Risky Business

Here's a great white paper on project risk assessment in the context of corporate risk appetite.

http://www.projectperfect.com.au/white-paper-a-different-view-of-project-risk.php?b3note=riskmat

Unfortunately it doesn't extend onto management of project risks.

The Office Of Government Commerce also has some really useful risk potential assessment tools and techniques . They even have the spreadsheets set up to save you the math!

It just a shame that too many UK public projects don't stick to these principles. It is a major victory for common sense, the UK tax payer and for students of project management that Gateway Reviews are now published under Freedom of Information.

Whatever your views are on Prince2 there can be no doubt that its approach to project risk management is a sound framework. It will be interesting to see how the new guidance for Directing Successful Projects with PRINCE2 2009, aimed at project executives and sponsors, will clarify the project directors vital role in risk management.

How long will it be before this guidance has an impact on the Gateway Reviews?

Labour Saving Devices

Very occasionally an IT project will be producing something totally new and innovative which hasn't existed before. But the vast majority of IT change is all about improving business efficiency. The business case for the projects will have the costs of the projects which are offset by the benefits of reducing costs – most of which will be likely to be salaries.

In the new world economics you will need to go back and reassess any savings and benefits because there are some fundamental changes and major discontinuities in the economics that have come in to play.

In the old world order:

• your business volumes were growing at a healthy rate of, perhaps, ten percent. So your project efficiency gains will easily pay for the project costs. You simply don't have to recruit extra people to support the extra volume. You also save the additional HR costs including the recruitment fees and training costs.
  
• If you have very dramatic performance improvements then the headcount savings can be increased by normal staff turnover. When someone leaves you don't replace them. Again you save on the cost of on-boarding new staff.
  

Now the whole balance changes:

• As general unemployment increases then staff turnover suddenly stops. No-one will give up a job with several years of accumulated benefits for the uncertainties of a new job with the risk of "first in – first out". The goodwill of employees for a projects objectives will, not surprisingly, evaporate as benefits become threats to their personal livelihood.
  
• Any saving in employee costs completely change if the company has to make compulsory redundancies, with the costs and compensation that have to be made. These may well come on top of other redundancies that the organisation has hade to make because of drops in business volumes.
  
• And leaving the sensitive subject of job cuts – do the ecomomics of your project still stand if business volumes have dropped by ten percent?
  

I hate to see irony in such a black situation, where real people's livelihoods are at stake. Believe me: I've been there myself. But it is "funny" that as the need to make efficiency savings increases then it actually becomes harder to make those savings.

Risks out of control

In any project some of the projects costs and benefits are out of your control. Not through any fault of the project. It's just the way it is.
In any business case there will be a number of macroeconomic and other external factors in play, and with the market discontinuity in the last year these have seen unprecedented turbulence:

• Cost of funds -used for your IRR or NPV of cost and benefits, and possibly any project financing.
• Exchange rates, particularly for multinational projects : although for offshore work, the vendor bears this risk, any adverse movement in x-rates can impact the vendors appetite for continuing work, and so still pose a risk to the project.
• Raw materials costs, for the business or the project. Will high fuel prices blow your travel budget?
• End product prices and sales volumes. You will have heeded my warning not to justify projects on increasing sales without demonstrable justification but still a 50% drop in sales is going to impact the businesses willingness to invest in projects.
• And throw in a few non ecomomic factors. What would happen if 30% of you project team were suffering from swine flu in the month of go live?

How should a project cope with this turbulence?

• Firstly you should identify the risk. Any assumption made in planning should be documented and the risks from changes to the assumptions identified.
• Stress testing and scenario planning. Once you have established the assumptions see the impact on changing them: Double them and halve them. Double some and halve others. What does this do to your business case?

On the outcome of your scenarios then you can use the standard risk countermeasures:

• Prevention. If the risk has too big an impact then terminate the risk - even to the extent of stopping the investment.
• Reduction. If the project travel budget can't absorb a future increase in airfares then reduce travel plans now, and buy a good conference phone.
• Transference. Speak to your CFO or treasury department. Will they accept the risk for you? If you have FX exposure does the business have some opposite exposures? Offshore profits to be repatriated? Can the business hedge the risk?
• Acceptance. Just get over it. If your scenario planning shows the impact is small then the project board can decide to live with the risk and bear the costs when the happen.
• Contingency. Plan and budget for the impact, if the risk materialises. If airfares increase then stop travel or have a contingency budget only to be used if air fares increase. To be fair to your project sponsor you should also reduce the budget if air fares go down!

Management of risk should be a core discipline of your project management.

Increase Sales! and other lies to justify IT

"The website for the ten million pound sales campaign with this partner will take just two days effort to develop!" appealed the sales leader to the Star Chamber for technology project justification.

"This is not going to increase our revenue by one pound" said the CEO. "Our web developers' time is better spent on other projects. Next proposal..."

The CEO was right. The addressable sales opportunity was not going to get any bigger because of the website. The website was not going to reduce the sales force assigned to the program.

It is all too easy to justify benefits as simply increased sales. It is the easiest way to get a big number on the benefit side. And the easiest trap to fall into for a business case.

(A search on Amazon shows that there are 127 books with "increase sales" in the title, bought by sales people who justify the purchase as "cost £20, benefit increased sales".

They are written by very canny salespeople who have discovered the benefits of scalability: If they sell then their income is limited by the number of hours in their day. If they write a book on selling then their income is no longer limited by their time but the marketablity of their ideas.)

So if you use "increased sales" as one of your benefits look long and hard at it.

• The benefits of the process improvement are not the total sales increase – but the increase in net revenue, after allowing for the full cost of sales and marketing and all other overheads.
• It is essential that there is a clear link between the increase in sales revenue and sales process improvement. It is not enough to attribute the increase in sales revenue in the current year to the process change. You should provide some firm and auditable types of deals or specific sales that can be justified and backed by sales management - who will need to ensure that the specific sales revenues have not been double counted for benefits or commission elsewhere.
• If you have an innovative sales channel then you need to make sure that you allow for any loss of sales revenue from other channels.

If you don't have the specific link from the process improvement to the benefit the risk is all to clear in the current economic climate: The process is implemented but because of the global recession sales fall. Now where is the benefit in that?

See if you go for the lease option..

"It's inexplicable, but the low-cost system I sold you seems woefully underpowered. You could replace it with another vendor's system, thus showing everybody you made a mistake. Or you can pay my outrageous upgrade fees." says Catbert to Pointy Haired Boss.
Pointy Haired Boss replies: "How big a fool do you think I am?"
Catbert: "I won't know until I see if you go for the lease option"

There aren't many jokes about leasing. I have been looking for over 20 years. There is however that one Dilbert cartoon in 1995!
Technology leasing , particularly software leasing, has been in the news lately:

• Microsoft cut its rates for leasing software by 26% (although it looks as if it will recover some of that through insisting you take out software assurance maintenance.)
• IT software leasing is set to become “more important” as costs increase, according to German lessors attending CeBIT (well they would say that wouldn't they?)

Leasing isnt going to totally transform the business case for your project. However used wisely it can overcome issues, particularly with the cashflow. It can avoid the upfront capital cost (particularly if the capex wasn't in this years budget) and match the cashflows to the timing of benefits - even seasonal (like farmers paying more for their tractors during harvest times).

Just watch out for a few pitfalls:

• Lease rates: the rentals seem lower than the repayments on an equivalent loan. but include all cashflows in your comparison, including the value of the asset at the end of the lease.
• Discounts: if the lease rates are lower (often trumpeted as 0% finance) that may be achieved by a subsidy from the supplier - which you might have got as a discount off the price instead.
• End of lease term: Check what happens at the end of the lease. Most likely if you don't return the equipment you will carry on paying rentals at the same rate which quickly changes the costs of your project. (although if you do need to carry on using the equipment, negotiate with the finance company. They will still make more money from a reduced rental than if you send back the equipment)
• Are you allowed to lease? UK public sector organisations will not be able to lease (as it counts as PSBR unless it comes under the private finance initiative). Check with your CFO on their policy to leasing as early as possible.
• It's not SAAS: Most importantly once the lease has started you have accepted the asset. If you have a dispute with the supplier, you can't stop paying the rentals - as they are due to the finance company. If you don't need the asset any more you can't just return it, unless you settle with the finance company.

1. Don't sign that finance agreement until you have reviewed it with a financial and legal adviser.
2. As with any project you can work out the NPV /IRR of the lease vs buying.
3. As with any project assess the risks and you can easily model the cost impact of the risks - if you need to terminate early or carry on using the equipment.

As I said there aren't many jokes about leasing. Just make sure that you analyse the full costs, benefits and risks, or else the joke will be on you.

Anything is better than what we have..

When building a business case for a project it is all too easy to go for your first option.
OK, you haven't said its a "no brainer" and got the differences in cost, and the shiney benefits.

But with some thought you can justify anything.

But have you included the full costs, and factored in all the risks, in particular the implementation risks. Would a five percent increase in the development costs, or a three month delay to implementation, wipe out the benefits?

More importantly have you looked at all the options?

• An hour brainstorming with colleagues will come up with some different approaches.
• 30 minutes googling will get you a list of alternative suppliers.
• Two weeks for a proper Request for Proposal will be worth the investment in most cases. Get the full list of your business requirements and then put weighting on each.
• Don't just look at improving the efficiency of your current business processes. Option B may offer business transformation opportunities or a new sales model.

USwitch is a price comparison website for utilities, credit cards insurance, phones. And of course it will always find a lower priced supplier. But is it the best for your particular case ? - not the option that pays them the highest commission. When picking a phone supplier it will give you the cheapest local call rates or low cost inclusive minutes. But will you use all the inclusive minutes? And what if you make regular calls to your aunt in Australia?

Obvious? Just do the same for your business case.

"No Brainers" don't mean no brains needed.

A not unusual scenario, that has been repeated countless times:
The EVP Technology of the parent company had a successful first week visiting their new subsidiary declaring: "I have never seen a company with such a good fit to our system." As he headed back to the airport with the integration team, the newly acquired company was a bit bewildered: Aren't they going to look at our requirements in any detail? What are the benefits? What are the costs?

Two years later the project to implement the parent company system collapsed, leaving the subsidiary with some deep challenges. Commitments had been made to suppliers, business partners and regulators that couldn't now be met without a system.

The traps are all to evident with 20/20 hindsight.
Of course, if you start knowing an answer it will always fit the question. But is it the best answer? Is it the full answer? Most importantly if you are blinkered by the answer you will simply miss business requirements that can't be met by the "solution". They are simply missed if you just start from a checklist of package features.

It may be a "no brainer" but that doesn't mean you abandon all critical faculties, or tear up the methodology. It should mean you get through the process far faster. But don't leap to conclusions.