Every LOB managers line up a series of projects during annual budget cycle. Ideas coming from all departments are great but given the budget constraints, organizations can only execute so many ideas. So, how does one go about selecting projects for investments?
Some projects like regulatory, compliance, safety/security, etc., have to be implemented whether they meet business case or not. For most projects, Project Selection & Prioritization Process includes the following basic steps –
1. CHECK FOR ALIGNMENT TO STRATEGIC OBJECTIVES
- Does the project align well with company vision, goals/objectives and strategies?
If it doesn’t, drop the idea right here.
2. CALCULATE FINANCIAL METRICS
Financial metrics are important to ensure that the investment you are proposing will provide a required return with appropriate risk exposure. Top 5 metrics that I have always seen in business cases include –
- Net Present Value (NPV) – NPV is used to analyze projects’ profitability. A positive NPV indicates that the projected earnings generated by a project or investment exceeds the anticipated costs.
- Payback Period – The payback period is the length of time required to recover the cost of an investment. Shorter payback period desirable
- Internal Rate of Return (IRR) – IRR is used to evaluate the attractiveness of a project or investment. Higher the IRR, the better.
- Opportunity Costs (the opportunity cost of a resource is the value of the net cash flow that could be derived from it if it were put to its best alternative use)
- Return on Investment (ROI) – a gauge of investments profitability
3. CONDUCT RISK ASSESSMENTS
A plotting of project on Value / Risk scale. Value could be NPV or any other metrics that organizations uses to value projects.
4. SCORE/PRIORITIZE PROJECTS
Project Prioritization is required to rank projects for execution. The criteria for ranking them is highly subjective e.g. some firms many value financial metrics more and may have higher weightage, others may value investment types more, etc. Each organization will have a different model for how its projects create value and, therefore, will want to use different metrics. There is no one set of project metrics that works for every organization.
Another factor to keep in mind: Sr. Management very often have a good idea in terms of how much investments should go for innovation vs. maintenance, etc. So, picking a right mix of “strategic investments”(Growth, Innovation) and “operational investments” (Maintenance, Productivity) is critical.
E.g. For 2017, mix could be 75% productivity; 10% maintenance; 10% growth; 5% innovation
……….. moving to ……
2018, mix could be 70% productivity; 10% maintenance; 15% growth; 10% innovation
……….. moving to …..
2019, mix could be 55% productivity; 10% maintenance; 25% growth; 15% innovation, etc.
In this example, focus is on cost reduction (i.e. with productivity gains), with progressive elaboration on innovation and growth.
The following diagram shows an example of a weighted attribute project selection process.
….. and plotted on scale again. Note that size of bubble indicates the total investments and color indicates the investment type. This chart can then be used to guide decisions.
5. WRITE PROJECT CHARTERS FROM APPROVED PROJECTS
Formally document the project approval process via project charter, which is provides the basis for project execution. The Project Charter is a key document and communication tool that describes the customers, problem, goal, scope, business case, milestones, budget allocated and team composition.
So, what can be done to improve the process further?
Managing investments and project portfolio is critical. Few questions to ask –
- Does your organization have a rigorous process for investing in right projects as part of PPM methodology?
- Does your organization involve Program Manager and PMs during project selection process?
- Does your organization feed the output from project selection in writing project charters? In other words, does business case translate to project charter?
- How often do leaders meet to review projects and investments? (Hint: Moving from annual to bi-annual review process helps bring innovative ideas faster to market and helps kill projects that are adding no value)
- What is the target investment mix for your organization today? How does that fare to competitors or disruptors?
Its time to start asking right questions and select projects that further the organizations goals.