Project Selection Models

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Strategic Managementand Project Selection

Maturity of Project ManagementCriteria for PS ModelsNature of PS ModelsTypes of PS ModelsUncertainty Analysis and Risk ManagementInformation Base for PS ModelsProject Portfolio Process (PPP)Project Proposal

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Overview of PS ProcessProject Management Office (PMO): Aligning corporate needs and project goalsProject selection: Choose candidate projects using evaluation criteriaDealing with uncertainty: Risk analysisStrategically selecting best projects: Project Portfolio Process (PPP)Locking up the deal: Writing a project proposal

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Project Management Maturity Levels

Ad-hoc (essentially disorganized)Abbreviated (some processes exist)Organized (standardized processes)Managed (measured processes)Adaptive (continuous improvement)

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PS Models

Idealized view of realityRepresenting the STRUCTURE of the problem, not the detailDeterministic or stochastic

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Criteria for Project Selection Models (Soulder)

Realism (technical-, resource-, market-risk)Capability (adequately sophisticated)Flexibility (valid results over large domain)Ease of Use (no expert needed to run model)Cost (much less than project benefit)Easy Computerization (use standard software)

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Nature of PS models: Caveats

Project decisions are made by PM --- NOT by PS model!

A PS model APPROXIMATES, but does NOT DUPLICATE reality!

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Nature of PS Models: Methodology

Start with detailed list of firm’s goalsCreate list of project evaluation factors (PEF’s)Weigh every element in PEF listCompute an overall score for project based on weighted PEF’sSelect project that has the closest alignment with firm’s goals

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Project Evaluation Factors (PEFs)

Production FactorsMarketing FactorsFinancial FactorsPersonnel FactorsAdministrative and Misc. Factors

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Types of PS Models: Nonnumeric

Sacred CowOperating NecessityCompetitive NecessityProduct Line ExtensionComparative Benefit Model

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Numeric PS Models:

Profit/ProfitabilityPayback Period (PB)Average Rate of ReturnDiscounted Cash Flow (NPV)Internal Rate of ReturnProfitability IndexOther Profitability Models

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Numeric PS Models: ScoringUnweighted 0-1 Factor ModelUnweighted Factor Scoring ModelWeighted Factor Scoring ModelConstrained Weighted Factor Scoring Model

S = ∑(x)

S = ∑(s)

S = ∑(s·w)

S = ∑(s·w) ∏(c)

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Choosing the PS ModelDependent on wishes and philosophy of management80% of Fortune 500 firms choose “nonnumeric” PS modelsFirms with outside funding often choose scoring PS modelsFirms without outside funding often choose profit / profitability PS models

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Management of Risk: Terminology

Risk: Decision based on complete information about the probability of each possible outcome.Uncertainty: Decision based on incomplete or insufficient data.Game: Decision based under conditions of conflict.

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Areas of UncertaintyProject timing & expected cash flow. Direct outcome of project, i.e. what exactly will the project accomplish

Side effects and unforeseen consequences of project

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Project Portfolio Process (PPP)

Step 1: Establish a Project CouncilStep 2: Identify project categories & criteriaStep 3: Collect project dataStep 4: Assess resource availabilityStep 5: Reduce project and criteria SetStep 6: Prioritize projects within categoriesStep 7: Prioritize the projects within categoriesStep 8: Implement the Process

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Step 1: Establish a Project Council

Includes:Senior ManagementProject Managers of major projectsRelevant general managersThose who identify key risksThose who could derail PPP later

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Step 2: Identify Project Categories and Criteria

Derivative Projects

Platform Projects

Breakthrough Projects

R & D Projects

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Step 3: Collect Project Data

Use “activity based costs” Verify all dataInclude timing for benefits and resource needsDocument assumptions for future checking

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Step 4: Access Resource AvailabilityAccess availability of Internal and

External Resources by: Type Department Timing: can vary 100% over project

life cycle

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Step 5: Reduce the Project and Criteria Set

Narrow down existing projects required competence exists in organization Market for offering Profitability Risk Potential partner to assist with project Right resources available at the right times Good technological fit with organization Uses organization’s strengths Synergetic with other important projects Slipped in desirability

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Step 6: Prioritize Projects within Categories

Rank projects within each categoryMeasure by Risk Development of new knowledgeConsider benefits firstConsider cost second

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Step 7: Select the projects to be Funded and Held in Reserve

Determine the mix of projects across various categories and time periods

Leave 10-15 % of organization’s resources free

Focus on committing to FEWER projects

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Step 8: Implement the Process

Make results of the PPP widely known

Senior management must fully fund

Process will be repeated on a regular basis

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Project Proposal: Content

Cover letterExecutive summaryDescription and past experience of project teamNature of technical problem to be solvedHow to approach solution of technical problemPlan for implementation of projectPlan for logistic support and administration

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Project Proposal: Cover Letter & Executive Summary

Compose a cover letter as key marketing instrumentExplain fundamental nature and general benefits of projectMinimally technical language

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Project Proposal: Past Experience of Project Team

List all key project personnel with titles and qualificationsInclude full resume of each principalProvide all pertinent references

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Project Proposal: Technical

Approach

General description of problem to be addressed or project to be undertakenMajor subsystems of problem or projectMethodology of solving the problemSpecial client requirementsTest and inspection procedures

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Project Proposal:Implementation

Plan

Estimates of time, cost and materials for each subsystem and the whole projectEstablish major milestones to break project into phasesList equipment, overhead and administrative costDevelop contingency plans (including slack time)

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Project Proposal: Plan for Administration and Logistic Support

Control over subcontractorsNature and Timing of all reports (progress, budget, audits)Change managementTermination Procedures“Touch of class” capabilities (artist’s renderings, meeting facilities, video conferencing, computer graphics)