It’s the responsibility of the management team of an organization to analyze a received project in terms of its finance prior to accepting / rejecting it. In order to do so, there are certain Project Finance Analytical Methods / concepts that have been designed to follow to make decisions based on the financial results the concepts result on.
Below template template has been developed to analyze a project using Return On Investment (ROI), Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period. The steps that need to be followed in order to use the template are mentioned in the template itself.
When an organization receives a project, it’s necessary to find out how worth it will be for the organization in terms of finance if the project is officially accepted. In order to analyze this, the portfolio / project / program management team has to go through a Project Financial Analysis process in order to calculate how much of a cash flow the organization receives throughout the project.
There are few concepts that have been developed to calculate and sort out this matter. Among those concepts, four concepts will be explained below. (A separate template has been designed by the author to calculate and analyze a project based on below 4 concepts)
Return on Investment (ROI)
It is a financial analytical method that compares the difference between the profit value and the cost of investment that can be earned and lose via a project . This is calculated as a percentage value. Higher the percentage, better the result.
Net Present Value (NPV)
This is a method used to evaluate investments where the net present value of all the cash inflows and outflows is considered under a given discount rate (which is the required rate of return). The project can be accepted if it produces a positive net present value.
Internal Rate of Return (IRR)
It is the discount rate at which the net present value of all the cash inflows and outflows of a particular project equals to zero. This is almost the same as Net Present Value concept. Higher the IRR, better the outcome, hence it’s recommended to select the project with the highest Internal Rate of Return value.
It is the time period required to recover the funds expended in an investment. The payback period will indicate how long it will take for the project / organization to cover / match the expenses from an initial investment. It’s recommended to go for the project that will support the organization to recover the incurred expense within a shortest time possible.
According to PMBOK 5th Edition, a stakeholder is an individual, an organization or an entity who will affect, be affected or perceive themselves to be affected by a decision, activity or an outcome of a particular project. Based on the stakeholder category, their interest towards the project and the level of impact they will be exerting on the project or be exerted on them by the project may vary.
It is an essential and a critical requirement to identify necessary stakeholders at the early phases of the project. Once identified, their level of interest, impact and their expectations need to be analyzed with regards to their importance and influential power towards the project. It is important for the project manager to successfully identify all the stakeholders in order to maintain and focus on a good relationship (Refer Stakeholder Management).
If the project is small, then the number of stakeholders is less and if the project is large, then the number of stakeholders is more. In order to manage stakeholders in a large project, it is important for the project manager to maintain a steady communication channel with every stakeholder in order to drive the project towards success.
There are few categories of stakeholders as identified by PMBOK 5th Edition. Among them, Internal and External stakeholders are considered main categories.
Internal stakeholder are groups or individuals who are working within / internal to the project organization.
Program / portfolio manager
Client / customer
Management of the project organization
External stakeholders are groups or individuals who are external to the project organizations
An external customer
Vendor / Subcontractor
End users of the project outcome
Apart from internal and external categorization, there are few other groupings named upon project stakeholders.
Direct and Indirect stakeholders
Direct stakeholders are concerned with the day-to-day project activities while Indirect stakeholders are concerned with the outcome of the project.
Positive and Negative stakeholders
Positive stakeholders look at the positive vision of the project and they support to drive the project towards success. Negative stakeholders look at the project in a negative manner and they are less likely to support the project.
Decomposition as defined in PMBOK (5th Edition) is a tool and technique used to divide and subdivide the project scope and deliverable into more smaller, manageable work packages. Once the scope is decomposed, it’ll be the lowest level of WBS (Work Breakdown Structure) which can be estimated and managed in terms of cost and schedule. The size of the work package after decomposition will depend on the complexity and size of the project. At the time of decomposing, activities such as assigning identification codes to each work package will take place.
There are few approaches followed to structure a WBS. The 2 most popular methods are;
As it’s shown in the above figure, the high level task ‘1’ has been broken down into 4 sub tasks (1.1, 1.2, 1.3 and 1.4) which are further subdivided into smaller work packages.
E.g.: 1.1 has been decomposed into 3 smaller work packages (1.1.1, 1.1.2 and 1.1.3) These work packages are smaller, manageable and can be estimated in terms of cost and schedule.
Decomposition will not be valid and possible for a task or a deliverable that will need to be accomplished and built far into the future. Therefore, project management team has to wait until that particular requirement / deliverable is confirmed, hence a details WBS can be developed. This function is sometimes referred to as ‘rolling wave planning’ (Source: PMBOK, 5th Edition)
In addition, when the project deliverables / activities are decomposed into smaller, manageable work packages, the project management team should be aware of decomposing it to a level which is useful for a valid estimation. If over-decomposed, estimating those work packages will not be possible and the effort put on for decomposition will be a waste. Since this is known to be a team work / activity, everyone on the project team is requested to participate in bringing up the most efficient WBS of the project.
When it comes to Project Management, usually there are multiple stakeholders expecting different outputs from the project life-cycle. Therefore, it’s necessary to implement proper group-decision making techniques and methods. Especially this is important when different opinions clash and make conflicts with each other. In addition, these techniques / method may align with group creativity techniques when it’s required. (prior to the execution of group decision-making techniques)
According to PMBOK (5th Edition), there are 4 different group decision-making techniques that can be applied throughout the entire project life-cycle. They are as follows;
This decision making is defined when everyone participating in the decision-making process agrees on a single course of action. There are few methods that can be followed to achieve this. (E.g.: Delphi technique where group of experts respond to the questionnaire anonymously) Apart from that, this method is known to provide the least hassles on project management team in terms of implementing decision making techniques.
Majority relies on most number of votes towards a particular decision. (more than 50%) In order to make this technique more efficient, it’s recommended to have an uneven number of people in the decision making panel to avoid resulting in a tied decision.
This is a bit of complicated decision making technique and more challenging to understand. According to PMBOK (5th Edition), it is a decision reached by the largest block in a decision making panel though it’s not achieved the majority concept. This method is used when the nominated options are greater than 2, hence the option voted by the largest block of the decision making panel is agreed and confirmed.
This is known to be the least agreed method to be used among a decision making panel. When the project leader acts as a dictator, he / she is not willing to listen to others and coming up with their own decisions which will have a higher probability to drive the project towards failure. A dictator doesn’t allow to develop group creativity techniques. In addition, due to the dictatorship, the project lead should be accountable for any future conflicts arising within the project community and tasks.
There are several techniques been defined to follow when it comes to requirement gathering phase. (Source: PMBOK 5th Edition) Group Creativity Techniques are few of them. Under this concept, there are few methods mentioned for effective requirement gathering sessions. Few of them are as follows;
This is same as interviewing, but recommended to use when there are multiple stakeholders sharing multiple ideas with regards to project / product requirements. This is sometimes referred to as a conference techniques due to the participation of multiple stakeholders.
Nominal Group Technique
This method works with brainstorming as a joint process. Once the ideas are generated through a brainstorming session, the brought up ideas / requirements will be analyzed and prioritized based on their value using the nominal group technique.
This is known to be a method of reaching the consensus of subject matter experts (SME). The facilitator has to prepare a list of questions that need to be answered by SMEs and shared among them. Once the SMEs receive the questionnaire, they will answer based on their knowledge and experience and share their opinions with the facilitator. Through this technique, it reduces the bias in the information shared since this technique is mostly following the anonymous techniques where only the facilitator will receive the SME opinions.
Idea / Mind Mapping
Mind mapping is a technique which consolidates several opinions collected via brainstorming sessions from individuals and form a central opinion. This mapping view visualizes the different ideas and opinions carried by different stakeholders which follows different deviations from the centralized opinion.
This is another technique that goes toe-to-toe with brainstorming and nominal group techniques. It takes ideas from different individuals and group them under different categories for reviewing and analysis purposes.
Multi-criteria Decision Analysis
Multi-Criteria Decision Analysis technique assigns different criteria for requirement evaluation purpose and rank them with a weighted value. Once the requirements are gathered, they will be rated based on the weighted values assigned to each criteria. This technique is mostly used to evaluate risk levels, uncertainties, valuation and other ideas that can be ranked with regards to the weighted criterion value.
Interviews are Questions and Answers sessions that can be used for information elicitation purpose from stakeholders in when it comes to different project management activities. (E.g.: Requirement collection) An interview can either be formal or informal and it can be defined as one of the strongest and most efficient requirement gathering techniques in project management.
In order to follow a successful requirement gathering session via interviews, the project management team has to have a prepared set of questions and the response from the client needs to be noted down then and there. Most of the time, an interview is conducted between an interviewer and an interviewee, but there are certain situations where requirements will have to be grabbed from multiple stakeholders at once. In such scenarios, it’s recommended to conduct a brain storming session
When conducting interviews, it’s important to understand who to interview and what sort of questions to ask in order to gather / elicit requirements effectively. Especially, interviewing subject matter experts, experienced project participants and sponsors will help to identify the desired deliverables that need to be produced via the project life-cycle.
Enterprise Environmental Factors are used as inputs to project activities same as Organizational Process Assets. These factors are not under the control of the project team, in spite of being influential towards project direction. This influential factor may negatively or positively impact towards the project success, hence it’s project team’s responsibility to use them under all the project processes to ensure that project is guided and followed under the respective factors accordingly.
PMBOK 5th edition has stated different factors that are used in project activities. Few of them are as follows;
Culture, structure and the governing rules of the performing organization
External factors such as political and marketing conditions
Geographical situation, resources and available facilities
Industry / government standards and policies
Available human resources (skills, knowledge level, etc…)
Company working structure (authorization structure)
Stakeholder engagement (risk tolerance, culture and other behavioral patterns)
Available communication channels and management methodologies
Information databases (commercial, risk related, baselines, etc…)
Personnel authority and administration (staffing plans, employee retention methods, performance appraisals and reviews)
Project Management Information System (an automated tool to collect and share information related to projects)
According to PMBOK (5th Edition), Organizational Process Assets (OPA) are plans, processes, procedures and knowledge bases specific to a particular organization. Any artifact (formal or informal plans), practice (processes, policies, procedures), any knowledge base (lessons learned, historical information) from any stakeholder group can be included as an organizational process asset to govern or drive projects. Among the project knowledge areas, these process assets are considered as inputs to project activities and they are updated throughout the project life cycle whenever needed and necessary.
The organizational process assets are separated under 2 categories.
Processes and Procedures
Corporate Knowledge Base
Under processes and procedures, the organizational process assets are categorized as follows.
Initiation and Planning
Executing, Monitoring and Controlling
1. Guidelines and specific criteria for a given project
2. Standards and Policies (HR
Policies, health and safety,
quality policies, etc…)
3. Procedures (Process audits,
checklists, KPIs, etc…)
4. Templates (WBS, Risk register, contract templates, etc…)
1. Change control procedures
2. Financial documents
3. Quality, issues and defects related
4. Communication related documents
Corporate Knowledge Base consists of organizational process assets which includes various types of information related to projects that can be used for any project activity. Few of them are as follows; (Source: PMBOK 5th Edition)
Configuration management related info: (baselines, policies, procedures, standards, etc…)
Lessons learned and historical knowledge base (previous project records, project documents, contract documents, project performance related information, other knowledge areas related documents such as risk management, stakeholder management, communication management, etc…)
Expert Judgement is one of the best and very useful techniques used during most of the project management activities. It’s a common technique used throughout the project management processes (among the project management process groups) such as charter development, project management plan development, project execution, monitoring, controlling, closing, etc… It is applied to all the management and technical details whenever needed. When it comes to Project Management, experts are known to be internal or external assets an organization keeps to provide inputs for planning and estimating during planning processes. The experts are mostly needed when the project management team feels that their opinions are very crucial for the success of the project.
The method ‘Expert Judgement’ has a lot of positive outcomes when used properly at the planning phases in Project Management. Not only it saves time for planning and estimating projects, but also it highlights risks that can have an impact towards the project outcomes, hence coming up with a risk response plan will become much easier for the project management team. In addition, the quality and accuracy of the estimations and planning phases become much greater. Most of the projects fail due to inaccurate estimations and less efficient risk management planning, hence it’s always recommended to go for expert judgement when developing the estimates and risk identification process.
Experts do have their own specialized knowledge, training and skills which can be used for different areas. These experts can either be a group or an individual and it’s project management team’s responsibility to identify and select the correct expert for necessary activities.
Experts can be available from many different sources. Few of them are as follows; (Source: PMBOK 5th Edition)
Within the same organization, but from different business units
Internal / External Consultants
Internal / External project stakeholder (it can be customer or sponsor as well)
Subject Matter Experts (SMEs)
Professional and Technical Associations
Other Industry Groups
Project Management Office (Even among the project managers, there can be subject matter experts who can act as Experts for projects)