Integrating the Project Balance Sheet and Business Value Models

Now let us integrate the concepts discussed in this chapter to complete the framework on which we hang quantitative analysis to be discussed in the remainder of this book. The business models drive the left side of the project balance sheet. The model results, working through the value flow-down process, frame opportunity (new products, new markets and customers, operational and organizational needs) and quantify goals. Goals, deployed through strategy, lead to identified projects. It remains to select among the identified projects those that are affordable, most beneficial, or of highest priority to the business. We will discuss decision making in quantitative terms in Chapter 4. Suffice it to say there is a means to make these selections and charter the project. The generally accepted definition of the project charter is "a document issued by senior management that formally authorizes the existence of a project..." ^[20] More about the charter can be found in the literature, primarily A Guide to the Project Management Body of Knowledge. ^[21] With charter in hand, the project sponsor conveys the project requirements and investment allocation to the project manager. Doing so completes the chain from business executive to project sponsor, thence to project manager through the connectivity of the project charter and the left-to-right-side bridging effect of scope on the project balance sheet, as illustrated in Figure 1-8.

Figure 1-8: Business Models and Project Balance Sheet.

We now have a consistent and traceable path to and from the source of business value for numbers from the right side of the project balance sheet representing capability and risk. A traceable path is needed, after all, because projects draw their value only from the business.

On the right side of the balance sheet we have two elements: (1) project capability and capacity and (2) risk. A well-accepted method to express capability and capacity is with the so-called "iron triangle" of scope, time, and cost. Since there is interdependency among these three, it is traditionally to set the one of highest priority, optimize the second highest priority element, and the third becomes what is necessary to close the triangle. This author prefers the "project four-angle" of scope, schedule, resources, and quality as shown in Figure 1-9. The set-and-optimize process is about the same as in the iron triangle, except that two elements could be involved in the setting or optimizing.

Figure 1-9: The Project Four-Angle.

We will see in Chapter 3 that the best quantification tool for scope is the WBS. Time and cost can be estimated for the scope on the WBS somewhat independently, but ultimately they are tied together through the concept of value. Earned value is the preferred numerical analysis tool, and that will be discussed in Chapter 6. There are numerous ways to evaluate quality. One we will address in Chapter 8 is Six Sigma.

Finally, there is risk. Risk in quantitative terms is expressed in the same units as the related item in the project capability and capacity. The risk component of the right side of the balance sheet holds the variance to the mean that must be managed in order not to endanger the business investment.

Figure 1-10 illustrates the points discussed.

Figure 1-10: Right Side Project Balance Sheet.

^[12]Goodpasture, John C. and Hulett, David T., A balance sheet for projects: a guide to risk-based value, PM Network, May (Part 1) and June (Part 2) 2000.

^[13]Goodpasture, John C., Managing Projects for Value, Management Concepts, Vienna, VA, 2001, chap. 3.

^[14]The author is indebted to Lou Lavendol, Senior Systems Engineer at Harris Corporation, Melbourne, Florida, for his insightful discourse with the author regarding risk taking and business value in the context of proposing on defense industry programs. In those discussions in the early 1990s, the tension was between marketing (sales) that represented the voice of the customer and system engineering that represented the project. Often, there was a gap between marketing and engineering, a gap that could only be filled by someone taking a risk.

^[15]Goodpasture, John C., Managing Projects for Value, Management Concepts, Vienna, VA, 2001, chap. 3., p. 46.

^[16]Goodpasture, John C., Managing Projects for Value, Management Concepts, Vienna, VA, 2001, chap. 3., p. 46.

^[17]The author has paraphrased slightly the project equation and the project manager's mission from the text given in the reference (also the author's work).

^[18]"Known unknowns" is a concept from risk management. The idea is simply that in framing the scope, there may be many unknowns, but the fact that there are undefined elements of scope is itself known.

^[19]Recall that we are using the word "capability" to stand in for the set (scope, cost, time, and quality). To credit capability means that either cost or time has increased, scope has expanded without corresponding relief from the project sponsor, or there is a greater demand on quality. A greater demand on quality usually means tighter tolerances, less scrap and rework, fewer functional or performance errors in the production deliverable, or perhaps lesser life cycle investment forecast for service and maintenance after delivery.

^[20]A Guide to the Project Management Body of Knowledge (PMBOK® Guide) — 2000 Edition, Project Management Institute, Newtown Square, PA, p. 204.

^[21]A Guide to the Project Management Body of Knowledge (PMBOK® Guide) — 2000 Edition, Project Management Institute, Newtown Square, PA, p. 54.