The value solves the question WHY
of the 3D WBS modeling...
of the 3D WBS modeling...
Copyright 2014: Stephen A. Devaux, Analytic Project Management
Every project and program is an investment, undertaken to generate benefits that are of greater value to the sponsor/customer/investor than the cost of the resources invested. In this sense, the relative success or failure of the project can be represented as expected project profit, i.e., the difference between the total cost of the resources invested and the value that, at completion, the project is expected to generate.
The above stipulation illustrates a serious misunderstanding in project metrics: the conflation of the unfortunately misnamed “earned value” with the project’s “business” or “investment” value. Earned value is always based on resource usage: the total resource budget or the budget for labor or for a specific material. But this has nothing to do with the value the project is expected to generate. Indeed, no intelligent sponsor would ever invest S1M in a project the product of which he values at exactly $1M – even the least project risk and shortest project duration would dictate that the sponsor would only invest $1M if he expects it create more than $1M in value. And sometimes that expected value may be much greater than $1M – an enabler project, for instance, such as a new platform on which many valuable systems may be loaded, may create value and opportunity worth many multiples of the platform-creation’s project budget. Yet that budget would be the basis for the project’s earned value.
Value, in the form of ROI or NPV or any other name, is the raison d’etre of every program and project, and is carefully analyzed and tracked on all other types of investments. Yet, on projects alone (where the project team often has the ability to make decisions that can greatly impact value), this driving investment metric is often never estimated, and even when it is, is not tracked and/or conveyed to the project team as a precision metric for decision-making.
The project’s value is created by the scope: mostly the product scope, but occasionally with some value added by the project scope (e.g., improved organizational skills with a new manufacturing technology). Yet while the resource budget is loaded into the elements of the work breakdown structure and summed to the top to create both the budget and the earned value baseline for each summary element and for the whole project, the project’s expected value, even if estimated, is not decomposed to the work elements.
Value behaves differently from cost, yet tracking it is no less important. Whereas cost is always additive (the sum of the dollar costs of five detail activities ALWAYS is equal to the dollar cost of their parent summary activity), value is not. The value of two activities may be less OR more than the sum of each, i.e., they may either duplicate some of the other’s value or kindle each other’s value.
- Mandatory activities/work packages/projects have a value equal to that of the entire project/program: if we build an airplane valued at $1M but leave out the left wing, the value of the project is zero unless and untilthat wing is added, making its value-added $1M. Interestingly, its right wing is exactly the same! But the value of the two (mandatory) wings does not sum to $2M – it only sums to the $1M value of the whole project.
- Optional activities have a value equal to the difference between the total expected project value and what the project would be worth if we did all the other work except that optional work (activity/work package/project within a project/program).
- Prioritization of work based on classification of mandatory vs. optional work;
- Prioritization of work based on classification of different optional work based on its relative value;
- Recognition of project value accumulation on terms other than earned value (i.e., cost);
- Recognition of accrued (i.e., salvageable) project value if considering project truncation;
- Quantification of the value impact of scope reduction;
- Identification of work whose value-added is less than its true cost. This is particularly important whenever there is a change in the schedule such that new optional work migrates to the critical path and acquires critical path drag and drag cost (true cost = resource cost plus drag cost).
Stephen A. DEVAUX
President, ANALYTIC PROJECT MANAGEMENT
Author, Instructor, & Consultant
Author of "Managing projects as investments"
http://www.crcpress.com/product/isbn/9781482212709
Author, Instructor, & Consultant
Author of "Managing projects as investments"
http://www.crcpress.com/product/isbn/9781482212709