Executing the priority outcomes in your project portfolio Pt 2.

This is Part 3 of a 3-Part series. Read Part 1. Read Part 3.

Here we take a deeper dive and look at selecting and maintaining the priorities in the portfolio and tracking the progress toward achieving the estimated ROI.

Choosing the projects that have the best returns on investment

So as an example, we could say in the current state we have an inefficient process for our CRM. Let’s call this the CRM Improvement Project. In the future state we will have more of the process automated giving a projected increase in sales and a decrease in costs. Since the investment has expected costs and an expected benefit value, we can map out the return.

For the CRM Improvement Project, the cost might be $50M investment returning $20M per year over 5 years. This would give us an IRR of 28.65%. We would do the same for all the projects and select the highest returning projects that have a positive NPV which have an investment that sums to the total of our budget (with some contingency). Then we can use this to come up with and maintain the portfolio of projects we should undertake.

For the discussion in the article let’s assume our company uses a discount rate of 12.7% (which happens to be 1% per month compounded) and this will give us an NPV of about $18.5M for the return for the example of the CRM Improvement Project. (Using the round number of 1% per month will make it easier to illustrate the cost of delays in this article.) Each of the projects in our portfolio could have an NPV calculated using the same discount rate. For the CRM Improvement Project, since we expect an NPV of $18.5M, if there is a one-month delay to this project it will cost 1% or $185K per month. Contrarily for each month earlier the project is completed it is worth $185k of accelerated value.

One point that is often overlooked about losing time is that a month lost during the project versus a month lost during the planning of the project have the same impact of pushing out the ROI out by 1 month. There is no difference in delaying the ROI. However, to make the project go faster by 1 month is much more costly than to speed the planning process by the same amount since less people are involved in planning than doing. This is where the tech vendor will rightly say that it is costly to delay and even say that /we cannot afford to delay the start of the project/!

Monitoring the progress to achieve the expected ROI from our projects

Ideally when we are executing a portfolio, we know the budgeted costs of all projects and the expected ROI and thus the expected NPV of all projects (or at least top projects). We should have these before we launch those projects. We also know the scheduled and estimated completion date of each project. (The end of the project is the start of realizing the ROI.) We have covered the cost of the delays from moving this completion date. However, how do we see the value being created month-by-month according to schedule as we complete portions of the projects according to their ROIs?

While executing a single project, one of the typical evaluation criteria would be to look at the start of month’s ETC (estimate to completion) and the end of the month’s ETC. The difference between these two would be the net improvement in the ETC for each month for a project. If the project were 10 months in duration with 10 FTEs, we would expect it to be 100 person months of effort. At the start of month 6 (assuming the project is fairly linear) we hopefully have an ETC of 50 person months representing 50%. If we finish month 6 with 40 person months of ETC then we have picked up 10% progress in that month as planned.

Therefore, in this simple example since we completed 10% of the project in one month we are ‘earning’ 10% of the NPV, which is $1.85M for our CRM Improvement Project. Each major project would have NPVs and ETCs so we could track the net completion percentages month-by-month weighted by the NPVs of these investments. We need to complete each project so that they can start generating ROI. Each month there will be progress toward each project’s completion.

Next, we will look at how to compare the effect of schedule, execution, and costs on the expected ROI.

Continue to Part 3.

Disclaimer: The opinions expressed are solely mine. They do not necessarily reflect the view of any of my employers nor relating to their business or policies.