Measuring Financials
In my previous blog we discussed specifically on measuring Processes using a consolidated e-PMO dashboard. Next, let us get to know more on how we can measure and use financial measures to effectively track Projects.
Re-iterating the key points for measuring project progress….
1) Ensure that the metrics are aligned with the organisational or programme goals, i.e., Financial, Process, Customer and HR related to say the least.
2) Ensure that the metrics cover the vital areas of the project. i.e., they focus on deliverables, Customer satisfaction, Intelligence, Quality, Development, Scope, HR, and last but not the least Risks and Issues.
3) Ensure that clear metrics criteria’s are established and communicated to all relevant stake holders.
ENTERPRISE PROJECT MANAGEMENT DASHBOARD
EPM Dashboard is normally used to show the end to end project status across all phases in a given project. It is especially useful in large budget projects that would have multiple stakeholders and sizeable end result, service or product. Here, I have referred to a large scale IT project.
Naturally, the EPM dashboard that we are assuming here is of a large proportion with rich UI and consolidation of variety of tools. As an example, see, How to show risk information in Enterprise Project Management Dashboard .
MEASURING FINANCIALS USING e-PMO
Measuring financials is of utmost importance since that tells us a number of things and helps take quantitative decisions. It helps to keep subjective decisions at bay and reduce the element of bias coming into decision making in the project. Some key elements where financial measurement helps are:
1) Deciding which project to invest in and whether to initiate the project at all.
2) Tracking whether the project is under the baseline budget.
3) Is it feasible to go for revised Budget at Completion?
4) Is it viable to use contingency or management reserves?
5) How does it add up to the overall company budget and financials?
To measure these, there are certain financial measurements that are very useful, namely:
A) Project Selection Criteria
B) Earned Value Analysis
C) Financial Accounting / Statements
Let us touch upon each one of these below:
A) Project Selection Criteria: Here, a number of measurements are useful such as:
a. Net Present Value: The Net Present Value is calculated as the difference between the Present Value of all incomes and the Present Value of all expenses.
i.e., NPV = PVincome – PVexpenses
If NPV is higher, it is good for the project. This measurement is useful in the initiating process of the project where the project charter is created and financial information is summarised to help in Go – No Go decision regarding the project.
b. Benefit Cost Ratio: Benefit to Cost ratio is simply put, the ratio of the revenues and cost. i.e., BCR = Revenues / Cost. Higher the BCR, better for the project.
c. Internal Rate of Return: The IRR lets us know the Rate of Return that we will get if the project is executed. Higher the IRR, better for the project.
d. Payback period: Payback period tells us how much time will it take to break even or simply put, to recover all the costs incurred in the project and start making profits. Lesser the Payback period, better for the project.
All these measurements can be done on a portfolio of projects and can help decide which project to go for. The comparative data can be displayed on the e-PMO dashboard to help take informed decision before signing the project charter. Since such data are very sensitive, proper care should be taken to ensure that ONLY authorised personnel can access such information. For this, it is very important that the e-PMO has appropriate security and ONLY appropriate data is visible to the appropriate level in the Organisation hierarchy.
B) Earned Value Analysis: Earned Value Analysis helps to quantitatively track the project progress. It helps in creating a baseline against which the project is tracked with the actual progress made, see, How to use Earned Value Management using MSProject 2007 for more details. More complex projects or programmes can be tracked through multiple baselines. Common tools available in the market that are used for Earned Value Analysis are MS Project, Prima Vera, and Easy Gantt etc…
Before baselining a project, it is important to come up with proper estimation. Most common tool used for Estimation is PERT, where the optimistic, pessimistic and Most Likely time for completing a project is found. The estimated time for completing the project is found by using the formula: Estimated time Te= ((O + 4 ML + P)/ 6)
Such data can come directly from MS Project or any such tracking tool used. Hence it is important that the tool is synced up with the e-PMO Database. The Parametric estimation technique such as DOCOMO Model, Function Point analysis etc can be used in conjunction with 3 point estimates (PERT) to come up with better estimates.
After applying scheduling techniques and applying leads/ lags and resource levelling, the project is finally baselined with the budget and time required for completion.
What comes out is the Performance Measurement Baseline or Cost Performance Baseline, also referred to as: Budget At Completion = BAC. Based on the BAC, the following parameters are calculated.
- Planned Value (PV) = Budgeted Cost of Work Scheduled (BCWS) = % (Work Scheduled) x BAC
- Earned Value (EV) = Budgeted Cost of Work Performed (BCWP) = % (Work completed) x BAC.
- Actual Cost (AC) = Actual Cost of Work Performed (ACWP) = Actual Cost incurred.
Based on this, once can now calculate the Schedule Variance and Cost Variance.
- Scheduled Variance (SV) = EV – PV. If > 0, Ahead of Schedule.
- Cost Variance (CV) = EV – AC. If > 0, Under Budget.
- Schedule Performance Index (SPI) = EV / PV. If > 1, Ahead of Schedule.
- Cost Performance Index (CPI) = EV/ AC. If > 1, under budget.
If the project needs re-baselining, a revised EAC (Estimate At Completion) is calculated. This is then used as a baseline. Estimate at Completion = BAC/ CPI OR = AC + (BAC-EV) OR = AC + (BAC-EV)/ (CPI x SPI).
- To Complete Performance Index (TCPI) intial = Work remaining / Funds remaining = (BAC-EV)/(BAC-AC). A higher TCPI means Tighter budget.
- To Complete Performance Index (TCPI) revised = Work remaining / Funds remaining = (BAC-EV)/(EAC-AC).
If all the budgeted expenditure and the contingency built on the project is over, then, based on the situation, the management can use the management reserve as a lump sum amount or as a percentage of the overall project BAC to help get the project on track and deliver. Remember, the management reserve is the last resort. It is used ONLY when all the agreed budget and contingency reserve built on top of it is totally exhausted. A provision for this can be made and visible only to the authorised personnel.
All these calculations are automatically calculated in the automated project tracking tools such as MS Project. So, connecting to the MS Project fields can provide the data directly for display on the e-PMO dashboard. One also has the option to track the entire project including all the calculations as a part of the e-PMO dashboard where the software can be developed in-house. But, this might involve additional efforts and resources and this needs to be taken into account as well. The data can be used to show Earned Value graphical charts that can directly provide inferences.
C) Financial Accounting / Statements: Accounting can provide the overall financial health of the organisation and also for a Strategic Business Unit with responsibility of a programme or portfolio. What Accounting can do is to provide key financial information such as Return on Investment (ROI), Return on Equity (ROE), Profitabiity, Net Profit, etc. This can help management take decisions on whether the project or groups of projects are viable and which project can continue and which ones need to be shelved.
Combining all this can provide a very comprehensive and accurate financial report of the project on a single e-PMO dashboard. Combine this with the statistics on deliverables, scope and quality discussed in my previous blog and it makes tracking the project more accurate.
In my next blog, we shall discuss about measuring HR related parameters that are crucial for the success of a project.