You know I’m interested in the financial aspects of project management – I’m even thinking of teaching a workshop on project budgeting and accounting later this year. I feel like I’ve got quite a good understanding of the topic, but I’m constantly learning.
Having only done a very small amount of work in a team I would say is using agile practices, I am by no means an expert in the practical ways of making agile approaches work on project teams. However, there is a lot of guidance out there for people like me who want to learn more.
The Agile Practice Guide, in particular, has some interesting information about how to apply information from the PMBOK® Guide Knowledge Areas to agile work processes. From a financial perspective, here’s my interpretation of how this would work.
Project Cost Management in Agile Environments
Typically, on predictive projects you would do a lot of costing and estimating in advance. For projects with a high degree of uncertainty, or those where you don’t have a fully-fleshed out scope (hello, agile projects), then obviously you don’t have the data to do this level of cost analysis.
Instead, the recommendation is to use “lightweight estimation methods” (although no detail is given as to what these might be) to come up with fast, high level cost forecasts for resource costs. I can see this working when you are forecasting the general length of a particular engagement – even if you simply plan out the resource costs for the next financial period as a basic benchmark.
Detailed costs for things that aren’t people costs do still need to be done. You can’t run a successful business if you aren’t aware of what project work is costing you. It is OK, however, to do those detailed analyses on a more just-in-time and rolling basis.
To be honest, on some of the long programmes I’ve been involved with we’ve taken the same approach. The business case costs might have been fixed from the start, but frankly they were only ever our best estimate at the time. I then worked out detailed forecasts for the actual year we were in, so the Finance team could manage cash flow and we could accurately account for the capital outlay in the current financial year.
Where your budget is fixed, but you still need to be agile in other respects, then your choice is simply to flex scope and schedule to stay within the cost constraints.
Project Procurement Management in Agile Environments
Procurement management is another area where we incur costs, and as project managers, we need to be aware of how to manage that – in all environments.
Typically, procurements I have been involved with have had a protracted contract negotiation at the beginning to come up with a Master Services Agreement, and then you define the current engagement with a Statement of Work. As we needed suppliers to do extra things, we created new SoWs detailing that engagement. This is also how change control worked: the change control process generated either a credit note (when something was being changed and the end result was the development cost less) or a purchase order and an addendum to the current SoW.
It turns out that, according to the Agile Practice Guide, this is a pretty agile way of working.
There probably are projects where it is prudent and necessary to sign a massive contract upfront (ERP deployments spring to mind, from experience!) but generally, staying small with the engagement and working in a flexible way will suit both parties on the majority of projects.
Either way, something that is the same regardless of the project management approach you are taking is the need to document contractual arrangements and file them somewhere you can easily find them again. I have had a few moments in my career where I have sheepishly rung a vendor and asked for a copy of the executed contracts because – whisper it – it wasn’t possible to find our version of the same document.
Don’t make that mistake! Be agile. Be tidy!
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I thought it was time to look at some more financial concepts. Last time I looked at depreciation, and today it’s the turn of Present Value and Future Value.
I write them with capitals because they also stand as abbreviations: PV and FV.
The basic idea behind them both is that they talk about how much an amount of money is worth at any given time. From a project management perspective (and in life in general), it’s better to receive the money now than get exactly the same amount of money in the future. Because of inflation and cost of living rises, £10 today doesn’t buy you what it did 10 years ago. And when I think of what my parents paid for their house…!
If someone offers you £10 today or £10 next year, you’d take it today. And that’s what underpins the concepts of PV and FV.
Understanding Present Value
Present Value is a way of ‘levelling out’ how much money is worth, so you can compare its earning/spending power today and in the future. This lets your calculations account for inflation (or deflation). You can use the calculation to compare cash flow across the lifespan of a project or the benefit cycle, and you’ll be comparing on a more even basis. And by using a standard formula, everyone can clearly see how the information has been reached.
(Note: PV is not the same as Net Present Value, which in my experience is far more likely to be found on a business case. Net Present Value is useful for working out whether a project is worth doing, so it’s commonly used as a metric for project selection. There’s a worked example I found useful for calculating value in projects here.)
Present Value tells you how much the money of the future is worth today.
Understanding Future Value
Future Value tells you how much the money of today is worth in the future. I found this a lot easier to understand than Present Value – it’s pretty easy to understand that with interest and/or inflation, you need more money in the future to buy the same things. Anyone who has seen the cost of newspapers rise will get that basic idea.
For those of you who are interested in what this means for your exam prep, pop your figures into this formula:
PV = FV / (1+r)n
In real life you aren’t going to be calculating this by hand. Your Finance team will do it for you, or you’ll have some kind of project assessment spreadsheet with the formulae built in. The benefit of understanding the formula in your day job is to be able to have informed and intelligent conversations with your project sponsor and colleagues about project cost, and to be able to input into the debate about whether the project is worth doing or not.
A note on NPV
The other thing to know is how all this relates to NPV. NPV, as I noted above, is more likely to be the measure your organisation uses to determine whether to move forward with a project.
Here’s what you need to know, at a high level:
You want your project to have a high NPV and you should discourage your sponsor from trying to pursue projects where the NPV is less than zero unless there is a really, really strong business reason to lose money on an initiative!
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Aligning Strategy to Value [Video]
Categories: value management
There has been a lot of talk in recent time about the point of aligning projects to strategy to ensure that value is delivered – and that value is the important thing, not outputs. Well, this is hardly rocket science. Projects are the way to deliver strategy. You can have a lovely strategy, but if it stays as a PowerPoint deck, it’s useless. You need to take action on strategy items to make them happen, and that’s where we come in as project managers.
But unfortunately, it seems to me, as I hear from many of the project managers that I mentor and work with, that they are still having conversations with project sponsors, and managers (not so much PMO professionals, who get this stuff) about making sure everything lines up.
In this video I talk about aligning strategy to value. I share 4 easy steps you can take at any level in the company to make sure your project adds a ton of value to the organisation by focusing on things that are really important. Hopefully it will help you have those conversations in your organisation, if you need to.
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On this blog I’ve looked at different Knowledge Areas and how they apply to us as project managers, and also taken a budgeting and cost focus on a lot of articles. But what if you are managing an agile project? How do some of the financially-leaning Knowledge Areas work when you are working in agile ways?
Here’s how. Today, I’m looking at how the schedule management Knowledge Area applies to the agile work process.
Project Schedule Management
When you work in an adaptive environment, your project schedules aren’t going to look like big old Gantt charts. You’ve got short cycles to do the work in. With a lot of the people I mentor, we’re talking two week sprints.
The short cycles allow you to do work, review the work and then tweak the results as necessary, including any testing that needs to be done. Ideally, you don’t want all your features dropping on the testing team on the last day of the sprint because that’s not kind!
One team I worked with had this problem a lot so actually set up testing sprints running ‘behind’ the development sprints, just so there was enough time to test everything. Whatever works.
Scheduling is a cost-driven activity because people cost money, and you need people resources to do the work. That’s why it’s important to understand what scheduling options are available to you and how best to get the most out of the time and people that you have.
This could look like pull-based scheduling – which is what I am doing on one Agile team at the moment. There are a lot of tasks. I have the luxury of being able to decide on my next task. They all have to get done, and I can choose. Within reason!
Or it could look like on-demand scheduling. I have used a scheduling approach on a predictive project where we only planned the next three months in detail and let the rest of it unfold as we got closer to the date. It was the only way to stay on top of the work, on that monster project. It wasn’t a project being run with agile principles, but our just-in-time approach to scheduling made our lives easier. As I said, whatever works.
If you work in a big company, there are probably predictive and adaptive methods in use. All of the projects need to fit into some kind of PMO roadmap that allows the business to strategically plan the change effort.
The Agile Practice Guide talks about using predictive, adaptive and hybrid approaches to combine practices to get the best approach for the project or programme being delivered. Consider what scaling you would need to do to your current methods based on:
However, good schedule management skills are universal, and being able to break down the work, estimate, ensure work is given to the right task owners, track progress against tasks being completed – all those are fundamental skills. The tools and techniques you use to do them might be different depending on whether you are taking predictive or adaptive approaches.
Your PMO should be able to support all kinds of ways of working, and if they can’t yet, they are probably thinking about how to make sure they can in the future, because more and more PMOs are needing to adapt the way they work to be able to better support agile project teams.
From a financial perspective, you should be able to track the resource cost (and any other costs directly related to scheduling, if there are any) via timesheets or the equivalent way of reporting actual hours worked. This is especially useful if your team is not 100% dedicated to your project. If they are only doing your project, and you’re running on a timeboxed approach, you should easily be able to work out how many hours it took you to get the output from this timebox.
Schedule Management as a Knowledge Area is applicable to project managers working in agile environments. As with all tailoring, you take what you need and adapt to the project, team and processes you are using.
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Are you working with suppliers on your project? Chances are you probably have – or if your current project doesn’t require external contractors/suppliers, then one in your future probably will. These days, it’s common to have suppliers partnering with you on a project because companies choose to outsource work to those who are specialists.
However, a lot of project failures begin an end with customer relationships breaking down between you and the supplier. I remember one (huge) project we were going to work on and we had a supplier in mind. They were lovely people as well as being specialists. We were at the point of signing their contract and then… the deal fell through. I can’t go into the specifics of why, but suffice to say that as a project team that gave us a big problem. Our preferred supplier was no longer available, and we needed a replacement fast.
In hindsight, that was a great project for learning about contracting.
Building collaborative contractual arrangements
When you set out to nail your suppliers to the ground, and get the most out of them for the least possible price, you are setting yourself up to fail. Not only is not ethical business practice, it puts your project at higher risk because you are creating a ‘them vs us’ or ‘winner vs loser’ situation. Be a nice client.
Taking a collaborative, partnership approach is something that will be common to many of you, including those on agile teams. I’ve worked in partnership with suppliers over several projects and many years. It’s always best for team harmony and productivity, and project success, for the supplier to be fully involved, supportive and partnering with us as part of the core project team.
Let’s say you want that for your project, but you still need the formal boundaries that come with having a third-party relationship with another company. Here are some contracting techniques that you could consider as the building blocks of your relationship.
1. Multi-tiered structure
Be more flexible. Document different elements of the project in different documents. You can have a master service agreement and then add on extra elements as the project progresses. Then you can amend the schedule of services to meet your current needs. Use a statement of work if you need more formal ways of defining scope elements etc.
Having a more flexible way to procure services makes it easier to make changes and gives you more options with how you work together.
2. Focus on value, not progress
The contracts I have been involved with have all hinged on having fixed milestones based on delivery or phase gates around when certain moments come to pass on the project. That’s OK, but you can also look at staggering contract payments based on the delivery of value instead of particular artefacts. That’s something I would look at for future contracts. If you are focused on value-driven deliverables, there is more incentive for you both to be agile and flexible to achieve the goals.
3. Price by increment
Another suggestion is to have flexible pricing based on smaller aspects of the project e.g. user stories, instead of one big payment for the whole thing. Fixed time and materials contracts are not something we use very often because they tend not to work out for either us or the supplier. If you know exactly what you are buying, and they know exactly what they are delivering, perhaps that will be OK. But for the kind of work we do, it’s more helpful to have a fixed price plus add ons for extra things. It gives us more control over how money is spent and lets us change our mind (with agreement from everyone) later in the project if necessary, without putting a financial burden on the supplier!
4. Cancellation options
Consider adding in cancellation optiosn that let you both escape the contract early. But build in enough notice for you both to make a graceful exit. One contract we gave notice on had a 3 month notice period. Given that it was a legacy system, in use for years, and with multiple integrations, it was difficult to extract ourselves in such a short period of time!
Another way to look at this, especially with agile work in mind, is that you should be free to exit a contract if you have got enough out of it. For example, let’s say you contract with a supplier to do a bunch of work, but you get to a point where you’ve achieved adequate business value from only half of the original scope. You don’t need to go any further, so you should be able to exit at that point. If the project contract has been written effectively, hopefully the supplier will not be at a loss either – you’ll want this to be a collaborative discussion. A cancellation fee could offset some of the inconvenience to the supplier, while still ‘getting back’ money for you.
5. Fund the team, not the deliverable
Another flexible way to build a solution that meets your needs in an agile team is to embed the supplier’s expert resources directly in the team. You basically buy in the skills you need, for the time you need them. They work alongside you, on whatever scope elements or user stories are at the top of the priority list. Then you are reserving the right to change scope or make flexible direction shifts, while still working with expert supplier resources.
This option works if you need what’s in people’s heads, or a spare pair of hands – but it’s less useful to you if your project is using what the supplier makes themselves.
There are other ways to look at collaborative contracting and the Agile Practice Guide has more information on alternative ways to have formal, but flexible, relationships with third parties.
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