Project Governance and Controls Symposium

Canberra hosted the inaugural Governance and Controls Symposium this week – it was a relatively small event packed with highlights.

The first PTMC (Project Time Management Certificate) workshop to be held in Australia – based on feedback from the attendees, this will grow to become a very popular training.

A free networking evening looking at the future of ‘project controls’ in Australasia. During the meeting the final wind-up of the Australian Performance Management Association was completed.

The main symposium included three outstanding key note addresses supported by stream papers and an engaging panel session.

The two days of concentrated learning and discussion were finished with animated networking sessions. All together an intense and enjoyable two days for both project controls professionals, and the executive managers responsible for governing this area of an organisation’s business. Two of the key outcomes from the Symposium were:

• Gary Troop, the President of the newly independent College of Performance Management (CPM) and symposium key note speaker announced a limited time offer to anyone in Australia to join the for US$25.  The CPM was a part of PMI from 1999 to 2012 but has reverted to an independent status to better serve the needs of the Earned Value community.  The College has a major on-line library of EV publications and plans to develop its conferences and webinars on a global basis – there is even talk of establishing an Australian Chapter – to be part of the exciting new development visit www.mycpm.org/aus and become part of the worlds leading EV community.
  
• The project controls professionals present in Canberra expresses a strong desire to see a network established to link all of the various ‘controls focused’ components within professional associations such as AIPM and PMI, independent bodies such as CPM and Planning Planet and individual controls professionals to help raise the profile of project controls, amplify the message from any one component member, and through the network assist in career development and finding the ‘right person’ for work when needed.

To help with this initiative, PM Global are starting to plan the second Symposium to be held in Canberra at around the same time in 2014 and discussions are underway to frame a proposal for a ‘no cost’ network designed to meet the needs of the ‘controls community’.

There’s a lot to do to maximise the gains made this week – watch this space……

In the meantime, if EV and /or ES is your ‘thing’ the US$25 offer is limited and needs prompt attention!  And to understand the link between controls and project governance see: http://www.mosaicprojects.com.au/Resources_Papers_172.html

PMI’s Standard for Portfolio Management

The publication of the third edition of PMIs Standard for Portfolio Management represents a significant step forward in linking the performance of project and programs to the achievement of the organisations vision, mission and strategy.

One of the key additions is the introduction of the ‘Portfolio Strategic Management’ process group. The standard’s fundamental proposition is that efficient portfolio management is integral to the implementation of the organization’s overall strategic plan. While project and program management focus on doing the work right, the purpose of portfolio management is to ensure the organisation is investing its limited resources in doing the right work.

As with any portfolio the optimum return is achieved through an appropriate diversification of risk. Short term, low risk, low return projects will not build the organisation of the future, investments to maintain and expand current capabilities need to be off-set by some future focused, high risk high reward projects to develop new capabilities, products or services. The challenge is developing a balanced portfolio that maximises stakeholder value overall, and this needs a practical strategic plan as the basis for developing the portfolio strategy.

The challenge facing most organisations is developing systems to efficiently link innovation, strategy, portfolio management, project execution, organisational change management and the realisation of value. Any weak point in this ‘value chain’ will reduce the return on its investment in projects and programs achieved by the organisation. Establishing systems to achieve this linkage is a key management challenge, ensuring they are in place is a key governance responsibility. We have posted on this topic several times:

- Linking Innovation to Value

- The failure of strategic planning

- Who Manages Benefits?

- Benefits and Value (White Paper)

The updated Standard for Portfolio Management provides an authoritative resource to assist organisations in the overall development of an effective value delivery capability.

One of the elements we really like if that PMI have separated the management of the portfolio (effectively investment decisions and oversight) from the need for organisations to manage their project delivery capability. The ‘enterprise project management’ system that develops and nurtures project delivery capability (see: PCD White Paper) should be quite separate from the portfolio investment decision making process. There is a fundamental conflict of interest created if the same management body is responsible for decisions to ‘kill’ projects that are no longer viable whilst at the same time supporting and nurturing the project team to help them remain viable. PMI have not fallen into this trap!!

Stocks of the PMI Standard for Portfolio Management Third Edition are available world-wide. Australian readers can buy from: http://www.mosaicprojects.com.au/shop/shopexd.asp?id=37&bc=no

For other PMI standards see: http://www.mosaicprojects.com.au/Books.html#PMI

The need for Governance and Project Controls

Brisconnections’ airport link, the Sydney Cross City Tunnel and 1000s of other projects are set up to fail through bad forecasting and estimating! Professor Bent Flyvbjerg, a leading international expert in the management of major projects, claims ‘the majority of forecasters are fools or liars’ and their forecasts misinform decision makers on projects instead of informing them.

Flyvbjerg’s new paper ‘Quality control and due diligence in project management: Getting decisions right by taking the outside view’ that is ‘in-press’ for publication in the International Journal of Project Management next year, defines the problem and proposes an ‘eight step’ solution.

The governance and control’s failures highlighted in this paper and the Saїd Business School, University of Oxford, press release (read the release) underpins the importance of the Governance and Controls Symposium on the 10th April in Canberra.

It is impossible to govern effectively if the information being provided from the controls systems is inaccurate or incorrect. But it is a governance responsibility to ensure adequate resources are invested in the organisation’s ‘controls systems’ and the organisation’s culture is attuned to requiring good data. The Symposium looks at how these two-sides-of-the-same-coin can be better understood. To be part of this important event either as a presenter, supporter or delegate, visit the symposium website.

Communication in governance

The effective governance of an organisation relies on effective communication between the organisation’s ‘governors’ and ‘managers’. If the communication fails, governance fails!

Governance is the exclusive role and responsibility of the governing body, in a commercial corporation this is the board of directors, and is their equivalents in other types of organisation. The role of governance is a subtle balancing of competing interests to optimise the long-term value of the organisation (see more on corporate governance). The outcomes from governance decisions are policies and strategies designed to guide the development of the organisation and balance the interests of its various stakeholder groups.

Management’s role is to implement the strategy within the policy framework defined by the ‘governors’ and to assure the governing body their policies are effective and are being implemented properly to achieve the organisation’s strategic objectives (or highlight issues).

The governance communication loop starts with the governing body communicating its strategy and policy decisions to management and is closed once the governing body receives assurance that this has occurred and is satisfied with the feedback. This process is not a one-off loop; continual adjustments are needed to the strategy, the policy, and their implementation to deal with changes in the environment, learned experience and the actual effects of the work undertaken.

The communication challenge is dealing with shades of opinion and expectation in areas where there are very few empirical measures. Let’s look at one practical policy area to demonstrate the challenge: optimising risk.

The role of the governing body is to develop a policy that defines the optimum risk profile for the projects and programs the organisation intends to undertake. Accepting too little risk leads to stagnation, too much risk may lead to failure. What is needed is a policy that accepts some long term, high risk projects in the expectation of higher rewards, and some low risk lower return projects that keep current operations functioning. The risk policy would also need to consider different classes of risk including safety, reputational and financial risks as a minimum.

Good practice suggests the best approach to governance is principles based rather than rules based so the policy should define the principles that management will apply in the management of risk.
Communication challenge #1 – this policy needs to be meaningful and then communicated to management in a way that can be implemented!

Having understood the policy intent, management then have to create the management systems to implement the policy by developing processes, procedures and guidelines that are capable of effectively delivering the policy objectives and communicate these systems to all levels of the management structure.
Communication challenge #2 – communicating the existence of the systems and way it is to be interpreted and implemented to other levels of management!

Ultimately individual managers (or committees) have to make decisions about specific projects and programs to implement the policy. Some of the decision points include:

• Deciding which project and programs to select for investment at the portfolio level.
• Deciding what risks can be accepted, and which risks require either contingencies to be created or the project changed to mitigate the risk at the project oversight level (sponsor or PCB).
• Deciding what emerging risks need escalation to more senior management, and how quickly, at the project management level.

Communication challenge #3, – communicating the decisions correctly so they are properly implemented.

Each of the specific management decisions made within the policy framework will have an effect. Assurance systems need to be in place to observe the outcomes of these decisions, with two primary objectives, firstly by observing the outcomes identify ways to improve the current practices and enhance the implementation of the current policy. Secondly to feed back to the governing body information on how the current policy is being implemented and suggestions for improvement.

Communication challenge #4 – understanding exactly what is occurring as a result of the management decisions (at all levels – this is a multi-faceted challenge).

Communication challenge #5 – providing effective feedback and recommendations to both senior management and the governing body.

None of these communications are simple. Decisions need to be made about what’s significant and what’s business as usual in an environment where very few of the matters under consideration have simple yes/no, right/wrong answers. An assessment of ‘significant’ depends on the perspective on the observer, not an empirical value. $500 may be significant to one manager $50,000 significant to another.

Given risk is only one facet of governance and similar communication loops are needed for all of the different facets of the governance framework, the magnitude of the communication challenge can begin to be understood. It therefor follows that it is a governance responsibility to ensure these critical communication channels are working effectively, which in turn requires a communication focused strategic intent, appropriate policies and for management to allocate adequate resources to achieve the intent.

Who Manages Benefits?

I attended the Benefits Realisation Summit in Sydney earlier this week which was focused on two significant ‘launches’ – the Australian launch of Managing Benefits, the official reference guide for the APMG qualification of the same name and the launch of the Maximiser benefits management software:
- See more on Managing Benefits
- See more on Maximiser

Managing Benefits will require a couple of posts over the next couple of months to cover the depth of information available to organisations to achieve the best return on their investments in projects and programs, and my contribution to the Benefits Realisation Summit was focused on understanding the links between stakeholders, the overall value chain, and the organisation’s project delivery capability (download the presentation).

The area of discussion I found most interesting at the summit was around the roles and responsibilities of the different managers involved in realising benefits and creating value. As a starting point there was a very good definition of the stages involved in creating value, based on the concept of developing a new retail shop:

• The output from the project to build the shop is a fitted out facility.
• The outcome from the staffing and stocking of the shop is a shop selling goods to customers.
• The benefit realised from the shop is the monthly profits from sales.
• The value created by the new business is its potential ‘sale price’ which is usually calculated as a multiple of the annual earnings (typically somewhere between 5 and 12 times the annual profit).

The realisation of the value outlined above requires a ‘chain’ of decisions and management actions:

• The chain starts with decisions around the type of shop, its location, size, etc. The overall value chain is discussed in The failure of strategic planning and the front end processes in Linking Innovation to Value.
• Once the optimum project has been selected, the organisation then needs to be capable of efficiently delivering the project and creating the required output. Project Delivery Capability (PDC) is discussed in White Paper WP1079.
• Once the project’s outputs are created, the requirement to make efficient use of them within the organisation requires effective organisational change management; this facet of the value chain is discussed in WP1078.
• Then, assuming the original concepts used in the business case were accurate, the intended benefits are realised and value is created.

Within all of these stages, the key to creating the intended value is effective benefits management; this is the focus of the Managing Benefits book and the objective of the Benefits Realisation Summit.

Maximising the benefits realised from a project or program is not a solo effort, it requires the effective cooperation of a number of managers with defined roles and responsibilities operating effectively as a team:

Each of the managers above has a distinct role to play:

• The Senior Management Grouphave ultimate responsibility for generating value from the organisation’s investment in a project:
  • The role of senior management and portfolio management in the pre-project phase is ensuring the right projects are selected for the right strategic reasons
  • Once the project has transitioned its output into operations, the senior management group responsible for the operation of the organisation’s business-as-usual processes need to make effective use of the deliverable to realise benefits and as a consequence, generate the intended value.
• The Sponsor is the senior manager responsible for taking ownership of the business case, approving the Project Charter once the organisation has agreed to fund and resource the project and ensuring the project’s outputs are effectively transitioned into operations and used effectively. The role of the sponsor is discussed in WP1031. From a benefits realisation perspective, the Sponsor (or Senior Responsible Owner – SRO) is the manager with primary responsibility for ensuring the intended benefits are realised. The sponsor may fulfil the role of benefits owner personally, or liaise with the designated benefits owners to ensure the benefits are realised (the benefits owner is the person responsible for the realisation of a specific benefit).
• The Sponsor is supported by two specialist managers:
  • The Project Manager responsible for the efficient delivery of the project and
  • The Change Manager responsible for managing the organisational change needed to make use of the new product, process or service.
• The role of the Benefits Manager is partially advisory, and partly an assurance role. The Benefits Manager should be responsible for developing an effective set of metrics supported by a system for identifying and measuring benefits (planned and realised) and should also be responsible for validating the realised benefits (see more below).

The relationship between the project and change managers
Change management and project management are different skills requiring different training and different personality types. Both roles are critical and should support the sponsor in achieving the best possible transition of the project’s outputs into operations.

During the life of the project the project manager is assisted by the change manger to ensure the project delivers the most useful output, the change manger also works on preparing the organisation for the change. The focus is creating the ‘right’ outputs as efficiently as possible and this is primarily a project management function.

During the critical transition phase the focus changes, the project manager’s role should shift to focus on helping the change manger to ensure the projects deliverables ‘work’ in the organisational setting. The project manager will also be working on project closure during this period but this should be secondary to ensuring the planned benefits are capable of being realised.

Throughout the whole process, the change manger is primarily responsible for facilitating the organisational change aspects of the initiative including of all of the processes involved in embedding the new product, process or service within the organisation and supporting its adoption through to the point where it is functioning as a normal part of the organisation’s ‘business-as-usual’ capabilities. This may require some level of support for two or three years after the project has finished.

The effect of programs and program management
Programs are created to manage the work of several projects in a coordinated way, may include some operational work for a period and many are set up specifically created as organisational change agents. The different types of program are outlined in WP1022.

If a project is a component of a program, the program manager is responsible for creating the project and is usually acts as the project’s sponsor. The program is responsible for the change management processes as part of its core integration and coordination functions and the program sponsor has overall responsibility for the return on investment in the program.

The roles and responsibilities of the Benefits Manager
The concept of a Benefits Manager is relatively new. The Benefits Manager provides a benefits realisation support service to sponsors, program managers, change managers and benefits owners. Some of the functions include:

• Develop, maintain and progressively enhance the benefits measurement system used by the organisation.
• Provide scrutiny of each business case to assure the organisation the benefits claimed are realistic and achievable within the proposed timeframes.
• Lead the benefits identification and mapping processes for project and programs.
• Assisting with the development of the benefits realisation strategy and plans for projects and programs.
• Help with the identification and optimisation of additional benefits, dis-benefits and assess the impact of changes from the benefits realisation perspective.
• Tracking and reporting on the actual realisation of benefits by the organisation.

This is an important role both from the facilitation perspective and the assurance perspective. People with a vested interest in the value of benefits proposed or realised should not be the people measuring their value; this is an untenable conflict of interest. The Benefits Manager provides independent assurance that the benefits proposed in the benefits realisation plan have been achieved to the extent defined in the plan, at the time defined in the plan and any variances are identified and explained or understood. For more on assurance see WP1080.

Conclusion
Benefits cannot be managed directly; they are a consequence of other management actions and decisions. An organisation will maximise the benefits actually realised by maintaining a focus on benefits from the early stages of project initiation right through to the point where they are fully realised by the operations of the changed organisation.

Productivity decline should generate more projects

Projects and programs are the key organisational change agents for creating the capability to improve productivity through new systems, processes and facilities. But only if sensible projects are started for the right reason.

Declines in productivity seem to be widespread. In Australia, labour productivity in the market sectors of the economy increased at 2.8% per annum between 1945 and 2001, reducing by 50% to an annual rate of 1.4% between 2001 and 2001.

• The measure of Labour Productivity is the gross value added per hour of work.
• The ‘market sectors’ measured exclude public administration, education and healthcare where measurement is almost impossible.

Some of this change can be attributed to macro economic factors, there were massive efficiency gains derived from the shift from paper based ‘mail’ and copy typist to the electronic distribution of information, improved global transport systems (particularly containerisation) and the restructuring of manufacturing post WW2. These massive changes in the last half of the 20th century are not being replicated in current.

Whilst this decline in the rate of improvement in labour productivity is significant, the capital inclusive index is a more telling statistic. The multi-factor productivity index which includes the capital invested in production, giving a purer measure of the efficiency with which labour and capital are combined to produce goods and services. In the six years leading up to 2001, this measure of productivity grew by an average of 1.5% per annum, in the decade between 2001 and 2011 this reversed and productivity fell by 0.4% per annum.

Around 40% of the decline in the last decade can be explained by massive investments in mining and utilities that have yet to generate a return on the capital invested. The other 60% represents the massive cost of ‘new capabilities’ in general business for relatively small, or no improvement in productivity.

One has only to look at the ever increasing number of ‘bells and whistles’ built into software systems ranging from high definition colour screens to features that are never used (and the cost of upgrading to the ‘new system’) to understand the problem. 90% of the efficiency gain came with the introduction of the new system many years ago, the on-going maintenance and upgrade costs often equal the original investment but without the corresponding improvement in productivity. Another area of ‘investment’ for 0% increase in productivity is compliance regimes. Whilst there may be good social arguments for many of these requirements, the infrastructure and systems needed to comply with the regulations consume capital and labour without increasing productivity.

In Australia general management have been rather slow to appreciate the challenge of declining productivity, the impact being cushioned by a range of other factors that helped drive profitability. But this has changed significantly in the last year or so. There is now an emerging recognition that productivity enhancing organisational change is an imperative; and smart management recognise this cannot be achieved through capability limiting cost reductions.

Organisations that thrive in the next decade will:

• Enhance customer satisfaction and service,
• Enhance their engagement with their workforce, the community and other stakeholders,
• Enhance their products and capabilities, and
• Improve their labour productivity.

Achieving a viable balance across all four areas will require an effective, balanced strategy supported by the efficient implementation of the strategic intent through effective portfolio, program and project management capabilities that encompass benefits realisation and value creation.

The three key capabilities needed to achieve this are:

• The ability to develop a meaningful and practical strategic plan.
• An effective Project Delivery Capability (PDC); see: WP1079_PDC.
• An effective Organisational Change Management Capability; see: WP1078_Change_Management.

Improving productivity is a major challenge for both general management and the project management community; and the contribution of stakeholder management and project management to the overall effort will continue to be a focus for this blog.

Linking Innovation to Value

In a recent post looking at the The failure of strategic planning  and the overall value delivery chain centred on projects and programs, the link between innovation and the strategic plan was raised briefly. The purpose of this post it to take a closer look at this critical ‘front end’ of the value chain because it does not matter how well you do the wrong projects! The ability to generate sustainable value for an organisation’s stakeholders requires the right projects to be done for the right reasons; and yes, they also need to be done right!

The section of the ‘value chain’ leading into a portfolio management decision to select a project or program as a viable investment is far more complex than the section after. Once a project or program has been selected, it needs to be accomplished efficiently, the outputs transferred to the organisation and the organisation adapt to make efficient use of the ‘deliverables’ to realise the intended benefits and generate value. This flow of work is primarily the responsibility of the project/program sponsor initially supported by project and program management, and then by organisational ‘line management’ until the final transition to ‘business as usual’ operations.

Developing a business case to the point where it can be accepted for investment is more complex, involves a wide spectrum of managers and potentially involves a number loops.

The three elements in this section of the overall ‘value chain’ are a viable strategic plan, a realistic business case that supports an element of the strategy and an effective portfolio management system to optimise the overall portfolio of projects and programs the organisation is capable of investing in.

The key is an effective and viable strategic planning process that is capable of developing a realistic strategy that encompasses both support and enhancements for business as usual, and innovation. Strategic planning is a complex and skilled process outside of the scope of this post – for now we will assume the organisation is capable of effective strategic planning.

The sign of an ineffective, unresponsive strategic planning process is seeing business cases fired off by business units without any reference to the strategic plan or worse projects being started without strategic alignment. The option to bypass the strategic planning may be valid in an emergency but not as a routine option. In a well disciplined value creation process, the portfolio management team simply reject business cases that cannot demonstrate alignment with the organisations strategic intentions. The red arrow in the diagram above simply should not be allowed to occur in anything other then an emergency situation.

The Portfolio/Strategic link (blue arrow)
There is a close link between the portfolio management processes  and strategic planning – what’s actually happening in the organisation’s existing projects and programs is one of the baselines needed to maintain an effective strategic plan (others include the current operational baseline and changes in the external environment). In the other direction, the current/updated strategy informs the portfolio decision making processes. The strategic plan is the embodiment of the organisation’s intentions for the future and the role of portfolio management is to achieve the most valuable return against this plan within the organisation’s capacity and capability constraints.

Routine inputs to the Strategic Plan (light green arrows)
The routine inputs to the strategic planning process come from the ‘organisation’ and include requirements, opportunities, enhancements and process innovations (eg, new software releases). These basic inputs are the core information required for strategic planning and form the majority of the new information in each update of the strategy.

The Innovation / Strategic Plan loop (light blue arrows)
This is the first of the more complex spaces – innovative ideas can come from anywhere in the business and are actively encouraged by leading organisations such as Google and 3M. Conversely, an organisational objective may require innovation to allow it to come to fruition. One of the most challenging objectives in recent times was Kennedy’s commitment to “before this decade is out, [land] a man on the moon and return him safely to earth.” The amount of scientific innovation required to achieve this objective was incredible.

The organisation’s governance processes and strategic development processes need to both encourage innovation whilst recognising that not every innovative idea will be appropriate for the overall development of the organisation. This requires the implementation of systems to encourage innovation, collect and sort innovative ideas and move the ‘right’ ideas into the strategic plan, where necessary revising and changing the plan to grab the innovative advantage.

The Feasibility loop (orange and yellow arrows)
Having innovative ideas and creative business cases is one thing, validating the feasibility of an idea is altogether different! The ability to test, validate and work-up innovative ideas into practical project specifications is a critical organisational capability. On mega projects the pre-feasibility and feasibility studies may in fact be significant projects in their own right involving considerable expenditure, feeding back to a gateway or portfolio management process to allow the next stage of the project to commence.

Several of the ‘gateways’ defined in most standard ‘gateway processes’ precede the commissioning of the main project and the organisation needs the capability to make informed decisions based on good quality information. This aspect of the value creation chain is industry specific and may be a central function or distributed across different business centres. What matters is the capability exists with the necessary skills to validate ideas and design projects ready for the more traditional project management processes to take over once the project is formally authorised.

Conclusion
The long term viability of any organisation depends on its ability to innovate. Traditional project and program management focus on doing the selected projects/programs ‘right’. But it is the ‘front end’ processes discussed in this post leading up to the investment decision that determine if the ‘right’ project is being selected for the ‘right’ reasons!

The effective governance of an organisation should require its management to invest sufficient skills and resources in these ‘front end’ processes to ensure a steady flow of innovative ideas, feeding into an effective and flexible strategic planning system, linked to a disciplined portfolio management process; to ensure the optimum mix of ‘right’ projects and programs are commissioned and supported.

Advising Upwards for Effect

The only purpose of undertaking a project or program is to have the deliverables it creates used by the organisation (or customer) to create value! Certainly value can be measured in many different ways, improved quality or safety, reduced effort or errors, increased profits or achieving regulatory compliance; the measure is not important, what matters is the work of the project is intended to create value. But this value will only be realised if the new process or artefact ‘delivered’ by the project is actually used by the organisation to achieve the intended improvements.

The organisation’s executive has a central role in this process. There is a direct link between the organisation’s decision to make an investment in a selected project and the need for the organisation to change so it can make effective use of the deliverables to generate the intended benefits and create a valuable return on its investment. The work of the project is a key link in the middle of this value creation chain, but the strength of the whole chain is measured by its weakest link – a failure at any stage will result in lost value.

In a perfect world, the degree of understanding, knowledge and commitment to the change would increase the higher up the organisational ladder you go. In reality, much of the in-depth knowledge and commitment is embedded in the project team; and the challenge is moving this knowledge out into the other areas of the business so that the whole ‘value chain’ can work effectively (see more on linking innovation to value).

To achieve this, the project team need to be able to effectively ‘advise upwards’ so their executive managers understand the potential value that can be generated from the initiative and work to ensure the organisation makes effective use of the project’s deliverables. The art of advising upwards effectively is the focus of my book ‘Advising Upwards’.

An effective Sponsor is a major asset in achieving these objectives, providing a direct link between the executive and the project or program. Working from the top down, an effective sponsor can ensure the project team fully understand the business objectives their project has been created to help achieve and will work with the team to ensure the project fulfils its Charter to maximise the opportunity for the organisation to create value.

Working from the bottom up, new insights, learning and experience from the ‘coal face’ need to be communicated back to the executive so that the overall organisational objectives can be managed based on the actual situation encountered within the work of the project.

The critical importance of the role of the sponsor has been reinforced by numerous studies, including the PMI 2012 Pulse of the Profession report. According to this report, 75% of high performance organizations have active sponsors on 80% of more of their projects (for more on the value of sponsorship see: Project Sponsorship).

If you project has an effective sponsor, make full use of the support. The challenge facing the rest of us is persuading less effective sponsors to improve their level of support; you cannot fire your manager! The solution is to work with other project managers and teams within your organisation to create a conversation about value. This is a very different proposition to being simply ‘on-time, on-scope and on-budget’; it’s about the ultimate value to the organisation created by using the outputs from its projects and programs. The key phrase is “How we can help make our organisation better!”

To influence executives within this conversation, the right sort of evidence is important; benchmarking your organisation against its competitors is a good start, as is understanding what ‘high performance’ organisations do. PMI’s ‘Pulse of the Profession’ is freely available and a great start as an authoritative reference.

The other key aspect of advising upwards is linking the information you bring into the conversation with the needs of the organisation and showing your organisation’s executive how this can provide direct benefits to them as well as the organisation.

In this respect the current tight economic conditions in most of the world are an advantage, organisations need to do more with less to stay competitive (or effective in the public service). Developing the skills of project sponsors so that they actively assist their projects to be more successful is one proven way to achieve a significant improvement with minimal cost – in fact, if projects are supported more effectively there may well be cost savings and increased value at the same time! And what’s in it for us as project managers? The answer is we have a much improved working environment – everyone wins!!

Governance -v- Management: A Functional Perspective

In an earlier post I looked at the governance and management of organisations from the perspective of Systems Theory, (See the post), this post looks at the functional differences between the two roles.

The purpose of any system is to deliver functionality or capability; governance and management are no different. However, for there to be a valid difference between governance and management, there has to be a different functional purpose. The purpose of this post is to define this difference!

There are three basic layers of functionality within any organisation:

• The producers of goods and/or services, the production workers and/or knowledge workers;
• The various layers of management who oversight and direct the production/knowledge workers;
• The ‘governors’ of the organisation who oversight and direct the managers.

Within this functional framework an individual may operate at different levels at different times depending on the actual function they are performing. A few examples include:

• A front line supervisor or team leader may spend some of her time working as the first line of management directing the work of others, and the rest of the time as a worker producing goods or services.
• A newspaper editor is primarily responsible for the direction and management of sub-editors and journalist with a view to getting ‘today’s issue’ to the presses on schedule, but also functions as a knowledge worker when drafting the ‘editorial column’.
• In corporations, executive directors operate at the governance level when acting as Board Members, as managers when directing the operations of the organisation.

The above clearly demonstrates function and position are not synonymous. But equally, it is important for a person in a position to understand the function they are currently performing.

Production/Knowledge work
The function of any worker is to produce goods services or other outputs as efficiently as possible. In simple organisations and pre-industrialisation, workers were typically responsible for all aspects of the production process in ‘cottage industries’; exchanging their surplus production for their other needs in local markets.

The advent of industrialisation and the division of work into highly specialised operations introduced the requirement for managers to organise the supply chain, the work and the workers; in order to obtain the efficiencies available from these ‘new’ production systems. The concepts of management were largely defined in the late 19th and early 20th century.

Management
There were many contributors to the development of management theory, Taylor’s Scientific Management focused on performance measurement and process optimisation. The Gilbreth’s, Henry Gantt and George Mayo added the concepts of efficiency, leadership, incentivation and motivation; and Max Weber introduced the concept of bureaucracy (standardising procedures and record keeping).

The overall definition of the function of management was created by Henri Fayol. His six primary functions of management are:

• Forecasting.
• Planning.
• Organising.
• Commanding.
• Coordinating.
• Controlling.

Implicit in these 6 factions is the requirement for decision making! The core purpose of management is to make the optimal decisions to make the work of the organisation as efficient and sustainable as practical.

It’s worth remembering, the production and knowledge workers in any organisations will generate some level of output without any input from management. And as Peter F Drucker commented ‘So much of what we call management consists of making it difficult for people to work.’

The function of effective management in a well structured organisation is to create efficiencies in the accomplishment of the ‘right amount’ of the ‘right work’ at the ‘right time’ that are greater than the costs associated with managing the organisation (or at the very least, better then competing organisations). To achieve this, the functions of forecasting, planning, managing and controlling the work, and recording the outcomes; needs to be undertaken within a governance framework that informs the decision making to achieve the optimum outcomes.

Governance
The function of governance is to provide oversight and direction to the management of the organisation. The Organisation for Economic Co-operation and Development in the OECD Principles of Corporate Governance 2004 (www.oecd.org) define governance as: ‘involving a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined’

The primary elements necessary to achieve this objective are outlined in the diagram below:

Governance is a holistic process, a failure in any one area will cause damage in others; a few recent examples include:

• The damage to David Jones’ reputation and share value caused by inappropriate interactions between a senior manager and a female employee.
• The vast amount of damage caused to BP due to failures in safe operating procedures leading to the Deepwater Horizon disaster.
• An inaccurate press release leading to the conviction of several Directors of the James Hardy group (under continuous disclosure requirements of the ASX).
• The legal actions brought against Centro for the misallocation of debt despite receiving and applying advice from a leading international accountancy firm.
• The personal liability of Directors under various legislative regimes for breaches of taxation requirements, OH&S failures, insolvent trading, etc.

Whilst avoiding ‘failure’ is important, the primary function of governance is to create sustainable success. This is of necessity, a multi-faceted process that requires the careful balancing of different, frequently contradictory, objectives. For example:

• The resources committed to implementing a future strategy cannot be used to enhance current viability or profitability causing a short term loss of value or revenue.
• However, if no commitment is made to develop the future of the organisation, the organisation itself will quickly become uncompetitive and irrelevant, destroying value for its owners in the longer term.

Determining the right balance is a governance decision. Implementing the decision is a management function.

In the area of strategic change, doing the ‘right project right’ is woefully inadequate. An effectively governed and managed organisation starts with a well defined strategy, and manages each selected project or program through the organisational changes needed to make full use of the outputs to the maximisation of the benefits realised; recognising that in a changing world, the potential benefits will be changing throughout the whole life of the initiative and adapting to optimise the overall outcomes (for more on this see: The failure of strategic planning).

Who governs?
There are two schools of thought about governance. One body of literature sees different types of governance, primarily corporate governance, IT governance and project governance. The people developing this concept are almost exclusively project mangers, IT managers and academics focused on these disciplines. Interestingly there does not seem to be a similar body of literature focused on HR governance, financial governance or any other area of management. This school of thought sees governance being a function of almost any management position or entity responsible for overseeing the work of IT departments or projects including sponsors and project boards.

The alternative school of thought developed by organisations such as the OECD, various Institutes of Directors and the agencies responsible for governing the various stock exchanges see governance as a single process with different facets. The approaches taken by various governments in legislating liability for corporate and governance failures supports this holistic view. The Directors of corporations are being increasingly made personally responsible for governance and management failures.

An interesting exception to the concept of ‘project governance’ being something different and special is the various guides developed by the Association for Project Management (APM, UK). The recently published 6th edition of the APM Body of Knowledge sees ‘the governance of portfolios, programs and projects as a necessary part of organisational governance.’ And governance as: ‘the set of policies, regulations, functions, processes, procedures and responsibilities that define the establishment, management and control of projects, programs and portfolios.’

In the referenced source document: Directing Change A guide to governance of project management, the body defined as responsible for governance is the organisations ‘Board’. In this context, the term ‘board’ applies to management boards and their equivalents in the public sector and to councils in companies limited by guarantee. It does not refer to project boards.

In a well governed organisation, responsibility for implementing defined aspects of the governance system is delegated to the appropriate management levels together with the necessary authority to undertake the work. Accountability for the governance of the organisation remains with the board of the host organisation. The resulting governance structure is outlined as:

Figure 1.2 Governance Structure © 6th Edition, APM-BoK, UK.

The concept of delegation outlined above is important; a key principle in managing governance is summed up in the legal doctrine ‘delegatus non potest delegare’… unless expressly authorised a delegate cannot delegate to someone else.

Part of the governing board’s responsibility is to ensure appropriate delegations of authority are made to management so they can develop an effective system of management that meets the governance needs of the organisation. However, delegating authority and responsibility to management does not remove the ultimate accountability for ensuring ‘good governance’ from the Board.

Interestingly, the APM-BoK acknowledges that in poorly governed organisations project teams may have to take responsibility for governing themselves. This lack of organisational maturity (and capability) is the focus of our paper ‘The Management of Project Management’  (due for publication Oct. 2012) and is the likely reason for the emergence of the separate concepts of project governance and IT governance outlined above.

Unfortunately the creation of ‘special’ governance sub-sets separate from the overall governance function compounds the immature governance the special functions are supposed to resolve – when projects fail and benefits are not realised the organisation suffers as a whole. In the absence of an effective governance system these ‘project failures’ are far more likely to be caused by general management failings than by project management failings (see: Project or Management Failures?).

Summary
The function of governance is and should be separate from the function of management although some managers may fulfil both governance and management functions at different times.

The core principles of effective governance are:

• It is a holistic process focused on the creation of sustainable value by the organisation. Authority for some aspects of governance can be delegated to management, accountability remains with the governing Board.
• Governance and management should be separate; importantly a manager cannot govern his/her own work.
• The governance structure is defined by the governing board and implemented by management (see our White Paper: Project Governance).
• A core aspect of good governance is making the decisions to invest in developing the appropriate capabilities to ensure organisational resources are used efficiently and effectively. The management systems and structures needed to create value from projects and programs are outlined in our White Paper: Project Delivery Capability.

The value of stakeholder management

One of the questions I’m regularly asked is to outline the business case for using stakeholder management in a business or project. This is a difficult question to answer accurately because no-one measures the cost of problems that don’t occur and very few organisations measure the cost of failure.

The problem is not unique; it is very difficult to value the benefits of an effective PMO, of improving project delivery methods (eg, improving the skills of your schedulers), of investing in effective communication (the focus of my September column in PMI’s PM Network magazine) or of better managing risk. The costs of investing in the improvement are easily defined, but the pay-back is far more difficult to measure.

There are two reasons why investing in effective stakeholder analytics is likely to deliver a valuable return on investment (ROI).

• The first is by knowing who the important stakeholders are at any point in time, the expenditure on other processes such as communication can be focused where it is needed most, generating efficiencies and a ‘bigger bang for your buck’.
• The second is stakeholders are a major factor in the risk profile of the work, their attitudes and actions can have significant positive or negative consequences and understanding the overall community provides valuable input to a range of processes including risk identification, requirements definition and schedule management.

At the most fundamental level, improving the management of stakeholders is directly linked to improving the quality of the organisation’s interaction with the stakeholders and as a consequence, the quality of the goods or services delivered to the end users or client (ie, stakeholders) as a result of being better informed whilst undertaking the work.

Quality was defined by Joseph Juran as fit for purpose, this elegant definition applies equally to the quality of your management processes as it does to your production processes and to the deliverables produced. And the three elements are interlinked; you need good management systems and information to allow an effective production system to create quality outputs for delivery to the client. A failure at any point in the chain will result in a quality failure and the production on deliverables that do not meet client requirements.

Placing stakeholder management within the context of quality allows access to some reasonably well researched data that can be interpolated to provide a reasonable basis for assessing the ‘return’ likely to be generated from an investment in stakeholder management.

Philip B. Crosby invented the concept of the ‘cost of quality’ and his book, Quality Is Free set out four major principles:

1. the definition of quality is conformance to requirements (requirements meaning both the product and the customer’s requirements)
2. the system of quality is prevention
3. the performance standard is zero defects (relative to requirements)
4. the measurement of quality is the price of nonconformance

His belief was that an organization that established a quality program will see savings returns that more than pay off the cost of the quality program: “quality is free”. The challenge is knowing you fully understand who the ‘customers’ actually are, and precisely what their various requirements and expectations are, and having ways to manage mutually exclusive or conflicting expectations. Knowing ‘who’s who and who’s important’ is a critical first step.

Feigenbaum’s categorization of the cost of quality has two main components; the cost of conformance (to achieve ‘good’ quality) and the cost of poor quality (or the cost of non-conformance).

Derived from: Feigenbaum, Armand V. (1991), Total Quality Control (3 ed.), New York, New York: McGraw-Hill, p. 109, ISBN 978-0-07-112612-0.

The cost of achieving the required level of quality is the investment made in the prevention of non-conformance to requirements plus the cost of testing and inspections to be comfortable the required quality levels have been achieved.

The cost of poor quality resulting from failing to meet requirements has both internal and external components. The internal costs are associated with defects, rework and lost opportunities caused by tying people up on rectification work. External failure costs can be much higher with major damage to an organisation’s brand and image as well as the direct costs associated with fixing the quality failure.

The management challenge is balancing the investment in quality against the cost of quality failure to hit the ‘sweet spot’ where your investment is sufficient to achieve the required quality level to be fit for purpose; overkill is wasted $$$$. But first you and ‘right stakeholders’ need to agree on precisely what fit for purpose actually means.

Also, the level of investment needed to achieve the optimum cost of quality is not fixed. The better the organisation’s quality systems, the lower the net cost. Six sigma proponents have assessed the total cost of quality as a percentage of sales based on the organisations sigma rating.

This table demonstrates that as the quality capability of the organisation improves, the overall cost of quality reduces offering a major competitive advantage to higher rating organisations. Most organisations are rated at 3 Sigma so the opportunity for improvement is significant.

Within this overall framework, the costs and risks associated with poor stakeholder engagement are significant and follow the typical pattern where most of the costs of poor quality are hidden. Using the quality ‘iceberg metaphor’ some of the consequences of poor stakeholder engagement and communication are set out below:

Effective stakeholder analysis and management directly contributes to achieving the required quality levels for the organisation’s outputs to be fit for purpose whilst at the same time reducing the overall expenditure on the cost of quality needed to achieve this objective. The key components are:

• Effective analysis of the stakeholder community will help you identify and understand all of the key stakeholders that need to be consulted to determine the relevant aspects of fit for purpose.
• Understanding the structure of your stakeholder community facilitates the implementation of an effective two-way communication strategy to fully understand and manage the expectations of key stakeholders.
• Effective communication builds trust and understanding within a robust relationship.
  o Trust reduces the cost of doing business.
  o Understanding the full set of requirements needed for the work to be successful reduces the risk of failure.
  o Robust relationships with key stakeholders also contribute to more effective problem solving and issue management.
• Maintaining the stakeholder engagement effort generates enhanced information that will mitigate risks and issues across all aspects of the work.

Calculating the Return on Investment:

Effective stakeholder management is a facilitating process that reduces the cost, and increases the efficiency of an organisations quality and risk management processes. Based on observations of similar process improvement initiatives such as CMMI, the reduction in the cost of quality facilitated by improved stakeholder engagement and management is likely to be in the order of 10% to 20%.

Based on the typical ‘Level 3’ organisation outlined above, a conservative estimate of the efficiency dividend per $1million in sales is likely to be:

Total cost of quality = $1,000,000 x 25% = $250,000
Efficiency dividend = $250,000 x 10% = $25,000 per $1 million in sales.

Given the basic costs of establishing an effective stakeholder management system for a $5million business, using the Stakeholder Circle®, (See: http://www.stakeholder-management.com) including software and training will be between $30,000 and $50,000 the efficiency dividend will be:

($25,000 x 5) – 50,000 = $75,000
(or more depending on the actual costs and savings).

The element not included above is the staff costs associated firstly with maintaining the ‘culture change’ associated with introducing an effective stakeholder engagement process and secondly with actually performing the stakeholder analysis and engagement. These costs are embedded in the cost of quality already being outlaid by the organisation and are inversely proportional to the effectiveness of the current situation:

• If current expenditures on stakeholder engagement are relatively low, the additional costs of engagement will be relatively high, but the payback in reduced failures and unexpected risk events will be greater. The overall ROI is likely to be significant.
• If the current expenditures on stakeholder engagement are relatively high, the additional costs will be minimal (implementing a systemic approach may even save costs), however, the payback in reduced failure costs will be lower because many of the more obvious issues and opportunities are likely to have been identified under the current processes. The directly measurable ROI will be lower, offset by the other benefits of moving towards a higher ‘Sigma level’.

Conclusion:

The introduction of an effective stakeholder management system is likely to generate a significant ROI for most organisations. The larger part of the ‘return’ being a reduction in the hidden costs associated with poor stakeholder engagement. These costs affect reputation and future business opportunities to a far greater extent than their direct costs on current work. For this reason, we feel implementing a system such as the Stakeholder Circle is best undertaken as a strategic organisational initiative rather than on an ad hoc project or individual workplace basis.

The path to organisational Stakeholder Relationship Management Maturity (SRMM®) is discussed at: http://www.stakeholdermapping.com/srmm-maturity-model