The Money Files

In this video we look at analogous estimating techniques.

Elizabeth Harrin is Director of The Otobos Group, a project management communications consultancy. Find her on Google+ and Facebook.

Enterprise Risk Management (ERM) sounds pretty advanced, like a bigger, better version of ‘ordinary’ project risk management. So what is it and is ERM really more complicated to do than the risk management we are all familiar with? I asked Chris Bell, Chief Marketing Officer at Active Risk.

Chris, tell us a bit more about what ERM actually is.

ERM is a scalable, holistic approach to risk management that consolidates and organizes risk information from across the organization into one location so that it may be used for improved decision making. By embracing ERM and creating a risk management culture, organizations can drive business performance, innovation and growth, while protecting company reputation and shareholder value.

OK, I can see that could be a really valuable function for a PMO – to be able to have all the risk information from across multiple projects in one place. If companies want to do this, how do they get started?

Unfortunately, too many leaders still perceive risk management as a complex progress. In reality, there are six steps that need to be followed to enable organizations to optimize the strategic value of risk – regardless of the industry, vertical, size or scope of the project.

First, employees across the business identify the risks currently facing their project or organization. It is critical to identify all risks, including risks that are low probability but high impact, which may have been ignored in the past. While each employee may know several risks, getting everyone into the same room to identify risks together will quickly yield a more comprehensive, more accurate list.

Yes, that’s the same approach as we use on projects, but spread out to include everything managed by the PMO or company. What next?

In the analyze step, teams evaluate each risk individually. How likely is the risk to occur? Who/what will be affected if it does occur? What are the business implications of the risk (e.g. schedule, budget, and scope)? Most risks have more than just a financial impact, so all business implications should be considered. This analysis should start to bring to light the interconnectivity of risks, and some of the connections may be surprising. For example, several different project teams may be relying on the same supplier or the same piece of equipment to meet different schedule and budget requirements, taken together that might cause a problem. At the end of this process, the team should have a comprehensive list/database of risks that can be organized by probability and impact to the project or organization.

Then the team agrees on the best course of action to manage each risk. This is where strategy is key. Often, the team will need to consider the business impact of the risk occurring versus the business impact and cost of controlling or mitigating the risk. If it makes sense to mitigate the risk, the team will discuss steps for risk reduction, risk transfer, insurance, and other options. At the end of this step, leaders should have a clear picture of all relevant risks, how they interrelate to each other, and how they will be managed moving forward.

The PMO would be a good place to keep this information, although it would have to be kept up to date regularly with assigned owners.

That’s correct. The monitor step is about accountability. A person or team should be assigned to each risk, so that they are responsible for monitoring and executing the mitigation plan.

So that’s where it ends?

No. There’s another step for organizations to streamline and enhance their ERM process and risk culture. Are the right people involved? What new risks can be identified? How can we improve the way we’re managing existing risks? Organizations should reward – not penalize – those who share risk information. The earlier a risk is identified, the easier and cheaper it usually is to stop it happening or reduce its impact.

Well, that’s true. How do project leaders get information about the risks that have been identified?

A best practice is to build reporting into the management cycle of meetings so that the right information is available in the right format at the right time. Having a reporting system readily available also ensures that ad-hoc questions from senior management can be answered at any time, with confidence.

Do you have any examples of companies currently using this ERM process on their projects?

A current example of a company that follows the six step process is Crossrail. Crossrail is Europe’s largest infrastructure project, constructing a new rail line across London with 21km of tunnels underneath the center of the city. The project, which has a budget of £14.5 billion, will increase London’s rail transport capacity by 10% by 2019.

Risk management is now an integrated part of Crossrail’s culture – tied into key progress indicators (KPIs) and therefore directly affecting employee bonuses.  The Company has also insisted that its most critical contractor and supplier partners implement the same risk management process and system, sharing real time risk data with Crossrail’s project managers. With the six steps in place, Crossrail has seen benefits including improved business performance and stronger, more effective partner relationships as they work on this very important project.

Given the amount of building work in London at the moment to support Crossrail, I think it’s great that they are integrating risk management and mitigation into their project plans. Thanks, Chris, that’s really insightful!

About the expert:

Chris Bell is the Chief Marketing Officer at leading ERM software provider Active Risk. Chris brings life and energy to technology and business topics such as Enterprise Risk Management (ERM), Project Portfolio Management (PPM), and Governance Risk & Compliance (GRC). He is also a published author of many articles, white papers and books, including EVM for Dummies, and contributed to Active Risk’s ERM Readiness Guide. 

Elizabeth Harrin is Director of The Otobos Group, a project management communications consultancy. Find her on Google+ and Facebook.

This month here at ProjectManagement.com we are looking at everything to do with resolutions and plans for the coming year. Here are 4 common project budgeting mistakes – how many of these will you be avoiding during 2013?

1. Not forecasting holidays

It’s really easy to forget to schedule in holiday time. This is a great time of year to review your project schedule for the year and plan in all the bank holidays, office closures, school holidays and other times where you think staff may be less available than usual. If you work with an international team, make sure you include the international holidays as well.

Start talking to team leaders now about when their team members will be off on annual leave – this is especially important if you do not have line management responsibility for project team members and do not see their vacation request forms. Building good relationships with their line managers will hopefully mean that later in the year you don’t get any surprises when project team members forget to tell you that they’ve just had a 3-week vacation approved and are leaving on Monday!

2. Scheduling at 100% availability

Don’t schedule your project team members to be 100% available for any task. This is a recipe for disaster – no one is 100% available for your project. There will be training days, sickness absence, team meetings, phone calls about other projects, coffee breaks, time spent surfing on Facebook and a number of other reasons why an 8-hour working day does not equate to 8 hours spent on project tasks.

Schedule team members at 80% available and across a working week (or longer) this should balance out. Your estimates will be better because of it!

3. Confusing tolerance and contingency

Contingency is a provision made within the project planning stages to allow for unforeseen circumstances. It is usually built into the budget or schedule. A budget tolerance is a range within which you can spend without having to report back to your sponsor and ask for more money.*

In other words, they are not the same thing. You have to ask permission to spend the contingency funds every time you want to dip into that pot. With tolerance, provided you stay within the agreed limit, you can go over budget (or under) by that amount without having to get permission. Tolerance is simply the ability to apply your professional judgement and is usually more appropriate on large projects with budgets in the hundreds of thousands or millions – where a bit of overspend can be easily lost in the rounding.

Contingency funds are for emergencies: unforeseen things. Or they could be used to offset some of the risk of a high risk project, especially one where the cost estimates are a bit vague because it is something you haven’t done before.

4. Forgetting tax

Most of what you buy incurs tax. Most quotes you get from suppliers do not include tax. If you take what the quote says and put that in your budget, you’ll be missing a big chunk of the actual cost to you.

In the UK, VAT is currently 20%. This is an extra fifth of the cost of anything you procure. Other countries have different tax regulations and you could find yourself having to pay a local tax as well as a national tax.

On top of simply remembering to add tax to the cost of the supplies you are buying, you have to take into account these different country rules. For example, in the UK, a vendor from a European country who is invoicing in euro will probably not be registered for VAT. As a result, they won’t put VAT on the quote or the invoice. Ah ha, you may think. That means I don’t have to pay it. Unfortunately, due to the tax legislation, it is quite likely that you will have to pay it anyway. The only difference is that it is paid directly to the government and not via the supplier. It’s an expensive pain for accounting, and the best advice I can offer is to talk to your financial accountants about how to treat tax if you come across any odd situations like that. Get advice early so that you can plan for any unusual tax bills that might be coming your way.

The easiest (if not the most accurate) way to handle tax is to add it on to everything in your budget. Then if for whatever reason you don’t have to pay it, you have money left over. It’s often easier to explain that to a project sponsor than it is to explain why you have to go over budget by 20% because you forgot to factor in VAT.

Next time I’ll be looking at three more common budgeting mistakes. In the meantime, what mistakes have you seen recently and what have you done to put them right? Let us know in the comments.

*These definitions come from my book, Project Management in the Real World.

Elizabeth Harrin is Director of The Otobos Group, a project management communications consultancy. Find her on Google+ and Facebook.

Sometimes on a project you need to find some extra pairs of hands. That can be easier said than done. These days many companies have gone through a number of rounds of redundancies and don’t have ‘spare’ people sitting around waiting for project work to come up. So finding additional project team members can be a challenge. Here are some options to consider if you need to find a couple of extra helpers on your project.

Contractors

Pros

Bringing in contractors is a quick way of getting skilled resource. You can generally get all kinds of industry knowledge. Using a preferred recruitment agency is one way to streamline the hire process and get the skills that you need.

Cons

Contractors can be expensive. They also rarely have knowledge of your company unless you have worked with them before, even if they do have industry or specialist knowledge. You have to go through a recruitment loop to bring them in and that can take time. If you use an agency to help you source suitable candidates you will also have to pay agency fees if you take on any of their suggested team members and that can equate to a couple of months’ salary.

Suppliers

Pros

You can ask suppliers if you can ‘borrow’ one of their application experts if you need technical help. You’ll probably have a good working relationship with a supplier already, so you know them and their staff which can make the transition easier. They will also know you and your working environment. You may already have day rates negotiated in your contract with them so you can cut out some of the commercial negotiations, making it even faster to bring someone on to the team on a short-term basis.

Cons

Suppliers may need convincing before they will loan you one of their prized members of staff (even if you do offer to pay for them at consultancy rates). As a result, this can be a difficult route to take as you may not get anywhere. However, if you don’t ask, you don’t get! It is still worth a call in to your account manager to see if they have anyone available to help you out on a project where you are short-handed.

Other internal resources

Pros

Who else in the company could step in? Ask your project team members for their recommendations. They are likely to know of colleagues who would be a good fit for the project team and who would have the required knowledge and skills.

Cons

Bringing someone else on to the project team from another department requires you to bring them up to speed quickly on the way the project works, its goals and their contribution to it. Sometimes training a new person can take longer than just getting on and doing the work with your existing team, so think carefully about who you bring on. You don’t simply want another pair of hands, you want someone who will make a useful contribution to the project.

Cancelling holidays

Pros

If you take the drastic step to cancel holiday requests you can get more hours out of your team members. However, that’s the only pro I can think of and this option has a lot more cons! If you do decide to cancel leave, make sure you have a clear policy on when this holiday time can be taken instead.

Cons

There will be a massive impact on staff morale of refusing requests for annual leave and going back on your earlier commitments by asking staff to cancel their existing plans. This is really not a good option.

Reviewing travel

Pros

Cutting out travel to and from meetings by allowing staff to work from their existing place of work or home can mean you eke out a few extra hours a day from project team members. If they don’t have to travel, they can work more effectively – it is hard to work from the car or on the train, and even if you do make calls or review documents, it is not the kind of work you would do if you were at your desk. You are distracted. So reducing travel time allows you to spend more time at your desk. Also consider letting people stay over if they are travelling distances. While this might seem counter-productive, it is better than people rushing to leave before the end of the working day to get at least some of their journey done during work hours. Equally, people stuck in a hotel will often check their emails in the evening or work later because they haven’t got anything else to do!

Cons

Project team meetings are always more effective face to face, so limiting travel means you have to potentially take a hit on other types of efficiency. Also, do you really want to squeeze extra hours out of your project team members? Wouldn’t it be better to get a new member on the team to take some of the burden rather than expecting team members to spend their evenings away from their families on a laptop in their bleak hotel room? Watch out for the hit on morale and on meeting efficiency if you opt to review the project’s travel policy.

You

Pros

You know a lot about the project and the team, so you could pick up additional tasks. Even if you don’t have the technical knowledge to complete a lot of the tasks, you could take on some of the administrative or other aspects of the work to alleviate the burden on team members who are over-stretched.

Cons

You’ll have to drop some of the project management tasks if you do this, so you will be sacrificing good management and governance for project progress – only you can work out if this is really worth it. The risk is that your involvement will be seen as permanent. If you bought in a contractor for 3 months it would be very clear that they would be a temporary resource, but using your own time just overburdens you and gets the team into the habit that you can pick up some of the less attractive areas of their own work. Handing these back to them in a couple of months when things are quieter could be a real challenge!

These are some of the ideas I came up with for dealing with a resource shortage in the project team. What other techniques have you used to manage with a lack of resources?

Find Elizabeth on Google+.

“The majority of forecasters are fools or liars,” says Professor Bent Flyvbjerg from the BT Centre for Major Programme Management, at the Sa?d Business School, University of Oxford, in a new paper on inaccurate estimates for major projects.

The paper, published in the International Journal of Project Management, sees Professor Flyvbjerg criticising the way that forecasts for projects are put together. He says they are inaccurate and provide poor material from which to make decisions about cost and benefits.

“Estimates are commonly poor predictors of the actual value and viability of projects, and cannot be trusted as the basis for informed decision-making,” he says. “These forecasts frequently misinform decision makers on projects instead of informing them. Some of the inaccuracy comes from genuine forecasting mistakes arising from over-optimism, but some estimates are deliberately misleading, designed to secure financial or political support for a project.”

You probably know of examples of where a project manager has padded estimates for one reason or another, by Prof. Flyvberg is pretty scathing about forecasting methods and the people who use them.

“Many forecasts are garbage and can be shown to be worse than garbage,” he is quoted as saying in a press release from the university. “These reports give the client, investors and others the impression that they are being informed about future demand, or the costs involved in a major project, when they are being misinformed. Instead of reducing risk, reports like this increase risk by systematically misleading decision-makers and investors about the real risks involved.”

What’s the answer?

Prof. Flyvbjerg says that the answer is for everyone to be a bit better at not putting up with this (I paraphrase). For example, he recommends that clients should ask for their money back when they receive reports which later prove to be significantly inaccurate and misleading. He even goes as far as saying that they could demand compensation (some contracts must have a clause for this in anyway). His most radical idea is that in some cases criminal action would be justified. “Merely firing the forecaster may be letting them off too easily,” he says. “Some forecasts are so grossly misrepresented and have such dire consequences that we need to consider suing them for the losses incurred as a result. In a few cases where forecasters foreseeably produce deceptive forecasts, criminal penalties may be warranted.”

Personally, I can’t see many project managers ending up in court because of poor scheduling, but as this has come from the Centre for Major Programme Management, Prof. Flyvbjerg is really talking about complex, mega projects.

When we say ‘everyone’, Prof. Flyvberg includes the professional bodies in that too. He calls on them to use their codes of ethics to penalise and possibly exclude members who produce unethical forecasts. “This needs to be debated openly within the relevant professional organisations,” he says. “Malpractice in project management should be taken as seriously as malpractice in other professions like medicine and law.” How many project managers genuinely produce unethical forecasts and how many are just incompetent? I think it would be hard to decide if someone was acting in good faith and to the best of their abilities or whether they were deliberately altering estimates for political gain.

A better way of forecasting

As you would hope from someone who is so outspoken about this, Prof. Flyvberg has all the answers. His answer is to turn to his own work and in this IJPM paper he sets out the case for quality control and due diligence to be applied to the evaluation of front-end forecasts. Unfortunately, I think his answer only works for massive projects and not for the type of forecasting and estimating most project managers do on their projects.

“Recent research has developed the concepts, tools and guidance on incentives that could help curb both delusional and deceptive forecasts,” he says. “Whether forecasters are unwittingly or deliberately under-estimating the costs, completion times, and risks of projects, and over-estimating their benefits, we need to have a systematic basis for evaluating their findings in order to make informed investment decisions. Given the high cost of major infrastructure projects, the irreversibility of decisions, and the limited availability of resources, this is clearly critical for both public sector and private sector projects. Significantly more accurate forecasts can be produced by looking at the evidence available from previous similar projects which have been already completed – what I call, taking an ‘outside view’. This seems so simple, but in practice it is transformative and leads to much more accurate forecasting.”

In other words, take large data sets or statistically relevant data for projects in your sector, apply due diligence, estimate from the basis of past experience and critically evaluate the forecasts. You’ve spotted it – the big downside to this estimating approach is that you need large, validated data sets to draw benchmark data from previous, relevant, projects. If your PMO has been up and running for years and has gathered all this, and you never do any projects which innovate or deliver something new in a way you haven’t done before, then you could make use of this technique.

If you don’t have all that data to hand, then this method of forecasting will not scale from mega projects and programmes to the humble projects that you and I work on. While using historical data is great and we should all look to the past to better predict the future, we would be wrong to expect this model to work for all projects.