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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In this instalment of Ask the Experts I talk to Jon Swain, President of Virginia Beach-based firm Ten Six Consulting. Ten Six specialises in enterprise project management tool deployment, so I talked to Jon about what these products can do and how they can help project managers work more effectively.
Jon, when I think of enterprise project management tools, I think of scheduling. What else can they do?
There are many features that take EPM tools beyond just scheduling. At a high level, EPM tools offer a centralized repository with all of an organization's project information in one place.This is coupled with a role-based security structure that allows an individual access to only what their role needs. Because you can centrally control the environment, you can enforce process disciplines. For example, take baselines. Baseline discipline is sometimes difficult to achieve with standalone tools as the project can re-baselined at any time without a formal process to control that. In EPM tools, you can better control the schedule from being informally baselined.
With everything in one place, senior management can see up-to-date project performance data across the whole organization allowing them to better manage their project portfolios. They can proactively choose which projects to select, prioritize projects particularly with competing or scarce resources, understand the interactions between projects and tie all of these decisions directly back to the company's strategy and goals.
So portfolio management is a big chunk of it. How do they fit into the rest of the systems in use?
It's not uncommon for EPM tools to be integrated with other enterprise systems including HR and accounting. Two very simple examples of these include allowing the synchronizing of resources from an HR system and the collecting of actuals costs from an accounting system. A project manager can not only plan and profile their budget, but accurately track project spending by collecting actual costs from these systems. This gives you a complete picture of your project finances. This kind of integration and information sharing at the enterprise level are benefits that stand-alone implementations of project management tools can’t easily match.
In addition, collaboration is available with many of the EPM tools today emphasizing the importance of collaborating and communicating to improve productivity and drive project success. These capabilities can enable the better management and sharing of project artifacts.
It would be remiss of me not to mention the tool vendors embracing web-based technologies. Having all this functionality in a tool suite that is now 100% web-based, makes it far easier from an IT perspective to deploy and manage large numbers of users.
That sounds great, but expensive. How do they pay back?
Many organizations that are not using EPM tools often have no way of measuring organizational project performance with empirical data, resulting in subjective assessments that can be misleading.
By way of example, a successful deployment across a 'green field' IT organization of say, a thousand staff, can yield millions of dollars in savings. These savings can come from improved project selection, removal of duplicate effort, better utilization of resources on the right projects, improved project delivery and reduction of project risk, to name just a few. These are fantastic benefits that any company could and should enjoy.
Also, learning from past project performance increases the likelihood of better estimating on future work. Building on past project successes helps create best practice templates that can be reused time and again. It's a cycle that naturally drives continuous project management improvement over time.
The customers in which Ten Six have successfully implemented EPM tools are reaping huge benefits and often have an improved organizational culture with a motivated staff that is focused and all pulling in the same direction.
I imagine you can get a lot of reports out of these systems. How does good reporting help a project manager make their project more successful?
Reporting plays a big part in supporting the project manager. EPM tools provide real-time information on the status of their project, which is presented in the format and style that they need to make decisions. These reporting capabilities can be extended using third party reporting tools, allowing complete customization of report formats and the ability to include information from other systems.
Getting the right data out of these tools is no longer the only priority; great graphical presentation in specific formats for different roles including senior management has become just as important. Web-based dashboards also play a large role in supporting both project managers and senior management in their decision making process.
I'm convinced. Is the next step to pick a tool?
There are three elements that are often talked about when implementing EPM: first tools, second processes and third people. Most organizations that are implementing EPM tools for the first time focus on these three things in that order.
In our experience, they should reverse the order to get better results faster. In other words, implementing the tool is typically the least of your challenges. Cultural issues, change management and user adoption are the challenges that need to be overcome to ensure a successful EPM tool implementation. So, if the priority were people, process and then tools, more emphasis, money and effort would be spent dealing with these “soft” issues that can slow down or even stall an EPM implementation, ironically making the implementation more expensive!
Value Management: Translating Aspirations into Performance is a new book by Roger H. Davies and Adam J. Davies (Gower, 2011). It’s heavy going, but if you are into getting the best value out of the change programmes you are delivering, then it makes useful reading.
There is a fair amount of theory, but there are techniques in here that you can apply to your programmes straight away. I’d say that it is aimed at people in a pure programme management, portfolio office or senior executive role, as there is not much here that project managers will be able to put into practice without senior support.
The authors define value as:
Or, to describe it less financially:
I would argue that value means different things to different people, but I understand that you need a common ground on which to base the rest of the book.
Asking the right questions
The book starts with a really nice feature that I’ve never seen before: executive questions. Here’s an example:
Q: How does Value Management address the challenge of delivering greater value from change programmes?
A: Value Management provides the means to deliver more benefit for less cost and risk. Value Management targets, times and aligns initiatives to maximise overall value. This is achieved by linking programmes explicitly to attributable benefits. This requires precise quantification of cause and effect relationships between programme deliverables, the drivers of business performance and consequential stakeholder benefits.
Reference: See Chapter 7 (Programming Value) and Chapter 8 (Aligning Value)
This is a neat way of explaining to people picking up the book the kind of questions that will be answered by reading it, and forms a kind of annotated table of contents so you can flick to the section that most interests you first.
Is it a good read?
Value Management is not an easy read, but perhaps I’m just not in a role where I can act effectively on the information in here. There is also a good glossary and lots and lots of graphs, figures and tables, so the authors make it as easy as possible to understand the concepts discussed. They also draw on real life examples and their own anecdotes, including examples from the movies, so they have tried to make the theory as accessible as possible.
One of the authors was obviously very taken with neuro-linguistic programming (NLP) and there are a number of references to how powerful this can be. The authors write: “The ability most relelvant to Value Management is to produce radical shifts in performance by re-programming limiting perceptions and ... enable clients to release latent potential through change.” They call this a value breakthrough, but this was one of the weaker points of the book for me. I’m sure you could achieve similar results with cultural change without having to ‘NLP’ your entire organisation.
If you are looking to drive savings and ensure that your change programmes and portfolio of projects delivers the best possible value for your company – and you work in an organisation with a high level of maturity when it comes to PMO practices and project thinking – then you could get a lot from this book. If your company doesn’t have a mature approach to programme management, you could struggle to get any of this implemented, but at least understanding the concepts will help you assess which are likely to be the best programmes for your business, and how to get the last drop of value out of them.