One of the most popular questions that frequently comes up in the conversations with senior and executive management of various companies is the one that appears in the title line of this article.
NOTE: This question, by the way, usually implies that the company has already taken a great leap forward and realized that it was impossible to accomplish all of their desired projects in a given period of time.
There are many different approaches to this task, but the most popular ones are the financial methods and the scoring models. Let us look first at the financial methodology. In a nutshell, it implies choosing some kind of a financial criterion – be it a return on investment, a net present value, an internal rate of return or some other formula – and calculating a value for each project. Once the ROI (or any other financial measure) for each project has been calculated, the projects are ranked according to their ROIs in the descending order.
Let us look at an example of how it may happen. We have a company that wants to implement 10 projects and has 200 man-months in their resource pool (roughly speaking 20 people working together for one year including the adjustments for the vacation time, sick days, etc.)
The list of projects together with their expected ROIs is presented in Table 1:
Table 1
|
Project |
Estimated ROI |
|
Project A |
21% |
|
Project B |
5% |
|
Project C |
12% |
|
Project D |
3% |
|
Project E |
25% |
|
Project F |
17% |
|
Project G |
8% |
|
Project H |
33% |
|
Project I |
10% |
|
Project J |
4% |
Next, the company needs to estimate the efforts required for each project and rank the projects according to their ROIs
Table 2
|
Project |
Estimated ROI |
Estimated Total Effort (man-months) |
Cumulative Total Effort (man-months) |
|
Project H |
33% |
30 |
30 |
|
Project E |
25% |
40 |
70 |
|
Project A |
21% |
50 |
120 |
|
Project F |
17% |
25 |
145 |
|
Project C |
12% |
15 |
160 |
|
Project I |
10% |
20 |
180 |
|
Project G |
8% |
20 |
200 |
|
Project B |
5% |
10 |
210 |
|
Project J |
4% |
20 |
230 |
|
Project D |
3% |
30 |
260 |
It is clear from Table 2 that the company in question can do projects H, E, A, F, C, I and G assuming their projections regarding the projects’ ROIs and efforts required were correct. Adding Project B to the mix will force the company to exceed their effort threshold. Thus projects B, J and D would have to be either canceled or postponed until the next year.
While the purely financial models are very good at instilling the sense of discipline and accountability they all suffer from a couple of inherent problems.
One can argue that every financial formula out there can be presented in the following format:
Financial value = f(Revenues/Costs)
In other words, any financial value is positively correlated with the expected cash inflows from the project and negatively correlated with the cost of the project.
Numerous studies confirm that our ability to predict project cost at the project inception is somewhere between +300% and -75% for high-risk industries and between +75% and -25% for familiar endeavors. On the other hand, in many instances the revenue forecasts are even less accurate with a potential array of values anywhere from -100% to +∞.
Let me prove this somewhat controversial point by using a couple of examples. When Segway was launched in 2001 it was advertised as the most revolutionary contraption since the invention of the personal computers. The company was forecasting sales of 50,000 units annually. However the company was only able to sell only 6,000 vehicles.
On the other hand, I seriously doubt that when the first iPhone project was being conceived in the mind of Steve Jobs, he expected the sales of this product to exceed the entire annual revenues of Microsoft.
So mathematically speaking we have a fraction in which the numerator can be predicted with an accuracy of +300%, -75% and the numerator with an accuracy of -100%, +infinity. How reliable then is the overall formula?
Another problem with the purely financial models is that they ignore such factors as strategic alignment, fit to the existing supply chain, market share and other important aspects.
So, having discussed the pros and cons of the financial models we move on to the scoring models approach that will be discussed in part 2 of this article.
About the Author
Jamal Moustafaev, MBA, PMP – president and founder of Thinktank Consulting is an internationally acclaimed expert and speaker in the areas of project/portfolio management, scope definition, process improvement and corporate training. Jamal Moustafaev has done work for private-sector companies and government organizations in Canada, US, Asia, Europe and Middle East. Read Jamal’s Blog @ www.thinktankconsulting.ca
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Jamal is an author of two very popular books: Delivering Exceptional Project Results: A Practical Guide to Project Selection, Scoping, Estimation and Management and Project Scope Management: A Practical Guide to Requirements for Engineering, Product, Construction, IT and Enterprise Projects.