4 ways to define value
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
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The PMBOK® Guide – Seventh Edition talks about four different ways to define business value.
‘Value’ is quite a vague term when it’s used in everyday speech, so I think it’s useful to have something to hang a definition on when we’re using the term in project management.
The Guide does specify that there are lots of aspects to value, including non-financial considerations, and that the four ways that are listed are only some of the ways that you could measure value. However, they are a good starting point if you’re trying to have conversations with execs about what projects you should work on – you do need some kind of idea of what value means.
Here are the four metrics that you can use to measure value, as outlined in the PMBOK® Guide.
1. Cost benefit ratio
This ration works out the present value of the investment compared to the initial cost, basically, do the costs outweigh the benefits (if they do, you probably shouldn’t start the project unless there is a strong justification for doing so in the knowledge that it will cost you more to deliver than the benefit expected).
2. Planned benefits compared to actual benefits
This is a bit of a weird one if you ask me – until you start delivering, you don’t have any actual benefits to compare to. It’s fine if you want to review value after the project is complete or while it is in progress, but it’s not a metric you could use for project selection.
You’d have to use the planned benefits, and that really is the planned value of the work to the organisation – so it’s just a different way of talking about the other metrics until you have some actuals.
3. Return on investment
This is my favourite of the four (is it odd to have a favourite value metric?). Probably because I use it the most and it’s very clear on what it is. It’s easy to explain to stakeholders and finance teams seem to like it.
Plus it’s easy to work out.
ROI is the financial return compared to the cost, so it’s helpful in project selection. However, you can use it throughout the project to refer back to whether or not you are on target to hit that particular ROI – useful to do when your costs are going up.
4. Net present value
NPV used to confuse me because it’s time-phased, but once you get your head around it, it’s straightforward. It’s a very common metric in use for project selection so it’s definitely worth taking the time to understand how it is put together and what it means.
You can measure NPV throughout the project and check that the investment still holds up.
With all of these, as long as you keep measuring if you are getting enough value out of the project, you can make an ongoing commitment to keep the work going. If the numbers point to a trend of decreasing value, there is likely to be a point where you’ll want to stop the work, because the amount of effort expended isn’t worth the value you’ll get at the end of it.
Of course, there are some projects where the value is simply being able to continue to trade or operate within a legal framework, or benefit related to social/corporate responsibility or sustainability, so you might find it irrelevant to track metrics like the ones above. The takeaway from all this is to work out what ‘value’ looks like to your team and your project, and measure that.
How do you do it? Let me know in the comments!
Posted on: September 19, 2023 08:00 AM |
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Comments (5)
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Elizabeth - thank you for sharing your knowledge, experience, and perspectives with the community.
Speaking of value-based management, Net Present Value, i.e., NPV (the time value of money), works best for me because, when implemented correctly, it leads to the decision that maximizes value.
Other approaches to value-based management (my view):
• Internal Rate of Return, i.e., IRR ignores project size
• Payback ignores project size and risk
A high-quality knowledge sharing article.
Thanks for publishing this, Elizabeth!
Value management is the big picture. The CBR needs to be 1:2 to get a project go ahead.
Derived value is the top continuum of the Multilevel project success framework by Bannerman (2008). So, the derived value should be considered along with the Multilevel project success criteria and stakeholders satisfaction. See the Multilevel framework here: https://www.pmi.org/learning/library/defining-project-success-multilevel-framework-7096
Guy Weisenbach
Sr Systems Mgr, Enterprise Systems| Uncommon Schools Inc.
Old Bridge, Nj, United States
Thanks for recap on objective value metrics. I would love to hear/see your thoughts on subjective value. I work in the non-profit world and so the objective measures don't always apply.
As we try to apply Agile ways of working, getting our stakeholders to come up with value for our many intangibles is challenging but if we could, then we'd be able to look at WSJF and other ways of selecting projects and/or prioritizing backlogs since we're actually pretty good at estimating the effort side of the equation.
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