Archive for the ‘Value’ Category

A comprehensive model for selecting information system project under fuzzy environment (Chen & Cheng, in press)

Dienstag, Oktober 7th, 2008

A comprehensive model for selecting information system project under fuzzy environment (Chen & Cheng, in press)Chen, Chen-Tung; Cheng, Hui-Ling: A comprehensive model for selecting information system project under fuzzy environment; in: International Journal of Project Management, in press.doi:10.1016/j.ijproman.2008.04.001Update: this article has been published in:  International Journal of Project Management Vol. 27 (2009), No. 4, pp. 389–399.Upfront management is an ever growing body of research and currently develops into it’s own profession. In this article Chen & Cheng propose a model for the optimal IT project portfolio selection. They outline a seven step process from the IT/IS/ITC project proposal to the enterprise success

  1. IS/IT/ITC project proposal
  2. Project type classification
  3. Individual project analysis
  4. Optimal portfolio selection
  5. Portfolio adjustment
  6. Successfully selection
  7. Enterprise success

Behind the process are three different types of selection methods and tools – (1) crisp selection, (2) strategy development, and (3) fuzzy selection.The crisp selection is the first step in the project evaluation activities. It consists of different factual financial analyses, e.g. analysis of discounted cash flow, cost-benefits, total investment, payback period, and the return on investment.Strategy development is the step after the crisp selection, whilst it also impacts the first selection step by setting guidelines on how to evaluate the project crisply. Strategy development consists of a project strategic status analysis. According to Chen & Cheng’s framework a project falls in one of four categories – strategic, turnaround, factory, or support.The last step is the fuzzy selection. In this step typical qualitative characteristics of a project are evaluated, e.g., risk, feasibility, suitability, and productivity improvements. In this step lies the novelty of Chen & Cheng’s approach. They let the evaluators assign a linguistic variable for rating, e.g., from good to poor. Then each variable is translated into a numerical value, e.g., poor = 0, good = 10. As such, every evaluator produces a vector of ratings for each project, e.g., (0;5;7;2) – vector length depends on the number of characteristics evaluated. These vectors are then aggregated and normalised.[The article also covers an in-depth numerical example for this proposed method.]

Understanding the Value of Project Management: First Steps on an International Investigation in Search of Value (Thomas & Mullaly, 2008)

Mittwoch, August 13th, 2008

Value of Project Management

Thomas, Janice; Mullaly, Mark: Understanding the Value of Project Management – First Steps on an International Investigation in Search of Value; in: Project Management Journal, Vol. 38 (2008), No. 3, pp. 74–89.

Thomas & Mullaly outline a conceptual model for investigating the value project management brings to an organisation. Their conceptual model assumes that three antecedents of value exist – (1) process criteria, (2) outcome criteria, and (3) fit of project management constructs with organisational context.

Furthermore they propose a 5 step evaluation of the value project management brings to the organisation in question

  1. Satisfaction – Is top management happy with project management?
  2. Aligned use of practices – Has project management implemented the processes it planned to do?
  3. Process outcomes – What process improvements have been achieved?
  4. Business outcomes – How did project management implementation impact business outcomes, e.g., customer satisfaction and retention, decreased time-to-market.
  5. ROI

[I am not sure about no. 2. This is quite a marketing/HR argument: ‚We can’t tell you if we achieved something, but we did, what we promised to do and we stayed in budget!‘. Still  I think that a better framework for the value created by project management is a value-oriented management approach.]

Formulation of Financial Valuation Methodologies for NASA’s Human Spaceflight Program (Hawes & Duffey, 2008)

Dienstag, August 12th, 2008

Real Option Modelling of Projects

Hawes, W. Michael; Duffey, Michael R.: Formulation of Financial Valuation Methodologies for NASA’s Human Spaceflight Program; in: Journal of Project Management, Vol. 39 (2008), No. 1, pp. 85-94.

In this article Hawes & Duffey explore real option analysis as a financial management tool to evaluate projects. The basic idea behind that is management can make go/no-go decisions thus eliminating the downside variability of the value of the project. In short you can always kill a project gone bad of course with sinking some costs.
[Some might call again for Occam’s razor and argue that it is sufficient to model this into the cash flow, because for the option price you need a cash flow anyway. But the authors ]

To put the classical Black-Scholes formula to use the authors look for equivalents to the input variables. More specifically they analyse NASA’s space flight program and valuated projects in respect to their go/no-go decision after the conceptual design. The authors used as input variables

  • NPV of project cash flow = Asset-value (S)
  • Actual one-time development costs = Exercise cost of the option (X)
  • Time until go/no-go decision = Expiry time of the option (T)
  • 5% treasury bill rate of return = Risk-free rate of return (R(f))
  • Historical data on initial budget estimate vs. actual development costs = Distribution of underlying (σ²)

Hawes & Duffey then compare the Black-Scholes pricing to the NPV and find that projects with higher volatility and longer time until decisions are higher priced than short-term decisions with less volatility (i.e. history of cost overruns).

I do find the managerial implications quite counter-intuitive. I modelled some Black-Scholes pricing for a real life project I worked on. My project had a NPV of 48 Mio. EUR but only an option price of 17 Mio EUR since the company had a history of cost overruns and a lot of front-loaded costs, in fact 70% of total expenditures would be spend before the go/no-go decision.
That is all very well and I can clearly see how that improves the decision making,
but if I look into the sensitivity analysis the longer the time to decision and the higher the volatility the higher is my option’s price. This is where I do not fully understand the managerial implication. Given that a similar judgement rule to a decision based on NPV comparison, I would favour a project where I decide later and I would favour projects from a department with higher variability in costs, because this gives me a higher degree of flexibility and higher variability can yield a higher gain. Surely not!?!?

Projects and programmes as value creation processes: A new perspective and some practical implications (Winter & Szczepanek 2008) and Value-based Management (Töpfer 2000)

Montag, August 11th, 2008

Value Creation in Projects and Programmes

Winter, Mark; Szczepanek, Tony: Projects and programmes as value creation processes – A new perspective and some practical implications; in: International Journal of Project Management, Vol. 26 (2008), No. 1 (Special Issue on European Academy of Management (EURAM 2007) Conference), pp. 95-103.


Töpfer, Armin (Ed.): Das Management der Werttreiber; Frankfurt 2000.
Amazon Link

Winter & Szczepanek base their article on Normann’s notion of value creation as an overarching goal of the organisation which also emphasises the customer as co-creator, co-producer and co-designer of value. Therefore true customer focus can only be achieved if a project looks also at the customer’s customer and leave behind organisational boundaries. Based on this value creating processes, the authors introduce a two-level customer relationship. The first level is the product creation, the additional second level represents the strategic domain of value creation.

The implications for a project are fourfold. Projects need to set their strategic focus on value creation and the second-level relationships. Secondly, project definition should outline the broader value to be created and the context instead of a narrow product view. Thirdly, projects should be set-up as multi-disciplinary, composite projects. Lastly a focus on value creates different images of the project, which helps understanding and shows the true complex nature of projects.

Finally the authors conclude with linking strategy, programmes, and projects. They outline chains of value creation on the Group level, which are fed by similar chains on the level of the business unit, which are fed by chains of value creation on the project level. On each of these levels the authors show the first-level relationship (product focus) and the second-level relationship (value focus). Furthermore they develop an enriched version of the project management triangle outlining the the strategy implementation in terms of products build, created value, and resource impact for each of the levels.

To contrast these thinking the right picture depicts what I learned about value oriented management at university. Töpfer outlines the value creation process as a chain of

  • Shareholder Value
  • Market Value
  • Customer Value
  • People Value
  • Future Value
  • Company Value

This chain is analysed top-down and managed bottom-up. The tool to manage the chain is the Balanced Score Card (BSC). The BSC consists of 4 dimensions (1) potential for performance/market performance, (2) customer satisfaction/market penetration, (3) entrepreneurial employees/employee satisfaction, and (4) economics/financial results.