assessed.

8.1 Overview of the Resource Scheduling Problem After staff and other resources were assigned to her project, a project manager listed the following questions that still needed to be addressed: ∙ Will the assigned labor and/or equipment be adequate and available to deal with my

project? ∙ Will outside contractors have to be used? ∙ Do unforeseen resource dependencies exist? Is there a new critical path? ∙ How much flexibility do we have in using resources? ∙ Is the original deadline realistic? Clearly, this project manager has a good understanding of the problems she is facing. Any project scheduling system should facilitate finding quick, easy answers to these questions. The planned network and activity project duration times found in previous chapters fail to deal with resource usage and availability. The time estimates for the work pack- ages and network times were made independently with the implicit assumption that resources would be available. This may or may not be the case. If resources are adequate but the demand varies widely over the life of the project, it may be desirable to even out resource demand by delaying noncritical activities (using slack) to lower peak demand and, thus, increase resource utilization. This pro- cess is called resource smoothing. On the other hand, if resources are not adequate to meet peak demands, the late start of some activities must be delayed, and the duration of the project may be increased. This process is called resource-constrained scheduling. One research study of more than 50 projects by Woodworth and Willie (1975) found that planned project network durations were increased 38 percent when resources were scheduled. The consequences of failing to schedule limited resources are costly and project delays usually manifest themselves midway in the project when quick corrective action is difficult. An additional consequence of failing to schedule resources is ignoring the peaks and valleys of resource usage over the duration of the project. Because project resources are usually overcommitted and because resources seldom line up by avail- ability and need, procedures are needed to deal with these problems. This chapter

Understand the differ- ences between time- constrained and resource-constrained schedules.

8-1LO

FIGURE 8.1 Project Planning Process

Scope/WBS Network

Risk

Resource and Cost Scheduling Master Plan

Chapter 8 Scheduling Resources and Costs 253

FIGURE 8.2 Constraint Examples Technical constraints

(A)

Resource constraints

Plan(C) Hire band Decoratehall Purchase

refreshments

Plan(B) Decoratehall

Purchase refreshments

Hire band

Reception

Reception

Pour

Code

Frame

Test

Roof

Design

End

End

Start

Start

addresses methods available to project managers for dealing with resource utilization and availability through resource leveling and resource-constrained scheduling. Up to now the start and sequence of activities has been based solely on technical or logical considerations. For example, a project network for framing a house might show three activities in a sequence: (1) pour foundation, (2) build frame, and (3) cover roof. A network for a new software project could place the activities in the network, as a sequence of (1) design, (2) code, and (3) test. In other words, you cannot logically perform activity 2 until 1 is completed, and so on. The project network depicts techni- cal constraints (see Figure 8.2A). The network assumes the personnel and equipment are available to perform the required work. This is often not the case! The absence or shortage of resources can drastically alter technical constraints. A proj- ect network planner may assume adequate resources and show activities occurring in parallel. However, parallel activities hold potential for resource conflicts. For example, assume you are planning a wedding reception that includes four activities—(1) plan, (2) hire band, (3) decorate hall, and (4) purchase refreshments. Each activity takes one day. Activities 2, 3, and 4 could be done in parallel by different people. There is no technical reason or dependency of one on another (see Figure 8.2B). However, if one person must perform all activities, the resource constraint requires the activities be performed in sequence or series. Clearly the consequence is a delay of these activities and a very differ- ent set of network relationships (see Figure 8.2C). Note that the resource dependency takes priority over the technological dependency but does not violate the technological depen- dency; that is, hire, decorate, and purchase may now have to take place in sequence rather than concurrently, but they must all be completed before the reception can take place. The interrelationships and interactions among time and resource constraints are complex for even small project networks. Some effort to examine these interactions before the project begins frequently uncovers surprising problems. Project managers

254 Chapter 8 Scheduling Resources and Costs

In rare situations, physical factors cause activities that would normally occur in parallel to be constrained by contractual or environmental conditions. For example, in theory

the renovation of a sailboat compartment might involve four to five tasks that can be done indepen- dently. However, since space allows only one person to work at one time, all tasks have to be performed sequentially. Likewise, on a mining project it may be physically possible for only two miners to work in a shaft at a time. Another example would be the erec- tion of a communication tower and nearby ground- work. For safety considerations, the contract prohib- its groundwork within 2,000 feet of the tower construction.

© Getty Images/iStockphoto

S N A P S H O T F R O M P R A C T I C E 8 . 1 Working in Tight Places

The procedures for handling physical factors are similar to those used for resource constraints.

who do not consider resource availability in moderately complex projects usually learn of the problem when it is too late to correct. A deficit of resources can significantly alter project dependency relationships, completion dates, and project costs. Project managers must be careful to schedule resources to ensure availability in the right quan- tities and at the right time. Fortunately, there are computer software programs that can identify resource problems during the early project planning phase when corrective changes can be considered. These programs only require activity resource needs and availability information to schedule resources. See the Snapshot from Practice 8.1: Working in Tight Places for a third constraint that impinges on project schedules.

8.2 Types of Resource Constraints Resources are people, equipment, and material that can be drawn on to accomplish something. In projects the availability or unavailability of resources will often influ- ence the way projects are managed.

1. People. This is the most obvious and important project resource. Human resources are usually classified by the skills they bring to the project—for example, programmer, mechanical engineer, welder, inspector, marketing director, supervisor. In rare cases some skills are interchangeable, but usually with a loss of productivity. The many dif- fering skills of human resources add to the complexity of scheduling projects.

2. Materials. Project materials cover a large spectrum: for example, chemicals for a scientific project, concrete for a road project, survey data for a marketing project.

Material availability and shortages have been blamed for the delay of many projects. When it is known that a lack of availability of materials is important and probable, materials should be included in the project network plan and schedule. For example, delivery and placement of an oil rig tower in a Siberian oil field has a very small time window during one summer month. Any delivery delay means a one-year, costly delay.

8-2LO Identify different types of resource constraints.

Chapter 8 Scheduling Resources and Costs 255

Another example in which material was the major resource scheduled was the resurfac- ing and replacement of some structures on the Golden Gate Bridge in San Francisco. Work on the project was limited to the hours between midnight and 5:00 a.m. with a penalty of $1,000 per minute for any work taking place after 5:00 a.m. Scheduling the arrival of replacement structures was an extremely important part of managing the five- hour work-time window of the project. Scheduling materials has also become impor- tant in developing products where time-to-market can result in loss of market share.

3. Equipment. Equipment is usually presented by type, size, and quantity. In some cases equipment can be interchanged to improve schedules, but this is not typical. Equip- ment is often overlooked as a constraint. The most common oversight is to assume the resource pool is more than adequate for the project. For example, if a project needs one earthmoving tractor six months from now and the organization owns four, it is common to assume the resource will not delay the pending project. However, when the earthmov- ing tractor is due on-site in six months, all four machines in the pool might be occupied on other projects. In multiproject environments it is prudent to use a common resource pool for all projects. This approach forces a check of resource availability across all proj- ects and reserves the equipment for specific project needs in the future. Recognition of equipment constraints before the project begins can avoid high crashing or delay costs.

8.3 Classification of a Scheduling Problem Most of the scheduling methods available today require the project manager to classify the project as either time constrained or resource constrained. Project managers need to con- sult their priority matrix (see Figure 4.2) to determine which case fits their project. One simple test to determine if the project is time or resource constrained is to ask, “If the criti- cal path is delayed, will resources be added to get back on schedule?” If the answer is yes, assume the project is time constrained; if no, assume the project is resource constrained. A time-constrained project is one that must be completed by an imposed date. If required, resources can be added to ensure the project is completed by a specific date. Although time is the critical factor, resource usage should be no more than is necessary and sufficient. A resource-constrained project is one that assumes the level of resources avail- able cannot be exceeded. If the resources are inadequate, it will be acceptable to delay the project, but as little as possible. In scheduling terms, time constrained means time (project duration) is fixed and resources are flexible, while resource constrained means resources are fixed and time is flexible. Methods for scheduling these projects are presented in the next section.

8.4 Resource Allocation Methods

Assumptions Ease of demonstrating the allocation methods available requires some limiting assump- tions to keep attention on the heart of the problem. The rest of the chapter depends entirely on the assumptions noted here. First, splitting activities will not be allowed. This means once an activity is placed in the schedule, assume it will be worked on continuously until it is finished; hence, an activity cannot be started, stopped for a period of time, and then finished. Second, the level of resources used for an activity cannot be changed. These limiting assumptions do not exist in practice, but simplify learning. It is easy for new project managers to deal with the reality of splitting activi- ties and changing the level of resources when they meet them on the job.

256 Chapter 8 Scheduling Resources and Costs

Time-Constrained Projects: Smoothing Resource Demand Scheduling time-constrained projects focuses on resource utilization. When demand for a specific resource type is erratic, it is difficult to manage, and utilization may be very poor. Practitioners have attacked the utilization problem using resource leveling techniques that balance demand for a resource. Basically, all leveling techniques delay noncritical activities by using positive slack to reduce peak demand and fill in the val- leys for the resources. An example will demonstrate the basic procedure for a time- constrained project. See Figure 8.3. For the purpose of demonstration, the Botanical Garden project uses only one resource (backhoes); all backhoes are interchangeable. The top bar chart shows the activities on a time scale. The dependencies are shown with the vertical connecting

8-3LO Describe how the smoothing approach is used on time- constrained projects.

FIGURE 8.3 Botanical Garden

0

Design

Layout & scarify

Walkways

Lighting

Number of backhoes required

Smoothed number of backhoes required

Irrigation

Fence & walls

Planting

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

0

4

1 Bh

1 Bh

1 Bh

1 Bh

2 Bh2 Bh 1 Bh

1 Bh

3 Bh

2 Bh 3 Bh2 Bh

3

2

1

4

3

2

1

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

1 Bh

2 Bh

1 Bh

3 Bh

1 Bh

2 Bh

Chapter 8 Scheduling Resources and Costs 257

arrows. The horizontal arrows following activities represent activity slack (for example, irrigation requires six days to complete and has six days slack). The number of backhoes needed for each task is shown in the shaded activity duration block (rectangle). After the land has been scarified and the plan laid out, work can begin on the walkways, irriga- tion, and fencing and retaining walls simultaneously. The middle chart shows the resource profile for the backhoes. For periods 4 through 10, four backhoes are needed. Because this project is declared time constrained, the goal will be to reduce the peak requirement for the resource and thereby increase the utilization of the resource. A quick examination of the ES (early start) resource load chart suggests only two activi- ties have slack that can be used to reduce the peak—fence and walls provide the best choice for smoothing the resource needs. Another choice could be irrigation, but it would result in an up and down resource profile. The choice will probably center on the activity that is perceived as having the least risk of being late. The smoothed resource loading chart shows the results of delaying the fence and walls activity. Note the differ- ences in the resource profiles. The important point is the resources needed over the life of the project have been reduced from four to three (25 percent). In addition the profile has been smoothed, which should be easier to manage. The Botanical Garden project schedule reached the three goals of smoothing: ∙ The peak of demand for the resource was reduced. ∙ The number of resources over the life of the project have been reduced. ∙ The fluctuations in resource demand were minimized. The latter improves the utilization of resources. Backhoes are not easily moved from location to location. There are costs associated with changing the level of resources needed. The same analogy applies to the movement of people back and forth among projects. It is well known that people are more efficient if they can focus their effort on one project rather than multitasking their time among, say, three projects. The downside of leveling is a loss of flexibility that occurs from reducing slack. The risk of activities delaying the project also increases because slack reduction can create more critical activities and/or near-critical activities. Pushing leveling too far for a perfectly level resource profile is risky. Every activity then becomes critical. The Botanical Garden example gives a sense of the time-constrained problem and the smoothing approach. However, in practice the magnitude of the problem is very complex for even small projects. Manual solutions are not practical. Fortunately, the software packages available today have very good routines for leveling project resources. Typically, they use activities that have the most slack to level project resources. The rationale is those activities with the most slack pose the least risk. Although this is generally true, other risk factors such as reduction of flexibility to use reassigned resources on other activities or the nature of the activity (easy, com- plex) are not addressed using such a simple rationale. It is easy to experiment with many alternatives to find the one that best fits your project and minimizes risk of delaying the project.

Resource-Constrained Projects When the number of people and/or equipment is not adequate to meet peak demand requirements and it is impossible to obtain more, the project manager faces a resource- constrained problem. Something has to give. The trick is to prioritize and allocate resources to minimize project delay without exceeding the resource limit or altering the technical network relationships.

8-4LO Describe how leveling approach is used for resource-constrained projects.

258 Chapter 8 Scheduling Resources and Costs

The resource scheduling problem is a large combinatorial one. This means even a modest-size project network with only a few resource types might have several thou- sand feasible solutions. A few researchers have demonstrated optimum mathematical solutions to the resource allocation problem but only for small networks and very few resource types (Arrow and Hurowicz, 1977; Talbot and Patterson, 1979; Woodworth and Shanahan, 1988). The massive data requirements for larger problems make pure mathematical solutions (e.g., linear programming) impractical. An alternative approach to the problem has been the use of heuristics (rules of thumb) to solve large combinatorial problems. These practical decision or priority rules have been in place for many years. Heuristics do not always yield an optimal schedule, but they are very capable of yielding a “good” schedule for very complex networks with many types of resources. The efficiency of different rules and combinations of rules has been well documented (Pascoe, 1965; Fendly, 1968; Davis and Patterson, 1975). However, because each proj- ect is unique, it is wise to test several sets of heuristics on a network to determine the priority allocation rules that minimize project delay. The computer software available today makes it very easy for the project manager to create a good resource schedule for the project. A simple example of the heuristic approach is illustrated here. Heuristics allocate resources to activities to minimize project delay; that is, heuris- tics prioritize which activities are allocated resources and which activities are delayed when resources are not adequate. The parallel method is the most widely used approach to apply heuristics, which have been found to consistently minimize project delay over a large variety of projects. The parallel method is an iterative process that starts from the beginning of project time and, when resources needed exceed the resources available, retains activities first by the priority rules:

1. Minimum slack. 2. Smallest duration. 3. Lowest activity identification number.

Those not able to be scheduled without delaying others are pushed out farther in time. However, do not attempt to move activities that have already started. When consider- ing activities not to delay, consider the resources each activity uses. In any period when two or more activities require the same resource, the priority rules are applied. For example, if in period 5 three activities are eligible to start (i.e., have the same ES) and require the same resource, the first activity placed in the schedule would be the activity with the least slack (rule 1). However, if all activities have the same slack, the next rule would be invoked (rule 2), and the activity with the smallest duration would be placed in the schedule first. In very rare cases, when all eligible activities have the same slack and the same duration, the tie is broken by the lowest activity identification number (rule 3), since each activity has a unique ID number. When a resource limit has been reached, the early start (ES) for succeeding activi- ties not yet in the schedule will be delayed (and all successor activities not having free slack) and their slack reduced. In subsequent periods the procedure is repeated until the project is scheduled. The procedure is demonstrated next; see Figure 8.4. The shaded areas in the resource loading chart represent the “scheduling interval” of the time- constrained schedule (ES through LF). You can schedule the resource any place within the interval and not delay the project. Scheduling the activity beyond the LF will delay the project.

Chapter 8 Scheduling Resources and Costs 259

Period Action

See Figure 8.4

0–1 Only activity 1 is eligible. It requires 2 programmers. Load activity 1 into schedule. 1–2 No activities are eligible to be scheduled. 2–3 Activities 2, 3, and 4 are eligible to be scheduled. Activity 3 has the least slack (0)—

apply rule 1. Load Activity 3 into schedule. Activity 2 is next with slack of 2; however, activity 2 requires 2 programmers and only 1 is available. Delay activity 2. Update: ES = 3, slack = 1. The next eligible activity is activity 4, since it only requires 1 programmer. Load activity 4 into schedule.

See Figure 8.5

3–4 Activity 2 is eligible but exceeds limit of 3 programmers in pool. Delay activity 2. Update: ES = 4, slack = 0. 4–5 Activity 2 is eligible but exceeds limit of 3 programmers in pool. Delay activity 2. Update: ES = 5, LF = 11, slack = −1. Delay activity 7. Update: ES = 11, LF = 13, slack = −1. 5–6 Activity 2 is eligible but exceeds limit of 3 programmers in pool. Delay activity 2. Update: ES = 6, LF = 12, slack = −2. Delay activity 7. Update: ES = 12, LF = 14, slack = −2. 6–7 Activities 2, 5, and 6 are eligible with slack of −2, 2, and 0, respectively. Load activity 2 into schedule (rule 1). Because activity 6 has 0 slack, it is the next eligible activity. Load activity 6 into schedule (rule 1). The programmer limit of 3 is reached. Delay activity 5. Update: ES = 7, slack = 1. 7–8 Limit is reached. No programmers available. Delay activity 5. Update: ES = 8, slack = 0. 8–9 Limit is reached. No programmers available. Delay activity 5. Update: ES = 9, LF = 11, slack = −1. 9–10 Limit is reached. No programmers available. Delay activity 5. Update: ES = 10, LF = 12, slack = −2. 10–11 Activity 5 is eligible.

Load activity 5 into schedule. (Note: Activity 6 does not have slack because there are no programmers available— 3 maximum.) 11–12 No eligible activities. 12–13 Activity 7 is eligible.

Load activity 7 into schedule.

The Parallel Method:

The programmers are limited to three. Follow the actions described in Figures 8.4 and 8.5. Note how the limit of three programmers starts to delay the project. Observe how it is necessary to update each period to reflect changes in activity early start and slack times so the heuristics can reflect changing priorities. When using the parallel scheduling method, the network in Figure 8.5 reflects the new schedule date of 14 time units, rather than the time-constrained project duration of 12 time units. The network has also been revised to reflect new start, finish, and slack times for each activity. Note that activity 6 is still critical and has a slack of 0 time units because no resources are available (they are being used on activities 2 and 5). Compare the slack

260 Chapter 8 Scheduling Resources and Costs

1

20

0

2

DUR ES LF SL

ES resource load chart

0 1 2 3 4 5 6 7 8 9 10 11 12ID RES

2 0 2 01 22

2P

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4 2 6 03 2 2 2 2

2 2 10 64 1 1

2 6 10 25 1 1

4 6 10 06 1 1 1 1

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Resource-constrained schedule through period 2–3

0 1 2 3 4 5 6 7 8 9 10 11 12

13

13

14

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2 0 2 01 22

2P

6 2 10 23 12 X

4 2 6 03 2 2 2 2

2 2 10 64 1 1

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4 6 10 06

2 10 12 07

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3PResource available 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P

2P

2P

2P

1P

1P

1P

1P

2P

2P

2P

1P

1P

1P

1P

FIGURE 8.4 Resource-Constrained Schedule through Period 2–3

Chapter 8 Scheduling Resources and Costs 261

DUR ES LF SL 0 1 2 3 4 5 6 7 8 9 10 11 12ID RES

2 0 2 01 22

2P

6 2 3 45 6 2 1 0 -1 -22 X X X X

4 2 6 03 2 2 2 2

2 2 10 64 1 1

2 6 10 25

4 6 10 06

2 12 14 -27 X X

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3PResource available 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P

1

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Resource-constrained schedule through period 5–6

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2 2 1 0-1 -25

4 6 10 06

2 0 -1-27

2P 3P 3P 2P 2P 3P 3P 3P 3P 3P 3P 1P 1P

1 1

3P 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P 3P

0 -112 13

12 13 14

10 11 12

10 11

12 10 11

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2 3 4 5 6

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Resource available

6 7 8 9 10

2P

2P

2P

1P

1P

1P

1P

2P

2P

2P

1P

1P

1P

1P

FIGURE 8.5 Resource-Constrained Schedule through Period 5–6

262 Chapter 8 Scheduling Resources and Costs

for each activity found in Figures 8.4 and 8.5; slack has been reduced significantly. Note that activity 4 has only 2 units of slack rather than what appears to be 6 slack units. This occurs because only three programmers are available, and they are needed to satisfy the resource requirements of activities 2 and 5. Note that the number of criti- cal activities (1, 2, 3, 5, 6, 7) has increased from four to six. This small example demonstrates the scenario of scheduling resources in real proj- ects and the resulting increase in the risk of being late. In practice this is not a trivial problem! Managers who fail to schedule resources usually encounter this scheduling risk when it is too late to work around the problem, resulting in a project delay. Since manually using the parallel method is impractical on real-world projects because of size, project managers will depend on software programs to schedule project resources.

8.5 Computer Demonstration of Resource-Constrained Scheduling Fortunately, project management software is capable of assessing and resolving com- plicated resource-constrained schedules using heuristics similar to what was described above. We will use the EMR project to demonstrate how this is done using MS Project. It is important to note that the software is not “managing” the project. The software is simply a tool the project manager uses to view the project from different perspectives and conditions. See Snapshot from Practice 8.2: Assessing Resource Allocation for more tips on assessing resource problems.

Understand how project management software creates resource- constrained schedules.

8-5LO

One of the strengths of today’s project management software is the ability to identify and provide options for resolv- ing resource allocation problems. A project manager who uses MS Project

to plan projects shared with us the following checklist for dealing with resource conflicts after preliminary assignment of resources has been made.

1. Assess whether you have overallocation problems (see Red in the resource sheet view).

2. Identify where and when conflicts occur by examin- ing the resource usage view.

3. Resolve the problem by

a. Replacing overallocated resources with appro- priate resources that are available. Then ask if this solves the problem.

If not:

b. Use the leveling tool and choose the level within slack option.

i. Does this solve the problem? (Are resources still overallocated?)

ii. Check the sensitivity of the network and ask if this is acceptable.

If not:

c. Consider splitting tasks.

i. Make sure to readjust task durations to take into account additional start-up and shut- down time.

4. If 3 does not work then either:

a. Use level tool default option and ask if you can live with the new completion date.

If not:

b. Negotiate for additional resources to complete the project. If not possible

c. Consider reducing project scope to meet deadline.

While this checklist makes specific references to MS Project, the same steps can be used with most project management software.

S N A P S H O T F R O M P R A C T I C E 8 . 2 Assessing Resource Allocation

Chapter 8 Scheduling Resources and Costs 263

EMR is the name given to the development of a handheld electronic medical refer- ence guide to be used by emergency medical technicians and paramedics. Figure 8.6 contains a time-limited network for the design phase of the project. For the purpose of this example, we assume that only design engineers are required for the tasks and that the design engineers are interchangeable. The number of engineers required to perform each task is noted in the network, where 500 percent means five design engineers are needed for the activity. For example, activity 5, feature specs, requires four design engineers (400 percent). The project begins January 1, and ends February 14, a duration of 45 workdays. The calendar for the project has been set up to work seven days a week so the reader can trace and more easily see the results and impacts of resources—similar to man- ual solutions present in chapter exercises. The time-limited (constrained) bar chart for the project is shown in Figure 8.7. This bar chart incorporates the same informa- tion used to develop the project network, but presents the project in the form of a bar chart along a time line. Finally, a resource usage chart is presented for a segment of the project—January 15 to January 23; see Figure 8.8A. Observe that the time-limited project requires 21 design engineers on January 18 and 19 (168 hrs/8 hrs per engineer = 21 engineers). This segment represents the peak requirement for design engineers for the project. However, due to the shortage of design engineers and commitments to other projects, only eight engineers can be assigned to the project. This creates overallocation prob- lems more clearly detailed in Figure 8.8B, which is a resource loading chart for design engineers. Notice that the peak is 21 engineers and the limit of 8 engineers is shown by the gray shaded area. To resolve this problem we use the “leveling” tool within the software and first try to solve the problem by leveling only within slack. This solution would preserve the original finish date. However, as expected, this does not solve all of the allocation problems. The next option is to allow the software to apply scheduling heuristics and level outside of slack. The new schedule is contained in the revised, resource-limited network chart presented in Figure 8.9. The resource-limited project network indicates the project duration has now been extended to 2/26, or 57 workdays (versus 45 days time limited). The critical path is now 2, 3, 9, 13. Figure 8.10 presents the project bar chart and the results of leveling the project schedule to reflect the availability of only eight design engineers. The application of the heuristics can be seen in the scheduling of the internal, external, and feature speci- fication activities. All three activities were originally scheduled to start immediately after activity 1, architectural decisions. This is impossible, since the three activities collectively require 14 engineers. The software chooses to schedule activity 5 first because this activity is on the original critical path and has zero slack (heuristic rule # 1). Next, and concurrently, activity 4 is chosen over activity 3 because activity 4 has a shorter duration (heuristic rule # 2); internal specs, activity 3, is delayed due to the limitation of 8 design engineers. Notice that the original critical path no longer applies because of the resource dependencies created by having only eight design engineers. See Figure 8.9 for the original planned critical path. Compare the bar chart in Figure 8.10 with the time-limited bar chart in Figure 8.7. For example, note the different start dates for activity 8 (screen). In the time-limited plan (Figure 8.7), the start date for activity 8 is 1/18, while the start date in the resource limited schedule (Figure 8.10) is 2/16, almost a month later!

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266 Chapter 8 Scheduling Resources and Costs

While resource bar graphs are commonly used to illustrate overallocation problems, we prefer to view resource usage tables like the one presented in Figure 8.8A. This table tells you when you have an overallocation problem and identifies activities that are causing the overallocation. The Impacts of Resource-Constrained Scheduling Like leveling schedules, the limited resource schedule usually reduces slack, reduces flexibility by using slack to ensure delay is minimized, and increases the number of critical and near-critical activities. Scheduling complexity is increased because resource constraints are added to technical constraints; start times may now have two constraints. The traditional critical path concept of sequential activities from the start to the end of the project is no longer meaningful. The resource constraints can break the sequence and leave the network with a set of disjointed critical activities.1

3,024 hrs 200 hrs 480 hrs 224 hrs 320 hrs 320 hrs

64 hrs 48 hrs

800 hrs 80 hrs

168 hrs 120 hrs

200 hrs

T 72h

40h

32h

136h

40h

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136h

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32h 16h 24h 32h 16h 24h 24h

168h

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900%Peak Units

Overallocated:Design Engineers Allocated:

2,500%

2,000%

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1,700% 1,700% 2,100% 2,100% 1,800% 1,300% 1,100% 800%

W T F S 144h

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T 64h

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W Design engineers

Work Jan 15 Jan 21Resource Name

Architectural decisions Internal specs External specs Feature specs Voice recognition SW Case Screen Database Microphone-soundcard Digital devices Computer I/O Review design

FIGURE 8.8A EMR Project—Time-Constrained Resource Usage View, January 15–23

FIGURE 8.8B Resource Loading Chart for EMR Project, January 15–23

1 See the appendix at the end of this chapter for more on how resource constraints affect project schedule.

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Chapter 8 Scheduling Resources and Costs 269

Conversely, parallel activities can become sequential. Activities with slack on a time- constrained network can change from critical to noncritical.

8.6 Splitting Activities Splitting tasks is a scheduling technique used to get a better project schedule and/or to increase resource utilization. A planner splits the continuous work included in an activity by interrupting the work and sending the resource to another activity for a period of time and then having the resource resume work on the original activity. Splitting can be a useful tool if the work involved does not include large start-up or shutdown costs—for example, moving equipment from one activity location to another. The most common error is to interrupt “people work,” where there are high conceptual start-up and shutdown costs. For example, having a bridge designer take time off to work on the design problem of another project may cause this individual to lose four days shifting conceptual gears in and out of two activities. The cost may be hidden, but it is real. Figure 8.11 depicts the nature of the splitting problem. The original activity has been split into three separate activities: A, B, and C. The shut- down and start-up times lengthen the time for the original activity. One study reported that task switching can cost from 20 percent to 40 percent loss in efficiency (Rubin- stein, Meyer, and Evans, 2001). Some have argued that the propensity to deal with resource shortages by splitting is a major reason why projects fail to meet schedule (c.f., Goldratt, 1997; Newbold, 1997). We agree. Planners should avoid the use of splitting as much as possible, except in situations where splitting costs are known to be small or when there is no alternative for resolving the resource problem. Computer software offers the splitting option for each activity; use it sparingly. See Snapshot from Practice 8.2: Assessing Resource Allocation.

Understand when and why splitting tasks should be avoided.

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Activity duration without splitting

Activity duration split into three segments—A, B, C

Activity A

Activity A

Activity B

Activity B

Activity C

Activity C

Activity duration split with shutdown and start-up

Shutdown Start-up

FIGURE 8.11 Splitting Activities

270 Chapter 8 Scheduling Resources and Costs

8.7 Benefits of Scheduling Resources It is important to remember that, if resources are truly limited and activity time esti- mates are accurate, the resource-constrained schedule will materialize as the project is implemented—not the time-constrained schedule! Therefore, failure to schedule lim- ited resources can lead to serious problems for a project manager. The benefit of creat- ing this schedule before the project begins leaves time for considering reasonable alternatives. If the scheduled delay is unacceptable or the risk of being delayed too high, the assumption of being resource constrained can be reassessed. Cost-time trade- offs can be considered. In some cases priorities may be changed. See Snapshot from Practice 8.3: U.S. Forest Service Resource Shortage. Resource schedules provide the information needed to prepare time-phased work package budgets with dates. Once established, they provide a quick means for a proj- ect manager to gauge the impact of unforeseen events such as turnover, equipment breakdowns, or transfer of project personnel. Resource schedules also allow project managers to assess how much flexibility they have over certain resources. This is use- ful when they receive requests from other managers to borrow or share resources. Honoring such requests creates goodwill and an “IOU” that can be cashed in during a time of need.

A major segment of work in managing U.S. Forest Service (USFS) forests is selling mature timber to logging com- panies that harvest the timber under contract conditions monitored by the

Service. The proceeds are returned to the federal gov- ernment. The budget allocated to each forest depends on the two-year plan submitted to the U.S. Department of Agriculture. Olympic Forest headquarters in Olympia, Washington, was developing a two-year plan as a basis for funding. All of the districts in the forest submitted their timber sale projects (numbering more than 50) to headquarters, where they were compiled and aggregated into a project plan for the whole forest. The first computer run was reviewed by a small group of senior managers to deter- mine if the plan was reasonable and “doable.” Manage- ment was pleased and relieved to note all projects appeared to be doable in the two-year time frame until a question was raised concerning the computer printout. “Why are all the columns in these projects labeled ‘RESOURCE’ blank?” The response from an engineer was, “We don’t use that part of the program.” The discussion that ensued recognized the impor- tance of resources in completing the two-year plan and ended with a request to “try the program with resources

© Seth Lazar/Alamy

S N A P S H O T F R O M P R A C T I C E 8 . 3 U.S. Forest Service Resource Shortage

included.” The new output was startling. The two-year program turned into a three-and-a-half-year plan because of the shortage of specific labor skills such as road engineer and environmental impact specialist. Analysis showed that adding only three skilled people would allow the two-year plan to be completed on time. In addition, further analysis showed hiring only a few more skilled people, beyond the three, would allow an extra year of projects to also be compressed into the two-year plan. This would result in additional revenue of more than $3 million. The Department of Agriculture quickly approved the requested extra dollars for addi- tional staff to generate the extra revenue.

Chapter 8 Scheduling Resources and Costs 271

8.8 Assigning Project Work When making individual assignments, project managers should match, as best they can, the demands and requirements of specific work with the qualifications and experi- ence of available participants. In doing so, there is a natural tendency to assign the best people the most difficult tasks. Project managers need to be careful not to overdo this. Over time these people may grow to resent the fact that they are always given the toughest assignments. At the same time, less experienced participants may resent the fact that they are never given the opportunity to expand their skill/knowledge base. Project managers need to balance task performance with the need to develop the tal- ents of people assigned to the project. Project managers not only need to decide who does what but who works with whom. A number of factors need to be considered in deciding who should work together. First, to minimize unnecessary tension, managers should pick people with compatible work habits and personalities but who complement each other (i.e., one person’s weakness is the other person’s strength). For example, one person may be bril- liant at solving complex problems but sloppy at documenting his or her progress. It would be wise to pair this person with an individual who is good at paying attention to details. Experience is another factor. Veterans should be teamed up with new hires— not only so they can share their experience but also to help socialize the newcomers to the customs and norms of the organization. Finally, future needs should be considered. If managers have some people who have never worked together before but who have to later on in the project, they may be wise to take advantage of opportunities to have these people work together early on so that they can become familiar with each other. Finally, see the Snapshot in Practice 8.4: Managing Geeks for some interesting thoughts from the former CEO of Google on how to put together teams.

Identify general guidelines for assigning people to specific tasks.

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Eric Schmidt, after a successful career at Sun Microsystems, took over strug- gling Novell, Inc., and helped turn it around within two years. Four years later he became the CEO of Google.

One of the keys to his success is his ability to manage the technical wizards who develop the sophisticated systems, hardware, and software that are the back- bone of electronically driven companies. He uses the term “geek” (and he can, since he is one, with a Ph.D. in computer science) to describe this group of technol- ogists who rule the cyberworld. Schmidt has some interesting ideas about assign- ing geeks to projects. He believes that putting geeks together in project teams with other geeks creates pro- ductive peer pressure. Geeks care a great deal about how other geeks perceive them. They are good at judg- ing the quality of technical work and are quick to praise

as well as criticize each other’s work. Some geeks can be unbearably arrogant, but Schmidt claims that having them work together on projects is the best way to con- trol them—by letting them control each other. At the same time, Schmidt argues that too many geeks spoil the soup. By this he means that, when there are too many geeks on a development team, there is a tendency for intense technical navel gazing. Members lose sight of deadlines, and delays are inevitable. To combat this tendency, he recommends using geeks only in small groups. He urges breaking up large proj- ects into smaller, more manageable projects so that small teams of geeks can be assigned to them. This keeps the project on time and makes the teams respon- sible to each other.

*Russ Mitchel, “How to Manage Geeks,” Fast Company, May 31, 1999, pp. 175–80.

S N A P S H O T F R O M P R A C T I C E 8 . 4 Managing Geeks*

272 Chapter 8 Scheduling Resources and Costs

8.9 Multiproject Resource Schedules For clarity we have discussed key resource allocation issues within the context of a single project. In reality resource allocation generally occurs in a multiproject environ- ment where the demands of one project have to be reconciled with the needs of other projects. Organizations must develop and manage systems for efficiently allocating and scheduling resources across several projects with different priorities, resource requirements, sets of activities, and risks. The system must be dynamic and capable of accommodating new projects as well as reallocating resources once project work is completed. While the same resource issues and principles that apply to a single project also apply to this multiproject environment, application and solutions are more com- plex, given the interdependency among projects. The following lists three of the more common problems encountered in managing multiproject resource schedules. Note that these are macro manifestations of single- project problems that are now magnified in a multiproject environment:

1. Overall schedule slippage. Because projects often share resources, delays in one project can have a ripple effect and delay other projects. For example, work on one software development project can grind to a halt because the coders scheduled for the next critical task are late in completing their work on another development project.

2. Inefficient resource utilization. Because projects have different schedules and requirements, there are peaks and valleys in overall resource demands. For example, a firm may have a staff of 10 electricians to meet peak demands when, under normal conditions, only 5 electricians are required.

3. Resource bottlenecks. Delays and schedules are extended as a result of shortages of critical resources that are required by multiple projects. For example, at one Lattice Semiconductor facility, project schedules were delayed because of competition over access to test equipment necessary to debug programs. Likewise, several projects at a U.S. forest area were extended because there was only one silviculturist on the staff.

To deal with these problems, more and more companies create project offices or depart- ments to oversee the scheduling of resources across multiple projects. One approach to multiple project resource scheduling is to use a first come–first served rule. A project queue system is created in which projects currently under way take precedence over new projects. New project schedules are based on the projected availability of resources. This queuing tends to lead to more reliable completion estimates and is preferred on contracted projects that have stiff penalties for being late. The disadvantages of this deceptively sim- ple approach are that it does not optimally utilize resources or take into account the priority of the project. See the Snapshot from Practice 8.5: Multiple Project Resource Scheduling. Many companies utilize more elaborate processes for scheduling resources to increase the capacity of the organization to initiate projects. Most of these methods approach the problem by treating individual projects as part of one big project and adapting the sched- uling heuristics previously introduced to this “megaproject.” Project schedulers monitor resource usage and provide updated schedules based on progress and resource availabil- ity across all projects. One major improvement in project management software in recent years is the ability to prioritize resource allocation to specific projects. Projects can be prioritized in ascending order (e.g., 1, 2, 3, 4,…), and these priorities will override sched- uling heuristics so that resources go to the project highest on the priority list. (Note: This improvement fits perfectly with organizations that use project priority models similar to those described in Chapter 2.) Centralized project scheduling also makes it easier to identify resource bottlenecks that stifle progress on projects. Once identified, the impact

Identify common prob- lems with multiproject resource scheduling.

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Chapter 8 Scheduling Resources and Costs 273

of the bottlenecks can be documented and used to justify acquiring additional equipment, recruiting critical personnel, or delaying the project. Finally, many companies are using outsourcing as a means for dealing with their resource allocation problems. In some cases, a company will reduce the number of proj- ects they have to manage internally to only core projects and outsource noncritical proj- ects to contractors and consulting firms. In other cases, specific segments of projects are outsourced to overcome resource deficiencies and scheduling problems. Companies may hire temporary workers to expedite certain activities that are falling behind schedule or contract project work during peak periods when there are insufficient internal resources to meet the demands of all projects. The ability to more efficiently manage the ebbs and flows of project work is one of the major driving forces behind outsourcing today.

8.10 Using the Resource Schedule to Develop a Project Cost Baseline Once resource assignments have been finalized we are able to develop a baseline bud- get schedule for the project. Using your project schedule, you can time-phase work packages and assign them to their respective scheduled activities to develop a budget schedule over the life of your project. Understanding the reason for time-phasing your budget is very important. Without a time-phased budget good project schedule and cost control are impossible.

Why a Time-Phased Budget Baseline Is Needed The need for a time-phased budget baseline is demonstrated in the following scenario. The development of a new product is to be completed in 10 weeks at an estimated cost

Explain why a time- phased budget baseline is needed.

8-9LO

The case for a central source to over- see project resource scheduling is well known by practitioners. Here is a syn- opsis of a conversation with one mid- dle manager.

Interviewer: Congratulations on acceptance of your multiproject scheduling proposal. Everyone tells me you were very convincing. Middle Manager: Thanks. Gaining acceptance was easy this time. The board quickly recognized we have no choice if we are to keep ahead of competition by placing our resources on the right projects. Interviewer: Have you presented this to the board before? Middle Manager: Yes, but not this company. I pre- sented the same spiel to the firm I worked for two years ago. For their annual review meeting I was charged to present a proposal suggesting the need and benefits of central capacity resource planning for managing the projects of the firm. I tried to build a case for bringing projects under one umbrella to standardize practices and to forecast

and assign key people to mission critical projects. I explained how benefits such as resource demands would be aligned with mission critical projects, proac- tive resource planning, and a tool for catching resource bottlenecks and resolving conflicts. Almost everyone agreed the idea was a good one. I felt good about the presentation and felt confi- dent something was going to happen. But the idea never really got off the ground; it just faded into the sunset. With hindsight, managers really did not trust col- leagues in other departments, so they only gave half- hearted support to central resource planning. Manag- ers wanted to protect their turf and ensure that they would not have to give up power. The culture there was simply too inflexible for the world we live in today. They are still struggling with constant conflicts among projects. I’m glad I made the switch to this firm. The culture here is much more team-oriented. Management is com- mitted to improving performance.

S N A P S H O T F R O M P R A C T I C E 8 . 5 Multiple Project Resource Scheduling

274 Chapter 8 Scheduling Resources and Costs

of $400,000 per week for a total cost of $4 million. Management wants a status report at the end of five weeks. The following information has been collected: ∙ Planned costs for the first five weeks are $2,000,000. ∙ Actual costs for the first five weeks are $2,400,000. How are we doing? It would be easy to draw the conclusion there is a $400,000 cost over- run. But we really have no way of knowing. The $400,000 may represent money spent to move the project ahead of schedule. Assume another set of data at the end of five weeks: ∙ Planned costs for the first five weeks are $2,000,000. ∙ Actual costs for the first five weeks are $1,700,000. Is the project costing $300,000 less than we expected? Perhaps. But the $300,000 may rep- resent the fact that the project is behind schedule and work has not started. Could it be the project is behind schedule and over cost? We cannot tell from these data. The many systems found in the real world that use only planned funds (a constant burn rate) and actual costs can provide false and misleading information. There is no way to be certain how much of the physical work has been accomplished. These systems do not measure how much work was accomplished for the money spent! Hence, without time-phasing cost to match your project schedule, it is impossible to have reliable information for control purposes.

Creating a Time-Phased Budget By using information from your WBS and resource schedule, you can create a time- phased cost baseline. Remember from the WBS for the PC Project in Chapters 4 and 5 we integrated the WBS and OBS organization breakdown structure so the work pack- ages could be tracked by deliverable and organization responsible. See Figure 8.12 for an example of the PC Prototype Project arranged by deliverable and organization unit responsible. For each intersection point of the WBS/OBS matrix, you see work pack- age budgets and the total cost. The total cost at each intersection is called a cost or control account. For example, at the intersection of the Read/write head deliverable and the Production department we see there are three work packages with a total bud- get of $200,000. The sum of all cost accounts in a column should represent the total costs for the deliverable. Conversely, the sum of the cost accounts in a row should represent the costs or budget for the organizational unit responsible to accomplish the work. You can continue to “roll up” costs on the WBS/OBS to total project costs. This WBS provides the information you can use to time phase work packages and assign them to their respective scheduled activities over the life of the project. Recall, from the development of your work breakdown structure for each work package, the following information needed to be developed: 1. Define work (what). 2. Identify time to complete a work package (how long). 3. Identify a time-phased budget to complete a work package (cost). 4. Identify resources needed to complete a work package (how much). 5. Identify a single person responsible for units of work (who). 6. Identify monitoring points for measuring progress (how well). Number three, time-phasing the work package, is critical for the final step of creating your budget baseline. The process of time-phasing work packages, which is illustrated next, is demonstrated in Figure 8.13. The work package has a duration of three weeks. Assuming labor, materials, and equipment are tracked separately, the work package

Create a time-phased project budget baseline.

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Chapter 8 Scheduling Resources and Costs 275

costs for labor are distributed over the three weeks as they are expected to occur— $40,000, $30,000, and $50,000 for each week, respectively. When the three-week work package is placed in the network schedule, the costs are distributed to the time-phased budget for the same three scheduled weeks. Fortunately, most single WPs become an

Disk storage units

$5,160

External USB 500

Manufacturing 1,250

Organization $1,660

Motor 10

Circuit board 1,000

Chassis frame

50

Read/write head 600

Optical 3,000

Hard disks 1,660

Total budget for cost account Work package budget

10 10

120 120

140 260

400

50 130 180

Summarize by organizational units

10 20 20

50 130 40 30

200

300300

100100

150 150 300

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Production 650

Test 220

Purchasing 10

Software 180

Su m

m ar

te b

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s

FIGURE 8.12 Direct Labor Budget Rollup ($000)

FIGURE 8.13 Time-Phased Work Package Budget (labor cost only)

Work Package Description

Work Package ID

Deliverable

Responsible organization unit

Work Package Duration weeks

Page of

Project

Date

Estimator

Total labor cost

Test 1

PC Prototype

3/24/xx

CEG

$120,000

1

Test

3

1.1.3.2.3

Circuit board

Time-Phased Work Package Budget Labor cost only

Time-Phased Labor Budget ($000)

Work Periods–WeeksWork Package

Code 1.1.3.2.3

Labor rate

$xxxx/ week

$40 $30 $50 $120

1 2 3 4 5 Total Resource

Quality testers

276 Chapter 8 Scheduling Resources and Costs

activity and the process of distributing costs is relatively simple. That is, the relationship is one-for-one. Such budget timing is directly from the work package to the activity. In a few instances an activity will include more than one work package, where the pack- ages are assigned to one responsible person or department and deliverable. In this case the work packages are consolidated into one activity. As seen in Figure 8.14, this activity includes two WPs. The first, WP-1.1.3.2.4.1 (Code), is distributed over the first three weeks. The second, WP-1.1.3.2.4.2 (Integration), is sequenced over weeks 3 and 4. The activity duration is four weeks. When the activity is placed in the schedule, the costs are distributed starting with the schedule start—$20,000, $15,000, $75,000, and $70,000, respectively. These time-phased budgets for work packages are lifted from your WBS and are placed in your project schedule as they are expected to occur over the life of the proj- ect. The outcome of these budget allocations is the project cost baseline (also called planned value—PV), which is used to determine cost and schedule variances as the project is implemented. Figure 8.15 shows the Patient Entry Project network schedule, which is used to place the time-phased work packages’ budgets in the baseline. Figure 8.16 presents the project time-phased budget for the Patient Entry Project and the cumulative graph of the project budget baseline. In this figure you can see how the time-phased work pack- age costs were placed into the network and how the cumulative project budget graph for a project is developed. Notice that costs do not have to be distributed linearly, but the costs should be placed as you expect them to occur. You have now developed complete time and cost plans for your project. These project baselines will be used to compare planned schedule and costs using an integrative system called earned value. The application and use of project baselines to measure performance are discussed in detail in Chapter 13. With your project budget baseline established, you are also able to generate cash flow statements for your project like the one presented in Figure 8.17. Such statements prepare the firm to cover costs over the lifespan of the proj- ect. Finally, with resource assignments finalized you are able to generate resource usage schedules for your project (see Figure 8.18). These schedules map out the full deployment of personnel and equipment and can be used to generate individual work schedules.

Work Package Description

Work Package ID

Deliverable

Responsible organization unit

Work Package Duration weeks

Page of

Project

Date

Estimator

Total labor cost

Software 1 1

PC Prototype

3/24/xx

LGG

$180,000

Software

4

1.1.3.2.4.1 and 1.1.3.2.4.2

Circuit board

Time-Phased Labor Budget ($000)

Work Periods–WeeksWork Package

Code 1.1.3.2.4.1

Integration 1.1.3.2.4.2

Labor rate

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$2,500/ week

$20

$20

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$15

$15

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$75

$70

$70

$130

$180

$50

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Program’rs

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Total

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FIGURE 8.14 Two Time-Phased Work Packages (labor cost only)

Chapter 8 Scheduling Resources and Costs 277

ID

Legend

DUR

Activity description

ES

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5

7

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7

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8 11

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11

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278 Chapter 8 Scheduling Resources and Costs

CEBOO Project Hardware

Hardware specifications

Hardware design

Prototypes

Order GXs

Assemble preproduction models

Operating system

Kernel specifications

Drivers

OC drivers

Serial VO drivers

Memory management

Operating system documentation

Network interface

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Utilities specifications

Routine utilities

Complex utilities

Utilities documentation

Shell

System integration

Architectural decisions

Integration first phase

System H/S test

Project documentation

Integration acceptance test

Total

Hardware documentation

January February March

$11,480.00 $24,840.00

$5,320.00

$20,400.00

$9,880.00

$10,240.00 $21,760.00

$3,360.00

$8,400.00

$5,760.00 $21,120.00

$7,680.00 $17,920.00

$20,160.00 $10,560.00

$12,320.00 $11,760.00 $12,880.00

$3,360.00

$23,120.00 $29,920.00 $14,960.00

$14,080.00 $24,320.00

April May June July

$37,200.00 $44,960.00 $48,240.00 $55,120.00 $80,400.00 $56,240.00 $23,440.00

FIGURE 8.17 CEBOO Project Monthly Cash Flow Statement

FIGURE 8.18 CEBOO Project Weekly Resource Usage Schedule

I. Suzuki Hardware specifications Hardware design Hardware documentation Operating system documentation Utilities documentation Architectural decisions J. Lopez Hardware specifications Hardware design Prototypes Kernel specifications Utilities specifications Architectural decisions Integration first phase J.J. Putz Hardware documentation Kernel specifications Operating system documentation Utilities documentation Project documentation R. Sexon Hardware specifications Prototypes Assemble preproduction models OC drivers Complex utilities Integration first phase System H/S test Integration acceptance test

12/30 1/6 1/13 1/20 1/27 2/03 24 hrs 40 hrs 40 hrs 40 hrs

24 hrs

24 hrs 40 hrs 40 hrs 16 hrs

40 hrs 40 hrs

40 hrs 40 hrs

24 hrs 40 hrs 40 hrs 40 hrs 12 hrs

24 hrs 40 hrs 40 hrs 16 hrs

40 hrs 20 hrs

40 hrs 20 hrs

24 hrs

24 hrs

40 hrs

40 hrs

40 hrs

40 hrs

24 hrs 24 hrs

40 hrs 40 hrs

40 hrs 40 hrs

12 hrs 20 hrs 20 hrs

Chapter 8 Scheduling Resources and Costs 279

Summary Usage and availability of resources are major problem areas for project managers. Attention to these areas in developing a project schedule can point out resource bottle- necks before the project begins. Project managers should understand the ramifications of failing to schedule resources. The results of resource scheduling are frequently significantly different from the results of the standard CPM method. With the rapid changes in technology and emphasis on time-to-market, catching resource usage and availability problems before the project starts can save the costs of crashing project activities later. Any resource deviations from plan and schedule that occur when the project is being implemented can be quickly recorded and the effect noted. Without this immediate update capability, the real negative effect of a change may not be known until it happens. Tying resource availability to a multiproject, multiresource system supports a project priority process that selects projects by their contribution to the organization’s objectives and strategic plan. Assignment of individuals to projects may not fit well with those assigned by com- puter software routines. In these cases overriding the computer solution to accommo- date individual differences and skills is almost always the best choice. The project resource schedule is important because it serves as your time base- line, which is used for measuring time differences between plan and actual. The resource schedule serves as the basis for developing your time-phased project cost budget baseline. The baseline (planned value, PV) is the sum of the cost accounts, and each cost account is the sum of the work packages in the cost account. Remem- ber, if your budgeted costs are not time-phased, you really have no reliable way to measure performance. Although there are several types of project costs, the cost baseline is usually limited to direct costs (such as labor, materials, equipment) that are under the control of the project manager; other indirect costs can be added to project costs separately.

Key Terms Heuristics, 258 Leveling, 256 Planned value (PV), 276

Resource-constrained project, 255 Resource smoothing, 252 Splitting, 269

Time-constrained project, 255 Time-phased budget baseline, 273

1. How does resource scheduling tie to project priority? 2. How does resource scheduling reduce flexibility in managing projects? 3. Present six reasons scheduling resources is an important task. 4. How can outsourcing project work alleviate the three most common problems asso-

ciated with multiproject resource scheduling? 5. Explain the risks associated with leveling resources, compressing or crashing proj-

ects, and imposed durations or “catch-up” as the project is being implemented. 6. Why is it critical to develop a time-phased baseline?

Review Questions

280 Chapter 8 Scheduling Resources and Costs

Exercises 1. Given the network plan that follows, compute the early, late, and slack times. What is the project duration? Using any approach you wish (e.g., trial and error), develop a loading chart for resources, Electrical Engineers (EE), and resource, Mechanical Engineers (ME). Assume only one of each resource exists. Given your resource schedule, compute the early, late, and slack times for your project. Which activities are now critical? What is the project duration now? Could something like this hap- pen in real projects?

2

4

10

0

2

3

3

EE

ME

10

Develop a loading schedule for each resource below. (Figure 8.3)

2 3 4 5 6 7 8

Pl an

9 10 11 12

4

1

6

2

5

6

7

4

1-EE

ID/RES

2-EE

3-ME

4-EE

5-ME

6-ME

7-EE

Fill in the times below for a resource activity schedule. LSES EF LF SL

ID

DURLS

SL

LF

ES EF

Legend

SL

Resource

Sc he

du le

Start End

EE EE ME

ME

EEME

EE

0

2. Given the network plan that follows, compute the early, late, and slack times. What is the project duration? Using any approach you wish (e.g., trial and error), develop a loading chart for resources Carpenters (C) and Electricians (E). Assume only one

Chapter 8 Scheduling Resources and Costs 281

Carpenter is available and two Electricians are available. Given  your resource schedule, compute the early, late, and slack times for your project. Which activities are now critical? What is the project duration now?

Carpenter

Electrician

10

Develop a loading schedule for each resource below.

2 3 4 5 6 7 8

Pl an

9 10 11 1412 13

2

4

3

1

4

3

5

5

10

3

6

2

1-C

2-C

3-C

4-E

5-2-E

6-C

Fill in the times below for a resource activity schedule. LSESID/RES EF LF SL

ID

DURLS

SL

LF

ES EF

Legend

SL

Resource

Sc he

du le

C

C E

C

2-EC

3. Compute the early, late, and slack times for the activities in the network that follows, assuming a time-constrained network. Which activities are critical? What is the time-constrained project duration?

Note: Recall, in the schedule resource load chart the time-constrained scheduling interval (ES through LF) has been shaded. Any resource scheduled beyond the shaded area will delay the project.

Assume you have only three resources and you are using a computer that uses software that schedules projects by the parallel method and following heuristics. Schedule only one period at a time!

Minimum slack Smallest duration Lowest identification number

282 Chapter 8 Scheduling Resources and Costs

Keep a log of each activity change and update you make each period—e.g., period 0–1, 1–2, 2–3, etc. (Use a format similar to the one on page 259.) The log should include any changes or updates in ES and slack times each period, activities scheduled, and activities delayed. (Hint: Remember to maintain the technical dependencies of the network.) Use the resource load chart to assist you in schedul- ing (see Figures 8.4 and 8.5).

List the order in which you scheduled the activities of the project. Which activi- ties of your schedule are now critical?

Recompute your slack for each activity given your new schedule. What is the slack for activity 1? 4? 5?

2

4

0

1

3

0

3

5

0

4

6

5

4

6

3

DUR ES LF SL

Scheduled resource load chart with ES and slack updates

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15RES

3 0 4 1

4 0 4 0

5 0 6 1

6 4 10 0

4 5 10 1

3 10 13 0

ID

1

2

3

4

5

6

Resources scheduled

3Resources available 3 3 3 3 3 3 3 3 3 3 3 3 3 3

ID

DURLS

SL

LF

ES EF

Legend

SL

Resource

2

1

2

2

1

1

2

1

1

1

2

2

Chapter 8 Scheduling Resources and Costs 283

4. *You have prepared the following schedule for a project in which the key resource is a tractor(s). There are three tractors available to the project. Activities A and D require one tractor to complete while activities B, C, E, and F require 2 tractors.

Develop a resource-constrained schedule in the loading chart that follows. Use the parallel method and heuristics given. Be sure to update each period as the com- puter would do. Record the early start (ES), late finish (LF), and slack (SL) for the new schedule.

DUR ES LF SL 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15RES

4

5

4

5

3

2

ID

A

B

C

D

E

F

Resources scheduled

3Resources available 3 3 3 3 3 3 3 3 3 3 3 3 3 3

ID

DURLS

SL

LF

ES EF

Legend

SL

Resource

1

2

2

1

2

2

A

4

0 4

11

1 5

1

B

5

0 5

00

0 5

2

C

4

4 8

22

6 10

2

D

5

5 10

00

5 10

1

F

2

10 12

00

10 12

2

E

3

5 8

22

7 10

2

Use the following heuristics: Minimum slack Smallest duration Lowest identification number

*The solution to this exercise can be found in Appendix 1.

284 Chapter 8 Scheduling Resources and Costs

5. Develop a resource schedule in the loading chart that follows. Use the parallel method and heuristics given. Be sure to update each period as the computer would do. Note: activities 2, 3, 5, and 6 use two of the resource skills. Three of the resource skills are available. How has slack changed for each activity? Has the risk of being late changed? How?

4 83

00

83 5

1

3 51

33

84 4

2

53 6

2 2

5 83

2

1 1

1

1

2 3

3

6 108

2

2

8

0

10

0

List the order in which your activities are scheduled /_____ /_____ /_____ / /_____ /_____ /_____ /

2

0

00

33

0

22

32

Use the following heuristics: Minimum slack Smallest duration Lowest identification number

ID

DURLS

SL

LF

ES EF

Legend

SL

DUR ES LF SL

What is the schedule slack for 1____, 3____, and 4_____? Which activities are critical now? _____________________

0 1 2 3 4 5 6 7 8 9 10 11 12 13ID RES

1 0 31

3 0 32

4 1 83

5 3 84

35

26

Resources scheduled

3Resources available 3 3 3 3 3 3 3 3 3 3 3 3

1

2

2

1

2

2

RES

6. You have prepared the following schedule for a project in which the key resource is a backhoe(s). This schedule is contingent on having 3 backhoes. You receive a call from your partner, Brooker, who desperately needs one of your backhoes. You tell

Chapter 8 Scheduling Resources and Costs 285

Brooker you would be willing to let him have the backhoe if you are still able to complete your project in 11 months.

Develop a resource schedule in the loading chart that follows to see if it is pos- sible to complete the project in 11 months with only 2 backhoes. Be sure to record the order in which you schedule the activities using scheduling heuristics. Activities 5 and 6 require 2 backhoes, while activities 1, 2, 3, and 4 require 1 backhoe. No splitting of activities is possible. Can you say yes to Brooker’s request?

2 20

11

2 31

1 10

4 4

4 51 4 42

33

2 75 6 97

2 97

00

3 30

00

3 30

1

1

1

1

2

ID

DURLS

SL

LF

ES EF

Legend

SL

Resource

2

5 73

4 73

00

DUR ES LF SL

Schedule the resource load chart with ES and Slack updates

0 1 2 3 4 5 6 7 8 9 10 11 12 13ID RES

1 5 41

2 3 12

3 3 03

2 7 34

4 7 05

2

0

0

0

2

3

7 9 06

Resources scheduled

2Resources available 2 2 2 2 2 2 2 2 2 2 2 2

1

1

1

1

2

2

7. *You are one of three carpenters assigned to complete a short construction project. Right before the start of the project, one of your fellow carpenters was hospitalized and will not be available to work on the project.

Develop a resource-constrained schedule in the loading chart that follows to see how long the project will take with only 2 carpenters. Be sure to record the order in

*The solution to this exercise can be found in Appendix 1.

286 Chapter 8 Scheduling Resources and Costs

which you schedule the activities using the scheduling heuristics. Activities A, B, C, D, E, G, and H require 2 carpenters to complete. Activity F requires only 1 carpenter. No splitting of activities is possible.

You will receive a bonus if the project is completed within 15 days. Should you start planning how you will spend your bonus?

DUR ES LF SL 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18RES

2

1

3

1

2

3

2

2

ID

A

B

C

D

E

F

G

H

Resources scheduled

2Resources available 2 2 2 2 2 2 2 22 2 2 2 2 2 2 2 2

2

2

2

2

2

1

2

2

A

2

0 2

00

0 2

2

B

1

2 3

22

4 5

2

C

3

2 5

00

2 5

2

D

1

5 6

00

5 6

2

E

2

6 8

00

6 8

2

F

3

6 9

11

7 10

1

Use the following heuristics: Minimum slack Smallest duration Lowest identification number

G

2

8 10

00

8 10

2

H

2

10 12

00

10 12

2

ID

DURLS

SL

LF

ES EF

Legend

SL

Resource

8. Given the time-phased work packages, complete the baseline budget form for the project.

Chapter 8 Scheduling Resources and Costs 287

Activity 1

Task Budget

Activity 2

Activity 3

Activity 4

Activity 5

Total

Cumulative

4

6

10

8

3

31

4

1 3 2

2 4 2 2

2 3 3

2 1

10 2 3 4 5 6 7 8 9 10

Time-phased budget ($ 000) Week

9. Given the time-phased work packages and network, complete the baseline budget form for the project.

3

Report

Design

Task Budget

Time-Phased Budget

Week

11 4

0 1 2 3 4 5 6 7 8 9 10 11 12

5 2

21

8

40

Survey

Report

Cumulative

Total

Market Survey Project

WBS Work Package Cost by Week

Project Network

3

Design

0 33

0

0

3

Survey

3

WP Design 4 5 2

WP Survey 2 2 4 4 4 5

WP Report 3 3 2

1

6

2

3

288 Chapter 8 Scheduling Resources and Costs

10. *Given the time-phased work packages and network, complete the baseline budget form for the project.

0 1 2 3 4 5 6 7 8 9 10 11 12Bu dg

et

ID

A

B

C

D

E

F

Total

Cumulative

40

32

48

18

28

40

206

A

4

0 4

11

1 5

B

5

0 5

00

0 5

C

4

4 8

22

6 10

D

5

5 10

00

5 10

F

2

10 12

00

10 12

E

3

5 8

22

7 10

Cost by Week

A

B

C

D

E

F

10

8

12

6

8

20

10

4

12

2

8

20

10

8

12

2

12

10

4

12

2

8

6

ID

DURLS

SL

LF

ES EF

Legend

SL

*The solution to this exercise can be found in Appendix 1.

Chapter 8 Scheduling Resources and Costs 289

11. Given the time-phased work packages and network, complete the baseline budget form for the project.

Legend

4

4

5

5

Prepare marketing

3

2

2

3

Build prototype

Soccer Toy Project

6

2

Assemble & test

7

1

Launch

1

2

0

Design prototype

Order parts

Prepare production

ID

DUR

ES

LS

EF

LF

SL Description

Build prototype

Design prototype

Bu dg

et

24

30

10

64

30

36

12

206

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Order parts

Prepare prod’n

Prepare market’g Assemble

& test

Launch

Total

Cumulative

Soccer Toy Project

Design prototype

Build prototype

Order parts

Prepare production

Prepare marketing

Assemble & test

Launch

Time-phased Budget ($000)

Week

Cost by Week ($000)

1

12

2 3 4 5

12

10 1010

16 10

55

22 16

6 126 06

18 18

12

290 Chapter 8 Scheduling Resources and Costs

12. The National Oceanic Research Institute is planning a research study on global warming in Antarctica. The 16-month network schedule is presented below. It is followed by budgets for each activity. Create a time-phased budget for the research project in the form provided.

A

3

0

0

0

Preliminary plan

3

3

B

2

3

0

3

Detail plan

5

5

C

2

5

2

7

Hire staff

7

9

G

2

7

6

13

Plane transportation

Global Warming Antarctic Research Project Months…. ($000)

9

15

F

3

7

2

9

Purchase clothing

10

12

K

3

10

2

12

Ship supplies

13

15

L

1

15

0

15

Travel

16

16

E

1

7

6

13

Train

8

14

J

1

14

0

14

Test equipment

15

15

D

1

5

0

5

Select equipment

6

6

H

5

6

0

6

Get custom equipment

11

11

I

3

11

0

11

Additional equipment

14

14

Global Warming Antarctic Research Project Activity Time Phased Work Packages by Month ($000)

Task Duration Budget 0 1 2 3 4 5 6

A Preliminary plan 3 3 1 1 1

B Detail plan 2 2 1 1

C Hire staff 2 4 4

D Select equipment 1 5 5

E Train 1 3 3

F Purchase clothing 3 9 3 0 6

G Plane transportation 2 60 5 55

H Get custom equipment 5 36 5 5 10 10 6

I Additional equipment 3 20 10 5 5

J Test equipment 1 6 6

K Ship all supplies 5 15 3 3 0 0 9

L Travel 1 9 9

Total budget 172

Chapter 8 Scheduling Resources and Costs 291

Arrow, K. J., and L. Hurowicz, Studies in Resource Allocation Process (New York: Cambridge University Press, 1997). Brucker, P., A. Drexl, R. Mohring, L. Newmann, and E. Pesch, “Resource-constrained Project Scheduling: Notation, Classification, Models and Methods,” European Journal of Operational Research, vol. 112 (1999), pp. 3–42. Burgess, A. R., and J. B. Kellebrew, “Variations in Activity Level on Cyclical Arrow Diagrams,” Journal of Industrial Engineering, vol. 13 (March–April 1962), pp. 76–83. Charnes, A., and W. W. Cooper, “A Network Interpretation and Direct Sub Dual Algorithm for Critical Path Scheduling,” Journal of Industrial Engineering, July–August 1962. Davis, E. W., and J. Patterson, “A Comparison of Heuristic and Optimum Solutions in Resource-Constrained Project Scheduling,” Management Science, April 1975, pp. 944–955. Demeulemeester, E. L., and W. S. Herroelen, Project Scheduling: A Research Hand- book (Norwell, MA: Kluwer Academic Publishers, 2002). Fendly, L. G., “Towards the Development of a Complete Multi Project Scheduling System,” Journal of Industrial Engineering, vol. 19 (1968), pp. 505–15. Goldratt, E., Critical Chain (Great Barrington, MA: North River Press, 1997). Kurtulus, I., and E. W. Davis, “Multi-project Scheduling: Categorization of Heuristic Rules Performance,” Management Science, February 1982, pp. 161–72. Newbold, R. C., “Leveraging Project Resources: Tools for the Next Century,” Pro- ceedings of 28th Annual Project Management Institute, 1997 Seminars and Sympo- sium (Newtown, PA: Project Management Institute, 1997), pp. 417–21. Pascoe, T. L., “An Experimental Comparison of Heuristic Methods for Allocating Resources,” Ph.D. dissertation, University of Cambridge, United Kingdom, 1965. Reinersten, D., “Is It Always a Bad Idea to Add Resources to a Late Project?” Electric Design, October 30, 2000, pp. 17–18. Rubinstein, J., D. Meyer, and J. Evans, “Executive Control of Cognitive Processes in Task Switching,” Journal of Experimental Psychology: Human Perception and Per- formance, vol. 27, no. 4 (2001), pp. 763–97. Talbot, B. F., and J. H. Patterson, “Optimal Methods for Scheduling Under Resource Constraints,” Project Management Journal, December 1979. Wiest, J. D., “A Heuristic Model for Scheduling Large Projects with Unlimited Resources,” Management Science, vol. 18 (February 1967), pp. 359–77. Woodworth, B. M., and C. J. Willie, “A Heuristic Algorithm for Resource Leveling in Multiproject, Multiresource Scheduling,” Decision Sciences, vol. 6 (July 1975), pp. 525–40. Woodworth, B. M., and S. Shanahan, “Identifying the Critical Sequence in a Resource Constrained Project,” International Journal of Project Management, vol. 6 (1988), pp. 89–96.

References

292 Chapter 8 Scheduling Resources and Costs

Case 8.1

Blue Mountain Cabin Jack and Jill Smith have just retired and want to build a small, basic cabin in the Blue Mountains of Vermont. They have hired Daryl Hannah as the general contractor for the project. She has assembled a team of three workers to complete the project: Tom, Dick, and Harry. Daryl has negotiated a cost-plus contract with the Smiths whereby she will receive 15 percent beyond the cost of labor and materials. Before they sign the contract the Smiths want an estimate of how much the project is likely to cost and how long it will take. Darryl has estimated that the cost for materials, permits, etc., will total $40,000. She wants to determine labor costs as well as how long the project will take. This is one of sev- eral projects Daryl is managing, and other than occasionally helping out, her role is strictly limited to supervising. She has devised the following master plan and assignments. Note that Dick is the only skilled plumber in the group while Harry is the only skilled electrician. Tom is a general carpenter and can assist them with their work. Dick and Harry each get paid $300 a day while Tom gets paid $200 per day. Darryl has negotiated a 10 percent management reserve to deal with unexpected problems. Unused funds will be returned to the Smiths.

Case 8.2

Power Train, Ltd. We have smashing systems for reporting, tracking, and controlling costs on design proj- ects. Our planning of projects is better than any I have seen at other companies. Our scheduling seemed to serve us well when we were small and we had only a few projects. Now that we have many more projects and schedule using multiproject software, there are too many occasions when the right people are not assigned to the projects deemed important to our success. This situation is costing us big money, headaches, and stress! Claude Jones, VP, Design and Operations

Prepare a short proposal for the Smiths that includes a Gantt chart with resources assigned, and cost estimates if the project starts on 8/1/16. Did resource limitations affect the final schedule? If so, how? What financial risks does this project face? What can the Smiths do to protect themselves against those risks?

ID Task Predecessor Time (days) Assignment

A Prepare Site none 2 Tom, Dick, Harry B Pour Foundation A 2 Tom, Dick, Harry C Erect Frame B 4 Tom, Dick, Harry D Roof C 3 Tom, Dick, Harry E Windows/Doors D 2 Tom, Dick F Electrical D 2 Harry, Tom G Plumbing D 2 Dick, Tom H Rough-in-frame E, F,G 2 Tom, Dick, Harry I Clean up H 1 Tom, Dick, Harry

Chapter 8 Scheduling Resources and Costs 293

HISTORY Power Train, Ltd. (PT), was founded in 1970 by Daniel Gage, a skilled mechanical engineer and machinist. Prior to founding PT he worked for three years as design engi- neer for a company that designed and built transmissions for military tanks and trucks. It was a natural transition for Dan to start a company designing and building power trains for farm tractor companies. Today, Dan is no longer active in the management of PT but is still revered as its founder. He and his family still own 25 percent of the com- pany, which went public in 1998. PT has been growing at a 6 percent clip for the last five years but expects industry growth to level off as supply exceeds demand. Today, PT continues its proud tradition of designing and building the best-quality power trains for manufacturers of farm tractors and equipment. The company employs 178 design engineers and has about 1,800 production and support staff. Contract design projects for tractor manufacturers represent a major portion of PT’s revenue. At any given time, about 45 to 60 design projects are going on concurrently. A small por- tion of their design work is for military vehicles. PT only accepts military contracts that involve very advanced, new technology and are cost plus. A new phenomenon has attracted management of PT to look into a larger market. Last year a large Swedish truck manufacturer approached PT to consider designing power trains for its trucks. As the industry consolidates, the opportunities for PT should increase because these large firms are moving to more outsourcing to cut infra- structure costs and stay very flexible. Only last week a PT design engineer spoke to a German truck manufacturing manager at a conference. The German manager was already exploring outsourcing of drive trains to Porsche and was very pleased to be reminded of PT’s expertise in the area. A meeting is set up for next month.

CLAUDE JONES Claude Jones joined PT in 1999 as a new MBA from the University of Edinburgh. He worked as a mechanical engineer for U.K. Hydraulics for five years prior to returning to school for the MBA. “I just wanted to be part of the management team and where the action is.” Jones moved quickly through the ranks. Today he is the vice president of design and operations. Sitting at his desk, Jones is pondering the conflicts and confusion that seem to be increasing in scheduling people to projects. He gets a real rush at the thought of designing power trains for large trucks; however, given their current project scheduling problems, a large increase in business would only compound their problems. Somehow these conflicts in scheduling have to be resolved before any serious thought can be given to expanding into design of power transmissions for truck manufacturers. Jones is thinking of the problems PT had in the last year. The MF project is the first to come to mind. The project was not terribly complex and did not require their best design engineers. Unfortunately, the scheduling software assigned one of the most creative and expensive engineers to the MF project. A similar situation, but reversed, happened on the Deer project. This project involved a big customer and new hydro- static technology for small tractors. In this project the scheduling software assigned engineers who were not familiar with small tractor transmissions. Somehow, thinks Jones, the right people need to be scheduled to the right projects. Upon reflection, this problem with scheduling has been increasing since PT went to multiproject schedul- ing. Maybe a project office is needed to keep on top of these problems. A meeting with the information technology team and software vendors was positive but not very helpful because these people are not really into detailed scheduling prob- lems. The vendors provided all sorts of evidence suggesting the heuristics used—least

294 Chapter 8 Scheduling Resources and Costs

slack, shortest duration, and identification number—are absolutely efficient in sched- uling people and minimizing project delays. One project software vendor, Lauren, kept saying their software would allow PT to customize the scheduling of projects and people to almost any variation selected. Lauren repeated over and over, “If the standard heuristics do not meet your requirements, create your own heuristics that do.” Lauren even volunteered to assist in setting up the system. But she is not willing to spend time on the problem until PT can describe to her exactly what criteria will be used (and their sequence) to select and schedule people to projects.

WHAT NEXT? Potential expansion into the truck power train business is not feasible until the confu- sion in project scheduling is solved or reduced significantly. Jones is ready to tackle this problem, but he is not sure where to start. What criteria should he consider? What should be the sequence for selecting and assigning people to projects?

Appendix 8.1

The Critical-Chain Approach LEARNING OBJECTIVES After reading this appendix you should be able to:

A8-1 Define what is meant by the term “critical chain.”

A8-2 Identify the reasons why projects are late even when estimates are padded.

A8-3 Describe the basic critical-chain methodology.

A8-4 Describe the differences between critical-chain scheduling and the traditional approach to scheduling.

In practice, project managers carefully manage slack on sensitive resource-limited proj- ects. If possible, they will add slack at the end of the project by committing to a comple- tion date that goes beyond the scheduled date. For example, the plans say the project should be completed on April 1, although the official completion date is May 1. Other managers take a more aggressive approach to managing slack within the schedule. They use an early start schedule and prohibit use of slack on any activity or work package to be used unless authorized by the project manager. Progress by percent complete and by remaining time are carefully monitored. Activities that are beating estimated comple- tion times are reported so that succeeding activities can start ahead of schedule. This ensures that the time gained is used to start a succeeding activity earlier and time is not wasted. The overall intent is to create and save slack as a time buffer to complete the project early or to cover delay problems that may creep up on critical activities or paths. Eliyahu Goldratt, who championed the “theory of constraints” in his popular book The Goal, advocates an alternative approach to managing slack.1 He has coined the term “critical chain” to recognize that the project network may be constrained by both resource and technical dependencies. Each type of constraint can create task dependencies, and in the case of resource constraints, new task dependencies can be Define what is meant by

the term “critical chain.”

A8-1LO

1 E. Goldratt, The Goal (Great Barrington, MA: North River Press, 1997).

Chapter 8 Scheduling Resources and Costs 295

created! Remember how resource constraints shifted the critical path? If not, visit Figure 8.5 again. The critical chain refers to the longest string of dependencies that exist on the project. Chain is used instead of path, since the latter tends to be associ- ated with just technical dependencies not resource dependencies. Goldratt uses the critical chain concept to develop strategies for accelerating the completion of proj- ects. These strategies are based on his observations about time estimates of individ- ual activities.

TIME ESTIMATES Goldratt argues that there is a natural tendency for people to add safety (just-in-case) time to their estimations. It is believed that those who estimate activity times provide an estimate that has about an 80 to 90 percent chance of being completed on or before the estimated time. Hence, the median time (50/50 chance) is overestimated by approximately 30 to 40 percent. For example, a programmer may estimate that there is a 50/50 chance that he can complete an activity in six days. However, to ensure success and to protect against potential problems, he adds three days of safety time and reports that it will take nine days to complete the task. In this case the median (50/50) time is overestimated by approximately 50 percent. He now has a 50/50 chance of completing the project three days ahead of the schedule. If this hid- den contingency is pervasive across a project, then most activities in theory should be completed ahead of schedule. Not only do workers add safety, but project managers like to add safety to ensure that they will be able to bring the project in ahead of schedule. They will add a month to a nine-month project to cover any delays or risks that might spring up. This situation raises an interesting paradox:

Why, if there is a tendency to overestimate activity durations, and add safety to the end of a project, do so many projects come in behind schedule?

Critical-Chain Project Management (CCPM) offers several explanations: ∙ Parkinson’s law: Work fills the time available. Why hustle to complete a task today

when it isn’t due until tomorrow? Not only will the pace of work be dictated by deadline, but workers will take advantage of perceived free time to catch up on other things. This is especially true in matrix environments where workers will use this time to clear work backlog on other projects and duties.

∙ Self-protection: Participants fail to report early finishes out of fear that management will adjust their future standards and demand more next time. For example, if a team member estimates that a task will take seven days and delivers it in five, the next time he is asked for an estimate, the project manager may want to trim the estimate based on past performance. Peer pressure may also be a factor here: to avoid being labeled a “rate buster,” members may not report early finishes.

∙ Dropped baton: Goldratt uses the metaphor of project as relay race to illustrate the impact of poor coordination. Just as a runner’s time is lost if the next runner is not ready to receive the baton, so is the time gained from completing a task early lost if the next group of people are not ready to receive the project work. Poor communication and inflexible resource schedules prevent progress from occurring.

∙ Excessive multitasking: The norm in most organizations is to have project person- nel work on several projects, activities, or assignments at the same time. This leads to costly interruptions and excessive task splitting. As pointed out in our discussion

Identify the reasons why projects are late even when estimates are padded.

A8-2LO

296 Chapter 8 Scheduling Resources and Costs

of splitting tasks, this adds time to each activity. When looked at in isolation the time loss may seem minimal, but when taken as a whole the transition costs can be staggering.

∙ Resource bottlenecks: In multiproject organizations projects are frequently delayed because test equipment or other necessary resources are tied up on other project work.

∙ Student syndrome (procrastination): Goldratt asserts that just as students delay writing a term paper until the last minute, workers delay starting tasks when they perceive that they have more than enough time to complete the task. The problem with delaying the start of a task is that obstacles are often not detected until the task is under way. By postponing the start of the task, the opportunity to cope with these obstacles and complete the task on time is compromised.

Critical-Chain in Action CCPM’s solution to reducing project time overruns is to insist on people using the “true 50/50” activity time estimates (rather than estimates which have an 80 to 90 percent chance of being completed before the estimated time); the 50/50 estimates result in a project duration about one-half the low risk of 80 to 90 percent estimates. This requires a corporate culture which values accurate estimates and refrains from blaming people for not meeting deadlines. According to CCPM, using 50/50 esti- mates will discourage Parkinson’s law, the student syndrome, and self-protection from coming into play because there is less “free time” available. Productivity will be increased as individuals try to meet tighter deadlines. Similarly, the compressed time schedule reduces the likelihood of the dropped baton effect. CCPM recommends inserting time buffers into the schedule to act as “shock absorb- ers” to protect the project completion date against task durations taking longer than the 50/50 estimate. The rationale is that by using 50/50 estimates you are in essence taking out all of the “safety” in individual tasks. CCPM also recommends using portions of this collective safety strategically by inserting time buffers where potential problems are likely to occur. There are three kinds of buffers in CCPM: ∙ Project buffer: First, since all activities along the critical chain have inherent uncer-

tainty that is difficult to predict, project duration is uncertain. Therefore, a project time buffer is added to the expected project duration. CCPM recommends using roughly 50 percent of the aggregate safety. For example, if the modified schedule reduces the project duration by 20 days from 50 to 30, then a 10-day project buffer would be used.

∙ Feeder buffers: Buffers are added to the network where noncritical paths merge with the critical chain. These buffers protect the critical chain from being delayed.

∙ Resource buffers: Time buffers are inserted where scarce resources are needed for an activity. Resource time buffers come in at least two forms. One form is a time buffer attached to a critical resource to ensure that the resource is on call and avail- able when needed. This preserves the relay race. The second form of time buffer is added to activities preceding the work of a scarce resource. This kind of buffer protects against resource bottlenecks by increasing the likelihood that the preceding activity will be completed when the resource is available.

All buffers reduce the risk of the project duration being late and increase the chance of early project completion.2 See Snapshot from Practice A8.1: Critical Chain Applied to Airplane Part Arrivals.

Describe the basic critical-chain methodology.

A8-3LO

2 For more information on buffers, see: L. P. Leach, “Critical Chain Project Management Improves Project Performance,” Project Management Journal, vol. 30, no. 2 (1999), pp. 39–51.

Chapter 8 Scheduling Resources and Costs 297

Critical-Chain versus Traditional Scheduling Approach To illustrate how CCPM affects scheduling let’s compare it with the traditional approach to project scheduling. We will first resolve resource problems in the way described in Chapter 8 and then using the CCPM method. Figure A8.1A shows the planned Air Con- trol project network without any concern for resources. That is, activities are assumed to be independent and resources will be made available and/or are interchangeable. Figure A8.1B depicts the bar chart for the project. The dark blue bars represent the durations of critical activities; the light blue bars represent the durations of noncritical activities; the gray bars represent slack. Note that the duration is 45 days and the criti- cal path is represented by activities 1, 4, 6, 7, and 8. Parallel activities hold potential for resource conflicts. This is the case in this project. Ryan is the resource for activities 3 and 6. If you insert Ryan in the bar chart in Figure A8.1B for activities 3 and 6, you can see activity 3 overlaps activity 6 by five days—an impossible situation. Because Ryan cannot work two activities simultaneously and no other person can take his place, a resource dependency exists. The result is that two activities (3 and 6) that were assumed to be independent now become dependent. Some- thing has to give! Figure A8.2A shows the Air Control project network with the resources included. A pseudo-dashed arrow has been added to the network to indicate the resource dependency. The bar chart in Figure A8.2B reflects the revised schedule resolving the overallocation of Ryan. Given the new schedule, slack for some activities has changed. More importantly, the critical path has changed. It is now 1, 3, 6, 7, 8. The resource schedule shows the new project duration to be 50 days rather than 45 days.

Describe the differences between critical-chain scheduling and the traditional approach to scheduling.

A8-4LO

In the past Spirit Aero Systems, manu- facturer of airplane parts, were forced to delay product development projects as a result of missing parts for assem- blies. Spirit management cycled

through several approaches, such as lean, value chain, cycle time reduction, knowledge based engineering, to reduce the problem. Although each yielded minor improvements, the impacts were not substantial. Rework, overtime, delay costs, and vendor expediting costs continued to have significant impact on costs, meeting commitments, and reputation. Spirit turned to critical-chain management methodology in a pilot project. Joseph Zenisek, the critical-chain manager, said the choice of critical chain was “a game changer for us.” Spirit applied the critical-chain approach to assem- bly of newly designed pylons (brackets) used for failure destruction testing of casings for a jet engine project. Zenisek credited success to three key factors:

all parts and staff are available.

– lantly monitoring assembly parts that use a large num- ber of parts or where rate or number used is high.

vendors and buffers to ensure that delivery of over 300 parts arrived on time.

The critical chain program led to impressive results. The parts and staffing rule cut down on late deliveries and rework on partially completed work packages caused by missing parts. The result was a reduction of 50 percent in overtime. Reducing delays reduced assembly cycle time by 18 percent. Work in process and work packages were also reduced since availability of buffer parts avoided delays. The critical-chain method led to better resource management and reduced stress. Given the success of the critical-chain program, Spirit intends to expand the application of the critical- chain method to new product development projects for their clients.

*Peter Fretty, “E Is in the Air,” PM Network, vol. 26, no. 2 (February 2012), pp. 50–56.

S N A P S H O T F R O M P R A C T I C E A 8 . 1 Critical Chain Applied to Airplane Part Arrivals*

298 Chapter 8 Scheduling Resources and Costs

Now let’s apply the CCPM approach to the Air Control project. Figure A8.3 details many of the changes. First, notice that task estimates now represent approximations of the 50/50 rule. Second, observe that not all of the activities on the critical chain are technically linked. Manufacture custom parts is included because of previously defined resource dependency. Third, a project time buffer is added at the end of schedule. Finally, feeder buffers are inserted at each point where a noncritical activity merges with the critical chain. The impact the CCPM approach has on the project schedule can best be seen in the Gantt chart presented in Figure A8.4. Notice first the late start times for each of the three noncritical activities. For example, under the critical path method, order vendor parts and software development would be scheduled to begin immediately after the order review. Instead they are scheduled later in the project. Three-day feeder buffers have been added to each of these activities to absorb any delays that might occur in these activities. Finally, instead of taking 50 days the project is now estimated to take only 27 days with a 10-day project buffer!

0

1 Order review 2

2 Order vendor parts 15

3 Produce std. parts 18

4 Design cust. parts 13

5 Software developm’t 18

6 Mfgr. cust. parts 15

7 Assemble 10

8 Test 5

5 10 15 20 25 30 35 40 45 50

Critical SlackNoncritical

FIGURE A8.1B Air Control Project: Time Plan without Resources

Manufacture custom parts Early start: 15 Early finish: 30

ID: 6 Dur: 15 days

Produce std. parts Early start: 2 Early finish: 20

ID: 3 Dur: 18 days

Order vendor parts Early start: 2 Early finish: 17

ID: 2 Dur: 15 days

Assemble Early start: 30 Early finish: 40

ID: 7 Dur: 10 days

Design custom parts Early start: 2 Early finish: 15

ID: 4 Dur: 13 days

Software development Early start: 2 Early finish: 20

ID: 5 Dur: 18 days

Order review Early start: 0 Early finish: 2

ID: 1 Dur: 2 days

Test Early start: 40 Early finish: 45

ID: 8 Dur: 5 days

Project duration 45 days

FIGURE A8.1A Air Control Project: Time Plan without Resources

Chapter 8 Scheduling Resources and Costs 299

Manufacture custom parts Early start: 20 Early finish: 35 Res: Ryan

ID: 6 Dur: 15 days

Produce std. parts Early start: 2 Early finish: 20 Res: Ryan

ID: 3 Dur: 18 days

Order vendor parts Early start: 2 Early finish: 17 Res: Carly

ID: 2 Dur: 15 days

Assemble Early start: 35 Early finish: 45 Res: Dawn

ID: 7 Dur: 10 days

Design custom parts Early start: 2 Early finish: 15 Res: Lauren

ID: 4 Dur: 13 days

Software development Early start: 2 Early finish: 20 Res: Connor

ID: 5 Dur: 18 days

Order review Early start: 0 Early finish: 2 Res: Ryan

ID: 1 Dur: 2 days Test

Early start: 45 Early finish: 50 Res: Kevin

ID: 8 Dur: 5 days

Project duration 50 days

FIGURE A8.2A Air Control Project: Schedule with Resources Limited

0

1 Order review 2

2 Order vendor parts 15

3 Produce std. parts 18

4 Design cust. parts 13

5 Software developm’t 18

6 Mfgr. cust. parts 15

7 Assemble 10

8 Test 5

5 10 15 20 25 30 35 40 45 50

Critical Slack

Ryan

Carly

Ryan

Ryan

Dawn

Kevin

Lauren

Connor

Noncritical

FIGURE A8.2B Air Control Project: Schedule with Resources Limited

Test Project buffer

Critical chain

3 Order review

1

FB

FB

Order vendor parts

8

Produce std. parts

8

Design cust. parts

7

FB

FBFeederbufferSoftwaredev.

10

Task

DUR

Mfgr. cust. parts

8

Assemble

6

FIGURE A8.3 Air Control Project: CCPM Network

300 Chapter 8 Scheduling Resources and Costs

Activity

1. Order review

2. Order vendor parts

3. Produce std. parts

4. Design cust. parts

5. Software dev.

6. Mfgr. cust. parts

7. Assemble

8. Test

DUR

1

8

8

7

10

8

6

3

LS

0

7

1

1

11

11

18

24

LF

1

15

9

8

21

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24

27

Buffer

0

3

0

3

3

0

0

12

0 5 10 15 20 25 30 35 40

Activity Buffer

FIGURE A8.4 Air Control Project Gantt Chart: CCPM Network

This example provides an opportunity for explaining the differences between buffers and slack. Slack is spare time inherent in the schedule of noncritical activi- ties and can be determined by differences between the early start and late start of a specific activity. Buffers, on the other hand, are dedicated time blocks reserved to cover most likely contingencies and are monitored closely so, if they are not needed, subsequent activities can proceed on schedule. Buffers are needed in part because the estimates are based on 50/50 approximations, and therefore roughly half of the activities will take longer than planned. To protect against these extended activity durations, buffers are inserted to minimize the impact on the schedule. Buffers are not part of the project schedule and are used only when sound manage- ment dictates it. While not depicted in the figures, an example of a resource buffer would be to add six days to Ryan’s schedule (remember he is the critical resource that caused the sched- ule to be extended). This would ensure that he could continue to work on the project beyond the 18th day in case either produce standard parts and/or manufacture custom parts takes longer than planned. Progress on these two tasks would be monitored closely, and his schedule would be adjusted accordingly.

CCPM and Splitting Tasks Buffers do not address the insidious effects of pervasive task splitting, especially in a multiproject environment where workers are juggling different project assign- ments. CCPM has three recommendations that will help to reduce the impact of splitting activities: 1. Reduce the number of projects so people are not assigned to as many projects

concurrently. 2. Control start dates of projects to accommodate resource shortages. Don’t start proj-

ects until sufficient resources are available to work full time on the project. 3. Contract (lock in) for resources before the project begins.

Monitoring Project Performance The CCPM method uses buffers to monitor project time performance. Remember that as shown in Figure A8.3 a project buffer is used to insulate the project against

Chapter 8 Scheduling Resources and Costs 301

FIGURE A8.5 Project Control— Buffer Management

OK

100% Full buffer time left

0% No buffer

time left

Region III Region II Region I

Act Watch

& Plan

delays along the critical chain. For monitoring purposes, this buffer is typically divided into three zones—OK, Watch and Plan, and Act, respectively (see Figure A8.5). As the buffer begins to decrease and moves into the second zone, alarms are set off to seek corrective action. To be truly effective, buffer management requires comparing buffer usage with actual progress on the project. For example, if the proj- ect is 75 percent complete and you have only used 50 percent of the project buffer, then the project is in pretty good shape. Conversely, if the project is only 25 percent complete and 50 percent of the buffer has already been used, you are in trouble and corrective action is needed. A method for estimating percentage complete is described in Chapter 13. The CCPM Method Today CCPM has generated considerable debate within the project management community. While sound in theory, support at this time is limited but growing. For example, Harris Semiconductor was able to build a new automated wafer fabrication facility within 13 months using CCPM methods when the industry standard for such a facility is 26–36 months. The Israeli aircraft industry has used CCPM techniques to reduce aver- age maintenance work on aircraft from two months to two weeks. The U.S. Air Force and Navy as well as Boeing, Lucent Technologies, Intel, GM, and 3M are applying critical-chain principles to their multiproject environments.3 CCPM is not without critics. First, CCPM does not address the biggest cause of project delays, which is an ill-defined and unstable project scope. Second, some critics challenge Goldratt’s assumptions about human behavior. They question the tendency of experts to pad estimates and that employees act deliberately against the organization for their own interest and benefit (c.f., Button, 2011; Pinto, 1999). Critics also object to the insinuation that trained professionals would exhibit the student syndrome habits (Zalmanson, 2001). Third, evidence of success is almost exclusively anecdotal and based on single case studies or on computer modeling. The lack of systematic evidence raises questions about generalizability of application. CCPM may prove to work best for only certain kinds of projects (Raz, Barnes, & Dvir, 2003). One of the keys to implementing CCPM is the culture of the organization. If the organization honors noble efforts that fail to meet estimates as it does efforts that do meet estimates, then greater acceptance will occur. Conversely, if management treats honest failure differently from success, then resistance will be high. Organizations adopting the CCPM approach have to invest significant energy to obtaining “buy-in” on the part of all participants to its core principles and allaying the fears that this system may generate.

3 Cited in materials developed by the Eliyahu Goldratt Institute (New Haven, CT) for a workshop attended by one of the authors entitled, “Project Management the TOC Way,” 1998.

302 Chapter 8 Scheduling Resources and Costs

Appendix Summary Regardless of where one stands in the debate, the CCPM approach deserves credit for bringing resource dependency to the forefront, highlighting the modern ills of multi- tasking, and forcing us to rethink conventional methods of project scheduling. Appendix Review Questions 1. Explain how time is wasted in management of projects. 2. Distinguish between project and feeder buffers. 3. Buffers are not the same as slack. Explain.

Appendix Exercises 1. Check out the Goldratt Institute’s homepage at http://www.goldratt.com for current

information on the application of critical-chain techniques to project management. 2. Apply critical-chain scheduling principles to the Print Software, Inc., project

(Exercise 10) presented in Chapter 6. Revise the estimated time durations by 50 percent except round up the odd time durations (i.e., 3 becomes 4). Draw a CCPM network diagram similar to the one contained in Figure A8.3 for the Print Soft- ware project as well as a Gantt chart similar to Figure A8.4. How would these diagrams differ from the ones generated using the traditional scheduling technique?

Appendix References Budd, C. S., and M. J. Cooper, “Improving On-time Service Delivery: The Case of

Project as Product,” Human Systems Management, vol. 24, no. 1 (2005), pp. 67–81. Button, S., “A Critical Look at Critical Chain”, EM 540 research Paper, March 2011. Goldratt, E., Critical Chain (Great Barrington, MA: North River Press, 1997). Herroelen, W., R. Leus, and E. Demeulemeester, “Critical Chain Project Scheduling:

Do Not Oversimplify,” Project Management Journal,  vol. 33, no. 4 (2002), pp. 48–60.

Leach, L. P., “Critical Chain Project Management,” Proceedings of 29th Annual Proj- ect Management Institute, 1998, Seminars and Symposium (Newtown, PA: Project Management Institute, 1998), pp. 1239–44.

Levine, H. A., “Shared Contingency: Exploring the Critical Chain,” PM Network, October 1999, pp. 35–38.

Newbold, R. C., Project Management in the Fast Lane: Applying the Theory of Con- straints (Boca Raton, FL: St. Lucie Press, 1998).

Noreen, E., D. Smith, and J. Mackey, The Theory of Constraints and Its Implication for Management Accounting (Great Barrington, MA: North River Press, 1995).

Pinto, J., “Some Constraints on the Theory of Constraints: Taking a Critical Look at Critical Chain,” PM Network, vol. 13, no. 8 (1999), pp. 49–51.

Raz, T., R. Barnes, and D. Dvir, “A Critical Look at Critical Chain Project Manage- ment,” Project Management Journal, December 2003, pp. 24–32.

Sood, S., “Taming Uncertainty: Critical-Chain Buffer Management Helps Minimize Risk in the Project Equation,” PM Network, March 2003, pp. 57–59.

Steyn, H., “An Investigation into the Fundamentals of Critical Chain Scheduling,” International Journal of Project Management, vol. 19 (2000), pp. 363–69.

Zalmanson, E., “Readers Feedback,” PM Network, vol. 15, no. 1 (2001), p. 4.

Chapter 8 Scheduling Resources and Costs 303

Case A8.1

The CCPM Dilemma Pinyarat worked in the IT department of a diversified IT firm. She was describing the firm’s early encounters with critical-chain scheduling to a friend in another IT firm. Three years ago management decided to add 10 percent time to all activity estimates because almost all projects were coming in late. One thought was people were simply working too hard and needed some relief. This approach did not work! Projects still came in late. Next, management decided to take away the extra time for activities and add 10 percent for project estimates to ensure project durations would be met. Again, nothing improved and projects continued to come in late. Recently, the firm hired a consultant who promoted critical-chain scheduling, which was implemented for all projects in her division. Almost all failed to perform. Pinyarat explained, “The estimates were basically impossible. The activity dura- tions got squeezed down to less than the 50 percent guideline. We were late on nearly every task. In addition, I was not allowed to put in a big enough project buffer, which only added to projects being late. One colleague who was working on six projects gave up and quit; he said he was killing himself and saw no hope of things getting better. My projects are not the only ones having big problems. Some people had no idea why anyone would use CCPM scheduling. To quote one of my best programmers: ‘They ask for an estimate and then they cut it 50 percent or more.’ What kind of game is this? Apparently they don’t trust us.” A week later, to Pinyarat’s surprise, she was called to the IT manager’s office. Pinyarat imagined numerous bad scenarios of how the meeting would go—even to the remote possibility of being fired! The manager wanted the division to straighten out their project management practices and stop this business of nearly all IT projects being late. There were rumors of cleaning house or outsourcing IT work. The manager believed Pinyarat, who passed the PMP exam, had the best chance of turning things around. He said, “Pinyarat, I’m nearing the desperate level; top manage- ment is reaching the end of the rope with our division. We need to turn this around for both our sakes. Give me a plan that I can sponsor within the week.” Pinyarat explained to her friend a few of her ideas—like squeezing estimates too far. But she said she would take any ideas she could get from anyone. Give Pinyarat a report that identifies the key problems and a plan of action she can present to her sponsor. Limit your report to 800 words or less.

Reducing Project Duration9 LEARNING OBJECTIVES After reading this chapter you should be able to:

9-1 Understand the different reasons for crashing a project.

9-2 Identify the different options for crashing an activ- ity when resources are not constrained.

9-3 Identify the different options for crashing an activ- ity when resources are constrained.

9-4 Determine the optimum cost-time point in a proj- ect network.

9-5 Understand the risks associated with compressing or crashing a project.

9-6 Identify different options for reducing the costs of a project.

OUTLINE 9.1 Rationale for Reducing Project Duration

9.2 Options for Accelerating Project Completion

9.3 Project Cost–Duration Graph

9.4 Constructing a Project Cost–Duration Graph

9.5 Practical Considerations

9.6 What If Cost, Not Time, Is the Issue?

Summary

C H A P T E R N I N E

304

In skating over thin ice our safety is in our speed. —Ralph Waldo Emerson

Imagine the following scenarios: — After finalizing your project schedule, you realize the estimated completion date

is two months beyond what your boss publicly promised an important customer. — Five months into the project, you realize that you are already three weeks

behind the drop-dead date for the project. — Four months into a project top management changes its priorities and now tells

you that money is not an issue. Complete the project ASAP!

What do you do? This chapter addresses strategies for reducing project duration either prior to setting the baseline for the project or in the midst of project execution. Choice of options is based on the constraints surrounding the project. Here the project priority matrix introduced in Chapter 4 comes into play. For example, there are many more options available for reduc- ing project time if you are not resource constrained than if you cannot spend more than

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

305

306 Chapter 9 Reducing Project Duration

your original budget. We will begin first by examining the reasons for reducing project duration followed by a discussion of different options for accelerating project completion. The chapter will conclude with the classic time-cost framework for selecting which activi- ties to “crash.” Crash is a term that has emerged in the Project Management lexicon for shortening the duration of an activity or project beyond when it can be normally done.

9.1 Rationale for Reducing Project Duration There are many good reasons for attempting to reduce the duration of a project. One of the more important reasons today is time to market. Intense global competition and rapid technological advances have made speed a competitive advantage. To succeed, companies have to spot new opportunities, launch project teams, and bring new prod- ucts or services to the marketplace in a flash. Perhaps in no industry does speed matter as much as in the electronics industry. For example, a rule of thumb for moderate- to high-technology firms is that a six-month delay in bringing a product to market can result in a loss of market share of about 35 percent. In these cases, high-technology firms typically assume that the time savings and avoidance of lost profits are worth any additional costs to reduce time without any formal analysis. See the Snapshot from Practice 9.1: Smartphone Wars for more on this.

Understand the different reasons for crashing a project.

9-1LO

Speed has been critical in business ever since the California Gold Rush. The smartphone industry is a good example of an intensely competitive business that places a premium on

speed and innovation. Analysts forecast over 14 differ- ent new smartphones on the market in 2016 including Acer Predator 6, Samsung Galaxy 7, and Iphone 7. In order to survive, RIM, Samsung, Apple, and other smartphone manufacturers have become masters at project management. They have been able to cut the market release time of new phones from 12–18 months to 6–9 months. What is at stake is over $1 billion in forecasted sales of new smartphones.

© Rex Features/AP Images

S N A P S H O T F R O M P R A C T I C E 9 . 1 Smartphone Wars*

* Hall, C., and B. O’Boyle, “Best Smartphones to Look Forward to in 2016,” pocket-lint.com, accessed January 11, 2015.

Chapter 9 Reducing Project Duration 307

Business survival depends not only on rapid innovation but also on adaptability. Global recession and energy crises have stunned the business world, and those compa- nies that survive will be those that can quickly adapt to new challenges. This requires speedy project management! For example, the fate of the U.S. auto industry depends in part on how quickly they shift their efforts to develop fuel-efficient, alternative forms of transportation. Another common reason for reducing project time occurs when unforeseen delays— for example, adverse weather, design flaws, and equipment breakdown—cause sub- stantial delays midway in the project. Getting back on schedule usually requires compressing the time on some of the remaining critical activities. The additional costs of getting back on schedule need to be compared with the consequences of being late. This is especially true when time is a top priority. Incentive contracts can make reduction of project time rewarding—usually for both the project contractor and owner. For example, a contractor finished a bridge across a lake 18 months early and received more than $6 million for the early completion. The availability of the bridge to the surrounding community 18 months early to reduce traffic gridlock made the incentive cost to the community seem small to users. In another example, in a continuous improvement arrangement, the joint effort of the owner and contractor resulted in early completion of a river lock and a 50/50 split of the savings to the owner and contractor. See Snapshot from Practice 9.2: Northridge Earthquake for a classic example of a contractor who went to great lengths to quickly complete a project with a big payoff. “Imposed deadlines” is another reason for accelerating project completion. For example, a politician makes a public statement that a new law building will be avail- able in two years. Or the president of a software company remarks in a speech that new advanced software will be available in one year. Such statements too often become imposed project duration dates—without any consideration of the problems or cost of meeting such a date. The project duration time is set while the project is in its “con- cept” phase before or without any detailed scheduling of all the activities in the proj- ect. This phenomenon occurs very frequently in practice! Unfortunately, this practice almost always leads to a higher-cost project than one that is planned using low-cost and detailed planning. In addition, quality is sometimes compromised to meet dead- lines. More important, these increased costs of imposed duration dates are seldom recognized or noted by project participants. Sometimes very high overhead costs are recognized before the project begins. For example, it may cost $80,000 per day to simply house and feed a construction crew in the farthest reaches of Northern Alaska. In these cases it is prudent to examine the direct costs of shortening the critical path versus the overhead cost savings. Usually there are opportunities to shorten a few critical activities at less than the daily over- head rate. Under specific conditions (which are not rare), huge savings are possible with little risk. Finally there are times when it is important to reassign key equipment and/or people to new projects. Under these circumstances, the cost of compressing the project can be compared with the opportunity costs of not releasing key equipment or people.

9.2 Options for Accelerating Project Completion Managers have several effective methods for crashing specific project activities when resources are not constrained. Several of these are summarized below.

308 Chapter 9 Reducing Project Duration

On January 17, 1994, a 6.8-magnitude earthquake struck the Los Angeles basin, near suburban Northridge, causing 60 deaths, thousands of inju- ries, and billions of dollars in property

damage. Nowhere was the destructive power of nature more evident than in the collapsed sections of the free- way system that disrupted the daily commute of an estimated 1 million Los Angelenos. The Northridge earthquake posed one of the greatest challenges to the California Department of Transportation (CalTrans) in its nearly 100-year history. To expedite the recovery process, Governor Pete Wilson signed an emergency declaration allowing CalTrans to streamline contracting procedures and offer attractive incentives for complet- ing work ahead of schedule. For each day that the schedule was beaten, a sizable bonus was to be awarded. Conversely, for each day over the deadline, the contractor would be penalized the same amount. The amount ($50,000 to $200,000) varied depending on the importance of the work. The incentive scheme proved to be a powerful motivator for the freeway reconstruction contractors. C. C. Myers, Inc., of Rancho Cordova, California, won the contract for the reconstruction of the Interstate 10 bridges. Myers pulled out all stops to finish the project in a blistering 66 days—a whopping 74 days ahead of schedule—and earning a $14.8 million bonus! Myers took every opportunity to save time and streamline operations. They greatly expanded the workforce. For example, 134 iron-workers were employed instead of the normal 15. Special lighting equipment was set up so that work could be performed around the clock. Likewise, the sites were prepared and special materi- als were used so that work could continue despite inclement weather that would normally shut down con- struction. The work was scheduled much like an assembly line so that critical activities were followed by

S N A P S H O T F R O M P R A C T I C E 9 . 2 Responding to the Northridge Earthquake*

the next critical activity. A generous incentive scheme was devised to reward teamwork and reach milestones early. Carpenters and iron-workers competed as teams against each other to see who could finish first. Although C. C. Myers received a substantial bonus for finishing early, they spent a lot of money on over- time, bonuses, special equipment, and other premiums to keep the job rolling along. CalTrans supported Myers’s efforts. With reconstruction work going on 24 hours a day, including jackhammering and pile-driving, CalTrans temporarily housed many families in local motels. CalTrans even erected a temporary plastic soundwall to help reduce the construction noise travel- ing to a nearby apartment complex. The double-layer curtain, 450 feet long and 20 feet high, was designed to reduce construction noise by 10 decibels. Despite the difficulties and expense incurred by around-the-clock freeway building, most of Los Angeles cheered CalTrans’s quake recovery efforts. The Governor’s Office of Planning and Research issued a report concluding that for every day the Santa Monica Freeway was closed, it cost the local economy more than $1 million.

© David Butow/Corbis SABA

* Jerry B. Baxter, “Responding to the Northridge Earthquake,” PM Network (November 1994), pp. 13–22.

Options When Resources Are Not Constrained Adding Resources  The most common method for shortening project time is to assign additional staff and equipment to activities. There are limits, however, as to how much speed can be gained by adding staff. Doubling the size of the workforce will not necessarily reduce com- pletion time by half. The relationship would be correct only when tasks can be parti- tioned so minimal communication is needed between workers, as in harvesting a crop by hand or repaving a highway. Most projects are not set up that way; additional

Identify the different options for crashing an activity when resources are not constrained.

9-2LO

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workers increase the communication requirements to coordinate their efforts. For example, doubling a team by adding two workers requires six times as much pairwise intercommunication than is required in the original two-person team. Not only is more time needed to coordinate and manage a larger team; there is the additional delay of training the new people and getting them up to speed on the project. The end result is captured in Brooks’s law: Adding manpower to a late software project makes it later.1 Frederick Brooks formulated this principle based on his experience as a project manager for IBM’s System/360 software project during the early 1960s. While subse- quent research confirmed Brooks’s prediction, it also discovered that adding more people to a late project does not always cause the project to be later.2 The key is whether the new staff is added early so there is sufficient time to make up for lost ground once the new members have been fully assimilated.

Outsourcing Project Work A common method for shortening the project time is to subcontract an activity. The subcontractor may have access to superior technology or expertise that will accelerate the completion of the activity. For example, contracting for a backhoe can accomplish in two hours what it can take a team of laborers two days to do. Likewise, by hiring a consulting firm that specializes in ADSI programming, a firm may be able to cut in half the time it would take for less experienced, internal programmers to do the work. Subcontracting also frees up resources that can be assigned to a critical activity and will ideally result in a shorter project duration. See Snapshot from Practice 9.3: Out- sourcing in Bio-Tech. Outsourcing will be addressed more fully in Chapter 12.

In the face of increasing time-to- market pressures, many bio-tech firms are turning to outsourcing to expedite the drug development process. Panos Kalaritis, vice president of operations

for Irix Pharmaceuticals, says that outsourcing process development can accelerate a drug’s evolution by allowing a pharmaceutical company to continue research while a contractor works on process optimiza- tion. Susan Dexter of Lonza Biologics identified different types of outsourcing contracts including agreements for product development, clinical trial supplies, in-market or commercial supplies, and technology transfer. Often, she said, a given project can encompass more than one of the above stages over a period of several years. Using a contractor, said Paul Henricks, business manager for Patheon Inc., gives the client company

access to specialized knowledge and infrastructure as well as flexible resources and capacity. The sponsoring company can also manage risks by sharing responsi- bilities through outsourcing. “Communication is key to a successful outsourc- ing relationship,” said Dan Gold, vice president of pro- cess development for Covance, which was formerly Corning Bio. “Contractors and sponsors should both assign project managers, and the two must work together to maintain, track, and document project completion. There must be a concerted effort on the part of both parties to work as partners to complete the project.”

S N A P S H O T F R O M P R A C T I C E 9 . 3 Outsourcing in Bio-Tech Picks Up Speed*

* Mathew Lerner, “Outsourcing in Bio-Technology Picks Up Speed,” Chemical Market Reporter, vol. 251, no. 14 (2002), p. 17.

1 Brooks’s The Mythical Man-Month (Reading, MA: Addison-Wesley, 1994) is considered a classic on software project management. 2 R. L. Gordon and J. C. Lamb, “A Close Look at Brooks’ Law,” Datamation, June 1977, pp. 81–86.

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Scheduling Overtime The easiest way to add more labor to a project is not to add more people, but to schedule overtime. If a team works 50 hours a week instead of 40, it might accomplish 20 percent more. By scheduling overtime you avoid the additional costs of coordina- tion and communication encountered when new people are added. If people involved are salaried workers, there may be no real additional cost for the extra work. Another advantage is that there are fewer distractions when people work outside normal hours. Overtime has disadvantages. First, hourly workers are typically paid time and a half for overtime and double time for weekends and holidays. Sustained overtime work by salaried employees may incur intangible costs such as divorce, burnout, and turnover. The latter is a key organizational concern when there is a shortage of workers. Further- more, it is an oversimplification to assume that, over an extended period of time, a person is as productive during his or her eleventh hour at work as during his or her third hour of work. There are natural limits to what is humanly possible, and extended overtime may actually lead to an overall decline in productivity when fatigue sets in (DeMarco, 2002). Overtime and working longer hours is the preferred choice for accelerating project completion, especially when the project team is salaried. The key is to use overtime judiciously. Remember a project is a marathon not a sprint! You do not want to run out of energy before the finish line.

Establish a Core Project Team As discussed in Chapter 3, one of the advantages of creating a dedicated core team to complete a project is speed. Assigning professionals full time to a project avoids the hidden cost of multitasking in which people are forced to juggle the demands of mul- tiple projects. Professionals are allowed to devote their undivided attention to a spe- cific project. This singular focus creates a shared goal that can bind a diverse set of professionals into a highly cohesive team capable of accelerating project completion. Factors that contribute to the emergence of high-performing project teams will be discussed in detail in Chapter 11.

Do It Twice—Fast and Correctly If you are in a hurry, try building a “quick and dirty” short-term solution, then go back and do it the right way. For example, pontoon bridges are used as temporary solutions to damaged bridges in combat. In business, software companies are notorious for releasing version 1.0 of products that are not completely finished and tested. Subse- quent versions 1.1 . . . x correct bugs and add intended functionality to the product. The additional costs of doing it twice are often more than compensated for by the benefits of satisfying the deadline.

Options When Resources Are Constrained A project manager has fewer options for accelerating project completion when addi- tional resources are either not available or the budget is severely constrained. This is especially true once the schedule has been established. Below are some of these options, which are also available when resources are not constrained.

Improve the Efficiency of the Project Team The project team may be able to improve productivity by implementing more efficient ways to do their work. This can be achieved by improving the planning and

Identify the different options for crashing an activity when resources are constrained.

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organization of the project or eliminating barriers to productivity such as excessive bureaucratic interference and red tape. Fast-Tracking Sometimes it is possible to rearrange the logic of the project network so that critical activities are done in parallel (concurrently) rather than sequentially. This alternative is commonly referred to as fast tracking and is a good one if the project situation is right. When this alternative is given serious attention, it is amazing to observe how creative project team members can be in finding ways to restructure sequential activities in paral- lel. As noted in Chapter 6, one of the most common methods for restructuring activities is to change a finish-to-start relationship to a start-to-start relationship. For example, instead of waiting for the final design to be approved, manufacturing engineers can begin building the production line as soon as key specifications have been established. Changing activi- ties from sequential to parallel is not without risk. Late design changes can produce wasted effort and rework. Fast tracking requires close coordination among those respon- sible for the activities affected and confidence in the work that has been completed. Critical-Chain Critical-chain project management (CCPM) is designed to accelerate project comple- tion. As discussed in Appendix 8.1, it would be difficult to apply CCPM midstream in a project. CCPM requires considerable training and a shift in habits and perspectives that takes time to adopt. Although there have been reports of immediate gains, espe- cially in terms of completion times, a long-term management commitment is probably necessary to reap full benefits. See the Snapshot from Practice 9.4: The Fastest House in the World for an extreme example of CCPM application. Reducing Project Scope Probably the most common response for meeting unattainable deadlines is to reduce or scale back the scope of the project. This invariably leads to a reduction in the functional- ity of the project. For example, the new car will average only 25 mpg instead of 30, or the software product will have fewer features than originally planned. While scaling back the scope of the project can lead to big savings in both time and money, it may come at a cost of reducing the value of the project. If the car gets lower gas mileage, will it stand up to competitive models? Will customers still want the software minus the features? The key to reducing a project scope without reducing value is to reassess the true specifications of the project. Often requirements are added under best-case, blue-sky scenarios and represent desirables, but not essentials. Here it is important to talk to the customer and/or project sponsors and explain the situation—you can get it your way but not until February. This may force them to accept an extension or to add money to expedite the project. If not, then a healthy discussion of what the essential require- ments are and what items can be compromised in order to meet the deadline needs to take place. More intense reexamination of requirements may actually improve the value of the project by getting it done more quickly and for a lower cost. Calculating the savings of reduced project scope begins with the work breakdown structure. Reducing functionality means certain tasks, deliverables, or requirements can be reduced or even eliminated. These tasks need to be found and the schedule adjusted. Focus should be on changes in activities on the critical path. Compromise Quality Reducing quality is always an option, but it is rarely acceptable or used. If quality is sacrificed, it may be possible to reduce the time of an activity on the critical path.

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December 17, 2002—After revving up their power tools and lin-

ing up volunteers, Shelby County Habitat for Humanity broke the world record for the fastest house ever built, clock- ing in at 3 hours, 26 minutes, and 34 seconds. Former record holder New Zealand’s Habitat Affiliate Mannakau held the record for three years at 3 hours, 44 minutes, and 59 seconds. The Alabama project beat the New Zealand record by 18 minutes. “This was different than any construction project that I’ve ever been a part of,” said Project Manager Chad Calhoun. “The minute-by-minute schedule, the planning of each precise movement, the organization of all the teams and materials, could not have gone more smoothly on build day. All the long hours of plan- ning definitely paid off.” In preparation for the build, Habitat volunteers put the foundation in place and constructed prefabricated wall panels. Once the whistle blew at 11:00 a.m. on December 17th, the exterior wall panels were raised into place, followed by the interior panel, which took only 16 minutes. Special color coded teams of workers connected the wiring and plumbing, put in insulation, installed appliances, laid carpet and tile, installed light fixtures, painted the house inside, applied vinyl siding outside, and attached assembled front and back porches. At the same time, the roof was constructed on the ground next to the house. Once the roof was completed—approximately 1½ hours later—a Steel City crane lifted the 14,000–pound roof assembly into

S N A P S H O T F R O M P R A C T I C E 9 . 4 The Fastest House in the World*

place. Crews attached the roof while others completed the interior work. There was even time to lay sod, plant shrubbery, and decorate a Christmas tree in the front yard—all within the official build time of 3 hours, 26 minutes, and 34 seconds. The recipient of this wonderful holiday gift was Bonnie Lilly, a single mother and nursing technician who had applied to Habitat for Humanity three times before she was selected to receive the three-bedroom, two-bath home. “It’s amazing,” Lilly said. “Who am I to have this happen for me? A world record, hundreds of people coming together to build my house—I still can’t believe it.” Habitat for Humanity is an international charitable organization that builds simple, affordable houses and sells them on a no-interest, no-profit basis to needy families.

© Blend Images/Ariel Skelley/Getty Images

* “The house that love built, really FAST—and just in time for Christmas kicker: Habitat for Humanity breaks world record set by New Zealand,” Erin Drummond, www.csre.com. “Shelby County, Ala. Builds fastest Habitat House in three and a half hours,” www.habitat.org/newsroom/2002archive.

In practice the methods most commonly used to crash projects are scheduling over- time, outsourcing, and adding resources. Each of these maintains the essence of the original plan. Options that depart from the original project plan include do it twice and fast-tracking. Rethinking of project scope, customer needs, and timing become major considerations for these techniques.

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9.3 Project Cost–Duration Graph Nothing on the horizon suggests that the need to shorten project time will change. In fact, if anything the pressure to get projects done quicker and sooner is likely to increase in importance. The challenge for the project manager is to use a quick, logical method to compare the benefits of reducing project time with the cost. When sound, logical methods are absent, it is difficult to isolate those activities that will have the greatest impact on reducing project time at least cost. This section describes a proce- dure for identifying the costs of reducing project time so that comparisons can be made with the benefits of getting the project completed sooner. The method requires gathering direct and indirect costs for specific project durations. Critical activities are searched to find the lowest direct-cost activities that will shorten the project duration. Total cost for specific project durations are computed and then compared with the benefits of reducing project time—before the project begins or while it is in progress.

Explanation of Project Costs The general nature of project costs is illustrated in Figure 9.1, Project Cost–Duration Graph. The total cost for each duration is the sum of the indirect and direct costs. Indirect costs continue for the life of the project. Hence, any reduction in project dura- tion means a reduction in indirect costs. Direct costs on the graph grow at an increas- ing rate as the project duration is reduced from its original planned duration. With the information from a graph such as this for a project, managers can quickly judge any alternative such as meeting a time-to-market deadline. Further discussion of indirect and direct costs is necessary before demonstrating a procedure for developing the information for a graph similar to the one depicted in Figure 9.1. Project Indirect Costs Indirect costs generally represent overhead costs such as supervision, administration, consultants, and interest. Indirect costs cannot be associated with any particular work

Determine the optimum cost-time point in a project network.

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50

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Total costs

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point

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pointC os

ts

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FIGURE 9.1 Project Cost– Duration Graph

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package or activity, hence the term. Indirect costs vary directly with time. That is, any reduction in time should result in a reduction of indirect costs. For example, if the daily costs of supervision, administration, and consultants are $2,000, any reduction in project duration would represent a savings of $2,000 per day. If indirect costs are a significant percentage of total project costs, reductions in project time can represent very real savings (assuming the indirect resources can be utilized elsewhere).

Project Direct Costs Direct costs commonly represent labor, materials, equipment, and sometimes subcon- tractors. Direct costs are assigned directly to a work package and activity, hence the term. The ideal assumption is that direct costs for an activity time represent normal costs, which typically mean low-cost, efficient methods for a normal time. When proj- ect durations are imposed, direct costs may no longer represent low-cost, efficient methods. Costs for the imposed duration date will be higher than for a project duration developed from ideal normal times for activities. Because direct costs are assumed to be developed from normal methods and time, any reduction in activity time should add to the costs of the activity. The sum of the costs of all the work packages or activities represents the total direct costs for the project. The major challenge faced in creating the information for a graph similar to Fig- ure 9.1 is computing the direct cost of shortening individual critical activities and then finding the total direct cost for each project duration as project time is compressed; the process requires selecting those critical activities that cost the least to shorten. (Note: The graph implies that there is always an optimum cost-time point. This is only true if shortening a schedule has incremental indirect cost savings exceeding the incremental direct cost incurred. However, in practice there are almost always several activities in which the direct costs of shortening are less than the indirect costs.)

9.4 Constructing a Project Cost–Duration Graph There are three major steps required to construct a project cost–duration graph: 1. Find total direct costs for selected project durations. 2. Find total indirect costs for selected project durations. 3. Sum direct and indirect costs for these selected durations. The graph is then used to compare additional cost alternatives for benefits. Details of these steps are presented here.

Determining the Activities to Shorten The most difficult task in constructing a cost–duration graph is finding the total direct costs for specific project durations over a relevant range. The central concern is to decide which activities to shorten and how far to carry the shortening process. Basi- cally, managers need to look for critical activities that can be shortened with the small- est increase in cost per unit of time. The rationale for selecting critical activities depends on identifying the activity’s normal and crash times and corresponding costs. Normal time for an activity represents low-cost, realistic, efficient methods for com- pleting the activity under normal conditions. Shortening an activity is called crashing. The shortest possible time an activity can realistically be completed in is called its crash time. The direct cost for completing an activity in its crash time is called crash cost. Both normal and crash times and costs are collected from personnel most familiar

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with completing the activity. Figure 9.2 depicts a hypothetical cost–duration graph for an activity. The normal time for the activity is 10 time units, and the corresponding cost is $400. The crash time for the activity is five time units and $800. The intersection of the normal time and cost represents the original low-cost, early-start schedule. The crash point represents the maximum time an activity can be compressed. The heavy line connecting the normal and crash points represents the slope, which assumes the cost of reducing the time of the activity is constant per unit of time. The assumptions underlying the use of this graph are as follows: 1. The cost-time relationship is linear. 2. Normal time assumes low-cost, efficient methods to complete the activity. 3. Crash time represents a limit—the greatest time reduction possible under realistic

conditions. 4. Slope represents cost per unit of time. 5. All accelerations must occur within the normal and crash times. Knowing the slope of activities allows managers to compare which critical activities to shorten. The less steep the cost slope of an activity, the less it costs to shorten one time period; a steeper slope means it will cost more to shorten one time unit. The cost per unit of time or slope for any activity is computed by the following equation:

Cost slope = RiseRun = Crash cost − Normal cost Normal time − Crash time

= CC − NCNT − CT = $800 − $400

10 − 5

= $4005 = $80 per unit of time

In Figure 9.2 the rise is the y axis (cost) and the run is the x axis (duration). The slope of the cost line is $80 for each time unit the activity is reduced; the limit reduction of the

FIGURE 9.2 Activity Graph $800

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activity time is five time units. Comparison of the slopes of all critical activities allows us to determine which activity(ies) to shorten to minimize total direct cost. Given the preliminary project schedule (or one in progress) with all activities set to their early-start times, the process of searching critical activities as candidates for reduction can begin. The total direct cost for each specific compressed project duration must be found.

A Simplified Example Figure 9.3A presents normal and crash times and costs for each activity, the computed slope and time reduction limit, the total direct cost, and the project network with a duration of 25 time units. Note the total direct cost for the 25-period duration is $450. This is an anchor point to begin the procedure of shortening the critical path(s) and finding the total direct costs for each specific duration less than 25 time units. The maximum time reduction of an activity is simply the difference between the normal and crash times for an activity. For example, activity D can be reduced from a normal

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FIGURE 9.3 Cost–Duration Trade-off Example

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time of 11 time units to a crash time of 7 time units, or a maximum of 4 time units. The positive slope for activity D is computed as follows:

Slope = Crash cost − Normal costNormal time − Crash time = $150 − $50

11 − 7

= $1004 = $25 per period reduced

The network shows the critical path to be activities A, D, F, G. Because it is impossible to shorten activity G (“x” is used to indicate this), activity A is circled because it is the least-cost candidate; that is, its slope ($20) is less than the slopes for activities D and F ($25 and $30). Reducing activity A one time unit cuts the project duration to 24 time units but increases the total direct costs to $470 ($450 + $20 = $470). Figure 9.3B reflects these changes. The duration of activity A has been reduced to two time units; the “x” indicates the activity cannot be reduced any further. Activity D is circled because it costs the least ($25) to shorten the project to 23 time units. Compare the cost of activity F. The total direct cost for a project duration of 23 time units is $495 (see Figure 9.4A).

FIGURE 9.4 Cost–Duration Trade-off Example (continued)

Total direct cost $ 495

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Observe that the project network in Figure 9.4A now has two critical paths—A, C, F, G and A, D, F, G. Reducing the project to 22 time units will require that activity F be reduced; thus, it is circled. This change is reflected in Figure 9.4B. The total direct cost for 22 time units is $525. This reduction has created a third critical path—A, B, E, G; all activities are critical. The least-cost method for reducing the project duration to 21 time units is the combination of the circled activities C, D, E which cost $30, $25, $30, respectively, and increase total direct costs to $610. The results of these changes are depicted in Figure 9.4C. Although some activities can still be reduced (those with- out the “x” next to the activity time), no activity or combination of activities will result in a reduction in the project duration. With the total direct costs for the array of specific project durations found, the next step is to collect the indirect costs for these same durations. These costs are typically a rate per day and are easily obtained from the accounting department. Figure 9.5 pres- ents the total direct costs, total indirect costs, and total project costs. These same costs are plotted in Figure 9.6. This graph shows that the optimum cost-time duration is 22 time units and $775. Assuming the project will actually materialize as planned, any movement away from this time duration will increase project costs. The movement from 25 to 22 time units occurs because, in this range, the absolute slopes of the indi- rect costs are greater than the direct cost slopes.

9.5 Practical Considerations

Using the Project Cost–Duration Graph This graph, as presented in Figures 9.1 and 9.6, is valuable to compare any proposed alternative or change with the optimum cost and time. More importantly, the creation of such a graph keeps the importance of indirect costs in the forefront of decision

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FIGURE 9.6 Project Cost–Duration Graph

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making. Indirect costs are frequently forgotten in the field when the pressure for action is intense. Finally, such a graph can be used before the project begins or while the project is in progress.  Creating the graph in the preproject planning phase without an imposed duration is the first choice because normal time is more meaningful. Creating the graph in the project planning phase with an imposed duration is less desirable because normal time is made to fit the imposed date and is probably not low cost. Creating the graph after the project has started is the least desirable because some alternatives may be ruled out of the decision process. Managers may choose not to use the formal procedure demon- strated. However, regardless of the method used, the principles and concepts inherent in the formal procedure are highly applicable in practice and should be considered in any cost–duration trade-off decision.

Crash Times Collecting crash times for even a moderate-size project can be difficult. The meaning of crash time is difficult to communicate. What is meant when you define crash time as “the shortest time you can realistically complete an activity”? Crash time is open to different interpretations and judgments. Some estimators feel very uncomfortable pro- viding crash times. Regardless of the comfort level, the accuracy of crash times and costs is frequently rough at best, when compared with normal time and cost.

Linearity Assumption Because the accuracy of compressed activity times and costs is questionable, the con- cern of some theorists—that the relationship between cost and time is not linear but curvilinear—is seldom a concern for practicing managers. Reasonable, quick compari- sons can be made using the linear assumption.3 The simple approach is adequate for most projects. There are rare situations in which activities cannot be crashed by single time units. Instead, crashing is “all or nothing.” For example, activity A will take 10 days (for say $1,000) or it will take 7 days (for say $1,500), but no options exist in which activity A will take 8 or 9 days to complete. In a few rare cases of very large, complex, long-duration projects, the use of present value techniques may be useful; such techniques are beyond the scope of this text.

Choice of Activities to Crash Revisited The cost–time crashing method relies on choosing the cheapest method for reducing the duration of the project. There are other factors that should be assessed beyond sim- ply cost. First, the inherent risks involved in crashing particular activities need to be considered. Some activities are riskier to crash than others. For example, accelerating the completion of a software design code may not be wise if it increases the likelihood of errors surfacing downstream. Conversely, crashing a more expensive activity may be wise if fewer inherent risks are involved. Second, the timing of activities needs to be considered. Crashing an early activity may be prudent if there is concern that subsequent activities are likely to be delayed, and absorb the time gained. Then the manager would still have the option of crashing final activities to get back on schedule. Third, crashing frequently results in overallocation of resources. The resources required to accelerate a cheaper activity may suddenly not be available. Resource availability, not cost, may dictate which activities are crashed.

Understand the risks as- sociated with compress- ing or crashing a project.

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3Linearity assumes that the cost for crashing each day is constant.

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Finally, the impact crashing would have on the morale and motivation of the project team needs to be assessed. If the least-cost method repeatedly signals a subgroup to accelerate progress, fatigue and resentment may set in. Conversely, if overtime pay is involved, other team members may resent not having access to this benefit. This situation can lead to tension within the entire project team. Good project managers gauge the response that crashing activities will have on the entire project team. See Snapshot from Practice 9.5: I’ll Bet You… for a novel approach to motivating employees to work faster.

Time Reduction Decisions and Sensitivity Should the project owner or project manager go for the optimum cost-time? The answer is, “It depends.” Risk must be considered. Recall from our example that the

The focus of this chapter has been on how project managers crash activities by typically assigning additional man- power and equipment to cut significant time off of scheduled tasks. Project

managers often encounter situations in which they need to motivate individuals to accelerate the completion of a specific, critical task. Imagine the following scenario. Bruce Young just received a priority assignment from corporate headquarters. The preliminary engi- neering sketches that were due tomorrow need to be e-mailed to the West Coast by 4:00 p.m. today so that the model shop can begin construction of a prototype to present to top management. He approaches Danny Whitten, the draftsman responsible for the task, whose initial response is, “That’s impossible!” While he agrees that it would be very difficult he does not believe that it is as impossible as Danny suggests or that Danny truly believes that. What should he do? He tells Danny that he knows this is going to be a rush job, but he is confident that he can do it. When Danny balks, he responds, “I tell you what, I’ll make a bet with you. If you are able to finish the design by 4:00, I’ll make sure you get two of the company’s tick- ets to tomorrow night’s Celtics–Knicks basketball game.” Danny accepts the challenge, works feverishly to complete the assignment, and is able to take his daughter to her first professional basketball game. Conversations with project managers reveal that many use bets like this one to motivate extraordinary performance. These bets range from tickets to sporting and entertainment events to gift certificates at high-class restaurants to a well-deserved afternoon off. For bets to work they need to adhere to the principles of expectancy theory of motivation.* Boiled down to simple terms, expectancy theory rests on three key questions:

S N A P S H O T F R O M P R A C T I C E 9 . 5 I’II Bet You . . .

1. Can I do it (Is it possible to meet the challenge)?

2. Will I get it (Can I demonstrate that I met the chal- lenge and can I trust the project manager will de- liver his/her end of the bargain)?

3. Is it worth it (Is the payoff of sufficient personal value to warrant the risk and extra effort)?

If in the mind of the participant the answer to any of these three questions is no, then the person is unlikely to accept the challenge. However, when the answers are affirmative, then the individual is likely to accept the bet and be motivated to meet the challenge. Bets can be effective motivational tools and add an element of excitement and fun to project work. But, the following practical advice should be heeded:

1. The bet has greater significance if it also benefits fam- ily members or significant others. Being able to take a son or daughter to a professional basketball game al- lows that individual to “score points” at home through work. These bets also recognize and reward the sup- port project members receive from their families and reinforces the importance of their work to loved ones.

2. Bets should be used sparingly; otherwise every- thing can become negotiable. They should be used only under special circumstances that require ex- traordinary effort.

3. Individual bets should involve clearly recognizable individual effort, otherwise others may become jealous and discord may occur within a group. As long as others see it as requiring truly remarkable, “beyond the call of duty” effort, they will consider it fair and warranted.

* Expectancy Theory is considered one of the major theories of human motivation and was first developed by V. H. Vroom, Work and Motivation (New York: John Wiley & Sons, 1964).

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optimum project time point represented a reduced project cost and was less than the original normal project time (review Figure 9.6). The project direct-cost line near the normal point is usually relatively flat. Because indirect costs for the project are usually greater in the same range, the optimum cost-time point is less than the normal time point. Logic of the cost-time procedure suggests managers should reduce the project duration to the lowest total cost point and duration. How far to reduce the project time from the normal time toward the optimum depends on the sensitivity of the project network. A network is sensitive if it has sev- eral critical or near-critical paths. In our example project movement toward the opti- mum time requires spending money to reduce critical activities, resulting in slack reduction and/or more critical paths and activities. Slack reduction in a project with several near-critical paths increases the risk of being late. The practical outcome can be a higher total project cost if some near-critical activities are delayed and become critical; the money spent reducing activities on the original critical path would be wasted. Sensitive networks require careful analysis. The bottom line is that compres- sion of projects with several near-critical paths reduces scheduling flexibility and increases the risk of delaying the project. The outcome of such analysis will probably suggest only a partial movement from the normal time toward the optimum time. There is a positive situation where moving toward the optimum time can result in very real, large savings—this occurs when the network is insensitive. A project network is insensitive if it has a dominant critical path, that is, no near-critical paths. In this project circumstance, movement from the normal time point toward the optimum time will not create new or near-critical activities. The bottom line here is that the reduction of the slack of noncritical activities increases the risk of their becoming critical only slightly when compared with the effect in a sensitive network. Insensitive networks hold the greatest potential for real, sometimes large, savings in total project costs with a minimum risk of noncritical activities becom- ing critical. Insensitive networks are not a rarity in practice; they occur in perhaps 25 percent of all projects. For example, a light rail project team observed from their network a dominant critical path and relatively high indirect costs. It soon became clear that by spending some dollars on a few critical activities, very large savings of indirect costs could be realized. Savings of several million dollars were spent extending the rail line and adding another station. The logic found in this example is just as applicable to small projects as large ones. Insensitive networks with high indirect costs can produce large savings. Ultimately, deciding if and which activities to crash is a judgment call requiring careful consideration of the options available, the costs and risks involved, and the importance of meeting a deadline.

9.6 What If Cost, Not Time, Is the Issue? In today’s fast-paced world, there appears to be a greater emphasis on getting things done quickly. Still, organizations are always looking for ways to get things done cheaply. This is especially true for fixed-bid projects, where profit margin is derived from the difference between the bid and actual cost of the project. Every dollar saved is a dollar in your pocket. Sometimes, in order to secure a contract, bids are tight, which puts added pressure on cost containment. In other cases, there are financial incentives tied to cost containment.

Identify different options for reducing the costs of a project.

9-6LO

322 Chapter 9 Reducing Project Duration

Even in situations where cost is transferred to customers there is pressure to reduce cost. Cost overruns make for unhappy customers and can damage future business opportunities. Budgets can be fixed or cut, and when contingency funds are exhausted, then cost overruns have to be made up with remaining activities. As discussed earlier, shortening project duration may come at the expense of over- time, adding additional personnel, and using more expensive equipment and/or materi- als. Conversely, sometimes cost savings can be generated by extending the duration of a project. This may allow for a smaller workforce, less-skilled (expensive) labor, and even cheaper equipment and materials to be used. Below are some of the more com- monly used options for cutting costs.

Reduce Project Scope Just as scaling back the scope of the project can gain time, delivering less than what was originally planned also produces significant savings. Again, calculating the sav- ings of a reduced project scope begins with the work breakdown structure. However, since time is not the issue, you do not need to focus on critical activities. For example, on over-budget movie projects it is not uncommon to replace location shots with stock footage to cut costs.

Have Owner Take on More Responsibility One way of reducing project costs is identifying tasks that customers can do them- selves. Homeowners frequently use this method to reduce costs on home improvement projects. For example, to reduce the cost of a bathroom remodel, a homeowner may agree to paint the room instead of paying the contractor to do it. On IS projects, a cus- tomer may agree to take on some of the responsibility for testing equipment or provid- ing in-house training. Naturally, this arrangement is best negotiated before the project begins. Customers are less receptive to this idea if you suddenly spring it on them. An advantage of this method is that, while costs are lowered, the original scope is retained. Clearly this option is limited to areas in which the customer has expertise and the capability to pick up the tasks.

Outsourcing Project Activities or Even the Entire Project When estimates exceed budget, it not only makes sense to re-examine the scope but also search for cheaper ways to complete the project. Perhaps instead of relying on internal resources, it would be more cost effective to outsource segments or even the entire project, opening up work to external price competition. Specialized subcontrac- tors often enjoy unique advantages, such as material discounts for large quantities, as well as equipment that not only gets the work done more quickly but also less expen- sively. They may have lower overhead and labor costs. For example, to reduce costs of software projects, many American firms outsource work to firms overseas where the salary of a software engineer is one-third that of an American software engineer. How- ever, outsourcing means you have less control over the project and will need to have clearly definable deliverables.

Brainstorming Cost Savings Options Just as project team members can be a rich source of ideas for accelerating project activities, they can offer tangible ways for reducing project costs. For example, one project manager reported that his team was able to come up with over $75,000 worth

Chapter 9 Reducing Project Duration 323

Summary The need for reducing the project duration occurs for many reasons such as imposed duration dates, time-to-market considerations, incentive contracts, key resource needs, high overhead costs, or simply unforeseen delays. These situations are very common in practice and are known as cost-time trade-off decisions. This chapter presented a logi- cal, formal process for assessing the implications of situations that involve shortening the project duration. Crashing the project duration increases the risk of being late. How far to reduce the project duration from the normal time toward the optimum de- pends on the sensitivity of the project network. A sensitive network is one that has several critical or near-critical paths. Great care should be taken when shortening sen- sitive networks to avoid increasing project risks. Conversely, insensitive networks rep- resent opportunities for potentially large project cost savings by eliminating some overhead costs with little downside risk. Alternative strategies for reducing project time were discussed within the context of whether or not the project is resource limited. Project acceleration typically comes at a cost of either spending money for more resources or compromising the scope of the project. If the latter is the case, then it is essential that all relevant stakeholders be con- sulted so that everyone accepts the changes that have to be made. One other key point is the difference in implementing time-reducing activities in the midst of project exe- cution versus incorporating them into the project plan. You typically have far fewer options once the project is under way than before it begins. This is especially true if you want to take advantage of the new scheduling methodologies such as fast-tracking and critical-chain. Time spent up front considering alternatives and developing contin- gency plans will lead to time savings in the end.

Key Terms Crashing, 314 Crash point, 315 Crash time, 314

Direct costs, 314 Fast-tracking, 311 Indirect costs, 313

Project Cost–Duration Graph, 313

1. What are five common reasons for crashing a project? 2. What are the advantages and disadvantages of reducing project scope to accelerate

a project? What can be done to reduce the disadvantages? 3. Why is scheduling overtime a popular choice for getting projects back on schedule?

What are the potential problems for relying on this option? 4. Identify four indirect costs you might find on a moderately complex project. Why

are these costs classified as indirect? 5. How can a cost–duration graph be used by the project manager? Explain. 6. Reducing the project duration increases the risk of being late. Explain. 7. It is possible to shorten the critical path and save money. Explain how.

Review Questions

of cost saving suggestions without jeopardizing the scope of the project. Project managers should not underestimate the value of simply asking if there is a cheaper, better way.

324 Chapter 9 Reducing Project Duration

1. Use the information contained below to compress one time unit per move using the least cost method. Reduce the schedule until you reach the crash point of the network. For each move identify what activity(ies) was crashed and the adjusted total cost.

Note: The correct normal project duration, critical path, and total direct cost are provided.

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A 50 1 3 150 B 100 1 3 100 C 60 2 4 200 D 60 2 3 200 E 70 1 4 200 F 0 0 1 150

1x

F

3

B

3

A

3

D Initial project duration: 12

Total direct cost: 4

E

4

C 1,000

2. *Use the information contained below to compress one time unit per move using the least cost method. Reduce the schedule until you reach the crash point of the network. For each move identify what activity(ies) was crashed and the adjusted total cost.

Note: Choose B instead of C and E (equal costs) because it is usually smarter to crash early rather than late AND one activity instead of two activities

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A 0 2 150 B 100 1 3 100 C 50 2 4 200 D 40 1 4 200 E 50 1 3 200 F 0 1 150

1x

F

3

B

2x

A

6

C Initial project duration 13

Total direct cost 3

E

4

D 1,000

Exercises

Chapter 9 Reducing Project Duration 325

3. Use the information contained below to compress one time unit per move using the least cost method. Reduce the schedule until you reach the crash point of the network. For each move identify what activity(ies) was crashed and the adjusted total cost.

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A 100 1 2 150 B 80 1 3 100 C 60 1 2 200 D 40 1 5 200 E 40 2 5 200 F 40 2 3 150 G 20 1 5 200 H 1 200

16

1,400

Project duration

Total direct cost

B

D G

C

2

A

2

3

E

5

5 5

H

1x

F

3

4. Given the data and information that follow, compute the total direct cost for each project duration. If the indirect costs for each project duration are $90 (15 time units), $70 (14), $50 (13), $40 (12), and $30 (11), compute the total project cost for each duration. What is the optimum cost-time schedule for the project? What is this cost?

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A   30 1 5     50 B   60 2 3     60 C     0 0 4     70 D   10 1 2     50 E   60 3 5   100 F 100 1 2     90 G   30 1 5     50 H   40 0 2     60 I 200 1 3     200 $730

D I

E

F

G

C

H

Initial project duration 15

Total direct cost $730

3

25

52

24

B

A

5

3

326 Chapter 9 Reducing Project Duration

5. Use the information contained below to compress one time unit per move using the least cost method. Assume the total indirect cost for the project is $700 and there is a savings of $50 per time unit reduced. Record the total direct, indirect, and project costs for each duration. What is the optimum cost-time schedule for the project? What is the cost?

Note: The correct normal project duration and total direct cost are provided.

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A 0 2 100 B 100 1 3 200 C 40 1 5 200 D 60 2 3 200 E 20 1 5 200 F 40 1 4 150 G 0 2 150

G

C

D

E A

B

F

Project duration 14

Total direct cost 1,200

2x 2x

4

5

5

33

6. If the indirect costs for each duration are $300 for 27 days, $240 for 26 days, $180 for 25 days, $120 for 24 days, $60 for 23 days, and $50 for 22 days, compute the direct, indirect, and total costs for each duration. What is the optimum cost-time schedule? The customer offers you $10 for every day you shorten the project from your original network. Would you take it? If so for how many days?

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A   80 2 10     40 B   30 3   8     10 C   40 1   5     80 D   50 2 11     50 E 100 4 15   100 F   30 1   6     20 $300

B F

C

D

Project duration

Total direct cost

A

E

10

8

5 15

11

6

27

$300

Chapter 9 Reducing Project Duration 327

7. Use the information contained below to compress one time unit per move using the least cost method. Assume the total indirect cost for the project is $2,000 and there is a savings of $100 per time unit reduced. Calculate the total direct, indirect, and project costs for each duration. Plot these costs on a graph. What is the optimum cost-time schedule for the project?

Note: The correct normal project duration and total direct cost are provided.

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A 0 2 200 B 50 1 4 1000 C 200 2 5 800 D 200 2 5 1000 E 100 1 3 800 F 40 1 5 1000 G 40 1 4 1000 H 0 1 200

Total cost 8,000

Project duration 20

Direct cost 6,000 1x

H

5

C

5

F

4

G

5

D

4

B

2x

A

3

E

Indirect cost 2,000

8.* Use the information contained below to compress one time unit per move using the least cost method. Reduce the schedule until you reach the crash point of the network. For each move identify what activity(ies) was crashed, the adjusted total cost, and explain your choice if you have to choose between activities that cost the same.

If the indirect cost for each duration is $1,500 for 17 weeks, $1,450 for 16 weeks, $1,400 for 15 weeks, $1,350 for 14 weeks, $1,300 for 13 weeks, $1,250 for 12 weeks, $1,200 for 11 weeks, and $1,150 for 10 weeks, what is the optimum cost-time schedule for the project? What is the cost?

* The solution to this exercise can be found in Appendix One.

328 Chapter 9 Reducing Project Duration

Act. Crash Cost (Slope) Maximum Crash Time Normal Time Normal Cost

A     0 0 3 150 B 100 1 4 200 C   60 1 3 250 D   40 1 4 200 E     0 0 2 250 F   30 2 3 200 G   20 1 2 250 H   60 2 4 300 I 200 1 2 200

D

4

A

3x

I

2

E

G

Normal time 17

Total direct cost $2,000

C

F

2

H

42×3

B

34

Abdel-Hamid, T., and S. Madnick, Software Project Dynamics: An Integrated Approach (Englewood Cliffs, NJ: Prentice Hall, 1991). Baker, B. M., “Cost/Time Trade-off Analysis for the Critical Path Method,” Journal of the Operational Research Society, vol. 48, no. 12 (1997), pp. 1241–44. Brooks, F. P., Jr., The Mythical Man-Month: Essays on Software Engineering Anniversary Edition (Reading, MA: Addison-Wesley Longman, Inc., 1994), pp. 15–26. DeMarco, T., Slack: Getting Past Burnout, Busywork, and the Myth of Total Efficiency (New York: Broadway, 2002). Gordon, R. I. and J. C. Lamb, “A Closer Look at Brooke’s Law,” Datamation, June 1977, pp. 81–86. Ibbs, C. W., S. A. Lee, and M. I. Li, “Fast-Tracking’s Impact on Project Change,” Project Management Journal, vol. 29, no. 4 (1998), pp. 35–42. Khang, D. B., and M.Yin, “Time, Cost, and Quality Trade-off in Project Management,” International Journal of Project Management, vol. 17, no. 4 (1999), pp. 249–56. Perrow, L. A., Finding Time: How Corporations, Individuals, and Families Can Benefit From New Work Practices (Ithaca, NY: Cornell University Press, 1997). Roemer, T. R., R. Ahmadi, and R. Wang, “Time-Cost Trade-offs in Overlapped Product Development,” Operations Research, vol. 48, no. 6 (2000), pp. 858–65. Smith, P. G., and D. G. Reinersten, Developing Products in Half the Time (New York: Van Nostrand Reinhold, 1995). Verzuh, E., The Fast Forward MBA in Project Management, 4th ed. (New York: John Wiley, 2012). Vroom, V. H., Work and Motivation (New York: John Wiley & Sons, 1964).

References

Chapter 9 Reducing Project Duration 329

Case 9.1

International Capital, Inc.—Part B Given the project network derived in Part A of the case from Chapter 7, Brown also wants to be prepared to answer any questions concerning compressing the project duration. This question will almost always be entertained by the accounting depart- ment, review committee, and the client. To be ready for the compression question, Brown has prepared the following data in case it is necessary to crash the project. (Use your weighted average times (te) computed in Part A of the International Capital case found in Chapter 7.)

Activity Normal Cost Maximum Crash Time Crash Cost/Day

A $ 3,000 3 $ 500 B       5,000 2  1,000 C       6,000 0      — D     20,000 3 3,000 E     10,000 2 1,000 F       7,000 1 1,000 G     20,000 2 3,000 H       8,000 1 2,000 I       5,000 1 2,000 J       7,000 1 1,000 K     12,000 6 1,000 Total normal costs = $103,000

Using the data provided, determine the activity crashing decisions and best-time cost project duration. Given the information you have developed, what suggestions would you give Brown to ensure she is well prepared for the project review committee? Assume the overhead costs for this project are $700 per workday. Will this alter your suggestions?

Case 9.2

Whitbread World Sailboat Race Each year countries enter their sailing vessels in the nine-month Round the World Whitbread Sailboat Race. In recent years, about 14 countries entered sailboats in the race. Each year’s sailboat entries represent the latest technologies and human skills each country can muster. Bjorn Ericksen has been selected as a project manager because of his past experi- ence as a master helmsman and because of his recent fame as the “best designer of racing sailboats in the world.” Bjorn is pleased and proud to have the opportunity to design, build, test, and train the crew for next year’s Whitbread entry for his country. Bjorn has picked Karin Knutsen (as chief design engineer) and Trygve Wallvik (as master helmsman) to be team leaders responsible for getting next year’s entry ready for the traditional parade of all entries on the Thames River in the United Kingdom, which signals the start of the race.

330 Chapter 9 Reducing Project Duration

As Bjorn begins to think of a project plan, he sees two parallel paths running through the project—design and construction and crew training. Last year’s boat will be used for training until the new entry can have the crew on board to learn mainte- nance tasks. Bjorn calls Karin and Trygve together to develop a project plan. All three agree the major goal is to have a winning boat and crew ready to compete in next year’s competition at a cost of $3.2 million. A check of Bjorn’s calendar indicates he has 45 weeks before next year’s vessel must leave port for the United Kingdom to start the race.

THE KICKOFF MEETING Bjorn asks Karin to begin by describing the major activities and the sequence required to design, construct, and test the boat. Karin starts by noting that design of the hull, deck, mast, and accessories should only take six weeks—given the design prints from past race entries and a few prints from other countries’ entries. After the design is complete, the hull can be constructed, the mast ordered, sails ordered, and accessories ordered. The hull will require 12 weeks to complete. The mast can be ordered and will require a lead time of eight weeks; the seven sails can be ordered and will take six weeks to get; accessories can be ordered and will take 15 weeks to receive. As soon as the hull is finished, the ballast tanks can be installed, requiring two weeks. Then the deck can be built, which will require five weeks. Concurrently, the hull can be treated with special sealant and friction-resistance coating, taking three weeks. When the deck is completed and mast and accessories received, the mast and sails can be installed, requiring two weeks; the accessories can be installed, which will take six weeks. When all of these activities have been completed, the ship can be sea-tested, which should take five weeks. Karin believes she can have firm cost estimates for the boat in about two weeks. Trygve believes he can start selecting the 12-man or woman crew and securing their housing immediately. He believes it will take six weeks to get a committed crew on-site and three weeks to secure housing for the crew members. Trygve reminds Bjorn that last year’s vessel must be ready to use for training the moment the crew is on-site until the new vessel is ready for testing. Keeping the old vessel operating will cost $4,000 per week as long as it is used. Once the crew is on-site and housed, they can develop and implement a routine sailing and maintenance training program, which will take 15 weeks (using the old vessel). Also, once the crew is selected and on-site, crew equip- ment can be selected, taking only two weeks. Then crew equipment can be ordered; it will take five weeks to arrive. When the crew equipment and maintenance training program are complete, crew maintenance on the new vessel can begin; this should take 10 weeks. But crew maintenance on the new vessel cannot begin until the deck is com- plete and the mast, sails, and accessories have arrived. Once crew maintenance on the new vessel begins, the new vessel will cost $6,000 per week until sea training is complete. After the new ship maintenance is complete and while the boat is being tested, initial sail- ing training can be implemented; training should take seven weeks. Finally, after the boat is tested and initial training is complete, regular sea training can be implemented— weather permitting; regular sea training requires eight weeks. Trygve believes he can put the cost estimates together in a week, given last year’s expenses. Bjorn is pleased with the expertise displayed by his team leaders. But he believes they need to have someone develop one of those critical path networks to see if they can safely meet the start deadline for the race. Karin and Trygve agree. Karin suggests the cost estimates should also include crash costs for any activities that can be

Chapter 9 Reducing Project Duration 331

Bjorn reviews the materials and wonders if the project will come in within the bud- get of $3.2 million and in 45 weeks. Advise the Whitbread team of their situation.

TWO WEEKS LATER Karin and Trygve submit the following cost estimates for each activity and corre- sponding crash costs to Bjorn (costs are in thousands of dollars):

Constrain

Enhance

Accept

Time Performance CostFIGURE C9.1 Project Priority Matrix: Whitbread Project

Normal Normal Crash Crash Activity Time Cost Time Cost

A Design 6 $ 40 2 $ — B Build hull 12 1,000 2 — C Install ballast tanks 2 100 0 — D Order mast 8 100 1 200 E Order sails 6 40 0 — F Order accessories 15 600 2 100 G Build deck 5 200 0 — H Coat hull 3 40 0 — I Install accessories 6 300 1 100 J Install mast and sails 2 40 1 40 K Test 5 60 1 40 L Sea trials 8 200 1 250 M Select crew 6 10 1 10 N Secure housing 3 30 0 — O Select crew equipment 2 10 0 — P Order crew equipment 5 30 0 — Q Routine sail/maintenance 15 40 3 30 R Crew maintenance training 10 100 1 240 S Initial sail training 7 50 2 150

Total direct cost $2,990

compressed and the resultant costs for crashing. Karin also suggests the team complete the following priority matrix for project decision making:

332 Chapter 9 Reducing Project Duration

Case 9.3

Nightingale Project—A You are the assistant project manager to Rassy Brown, who is in charge of the Nightingale project. Nightingale was the code name given to the development of a handheld electronic medical reference guide. Nightingale would be designed for emergency medical techni- cians and paramedics who need a quick reference guide to use in emergency situations. Rassy and her project team were developing a project plan aimed at producing 30 working models in time for MedCON, the biggest medical equipment trade show each year. Meeting the MedCON October 25 deadline was critical to success. All the major medical equipment manufacturers demonstrated and took orders for new products at MedCON. Rassy had also heard rumors that competitors were considering developing a similar product, and she knew that being first to market would have a significant sales advantage. Besides, top management made funding contingent upon developing a workable plan for meeting the MedCON deadline. The project team spent the morning working on the schedule for Nightingale. They started with the WBS and developed the information for a network, adding activities when needed. Then the team added the time estimates they had collected for each activity. Fol- lowing is the preliminary information for activities with duration time and predecessors:

Activity Description Duration Predecessor   1 Architectural decisions 10 None   2 Internal specifications 20 1   3 External specifications 18 1   4 Feature specifications 15 1   5 Voice recognition 15 2,3   6 Case   4 2,3   7 Screen   2 2,3   8 Speaker output jacks   2 2,3   9 Tape mechanism   2 2,3 10 Database 40 4 11 Microphone/soundcard   5 4 12 Pager   4 4 13 Barcode reader   3 4 14 Alarm clock   4 4 15 Computer I/O   5 4 16 Review design 10 5,6,7,8,9,10,11,12,13,14,15 17 Price components   5 5,6,7,8,9,10,11,12,13,14,15 18 Integration 15 16,17 19 Document design 35 16 20 Procure prototype components 20 18 21 Assemble prototypes 10 20 22 Lab test prototypes 20 21 23 Field test prototypes 20 19,22 24 Adjust design 20 23 25 Order stock parts 15 24 26 Order custom parts   2 24 27 Assemble first production unit 10 25, FS—8 time units 26, FS—13 time units 28 Test unit 10 27 29 Produce 30 units 15 28 30 Train sales representatives 10 29

Chapter 9 Reducing Project Duration 333

Use any project network computer program available to you to develop the schedule for activities (see Case Appendix for further instructions)—noting late and early times, the critical path, and estimated completion for the project. Prepare a short memo that addresses the following questions: 1. Will the project as planned meet the October 25th deadline? 2. What activities lie on the critical path? 3. How sensitive is this network?

Case 9.4

Nightingale Project—B Rassy and the team were concerned with the results of your analysis. They spent the afternoon brainstorming alternative ways for shortening the project duration. They rejected outsourcing activities because most of the work was developmental in nature and could only be done in-house. They considered altering the scope of the project by eliminating some of the proposed product features. After much debate, they felt they could not compromise any of the core features and be successful in the marketplace. They then turned their attention to accelerating the completion of activities through overtime and adding additional technical manpower. Rassy had built into her proposal a discretionary fund of $200,000. She was willing to invest up to half of this fund to accelerate the project, but wanted to hold onto at least $100,000 to deal with unex- pected problems. After a lengthy discussion, her team concluded that the following activities could be reduced at the specified cost: ∙ Development of voice recognition system could be reduced from 15 days to 10 days

at a cost of $15,000. ∙ Creation of database could be reduced from 40 days to 35 days at a cost of $35,000. ∙ Document design could be reduced from 35 days to 30 days at a cost of $25,000. ∙ External specifications could be reduced from 18 days to 12 days at a cost of $20,000. ∙ Procure prototype components could be reduced from 20 days to 15 days at a cost

of $30,000. ∙ Order stock parts could be reduced from 15 days to 10 days at a cost of $20,000. Ken Clark, a development engineer, pointed out that the network contained only finish-to-start relationships and that it might be possible to reduce project duration by creating start-to-start lags. For example, he said that his people would not have to wait for all of the field tests to be completed to begin making final adjustments in the design. They could start making adjustments after the first 15 days of testing. The project team spent the remainder of the day analyzing how they could introduce lags into the network to hopefully shorten the project. They concluded that the following finish-to-start relationships could be converted into lags: ∙ Document design could begin 5 days after the start of the review design. ∙ Adjust design could begin 15 days after the start of field test prototypes. ∙ Order stock parts could begin 5 days after the start of adjust design. ∙ Order custom parts could begin 5 days after the start of adjust design.

334 Chapter 9 Reducing Project Duration

∙ Training sales representatives could begin 5 days after the start of test unit and com- pleted 5 days after the production of 30 units.

As the meeting adjourns, Rassy turns to you and tells you to assess the options presented and try to develop a schedule that will meet the October 25th deadline. You are to pre- pare a report to be presented to the project team that answers the following questions: 1. Is it possible to meet the deadline? 2. If so, how would you recommend changing the original schedule (Part A) and why?

Assess the relative impact of crashing activities versus introducing lags to shorten project duration.

3. What would the new schedule look like? 4. What other factors should be considered before finalizing the schedule?

CASE APPENDIX: TECHNICAL DETAILS Create your project schedule and assess your options based on the following information: 1. The project will begin the first working day in January, 2010. 2. The following holidays are observed: January 1, Memorial Day (last Monday in

May), July 4, Labor Day (first Monday in September), Thanksgiving Day (fourth Thursday in November), December 25 and 26.

3. If a holiday falls on a Saturday, then Friday will be given as an extra day off; if it falls on a Sunday, then Monday will be given as a day off.

4. The project team works Monday through Friday, 8 hour days. 5. If you choose to reduce the duration of any one of the activities mentioned, then it

must be for the specified time and cost (i.e., you cannot choose to reduce database to 37 days at a reduced cost; you can only reduce it to 35 days at a cost of $35,000).

6. You can only spend up to $100,000 to reduce project activities; lags do not contain any additional costs.

Case 9.5

The “Now” Wedding—Part A* On December 31 of last year, Lauren burst into the family living room and announced that she and Connor (her college boyfriend) were going to be married. After recover- ing from the shock, her mother hugged her and asked, “When?” The following conver- sation resulted:

Lauren: January 21. Mom: What? Dad: The Now Wedding will be the social hit of the year. Wait a minute. Why so

soon? Lauren: Because on January 30 Connor, who is in the National Guard, will be ship-

ping out overseas. We want a week for a honeymoon.

* This case was adapted from a case originally written by Professor D. Clay Whybark, University of North Carolina, Chapel Hill, N.C.

Chapter 9 Reducing Project Duration 335

Mom: But Honey, we can’t possibly finish all the things that need to be done by then. Remember all the details that were involved in your sister’s wedding? Even if we start tomorrow, it takes a day to reserve the church and recep- tion hall, and they need at least 14 days’ notice. That has to be done before we can start decorating, which takes 3 days. An extra $200 on Sunday would probably cut that 14 day notice to 7 days, though.

Dad: Oh, boy! Lauren: I want Jane Summers to be my maid of honor. Dad: But she’s in the Peace Corps in Guatemala, isn’t she? It would take her 10

days to get ready and drive up here. Lauren: But we could fly her up in 2 days and it would only cost $1,000. Dad: Oh, boy! Mom: And catering! It takes 2 days to choose the cake and decorations, and Jack’s

Catering wants at least 5 days’ notice. Besides, we’d have to have those things before we could start decorating.

Lauren: Can I wear your wedding dress, Mom? Mom: Well, we’d have to replace some lace, but you could wear it, yes. We could

order the lace from New York when we order the material for the brides- maids’ dresses. It takes 8 days to order and receive the material. The pat- tern needs to be chosen first, and that would take 3 days.

Dad: We could get the material here in 5 days if we paid an extra $20 to air- freight it. Oh, boy!

Lauren: I want Mrs. Jacks to work on the dresses. Mom: But she charges $48 a day. Dad: Oh, boy! Mom: If we did all the sewing we could finish the dresses in 11 days. If Mrs.

Jacks helped we could cut that down to 6 days at a cost of $48 for each day less than 11 days. She is very good too.

Lauren: I don’t want anyone but her. Mom: It would take another 2 days to do the final fitting and 2 more days to clean

and press the dresses. They would have to be ready by rehearsal night. We must have rehearsal the night before the wedding.

Dad: Everything should be ready rehearsal night. Mom: We’ve forgotten something. The invitations! Dad: We should order the invitations from Bob’s Printing Shop, and that usually

takes 7 days. I’ll bet he would do it in 6 days if we slipped him an extra $20!

Mom: It would take us 2 days to choose the invitation style before we could order them and we want the envelopes printed with our return address.

Lauren: Oh! That will be elegant. Mom: The invitations should go out at least 10 days before the wedding. If we let

them go any later, some of the relatives would get theirs too late to come and that would make them mad. I’ll bet that if we didn’t get them out until 8 days before the wedding, Aunt Ethel couldn’t make it and she would reduce her wedding gift by $200.

Dad: Oh, boy!! Mom: We’ll have to take them to the Post Office to mail them and that takes a day.

Addressing would take 3 days unless we hired some part-time girls and we can’t start until the printer is finished. If we hired the girls we could prob- ably save 2 days by spending $40 for each day saved.

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Lauren: We need to get gifts for the bridesmaids. I could spend a day and do that. Mom: Before we can even start to write out those invitations we need a guest list.

Heavens, that will take 4 days to get in order and only I can understand our address file.

Lauren: Oh, Mom, I’m so excited. We can start each of the relatives on a different job.

Mom: Honey, I don’t see how we can do it. Why, I’ve got to choose the invitations and patterns and reserve the church and . . .

Dad: Why don’t you just take $3,000 and elope. Your sister’s wedding cost me $2,400 and she didn’t have to fly people up from Guatemala, hire extra girls and Mrs. Jacks, use airfreight, or anything like that.

1. Using a yellow sticky approach shown in Snapshot from Practice 6.1, develop a project network for the “Now” Wedding.

2. Create a schedule for the wedding using MS Project. Can you reach the deadline of January 21 for the “Now” Wedding? If you cannot, what would it cost to make the January 21 deadline and which activities would you change?

Case 9.6

The “Now” Wedding—Part B Several complications arose during the course of trying to meet the deadline of Janu- ary 20 for the “Now” Wedding rehearsal. Since Lauren was adamant on having the wedding on January 21 (as was Connor for obvious reasons), the implications of each of these complications had to be assessed. 1. On January 1 the chairman of the Vestry Committee of the church was left unim-

pressed by the added donation and said he wouldn’t reduce the notice period from 14 to 7 days.

2. Mother comes down with the three-day flu as she starts work on the guest list January 2.

3. Bob’s Printing Shop press was down for one day on January 5 in order to replace faulty brushes in the electric motor.

4. The lace and dress material are lost in transit. Notice of the loss is received on January 10.

Can the wedding still take place on January 21? If not, what options are available?

Being an Effective Project Manager10

LEARNING OBJECTIVES After reading this chapter you should be able to:

10-1 Understand the difference between leading and managing a project.

10-2 Understand the need to manage project stakeholders.

10-3 Identify and apply different “influence currencies” to build positive relations with others.

10-4 Create a stakeholder map and develop strategies for managing project dependencies.

10-5 Understand the need for a highly interactive man- agement style on projects.

10-6 More effectively manage project expectations.

10-7 Develop strategies for managing upward relations.

10-8 Understand the importance of building trust and acting in an ethical manner while working on a project.

10-9 Identify the qualities of an effective project manager.

OUTLINE 10.1 Managing versus Leading a Project

10.2 Managing Project Stakeholders

10.3 Influence as Exchange

10.4 Social Network Building

10.5 Ethics and Project Management

10.6 Building Trust: The Key to Exercising Influence

10.7 Qualities of an Effective Project Manager

Summary

338

C H A P T E R T E N

I couldn’t wait to be the manager of my own project and run the project the way I thought it should be done. Boy, did I have a lot to learn!

—First-time project manager

This chapter is based on the premise that one of the keys to being an effective project manager is building cooperative relationships among different groups of people to complete projects. Project success does not just depend on the performance of the project team. Success or failure often depends on the contributions of top manage- ment, functional managers, customers, suppliers, contractors, and others. The chapter begins with a brief discussion of the differences between leading and managing a project. The importance of managing project stakeholders is then intro- duced. Managers require a broad influence base to be effective in this area. Different sources of influence are discussed and are used to describe how project managers build social capital. This management style necessitates constant interacting with dif- ferent groups of people whom project managers depend on. Special attention is devoted to managing the critical relationship with top management and the importance of leading by example. The importance of gaining cooperation in ways that build and

Project networks

6

Managing risk 7

Monitoring progress

13

Teams 11

Outsourcing 12

Project manager

10

Strategy 2

Introduction 1

Organization 3

Schedule resources & costs

8

Intern ation

al

proje cts

15

Agile PM 16

Project closure

14

Estimate 5

Reducing duration

9

Define project

4

339

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sustain the trust of others is emphasized. The chapter concludes by identifying per- sonal attributes associated with being an effective project manager. Subsequent chap- ters will expand on these ideas in a discussion of managing the project team and working with people outside the organization.

10.1 Managing versus Leading a Project In a perfect world, the project manager would simply implement the project plan and the project would be completed. The project manager would work with others to for- mulate a schedule, organize a project team, keep track of progress, and announce what needs to be done next, and then everyone would charge along. Of course no one lives in a perfect world, and rarely does everything go according to plan. Project partici- pants get testy; they fail to get along with each other; other departments are unable to fulfill their commitments; technical glitches arise; work takes longer than expected. The project manager’s job is to get the project back on track. A manager expedites certain activities; figures out ways to solve technical problems; serves as peacemaker when tensions rise; and makes appropriate trade-offs among time, cost, and scope of the project. However, project managers often do more than put out fires and keep the project on track. They also innovate and adapt to ever-changing circumstances. They sometimes have to deviate from what was planned and introduce significant changes in the project scope and schedule to respond to unforeseen threats or opportunities. For example, cus- tomers’ needs may change, requiring significant design changes midway through the project. Competitors may release new products that dictate crashing project deadlines. Working relationships among project participants may break down, requiring a refor- mulation of the project team. Ultimately, what was planned or expected in the begin- ning may be very different from what was accomplished by the end of the project. Project managers are responsible for integrating assigned resources to complete the project according to plan. At the same time they need to initiate changes in plans and schedules as persistent problems make plans unworkable. In other words, managers want to keep the project going while making necessary adjustments along the way. According to Kotter (1990) these two different activities represent the distinction between management and leadership. Management is about coping with complexity, while leadership is about coping with change. Good management brings about order and stability by formulating plans and objec- tives, designing structures and procedures, monitoring results against plans, and taking corrective action when necessary. Leadership involves recognizing and articulating the need to significantly alter the direction and operation of the project, aligning people to the new direction, and motivating them to work together to overcome hurdles pro- duced by the change and to realize new objectives. Strong leadership, while usually desirable, is not always necessary to successfully complete a project. Well-defined projects that encounter no significant surprises require little leadership, as might be the case in constructing a conventional apartment building in which the project manager simply administrates the project plan. Con- versely, the higher the degree of uncertainty encountered on a project—whether in terms of changes in project scope, technological stalemates, breakdowns in coordina- tion between people, and so forth—the more leadership is required. For example, strong leadership would be needed for a software development project in which the parameters are always changing to meet developments in the industry.

10-1 Understand the difference between leading and managing a project.

LO

Chapter 10 Being an Effective Project Manager 341

It takes a special person to perform both roles well. Some individuals are great visionaries who are good at exciting people about change. Too often though, these same people lack the discipline or patience to deal with the day-to-day drudgeries of managing. Likewise, there are other individuals who are very well organized and methodical but lack the ability to inspire others. Strong leaders can compensate for their managerial weaknesses by having trusted assistants who oversee and manage the details of the project. Conversely, a weak leader can complement his or her strengths by having assistants who are good at sensing the need to change and rallying project participants. Still, one of the things that make good project managers so valuable to an organization is that they have the ability to both manage and lead a project. In doing so they recognize the need to create a social net- work that allows them to find out what needs to be done and obtain the cooperation necessary to achieve it.

10.2 Managing Project Stakeholders First-time project managers are eager to implement their own ideas and manage their people to successfully complete their project. What they soon find out is that project success depends on the cooperation of a wide range of individuals, many of whom do not directly report to them. For example, during the course of a system integration project, a project manager was surprised by how much time she was spending negoti- ating and working with vendors, consultants, technical specialists, and other functional managers:

Instead of working with my people to complete the project, I found myself being constantly pulled and tugged by demands of different groups of people who were not directly involved in the project but had a vested interest in the outcome.

Too often when new project managers do find time to work directly on the project, they adopt a hands-on approach to managing the project. They choose this style not because they are power-hungry egomaniacs but because they are eager to achieve results. They become quickly frustrated by how slowly things operate, the number of people that have to be brought on board, and the difficulty of gaining cooperation. Unfortunately, as this frustration builds, the natural temptation is to exert more pres- sure and get more heavily involved in the project. These project managers quickly earn the reputation of “micro managing” and begin to lose sight of the real role they play on guiding a project. Some new managers never break out of this vicious cycle. Others soon realize that authority does not equal influence and that being an effective project manager involves managing a much more complex and expansive set of interfaces than they had previ- ously anticipated. They encounter a web of relationships that requires a much broader spectrum of influence than they felt was necessary or even possible. For example, a significant project, whether it involves renovating a bridge, creating a new product, or installing a new information system, will likely involve in one way or another working with a number of different groups of stakeholders. First, there is the core group of specialists assigned to complete the project. This group is likely to be supplemented at different times by professionals who work on specific segments of the project. Second, there are the groups of people within the performing organization who are either directly or indirectly involved with the project. The most notable is top management, to whom the project manager is accountable. There are also other

10-2LO Understand the need to manage project stakeholders.

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managers who provide resources and/or may be responsible for specific segments of the project, and administrative support services such as human resources, finance, etc. Depending on the nature of the project, there are a number of different groups outside the organization that influence the success of the project; the most important is the customer for which the project is designed (see Figure 10.1). Each of these groups of stakeholders brings different expertise, standards, priorities, and agendas to the project. Stakeholders are people and organizations that are actively involved in the project, or whose interests may be positively or negatively affected by the project (PMBOK, 2013). The sheer breadth and complexity of stakeholder relationships distinguish project management from regular management. To be effective, a project manager must understand how stakeholders can affect the project and develop methods for managing the dependency. The nature of these dependencies is identified here: ∙ The project team manages and completes project work. Most participants want to

do a good job, but they are also concerned with their other obligations and how their involvement on the project will contribute to their personal goals and aspirations.

∙ Project managers naturally compete with each other for resources and the support of top management. At the same time they often have to share resources and exchange information.

∙ Administrative support groups, such as human resources, information systems, purchasing agents, and maintenance, provide valuable support services. At the same time they impose constraints and requirements on the project such as the documen- tation of expenditures and the timely and accurate delivery of information.

FIGURE 10.1 Network of Stakeholders

Project manager

Pro ject

Project

Team

Tea m

Project managers

Functional managers

Administrative support

Top management

Other organizations

Customers

Government agencies

Contractors

Project sponsors

Chapter 10 Being an Effective Project Manager 343

∙ Functional managers, depending on how the project is organized, can play a minor or major role toward project success. In matrix arrangements, they may be respon- sible for assigning project personnel, resolving technical dilemmas, and overseeing the completion of significant segments of the project work. Even in dedicated proj- ect teams, the technical input from functional managers may be useful, and accep- tance of completed project work may be critical to in-house projects. Functional managers want to cooperate up to a point, but only up to a certain point. They are also concerned with preserving their status within the organization and minimizing the disruptions the project may have on their own operations.

∙ Top management approves funding of the project and establishes priorities within the organization. They define success and adjudicate rewards for accomplishments. Significant adjustments in budget, scope, and schedule typically need their approval. They have a natural vested interest in the success of the project, but at the same time have to be responsive to what is best for the entire organization.

∙ Project sponsors champion the project and use their influence to gain approval of the project. Their reputation is tied to the success of the project, and they need to be kept informed of any major developments. They defend the project when it comes under attack and are a key project ally.

∙ Contractors may do all the actual work, in some cases, with the project team merely coordinating their contributions. In other cases, they are responsible for ancillary segments of the project scope. Poor work and schedule slips can affect work of the core project team. While contractors’ reputations rest with doing good work, they must balance their contributions with their own profit margins and their commitments to other clients.

∙ Government agencies place constraints on project work. Permits need to be secured. Construction work has to be built to code. New drugs have to pass a rigor- ous battery of U.S. Food and Drug Administration tests. Other products have to meet safety standards, for example, Occupational Safety and Health Administration standards.

∙ Other organizations, depending on the nature of the project, may directly or indi- rectly affect the project. For example, suppliers provide necessary resources for completion of the project work. Delays, shortages, and poor quality can bring a project to a standstill. Public interest groups may apply pressure on government agencies. Customers often hire consultants and auditors to protect their interests on a project.

∙ Customers define the scope of the project, and ultimate project success rests in their satisfaction. Project managers need to be responsive to changing customer needs and requirements and to meeting their expectations. Customers are primarily concerned with getting a good deal and, as will be elaborated in Chapter 11, this naturally breeds tension with the project team.

These relationships are interdependent in that a project manager’s ability to work effectively with one group will affect her ability to manage other groups. For example, functional managers are likely to be less cooperative if they perceive that top manage- ment’s commitment to the project is waning. Conversely, the ability of the project manager to buffer the team from excessive interference from a client is likely to increase her standing with the project team. The project management structure being used will influence the number and degree of external dependencies that will need to be managed. One advantage of creating a

344 Chapter 10 Being an Effective Project Manager

dedicated project team is that it reduces dependencies, especially within the organiza- tion, because most of the resources are assigned to the project. Conversely, a func- tional matrix structure increases dependencies, with the result that the project manager is much more reliant upon functional colleagues for work and staff. The old-fashioned view of managing projects emphasized planning and directing the project team; the new perspective emphasizes managing project stakeholders and anticipating change as the most important jobs. Project managers need to be able to assuage concerns of customers, sustain support for the project at higher levels of the organization, quickly identify problems that threaten project work, while at the same time defend the integrity of the project and the interests of the project participants.1 Within this web of relationships, the project manager must find out what needs to be done to achieve the goals of the project and build a cooperative network to accom- plish it. Project managers must do so without the requisite authority to expect or demand cooperation. Doing so requires sound communication skills, political savvy, and a broad influence base. See the Snapshot from Practice 10.1: The Project Manager as Conductor for more on what makes project managers special. See Research High- light 10.1: Give and Take for an interesting finding regarding this concept.

1 For a systematic treatise on stakeholder management, see: Lynda Bourne, Stakeholder Relationship Management (Farnham, England: Gower Publishing Ltd., 2009).

Metaphors convey meaning beyond words. For example, a meeting can be described as being difficult or “like wading through molasses.” A popular metaphor for the role of a project

manager is that of conductor. The conductor of an orchestra integrates the divergent sounds of different instruments to perform a given composition and make beautiful music. Similarly, the project manager inte- grates the talents and contributions of different spe- cialists to complete the project. Both have to be good at understanding how the different players contribute to the performance of the whole. Both are almost entirely dependent upon the expertise and know-how of the players. The conductor does not have command of all the musical instruments. Likewise, the project manager usually possesses only a small proportion of the technical knowledge to make decisions. As such, the conductor and project manager both facilitate the performance of others rather than actually perform. Conductors use their arms, baton, and other non- verbal gestures to influence the pace, intensity, and involvement of different musicians. Likewise, project managers orchestrate the completion of the project by

S N A P S H O T F R O M P R A C T I C E 1 0 . 1 The Project Manager as Conductor

managing the involvement and attention of project members. Project managers balance time and process and induce participants to make the right decisions at the right time just as the conductor induces the wind instruments to perform at the right moment in a move- ment. Each controls the rhythm and intensity of work by managing the tempo and involvement of the players. Finally, each has a vision that transcends the music score or project plan. To be successful they must both earn the confidence, respect, and trust of their players.

© JGI/Jamie Grill/Blend Images LLC

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10.3 Influence as Exchange To successfully manage a project, a manager must adroitly build a cooperative network among divergent allies. Networks are mutually beneficial alliances that are generally gov- erned by the law of reciprocity (Kaplan, 1984; Grant, 2013). The basic principle is that “one good deed deserves another, and likewise, one bad deed deserves another.” The pri- mary way to gain cooperation is to provide resources and services for others in exchange for future resources and services. This is the age-old maxim: “Quid pro quo (something for something).” Or in today’s vernacular: “You scratch my back, I’ll scratch yours.” Cohen and Bradford (1990) described the exchange view of influence as “curren- cies.” If you want to do business in a given country, you have to be prepared to use the appropriate currency, and the exchange rates can change over time as conditions change. In the same way, what is valued by a marketing manager may be different from what is valued by a veteran project engineer, and you are likely to need to use different influence currency to obtain the cooperation of each individual. Although this analogy is a bit of an oversimplification, the key premise holds true that in the long run, “debit” and “credit” accounts must be balanced for cooperative relationships to work. Table 10.1 presents the commonly traded organizational currencies identified by Cohen and Bradford; they are then discussed in more detail in the following sections.

Task-Related Currencies This form of influence comes in different forms and is based on the project manager’s ability to contribute to others’ accomplishing their work. Probably the most significant form of this currency is the ability to respond to subordinates’ requests for additional

10-3LO Identify and apply differ- ent “influence currencies” to build positive relations with others.

Adam Grant from the University of Pennsylvania identified three funda- mental styles of social interaction with regard to the law of reciprocity:

Takers: Like to get more than give and put their own interests ahead of others.

Givers: Prefer to give more than they get and pay more attention to what others need. Matchers: Strive to preserve an equal balance be- tween giving and getting and operate on the prin- ciple of fairness.

While Grant admits that people will shift from one style to another, he cites research that indicates that most people develop a primary interaction style. He goes on to review research on the relationship between interaction style and professional success. Not surprisingly, he found Givers tend to sink to the bottom of the success ladder. They make others better off but sacrifice their own success in the process. Guess who was at the very top of the success lad- der? It was Givers again! Grant goes on to explain this paradox by arguing that while it is true that many

Givers are too caring and too timid, there are other Givers who are willing to give more than they receive, and still keep their own interests in sight, using them as a guide for choosing when, how, and to whom to give. These kind of Givers are able to create much bigger and more powerful social networks than Takers and Matchers. The good will they are able to generate is a major factor behind the success of this kind of Givers. Grant claims that Abraham Lincoln is a perfect example of a Giver that climbed to the top. When he won the presidency in 1860, he recruited bitter com- petitors whom he had earlier defeated to join his management team (Cabinet) in key positions. Grant predicts a Taker would have protected his ego and invited only “yes men” and a Matcher would have offered appointments to allies. Lincoln reported he needed the best men possible to run the country and by always focusing on what was best for the country he was able to forge an effective manage- ment team.

Research Highlight 10.1 Give and Take*

* Adam Grant, Give and Take: A Revolutionary Approach to Success (New York: Viking Press, 2013).

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Task-related currencies

Resources Lending or giving money, budget increases, personnel, etc. Assistance Helping with existing projects or undertaking unwanted tasks. Cooperation Giving task support, providing quicker response time, or aiding

implementation. Information Providing organizational as well as technical knowledge.

Position-related currencies

Advancement Giving a task or assignment that can result in promotion. Recognition Acknowledging effort, accomplishments, or abilities. Visibility Providing a chance to be known by higher-ups or significant others in the

organization. Network/contacts Providing opportunities for linking with others.

Inspiration-related currencies

Vision Being involved in a task that has larger significance for the unit, organiza- tion, customer, or society.

Excellence Having a chance to do important things really well. Ethical correctness Doing what is “right” by a higher standard than efficiency.

Relationship-related currencies

Acceptance Providing closeness and friendship. Personal support Giving personal and emotional backing. Understanding Listening to others’ concerns and issues.

Personal-related currencies

Challenge/learning Sharing tasks that increase skills and abilities. Ownership/involvement Letting others have ownership and influence. Gratitude Expressing appreciation.

TABLE 10.1 Commonly Traded Organizational Currencies

Source: Adapted from A. R. Cohen and David L. Bradford, Influence without Authority (New York: John Wiley & Sons, 1990).

manpower, money, or time to complete a segment of a project. This kind of currency is also evident in sharing resources with another project manager who is in need. At a more personal level, it may simply mean providing direct assistance to a colleague in solving a technical problem. Providing a good word for a colleague’s proposal or recommendation is another form of this currency. Because most work of significance is likely to generate some form of opposition, the person who is trying to gain approval for a plan or proposal can be greatly aided by having a “friend in court.” Another form of this currency includes extraordinary effort. For example, fulfilling an emergency request to complete a design document in two days instead of the nor- mal four days is likely to engender gratitude. Finally, sharing valuable information that would be useful to other managers is another form of this currency.

Position-Related Currencies This form of influence stems from the manager’s ability to enhance others’ positions within their organization. A project manager can do this by giving someone a chal- lenging assignment that can aid their advancement by developing their skills and abili- ties. Being given a chance to prove yourself naturally generates a strong sense of gratitude. Sharing the glory and bringing to the attention of higher-ups the efforts and accomplishments of others generate goodwill.

Chapter 10 Being an Effective Project Manager 347

Project managers confide that a useful strategy for gaining the cooperation of pro- fessionals in other departments/organizations is figuring out how to make these people look good to their bosses. For example, a project manager worked with a subcontractor whose organization was heavily committed to total quality management (TQM). The project manager made it a point in top-level briefing meetings to point out how quality improvement processes initiated by the contractor contributed to cost control and problem prevention. Another variation of recognition is enhancing the reputation of others within the firm. “Good press” can pave the way for lots of opportunities, while “bad press” can quickly shut a person off and make it difficult to perform. This currency is also evident in helping to preserve someone’s reputation by coming to the defense of someone unjustly blamed for project setbacks. Finally, one of the strongest forms of this currency is sharing contacts with other people. Helping individuals expand their own networks by introducing them to key people naturally engenders gratitude. For example, suggesting to a functional manager that he should contact Sally X if he wants to find out what is really going on in that department or to get a request expedited is likely to engender a sense of indebtedness.

Inspiration-Related Currencies Perhaps the most powerful form of influence is based on inspiration. Most sources of inspiration derive from people’s burning desire to make a difference and add meaning to their lives. Creating an exciting, bold vision for a project can elicit extraordinary commitment. For example, many of the technological breakthroughs associated with the introduction of the original Macintosh computer were attributed to the feeling that the project members had a chance to change the way people approached computers. A variant form of vision is providing an opportunity to do something really well. Being able to take pride in your work often drives many people. Often the very nature of the project provides a source of inspiration. Discovering a cure for a devastating disease, introducing a new social program that will help those in need, or simply building a bridge that will reduce a major traffic bottleneck can pro- vide opportunities for people to feel good about what they are doing and that they are making a difference. Inspiration operates as a magnet—pulling people as opposed to pushing people toward doing something.

Relationship-Related Currencies These currencies have more to do with strengthening the relationship with someone than directly accomplishing the project tasks. The essence of this form of influence is forming a relationship that transcends normal professional boundaries and extends into the realm of friendship. Such relationships develop by giving personal and emo- tional backing. Picking people up when they are feeling down, boosting their confi- dence, and providing encouragement naturally breed goodwill. Sharing a sense of humor and making difficult times fun is another form of this currency. Similarly, engaging in non-work-related activities such as sports and family outings is another way relationships are naturally enhanced. Perhaps the most basic form of this currency is simply listening to other people. Psychologists suggest that most people have a strong desire to be understood and that relationships break down because the parties stop listening to each other. Sharing per- sonal secrets/ambitions and being a wise confidant also creates a special bond between individuals.

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Personal-Related Currencies This last form of currency deals with individual needs and an overriding sense of self-esteem. Some argue that self-esteem is a primary psychological need; the extent to which we can help others feel a sense of importance and personal worth will naturally generate goodwill. A project manager can enhance a colleague’s sense of worth by asking for help and seeking opinions, delegating authority over work and allowing individuals to feel comfortable stretching their abilities. This form of currency can also be seen in sincere expressions of gratitude for the contri- butions of others. Care, though, must be exercised in expressing gratitude since it is easily devalued when overused. That is, the first thank you is likely to be more valued than the fiftieth. The bottom line is that a project manager will be influential only insofar as she can offer something that others value. Furthermore, given the diverse cast of people a proj- ect manager depends on, it is important that she be able to acquire and exercise differ- ent influence currencies. The ability to do so will be constrained in part by the nature of the project and how it is organized. For example, a project manager who is in charge of a dedicated team has considerably more to offer team members than a manager who is given the responsibility of coordinating the activities of different professionals across different departments and organizations. In such cases, that manager will prob- ably have to rely more heavily on personal and relational bases of influence to gain the cooperation of others.

10.4 Social Network Building

Mapping Stakeholder Dependencies The first step to social network building is identifying those stakeholders on whom the project depends for success. The project manager and his or her key assistants need to ask the following questions: ∙ Whose cooperation will we need? ∙ Whose agreement or approval will we need? ∙ Whose opposition would keep us from accomplishing the project? Many project managers find it helpful to draw a map of these dependencies. For exam- ple, Figure 10.2 contains the dependencies identified by a project manager responsible for installing a new financial software system in her company. It is always better to overestimate rather than underestimate dependencies. All too often, otherwise talented and successful project managers have been derailed because they were blindsided by someone whose position or power they had not anticipated. After identifying the stakeholders associated with your project, it is important to assess their significance. Here the power/interest matrix introduced in Chapter 3 becomes useful. Those individuals with the most power over and interest in the project are the most significant stakeholders and deserve the greatest attention. In particular, you need to “step into their shoes” and see the project from their perspective: ∙ What differences exist between myself and the people on whom I depend (goals,

values, pressures, working styles, risks)? ∙ How do these different people view the project (supporters, indifferents,

antagonists)?

10-4LO Create a stakeholder map and develop strate- gies for managing proj- ect dependencies.

Chapter 10 Being an Effective Project Manager 349

∙ What is the current status of the relationship I have with the people I depend on? ∙ What sources of influence do I have relative to those on whom I depend? Once you start this analysis you can begin to appreciate what others value and what currencies you might have to offer as a basis on which to build a working relation- ship. You begin to realize where potential problems lie—relationships in which you have a current debit or no convertible currency. Furthermore, diagnosing another’s point of view as well as the basis for their positions will help you anticipate their reactions and feelings about your decisions and actions. This information is vital for selecting the appropriate influence strategy and tactics and producing win/win solutions. For example, after mapping her dependency network, the project manager who was in charge of installing the software system realized that she was likely to have serious problems with the manager of the receipts department, who would be one of the pri- mary users of the software. She had no previous history of working with this individ- ual but had heard through the grapevine that the manager was upset with the choice of software and that he considered this project to be another unnecessary disruption of his department’s operation.  Prior to project initiation the project manager arranged to have lunch with the manager, where she sat patiently and listened to his concerns. She invested addi- tional time and attention to educate him and his staff about the benefits of the new software. She tried to minimize the disruptions the transition would cause in his department. She altered the implementation schedule to accommodate his prefer- ences as to when the actual software would be installed and the subsequent training would occur. In turn, the receipts manager and his people were much more accept- ing of the change, and the transition to the new software went more smoothly than anticipated.

Software installation

project

Billing and receipts

Purchasing

Top management

Software vendor

Inventory

Information technology manager

Information technology

director Shipping

FIGURE 10.2 Stakeholder Map for Financial Software Installation Project

350 Chapter 10 Being an Effective Project Manager

Management by Wandering Around (MBWA) The preceding example illustrates a key point – project management is a “contact sport.” Once you have established who the key players are, then you initiate contact and begin to build a relationship with those players. Building this relationship requires an interactive management style employees at Hewlett-Packard refer to as “manage- ment by wandering around” (MBWA) to reflect that managers spend the majority of their time outside their offices. MBWA is somewhat of a misnomer in that there is a purpose/pattern behind the “wandering.” Through face-to-face interactions, project managers are able to stay in touch with what is really going on in the project and build cooperation essential to project success. Effective project managers initiate contact with key players to keep abreast of devel- opments, anticipate potential problems, provide encouragement, and reinforce the objectives and vision of the project. They are able to intervene to resolve conflicts and prevent stalemates from occurring. In essence, they “manage” the project. By staying in touch with various aspects of the project they become the focal point for information on the project. Participants turn to them to obtain the most current and comprehensive information about the project which reinforces their central role as project manager. We have also observed less-effective project managers who eschew MBWA and attempt to manage projects from their offices and computer terminals. Such managers proudly announce an open-door policy and encourage others to see them when a prob- lem or an issue comes up. To them no news is good news. This allows their contacts to be determined by the relative aggressiveness of others. Those who take the initiative and seek out the project manager get too high a proportion of the project manager’s attention. Those people less readily available (physically removed) or more passive get ignored. This behavior contributes to the adage, “Only the squeaky wheel gets greased,” which breeds resentment within the project team. Effective project managers also find the time to regularly interact with more distal stakeholders. They keep in touch with suppliers, vendors, top management, and other functional managers. In doing so they maintain familiarity with different parties,