Chapter 3: How Do Projects Work? Project Success
Organizations strive to provide a continuous flow of value through their operational value streams. To create and improve their value streams, they invest in specific initiatives (projects):
- Transformation initiatives to introduce a fundamental change in the organization’s value stream system
- Initiatives to create new value streams involving new products or services
- Initiatives to improve the existing value stream system
- Initiatives to eliminate obsolete value streams
- Emergency response initiatives to preserve or restore the value stream system
These initiatives invest resources to create project products (deliverables) to be used in the organization’s operations.
The project is a system of interrelated elements – resources, workflow activities, deliverables, objectives and goals – between which there are causal relationships (Apply systems thinking principle).
The purpose of project resources is to ensure the execution of workflow. The resources invested must be necessary and sufficient to carry out the workflow activities.
The purpose of project workflow is to create deliverables. Therefore, the workflow activities should be necessary and sufficient to create the deliverables.
The purpose of project deliverables is to get integrated into the operational value streams, improving the organization's value stream system (we refer to this improvement as project objectives). Thus, project deliverables, when used as intended, should be necessary and sufficient to improve the value stream system.
The purpose of the improved value stream system is to provide incremental value to the customers and the organization (goal of the project). The improved system must be necessary and sufficient to achieve the desired incremental value.
The deliverables are the assets created by the project. They can take different forms:
- Physical infrastructure or structure
- New or improved products or services
- Information products
- Document-based deliverables (e.g., textbook, contract, documented test results)
- New or improved processes, technology, methods
- New or improved organizations
- New knowledge and skills
- Result of a study, research or scientific experiment
- New natural resources
- Pieces of art
- Complex deliverables, comprising of deliverables of different forms
- Project management deliverables (e.g., plan, report)
When relevant project deliverables are integrated into operational value streams, this improves the organization's capability to deliver specific products and services. The improved operational value streams add value to the customers and the organization.
The following figures demonstrate the project logic for improving a value stream and for creating a new value stream.
Figure 3-1: The project logic for improving a value stream
Figure 3-2: The project logic for creating a new value stream
Until we define project success criteria (which doesn’t happen often), we can speculate endlessly about how successful it was, but we won’t be able to measure success. When we’ve specified inappropriate criteria, we can delude ourselves that we’ve succeeded. Does it matter that we have met the time, cost and scope “objectives” if the project is a strategic waste?
The Measure of Success
Project success should be measured by its net benefits, provided that we meet the agreed project conditions (see Conditions of Satisfaction below). Any other metrics such as scope, time, cost and quality are proxy or secondary metrics - in fact, these are factors that affect the net benefits.
When comparing the benefits and costs of a project, we need to use the same units of measurement, and the most convenient ones are the monetary units. Therefore, as a synonym for the project’s net benefits, we can use the economic or social life cycle profit - the difference between the project life cycle revenues and the life cycle costs, brought to the same point in time.
The project life cycle costs include:
- Investment costs (the costs for creating project assets)
- Operation and maintenance costs (including manufacturing costs, when applicable)
- Replacement costs and decommissioning costs (when applicable)
- Cost of Time (see the chapter on Cost of Time)
The project life cycle revenues can take any of the following forms:
- Revenues from the sale of products or services created through a direct use of the project's deliverables, for example, proceeds from the sale of software or bridge tolls.
- Project benefits expressed in monetary units. Even the project benefits that have no market value (e.g., good health and well-being) can be expressed in monetary units. The need for quantification also applies to organizational achievements, such as improving the customer churn rate or lowering the employee turnover rate, or increasing customer and employee satisfaction.
- Avoided or reduced costs as a result of a project should also be considered as project revenue - for example, reduced customer acquisition cost or production cost (operational value stream costs).
Costs and revenues should factor in the cost of time. We should consider only incremental costs and benefits, that is, costs and benefits attributable to the project.
The benefit-cost measures like NPV and IRR are well known, so we won't look at them here.
We should assess all actions and decisions in a project for their net benefit, that is, for their contribution to the success of the project within the agreed Conditions of Satisfaction. However, it would be simplistic to say that we must strive to maximize benefits and minimize costs, since we have to account for the trade-offs between their contributing factors. In this way, the success of the project becomes an optimization task.
Conditions of Satisfaction
Conditions of Satisfaction (CoS) are additional project success criteria based on priorities and conditions co-developed by stakeholders. The CoS align the interests of different parties, facilitate collaboration and guide decision-making that benefits everyone (Serve people principle).
CoS require a consensus-based agreement, containing both the conditions of individual stakeholders (owner, customer, team members, etc.) and the conditions common to all.
The agreed CoS may include, but not be limited to:
- Time, cost and quality
The CoS should be SMART: Specific, Measurable, Achievable, Realistic, Time-based, but we can also define other conditions with the help of states and feelings.
Here’s a template for a value-based CoS, describing the future state resulting from the project:
As an owner/customer/end-user, I am/I feel <expression of state or status>; because <conditions of satisfaction>.
For example: "As a researcher (end-user), I can perform state-of-the-art, innovative and advanced research because I work in a world-class research facility. "
CoS complement project objectives and the measure of success.
The project variables are agile factors that influence the success of the project.Each project variable affects other variables and the outcome of the benefit-cost model needs to be optimized through a systemic approach (Apply systems thinking principle).
The key project variables that affect the outcome are:
- Investment costs
- Operation, maintenance, replacement costs and decommissioning costs
- Time (Cost of Time)
Let's look at some examples of relationships between project variables. Note that, when viewed through the lens of the benefit-cost model, these examples appear as local optimizations. The life cycle profit maximization requires a systems approach and holistic optimization modeling (Apply systems thinking principle).
Project Time-Cost Trade-off
The project cycle time and the investment costs are in a trade-off relationship. The optimum cycle time results from U-shaped distribution optimization.
While there’s usually a linear relationship between the time and the indirect project costs, the corresponding relationship with the direct costs is nonlinear.The total costs curve has three sections (Figure 3-3):
- a flat bottom of the optimum cycle time (lowest total costs)
- a left section with higher costs because of schedule acceleration
- a right section with higher costs because of project delay.
Direct costs don’t go down indefinitely with the extension of cycle time, and it may seem logical that they reach a stable minimum. In practice, however, once they reach a minimum, direct costs rise again. The reason is that much of the project information is perishable and loses its initial value over time. This results in aging work items.
That’s why, we “buy” new information through data collection, analysis, hypothesis testing, etc. The new information may require additional planning and development efforts to revitalize the aged items.
And there is another effect if the time cycle is extended. Team members have a limited working memory and, when a project is delayed, they lose or forget information relating to the delayed activities. They need extra effort to recover that information. Because of the cost of perishable information, the direct cost function is an asymmetric U-shaped curve.The project acceleration and delay can be measured by using the optimum cycle time as a reference point. We show the acceleration and delay costs as well as the cost of perishable information in Figure 3-3.
Figure 3-3: Cost of Acceleration and Cost of Delay
Trade-off Between Investment and Operation Costs
It may be possible to decrease the project operation costs with a targeted increase of the investment costs, resulting in the minimization of the total life cycle costs. For example, additional investments in the energy efficiency of a building can lead to a reduction in its operation costs. This is another U-shaped distribution optimization as we show in Figure 3-4.
Figure 3-4: Trade-off between Investment and Operation Costs
Trade-off Between Project Costs and Revenues
Incremental targeted investments in the design and quality of project deliverables may increase the customers’ willingness to pay for them (or use them) and the project revenues (Figure 3-5). A similar trade-off exists between the operation costs and revenues and between the project scope and the revenues. This is a normal distribution (bell curve) optimization.
Figure 3-5: Trade-off between Revenue and Costs
Takeaways: How Do Projects Work? Project Success
- A project is a temporary value stream, aimed at creating or improving the existing value stream system of an organization or its customers, thus creating increased value for the organization’s stakeholders.
- Project management is the practice of managing project value streams to maximize their net benefit.
- To improve their value-creating system, organizations invest in specific initiatives (projects): transformation initiatives, initiatives for improving or creating value streams or for removing obsolete value streams, and in emergency response actions.
- The project is a system of interrelated elements that have causal relationships: resources, workflow activities, deliverables (project assets), objectives and goals.
- The most important measure of project success is the economic or social life cycle profit of the project (its net benefits).
- Conditions of Satisfaction for project stakeholders should complement the measure of project success.
- Variables that are in complex trade-off relationships influence project success. The net benefit can only be maximized with a systems approach and holistic optimization modeling.
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