Project Management

Cents and Sensibility

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A hard line on the bottom line means projects better show value. But ROI can be spelled many ways.

No business goes to market with a product or service that it isn't confident will justify the time and resources spent developing it. Should project selection be any different? Most organizations answer with a resounding "No!" Understandably, they want to focus on initiatives that promise a solid return on investment (ROI). Indeed, for executives and customers—the stakeholders who ultimately decide the fate of projects—it sometimes seems that R-O-are the only letters in the alphabet.

But making ROI the “Holy Grail” of project valuation and selection can backfire. A project's value is driven by many factors, and many of them can't be measured, or even imagined, by ROI alone. The challenge is to take into account all the important value drivers for ongoing and future projects. 

Generally stated as the benefit divided by the cost, ROI seems straightforward enough. But simplified formulas are part of a complicated problem. Project ROI equations should consider many factors, including overall impact on the organization. ROI viewed at the departmental level may look great or disastrous, but the impact on other departments may be just the opposite, depending on what the project delivers.

In some industries, companies that seek rapid paybacks may tend to avoid long-term projects with big budgets. But exclusive emphasis on quick ROI can be unhealthyin the long run. By focusing solely on an ROI percentage calculation and ignoring qualitative metrics, companies shy away from projects that can lead to significant business advantages down the road.

It can be said, some projects run the business, some projects extend the business, and some projects transform the business. Because the latter group of projects are strategic in nature, they are often the “fuzziest” to assess, and they don't stand up well in ROI comparisons to easily quantifiable projects with clear numeric results. Unfortunately, when taken at face value, these projects tend to fall down the project selection list at an organization's own peril.

At the team level, an overemphasis on ROI can often negatively impact project management behavior as much as it does decision-making at the executive level. During project execution, team members are often pushed, or take it upon themselves, to act to improve ROI. Lacking clear understanding of the project's alignment with business goals, they can often have the opposite effect.

For example, a team may cut corners in attempts to reduce costs or decrease implementation time. These actions, in turn, can cause project risks to escalate. And when ROI is held over the head of project teams without a clear explanation of how it relates to the big picture, projects may actually lose value as team members miss or ignore opportunities to improve quality.

Just as organizations need to take many factors into account when selecting projects, the question of value must be revisited and re-evaluated during project execution. Project management performed in an "ROI vacuum" can hurt team morale, productivity and creativity-all human factors that contribute directly to project value. 

Perhaps the greatest attraction to ROI is also its greatest myth—that ROI is all about hard numbers and, thus, objectivity. But the fact is, how an ROI study is conducted will determine what it finds. Even more subjectively: Who conducts and presents a particular ROI analysis will often influence the ROI result.

Project sponsors, for example, will often "back into" an ROI figure to arrive at a number they believe management needs to see in order to approve the project. A savvy proponent of a project can show what appears to be an acceptable ROI, but under scrutiny, the score may lack sufficient validity.

On the other side of the coin, upper management may mandate the use of complex or unrealistic ROI equations in order to have a means to cancel or reject projects that may deliver value but do not have political support for whatever reason.

Management must consider more than ROI scores, starting with the data's relevance—from collection methods and sample size, to variables that were or weren't included. Otherwise, they won't understand what the ROI really means.

For the ROI equation to be reliable, estimated costs and benefits must be scrutinized through comparison studies and take into account all possible issues, be they changing market conditions, corporate cultures or cost of capital. These factors may help to defend or dispute the ROI results, but they certainly ensure more accuracy.

In addition, project managers and stakeholders should never forget or underestimate the effectiveness of applying common sense to support a project worth defending, or to throw water on an ROI figure arrived at by incomplete or insincere means.

And post-project reviews should be used to get a final word on the ROI of every project. It is extremely important to revisit a project and evaluate the actual costs and benefits associated with projects. In addition to identifying lessons learned and areas for improvement, reviews show the accuracy of project estimates, paving the way for better ROI forecasting in the future.

Posted on: February 10, 2020 03:44 PM | Permalink

Comments (8)

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Dear Aaron
Interesting is your perspective on the topic: "Cents and Sensibility"

Thanks for sharing

Make Meaning or Make Money?

I am convinced that the reason for the existence of projects is to make meaning

Hello Aaron: I've worked for "for profit" and "not-for-profit" companies and there is a difference when implementing projects for each. ROI is like an onion with many layers to consider - sometimes benefits are soft dollar savings which could have a very great positive impact, but not show the same hard dollar savings.

Thanks Aaron,
For many it is an apostasy, to question the importance of ROI, when evaluating an investment project.
But I share your point of view, ROI is a more typical measure of the short term and generally the investments in projects are long term, this must be so because investment projects are one of the ways in which the corporate strategic plan is concretized .
One of the problems that ROI has, as it is generally calculated in companies, is that it does not take into account the risks of the sector, nor its own corporate risks, among others; Projects require a multidimensional evaluation, where both qualitative and quantitative impacts must be considered.
From the financial point of view it is preferable to use evaluative instruments such as VNA and FCF, more appropriate for use in the long-term analysis.

Thanks, Aaron. Definitely important to reassess project benefits periodically during the execution. These assessments can ensure the team is aligned on the intended outcomes and pivot if needed.

Thanks Aaron for sharing your perspective and it is interesting that it matches my views on this topic. I worked on couple of projects where it seemed one who conducts and presents a particular ROI analysis will often influence the ROI result.

ROI is becoming more qualitative and subjective by the day.

Interesting perspective thank you!
Does this also mean that sense and sensitivity (analysis) matters more now?

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