Tag Archives: Value Management

What price should you pay for perfection?

What price should you pay for perfection or alternatively how do you mange genius?

3D Scan of the building by the Scottish Ten Project

3D Scan of the building by the Scottish Ten Project

The Sydney Opera House is now over 40 years old, is the youngest cultural site to ever have been included in the World Heritage List, is the busiest performing arts centre in the world, supports more then 12,000 jobs and contributes more then $1 billion to the Australian economy each year. The fact is cost nearly 15 times the original under estimate with a final bill of $102 million pales into significance compared to the benefits it generates.

Over the years, we have written about the project and its value on numerous occasions some of the key discussions are:

What I want to focus attention on this time is the genius of Jørn Utzon and the inability of the NSW Government bureaucrats and politicians of the time to understand and appreciate the value of the work he did 50 years ago.

Utzon focused on developing partnerships with ‘best of kind’ manufacturers to prototype and test components then incorporating the best possible design into the fabric of the building. The process appeared relatively expensive in the short term (especially to bureaucrats used to contracting work to the lowest cost tenderer), but 50 years later the value of careful design and high quality craftsmanship is becoming more and more apparent.

Much of the structure was carefully designed precast concrete units, they were used extensively in the shell roofs, podium walls, sunhoods and external board walks. 50 years later the near perfect condition of the concrete despite its continuous exposure to a very hostile saline environment shows the genius of a person focused on creating a lasting landmark rather than seeking the cheapest short-term solution.

Similar longevity can be seen in the tiles that clad the shell roof, the glazed walls and most of the other work designed by Utzon (for more on this see the recently rediscovered, iconic 1968 film Autopsy On a Dream).

Contrast this clarity of vision leading to a high quality, long lasting, low overall cost outcome to the high costs of maintaining and/or replacing the elements of the building designed and installed by others after Utzon was forced to resign. The internal concert and opera halls are planned to be rebuilt at a mooted cost of between $700 million and $1 billion; and changes to Utzon’s design for the precast ‘skirts’ around the podium have resulted in $ millions more in repair costs.

The Sydney Opera House and the National Broadband Network have a lot in common. Both were inspirational schemes intended to cause a major change in culture and move society forward. Both were the subject of opportunistic political attack. Neither was well marketed to the wider stakeholder community at the time, very few understood the potential of what was being created (particularly the conservative opposition), and after a change of government both had the fundamental vision compromised to ‘save costs’ and as a result the Opera House lost much of its integrity as a performance venue with poor acoustics and an ineffective use of space.

Hopefully over the next 10 years $1 billion may solve most of the problems caused by the short sighted ‘cost savings’ in the finishing of the Opera House so it can at last achieve its full potential. The tragedy is repairing the damage done by the short term cost savings and compromises in design to appease vested interests are likely to cost 30 to 40 times the amount saved.

I’m wondering how much future telecommunication users will have to pay to drag the sub-standard NBN (National Broadband Network) we are now getting back to the levels intended in the original concept. The cost savings are focused on doing just enough to meet the needs of the 20th century such as telephony and quick movie downloads – simple things that politicians can understand. Unfortunately the damage this backward looking simplistic view will do to the opportunities to develop totally new businesses and ways of working that could have been facilitated by the original NBN concept of universal fibre to the premises will not be able to be measured for 20 to 30 years. Envisioning what might be requires a different mind set and a spark of genius.

In both the situations discussed in the blog, and when looking at the next bold concept proposed by a different ‘visionary’ the challenge will still be answering the opening question. How can businesses, bureaucracies and politicians learn to manage genius and properly assess a visionary multi-generational project to achieve the best overall outcome? There’s no easy answer to this question.

The N B-Grade N Debacle

fast-good-cheap1By focusing on the wrong thing, our politicians seen bent on consigning Australian business to the B-List for the next 50 years. We are already in the knowledge economy and knowledge it transmitted through integrated communication networks.

The proposed NBN – fibre to the premises – is not world beating, is it a catch up to bring Australia back onto a level playing field so we can compete with more advanced economies such as Singapore and South Korea. The proposed N B-Grade N is a hotchpotch of systems scrambled together and not very different to the system that would have evolved without government intervention – $ Billions wasted for no real advantage.

The N B-Grade N will condemn large slices of Australia to a sub-optimal communication system and eventually cost us all $ Billions more to maintain and upgrade to a standard approaching the level the original NBN would have delivered.

This policy failure places innovators and small businesses in Australia at a significant disadvantage and given more than 50% of future growth is generated in this sector, and that 60% plus of the services we will be using on our communication network in 20 years time have not even been invented yet, the loss in growth and competitiveness will damage the economy and all levels of Australian business for much of this century.

So how did this mess happen?

First the luddites in the then opposition who cannot differentiate between national infrastructure needed to transport physical goods – the nation building vehicles of the 19th an 20th centuries and national infrastructure needed to create and transfer knowledge – the nation building vehicles of the 21st and 22nd centuries. There is no fundamental difference between a rail line to export coal and a fibre optic cable to export training or design except you can only export coal once, knowledge is infinite. Link this to the Liberal’s successful policy of opposing everything and any possibility of a long term bi-partisan approach to communications infrastructure was out of the question.

The Labour party response was to focus their NBN onto a completely irrelevant and highly damaging objective – a ‘quick build’. No one seemed to notice that Australia has a functioning telephone system that still has capacity for limited upgrading. Certainly it is based on 100 year old copper wire infrastructure and is becoming increasingly expensive to maintain but it does not need replacing in 4 or 5 years. It just needs replacing in a sensible timeframe with appropriate 21st century technology that has the potential to remain viable for another 100 years.

The consequence of the political pressures on NBN Co. to achieve an impossible roll out schedule simply ramped up costs for absolutely no benefit. We are paying $ Billions more than we need simply to achieve a politically imposed deadline that has no technical imperative or relevance. There may have been a political imperative – get so far into the build the Luddites could not cancel it but this simply highlights the failings on both sides of politics.

Then the Liberals came along and introduced the N B-Grade N proposals that are designed to reduce costs by a little, reduce the build time by a couple of unnecessary years, reduce capability significantly and increase maintenance and ownership costs by a vast amount over the next 50 years. What’s the point?

We don’t need the Liberals B-Grade NBN in 4 or 5 years that will damage Australia’s competitiveness for decades. And we don’t need the Labour NBN in 5 to 7 years at the likely cost associated with maintaining the ridiculous time pressures on the build.

What we need is a world class NBN rolled out sensibly over the next 5 to 10 years, at the lowest practical cost, designed to position Australia for the commerce of the next 100 years. With the build planned around industry capacities and business needs, not political irrelevances.

good-fast-cheap2As the old adage goes “You we be good, we can be fast and we can be cheap – pick any two!” The NBN needs to be cheap and good! What’s currently being discussed is ‘fast and cheap’ and let the next government worry about the lack of quality.

The trouble is its Australian businesses that will suffer as a consequence of both political parties focusing on ‘fast’ and a three year election cycle rather than good and our competitive position for the next 30 to 60 years.

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.

The failure of strategic planning

Projects struggling for management support are one of the key indicators of a sub-standard value creation system that is failing to make full use of the deliverables created by projects and programs. But the problem is likely to be much deeper; surveys consistently show that between 15% and 80% of projects undertaken by organisations cannot be linked to the performing organisations strategy. These ‘ferrel projects’ are either symptoms of inadequate governance, or symptoms of inadequate strategic planning!

In many organisations, and particularly in business areas focused on system support such as IT the typical path taken by an innovative idea through to some confused delivery of value is a straight line from the innovation, to a business case, to a project that has to seek management support and the surviving projects eventually deliver their outputs to a bunch on unprepared and unwilling end users. The generation of value is far from certain!

Over the last few years, Portfolio Management has started to emerge. Portfolio management should have a strategic focus and make selections based on strategic priorities but in most current implementations tends to be a process oriented, stand alone function. Certainly by applying capacity constraints the number of projects that fail due to lack of organisational resources will be reduced but the focus on value creation is minimal. Management support and organisational change are not central to the process. There is literally a ‘fence’ between the executive ‘strategic planning’ processes and innovation within the organisation.

Most authorities describe project and programs as the ‘change agent’ responsible for creating the ability to implement strategic initiatives to grow and improve the organisation. For this to occur, the strategic planning system needs to be far more engaged with the organisation and central to the process of innovation, guided and supported by the organisations executive!

Within a value driven framework, the strategic planning process should be central to innovation, initiating work to develop prospective ideas, and receiving all of the innovative ideas to enhance the organisation from every source. Innovative organisations such as Google actively encourage innovation and experimentation within parameters but have careful selection processes before burning money on significant projects. They are also prepared use the innovative ideas to inform strategy, and to take significant strategic risks if an innovation warrants the speculation on a ‘whole new future’ for the organisation.
Within this framework, the evolution of the strategic plan is a cyclical process, possibilities and ‘blue sky’ ideas are communicated to the governing body, who formulate, review and update the overall strategic guidelines as new ideas and possibilities emerge.

However, my feeling is there is a tactical level missing from strategic thinking that will be needed for this process to work effectively. The overarching ‘strategic guidance’ needs to be fairly stable and take a long view and only be updated as needed (possibly twice a year). Based on this strategic guidance, a detailed strategic plan is developed at a ‘tactical level’, to frame the current implementation of the strategy. This process needs more rigour and more flexibility (the two are not mutually exclusive) compared to the high level plan, should only take a medium term view and be updated continuously. Based on this plan, feasible ideas that support the strategy are authorised for the development of a value oriented business case.

The creation of this flexible but rigorous tactical-level strategic process would place the ‘plan’ at the forefront of processes such as Portfolio Management and virtually eliminate ferrel projects.

Portfolio management also has a central role to play in developing strategy. The current strategy informs the portfolio selection process, and information on current projects and programs, the viability of assessed business cases and other consolidated information is absorbed back into the strategic planning process. Based on these factors, the key job of the portfolio managers is to select the most strategically important business cases, within the capability and capacity limitations of the organisation, for initiation as projects or programs, and cancel or modify projects that no longer align with the evolving strategic plan.

The role of management is firstly to implement the executive guidance by supporting the Portfolio Management processes and the selected projects. More importantly, management is also responsible for managing the organisation so that the necessary change initiatives are implemented to make effective use of the project deliverables to generate valuable returns over the life of the initiative, frequently a period of many years!

Developing a value driven system similar to the one described in this post is primarily a governance issue. The organisations directors and executives need to lead the process and be closely involved in the strategic management of the organisation.

Strategic planning also needs to evolve from a fluffy ‘high level’ process to a far more useful function that actually sets the strategy for the organisation’s management to implement. Within this framework, the organisations governance systems and leadership need to ensure their management support the process and are focused on creating value.

The Value Chain

However, the value creation chain is only as strong as its weakest link, which includes effective strategic planning supported by effective governance that ensures management support for the overall process. A clear indication the strategic governance processes are not working is when projects and programs have to fight to receive executive support to ‘exist’ and the organisation’s measure of success is limited to the ‘iron triangle’ of time, cost and scope focused at the end of the project.

Successful organisations focus on the more difficult, but more important measures of benefits realised and the value created for the organisation as a result of the project deliverables being used by the organisation to support its strategic initiatives and generate lasting improvements.

Most of the work needed to make this process work is in management areas outside of the traditional Portfolio, Program and Project management (PPP) arena. But no organisation will achieve the optimum results from its PPP initiatives without the front and back ends of the overall value chain being of equal ‘strength’.

This is not rocket science, many successful organisations, particularly in mining and engineering achieve this type of integration in their core business. For more on the governance aspects see: Mosaic WP1073 – Project Governance.  

For more on the overall project delivery capability see: Mosaic WP1079 – Project Delivery Capability.

The Capital Crime

A recently published, free e-book, ‘The Capital Crime’ focuses on the massive loss and waste of capital being perpetrated on an ongoing basis in most organizations across the world, through their executive management, failing to effectively ‘manage the management’ of projects and programs.

Cobb described his Paradox more than 15 years ago , but organisations still deliberately set up projects so they are almost guaranteed to fail and waste vast amounts of capital as a result. However, fixing Cobb’s Paradox and doing projects ‘right’ is only part of the answer, a wider capability is needed focused on using capital effectively in support the organisations strategy to generate real value for the organisation’s stakeholders!

We refer to this as ‘Project Delivery Capability’ or PDC; the e-book’s authors use a wider definition, ‘Value Delivery Capability’. Regardless of the name, we agree with Jed Simms, the only piece of the value delivery chain that is understood is the piece in the middle called ‘project management’. The surrounding envelope of organisational abilities to only start the ‘right projects’, set the selected projects up for success and then make effective use of the project deliverables to create value is poorly understood – the strength of a chain is defined by its weakest link, not its strongest!

The consequence of this lack of understanding of the ‘value chain’, at the very top of the organisation, is organisations setting their project up to fail, failing to support projects during their execution, and failing to make use of the project deliverables to generate value. The failure of any of these ‘weak links’ reduces the organisations ability to achieve its strategy and a return on investment. The associated waste of capital caused by sub-optimal project outcomes is the core of the ‘capital crime’ discussed in an easy to read ‘story’ format in the free e-book, ‘The Capital Crime’.

You are invited to download your copy of ‘The Capital Crime’ from: http://www.thecapitalcrime.com/

Managing risk

One of the most overlooked processes for effectively managing the day-to-day uncertainty that is the reality for every single project, everywhere, all of the time, is an effective performance surveillance process. This involves more than simply reporting progress on a weekly or monthly basis.

An effective surveillance system includes regular in-depth reviews by an independent team focused on supporting and helping the project team identify and resolve emerging problems. Our latest White Paper, Proactive Project Surveillance defines this valuable concept that is central to providing effective assurance to the organisation’s key stakeholders in management, the executive and the governance bodies that the project’s likely outcomes are optimised to the needs of the organisation.

Stakeholder Risk Tolerance

Managing the inherent risk associated with undertaking any project, anywhere, in any industry is a critical organisational capability. Within the organisations overall Project Delivery Capability (PDC) the maturity of its risk management approaches is central to the organisation’s ability to generate value (see more on PDC Maturity).

Only very immature or deluded organisations seek or expect to run ‘risk free’ projects. To quote Suzanne Finnamore: “Delusion detests focus and romance provides the veil.” Any sensible analysis of any business activity will indicate levels of risk; effective organisations understand and manage those risks better then ineffective organisation.

The skills that a mature organisation brings to the art of ‘risk management’ is to focus effort on managing risks that can be managed, providing adequate contingencies for those risks that cannot be controlled and deciding how much residual risk is sensible. The balance that has to be struck is between the cost and time needed to reduce the risk exposure further (the pay-back diminishes rapidly), the impact of the risk if it occurs and the profit to be made or value created as a result of the total expenditure on a project.

The sums are superficially simple; adding another $100,000 to the cost of a project to reduce its risk exposure by $10,000 reduces the value of the project by $90,000. In competitive bids, increase your bid price too much and the value drops to $Zero because the organisation fails to win the work! However, the situation is more complex; the nature of the risk may require the expenditure regardless of the potential saving (particularly in areas of safety and quality) and whilst expenditures are reasonably quantifiable, the actual cost of a risk event and the probability of it occurring are variable and cannot be precisely defined for a unique project. Our paper The Meaning of Risk in an Uncertain World discusses these issues in more depth.

To develop a mature approach to risk management, each layer of management has a role to play:

  • The organisation’s governing body (typically a Board of Directors) is responsible for developing an appropriate risk taking policy and defining the organisations ‘risk appetite’.
  • The Executive are responsible for creating the culture and framework that approached the management of risk within the parameters set by the Board in a capable and effective way.
  • Senior management are responsible for implementing the risk management system.

The mark of a mature organisation is the recognition at all levels of management that having implemented these systems, the organisation still has to expect failure! Every single project has an associated risk and properly managed, these risks are at an acceptable level for the organisation. But if there is a probability for success, there has to be a corresponding probability of failure!

Assuming the organisation is very conservative and requires budgets to be set with appropriate contingencies to offer a 90% certainty of being achieved, and this setting is applied to all projects consistently, the direct consequence is an expectation that 1 in 10 projects will overrun cost. Certainly 9 out of 10 projects will equal or underrun cost but there is always the remaining 10%. Mature organisations expect the profits and un-spent contingencies on the ‘9 underruns’ to more then offset the ‘1 overrun’. However, these ‘expected failures’ tend to be totally ignored by immature executives who want to pretend there is ‘no risk’ and then blame the PM for the failure.

There are two aspects of dealing with the ‘expected failures’ implicit in any realistic risk assessment. The first is setting the boundaries of accepted risk at an appropriate level of the organisation. Aggressive ‘risk seeking’ organisations will set a lower threshold for acceptability and experience more failures that conservative organisations. But the conservative organisations will achieve far less.

Source: Full Monte Risk Analysis

Looking at the cost aspect of risk for the project above, the most likely cost for this project is $17,500 but this is optimistic with a less then 50% chance of being achieved. The range of sensible options are to set the budget at:

  • The Mean (50% probability of being achieved) is $17,770.
  • Add one standard deviation to the Mean increases the probability of achieving the project to 84%, but the budget is now $18,520.
  • Add two standard deviations to the Mean and the probability of achieving the budget increases to 97% but the budget is now up to $19,270.

From this point, the pay-back diminishes rapidly, to move from 97% to 99.99% (six sigma), an additional $3,000 would be required in contingencies making a total contingency of $4,770 to effectively guaranteed there will be no cost overruns. Because of this very high cost for a very limited change in the probability of achieving the objective most projects focus on either the 80% or the 90% probabilities.

However, even within these relatively sensible ranges, making an appropriate allowance for risk has consequences. Assuming all projects have a similar cost distribution and the organisations total budget for all projects is $10 million the consequences are:

  • To achieve a 50%/50% probability of projects achieving budget, approximately 1.6% of the budget will need to be allocated to contingencies: $160,000
  • To achieve an 84% probability of projects meeting the allocated budget, approximately 5.8% of the budget will need to be allocated to contingencies: $580,000
  • To achieve a 97% probability of projects meeting the allocated budget, approximately 10.1% of the budget will need to be allocated to contingencies: $1,010,000

Whilst the mathematics used above are highly simplified, the consequences of risk decisions are demonstrated sufficiently for the purpose of this post (for more on probability see: WP1037 – Probability). To be 97% sure there will be no cost overruns, more than 10% of the available budget to undertake projects will be tied up in contingencies that may or may not be needed, the consequence is less than 90% of the possible project work will be undertaken by the organisation in a year. The projects ‘not done’ are opportunities foregone to be ‘safe’.

In a competitive bidding market, adding 10% to your estimate to be 90% sure there will be no cost overruns is likely to have a more dramatic effect and price the organisation out of the market resulting in no work. In either situation a careful balance has to be struck between accepted risk and work accomplished, this is a governance decision that needs input from the executive and a decision by the Board.

The governance challenge is getting the balance ‘right’:

  • The higher the safety margin the more likely most projects will underrun and the greater the probability some of the contingent reserves will not be used and therefore opportunities to use the funds elsewhere are foregone.
  • However, reducing the reserves increases the probability that more projects will overrun (ie, ‘fail’) and this increases the probability that in aggregate the whole project budget will be exceeded.

The challenge for the rest of management is making sure the data being used is as reliable as possible.

The second key feature of mature organisations is the existence of efficient scanning systems to see problems emerging backed up with effective support systems to proactively help the project team achieve the best outcome. The key words here are ‘proactive’ and ‘help’. The future is not set in concrete and timely interventions to help overcome emerging problems can pay dividends. This requires a culture of openness and supportiveness within the organisation so that the root cause of the emerging issue can be quickly defined and appropriate support provided, promptly and effectively. This approach is the antithesis of the approach adopted by immature organisations where the ‘blame game’ is played out and the project team ‘blamed’ for every project failure.

In summary, the organisation’s directors and executive managers need to determine the appropriate risk tolerance levels for their organisation and then set up systems that have the capability of keeping most projects within these accepted boundaries. Understanding and managing risk is a key element of PDC. But having done all of this, mature risk organisations know there are still Black Swans’  lurking in the environment and remain vigilant and responsive to unexpected and unforeseen events.