With so many projects to choose from, how do you select the right ones? It may sound obvious, but choosing the right projects will increase the likelihood of project success. In fact, the more time you spend choosing the right project and setting a project up for success at the very beginning the greater the likelihood of success at completion. Fundamental to this is the ability to apply some practically perfect filters to your project selection process to ensure the good ones get through and the bad ones are rejected. This process should be part of your practically perfect project management methodology as it is the first step in a successful project.
The project selection process starts with all potential projects having to go through a rigorous, repeatable and appropriate selection process. There are a few exceptions. In the normal course of business there may be some emergency or legislative compliance works that must be done that meet none of the following criteria. There are also projects that are supported by someone with enough political power to shortcut a good selection process. A high priority of these ones end in failure though.
It is not uncommon for a project manager to be given the project after it has passed through this process. In a perfect world, the project manager would be involved in this process in some way. However, in the absence of a perfect world, if you find yourself receiving a project to manage, make sure you ask if it has been through the project selection process. Perhaps think twice about accepting a project that hasn’t been through the process as the chances of project success are less than one that has been through the process.
The following diagram shows the process that projects can go through from being part of all potential projects through to being included as part of the approved portfolio of projects.
The Project Selection Process
Checking Strategic Alignment
We begin this process with a list of all the potential projects that we could do or that have been suggested to us. The first step that any project must go through is to check whether it helps the company achieve its strategic goals. If it doesn’t, then the company shouldn’t support it. It won’t advance the organisation, and the organisation likely lacks the core competencies to complete the work. If you don’t have a defined strategy you can instead use this filter to assess whether you have the necessary skills to complete the work or whether you’re just tempted by the chance to make a quick dollar. Resist this temptation! You will not have the necessary ability or motivation to do justice to the project and it’s a sure fire way to increase the chance of project failure.
Financial Justification for a Project
Once you have ensured that all potential projects meet your organization’s strategies goals, skills, and abilities, the next step is to consider whether the project meets any pre-determined financial filters. The process of justifying a project from a financial point of view is important for two reasons.
The first is to ensure that the investment you are making will provide a satisfactory return. Does your organisation have a requirement for a certain level of financial return? If it does, you need to ensure that all projects meet this. If a project doesn’t meet strict financial criteria, it must meet some other strategic imperative, such as generating future work or contributing to charity. However, you cannot do these projects forever or you will go out of business fast.
The second reason is that you need to keep in mind that it isn’t the client financing the project. Your organisation will pay wages and salaries, materials, and any other costs until the client pays the first invoices sent out. This means that you need to know how this project is going to affect your company financially.
There are many ways to assess the financial viability of a project and it is not uncommon to require that a project be assessed against several financial metrics. Here are six of the most commonly used financial assessment tools. The first three are relatively easy to use and set up, while the second three are a little more difficult (i.e. you are going to need a software spreadsheet to do the calculations); however, the results tend to be a little more thorough.
1. Payback period is a nice easy one to use. It simply a calculation of how long it takes to earn back the investment you’ve made. You decide on an appropriate time period, and if the project earns back the investment within that time period it’s good. If it takes longer than that time period to earn back the money invested then it’s not a good idea.
2. Profit margin is also one of the more popular ones as it is nice and simple. The company sets a required profit margin to be made on all projects and simply doesn’t do any projects which fail to make that profit margin. Margins are identified across industries so it’s probably best to check with your accountant to set this.
3. Opportunity costs also need to be considered. If you decide to do this project, what other projects are you not able to do? If the value of other projects is higher than this particular project you may wish to reconsider which ones you do.
4. Net present value (NPV) is the value in today’s dollars of future cash flows. In some projects you are spending money now to make money in the future. You want to assess what that future money is worth in today’s dollars. To do this you take your cash flows, in and out, over a predetermined period of time and apply a discount rate to them. The discount rate is usually linked to the level of required return that you, your shareholders or your accountant has determined is needed to keep the organisation profitable. If the NPV is positive, it means that the money you are investing today will generate future cash flows that are earning the required amount of return. A negative NPV means that the future cash flows are worth less than what you are investing in today’s dollars and the project may not be worth doing. NPV calculations between two projects can often be used to select which is the more appealing project; a rough rule of thumb is that the project with the higher NPV is the better one to do.
5. Return on investment (ROI) is a similar concept to the profit margin discussed above; it just has a little more accountant-speak around it. The profit margin generally refers to the net profit made after costs, tax and depreciation have been removed from the equation. Return on investment can mean the gross financial return on the investment, expressed a percentage of the investment made. Once again, you, your shareholders or your accountant should determine what is an appropriate level of required ROI.
6. Internal rate of return (IRR) is perhaps the most difficult to calculate but arguably gives the most accurate financial assessment of a particular investment a project. It is the annualised and compounded interest rate that the investment will return. So you need to know the time period, the return on investment and how to calculate the compounding effect over that time period. Obviously, a good IRR will be at a minimum more than what you can get by putting your money in the bank.
As you can see, there are both simple and sophisticated ways to assess the financial performance of any project you are going to do. It is up to you to decided what is the most appropriate means of doing this. Don’t get into the habit of simply going ahead with a project simply because you think, or feel, it will make money. If you don’t do a thorough and appropriate financial analysis of your projects there is a great chance they will lose money and eventually you will go out of business.
Additionally, making sure you have completed a robust financial justification process ensures that you organisation has approved investment of its money and will pay the bills. Remember that often you or your organisation has to outlay quite a bit of money before the first invoices are generated and paid. So having a robust financial assessment process means less risk to you and your money.
Non-Financial Justification for a Project
In addition to financial criteria, there are several non-financial criteria that can be used to justify proceeding, or not proceeding, with a project. Typical non-financial criteria include market share, putting in place barriers to market entry, reducing reliance on suppliers and to provide for community development or support.
Health, social services, not-for-profit organizations, wildlife conservation projects and even the Olympic Games are all examples of organizations having non-financial criteria to help in their decision making process about which projects they undertake.
It is your decision what mix of financial and non-financial criteria you use in your project selection method. The more practically perfect the criteria are, the greater the chance of project success.
It may be that you have a few projects that make it through the selection process and all pass with flying colors. However, it may be that you don’t have resources to do them all or need to rank them somehow to determine which ones are the most important to you. This is the process of prioritizing your projects. To start with you need to decide which metrics are important to you in choosing between them.
The criteria for ranking them is highly subjective. Most organizations will place a greater emphasis on financial return. But there are other metrics to use, such as reputation, difficulty, future growth, repeat business and market share. You may also want to give each of your selected assessment criteria a different weighting so you can place a different emphasis on different elements.
At the end of this process you want to have a documented list of all the projects you are doing ranked by order of importance to the company that everyone can see. It also helps when new projects join the list to put them in their correct position according to the practically perfect assessment criteria you have developed. Doing this correctly will help you allocate time, energy and resources to the most important projects.
The following diagram shows an example of a weighted attribute project selection process showing the areas being considered as important when prioritizing projects, the score each project gets for each area, the weighting given to each area and the total score showing that Project C has the top priority despite Project B having the greatest financial return.
Weighted Attribute Project Selection
Signing Off and Starting a Project
Once you have put all your potential projects through some sort of appropriate selection process you need to document the formal approval. This is done via a project charter, which is the founding document or birth certificate for a project. It proves the project has support and approval. For a large project, a project charter may be a large and comprehensive document, perhaps even an exhaustive business case. For small projects, the project charter can be as simple as a work order with the necessary points acknowledged and signed off. It usually does not have the same level of detail as some of the documents yet to be prepared such as the scope statement and project budget but it does contain enough information to commit your time and money to the project.
There is also a symbolic aspect to having a project charter for every project. It demonstrates a commitment to professional project management. It is also important to have the project manager involved in preparing the project charter. Having someone else prepare it and get it signed off then presenting the project manager with it will often result in missed information, poor initial estimates and lack of commitment to the project right from the beginning. At the end of day you decide how detailed your project charter will be but you must ensure that all projects have one.
These are some of the questions a project charter can answer:
1. Does the project align itself with the organisation’s strategic goals or its core competencies?
2. Does it meet the necessary financial requirements?
3. Who is the client?
4. Has the client agreed to this project charter?
5. What is the known scope of work at this stage?
6. What is the known budget for the project at this stage?
7. What are the known time constraints at this stage?
8. Who will the project manager be?
Use these questions to help put together your own unique and appropriate practically perfect project charter.