Project Manager Street Smarts E-Book

Terri Wagner

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 444

Veröffentlichungsjahr: 2009

Beschreibung

Hands-on practice for the most common-and most difficult-projectmanagement tasksBreaking into the field of project management is difficult, andthe Project Management Institute requires that Project ManagementProfessionals (PMPs) have on-the-job experience before earningtheir certification. This handy, task-based resource addresses themost common and the most challenging tasks Project Managers faceand demonstrates how to perform these tasks.The Street Smarts series is designed to help current or aspiringprofessionals put their certification to work for them. Full ofpractical, real world scenarios, each book features actual tasksfrom the field and then offers step-by-step exercises that teachthe skills necessary to complete those tasks.* Aimed at anyone looking to gain hands-on experience in thefield of project management by offering a unique look at the dailyroutine of a project manager* Offers a variety of real-world scenarios, covering everythingfrom the most common tasks to the most demanding roadblocks* Walks you through step-by-step instructions of working with aproject: initiating, planning, executing, monitoring andcontrolling, and closing* Demonstrates defining a scope, developing a project charter,creating the work breakdown structure, managing resourceallocation, and moreDesigned to provide you with an accurate look into the field ofproject management, this book offers you a unique and insightfulperspective on the demands of a project manager on a day-to-daybasis.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Acknowledgements

About the Authors

Introduction

Project Success Factors

What Is PMP Certification?

Is This Book for You?

How This Book Is Organized

Project Management Tasks

How to Contact the Publisher

How to Contact the Authors

Phase 1 - Initiating Process

Task 1.1: Understanding Finance Principles

Task 1.2: Understanding Project Selection Methods

Task 1.3: Using Business Cases with Built-in Feasibility Analysis

Task 1.4: Identifying Stakeholders—Who Are They?

Task 1.5: Conducting a Stakeholder Analysis

Task 1.6: Understanding Corporate Strategy

Task 1.7: Creating the Scope Statement

Task 1.8: Creating the Project Charter

Phase 2 - Planning Process

Task 2.1: Identifying Team Members

Task 2.2: Assigning Responsibilities in the Planning Phase

Task 2.3: Creating the Project Organizational Structure

Task 2.4: Developing a Communication Plan

Task 2.5: Creating the Work Breakdown Structure

Task 2.6: Creating Subsidiary Plans

Task 2.7: Managing Project Risks

Task 2.8: Creating the Master Project Management Plan

Task 2.9: Obtaining Plan Approval

Task 2.10: Developing a Change Management Plan

Phase 3 - Executing Process

Task 3.1: Directing and Managing Project Execution

Task 3.2: Acquiring the Project Team

Task 3.3: Developing the Project Team

Task 3.4: Managing the Project Team

Task 3.5: Providing Quality Assurance

Task 3.6: Executing the Communications Plan

Task 3.7: Conducting Procurements

Phase 4 - Monitoring and Controlling Process

Task 4.1: Monitoring and Controlling Project Work

Task 4.2: Managing Risks

Task 4.3: Administering Procurements

Phase 5 - Closing Process

Task 5.1: Formalizing Project Acceptance

Task 5.2: Performing Personnel Performance Reviews

Task 5.3: Obtaining Contract Closure

Task 5.4: Understanding the Lessons Learned

Task 5.5: Creating and Distributing Final Reports

Appendix A - Solutions

Index

Copyright © 2009 by Wiley Publishing, Inc., Indianapolis, Indiana

Published simultaneously in Canada

eISBN : 978-0-470-59610-4

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Library of Congress Cataloging-in-Publication Data

Zaval, Linda Kretz, 1948-

p. cm.

1. Project management. I. Wagner, Terri, 1959- II. Title.

HD69.P75.Z38 2009

658.4’04--dc22

2009019175

TRADEMARKS: Wiley, the Wiley logo, and the Sybex logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates, in the United States and other countries, and may not be used without written permission. PMI, CAMP, PMP, and PMBOK are trademarks of registered trademarks of Project Management Institute, Inc. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book.

Dear Reader,

Thank you for choosing Project Manager Street Smarts: A Real World Guide to PMP®Skills. This book is part of a family of premium-quality Sybex books, all of which are written by outstanding authors who combine practical experience with a gift for teaching.

Sybex was founded in 1976. More than 30 years later, we’re still committed to producing consistently exceptional books. With each of our titles, we’re working hard to set a new standard for the industry. From the paper we print on, to the authors we work with, our goal is to bring you the best books available.

I hope you see all that reflected in these pages. I’d be very interested to hear your comments and get your feedback on how we’re doing. Feel free to let me know what you think about this or any other Sybex book by sending me an email at [email protected]. If you think you’ve found a technical error in this book, please visit http://sybex.custhelp.com. Customer feedback is critical to our efforts at Sybex.

Best regards,

Neil EddeVice President and PublisherSybex, an Imprint of Wiley

To Eldred, my forever love, for his patience and support, and Daryl, who can see me from heaven and smile.

—Linda

To my mother, who always told me I should write a book someday, and to Von, who taught me how to breathe life into dreams and watch them come true.

—Terri

Acknowledgments

It takes a village…to write a book. Thank you to the tireless team of folks supporting this effort. First to Neil Edde for his suggestion we venture down this path. Next, thanks go out to acquisitions editor Jeff Kellum for grabbing his book-publishing compass and mapping the course. Another shout out to editorial manager Pete Gaughan for gathering an awesome team. A special thank you also to Kim Heldman for walking the path before us, setting the example, and inspiring this work; we love you Kim. Liz Britten, our production editor, did a wonderful job. Thanks also to Sharon Wilkey, the copy editor, for grammatical help and suggestions. Hats off to development editor Toni Zuccarini Ackley for keeping the project on track and offering helpful recommendations along the way. Another thank you to Brett Feddersen, our technical editor, for reviewing every word and every exercise for clarity, usefulness, and accuracy. And finally, a very special thank you to the community of project managers who have taught us throughout our careers by words and by action, and who continue to lend wisdom to the profession.

About the Authors

Linda Kretz Zaval (PMP) has successfully managed several multi-million-dollar projects within the telecommunications, cable, and IT industries. Her most recent assignments have included training for many government agencies including the Department of Defense, the Department of Energy, the National Park Service, and the National Security Agency.

During her 40-year working career, Zaval held a variety of positions at US WEST, including Director of Project Management. She was a member of the core team that developed the Center for Program Management at the University of Denver. She has also served as Vice President of Training and Product Development for the International Institute for Learning in New York City and managed a global team of project managers for IBM.

Zaval is the owner/managing member of 20/20 Solutions, LLC, an Idaho-based project management consulting and training company.

She is also an active member of the Project Management Institute (PMI) and is the author of The Project Manager’s Toolkit. She has taught several university-level seminars as well as public and custom programs in project management, finance, and systems development. She is an internationally sought after public speaker and consultant known for her ability to establish real world methodologies for implementing project management in a corporate environment.

Terri Wagner (PMP) has managed multi-million-dollar project management office portfolios for international consulting clients. Wagner also has led teams of project managers, business analysts, process specialists, operational groups, and trainers in the planning, design, development, and deployment of system and operational enhancements, as well as client-based initiatives. She has been awarded honors for being a creative thinker with the ability to successfully apply technology for the advancement of internal and external operational efficiencies and quality. She has taught project management, portfolio management, program management, business leadership, quality management, and other topics to state agencies, governmental entities, corporate clients, and at the graduate level in the university system. Wagner has delivered training, consulting, and project management in the United States, Canada, the Caribbean, and Europe while continuing to both run projects and consult with organizations on project management methodologies and strategies.

Wagner is owner/managing member of Mentor Source, Inc., a Colorado-based project management consulting and training company. She is an active member of Project Management Institute (PMI) and technical editor for several textbooks on the topic of project management.

Introduction

The project management discipline is swiftly becoming the catalyst of choice for change in modern business models. The added value project management provides to the bottom line is now considered a corporate lifesaver, not a corporate cost center. Even though the discipline does not usually generate revenue (except in projectized organizations) it enables profit generation by maintaining tight controls on expenditures with a proactive view of project events.

Project managers today are provided the power and authority to establish, maintain, and forecast project results. It is a proactive instead of reactive process. Project managers today participate with finance and marketing analysts in the financial justification of projects. Their contribution to the corporate bottom line makes the discipline of project management a twenty-first century core business process.

If used correctly, the process of project management can impact revenue-to-expense ratios in a positive way. It can curtail expenses and assist senior management in choosing one project over another by providing a realistic and defendable cost structure designed to increase competitive advantage and maximize shareholder wealth. In other words, project management is a cost saver rather than a cost center.

So just how does a project fit within an organization’s goals and strategies? How can a project manager get others excited about the project? Complex projects challenge the capabilities of contemporary organizations, requiring new structures, sophisticated management skills, and new roles and relationships. This book addresses these challenges. Novice project managers will be able to follow a project from beginning to end. Seasoned project practitioners will be able to see how real world project management and the Project Management Body of Knowledge® are aligned. While learning project processes and the activities associated with, them the reader will be able to:

• Describe how project management principles and techniques apply to the real word challenges of project management

• Understand how to define project scope and explain the steps needed for successful project plan execution

• Develop competency in creating a work breakdown structure (WBS)

• Contrast the accountabilities of functional managers with those of project managers

• Develop schedule logic

• Develop competency in evaluating schedule performance

• Understand how to determine corrective action when plans go awry

• Utilize human resources effectively

• Understand appropriate communications with project stakeholders

• Get a glimpse of project portfolio management and how it relates to project selection

• Understand the characteristics of high performance teams and their challenges

• Understand motivation techniques through constructive counsel

• Understand how to communicate more effectively in conflict situations

• Understand and demonstrate listening, persuasion, and delegation techniques

• Describe risk management components and concepts

• Understand uncertainty and its role in decision making

Project Success Factors

Before we begin, let’s take a look at the factors that can make or break projects. As you move forward, keep these factors in mind so that your project will start out on a positive note. If these success factors do not exist in your organization, perhaps more up front work will be needed before you begin your project management journey.

Project Success Factor 1

In order for project management to be successful within an organization, it must have top down, senior-level or executive support. The project owner must support the benefits of the project, accept responsibility for funding and budget status, concur with project and charter requirements, sign off on risk plans, and be knowledgeable of the status of both planned and actual results.

Project Success Factor 2

Clients and users must have ownership of the project. This is demonstrated by providing resources, being involved in the project initiative, signing off on requirements once the plan is completed, signing off on the schedule, participating in the risk management processes, and concurring with scope changes.

Project Success Factor 3

Business processes must be fully known. The project manager and the team must demonstrate knowledge of business processes. Many projects are generated due to a business problem, and the team must understand that problem and define how the project solution will change business processes. When there are changes, the impacts should be documented and fully understood by the client. Process improvement metrics must also be identified so that it can be determined whether the project has met its intended purpose relative to the business problem.

Project Success Factor 4

Projects should be chosen based on a sound business plan that is completed for a particular stage or effort. The infrastructure and business solution units must be identified and synched with the corporate plan and economically validated.

Project Success Factor 5

The project scope should be clearly defined and identified in the project charter. Impact analysis relative to budget and schedule must be performed when scope changes occur, and the focus of the team must be limited to approved changes only. Owners must step up to the risks and benefits for all scope changes.

Project Success Factor 6

An effective change control process must exist that is followed by all stakeholders. The project manager must regularly review all changes and their impacts with the owner, who must approve change requests and associated funding.

Project Success Factor 7

The business drivers must be fully identified and agreed upon by the owner and user community. In other words, the project must add value to the business. The solution elements of the project should be traced back to business drivers, with success criteria defined at the onset and benchmarked at each phase. A means to collect data should be established so that the metrics can be demonstrated.

Project Success Factor 8

There should be limited experimentation with new technology. Previous use must be demonstrated prior to commitment for mission-critical projects. Previous industry application must be demonstrated before application for customer-affecting projects. The appropriate technology group must agree to support the technology in a deployed state.

What Is PMP Certification?

The Project Management Institute (PMI) was founded in 1969 with the goal of developing standards for project management practices across industries and across the globe. It has outlined processes and techniques in its own publication, A Guide to the Project Management Body of Knowledge (PMBOK®Guide), which has also been approved as the American National Standard by ANSI, the American National Standards Institute. PMI also administers a certification process granting several different credentials depending on experience, education, and specialties such as risk, scheduling, program management, and project management. The Project Management Professional (PMP) is their most recognized credential, as of this printing.

According to its web site at www.pmi.org, “The PMP® credential recognizes demonstrated knowledge and skill in leading and directing project teams and in delivering project results within the constraints of schedule, budget and resources.” To sit for the PMP exam, you must demonstrate experience by filling out their application and capturing hours leading project tasks during the last 8 years of your career. At the time of publication of this book, PMI required that professionals holding a bachelor’s degree document a minimum of 4,500 hours of experience covering at least 36 unique months during the past eight years while those with a high school diploma need to demonstrate 7,500 hours of experience covering at least 60 unique months during the past 8 years. Along with that experience, applicants must also show that they have accumulated at least 35 contact hours of project management education prior to submitting the application to sit for the professional exam. Once the application is accepted, and the applicant agrees to abide by the organization’s Code of Ethics, the applicant must then take and pass the proctored exam, consisting of 200 multiple choice questions, within a 4-hour period of time. The tests are offered by a third-party professional test facility with locations around the globe. For more details on the professional exam, go to www.pmi.org.

Is This Book for You?

Project Manager Street Smarts is designed to give a project manager all of the tools and techniques to be successful. Whether you are a Project Management Professional (PMP), aspiring to become one, or are a novice project practitioner, this book will guide you from the beginning of a project to the end.

One case study is used throughout the book to bring reality to the challenges and successes a project manager faces. The book contains more than 65 exercises to challenge your knowledge of project management principals as they relate to real world situations. We’ve also provided dozens of templates that you can use if you do not have access to them in your own work environment.

This is not a PMP Study Guide, although Project Management Street Smarts does align with the Project Management Body of Knowledge, 4th ed. (PMBOK®Guide). It is a companion book to Kim Heldman’s PMP®Project Management Professional Study Guide

How This Book Is Organized

This book is organized into five phases, which represent the five main process groups of project management according to the PMBOK®Guide. Each phase is separated into individual tasks. The tasks within each phase lead you step-by-step toward completion of that phase.

Phase 1: Initiating Process This process includes financial information needed for a project, creating the charter, and defining the scope of the project.

Phase 2: Planning Process This process guides you through all of the project management plans needed for the master project management plan.

Phase 3: Executing Process This process brings you to the implementation of all plans as well as management of team personnel.

Phase 4: Monitoring and Controlling Process This process provides real-world situations to keep the project on track as well as how to manage performance issues related to cost, schedule, scope, quality, risk, communications, procurement, and so forth.

Phase 5: Closing Process This process walks you through all of the steps to close out a contract as well as the project.

Each task in this book is organized into sections aimed at giving you what you need when you need it. The first section introduces you to the task. Descriptions of the remaining sections follow.

Scenario This section places you in the shoes of the project manager, describing a situation in which you will likely find yourself.

Scope of Task This section is all about preparing for the task. It gives you an idea of how much time is required to complete the task, what setup procedure is needed before beginning, and any concerns or issues to look out for.

Procedure This section is an outline of what will be learned in the task.

Details This is where the learning takes place. This section informs you how to complete the individual items included in the task.

Project Management Tasks

The tasks included in Project Management Street Smarts include:

Phase 1:

• Understanding finance principals

• Conducting project selection methods

• Establishing a progressive business case with built-in feasibility analysis

• Conducting a stakeholder analysis

• Creating a scope statement

• Developing the charter

• Documenting high level risks, assumptions, and constraints

Phase 2:

• Identifying team members

• Defining roles and responsibilities in this phase

• Creating a project organization structure

• Developing a communications plan

• Creating the work breakdown structure (WBS)

• Creating subsidiary plans

• Determining project risks

• Creating the master project management plan

• Obtaining plan approval

• Developing a change management plan

Phase 3:

• Directing and managing project execution

• Acquiring team

• Developing team

• Managing team

• Performing quality assurance

• Executing the communication plan

• Managing stakeholder expectations

• Conducting procurements

Phase 4:

• Monitoring and controlling work

• Managing risks

• Administering procurements

Phase 5:

• Formalizing customer acceptance

• Performing personnel performance reviews

• Obtaining contract closure

• Understanding lessons learned

• Creating and distributing final reports

How to Contact the Publisher

Sybex welcomes feedback on all of its titles. Visit the Sybex website at www.sybex.com for book updates and additional certification information. You’ll also find forms you can use to submit comments or suggestions regarding this or any other Sybex title.

How to Contact the Authors

Linda Kretz Zaval and Terri A. Wagner welcome your questions and comments. You can reach them by email at [email protected] and [email protected].

Phase 1

Initiating Process

Workers may think that projects are launched on nothing more than a grab out of thin air. Some feel that “sweetheart deals” are made before the project is cost justified. Others use sophisticated feasibility analysis as well as business cases to determine whether a project should be launched.

Regardless of how your project is approved, at some point, trusted and experienced project managers may have to challenge the rationale of senior managers before placing the project into the portfolio or moving on to the next phase. Let’s face it: these senior managers don’t always have all of the information that we project managers may have. We do this based on data and facts. Emotions have no place here.

For example, some project managers working on internal projects (for example, capital improvement projects) are advised not to be concerned with the cost; “just do whatever it takes to get the job done” seems to be the order from the sponsor and senior management. We as project managers are stewards of company funds. We can help launch projects that will not only provide benefit to the company, but also be cost-effective. But first we have to start at the beginning. This phase explores several ways you as the project manager can make a difference as projects are initiated:

• Understand finance principles

• Conduct project selection methods

• Establish a progressive business case with built-in feasibility analysis

• Conduct a stakeholder analysis

• Create a scope statement

• Develop the charter

• Document high-level risks, assumptions, and constraints

Task 1.1: Understanding Finance Principles

Project managers play a pivotal role in the economic engineering of projects and participate in feasibility studies as well as economic justification of projects, so we must have a broad understanding of the concepts of how money is used. In no way is this information intended to be all-inclusive—people earn degrees to master this topic.

Scenario

Cimarron Industries is a multimillion dollar corporation that had very humble beginnings. It is now in the Fortune 500 ranks and owns 200 stores as well as a centralized textile mill that produces fabrics.

The company was started to produce a series of children’s books that were being written by the company founder and current CEO, Olivia Ross. The books were a total success, and the revenues from the books provided seed money to open a line of children’s clothing stores patterned after the principal characters in the books.

The lines of clothing for each character were originally designed and created by Ms. Ross and were consigned to a children’s boutique of a large clothing chain. They sold out immediately. Later, the apparel stores were also wildly successful. Marketing continues to focus on the superior quality of the clothing at discount store prices.

Based on that success, Ms. Ross would now like to open a line of women’s clothing stores called Apples and Pears. Ms. Ross believes that the store would provide what women everywhere are looking for, that is, chic clothing tailored to body types. Those women with expanded waistlines would be “apples” and those with large derrières and legs would be “pears.” The target audience would be middle-age to senior women, but Apples and Pears (A&P) would also have a line for younger women with less-than-perfect shapes. It will not focus on plus sizes, just body types in all sizes.

Ms. Ross does not consider herself business savvy. Her degree is in textiles and merchandising, so she counts on Skylar Reese, MBA, chief financial officer (CFO), to guide her business and financial decisions. During the discussions between Ms. Reese and Ms. Ross, Ms. Reese reminded Ms. Ross that several other projects are under consideration. One of these is the remodel of the five top-producing stores. Another is the upgrade of equipment at the textile mill.

Ms. Reese believes that to start another project now would tighten their cash flow, but has suggested that a market analysis and economic study of the proposal be conducted and the decision made after that. Ms. Ross agrees.

Scope of Task

Duration

This task should take several days, if not weeks, depending on the size of the project and your level of involvement in project selection methods.

Setup

For this task you need an understanding, if not a working knowledge, of key financial principles. The project manager collects data pertinent to the project, and a financial person crunches the numbers. You have to know what the crunched numbers mean and be able to use them to help create your project plan.

Caveat

During project selection, the project manager usually partners with a financial person to the extent needed to clarify the project to senior management.

Procedure

In this task you will learn how businesses and organizations use money and understand its relevance in project management. We will review the following:

• Time value of money

• Capital budgeting concepts

• Cash flow concepts

• Future value of money

• Present value of money

Details

It has been our experience that even though complete finance concepts are not generally taught in a project management class, business leaders expect project managers to be able to discuss issues relevant to finance. You may not be involved in the actual selection of projects, but given a basic knowledge of project selection methods and the way your project was chosen, you will be able to provide logical answers to problems along the way. Our intention is to provide simple finance concepts relevant to the project manager’s role in the money game.

Time Value of Money

One of the basic concepts of business economics and managerial decision making is that the value of an amount of money is a function of the time of receipt or disbursement of cash. A dollar received today is more valuable than a dollar to be received at some future period of time. The only requirement for this concept to be valid is that there exists a positive rate of interest wherever you invest your funds. We will further explore this concept by showing you how to find the present value of a future amount and the future equivalent of a present amount. Time value of money is the heart of capital budgeting.

Capital Budgeting Concepts

Capital budgeting is used for investment decision making. Some decision-making criteria include the following:

• Maximize shareholder wealth

• Consider all cash flows

• Discount cash flows at the cost of capital

• Attempt to place an economic value on the strategic implications of new projects and include them in the economic analysis

• Quantify the strategic benefits of new projects in nonfinancial terms (for example, quality improvement, reduced lead time, and so forth)

Capital budgeting’s purpose is to

• Generate and gather investment ideas

• Estimate/forecast investment costs and benefits

• Analyze/evaluate the costs and benefits of each alternative

• Select among the alternatives and implement the investment chosen

• Evaluate the implemented investment

Cash Flow Concepts

Because investment decision making requires knowledge of cash flows, let’s take a brief look at a simple cash flow illustration (see Table 1.1). A company spends $100,000 on a concept study and uses the following facts to determine cash flow:

Equipment $2,400 (year 0)

Depreciation $450, $360, $270, $180, $90

Training costs $816 (year 0)

Incremental sales $7,500 with a 10% increase over six years

Incremental operating expenses $6,500 with a 6% increase over five years

TABLE 1.1 Sample Cash Flow

Notice that in year 0, there are only expenses. The following years show depreciation as a negative number, which is subtracted from the incremental revenue as well as the operating expenses to come up with the EBIT figures. Taxes are then subtracted to find the cash flow. Most cash flows are more complicated and include adding back the depreciation to receive a net cash flow.

Present Value

Most large companies today use some form of discounted cash flow (DCF) techniques in investment decision making (capital budgeting). To perform a DCF analysis, we must find the present value of future sums of money. If you are entitled to receive $200 at the end of two years, you might consider receiving a lesser amount today (say, $188.68), provided that you could invest it over the next two years and earn enough to receive the $200.

These discount factors determine potential growth. Present value is equal to the future value times the discount factor. These factors can be computed in three ways: via tables, hand calculators, or computer programs. Tables are the easiest. Table 1.2 is an example of discount factors.

TABLE 1.2 Discount Factors

What is the present value of $1 to be received three time periods from now if the time value of money is 0.10 per period?

In Table 1.2 at the intersection of 10% and 3 time periods, the value equals 0.7513. Therefore, if you invest $0.7513 to earn 10% per year, after three years you will have $1.

TABLE 1.3 Present Value Example

With discount factors, we can compute the present value of any single cash flow. But in most applications we need to be able to calculate the present value of any sequence of cash flows.

Present Value Addition Rule

The present value addition rule states that the value of any set of cash flows is the sum of the present value of each of the cash flows in the set. For example, using Table 1.2, what is the present value of two cash flows, $100 to be received at the end of one period from now and $200 to be received two periods from now, if the time value of money is 0.10? Table 1.4 shows an example of how to compute this.

TABLE 1.4 Present Value Addition Rule

By using the formula for the present value of a future cash flow and the present value addition rule, you can calculate the present value of any possible cash flow.

Future Value

Assume that you have $1 now and can invest it to earn i interest. After one period, you will have $1 plus the interest earned on the $1. Let FV be the future value and i be the annual interest.

Repeating the process, at time 2 you will have

or to be precise,

If, instead of starting with $1, we start with a present value, PV, of $50, the value at time 2 is

At 10% interest, $50.00 grows to $55.00 at time 1. The $55.00 (still at 10% interest) grows to $60.50 at time 2. This equation is the standard compound interest formula for the future value of a present sum. The term (1 + i)n is called the accumulation factor. It shows how to calculate future values of a present sum: the dollar amount you will have in n periods (which could be months, quarters, years, and so on) in the future if a present sum of PV dollars is compounded for n periods at an interest rate of i per period. Instead of computing future values, business decisions are frequently made based on present values.

Hands-on 1.1: Testing Your Knowledge of Finance Principles

Make the calculations necessary to show which of the following statements are true and which are false if the interest rate is 5% per year. Remember that n is an accumulation factor and not a multiplier.

1. $ 98.00 now is equivalent to $105.60 one year from now. (True or false?)

2. $200.00 one year past is equivalent to $205.00 now. (True or false?)

3. $ 3,000.00 now is equivalent to $ 3,150.00 one year from now. (True or false?)

4. $ 3,000.00 now is equivalent to $2,887.14 one year ago. (True or false?)

5. Interest accumulated in one year on an investment of $2,000.00 is $100.00. (True or false?)

Task 1.2: Understanding Project Selection Methods

Internal projects are selected in a variety of ways. Most come from internal customers wanting to change the way they operate, the systems they use, their location, and so on.

Project selection methods help decision makers choose projects based on some criteria. There are several types of project selection methods. In this task we will show you economic models using net present value and internal rate of return as well as benefit measurement methods that compare projects based on prearranged criteria. We will also look at a weighted scoring model.

Scenario

You have been assigned as the project manager of the Apples and Pears project and are to assist Ms. Reese any way you can. Ms. Reese has chosen you because your previous position was that of a business analyst. You have been a successful project manager for five years now, and know your way around the company and most of its processes.

You gathered data about cash flows, and considered operating expenses and earnings before interest, taxes, depreciation, and amortization (EBITDA) as well as the availability of personnel to work on the project, the training needed, strategic fit, competitive advantage, and a high-level comparative analysis. You have taken a recent class on capital budgeting and are anxious to try out what you have learned. It all looks promising, but the answer is in the money.

Scope of Task

Duration

This task may take hours or days, depending on the complexity of the project and your involvement in financial decision making.

Setup

Now that you have an understanding, if not a working knowledge, of key financial principles, you are ready to make some financial calculations.

Caveat

None.

Procedure

In this task you will learn different approaches to determine whether projects should be approved or denied. We will discuss the following:

• Net present value

• Internal rate of return • Benefit measurement methods

• Economic methods such as net present value (NPV) and internal rate of return (IRR)

• Benefit measurement methods such as comparative approaches and scoring models

Details

Sometimes it is difficult to choose one project over another. You may have a variety of project selection methods, but one of them should at least include an objective economic model such as NPV or IRR. You want to be able to defend your logic with facts and figures as well as your own subjective thoughts and ideas.

Economic Model: Net Present Value

NPV is the current market value of a cash flow amount at time n if the discount factor Dn is based on a discount rate r that is the market price for the use of one dollar. It is an application of the present value concept, in which the values are summed over time. NPV is also known as the market value for the stream of cash.

If the NPV is greater than 0, the investment is always considered acceptable. With zero taxes, the NPV of an investment may be described as the maximum amount a firm could pay for the opportunity of making the investment without being financially worse off.

The NPV of the investment is the sum of the present values of the cash flow minus the initial investment. NPV is determined by following these steps:

1. Choose an appropriate rate of discount.

2. Compute the present value of the cash proceeds expected from the investment.

3. Compute the present values of the cash outlays required by the investment.

4. Sum the present values of the proceeds minus the present values of the outlays.

Following along in Table 1.5, assume that an investment costs $10,000,000 and returns $12,100,000 a year later. If the rate of discount is 10%, a company could make a maximum immediate outlay of $11,000,110 in the expectation of receiving $12,100,000 a year later. If it can receive the $12,100,000 with an actual outlay of only $10,000,000, the NPV of the investment will be $1,000,110. In other words, the $1,000,110 represents the difference between the present value of the proceeds, $11,000,110, and the actual outlay of $10,000,000. The value in period 0 is negative because that is our original investment.

TABLE 1.5 Net Present Value Example

NPV is widely used and accepted by most organizations. It is simple to calculate and easy to understand. Additionally, NPV in this example is positive, indicating that the investment is acceptable. NPV has the following advantages:

NPV is valid. It directly measures the present market value of one or more cash flows considered separately or in combination.

NPV is effective. As a decision variable, NPV provides all the usefulness of any other variable and also provides additional strengths.

NPV is reliable. If the rules for calculating NPV are followed, any analyst will produce the same result for a given stream of cash flows and a discount rate based on the market cost of money.

NPV is flexible. After the NPV has been calculated for a portion of any project, it can be used without recalculation to include that portion in any other investment.

In several examples we have shown the use of NPV at either time 0 or time 1. If we start with time 0, that is the beginning of the time period. If we use time 1, we are saying that the investment has been working for a period of time (for example, the end of the first year).

It is also important to note that if you start with time 0, you stay with time 0 to calculate NPV. If you start with time 1, you stay with time 1 to calculate NPV.

Now that you know the steps needed to calculate NPV, let’s try it.

Hands-on 1.2: Testing Your Knowledge of NPV

1. Assume that there is an investment to pursue. The initial investment is $12,337 (year 0). Because this amount is the initial investment, it appears as a negative number. The cash flow at the end of the first year (period 1) is $10,000. The cash flow at the end of the second year is $ 5,000. Using Table 1.6, compute the NPV of this investment by using 10% as the discount rate.

TABLE 1.6 Determine NPV Problem 1

2. The remodel project initial investment is $5 million, and the cost of money is 9% . Cash flow for year 1 is $1 million, for years 2-3 is $900,000, and for years 4-6 is $750,000. Using Table 1.7, determine the present values for each year of the remodel project.

TABLE 1.7 PV for Remodel Project

3. What is the NPV for the remodel project?

4. The Apples and Pears project initial investment is $7,000,000, and the cost of money is 9%. Assume cash flow for year 1 is $ 3,000,000, for years 2-3 is $2,000,000, and for years 4-6 is $1,500,000. Using Table 1.8, determine the present values for each year of the Apples and Pears project.

TABLE 1.8 PV for Apples and Pears Project

5. What is the NPV of the Apples and Pears project?

6. If the investment for the Apples and Pears project increased to $ 8,750,000, how would that change the NPV?

7. Which project should be pursued?

8. What other project selection methods could you pursue?

Economic Model: Internal Rate of Return (IRR)

Using IRR can create serious challenges for those who manage capital budgets. When managers decide to finance only the projects with the highest IRR, they may be making a decision that is not as favorable as they think. For example, when all elements of the cash flow stream are known, the IRR provides some information about a particular stream of cash. Each financial investment in Table 1.9 has an IRR of 10%.

TABLE 1.9 Internal Rate of Return Example

• In scenario A $100 is invested at 10% for two years before there is a return on the investment of $100.

• In scenario B $100 is invested at 10% for two years also, but the interest payment is made at the end of year 1 and principal is returned at the end of year 2 along with an interest payment for the last year.

• In scenario C principal and interest are paid at the end of year 1. The principal ($100) is then invested for the second year at the same rate (10%).

These examples have quite different scenarios, but all have the same IRR. Be careful when using IRR.

Although it is quite possible that each of the alternatives A, B, and C would be viewed as the same by one or more investors, it is also possible to alter the differences of the scale so the IRR would be the same for financial investment opportunities that would otherwise appear very different—say, when compared with one another using NPV.

Benefit Measurement Method: Comparative Approach

There are several comparative approaches you can use to select one project over another. Table 1.10 illustrates one of them. There are three steps:

1. Criteria are determined. (These are typically preassigned.)

2. Each criterion is compared.

3. The decision is weighed.

TABLE 1.10Comparative Approach

It is important to remember that most projects also use an economic model before a decision is made or include an economic model as one of the criteria.

Benefit Measurement Methods: Weighted Scoring Models

Table 1.11 shows an example of weighted scoring.

TABLE 1.11Weighted Scoring

Weighted scoring models are simple and provide consistency in their approach. For small projects (and your company would have to decide what is considered small), weighted scoring models may be enough. But most companies use an economic model as well.

There could be challenges with scoring models. Projects may be ranked and scored subjectively (without data and facts) instead of objectively. There may be inconsistencies in the selection committee based on politics, a personal agenda, and so on. Senior management may override the decision. If these challenges do exist, consider revamping the criteria so that all are in agreement.

Hands-on 1.3: Testing Your Knowledge of Benefit Measurement Methods—Scoring Models

Answer the following questions:

1. For each criterion found in Table 1.11, what information could you provide that would justify the rating and score?

2. Select five additional criteria. Weight and rank them. Determine the score. How could this impact the result in question 1?

3. What are the advantages of scoring models?

4. Is a comparative approach enough? Why or why not?

5. What problems could you have with this approach?

Task 1.3: Using Business Cases with Built-in Feasibility Analysis

Now that you have a good grasp of business finance, you are ready to look at a business case and its value to project management. Business cases are only as good as the people who prepare them and their knowledge of corporate finance and project management. A progressive business case has built-in feasibility analysis and provides a score at the completion of each phase. A minimum score is needed in order to move to the next phase. Each phase has its own scorecard that measures progress by the use of a minimum score. The scorecards for three activities are as follows:

• Project selection scorecard

• Project charter sign-off scorecard

• Project planning scorecard

Scenario

Although Ms. Reese is 99% sure that Ms. Ross would approve the project, based on what is known to date, Ms. Reese wants to take a closer look at the real world implications to their business. You have apprised Ms. Reese that there are operational issues, revenue tests, and other elements besides financials that could impact the bottom line. Ms Reese has discussed your suggestion with James Stevens, a member of the finance committee they both attend, and he agrees that a progressive business case should be used. He believes that it would bring reality to their assumptions and solidify support from those who may oppose the project.

Scope of Task

Duration

This task should take several days, if not weeks, depending on the size of the project and your level of involvement in project selection.

Setup

For this task you need a basic understanding of how business operates. With that, you can easily assist in the preparation of a business case. Again you will work with other managers—all of whom will own a piece of the pie.

Caveat

The project manager is typically given the operations criteria of the business case segment, called probability of success and milestones, because that is where project managers typically have expertise.

Procedure

In this task you will learn the elements of a progressive business case and see how they are iteratively refined. You will look at the five segments of a business case and compare their iterative scorecards. Those five segments are:

• Program assessment

• Financials

• Internal issues

• Alternatives and recommendations

• Milestones

Details

The difference between a business case and other project selection methods is that a business case affords a higher level of confidence to decision makers, because it takes a holistic view of the company. The business case is completed through the planning phase, thus before major expenditures occur. Additionally, the business case can be followed through the end of the project and beyond. For instance, if the business goal of the project were to increase revenues, it may take another year or more to see whether revenues have increased.

A minimum score is assigned to each of the criteria within a segment of the business case. If the total minimum score is not achieved, the project cannot proceed to the next activity.

The minimum values have been preassigned to each criteria. A project selection committee usually decides the minimum score for each scorecard. In the real world, this business case is repeated for the project charter sign-off and planning activities. Each progressive phase increases the minimum score that enables a decision maker to decide whether the project should continue.

For example, if the minimum score through project charter sign-off does not meet the minimum score for both activities (selection and charter), the project cannot advance to planning. Rather than show the table in its entirety for charter and planning, we include only summary minimums. Table 1.12 is an example of a minimum scorecard for the project selection activities.

TABLE 1.12 Project Selection Scorecard

Now that you have reviewed the business case, take a look at the summaries for the project selection scorecard as well as the summaries for charter sign-off and planning (see Table 1.13). Notice how the scores progressively increase.

Hands-on 1.4: Testing Your Knowledge of Business Cases

Using your common sense and experience, please answer the following questions:

1. Who should prepare the business case? Why?

2. What do you think are the advantages of a project manager participating in the business case process?

3. Are there disadvantages? Why or why not?

4. Is a business case enough? Why or why not?

TABLE 1.13 Summary Scorecards for Project Selection, Charter Sign-off, and Planning

Now that you have an overview on finance, how projects are selected, and how business cases evolve, you are ready to move forward! You now have the ability to map your project activities to the corporate issues that matter the most—money. Remember, at the top of the food chain, it’s always about money. You can now plan your project brilliantly, present your project brilliantly, and defend your project brilliantly: with data and facts relative to money!

Task 1.4: Identifying Stakeholders—Who Are They?

Stakeholders are people. First and foremost, they are human beings. These folks can be an individual, a group, a community, or the like, but whatever we call them, they have an interest in your project. They may support your project with enthusiasm or they may have serious concerns about your project.

Some people may have serious concerns but have no power to change anything in the project. Others may be highly supportive but have no rank. And the opposite is also true: Some high-ranking corporate individuals may be the champions for your project or the harbingers of doom because they do not support the project at all.

In all cases it is important to listen to all of the stakeholders in your project. You may learn something you didn’t understand or know. In this task you will discover who your stakeholders are, and their roles and responsibilities in a project.

Scenario

Ms. Reese, with help from her project manager from Cimarron Industries, has determined that the Apples and Pears project is a favorable project to pursue. It was determined that this project will generate more revenue in the short term than upgrades to the textile mill or a remodel of existing children’s stores.

Creating clothing stores is the company’s bread and butter. Ms. Ross believes they should use the same approach they used 20 years ago when the original children’s stores were launched. Ms. Reese wants to bring in additional internal people who may have a better understanding of the more current way this type of project is handled. Ms. Ross thinks this is a waste of time but reluctantly agrees.

Ms. Reese also reminds Ms. Ross that if all goes well during this initiation phase, the planning work can be started in December and the project could be complete by the start of the next holiday season. Ms. Ross thinks that would be splendid but realizes those dates are not cast in stone until thorough planning has occurred.

Scope of Task

Duration

This task may take a few hours or several days, depending on the scope of the project and the availability of stakeholders.

Setup

None.

Caveat

For this task, you must be able to converse with senior management or others at their level.

Procedure

In this task we will

• Identify types of projects.

• Identify and analyze project stakeholders.

• Explore the roles and responsibilities of the project sponsor and project manager.

• Take a look at the management and leadership skills needed in a project manager.

Details

People are the most important resource on a project! Individuals are complex, and the project manager spends a great deal of time with them. We provide and receive information, overcome emotional hurdles, and provide and receive performance information in all manner of communications. First and foremost we must know and understand who these people are and their roles in the project. The stakeholders will come from different backgrounds, depending on the types of projects you’re working on. Let’s take a look at the types of projects you may manage someday.

Types of Projects

Different project types will dictate the appropriate stakeholders who will participate in the project. Most project managers do not have experience in all types of projects, and although it is helpful to have technical skills, the right project manager can manage many types of projects. Several types of projects seem to be common to most businesses and organizations from time to time, although this list is not all-inclusive:

Research and development projects are often likened to programs because they typically have an element of ongoing activity and exist as long as they are funded and achieve the desired result.

Strategic projects