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Table of Contents
2.0 Selection of Project:.
Identify the projects that support the strategy.
Evaluate projects and set priorities.
Select and start projects.
Monitor or status of ongoing projects periodically.
3.0 Identification of the projects.
3.1 "Prescriptive" identification.
3.2 Expert-led identification.
3.3 "Incremental" or "evolutionary" identification.
3.4 Holistic identification.
4.0 Evaluation and priorities.
4.1 Net Present Value (NPV).
4.2 Internal Rate of Return (IRR).
4.3 Benefit Cost Ratio (BCR).
4.4 Opportunity Cost (OC).
4.5 Payback Period (PP).
4.6 Initial Risk Assessment (IRA).
5.0 Selection and launch.
6.0 Monitoring and review..
One of the fundamental aspects of any business is the choice of projects to which they allocate the economic resources collected by their donors. This activity must be made with great objectivity and sense of responsibility and with total transparency towards supporters. It is therefore essential that a project selection method is applied with objective evaluation parameters and that the method is applied with total autonomy, independence of judgment. Every company - small, medium or large must has a strategy (and if not, it would have already gone bankrupt). This strategy often translates into the identification of "great objectives", to achieve which is necessary to propose, select and start (according to a pre-established sequence) of the projects. These project proposals could refer to different business areas and could be unrelated from the operational point of view and the resources involved.
Such as in this case, AMEC Foster Wheeler, is one of the large multinational companies with diversified businesses, where the projects are referred to as individual business units, in line with the portfolio strategy defined by the board. Here the projects are analyzed from the point of view of costs, commitment of resources, expected benefits and possible interrelationships with other projects in the portfolio. They are providing project management services since long and has employed more than forty thousand employees. Their vision is leading the individual career & team development for meeting the future challenges & aspiration of global business
For AMEC selection of project is crucial and therefore, they are following the principles of PMBOK. Following are the steps that will need to implement sequentially for the selection of any project
Metaphorically speaking, this phase allows in defining the deck from which to draw the winning cards. Projects are identified in four main ways:
First step is the identification where it is important to identify one or more companies and who decides to enrich the portfolio with a new product because this will allow entry into a specific market. In this case the identification is soon made; the person in charge of management (the CEO) will identify the project (or projects) necessary for the development of the new product to be integrated into the portfolio.
Instead, think of the classic case in which an external subject (consulting firm) performs a benchmark with the main competitor and defines the guidelines for improving a specific company area (e.g. Construction of Building). If the strategy prescribes an increase in market shares to the detriment of the main competitor, all the projects that are functional to the objective will be identified in the company (e.g. project for the development of a new customer service).
In this case, thinking about improvement proposals that come from subjects within the company (e.g. proposal to improve the road infrastructure, proposal to improve road, etc.). Typically, these design proposals are advanced by technical profiles, who know the state of the art of products and services very well. Depending on the case, it will be up to the Steering Committee, the CEO or the Entrepreneur to identify on the basis of the link with the strategy.
In the latter case, think about what happens in many modernly structured companies. Every year, typically in the last quarter of the financial year, a meeting is organized which involves all company functions where project proposals are presented for the following financial year. The proposals made for the individual functions (marketing, production, sales, etc.) will then be assessed (individually and / or in an integrated way) and linked to the strategy.
Once the projects have been identified, in order to be able to choose, an evaluation must be carried out and priorities must be established. There are several techniques for doing this, the ones that I will illustrate are the following:
The correct application of these techniques requires that some general planning information is known for the projects identified, such as:
It is a technique that allows you to estimate the present value (present value or PV) of a series of expected cash flows (future value or FV), obtained as the accounting sum of the number of years (n) discounted based on the rate of return (r).
PV = FV / (1 + rn)
By definition it represents the interest rate at which the PV present value of the project is zero. In general terms the IRR is the rate of return brought by a project or program. It is clear that the higher the IRR, the more attractive the project proposal (business case) will be.
How can you determine if a given IRR value justifies starting the project?
In terms of financial investments, if the IRR for a project is not greater than the return that could be obtained by investing an equivalent amount of money in the financial markets, then it is not worth starting the work.
In order to select it is essential that all the benefits and costs associated with the projects are known, at least in general terms. The evaluation of the benefits and costs must be made in monetary terms (present value at a given interest rate)
BCR = PVin / PV out
It is clear that if we take the incoming cash flows as benefits (cash inflow) and the outgoing cash flows as costs (cash outflow), the selection between projects in terms of benefit / cost ratio will be made in favor of those who have the highest BCR value.
The basic concept is the following: every time we make a choice, we are forced to give up at least one alternative. In practice, what you give up for something is the true value of what you choose to have.
By opportunity cost or opportunity cost we mean the cost resulting from the failure to exploit an alternative opportunity. Indeed, given that there may be more than one alternative, the opportunity cost is the value of the best alternative left out.
The payback period or repayment period is a method that is frequently used by companies to calculate the time within which the capital invested in a project is recovered through the financial flows generated. In practice, the PP answers the question "how long will it take me to recover the money initially invested on the project?"
The formula for calculating the PP is the following:
PP = Initial investment / Average annual cash flows
Among the various projects (each representing an alternative investment proposal), the one with the shortest "recovery period" will be chosen, since from that moment on, the cash flows generated by the project results will contribute to the formation of profits (gross) for the company.
If sufficient information is available to set up the analysis, the assessment criterion can be based on an initial (preliminary) risk assessment.
As per this we are going to place the projects in one of the quadrants according to the NPV values and the risks that characterize it (in the example in the figure I simplified using a low / high binary scale). The projects are depicted with circles whose dimensions are representative of the economic volumes involved. It is intuitive to think that projects with a high NPV value and a low risk profile (green area) will be preferred, projects positioned in the yellow areas are to be carefully evaluated, while projects positioned in the area will be avoided in red (low NPV, high risk profile).
Once the evaluation is completed and the priorities are assigned, a sort of project ranking is obtained. In this sort of ranking, the positioning of each of them determines the level of adherence to the strategy.
Once the ranking is fixed, it is natural to go to the selection and start-up phase. During this phase the most delicate aspect is the staffing of resources. Remember that the correct use of company resources must be balanced and equally distributed over the projects in progress. Inappropriate staffing can lead to an overload of resources (overload) or to their under-utilization (underload). Both situations cause side effects which are best avoided.
Once the selection of the projects has been made and the works have started, a review must be carried out periodically to verify that there are no deviations from the strategy in progress.
This translates into repeating the evaluation process periodically with more precise values and estimates as activities progress and new information is made available. This process, by its iterative nature, could lead to a redefinition of the priorities and criteria for allocating investments.
In this regard, company must aim to implement effective and sustainable portfolio management should clearly define the criteria by which to discontinue, or even cancel, a project if the indications that come from the progress highlight its impossibility of maintaining the objectives initially set.
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