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02: 30: Preface
The primary purpose of this text is to provide an open source textbook that covers most project management courses. The material in the textbook was obtained from a variety of sources. All the sources are found in the reference section at the end of each chapter. I expect, with time, the book will grow with more information and more examples.
I welcome any feedback that would improve the book. If you would like to add a section to the book, please let me know.
03: 29: List of Links by Chapter for Print
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04: 28: Introduction
People have been undertaking projects since the earliest days of organized human activity. The hunting parties of our prehistoric ancestors were projects. Large complex projects such as the pyramids and the Great Wall of China were also projects. Even something as simple as creating a dinner is considered a project. We use the term “project” frequently in our daily conversations. This book covers the basics of project management. This includes the process of initiation, planning, execution, control, and closeout that all projects share.
05: 26: Copyright
Project Management by Adrienne Watt is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.
© 2014 Adrienne Watt
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06: 20: About the Author
Adrienne Watt holds a Computer Systems Diploma (BCIT), a Bachelors in Technology (BCIT) and a Master’s in Business Administration (City University).
Since 1989, Adrienne has worked as an educator and gained extensive experience developing and delivering business and technology curriculum to post-secondary students. During that time she ran a successful software development business. In the business she worked as an IT Professional in a variety of senior positions including Project Manager, Database Designer, Administrator and Business Analyst. Recently she has been exploring a wide range of technology related tools and processes to improve delivery methods and enhance learning for her students. | textbooks/biz/Management/Project_Management_(Watt)/00%3A_New_Page/01%3A_33%3A_Versioning_History.txt |
About the Book
Project Management by Adrienne Watt and published by BCcampus Open Education is a remix and adaptation of the following works:
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Careers Using Project Management Skills
Skills learned by your exposure to studying project management can be used in most careers as well as in your daily life. Strong planning skills, good communication, ability to implement a project to deliver the product or service while also monitoring for risks and managing the resources will provide an edge toward your success. Project managers can be seen in many industry sectors including agriculture and natural resources; arts, media, and entertainment; building trades and construction; energy and utilities; engineering and design; fashion and interiors; finance and business; health and human services; hospitality, tourism, and recreation; manufacturing and product development; public and private education services; public services; retail and wholesale trade; transportation; and information technology.
Below we explore various careers and some of the ways in which project management knowledge can be leveraged.
Business Owners
Business owners definitely need to have some project management skills. With all successful businesses, the product or service being delivered to the customer meets their needs in many ways. The product or service is of the quality desired, the costs are aligned with what the consumer expected, and the timeliness of the product or service meets the deadline for the buyer of that item.
The pillars of project management are delivering a product/service within schedule, cost, scope, and quality requirements. Business owners need planning, organizing, and scoping skills and the ability to analyze, communicate, budget, staff, equip, implement, and deliver.
Understanding the finances, operations, and expenses of the business are among the skills that project managers learn and practice. Some businesses may focus more on accounting, providing financial advice, sales, training, public relations, and actuary or logistician roles. Business owners may own a travel agency or provide hospitality. Business owners could be managing a storefront or a location in their town’s marketplace.
Example: Restaurant Owner/Manager
Restaurant managers are responsible for the daily operations of a restaurant that prepares and serves meals and beverages to customers. Strong planning skills, especially coordinating with the various departments (kitchen, dining room, banquet operations, food service managers, vendors providing the supplies) ensure that customers are satisfied with their dining experience. Managers’ abilities to recruit and retain employees, and monitor employee performance and training ensure quality with cost containment. Scheduling in many aspects, not only the staff but also the timing of the food service deliveries, is critical in meeting customer expectations.
Risk management is essential to ensure food safety and quality. Managers monitor orders in the kitchen to determine where delays may occur, and they work with the chef to prevent these delays. Legal compliance is essential in order for the restaurant to stay open, so restaurant managers direct the cleaning of the dining areas and the washing of tableware, kitchen utensils, and equipment. They ensure the safety standards and legality, especially in serving alcohol. Sensitivity and strong communication skills are needed when customers have complaints or employees feel pressured because more customers arrive than predicted.
Financial knowledge is needed for the soundness of running the restaurant, especially tracking special projects, events, and costs for the various menu selections. Catering events smoothly can be an outcome of using project plans and the philosophy of project management. The restaurant manager or the executive chef analyzes the recipes to determine food, labour, and overhead costs; determines the portion size and nutritional content of each serving; and assigns prices to various menu items, so that supplies can be ordered and received in time.
Planning is the key for successful implementation. Managers or executive chefs need to estimate food needs, place orders with distributors, and schedule the delivery of fresh food and supplies. They also plan for routine services (equipment maintenance, pest control, waste removal) and deliveries, including linen services or the heavy cleaning of dining rooms or kitchen equipment, to occur during slow times or when the dining room is closed. A successful restaurant relies on many skills that the project management profession emphasizes.
Outsourcing Services
Many businesses explore outsourcing for certain services. Below is a sample status and project plan that reflects the various tasks needed for a project. A review of finances, the importance of communicating to stakeholders, and the importance of time, cost, schedule, scope, and quality are reflected. Many companies may use these steps in their business. These plans show the need for the entire team to review the various proposals to choose the best plan. Figure 1.1 represents a sample project status report.
Example: Construction Managers
Construction managers plan, direct, coordinate, and budget a wide variety of residential, commercial, and industrial construction projects including homes, stores, offices, roads, bridges, wastewater treatment plants, schools, and hospitals. Strong scheduling skills are essential for this role. Communication skills are often used in coordinating design and construction processes, teams executing the work, and governance of special trades (carpentry, plumbing, electrical wiring) as well as government representatives for the permit processes.
A construction manager may be called a project manager or project engineer. The construction manager ensures that the project is completed on time and within budget while meeting quality specifications and codes and maintaining a safe work environment. These managers create project plans in which they divide all required construction site activities into logical steps, estimating and budgeting the time required to meet established deadlines, usually utilizing sophisticated scheduling and cost-estimating software. Many use software packages such as Microsoft Project® or Procure® or online tools like BaseCamp®. Most construction projects rely on spreadsheets for project management. Procurement skills used in this field include acquiring the bills for material, lumber for the house being built, and more. Construction managers also coordinate labor, determining the needs and overseeing their performance, ensuring that all work is completed on schedule.
Values including sustainability, reuse, LEED-certified building, use of green energy, and various energy efficiencies are being incorporated into today’s projects with an eye to the future. Jennifer Russell, spoke about project management and global sustainability” at the 2011 Silicon Valley Project Management Institute (PMI) conference. She informed the attendees of the financial, environmental, and social areas in expanding the vision of project management with the slide in Figure 1.2. These values are part of the PMI’s code of ethics and professionalism. By adhering to this code, project managers include in their decisions the best interests of society, the safety of the public, and enhancement of the environment.
Creative Services
Creative service careers include graphic artists, curators, video editors, gaming managers, multimedia artists, media producers, technical writers, interpreters, and translators. These positions use project management skills, especially in handling the delivery channel and meeting clients’ requirements.
Let us look at one example, graphic artists, to understand and identify some of the project management skills that aid in this career.
Example: Graphic Artists
Graphic artists plan, analyze, and create visual solutions to communication problems. They use many skills found in project management, especially communications. They work to achieve the most effective way to get messages across in print and electronic media. They emphasize their messages using colour, type, illustration, photography, animation, and various print and layout techniques. Results can be seen in magazines, newspapers, journals, corporate reports, and other publications. Other deliverables from graphic artists using project management skills include promotional displays, packaging, and marketing brochures supporting products and services, logos, and signage. In addition to print media, graphic artists create materials for the web, TV, movies, and mobile device apps.
Initiation in project management can be seen in developing a new design: determining the needs of the client, the message the design should portray, and its appeal to customers or users. Graphic designers consider cognitive, cultural, physical, and social factors in planning and executing designs for the target audience, very similar to some of the dynamics a project manager considers in communicating with various project stakeholders. Designers may gather relevant information by meeting with clients, creative staff, or art directors; brainstorming with others within their firm or professional association; and performing their own research to ensure that their results have high quality and they can manage risks.
Graphic designers may supervise assistants who follow instructions to complete parts of the design process. Therefore scheduling, resource planning, and cost monitoring are pillars of project management seen in this industry. These artists use computer and communications equipment to meet their clients’ needs and business requirements in a timely and cost-efficient manner.
Educators
“Educator” is a broad term that can describe a career in teaching, maybe being a lecturer, a professor, a tutor, or a home-schooler. Other educators include gurus, mullahs, pastors, rabbis, and priests. Instructors also provide vocational training or teach skills like learning how to drive a car or use a computer. Educators provide motivation to learn a new language or showcase new products and services. Educators use project management skills including planning and communication.
Let us look at teachers, since we all have had teachers, and see if we can recognize the project management skills that are demonstrated in this profession.
Example: Teachers
Some teachers foster the intellectual and social development of children during their formative years; other teachers provide knowledge, career skill sets, and guidance to adults. Project management skills that teachers exhibit include acting as facilitators or coaches and communicating in the classroom and in individual instruction. Project managers plan and evaluate various aspects of a project; teachers plan, evaluate, and assign lessons; implement these plans; and monitor each student’s progress similar to the way a project manager monitors and delivers goods or services. Teachers use their people skills to manage students, parents, and administrators. The soft skills that project managers exercise can be seen in teachers who encourage collaboration in solving problems by having students work in groups to discuss and solve problems as a team.
Project managers may work in a variety of fields with a broad assortment of people, similar to teachers who work with students from varied ethnic, racial, and religious backgrounds. These teachers must have awareness and understanding of different cultures.
Teachers in some schools may be involved in making decisions regarding the budget, personnel, textbooks, curriculum design, and teaching methods, demonstrating skills that a project manager would possess such as financial management and decision making.
Engineers
Engineers apply the principles of science and mathematics to develop economical solutions to technical problems. As a project cycles from an idea in the project charter to the implementation and delivery of a product or service, engineers link scientific discoveries to commercial applications that meet societal and consumer needs.
Engineers use many project management skills, especially when they must specify functional requirements. They demonstrate attention to quality as they evaluate a design’s overall effectiveness, cost, reliability, and safety similar to the project manager reviewing the criteria for the customer’s acceptance of delivery of the product or service.
Estimation skills in project management are used in engineering. Engineers are asked many times to provide an estimate of time and cost required to complete projects.
Health Care
There are many jobs and careers in health care that use project management skills. Occupations in the field of health care vary widely, such as athletic trainer, dental hygienist, massage therapist, occupational therapist, optometrist, nurse, physician, physician assistant, and X-ray technician. These individuals actively apply risk management in providing health care delivery of service to their clients, ensuring that they do not injure the person they are caring for. Note: There is a section on nursing later in this chapter.
Many of you may have had a fall while you were growing up, and needed an X-ray to determine if you had a fracture or merely a sprain. Let us look at this career as an example of a health care professional using project management skills.
Example: Radiology Technologists
Radiology technologists and technicians perform diagnostic imaging examinations like X-rays, computed tomography (CT), magnetic resonance imaging (MRI), and mammography. They could also be called radiographers, because they produce X-ray films (radiographs) of parts of the human body for use in diagnosing medical problems.
Project management skills, especially people skills and strong communication, are demonstrated when they prepare patients for radiologic examinations by explaining the procedure and what position the patient needs to be in, so that the parts of the body can be appropriately radiographed. Risk management is demonstrated when these professionals work to prevent unnecessary exposure to radiation by surrounding the exposed area with radiation protection devices, such as lead shields, or limiting the size of the X-ray beam. To ensure quality results, the health technician monitors the radiograph and sets controls on the X-ray machine to produce radiographs of the appropriate density, detail, and contrast.
Safety and regulations concerning the use of radiation to protect themselves, their patients, and their coworkers from unnecessary exposure is tracked in an efficient manner and reported as a control to ensure compliance. Project management skills are also used in preparing work schedules, evaluating equipment for purchase, or managing a radiology department.
Some radiological technologists specialize in CT scans; as CT technologists they too use project management skills. CT uses ionizing radiation to produce a substantial number of cross-sectional X-rays of an area of the body. Therefore, it requires the same precautionary measures that are used with X-rays, hence the need for risk management and monitoring for exposure.
Teamwork, not only with the patient that the radiological technologist supports and the doctor who ordered the request, but also with other health care providers, relies on strong communication, quality, work done in a timely manner, and wise use of hospital resources. This all boils down to ensuring that the three elements of the project management triangle of cost, schedule, and scope with quality delivered remain the essentials that provide a cornerstone to project management and the skills needed to obtain the objective.
Example: Nurses
Nurses treat and educate patients and their families and the public about various medical conditions and provide advice and emotional support. Nurses establish a care plan for their patients that include activities like scheduling the administration and discontinuation of medications (e.g., intravenous (IV) lines for fluid, medication, blood, and blood products) and application of therapies and treatments. Communication with the patient, their family, physicians and other health care clinicians may be done in person or via technology. Telehealth allows nurses to provide care and advice through electronic communications media including videoconferencing, the Internet, or telephone.
Risk management is very important for a nurse, with some cases having a life or death consequence. Nurses monitor pain management and vital signs and provide status reports to physicians to help in responding to the health care needs of the patient.
The nursing field varies. Some nurses work in infection control. They identify, track, and control infectious outbreaks in health care facilities and create programs for outbreak prevention and response to biological terrorism. Others are educators who plan, develop, execute, and evaluate educational programs and curricula for the professional development of students and graduate nurses. Nurses may use project management skills while conducting health care consultations, advising on public policy, researching in the field, or providing sales support of a product or service.
Paralegal
Attorneys assume the ultimate responsibility for legal work but they often obtain assistance. Paralegals assume this role in law firms and perform many tasks to aid the legal profession. However, they are explicitly prohibited from carrying out duties considered to be the practice of law (e.g., giving legal advice, setting legal fees, presenting court cases).
Project management skills such as planning are used in helping lawyers prepare for closings, hearings, trials, and corporate meetings. Communication skills are used in preparing written reports that help attorneys determine how cases should be handled or drafts for actions such as pleading, filing motions, and obtaining affidavits.
Monitoring skills aid paralegals who may track files of important case documents, working on risk containment related to filing dates and responses to the court. Procurement skills, which a project manager uses, can also be seen from a paralegal perspective in negotiating terms of hiring expert witnesses as well as other services such as acquiring services from process servers.
Financial skills may be used as well, such as assisting in preparing tax returns, establishing trust funds, and planning estates or maintaining financial office records at the law firm.
Government, litigation, personal injury, corporate law, criminal law, employee benefits, intellectual property, labour law, bankruptcy, immigration, family law, and real estate are some of the many different law practices where a paralegal professional may use project management skills.
Software developer
Computer software developers and computer programmers design and develop software. They apply the principles of computer science and mathematics to create, test, and evaluate software applications and systems that make computers come alive. Software is developed in many kinds of projects: computer games, business applications, operating systems, network control systems, and more. Software developers us project management skills to develop the requirements for the software, identify and track the product development tasks, communicate within the development team and with clients, test cases, and manage quality, the schedule, and resources (staff, equipment, labs, and more).
Science Technicians
Science technicians use principles and theories of science and mathematics to assist in research and development and help invent and improve products and processes. In their jobs, they are more practically oriented than scientists. Planning skills project managers use can be seen as science technicians set up, operate, and maintain labouratory instruments; monitor experiments; and observe, calculate, and record results. Quality is a factor here as it is in project management; science technicians must ensure that processes are performed correctly, with proper proportions of ingredients, for purity or for strength and durability.
There are different fields in which science technicians can apply project management skills. Agricultural and food science technicians test food and other agricultural products and are involved in food, fibre, and animal research, production, and processing. Control and risk management are important here in executing the tests and experiments, for example, to improve the yield and quality of crops, or the resistance of plants and animals to disease, insects, or other hazards. Quality factors are paramount when food science technicians conduct tests on food additives and preservatives to ensure compliance with government regulations regarding colour, texture, and nutrients.
Biological technicians work with biologists studying living organisms. Many assist scientists who conduct medical research or who work in pharmaceutical companies to help develop and manufacture medicines. Skills in scheduling, especially in incubation periods for the study of the impact on cells, could impact projects, such as exploring and isolating variables for research in living organisms and infectious agents. Biotechnology technicians apply knowledge and execution skills and techniques gained from basic research, including gene splicing and recombinant DNA, to product development. Project management skills are used in collaboration and communication among team members to record and understand the results and progress toward a cure or product.
Other kinds of technicians are chemical technicians who may work in labouratories or factories, using monitoring and control skills in the way they collect and analyze samples. Again, quality assurance is an important factor for most process technicians’ work in manufacturing, testing packaging for design, ensuring integrity of materials, and verifying environmental acceptability.
Technicians use a project management skill set to assist in their initiation, planning, and executing tasks, while managing risks with some measure of reporting to determine if their objectives satisfy the constraints of cost, schedule, resource, and quality standards set.
History
Could the Great Wall of China, the pyramids, or Stonehenge have been built without project management? It is possible to say that the concept of project management has been around since the beginning of history. It has enabled leaders to plan bold and massive projects and manage funding, materials, and labour within a designated time frame.
In late 19th century, in the United States, large-scale government projects were the impetus for making important decisions that became the basis for project management methodology such as the transcontinental railroad, which began construction in the 1860s. Suddenly, business leaders found themselves faced with the daunting task of organizing the manual labour of thousands of workers and the processing and assembly of unprecedented quantities of raw material.
Henry Gantt, studied in great detail the order of operations in work and is most famous for developing the Gantt chart in the 1910s. A Gantt chart (Figure 1.3) is a popular type of bar chart that illustrates a project schedule and has become a common technique for representing the phases and activities of a project so they can be understood by a wide audience. Although now a common charting technique, Gantt charts were considered revolutionary at the time they were introduced. Gantt charts were employed on major infrastructure projects in the United States including the Hoover Dam and the interstate highway system and are still accepted today as important tools in project management.
By the mid-20th century, projects were managed on an ad hoc basis using mostly Gantt charts and informal techniques and tools. During that time, the Manhattan Project was initiated and its complexity was only possible because of project management methods. The Manhattan Project was the code name given to the Allied effort to develop the first nuclear weapons during World War II. It involved over 30 different project sites in the United States and Canada, and thousands of personnel from the United States, Canada, and the U.K. Born out of a small research program that began in 1939, the Manhattan Project would eventually employ 130,000 people, cost a total of nearly US\$2 billion, and result in the creation of multiple production and research sites operated in secret. The project succeeded in developing and detonating three nuclear weapons in 1945.
The 1950s marked the beginning of the modern project management era. Two mathematical project-scheduling models were developed.
The program evaluation and review technique (PERT) was developed by Booz-Allen and Hamilton as part of the United States Navy’s Polaris missile submarine program. PERT is basically a method for analyzing the tasks involved in completing a project, especially the time needed to complete each task, the dependencies among tasks, and the minimum time needed to complete the total project (Figure 1.4).
The critical path method (CPM) was developed in a joint venture by DuPont Corporation and Remington Rand Corporation for managing plant maintenance projects. The critical path determines the float, or schedule flexibility, for each activity by calculating the earliest start date, earliest finish date, latest start date, and latest finish date for each activity. The critical path is generally the longest full path on the project. Any activity with a float time that equals zero is considered a critical path task. CPM can help you figure out how long your complex project will take to complete and which activities are critical, meaning they have to be done on time or else the whole project will take longer. These mathematical techniques quickly spread into many private enterprises.
Project management in its present form began to take root a few decades ago. In the early 1960s, industrial and business organizations began to understand the benefits of organizing work around projects. They understood the critical need to communicate and integrate work across multiple departments and professions.
Text Attributions
This chapter of Project Management is a derivative and remix of the following sources: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.01%3A_Project_Management_-_Past_and_Present.txt |
The starting point in discussing how projects should be properly managed is to first understand what a project is and, just as importantly, what it is not.
People have been undertaking projects since the earliest days of organized human activity. The hunting parties of our prehistoric ancestors were projects, for example; they were temporary undertakings directed at the goal of obtaining meat for the community. Large complex projects have also been with us for a long time. The pyramids and the Great Wall of China were in their day of roughly the same dimensions as the Apollo project to send men to the moon. We use the term “project” frequently in our daily conversations. A husband, for example may tell his wife, “My main project for this weekend is to straighten out the garage.” Going hunting, building pyramids, and fixing faucets all share certain features that make them projects.
Project Attributes
A project has distinctive attributes that distinguish it from ongoing work or business operations. Projects are temporary in nature. They are not an everyday business process and have definitive start dates and end dates. This characteristic is important because a large part of the project effort is dedicated to ensuring that the project is completed at the appointed time. To do this, schedules are created showing when tasks should begin and end. Projects can last minutes, hours, days, weeks, months, or years.
Projects exist to bring about a product or service that hasn’t existed before. In this sense, a project is unique. Unique means that this is new; this has never been done before. Maybe it’s been done in a very similar fashion before but never exactly in this way. For example, Ford Motor Company is in the business of designing and assembling cars. Each model that Ford designs and produces can be considered a project. The models differ from each other in their features and are marketed to people with various needs. An SUV serves a different purpose and clientele than a luxury car. The design and marketing of these two models are unique projects. However, the actual assembly of the cars is considered an operation (i.e., a repetitive process that is followed for most makes and models).
In contrast with projects, operations are ongoing and repetitive. They involve work that is continuous without an ending date and with the same processes repeated to produce the same results. The purpose of operations is to keep the organization functioning while the purpose of a project is to meet its goals and conclude. Therefore, operations are ongoing while projects are unique and temporary.
A project is completed when its goals and objectives are accomplished. It is these goals that drive the project, and all the planning and implementation efforts undertaken to achieve them. Sometimes projects end when it is determined that the goals and objectives cannot be accomplished or when the product or service of the project is no longer needed and the project is cancelled.
Definition of a Project
There are many written definitions of a project. All of them contain the key elements described above. For those looking for a formal definition of a project, the Project Management Institute (PMI) defines a project as a temporary endeavor undertaken to create a unique product, service, or result. The temporary nature of projects indicates a definite beginning and end. The end is reached when the project’s objectives have been achieved or when the project is terminated because its objectives will not or cannot be met, or when the need for the project no longer exists.
Project Characteristics
When considering whether or not you have a project on your hands, there are some things to keep in mind. First, is it a project or an ongoing operation? Second, if it is a project, who are the stakeholders? And third, what characteristics distinguish this endeavor as a project?
Projects have several characteristics:
• Projects are unique.
• Projects are temporary in nature and have a definite beginning and ending date.
• Projects are completed when the project goals are achieved or it’s determined the project is no longer viable.
A successful project is one that meets or exceeds the expectations of the stakeholders.
Consider the following scenario: The vice-president (VP) of marketing approaches you with a fabulous idea. (Obviously it must be “fabulous” because he thought of it.) He wants to set up kiosks in local grocery stores as mini-offices. These offices will offer customers the ability to sign up for car and home insurance services as well as make their bill payments. He believes that the exposure in grocery stores will increase awareness of the company’s offerings. He told you that senior management has already cleared the project, and he’ll dedicate as many resources to this as he can. He wants the new kiosks in place in 12 selected stores in a major city by the end of the year. Finally, he has assigned you to head up this project.
Your first question should be, “Is it a project?” This may seem elementary, but confusing projects with ongoing operations happens often. Projects are temporary in nature, have definite start and end dates, result in the creation of a unique product or service, and are completed when their goals and objectives have been met and signed off by the stakeholders.
Using these criteria, let’s examine the assignment from the VP of marketing to determine if it is a project:
• Is it unique? Yes, because the kiosks don’t exist in the local grocery stores. This is a new way of offering the company’s services to its customer base. While the service the company is offering isn’t new, the way it is presenting its services is.
• Does the product have a limited timeframe? Yes, the start date of this project is today, and the end date is the end of next year. It is a temporary endeavor.
• Is there a way to determine when the project is completed? Yes, the kiosks will be installed and the services will be offered from them. Once all the kiosks are installed and operating, the project will come to a close.
• Is there a way to determine stakeholder satisfaction? Yes, the expectations of the stakeholders will be documented in the form of requirements during the planning processes. These requirements will be compared to the finished product to determine if it meets the expectations of the stakeholder.
If the answer is yes to all these questions, then we have a project.
The Process of Project Management
You’ve determined that you have a project. What now? The notes you scribbled down on the back of the napkin at lunch are a start, but not exactly good project management practice. Too often, organizations follow Nike’s advice when it comes to managing projects when they “just do it.” An assignment is made, and the project team members jump directly into the development of the product or service requested. In the end, the delivered product doesn’t meet the expectations of the customer. Unfortunately, many projects follow this poorly constructed path, and that is a primary contributor to a large percentage of projects not meeting their original objectives, as defined by performance, schedule, and budget.
In the United States, more than \$250 billion is spent each year on information technology (IT) application development in approximately 175,000 projects. The Standish Group (a Boston-based leader in project and value performance research) released the summary version of their 2009 CHAOS Report that tracks project failure rates across a broad range of companies and industries (Figure 2.1).
Jim Johnson, chairman of the Standish Group, has stated that “this year’s results show a marked decrease in project success rates, with 32% of all projects succeeding which are delivered on time, on budget, with required features and functions, 44% were challenged-which are late, over budget, and/or with less than the required features and functions and 24% failed which are cancelled prior to completion or delivered and never used.”
When are companies going to stop wasting billions of dollars on failed projects? The vast majority of this waste is completely avoidable: simply get the right business needs (requirements) understood early in the process and ensure that project management techniques are applied and followed, and the project activities are monitored.
Applying good project management discipline is the way to help reduce the risks. Having good project management skills does not completely eliminate problems, risks, or surprises. The value of good project management is that you have standard processes in place to deal with all contingencies.
Project management is the application of knowledge, skills, tools, and techniques applied to project activities in order to meet the project requirements. Project management is a process that includes planning, putting the project plan into action, and measuring progress and performance.
Managing a project includes identifying your project’s requirements and writing down what everyone needs from the project. What are the objectives for your project? When everyone understands the goal, it’s much easier to keep them all on the right path. Make sure you set goals that everyone agrees on to avoid team conflicts later on. Understanding and addressing the needs of everyone affected by the project means the end result of your project is far more likely to satisfy your stakeholders. Last but not least, as project manager, you will also be balancing the many competing project constraints.
On any project, you will have a number of project constraints that are competing for your attention. They are cost, scope, quality, risk, resources, and time.
• Cost is the budget approved for the project including all necessary expenses needed to deliver the project. Within organizations, project managers have to balance between not running out of money and not underspending because many projects receive funds or grants that have contract clauses with a “use it or lose it” approach to project funds. Poorly executed budget plans can result in a last-minute rush to spend the allocated funds. For virtually all projects, cost is ultimately a limiting constraint; few projects can go over budget without eventually requiring a corrective action.
• Scope is what the project is trying to achieve. It entails all the work involved in delivering the project outcomes and the processes used to produce them. It is the reason and the purpose of the project.
• Quality is a combination of the standards and criteria to which the project’s products must be delivered for them to perform effectively. The product must perform to provide the functionality expected, solve the identified problem, and deliver the benefit and value expected. It must also meet other performance requirements, or service levels, such as availability, reliability, and maintainability, and have acceptable finish and polish. Quality on a project is controlled through quality assurance (QA), which is the process of evaluating overall project performance on a regular basis to provide confidence that the project will satisfy the relevant quality standards.
• Risk is defined by potential external events that will have a negative impact on your project if they occur. Risk refers to the combination of the probability the event will occur and the impact on the project if the event occurs. If the combination of the probability of the occurrence and the impact on the project is too high, you should identify the potential event as a risk and put a proactive plan in place to manage the risk.
• Resources are required to carry out the project tasks. They can be people, equipment, facilities, funding, or anything else capable of definition (usually other than labour) required for the completion of a project activity.
• Time is defined as the time to complete the project. Time is often the most frequent project oversight in developing projects. This is reflected in missed deadlines and incomplete deliverables. Proper control of the schedule requires the careful identification of tasks to be performed and accurate estimations of their durations, the sequence in which they are going to be done, and how people and other resources are to be allocated. Any schedule should take into account vacations and holidays.
You may have heard of the term “triple constraint,” which traditionally consisted of only time, cost, and scope. These are the primary competing project constraints that you have to be most aware of. The triple constraint is illustrated in the form of a triangle to visualize the project work and see the relationship between the scope/quality, schedule/time, and cost/resource (Figure 2.2). In this triangle, each side represents one of the constraints (or related constraints) wherein any changes to any one side cause a change in the other sides. The best projects have a perfectly balanced triangle. Maintaining this balance is difficult because projects are prone to change. For example, if scope increases, cost and time may increase disproportionately. Alternatively, if the amount of money you have for your project decreases, you may be able to do as much, but your time may increase.
Your project may have additional constraints that you must face, and as the project manager, you have to balance the needs of these constraints against the needs of the stakeholders and your project goals. For instance, if your sponsor wants to add functionality to the original scope, you will very likely need more money to finish the project, or if they cut the budget, you will have to reduce the quality of your scope, and if you don’t get the appropriate resources to work on your project tasks, you will have to extend your schedule because the resources you have take much longer to finish the work.
You get the idea; the constraints are all dependent on each other. Think of all of these constraints as the classic carnival game of Whac-a-mole (Figure 2.3). Each time you try to push one mole back in the hole, another one pops out. The best advice is to rely on your project team to keep these moles in place.
Here is an example of a project that cut quality because the project costs were fixed. The P-36 oil platform (Figure 2.4) was the largest footing production platform in the world capable of processing 180,000 barrels of oil per day and 5.2 million cubic metres of gas per day. Located in the Roncador Field, Campos Basin, Brazil, the P-36 was operated by Petrobras.
In March 2001, the P-36 was producing around 84,000 barrels of oil and 1.3 million cubic metres of gas per day when it became destabilized by two explosions and subsequently sank in 3,900 feet of water with 1,650 short tons of crude oil remaining on board, killing 11 people. The sinking is attributed to a complete failure in quality assurance, and pressure for increased production led to corners being cut on safety procedures. It is listed as one of the most expensive accidents with a price tag of \$515,000,000.
The following quotes are from a Petrobras executive, citing the benefits of cutting quality assurance and inspection costs on the project.
“Petrobras has established new global benchmarks for the generation of exceptional shareholder wealth through an aggressive and innovative program of cost cutting on its P36 production facility.”
“Conventional constraints have been successfully challenged and replaced with new paradigms appropriate to the globalized corporate market place.”
“Elimination of these unnecessary straitjackets has empowered the project’s suppliers and contractors to propose highly economical solutions, with the win-win bonus of enhanced profitability margins for themselves.”
“The P36 platform shows the shape of things to come in the unregulated global market economy of the 21st century.”
The dynamic trade-offs between the project constraint values have been humorously and accurately described in Figure 2.5.
Project Management Expertise
In order for you, as the project manager, to manage the competing project constraints and the project as a whole, there are some areas of expertise you should bring to the project team (Figure 2.11). They are knowledge of the application area and the standards and regulations in your industry, understanding of the project environment, general management knowledge and skills, and interpersonal skills. It should be noted that industry expertise is not in a certain field but the expertise to run the project. So while knowledge of the type of industry is important, you will have a project team supporting you in this endeavor. For example, if you are managing a project that is building an oil platform, you would not be expected to have a detailed understanding of the engineering since your team will have mechanical and civil engineers who will provide the appropriate expertise; however, it would definitely help if you understood this type of work.
Let’s take a look at each of these areas in more detail.
Application knowledge
By standards, we mean guidelines or preferred approaches that are not necessarily mandatory. In contrast, when referring to regulations we mean mandatory rules that must be followed, such as government-imposed requirements through laws. It should go without saying that as a professional, you’re required to follow all applicable laws and rules that apply to your industry, organization, or project. Every industry has standards and regulations. Knowing which ones affect your project before you begin work will not only help the project to unfold smoothly, but will also allow for effective risk analysis.
Some projects require specific skills in certain application areas. Application areas are made up of categories of projects that have common elements. They can be defined by industry group (pharmaceutical, financial, etc.), department (accounting, marketing, legal, etc.), technology (software development, engineering, etc), or management specialties (procurement, research and development, etc.). These application areas are usually concerned with disciplines, regulations, and the specific needs of the project, the customer, or the industry. For example, most government agencies have specific procurement rules that apply to their projects that wouldn’t be applicable in the construction industry. The pharmaceutical industry is interested in regulations set forth by government regulators, whereas the automotive industry has little or no concern for either of these types of regulations. You need to stay up-to-date regarding your industry so that you can apply your knowledge effectively. Today’s fast-paced advances can leave you behind fairly quickly if you don’t stay abreast of current trends.
Having some level of experience in the application area you’re working in will give you an advantage when it comes to project management. While you can call in experts who have the application area knowledge, it doesn’t hurt for you to understand the specific aspects of the application areas of your project.
Understanding the Project Environment
There are many factors that need to be understood within your project environment (Figure 2.7). At one level, you need to think in terms of the cultural and social environments (i.e., people, demographics, and education). The international and political environment is where you need to understand about different countries’ cultural influences. Then we move to the physical environment; here we think about time zones. Think about different countries and how differently your project will be executed whether it is just in your country or if it involves an international project team that is distributed throughout the world in five different countries.
Of all the factors, the physical ones are the easiest to understand, and it is the cultural and international factors that are often misunderstood or ignored. How we deal with clients, customers, or project members from other countries can be critical to the success of the project. For example, the culture of the United States values accomplishments and individualism. Americans tend to be informal and call each other by first names, even if having just met. Europeans tend to be more formal, using surnames instead of first names in a business setting, even if they know each other well. In addition, their communication style is more formal than in the United States, and while they tend to value individualism, they also value history, hierarchy, and loyalty. The Japanese, on the other hand, tend to communicate indirectly and consider themselves part of a group, not as individuals. The Japanese value hard work and success, as most of us do.
How a product is received can be very dependent on the international cultural differences. For example, in the 1990s, when many large American and European telecommunications companies were cultivating new markets in Asia, their customer’s cultural differences often produced unexpected situations. Western companies planned their telephone systems to work the same way in Asia as they did in Europe and the United States. But the protocol of conversation was different. Call-waiting, a popular feature in the West, is considered impolite in some parts of Asia. This cultural blunder could have been avoided had the team captured the project environment requirements and involved the customer.
It is often the simplest things that can cause trouble since, unsurprisingly, in different countries, people do things differently. One of the most notorious examples of this is also one of the most simple: date formats. What day and month is 2/8/2009? Of course it depends where you come from; in North America it is February 8th while in Europe (and much of the rest of the world) it is 2nd August. Clearly, when schedules and deadlines are being defined it is important that everyone is clear on the format used.
The diversity of practices and cultures and its impact on products in general and on software in particular goes well beyond the date issue. You may be managing a project to create a new website for a company that sells products worldwide. There are language and presentation style issues to take into consideration; converting the site into different languages isn’t enough. It is obvious that you need to ensure the translation is correct; however, the presentation layer will have its own set of requirements for different cultures. The left side of a website may be the first focus of attention for a Canadian; the right side would be the initial focus for anyone from the Middle East, as both Arabic and Hebrew are written from right to left. Colors also have different meanings in different cultures. White, which is a sign of purity in North America (e.g., a bride’s wedding dress), and thus would be a favoured background colour in North America, signifies death in Japan (e.g., a burial shroud). Table 2.1 summarizes different meanings of common colours.
Table 2.1: The meaning of colours in various cultures.
Colour United States China Japan Egypt France
Red Danger, stop Happiness Anger, danger Death Aristocracy
Blue Sadness, melancholy Heavens, clouds Villainy Virtue, faith, truth Freedom, peace
Green Novice, apprentice Ming dynasty, heavens Future, youth, energy Fertility, strength Criminality
Yellow Cowardice Birth, wealth Grace, nobility Happiness, prosperity Temporary
White Purity Death, purity Death Joy Naturality
Project managers in multicultural projects must appreciate the culture dimensions and try to learn relevant customs, courtesies, and business protocols before taking responsibility for managing an international project. A project manager must take into consideration these various cultural influences and how they may affect the project’s completion, schedule, scope, and cost.
Management Knowledge and Skills
As the project manager, you have to rely on your project management knowledge and your general management skills. Here, we are thinking of items like your ability to plan the project, execute it properly, and of course control it and bring it to a successful conclusion, along with your ability to guide the project team to achieve project objectives and balance project constraints.
There is more to project management than just getting the work done. Inherent in the process of project management are the general management skills that allow the project manager to complete the project with some level of efficiency and control. In some respects, managing a project is similar to running a business: there are risk and rewards, finance and accounting activities, human resource issues, time management, stress management, and a purpose for the project to exist. General management skills are needed in every project.
Interpersonal Skills
Last but not least you also have to bring the ability into the project to manage personal relationships and deal with personnel issues as they arise. Here were talking about your interpersonal skills as shown in Figure 2.8.
Communication
Project managers spend 90% of their time communicating. Therefore they must be good communicators, promoting clear, unambiguous exchange of information. As a project manager, it is your job to keep a number of people well informed. It is essential that your project staff know what is expected of them: what they have to do, when they have to do it, and what budget and time constraints and quality specifications they are working toward. If project staff members do not know what their tasks are, or how to accomplish them, then the entire project will grind to a halt. If you do not know what the project staff is (or often is not) doing, then you will be unable to monitor project progress. Finally, if you are uncertain of what the customer expects of you, then the project will not even get off the ground. Project communication can thus be summed up as knowing “who needs what information and when” and making sure they have it.
All projects require sound communication plans, but not all projects will have the same types of communication or the same methods for distributing the information. For example, will information be distributed via mail or email, is there a shared website, or are face-to-face meetings required? The communication management plan documents how the communication needs of the stakeholders will be met, including the types of information that will be communicated, who will communicate them, and who will receive them; the methods used to communicate; the timing and frequency of communication; the method for updating the plan as the project progresses, including the escalation process; and a glossary of common terms.
Influence
Project management is about getting things done. Every organization is different in its policies, modes of operations, and underlying culture. There are political alliances, differing motivations, conflicting interests, and power struggles. A project manager must understand all of the unspoken influences at work within an organization.
Leadership
Leadership is the ability to motivate and inspire individuals to work toward expected results. Leaders inspire vision and rally people around common goals. A good project manager can motivate and inspire the project team to see the vision and value of the project. The project manager as a leader can inspire the project team to find a solution to overcome perceived obstacles to get the work done.
Motivation
Motivation helps people work more efficiently and produce better results. Motivation is a constant process that the project manager must guide to help the team move toward completion with passion and a profound reason to complete the work. Motivating the team is accomplished by using a variety of team-building techniques and exercises. Team building is simply getting a diverse group of people to work together in the most efficient and effective manner possible. This may involve management events as well as individual actions designed to improve team performance.
Recognition and rewards are an important part of team motivations. They are formal ways of recognizing and promoting desirable behaviour and are most effective when carried out by the management team and the project manager. Consider individual preferences and cultural differences when using rewards and recognition. Some people don’t like to be recognized in front of a group; others thrive on it.
Negotiation
Project managers must negotiate for the good of the project. In any project, the project manager, the project sponsor, and the project team will have to negotiate with stakeholders, vendors, and customers to reach a level of agreement acceptable to all parties involved in the negotiation process.
Problem Solving
Problem solving is the ability to understand the heart of a problem, look for a viable solution, and then make a decision to implement that solution. The starting point for problem solving is problem definition. Problem definition is the ability to understand the cause and effect of the problem; this centres on root-cause analysis. If a project manager treats only the symptoms of a problem rather than its cause, the symptoms will perpetuate and continue through the project life. Even worse, treating a symptom may result in a greater problem. For example, increasing the ampere rating of a fuse in your car because the old one keeps blowing does not solve the problem of an electrical short that could result in a fire. Root-cause analysis looks beyond the immediate symptoms to the cause of the symptoms, which then affords opportunities for solutions. Once the root of a problem has been identified, a decision must be made to effectively address the problem.
Solutions can be presented from vendors, the project team, the project manager, or various stakeholders. A viable solution focuses on more than just the problem; it looks at the cause and effect of the solution itself. In addition, a timely decision is needed or the window of opportunity may pass and then a new decision will be needed to address the problem. As in most cases, the worst thing you can do is nothing.
All of these interpersonal skills will be used in all areas of project management. Start practicing now because it’s guaranteed that you’ll need these skills on your next project.
Image Descriptions
Figure 2.5 image description: The sign says, “We can do good, quick, and cheap work. You can have any two but not all three. 1. Good, quick work won’t be cheap. 2. Good, cheap work won’t be quick. 3. Quick, cheap work won’t be good.” [Return to Figure 2.5] | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.02%3A_Project_Management_Overview.txt |
The project manager and project team have one shared goal: to carry out the work of the project for the purpose of meeting the project’s objectives. Every project has a beginning, a middle period during which activities move the project toward completion, and an ending (either successful or unsuccessful). A standard project typically has the following four major phases (each with its own agenda of tasks and issues): initiation, planning, implementation, and closure. Taken together, these phases represent the path a project takes from the beginning to its end and are generally referred to as the project “life cycle.”
Initiation Phase
During the first of these phases, the initiation phase, the project objective or need is identified; this can be a business problem or opportunity. An appropriate response to the need is documented in a business case with recommended solution options. A feasibility study is conducted to investigate whether each option addresses the project objective and a final recommended solution is determined. Issues of feasibility (“can we do the project?”) and justification (“should we do the project?”) are addressed.
Once the recommended solution is approved, a project is initiated to deliver the approved solution and a project manager is appointed. The major deliverables and the participating work groups are identified, and the project team begins to take shape. Approval is then sought by the project manager to move onto the detailed planning phase.
Planning Phase
The next phase, the planning phase, is where the project solution is further developed in as much detail as possible and the steps necessary to meet the project’s objective are planned. In this step, the team identifies all of the work to be done. The project’s tasks and resource requirements are identified, along with the strategy for producing them. This is also referred to as “scope management.” A project plan is created outlining the activities, tasks, dependencies, and timeframes. The project manager coordinates the preparation of a project budget by providing cost estimates for the labour, equipment, and materials costs. The budget is used to monitor and control cost expenditures during project implementation.
Once the project team has identified the work, prepared the schedule, and estimated the costs, the three fundamental components of the planning process are complete. This is an excellent time to identify and try to deal with anything that might pose a threat to the successful completion of the project. This is called risk management. In risk management, “high-threat” potential problems are identified along with the action that is to be taken on each high-threat potential problem, either to reduce the probability that the problem will occur or to reduce the impact on the project if it does occur. This is also a good time to identify all project stakeholders and establish a communication plan describing the information needed and the delivery method to be used to keep the stakeholders informed.
Finally, you will want to document a quality plan, providing quality targets, assurance, and control measures, along with an acceptance plan, listing the criteria to be met to gain customer acceptance. At this point, the project would have been planned in detail and is ready to be executed.
Implementation (Execution) Phase
During the third phase, the implementation phase, the project plan is put into motion and the work of the project is performed. It is important to maintain control and communicate as needed during implementation. Progress is continuously monitored and appropriate adjustments are made and recorded as variances from the original plan. In any project, a project manager spends most of the time in this step. During project implementation, people are carrying out the tasks, and progress information is being reported through regular team meetings. The project manager uses this information to maintain control over the direction of the project by comparing the progress reports with the project plan to measure the performance of the project activities and take corrective action as needed. The first course of action should always be to bring the project back on course (i.e., to return it to the original plan). If that cannot happen, the team should record variations from the original plan and record and publish modifications to the plan. Throughout this step, project sponsors and other key stakeholders should be kept informed of the project’s status according to the agreed-on frequency and format of communication. The plan should be updated and published on a regular basis.
Status reports should always emphasize the anticipated end point in terms of cost, schedule, and quality of deliverables. Each project deliverable produced should be reviewed for quality and measured against the acceptance criteria. Once all of the deliverables have been produced and the customer has accepted the final solution, the project is ready for closure.
Closing Phase
During the final closure, or completion phase, the emphasis is on releasing the final deliverables to the customer, handing over project documentation to the business, terminating supplier contracts, releasing project resources, and communicating the closure of the project to all stakeholders. The last remaining step is to conduct lessons-learned studies to examine what went well and what didn’t. Through this type of analysis, the wisdom of experience is transferred back to the project organization, which will help future project teams.
Example: Project Phases on a Large Multinational Project
A U.S. construction company won a contract to design and build the first copper mine in northern Argentina. There was no existing infrastructure for either the mining industry or large construction projects in this part of South America. During the initiation phase of the project, the project manager focused on defining and finding a project leadership team with the knowledge, skills, and experience to manage a large complex project in a remote area of the globe. The project team set up three offices. One was in Chile, where large mining construction project infrastructure existed. The other two were in Argentina. One was in Buenos Aries to establish relationships and Argentinian expertise, and the second was in Catamarca—the largest town close to the mine site. With offices in place, the project start-up team began developing procedures for getting work done, acquiring the appropriate permits, and developing relationships with Chilean and Argentine partners.
During the planning phase, the project team developed an integrated project schedule that coordinated the activities of the design, procurement, and construction teams. The project controls team also developed a detailed budget that enabled the project team to track project expenditures against the expected expenses. The project design team built on the conceptual design and developed detailed drawings for use by the procurement team. The procurement team used the drawings to begin ordering equipment and materials for the construction team; develop labour projections; refine the construction schedule; and set up the construction site. Although planning is a never-ending process on a project, the planning phase focused on developing sufficient details to allow various parts of the project team to coordinate their work and allow the project management team to make priority decisions.
The implementation phase represents the work done to meet the requirements of the scope of work and fulfill the charter. During the implementation phase, the project team accomplished the work defined in the plan and made adjustments when the project factors changed. Equipment and materials were delivered to the work site, labour was hired and trained, a construction site was built, and all the construction activities, from the arrival of the first dozer to the installation of the final light switch, were accomplished.
The closeout phase included turning over the newly constructed plant to the operations team of the client. A punch list of a few remaining construction items was developed and those items completed. The office in Catamarca was closed, the office in Buenos Aries archived all the project documents, and the Chilean office was already working on the next project. The accounting books were reconciled and closed, final reports written and distributed, and the project manager started on a new project.
Text Attributions
This chapter of Project Management is a derivative the following texts: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.03%3A_The_Project_Life_Cycle_%28Phases%29.txt |
Many different professions contribute to the theory and practice of project management. Engineers and architects have been managing major projects since pre-history. Since approximately the 1960s, there have been efforts to professionalize the practice of project management as a specialization of its own. There are many active debates around this: Should project management be a profession in the same way as engineering, accounting, and medicine? These have professional associations that certify who is legally allowed to use the job title, and who can legally practice the profession. They also provide a level of assurance of quality and discipline members who behave inappropriately. Another ongoing debate is: How much industry knowledge is required of a seasoned project manager? How easily can a project manager from one industry, say, IT, transition to another industry such as hospitality?
There are two major organizations with worldwide impact on the practice of project management: the Project Management Institute (PMI), with world headquarters in the United States, and the International Project Management Association (IPMA), with world headquarters in Switzerland. This textbook takes an approach that is closer to the PMI approach. More details are included in this chapter, along with a section on the project management office.
Project Management Institute Overview
Five volunteers founded the Project Management Institute (PMI) in 1969. Their initial goal was to establish an organization where members could share their experiences in project management and discuss issues. Today, PMI is a non-profit project management professional association and the most widely recognized organization in terms of promoting project management best practices. PMI was formed to serve the interests of the project management industry. The premise of PMI is that the tools and techniques of project management are common even among the widespread application of projects from the software to the construction industry. PMI first began offering the Project Management Professional (PMP) certification exam in 1984. Although it took a while for people to take notice, now more than 590,000 individuals around the world hold the PMP designation.
To help keep project management terms and concepts clear and consistent, PMI introduced the book A Guide to the Project Management Body of Knowledge (PMBOK Guide) in 1987. It was updated it in 1996, 2000, 2004, 2009, and most recently in 2013 as the fifth edition. At present, there are more than one million copies of the PMBOK Guide in circulation. The highly regarded Institute of Electrical and Electronics Engineers (IEEE) has adopted it as their project management standard. In 1999 PMI was accredited as an American National Standards Institute (ANSI) standards developer and also has the distinction of being the first organization to have its certification program attain International Organization for Standardization (ISO) 9001 recognition. In 2008, the organization reported more than 260,000 members in over 171 countries. PMI has its headquarters in Pennsylvania, United States, and also has offices in Washington, DC, and in Canada, Mexico, and China, as well as having regional service centres in Singapore, Brussels (Belgium), and New Delhi (India). Recently, an office was opened in Mumbai (India).
Because of the importance of projects, the discipline of project management has evolved into a working body of knowledge known as PMBOK – Project Management Body of Knowledge. The PMI is responsible for developing and promoting PMBOK. PMI also administers a professional certification program for project managers, the PMP. So if you want to get grounded in project management, PMBOK is the place to start, and if you want to make project management your profession, then you should consider becoming a PMP.
So what is PMBOK?
PMBOK is the fundamental knowledge you need for managing a project, categorized into 10 knowledge areas:
1. Managing integration: Projects have all types of activities going on and there is a need to keep the “whole” thing moving collectively – integrating all of the dynamics that take place. Managing integration is about developing the project charter, scope statement, and plan to direct, manage, monitor, and control project change.
2. Managing scope: Projects need to have a defined parameter or scope, and this must be broken down and managed through a work breakdown structure or WBS. Managing scope is about planning, definition, WBS creation, verification, and control.
3. Managing time/schedule: Projects have a definite beginning and a definite ending date. Therefore, there is a need to manage the budgeted time according to a project schedule. Managing time/schedule is about definition, sequencing, resource and duration estimating, schedule development, and schedule control.
4. Managing costs: Projects consume resources, and therefore, there is a need to manage the investment with the realization of creating value (i.e., the benefits derived exceed the amount spent). Managing costs is about resource planning, cost estimating, budgeting, and control.
5. Managing quality: Projects involve specific deliverables or work products. These deliverables need to meet project objectives and performance standards. Managing quality is about quality planning, quality assurance, and quality control.
6. Managing human resources: Projects consist of teams and you need to manage project team(s) during the life cycle of the project. Finding the right people, managing their outputs, and keeping them on schedule is a big part of managing a project. Managing human resources is about human resources planning, hiring, and developing and managing a project team.
7. Managing communication: Projects invariably touch lots of people, not just the end users (customers) who benefit directly from the project outcomes. This can include project participants, managers who oversee the project, and external stakeholders who have an interest in the success of the project. Managing communication is about communications planning, information distribution, performance reporting, and stakeholder management.
8. Managing risk: Projects are a discovery-driven process, often uncovering new customer needs and identifying critical issues not previously disclosed. Projects also encounter unexpected events, such as project team members resigning, budgeted resources suddenly changing, the organization becoming unstable, and newer technologies being introduced. There is a real need to properly identify various risks and manage these risks. Managing risk is about risk planning and identification, risk analysis (qualitative and quantitative), risk response (action) planning, and risk monitoring and control.
9. Managing procurement: Projects procure the services of outside vendors and contractors, including the purchase of equipment. There is a need to manage how vendors are selected and managed within the project life cycle. Managing procurement is about acquisition and contracting plans, sellers’ responses and selections, contract administration, and contract closure.
10. Managing stakeholders: Every project impacts people and organizations and is impacted by people and organizations. Identifying these stakeholders early, and as they arise and change throughout the project, is a key success factor. Managing stakeholders is about identifying stakeholders, their interest level, and their potential to influence the project; and managing and controlling the relationships and communications between stakeholders and the project.
This is the big framework for managing projects and if you want to be effective in managing projects, then you need to be effective in managing each of the 10 knowledge areas that make up PMBOK (see Figure 4.1)
Certification in project management is available from the PMI, PRINCE2, ITIL, Critical Chain, and others. Agile project management methodologies (Scrum, extreme programming, Lean Six Sigma, others) also have certifications.
Introduction to the Project Management Knowledge Areas
As discussed above, projects are divided into components, and a project manager must be knowledgeable in each area. Each of these areas of knowledge will be explored in more depth in subsequent chapters. For now, lets look at them in a little more detail to prepare you for the chapters that follow.
Project Start-Up and Integration
The start-up of a project is similar to the start-up of a new organization. The project leader develops the project infrastructure used to design and execute the project. The project management team must develop alignment among the major stakeholders—those who have a share or interest—on the project during the early phases or definition phases of the project. The project manager will conduct one or more kickoff meetings or alignment sessions to bring the various parties of the project together and begin the project team building required to operate efficiently during the project.
During project start-up, the project management team refines the scope of work and develops a preliminary schedule and conceptual budget. The project team builds a plan for executing the project based on the project profile. The plan for developing and tracking the detailed schedule, the procurement plan, and the plan for building the budget and estimating and tracking costs are developed during the start-up. The plans for information technology, communication, and tracking client satisfaction are also all developed during the start-up phase of the project.
Flowcharts, diagrams, and responsibility matrices are tools to capture the work processes associated with executing the project plan. The first draft of the project procedures manual captures the historic and intuitional knowledge that team members bring to the project. The development and review of these procedures and work processes contribute to the development of the organizational structure of the project.
This is typically an exciting time on a project where all things are possible. The project management team is working many hours developing the initial plan, staffing the project, and building relationships with the client. The project manager sets the tone of the project and sets expectations for each of the project team members. The project start-up phase on complex projects can be chaotic, and until plans are developed, the project manager becomes the source of information and direction. The project manager creates an environment that encourages team members to fully engage in the project and encourages innovative approaches to developing the project plan.
Project Scope
The project scope is a document that defines the parameters—factors that define a system and determine its behaviour—of the project, what work is done within the boundaries of the project, and the work that is outside the project boundaries. The scope of work (SOW) is typically a written document that defines what work will be accomplished by the end of the project—the deliverables of the project. The project scope defines what will be done, and the project execution plan defines how the work will be accomplished.
No template works for all projects. Some projects have a very detailed scope of work, and some have a short summary document. The quality of the scope is measured by the ability of the project manager and project stakeholders to develop and maintain a common understanding of what products or services the project will deliver. The size and detail of the project scope is related to the complexity profile of the project. A more complex project often requires a more detailed and comprehensive scope document.
According to the PMI, the scope statement should include the following:
• Description of the scope
• Product acceptance criteria
• Project deliverables
• Project exclusions
• Project constraints
• Project assumptions
The scope document is the basis for agreement by all parties. A clear project scope document is also critical to managing change on a project. Since the project scope reflects what work will be accomplished on the project, any change in expectations that is not captured and documented creates the opportunity for confusion. One of the most common trends on projects is the incremental expansion in the project scope. This trend is labeled “scope creep.” Scope creep threatens the success of a project because the small increases in scope require additional resources that were not in the plan. Increasing the scope of the project is a common occurrence, and adjustments are made to the project budget and schedule to account for these changes. Scope creep occurs when these changes are not recognized or not managed. The ability of a project manager to identify potential changes is often related to the quality of the scope documents.
Events do occur that require the scope of the project to change. Changes in the marketplace may require change in a product design or the timing of the product delivery. Changes in the client’s management team or the financial health of the client may also result in changes in the project scope. Changes in the project schedule, budget, or product quality will have an effect on the project plan. Generally, the later in the project the change occurs, the greater the increase to the project costs. Establishing a change management system for the project that captures changes to the project scope and assures that these changes are authorized by the appropriate level of management in the client’s organization is the responsibility of the project manager. The project manager also analyzes the cost and schedule impact of these changes and adjusts the project plan to reflect the changes authorized by the client. Changes to the scope can cause costs to increase or decrease.
Project Schedule and Time Management
The definition of project success often includes completing the project on time. The development and management of a project schedule that will complete the project on time is a primary responsibility of the project manager, and completing the project on time requires the development of a realistic plan and the effective management of the plan. On smaller projects, project managers may lead the development of the project plan and build a schedule to meet that plan. On larger and more complex projects, a project controls team that focuses on both costs and schedule planning and controlling functions will assist the project management team in developing the plan and tracking progress against the plan.
To develop the project schedule, the project team does an analysis of the project scope, contract, and other information that helps the team define the project deliverables. Based on this information, the project team develops a milestone schedule. The milestone schedule establishes key dates throughout the life of a project that must be met for the project to finish on time. The key dates are often established to meet contractual obligations or established intervals that will reflect appropriate progress for the project. For less complex projects, a milestone schedule may be sufficient for tracking the progress of the project. For more complex projects, a more detailed schedule is required.
To develop a more detailed schedule, the project team first develops a work breakdown structure (WBS)—a description of tasks arranged in layers of detail. Although the project scope is the primary document for developing the WBS, the WBS incorporates all project deliverables and reflects any documents or information that clarifies the project deliverables. From the WBS, a project plan is developed. The project plan lists the activities that are needed to accomplish the work identified in the WBS. The more detailed the WBS, the more activities that are identified to accomplish the work.
After the project team identifies the activities, the team sequences the activities according to the order in which the activities are to be accomplished. An outcome from the work process is the project logic diagram. The logic diagram represents the logical sequence of the activities needed to complete the project. The next step in the planning process is to develop an estimation of the time it will take to accomplish each activity or the activity duration. Some activities must be done sequentially, and some activities can be done concurrently. The planning process creates a project schedule by scheduling activities in a way that effectively and efficiently uses project resources and completes the project in the shortest time.
On larger projects, several paths are created that represent a sequence of activities from the beginning to the end of the project. The longest path to the completion of the project is the critical path. If the critical path takes less time than is allowed by the client to complete the project, the project has a positive total float or project slack. If the client’s project completion date precedes the calculated critical path end date, the project has a negative float. Understanding and managing activities on the critical path is an important project management skill.
To successfully manage a project, the project manager must also know how to accelerate a schedule to compensate for unanticipated events that delay critical activities. Compressing—crashing—the schedule is a term used to describe the techniques used to shorten the project schedule. During the life of the project, scheduling conflicts often occur, and the project manager is responsible for reducing these conflicts while maintaining project quality and meeting cost goals.
Project Costs
The definition of project success often includes completing the project within budget. Developing and controlling a project budget that will accomplish the project objectives is a critical project management skill. Although clients expect the project to be executed efficiently, cost pressures vary on projects. On some projects, the project completion or end date is the largest contributor to the project complexity. The development of a new drug to address a critical health issue, the production of a new product that will generate critical cash flow for a company, and the competitive advantage for a company to be first in the marketplace with a new technology are examples of projects with schedule pressures that override project costs.
The accuracy of the project budget is related to the amount of information known by the project team. In the early stages of the project, the amount of information needed to develop a detailed budget is often missing. To address the lack of information, the project team develops different levels of project budget estimates. The conceptual estimate (or “ballpark estimate”) is developed with the least amount of knowledge. The major input into the conceptual estimate is expert knowledge or past experience. A project manager who has executed a similar project in the past can use those costs to estimate the costs of the current project.
When more information is known, the project team can develop a rough order of magnitude (ROM) estimate. Additional information such as the approximate square feet of a building, the production capacity of a plant, and the approximate number of hours needed to develop a software program can provide a basis for providing a ROM estimate. After a project design is more complete, a project detailed estimate can be developed. For example, when the project team knows the number of rooms, the type of materials, and the building location of a home, they can provide a detailed estimate. A detailed estimate is not a bid.
The cost of the project is tracked relative to the progress of the work and the estimate for accomplishing that work. Based on the cost estimate, the cost of the work performed is compared against the cost budgeted for that work. If the cost is significantly higher or lower, the project team explores reasons for the difference between expected costs and actual costs.
Project costs may deviate from the budget because the prices in the marketplace were different from what was expected. For example, the estimated costs for lumber on a housing project may be higher than budgeted or the hourly cost for labour may be lower than budgeted. Project costs may also deviate based on project performance. For example, a project team estimated that the steel design for a bridge over a river would take 800 labour hours, but 846 hours were actually expended. The project team captures the deviation between costs budgeted for work and the actual cost for work, revises the estimate as needed, and takes corrective action if the deviation appears to reflect a trend.
The project manager is responsible for assuring that the project team develops cost estimates based on the best information available and revises those estimates as new or better information becomes available. The project manager is also responsible for tracking costs against the budget and conducting an analysis when project costs deviate significantly from the project estimate. The project manager then takes appropriate corrective action to ensure that project performance matches the revised project plan.
Project Quality
Project quality focuses on the end product or service deliverables that reflect the purpose of the project. The project manager is responsible for developing a project execution approach that provides for a clear understanding of the expected project deliverables and the quality specifications. The project manager of a housing construction project not only needs to understand which rooms in the house will be carpeted but also what grade of carpet is needed. A room with a high volume of traffic will need a high-grade carpet.
The project manager is responsible for developing a project quality plan that defines the quality expectations and ensures that the specifications and expectations are met. Developing a good understanding of the project deliverables through documenting specifications and expectations is critical to a good quality plan. The processes for ensuring that the specifications and expectations are met are integrated into the project execution plan. Just as the project budget and completion dates may change over the life of a project, the project specifications may also change. Changes in quality specifications are typically managed in the same process as cost or schedule changes. The impact of the changes is analyzed for impact on cost and schedule, and with appropriate approvals, changes are made to the project execution plan.
The PMI’s A Guide to the Project Management Body of Knowledge (PMBOK Guide) has an extensive chapter on project quality management. The material found in this chapter would be similar to material found in a good operational management text.
Although any of the quality management techniques designed to make incremental improvement to work processes can be applied to a project work process, the character of a project (unique and relatively short in duration) makes small improvements less attractive on projects. Rework on projects, as with manufacturing operations, increases the cost of the product or service and often increases the time needed to complete the reworked activities. Because of the duration constraints of a project, the development of the appropriate skills, materials, and work processes early in the project is critical to project success. On more complex projects, time is allocated to developing a plan to understand and develop the appropriate levels of skills and work processes.
Project management organizations that execute several similar types of projects may find process improvement tools useful in identifying and improving the baseline processes used on their projects. Process improvement tools may also be helpful in identifying cost and schedule improvement opportunities. Opportunities for improvement must be found quickly to influence project performance. The investment in time and resources to find improvements is greatest during the early stages of the project, when the project is in the planning stages. During later project stages, as pressures to meet project schedule goals increase, the culture of the project is less conducive to making changes in work processes.
Another opportunity for applying process improvement tools is on projects that have repetitive processes. A housing contractor that is building several identical houses may benefit from evaluating work processes in the first few houses to explore the opportunities available to improve the work processes. The investment of \$1,000 in a work process that saves \$200 per house is a good investment as long as the contractor is building more than five houses.
Project Team: Human Resources and Communications
Staffing the project with the right skills, at the right place, and at the right time is an important responsibility of the project management team. The project usually has two types of team members: functional managers and process managers. The functional managers and team focus on the technology of the project. On a construction project, the functional managers would include the engineering manager and construction superintendents. On a training project, the functional manager would include the professional trainers; on an information technology project, the software development managers would be functional managers. The project management team also includes project process managers. The project controls team would include process managers who have expertise in estimating, cost tracking, planning, and scheduling. The project manager needs functional and process expertise to plan and execute a successful project.
Because projects are temporary, the staffing plan for a project typically reflects both the long-term goals of skilled team members needed for the project and short-term commitment that reflects the nature of the project. Exact start and end dates for team members are often negotiated to best meet the needs of individuals and the project. The staffing plan is also determined by the different phases of the project. Team members needed in the early or conceptual phases of the project are often not needed during the later phases or project closeout phases. Team members needed during the implementation phase are often not needed during the conceptual or closeout phases. Each phase has staffing requirements, and the staffing of a complex project requires detailed planning to have the right skills, at the right place, at the right time.
Typically a core project management team is dedicated to the project from start-up to closeout. This core team would include members of the project management team: project manager, project controls, project procurement, and key members of the function management or experts in the technology of the project. Although longer projects may experience more team turnover than shorter projects, it is important on all projects to have team members who can provide continuity through the project phases.
For example, on a large commercial building project, the civil engineering team that designs the site work where the building will be constructed would make their largest contribution during the early phases of the design. The civil engineering lead would bring on different civil engineering specialties as they were needed. As the civil engineering work is completed and the structural engineering is well underway, a large portion of the civil engineers would be released from the project. The functional managers, the engineering manager, and civil engineering lead would provide expertise during the entire length of the project, addressing technical questions that may arise and addressing change requests.
Project team members can be assigned to the project from a number of different sources. The organization that charters the project can assign talented managers and staff from functional units within the organization, contract with individuals or agencies to staff positions on the project, temporarily hire staff for the project, or use any combination of these staffing options. This staffing approach allows the project manager to create the project organizational culture. Some project cultures are more structured and detail oriented, and some are less structured with less formal roles and communication requirements. The type of culture the project manager creates depends greatly on the type of project.
Communications
Completing a complex project successfully requires teamwork, and teamwork requires good communication among team members. If those team members work in the same building, they can arrange regular meetings, simply stop by each other’s office space to get a quick answer, or even discuss a project informally at other office functions. Many complex projects in today’s global economy involve team members from widely separated locations, and the types of meetings that work within the same building are not possible. Teams that use electronic methods of communicating without face-to-face meetings are called virtual teams.
Communicating can be divided into two categories: synchronous and asynchronous. If all the parties to the communication are taking part in the exchange at the same time, the communication is synchronous. A telephone conference call is an example of synchronous communication. When the participants are not interacting at the same time, the communication is asynchronous. (The letter a at the beginning of the word means not.) Communications technologies require a variety of compatible devices, software, and service providers, and communication with a global virtual team can involve many different time zones. Establishing effective communications requires a communications plan.
Project Risk
Risk exists on all projects. The role of the project management team is to understand the kinds and levels of risks on the project and then to develop and implement plans to mitigate these risks. Risk represents the likelihood that an event will happen during the life of the project that will negatively affect the achievement of project goals. The type and amount of risk varies by industry type, complexity, and phase of the project. The project risk plan will also reflect the risk profile of the project manager and key stakeholders. People have different comfort levels with risk, and some members of the project team will be more risk averse than others.
The first step in developing a risk management plan involves identifying potential project risks. Some risks are easy to identify, such as the potential for a damaging storm in the Caribbean, and some are less obvious. Many industries or companies have risk checklists developed from past experience. The Construction Industry Institute published a 100-item risk checklist that provides examples and areas of project risks. No risk checklist will include all potential risks. The value of a checklist is the stimulation of discussion and thought about the potential risks on a project.
The project team analyzes the identified risks and estimates the likelihood of the risks occurring. The team then estimates the potential impact on project goals if the event does occur. The outcome from this process is a prioritized list of estimated project risks with a value that represents the likelihood of occurrence and the potential impact on the project.
The project team then develops a risk mitigation plan that reduces the likelihood of an event occurring or reduces the impact on the project if the event does occur. The risk management plan is integrated into the project execution plan, and mitigation activities are assigned to the appropriate project team member. The likelihood that all the potential events identified in the risk analysis would occur is extremely rare. The likelihood that one or more events will happen is high.
The project risk plan reflects the risk profile of the project and balances the investment of the mitigation against the benefit for the project. One of the more common risk mitigation approaches is the use of contingency. Contingency is funds set aside by the project team to address unforeseen events. Projects with a high-risk profile will typically have a large contingency budget. If the team knows which activities have the highest risk, contingency can be allocated to activities with the highest risk. When risks are less identifiable to specific activities, contingency is identified in a separate line item. The plan includes periodic risk-plan reviews during the life of the project. The risk review evaluates the effectiveness of the current plan and explores possible risks not identified in earlier sessions.
Project Procurement
The procurement effort on projects varies widely and depends on the type of project. Often the client organization will provide procurement services on less complex projects. In this case, the project team identifies the materials, equipment, and supplies needed by the project and provides product specifications and a detailed delivery schedule. When the procurement department of the parent organization provides procurement services, a liaison from the project can help the procurement team better understand the unique requirements of the project and the time-sensitive or critical items of the project schedule.
On larger, more complex projects, personnel are dedicated to procuring and managing the equipment, supplies, and materials needed by the project. Because of the temporary nature of projects, equipment, supplies, and materials are procured as part of the product of the project or for the execution of the project. For example, the bricks procured for a construction project would be procured for the product of the project, and the mortar mixer would be equipment procured for the execution of the project work. At the end of the project, equipment bought or rented for the execution of the work of the project are sold, returned to rental organizations, or disposed of some other way.
More complex projects will typically procure through different procurement and management methods. Commodities are common products that are purchased based on the lowest bid. Commodities include items like concrete for building projects, office supplies, or even lab equipment for a research project. The second type of procurement includes products that are specified for the project. Vendors who can produce these products bid for a contract. The awarding of a contract can include price, ability to meet the project schedule, the fit for purpose of the product, and other considerations important to the project. Manufacturing a furnace for a new steel mill would be provided by a project vendor. Equipment especially designed and built for a research project is another example. These vendors’ performances become important parts of the project, and the project manager assigns resources to coordinate the work and schedule of the vendor. The third procurement approach is the development of one or more partners. A design firm that is awarded the design contract for a major part of the steel mill and a research firm that is conducting critical subparts of the research are examples of potential project partners. A partner contributes to and is integrated into the execution plan. Partners perform best when they share the project vision of success and are emotionally invested in the project. The project management team builds and implements a project procurement plan that recognizes the most efficient and effective procurement approach to support the project schedule and goals.
Project Stakeholder Management
People and organizations can have many different relationships to the project. Most commonly, these relationships can be grouped into those who will be impacted by the project and those who can impact the project.
A successful project manager will identify stakeholders early in the project. For each stakeholder, it is important to identify what they want or need and what influence or power they have over the project. Based on this information, the need to communicate with the stakeholder or stakeholder group can be identified, followed by the creation of a stakeholder management plan. A stakeholder register is used to identify and track the interactions between the project and each stakeholder. This register must be updated on a regular basis, as new stakeholders can arise at any time, and the needs and interest levels of a particular stakeholder may change through the course of the project.
Table 4.1 Stakeholder Register
Knowledge Area Initiating Planning Executing Monitoring and Controlling Closing
Project Integration Management Develop Project Charter Develop Project Management Plan
• Monitor and control project work
• Perform integrated change control
Close project or phase
Project Scope Management
• Plan scope management
• Collect requirements
• Define scope
• Create WBS
• Validate scope
• Control scope
Project Time Management
• Plan schedule management
• Define activities
• Sequence activities
• Estimate activity resources
• Estimate activity durations
• Develop schedule
Control schedule
Project Cost Management
• Plan cost management
• Estimate costs
• Determine budget
Control costs
Project Quality Management Plan quality management Perform quality assurance Control quality
Scrum Development Overview
“Scrum” is another formal project management/product development methodology and part of agile project management. Scrum is a term from rugby (scrimmage) that means a way of restarting a game. It’s like restarting the project efforts every X weeks. It’s based on the idea that you do not really know how to plan the whole project up front, so you start and build empirical data, and then re-plan and iterate from there.
Scrum uses sequential sprints for development. Sprints are like small project phases (ideally two to four weeks). The idea is to take one day to plan for what can be done now, then develop what was planned for, and demonstrate it at the end of the sprint. Scrum uses a short daily meeting of the development team to check what was done yesterday, what is planned for the next day, and what if anything is impeding the team members from accomplishing what they have committed to. At the end of the sprint, what has been demonstrated can then be tested, and the next sprint cycle starts.
Scrum methodology defines several major roles. They are:
• Product owners: essentially the business owner of the project who knows the industry, the market, the customers, and the business goals of the project. The product owner must be intimately involved with the Scrum process, especially the planning and the demonstration parts of the sprint.
• Scrum Master: somewhat like a project manager, but not exactly. The Scrum Master’s duties are essentially to remove barriers that impede the progress of the development team, teach the product owner how to maximize return on investment (ROI) in terms of development effort, facilitate creativity and empowerment of the team, improve the productivity of the team, improve engineering practices and tools, run daily standup meetings, track progress, and ensure the health of the team.
• Development team: self-organizing (light-touch leadership), empowered group; they participate in planning and estimating for each sprint, do the development, and demonstrate the results at the end of the sprint. It has been shown that the ideal size for a development team is 7 +/- 2. The development team can be broken into “teamlets” that “swarm” on user stories, which are created in the sprint planning session.
Typically, the way a product is developed is that there is a “front burner” (which has stories/tasks for the current sprint), a “back burner” (which has stories for the next sprint), and a “fridge” (which has stories for later, as well as process changes). One can look at a product as having been broken down like this: product -> features -> stories -> tasks.
Often effort estimations are done using “story points” (tiny = 1 SP, small = 2 SP, medium = 4 SP, large = 8 SP, big = 16+ SP, unknown = ? SP) Stories can be of various types. User stories are very common and are descriptions of what the user can do and what happens as a result of different actions from a given starting point. Other types of stories are from these areas: analysis, development, QA, documentation, installation, localization, and training.
Planning meetings for each sprint require participation by the product owner, the Scrum Master, and the development team. In the planning meeting, they set the goals for the upcoming sprint and select a subset of the product backlog (proposed stories) to work on. The development team decomposes stories to tasks and estimates them. The development team and product owner do final negotiations to determine the backlog for the following sprint.
The Scrum methodology uses metrics to help with future planning and tracking of progress; for example, “burn down” – the number of hours remaining in the sprint versus the time in days; “velocity” – essentially, the amount of effort the team expends. (After approximately three sprints with the same team, one can get a feel for what the team can do going forward.)
Some caveats about using Scrum methodology: 1) You need committed, mature developers; 2) You still need to do major requirements definition, some analysis, architecture definition, and definition of roles and terms up front or early; 3) You need commitment from the company and the product owner; and 4) It is best for products that require frequent new releases or updates, and less effective for large, totally new products that will not allow for frequent upgrades once they are released.
The Project Management Office
Many large and even medium-sized organizations have created a department to oversee and support projects throughout the organization. This is an attempt to reduce the high numbers of failed projects (see the Project Management Overview chapter.) These offices are usually called the project management office or PMO.
The PMO may be the home of all the project managers in an organization, or it may simply be a resource for all project managers, who report to their line areas.
Typical objectives of a PMO are:
• Help ensure that projects are aligned with organizational objectives
• Provide templates and procedures for use by project managers
• Provide training and mentorship
• Provide facilitation
• Stay abreast of the latest trends in project management
• Serve as a repository for project reports and lessons learned
The existence and role of PMOs tends to be somewhat fluid. If a PMO is created, and greater success is not experienced in organizational projects, the PMO is at risk of being disbanded as a cost-saving measure. If an organization in which you are a project manager or a project team member has a PMO, try to make good use of the resources available. If you are employed as a resource person in a PMO, remember that your role is not to get in the way and create red tape, but to enable and enhance the success of project managers and projects within the organization.
Text Attributions
This chapter of Project Management is a derivative of the following texts: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.04%3A_Framework_for_Project_Management.txt |
A project is successful when it achieves its objectives and meets or exceeds the expectations of the stakeholders. But who are the stakeholders? Stakeholders are individuals who either care about or have a vested interest in your project. They are the people who are actively involved with the work of the project or have something to either gain or lose as a result of the project. When you manage a project to add lanes to a highway, motorists are stakeholders who are positively affected. However, you negatively affect residents who live near the highway during your project (with construction noise) and after your project with far-reaching implications (increased traffic noise and pollution).
NOTE: Key stakeholders can make or break the success of a project. Even if all the deliverables are met and the objectives are satisfied, if your key stakeholders aren’t happy, nobody’s happy.
The project sponsor, generally an executive in the organization with the authority to assign resources and enforce decisions regarding the project, is a stakeholder. The customer, subcontractors, suppliers, and sometimes even the government are stakeholders. The project manager, project team members, and the managers from other departments in the organization are stakeholders as well. It’s important to identify all the stakeholders in your project upfront. Leaving out important stakeholders or their department’s function and not discovering the error until well into the project could be a project killer.
Figure 5.1 shows a sample of the project environment featuring the different kinds of stakeholders involved on a typical project. A study of this diagram confronts us with a couple of interesting facts.
First, the number of stakeholders that project managers must deal with ensures that they will have a complex job guiding their project through the lifecycle. Problems with any of these members can derail the project.
Second, the diagram shows that project managers have to deal with people external to the organization as well as the internal environment, certainly more complex than what a manager in an internal environment faces. For example, suppliers who are late in delivering crucial parts may blow the project schedule. To compound the problem, project managers generally have little or no direct control over any of these individuals.
Let’s take a look at these stakeholders and their relationships to the project manager.
Project Stakeholders
Top Management
Top management may include the president of the company, vice-presidents, directors, division managers, the corporate operating committee, and others. These people direct the strategy and development of the organization.
On the plus side, you are likely to have top management support, which means it will be easier to recruit the best staff to carry out the project, and acquire needed material and resources; also visibility can enhance a project manager’s professional standing in the company.
On the minus side, failure can be quite dramatic and visible to all, and if the project is large and expensive (most are), the cost of failure will be more substantial than for a smaller, less visible project.
Some suggestions in dealing with top management are:
• Develop in-depth plans and major milestones that must be approved by top management during the planning and design phases of the project.
• Ask top management associated with your project for their information reporting needs and frequency.
• Develop a status reporting methodology to be distributed on a scheduled basis.
• Keep them informed of project risks and potential impacts at all times.
The Project Team
The project team is made up of those people dedicated to the project or borrowed on a part-time basis. As project manager, you need to provide leadership, direction, and above all, the support to team members as they go about accomplishing their tasks. Working closely with the team to solve problems can help you learn from the team and build rapport. Showing your support for the project team and for each member will help you get their support and cooperation.
Here are some difficulties you may encounter in dealing with project team members:
• Because project team members are borrowed and they don’t report to you, their priorities may be elsewhere.
• They may be juggling many projects as well as their full-time job and have difficulty meeting deadlines.
• Personality conflicts may arise. These may be caused by differences in social style or values or they may be the result of some bad experience when people worked together in the past.
• You may find out about missed deadlines when it is too late to recover.
Managing project team members requires interpersonal skills. Here are some suggestions that can help:
• Involve team members in project planning.
• Arrange to meet privately and informally with each team member at several points in the project, perhaps for lunch or coffee.
• Be available to hear team members’ concerns at any time.
• Encourage team members to pitch in and help others when needed.
• Complete a project performance review for team members.
Your Manager
Typically the boss decides what the assignment is and who can work with the project manager on projects. Keeping your manager informed will help ensure that you get the necessary resources to complete your project.
If things go wrong on a project, it is nice to have an understanding and supportive boss to go to bat for you if necessary. By supporting your manager, you will find your manager will support you more often.
• Find out exactly how your performance will be measured.
• When unclear about directions, ask for clarification.
• Develop a reporting schedule that is acceptable to your boss.
• Communicate frequently.
Peers
Peers are people who are at the same level in the organization as you and may or may not be on the project team. These people will also have a vested interest in the product. However, they will have neither the leadership responsibilities nor the accountability for the success or failure of the project that you have.
Your relationship with peers can be impeded by:
• Inadequate control over peers
• Political maneuvering or sabotage
• Personality conflicts or technical conflicts
• Envy because your peer may have wanted to lead the project
• Conflicting instructions from your manager and your peer’s manager
Peer support is essential. Because most of us serve our self-interest first, use some investigating, selling, influencing, and politicking skills here. To ensure you have cooperation and support from your peers:
• Get the support of your project sponsor or top management to empower you as the project manager with as much authority as possible. It’s important that the sponsor makes it clear to the other team members that their cooperation on project activities is expected.
• Confront your peer if you notice a behaviour that seems dysfunctional, such as bad-mouthing the project.
• Be explicit in asking for full support from your peers. Arrange for frequent review meetings.
• Establish goals and standards of performance for all team members.
Resource Managers
Because project managers are in the position of borrowing resources, other managers control their resources. So their relationships with people are especially important. If their relationship is good, they may be able to consistently acquire the best staff and the best equipment for their projects. If relationships aren’t good, they may find themselves not able to get good people or equipment needed on the project.
Internal Customers
Internal customers are individuals within the organization who are customers for projects that meet the needs of internal demands. The customer holds the power to accept or reject your work. Early in the relationship, the project manager will need to negotiate, clarify, and document project specifications and deliverables. After the project begins, the project manager must stay tuned in to the customer’s concerns and issues and keep the customer informed.
Common stumbling blocks when dealing with internal customers include:
• A lack of clarity about precisely what the customer wants
• A lack of documentation for what is wanted
• A lack of knowledge of the customer’s organization and operating characteristics
• Unrealistic deadlines, budgets, or specifications requested by the customer
• Hesitancy of the customer to sign off on the project or accept responsibility for decisions
• Changes in project scope
To meet the needs of the customer, client, or owner, be sure to do the following:
• Learn the client organization’s buzzwords, culture, and business.
• Clarify all project requirements and specifications in a written agreement.
• Specify a change procedure.
• Establish the project manager as the focal point of communications in the project organization.
External customer
External customers are the customers when projects could be marketed to outside customers. In the case of Ford Motor Company, for example, the external customers would be the buyers of the automobiles. Also if you are managing a project at your company for Ford Motor Company, they will be your external customer.
Government
Project managers working in certain heavily regulated environments (e.g., pharmaceutical, banking, or military industries) will have to deal with government regulators and departments. These can include all or some levels of government from municipal, provincial, federal, to international.
Contractors, subcontractors, and suppliers
There are times when organizations don’t have the expertise or resources available in-house, and work is farmed out to contractors or subcontractors. This can be a construction management foreman, network consultant, electrician, carpenter, architect, or anyone who is not an employee. Managing contractors or suppliers requires many of the skills needed to manage full-time project team members.
Any number of problems can arise with contractors or subcontractors:
• Quality of the work
• Cost overruns
• Schedule slippage
Many projects depend on goods provided by outside suppliers. This is true for example of construction projects where lumber, nails, bricks, and mortar come from outside suppliers. If the supplied goods are delivered late or are in short supply or of poor quality or if the price is greater than originally quoted, the project may suffer.
Depending on the project, managing contractor and supplier relationships can consume more than half of the project manager’s time. It is not purely intuitive; it involves a sophisticated skill set that includes managing conflicts, negotiating, and other interpersonal skills.
Politics of Projects
Many times, project stakeholders have conflicting interests. It’s the project manager’s responsibility to understand these conflicts and try to resolve them. It’s also the project manger’s responsibility to manage stakeholder expectations. Be certain to identify and meet with all key stakeholders early in the project to understand all their needs and constraints.
Project managers are somewhat like politicians. Typically, they are not inherently powerful or capable of imposing their will directly on coworkers, subcontractors, and suppliers. Like politicians, if they are to get their way, they have to exercise influence effectively over others. On projects, project managers have direct control over very few things; therefore their ability to influence others – to be a good politician – may be very important
Here are a few steps a good project politician should follow. However, a good rule is that when in doubt, stakeholder conflicts should always be resolved in favour of the customer.
Assess the environment
Identify all the relevant stakeholders. Because any of these stakeholders could derail the project, you need to consider their particular interest in the project.
• Once all relevant stakeholders are identified, try to determine where the power lies.
• In the vast cast of characters, who counts most?
• Whose actions will have the greatest impact?
Identify goals
After determining who the stakeholders are, identify their goals.
• What is it that drives them?
• What is each after?
• Are there any hidden agendas or goals that are not openly articulated?
• What are the goals of the stakeholders who hold the power? These deserve special attention.
Define the problem
• The facts that constitute the problem should be isolated and closely examined.
• The question “What is the real situation?” should be raised over and over.
Culture of Stakeholders
When project stakeholders do not share a common culture, project management must adapt its organizations and work processes to cope with cultural differences. The following are three major aspects of cultural difference that can affect a project:
1. Communications
2. Negotiations
3. Decision making
Communication is perhaps the most visible manifestation of culture. Project managers encounter cultural differences in communication in language, context, and candor.
Language is clearly the greatest barrier to communication. When project stakeholders do not share the same language, communication slows down and is often filtered to share only information that is deemed critical.
The barrier to communication can influence project execution where quick and accurate exchange of ideas and information is critical.
The interpretation of information reflects the extent that context and candor influence cultural expressions of ideas and understanding of information. In some cultures, an affirmative answer to a question does not always mean yes. The cultural influence can create confusion on a project where project stakeholders represent more than one culture.
Example: Culture Affects Communication in Mumbai
A project management consultant from the United States was asked to evaluate the effectiveness of a U.S. project management team executing a project in Mumbai, India. The project team reported that the project was on schedule and within budget. After a project review meeting where each of the engineering leads reported that the design of the project was on schedule, the consultant began informal discussions with individual engineers and began to discover that several critical aspects of the project were behind schedule. Without a mitigating strategy, the project would miss a critical window in the weather between monsoon seasons. The information on the project flowed through a cultural expectation to provide positive information. The project was eventually canceled by the U.S. corporation when the market and political risks increased.
Not all cultural differences are related to international projects. Corporate cultures and even regional differences can create cultural confusion on a project.
Example: Cultural Differences between American Regions
On a major project in South America that included project team leaders from seven different countries, the greatest cultural difference that affected the project communication was between two project leaders from the United States. Two team members, one from New Orleans and one from Brooklyn, had more difficulty communicating than team members from Lebanon and Australia.
Managing Stakeholders
Often there is more than one major stakeholder in the project. An increase in the number of stakeholders adds stress to the project and influences the project’s complexity level. The business or emotional investment of the stakeholder in the project and the ability of the stakeholder to influence the project outcomes or execution approach will also influence the stakeholder complexity of the project. In addition to the number of stakeholders and their level of investment, the degree to which the project stakeholders agree or disagree influences the project’s complexity.
A small commercial construction project will typically have several stakeholders. All the building permitting agencies, environmental agencies, and labour and safety agencies have an interest in the project and can influence the execution plan of the project. The neighbours will have an interest in the architectural appeal, the noise, and the purpose of the building.
Example: Tire Plant in India
A U.S. chemical company chartered a project team to design and build a plant to produce the raw materials for building truck tires designed for unpaved roads. The plant was to be built in India a few years after an accident that killed several Indians and involved a different U.S. chemical company. When the company announced the new project and began to break ground, the community backlash was so strong that the project was shut down. A highly involved stakeholder can significantly influence your project.
Example: Wind Turbine on a College Campus
A small college in South Carolina won a competitive grant to erect and operate a wind turbine on campus. The engineering department submitted the grant as a demonstration project for engineering students to expose students to wind technology. The campus facilities department found only one location for the wind turbine that would not disrupt the flow of traffic on campus. The engineering department found that location unacceptable for students who had to maintain the wind turbine. The county construction permitting department had no policies for permitting a wind turbine and would not provide a building permit. The college had to go to the county council and get an exception to county rules. The marketing department wanted the wind turbine placed in a highly visible location to promote the innovative approach of the college.
Each of the college’s stakeholders had a legitimate interest in the location of the wind turbine. The number of stakeholders on the project, multiplied by their passion for the subject and the lack of agreement on the location, increased the complexity of the project. Significant time and resources of a project will be dedicated to identifying, understanding, and managing client expectations.
Example: Stakeholders and a Bridge Project
The Department of Highways chartered a project to upgrade a number of bridges that crossed the interstate in one of the larger cities in South Carolina. The closing of these bridges severely impacted traffic congestion, including a large shopping mall. The contract included provisions for minimizing the impact on the traffic and communities near the construction areas. This provision allowed businesses or interested parties to review the project schedule and make suggestions that would lessen the impact of the construction. The project leadership invested significant time and resources in developing alignment among the various political stakeholders on the project approach and schedule.
Relationship Building Tips
Take the time to identify all stakeholders before starting a new project. Include those who are impacted by the project, as well as groups with the ability to impact the project. Then, begin the process of building strong relationships with each one using the following method.
• Analyze stakeholders: Conduct a stakeholder analysis, or an assessment of a project’s key participants, and how the project will affect their problems and needs. Identify their individual characteristics and interests. Find out what motivates them, as well as what provokes them. Define roles and level of participation, and determine if there are conflicts of interest among groups of stakeholders.
• Assess influence: Measure the degree to which stakeholders can influence the project. The more influential a stakeholder is, the more a project manager will need their support. Think about the question, “What’s in it for them?” when considering stakeholders. Knowing what each stakeholder needs or wants from the project will enable the project manager to gauge his or her level of support. And remember to balance support against influence. Is it more important to have strong support from a stakeholder with little influence, or lukewarm support from one with a high level of influence?
• Understand their expectations: Nail down stakeholders’ specific expectations. Ask for clarification when needed to be sure they are completely understood.
• Define “success”: Every stakeholder may have a different idea of what project success looks like. Discovering this at the end of the project is a formula for failure. Gather definitions up front and include them in the objectives to help ensure that all stakeholders will be supportive of the final outcomes.
• Keep stakeholders involved: Don’t just report to stakeholders. Ask for their input. Get to know them better by scheduling time for coffee, lunch, or quick meetings. Measure each stakeholder’s capacity to participate and honour time constraints.
• Keep stakeholders informed: Send regular status updates. Daily may be too much; monthly is not enough. One update per week is usually about right. Hold project meetings as required, but don’t let too much time pass between meetings. Be sure to answer stakeholders’ questions and emails promptly. Regular communication is always appreciated – and may even soften the blow when you have bad news to share.
These are the basics of building strong stakeholder relationships. But as in any relationship, there are subtleties that every successful project manager understands – such as learning the differences between and relating well to different types stakeholders.
How to Relate to Different Types of Stakeholders
By conducting a stakeholder analysis, project managers can gather enough information on which to build strong relationships – regardless of the differences between them. For example, the needs and wants of a director of marketing will be different from those of a chief information officer. Therefore, the project manager’s engagement with each will need to be different as well.
Stakeholders with financial concerns will need to know the potential return of the project’s outcomes. Others will support projects if there is sound evidence of their value to improving operations, boosting market share, increasing production, or meeting other company objectives.
Keep each stakeholder’s expectations and needs in mind throughout each conversation, report or email, no matter how casual or formal the communication may be. Remember that the company’s interests are more important than any individual’s – yours or a stakeholder’s. When forced to choose between them, put the company’s needs first.
No matter what their needs or wants, all stakeholders will respect the project manager who:
• Is always honest, even when telling them something they don’t want to hear
• Takes ownership of the project
• Is predictable and reliable
• Stands by his or her decisions
• Takes accountability for mistakes
Supportive Stakeholders are Essential to Project Success
Achieving a project’s objectives takes a focused, well-organized project manager who can engage with a committed team and gain the support of all stakeholders. Building strong, trusting relationships with interested parties from the start can make the difference between project success and failure.
Tools to Help Stakeholder Management
There are many project decelerators, among them lack of stakeholder support. Whether the stakeholders support your project or not, if they are important to your project, you must secure their support. How do you do that?
First, you must identify who your stakeholders are. Just because they are important in the organization does not necessarily mean they are important to your project. Just because they think they are important does not mean they are. Just because they don’t think they need to be involved does not mean they do not have to be. The typical suspects: your manager, your manager’s manager, your client, your client’s manager, any SME (subject matter expert) whose involvement you need, and the board reviewing and approving your project. Note that in some situations there are people who think they are stakeholders. From your perspective they may not be, but be careful how you handle them. They could be influential with those who have the power to impact your project. Do not dismiss them out of hand.
Second, you need to determine what power they have and what their intentions toward your project are. Do they have the power to have an impact on your project? Do they support or oppose you? What strategies do you follow with them?
Third, what’s the relationship among stakeholders? Can you improve your project’s chances by working with those who support you to improve the views of those who oppose you? Table 5.1 summarizes the options based on an assessment of your stakeholders’ potential for cooperation and potential for threat.
Table 5.1 Stakeholder Analysis (Solera, 2009)
Low threat potential High threat potential
Low potential for cooperation Type: Marginal
Strategy: Monitor
Type: Non-supportive
Strategy: Defend
High potential for cooperation Type: Supportive
Strategy: Involve
Type: Mixed blessing
Strategy: Collaborative
Now that you have this information, you can complete a stakeholder analysis template (Table 5.2) that will help you define your strategies to improve their support:
Table 5.2 Stakeholder Analysis Template (Solera, 2009)
Stakeholder Names and Roles How important? (Low – Med – High) Current level of support? (Low – Med – High) What do you want from stakeholders? What is important to stakeholders? How could stakeholders block your efforts? What is your strategy for enhancing stakeholder support?
Finally, a key piece of your stakeholder management efforts is constant communication to your stakeholders. Using the information developed above, you should develop a communications plan that secures your stakeholders’ support. The template in Figure 5.2 can be used.
References
Solera, J. (2009). Project Decelerators – Lack of Stakeholder Support. Silicon Valley Project Management. Retrieved from https://svprojectmanagement.com/proj...holder-support.
Image descriptions
Figure 5.2 Stakeholder Communication Template
The stakeholder analysis template has six fields plus a table to be filled out. The lines ask for: the project scope, key messages, communication goals, communication teams, project team, and other stakeholders. Then, there is a table with seven columns where you can track the communication plan. The column headers of this table are: communication date, deliverable, audience, message, action item or FYI (info?), plans, and status. [Return to Figure 5.2]
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What Is Organizational Culture?
When working with internal and external customers on a project, it is essential to pay close attention to relationships, context, history, and the corporate culture. Corporate culture refers to the beliefs, attitudes, and values that the organization’s members share and the behaviours consistent with them (which they give rise to). Corporate culture sets one organization apart from another, and dictates how members of the organization will see you, interact with you, and sometimes judge you. Often, projects too have a specific culture, work norms, and social conventions.
Some aspects of corporate culture are easily observed; others are more difficult to discern. You can easily observe the office environment and how people dress and speak. In one company, individuals work separately in closed offices; in another, teams may work in a shared environment. The more subtle components of corporate culture, such as the values and overarching business philosophy, may not be readily apparent, but they are reflected in member behaviours, symbols, and conventions used.
Project Manager’s Checklist
Once the corporate culture has been identified, members should try to adapt to the frequency, formality, and type of communication customary in that culture. This adaptation will strongly affect project members’ productivity and satisfaction internally, as well as with the client organization.
• Which stakeholders will make the decision in this organization on this issue? Will your project decisions and documentation have to go up through several layers to get approval? If so, what are the criteria and values that may affect acceptance there? For example, is being on schedule the most important consideration? Cost? Quality?
• What type of communication among and between stakeholders is preferred? Do they want lengthy documents? Is “short and sweet” the typical standard?
• What medium of communication is preferred? What kind of medium is usually chosen for this type of situation? Check the files to see what others have done. Ask others in the organization.
• What vocabulary and format are used? What colours and designs are used (e.g., at Hewlett-Packard, all rectangles have curved corners)?
Project Team Challenges
Today’s globally distributed organizations (and projects) consist of people who have differing “worldviews.” Worldview is a looking glass through which people see the world as Bob Shebib describes: “[It is] a belief system about the nature of the universe, its perceived effect on human behaviour, and one’s place in the universe. Worldview is a fundamental core set of assumptions explaining cultural forces, the nature of humankind, the nature of good and evil, luck, fate, spirits, the power of significant others, the role of time, and the nature of our physical and natural resources” (Shebib, 2003, p. 296).
If, for example, a Canadian manager is sent to India to manage an R&D team or a joint venture, they are likely to have to “[cope] with eco-shock or the physiological, psychological, and social reaction to a new assignment ecology.” Hanging a shingle in a fluid and culturally diverse organization, project team, and work culture, a project manager may find new working relationships and hidden challenges have significant implications for performance and knowledge exchange – for the manager and colleagues at home and in the host country.
In most situations, there is simply no substitute for having a well-placed person from the host culture to guide the new person through the cultural nuances of getting things done. In fact, if this “intervention” isn’t present, it is likely to affect the person’s motivation or desire to continue trying to break through the cultural (and other) barriers. Indeed, optimal effectiveness in such situations requires learning of cultures in developing countries or international micro-cultures and sharing perceptions among the culturally diverse task participants on how to get things done. Project leaders require sensitivity and awareness of multicultural preferences. The following broad areas should be considered:
• Individual identity and role within the project versus family of origin and community
• Verbal and emotional expressiveness
• Relationship expectations
• Style of communication
• Language
• Personal priorities, values, and beliefs
• Time orientation
There are many interpersonal dynamics and intra-project challenges faced by a globally distributed team. Individual members and the team itself requires important social supports to mitigate uncertainty, conflict, motivational challenges, culture shock, and the more-encompassing eco-shock that comes from facing head-on the unfamiliar and diverse situations consistent with a different cultural and geographically distributed context.
Diverse and globally distributed project teams (i.e., different ethnic cultures, genders, ages, and functional capabilities), often working on complex projects spanning multiple time zones, geography, and history, and operating with tight deadlines in cost-conscious organizations, need to make time and resources available to physically meet each other, and connect (at the very least) at a formal “kick-off” meeting. Especially when working with team members from high-context cultures, it is essential to meet face-to-face, discover member’s individual identities and cultural preferences, share professional knowledge and personal stories, and observe critical verbal and non-verbal cues (that may not easily be observed online, or on the telephone). This is key to establishing a safer climate and building trust for stronger relationships among both team members and management.
Dealing with Conflict
The question isn’t whether, when, or with what frequency conflict will occur among intercultural team members — or what will create the conflict. If a team wants to overcome (or harness) conflict for effectiveness and productivity, the question is how to navigate and resolve the conflicts. Conflict that springs from diversity can actually assist the team in completing complex problem solving. However, if not navigated successfully, it can create relationship strain and derail achievement due to increased difficulties in communication and coordination.
As the global marketplace continues its rapid expansion, researchers are increasingly turning their attention to the issue of conflict management. Differing social and cultural values don’t necessarily increase the number of conflicts a team will experience, but they can have an impact on how conflicts are managed and resolved. Cultural awareness is needed for understanding and appreciating others’ values and behavioural norms. Without that, foreign assignments will become an overwhelming challenge. Self-awareness and skill development can aid in resolving the problematic conflict arising from cultural differences to help a team maintain good relations and remain productive.
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The project initiation phase is the first phase within the project management life cycle, as it involves starting up a new project. Within the initiation phase, the business problem or opportunity is identified, a solution is defined, a project is formed, and a project team is appointed to build and deliver the solution to the customer. A business case is created to define the problem or opportunity in detail and identify a preferred solution for implementation. The business case includes:
• A detailed description of the problem or opportunity with headings such as Introduction, Business Objectives, Problem/Opportunity Statement, Assumptions, and Constraints
• A list of the alternative solutions available
• An analysis of the business benefits, costs, risks, and issues
• A description of the preferred solution
• Main project requirements
• A summarized plan for implementation that includes a schedule and financial analysis
The project sponsor then approves the business case, and the required funding is allocated to proceed with a feasibility study. It is up to the project sponsor to determine if the project is worth undertaking and whether the project will be profitable to the organization. The completion and approval of the feasibility study triggers the beginning of the planning phase. The feasibility study may also show that the project is not worth pursuing and the project is terminated; thus the next phase never begins.
All projects are created for a reason. Someone identifies a need or an opportunity and devises a project to address that need. How well the project ultimately addresses that need defines the project’s success or failure.
The success of your project depends on the clarity and accuracy of your business case and whether people believe they can achieve it. Whenever you consider past experience, your business case is more realistic; and whenever you involve other people in the business case’s development, you encourage their commitment to achieving it.
Often the pressure to get results encourages people to go right into identifying possible solutions without fully understanding the need or what the project is trying to accomplish. This strategy can create a lot of immediate activity, but it also creates significant chances for waste and mistakes if the wrong need is addressed. One of the best ways to gain approval for a project is to clearly identify the project’s objectives and describe the need or opportunity for which the project will provide a solution. For most of us, being misunderstood is a common occurrence, something that happens on a daily basis. At the restaurant, the waiter brings us our dinner and we note that the baked potato is filled with sour cream, even though we expressly requested “no sour cream.” Projects are filled with misunderstandings between customers and project staff. What the customer ordered (or more accurately what they think they ordered) is often not what they get. The cliché is “I know that’s what I said, but it’s not what I meant.” Figure 7.1 demonstrates the importance of establishing clear objectives.
The need for establishing clear project objectives cannot be overstated. An objective or goal lacks clarity if, when shown to five people, it is interpreted in multiple ways. Ideally, if an objective is clear, you can show it to five people who, after reviewing it, hold a single view about its meaning. The best way to make an objective clear is to state it in such a way that it can be verified. Building in ways to measure achievement can do this. It is important to provide quantifiable definitions to qualitative terms.
For example, an objective of the team principle (project manager) of a Formula 1 racing team may be that their star driver, “finish the lap as fast as possible.” That objective is filled with ambiguity.
How fast is “fast as possible?” Does that mean the fastest lap time (the time to complete one lap) or does it mean the fastest speed as the car crosses the start/finish line (that is at the finish of the lap)?
By when should the driver be able to achieve the objective? It is no use having the fastest lap after the race has finished, and equally the fastest lap does not count for qualifying and therefore starting position, if it is performed during a practice session.
The ambiguity of this objective can be seen from the following example. Ferrari’s Michael Schumacher achieved the race lap record at the Circuit de Monaco of 1 min 14.439 sec in 2004 (Figure 7.2). However, he achieved this on lap 23 of the race, but crashed on lap 44 of a 77-lap race. So while he achieved a fastest lap and therefore met the specific project goal of “finish the lap as fast as possible,” it did not result in winning the race, clearly a different project goal. In contrast, the fastest qualifying time at the same event was by Renault’s Jarno Trulli (1 min 13.985 sec), which gained him pole position for the race, which he went on to win (Figure 7.2). In his case, he achieved the specific project goal of “finish the lap as fast as possible,” but also the larger goal of winning the race.
The objective can be strengthened considerably if it is stated as follows: “To be able to finish the 3.340 km lap at the Circuit de Monaco at the Monaco Grand Prix in 1 min 14.902 sec or less, during qualifying on May 23, 2009.” This was the project objective achieved by Brawn GP’s Jenson Button (Figure 7.2).
There is still some ambiguity in this objective; for example, it assumes the star driver will be driving the team’s race car and not a rental car from Hertz. However, it clarifies the team principal’s intent quite nicely. It should be noted that a clear goal is not enough. It must also be achievable. The team principal’s goal becomes unachievable, for example, if he changes it to require his star driver to finish the 3.340 km lap in 30 sec or less.
To ensure the project’s objectives are achievable and realistic, they must be determined jointly by managers and those who perform the work. Realism is introduced because the people who will do the work have a good sense of what it takes to accomplish a particular task. In addition, this process assures some level of commitment on all sides: management expresses its commitment to support the work effort and workers demonstrate their willingness to do the work.
Imagine an office manager has contracted a painter to paint his office. His goal or objective is to have the office painted a pleasing blue colour. Consider the conversation that occurs in Figure 7.3 after the job was finished.
This conversation captures in a nutshell the essence of a major source of misunderstandings on projects: the importance of setting clear objectives. The office manager’s description of how he wanted the room painted meant one thing to him and another to the painter. As a consequence, the room was not painted to the office manager’s satisfaction. Had his objective been more clearly defined, he probably would have had what he wanted.
Comparing Options Using a Weighted Decision Matrix
Sometimes we have multiple options to choose from when determining requirements and deciding which project to work on. To select the best option, we can use tools such as a weighted decision matrix.
A basic decision matrix consists of establishing a set of criteria for options that are scored and summed to gain a total score that can then be ranked. Importantly, it is not weighted to allow a quick selection process.
A weighted decision matrix operates in the same way as the basic decision matrix but introduces the concept of weighting the criteria in order of importance. The resultant scores better reflect the importance to the decision maker of the criteria involved. The more important a criterion, the higher the weighting it should be given. Each of the potential options is scored and then multiplied by the weighting given to each of the criteria to produce a result.
The advantage of the weighted decision matrix is that subjective opinions about one alternative versus another can be made more objective. Another advantage of this method is that sensitivity studies can be performed. An example of this might be to see how much your opinion would have to change in order for a lower-ranked alternative to outrank a competing alternative.
A weighted decision matrix therefore allows decision makers to structure and solve their problem by:
1. Specifying and prioritizing their needs with a list a criteria; then
2. Evaluating, rating, and comparing the different solutions; and
3. Selecting the best matching solution.
A weighted decision matrix is a decision tool used by decision makers.
A decision matrix is basically an array presenting on one axis a list of alternatives, also called options or solutions, that are evaluated regarding, on the other axis, a list of criteria, which are weighted depending on their respective importance in the final decision to be taken.
Weighted Decision Matrix Sample
The example in Figure 7.4 shows a weighted decision matrix that compared three options for a web development project (SJS Enterprises). This method is especially useful when choosing purchase alternatives and comparing them against specific desirable system requirements.
Financial Considerations
In many new project endeavors, we need to find out if our project is financially feasible. We do that by using net present value (NPV), rate of return (ROI), and payback analysis.
NPV
A dollar earned today is worth more than a dollar earned one or more years from now. The NPV of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.
In the case when all future cash flows are incoming and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting and widely used throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.
NPV can be described as the “difference amount” between the sums of discounted cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price.
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms.
where
• t is the time of the cash flow
• i is the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk; the opportunity cost of capital)
• Rt is the net cash flow (i.e., cash inflow − cash outflow, at time t).
NPV is an indicator of how much value an investment or project adds to the firm. With a particular project, if NPV is a positive value, the project is in the status of positive cash inflow in the time t. If NPV is a negative value, the project is in the status of discounted cash outflow in the time t. Sometimes risky projects with a positive NPV could be accepted. This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost (i.e., comparison with other available investments). In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.
Table 7.1 Net Present Value
If… It means… Then…
NPV > 0 The investment would add value to the firm. The project may be accepted.
NPV < 0 The investment would subtract value from the firm. The project should be rejected.
NPV = 0 The investment would neither gain nor lose value for the firm. We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria (e.g., strategic positioning or other factors not explicitly included in the calculation).
Table 7.2: Present Value Table
(Take note of the decreasing value of money as the period increases from 1 to 10 years.)
Periods (years) 6% 8% 10% 12% 14%
1 0.943 0.926 0.909 0.893 0.877
2 0.890 0.857 0.826 0.797 0.769
3 0.840 0.794 0.751 0.712 0.675
4 0.792 0.735 0.683 0.636 0.592
5 0.747 0.681 0.621 0.567 0.519
6 0.705 0.630 0.564 0.507 0.456
7 0.665 0.583 0.513 0.452 0.400
8 0.627 0.540 0.467 0.404 0.351
9 0.592 0.500 0.424 0.361 0.308
10 0.558 0.463 0.386 0.322 0.270
NPV Example
The following example is calculating the NPV of a project at a discount rate of 12%. The project takes five years to complete with given benefits and costs for each year. In Year 0, there is no benefit to the organization, just an initial cost of \$75,000 with no discount rate. In Year 1, the discount rate is 89%. This means that at 12% assumed interest, the time value of money says that the \$1 today is worth \$0.89 in one year, \$0.80 in two years, etc. By calculating the NPV for the benefits and the costs, you subtract the NPV of all costs from the NPV of all benefits. The final result is a positive value of \$105,175.
ROI
Return on investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. It is one way of considering profits in relation to capital invested.
This is calculated by subtracting the project’s costs from the benefits and then dividing by the costs. For example, if you invest \$100 and your investment is worth \$110 next year, the ROI is (110 − 100) ÷ 100 = 0.1 or a 10% return.
In our example: (306,425 − 201,175) ÷ 201,175 = 0.52, or a 52% return. That’s considered a nice return on investment.
Payback Analysis
Payback analysis is important in determining the amount of time it will take for a project to recoup its investments. This is the point at which the benefits start to outweigh the costs. The best way to see that is by charting the cumulative benefits and costs. As you can see in the example in Figure 7.5, the cumulative benefits outweigh the cumulative costs in the second year.
Project Charter
A project charter, project definition, or project statement is a statement of the scope, objectives, and participants in a project. It provides a preliminary delineation of roles and responsibilities, outlines the project objectives, identifies the main stakeholders, and defines the authority of the project manager. It serves as a reference of authority for the future of the project.
The purpose of a project charter is to:
• Provide an understanding of the project, the reason it is being conducted, and its justification
• Establish early on in the project the general scope
• Establish the project manager and his or her authority level. A note of who will review and approve the project charter must be included.
Example of a Project Charter
Sample Project Charter
Identification Section
List the project name, the date of the current version of the project charter, the sponsor’s name and authority, and the project manager’s name.
Example:
Project Name: Rice University Computer Store Creation
Project Sponsor: Jane Ungam, Facilities Manager
Date: Jan 12, 2010
Revision: 1
Project Manager: Fred Rubens
Overview of the Project
Provide a simple but precise statement of the project.
Example: Rice University is planning to create a store to sell computer supplies.
Objective
State the objectives of the project clearly and ensure they contain a measure of how to assess whether they have been achieved. The statement should be realistic and should follow the SMART protocol:
• Specific (get into the details)
• Measurable (use quantitative language so that you know when you are finished)
• Acceptable (to stakeholders)
• Realistic (given project constraints)
• Time based (deadlines, not durations)
Example: The objective of this project is to implement a campus store that is ready to sell computer supplies such as memory sticks, mouse pads, and cables, when class starts in August 2010, with enough inventory to last through the first two weeks of classes.
Scope
Specify the scope of the project by identifying the domain or range of requirements.
Example: The scope of Rice’s school supplies store project includes the activities listed below:
1. Determine what supplies will be sold in the store.
2. Establish competitive prices for the computer supplies.
3. Source and secure supply vendors.
4. Establish marketing, procurement, operations, and any other necessary departments, schools, centres, and institutes.
It is equally important to include in the scope what is not included in the project.
Example: The scope of the project does not include:
• Development of any other school store departments
• Store design or construction
Major Milestones
List all major milestones needed to ensure successful project completion.
Example:
• All vendors selected
• Contracts or orders completed with all vendors
• Supplies delivered to the store
• Pricing determined
Major Deliverables
List and describe the major deliverables that will result from the project.
Example:
• Supplies procured
• Operations, procurement, marketing, and other teams established
• Store supplies stocked and displayed
• Store staffing completed, including work schedules
• Store operations policies, including hours of operation, established
Assumptions
Outline the assumptions made in creating the project. An assumption is a fact you are unsure of but can either confirm at a later time or are simply stating so that the project can proceed as if the statement were true.
Example:
• Only computer supplies will be sold in the store.
• Customers will be the Rice University student body and faculty.
• Rice University students will manage the project and be responsible for ongoing operations.
• A store sponsor from the university faculty or staff will be assigned to mentor students and provide oversight.
• Store hours of operation will be approved by the Rice University students or store sponsor.
• Supplier deliveries will be arranged or the store sponsor will pick them up with students.
• Students will be empowered to contact vendors for order placement and inquiries via telephone.
Constraints
Define any and all constraints on the project or those working on the project. This is an important part of the project charter. A constraint is anything that limits the range of solutions or approaches.
Example:
• Student availability to meet for project planning is limited to school hours.
• Software is not available for project planning and control.
Business Need or Opportunity (Benefits)
Provide a concise statement of the business need or opportunity that led to the creation of the project. Why was it created? What are the benefits? How does the project contribute to organizational objectives?
Example: The goal of this project is to provide income for the Rice Student Centre while supplying necessary items to students and faculty at competitive prices. The school store will be a convenience to students since necessary supplies will be available on campus. This will help students learn to manage their personal supplies.
Preliminary Cost for the Project
Provide a statement indicating how the cost of the project will be defined and controlled.
Example: The procurement team will assemble a proposal based on expected costs for review by the Dean of Undergraduate Studies.
Project Risks
A risk is anything uncertain that may occur that will reduce or decrease the chances of project success.
Example:
1. There is a state election coming and the new government may change the taxation rules for private university retail outlets.
2. The cloud is changing student demand for media such as flash drives in somewhat unpredictable ways. If this happens faster than we forecast, we may be building a store that students don’t need.
3. Deliveries of store shelves, etc. will be delayed if a major hurricane occurs.
Project Charter Acceptance
Provide the names, titles, and signature lines of the individuals who will sign off on the project charter.
Project Stakeholders
Provide the key stakeholders and team members by function, name, and role.
Function Name Role
Project Manager Monica Styles Leads the project
Sponsor Adrienne Watt Project sponsor
etc.
Image Descriptions
Figure 7.3 image description: A conversation between an office manager and a contractor.
Office manager: Not only did you paint my office walls blue, but you painted the ceiling blue as well.
Contractor: You asked me to paint the room blue, and now you’ve got a blue room.
Office manager: But the ceiling is oppressive! Ceilings should never be the same colour as the walls. They should always be a lighter colour.
Contractor: You asked for a blue room. You’re lucky I didn’t paint the floor blue as well.
Figure 7.4 image description:
Weighted Decision Matrix for Game Delivery System
Criteria Weight SJS Enterprises Game Access DVD Link
Educational 15% 90 0 0
Sports-related 15% 90 90 90
Secure payment area with the ability to use Payplay, bank payments, cheques, and school payment systems as a payment source. 10% 90 50 50
Live Support 15% 90 0 0
Search Option 5% 50 50 30
Games available for all platforms currently on the market including school learning systems. 10% 60 30 30
Longer rental periods (1 to 2 weeks) 5% 40 20 40
Sidebar with categories, such as most popular, multiplayer, and just released. 5% 50 50 20
Registered customers must be able to order the videos, track delivery, return videos, and be able to provide reviews of views. 10% 50 30 30
Age/grade appropriate section (can isolate certain games to certain ages or grade levels) 10% 70 5 0
Weighted project scores: 100% 75.4 31 29
Text Attributions
This chapter of Project Management is a derivative of the following works: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.07%3A_Project_Initiation.txt |
After the project has been defined and the project team has been appointed, you are ready to enter the second phase in the project management life cycle: the detailed project planning phase.
Project planning is at the heart of the project life cycle, and tells everyone involved where you’re going and how you’re going to get there. The planning phase is when the project plans are documented, the project deliverables and requirements are defined, and the project schedule is created. It involves creating a set of plans to help guide your team through the implementation and closure phases of the project. The plans created during this phase will help you manage time, cost, quality, changes, risk, and related issues. They will also help you control staff and external suppliers to ensure that you deliver the project on time, within budget, and within schedule.
The project planning phase is often the most challenging phase for a project manager, as you need to make an educated guess about the staff, resources, and equipment needed to complete your project. You may also need to plan your communications and procurement activities, as well as contract any third-party suppliers.
The purpose of the project planning phase is to:
• Establish business requirements
• Establish cost, schedule, list of deliverables, and delivery dates
• Establish resources plans
• Obtain management approval and proceed to the next phase
The basic processes of project planning are:
• Scope planning – specifying the in-scope requirements for the project to facilitate creating the work breakdown structure
• Preparation of the work breakdown structure – spelling out the breakdown of the project into tasks and sub-tasks
• Project schedule development – listing the entire schedule of the activities and detailing their sequence of implementation
• Resource planning – indicating who will do what work, at which time, and if any special skills are needed to accomplish the project tasks
• Budget planning – specifying the budgeted cost to be incurred at the completion of the project
• Procurement planning – focusing on vendors outside your company and subcontracting
• Risk management – planning for possible risks and considering optional contingency plans and mitigation strategies
• Quality planning – assessing quality criteria to be used for the project
• Communication planning – designing the communication strategy with all project stakeholders
The planning phase refines the project’s objectives, which were gathered during the initiation phase. It includes planning the steps necessary to meet those objectives by further identifying the specific activities and resources required to complete the project. Now that these objectives have been recognized, they must be clearly articulated, detailing an in-depth scrutiny of each recognized objective. With such scrutiny, our understanding of the objective may change. Often the very act of trying to describe something precisely gives us a better understanding of what we are looking at. This articulation serves as the basis for the development of requirements. What this means is that after an objective has been clearly articulated, we can describe it in concrete (measurable) terms and identify what we have to do to achieve it. Obviously, if we do a poor job of articulating the objective, our requirements will be misdirected and the resulting project will not represent the true need.
Users will often begin describing their objectives in qualitative language. The project manager must work with the user to provide quantifiable definitions to those qualitative terms. These quantifiable criteria include schedule, cost, and quality measures. In the case of project objectives, these elements are used as measurements to determine project satisfaction and successful completion. Subjective evaluations are replaced by actual numeric attributes.
Example 1
A web user may ask for a fast system. The quantitative requirement should be all screens must load in under three seconds. Describing the time limit during which the screen must load is specific and tangible. For that reason, you’ll know that the requirement has been successfully completed when the objective has been met.
Example 2
Let’s say that your company is going to produce a holiday batch of eggnog. Your objective statement might be stated this way: Christmas Cheer, Inc. will produce two million cases of holiday eggnog, to be shipped to our distributors by October 30, at a total cost of \$1.5 million or less. The objective criteria in this statement are clearly stated and successful fulfillment can easily be measured. Stakeholders will know that the objectives are met when the two million cases are produced and shipped by the due date within the budget stated.
When articulating the project objectives you should follow the SMART rule:
• Specific – get into the details. Objectives should be specific and written in clear, concise, and understandable terms.
• Measurable – use quantitative language. You need to know when you have successfully completed the task.
• Acceptable – agreed with the stakeholders.
• Realistic – in terms of achievement. Objectives that are impossible to accomplish are not realistic and not attainable. Objectives must be centred in reality.
• Time based – deadlines not durations. Objectives should have a time frame with an end date assigned to them.
If you follow these principles, you’ll be certain that your objectives meet the quantifiable criteria needed to measure success.
Text Attributions
This chapter of Project Management is a derivative of the following text: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.08%3A_Overview_of_Project_Planning.txt |
You always want to know exactly what work has to be done before you start it. You have a collection of team members, and you need to know exactly what they’re going to do to meet the project’s objectives. The scope planning process is the very first thing you do to manage your scope. Project scope planning is concerned with the definition of all the work needed to successfully meet the project objectives. The whole idea here is that when you start the project, you need to have a clear picture of all the work that needs to happen on your project, and as the project progresses, you need to keep that scope up to date and written down in the project’s scope management plan.
Defining the Scope
You already have a head start on refining the project’s objectives in quantifiable terms, but now you need to plan further and write down all the intermediate and final deliverables that you and your team will produce over the course of the project. Deliverables include everything that you and your team produce for the project (i.e., anything that your project will deliver). The deliverables for your project include all of the products or services that you and your team are performing for the client, customer, or sponsor. They include every intermediate document, plan, schedule, budget, blueprint, and anything else that will be made along the way, including all of the project management documents you put together. Project deliverables are tangible outcomes, measurable results, or specific items that must be produced to consider either the project or the project phase completed. Intermediate deliverables, like the objectives, must be specific and verifiable.
All deliverables must be described in a sufficient level of detail so that they can be differentiated from related deliverables. For example:
• A twin engine plane versus a single engine plane
• A red marker versus a green marker
• A daily report versus a weekly report
• A departmental solution versus an enterprise solution
One of the project manager’s primary functions is to accurately document the deliverables of the project and then manage the project so that they are produced according to the agreed-on criteria. Deliverables are the output of each development phase, described in a quantifiable way.
Project Requirements
After all the deliverables are identified, the project manager needs to document all the requirements of the project. Requirements describe the characteristics of the final deliverable, whether it is a product or a service. They describe the required functionality that the final deliverable must have or specific conditions the final deliverable must meet in order to satisfy the objectives of the project. A requirement is an objective that must be met. The project’s requirements, defined in the scope plan, describe what a project is supposed to accomplish and how the project is supposed to be created and implemented. Requirements answer the following questions regarding the as-is and to-be states of the business: who, what, where, when, how much, and how does a business process work?
Requirements may include attributes like dimensions, ease of use, colour, specific ingredients, and so on. If we go back to the example of the company producing holiday eggnog, one of the major deliverables is the cartons that hold the eggnog. The requirements for that deliverable may include carton design, photographs that will appear on the carton, colour choices, etc.
Requirements specify what the final project deliverable should look like and what it should do. Requirements must be measurable, testable, related to identified business needs or opportunities, and defined to a level of detail sufficient for system design. They can be divided into six basic categories: functional, non-functional, technical, business, user, and regulatory requirements.
Functional Requirements
Functional requirements describe the characteristics of the final deliverable in ordinary non-technical language. They should be understandable to the customers, and the customers should play a direct role in their development. Functional requirements are what you want the deliverable to do.
Vehicle Example
If you were buying vehicles for a business, your functional requirement might be: “The vehicles should be able to take up to a one ton load from a warehouse to a shop.”
Computer System Example
For a computer system you may define what the system is to do: “The system should store all details of a customer’s order.”
The important point to note is that what is wanted is specified and not how it will be delivered.
Non-Functional Requirements
Non-functional requirements specify criteria that can be used to judge the final product or service that your project delivers. They are restrictions or constraints to be placed on the deliverable and how to build it. Their purpose is to restrict the number of solutions that will meet a set of requirements. Using the vehicle example, the functional requirement is for a vehicle to take a load from a warehouse to a shop. Without any constraints, the solutions being offered might result in anything from a small to a large truck. Non-functional requirements can be split into two types: performance and development.
To restrict the types of solutions, you might include these performance constraints:
• The purchased trucks should be American-made trucks due to government incentives.
• The load area must be covered.
• The load area must have a height of at least 10 feet.
Similarly, for the computer system example, you might specify values for the generic types of performance constraints:
• The response time for information is displayed on the screen for the user.
• The number of hours a system should be available.
• The number of records a system should be able to hold.
• The capacity for growth of the system should be built in.
• The length of time a record should be held for auditing purposes.
For the customer records example, the constraints might be:
• The system should be available from 9 a.m. to 5 p.m.Monday to Friday.
• The system should be able to hold 100,000 customer records initially.
• The system should be able to add 10,000 records a year for 10 years.
• A record should be fully available on the system for at least seven years.
One important point with these examples is that they restrict the number of solution options that are offered to you by the developer. In addition to the performance constraints, you may include some development constraints.
There are three general types of non-functional development constraints:
• Time: When a deliverable should be delivered
• Resource: How much money is available to develop the deliverable
• Quality: Any standards that are used to develop the deliverable, development methods, etc.
Technical Requirements
Technical requirements emerge from the functional requirements to answer the questions: how will the problem be solved this time and will it be solved technologically and/or procedurally? They specify how the system needs to be designed and implemented to provide required functionality and fulfill required operational characteristics.
For example, in a software project, the functional requirements may stipulate that a database system will be developed to allow access to financial data through a remote terminal. The corresponding technical requirements would spell out the required data elements, the language in which the database management system will be written (due to existing knowledge in-house), the hardware on which the system will run (due to existing infrastructure), telecommunication protocols that should be used, and so forth.
Business Requirements
Business requirements are the needs of the sponsoring organization, always from a management perspective. Business requirements are statements of the business rationale for the project. They are usually expressed in broad outcomes, satisfying the business needs, rather than specific functions the system must perform. These requirements grow out of the vision for the product that, in turn, is driven by mission (or business) goals and objectives.
User Requirements
User requirements describe what the users need to do with the system or product. The focus is on the user experience with the system under all scenarios. These requirements are the input for the next development phases: user-interface design and system test cases design.
Regulatory requirements
Regulatory requirements can be internal or external and are usually non-negotiable. They are the restrictions, licenses, and laws applicable to a product or business that are imposed by the government.
An Example of Requirements
Automated teller machines (ATMs) can be used to illustrate a wide range of requirements (Figure 9.1). What are some of the physical features of these machines, and what kinds of functions do they perform for the bank’s customers? Why did banks put these systems in place? What are the high-level business requirements?
The following represents one possible example of each type of requirement as they would be applied to a bank’s external ATM.
• ATM functional requirement: The system will enable the user to select whether or not to produce a hard-copy transaction receipt before completing a transaction.
• ATM non-functional requirement: All displays will be in white, 14-point Arial text on black background.
• ATM technical requirement: The ATM system will connect seamlessly to the existing customer’s database.
• ATM user requirement: The system will complete a standard withdrawal from a personal account, from login to cash, in less than two minutes.
• ATM business requirement: By providing superior service to our retail customers, Monumental Bank’s ATM network will allow us to increase associated service fee revenue by 10% annually on an ongoing basis.
• ATM regulatory requirement: All ATMs will connect to standard utility power sources within their civic jurisdiction, and be supplied with an uninterrupted power source approved by the company.
The effective specification of requirements is one of the most challenging undertakings project managers face. Inadequately specified requirements will guarantee poor project results.
Documenting requirements is much more than just the process of writing down the requirements as the user sees them; it should cover not only what decisions have been made, but why they have been made, as well. Understanding the reasoning that was used to arrive at a decision is critical in avoiding repetition. For example, the fact that a particular feature has been excluded, because it is simply not feasible, needs to be recorded. If it is not, then the project risks wasted work and repetition, when a stakeholder requests the feature be reinstated during development or testing.
Once the requirements are documented, have the stakeholders sign off on their requirements as a confirmation of what they desire.
While the project manager is responsible for making certain the requirements are documented, it does not mean that the project manager performs this task. The project manager enlists the help of all the stakeholders (business analysts, requirement analysts, business process owners, customers and other team members) to conduct the discussions, brain-storming, and interviews, and to document and sign off the requirements. The project manager is responsible only for enabling the process and facilitating it. If the project manager feels that the quality of the document is questionable, his or her duty is to stop the development process.
The project manager reviews the requirements, incorporates them into the project documentation library, and uses them as an input for the project plan.
Software Requirements Fundamentals
This section refers to requirements of “software” because it is concerned with problems to be addressed by software. A software requirement is a property that must be exhibited by software developed or adapted to solve a particular problem. The problem may be to automate part of a task of someone who will use the software, to support the business processes of the organization that has commissioned the software, to correct shortcomings of existing software, to control a device, etc. The functioning of users, business processes, and devices is typically complex. Therefore, the requirements on particular software are typically a complex combination of requirements from different people at different levels of an organization and from the environment in which the software will operate.
An essential property of all software requirements is that they be verifiable. It may be difficult or costly to verify certain software requirements. For example, verification of the throughput requirement on a call centre may necessitate the development of simulation software. Both the software requirements and software quality personnel must ensure that the requirements can be verified within the available resource constraints.
Requirements have other attributes in addition to the behavioural properties that they express. Common examples include a priority rating to enable trade-offs in the face of finite resources and a status value to enable project progress to be monitored. Typically, software requirements are uniquely identified so that they can be monitored over the entire software life cycle.
Measuring Requirements
As a practical matter, it is typically useful to have some concept of the volume of the requirements for a particular software product. This number is useful in evaluating the size of a change in requirements, in estimating the cost of a development or maintenance task, or simply in using it as the denominator in other measurements (see Table 9.1).
Table 9.1: Measuring Requirements
Property Measure
Speed
• Processed transactions/second
• User/Event response time
• Screen refresh time
Size
• K Bytes
• Number of RAM chips
Ease of use
• Training time
• Number of help frames
Reliability
• Mean time to failure
• Probability of unavailability
• Rate of failure occurence
• Availability
Robustness
• Time to restart after failure
• Percentage of events causing failure
• Probability of data corruption on failure
Portability
• Percentage of target dependent statements
• Number of target systems
Scope Inputs
The project manager gathers initial project facts from the project charter. In addition, background information on the stakeholder’s workplace, existing business model and rules, etc. assist in creating the vision of the final product/service, and consequently, the project scope (see Figure 9.2).
Techniques
Certainly being a seasoned project manager broadens the repertoire of one’s scope planning techniques. An experienced project manager can draw on past experiences with like projects to determine the work that is realistically doable, given time and cost constraints, for a current project. Communication and negotiation skills are a “must-have” as well. Project managers need to educate stakeholders about the project impacts of some requirements. Adding complexity to a project may require more staff, time, and/or money. It may also have an impact on project quality. Some aspects of the project may be unfeasible – stakeholders need to know this so they can adjust their vision or prepare for future challenges.
Gathering requirements is part of scope definition, and it can be done using one or more of following techniques:
• Interviews
• Focus groups
• Facilitated groups such as JAD (joint application development)
• Group creativity techniques: brainstorming, nominal groups, delphi, mind map, affinity diagnostics
• Prototyping
• Observation
• Questions and surveys
• Group decision-making techniques: unanimity, majority, plurality, dictatorship
Requirements Traceability Matrix
The requirements traceability matrix is a table that links requirements to their origin and traces them throughout the project life cycle. The implementation of a requirements traceability matrix helps ensure that each requirement adds business value by linking it to the business and project objectives. It provides a means to track requirements throughout the project life cycle, helping to ensure that requirements approved in the requirements documentation are delivered at the end of the project. Finally, it provides a structure for managing changes to the product scope. This process includes, but is not limited to, tracking:
• Requirements to business needs, opportunities, goals, and objectives
• Requirements to project objectives
• Requirements to project scope/work breakdown structure deliverables
• Requirements to product design
• Requirements to product development
• Requirements to test strategy and test scenarios
• High-level requirements to more detailed requirements
Attributes associated with each requirement can be recorded in the requirements traceability matrix. These attributes help to define key information about the requirement. Typical attributes used in the requirements traceability matrix may include a unique identifier, a textual description of the requirement, the rationale for inclusion, owner, source, priority, version, current status (such as active, cancelled, deferred, added, approved), and date completed. Additional attributes to ensure that the requirement has met stakeholders’ satisfaction may include stability, complexity, and acceptance criteria.
Matrix Fields
These are suggestions only and will vary based on organizational and project requirements.
• A unique identification number containing the general category of the requirement (e.g., SYSADM) and a number assigned in ascending order (e.g., 1.0, 1.1, 1.2)
• Requirement statement
• Requirement source (conference, configuration control board, task assignment, etc.)
• Software requirements specification/functional requirements document paragraph number containing the requirement
• Design specification paragraph number containing the requirement
• Program module containing the requirement
• Test specification containing the requirement test
• Test case number(s) where requirement is to be tested (optional)
• Verification of successful testing of requirements
• Modification field (If a requirement was changed, eliminated, or replaced, indicate disposition and authority for modification.)
• Remarks
Work Breakdown Structure
Now that we have the deliverables and requirements well defined, the process of breaking down the work of the project via a work breakdown structure (WBS) begins. The WBS defines the scope of the project and breaks the work down into components that can be scheduled, estimated, and easily monitored and controlled. The idea behind the WBS is simple: you subdivide a complicated task into smaller tasks, until you reach a level that cannot be further subdivided. Anyone familiar with the arrangements of folders and files in a computer memory or who has researched their ancestral family tree should be familiar with this idea. You stop breaking down the work when you reach a low enough level to perform an estimate of the desired accuracy. At that point, it is usually easier to estimate how long the small task will take and how much it will cost to perform than it would have been to estimate these factors at the higher levels. Each descending level of the WBS represents an increased level of detailed definition of the project work.
WBS describes the products or services to be delivered by the project and how they are decomposed and related. It is a deliverable-oriented decomposition of a project into smaller components. It defines and groups a project’s discrete work elements in a way that helps organize and define the total work scope of the project.
A WBS also provides the necessary framework for detailed cost estimating and control, along with providing guidance for schedule development and control.
Overview
WBS is a hierarchical decomposition of the project into phases, deliverables, and work packages. It is a tree structure, which shows a subdivision of effort required to achieve an objective (e.g., a program, project, and contract). In a project or contract, the WBS is developed by starting with the end objective and successively subdividing it into manageable components in terms of size, duration, and responsibility (e.g., systems, subsystems, components, tasks, subtasks, and work packages), which include all steps necessary to achieve the objective.
The WBS creation involves:
• Listing all the project outputs (deliverables and other direct results)
• Identifying all the activities required to deliver the outputs
• Subdividing these activities into subactivities and tasks
• Identifying the deliverable and milestone(s) of each task
• Identifying the time usage of all the resources (personnel and material) required to complete each task
The purpose of developing a WBS is to:
• Allow easier management of each component
• Allow accurate estimation of time, cost, and resource requirements
• Allow easier assignment of human resources
• Allow easier assignment of responsibility for activities
Example of a WBS
If I want to clean a room, I might begin by picking up clothes, toys, and other things that have been dropped on the floor. I could use a vacuum cleaner to get dirt out of the carpet. I might take down the curtains and take them to the cleaners, and then dust the furniture. All of these tasks are subtasks performed to clean the room. As for vacuuming the room, I might have to get the vacuum cleaner out of the closet, connect the hose, empty the bag, and put the machine back in the closet. These are smaller tasks to be performed in accomplishing the subtask called vacuuming. Figure 9.3 shows how this might be portrayed in WBS format.
It is very important to note that we do not worry about the sequence in which the work is performed or any dependencies between the tasks when we do a WBS. That will be worked out when we develop the schedule. For example, under 3.0 Vacuum, it would be obvious that 3.3 Vacuum carpet would be performed after 3.4 Connect hose and plug! However, you will probably find yourself thinking sequentially, as it seems to be human nature to do so. The main idea of creating a WBS is to capture all of the tasks, irrespective of their order. So if you find yourself and other members of your team thinking sequentially, don’t be too concerned, but don’t get hung up on trying to diagram the sequence or you will slow down the process of task identification. A WBS can be structured any way it makes sense to you and your project. In practice, the chart structure is used quite often but it can be composed in outline form as well (Figure 9.4).
You’ll notice that each element at each level of the WBS in both figures is assigned a unique identifier. This unique identifier is typically a number, and it’s used to sum and track costs, schedules, and resources associated with WBS elements. These numbers are usually associated with the corporation’s chart of accounts, which is used to track costs by category. Collectively, these numeric identifiers are known as the code of accounts.
There are also many ways you can organize the WBS. For example, it can be organized by either deliverable or phase. The major deliverables of the project are used as the first level in the WBS. For example, if you are doing a multimedia project the deliverables might include producing a book, CD, and a DVD (Figure 9.5).
Many projects are structured or organized by project phases (Figure 9.6). Each phase would represent the first level of the WBS and their deliverables would be the next level and so on.
The project manager is free to determine the number of levels in the WBS based on the complexity of the project. You need to include enough levels to accurately estimate project time and costs but not so many levels that are difficult to distinguish between components. Regardless of the number of levels in a WBS, the lowest level is called a work package.
Work packages are the components that can be easily assigned to one person or a team of people, with clear accountability and responsibility for completing the assignment. The work-package level is where time estimates, cost estimates, and resource estimates are determined.
100 Percent Rule
The 100 percent rule is the most important criterion in developing and evaluating the WBS. The rule states that each decomposed level (child) must represent 100 percent of the work applicable to the next higher (parent) element. In other words, if each level of the WBS follows the 100 percent rule down to the activities, then we are confident that 100 percent of the activities will have been identified when we develop the project schedule. When we create the budget for our project, 100 percent of the costs or resources required will be identified.
Scope Statement
Scope statements may take many forms depending on the type of project being implemented and the nature of the organization. The scope statement details the project deliverables and describes the major objectives. The objectives should include measurable success criteria for the project.
A scope statement captures, in very broad terms, the product of the project: for example, “development of a software-based system to capture and track orders for software.” A scope statement should also include the list of users using the product, as well as the features in the resulting product.
As a baseline scope statements should contain:
• The project name
• The project charter
• The project owner, sponsors, and stakeholders
• The problem statement
• The project goals and objectives
• The project requirements
• The project deliverables
• The project non-goals (what is out of scope)
• Milestones
• Cost estimates
In more project-oriented organizations, the scope statement may also contain these and other sections:
• Project scope management plan
• Approved change requests
• Project assumptions and risks
• Project acceptance criteria
Image Descriptions
Figure 9.2 image description: A project manager develops a Scope Management Plan by taking the project charter, organizational memory, and the project plan and applying the following techniques and tools:
• Calls on past project experience
• Uses scope management templates (SOS, WBS, Scope Management Plan)
• Uses Communication skills (for negotiating with and educating clients)
[Return to Figure 9.2]
Figure 9.3 image description:
0.0 Clean Room
• 1.0 Mop floor.
• 1.1 Get mop and bucket out.
• 1.2 Mix cleaner with water in bucket.
• 1.3 Rinse out bucket and mop.
• 2.0 Dust
• 2.1 Coffee table
• 2.2 Blinds
• 3.0 Vacuum
• 3.1 Get vacuum out of closet
• 3.2 Vacuum carpet
• 3.3 Empty bag
• 3.4 Connect hose and plug
• 4.0 Pick up floor
• 4.1 Toys
• 4.1.1 Put toys in box
• 4.2 Clothes
• 4.2.1 Hang up in closet
• 5.0 Clean curtains
• 5.1 Remove curtains
• 5.2 Take to cleaners
• 5.3 Hang curtains
[Return to Figure 9.3]
Text Attributions
This chapter of Project Management is a derivative of the following texts: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.09%3A_Scope_Planning.txt |
In order to develop our schedule, we first need to define the activities, sequence them in the right order, estimate the resources needed, and estimate the time it will take to complete the tasks.
Defining Activities
The activity definition process is a further breakdown of the work package elements of the WBS. It documents the specific activities needed to fulfill the deliverables detailed in the WBS. These activities are not the deliverables themselves but the individual units of work that must be completed to fulfill the deliverables. Activity definition uses everything we already know about the project to divide the work into activities that can be estimated. You might want to look at all the lessons learned from similar projects your company has done to get a good idea of what you need to do on the current one.
Expert judgment in the form of project team members with prior experience developing project scope statements and WBS can help you define activities. If you are asked to manage a project in a new domain, you might also use experts in that particular field to help define tasks so you can understand what activities are going to be involved. You may want to create an activity list and then have the expert review it and suggest changes. Alternatively, you could involve the expert from the very beginning and ask to have an activity definition conversation with him or her before even making your first draft of the list.
Sometimes you start a project without knowing a lot about the work that you’ll be doing later. Rolling-wave planning lets you plan and schedule only the portion that you know enough about to plan well. When you don’t know enough about a project, you can use placeholders for the unknown portions until you know more. These are extra items that are put at high levels in the WBS to allow you to plan for the unknown.
A Case Study
Susan and Steve have decided to tie the knot, but they don’t have much time to plan their wedding. They want the big day to be unforgettable. They want to invite many people and provide a great time. They’ve always dreamed of a June wedding, but it’s already January. Just thinking about all of the details involved is overwhelming. Susan has been dreaming of the big day since she was 12, but it seems that there’s so little time for all the tasks to be completed. When they were choosing the paper for the invitations, the couple realized that they needed help.
Susan: Steve, we need some help.
Steve: Don’t worry. My sister’s wedding planner was great. Let me give her a call. [Steve calls the wedding planner Sally.]
Wedding Planner: Hello, Susan and Steve.
Steve: We want everything to be perfect.
Susan: There is so much to do! Invitations, food, guests, and music.
Steve: Oh no, we haven’t even booked a place!
Susan: And it has to be done right. We can’t print the invitations until we have the menu planned. We can’t do the seating arrangements until we have the RSVPs. We aren’t sure what kind of band to get for the reception, or should it be a DJ? We’re just overwhelmed.
Steve: My sister said you really saved her wedding. I know she gave you over a year to plan. But I’ve always dreamed of a June wedding, and I’m not willing to give that up. I know it’s late, but Sally, can you help us?
Wedding Planner: Take it easy. I’ve got it under control. We’ve a lot of people and activities to get under control. You really should have called six months ago, but we’ll still make this wedding happen on time.
Much work has to be done before June. First, Sally figures out what work needs to be done. She starts to put together a to-do list:
• Invitations
• Flowers
• Wedding cake
• Dinner menu
• Band
Since many different people are involved in the making of the wedding, it takes much planning to coordinate all the work in the right order by the right people at the right time. Initially, Sally was worried that she didn’t have enough time to make sure that everything would be done properly. However, she knew that she had some powerful time management tools on her side when she took the job, and these tools would help her to synchronize all the required tasks.
To get started, Sally arranged all the activities in a work breakdown structure. The next exercise presents part of the WBS Sally made for the wedding.
WBS Exercise
Arrange the following activities into the WBS (Figure 10.1) to show how the work items decompose into activities.
• Shop for shoes
• Create guest list
• Have the tailoring and fitting done
• Shop for dress
• Find caterer
• Cater the wedding
• Wait for RSVPs
• Mail the invitations
• Finalize the menu
• Print the invitations
• Choose the bouquet
Solution to Exercise:
Activity List
Now that the activity definitions for the work packages have been completed, the next task is to complete the activity list. The project activity list is a list of everything that needs to be done to complete your project, including all the activities that must be accomplished to deliver each work package. Next you want to define the activity attributes. Here’s where the description of each activity is kept. It includes all the information you need to figure out plus the order of the work. Any predecessor activities, successor activities, or constraints should be listed in the attributes along with descriptions and any other information about resources or time that you need for planning. The three main kinds of predecessors are finish-to-start (FS), start-to-start (SS), and finish-to-finish (FF). The most common kind of predecessor is the finish-to-start. It means that one task needs to be completed before another one can start. When you think of predecessors, this is what you usually think of; one thing needs to end before the next can begin. It’s called finish-to-start because the first activity’s finish leads into the second activity’s start (Figure 10.3).
The start-to-start predecessor is a little less common, but sometimes you need to coordinate activities so they begin at the same time (Figure 10.4).
The finish-to-finish predecessor shows activities that finish at the same time (Figure 10.5).
It is possible to have start-to-finish (SF) predecessors. This happens when activities require that another task be started before the successor task can finish. An example might be that the musicians cannot finish playing until the guests have started leaving the ceremony. In addition, there are some particular types of predecessors that must be considered.
External Predecessors
Sometimes your project will depend on things outside the work you’re doing. For the wedding, we are depending on the wedding party before us to be out of the reception hall in time for us to decorate. The decoration of the reception hall then depends on that as an external predecessor.
Discretionary Predecessors
These are usually process- or procedure-driven or best-practice techniques based on past experience. In the wedding example, Steve and Susan want the bridesmaids to arrive at the reception before the couple arrives. There’s no necessity; it is just a matter of preference.
Mandatory Predecessors
You can’t address an invitation that hasn’t been printed yet. So printing invitations is a mandatory predecessor for addressing them. Mandatory predecessors are the kinds that have to exist just because of the nature of the work.
Leads and Lags
Sometimes you need to give some extra time between activities. Lag time is when you purposefully put a delay between the predecessor task and the successor. For example, when the bride and her father dance, the others wait awhile before they join them (Figure 10.6).
Lead time is when you give a successor task some time to get started before the predecessor finishes (Figure 10.7). So you might want the caterer preparing dessert an hour before everybody is eating dinner.
Figure 10.7: A lead is when you let a task get started before its predecessor is done.
Milestones
All of the important checkpoints of your project are tracked as milestones. Some of them could be listed in your contract as requirements of successful completion; some could just be significant points in the project that you want to keep track of. The milestone list needs to let everyone know which milestones are required and which are not.
Some milestones for Susan and Steve’s wedding might be:
• Invitations sent
• Menu finalized
• Location booked
• Bridesmaids’ dresses fitted
As you figure out which activities will need to be done, you may realize that the scope needs to change. When that happens, you need to create a change request and send it through the change control system.
Some things that could go wrong:
Wedding Planner: We just got the programs back from the printer and they’re all wrong.
Steve: The quartet cancelled. They had another wedding that day.
Susan: Aunt Jane is supposed to sing at the service, but after what happened at her uncle’s funeral, I think I want someone else to do it.
Steve: Should we really have a pan flute player? I’m beginning to think it might be overkill.
Susan: Apparently! Maybe we should hold off on printing the invitations until these things are worked out.
Wedding Planner: OK, let’s think about exactly how we want to do this. I think we need to be sure about how we want the service to go before we do any more printing.
The Activity Sequencing Process
Now that we know what we have to do to make the wedding a success, we need to focus on the order of the work. Sally sat down with all of the activities she had defined for the wedding and decided to figure out exactly how they needed to happen. That’s where she used the activity sequencing process.
The activity attribute list Sally created had most of the predecessors and successors necessary written in it. This is where she thought of what comes first, second, third, etc. Sally’s milestone list had major pieces of work written down, and there were a couple of changes to the scope she had discovered along the way that were approved and ready to go.
Example milestone list: Steve and Susan had asked that the invitations be printed at least three months in advance to be sure that everyone had time to RSVP. That’s a milestone on Sally’s list.
Example change request: When Sally realized that Steve and Susan were going to need another limo to take the bridesmaids to the reception hall, she put that change through change control, including running everything by Susan’s mother, and it was approved.
Creating the Gantt Chart
A Gantt chart is a type of bar chart, developed by Henry Gantt, that illustrates a project schedule. Gantt charts are easy to read and are commonly used to display schedule activities. These charts display the start and finish dates of the terminal elements and summary elements of a project. Terminal elements and summary elements comprise the work breakdown structure of the project. Some Gantt charts also show the dependency relationships (i.e., precedence network) between activities.
Gantt charts show all the key stages of a project and their duration as a bar chart, with the time scale across the top. The key stages are placed on the bar chart in sequence, starting in the top left corner and ending in the bottom right corner (Figure 10.8). A Gantt chart can be drawn quickly and easily and is often the first tool a project manager uses to provide a rough estimate of the time that it will take to complete the key tasks. Sometimes it is useful to start with the target deadline for completion of the whole project, because it is soon apparent if the time scale is too short or unnecessarily long. The detailed Gantt chart is usually constructed after the main objectives have been determined.
In this example in Figure 10.8, key stage K (Organize distribution) starts at week 23 so that its end point coincides with key stage L (Distribute directory). However, K could begin as early as week 17, as soon as key stage J is completed. Key stage K is therefore said to have “slack.” Key stage H (Agree print contract) has been placed to end at week 12. However, it could end as late as week 22, because key stage I (Print directory) does not begin until week 23. Key stage H is therefore said to have “float.” Float time can be indicated on the chart by adding a line ahead of the bar to the latest possible end point. Slack and float show you where there is flexibility in the schedule, and this can be useful when you need to gain time once the project is up and running.
You can add other information to a Gantt chart, for example:
• Milestones could be indicated by using a symbol such as a diamond or triangle.
• Project meetings could be indicated by another symbol such as a circle.
• Reviews of progress could be indicated by a square.
For a complex project, you may decide to produce a separate Gantt chart for each of the key stages. If you do this shortly before each key stage begins, you will be able to take any last-minute eventualities into account. These charts provide a useful tool for monitoring and control as the project progresses.
Gantt charts are relatively easy to draw by hand, but this doesn’t offer the same level of flexibility during monitoring that you would get from a software package. Various programs are available to assist project managers in scheduling and control. Once the data have been entered, a program helps you to work on “what if” scenarios, showing what might happen if a key stage is delayed or speeded up. This is more difficult if you are working manually.
Creating the Network Diagram
Many project managers use network diagrams when scheduling a project. The network diagram is a way to visualize the interrelationships of project activities. Network diagrams provide a graphical view of the tasks and how they relate to one another. The tasks in the network are the work packages of the WBS. All of the WBS tasks must be included in the network because they have to be accounted for in the schedule. Leaving even one task out of the network could change the overall schedule duration, estimated costs, and resource allocation commitments.
The first step is to arrange the tasks from your WBS into a sequence. Some tasks can be accomplished at any time throughout the project where other tasks depend on input from another task or are constrained by time or resources.
The WBS is not a schedule, but it is the basis for it. The network diagram is a schedule but is used primarily to identify key scheduling information that ultimately goes into user-friendly schedule formats, such as milestone and Gantt charts.
The network diagram provides important information to the project team. It provides information about how the tasks are related (Figure 10.9), where the risk points are in the schedule, how long it will take as currently planned to finish the project, and when each task needs to begin and end.
In our wedding planner example, Sally would look for relationships between tasks and determine what can be done in parallel and what activities need to wait for others to complete. As an example, Figure 10.10 shows how the activities involved in producing the invitations depend on one another. Showing the activities in rectangles and their relationships as arrows is called a precedence diagramming method (PDM). This kind of diagram is also called an activity-on-node (AON) diagram.
Another way to show how tasks relate is with the activity-on-arrow (AOA) diagram. Although AON is more commonly used and is supported by all project management programs, PERT is the best-known AOA-type diagram and is the historical basis of all network diagramming. The main difference is the AOA diagram is traditionally drawn using circles as the nodes, with nodes representing the beginning and ending points of the arrows or tasks. In the AOA network, the arrows represent the activities or tasks (Figure 10.11).
All network diagrams have the advantages of showing task interdependencies, start and end times, and the critical path (the longest path through the network) but the AOA network diagram has some disadvantages that limit the use of the method.
Figure 10.11: An example of an activity arrow (AOA) network diagram.
The three major disadvantages of the AOA method are:
• The AOA network can only show finish-to-start relationships. It is not possible to show lead and lag except by adding or subtracting time, which makes project tracking difficult.
• There are instances when dummy activities can occur in an AOA network. Dummy activities are activities that show the dependency of one task on other tasks but for other than technical reasons. For example, one task may depend on another because it would be more cost effective to use the same resources for the two; otherwise the two tasks could be accomplished in parallel. Dummy activities do not have durations associated with them. They simply show that a task has some kind of dependence on another task.
• AOA diagrams are not as widely used as AON diagrams simply because the latter are somewhat simpler to use, and all project management software programs can accommodate AON networks, whereas not all can accommodate AOA networks.
The Critical Path
The critical path describes the sequence of tasks that would enable the project to be completed in the shortest possible time. It is based on the idea that some tasks must be completed before others can begin. A critical path diagram is a useful tool for scheduling dependencies and controlling a project. In order to identify the critical path, the length of time that each task will take must be calculated.
Let’s take a look at an example. The length of time in weeks for each key stage is estimated:
Table 10.1 Stages of the Critical Path
Key stage Estimated time in weeks
A. Secure funds 0
B. Negotiate with other agencies 4
C. Form advisory group 4
D. Establish data collection plan 6
E. Collect data 4
F. Write directory text 4
G. Identify printer 2
H. Agree print contract 2
I. Print directory 4
J. Agree distribution plan 12
K. Organize distribution 4
L. Distribute directory 2
We have given the key stage “Secure funds” an estimated time of zero weeks because the project cannot start without the availability of some funding, although estimates would provide detail at a later stage. The stages can now be lined up to produce a network diagram that shows that there are three paths from start to finish and that the lines making up each path have a minimum duration (Figure 10.12).
If we now trace each of the possible paths to “Distribute directory” (the finishing point), taking dependencies into account, the route that has the longest duration is known as the critical path. This is the minimum time in which it will be possible to complete the project.
Figure 10.12: Critical Path Diagram
In this example, the critical path is A–B–C–D–E–F–I–L, and the earliest completion date for the project is the sum of the estimated times for all the stages on the critical path – 28 weeks – from the point of securing the funding. All the key stages on the critical path must be completed on time if the project is to be finished on schedule.
If the projected total time is much longer than the project sponsor’s expectations, you will need to renegotiate the time scale. Mapping the critical path helps to identify the activities that need to be monitored most closely.
Image Descriptions
Figure 10.2 image description:
0.0 Wedding
• 1.0 Invitations
• 1.1 Create guest list
• 1.2 Wait for RSVPs
• 1.3 Mail the invitations
• 1.4 Print the invitations
• 2.0 Food
• 2.1 Find caterer
• 2.2 Cater the wedding
• 2.3 Finalize the menu
• 3.0 Bridal
• 3.1 Shop for shoes
• 3.2 Tailoring and fitting
• 3.3 Shop for dress
• 3.4 Choose the bouquet
Text Attributions
This chapter of Project Management is a derivative of the following texts: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.10%3A_Project_Schedule_Planning.txt |
In the previous wedding case study, it is clear that Steve and Susan have resource problems. Getting a handle on all of the tasks that have to be done is a great start, but it’s not enough to know the tasks and the order they come in. Before you can put the final schedule together, you need to know who is going to do each job, and the things they need so they can do it.
“We’ve got so much to do! Invitations, catering, music… and I’ve got no idea who’s going to do it all. I’m totally overwhelmed.” From this statement it is clear that Susan is worried about human resources. In comparison, Steve realizes that not all resources are people: “And it’s not just people. We need food, flowers, a cake, a sound system, and a venue. How do we get a handle on this?”
Resources are people, equipment, place, money, or anything else that you need in order to do all of the activities that you planned for. Every activity in your activity list needs to have resources assigned to it. Before you can assign resources to your project, you need to know their availability. Resource availability includes information about what resources you can use on your project, when they’re available to you, and the conditions of their availability. Don’t forget that some resources, like consultants or training rooms, have to be scheduled in advance, and they might only be available at certain times. You’ll need to know this before you can finish planning your project. If you are starting to plan in January, a June wedding is harder to plan than one in December, because the wedding halls are all booked up in advance. That is clearly a resource constraint. You’ll also need the activity list that you created earlier, and you’ll need to know how your organization typically handles resources. Once you’ve got a handle on these things, you’re set for resource estimation.
Estimating the Resources
The goal of activity resource estimating is to assign resources to each activity in the activity list. There are five tools and techniques for estimating activity resources.
Expert judgment means bringing in experts who have done this sort of work before and getting their opinions on what resources are needed.
Alternative analysis means considering several different options for how you assign resources. This includes varying the number of resources as well as the kind of resources you use. Many times, there’s more than one way to accomplish an activity and alternative analysis helps decide among the possibilities.
Published estimatingdata is something that project managers in a lot of industries use to help them figure out how many resources they need. They rely on articles, books, journals, and periodicals that collect, analyze, and publish data from other people’s projects.
Project management software such as Microsoft Project will often have features designed to help project managers estimate resource needs and constraints and find the best combination of assignments for the project.
Bottom-up estimating means breaking down complex activities into pieces and working out the resource assignments for each piece. It is a process of estimating individual activity resource need or cost and then adding these up together to come up with a total estimate. Bottom-up estimating is a very accurate means of estimating, provided the estimates at the schedule activity level are accurate. However, it takes a considerable amount of time to perform bottom-up estimating because every activity must be assessed and estimated accurately to be included in the bottom-up calculation. The smaller and more detailed the activity, the greater the accuracy and cost of this technique.
Estimating Activity Durations
Once you’re done with activity resource estimating, you’ve got everything you need to figure out how long each activity will take. That’s done in a process called activity duration estimating. This is where you look at each activity in the activity list, consider its scope and resources, and estimate how long it will take to perform.
Estimating the duration of an activity means starting with the information you have about that activity and the resources that are assigned to it, and then working with the project team to come up with an estimate. Most of the time you’ll start with a rough estimate and then refine it to make it more accurate. You’ll use these five tools and techniques to create the most accurate estimates:
Expert judgment will come from your project team members who are familiar with the work that has to be done. If you don’t get their opinion, there’s a huge risk that your estimates will be wrong.
Analogous estimating is when you look at similar activities from previous projects and how long they took. This only works if the activities and resources are similar.
Parametric estimating means plugging data about your project into a formula, spreadsheet, database, or computer program that comes up with an estimate. The software or formula that you use for parametric estimating is based on a database of actual durations from past projects.
Three-point estimating is when you come up with three numbers: a realistic estimate that’s most likely to occur, an optimistic one that represents the best-case scenario, and a pessimistic one that represents the worst-case scenario. The final estimate is the weighted average of the three.
Reserve analysis means adding extra time to the schedule (called a contingency reserve or a buffer) to account for extra risk.
(Solutions follow.)
Exercises
In each of the following scenarios of planning Steve and Susan’s wedding, determine which of the five activity resource estimation tools and techniques is being used.
1. Sally has to figure out what to do for the music at Steve and Susan’s wedding. She considers using a DJ, a rock band, or a string quartet.
2. The latest issue of Wedding Planner’s Journal has an article on working with caterers. It includes a table that shows how many waiters work with various guest-list sizes.
3. There’s a national wedding consultant who specializes in Caribbean-themed weddings. Sally gets in touch with her to ask about menu options.
4. Sally downloads and fills out a specialized spreadsheet that a project manager developed to help with wedding planning.
5. There’s so much work that has to be done to set up the reception hall that Sally has to break it down into five different activities in order to assign jobs.
6. Sally asks Steve and Susan to visit several different caterers and sample various potential items for the menu.
7. Sally calls up her friend who knows specifics of the various venues in their area for advice on which one would work best.
8. There are two different catering companies at the wedding. Sally asks the head chef at each of them to give her an estimate of how long it will take each of them to do the job.
9. There’s a spreadsheet Sally always uses to figure out how long it takes guest to RSVP. She enters the number of guests and their zip codes, and it calculates estimates for her.
10. Sally’s done four weddings that are very similar to Steve and Susan’s, and in all four of them, it took exactly the same amount of time for the caterers to set up the reception hall.
Solutions
1. Alternative analysis
2. Published estimating data
3. Expert judgment
4. Project management software
5. Bottom-up estimating
6. Alternative analysis
7. Expert judgment
8. Expert judgment
9. Parametric estimating
10. Analogous estimating
The activity duration estimates are an estimate of how long each activity in the activity list will take. This is a quantitative measure usually expressed in hours, weeks, days, or months. Any work period is fine, and you’ll use different work periods for different jobs. A small job (like booking a DJ) may take just a few hours; a bigger job (like catering, including deciding on a menu, ordering ingredients, cooking food, and serving guests on the big day) could take days.
Another thing to keep in mind when estimating the duration of activities is determining the effort involved. Duration is the amount of the time that an activity takes, while effort is the total number of person-hours that are expended. If it takes two people six hours to carve the ice sculpture for the centrepiece of a wedding, the duration is six hours. But if two people worked on it for the whole time, it took 12 person-hours of effort to create.
You’ll also learn more about the specific activities while you’re estimating them. That’s something that always happens. You have to really think through all of the aspects of a task in order to estimate it. As you learn more about the specific activities remember to update the activity attributes.
If we go back to our case study of the wedding, we can see that while Sally has a handle on how long things are going to take, she still has some work to do before she has the whole project under control. Steve and Susan know where they want to get married, and they have the place booked now. But, what about the caterer? They have no idea who’s going to be providing food. And what about the band they want? Will the timing with their schedule work out? “If the caterers come too early, the food will sit around under heat lamps. But if they come too late, the band won’t have time to play. I just don’t see how we’ll ever work this out.”
It’s not easy to plan for a lot of resources when they have tight time restrictions and overlapping constraints. How do you figure out a schedule that makes everything fit together? You’re never going to have the complete resource picture until you have finished building the schedule. And the same goes for your activity list and duration estimates! It’s only when you lay out the schedule that you’ll figure out that some of your activities and durations didn’t quite work.
Project Schedule and Critical Path
The project schedule should be approved and signed off by stakeholders and functional managers. This ensures they have read the schedule, understand the dates and resource commitments, and will cooperate. You’ll also need to obtain confirmation that resources will be available as outlined in the schedule. The schedule cannot be finalized until you receive approval and commitment for the resource assignments outlined in it. Once the schedule is approved, it will become your baseline for the remainder of the project. Project progress and task completion will be monitored and tracked against the project schedule to determine if the project is on course as planned.
The schedule can be displayed in a variety of ways, some of which are variations of what you have already seen. Project schedule network diagrams will work as schedule diagrams when you add the start and finish dates to each activity. These diagrams usually show the activity dependencies and critical path.
The critical path method is an important tool for keeping your projects on track. Every network diagram has something that is called the critical path. It’s the string of activities that, if you add up all of the durations, is longer than any other path through the network. It usually starts with the first activity in the network and usually ends with the last one.
Steve: Aunt Jane is a vegetarian. That won’t be a problem, right?
Susan: Well, let’s see. What menu did we give the caterers?
Steve: We didn’t give it to them yet because we won’t have the final menu until everyone RSVPs and lets us know which entrée they want.
Susan: But they can’t RSVP because we haven’t sent out the invitations! What’s holding that up?
Steve: We’re still waiting to get them back from the printer. We can’t send them out if we don’t have them yet!
Susan: Oh no! I still have to tell the printer what to print on the invitations and what paper to use.
Steve: But you were waiting on that until we finished the guest list.
Susan: What a mess!
Steve thought Aunt Jane being a vegetarian was just a little problem. But it turns out to be a lot bigger than either Steve or Susan realized at first. How did a question about one guest’s meal lead to such a huge mess?
The reason that the critical path is critical is that every single activity on the path must finish on time in order for the project to come in on time. A delay in any one of the critical path activities will cause the entire project to be delayed (Figure 11.1).
Knowing where your critical path is can give you a lot of freedom. If you know an activity is not on the critical path, then you know a delay in that activity may not necessarily delay the project. This can really help you handle emergency situations. Even better, it means that if you need to bring your project in earlier than was originally planned, you know that adding resources to the critical path will be much more effective than adding them elsewhere.
It’s easy to find the critical path in any project. Of course, on a large project with dozens or hundreds of tasks, you’ll probably use software like Microsoft Project to find the critical path for you. But when it does, it’s following the same exact steps that are followed here (Figure 11.12).
Step 1. Start with a network diagram.
Step 2. Find all the paths in the diagram. A path is any string of activities that goes from the start of the project to the end.[1]
• Start > Activity “A” > Activity “B” > Finish
• Start > Activity “A” > Activity “C” > Finish
• Start > Activity “D” > Activity “E” > Finish
Step 3. Find the duration of each path by adding up the durations of each of the activities on the path.
• Start > Activity “A” > Activity “B” > Finish = 4 + 7 = 11
• Start > Activity “A” > Activity “C” > Finish = 4 + 2 = 6
• Start > Activity “D” > Activity “E” > Finish = 3 + 5 = 8
Step 4. The first path has a duration of 11, which is longer than the other paths, so it’s the critical path.
The schedule can also be displayed using a Gantt chart (Figure 11.3).
Resource Management
Resource management is the efficient and effective deployment of an organization’s resources when they are needed. Such resources may include financial resources, inventory, human skills, production resources, or information technology (IT). In the realm of project management, processes, techniques, and philosophies for the best approach for allocating resources have been developed. These include discussions on functional versus cross-functional resource allocation as well as processes espoused by organizations like the Project Management Institute (PMI) through the methodology of project management outlined in their publication A Guide to the Project Management Body of Knowledge (PMBOK). Resource management is a key element to activity resource estimating and project human resource management. As is the case with the larger discipline of project management, there are resource management software tools available that automate and assist the process of resource allocation to projects.
HR Planning
The most important resource to a project is its people—the project team. Projects require specific expertise at specific moments in the schedule, depending on the milestones being delivered or the given phase of the project. An organization can host several strategic projects concurrently over the course of a budget year, which means that its employees can be working on more than one project at a time. Alternatively, an employee may be seconded away from his or her role within an organization to become part of a project team because of a particular expertise. Moreover, projects often require talent and resources that can only be acquired via contract work and third party vendors. Procuring and coordinating these human resources, in tandem with managing the time aspect of the project, is critical to overall success.
Managing the Team
In order to successfully meet the needs of a project, it is important to have a high-performing project team made up of individuals who are both technically skilled and motivated to contribute to the project’s outcome. One of the many responsibilities of a project manager is to enhance the ability of each project team member to contribute to the project, while also fostering individual growth and accomplishment. At the same time, each individual must be encouraged to share ideas and work with others toward a common goal.
Through performance evaluation, the manager will get the information needed to ensure that the team has adequate knowledge, to establish a positive team environment and a healthy communication climate, to work properly, and to ensure accountability.
Managing the project team includes appraisal of employee performance and project performance. The performance reports provide the basis for managerial decisions on how to manage the project team.
Employee performance includes the employee’s work results such as:
• Quality and quantity of outputs
• Work behaviour (such as punctuality)
• Job-related attributes (such as cooperation and initiative)
After conducting employee performance reviews, project managers should:
• Provide feedback to employees about how well they have performed on established goals
• Provide feedback to employees about areas in which they are weak or could do better
• Take corrective action to address problems with employees performing at or below minimum expectations
• Reward superior performers to encourage their continued excellence
Techniques for Managing Resources
One resource management technique is resource leveling. It aims at smoothing the stock of resources on hand, reducing both excess inventories and shortages.
The required data are the demands for various resources, forecast by time period into the future as far as is reasonable; the resources’ configurations required in those demands; and the supply of the resources, again forecast by time period into the future as far as is reasonable.
The goal is to achieve 100% utilization. However that is very unlikely, when weighted by important metrics and subject to constraints; for example: meeting a minimum quality level, but otherwise minimizing cost.
Resource Leveling
Resource leveling is used to examine unbalanced use of resources (usually people or equipment) over time and for resolving over-allocations or conflicts.
When performing project planning activities, the manager will attempt to schedule certain tasks simultaneously. When more resources such as machines or people are needed than are available, or perhaps a specific person is needed in both tasks, the tasks will have to be rescheduled sequentially to manage the constraint. Resource leveling during project planning is the process of resolving these conflicts. It can also be used to balance the workload of primary resources over the course of the project, usually at the expense of one of the traditional triple constraints (time, cost, scope).
When using specially designed project software, leveling typically means resolving conflicts or over-allocations in the project plan by allowing the software to calculate delays and update tasks automatically. Project management software leveling requires delaying tasks until resources are available. In more complex environments, resources could be allocated across multiple, concurrent projects thus requiring the process of resource leveling to be performed at company level.
In either definition, leveling could result in a later project finish date if the tasks affected are in the critical path.
Working with Individuals
Working with other people involves dealing with them both logically and emotionally. A successful working relationship between individuals begins with appreciating the importance of emotions and how they relate to personality types, leadership styles, negotiations, and setting goals.
Emotional Intelligence
Emotions are both a mental and physiological response to environmental and internal stimuli. Leaders need to understand and value their emotions to appropriately respond to the client, project team, and project environment.
Emotional intelligence includes the following:
• Self-awareness
• Self-regulation
• Empathy
• Relationship management
Emotions are important to generating energy around a concept, building commitment to goals, and developing high-performing teams. Emotional intelligence is an important part of the project manager’s ability to build trust among the team members and with the client. It is an important factor in establishing credibility and an open dialogue with project stakeholders. Emotional intelligence is critical for project managers, and the more complex the project profile, the more important the project manager’s emotional intelligence becomes to project success.
Personality Types
Personality types refer to the differences among people in such matters as what motivates them, how they process information, how they handle conflict, etc. Understanding people’s personality types is acknowledged as an asset in interacting and communicating with them more effectively. Understanding your personality type as a project manager will assist you in evaluating your tendencies and strengths in different situations. Understanding others’ personality types can also help you coordinate the skills of your individual team members and address the various needs of your client.
The Myers-Briggs Type Indicator (MBTI) is one of most widely used tools for exploring personal preference, with more than two million people taking the MBTI each year. The MBTI is often referred to as simply the Myers-Briggs. It is a tool that can be used in project management training to develop awareness of preferences for processing information and relationships with other people.
Based on the theories of psychologist Carl Jung, the Myers-Briggs uses a questionnaire to gather information on the ways individuals prefer to use their perception and judgment. Perception represents the way people become aware of people and their environment. Judgment represents the evaluation of what is perceived. People perceive things differently and reach different conclusions based on the same environmental input. Understanding and accounting for these differences is critical to successful project leadership.
The Myers-Briggs identifies 16 personality types based on four preferences derived from the questionnaire. The preferences are between pairs of opposite characteristics and include the following:
• Extroversion (E)-Introversion (I)
• Sensing (S)-Intuition (N)
• Thinking (T)-Feeling (F)
• Judging (J)-Perceiving (P)
Sixteen Myers-Briggs types can be derived from the four dichotomies. Each of the 16 types describes a preference: for focusing on the inner or outer world (E-I), for approaching and internalizing information (S-I), for making decisions (T-F), and for planning (J-P). For example, an ISTJ is a Myers-Briggs type who prefers to focus on the inner world and basic information, prefers logic, and likes to decide quickly.
It is important to note that there is no best type and that effective interpretation of the Myers-Briggs requires training. The purpose of the Myers-Briggs is to understand and appreciate the differences among people. This understanding can be helpful in building the project team, developing common goals, and communicating with project stakeholders. For example, different people process information differently. Extroverts prefer face-to-face meetings as the primary means of communicating, while introverts prefer written communication. Sensing types focus on facts, and intuitive types want the big picture.
On larger, more complex projects, some project managers will use the Myers-Briggs as a team-building tool during project start-up. This is typically a facilitated work session where team members take the Myers-Briggs and share with the team how they process information, what communication approaches they prefer, and what decision-making preferences they have. This allows the team to identify potential areas of conflict, develop communication strategies, and build an appreciation for the diversity of the team.
Another theory of personality typing is the DISC method, which rates people’s personalities by testing a person’s preferences in word associations in the following four areas:
• Dominance/Drive—relates to control, power, and assertiveness
• Inducement/Influence—relates to social situations and communication
• Submission/Steadiness—relates to patience, persistence, and thoughtfulness
• Compliance/Conscientiousness—relates to structure and organization
Understanding the differences among people is a critical leadership skill. This includes understanding how people process information, how different experiences influence the way people perceive the environment, and how people develop filters that allow certain information to be incorporated while other information is excluded. The more complex the project, the more important the understanding of how people process information, make decisions, and deal with conflict. There are many personality-type tests that have been developed and explore different aspects of people’s personalities. It might be prudent to explore the different tests available and utilize those that are most beneficial for your team.
Leadership Styles
Leadership style is a function of both the personal characteristics of the leader and the environment in which the leadership must occur, and a topic that several researchers have attempted to understand. Robert Tannenbaum and Warren Schmidt described leaders as either autocratic or democratic (1958). Harold Leavitt described leaders as pathfinders (visionaries), problem solvers (analytical), or implementers (team oriented) (1986). James MacGregor Burns conceived leaders as either transactional (focused on actions and decisions) or transformational (focused on the long-term needs of the group and organization) (1978).
Fred Fiedler introduced his contingency theory, which is the ability of leaders to adapt their leadership approach to the environment (1971). Most leaders have a dominant leadership style that is most comfortable for them. For example, most engineers spend years training in analytical problem solving and often develop an analytical approach to leadership.
A leadership style reflects personal characteristics and life experiences. Although a project manager’s leadership style may be predominantly a pathfinder (using Leavitt’s taxonomy), most project managers become problem solvers or implementers when they perceive the need for these leadership approaches. The leadership approach incorporates the dominant leadership style and Fiedler’s contingency focus on adapting to the project environment.
No particular leadership approach is specifically appropriate for managing a project. Due to the unique circumstances inherent in each project, the leadership approach and the management skills required to be successful vary depending on the complexity profile of the project. However, the Project Management Institute published Shi and Chen’s research that studied project management leadership traits and concluded that good communication skills and the ability to build harmonious relationships and motivate others are essential (2006). Beyond this broad set of leadership skills, the successful leadership approach will depend on the profile of the project. For example, a transactional project manager with a strong command-and-control leadership approach may be very successful on a small software development project or a construction project, where tasks are clear, roles are well understood, and the project environment is cohesive. This same project manager is less likely to be successful on a larger, more complex project with a diverse project team and complicated work processes.
Matching the appropriate leadership style and approach to the complexity profile of the project is a critical element of project success. Even experienced project managers are less likely to be successful if their leadership approach does not match the complexity profile of the project.
Each project phase may also require a different leadership approach. During the start-up phase of a project, when new team members are first assigned to the project, the project may require a command-and-control leadership approach. Later, as the project moves into the conceptual phase, creativity becomes important, and the project management takes on a more transformational leadership approach. Most experienced project managers are able to adjust their leadership approach to the needs of the project phase. Occasionally, on very large and complex projects, some companies will bring in different project managers for various phases of a project. Changing project managers may bring the right level of experience and the appropriate leadership approach, but is also disruptive to a project. Senior management must balance the benefit of matching the right leadership approach with the cost of disrupting established relationships.
Example: Multinational Textbook Publishing Project
On a project to publish a new textbook at a major publisher, a project manager led a team that included members from partners that were included in a joint venture. The editorial manager was Greek, the business manager was German, and other members of the team were from various locations in the United States and Europe. In addition to the traditional potential for conflict that arises from team members from different cultures, the editorial manager and business manager were responsible for protecting the interest of their company in the joint venture.
The project manager held two alignment or team-building meetings. The first was a two-day meeting held at a local resort and included only the members of the project leadership team. An outside facilitator was hired to facilitate discussion, and the topic of cultural conflict and organizational goal conflict quickly emerged. The team discussed several methods for developing understanding and addressing conflicts that would increase the likelihood of finding mutual agreement.
The second team-building session was a one-day meeting that included the executive sponsors from the various partners in the joint venture. With the project team aligned, the project manager was able to develop support for the publication project’s strategy and commitment from the executives of the joint venture. In addition to building processes that would enable the team to address difficult cultural differences, the project manager focused on building trust with each of the team members. The project manager knew that building trust with the team was as critical to the success of the project as the technical project management skills and devoted significant management time to building and maintaining this trust.
Leadership Skills
The project manager must be perceived to be credible by the project team and key stakeholders. A successful project manager can solve problems and has a high degree of tolerance for ambiguity. On projects, the environment changes frequently, and the project manager must apply the appropriate leadership approach for each situation.
The successful project manager must have good communication skills. All project problems are connected to skills needed by the project manager:
• Breakdown in communication represents the lack of communication skills
• Uncommitted team members represents the lack of team-building skills
• Role confusion represents the lack of organizational skill
Project managers need a large numbers of skills. These skills include administrative skills, organizational skills, and technical skills associated with the technology of the project. The types of skills and the depth of the skills needed are closely connected to the complexity profile of the project. Typically on smaller, less complex projects, project managers need a greater degree of technical skill. On larger, more complex projects, project managers need more organizational skills to deal with the complexity. On smaller projects, the project manager is intimately involved in developing the project schedule, cost estimates, and quality standards. On larger projects, functional managers are typically responsible for managing these aspects of the project, and the project manager provides the organizational framework for the work to be successful.
Listening
One of the most important communication skills of the project manager is the ability to actively listen. Active listening is placing oneself in the speaker’s position as much as possible, understanding the communication from the point of view of the speaker, listening to the body language and other environmental cues, and striving not just to hear, but to understand. Active listening takes focus and practice to become effective. It enables a project manager to go beyond the basic information that is being shared and to develop a more complete understanding of the information.
Example: Client’s Body Language
A client just returned from a trip to Australia where he reviewed the progress of the project with his company’s board of directors. The project manager listened and took notes on the five concerns expressed by the board of directors to the client.
The project manager observed that the client’s body language showed more tension than usual. This was a cue to listen very carefully. The project manager nodded occasionally and clearly demonstrated he was listening through his posture, small agreeable sounds, and body language. The project manager then began to provide feedback on what was said using phrases like “What I hear you say is…” or “It sounds like.…” The project manager was clarifying the message that was communicated by the client.
The project manager then asked more probing questions and reflected on what was said. “It sounds as if it was a very tough board meeting.” “Is there something going on beyond the events of the project?” From these observations and questions, the project manager discovered that the board of directors meeting did not go well. The company had experienced losses on other projects, and budget cuts meant fewer resources for the project and an expectation that the project would finish earlier than planned. The project manager also discovered that the client’s future with the company would depend on the success of the project. The project manager asked, “Do you think we will need to do things differently?” They began to develop a plan to address the board of directors’ concerns.
Through active listening, the project manager was able to develop an understanding of the issues that emerged from the board meeting and participate in developing solutions. Active listening and the trusting environment established by the project manager enabled the client to safely share information he had not planned on sharing and to participate in creating a workable plan that resulted in a successful project.
In the example above, the project manager used the following techniques:
• Listening intently to the words of the client and observing the client’s body language
• Nodding and expressing interest in the client without forming rebuttals
• Providing feedback and asking for clarity while repeating a summary of the information back to the client
• Expressing understanding and empathy for the client
Active listening was important in establishing a common understanding from which an effective project plan could be developed.
Negotiation
When multiple people are involved in an endeavor, differences in opinions and desired outcomes naturally occur. Negotiation is a process for developing a mutually acceptable outcome when the desired outcome for each party conflicts. A project manager will often negotiate with a client, team members, vendors, and other project stakeholders. Negotiation is an important skill in developing support for the project and preventing frustration among all parties involved, which could delay or cause project failure.
Negotiations involve four principles:
1. Separate people from the problem. Framing the discussions in terms of desired outcomes enables the negotiations to focus on finding new outcomes.
2. Focus on common interests. By avoiding the focus on differences, both parties are more open to finding solutions that are acceptable.
3. Generate options that advance shared interests. Once the common interests are understood, solutions that do not match with either party’s interests can be discarded, and solutions that may serve both parties’ interests can be more deeply explored.
4. Develop results based on standard criteria. The standard criterion is the success of the project. This implies that the parties develop a common definition of project success.
For the project manager to successfully negotiate issues on the project, he or she should first seek to understand the position of the other party. If negotiating with a client, what is the concern or desired outcome of the client? What are the business drivers and personal drivers that are important to the client? Without this understanding, it is difficult to find a solution that will satisfy the client. The project manager should also seek to understand what outcomes are desirable to the project. Typically, more than one outcome is acceptable. Without knowing what outcomes are acceptable, it is difficult to find a solution that will produce that outcome.
One of the most common issues in formal negotiations is finding a mutually acceptable price for a service or product. Understanding the market value for a product or service will provide a range for developing a negotiating strategy. The price paid on the last project or similar projects provides information on the market value. Seeking expert opinions from sources who would know the market is another source of information. Based on this information, the project manager can then develop an expected range within the current market from the lowest price to the highest price.
Additional factors will also affect the negotiated price. The project manager may be willing to pay a higher price to assure an expedited delivery or a lower price if delivery can be made at the convenience of the supplier or if payment is made before the product is delivered. Developing as many options as possible provides a broader range of choices and increases the possibility of developing a mutually beneficial outcome.
The goal of negotiations is not to achieve the lowest costs, although that is a major consideration, but to achieve the greatest value for the project. If the supplier believes that the negotiations process is fair and the price is fair, the project is more likely to receive higher value from the supplier. The relationship with the supplier can be greatly influenced by the negotiation process and a project manager who attempts to drive the price unreasonably low or below the market value will create an element of distrust in the relationship that may have negative consequences for the project. A positive negotiation experience may create a positive relationship that may be beneficial, especially if the project begins to fall behind schedule and the supplier is in a position to help keep the project on schedule.
Conflict Resolution
Conflict on a project is to be expected because of the level of stress, lack of information during early phases of the project, personal differences, role conflicts, and limited resources. Although good planning, communication, and team building can reduce the amount of conflict, conflict will still emerge. How the project manager deals with the conflict results in the conflict being destructive or an opportunity to build energy, creativity, and innovation.
David Whetton and Kim Cameron developed a response-to-conflict model that reflected the importance of the issue balanced against the importance of the relationship (2005). The model presented five responses to conflict:
• Avoiding
• Forcing
• Collaborating
• Compromising
• Accommodating
Each of these approaches can be effective and useful depending on the situation. Project managers will use each of these conflict resolution approaches depending on the project manager’s personal approach and an assessment of the situation.
Most project managers have a default approach that has emerged over time and is comfortable. For example, some project managers find the use of the project manager’s power the easiest and quickest way to resolve problems. “Do it because I said to” is the mantra for project managers who use forcing as the default approach to resolve conflict. Some project managers find accommodating with the client the most effective approach to dealing with client conflict.
The effectiveness of a conflict resolution approach will depend on the situation. The forcing approach often succeeds in a situation where a quick resolution is needed, and the investment in the decision by the parties involved is low.
Example: Resolving an Office Space Conflict
Two senior managers both want the office with the window. The project manager intercedes with little discussion and assigns the window office to the manager with the most seniority. The situation was a low-level conflict with no long-range consequences for the project and a solution all parties could accept.
Sometimes office size and location is culturally important, and this situation would take more investment to resolve.
Example: Conflict Over a Change Order
In another example, the client rejected a request for a change order because she thought the change should have been foreseen by the project team and incorporated into the original scope of work. The project controls manager believed the client was using her power to avoid an expensive change order and suggested the project team refuse to do the work without a change order from the client.
This is a more complex situation, with personal commitments to each side of the conflict and consequences for the project. The project manager needs a conflict resolution approach that increases the likelihood of a mutually acceptable solution for the project. One conflict resolution approach involves evaluating the situation, developing a common understanding of the problem, developing alternative solutions, and mutually selecting a solution. Evaluating the situation typically includes gathering data. In our example of a change order conflict, gathering data would include a review of the original scope of work and possibly of people’s understandings, which might go beyond the written scope.The second step in developing a resolution to the conflict is to restate, paraphrase, and reframe the problem behind the conflict to develop a common understanding of the problem. In our example, the common understanding may explore the change management process and determine that the current change management process may not achieve the client’s goal of minimizing project changes. This phase is often the most difficult and may take an investment of time and energy to develop a common understanding of the problem.
After the problem has been restated and agreed on, alternative approaches are developed. This is a creative process that often means developing a new approach or changing the project plan. The result is a resolution to the conflict that is mutually agreeable to all team members. If all team members believe every effort was made to find a solution that achieved the project charter and met as many of the team member’s goals as possible, there will be a greater commitment to the agreed-on solution.
Delegation
Delegating responsibility and work to others is a critical project management skill. The responsibility for executing the project belongs to the project manager. Often other team members on the project will have a functional responsibility on the project and report to a functional manager in the parent organization. For example, the procurement leader for a major project may also report to the organization’s vice-president for procurement. Although the procurement plan for the project must meet the organization’s procurement policies, the procurement leader on the project will take day-to-day direction from the project manager. The amount of direction given to the procurement leader, or others on the project, is the decision of the project manager.
If the project manager delegates too little authority to others to make decisions and take action, the lack of a timely decision or lack of action will cause delays on the project. Delegating too much authority to others who do not have the knowledge, skills, or information will typically cause problems that result in delay or increased cost to the project. Finding the right balance of delegation is a critical project management skill.
When developing the project team, the project manager selects team members with the knowledge, skills, and abilities to accomplish the work required for the project to be successful. Typically, the more knowledge, skills, abilities, and experience a project team member brings to the project, the more that team member will be paid. To keep the project personnel costs lower, the project manager will develop a project team with the level of experience and the knowledge, skills, and abilities to accomplish the work.
On smaller, less complex projects, the project manager can provide daily guidance to project team members and be consulted on all major decisions. On larger, more complex projects, there are too many important decisions made every day for the project manager to be involved at the same level, and project team leaders are delegated decision-making authority. Larger projects, with a more complex profile will typically pay more because of the need for the knowledge and experience. On larger, more complex projects, the project manager will develop a more experienced and knowledgeable team that will enable the project manager to delegate more responsibility to these team members.
Example Learning Project in Peru
An instructional design project in Peru was falling behind schedule, and a new manager was assigned to the design team, which was the one most behind schedule. He was an experienced project manager from the United States with a reputation for meeting aggressive schedules. However, he failed to see that as a culture, Peruvians do a great deal more socializing than teams in the U.S. The project manager’s communication with the team was then limited because he did not go out and spend time with them, and his team did not develop trust or respect for him. Due to these cultural differences, the project fell further behind, and another personnel change had to be made at a significant cost of time, trust, and money.
The project manager must have the skills to evaluate the knowledge, skills, and abilities of project team members and evaluate the complexity and difficulty of the project assignment. Often project managers want project team members they have worked with in the past. Because the project manager knows the skill level of the team member, project assignments can be made quickly with less supervision than with a new team member with whom the project manager has little or no experience.
Delegation is the art of creating a project organizational structure with the work organized into units that can be managed. Delegation is the process of understanding the knowledge, skills, and abilities needed to manage that work and then matching the team members with the right skills to do that work. Good project managers are good delegators.
Adjusting Leadership Styles
Remember that personality traits reflect an individual’s preferences, not their limitations. It is important to understand that individuals can still function in situations for which they are not best suited. It is also important to realize that you can change your leadership style according to the needs of your team and the particular project’s attributes and scope.
For example, a project leader who is more thinking (T) than feeling (F) (according to the Myers-Briggs model) would need to work harder to be considerate of how team members who are more feeling (F) might react if they were singled out in a meeting because they were behind schedule. If individuals knows their own preferences and which personality types are most successful in each type of project or project phase, they can set goals for improvement in their ability to perform in those areas that are not their natural preference.
Another individual goal is to examine which conflict resolution styles you are least comfortable and work to improve those styles so that they can be used when they are more appropriate than your default style.
Working with Groups and Teams
A team is a collaboration of people with different personalities that is led by a person with a favoured leadership style. Managing the interactions of these personalities and styles as a group is an important aspect of project management.
Trust
Trust is the foundation for all relationships within a project. Without a minimum level of trust, communication breaks down, and eventually the project suffers in the form of costs increasing and schedules slipping. Often, when reviewing a project where the performance problems have captured the attention of upper management, the evidence of problems is the increase in project costs and the slippage in the project schedule. The underlying cause is usually blamed on communication breakdown. With deeper investigation, the communication breakdown is associated with a breakdown in trust.
On projects, trust is the filter through which we screen information that is shared and the filter we use to screen information we receive. The more trust that exists, the easier it is for information to flow through the filters. As trust diminishes, the filters become stronger and information has a harder time getting through, and projects that are highly dependent on an information-rich environment will suffer from information deprivation.
Contracts and Trust Relationships
A project typically begins with a charter or contract. A contract is a legal agreement that includes penalties for any behaviour or results not achieved. Contracts are based on an adversarial paradigm and do not lend themselves to creating an environment of trust. Contracts and charters are necessary to clearly establish the scope of the project, among other things, but they are not conducive to establishing a trusting project culture.
A relationship of mutual trust is less formal but vitally important. When a person or team enters into a relationship of mutual trust, each person’s reputation and self-respect are the drivers in meeting the intent of the relationship. A relationship of mutual trust within the context of a project is a commitment to an open and honest relationship. There is nothing that enforces the commitments in the relationship except the integrity of the people involved. Smaller, less complex projects can operate within the boundaries of a legal contract, but larger, more complex projects must develop a relationship of mutual trust to be successful.
Types of Trust
Svenn Lindskold describes four kinds of trust (1978):
• Objective credibility. A personal characteristic that reflects the truthfulness of an individual that can be checked against observable facts.
• Attribution of benevolence. A form of trust that is built on the examination of the person’s motives and the conclusion that they are not hostile.
• Non-manipulative trust. A form of trust that correlates to a person’s self-interest and the predictability of a person’s behaviour in acting consistent in that self-interest.
• High cost of lying. The type of trust that emerges when persons in authority raise the cost of lying so high that people will not lie because the penalty will be too high.
Creating Trust
Building trust on a project begins with the project manager. On complex projects, the assignment of a project manager with a high trust reputation can help establish the trust level needed. The project manager can also establish the cost of lying in a way that communicates an expectation and a value for trust on the project. Project managers can also assure that the official goals (stated goals) and operational goals (goals that are reinforced) are aligned. The project manager can create an atmosphere where informal communication is expected and reinforced.
The informal communication is important to establishing personal trust among team members and with the client. Allotting time during project start-up meetings to allow team members to develop a personal relationship is important to establishing the team trust. The informal discussion allows for a deeper understanding of the whole person and creates an atmosphere where trust can emerge.
Example: High Cost of Lying in a Charleston Project
On a project in Charleston, South Carolina, the client was asking for more and more backup to information from the project. The project manager visited the client to better understand the reporting requirements and discovered the client did not trust the reports coming from the project and wanted validating material for each report. After some candid discussion, the project manager discovered that one of the project team members had provided information to the client that was inaccurate. The team member had made a mistake but had not corrected it with the client, hoping that the information would get lost in the stream of information from the project. The project manager removed the team member from the project for two main reasons. The project manager established that the cost of lying was high. The removal communicated to the project team an expectation of honesty. The project manager also reinforced a covenant with the client that reinforced the trust in the information the project provided. The requests for additional information declined, and the trust relationship between project personnel and the client remained high.
Small events that reduce trust often take place on a project without anyone remembering what happened to create the environment of distrust. Taking fast and decisive action to establish a high cost of lying, communicating the expectation of honesty, and creating an atmosphere of trust are critical steps a project manager can take to ensure the success of complex projects.
Project managers can also establish expectations of team members to respect individual differences and skills, look and react to the positives, recognize each other’s accomplishments, and value people’s self-esteem to increase a sense of the benevolent intent.
Managing Team Meetings
Team meetings are conducted differently depending on the purpose of the meeting, the leadership style that is appropriate for the meeting, and the personality types of the members of the team.
Action Item Meetings
Action item meetings are short meetings to develop a common understanding of what the short-term priorities are for the project, individual roles, and expectations for specific activities. This type of meeting is for sharing, not problem solving. Any problems that emerge from the discussion are assigned to a person, and another meeting is established to address the issue. Action item meetings focus on short-term activities, usually less than a week in duration.
The action item meeting is fact based and information oriented. It is a left-brain-type focus. The action item meeting has very little dialogue except to ask clarification questions. If discussion is needed or disagreement is not easily resolved, another problem-solving meeting is established to deal with that issue. On smaller topics, that meeting might take place immediately after the action item meeting and only include those people with an interest in the outcome of the discussion.
The project manager keeps the successful action item meeting short in duration and focused on only those items of information needed for the short-term project plan. The project manager will restate the common understandings of what activities are priorities and who will be responsible for the activities. Often these meetings can include a review of safety procedures or security procedures when these issues are important to the project. The leadership approach to action item meetings focuses on data, actions, and commitments. Although the project manager may observe stresses between project team members or other issues, they are not addressed in this meeting. These are fact-based meetings. If issues begin to arise between people, the project manager will develop other opportunities to address these issues in another forum. Using the Myers-Briggs descriptions, team members who favour thinking more than feeling and judging more than perceiving are more comfortable with this type of meeting.
Management Meetings
Management meetings are longer in duration and are focused on planning. They are oriented toward developing plans, tracking progress of existing plans, and making adjustments to plans in response to new information.
These meetings include focused discussion on generating a common understanding of the progress of the existing plan. This discussion is based on quantitative information provided on the progress of the schedule and other data, but the discussion is qualitative in evaluating the data to develop a more complete understanding of the data. The experience and opinions of the project leaders are solicited, and disagreement about meaning of the data is even encouraged to develop a deeper understanding of the data. Through this discussion, a common understanding of the status of the project should emerge, and the project manager invites discussion, invites people to offer their thoughts, and assures that disagreements are positive discussions about interpretation of the information and that disagreements do not become personal.
Management meetings also focus on developing mid-term goals. For larger, more complex projects, the goals may be monthly or even quarterly. For smaller or less complex projects, weekly goals will provide the focus. The project manager focuses the discussion on the broad priorities for the next period and includes all the functional leaders in the discussion. The goals that emerge from the discussion should represent a common understanding of the priorities of the project for the next term.
For example, during the early phases of a project, the team is focused on developing a conceptual understanding of the project. A major milestone on complex projects is typically the completion of the conceptual plan. The project manager would lead a discussion on what needs to be accomplished to meet the project milestone and asks what potential barriers exist and what key resources are needed. From the discussion, the project team develops a few key goals that integrate the various functions of the project team and focus the team on priorities.
The following are some examples of goals during the conceptual phase:
• Developing a list of the procurement long-lead items and defining critical dates
• Developing a human resources plan that identifies critical positions
• Developing and building agreement with the client on the project scope of work
Each of these goals is measurable and has a time frame specified. They can be developed as positive motivators and will take the project leaders and most of the project team to accomplish. They develop a general understanding of the priorities and are easy to remember.
Management meetings are a combination of left-brain thinking, which is fact based, and right-brain thinking, which is creative and innovative. Using the Myers-Briggs terminology, team members who prefer feeling over thinking and perceiving over judging can contribute ideas and perspectives on the project that the more fact-oriented members might miss.
The project manager allows and encourages conversation in developing and evaluating the goals but focuses the discussion on the goals and obstacles. Management meetings take on a different focus during the month. Meetings at the beginning of the month spend time addressing the progress and potential barriers to the goals developed the previous month. During the middle of the month, the project manager leads the team to develop next month’s goals as the team also works on the current month’s goals. Toward the end of the month as the goals for the month are accomplished, the meeting focuses more on the next month, enabling the team to remain goal focused during the life of the project.
Management meetings are also an opportunity to discover obstacles to goal achievement. The project team reallocates resources or develops alternative methods for accomplishing the goals. As the project team discusses the progress of project goals, the project manager explores possible obstacles and encourages exposing potential problems in achieving goals. The project manager focuses the team on finding solutions and avoids searching for blame.
The project manager uses a facilitative leadership approach, encouraging the management team to contribute their ideas, and builds consensus on what goals will bring the appropriate focus. The project manager keeps the focus on developing the goals, tracking progress, identifying barriers, and making adjustments to accomplish the management goals. Although there are typically meetings for scheduling and procurement and other meetings where goals are established and problems solved, the management meeting and the goal development process create alignment among the project leadership on the items critical to the project’s success.
Leadership Meetings
Leadership meetings are held less frequently and are longer in length. These meetings are used by the project manager to reflect on the project, explore the larger issues of the project, and back away from the day-to-day problem solving. The project manager will create a safe environment for sharing thoughts and evaluations of issues that are less data oriented. This is a right-brained, creative meeting that focuses on the people issues of the project: the relationship with the client, vendors, and project team. Team members who favour feeling, perceiving, and intuition often contribute valuable insights in this type of meeting. The team might also share perceptions by upper management and perceptions of the community in which the project is being executed. Where the time frame for action item meetings is in weeks and management meetings is in months, the time frame for leadership meetings is longer and takes in the entire length and impact of the project.
The project manager’s meeting management skill includes creating the right meeting atmosphere for the team discussion that is needed. For discussions based on data and facts, the project manager creates the action item type meeting. The conversation is focused on sharing information and clarification. The conversation for leadership meetings is the opposite. Discussion is more open ended and focused on creativity and innovation. Because each type of meeting requires a different meeting atmosphere, mixing the purposes of a meeting will make it difficult for the project manager to develop and maintain the appropriate kind of conversation.
Skilled project managers know what type of meeting is needed and how to develop an atmosphere to support the meeting type. Meetings of the action item type are focused on information sharing with little discussion. They require efficient communication of plans, progress, and other information team members need to plan and execute daily work. Management type meetings are focused on developing and progressing goals. Leadership meetings are more reflective and focused on the project mission and culture.
These three types of meetings do not cover all the types of project meetings. Specific problem-solving, vendor evaluation, and scheduling meetings are examples of typical project meetings. Understanding what kinds of meetings are needed on the project and creating the right focus for each meeting type is a critical project management skill.
Types of Teams
Teams can outperform individual team members in several situations. The effort and time invested in developing a team and the work of the team are large investments of project resources, and the payback is critical to project success. Determining when a team is needed and then chartering and supporting the development and work of the team are other critical project management abilities.
Teams are effective in several project situations:
• When no one person has the knowledge, skills, and abilities to either understand or solve the problem
• When a commitment to the solution is needed by large portions of the project team
• When the problem and solution cross project functions
• When innovation is required
Individuals can outperform teams on some occasions. An individual tackling a problem consumes fewer resources than a team and can operate more efficiently—as long as the solution meets the project’s needs. A person is most appropriate in the following situations:
• When speed is important
• When one person has the knowledge, skills, and resources to solve the problem
• When the activities involved in solving the problem are very detailed
• When the actual document needs to be written (Teams can provide input, but writing is a solitary task.)
In addition to knowing when a team is appropriate, the project manager must also understand what type of team will function best.
Functional Teams
A functional team refers to the team approach related to the project functions. The engineering team, the procurement team, and the project controls team are examples of functional teams within the project. On a project with a low complexity profile that includes low technological challenges, good team member experience, and a clear scope of work, the project manager can utilize well-defined functional teams with clear expectations, direction, and strong vertical communication.
Cross-Functional Teams
Cross-functional teams address issues and work processes that include two or more of the functional teams. The team members are selected to bring their functional expertise to addressing project opportunities.
Example: Cross-Functional Teamwork
A cross-functional project team in Tennessee was assigned to develop a project approach to drafting, shooting, and editing educational videos without storing the videos on the school server. Although the complexity of this goal is primarily related to creating the videos and procuring editing equipment, the planning involved coordination of the script drafting, procurement of equipment and talent, and establishment of project controls. Team members from each of these functions developed and tracked a plan to meet the project goal. Because they communicated so frequently and clearly, the cross-functional team was successful in designing a process and executing the plan in a way that saved three weeks on the video schedule and several thousand dollars in cost by hosting off-site.
Problem-Solving Teams
Problem-solving teams are assigned to address specific issues that arise during the life of the project. The project leadership includes members that have the expertise to address the problem. The team is chartered to address that problem and then disband.
Qualitative Assessment of Project Performance
Project managers should provide an opportunity to ask such questions as “What is your gut feeling about how the project going?” and “How do you think our client perceives the project?” This creates the opportunity for reflection and dialogue around larger issues on the project. The project manager creates an atmosphere for the team to go beyond the data and search for meaning. This type of discussion and reflection is very difficult in the stress of day-to-day problem solving.
The project manager has several tools for developing good quantitative information—based on numbers and measurements—such as the project schedules, budgets and budget reports, risk analysis, and goal tracking. This quantitative information is essential to understanding the current status and trends on the project. Just as important is the development of qualitative information—comparisons of qualities—such as judgments made by expert team members that go beyond the quantitative data provided in a report. Some would label this the “gut feeling” or intuition of experienced project managers.
The Humm Factor is a survey tool developed by Russ Darnall to capture the thoughts of project participants. It derived its name from a project manager who always claimed he could tell you more by listening to the hum of the project than reading all the project reports. “Do you feel the project is doing the things it needs to do to stay on schedule?” and “Is the project team focused on project goals?” are the types of questions that can be included in the Humm Factor. It is distributed on a weekly or less frequent basis depending on the complexity profile of the project. A project with a high level of complexity due to team-based and cultural issues will be surveyed more frequently.
The qualitative responses are converted to a quantitative value as a score from 1 to 10. Responses are tracked by individuals and the total project, resulting in qualitative comparisons over time. The project team reviews the ratings regularly, looking for trends that indicate an issue may be emerging on the project that might need exploring.
Example: Humm Survey Uncovers Concerns
On a project in South Carolina, the project surveyed the project leadership with a Humm Survey each week. The Humm Factor indicated an increasing worry about the schedule beginning to slip when the schedule reports indicated that everything was according to plan. When the project manager began trying to understand why the Humm Factor was showing concerns about the schedule, he discovered an apprehension about the performance of a critical project supplier. When he asked team members, they responded, “It was the way they answered the phone or the hesitation when providing information—something didn’t feel right.”
The procurement manager visited the supplier and discovered the company was experiencing financial problems and had serious cash flow problems. The project manager was able to develop a plan to help the supplier through the period, and the supplier eventually recovered. The project was able to meet performance goals. The Humm Factor survey provided a tool for members of the project team to express concerns that were based on very soft data, and the project team was able to discover a potential problem.
Another project team used the Humm Factor to survey the client monthly. The completed surveys went to a person who was not on the project team to provide anonymity to the responses. The responses were discussed at the monthly project review meetings, and the project manager summarized the results and addressed all the concerns expressed in the report. “I don’t feel my concerns are being heard” was one response that began increasing during the project, and the project manager spent a significant portion of the next project review meeting attempting to understand what this meant. The team discovered that as the project progressed toward major milestones, the project team became more focused on solving daily problems, spent more time in meetings, and their workday was becoming longer. The result was fewer contacts with the clients, slower responses in returning phone calls, and much fewer coffee breaks where team members could casually discuss the project with the client.
The result of the conversation led to better understanding by both the project team and client team of the change in behaviour based on the current phase of the project and the commitment to developing more frequent informal discussion about the project.
Creating a Project Culture
Project managers have a unique opportunity during the start-up of a project. They create a project culture, something organizational managers seldom have a chance to do. In most organizations, the corporate or organizational culture has developed over the life of the organization, and people associated with the organization understand what is valued, what has status, and what behaviours are expected. Edgar Schein identified three distinct levels in organizational culture.
1. Artifacts and behaviours
2. Espoused values
3. Assumptions
Artifacts are the visible elements in a culture and they can be recognized by people not part of the culture. Espoused values are the organization’s stated values and rules of behaviour. Shared basic assumptions are the deeply embedded, taken-for-granted behaviours that are usually unconscious, but constitute the essence of culture.
Characteristics of Project Culture
A project culture represents the shared norms, beliefs, values, and assumptions of the project team. Understanding the unique aspects of a project culture and developing an appropriate culture to match the complexity profile of the project are important project management abilities.
Culture is developed through the communication of:
• The priority
• The given status
• The alignment of official and operational rules
Official rules are the rules that are stated, and operational rules are the rules that are enforced. Project managers who align official and operational rules are more effective in developing a clear and strong project culture because the project rules are among the first aspects of the project culture to which team members are exposed when assigned to the project.
Example: Operational Rules on a Multi-site Project
During an instructional design project that required individuals to collaborate remotely, an official rule had been established that individuals would back up their work in a location other than the shared folders they were using every week. It did not take long, however, for everyone involved to see that one member was actively backing up all work. Believing that was sufficient, the operational rule became simply leaving the backing up to a single individual. They assumed that official rules could be ignored if they were difficult to obey.
When this individual fell ill, however, no one picked up the slack and followed the official rule. When some files were corrupted, the team found that their most recent backups were weeks old, resulting in redoing a lot of work. The difference between the official rules and the operational rules of the project created a culture that made communication of the priorities more difficult.
In addition to official and operational rules, the project leadership communicates what is important by the use of symbols, storytelling, rituals, rewards or punishments, and taboos.
Example: Creating a Culture of Collaboration
A project manager met with his team prior to the beginning of an instructional design project. The team was excited about the prestigious project and the potential for career advancement involved. With this increased competitive aspect came the danger of selfishness and backstabbing. The project leadership team told stories of previous projects where people were fired for breaking down the team efforts and often shared inspirational examples of how teamwork created unprecedented successes—an example of storytelling. Every project meeting started with team-building exercises—a ritual—and any display of hostility or separatism was forbidden—taboo—and was quickly and strongly cut off by the project leadership if it occurred.
Culture guides behaviour and communicates what is important and is useful for establishing priorities. On projects that have a strong culture of trust, team members feel free to challenge anyone who breaks a confidence, even managers. The culture of integrity is stronger than the cultural aspects of the power of management.
Innovation on Projects
The requirement of innovation on projects is influenced by the nature of the project. Some projects are chartered to develop a solution to a problem, and innovation is a central ingredient of project success. The lack of availability of education to the world at large prompted the open education movement, a highly innovative endeavor, which resulted in the textbook you are now reading. Innovation is also important to developing methods of lowering costs or shortening the schedule. Traditional project management thinking provides a trade-off between cost, quality, and schedule. A project sponsor can typically shorten the project schedule with an investment of more money or a lowering of quality. Finding innovative solutions can sometimes lower costs while also saving time and maintaining the quality.
Innovation is a creative process that requires both fun and focus. Stress is a biological reaction to perceived threats. Stress, at appropriate levels, can make the work environment interesting and even challenging. Many people working on projects enjoy a high-stress, exciting environment. When the stress level is too high, the biological reaction increases blood flow to the emotional parts of the brain and decreases the blood flow to the creative parts of the brain, making creative problem solving more difficult. Fun reduces the amount of stress on the project. Project managers recognize the benefits of balancing the stress level on the project with the need to create an atmosphere that enables creative thought.
Example: Stress Managed on a Website Design Project
When a project manager visited the team tasked with designing the website for a project, she found that most of the members were feeling a great deal of stress. As she probed to find the reason behind the stress, she found that in addition to designing, the team was increasingly facing the need to build the website as well. As few of them had the necessary skills, they were wasting time that could be spent designing trying to learn building skills. Once the project manager was able to identify the stress as well as its cause, she was able to provide the team with the support it needed to be successful.
Exploring opportunities to create savings takes an investment of time and energy, and on a time-sensitive project, the project manager must create the motivation and the opportunity for creative thinking.
Text Attributions
This chapter of Project Management is a derivative of the following texts: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.11%3A_Resource_Planning.txt |
Every project boils down to money. If you had a bigger budget, you could probably get more people to do your project more quickly and deliver more. That’s why no project plan is complete until you come up with a budget. But no matter whether your project is big or small, and no matter how many resources and activities are in it, the process for figuring out the bottom line is always the same.
It is important to come up with detailed estimates for all the project costs. Once this is compiled, you add up the cost estimates into a budget plan. It is now possible to track the project according to that budget while the work is ongoing.
Often, when you come into a project, there is already an expectation of how much it will cost or how much time it will take. When you make an estimate early in the project without knowing much about it, that estimate is called a rough order-of-magnitude estimate (or a ballpark estimate). This estimate will become more refined as time goes on and you learn more about the project. Here are some tools and techniques for estimating cost:
• Determination of resource cost rates: People who will be working on the project all work at a specific rate. Any materials you use to build the project (e.g., wood or wiring) will be charged at a rate too. Determining resource costs means figuring out what the rate for labour and materials will be.
• Vendor bid analysis: Sometimes you will need to work with an external contractor to get your project done. You might even have more than one contractor bid on the job. This tool is about evaluating those bids and choosing the one you will accept.
• Reserve analysis: You need to set aside some money for cost overruns. If you know that your project has a risk of something expensive happening, it is better to have some cash available to deal with it. Reserve analysis means putting some cash away in case of overruns.
• Cost of quality: You will need to figure the cost of all your quality-related activities into the overall budget. Since it’s cheaper to find bugs earlier in the project than later, there are always quality costs associated with everything your project produces. Cost of quality is just a way of tracking the cost of those activities. It is the amount of money it takes to do the project right.
Once you apply all the tools in this process, you will arrive at an estimate for how much your project will cost. It’s important to keep all of your supporting estimate information. That way, you know the assumptions made when you were coming up with the numbers. Now you are ready to build your budget plan.
Estimating Costs to Compare and Select Projects
During the conceptual phase when project selection occurs, economic factors are an important consideration in choosing between competing projects. To compare the simple paybacks or internal rates of return between projects, an estimate of the cost of each project is made. The estimates must be accurate enough so that the comparisons are meaningful, but the amount of time and resources used to make the estimates should be appropriate to the size and complexity of the project. The methods used to estimate the cost of the project during the selection phase are generally faster and consume fewer resources than those used to create detailed estimates in later phases. They rely more on the expert judgment of experienced managers who can make accurate estimates with less detailed information. Estimates in the earliest stages of project selection are usually based on information from previous projects that can be adjusted—scaled—to match the size and complexity of the current project or developed using standardized formulas.
Analogous Estimate
An estimate that is based on other project estimates is an analogous estimate. If a similar project cost a certain amount, then it is reasonable to assume that the current project will cost about the same. Few projects are exactly the same size and complexity, so the estimate must be adjusted upward or downward to account for the differences. The selection of projects that are similar and the amount of adjustment needed is up to the judgment of the person who makes the estimate. Normally, this judgment is based on many years of experience estimating projects, including incorrect estimates that were learning experiences for the expert.
Less-experienced managers who are required to make analogous estimates can look through the documentation that is available from previous projects. If projects were evaluated using the Darnall-Preston Complexity Index (DPCI), the manager can quickly identify projects that have profiles similar to the project under consideration, even if those projects were managed by other people.
The DPCI assesses project attributes, enabling better-informed decisions in creating the project profile. This index assesses the complexity level of key components of a project and produces a unique project profile. The profile indicates the project complexity level, which provides a benchmark for comparing projects and information about the characteristics of a project that can then be addressed in the project execution plan. It achieves this objective by grouping 11 attributes into four broad categories: internal, external, technological complexity, and environmental.
Comparing the original estimates with the final project costs on several previous projects with the same DPCI ratings gives a less-experienced manager the perspective that it would take many years to acquire by trial and error. It also provides references the manager can use to justify the estimate.
Example: Analogous Estimate for John’s Move
John sold his apartment and purchased another one. It is now time to plan for the move. John asked a friend for advice about the cost of his move. His friend replied, “I moved from an apartment a little smaller than yours last year and the distance was about the same. I did it with a 14-foot truck. It cost about \$575 for the truck rental, pads, hand truck, rope, boxes, and gas.” Because of the similarity of the projects, John’s initial estimate of the cost of the move was less than \$700 so he decided that the cost would be affordable and the project could go forward.
Parametric Estimate
If the project consists of activities that are common to many other projects, average costs are available per unit. For example, if you ask a construction company how much it would cost to build a standard office building, the estimator will ask for the size of the building in square feet and the city in which the building will be built. From these two factors—size and location—the company’s estimator can predict the cost of the building. Factors like size and location are parameters—measurable factors that can be used in an equation to calculate a result. The estimator knows the average cost per square foot of a typical office building and adjustments for local labour costs. Other parameters such as quality of finishes are used to further refine the estimate. Estimates that are calculated by multiplying measured parameters by cost-per-unit values are parametric estimates.
Example: Parametric Estimate for John’s Move
To estimate the size of the truck needed for John’s move, the parameter used by a truck rental company is the number of bedrooms (Figure 12.1). The company assumes that the number of bedrooms is the important parameter in determining how big a truck is needed for a move. John has a one-bedroom apartment, so he chooses the 14-foot truck. Once the size is determined, other parameters, such as distance and days, are used to estimate the cost of the truck rental.
Bottom-Up Estimating
The most accurate and time-consuming estimating method is to identify the cost of each item in each activity of the schedule, including labour and materials. If you view the project schedule as a hierarchy where the general descriptions of tasks are at the top and the lower levels become more detailed, finding the price of each item at the lowest level and then summing them to determine the cost of higher levels is called bottom-up estimating.
Example: Bottom-Up Estimate for John’s Move
Table 12.1 Detailed Cost Estimate
Category Description Activity Quantity Unit Price Cost
Packing Materials Small Boxes 2.1 10 \$1.70 \$17.00
Packing Materials Medium Boxes 2.1 15 \$2.35 \$35.25
Packing Materials Large Boxes 2.1 7 \$3.00 \$21.00
Packing Materials Extra-Large Boxes 2.1 7 \$3.75 \$26.25
Packing Materials Short-Hanger Boxes 2.1 3 \$7.95 \$23.85
Packing Materials Box Tape 2.1 2 \$3.85 \$7.70
Packing Materials Markers 2.1 2 \$1.50 \$3.00
Packing Materials Mattress/Spring Bags 2.1 2 \$2.95 \$5.90
Packing Materials Life Straps per Pair 2.1 1 \$24.95 \$24.95
Packing Materials Bubble Wrap 2.1 1 \$19.95 \$19.95
Packing Materials Furniture Pads 2.1 4 \$7.95 \$31.80
Truck Rental 2.2 \$400.00
Truck Gas at 10mpg 2.2 200 \$2.25 \$45.00
After evaluating the bids by the moving companies, John decides the savings are worth his time if he can get the packing done with the help of his friends. He decides to prepare a detailed estimate of costs (Table 12.1) for packing materials and use of a rental truck. He looks up the prices for packing materials and truck rental costs on company websites and prepares a detailed list of items, quantities, and costs.
This type of estimate is typically more accurate than an analogous or parametric estimate. In this example, the sum of packing materials and truck expenses is estimated to be \$661.25.
The estimate can be rolled up—subtotaled—to display less detail. This process is made easier using computer software. On projects with low complexity, the cost estimates can be done on spreadsheet software. On larger projects, software that manages schedules can also manage costs and display them by activity and category. For example, the subtotal feature could be used in Excel and collapsed to show the subtotals for the two categories of costs (Figure 12.2).
Activity-Based Estimates
An activity can have costs from multiple vendors in addition to internal costs for labour and materials. Detailed estimates from all sources can be reorganized so those costs associated with a particular activity can be grouped by adding the activity code to the detailed estimate (Table 12.2).
Table 12.2 Costs Associated with Activities
Category Activity Cost
Packing Materials 2.1 \$216.65
Truck 2.2 \$445.00
The detailed cost estimates can be sorted and then subtotaled by activity to determine the cost for each activity.
Managing the Budget
Projects seldom go according to plan in every detail. It is necessary for the project manager to be able to identify when costs are varying from the budget and manage those variations.
Managing Cash Flow
If the total amount spent on a project is equal to or less than the amount budgeted, the project can still be in trouble if the funding for the project is not available when it is needed. There is a natural tension between the financial people in an organization, who do not want to pay for the use of money that is just sitting in a checking account, and the project manager, who wants to be sure that there is enough money available to pay for project expenses. The financial people prefer to keep the company’s money working in other investments until the last moment before transferring it to the project account. The contractors and vendors have similar concerns, and they want to get paid as soon as possible so they can put the money to work in their own organizations. The project manager would like to have as much cash available as possible to use if activities exceed budget expectations.
Contingency Reserves
Most projects have something unexpected occur that increases costs above the original estimates. If estimates are rarely exceeded, the estimating method should be reviewed because the estimates are too high. It is impossible to predict which activities will cost more than expected, but it is reasonable to assume that some of them will. Estimating the likelihood of such events is part of risk analysis, which is discussed in more detail in a later chapter.
Instead of overestimating each cost, money is budgeted for dealing with unplanned but statistically predictable cost increases. Funds allocated for this purpose are called contingency reserves. Because it is likely that this money will be spent, it is part of the total budget for the project. If this fund is adequate to meet the unplanned expenses, then the project will complete within the budget.
Management Reserves
If something occurs during the project that requires a change in the project scope, money may be needed to deal with the situation before a change in scope can be negotiated with the project sponsor or client. It could be an opportunity as well as a challenge. For example, if a new technology were invented that would greatly enhance your completed project, there would be additional cost and a change to the scope, but it would be worth it. Money can be made available at the manager’s discretion to meet needs that would change the scope of the project. These funds are called management reserves. Unlike contingency reserves, they are not likely to be spent and are not part of the project’s budget baseline, but they can be included in the total project budget.
Evaluating the Budget During the Project
A project manager must regularly compare the amount of money spent with the budgeted amount and report this information to managers and stakeholders. It is necessary to establish an understanding of how this progress will be measured and reported.
Example: Reporting Budget Progress on John’s Move
In the John’s move example, he estimated that the move would cost about \$1,500 and take about 16 days. Eight days into the project, John has spent \$300. John tells his friends that the project is going well because he is halfway through the project but has only spent a fifth of his budget. John’s friend Carlita points out that his report is not sufficient because he did not compare the amount spent to the budgeted amount for the activities that should be done by the eighth day.
As John’s friend pointed out, a budget report must compare the amount spent with the amount that is expected to be spent by that point in the project. Basic measures such as percentage of activities completed, percentage of measurement units completed, and percentage of budget spent are adequate for less complex projects, but more sophisticated techniques are used for projects with higher complexity.
Earned Value Analysis
A method that is widely used for medium- and high-complexity projects is the earned value management (EVM) method. EVM is a method of periodically comparing the budgeted costs with the actual costs during the project. It combines the scheduled activities with detailed cost estimates of each activity. It allows for partial completion of an activity if some of the detailed costs associated with the activity have been paid but others have not.
The budgeted cost of work scheduled (BCWS) comprises the detailed cost estimates for each activity in the project. The amount of work that should have been done by a particular date is the planned value (PV). These terms are used interchangeably by some sources, but the planned value term is used in formulas to refer to the sum of the budgeted cost of work up to a particular point in the project, so we will make that distinction in the definitions in this text for clarity.
Example: Planned Value on Day Six of John’s Move
On day six of the project, John should have taken his friends to lunch and purchased the packing materials. The portion of the BCWS that should have been done by that date (the planned value) is shown in Table 12.3. This is the planned value for day six of the project.
Table 12.3 Planned Value for Lunch and Packing Materials
Description Quantity Cost
Lunch 3 \$45.00
Small Boxes 10 \$17.00
Medium Boxes 15 \$35.25
Large Boxes 7 \$21.00
Extra Large Boxes 7 \$26.25
Short Hanger Boxes 3 \$23.85
Box Tape 2 \$7.70
Markers 2 \$3.00
Mattress/Spring Bags 2 \$5.90
Life Straps per Pair 1 \$24.95
Bubble Wrap 1 \$19.95
Furniture Pads 4 \$31.80
Total: \$261.65
The budgeted cost of work performed (BCWP) is the budgeted cost of work scheduled that has been done. If you sum the BCWP values up to that point in the project schedule, you have the earned value (EV). The amount spent on an item is often more or less than the estimated amount that was budgeted for that item. The actual cost (AC) is the sum of the amounts actually spent on the items.
Example: Comparing PV, EV, and AC in John’s Move on Day Six
Dion and Carlita were both trying to lose weight and just wanted a nice salad. Consequently, the lunch cost less than expected. John makes a stop at a store that sells moving supplies at discount rates. They do not have all the items he needs, but the prices are lower than those quoted by the moving company. They have a very good price on lifting straps so he decides to buy an extra pair. He returns with some of the items on his list, but this phase of the job is not complete by the end of day six. John bought half of the small boxes, all of five other items, twice as many lifting straps, and none of four other items. John is only six days into his project, and his costs and performance are starting to vary from the plan. Earned value analysis gives us a method for reporting that progress (Table 12.4).
Table 12.4 Planned Value, Earned Value, and Actual Cost
Budgeted Cost of Work Scheduled (BCWS) Budgeted Cost of Work Performed (BCWP) Actual Cost (AC)
Description Quantity Cost Quantity Cost Quantity Cost
Lunch 3 \$45.00 3 \$45.00 3 \$35.00
Small Boxes 10 \$7.00 5 \$8.50 5 \$9.50
Medium Boxes 15 \$35.25 15 \$35.25 15 \$28.00
Large Boxes 7 \$21.00
Extra-Large Boxes 7 \$26.25
Short-Hanger Boxes 3 \$23.85
Box Tape 2 \$7.70 2 \$7.70 2 \$5.50
Markers 2 \$3.00 2 \$3.00 2 \$2.00
Mattress/Spring Bags 2 \$5.90 2 \$5.90 2 \$7.50
Life Straps per Pair 1 \$24.95 1 \$24.95 2 38.50
Bubble Wrap 1 \$19.95
Furniture Pads 4 \$31.80 4 \$31.80 4 28.50
The original schedule called for spending \$261.65 (PV) by day six. The amount of work done was worth \$162.10 (EV) according to the estimates, but the actual cost was only \$154.50 (AC).
Schedule Variance
The project manager must know if the project is on schedule and within the budget. The difference between planned and actual progress is the variance. The schedule variance (SV) is the difference between the earned value (EV) and the planned value (PV). Expressed as a formula, SV = EV − PV. If less value has been earned than was planned, the schedule variance is negative, which means the project is behind schedule.
Example: Schedule Variance on John’s Move
Planning for John’s move calls for spending \$261.65 by day six, which is the planned value (PV). The difference between the planned value and the earned value is the scheduled variance (SV). The formula is SV = EV − PV. In this example, SV = \$162.10 − \$261.65 = (\$99.55) A negative SV indicates the project is behind schedule.
The difference between the earned value (EV) and the actual cost (AC) is the cost variance (CV). Expressed as a formula, CV = EV −AC. A positive CV indicates the project is under budget.
Example: Cost Variance on John’s Move
The difference between the earned value of \$162.10 and the actual cost of \$154.50 is the cost variance (CV). The formula is CV = EV − AC. In this example, CV = \$162.10 − \$154.50 = \$7.60.
Variance Indexes for Schedule and Cost
The schedule variance and the cost variance provide the amount by which the spending is behind (or ahead of) schedule and the amount by which a project is exceeding (or not fully using) its budget. They do not give an idea of how these amounts compare with the total budget.
The ratio of earned value to planned value gives an indication of how much of the project is completed. This ratio is the schedule performance index (SPI). The formula is SPI = EV ÷ PV. In the John’s move example, the SPI equals 0.62 (SPI = \$162.10 ÷ \$261.65 = 0.62) An SPI value less than 1 indicates the project is behind schedule.
The ratio of the earned value to the actual cost is the cost performance index (CPI). The formula is CPI = EV ÷ AC.
Example: Cost Performance Index of John’s Move
In the John’s move example, CPI = \$162.10 ÷ \$154.50 = 1.05. A value greater than 1 indicates that the project is under budget.
The cost variance of positive \$7.60 and the CPI value of 1.05 tell John that he is getting more value for his money than planned for the tasks scheduled by day six. The schedule variance (SV) of negative \$99.55 and the schedule performance index (SPI) of 0.62 tell him that he is behind schedule in adding value to the project (Figure 12.3).
During the project, the manager can evaluate the schedule using the schedule variance (SV) and the schedule performance index (SPI), and the budget using the cost variance (CV) and the cost performance index (CPI).
Estimated Cost to Complete the Project
Part way through the project, the manager evaluates the accuracy of the cost estimates for the activities that have taken place and uses that experience to predict how much money it will take to complete the unfinished activities—the estimate to complete (ETC).
To calculate the ETC, the manager must decide if the cost variance observed in the estimates to that point are representative of the future. For example, if unusually bad weather causes increased cost during the first part of the project, it is not likely to have the same effect on the rest of the project. If the manager decides that the cost variance up to this point in the project is atypical—not typical—then the estimate to complete is the difference between the original budget for the entire project—the budget at completion (BAC)—and the earned value (EV) up to that point. Expressed as a formula, ETC = BAC − EV.
Example: Estimate to Complete John’s Move
For his move, John was able to buy most of the items at a discount house that did not have a complete inventory, and he chose to buy an extra pair of lift straps. He knows that the planned values for packing materials were obtained from the price list at the moving company where he will have to buy the rest of the items, so those two factors are not likely to be typical of the remaining purchases. The reduced cost of lunch is unrelated to the future costs of packing materials, truck rentals, and hotel fees. John decides that the factors that caused the variances are atypical. He calculates that the estimate to complete (ETC) is the budget at completion (\$1,534) minus the earned value at that point (\$162.10), which equals \$1,371.90. Expressed as a formula, ETC = \$1,534 − \$162.10 = \$1,371.90.
If the manager decides that the cost variance is caused by factors that will affect the remaining activities, such as higher labour and material costs, then the estimate to complete (ETC) needs to be adjusted by dividing it by the cost performance index (CPI). For example, if labour costs on the first part of a project are estimated at \$80,000 (EV) and they actually cost \$85,000 (AC), the cost performance (CPI) will be 0.94. (Recall that the CPI = EV ÷ AC.)
To calculate the estimate to complete (ETC), assuming the cost variance on known activities is typical of future cost, the formula is ETC = (BAC − EV) ÷ CPI. If the budget at completion (BAC) of the project is \$800,000, the estimate to complete is (\$800,000 − \$80,000) ÷ 0.94 = \$766,000.
Estimate Final Project Cost
If the costs of the activities up to the present vary from the original estimates, this will affect the total estimate of the project cost. The new estimate of the project cost is the estimate at completion (EAC). To calculate the EAC, the estimate to complete (ETC) is added to the actual cost (AC) of the activities already performed. Expressed as a formula, EAC = AC + ETC.
Example: Estimate at Completion for John’s Move
The revised estimate at completion (EAC) for John’s move at this point in the process is EAC = \$154.50 + \$1,371.90 = \$1,526.40.
Table 12.5 Summary of Terms and Formulas for Earned Value Analysis
Term Acronym Description Formula John’s Move
Actual Cost AC The money actually spent on projects up to the present. \$154.50
Budget at Completion BAC Original budget for the project (same sa BCWS) \$1,534.00
Cost Performance Index CPI Ratio of earned value to actual cost CPI = EV ÷ AC 1.05
Cost Variance CV Difference between earned value and actual cost CV = EV − AC \$7.60
Earned Value EV Sum of estimates for work actually done up to the present \$162.10
Estimate at Completion EAC Revised estimate of total project cost EAC = AC + ETC \$1,526.40
Estimate to Complete ETC Money to complete the project if early cost variance is atypical ETC = (BAC − EV) ÷ CPI n/a
Planned Vale PV Sum of the estimates for work done up to the present \$261.65
Schedule Performnce Index SPI Ratio of earned value to planned value SPI = EV ÷ PV 0.62
Schedule Variance SV Difference between earned value and planned value SV = EV − PV \$99.55
To summarize (Table 12.5):
• Extra money is allocated in a contingency fund to deal with activities where costs exceed estimates. Funds are allocated in a management reserve in case a significant opportunity or challenge occurs that requires change of scope but funds are needed immediately before a scope change can typically be negotiated.
• Schedule variance is the difference between the part of the budget that has been spent so far (EV) versus the part that was planned to be spent by now (PV). Similarly, the cost variance is the difference between the EV and the actual cost (AC).
• The schedule performance index (SPI) is the ratio of the earned value and the planned value. The cost performance index (CPI) is the ratio of the earned value (EV) to the actual cost (AC).
• The formula used to calculate the amount of money needed to complete the project (ETC) depends on whether or not the cost variance to this point is expected to continue (typical) or not (atypical). If the cost variance is atypical, the ETC is simply the original total budget (BAC) minus the earned value (EV). If they are typical of future cost variances, the ETC is adjusted by dividing the difference between BAC and EV by the CPI.
• The final budget is the actual cost (AC) to this point plus the estimate to complete (ETC).
Establishing a Budget
Once you have broken your project down into activities, you will be able to calculate your overall project costs by estimating and totaling the individual activity costs.
This process of subtotaling costs by category or activity is called cost aggregation.
Budget Timeline
Costs are associated with activities, and since each activity has a start date and a duration period, it is possible to calculate how much money will be spent by any particular date during the project. The money needed to pay for a project is usually transferred to the project account shortly before it is needed. These transfers must be timed so that the money is there to pay for each activity without causing a delay in the start of the activity. If the money is transferred too far in advance, the organization will lose the opportunity to use the money somewhere else, or they will have to pay unnecessary interest charges if the money is borrowed. A schedule of money transfers is created that should match the need to pay for the activities. The process of matching the schedule of transfers with the schedule of activity payments is called reconciliation. Refer to Figure 12.4, which shows the costs of 10 major activities in a project. Funds are transferred into the project account four times. Notice that during most of the project, there were more funds available than were spent except at activity 6 when all the available funds were spent.
In the project budget profile shown in Figure 12.4, there is no margin for error if the total of the first six activities exceeds the amount of funding at that point in the project.
Contractual agreements with vendors often require partial payment of their costs during the project. Those contracts can be managed more conveniently if the unit of measure for partial completion is the same as that used for cost budgeting. For example, if a graphic designer is putting together several pieces of artwork for a textbook, their contract may call for partial payment after 25% of their total number of drawings is complete.
Text Attributions
This chapter of Project Management is a derivative of the following texts: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.12%3A_Budget_Planning.txt |
Procurement management follows a logical order. First, you plan what you need to contract; then you plan how you’ll do it. Next, you send out your contract requirements to sellers. They bid for the chance to work with you. You pick the best one, and then you sign the contract with them. Once the work begins, you monitor it to make sure that the contract is being followed. When the work is done, you close out the contract and fill out all the paperwork.
You need to start with a plan for the whole project. Before doing anything else, you need to think about all of the work that you will contract out for your project. You will want to plan for any purchases and acquisitions. Here’s where you take a close look at your needs to be sure that contracting is necessary. You figure out what kinds of contracts make sense for your project, and you try to define all of the parts of the project that will be contracted out.
Contract planning is where you plan out each individual contract for the project work. You work out how you’ll manage the contract, what metrics it will need to meet to be considered successful, how you’ll pick a seller, and how you’ll administer the contract once the work is happening.
The procurement management plan details how the procurement process will be managed. It includes the following information:
• The types of contracts you plan to use and any metrics that will be used to measure the contractors’ performance
• The planned delivery dates for the work or products you are contracting
• The company’s standard documents you will use
• The number of vendors or contractors involved and how they will be managed
• How purchasing may impact the constraints and assumptions of the project plan
• The coordination of purchasing lead times with the development of the project schedule
• The identification of prequalified sellers (if known)
The procurement management plan, like all other management plans, becomes a subsidiary of the project management plan. Some tools and techniques you may use during the procurement planning stage include make-or-buy analysis and definition of the contract type.
Make-or-Buy Analysis
This means figuring out whether or not you should be contracting the work or doing it yourself. It could also mean deciding whether to build a solution to your problem or buy one that is already available. Most of the same factors that help you make every other major project decision will help you with this one. How much does it cost to build it as opposed to buying it? How will this decision affect the scope of your project? How will it affect the project schedule? Do you have time to do the work and still meet your commitments? As you plan out what you will and won’t contract, you need to think through your reasoning very carefully.
There are some resources (like heavy equipment) that your company can buy, rent, or lease depending on the situation. You’ll need to examine leasing-versus-buying costs and determine the best way to go forward.
Contract Types
You should know a little bit about the major kinds of contracts available to you (the client) so that you choose the one that creates the most fair and workable deal for you and the contractor. Some contracts are fixed price: no matter how much time or effort goes into them, the client always pay the same. In Figure 13.1 the cost to the client stays the same, but as more effort is exerted the profit to the contractor goes down. Some are cost reimbursable also called cost plus. This is where the seller charges you for the cost of doing the work plus some fee or rate. Table 13.1 illustrates this by showing that as efforts increase, costs to the client go up but the contractor’s profits stay the same. The third major kind of contract is time and materials. That’s where the client pays a rate for the time spent working on the project and also pays for all the materials used to do the work. Figure 13.2 shows that as costs to the client go up, so does the profit for the contractor.
Fixed-Price Contracts
The fixed-price contract is a legal agreement between the project organization and an entity (person or company) to provide goods or services to the project at an agreed-on price. The contract usually details the quality of the goods or services, the timing needed to support the project, and the price for delivering goods or services. There are several variations of the fixed-price contract. For commodities and goods and services where the scope of work is very clear and not likely to change, the fixed-price contract offers a predictable cost. The responsibility for managing the work to meet the needs of the project is focused on the contractor. The project team tracks the quality and schedule progress to ensure the contractors will meet the project needs. The risks associated with fixed-price contracts are the costs associated with project change. If a change occurs on the project that requires a change order from the contractor, the price of the change is typically very high. Even when the price for changes is included in the original contract, changes on a fixed-price contract will create higher total project costs than other forms of contracts because the majority of the cost risk is transferred to the contractor, and most contractors will add a contingency to the contract to cover their additional risk.
Fixed-price contracts require the availability of at least two or more suppliers that have the qualifications and performance histories that ensure the needs of the project can be met. The other requirement is a scope of work that is most likely not going to change. Developing a clear scope of work based on good information, creating a list of highly qualified bidders, and developing a clear contract that reflects that scope of work are critical aspects of a good fixed-priced contract.
If the service provider is responsible for incorporating all costs, including profit, into the agreed-on price, it is a fixed-total-cost contract. The contractor assumes the risks for unexpected increases in labour and materials that are needed to provide the service or materials and in the materials and timeliness needed.
The fixed-price contract with price adjustment is used for unusually long projects that span years. The most common use of this type of contract is the inflation-adjusted price. In some countries, the value of its local currency can vary greatly in a few months, which affects the cost of local materials and labour. In periods of high inflation, the client assumes the risk of higher costs due to inflation, and the contract price is adjusted based on an inflation index. The volatility of certain commodities can also be accounted for in a price-adjustment contract. For example, if the price of oil significantly affects the costs of the project, the client can accept the oil price volatility risk and include a provision in the contract that would allow the contract price adjustment based on a change in the price of oil.
The fixed-price contract with incentive fee provides an incentive for performing on the project above the established baseline in the contract. The contract might include an incentive for completing the work on an important milestone for the project. Often contracts have a penalty clause if the work is not performed according to the contract. For example, if the new software is not completed in time to support the implementation of the training, the contract might penalize the software company a daily amount of money for every day the software is late. This type of penalty is often used when the software is critical to the project and the delay will cost the project significant money.
If the service or materials can be measured in standard units, but the amount needed is not known accurately, the price per unit can be fixed—a fixed-unit-price contract. The project team assumes the responsibility of estimating the number of units used. If the estimate is not accurate, the contract does not need to be changed, but the project will exceed the budgeted cost.
Table 13.1 Fixed price contracts and characteristics
Type Known Scope Share of Risk Incentive for Meeting Milestones Predictability of Cost
Fixed total cost Very High All contractor Low Very high
Fixed unit price High Mostly project Low High
Fixed price with incentive fee High Mostly project High Medium-high
Fixed fee with price adjustment High Mostly project Low Medium
Cost-Reimbursable Contracts
In a cost-reimbursable contract, the organization agrees to pay the contractor for the cost of performing the service or providing the goods. Cost-reimbursable contracts are also known as cost-plus contracts. Cost-reimbursable contracts are most often used when the scope of work or the costs for performing the work are not well known. The project uses a cost-reimbursable contract to pay the contractor for allowable expenses related to performing the work. Since the cost of the project is reimbursable, the contractor has much less risk associated with cost increases. When the costs of the work are not well known, a cost-reimbursable contract reduces the amount of money the bidders place in the bid to account for the risk associated with potential increases in costs. The contractor is also less motivated to find ways to reduce the cost of the project unless there are incentives for supporting the accomplishment of project goals.
Cost-reimbursable contracts require good documentation of the costs that occurred on the project to ensure that the contractor gets paid for all the work performed and to ensure that the organization is not paying for something that was not completed. The contractor is also paid an additional amount above the costs. There are several ways to compensate the contractor.
• A cost-reimbursable contract with a fixed fee provides the contractor with a fee, or profit amount, that is determined at the beginning of the contract and does not change.
• A cost-reimbursable contract with a percentage fee pays the contractor for costs plus a percentage of the costs, such as 5% of total allowable costs. The contractor is reimbursed for allowable costs and is paid a fee.
• A cost-reimbursable contract with an incentive fee is used to encourage performance in areas critical to the project. Often the contract attempts to motivate contractors to save or reduce project costs. The use of the cost reimbursable contract with an incentive fee is one way to motivate cost-reduction behaviours.
• A cost-reimbursable contract with award fee reimburses the contractor for all allowable costs plus a fee that is based on performance criteria. The fee is typically based on goals or objectives that are more subjective. An amount of money is set aside for the contractor to earn through excellent performance, and the decision on how much to pay the contractor is left to the judgment of the project team. The amount is sufficient to motivate excellent performance.
On small activities that have a high uncertainty, the contractor might charge an hourly rate for labour, plus the cost of materials, plus a percentage of the total costs. This type of contract is called time and materials (T&M). Time is usually contracted on an hourly rate basis and the contractor usually submits time sheets and receipts for items purchased on the project. The project reimburses the contractor for the time spent based on the agreed-on rate and the actual cost of the materials. The fee is typically a percentage of the total cost.
T&M contracts are used on projects for work that is smaller in scope and has uncertainty or risk. The project, rather than the contractor, assumes the risk. Since the contractor will most likely include contingency in the price of other types of contracts to cover the high risk, T&M contracts provide lower total cost to the project.
Table 13.2 Cost-reimbursable contracts
Cost Reimbursable (CR) Known Scope Share of Risk Incentive for Meeting Milestones Predictability of Cost
CR with fixed fee Medium Mostly project Low Medium-high
CR with percentage fee Medium Mostly project Low Medium-high
CR with incentive fee Medium Mostly project High Medium
CR with award fee Medium Mostly project High Medium
Time and Materials Low All project Low Low
To minimize the risk to the project, the contractor typically includes a not-to-exceed amount, which means the contract can only charge up to the agreed amount. The T&M contract allows the project to make adjustments as more information is available. The final cost of the work is not known until sufficient information is available to complete a more accurate estimate.
Progress Payments and Change Management
Vendors and suppliers usually require payments during the life of the contract. On contracts that last several months, the contractor will incur significant cost and will want the project to pay for these costs as early as possible. Rather than wait until the end of the contract, a schedule of payments is typically developed as part of the contract and is connected to the completion of a defined amount of work or project milestones. These payments made before the end of the project and based on the progress of the work are called progress payments. For example, the contract might develop a payment schedule that pays for the design of the curriculum, then the development of the curriculum, and then a final payment is made when the curriculum is completed and accepted. In this case there would be three payments made. There is a defined amount of work to be accomplished, a time frame for accomplishing that work, and a quality standard the work must achieve before the contractor is paid for the work.
Just as the project has a scope of work that defines what is included in the project and what work is outside the project, vendors and suppliers have a scope of work that defines what they will produce or supply to the company. (Partners typically share the project scope of work and may not have a separate scope of work.) Often changes occur on the project that require changes in the contractor’s scope of work. How these changes will be managed during the life of the project is typically documented in the contract. Capturing these changes early, documenting what changed and how the change impacted the contract, and developing a change order (a change to the contract) are important to maintaining the progress of the project. Conflict among team members may arise when changes are not documented or when the team cannot agree on the change. Developing and implementing an effective change management process for contractors and key suppliers will minimize this conflict and the potential negative effect on the project.
Procurement Process
The project procurement cycle reflects the procurement activities from the decision to purchase the material or service through to the payment of bills and closing of procurement contracts.
Procurement Plan
After the decision has been made to purchase goods or outsource services, the procurement team develops a plan that includes the following:
• Selecting the appropriate relationships and contract approaches for each type of purchased goods or outsourced service
• Preparing requests for quotes (RFQs) and requests for proposals (RFPs) and evaluating partnership opportunities
• Evaluating RFQs, RFPs, and partnerships
• Awarding and signing contracts
• Managing quality and timely performance
• Managing contract changes
• Closing contracts
Depending on the complexity level of the project, each of these steps can take either hours or sometimes weeks of work to complete. Each of these steps is also included in the project master schedule. The time involved in the procurement cycle can influence the scheduling of critical activities, including the decision to self-perform the work or contract the work to others. The delivery dates for equipment and materials and the work completion dates for contracted works are placed on the project schedule. Any procurement activities that create a project delay or fall on the project critical path may require special attention.
Selecting the Contract Approach
The technical teams typically develop a description of the work that will be outsourced. From this information, the project management team answers the following questions:
• Is the required work or materials a commodity, customized product or service, or unique skill or relationship?
• What type of relationship is needed: supplier, vendor, or partnership?
• How should the supplier, vendor, or potential partner be approached: RFQ, RFP, or personal contact?
• How well known is the scope of work?
• What are the risks and which party should assume which types of risk?
• Does the procurement of the service or goods affect activities on the project schedule’s critical path and how much float is there on those activities?
• How important is it to be sure of the cost in advance?
The procurement team uses the answers to the first three questions listed above to determine the approach to obtaining the goods or services and the remaining questions to determine what type of contract is most appropriate.
A key factor in selecting the contract approach is determining which party will take the most risk. The team determines the level of risk that will be managed by the project and what risks will be transferred to the contractor. Typically, the project management team wants to manage the project risk, but in some cases, contractors have more expertise or control that enable them to better manage the risk associated with the contracted work.
Soliciting Bids
A solicitationis the process of requesting a price and supporting information from bidders. The solicitation usually takes the form of either an RFQ or an RFP. Partnerships are pursued and established differently on a case-by-case basis by senior management.
Qualifying Bidders
Potential bidders are people or organizations capable of providing the materials or performing the work required for the project. On smaller, less complex projects, the parent company typically has a list of suppliers and vendors that have successfully provided goods and services in the past, and the project has access to the performance record of companies on that list. On unique projects, where no supplier lists exist, the project team develops a list of potential suppliers and then qualifies them to become eligible to bid on project work. Eligible bidders are placed on the bidders list and provided with a schedule of when work on the project will be put out for bid.
The eligibility of a supplier is determined by the ability to perform the work in a way that meets project requirements and demonstrates financial stability. Ability to perform the work includes the ability to meet quality specifications and the project schedule. During times when economic activity is high in a region, many suppliers become busy and stretch their resources. The project team investigates the potential suppliers, before they are included on the bidder’s list, to ensure that they have the capacity and track record to meet deadlines.
The potential supplier must also be financially stable to be included on the bidders list. A credit check or a financial report from Dun and Bradstreet (D&B)—a well-known provider of financial information about individual companies—will provide the project with information about the potential bidder’s financial status. D&B services include the following:
• D&B proprietary rankings and predictive creditworthiness scores
• Public filings, including suits, liens, judgments, and UCC (uniform commercial code) filings—standardized financial disclosure documents that conform to the uniform commercial code
• Company financial statements and history
Request for Quote
An RFQ focuses on price. The type of materials or service is well defined and can be obtained from several sources. The bidder that can meet the project quality and schedule requirements usually wins the contract by quoting the lowest price.
Request for Proposal
An RFP accounts for price but focuses on meeting the project quality or schedule requirements. The process of developing a proposal in response to an RFP can be very expensive for the bidder, and the project team should not issue an RFP to a company that is not eligible to win the bid.
Evaluating Bids
Evaluation of bids in response to RFQs for commodity items and services is heavily graded for price. In most cases, the lowest total price will win the contract. The total price will include the costs of the goods or services, any shipping or delivery costs, the value of any warranties, and any additional service that adds value to the project.
The evaluation of bids based on RFPs is more complex. The evaluation of proposals includes the price and also an evaluation of the technical approach chosen by the bidder. The project team evaluating the proposal must include people with the expertise to understand the technical aspects of the various proposal options and the value of each proposal to the project. On more complex projects, the administrative part of the proposal is evaluated and scored by one team, and the technical aspect of the proposal is evaluated by another team. The project team combines the two scores to determine the best proposal for the project.
Awarding the Contract
After the project team has selected the bidder that provides the best value for the project, a project representative validates all conditions of the bid and the contract with the potential contractor. Less complex awards, like contracts for printed materials, require a reading and signing of the contract to ensure that the supplier understands the contract terms and requirements of the project schedule. More complex projects require a detailed discussion of the goals, the potential barriers to accomplishing those goals, the project schedule and critical dates, and the processes for resolving conflicts and improving work processes.
Managing the Contracts
The contract type determines the level of effort and the skills needed to manage the contract. The manager of supplier contracts develops detailed specifications and ensures compliance with these specifications. The manager of vendor contracts ensures that the contractors bidding on the work have the skills and capacity to accomplish the work according to the project schedule and tracks the vendor’s performance against the project needs, supplying support and direction when needed. The manager of partnering arrangements develops alignment around common goals and work processes. Each of these approaches requires different skills and various degrees of effort.
Items that take a long time to acquire—long-lead items—receive early attention by the project leadership. Examples of long-lead items are equipment that is designed and built specifically for the project, curriculum that is created for training a new workforce, and a customized bioreactor for a biotech project. These items might require weeks, months, or years to develop and complete. The project team identifies long-lead items early to begin the procurement activities as soon as possible because those procured through the normal procurement cycle may cause delays in the project.
After the contract is awarded, the project team tracks the performance of the contractor against performance criteria in the contract and his or her contribution to the performance of the project. Usually, contractors deliver the product or service that meets the quality expectations and supports the project schedule. Typically, there are also one or two contractors that do not perform to project expectations. Some project managers will refer to the contract and use it to attempt to persuade the contractor to improve performance or be penalized. Other project managers will explore with the contractor creative ways to improve performance and meet project requirements. The contract management allows for both approaches to deal with non`-performing contractors, and the project team must assess what method is most likely to work in each situation.
Managing contractor performance on a project is as important to the overall project outcomes as the work performed by the project team.
Logistics and Expediting
Equipment and materials that are purchased for use on the project must be transported, inventoried, warehoused, and often secured. This area of expertise is called logistics. The logistics for the project can be managed by the project team or can be included in the RFP or RFQ. On international projects, materials may be imported, and the procurement team manages the customs process. On smaller projects, the logistical function is often provided by the parent company. On larger projects, these activities are typically contracted to companies that specialize in logistical services. On larger, more complex projects, the procurement team will include logistical expertise.
The project work often depends on materials procured for the project. The delivery of these materials influences the scheduling of the project, and often some materials are needed earlier than normal procurement practices would deliver. On long-lead items, the project schedule is included in the contracting plans and contractors must explain how they will support the project schedule.
On large, complex projects, critical items might be scheduled for delivery after they are needed on the project. The procurement team then explores ideas with the contractor to expedite the manufacturing or transportation of the equipment or materials. The contract can often place a priority on the fabrication of the equipment and delivery of the equipment to meet the project schedule. The project logistics team can also explore ways of shortening the transportation time. For example, a project in Argentina flew some critical equipment from Sweden rather than transport the equipment by ship to save several weeks in transit. The logistics costs were higher, but the overall value to the project was greater.
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It’s not enough to make sure you get a project done on time and under budget. You need to be sure you make the right product to suit your stakeholders’ needs. Quality means making sure that you build what you said you would and that you do it as efficiently as you can. And that means trying not to make too many mistakes and always keeping your project working toward the goal of creating the right product.
Everybody “knows” what quality is. But the way the word is used in everyday life is a little different from how it is used in project management. Just like the triple constraint (scope, cost, and schedule), you manage quality on a project by setting goals and taking measurements. That’s why you must understand the quality levels your stakeholders believe are acceptable, and ensure that your project meets those targets, just like it needs to meet their budget and schedule goals.
Customer satisfaction is about making sure that the people who are paying for the end product are happy with what they get. When the team gathers requirements for the specification, they try to write down all of the things that the customers want in the product so that you know how to make them happy. Some requirements can be left unstated. Those are the ones that are implied by the customer’s explicit needs. For example, some requirements are just common sense (e.g., a product that people hold can’t be made from toxic chemicals that may kill them). It might not be stated, but it’s definitely a requirement.
“Fitness to use” is about making sure that the product you build has the best design possible to fit the customer’s needs. Which would you choose: a product that’s beautifully designed, well constructed, solidly built, and all around pleasant to look at but does not do what you need, or a product that does what you want despite being ugly and hard to use? You’ll always choose the product that fits your needs, even if it’s seriously limited. That’s why it’s important that the product both does what it is supposed to do and does it well. For example, you could pound in a nail with a screwdriver, but a hammer is a better fit for the job.
Conformance to requirements is the core of both customer satisfaction and fitness to use, and is a measure of how well your product does what you intend. Above all, your product needs to do what you wrote down in your requirements document. Your requirements should take into account what will satisfy your customer and the best design possible for the job. That means conforming to both stated and implied requirements.
In the end, your product’s quality is judged by whether you built what you said you would build.
Quality planning focuses on taking all of the information available to you at the beginning of the project and figuring out how you will measure quality and prevent defects. Your company should have a quality policy that states how it measures quality across the organization. You should make sure your project follows the company policy and any government rules or regulations on how to plan quality for your project.
You need to plan which activities you will use to measure the quality of the project’s product. And you’ll need to think about the cost of all the quality-related activities you want to do. Then you’ll need to set some guidelines for what you will measure against. Finally, you’ll need to design the tests you will run when the product is ready to be tested.
Quality and Grade
According to the International Organization for Standardization (ISO), qualityis “the degree to which a set of inherent characteristics fulfill requirements.” The requirements of a product or process can be categorized or given a grade that will provide a basis for comparison. The quality is determined by how well something meets the requirements of its grade.
For most people, the term quality also implies good value—getting your money’s worth. For example, even low-grade products should still work as expected, be safe to use, and last a reasonable amount of time. Consider the following examples.
Example: Quality of Gasoline Grades
Petroleum refiners provide gasoline in several different grades based on the octane rating because higher octane ratings are suitable for higher compression engines. Gasoline must not be contaminated with dirt or water, and the actual performance of the fuel must be close to its octane rating. A shipment of low-grade gasoline graded as 87 octane that is free of water or other contaminants would be of high quality, while a shipment of high-grade 93 octane gas that is contaminated with dirt would be of low quality.
Example: Quality of Furniture Packing
John has antique furniture in excellent condition that was left to him by his grandmother. The pieces are important to John for sentimental reasons, and they are valuable. John decides to hire movers (high-grade professionals) to load his furniture into the truck using appropriate padding and restraints to prevent dents and scratches during the move. John’s standard for high quality is that no observable damage occurs to his large pieces of furniture, especially the antiques. If the furniture arrives in his new apartment without a single dent, scratch, or other damage, the activity will be of high quality. John’s standard for packing his kitchen is lower. His dishes are old and cheap, so he decides to trust his inexperienced friends (low-grade amateurs) to help him pack his kitchen. If a few of the dishes or glassware are chipped or broken in the process, the savings in labour cost will more than make up for the loss and will be a good value.
Statistics
Determining how well products meet grade requirements is done by taking measurements and then interpreting those measurements. Statistics—the mathematical interpretation of numerical data—are useful when interpreting large numbers of measurements and are used to determine how well the product meets a specification when the same product is made repeatedly. Measurements made on samples of the product must be within control limits—the upper and lower extremes of allowable variation—and it is up to management to design a process that will consistently produce products between those limits.
Instructional designers often use statistics to determine the quality of their course designs. Student assessments are one way in which instructional designers are able to tell whether learning occurs within the control limits.
Example: Setting Control Limits
A petroleum refinery produces large quantities of fuel in several grades. Samples of the fuels are extracted and measured at regular intervals. If a fuel is supposed to have an 87 octane performance, samples of the fuel should produce test results that are close to that value. Many of the samples will have scores that are different from 87. The differences are due to random factors that are difficult or expensive to control. Most of the samples should be close to the 87 rating and none of them should be too far off. The manufacturer has grades of 85 and 89, so they decide that none of the samples of the 87 octane fuel should be less than 86 or higher than 88.
If a process is designed to produce a product of a certain size or other measured characteristic, it is impossible to control all the small factors that can cause the product to differ slightly from the desired measurement. Some of these factors will produce products that have measurements that are larger than desired and some will have the opposite effect. If several random factors are affecting the process, they tend to offset each other, and the most common results are near the middle of the range; this phenomenon is called the central limit theorem.
If the range of possible measurement values is divided equally into subdivisions called bins, the measurements can be sorted, and the number of measurements that fall into each bin can be counted. The result is a frequency distribution that shows how many measurements fall into each bin. If the effects that are causing the differences are random and tend to offset each other, the frequency distribution is called a normal distribution, which resembles the shape of a bell with edges that flare out. The edges of a theoretical normal distribution curve get very close to zero but do not reach zero.
Example: Normal Distribution
A refinery’s quality control manager measures many samples of 87 octane gasoline, sorts the measurements by their octane rating into bins that are 0.1 octane wide, and then counts the number of measurements in each bin. Then she creates a frequency distribution chart of the data, as shown in Figure 14.1.
It is common to take samples—randomly selected subsets from the total population—and measure and compare their qualities, since measuring the entire population would be cumbersome, if not impossible. If the sample measurements are distributed equally above and below the centre of the distribution as they are in Figure 14.1, the average of those measurements is also the centre value that is called the mean, and is represented in formulas by the lowercase Greek letter µ (pronounced mu). The amount of difference of the measurements from the central value is called the sample standard deviation or just the standard deviation.
The first step in calculating the standard deviation is subtracting each measurement from the central value (mean) and then squaring that difference. (Recall from your mathematics courses that squaring a number is multiplying it by itself and that the result is always positive.) The next step is to sum these squared values and divide by the number of values minus one. The last step is to take the square root. The result can be thought of as an average difference. (If you had used the usual method of taking an average, the positive and negative numbers would have summed to zero.) Mathematicians represent the standard deviation with the lowercase Greek letter σ (pronounced sigma). If all the elements of a group are measured, instead of just a sample, it is called the standard deviation of the population and in the second step, the sum of the squared values is divided by the total number of values.
Figure 14.1 shows that the most common measurements of octane rating are close to 87 and that the other measurements are distributed equally above and below 87. The shape of the distribution chart supports the central limit theorem’s assumption that the factors that are affecting the octane rating are random and tend to offset each other, which is indicated by the symmetric shape. This distribution is a classic example of a normal distribution. The quality control manager notices that none of the measurements are above 88 or below 86 so they are within control limits, and she concludes that the process is working satisfactorily.
Example: Standard Deviation of Gasoline Samples
The refinery’s quality control manager uses the standard deviation function in her spreadsheet program to find the standard deviation of the sample measurements and finds that for her data, the standard deviation is 0.3 octane. She marks the range on the frequency distribution chart to show the values that fall within one sigma (standard deviation) on either side of the mean (Figure 14.2).
For normal distributions, about 68.3% of the measurements fall within one standard deviation on either side of the mean. This is a useful rule of thumb for analyzing some types of data. If the variation between measurements is caused by random factors that result in a normal distribution, and someone tells you the mean and the standard deviation, you know that a little over two-thirds of the measurements are within a standard deviation on either side of the mean. Because of the shape of the curve, the number of measurements within two standard deviations is 95.4%, and the number of measurements within three standard deviations is 99.7%. For example, if someone said the average (mean) height for adult men in the United States is 178 cm (70 inches) and the standard deviation is about 8 cm (3 inches), you would know that 68% of the men in the United States are between 170 cm (67 inches) and 186 cm (73 inches) in height. You would also know that about 95% of the adult men in the United States were between 162 cm (64 inches) and 194 cm (76 inches) tall, and that almost all of them (99.7%) are between 154 cm (61 inches) and 202 cm (79 inches) tall. These figures are referred to as the 68-95-99.7 rule.
Example: Gasoline within Three Standard Deviations
The refinery’s quality control manager marks the ranges included within two and three standard deviations, as shown in Figure 14.3. Some products must have less variability than others to meet their purpose. For example, if training designed to operate highly specialized and potentially dangerous machinery was assessed for quality, most participants would be expected to exceed the acceptable pass rate. Three standard deviations from the control limits might be fine for some products but not for others. In general, if the mean is six standard deviations from both control limits, the likelihood of a part exceeding the control limits from random variation is practically zero (2 in 1,000,000,000).
Example: A Step Project Improves Quality of Gasoline
A new refinery process is installed that produces fuels with less variability. The refinery’s quality control manager takes a new set of samples and charts a new frequency distribution diagram, as shown in Figure 14.4. The refinery’s quality control manager calculates that the new standard deviation is 0.2 octane. From this, she can use the 68-95-99.7 rule to estimate that 68.3% of the fuel produced will be between 86.8 and 87.2 and that 99.7% will be between 86.4 and 87.6 octane. A shorthand way of describing this amount of control is to say that it is a five-sigma production system, which refers to the five standard deviations between the mean and the control limit on each side.
Quality planning tools
High quality is achieved by planning for it rather than by reacting to problems after they are identified. Standards are chosen and processes are put in place to achieve those standards.
Measurement Terminology
During the execution phase of the project, services and products are sampled and measured to determine if the quality is within control limits for the requirements and to analyze causes for variations. This evaluation is often done by a separate quality control group, and knowledge of a few process measurement terms is necessary to understand their reports. Several of these terms are similar, and it is valuable to know the distinction between them.
The quality plan specifies the control limits of the product or process; the size of the range between those limits is the tolerance. Tolerancesare often written as the mean value, plus or minus the tolerance. The plus and minus signs are written together, ±.
Example: Tolerance in Gasoline Production
The petroleum refinery chose to set its control limits for 87 octane gasoline at 86 and 88 octane. The tolerance is 87 ± 1.
Tools are selected that can measure the samples closely enough to determine if the measurements are within control limits and if they are showing a trend. Each measurement tool has its own tolerances.
The choice of tolerance directly affects the cost of quality (COQ). In general, it costs more to produce and measure products that have small tolerances. The costs associated with making products with small tolerances for variation can be very high and not proportional to the gains. For example, if the cost of evaluating each screen as it is created in an online tutorial is greater than delivering the product and fixing any issues after the fact, then the COQ may be too high and the instructional designer will tolerate more defects in the design.
Defining and Meeting Client Expectations
Clients provide specifications for the project that must be met for the project to be successful. Recall that meeting project specifications is one definition of project success. Clients often have expectations that are more difficult to capture in a written specification. For example, one client will want to be invited to every meeting of the project and will then select the ones that seem most relevant. Another client will want to be invited only to project meetings that need client input. Inviting this client to every meeting will cause unnecessary frustration. Listening to the client and developing an understanding of the expectations that are not easily captured in specifications is important to meeting those expectations.
Project surveys can capture how the client perceives the project performance and provide the project team with data that are useful in meeting client expectations. If the results of the surveys indicate that the client is not pleased with some aspect of the project, the project team has the opportunity to explore the reasons for this perception with the client and develop recovery plans. The survey can also help define what is going well and what needs improvement.
Sources of Planning Information
Planning for quality is part of the initial planning process. The early scope, budget, and schedule estimates are used to identify processes, services, or products where the expected grade and quality should be specified. Risk analysis is used to determine which of the risks to the project could affect quality.
Techniques
Several different tools and techniques are available for planning and controlling the quality of a project. The extent to which these tools are used is determined by the project complexity and the quality management program in use by the client.
The following represents the quality planning tools available to the project manager.
• Cost-benefit analysis is looking at how much your quality activities will cost versus how much you will gain from doing them. The costs are easy to measure; the effort and resources it takes to do them are just like any other task on your schedule. Since quality activities don’t actually produce a product, it is sometimes harder for people to measure the benefit. The main benefits are less reworking, higher productivity and efficiency, and more satisfaction from both the team and the customer.
• Benchmarking means using the results of quality planning on other projects to set goals for your own. You might find that the last project in your company had 20% fewer defects than the one before it. You should want to learn from a project like that and put in practice any of the ideas they used to make such a great improvement. Benchmarks can give you some reference points for judging your own project before you even start the work.
• Design of experiments is the list of all the kinds of tests you are going to run on your product. It might list all the kinds of test procedures you’ll do, the approaches you’ll take, and even the tests themselves. (In the software world, this is called test planning.)
• Cost of quality is what you get when you add up the cost of all the prevention and inspection activities you are going to do on your project. It doesn’t just include the testing. It includes any time spent writing standards, reviewing documents, meeting to analyze the root causes of defects, reworking to fix the defects once they’re found by the team: in other words, absolutely everything you do to ensure quality on the project. Cost of quality can be a good number to check to determine whether your project is doing well or having trouble. Say your company tracks the cost of quality on all of its projects; then you could tell if you are spending more or less than has been spent on other projects to get your project up to quality standards.
• Control charts can be used to define acceptable limits. If some of the functions of a project are repetitive, statistical process controls can be used to identify trends and keep the processes within control limits. Part of the planning for controlling the quality of repetitive processes is to determine what the control limits are and how the process will be sampled.
• Cause-and-effect diagrams can help in discovering problems. When control charts indicate an assignable cause for a variation, it is not always easy to identify the cause of a problem. Discussions that are intended to discover the cause can be facilitated using a cause-and-effect or fishbone diagram where participants are encouraged to identify possible causes of a defect.
Example: Diagramming Quality Problems
A small manufacturing firm tries to identify the assignable causes to variations in its manufacturing line. They assemble a team that identifies six possibilities:
• Low-quality raw materials
• Power fluctuation
• Ambient temperature
• Worker absenteeism
• Poor training
• Old equipment
Each of these possibilities are organized into a fishbone diagram in Figure 14.5:
Each branch of the diagram can be expanded to break down a category into more specific items. An engineer and an electrician work on one of the branches to consider possible causes of power fluctuation. They identify:
• Utility reliability
• Personal space heaters and large motor start up leading to over loaded circuits
• Lighting
Those items are added to their part of the fishbone diagram, as shown in Figure 14.6.
Check sheets, histograms, and Pareto charts are used to solve several quality problems. When a quality-control issue occurs, a project manager must choose which problem to address first. One way to prioritize quality problems is to determine which ones occur most frequently. These data can be collected using a check sheet, which is a basic form on which the user can make a check in the appropriate box each time a problem occurs or by automating the data collection process using the appropriate technology. Once the data are collected, they can be analyzed by creating a type of frequency distribution chart called a histogram. A true histogram is a column chart where the widths of the columns fill the available space on the x-axis axis and are proportional to the category values displayed on that axis, while the height of the columns is proportional to the frequency of occurrences. Most histograms use one width of column to represent a category, while the vertical axis represents the frequency of occurrences.
A variation on the histogram is a frequency distribution chart invented by economist Vilfredo Pareto known as a Pareto chart, in which the columns are arranged in decreasing order with the most common on the left and a line added that shows the cumulative total. The combination of columns and a line allows the user to tell at a glance which problems are most frequent and what fraction of the total they represent.
Once you have your quality plan, you know your guidelines for managing quality on the project. Your strategies for monitoring project quality should be included in the plan, as well as the reasons for all the steps you are taking. It’s important that everyone on the team understand the rationale behind the metrics being used to judge success or failure of the project.
Quality Assurance
The purpose of quality assurance is to create confidence that the quality plan and controls are working properly. Time must be allocated to review the original quality plan and compare that plan to how quality is being ensured during the implementation of the project.
Process Analysis
The flowcharts of quality processes are compared to the processes followed during actual operations. If the plan was not followed, the process is analyzed and corrective action taken. The corrective action could be to educate the people involved on how to follow the quality plan, or it could be to revise the plan.
The experiments that sample products and processes and collect data are examined to see if they are following statistically valid sampling techniques and that the measurement methods have small enough tolerances to detect variation within control limits.
Because projects are temporary, there are fewer opportunities to learn and improve within a project, especially if it has a short duration. But even in short projects, the quality manager should have a way to learn from experience and change the process for the next project of a similar complexity profile.
Example: Analyzing Quality Processes in Safety Training
A technical college responsible for training employees in safe plant practices evaluates its instructor selection process at the end of the training to see if it had the best criteria for selection. For example, it required the instructors to have master’s degrees in manufacturing to qualify as college instructors. The college used an exit survey of the students to ask what they thought would improve the instruction of future classes on this topic. Some students felt that it would be more important to require that the instructors have more years of training experience, while others recommended that instructors seek certification at a training centre. The college considered these suggestions and decided to retain its requirement of a master’s degree but add a requirement that instructors be certified in plant safety.
The purpose of quality assurance is to build confidence in the client that quality standards and procedures are being followed. This is done by an internal review of the plan, testing, and revisions policies or by an audit of the same items performed by an external group or agency.
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Communications management is about keeping everybody in the loop. The communications planning process concerns defining the types of information you will deliver, who will receive it, the format for communicating it, and the timing of its release and distribution. It turns out that 90% of a project manager’s job is spent on communication so it’s important to make sure everybody gets the right message at the right time.
The first step in defining your communication plan is figuring out what kind of communication your stakeholders need from the project so they can make good decisions. This is called the communications requirements analysis. Your project will produce a lot of information; you don’t want to overwhelm your stakeholders with all of it. Your job is to figure out what they feel is valuable. Communicating valuable information doesn’t mean you always paint a rosy picture. Communications to stakeholders may consist of either good news or bad news. The point is that you don’t want to bury stakeholders in too much information but you do want to give them enough so that they’re informed and can make appropriate decisions.
Communications technology has a major impact on how you keep people in the loop. Methods of communicating can take many forms, such as written reports, conversations, email, formal status reports, meetings, online databases, online schedules, and project websites. You should consider several factors before deciding what methods you’ll choose to transfer information. The timing of the information exchange or need for updates is the first factor. Do you need to procure new technology or systems, or are there systems already in place that will work? The technologies available to you should figure into your plan of how you will keep everyone notified of project status and issues. Staff experience with the technology is another factor. Are there project team members and stakeholders experienced at using this technology, or will you need to train them? Finally, consider the duration of the project and the project environment. Will the technology you’re choosing work throughout the life of the project or will it have to be upgraded or updated at some point? And how does the project team function? Are they located together or spread out across several campuses or locations?
The answers to these questions should be documented in the communication plan.
All projects require a sound communication plan, but not all projects will have the same types of communication or the same methods for distributing the information. The communication plan documents the types of information needs the stakeholders have, when the information should be distributed, and how the information will be delivered.
The types of information you will communicate typically include project status, project scope statements and updates, project baseline information, risks, action items, performance measures, project acceptance, and so on. It’s important that the information needs of the stakeholders be determined as early in the planning phase of the project management life cycle as possible so that as you and your team develop project planning documents, you already know who should receive copies of them and how they should be delivered.
Types of Communication
Completing a complex project successfully requires good communication among team members. If those team members work in the same building, they can arrange regular meetings, simply stop by each other’s office space to get a quick answer, or even discuss a project informally at other office functions. Many projects are performed by teams that interact primarily through electronic communication and are, therefore, called virtual teams. To avoid miscommunication that can harm trust and to include team members in a project culture, the project team needs a plan for communicating reliably and in a timely manner. This planning begins with understanding two major categories of communication.
Synchronous Communications
If all the parties to the communication are taking part in the exchange at the same time, the communication is synchronous. A telephone or Skype conference call is an example of synchronous communication. The following are examples of synchronous communications:
• Live meeting: Gathering of team members at the same location
• Conference call: A telephone call in which several people participate
• Audio conference: Like a conference call, but conducted online using software like Skype
• Computer-assisted conference: Audio conference with a connection between computers that can display a document or spreadsheet that can be edited by both parties
• Video conference: Similar to an audio conference but with live video of the participants. Some laptop computers have built-in cameras to facilitate video conferencing
• IM (instant messaging): Exchange of text or voice messages using pop-up windows on the participants’ computer screens
• Texting: Exchange of text messages between mobile phones, pagers, or personal digital assistants (PDAs)—devices that hold a calendar, a contact list, a task list, and other support programs
Modern communication technologies make it possible to assemble project teams from anywhere in the world. Most people work during daylight hours, which can make synchronous meetings difficult if the participants are in different time zones. However, it can be an advantage in some circumstances; for example, if something must be done by the start of business tomorrow, team members in Asia can work on the problem during their normal work hours while team members in North America get some sleep.
Remember Time Zones
It is important to remember time zones and calculate the difference between yours and your associates’ zones correctly so as not to miss important meetings or deadlines. Cities and countries to the north or south of each other all observe the same local time. Be aware that many well-educated people in the United States and Canada think of South America as directly south of North America. As you can see, South American countries can be up to five time zones east of North America. A helpful site to convert local time to another time zone is Time Zone Converter.
Time zones are calculated in reference to the time zone of the Royal Observatory in Greenwich, England. The time at that location is Greenwich Mean Time (GMT). More recent references designate it as Coordinated Universal Time (UTC) instead of GMT. The time zones advance from Greenwich in an easterly direction (Figure 15.1). However, at the international dateline (about the midpoint around the world from Greenwich), you subtract the time zone from GMT. To prevent confusion between a.m. and p.m., times are often given using a 24-hour clock. For example, midnight is indicated as 00:00, noon is 12:00 and 1 p.m. is 13:00.
Example: Conference Call between Toronto and Paris
A project manager for a software development project in Toronto is five time zones west of the reference zone, so the time is given as UTC–5 (or GMT–5). If it is noon in the reference zone, it is 7 a.m. (five hours earlier) in Toronto. The manager would like to contact a project team member in Paris, France. Paris is one time zone east of the reference zone (UTC+1 or GMT+1). If it is noon (12:00) in the reference zone, it is 1 p.m. (13:00) in Paris. This means that there is a six-hour difference between Toronto and Paris. If the project manager waits until after lunch to place the call (1 p.m. in Toronto), it will be too late in the day in Paris (7 p.m.) to reach someone.
Asynchronous Communications
Getting a team together at the same time can be a challenge—especially if they are spread out across time zones. Many types of communication do not require that the parties are present at the same time. This type of communication is asynchronous. There are several choices of asynchronous communications.
Mail and Package Delivery
Many companies prefer that final contracts are personally signed by an authorized representative of each party to the agreement. If several signatures are required, this can take weeks to get all the signatures if the contracts are transferred by a postal service. If this process is holding up the start of the project, you can use an overnight delivery service to minimize the time spent transferring the documents.
Fax
Fax machines have been around a long time and enjoy a high level of trust for transmitting documents accurately. Although it might seem archaic to still use fax transmissions, in many countries a fax of a signed contract is legal, but a computer-scanned image is not.
Email
Electronic mail (email) is widely used to coordinate projects and to communicate between team members. It has several valuable characteristics for project management:
• Information can be sent to a list of team members.
• Messages can be saved to document the process in case of a misunderstanding or miscommunication.
• Files can be attached and distributed.
Project Blog
A blog is an online journal that can be private, shared by invitation, or made available to the world. Some project managers keep a journal in which they summarize the day’s challenges and triumphs and the decisions they made. They return to this journal at a later date to review their decision-making process after the results of those decisions are known to see if they can learn from their mistakes. Many decisions in project management are made with incomplete knowledge, and reflecting on previous decisions to develop this decision-making skill is important to growth as a project manager.
Really Simple Syndication (RSS)
Some projects are directly affected by external factors such as political elections, economic trends, corporate mergers, technological or scientific breakthroughs, or weather. To keep informed about these factors, you can subscribe to online news sources. A technology that facilitates this process is Really Simple Syndication (RSS). Web pages with RSS news feeds have labeled links.
If the user clicks on the RSS feed, news from the website is automatically sent to the user’s news reader, such as Google Reader. The news reader can be set to filter the news for key words to limit the stories to those that are relevant to the project.
Assessing New Communication Technologies
New technologies for communicating electronically appear with increasing frequency. Using a new technology that is unfamiliar to the team increases the technology complexity, which can cause delays and increase costs. To decide if a new technology should be included in a communications plan, seek answers to the following questions (Business Dictionary):
• Does the new communication technology provide a competitive advantage for the project by reducing cost, saving time, or preventing mistakes?
• Does the project team have the expertise to learn the new technology quickly?
• Does the company offer support such as a help desk and equipment service for new communication technology?
• What is the cost of training and implementation in terms of time as well as money
Communication Plan Template
So how do you create a communication plan?
1. Identify your stakeholders (to whom)
2. Identify stakeholder expectations (why)
3. Identify communication necessary to satisfy stakeholder expectations and keep them informed (what)
4. Identify time-frame and/or frequency of communication messages (when)
5. Identify how the message will be communicated (the stakeholder’s preferred method) (how)
6. Identify who will communication each message (who)
7. Document items – templates, formats, or documents the project must use for communicating.
Figure 15.2 shows a communication plan template.
Text Attributions
This chapter of Project Management is a derivative of the following texts: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.15%3A_Communication_Planning.txt |
Even the most carefully planned project can run into trouble. No matter how well you plan, your project can always encounter unexpected problems. Team members get sick or quit, resources that you were depending on turn out to be unavailable, even the weather can throw you for a loop (e.g., a snowstorm). So does that mean that you’re helpless against unknown problems? No! You can use risk planning to identify potential problems that could cause trouble for your project, analyze how likely they are to occur, take action to prevent the risks you can avoid, and minimize the ones that you can’t.
A risk is any uncertain event or condition that might affect your project. Not all risks are negative. Some events (like finding an easier way to do an activity) or conditions (like lower prices for certain materials) can help your project. When this happens, we call it an opportunity; but it’s still handled just like a risk.
There are no guarantees on any project. Even the simplest activity can turn into unexpected problems. Anything that might occur to change the outcome of a project activity, we call that a risk. A risk can be an event (like a snowstorm) or it can be a condition (like an important part being unavailable). Either way, it’s something that may or may not happen …but if it does, then it will force you to change the way you and your team work on the project.
If your project requires that you stand on the edge of a cliff, then there’s a risk that you could fall. If it’s very windy out or if the ground is slippery and uneven, then falling is more likely (Figure 16.1).
When you’re planning your project, risks are still uncertain: they haven’t happened yet. But eventually, some of the risks that you plan for do happen, and that’s when you have to deal with them. There are four basic ways to handle a risk.
1. Avoid: The best thing you can do with a risk is avoid it. If you can prevent it from happening, it definitely won’t hurt your project. The easiest way to avoid this risk is to walk away from the cliff, but that may not be an option on this project.
2. Mitigate: If you can’t avoid the risk, you can mitigate it. This means taking some sort of action that will cause it to do as little damage to your project as possible.
3. Transfer: One effective way to deal with a risk is to pay someone else to accept it for you. The most common way to do this is to buy insurance.
4. Accept: When you can’t avoid, mitigate, or transfer a risk, then you have to accept it. But even when you accept a risk, at least you’ve looked at the alternatives and you know what will happen if it occurs. If you can’t avoid the risk, and there’s nothing you can do to reduce its impact, then accepting it is your only choice.
By the time a risk actually occurs on your project, it’s too late to do anything about it. That’s why you need to plan for risks from the beginning and keep coming back to do more planning throughout the project.
The risk management plan tells you how you’re going to handle risk in your project. It documents how you’ll assess risk, who is responsible for doing it, and how often you’ll do risk planning (since you’ll have to meet about risk planning with your team throughout the project).
Some risks are technical, like a component that might turn out to be difficult to use. Others are external, like changes in the market or even problems with the weather.
It’s important to come up with guidelines to help you figure out how big a risk’s potential impact could be. The impact tells you how much damage the risk would cause to your project. Many projects classify impact on a scale from minimal to severe, or from very low to very high. Your risk management plan should give you a scale to help figure out the probability of the risk. Some risks are very likely; others aren’t.
Risk Management Process
Managing risks on projects is a process that includes risk assessment and a mitigation strategy for those risks. Risk assessment includes both the identification of potential risk and the evaluation of the potential impact of the risk. A risk mitigation plan is designed to eliminate or minimize the impact of the risk events—occurrences that have a negative impact on the project. Identifying risk is both a creative and a disciplined process. The creative process includes brainstorming sessions where the team is asked to create a list of everything that could go wrong. All ideas are welcome at this stage with the evaluation of the ideas coming later.
Risk Identification
A more disciplined process involves using checklists of potential risks and evaluating the likelihood that those events might happen on the project. Some companies and industries develop risk checklists based on experience from past projects. These checklists can be helpful to the project manager and project team in identifying both specific risks on the checklist and expanding the thinking of the team. The past experience of the project team, project experience within the company, and experts in the industry can be valuable resources for identifying potential risk on a project.
Identifying the sources of risk by category is another method for exploring potential risk on a project. Some examples of categories for potential risks include the following:
• Technical
• Cost
• Schedule
• Client
• Contractual
• Weather
• Financial
• Political
• Environmental
• People
You can use the same framework as the work breakdown structure (WBS) for developing a risk breakdown structure (RBS). A risk breakdown structure organizes the risks that have been identified into categories using a table with increasing levels of detail to the right. The people category can be subdivided into different types of risks associated with the people. Examples of people risks include the risk of not finding people with the skills needed to execute the project or the sudden unavailability of key people on the project.
Example: Risks in John’s Move
In John’s move, John makes a list of things that might go wrong with his project and uses his work breakdown structure as a guide. A partial list for the planning portion of the RBS is shown in Table 16.1.
Table 16.1 Risk Breakdown Structure (RBS)
Task Risk
Contact Dion and Carlita
• Dion backs out
• Carlita backs out
• No common date available
Host planning lunch
• Restaurant full or closed
• Wring choice of ethnic food
• Dion or Carlita have special food allergies or preferences
Develop and distribute schedule
• Printer out of toner
• Out of paper
The result is a clearer understanding of where risks are most concentrated. This approach helps the project team identify known risks, but can be restrictive and less creative in identifying unknown risks and risks not easily found inside the WBS.
Risk Evaluation
After the potential risks have been identified, the project team then evaluates each risk based on the probability that a risk event will occur and the potential loss associated with it. Not all risks are equal. Some risk events are more likely to happen than others, and the cost of a risk can vary greatly. Evaluating the risk for probability of occurrence and the severity or the potential loss to the project is the next step in the risk management process.
Having criteria to determine high-impact risks can help narrow the focus on a few critical risks that require mitigation. For example, suppose high-impact risks are those that could increase the project costs by 5% of the conceptual budget or 2% of the detailed budget. Only a few potential risk events meet these criteria. These are the critical few potential risk events that the project management team should focus on when developing a project risk mitigation or management plan. Risk evaluation is about developing an understanding of which potential risks have the greatest possibility of occurring and can have the greatest negative impact on the project (Figure 16.2). These become the critical few.
There is a positive correlation—both increase or decrease together—between project risk and project complexity. A project with new and emerging technology will have a high-complexity rating and a correspondingly high risk. The project management team will assign the appropriate resources to the technology managers to ensure the accomplishment of project goals. The more complex the technology, the more resources the technology manager typically needs to meet project goals, and each of those resources could face unexpected problems.
Risk evaluation often occurs in a workshop setting. Building on the identification of the risks, each risk event is analyzed to determine the likelihood of occurrence and the potential cost if it did occur. The likelihood and impact are both rated as high, medium, or low. A risk mitigation plan addresses the items that have high ratings on both factors—likelihood and impact.
Example: Risk Analysis of Equipment Delivery
A project team analyzed the risk of some important equipment not arriving at the project on time. The team identified three pieces of equipment that were critical to the project and would significantly increase costs if they were late in arriving. One of the vendors, who was selected to deliver an important piece of equipment, had a history of being late on other projects. The vendor was good and often took on more work than it could deliver on time. This risk event (the identified equipment arriving late) was rated as high likelihood with a high impact. The other two pieces of equipment were potentially a high impact on the project but with a low probability of occurring.
Not all project managers conduct a formal risk assessment on a project. One reason, as found by David Parker and Alison Mobey in their phenomenological study of project managers, was a low understanding of the tools and benefits of a structured analysis of project risks (2004). The lack of formal risk management tools was also seen as a barrier to implementing a risk management program. Additionally, the project manager’s personality and management style play into risk preparation levels. Some project managers are more proactive and develop elaborate risk management programs for their projects. Other managers are reactive and are more confident in their ability to handle unexpected events when they occur. Yet others are risk averse, and prefer to be optimistic and not consider risks or avoid taking risks whenever possible.
On projects with a low-complexity profile, the project manager may informally track items that may be considered risk items. On more complex projects, the project management team may develop a list of items perceived to be higher risk and track them during project reviews. On projects of even greater complexity, the process for evaluating risk is more formal with a risk assessment meeting or series of meetings during the life of the project to assess risks at different phases of the project. On highly complex projects, an outside expert may be included in the risk assessment process, and the risk assessment plan may take a more prominent place in the project implementation plan.
On complex projects, statistical models are sometimes used to evaluate risk because there are too many different possible combinations of risks to calculate them one at a time. One example of the statistical model used on projects is the Monte Carlo simulation, which simulates a possible range of outcomes by trying many different combinations of risks based on their likelihood. The output from a Monte Carlo simulation provides the project team with the probability of an event occurring within a range and for combinations of events. For example, the typical output from a Monte Carlo simulation may indicate a 10% chance that one of the three important pieces of equipment will be late and that the weather will also be unusually bad after the equipment arrives.
Risk Mitigation
After the risk has been identified and evaluated, the project team develops a risk mitigation plan, which is a plan to reduce the impact of an unexpected event. The project team mitigates risks in various ways:
• Risk avoidance
• Risk sharing
• Risk reduction
• Risk transfer
Each of these mitigation techniques can be an effective tool in reducing individual risks and the risk profile of the project. The risk mitigation plan captures the risk mitigation approach for each identified risk event and the actions the project management team will take to reduce or eliminate the risk.
Risk avoidance usually involves developing an alternative strategy that has a higher probability of success but usually at a higher cost associated with accomplishing a project task. A common risk avoidance technique is to use proven and existing technologies rather than adopt new techniques, even though the new techniques may show promise of better performance or lower costs. A project team may choose a vendor with a proven track record over a new vendor that is providing significant price incentives to avoid the risk of working with a new vendor. The project team that requires drug testing for team members is practising risk avoidance by avoiding damage done by someone under the influence of drugs.
Risk sharing involves partnering with others to share responsibility for the risky activities. Many organizations that work on international projects will reduce political, legal, labour, and others risk types associated with international projects by developing a joint venture with a company located in that country. Partnering with another company to share the risk associated with a portion of the project is advantageous when the other company has expertise and experience the project team does not have. If a risk event does occur, then the partnering company absorbs some or all of the negative impact of the event. The company will also derive some of the profit or benefit gained by a successful project.
Risk reduction is an investment of funds to reduce the risk on a project. On international projects, companies will often purchase the guarantee of a currency rate to reduce the risk associated with fluctuations in the currency exchange rate. A project manager may hire an expert to review the technical plans or the cost estimate on a project to increase the confidence in that plan and reduce the project risk. Assigning highly skilled project personnel to manage the high-risk activities is another risk-reduction method. Experts managing a high-risk activity can often predict problems and find solutions that prevent the activities from having a negative impact on the project. Some companies reduce risk by forbidding key executives or technology experts to ride on the same airplane.
Risk transfer is a risk reduction method that shifts the risk from the project to another party. The purchase of insurance on certain items is a risk-transfer method. The risk is transferred from the project to the insurance company. A construction project in the Caribbean may purchase hurricane insurance that would cover the cost of a hurricane damaging the construction site. The purchase of insurance is usually in areas outside the control of the project team. Weather, political unrest, and labour strikes are examples of events that can significantly impact the project and that are outside the control of the project team.
Contingency Plan
The project risk plan balances the investment of the mitigation against the benefit for the project. The project team often develops an alternative method for accomplishing a project goal when a risk event has been identified that may frustrate the accomplishment of that goal. These plans are called contingency plans. The risk of a truck drivers’ strike may be mitigated with a contingency plan that uses a train to transport the needed equipment for the project. If a critical piece of equipment is late, the impact on the schedule can be mitigated by making changes to the schedule to accommodate a late equipment delivery.
Contingency funds are funds set aside by the project team to address unforeseen events that cause the project costs to increase. Projects with a high-risk profile will typically have a large contingency budget. Although the amount of contingency allocated in the project budget is a function of the risks identified in the risk analysis process, contingency is typically managed as one line item in the project budget.
Some project managers allocate the contingency budget to the items in the budget that have high risk rather than developing one line item in the budget for contingencies. This approach allows the project team to track the use of contingency against the risk plan. This approach also allocates the responsibility to manage the risk budget to the managers responsible for those line items. The availability of contingency funds in the line item budget may also increase the use of contingency funds to solve problems rather than finding alternative, less costly solutions. Most project managers, especially on more complex projects, manage contingency funds at the project level, with approval of the project manager required before contingency funds can be used.
Project Risk by Phases
Project risk is dealt with in different ways depending on the phase of the project.
Initiation
Risk is associated with things that are unknown. More things are unknown at the beginning of a project, but risk must be considered in the initiation phase and weighed against the potential benefit of the project’s success in order to decide if the project should be chosen.
Example: Risks by Phase in John’s Move
In the initiation phase of his move, John considers the risk of events that could affect the whole project. Lets assume that John’s move is not just about changing jobs, but also a change of cities. This would certainly incur more risks for the project. He identifies the following risks during the initiation phase that might have a high impact and rates the likelihood of their happening from low to high.
1. His new employer might change his mind and take back the job offer after he’s given notice at his old job: Low.
2. The current tenants of his apartment might not move out in time for him to move in by the first day of work at the new job: Medium.
3. The movers might lose his furniture: Low.
4. The movers might be more than a week late delivering his furniture: Medium.
5. He might get in an accident driving from Chicago to Atlanta and miss starting his job: Low.
John considers how to mitigate each of the risks.
1. During his job hunt, John had more than one offer, and he is confident that he could get another job, but he might lose deposit money on the apartment and the mover. He would also lose wages during the time it took to find the other job. To mitigate the risk of his new employer changing his mind, John makes sure that he keeps his relationships with his alternate employers cordial and writes to each of them thanking for their consideration in his recent interviews.
2. John checks the market in Atlanta to determine the weekly cost and availability of extended-stay motels.
3. John checks the mover’s contract to confirm that they carry insurance against lost items, but they require the owner to provide a detailed list with value estimates and they limit the maximum total value. John decides to go through his apartment with his digital camera and take pictures of all of his possessions that will be shipped by truck and to keep the camera with him during the move so he has a visual record and won’t have to rely on his memory to make a list. He seals and numbers the boxes so he can tell if a box is missing.
4. If the movers are late, John can use his research on extended-stay motels to calculate how much it would cost. He checks the moving company’s contract to see if they compensate the owner for late delivery, and he finds that they do not.
5. John checks the estimated driving time from Chicago to Atlanta using an Internet mapping service and gets an estimate of 11 hours of driving time. He decides that it would be too risky to attempt to make the drive by himself in one day, especially if he didn’t leave until after the truck was packed. John plans to spend one night on the road in a motel to reduce the risk of an accident caused by driving while too tired.
John concludes that the medium-risks can be mitigated and the costs from the mitigation would be acceptable in order to get a new job.
Planning Phase
Once the project is approved and it moves into the planning stage, risks are identified with each major group of activities. A risk breakdown structure (RBS) can be used to identify increasing levels of detailed risk analysis.
Example: Risk Breakdown Structure for John’s Move
John decides to ask Dion and Carlita for their help during their first planning meeting to identify risks, rate their impact and likelihood, and suggest mitigation plans. They concentrate on the packing phase of the move. They fill out a table of risks, as shown in Table 16.2.
Legend:
• RA: Risk avoidance
• RS: Risk sharing
• RR: Risk reduction
• RT: Risk transfer
Table 16.2: Risk Breakdown Structure (RBS) for Packing John’s Apartment
Task Risks Mitigation
Pack kitchen Cuts from handling sharp knives Buy small boxes for packing knives (RR)
Cuts from cracked glasses that break while being packed Discard cracked glasses (RA)
Transporting alcoholic beverages Give opened bottles to Dion or Carlita (RA)
Packing living room Damage to antique furniture Supervise wrapping and loading personally (RR) and require movers to insure against damage (RT)
Lose parts while talking apart the entertainment centre Buy box of large freezer bags with a marker to bag and label parts (RR)
Break most valuable electronics—TV, DVD, Tuner, Speakers Buy boxes of the right size with sufficient bubble wrap (RR)
Pack bedroom Break large mirror Buy or rent a mirror-box with Styrofoam blocks at each corner (RR)
Lose prescription drugs or pack them where they cannot be found quickly Separate prescription drugs for transportation in the car (RA)
Pack remaining items Damage to house plants Ask Carlita to care for them and bring them with her in her van when she visits in exchange for half of them (RS)
Transportation of flammable liquids from charcoal grill Give to Dion or Carlita (RA)
Implementation Phase
As the project progresses and more information becomes available to the project team, the total risk on the project typically reduces, as activities are performed without loss. The risk plan needs to be updated with new information and risks checked off that are related to activities that have been performed.
Understanding where the risks occur on the project is important information for managing the contingency budget and managing cash reserves. Most organizations develop a plan for financing the project from existing organizational resources, including financing the project through a variety of financial instruments. In most cases, there is a cost to the organization to keep these funds available to the project, including the contingency budget. As the risks decrease over the length of the project, if the contingency is not used, then the funds set aside by the organization can be used for other purposes.
To determine the amount of contingency that can be released, the project team will conduct another risk evaluation and determine the amount of risk remaining on the project. If the risk profile is lower, the project team may release contingency funds back to the parent organization. If additional risks are uncovered, a new mitigation plan is developed including the possible addition of contingency funds.
Closeout Phase
During the closeout phase, agreements for risk sharing and risk transfer need to be concluded and the risk breakdown structure examined to be sure all the risk events have been avoided or mitigated. The final estimate of loss due to risk can be made and recorded as part of the project documentation. If a Monte Carlo simulation was done, the result can be compared to the predicted result.
Example: Risk Closeout on John’s Move
To close out the risk mitigation plan for his move, John examines the risk breakdown structure and risk mitigation plan for items that need to be finalized. He makes a checklist to be sure all the risk mitigation plans are completed, as shown in Table 16.3. Risk is not allocated evenly over the life of the project. On projects with a high degree of new technology, the majority of the risks may be in the early phases of the project. On projects with a large equipment budget, the largest amount of risk may be during the procurement of the equipment. On global projects with a large amount of political risk, the highest portion of risk may be toward the end of the project.
Table 16.3 Closeout of Risk Mitigation Plan for John’s Move
Risk Mitigation Closeout
Items lost by movers Mover’s insurance plus digital image inventory Confirm all of the numbered boxes are present and still sealed.
Antique furniture damaged Mover’s insurance plus personal supervision of wrapping and loading Supervise unloading and unwrapping; visually inspect each piece.
House plants Ask Carlita to bring half of them in her van when she visits. Confirm that the plants are healthy and that Carlita brought about half of them.
Attribution
This chapter of Project Management is a derivative of the following text: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.16%3A_Risk_Management_Planning.txt |
After you have carefully planned your project, you will be ready to start the project implementation phase, the third phase of the project management life cycle. The implementation phase involves putting the project plan into action. It’s here that the project manager will coordinate and direct project resources to meet the objectives of the project plan. As the project unfolds, it’s the project manager’s job to direct and manage each activity, every step of the way. That’s what happens in the implementation phase of the project life cycle: you follow the plan you’ve put together and handle any problems that come up.
The implementation phase is where you and your project team actually do the project work to produce the deliverables. The word “deliverable” means anything your project delivers. The deliverables for your project include all of the products or services that you and your team are performing for the client, customer, or sponsor, including all the project management documents that you put together.
The steps undertaken to build each deliverable will vary depending on the type of project you are undertaking, and cannot therefore be described here in any real detail. For instance engineering and telecommunications projects will focus on using equipment, resources, and materials to construct each project deliverable, whereas computer software projects may require the development and implementation of software code routines to produce each project deliverable. The activities required to build each deliverable will be clearly specified within the project requirements document and project plan.
Your job as project manager is to direct the work, but you need to do more than deliver the results. You also need to keep track of how well your team performs. The implementation phase keeps the project plan on track with careful monitoring and control processes to ensure the final deliverable meets the acceptance criteria set by the customer. This phase is typically where approved changes are implemented.
Most often, changes are identified by looking at performance and quality control data. Routine performance and quality control measurements should be evaluated on a regular basis throughout the implementation phase. Gathering reports on those measurements will help you determine where the problem is and recommend changes to fix it.
Change Control
When you find a problem, you can’t just make a change, because it may be too expensive or take too long to do. You will need to look at how it affects the triple constraint (time, cost, scope) and how it impacts project quality. You will then have to figure out if it is worth making the change. If you evaluate the impact of the change and find that it won’t have an impact on the project triple constraint, then you can make the change without going through change control. Change control is a set of procedures that lets you make changes in an organized way.
Any time you need to make a change to your plan, you must start with a change request. This is a document that either you or the person making the request must complete. Any change to your project must be documented so you can figure out what needs to be done, by when, and by whom.
Once the change request is documented, it is submitted to a change control board. A change control board is a group of people who consider changes for approval. Not every change control system has a board but most do. The change request could also be submitted to the project sponsor or management for review and approval. Putting the recommended changes through change control will help you evaluate the impact and update all the necessary documents. Not all changes are approved, but if the changes are approved, you send them back to the team to put them in place.
The implementation phase uses the most project time and resources, and as a result, costs are usually the highest during this phase. Project managers also experience the greatest conflicts over schedules in this phase. You may find as you are monitoring your project that the actual time it is taking to do the scheduled work is longer than the amount of time planned.
When you absolutely have to meet the date and you are running behind, you can sometimes find ways to do activities more quickly by adding more resources to critical path tasks. That’s called crashing. Crashing the schedule means adding resources or moving them around to to bring the project back into line with the schedule. Crashing always costs more and doesn’t always work. There’s no way to crash a schedule without raising the overall cost of the project. So, if the budget is fixed and you don’t have any extra money to spend, you can’t use this technique.
Sometimes you’ve got two activities planned to occur in sequence, but you can actually do them at the same time. This is called fast tracking the project. On a software project, you might do both your user acceptance testing (UAT) and your functional testing at the same time, for example. This is pretty risky. There’s a good chance you might need to redo some of the work you have done concurrently. Crashing and fast tracking are schedule compression tools. Managing a schedule change means keeping all of your schedule documents up to date. That way, you will always be comparing your results to the correct plan.
After the deliverables have been physically constructed and accepted by the customer, a phase review is carried out to determine whether the project is complete and ready for closure.
Text Attributions
This chapter of Project Management is a derivative of the following text: | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.17%3A_Project_Implementation_Overview.txt |
Every project needs to end and that’s what project completion is all about in the last phase of the project life cycle. The whole point of the project is to deliver what you promised. By delivering everything you said you would, you make sure that all stakeholders are satisfied and all acceptance criteria have been met. Once that happens, your project can end.
Project completion is often the most neglected phase of the project life cycle. Once the project is over, it’s easy to pack things up, throw some files in a drawer, and start moving right into the initiation phase of the next project. Hold on. You’re not done yet.
The key activities in project completion are gathering project records; disseminating information to formalize acceptance of the product, service, or project; and performing project closure. As the project manager, you will need to review project documents to make certain they are up-to-date. For example, perhaps some scope change requests were implemented that changed some of the characteristics of the final product. The project information you are collecting during this phase should reflect the characteristics and specifications of the final product. Don’t forget to update your resource assignments as well. Some team members will have come and gone over the course of the project. You need to double-check that all the resources and their roles and responsibilities are noted.
Once the project outcomes are documented, you’ll request formal acceptance from the stakeholders or customer. They’re interested in knowing if the product or service of the project meets the objectives the project set out to accomplish. If your documentation is up-to-date, you’ll have the project results at hand to share with them.
Contract Closure
Contracts come to a close just as projects come to a close. Contract closure is concerned with completing and settling the terms of the contracts let for the project. It supports the project completion process because the contract closure process determines if the work described in the contracts was completed accurately and satisfactorily. Keep in mind that not all projects are performed under contract so not all projects require the contract closure process. Obviously, this process applies only to those phases, deliverables, or portions of the project that were performed under contract.
Contract closure updates the project records, detailing the final results of the work on the project. Contracts may have specific terms or conditions for completion. You should be aware of these terms or conditions so that project completion isn’t held up because you missed an important detail. If you are administering the contract yourself, be sure to ask your procurement department if there are any special conditions that you should be aware of so that your project team doesn’t inadvertently delay contract project closure.
One of the purposes of the contract closure process is to provide formal notice to the seller, usually in written form, that the deliverables are acceptable and satisfactory or have been rejected. If the product or service does not meet the expectations, the vendor will need to correct the problems before you issue a formal acceptance notice. Before the contract is closed, any minor items that need to be repaired or completed are placed on a punch list, which is a list of all the items found by the client or team or manager that still remain to be done. Hopefully, quality audits have been performed during the course of the project, and the vendor was given the opportunity to make corrections earlier in the process than the closing phase. It’s not a good idea to wait until the very end of the project and then spring all the problems and issues on the vendor at once. It’s much more efficient to discuss problems with your vendor as the project progresses because it provides the opportunity for correction when the problems occur.
The project team will then work on all of the items on the punch list, building a small schedule to complete the remaining work. If the number of items on the punch list is too large or the amount of work is significant, the project team continues to work on the project. Once the punch list becomes smaller, the project manager begins closing down the project, maintaining only enough staff and equipment to support the team that is working on the punch list.
If the product or service does meet the project’s expectations and is acceptable, formal written notice to the seller is required, indicating that the contract is complete. This is the formal acceptance and closure of the contract. It’s your responsibility as the project manager to document the formal acceptance of the contract. Many times the provisions for formalizing acceptance and closing the contract are spelled out in the contract itself.
If you have a procurement department handling the contract administration, they will expect you to inform them when the contract is complete and will in turn follow the formal procedures to let the seller know the contract is complete. However, you will still note the contract completion in your copy of the project records.
Releasing the Project Team
Releasing project team members is not an official process. However, it should be noted that at the conclusion of the project, you will release your project team members, and they will go back to their functional managers or get assigned to a new project. You will want to keep their managers, or other project managers, informed as you get closer to project completion, so that they have time to adequately plan for the return of their employees. Let them know a few months ahead of time what the schedule looks like and how soon they can plan on using their employees on new projects. This gives the other managers the ability to start planning activities and scheduling activity dates.
Final Payments
The final payment is usually more than a simple percentage of the work that remains to be completed. Completing the project might involve fixing the most difficult problems that are disproportionately expensive to solve, so the final payment should be large enough to motivate the vendor to give the project a high priority so that the project can be completed on time.
If the supplier has met all the contractual obligations, including fixing problems and making repairs as noted on a punch list, the project team signs off on the contract and submits it to the accounting department for final payment. The supplier is notified that the last payment is final and completes the contractual agreement with the project.
Post-Project Evaluations
Before the team is dissolved and begins to focus on the next project, a review is conducted to capture the lessons that can be learned from this project, often called a lessons-learned meeting or document. The team explores what went well and captures the processes to understand why they went well. The team asks if the process is transferable to other projects. The team also explores what did not go well and what people learned from the experience. The process is not to find blame, but to learn.
Quality management is a process of continual improvement that includes learning from past projects and making changes to improve the next project. This process is documented as evidence that quality management practices are in use. Some organizations have formal processes for changing work processes and integrating the lessons learned from the project so other projects can benefit. Some organizations are less formal in the approach and expect individuals to learn from the experience and take the experience to their next project and share what they learned with others in an informal way. Whatever type of approach is used, the following elements should be evaluated and the results summarized in reports for external and internal use.
Trust and Alignment Effectiveness
The project leadership reviews the effect of trust—or lack of trust—on the project and the effectiveness of alignment meetings at building trust. The team determines which problems might have been foreseen and mitigated and which ones could not have been reasonably predicted. What were the cues that were missed by the team that indicated a problem was emerging? What could the team have done to better predict and prevent trust issues?
Schedule and Budget Management
The original schedule of activities and the network diagram are compared to the actual schedule of events. Events that caused changes to the schedule are reviewed to see how the use of contingency reserves and float mitigated the disruption caused by those events. The original estimates of contingency time are reviewed to determine if they were adequate and if the estimates of duration and float were accurate. These activities are necessary for the project team to develop expertise in estimating schedule elements in future projects—they are not used to place blame.
A review of budget estimates for the cost of work scheduled is compared to the actual costs. If the estimates are frequently different from the actual costs, the choice of estimating method is reviewed.
Risk Mitigation
After the project is finished, the estimates of risk can be reviewed and compared to the events that actually took place. Did events occur that were unforeseen? What cues existed that may have allowed the team to predict these events? Was the project contingency sufficient to cover unforeseen risks? Even if nothing went wrong on this project, it is not proof that risk mitigation was a waste of money, but it is useful to compare the cost of avoiding risk versus the cost of unexpected events to understand how much it cost to avoid risk.
Procurement Contracts
The performance of suppliers and vendors is reviewed to determine if they should still be included in the list of qualified suppliers or vendors. The choice of contract for each is reviewed to determine if the decision to share risk was justified and if the choice of incentives worked.
Customer Satisfaction
Relationships with the client are reviewed and decisions about including the client in project decisions and alignment meetings are discussed. The client is given the opportunity to express satisfaction and identify areas in which project communication and other factors could be improved. Often a senior manager from the organization interviews the client to develop feedback on the project team performance.
A general report that provides an overview of the project is created to provide stakeholders with a summary of the project. The report includes the original goals and objectives and statements that show how the project met those goals and objectives. Performance on the schedule and budget are summarized and an assessment of client satisfaction is provided. A version of this report can be provided to the client as a stakeholder and as another means for deriving feedback.
Senior Management
The report to senior management contains all the information provided to the stakeholders in a short executive summary. The report identifies practices and processes that could be improved or lessons that were learned that could be useful on future projects.
Archiving of Document
The documents associated with the project must be stored in a safe location where they can be retrieved for future reference. Signed contracts or other documents that might be used in tax reviews or lawsuits must be stored. Organizations will have legal document storage and retrieval policies that apply to project documents and must be followed. Some project documents can be stored electronically.
Care should be taken to store documents in a form that can be recovered easily. If the documents are stored electronically, standard naming conventions should be used so documents can be sorted and grouped by name. If documents are stored in paper form, the expiration date of the documents should be determined so they can be destroyed at some point in the future. The following are documents that are typically archived:
• Charter documents
• Scope statement
• Original budget
• Change documents
• DPCI ratings
• Manager’s summary—lessons learned
• Final DPCI rating
Text Attributions
This chapter of Project Management is a derivative of the following texts:
1.19: Celebrate
The project team should celebrate their accomplishments, and the project manager should officially recognize their efforts, thank them for their participation, and officially close the project. A celebration helps team members formally recognize the project’s end and brings closure to the work they’ve done. It also encourages them to remember what they’ve learned and start thinking about how their experiences will benefit them and the organization during the next project.
Text Attributions
This chapter of Project Management is a derivative of the following text:
Media Attributions
• Champagne by Baron & Baron Project Management for Scientists and Engineers © CC BY (Attribution) | textbooks/biz/Management/Project_Management_(Watt)/01%3A_Chapters/1.18%3A_Project_Completion.txt |
Learning Objectives
1. Identify the Project Management Institute’s definition of project management.
2. Analyze and evaluate the role of client expectations in a project.
3. Define project scope.
“Project management is the application of knowledge, skills, tools, and techniques to project activities to meet the project requirements” (Project Management Institute, Inc., 2008). This simple definition represents a compromise that resulted from intense discussions within the Project Management Institute (PMI) during the 1980s. One of the priorities of PMI during this time was the development of project management as a profession. Although debate continues on whether project management is a profession with an enforceable code of conduct and other traditional criteria for recognition as a profession, the development of A Guide to the Project Management Body of Knowledge (PMBOK Guide) and the project management certifications that derived from these efforts helped promote the understanding and development of the project management field.
The discussion about what should be in the definition of project management included debates about the purpose of project management. Is the main purpose to meet client expectations or is the main purpose to meet the written specifications and requirements? This discussion around meeting project requirements was not easily settled. If it is assumed that the project client is the one who defines project requirements, then maybe project management is the application of knowledge, skills, tools, and techniques to meet client requirements or client expectations. PMI’s definition of project management does provide a good understanding of project management, but it does not help us understand project success. For that, we must include the client.
Jack Meredith and Samuel Mantel (Meredith & Mantel Jr., 2006) discussed project management in terms of producing project outcomes within the three objectives of cost, schedule, and specifications. Project managers are then expected to develop and execute a project plan that meets cost, schedule, and specification parameters. According to this view, project management is the application of everything a project manager does to meet these parameters. This approach to defining project management shares PMI’s focus on the project outcomes in terms of requirements.
Meredith and Mantel added a fourth aspect of project management—the expectations of the client. One client-centered definition of project management is the application of knowledge, skills, tools, and techniques to meet or exceed the expectations of the client. This definition focuses on delivering a product or service to the client that meets expectations rather than project specifications. It is possible to meet all project specifications and not meet client expectations or fail to meet one or more specifications and still meet or exceed a client’s expectation (Darnall, 1996).
Meredith and Mantel discussed a tendency noted by Darnall (Darnall, 1996) that expectations often increase during the life of a project. Meredith and Mantel suggest that this is a form of scope increase. A project scope is a carefully crafted document that reflects the performance specifications of the project deliverables. Defining the project scope and managing scope change is a very different process from developing an understanding of a client’s expectations and managing those expectations. Darnall focused on defining and managing client expectations as a critical project management skill that is distinct from scope development and management.
Client expectations encompass an emotional component that includes many client desires that are not easily captured within a specification document. Although closely correlated with project specifications, client expectations are driven by different needs. It is possible for a project team to exceed every project specification and end up with an unsatisfied client.
Highway Project
The Department of Highways in South Carolina was exploring ways to reduce the road construction costs and developed new contracting processes to allow the road builders to bring new ideas for cutting costs. On one project, the contractor proposed cost-cutting ideas throughout the life of the project. At each phase, the client accepted many of the ideas and then revised the budget. The client promoted the revised cost target of the project as an example of the success of the new process. By the end of the project, the final cost was less than 1 percent over the newest target. Although the total cost of the project was almost 10 percent less than the original cost projections and contract obligations, the success of the project was connected to the new expectations that developed during the life of the project. Even though this project performance exceeded the original goal, the client was disappointed.
The reverse is also true. A project can be late and over budget and the client can be satisfied. Although this may be counterintuitive, the response of a client to the events of a project is complex and goes beyond the data related in project specifications.
Biotech Project
A biotechnology company developed a new drug that proved to have a large market demand, and the team that developed the drug was assigned to build a new manufacturing facility to produce the drug. The project manager for the construction company that was awarded the contract to build the manufacturing facility managed the project effectively. Every request for a change in scope was approved, and the result was a 20 percent increase to the total cost of the project. On most projects, a 20 percent increase in the project cost would be considered poor performance. For the client’s project team, who were accustomed to complex projects with a large number of unknown issues that increase the final cost of the project, a 20 percent overrun in cost was not unusual. Even though the project was 20 percent over budget, the client was happy. Client satisfaction is often tied to expectations about project performance. Identifying and managing those expectations is a primary responsibility of the project manager.
Key Takeaways
• According to PMI, project management is the application of knowledge, skills, tools, and techniques to meet project requirements.
• The role of the client is controversial. Some clients include meeting or exceeding their expectations as part of project management.
• Project scope is a document that defines the work required to complete the project successfully.
Exercises
1. According to PMI, project management is the application of knowledge, ________, tools, and techniques to meet project requirements.
2. According to Meredith and Mantel, a project should ____ __ ______ (three words) the expectations of the client.
3. If someone had asked you to define project management before you read this section, how would you have defined it? How did your definition differ from the PMI definition?
4. What aspect of project management was omitted from the PMI definition that is included in the definition proposed by Meredith and Mantel? If you were on the PMI decision-making body, would you vote to include it? Explain your choice.
5. What is meant by the statement “The response of the client to the events of the project may be counterintuitive”?
Client Expectations
• >Compare and contrast the highway and biotech examples previously described. Suggest an approach that might have prevented client disappointment in the highway project. Include the following in your answer:
• What are the differences between the two projects? Provide a bulleted list.
• Identify the single most important difference between the two projects that affected client satisfaction.
• Suggest an approach to managing client expectations in the highway project that might have resulted in meeting or exceeding expectations rather than disappointment. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/01%3A_Introduction_to_Project_Management/1.01%3A_Project_Management_Defined.txt |
Learning Objectives
1. Describe two defining characteristics of a project.
2. Organize projects within projects.
The Project Management Institute (PMI) defines a project by its two key characteristics. All projects are temporary and undertaken to create a product, service, or result that is unique (Project Management Institute, Inc., 2008). These two simple concepts create a work environment that mandates different management approach from that used by an operations manager, whose work is oriented toward continuous improvement of existing processes over longer periods of time. A project manager needs a different set of skills to both define and successfully execute temporary projects. Because projects are temporary, they have a defined beginning and end. Project managers must manage start-up activities and project closeout activities. The processes for developing teams, organizing work, and establishing priorities require a different set of knowledge and skills because members of the project management team recognize that it is temporary. They seldom report directly to the project manager and the effect of success or failure of the project might not affect their reputations or careers the same way that the success or failure of one of their other job responsibilities would.
The second characteristic of a project, the delivery of a unique product, service, or result, also changes the management approach to the work. A project manager must take time to understand the deliverables of a project, develop a plan for producing the deliverables in the time available, and then execute that plan.
Projects are also defined within the context of larger projects as the following example illustrates.
National Energy Plan
The National Energy Technology Laboratory laid out a plan for a national energy policy that had a clear and identifiable outcome—providing reliable, affordable, and environmentally sound energy (National Energy Technology Laboratory, 2001). The details of this plan will be revised and updated, but the general goals are likely to remain unchanged. To accomplish these goals, the project requires the development of new technologies, complex scheduling and cost control, coordination of a large number of subcontractors, and skillful stakeholder management. Development of each of the major components became a project for the winning contractors within the larger project of providing reliable, affordable, and environmentally sound energy. Contractors for cleaner use of fossil fuels, conservation efforts, and development of renewable energy sources would manage major projects. Each project has to develop new technologies, manage a large number of subcontractors, and manage the stakeholders at the Department of Energy.
• >Each subcontractor or work unit becomes a project for that organization. The project is defined by the scope of work. In the energy policy, the scope of work included all activities associated with reducing use of fossil fuels and reliance on imported energy. Using our definition that a project is a temporary endeavor that creates a unique product or service, implementation of the energy policy would be a project that consists of other projects, such as development of the following:
• Wind power
• Solar power
• Electricity transmission
• Electricity storage
• New nuclear reactor design and installation
• Other renewable energy sources
• Biofuels
• Electric vehicles
• Nonpolluting use of coal and natural gas
• Environmental protection
• Key Takeaways
• All projects are temporary and undertaken to create a product, service, or result.
• Projects can contain smaller projects.
Exercises
1. The project scope is the _____ required to complete the project successfully.
2. According to PMI, all projects are ________ and undertaken to create a product or service that is unique.
3. Projects can contain ___________ projects.
4. What are two defining characteristics of a project that distinguish it from a process?
5. If you were planning to move from your current apartment or home to another location, would this qualify as a project? Explain your answer.
Projects within Projects
• >Choose a large public works project such as the construction of a new high school. Identify at least five phases to this project that could be treated as projects within a project. Specifically state how each project meets the definition of a project, and describe the product, service, or result of each project and why it is temporary. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/01%3A_Introduction_to_Project_Management/1.02%3A_Project_Defined.txt |
Learning Objectives
1. Identify the effect of organization type on time horizons.
2. Compare project management and operations management.
3. Describe the organizational options for managing projects.
The project is affected by the type of organization in which the project is conducted and how the organization is organized to manage projects.
• Organizational Priorities
Organizations fulfill a societal role to meet economic, religious, and governance functions. Local factories, churches, and hospitals are all organizations that provide some social or community need. Factories create wealth and jobs, churches provide spiritual and common social needs for communities, and government organizations provide regulations and services that allow for an orderly society. These organizations have different views of time and each organization develops an operational approach to accomplishing the purpose of the organization over that time horizon. For example, a religious group might begin construction of a cathedral that would take several lifetimes to complete, government performance is reviewed at election time, and a publicly owned company must justify its use of money each year in the annual report.
Organizations operate to effectively and efficiently produce the product or service that achieves the organization’s purpose and goals as defined by the key stakeholders—those who have a share or interest. An organization seeks to develop stable and predictable work processes and then improve those work processes over time through increased quality, reduced costs, and shorter delivery times. Total quality management, lean manufacturing, and several other management philosophies and methodologies have focused on providing the tools and processes for increasing the effectiveness and efficiency of the organization. Historically, these methodologies focused on creating incremental and continuous improvement in work processes. More recently, organizations are increasingly focused on step changes that take advantage of new technologies to create a significant improvement in the effectiveness or efficiency of the organization.
Often, these initiatives to increase organizational effectiveness or efficiency are identified as projects. Economic organizations will initiate a project to produce a new product, to introduce or revamp work processes to significantly reduce product costs, or to merge with other organizations to reduce competition or lower costs and generate additional profits. A social organization, such as a hospital, may build a new wing, introduce a new service, or design new work processes to reduce costs. A government organization may introduce a new software program that handles public records more efficiently, build a new road to reduce congestion, or combine departments to reduce costs.
Each of the initiatives meets our definition of a project. Each is a temporary endeavor and produces a unique product or service. Managing these projects effectively entails applying project management knowledge, skills, and tools.
• Operations Management versus Project Management
One way to improve understanding of project management is to contrast project management with operations management. Whether in an economic, socioreligious, or government organization, managers are charged with effectively and efficiently achieving the purpose of the organization. Typically, a manager of an economic organization focuses on maximizing profits and stockholder value. Leaders with socioreligious organizations focus on effective and efficient delivery of a service to a community or constituency, and governmental managers are focused on meeting goals established by governmental leaders.
Operations managers focus on the work processes of the operation. More effective work processes will produce a better product or service, and a more efficient work process will reduce costs. Operations managers analyze work processes and explore opportunities to make improvements. Total quality management, continuous process improvement, lean manufacturing, and other aspects of the quality movement provide tools and techniques for examining organizational culture and work processes to create a more effective and efficient organization. Operations managers are process focused, oriented toward capturing and standardizing improvement to work processes and creating an organizational culture focused on the long-term goals of the organization.
Project managers focus on the goals of the project. Project success is connected to achieving the project goals within the project timeline. Project managers are goal directed and time sensitive. Project managers apply project management tools and techniques to clearly define the project goals, develop an execution plan to meet those goals, and meet the milestones and end date of the project.
An operations manager may invest \$10,000 to improve a work process that saves \$3,000 a year. Over a five-year period, the operations manager improved the profitability of the operations by \$5,000 and will continue to save \$3,000 every year. The project manager of a one-year project could not generate the savings to justify this kind of process improvement and would not invest resources to explore this type of savings.
An operations manager creates a culture to focus on the long-term health of the organization. Operations managers build teams over time that focus on standardizing and improving work processes, that search for and nurture team members who will “fit in,” and that contribute to both the effectiveness of the team and the team culture. Project managers create a team that is goal focused and energized around the success of the project. Project team members know that the project assignment is temporary because the project, by definition, is temporary. Project team members are often members of organizational teams that have a larger potential to affect long-term advancement potential. Project managers create clear goals and clear expectations for team members and tie project success to the overall success of the organization. Operations managers are long-term focused and process oriented. Project managers are goal directed and milestone oriented.
• Organizing to Manage Projects
Because project management is different from operations management, projects are handled best by people who are trained in project management. This expertise can be obtained by hiring an outside consulting firm that specializes in project management or by developing an in-house group.
Some organizations are designed to execute projects. Often entities contract with engineering and construction companies to design and build their facilities or hire software companies to develop a software solution. The major work processes within these organizations are designed to support the acquisition and execution of projects. Functional departments such as estimating, scheduling, and procurement create and maintain core competencies designed to support projects. The ability of these types of organizations to successfully manage projects becomes a competitive advantage in the marketplace.
Organizations designed to produce products or services also use projects. Major activities outside the normal work of the organization’s department or functional units or major activities that cross functional boundaries become a project (a temporary task undertaken to create a product or service that is unique). As economic pressures increase the speed in which organizations must change and adapt to new environmental conditions, leaders are increasingly chartering projects to enable the organization to more quickly adapt. The application of a project management approach increases the likelihood of success as organizations charter a project to facilitate organizational change, to increase the development and introduction of new products or support the merger or divesture of organizational units.
Project management offices (PMOs) have emerged to facilitate development of organizational knowledge, skills, and tools to internally charter and manage projects within the organization. The PMO varies in structure and responsibility depending on the project management approach of the parent organization. On one end of the spectrum, the PMO has complete responsibility for projects within an organization from the criteria and selection of appropriate projects to accountability for project performance. In organizations that make a large investment in the PMO, a large number of new product or process improvement projects are submitted, and the project office develops a portfolio of projects to manage over a given period that maximizes the use of organizational resources and provides the greatest return to the organization.
PMOs can provide various functions for an organization. Some possible functions include the following:
• Project management. Some organizations maintain the project manager within the PMO, assign project managers from other departments, procure contract project managers, or practice a combination of all three.
• Center of excellence. The project office can maintain the organization’s project management policies and procedures, maintain a historical database, maintain best practices, and provide training and specialized expertise when needed.
• Portfolio management. The project office actually supervises the project managers and monitors project performance. Portfolio management also includes prioritizing projects on the basis of value to the organization and maintains an inventory of projects. Portfolio management balances the number and type of projects to create the greatest return from the entire portfolio of projects.
• Functional support. The project office maintains project management expertise to support the project. Estimating, project scheduling, and project cost analysis are examples of functional support.
Key Takeaways
• The purpose of an organization can affect its view of the time allowed for projects.
• In an organization, project management can be used to make step changes to take advantage of new technologies or make significant improvements in effectiveness or efficiency.
• Operations managers are long-term focused and process oriented. Project managers are goal directed and milestone oriented.
• Projects can be handled by outside contractors or by an internal group in a PMO.
Exercises
1. The type of organization can influence the ____ frame allowed for projects.
2. Operations managers are focused on __________, while project managers are focused on the goals of the project.
3. If projects are routinely handled internally, the group that manages the projects might be called the ______ ______ _____ (three words).
4. A friend of yours has a forty-five-minute commute to work. She decides to spend some time evaluating the different options she has for routes and possible carpooling to reduce the cost or time it takes to get to work. Is this task an example of something that uses the skills of an operations manager, or does it need the additional skills of a project manager? Explain your answer and refer to the definitions provided.
5. Business managers focus on improving efficiency and effectiveness, but sometimes they use a project management approach to make significant changes. What often prompts them to use the project management approach? What would be an example?
Operations versus Project Management
• >The manager of a sales department must meet annual sales goals, manage personnel in the department, and develop and deliver product training for clients. How is this type of operations management different from project management? Address each of the following issues in your answer:
• How is the relationship between the operations manager and the sales staff different from the relationship between a project manager and the project team members?
• Which of the duties described above is most like project management and might be contracted to an outside firm?
• What is the biggest difference between project management and the sales manager’s job? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/01%3A_Introduction_to_Project_Management/1.03%3A_Project_Context.txt |
Learning Objectives
1. Identify necessary operational leadership skills.
2. Identify additional leadership skills required of a project manager.
Every project is unique, and most projects will encounter unexpected technical challenges. Each project management team is a group of individuals who need motivation and coordination. Planning is vital, but the ability to adapt to changes and work with people to overcome challenges is just as necessary. A project manager must master the skills that are necessary to be successful in this environment.
• Operational Management Skills
Often the difference between the project that succeeds and the project that fails is the leadership of the project manager. The leadership skills needed by the successful project manager include all the skills needed by operations managers of organizations. These skills include:
• Good communication
• Team building
• Planning
• Motivating
• Political sensitivity
• Project Management Skills
Because project managers generally operate in a project environment that is more time sensitive and goal driven, the successful project manager requires additional knowledge, skills, and abilities.
Albert Einsiedel (Einsiedel, 1987) discussed leader-sensitive projects and defined five characteristics of an effective project leader. These characteristics were chosen based on some assumptions about projects. These characteristics include the project environment, which is often a matrix organization that results in role ambiguity, role conflict, and role erosion. The project environment is often a fluid environment where decisions are made with little information. In this environment, the five characteristics of an effective project leader include the following:
• Credibility
• Creativity as a problem solver
• Tolerance for ambiguity
• Flexibility in management style
• Effectiveness in communicating
Hans Thamhain (Thamhain, 1991) researched the training of project managers and, based on the finding, categorized project management into interpersonal, technical, and administrative skills:
• Interpersonal skills. These skills include providing direction, communicating, assisting with problem solving, and dealing effectively with people without having authority.
• Technical expertise. Technical knowledge gives the project manager the creditability to provide leadership on a technically based project, the ability to understand important aspects of the project, and the ability to communicate in the language of the technicians.
• Administrative skills. These skills include planning, organizing, and controlling the work.
Thamhain’s work provides a taxonomy for better understanding the skills needed by project managers.
Traditionally, the project manager has been trained in skills such as developing and managing the project scope, estimating, scheduling, decision making, and team building. Although the level of skills needed by the project manager depends largely on the project profile, increasingly the people skills of the project manager are becoming more important. The skills to build a high-performing team, manage client expectations, and develop a clear vision of project success are the type of skills needed by project managers on more complex projects. “To say Joe is a good project manager except he lacks good people skills is like saying he’s a good electrical engineer but doesn’t really understand electricity” (Darnall, 1997).
Key Takeaways
• Project managers need the same skills as an operations manager, such as good communications, team building, planning, expediting, motivating, and political sensitivity.
• Project managers need additional skills in establishing credibility, creative problem solving, tolerance for ambiguity, flexible management, and very good people skills.
Exercises
1. Project managers need the same skills as an operations manager, including communications, team building, planning, expediting, and _______ sensitivity.
2. In addition to the skills needed by an operations manager, a project manager needs to establish credibility, solve problems creatively, have a tolerance for ____________, be flexible, and have good people skills.
Personal Leadership Inventory
• >Rate your personal project management skills using the following scale:
• S Strong
• M Moderate
• I Improvement needed
• >Operational management skills:
1. Good communication
2. Team building
3. Planning
4. Expediting
5. Motivating others
6. Sensitive to the politics of a situation
• >Additional project management skills:
1. Establish credibility with others
2. Find creative solutions to problems
3. Tolerate ambiguity
4. Use a flexible management style—adapt your management style to changing situations | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/01%3A_Introduction_to_Project_Management/1.04%3A_Key_Skills_of_the_Project_Manager.txt |
Learning Objectives
1. Identify the tasks performed in a project start-up.
2. Describe the areas of project management knowledge as defined by the Project Management Institute.
Projects are divided into components, and a project manager must be knowledgeable in each area. Each of these areas of knowledge will be explored in more depth in subsequent chapters.
• Project Start-Up and Integration
The start-up of a project is similar to the start-up of a new organization. The project leader develops the project infrastructure used to design and execute the project. The project management team must develop alignment among the major stakeholders—those who have a share or interest—on the project during the early phases or definition phases of the project. The project manager will conduct one or more kickoff meetings or alignment sessions to bring the various parties of the project together and begin the project team building required to operate efficiently during the project.
During project start-up, the project management team refines the scope of work and develops a preliminary schedule and conceptual budget. The project team builds a plan for executing the project based on the project profile. The plan for developing and tracking the detailed schedule, the procurement plan, and the plan for building the budget and estimating and tracking costs are developed during the start-up. The plans for information technology, communication, and tracking client satisfaction are all developed during the start-up phase of the project.
Flowcharts, diagrams, and responsibility matrices are tools to capture the work processes associated with executing the project plan. The first draft of the project procedures manual captures the historic and intuitional knowledge that team members bring to the project. The development and review of these procedures and work processes contribute to the development of the organizational structure of the project.
This is typically an exciting time on a project where all things are possible. The project management team is working many hours developing the initial plan, staffing the project, and building relationships with the client. The project manager sets the tone of the project and sets expectations for each of the project team members. The project start-up phase on complex projects can be chaotic, and until plans are developed, the project manager becomes the source of information and direction. The project manager creates an environment that encourages team members to fully engage in the project and encourages innovative approaches to developing the project plan.
• Project Scope
The project scope is a document that defines the parameters—factors that define a system and determine its behavior—of the project, what work is done within the boundaries of the project, and the work that is outside the project boundaries. The scope of work (SOW) is typically a written document that defines what work will be accomplished by the end of the project—the deliverables of the project. The project scope defines what will be done, and the project execution plan defines how the work will be accomplished.
No template works for all projects. Some projects have a very detailed scope of work, and some have a short summary document. The quality of the scope is measured by the ability of the project manager and project stakeholders to develop and maintain a common understanding of what products or services the project will deliver. The size and detail of the project scope is related to the complexity profile of the project. A more complex project often requires a more detailed and comprehensive scope document.
According to the Project Management Institute (Project Management Institute, Inc., 2008), the scope statement should include the following:
• Description of the scope
• Product acceptance criteria
• Project deliverables
• Project exclusions
• Project constraints
• Project assumptions
The scope document is the basis for agreement by all parties. A clear project scope document is also critical to managing change on a project. Since the project scope reflects what work will be accomplished on the project, any change in expectations that is not captured and documented creates the opportunity for confusion. One of the most common trends on projects is the incremental expansion in the project scope. This trend is labeled scope creep. Scope creep threatens the success of a project because the small increases in scope require additional resources that were not in the plan. Increasing the scope of the project is a common occurrence, and adjustments are made to the project budget and schedule to account for these changes. Scope creep occurs when these changes are not recognized or not managed. The ability of a project manager to identify potential changes is often related to the quality of the scope documents.
Events do occur that require the scope of the project to change. Changes in the marketplace may require change in a product design or the timing of the product delivery. Changes in the client’s management team or the financial health of the client may also result in changes in the project scope. Changes in the project schedule, budget, or product quality will have an effect on the project plan. Generally, the later in the project the change occurs, the greater the increase to the project costs. Establishing a change management system for the project that captures changes to the project scope and assures that these changes are authorized by the appropriate level of management in the client’s organization is the responsibility of the project manager. The project manager also analyzes the cost and schedule impact of these changes and adjusts the project plan to reflect the changes authorized by the client. Changes to the scope can cause costs to increase or decrease.
• Project Schedule and Time Management
The definition of project success often includes completing the project on time. The development and management of a project schedule that will complete the project on time is a primary responsibility of the project manager, and completing the project on time requires the development of a realistic plan and the effective management of the plan. On smaller projects, project managers may lead the development of the project plan and build a schedule to meet that plan. On larger and more complex projects, a project controls team that focuses on both costs and schedule planning and controlling functions will assist the project management team in developing the plan and tracking progress against the plan.
To develop the project schedule, the project team does an analysis of the project scope, contract, and other information that helps the team define the project deliverables. Based on this information, the project team develops a milestone schedule. The milestone schedule establishes key dates throughout the life of a project that must be met for the project to finish on time. The key dates are often established to meet contractual obligations or established intervals that will reflect appropriate progress for the project. For less complex projects, a milestone schedule may be sufficient for tracking the progress of the project. For more complex projects, a more detailed schedule is required.
To develop a more detailed schedule, the project team first develops a work breakdown structure (WBS)—a description of tasks arranged in layers of detail. Although the project scope is the primary document for developing the WBS, the WBS incorporates all project deliverables and reflects any documents or information that clarifies the project deliverables. From the WBS, a project plan is developed. The project plan lists the activities that are needed to accomplish the work identified in the WBS. The more detailed the WBS, the more activities that are identified to accomplish the work.
After the project team identifies the activities, the team then sequences the activities according to the order in which the activities are to be accomplished. An outcome from the work process is the project logic diagram. The logic diagram represents the logical sequence of the activities needed to complete the project. The next step in the planning process is to develop an estimation of the time it will take to accomplish each activity or the activity duration. Some activities must be done sequentially, and some activities can be done concurrently. The planning process creates a project schedule by scheduling activities in a way that effectively and efficiently uses project resources and completes the project in the shortest time.
On larger projects, several paths are created that represent a sequence of activities from the beginning to the end of the project. The longest path to the completion of the project is the critical path. If the critical path takes less time than is allowed by the client to complete the project, the project has a positive total float or project slack. If the client’s project completion date precedes the calculated critical path end date, the project has a negative float. Understanding and managing activities on the critical path is an important project management skill.
To successfully manage a project, the project manager must also know how to accelerate a schedule to compensate for unanticipated events that delay critical activities. Compressing—crashing—the schedule is a term used to describe the techniques used to shorten the project schedule. During the life of the project, scheduling conflicts often occur, and the project manager is responsible for reducing these conflicts while maintaining project quality and meeting cost goals.
• Project Costs
The definition of project success often includes completing the project within budget. Developing and controlling a project budget that will accomplish the project objectives is a critical project management skill. Although clients expect the project to be executed efficiently, cost pressures vary on projects. On some projects, the project completion or end date is the largest contributor to the project complexity. The development of a new drug to address a critical health issue, the production of a new product that will generate critical cash flow for a company, and the competitive advantage for a company to be first in the marketplace with a new technology are examples of projects with schedule pressures that override project costs.
The accuracy of the project budget is related to the amount of information known by the project team. In the early stages of the project, the amount of information needed to develop a detailed budget is often missing. To address the lack of information, the project team develops different levels of project budget estimates. The conceptual estimate (or “ballpark estimate”) is developed with the least amount of knowledge. The major input into the conceptual estimate is expert knowledge or past experience. A project manager who has executed a similar project in the past can use those costs to estimate the costs of the current project.
When more information is known, the project team can develop a rough order of magnitude (ROM) estimate. Additional information such as the approximate square feet of a building, the production capacity of a plant, and the approximate number of hours needed to develop a software program can provide a basis for providing a ROM estimate. After a project design is more complete, a project detailed estimate can be developed. When the project team knows the number of rooms, the type of materials, and the building location of a home, the project team can provide a detailed estimate. A detailed estimate is not a bid.
The cost of the project is tracked relative to the progress of the work and the estimate for accomplishing that work. Based on the cost estimate, the cost of the work performed is compared against the cost budgeted for that work. If the cost is significantly higher or lower, the project team explores reasons for the difference between expected costs and actual costs.
Project costs may deviate from the budget because the prices in the marketplace were different from what was expected. For example, the estimated costs for lumber on a housing project may be higher than budgeted or the hourly cost for labor may be lower than budgeted. Project costs may also deviate based on project performance. For example, the project team estimated that the steel design for a bridge over the Hudson River would take 800 labor hours, but 846 hours were actually expended. The project team captures the deviation between costs budgeted for work and the actual cost for work, revises the estimate as needed, and takes corrective action if the deviation appears to reflect a trend.
The project manager is responsible for assuring that the project team develops cost estimates based on the best information available and revises those estimates as new or better information becomes available. The project manager is also responsible for tracking costs against the budget and conducting an analysis when project costs deviate significantly from the project estimate. The project manager then takes appropriate corrective action to assure that project performance matches the revised project plan.
• Project Quality
Project quality focuses on the end product or service deliverables that reflect the purpose of the project. The project manager is responsible for developing a project execution approach that provides for a clear understanding of the expected project deliverables and the quality specifications. The project manager of a housing construction project not only needs to understand which rooms in the house will be carpeted but also what grade of carpet is needed. A room with a high volume of traffic will need a high-grade carpet.
The project manager is responsible for developing a project quality plan that defines the quality expectations and assures that the specifications and expectations are met. Developing a good understanding of the project deliverables through documenting specifications and expectations is critical to a good quality plan. The processes for assuring that the specifications and expectations are met are integrated into the project execution plan. Just as the project budget and completion dates may change over the life of a project, the project specifications may also change. Changes in quality specifications are typically managed in the same process as cost or schedule changes. The impact of the changes is analyzed for impact on cost and schedule, and with appropriate approvals, changes are made to the project execution plan.
The Project Management Institute’s A Guide to the Project Management Body of Knowledge (PMBOK Guide) has an extensive chapter on project quality management. The material found in this chapter would be similar to material found in a good operational management text. Although any of the quality management techniques designed to make incremental improvement to work processes can be applied to a project work process, the character of a project (unique and relatively short in duration) makes small improvements less attractive on projects.
Rework on projects, as with manufacturing operations, increases the cost of the product or service and often increases the time needed to complete the reworked activities. Because of the duration constraints of a project, the development of the appropriate skills, materials, and work process early in the project is critical to project success. On more complex projects, time is allocated to developing a plan to understand and develop the appropriate levels of skills and work processes.
Project management organizations that execute several similar types of projects may find the process improvement tools useful in identifying and improving the baseline processes used on their projects. Process improvement tools may also be helpful in identifying cost and schedule improvement opportunities. Opportunities for improvement must be found quickly to influence project performance. The investment in time and resources to find improvements is greatest during the early stages of the project, when the project is in the planning stages. During later project stages, as pressures to meet project schedule goals increase, the culture of the project is less conducive to making changes in work processes.
Another opportunity for applying process improvement tools is on projects that have repetitive processes. A housing contractor that is building several identical houses may benefit from evaluating work processes in the first few houses to explore the opportunities available to improve the work processes. The investment of \$1,000 in a work process that saves \$200 per house is a good investment as long as the contractor is building more than five houses.
• Project Team: Human Resources and Communications
Staffing the project with the right skills, at the right place, and at the right time is an important responsibility of the project management team. The project usually has two types of team members: functional managers and process managers. The functional managers and team focus on the technology of the project. On a construction project, the functional managers would include the engineering manager and construction superintendents. On a training project, the functional manager would include the professional trainers; on an information technology project, the software development managers would be functional managers. The project management team also includes project process managers. The project controls team would include process managers who have expertise in estimating, cost tracking, planning, and scheduling. The project manager needs functional and process expertise to plan and execute a successful project.
Because projects are temporary, the staffing plan for a project typically reflects both the long-term goals of skilled team members needed for the project and short-term commitment that reflects the nature of the project. Exact start and end dates for team members are often negotiated to best meet the needs of individuals and the project. The staffing plan is also determined by the different phases of the project. Team members needed in the early or conceptual phases of the project are often not needed during the later phases or project closeout phases. Team members needed during the execution phase are often not needed during the conceptual or closeout phases. Each phase has staffing requirements, and the staffing of a complex project requires detailed planning to have the right skills, at the right place, at the right time.
Typically a core project management team is dedicated to the project from start-up to closeout. This core team would include members of the project management team: project manager, project controls, project procurement, and key members of the function management or experts in the technology of the project. Although longer projects may experience more team turnover than shorter projects, it is important on all projects to have team members who can provide continuity through the project phases.
For example, on a large commercial building project, the civil engineering team that designs the site work where the building will be constructed would make their largest contribution during the early phases of the design. The civil engineering lead would bring on different civil engineering specialties as they were needed. As the civil engineering work is completed and the structural engineering is well under way, a large portion of the civil engineers would be released from the project. The functional managers, the engineering manager, and civil engineering lead would provide expertise during the entire length of the project, addressing technical questions that may arise and addressing change requests.
Project team members can be assigned to the project from a number of different sources. The organization that charters the project can assign talented managers and staff from functional units within the organization, contract with individuals or agencies to staff positions on the project, temporarily hire staff for the project, or use any combination of these staffing options. This staffing approach allows the project manager to create the project organizational culture. Some project cultures are more structured and detail oriented, and some are less structured with less formal roles and communication requirements. The type of culture the project manager creates depends greatly on the type of project.
• Communications
Completing a complex project successfully requires teamwork, and teamwork requires good communication among team members. If those team members work in the same building, they can arrange regular meetings, simply stop by each other’s office space to get a quick answer, or even discuss a project informally at other office functions. Many complex projects in today’s global economy involve team members from widely separated locations, and the types of meetings that work within the same building are not possible. Teams that use electronic methods of communicating without face-to-face meetings are called virtual teams.
Communicating can be divided into two categories: synchronous and asynchronous. If all the parties to the communication are taking part in the exchange at the same time, the communication is synchronous. A telephone conference call is an example of synchronous communication. When the participants are not interacting at the same time, the communication is asynchronous. The letter a at the beginning of the word means not. Communications technologies require a variety of compatible devices, software, and service providers, and communication with a global virtual team can involve many different time zones. Establishing effective communications requires a communications plan.
• Project Risk
Risk exists on all projects. The role of the project management team is to understand the kinds and levels of risks on the project and then to develop and implement plans to mitigate these risks. Risk represents the likelihood that an event will happen during the life of the project that will negatively affect the achievement of project goals. The type and amount of risk varies by industry type, complexity, and phase of the project. The project risk plan will also reflect the risk profile of the project manager and key stakeholders. People have different comfort levels with risk, and some members of the project team will be more risk adverse than others.
The first step in developing a risk management plan involves identifying potential project risks. Some risks are easy to identify, such as the potential for a damaging storm in the Caribbean, and some are less obvious. Many industries or companies have risk checklists developed from past experience. The Construction Industry Institute published a one-hundred-item risk checklist (Construction Industry Institute Cost/Schedule Task Force, 1989) that provides examples and areas of project risks. No risk checklist will include all potential risks. The value of a checklist is the stimulation of discussion and thought about the potential risks on a project.
The project team then analyzes the identified risks and estimates the likelihood of the risks occurring. The team then estimates the potential impact of project goals if the event does occur. The outcome from this process is a prioritized list of estimated project risks with a value that represents the likelihood of occurrence and the potential impact on the project.
The project team then develops a risk mitigation plan that reduces the likelihood of an event occurring or reduces the impact on the project if the event does occur. The risk management plan is integrated into the project execution plan, and mitigation activities are assigned to the appropriate project team member. The likelihood that all the potential events identified in the risk analysis would occur is extremely rare. The likelihood that one or more events will happen is high.
The project risk plan reflects the risk profile of the project and balances the investment of the mitigation against the benefit for the project. One of the more common risk mitigation approaches is the use of contingency. Contingency is funds set aside by the project team to address unforeseen events. Projects with a high-risk profile will typically have a large contingency budget. If the team knows which activities have the highest risk, contingency can be allocated to activities with the highest risk. When risks are less identifiable to specific activities, contingency is identified in a separate line item. The plan includes periodic risk plan reviews during the life of the project. The risk review evaluates the effectiveness of the current plan and explores for possible risks not identified in earlier sessions.
• Project Procurement
The procurement effort on projects varies widely and depends on the type of project. Often the client organization will provide procurement services on less complex projects. In this case, the project team identifies the materials, equipment, and supplies needed by the project and provides product specifications and a detailed delivery schedule. When the procurement department of the parent organization provides procurement services, a liaison from the project can help the procurement team better understand the unique requirements of the project and the time-sensitive or critical items of the project schedule.
On larger, more complex projects, personnel are dedicated to procuring and managing the equipment, supplies, and materials needed by the project. Because of the temporary nature of projects, equipment, supplies, and materials are procured as part of the product of the project or for the execution of the project. For example, the bricks procured for a construction project would be procured for the product of the project, and the mortar mixer would be equipment procured for the execution of the project work. At the end of the project, equipment bought or rented for the execution of the work of the project are sold, returned to rental organizations, or disposed of some other way.
More complex projects will typically procure through different procurement and management methods. Commodities are common products that are purchased based on the lowest bid. Commodities include items like concrete for building projects, office supplies, or even lab equipment for a research project. The second type of procurement includes products that are specified for the project. Vendors who can produce these products bid for a contract. The awarding of a contract can include price, ability to meet the project schedule, the fit for purpose of the product, and other considerations important to the project. Manufacturing a furnace for a new steel mill would be provided by a project vendor. Equipment especially designed and built for a research project is another example. These vendors’ performances become important parts of the project, and the project manager assigns resources to coordinate the work and schedule of the vendor. The third procurement approach is the development of one or more partners. A design firm that is awarded the design contract for a major part of the steel mill and a research firm that is conducting critical subparts of the research are examples of potential project partners. A partner contributes to and is integrated into the execution plan. Partners perform best when they share the project vision of success and are emotionally invested in the project. The project management team builds and implements a project procurement plan that recognizes the most efficient and effective procurement approach to support the project schedule and goals.
Key Takeaways
• During the start-up phase, the project leader develops the project infrastructure used to design and execute the project. A team is formed to create agreement among project stakeholders on the goals, cost, and completion date. Plans for executing the project, managing the schedule and quality, and controlling the budget are created.
• The scope statement establishes project parameters that define what will be done.
• The project schedule begins with a milestone schedule followed by a WBS and a project diagram. The longest path through the project diagram is the critical path, and the difference between the completion of the critical path and the project finish date is the float. Shortening the critical path is called crashing the project.
• Cost estimating begins with a conceptual or ballpark estimate that is followed by a ROM estimate. A project budget is determined from the cost of the tasks in the WBS. Costs are monitored during the project and estimates updated if the costs vary from expectations.
• Project quality begins with the specifications of materials and labor. A quality plan creates a process for assuring the requirements and specifications of the project are met. Quality improvement tools can be applied to projects if the company has several similar projects.
• Team members are selected to manage functions and processes. The staffing plan assigns people as needed. Sources of team members are company employees, contractors, new hires, and partners.
• The risk on a project reflects the number of things that can possibly happen that will have a negative effect on the project and the probability of those events happening.
• The provider of procurement management depends on the size of the project and the organization. Commodities are purchased from the lowest bidder, while specialty items are purchased from bids or from partners.
Exercises
1. During the start-up phase, the first estimate of the cost of the project is called the __________ or ballpark estimate.
2. Shortening the schedule to meet the project completion date is called ___________the schedule.
3. Why would it be important to get the stakeholders in a project to actually sign the scope statement?
4. What is the difference between a milestone schedule and a work breakdown schedule?
Areas of Knowledge
• >Write one or two sentences in which you describe each area of project management knowledge—as defined by the Project Management Institute.
1. Start-up
2. Scope
3. Time
4. Cost
5. Quality
6. Team selection (human resources)
7. Communications
8. Risk
9. Procurement | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/01%3A_Introduction_to_Project_Management/1.05%3A_Introduction_to_the_Project_Management_Knowledge_Areas.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. If you were planning to change the landscaping around the location where you or a friend lives and decided to approach it like a project, describe the start-up activities you would use. Refer to the elements of a project start-up as described in this chapter.
2. Describe a project you have worked on where you experienced scope creep. Begin by defining scope creep in your own words. Describe the project, how the scope creep occurred, and the effect it had on the project cost, quality, and completion date.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Client satisfaction. Should the project manager go beyond the written requirements in the project scope statement to satisfy the client? Does the answer to this question depend on the role of the project in the organization? For example, does it matter if the organization is a consulting firm that sells project management or if the project is done for another department in the same organization? Form an opinion on this topic, and write a few paragraphs on it to organize your thoughts on the subject. Be prepared to share your thoughts with classmates. Submit the work as directed by your instructor.
2. Organizational priorities. Consider that three different organizations are planning to construct a building for their own use. The organizations are a for-profit company, a religious group, and a local school district. Choose three project knowledge areas, and consider how the project might be affected in each of these areas by the different types of organizations behind the project. Write a few paragraphs on this topic to organize your thoughts on the subject, and be prepared to share your thoughts with classmates. Submit the work as directed by your instructor.
1.07: Web Exercise
Learning Objective
1. Find pronunciation of terms using an online dictionary.
• Use an Online Audio Pronunciation Aid
One of the problems with learning a new vocabulary in an online class is that you do not get to hear the instructor pronounce the terms. If the pronunciation is not obvious from the spelling, it can be embarrassing if you say the word incorrectly. Fortunately, several online dictionaries have features that say the word. You must have speakers or headphones attached to the computer, and they must be enabled.
• How to Use an Online Audio Pronunciation Aid
1. Obtain speakers or headphones and plug them into the audio output jack on your computer. The location of this jack on computers varies greatly, but it is usually green as shown in Figure 1.10 “Audio Output Ports on Two Computers”.
Figure 1.10 Audio Output Ports on Two Computers
Rob DiCarterino – White 13” Apple Macbook – CC BY 2.0; Ryan Franklin – Audio Port – CC BY 2.0.
2. Enable the speaker output. In Windows computers, look for a speaker icon in the lower right corner of the screen. If the speakers/headphone jack is turned off, it will have the universal symbol for “No” on it. If that is the case, double-click the icon and remove the check mark next to Mute to enable the speaker output. The icon displays without the “No” symbol.
3. Use your web browser to go to http://www.thefreedictionary.com.
4. In the Search box, type synchronous and then click the Search button.
5. The term is displayed with a phonetic spelling and a speaker icon, as shown in Figure 1.11 “Pronunciation Option in an Online Dictionary”.
Figure 1.11 Pronunciation Option in an Online Dictionary
6. To the right of the word, click the speaker icon. You should be able to hear the pronunciation through the speakers or headphones.
7. Capture a screen that shows the dictionary definition of synchronous and then paste it into a word processing document.
8. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name N/A
Used an online audio aid to learn to pronounce terms correctly Used a browser to open an online dictionary that has an audio feature for pronouncing terms that is indicated by an icon Same as Best Choice of a website that does not include audio pronunciations or has an inability to activate the audio output
9. Submit evidence of completion as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/01%3A_Introduction_to_Project_Management/1.06%3A_Exercises.txt |
Learning Objectives
1. Download software from an Internet site and install it on a computer.
2. Capture a computer screen and paste it into a word processing document.
3. Create a folder of project management web addresses in a web browser.
• Download and Install Adobe Reader
There are many programs that are useful for project managers that can be downloaded from a website. Some of them are free while others are trial versions or are available for a license fee. To download and install software on a computer, you must have administrative rights on that computer. If you are trying to use a computer at a company for your homework in this class, you probably do not have administrative rights to install software. You need to use a private computer on which you can log in as the administrator or as a user with rights to install software.
Alternatively, in some campus computer labs you are allowed to install software, but the computer is refreshed to its original configuration when the machine is restarted. If you use a computer in a common lab, be sure to complete the assignment before the machine is restarted.
In this exercise, you download and install Adobe Reader. This program allows you to read files that are saved in the PDF format. This format is very popular because it allows distribution of documents that may be easily viewed but not changed.
• How to Download and Install Adobe Reader
1. Using a web browser, go to https://get.adobe.com/reader/. The Adobe home page displays as shown in Figure 1.12 “Adobe Reader Download Page”.
Figure 1.12 Adobe Reader Download Page
2. Click the check boxes next to optional features, such as virus scans or toolbars, to deselect them and then click Download now.
3. Follow the directions on the screen to install Adobe Reader.
4. When the installation process is complete, the program is added to the list of available programs on your computer. It will start automatically whenever you try to open a file that is saved using the PDF file format.
5. From the list of programs on your computer start Adobe Reader to confirm that it is successfully installed, as shown in Figure 1.13 “Adobe Reader Installed”.
Figure 1.13 Adobe Reader Installed
6. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name N/A
Downloaded software from an Internet site and installed it on a computer Program is installed and functioning Same as Best Did not allow time to find a computer on which software could be installed; process failed
7. Submit evidence of completion as directed by the instructor.
• Download and Install Google Earth
There are many programs that are useful for project managers that can be downloaded from a website. Some of them are free while others are trial versions or are available for a license fee. To download and install software on a computer, you must have administrative rights on that computer. If you are trying to use a computer at a company for your homework in this class, you probably do not have administrative rights to install software. You need to use a private computer on which you can log in as the administrator or as a user with rights to install software.
Alternatively, in some campus computer labs you are allowed to install software, but the computer is refreshed to its original configuration when the machine is restarted. If you use a computer in a common lab, be sure to complete the assignment before the machine is restarted.
In this exercise, you download and install Google Earth. This program provides information that would be valuable to a project manager who needs to consider the implications of the location of a project.
• How to Download and Install Google Earth
1. Using a web browser, go to http://earth.google.com. The Google Earth home page displays as shown in Figure 1.14 “Google Earth Home Page”.
2. Click the Download Google Earth button.
3. Scroll through and review the Terms of Service. See Figure 1.15 “Terms of Service”.
4. Click the Agree and Download button if you agree to abide by the terms. If not, contact your instructor for an alternative assignment.
5. Choose a folder into which the file will be downloaded. The default choice in Windows is usually the Downloads folder in My Documents. Make note of where the file will be placed so you can find it in the next step.
The file that is downloaded is a program that can be executed by clicking the file name. It is an installation program that manages the rest of the download and installation process. In some browsers, the option to click the file name is available from the browser window, and in others, you must use a file management program like Windows Explorer to find the file and then double-click the file name. This process is typical of most programs that you download and install.
6. Click or double-click the file name to start the installation. A security warning box may display seeking your permission to install a program, as shown in Figure 1.16 “Permission to Run the Installation Program”. Only programs from trusted sites should be installed.
7. Click the Run button. The program will contact the Google Earth website and begin the process of downloading the main part of the program. A window with a progress bar displays to indicate how much of the file has been successfully transferred, as shown in Figure 1.17 “Progress Bar”.
8. When the installation process is complete, the program starts. Any location on earth may be entered, and a satellite image with a variety of accompanying information is displayed, as shown in Figure 1.18 “Google Earth Installed”.
9. Enter a location of your choice in the Fly to box and then press Enter.
10. Capture the screen and then paste it into a word processing document.
11. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name N/A
Downloaded software from an Internet site and installed it on a computer Program is installed and functioning Same as Best Did not allow time to find a computer on which software could be installed; process failed
12. Submit evidence of completion as directed by the instructor.
• Capture a Screen Using Windows XP and the Print Screen Button
The operating system of your computer manages the display on the monitor or screen. The operating system can make a copy of the screen and save it to disk or to the clipboard—a temporary storage area—and then the image of the screen can be pasted into a word processing document. The document can be saved and then attached to an e-mail or otherwise sent to team members. This skill might be used to illustrate a computer problem, illustrate a point, or prove that you have followed directions properly.
• How to Capture a Screen Using Windows XP and the Print Screen Button
1. Open a blank document in your word processing program.
2. Save the file to a folder of your choice, such as Ch01StudentName, where you use your name without spaces in place of StudentName. Save the file as a Word 97–2003 file type. Your display may show the .doc file extension that is characteristic of the file type if it is set to display file extensions. See Figure 1.19 “File Name in Save As Dialog Box”.
3. In the first line of the document, type Chapter 1 Exercises by StudentName where you replace StudentName with your name. Press the Enter key to move the insertion point to the next line, as shown in Figure 1.20 “Document with Insertion Point on Second Line”.
4. Leave this document open. Start a web browser. Use the browser to go to http://maps.google.com. The Google Maps page displays.
5. On the keyboard, find the PrntScrn button. This is the Print Screen button. (Some laptop computers do not have a PrntScrn button. If you have a laptop with Windows XP and no PrntScrn button, use a search engine like Google to find a free screen capture software like ScreenHunter, and then install it.)
6. Press the PrntScrn button. An image of the screen is saved in a temporary memory area called the Windows clipboard.
7. Switch to the word processing document. Click below the first line of text. Hold the Control (CTRL) key and then press the V key to paste the image from the clipboard.
8. Press the Enter key twice to create a new empty line below the image. See Figure 1.21 “Capture of the Google Maps Screen with Insertion Point below the Image”.
9. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch01StudentName in the Word 2003 format where StudentName is replaced by your name Same as Best Different file name than specified without the student’s name
Download software from an Internet site and install it on a computer Title; screen capture of the Google Maps site; insertion point below the image Title plus screen capture; insertion point on same line as image Missing title
10. Save the file and submit it as directed by the instructor.
• Capture a Screen Using Windows Vista or Windows 7
The operating system of your computer manages the display on the monitor or screen. The operating system can make a copy of the screen and save it to disk or to the clipboard—a temporary storage area—and then the image of the screen can be pasted into a word processing document. The document can be saved and then attached to an e-mail or otherwise sent to team members. This skill might be used to illustrate a computer problem, illustrate a point, or prove that you have followed directions properly.
• How to Capture a Screen Using Vista or Windows 7 and the Snipping Tool
1. Open a blank document in your word processing program.
2. Save the file to a folder of your choice, such as Ch01StudentName where you use your name in place of StudentName. Save the file as a Word 97–2003 file type. Your display may show the .doc file extension that is characteristic of the file type if it is set to display file extensions. See Figure 1.19 “File Name in Save As Dialog Box”.
3. In the first line of the document, type Chapter 1 Exercises by StudentName where you replace StudentName with your name. Press the Enter key to move the insertion point to the next line, as shown in Figure 1.20 “Document with Insertion Point on Second Line”.
4. Leave this document open. Start a web browser. Use the browser to go to http://maps.google.com. The Google Maps page displays.
5. Click the Windows Start button to display a menu of options.
6. On the menu of options, click All Programs.
7. On the menu of programs, click the Accessories folder.
8. On the menu of accessories, click Snipping Tool.
9. In the Snipping Tool, click the New Snip button arrow and then click Window Snip.
10. Click anywhere on the screen. In the Snipping Tool dialog box, on the toolbar, click the Copy button.
11. Switch to the word processing document. Click below the first line of text. Hold the CTRL key, and then press the V key to paste the image from the clipboard.
12. Press the Enter key twice to create a new empty line below the image. See Figure 1.21 “Capture of the Google Maps Screen with Insertion Point below the Image”.
13. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch01StudentName in the Word 2003 format where StudentName is replaced by your name Same as Best Different file name than specified without the student’s name
Capture a computer screen and paste it into a word processing document Title; screen capture of the Google Maps site; insertion point below the image Title plus screen capture; insertion point on same line as image Missing title
14. Save the file and submit it as directed by the instructor.
• Capture a Screen Using OSX on a Mac
The operating system of your computer manages the display on the monitor or screen. The operating system can make a copy of the screen and save it to disk or to the clipboard—a temporary storage area—and then the image of the screen can be pasted into a word processing document. The document can be saved and then attached to an e-mail or otherwise sent to team members. This skill might be used to illustrate a computer problem, illustrate a point, or prove that you have followed directions properly.
• How to Capture a Screen Using OSX on a Mac
1. Open a blank document in your word processing program.
2. Save the file to a folder of your choice, such as Ch01StudentName where you use your name in place of StudentName. Save the file as a Word 97–2003 file type. Your display may show the .doc file extension that is characteristic of the file type if it is set to display file extensions. See Figure 1.19 “File Name in Save As Dialog Box”.
3. In the first line of the document, type Chapter 1 Exercises by StudentName where you replace StudentName with your name. Press the Enter key to move the insertion point to the next line, as shown in Figure 1.20 “Document with Insertion Point on Second Line”.
4. On the keyboard, press Command + Control + Shift + 3. An image of the screen is saved in the clipboard.
5. Switch to the word processing document. Click below the first line of text. Hold the CTRL key, and then press the V key to paste the image from the clipboard.
6. Press the Enter key twice to create a new empty line below the image. See Figure 1.21 “Capture of the Google Maps Screen with Insertion Point below the Image”.
7. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch01StudentName in the Word 2003 format where StudentName is replaced by your name Same as Best Different file name than specified without the student’s name
Capture a computer screen and paste it into a word processing document Title; screen capture of the Google Maps site; insertion point below the image Title plus screen capture; insertion point on same line as image Missing title
8. Save the file and submit it as directed by the instructor.
• Create a Folder of Bookmarks in a Web Browser in Chrome
You will visit sites that contain supporting information and useful templates. To save the addresses of these sites, you can create in a folder named Project Management in your web browser.
• How to Create a Folder of Bookmarks in Google Chrome
1. Open your web browser program. In the address box, type http://maps.google.com and then press Enter. The Google Maps home page displays as shown in Figure 1.22 “Google Maps Home Page”.
2. On the toolbar, click the Bookmarks button. The Bookmark Added dialog box displays.[1]The default location for the bookmark is the Bookmarks bar, which is a toolbar that contains links to the websites. It is also a folder.
3. In the Bookmark dialog box, click the Close button. The web address for http://maps.google.com is placed in the Bookmarks bar folder and is available for display on the toolbar.
4. On your keyboard, at the lower left, locate the Control (CTRL) key. Press and hold the CTRL key, and then on the keyboard press B.[2] The Bookmark toolbar displays, as shown in Figure 1.23 “Chrome Bookmarks Bar”.
5. On the toolbar above the Bookmarks bar, click the Tools button. On the menu, click Bookmark Manager. The Bookmark Manager dialog box displays, as shown in Figure 1.24 “Chrome Bookmark Manager Dialog Box”.
6. In the Bookmark Manager dialog box, on the toolbar, on the Organize button, click the small arrow.[3]
In the menu, click New Folder. The New Folder dialog box displays.
7. In the New Folder dialog box, in the Name box, type Project Management and then click OK. The Project Management folder is added to the Bookmarks bar as shown in Figure 1.25 “Folder Added to the Bookmarks Bar”.
8. On the toolbar, click the Tools button. On the menu, click Bookmark manager. The Bookmark manager dialog box displays, as shown in Figure 1.26 “Managing Bookmarks”.
9. Move the mouse pointer onto Google Maps. Press and hold the left mouse button and move the mouse to move the pointer on the screen to the Project Management folder in either pane of the dialog box.[4]
The link is moved into the Project Management folder.
10. In the Bookmark Manager dialog box, in the left pane, click the Project Management folder. The link to Google Maps is displayed in the right pane to indicate that it is now in the Project Management folder. The link to Google Maps displays in the pane to the right, as shown in Figure 1.27 “Link Placed in the Project Management Folder”.
11. Use the skills you practiced previously to capture an image of this dialog box and then paste it into Ch01StudentName.doc.
12. In the Bookmark Manager dialog box, in the upper right corner, click the close button.[5]
Close the Chrome web browser.
13. Start the Chrome browser again. On the Bookmarks bar, click the Project Management folder. The link to Google Maps is displays under the Project Management folder on the Bookmarks bar, as shown in Figure 1.28 “Project Management Folder on the Chrome Bookmarks Bar”.
14. Click the link to Google Maps. The Google Maps home page displays. Close the browser.
15. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch01StudentName.doc Same name using .docx format Does not include student name in file name
Create a folder of project management web addresses in a web browser Folder named Project Management on the Bookmarks toolbar with a working link to Google Maps Same as Best Project Management folder without a working link to Google Maps or just a link to Google Maps as one of the Favorites but not in a folder
16. Submit evidence of completion as directed by the instructor.
• Create a Folder of Bookmarks in a Web Browser in Firefox 3
You will visit sites that contain supporting information and useful templates. To save the addresses of these sites, you can create a folder named Project Management in your web browser.
• How to Create a Folder of Bookmarks in Mozilla Firefox 3
1. Open your web browser program. In the address box, type http://maps.google.com and then press Enter. The Google Maps home page displays as shown in Figure 1.29 “Firefox 3 Browser”.
2. On the toolbar, click the Bookmarks button. The Edit This Bookmark dialog box displays[6]
as shown in Figure 1.30 “Bookmark Dialog Box in Firefox”. The default location for the bookmark is the Unsorted Bookmarks.
3. In the Edit This Bookmark dialog box, click the Done button. The web address for http://maps.google.com is placed in the list of unsorted bookmarks, and the Bookmarks toolbar displays, as shown in Figure 1.31 “Firefox Bookmarks Bar”.
4. On the Menu bar, click Bookmarks. On the menu, click Organize Bookmarks. The Library dialog box displays, as shown in Figure 1.32 “Library of Bookmarks in Firefox”.
5. In the Library dialog box, in the left pane, click Bookmarks Toolbar. On the Library dialog box, on the toolbar, click Organize. On the menu, click New Folder. The Add Folder dialog box displays.
6. In the Add Folder dialog box, in the Name box, type Project Management as shown in Figure 1.33 “Folder Added to the Bookmarks Bar”.
7. In the Add Folder dialog box, click the Add button. The new folder is added to the Bookmarks toolbar.
8. In the Library dialog box, in the left pane, click the arrow to the left of Bookmarks Toolbar to show its subfolders. The Project Management folder displays as a subfolder.
9. In the Library dialog box, in the left pane, click Unsorted Bookmarks to show its bookmarks. Locate the link to Google Maps, as shown in Figure 1.34 “Managing Bookmarks”.
10. Move the mouse pointer onto Google Maps. Press and hold the left mouse button and move the mouse to move the pointer on the screen to the Project Management folder in the left pane of the dialog box.[7]
The link is moved into the Project Management folder.
11. In the Library dialog box, in the left pane, click the Project Management folder. The link to Google Maps is displayed in the right pane to indicate that it is now in the Project Management folder, as shown in Figure 1.35 “Link Placed in the Project Management Folder”.
12. In the Library dialog box, in the upper right corner, click the Close button.[8]
Close the Firefox web browser.
13. Start the Firefox browser again. On the Bookmarks bar, click the Project Management folder. The link to Google Maps displays under the Project Management folder on the Bookmarks bar, as shown in Figure 1.36 “Project Management Folder on the Bookmarks Bar”.
14. Capture this screen and paste it into a blank word processing document. Save the document as Ch01StudentName.doc
15. In the browser, click the link in the Project Management folder to Google Maps. The Google Maps home page displays. Close the browser.
16. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name N/A
Create a folder of project management web addresses in a web browser Folder named Project Management on the Bookmarks toolbar with a working link to Google Maps Same as Best Project Management folder without a working link to Google Maps or just a link to Google Maps as one of the Favorites but not in a folder
17. Submit evidence of completion as directed by the instructor.
• Create a Folder of Bookmarks in a Web Browser in Internet Explorer 8
You will visit sites that contain supporting information and useful templates. To save the addresses of these sites, you can create a folder named Project Management in your web browser.
• How to Create a Folder of Favorites in Internet Explorer 8
1. Open your web browser program. In the address box, type http://maps.google.com and then press Enter. The Google Maps home page displays as shown in Figure 1.37 “Google Maps Home Page”.
2. On the toolbar, click the Favorites button. The Add to Favorites menu displays as shown in Figure 1.38 “Add to Favorites Menu”.
3. To the right of Add to Favorites, click the arrow.[9]
On the menu, click Add to Favorites bar. Click outside the menu to close it. The web address for maps.google.com is placed in the Favorites toolbar and the toolbar is displayed, as shown in Figure 1.39 “Internet Explorer Favorites Toolbar”.
4. On the Favorites toolbar, click the Favorites button. On the menu, click the Add to Favorites arrow. On the menu, click Organize Favorites. The Organize Favorites dialog box displays, as shown in Figure 1.40 “Internet Explorer Favorites Dialog Box”. Your favorites and folders will be different from those shown.
5. In the Organize Favorites dialog box, click the New Folder button. A new folder is added with the default name—New Folder—selected and ready to be replaced.
6. Type Project Management and then press Enter. The Project Management folder is added at the bottom of the list of favorite links and folders, as shown in Figure 1.41 “Folder Added to the List of Favorites”.
7. Locate the Favorites Bar folder on the list of favorites. Drag the Project Management folder onto the Favorites Bar folder and release the mouse button. The Project Management folder is a subfolder of the Favorites Bar, as shown in Figure 1.42 “Project Management Folder Moved into the Favorites Bar Folder”.
8. In the Organize Favorites dialog box, drag the Google Maps link onto the Project Management folder. The link to Google Maps is placed in the Project Management folder.
9. Click the Project Management folder. The Google Maps link displays in the Project Management folder, as shown in Figure 1.43 “Google Maps Link in the Project Management Subfolder”.
10. In the Bookmark Manager dialog box, click the Close button. Close the web browser.
11. Start the Internet Explorer browser again. On the Favorites toolbar, click the Project Management folder. The link to Google Maps displays under the Project Management folder on the Bookmarks bar, as shown in Figure 1.44 “Project Management Folder on the Internet Explorer Bookmarks Bar”.
12. Capture this screen and paste it into Ch01StudentName.doc.
13. In the browser, click the link to Google Maps. The Google Maps home page displays. Close the browser.
14. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch01StudentName.doc .docx format Student name not in file name
Create a folder of project management web addresses in a web browser Folder named Project Management on the Favorites toolbar with a working link to Google Maps Same as Best Project Management folder without a working link to Google Maps or just a link to Google Maps as one of the Favorites but not in a folder
15. Submit evidence of completion as directed by the instructor.
• Create a Folder of Bookmarks in a Web Browser in Internet Explorer 9
You will visit sites that contain supporting information and useful templates. To save the addresses of these sites, you can create a folder named Project Management in your web browser.
• How to Create a Folder of Favorites in Internet Explorer 9
1. Open your web browser program. In the address box, type http://maps.google.com and then press Enter. The Google Maps home page displays as shown in Figure 1.45 “Google Maps Home Page”.
2. On the toolbar, click the View Favorites button, and then click the Add to Favorites button. The Add a Favorite dialog box displays as shown in Figure 1.46 “Add a Favorite Dialog Box”.
3. Click the New Folder button. In the Create a Folder dialog box, in the Folder Name box, type Project Management. Confirm that Favorites is chosen in the Create in box, as shown in Figure 1.47 “Create a New Folder”.
4. Click the Create button.
5. In the Add a Favorite dialog box, observe that the new folder displays in the Create in box, as shown in Figure 1.48 “Internet Explorer Add a Favorite Dialog Box”.
6. Click the Add button.
7. Click the View Favorites button. Click the Favorites tab, if necessary. Scroll to the new Project Management folder and then click it. The link to Google Maps is stored within the Project Management folder, as shown in Figure 1.49 “Google Maps Link in the Project Management Folder”.
8. In the Bookmark Manager dialog box, click the Close button. Close the web browser.
9. Capture this screen and paste it into Ch01StudentName.doc.
10. In the browser, click the link to Google Maps. The Google Maps home page displays. Close the browser.
11. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch01StudentName.doc .docx format StudentName not in file name
Create a folder of project management web addresses in a web browser Folder named Project Management on the Favorites toolbar with a working link to Google Maps Same as Best Project Management folder without a working link to Google Maps or just a link to Google Maps as one of the Favorites but not in a folder
12. Submit evidence of completion as directed by the instructor.
• Create a Folder of Bookmarks in a Web Browser in Safari
You will visit sites that contain supporting information and useful templates. To save the addresses of these sites, you can create a folder named Project Management in your web browser.
• How to Create a Folder of Bookmarks in Apple Safari
1. Open your web browser program. In the address box, type http://maps.google.com and then press Enter. The Google Maps home page displays as shown in Figure 1.50 “Safari Browser”.
2. On the toolbar, click the Bookmarks button. A dialog box displays[10]as shown in Figure 1.51 “Dialog Box in Safari”. The default location for the bookmark is the Bookmarks bar.
3. In the dialog box, click the Add button. The web address for http://maps.google.com is placed on the Bookmarks toolbar, as shown in Figure 1.52 “Safari Bookmarks Bar”.
4. On the Menu bar, click Bookmarks. On the menu, click Add Bookmarks Folder. The Bookmarks dialog box displays, as shown in Figure 1.53 “New Folder”.
5. In the Bookmarks dialog box, with untitled folder selected, type Project Management as shown in Figure 1.54 “Folder Added to the Bookmarks Bar”.
6. In the Bookmarks dialog box, in the Collections pane, click Bookmarks Bar to display its contents. The Google Maps link displays in the right pane.
7. Move the mouse pointer onto Google Maps. Drag the Google Maps link onto the Project Management folder. The link is moved into the Project Management folder.
8. In the Bookmarks dialog box, in the left pane, click the Project Management folder. The link to Google Maps is displayed in the right pane to indicate that it is now in the Project Management folder, as shown in Figure 1.55 “Link Placed in Project Management Folder”.
9. Use the skills you practiced previously to capture an image of this dialog box. If necessary, open Ch01StudentName.doc. Paste the screen capture below the previous screen. Save the file and leave it open.
10. From the Collections pane, drag the Project Management folder onto the Bookmarks toolbar. The Project Management folder is added to the Bookmarks toolbar, as shown in Figure 1.56 “Project Management Folder on Bookmarks Toolbar”.
11. In the Bookmarks dialog box, in the upper left corner, click the close button.[11]
Close the Safari web browser.
12. Start the Safari browser again. On the Bookmarks bar, click the Project Management folder. The link to Google Maps displays under the Project Management folder on the Bookmarks bar, as shown in Figure 1.57 “Project Management Folder on Bookmarks Toolbar”.
13. Capture this screen and paste it into a blank word processing document. Save the document as Ch01StudentName.doc.
14. In the browser, click the link to Google Maps. The Google Maps home page displays. Close the browser.
15. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch01StudentName.doc Same as Best Other word processing program format
Create a folder of project management web addresses in a web browser Folder named Project Management on the Bookmarks toolbar with a working link to Google Maps Same as Best Project Management folder without a working link to Google Maps or just a link to Google Maps as one of the Favorites but not in a folder
16. Submit evidence of completion as directed by the instructor.
1. This assumes that you have not previously added this site as a bookmark.
2. In the future, this sequence of holding the Control key and pressing another key will be written with a plus sign (e.g., Ctrl + B).
3. This is an example of Microsoft syntax. In the future, the process of clicking the arrow on a button will be shortened (e.g., click the Organize arrow).
4. In the future, description of this type of process will be shortened (e.g., drag Google Maps to the Project Management folder).
5. In the future, description of this process will be shortened (e.g., close the dialog box).
6. This assumes that you have not previously added this site as a bookmark.
7. In the future, description of this type of process will be shortened (e.g., drag Google Maps to the Project Management folder).
8. In the future, description of this process will be shortened (e.g., close the dialog box).
9. In the future, arrows associated with buttons will be referred to with the button name (e.g., click the Add to Favorites button).
10. This assumes that you have not previously added this site as a bookmark.
11. In the future, description of this process will be shortened (e.g., close the dialog box). | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/01%3A_Introduction_to_Project_Management/1.08%3A_Software_and_Technology_Exercises.txt |
Learning Objectives
1. Identify project attributes that can be used for project profiling.
2. Define project profiling.
A few years ago, I observed a project manager with a long list of successful projects absolutely struggle with a project. As I looked around, I noticed that often times project managers who do superb jobs on some projects will fail on others. What causes this to happen? Why were project managers successful on some projects but struggling on others?
Even though all projects are by definition unique, there are attributes that are common among projects that allow the characterization or profiling of a project. We can look at just two project attributes and develop some understanding of the project. A large project that will be executed in at least three locations will have a very different profile from a small project that will be executed in one location. These two attributes—size and location—provide information about the project that will enable a manager in the parent organization to assign a project manager with the appropriate knowledge and skills. We can then develop an execution approach to increase the likelihood of success.
Project managers have not always been assigned to projects based on their skills and the skills required by the project. Research by the Construction Industry Institute (Construction Industry Institute, 2009) indicated that the number one criterion for assignment of a project manager to a project was availability. Even if available, the ideal project manager for a large construction project may not be a good fit for a software development project. The technical knowledge needed to manage these projects is not the same and having the wrong technical knowledge may make the difference between a successful project and project failure.
Even within the same industry, like the construction industry, different skills are needed by the project manager for different projects. For example, the construction of an office building in downtown Philadelphia is a very different project from the construction of a chemical plant in Mexico. The differences in these projects require different skills and different execution approaches. Organizations have not had good tools for understanding and matching the needs of a project with the project manager who has the right skills and experience. Developing a project profile is one method for developing an understanding of the project that will allow a systematic approach to developing an execution plan based on the profile of the project and selecting a project manager who has the right kind of experience and skills.
Project profiling is the process of extracting a characterization from the known attributes of a project. The characterization will provide a more comprehensive understanding of the project that should result in developing an appropriate execution approach and the assignment of organizational resources. In different terms, project profiling is a process that summarizes what is known about the attributes of a project and places the project into a category with other projects that have similar characteristics. For example, you can characterize a project as a large project or a small project. The size of the project becomes the profiling attribute. You can characterize a project as domestic or global, and the location of the project becomes the profiling characteristic.
A company that has twenty projects may determine that four of these projects are estimated to cost more than \$1 million dollars and the remaining sixteen projects are estimated to cost much less. The company then communicates that all projects over \$1 million be considered a large project. The company now establishes a rule that large projects will require a project manager with at least five years experience, it will have a vice president as executive sponsor, and it will require formal quarterly reports. In this example, one characteristic is used to develop the organization’s project management approach to their twenty projects.
Key Takeaways
• Project profiles can be created based on attributes such as budget and size to determine a systematic approach to developing an execution plan and selecting a project manager.
• Project profiling is the process of extracting a characterization from the known attributes of a project.
Exercises
1. Several types of project profiles use budget size, location, and __________ knowledge.
2. Project profiling is the process of extracting a characterization from the known _____________ of a project.
3. Describe how location can make a difference in the difficulty of a project.
4. Why is it valuable to create a project profile? Base your answer on the text of this chapter but use your own words.
Project Profiling
• >Propose another attribute that might be used for project profiling besides budget size, location, and technical knowledge. Include the following in your answer:
• Describe the categories into which you would divide your attribute.
• Describe the skills or knowledge a project manager would need to work on a project in each of your categories. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/02%3A_Project_Profiling/2.01%3A_Using_a_Project_Profile.txt |
Learning Objective
1. Identify different methods of typing projects.
Aaron J. Shenhar and Dov Dvir (Shenhar & Dvir, 1996) developed a typology—classification or profile—of engineering projects that reflected two dimensions. The first dimension reflected the technological uncertainty and ranged from low tech, medium tech, and high tech to super high tech. Although projects involve the use of various levels of technology, Shenhar and Dvir develop criteria for each type of technological uncertainty that enabled the project to be typed. The second dimension reflected the system scope. The system scope dimension ranged from assembly projects that dealt with building a single component, to system projects that included interactive elements, to array projects that included a wide dispersal of interactive systems and subsystems.
Shenhar and Dvir observed that the project execution approach was connected to the project type. The study identified different management patterns associated with project type as well as different management tools and practices. As the project system scope became more complex and the system scope of the project became larger, more sophisticated management tools were put in place to reduce project uncertainty. As project technology increased, project managers became more invested in processes to manage technical issues such as redesign and testing. As projects increased in system scope, project managers became more invested in formal planning and control issues. In later research, Shenhar (Shenhar, 1999) developed recommendations for adjusting the project management approach based on the project typology—systematic classification or profile. For example, project managers will use more risk management techniques (see Chapter 11 “Managing Project Risk” on risk management) when the technological uncertainty is high.
Robert Youker (Youker, 1998) identified basic differences in project types. Among the attributes he used were the uncertainty and risk, level of sophistication of the workers, the level of detail in the planning, the newness of the technology, and the time pressure. Youker also looked at project size, duration, industrial sector, geographic location, number of workers, cost, complexity, urgency, and organizational design as attributes that help determine a project profile.
Key Takeaways
• The typology of Shenhar and Dvir characterized projects based on the attributes of technological uncertainty and complexity of scope.
• Youker used the attributes of uncertainty and risk, sophistication of workers, planning detail, industrial sector, location, number of workers, cost, complexity, urgency, and organizational design.
Exercises
1. The typology of Shenhar and Dvir used attributes of technological ____________ and project scope.
2. The typology of Youker used several attributes, including the ________ of workers.
3. What are the two attributes of a project that Shenhar and Dvir used to characterize projects?
Simple versus Complex Profiles
• >Simple profiles are easier to use than profiles that consider many attributes. Compare the profiling method of Shenhar and Dvir with the profiling method of Youker. Address the following issues:
• Which profiling method would be faster and easier to communicate to team members? (Explain your choice.)
• Which attributes used by Youker but not used by Shenhar and Dvir do you think are important? Explain your answer and give an example of a situation where consideration of the attribute would make a difference to the project. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/02%3A_Project_Profiling/2.02%3A_Project_Profiling_Models.txt |
Learning Objectives
1. Describe the characteristics of complex systems.
2. Identify the categories used by the Darnall-Preston Complexity Index.
Understanding and managing complex systems like a project require some systems concepts that have been developed in other disciplines and applied to project management as a tool to make complex projects manageable.
• Complex Systems
When is a project complex? The answer to this question depends on how you define complex. One way to explore this question is to look at complexity models in various disciplines for insights that may apply to project management. In biology, the simplest plant is composed of one cell. As the cellular structure increases in number of cells and the number of connections to other cells increases, the plant life is seen as more complex. In the animal kingdom, the single cell ameba is the simplest animal, and life becomes more complex as the numbers of cells combine to form muscles and organs.
The complexity of a system is usually determined by the number of parts or activities, the degree of differentiation between the parts, and the structure of their connections. Heterogeneous and irregularly configured systems are complex, such as organisms, airplanes, and junkyards. Order is the opposite of complex. Ordered systems are homogenous and redundant, like an interstate toll booth or a production line in a factory. Complex systems have multiple interacting components whose collective behavior cannot be simply inferred from the behavior of the components (Gould, 1996).
In addition to the number of parts, the degree of differentiation between parts and the number, type, and strength of relationships between parts also influences the degree of complexity. For example, the transistors in a computer have three connections to other parts of the computer, but each nerve cell in the human brain can be connected to thousands of other cells in the brain, which is why the human brain is more complex than a computer. Complexity is context dependent. A project is more or less complex in relation to the number of activities, the type and strength of relationships to other project activities, and the degree and type of relationships to the project environment.
Projects are complex adaptive systems. A complex adaptive system is a system consisting of a large number of parts or activities that interact with each other in numerous and various ways. A complex adaptive system is adaptive if the activities adjust or react to the events of the environment. Successful adaptive systems adjust in a way that facilitates or allows the system or project to achieve its purpose.
The dependence of the project on the activities, the interdependence of the activities, and the specialization of the activities underscore the relationship dependence of project activities. This relationship dependence is a key aspect of complex adaptive systems. The nature of complex adaptive systems can be probed by investigating the impact of change in one activity and the effect on other activities and the behavior of the whole. Activities must be studied and understood as interrelated, connected parts of the whole. If you remove a computer chip from a computer and the computer powers down, do not assume the purpose of the chip was to provide power to the computer. If you remove or shorten a project kickoff activity, do not assume the project will finish earlier because of the dependence of later project activities on project kickoff activities. Any change to the kickoff activities will impact other activities and the project as a whole.
Chemical Company
A chemical company was building a new plant in Tennessee with a new design model that was intended to shorten the design phase on the project and lower the cost. The design of the plant was managed by a United States–based company with part of the design work contracted to an Indian company. The engineers in the United States would work on the design and would electronically transfer the design work to India at the end of the day. Engineers in India, many who had graduated from U.S. colleges, continued to work on the design and at the end of the day would electronically transfer the work back to the United States. The project would benefit from differences in time zones that would allow work on the project twenty-four hours per day. The project would also benefit from the lower engineering wages in India. The project approach was abandoned when the project started falling behind schedule. The added complexity of the project offset the scheduling and cost benefit. The project complexity profile became significantly less complex when the execution approach changed from global to domestic partnering. The execution model could have worked but would have required more investment during the start-up phase of the project.
Complex adaptive systems have three characteristics that are also reflected in complex projects.
• Complex Adaptive Systems Tend to Self-Organize
Formal organizational charts indicate reporting relationships but are not very effective at displaying project relationships. Projects organize around the work, phases, or activities. The organization of the project reacts to the nature of the work at any given phase.
During the start-up meeting of a large complex project, the project manager facilitated the development of the project organization chart that included all the major companies and leaders from the client and key subcontractors. After the chart was complete, the project manager ripped the chart up in front of the entire project team to demonstrate his key message, which was that there are formal reporting relationships, but the real leadership and communication will change during the life of the project. In other words, the system will adapt to meet the needs of the project at each phase. During the design phase, the engineering team will identify the primary needs and communication will center on supporting the engineering efforts. Later, the procurement team will take the lead as critical equipment and supplies are identified and purchased. Later in the project, the construction team takes the lead as the project moves from the design offices to the field and the engineering and procurement teams support the construction effort.
Informally, the project team reorganizes information flows and priorities to support the current work of the project and a good project manager facilitates this adaptive behavior of the project organization by minimizing the impact of formal authority and processes.
• Complex Systems Adapt to Changing Environments
A deterministic system is a system that will produce the same results if you start with the same conditions. The outcome can be reliably predicted if you know the starting conditions. For example, if you fire a rifle several times at a target, the hits on the target will be closely grouped if all the initial conditions are almost identical. A nonlinear, or chaotic, system can produce wildly different results even if the starting conditions are almost exactly the same. If today’s weather pattern is almost exactly the same as it was on a previous date, the weather a week later could be entirely different. Projects are usually nonlinear systems. If we execute an identical complex project three different times, we would deliver three different outcomes. We start with the assumption that the project is deterministic and use scenarios and simulations to develop the most likely outcome, yet a small change such as the timing of someone’s vacation or a small change in the delivery date of equipment can change the entire trajectory of a project.
Drug Manufacturing Facility
A pharmaceutical company in California developed a drug that improved the quality of life for people with arthritis and in some cases prevented serious debilitations and even death. The drug was in the final FDA testing stage, and the company decided to accept the risk and proceed with designing and building a facility to manufacture the drug. The company had done this type of project before, and some managers felt that the outcome would be fairly predictable. The company assigned the lead scientist as the project manager to get the project started. Two weeks into the project start-up, the company president realized the project needed a project manager with more engineering and construction expertise and hired a new person to manage the project. Then the company decided to build the facility on land the company owned in Colorado, and the project team began designing a facility that would fit the existing site. Thirty days into the design phase, the company found an existing facility that could be retrofitted to meet the production needs of the new drug. During the first week of construction, the drug failed an FDA test and the project was placed on hold. This project environment was highly volatile, and the project plan and organization adjusted and evolved to respond to each of these changes.
Not all projects experience this degree of environmental turbulence, yet all projects experience some forms of environment shift during the life of the project. This is one of the reasons project managers develop an aggressive change management process. The purpose of the change management process is not to stop change but to incorporate the change into the project planning and execution processes. Projects, like all other complex adaptive systems, must respond to the evolving environment to succeed. Plan as if the project is deterministic but be prepared for unpredictable changes.
In addition to responding to changes in the project environment, the internal project organization and environment is in a constant state of change. New people become members of the team, people quit, retire, and get sick. The office roof starts leaking, headquarters rolls out a new computer program required for all workers, or the project’s lead engineer cannot get her immigration visa extended. These are real examples of events that occurred on one project, and the project team adjusted to each event. The adaptation to changes in the project’s internal situation while also adapting to the external environment reflects the coevolving nature of a complex adaptive system. An increase in the number of events within the project and the project environment that are likely to change during the life of the project is reflected in an increase in the complexity of a project.
• Darnall-Preston Complexity Index
Profiling a project correctly requires a system that is relatively easy to use but that includes enough attributes to capture all the most important characteristics of a complex project. The Darnall-Preston Complexity Index (DPCI™) achieves this objective by grouping eleven attributes into four broad categories: internal attributes, external attributes, technological complexity, and environmental attributes.
Projects are more likely to fail in the beginning, not in the end. This generalized statement reflects the importance of understanding the environment in which a project will be executed and the importance of developing an execution plan that can be successfully implemented within this environment. Recovery costs can be extremely high for projects where the environment is misread or the execution plan does not address critical issues of the project environment. In addition to cost overruns and delays in the project, execution plans that are not aligned with the project environment can create barriers that make recovery difficult, and in some cases, the business purpose of the project cannot be met. The DPCI is a tool to assist project stakeholders in developing a comprehensive analysis of the project environment and a project execution plan more aligned with that environment. Understanding and aligning a project with the project’s environment increase the likelihood of achieving project success.
The foundation of a sound project execution plan is an assessment of the project environment. This assessment provides the information on which the execution plan is built. In the absence of an accurate assessment of the project environment, the project leadership makes assumptions and develops the execution plan around those assumptions. The quantity and quality of those assumptions will significantly influence the effectiveness of the project execution plan. The amount of information available to the project manager will increase over time and assumptions will be replaced with better information and better estimates. As better tools are developed for evaluating the project environment, better information will become available to the project manager.
The project environment includes all the conditions that can influence the outcome or success of the project. Project size, technological complexity, cultural and language barriers, the political landscape, and resource constraints are some of the components of the project environment that can influence the project success. Understanding these influences and developing a project profile creates a foundation for building an effective project execution plan.
The DPCI is one model for understanding and profiling projects. This index assesses the complexity level of key components of a project and produces a unique project profile. The profile indicates the project complexity level, which provides a benchmark for comparing projects and provides information about the characteristics of a project that can then be addressed in the project execution plan.
The DPCI provides project stakeholders with information about the project to define the experience, knowledge, skills, and abilities needed by the project manager. The DPCI also has implications for the composition, organization, and skills needed by the project leadership team. The DPCI provides information and a context for developing the project execution plan and for assessing the probability of success.
Key Takeaways
• Complex systems have many different parts that interact with each other in different and often unpredictable ways. They adapt to changes in their external and internal environments.
• The Darnall-Preston Complexity Index (DPCI) groups project attributes into four categories: external attributes, internal attributes, technological complexity, and environmental attributes.
Exercises
1. Complex systems _____ to changes in their external and internal environments.
2. The Darnall-Preston Complexity Index (DPCI) groups project attributes into four categories: external, internal, _________, and environmental.
3. What are the characteristics of a system that make it complex?
Complex Systems
• >Consider the example of the drug manufacturing facility. Describe in your own words how this project demonstrated the attributes of a complex system.
• External
• Internal
• Technological
• Environmental | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/02%3A_Project_Profiling/2.03%3A_Complex_Systems_and_the_Darnall-Preston_Complexity_Index.txt |
Learning Objectives
1. Describe each of the external attributes that contribute to project complexity.
2. Describe each of the internal attributes that contribute to project complexity.
3. Describe each of the technological attributes that contribute to project complexity.
4. Describe each of the environmental attributes that contribute to project complexity.
The Darnall-Preston Complexity Index (DPCI™) is designed to develop a project profile that reflects different aspects of the project that will influence the approach to leading and executing the project. The DPCI is built on four categories of attributes:
1. External. Environmental attributes that are in existence at the beginning of the project, such as size, duration, and available resources
2. Internal. Clarity of project objectives, the clarity of scope, the organizational complexity, and stakeholder agreement
3. Technological. Newness of the technology and familiarity of team members with the technology
4. Environmental. Legal, cultural, political, and ecological
The DPCI was developed around four assumptions:
1. All projects are unique.
2. Projects have common characteristics.
3. These characteristics can be grouped together to create a project profile.
4. There is an optimum execution approach for each project profile and therefore an optimum set of skills and experience for the project manager and execution team.
• External Attributes
The external attributes include those issues that are typically established early in the project definition phase and are usually outside the direct control of the project management team. The project size can be a product of the dollars needed to execute the project or project cost. The cost of the project is estimated during the conceptual phase of the project. At the time the project is authorized, the cost or size of the project is established. The duration or time allocated to complete the project and the resources available are also attributes that are established when the project is authorized.
• Size
Project size is a relative concept. How do we decide if something is large or small? A 150-pound person is big if the person is ten years old. A 150-pound person is small if the person is a professional football lineman. The frame of reference provides the context in which size is determined.
The size of a project is also relative. A \$250 million oil refinery expansion is a relatively small project in an industry where billion dollar projects are common. A \$250 million pharmaceutical development project or software development project would be considered a large project. The size of a project is determined by the context of the industry and the experience of the team executing the project.
Within the construction industry, firms usually specialize in projects that fall within a defined range. Small firms usually execute small projects and large firms usually execute larger projects. There is a size range for which the company experience, management skills, tools, and work processes are primarily designed. This size range or comfort zone exists for both the company and the members of the project team executing the project.
When a project team executes a project outside their comfort zone, stress is placed on both the tools and project team. When a project is larger than the comfort zone of a company, stresses are placed on the ability to provide experience and appropriate work processes, and the results are typically cost overruns and schedule delays. To mitigate this stress, some companies will divide large projects into smaller projects and execute the smaller projects with separate dedicated staff and resources. The key to success then becomes the coordination of the small projects to behave as if they are one large project.
Copper Mining in Argentina
One example of this process was a copper mining project in Argentina. The comfort zone of the company was projects ranging from \$150 million to \$500 million. Projects over \$500 million were divided into smaller projects. The mining project was estimated to cost a little over \$1 billion and the project was divided into three projects, each with a project manager and leadership team. Although the projects shared some resources and reported to an oversight project manager, each project developed a separate execution plan that included a budget and schedule.
When a company is executing a project that is much smaller than the company norm, resources are often misused and inappropriate work processes are utilized. The result often increases the project costs. Some companies with a history of executing large projects have set up a small project group to execute smaller projects. These groups establish a different culture, develop appropriate work processes, and use tools designed to execute smaller projects.
The more the project size is outside the comfort zone of the project, the more stress is created for the project. This is true on both ends of the spectrum. Both smaller and larger projects that fall outside the comfort zone of the project management team will create stress for the project. New skills, tools, and processes will need to be developed to manage the project, and this activity will absorb management time and energy. The higher the stress level created by executing a project outside the comfort zone of the organization, the greater the impact on the complexity level of the project.
• Duration
The duration of a project is often set by the parent organization that charters the project with a deadline that reflects the business purpose of the project. The following are examples of projects with end dates that are established to meet the organization’s business purpose:
• A new software program for a university to be implemented in time for registering students in the fall
• A new product to be introduced to the marketplace at the industry’s major conference
• A new high school to be constructed and open next fall
The project team also estimates the duration of the project and establishes a project end date based on normal work (e.g., forty hours per week) and the availability of resources.
Sometimes the normal time needed to complete a project is longer than the time available.
Super Bowl Hotel Space
The investors in a planned hotel start booking rooms for an upcoming Super Bowl weekend a year before the hotel is finished. This is six weeks ahead of the time estimated to build and open the hotel. People will be working overtime, suppliers will be paid a bonus to supply materials early, and management is meeting with city officials to expedite permitting issues. A new project schedule is developed based on these changes to the execution approach, and now the project schedule has zero float.
The result of this six-week compression to the project schedule is additional stress on the project. Significant management time and energy will be invested in tracking and managing schedule issues. Every issue that arises will need to be resolved quickly and involve the project’s senior manager to assure the project schedule does not slip. This additional stress increases the overall project complexity.
• Resource Availability
Projects require both human and tangible resources. The project requires people with the right experience, knowledge, and skills to accomplish the assigned tasks. Construction projects typically require resources such as bricks and cranes. Some projects require specialized subcontractors with skills not found within the project team. Each of these resources required by the project will be needed at the point in the project schedule when the materials or skills are required. When these resources are scarce or not available, additional management time and energy is needed.
Boeing Dreamliner
In 2003, Boeing announced the development of the new 787 Dreamliner Airplane. The airframe for the new airplane was a new composite material. During the same period that Boeing was beginning construction of the new manufacturing facility, other new planes were announced, and the Air Force increased its demand for people with airplane manufacturing and maintenance experience. A project was chartered to train the people the new plant would need to manufacture the Boeing Dreamliner. The project manager found that the people with the skills and knowledge needed to develop the curriculum and train the workers were in short supply. In addition to the lack of skilled trainers, the materials needed for the workers to train on were also scarce. The project manager dedicated significant time and energy developing the resources the project needed.
When resources needed to execute the project are not readily available, the project leadership dedicates more management time and energy to acquiring the resources or finding innovative solutions to accomplish the project goals without the needed resources or with creative alternative solutions. The more time and energy the management team must dedicate to searching for resources or alternatives, the more stress on the project. The more scarce and more important the resources, the more stress that is placed on the project.
• Internal Attributes
The internal attributes are within the control or influence of the project manager. Internal attributes include clarity of objectives, clarity of scope, the organizational complexity, and stakeholder agreement. Although the clarity of objectives, as with the other attributes, can be improved during the life of the project, the project profile reflects the project at a given time. If the project objectives are not clear during the evaluation of the project, this lack of clarity impacts the complexity of the project.
• Clarity of the Project Objectives
Project decisions are made based on how these decisions help the project meet its objectives. If the objectives are unclear, the team will not make the best decisions. The greater the confusion for the project team on the goals and objectives of the project, the greater the impact on the complexity of the project.
Confusion Over Objectives in Philadelphia
A consultant was asked to evaluate the likelihood of success of a large project in Philadelphia. The consultant interviewed the project leadership and asked if the goals of the projects were clear. Each member of the leadership team responded that the goals and objectives were clear. When asked what the goals were, the answers varied greatly.
Clarity of Objectives Saves Millions
A critical piece of equipment was being fabricated in Europe for a construction project in South America. The cost to transport the equipment by air was \$200,000 more than by ship. Transporting the equipment by ship would also delay the project two months. Early in the project, it was determined that any delay in the project would cost the project over \$1 million per month. Because the goals of the project were well understood, the decision to transport the equipment by air was made quickly and easily.
Island Ecology Protected
A large mining company initiated a copper mining project on an ecologically sensitive island in Indonesia. The company stated very clearly and forcefully that every effort would be made on the project to protect both the human and natural environment of the island during construction and operation. Every major decision passed through an evaluation of the impact on the island ecology. Although the island ecology increased the complexity of the project, the clear goals mediated the project complexity.
• Clarity of Scope
The project scope defines what is inside the project and what is outside. Does the project to train five hundred technicians for the Boeing 787 include recruiting and assessing potential employees? The project scope did include recruitment and assessment, but hiring processes and drug testing belonged to Boeing. This scope was clear about which responsibilities belonged to the contractor doing the training and which responsibilities belonged to the parent organization.
Not all project scopes are this clear. The development of a clear project scope depends on information available about what products and services will be required. A project to develop a vaccine for a new strain of flu may not include sufficient information to develop the processes the team will utilize to understand the flu virus and develop a vaccine. As the team develops more information, the scope can be further developed.
Leadership time and energy will be focused on developing scope clarity. The lack of clarity and the amount of time needed by the leadership team to develop a clear scope will add to the project complexity.
• Organizational Complexity
The structure of the project’s client organization and the organizational decision-making processes influence the project complexity. A project with one client as the central point for making decisions and providing client approvals and technical information has only one relationship to manage and a streamlined communication process. Projects with a team representing the client require more of the project manager’s time and energy managing the client relationships and communication process. The client team approach brings more expertise and often more comprehensive project oversight, but it adds to the project complexity.
• Stakeholder Agreement
Often there is more than one major stakeholder in the project. An increase in the number of stakeholders adds stress to the project and influences the project’s complexity level. The business or emotional investment of the stakeholder in the project and the ability of the stakeholder to influence the project outcomes or execution approach will also influence the stakeholder complexity of the project. In addition to the number of stakeholders and their level of investment, the degree in which the project stakeholders agree or disagree also influences the complexity of the project.
A small commercial construction project will typically have several stakeholders in addition to the client. All the building permitting agencies, environmental agencies, and labor and safety agencies have an interest in the project and can influence the execution plan of the project. The neighbors will have an interest in the architectural appeal, the noise, and the purpose of the building.
Tire Plant in India
A U.S. chemical company chartered a project team to design and build a plant to produce the raw materials for building truck tires designed for nonpaved roads. The plant was to be built in India a few years after an accident that killed several Indians and involved a different U.S. chemical company. When the company announced the new project and began to break ground, the community backlash was so strong that the project was shut down. A highly involved stakeholder can significantly influence your project.
Wind Turbine on a College Campus
A small college in South Carolina won a competitive grant to erect and operate a wind turbine on campus. The engineering department submitted the grant as a demonstration project for engineering students to expose students to wind technology. The campus facilities department found only one location for the wind turbine that would not disrupt the flow of traffic on campus. The engineering department found that location unacceptable for students who had to maintain the wind turbine. The county construction permitting department had no policies for permitting a wind turbine and would not provide a building permit. The college had to go to the county council and get an exception to county rules. The marketing department wanted the wind turbine placed in a highly visible location to promote the innovativeness of the college.
Each of the college’s stakeholders had a legitimate interest in the location of the wind turbine. The number of stakeholders on the project, multiplied by their passion for the subject and the lack of agreement on the location, increased the complexity of the project. Significant time and resources of the project will be dedicated to identifying, understanding, and managing client expectations.
• Technological Complexity
The technology of a project refers to the product of the project and not the technology used to manage the project. This technology is typically unique to the industry. A pharmaceutical project technology is the drug-making technology or pharmacology. The technology for a project to build a new automobile plant is the car production process. The key stress on the project is the newness of the technology. What aspects of the technology are known, and what aspects are unknown? Does the project combine technologies on the project that have never been combined?
Project technology that is newer and more complex will require more technological expertise on the project team.
Family Life Center
A church in western New York decided to build a new family life center that would not use electricity from the power grid. The charter of the project included statements that required the building to use renewable power sources and have an environmentally friendly footprint. The project required the adaptation of a new technology for producing and managing power, location of the building relative to the sun, and landscaping to minimize water usage. Most of the technology was tested, and the project team brought in experts to help design and implement a program to meet the requirements of the project. The technology of the project required the project team to develop a new understanding of this technology and work processes to adapt the project to address the requirement of the technology.
Typically, the newer the technology and the less familiar the project team is with the technology, the greater the stress and the contribution to the complexity of the project.
• Project Environment
The project environment includes all the issues related to the environment that will influence the development and execution of the project plan. A project to build an airport expansion in Pittsburgh, Pennsylvania will have very different legal, cultural, political, and ecological issues to address from an airport expansion in São Paolo, Brazil. The environment attributes in Brazil require more planning, resources, and leadership attention to successfully execute the project. The greater the number and difficulty of the issues, the greater the influence on the complexity of the project.
• Legal
The legal issues on a project can be broad and include many different levels of government. Most local governments have various permits, such as business licenses and building permits, required to do work. Some projects will have security issues and will work with local law enforcement.
Workforce laws vary significantly in country, regional, and local jurisdictions. The hiring and management of workers can be a complex and time-consuming issue for some projects. Companies not used to working in a union environment will invest project resources in learning and adapting to the new environment. Scheduling holidays, supporting maternity leave, and dealing with workforce reduction issues surrounding project closeout will vary in each environment, industry, and project. Understanding and managing workforce issues on a project can be simple or very complex.
National, regional, and local taxes require a project tax approach or policy on most international projects and some domestic projects. Duties for equipment and material brought into a country add complexity to the procurement plan. Equipment used temporarily to execute the project, such as a crane, is treated differently than permanently installed equipment, such as a pump. In some countries, a third party is hired to expedite the flow of materials through complex custom processes.
Copper Mining in Argentina
The new president of Argentina instituted a program to encourage economic development. One of the projects to support this program was a copper mining project in northern Argentina. This is the desert area of Argentina with a basic agrarian economy. A joint venture was formed with the encouragement of the Argentina government between a Canadian and Australian Company with all three entities owning a share of the new company.
• >The conceptual design work was done in Canada with support from offices in Chile, Argentina, and the United States. A U.S. contractor was awarded the contract to design, procure equipment, and build the mine. The project leadership team included members from the United States, Canada, Australia, Argentina, Chile, Puerto Rico, Cuba, and Lebanon. Materials were procured, transported, and brought through customs from twenty-one different countries. Legal issues on this project consumed a great deal of management attention and sometimes affected the project execution. Materials were occasionally delayed in customs, people with critical skills could not get visas to enter Argentina, and which country’s laws would apply to the contracts had to be debated.
• Not every project will have significant legal issues. When legal issues are involved, they are typically significant and will add to the complexity of the project. Understanding the legal issues than can affect the project and developing a plan to address these issues will reduce the complexity of the project.
• Cultural
Culture is a term that reflects the community’s assumptions, norms, values, and artifacts. Community includes the parent organization charting the project, the local community or communities where the project is executed, and the region and country where the project is located. The project team must understand the community’s culture and its potential impact on the project.
Culture also defines the meaning of work, truth, the value of nature, relationships, and how to communicate. Projects executed in various cultures will often experience cultural conflict.
Gender Difficulties in Argentina
A project team from the United States was responsible for executing a project in Argentina. The U.S. leadership team included women in key leadership positions, and the Argentines refused to take direction from females. The U.S. team believed strongly in their leadership capability and refused to make changes. This conflict was settled by senior managers of both organizations, and rules were established that respected all team members in leadership roles. The conflict did not go away, but the team was able to successfully execute the project with the original team. Delays were experienced on the project that could be traced to this cultural conflict.
Many organizations have rule-based cultures. Institutions of higher learning, organizations related to judicial organizations, and most government organizations are examples of rule-based organizations. The organizational structure and culture inhibits risk taking through established rules and policies. Projects are goal based and focus on plans and processes to achieve goals. Goal-based cultures promote assuming risk to achieve goals. Projects that are closely tied to a rule-based parent organization will often find conflict with the parent organization’s need to follow rules and the project’s need to accomplish goals. This conflict creates additional stress that adds to the project complexity.
On global projects, language, cultural conflict with the role of women, the religious role in daily activities, and even the concept of time can becomes issues on the project. These issues require project leadership to resolve and they add to the project complexity. In some countries and even different companies in the same country, meetings start on time, and a person arriving five minutes late will cause major disruption. In other situations, meetings can start within thirty minutes of the starting time without anyone objecting.
Communication Problem in India
A team of project experts was sent to India to evaluate a large construction project. The team arrived and reviewed the project documents and found the project on time and meeting all project goals. After spending three days with various contractors and team managers, the team discovered the project was significantly behind schedule and would miss an important window during the monsoon season. A culture existed on the project where workers told the project management what they expected to hear, and the difference between the progress of the project team and the progress reports became so large that the difference could not be reconciled during the original schedule of the project.
An increase in the number of cultures represented on the project team raises the cultural complexity. Increases in the number of cultures with which the project team must interface also increase the complexity of a project. Although this cultural diversity creates leadership challenges, it also presents opportunities. The diversity of cultures presents various approaches to solving problems, and the project manager may find innovative solutions easier to develop with a diverse project team.
• Political
Every project operates within one or more communities that reflect organizational dynamics and power struggles. The more important the project is to the organizational leadership, the more invested various organizational leaders will be in the project. The more people that become invested in the project and the more influence these people exhibit on the resources and activities of the project, the more time and energy will be expended by the project team in managing these outside influences. This additional stress on project leadership time and resources adds complexity to the project.
Stakeholders and a Bridge Project
The Department of Highways chartered a project to upgrade a number of bridges that crossed the interstate in one of the larger cities in South Carolina. The closing of these bridges severely impacted traffic congestion, including a large shopping mall. The contract included provisions for minimizing the impact on the traffic and communities near the construction areas. This provision allowed businesses or interested parties to review the project schedule and make suggestions that would lessen the impact of the construction. The project leadership invested significant time and resources in developing alignment among the various political stakeholders on the project approach and schedule.
• Ecological
Projects have the potential to impact the living conditions or the health of people, plants, and animals. In addition to the potential impact to land, water, and air, the ecology includes the sights and sounds that can impact the quality of life. An increasing number of clients expect the project team to minimize the impact of the project on the ecology. An ecology that is more sensitive to disruption and a more disruptive technology will place greater stress on the project and increase the project complexity. Construction projects that require the use of explosions to effectively move rocks and dirt, projects that require the addition of twenty-five people in existing office space, and projects that require the release of strong odors like those from adhesives in an office environment will all impact the ecology. The project team develops means and methods to minimize the impact of the disruption in a manner consistent with the requirements as communicated by the client. The effort that is needed to minimize the ecological impact will influence the complexity of the project.
The ecology will also impact the execution of a project. The weather is an attribute of most construction projects. Construction projects in India are often scheduled around the monsoon season, and construction projects in the Caribbean consider the hurricane season. A project to build an offshore wind farm will require an understanding of the ocean currents, the wind currents, and temperature fluctuation to understand the impact of the ecology on the project execution plan.
The larger the number of potential ecological attributes and the greater the impact of each attribute, the greater the influence on the project complexity.
Key Takeaways
• The external attributes are the relative size of the project, duration of the project, and the available resources.
• The internal attributes are the clarity of its scope, the complexity of the organization, and the agreement among stakeholders.
• The technological attributes are the technology of the product (not the technology used to manage the project), the newness of the technology, and the familiarity of the team with the technology.
• The environmental attributes are the legal issues, cultural conflicts, political interests, the impact of the project on the ecology, and the impact of the ecology on the project.
Exercises
1. The external attributes considered in the DPCI are relative size, ________, and available resources.
2. The internal attributes considered in the DPCI are clarity of scope, complexity of the organization, and agreement among _________.
3. The technological attributes considered in the DPCI are ______ of the technology and familiarity of the team with the technology.
4. The environmental attributes considered in the DPCI are _____, cultural, political, impact on the ecology, and impact of the ecology on the project.
5. Under what circumstances would a large project qualify for a low DPCI score?
6. Describe an organization structure that would receive a high score for complexity.
7. Does the technology attribute refer to the technology used by the project team or the project itself?
8. Give an example of a cultural problem that would have a high-complexity score.
9. Give an example of an ecological problem that would have a high-complexity score.
10. What is the difference between an external and an internal attribute in the DPCI?
Behind the Scenes
• >Stanley Portny (Portny, 2007) advocates that as a project manager, you research the source of a project to determine who had the original idea by asking questions of your boss, reading meeting minutes and feasibility studies, and checking other correspondence and contacts. The purpose of this investigation is to find out who is most likely to champion the project if you have trouble, who opposed the project, or whose interests will be harmed by the project. Consider this advice in light of the Darnall-Preston Complexity Index and answer the following questions:
• Is this an external, internal, technological or environmental attribute? Explain your reasoning and refer to the definitions provided. A case can be made for putting it in more than one.
• What might you find that would increase the project’s complexity and what might you find out that would reduce the complexity? Provide examples of each. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/02%3A_Project_Profiling/2.04%3A_Darnall-Preston_Complexity_Index_Structure.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Compare the attributes used by the Darnall-Preston Complexity Index and those used by Youker. Which attributes are used in both typologies? Which attributes are not in common? If you chose to add one attribute to either typology what would it be? Explain your answer.
2. Complex systems. A complex system adapts to changes in its external and internal characteristics. Describe a project with which you are familiar that has experienced changes in its external or internal characteristics during the life of the project and describe how the project manager and the management team changed their behavior to adapt to the new situation or how they failed to adapt and the result of that failure.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Institutional memory. One of the responsibilities of a project manager is to keep a history of past projects to create an organizational knowledge base. Do you think using the DPCI™ as a basis for organizing those past projects would be useful? How would you go about creating a storage and retrieval system that uses the DPCI?
2. Environmental impact. Describe a project that might have an impact on the environment and the steps the project manager might have to take. Describe the score you would give this attribute if you were using the DPCI.
2.06: Software and Technology Exercise
Learning Objective
1. Calculate and interpret the DPCI.
• Calculate the DPCI
Russell Darnall (Darnall 1996) introduced a method that rates characteristics of a project on a scale from 1 to 5. The characteristics are grouped into four categories: external attributes, internal attributes, technology, and project environment. Each category is rated based on the average of the scores of its attributes.
A method of calculating and representing the final Darnall-Preston Complexity Index (DPCI) was added by John Preston and Darnall in this publication to allow the DPCI to be represented by a four-number code. The rules for calculating the DPCI are as follows:
1. The scores in each category are averaged and then rounded to a whole number to create a category rating.
2. Averages that are halfway between two whole numbers are rounded up.
3. If one of the characteristics has a score that is higher than the average for that category by 2 or more, the average for that category is shown in boldface.
A project can be quickly characterized using the DPCI. For example, a project that is similar in size to previous projects with plenty of time to complete it and with adequate resources available would have a low average external complexity score of 2 (see Table 2.1 “Calculating the DPCI”). If there is significant disagreement among the stakeholders on the objectives and several scope issues are not well defined because there is overlap between responsibilities of groups within the organization, the internal complexity score would be high—4 (see Table 2.1 “Calculating the DPCI”). If the project relies on technology that is fairly new and some of the team members are unfamiliar with it, the average score would be 2.5, rounded up to 3 (see Table 2.1 “Calculating the DPCI”). If the legal and cultural attributes have low complexity, and there is little impact on the project by ecological factors, the average is low—2—in spite of a high complexity score for the effect of politics of the project. In this case, the score is shown in boldface to warn the user that there is an individual score that is at least two points higher than the average, and the details of that category must be investigated.
Table 2.1 Calculating the DPCI
Category Attribute Score Average Rating DPCI
External Size 2 2 2 2.4.3.2
Duration 1
Resource availability 2
Internal Clarity of objectives 4 3.75 4
Clarity of scope 3
Organizational complexity 4
Stakeholder agreement 4
Technological Newness 2 2.5 3
Familiarity of team 3
Environmental Legal 2 2 2
Culture 1
Political 4
Ecological 1
The final DPCI in this example is 2.4.3.2, which tells you at a glance that this project has fairly low external complexity, a fairly high degree of internal complexity, and a moderate technological complexity and that a majority of the environmental attributes are low complexity, but at least one of them has a rating of 4 or 5 and needs attention.
Projects with different profiles require different management approaches, applications of different tools, and mitigation of different levels of risk. Information derived from the complexity profile can be used in the selection of the project manager, the project leadership team, and the execution approach to the project and in the analysis of the project risk.
There is no generally agreed-upon project typology or classification system. In this text, we will utilize the DPCI as a tool for analyzing projects and choosing appropriate tools, but the same skills could be used with other taxonomies.
• How to Calculate a DPCI Rating
Assume that a project went through the DPCI rating process and it achieved the following scores in each attribute:
Table 2.2 Calculating the DPCI
Category Attribute Score Average Rating DPCI
External Size 1
Duration 1
Resource availability 2
Internal Clarity of objectives 1
Clarity of scope 4
Organizational complexity 4
Stakeholder agreement 3
Technological Newness 3
Familiarity 2
Environmental Legal 2
Culture 1
Political 4
Ecological 1
1. Start a spreadsheet program such as Excel 2010. Refer to Table 2.2 “Calculating the DPCI” and then type the category and subcategory labels into the first two columns and the scores in column C. Some of the labels will appear to be cut off if there is not enough width to display the entire label, as shown in Figure 2.9 “Labels in a Spreadsheet”.
2. Click cell B15 and then type your name.
3. Capture a screen that shows the worksheet at this point in its development with your name in cell B15. (Refer to Section 1.7 “Web Exercise” and Section 1.8 “Software and Technology Exercises”, if necessary, for instruction on how to capture a screen.)
4. Open a new word processing document and then paste the screen capture into the new document. Your name must be included in the screen capture. Save the document as Ch02DPCIStudentName using the Word 2003 .doc file format.
5. Move the mouse pointer to the boundary between the headers of columns A and B, where it turns into a double-headed pointer. Double-click the boundary to automatically adjust the column width to the widest label, as shown in Figure 2.10 “Adjust Column Width”. Alternatively, drag the boundary to the right to adjust the column width manually.
6. Repeat the skill you practiced in the previous step to widen column B to accommodate the longest label (or your name) in column B.
7. Click cell D3. Type =AVERAGE(C1:C3) and then press Enter. The average of numbers in cells C1, C2, and C3 is calculated and displayed in cell D3. A sequence of cells is denoted by the first cell address and the last cell address separated by a colon.
8. Click cell D7. Type =AVERAGE(C4:C7) and then press Enter.
9. Use the skill you practiced in the previous steps to calculate the averages of the technological and environmental categories and display them in cells D9 and D13 respectively.
10. Click cell D13. Notice the formula displays in the formula bar, as shown in Figure 2.11 “Adjusted Column Widths and Average Functions” (You may ignore the alert boxes or notations due to the unused cells in column D.)
11. Capture this screen and then paste it into the word processing document Ch02DPCIStudentName below the previously captured screen.
12. In the spreadsheet, click cell E3. Type =ROUND(D3,0) and then press Enter. The ROUND function requires two types of information. The first is a cell address and the second is the decimal place to which the number in that cell will be rounded. A zero indicates rounding to whole numbers. (See the spreadsheet Help menu if you would like more information about the ROUND function.)
13. Use the skill you practiced in the previous step to calculate the rounded values for each category. Click cell E13 to display the ROUND function in the formula bar, as shown in Figure 2.12 “Round Function Rounds to the Nearest Whole Number”. Notice the ROUND function in cell E9 rounded the number 2.5 up to 3. This is the method used for rounding in the DPCI.
14. Capture this screen and paste it into Ch02DPCIStudentName.doc.
15. In cell B16, type DPCI rating:. In cell C16, type the DPCI rating 1.3.3.2 and then press Enter.
16. Visually examine the individual scores in column C and the rounded averages in column E. Determine if any of the individual scores is 2 points or more higher than the rounded average. Notice that the political rating is 4, and the environmental rating is 2. Also notice that the clarity of objectives rating is 1 and the internal rating is 3. According to the DPCI method, the environmental rating should be displayed in bold. (Even though the internal rating has a score that is 2 points lower than the rounded average, it is not bold. An individual rating must be 2 points or more higher than the rounded average—not lower.)
17. Click cell C16. On the formula bar, select the 2 and then on the ribbon (or formatting toolbar) click the Bold button. The rating for environmental complexity is emphasized with bold font to indicate there is a significantly higher individual rating that should be considered, as shown in Figure 2.13 “Ratings That Contain Higher Individual Ratings Are Bold”.
18. Capture this screen and paste it into Ch02DPCIStudentName.doc. Save and close Ch02DPCIStudentName.doc.
19. In the spreadsheet, save the file as Ch02DPCIStudentName.xls using the Excel 2003 .xls file format.
20. Close the spreadsheet.
21. Review your word processing file, Ch02DPCIStudentName.doc and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch02DPCIStudentName.doc Word 2010 .docx version Other file name or format
Calculate and interpret the DPCI Sequence of screen captures shows the development of the spreadsheet One or two screens taken out of the exact sequence described; student name displayed clearly in each of the development screens Only one image of the finished spreadsheet; development by the student not proven
22. Review your spreadsheet file, Ch02DPCIStudentName.xls, and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch02DPCIStudentName.xls Excel 2010 version using .xlsx Other file name
Calculate and interpret the DPCI AVERAGE and ROUND functions used correctly; bold feature used correctly AVERAGE and ROUND functions not in the cells specified but used the correct ranges Incorrect ranges in the functions; last number in the DPCI rating not bold
23. Submit the file(s) as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/02%3A_Project_Profiling/2.05%3A_Exercises.txt |
Learning Objectives
1. Identify the phases of a project.
2. Describe the types of activities in each phase of a project.
Projects, by definition, have a beginning and an end. They also have defined phases between the project kickoff and project closeout. A phase represents a grouping of similar activities that has a very loosely defined beginning and end. Phases are also typically sequential, where the prior phase is essentially complete before the beginning of the next phase. Phases do not have clear-cut end dates and some activities in an early phase of the project will continue into the later phases. This is in contrast to project beginning and ending dates and milestone dates, which do have clearly defined dates with the expectation that these dates will be met.
• Initiation
The initiation phase of a project represents the activities associated with starting up the project. Activities during the initiation phase include project kickoff meetings, identifying the project team, developing the resources needed to develop the project plan, and identifying and acquiring the project management infrastructure (space, computers). On projects where the scope of work for the project is not well defined, the project team will invest time and resources in developing a clearer scope of work. On projects where the major project stakeholders are not aligned, the project team will expend resources and time creating stakeholder alignment.
The activities that occur within the initiation phase of the project vary on each project. They include all the activities necessary to begin planning the project. The initiation phase typically begins with the assignment of the project manager and ends when the project team has sufficient information to begin developing a detailed schedule and budget. Unlike project milestones, some activities associated with project initiation may be delayed without delaying the end of the project. For example, it is advantageous for the project to have the major project stakeholders aligned from the beginning, but sometimes it is difficult to get the commitment from stakeholders to invest the time and resources to engage in an alignment process. Sometimes it is only after stakeholders begin observing progress on a project that the project manager can facilitate the stakeholder alignment processes.
The knowledge, skills, and experience needed on the project can vary in each phase. During the early phases of a project, the project leadership needs good conceptual skills, the ability to build a team, and the experience to build a project roadmap. During project closeout, the project leadership provides a high degree of motivation and attention to details. On a large project, lasting two or more years, it is common to see the project management team change leadership to provide skills that are appropriate to the final phases of the project.
The Project Management Institute (Project Management Institute, Inc., 2008) identifies four major phases of a project as characteristics of the project life cycle. These four life-cycle phases are initiation, planning, execution, and project closeout. The initiation phase, which PMI labels “starting the project,” includes all the activities necessary to start the project. These activities include holding the project kickoff meeting, confirming or developing conceptual schedules and budgets, and acquiring project execution resources such as office space, computers, and communications equipment.
• Planning
The planning phase, which PMI labels “organizing and preparing,” includes the development of more detailed schedules and a budget. The planning also includes developing detailed staffing, procurement, and project controls plans. The emphasis of the planning phase is to develop an understanding of how the project will be executed and a plan for acquiring the resources needed to execute it. Although much of the planning activity takes place during the planning phase, the project plan will continue to be adjusted to respond to new challenges and opportunities. Planning activities occur during the entire life of the project.
• Execution
The execution phase, labeled by PMI as “carrying out the work,” includes the major activities needed to accomplish the work of the project. On a construction project, this would include the design and construction activities. On an information technology (IT) project, this would include the development of the software code. On a training project, this would include the development and delivery of the training.
• Closeout
The closeout phase—or using PMI’s nomenclature, “closing of the project”—represents the final stage of a project. Project staff is transferred off the project, project documents are archived, and the final few items or punch list is completed. The project client takes control of the product of the project, and the project office is closed down.
The amount of resources and the skills needed to implement each phase of the project depends on the project profile. Typically, a project with a higher-complexity profile requires more skills and resources during the initiation phase. Projects with a profile that indicates problems with alignment among key stakeholders or political and legal issues will require specialized resources to develop plans that address these issues early in the project. A project with a lower complexity level will invest more resources in the execution phases to execute the project as effectively and efficiently as possible.
Project Phases on a Large Multinational Project
A United States Construction company won a contract to design and build the first copper mine in northern Argentina. There was no existing infrastructure for either the mining industry or large construction projects in this part of South America. During the initiation phase of the project, the project manager focused on defining and finding a project leadership team with the knowledge, skills, and experience to manage a large complex project in a remote area of the globe. The project team set up three offices. One was in Chile, where large mining construction project infrastructure existed. The other two were in Argentina. One was in Buenos Aries to establish relationships and Argentinean expertise, and the second was in Catamarca—the largest town close to the mine site. With offices in place, the project start-up team began developing procedures for getting work done, acquiring the appropriate permits, and developing relationships with Chilean and Argentine partners.
• >During the planning phase, the project team developed an integrated project schedule that coordinated the activities of the design, procurement, and construction teams. The project controls team also developed a detailed budget that enabled the project team to track project expenditures against the expected expenses. The project design team built on the conceptual design and developed detailed drawings for use by the procurement team. The procurement team used the drawings to begin ordering equipment and materials for the construction team; to develop labor projections; to refine the construction schedule; and to set up the construction site. Although planning is a never-ending process on a project, the planning phase focused on developing sufficient details to allow various parts of the project team to coordinate their work and to allow the project management team to make priority decisions.
• >The execution phase represents the work done to meet the requirements of the scope of work and fulfill the charter. During the execution phase, the project team accomplished the work defined in the plan and made adjustments when the project factors changed. Equipment and materials were delivered to the work site, labor was hired and trained, a construction site was built, and all the construction activities, from the arrival of the first dozer to the installation of the final light switch, were accomplished.
• >The closeout phase included turning over the newly constructed plant to the operations team of the client. A punch list of a few remaining construction items was developed and those items completed. The office in Catamarca was closed, the office in Buenos Aries archived all the project documents, and the Chilean office was already working on the next project. The accounting books were reconciled and closed, final reports written and distributed, and the project manager started on a new project.
• Key Takeaways
• The phases of a project are initiation, planning, execution, and closeout.
• The initiation phase, which PMI calls “starting the project,” includes activities such as holding alignment and kickoff meetings, identifying the project team, developing the resources needed to develop the project plan, and identifying and acquiring the project management infrastructure.
• The planning phase, which PMI calls “organizing and preparing,” includes developing detailed staffing, procurement, and project controls plans.
• The execution phase, which PMI calls “carrying out the work,” includes the major activities needed to accomplish the work of the project.
• The closeout phase, which PMI calls “closing of the project,” includes transferring staff, archiving documents, closing offices, completing punch list tasks, and turning over the results of the project to the client.
Exercises
1. Completing the items on a punch list occurs during the _________ phase.
2. The ______ phase includes start-up activities and is called “starting the project” by PMI.
3. The phase in which the project work is mainly accomplished is the _______ phase.
4. How does the initiation phase differ from the planning phase?
5. What is a punch list and in which phase is it used?
6. What are the four phases of a project?
Project Phases
• >Consider a personal project that you have been involved with in the last few years, such as moving your residence, buying a car, or changing jobs. Describe the activities related to that project that fit into each of the four project phases. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/03%3A_Project_Phases_and_Organization/3.01%3A_Project_Phases.txt |
Learning Objectives
1. Identify the various functions represented on a project.
2. Analyze and evaluate the influence of organizational structure on project functions.
3. Design a project organizational chart for various project complexity profiles.
There is no single organizational approach to projects. Each project is organized to accomplish the work effectively and efficiently. Several factors influence the organizational approach to execute a project. The complexity profile of a project, the culture of the parent organization, the preferences of the project manager, the knowledge and skills of the team, and a parent organization with a project management office are examples of factors that influence the project’s organization.
In developing the project organizational structure, the project manager considers the span of control for each manager. The span of control represents the number of people reporting to a manager. For example, the project manager does not want all the engineers on a project reporting to the engineering manager and assigns senior engineers to report to the engineering manager with other engineers reporting to the senior engineers.
The engineering manager can organize the engineering reporting structure so that the various engineering discipline managers would report to him or her. For example, the structural, electrical, and mechanical engineering team leaders would report to the engineer manager. On a larger, more complex project, the engineer manager may establish area team leaders and have the structural, electrical, and mechanical engineers report to an area team leader. If the project is geographically dispersed, with the engineering office staff in different cities working on the project, then structuring the engineering function by area provides better coordination and control (see Figure 3.1 “Decreasing Span of Control by Increasing Levels of Reporting”).
Figure 3.1 Decreasing Span of Control by Increasing Levels of Reporting
The organization on the left has seventy-one engineers reporting to the same person. The organization on the right creates two additional positions and reduces the span of control to thirty-seven and thirty-four, respectively.
Most projects have similar functions that are important to successfully managing the project. Included among these are the following:
• Sponsor
• Project manager
• Controls
• Procurement
• Technical management
• Quality
• Administration
Figure 3.2 Typical Project Organization
On smaller projects, more than one function can be managed by one person. On larger projects, large teams may be needed to accomplish the work within the function.
• Project Sponsor
The project sponsor is outside the day-to-day operations of the project and has the organizational authority to provide resources and overcome barriers for the project. The project sponsor is typically a leader in the parent organization with an interest in the outcome of the project. As a leader in the parent organization, the project sponsor can provide input into the project scope and other documents that define project success. The guidance and support from the project sponsor enhances the ability of the project to successfully meet the parent organization’s objectives.
Southern Training Center Organization
A training organization in South Carolina assigned a project sponsor to every project. For smaller projects, the regional manager fulfilled the role of project sponsor. On larger, more complex projects, the operations manager was the project sponsor. The vice president was the project sponsor of the three or four most complex projects, and the president was the project sponsor only on projects with a high degree of political risk. This approach to assigning project sponsors assured that each project had an organizational advocate that could address barriers and provide direction and resources. The project sponsor, in this organization, developed a relationship with a senior representative of the client organization, reviewed monthly reports, and conducted thorough quarterly reviews.
• Project Manager
Project managers often have the breadth of responsibility associated with corporate chief executive officers (CEOs). The project manager facilitates the start-up of a project and develops the staff, resources, and work processes to accomplish the work of the project. He or she manages the project effectively and efficiently and oversees the closeout phase. Some projects are larger than major divisions of some organizations, with the project manager responsible for a larger budget and managing more risk than most of the organizational leaders. A mining company that builds a new mine in South Africa, an automobile manufacturer that creates a new truck design, and a pharmaceutical company that moves a new drug from testing to production are examples of projects that may consume more resources in a given year than any of the organization’s operating divisions.
The function of the project manager can vary depending on the complexity profile and the organizational structure. Defining and managing client expectations and start-up activities, developing the scope, and managing change are functions of the project manager. On some projects, the project manager may provide direction to the technical team on the project. On other projects, the technical leadership might come from the technical division of the parent organization.
Although the functional responsibilities of the project manager may vary, the primary role is consistent on every project. The primary role of the project manager is to lead, to provide a vision of success, to connect everyone involved in the project to that vision, and to provide the means and methods to achieve success. The project manager creates a goal-directed and time-focused project culture. The project manager provides leadership.
• Project Control
In general, project controls is both the planning function and the function that tracks progress against the plan. Project control provides critical information to all the other functions of the project and works closely with the project manager to evaluate the cost and scheduling impact of various options during the life of a project.
Sometimes accounting functions such as payroll, budgeting, and cash management are included within project controls. On larger projects, accounting functions are typically separate because the accounting culture tracks expenses to the nearest penny, and cost estimating and tracking by project controls can often be off by hundreds and sometimes thousands of dollars. The lack of definitive information necessitates the development of cost estimates within ranges that are often inconsistent with accounting practices. Separating these two functions allows each to operate within their own accuracy comfort zone. The following are typical activities included within the project controls function:
• Estimating
• Tracking costs
• Analyzing trends and making projections
• Planning and scheduling
• Managing change
• Tracking progress against schedule
The project controls team gathers this information from all the functions on the project and develops reports that enable each functional manager to understand the project plan and progress against the plan at both the project level and the functional level. On large complex projects, some project managers will assign project controls professionals to work within the major functions as well as the project management office. This approach allows each function to plan and track the function’s work in more detail. The project controls manager then coordinates activities across functions.
• Project Procurement
The approach to purchasing the supplies and equipment needed by the project is related to the complexity profile of the project. A small project with a low complexity level may be able to use the procurement services of the parent organization. In an organization where project resources reside in various departments, the departments may provide the supplies and equipment each team member of the project may need.
Southern College Procurement Organization
A college in South Carolina chartered a number of projects to increase the energy efficiency of the college. The project team included members from various college departments. Each department paid for the time, travel expenses, and supplies needed by the team member from their department. Each team member continued to use the computers and administrative support in their department for project work. The costs for this support was not included in the project budget nor tracked as a project expense. Equipment purchased by the project that was installed to reduce the energy consumption of the college was purchased through the college procurement department and charged to the project.
More complex projects with greater procurement activity may have a procurement person assigned to the project. This same South Carolina college retrofitted a warehouse to create a new training center for industry. A procurement person was assigned to the project to manage the contract with the construction firm remodeling the space, the purchase and installation of the new training equipment, and the purchase of the supplies needed by the project team. All the procurement activity was charged to the project. The procurement person reported to the project manager for better communication on what the project needed and when it needed it. The procurement person participated as a member of the project team to understand and provide input into the costs and scheduling decisions. The procurement person reported to the college procurement manager for developing and implementing project procurement processes that met college procurement policies and procedures.
Figure 3.3
• >The procurement manager is part of the project team.
• On larger, more complex projects, the procurement team has several responsibilities. The team is responsible for procuring the supplies and equipment (such as office supplies and computers) needed for the project team and the supplies and equipment (such as the training equipment) needed to execute the project. On a typical construction project, the procurement team would rent a construction trailer, office supplies, and computers for the project team to establish a construction office at the construction site. The procurement team would also purchase the concrete, rebar, steel, and other material needed to construct the building.
Procurement for Mining Project in South America
On the large mining project in South America, during the initiation phase of the project, the procurement department arranged for office space and supplies for the engineering teams in Canada, Chile, and Argentina and construction offices at the construction site in Argentina. As the design and engineering progressed, the procurement team managed bids for the major equipment and bids for the preparation of the construction site. The procurement team managed the logistics associated with transporting large equipment from Europe, North America, and Asia to the job site in rural Argentina. After the completion of the project, the procurement team managed the deposal of project property.
On large, complex projects, the procurement team manages at least three types of relationships with companies doing business with the project.
• Commodity Procurement
The largest number of purchased items for most projects are commodity items. Commodities are items that can be bought off the shelf with no special modification for the project. These items are typically bid and the lowest prices that can meet the schedule of the project will win the contract. The procurement team assures the company that wins the bid can perform to the contact specifications and then monitors the progress of the company in meeting the projects requirements. Concrete for the project and the cranes leased to the project are examples of commodities. The key to success in managing commodity suppliers is the process for developing the bids and evaluating and awarding the contracts.
• Procurement from Vendors
The second type of relationship is the vendor relationship. The terms supplier and vendor are often used interchangeably. In this text, suppliers provide commodities, and vendors provide custom services or goods. Suppliers bid on specialized equipment for the project. Engineers will specify the performance requirements of the equipment, and suppliers that have equipment that meets the requirements will bid on the project. The engineering team will assist in the evaluation of the bids to assure compliance with specifications. The lowest bid may not win the contract. Sometimes the long-term maintenance costs and reliability of the equipment may indicate a high price for the equipment. The key to success is the development of clear performance specifications, good communication with potential bidders to allow bidders to develop innovative concepts for meeting the performance requirements, and a bidding process that focuses on the goals of the project.
• Partnerships
The third type of project procurement relationship is the partnership. Sometimes the partnership is legally defined as a partnership, and sometimes the success of each partner is so closely tied together that the relationship operates as a partnership. On the South American project, the project team partnered with an Argentinean construction company to access the local construction practices and relationship with local vendors. This was a legal partnership with shared profits. The partner also designed and procured some large mining equipment on which the success of the project and the company building the mining equipment depended. With this type of relationship, a senior manager on the project is assigned to coordinate activities with the partner, and processes are put in place to develop shared goals, align work processes, and manage change.
Figure 3.4 Procurement Manager Relationships
• Technical Management
The technical management on the project is the management of the technology inherent in the project—not the technology used by the team to manage the project. The technical complexity on a project can vary significantly. The technological challenges required to build a bridge to span a five-hundred-meter canyon are significantly different from those required to span a five-thousand-meter body of water. The technological complexity of the project will influence the organizational approach to the project. The technological complexity for a project reflects two aspects: the newness of the technology and the team’s familiarity with the technology. The newness refers to the degree to which the technology has been accepted in the industry. The more accepted the technology is in the industry usually means that more knowledge and experience will be available to the team. Familiarity refers to the experience the project team has with the technology. The less familiarity the team has with the technology, the more energy and resources the team will expend on managing the technological aspect of the project. For projects with high levels of project technology, a specialist may be hired to advise the technology manager.
Indiana Steel Company
A steel company in Indiana purchased a new coal injection technology that would improve the quality of steel, reduce the cost to produce the steel, and reduce air and water pollution. The contract to design and construct the new plant was awarded to an engineering and construction company. No one on the engineering and construction team had experience with the coal injection technology. The client’s team understood the technology and provided guidance to both the project engineering and construction teams. The client owned the coal injection technology, and the engineering and construction team brought the project management technology.
• Project Quality
Project quality is often part of the technical manager’s responsibility. On large projects or projects with a high degree of technical complexity, the quality is sometimes a separate function reporting to the project manager. The project quality manager focuses on the quality of the project work processes and not the quality of the client’s product. For example, if the project is to design and construct an automobile factory, the quality manager focuses on the project work processes and meeting the technical specification of the equipment installed by the project team. The project quality manager is not responsible for the quality of the car the plant produces. If the plant functions to the defined project specifications, the quality of the plant output is the responsibility of the plant quality department, and it may take several months for the plant to refine the work processes to meet the design specifications of the car.
On a construction project, the quality manager may test steel welders to assure the welders have the skills and that the welds meet project specifications. On a training project, the quality manager may review the training curriculum and the qualification of the instructors to assure the training provides the knowledge and skills specified by the client. On a drug development project, the quality manager may develop processes to assure the water and other raw material meet specifications and every process in the development process is properly documented.
• Project Administration
The administrative function provides project specific support such as the following:
• Accounting services
• Legal services
• Property management
• Human resources (HR) management
• Other support functions found in most organizations
In most organizations, support for these functions is provided by the parent organization. For example, people assigned to the project will get human resources (HR) support from the HR department of the parent organization. Salary, benefits, and HR policies for employees assigned to the project will be supported out of the HR department. The parent organization will provide accounting functions such as determining the cost of cash, taxes, year-end project reports, and property disposal at the end of the project.
The project manager on smaller, less complex projects will have sufficient knowledge about these issues to coordinate with the parent organization’s functional leaders. On more complex projects, the project may have an administrative manager responsible for coordinating the administrative functions of the projects. On larger, more complex projects, an administrative function may be established as part of the project team, with many of the functions assigning a resource to the project. In all cases, the administrative function on a project is closely related to the legal and organizational responsibilities of the parent organization and close coordination is important.
South American Mining Project
The South American mine project has major design work to accomplish in three different design offices: Vancouver, Santiago, and Argentina. The project manager and the leadership team reside in Santiago, Chile. During the design stage of the project, the engineering manager in each engineering office is leading the work with project controls, procurement, and administration, each assigning resources to support the engineering activities at each location. The project engineer manager assigned the engineering work based on the capabilities of the office and coordinates the work between offices. The procurement, project controls, and administrative leaders assign resources to support the work in each office. For example, the project controls manager assigned a planner in each office to support the engineering manager in that office to develop and track the schedule. The project planner in Vancouver supports the development of the engineering schedule in Vancouver and communicates and coordinates with the planning activities in the other locations
• >When the project construction activities started, project controls, procurement, and administrative resources moved from supporting engineering to supporting the construction activity. The project organizational structure changed as the engineering manager and the engineering effort changed from primarily designing the project to supporting the construction effort, by answering construction questions and developing solutions to construction challenges. The procurement effort changes from managing the bidding and contracting activities to managing the logistics.
• Figure 3.5 Organization for Major International Project
Key Takeaways
• Key functions on a project include sponsor, project manager, controls, procurement, technical, quality, and administration.
• The project sponsor has the organizational authority to provide guidance and resources and can overcome barriers for the project.
• The project manager is the project leader with broad responsibilities for all phases of the project and for meeting project goals and client expectations.
• The project controls manager is responsible for controlling the project processes, including cost estimating and tracking, developing schedules, tracking progress against schedules, managing changes to the schedule or budget, and analyzing trends.
• The procurement manager is responsible for obtaining the services and materials needed to complete the project. This is accomplished by purchasing commodities, managing contractors who provide services and products, and working with partners.
• The technical manager deals with the issues related to the technology of the project.
• The quality manager monitors the project’s processes—not the quality of the product of the project—and takes steps to assure they are done correctly and meet specifications.
• Project administration manages accounting, legal, property, and human resources.
Exercises
1. Materials or services whose quality is standardized and that are usually purchased based on lowest price are __________.
2. Major components of a project that are specialized and that require the provider to help with solving problems and share in the profits are provided by ____________
3. Worker benefits would be managed by the ________ function.
4. Tracking costs and comparing them to the project budget is handled by the ___________ function.
5. Buying concrete for a bridge project would be handled by the __________ function.
6. Checking to see that the work performed on the project is done consistently and up to specifications is managed by the ________ function.
7. The number of people who report to a manager is referred to as the _____ __ ______ (three words).
8. If employees are responsible for estimating costs, to whom would they report?
9. Refer to Figure 3.1 “Decreasing Span of Control by Increasing Levels of Reporting”. How many additional employees were added to decrease the span of control of the engineering manager, and how was this accomplished?
10. Refer to Figure 3.4 “Procurement Manager Relationships”. How do partnerships affect the complexity of the project? Describe an example of a situation where the partnership could affect the complexity of the project.
11. How is procurement from suppliers different from buying commodities?
12. Refer to Figure 3.3. To whom does the procurement manager report? Provide an example of a situation where this reporting relationship might increase the complexity of the project.
Project Organization
• >Refer to the descriptions of the project functions and determine which manager would take care of each of the following problems. If you think the problem requires the attention of more than one function, explain why.
1. One of the project team members has filed a sexual harassment suit against another team member of equal rank. ___________
2. A contractor is installing equipment that is substandard. ___________
3. The computer software used to make a step improvement in the client’s operations has a significant bug in it. ___________
4. The client wants to use higher-quality materials in the project than was originally agreed on. ___________
5. Your organization has announced budget cuts but you cannot afford to lose anyone at this crucial stage in the project. ___________
6. A contractor has complained that the procurement manager has a conflict of interest with a competing contractor. ___________ | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/03%3A_Project_Phases_and_Organization/3.02%3A_Project_Organization.txt |
Learning Objective
1. Analyze a project function for size, organizational complexity, technological newness, and technological familiarity and assign a complexity score.
Recall that the Darnall-Preston Complexity Index (DPCI™) ranks complexity in four categories: external, internal, technological, and environmental. The information provided in this chapter can be used to rate a project’s complexity in the areas of size, organizational complexity, technological newness, and technology familiarity. Scores range from 1 (least complex) to 5 (most complex).
• Size
Recall that size is relative to the organization’s comfort zone for projects. Refer to the following descriptions for tips on arriving at a DPCI score for size:
1. The project size is the most common size the organization does. The project manager and team members have done many similarly sized projects, and the tools they use to manage this size project are well tested and reliable.
2. The project size is at the high or low end of the range of project sizes that the organization or team members have done before.
3. The project size is about 20 percent higher or lower than projects the organization or some of the team members have done before. The project leader and a few key team leaders are familiar with this size project from work they have done elsewhere. Project management tools and processes will have to be adjusted but will probably work.
4. The project size is about 50 percent higher or lower than projects the organization or most of the team members have done before. Project management tools and processes will have to be adjusted, and it is not certain that they will work well. New tools and procedures may be needed.
5. Neither the organization nor the team members are experienced working on a project this size. It is several times larger or smaller than previous projects. It is too small or too large for the tools and techniques with which the team is familiar.
• Organizational Complexity
Recall that system complexity is determined by the variety of types of elements and the number of connections there are between elements. Review a chart of the organizational structure that depicts the reporting relationships, the number of people involved, their familiarity with each other, and the amount of cross connections between reporting relationships and functions. Refer to the following descriptions for tips on arriving at a DPCI score for size:
1. The organizational structure is simple and involves few people. No new relationships need to be formed, and the people have worked together in these relationships before.
2. The team includes people who report to operations managers instead of the project manager, and more people are involved.
3. The organization chart has numerous segments, but most people are familiar with their roles and have worked in this type of role before.
4. The number of people involved is large, and the functions are handled by many different people. There are several levels of reporting in the organization chart.
5. The number of people is very large, and many of them do not know each other or have never met. Each major function requires a full-time person, and coordinating between functions requires frequent meetings among mid- and top-level managers.
• Technology Newness
Recall that this category refers to the technology that is part of the project. It might be new technology that is being implemented to make a step change in the efficiency of an operation. Refer to the following descriptions for tips on arriving at a DPCI score for size:
1. The technology is not new. It has been around for years and is reliable.
2. The technology is only a few years old. Most of the initial bugs are out of it, but the fixes have not been thoroughly tested.
3. The technology is recent, and only a few other organizations have experience with it. The providers promise that the next release or version will have the problems resolved.
4. The technology is new and has just been released for general use. Problems are likely.
5. The technology is in an early testing phase, and your organization is one of the test sites. Problems are expected.
• Technology Familiarity
Recall that this category refers to the familiarity of the project team with the technology that is part of the project. Refer to the following descriptions for tips on arriving at a DPCI score for size:
1. The team members have all used the technology or have been involved with projects that used this technology. They are confident that they understand it and can handle problems related to it.
2. The technology is new to some of the team members who are not in key positions. Standardized training is available, if necessary, to teach them what they need to know about it to do their jobs.
3. Several team members have not worked with this technology, including some of the key team members. Standardized training is not available, and consultants might be needed.
4. The technology is new but is similar to previous technologies with which the team leaders are familiar. An advisor from the product’s development team may serve as a technology advisor.
5. The technology is new, and no one has worked with it before. A specialist might be needed to avoid serious errors.
• Tips for Assigning a Score
Assigning a score is not an absolutely accurate process. Your objective is to be approximately correct, and some people are not comfortable with this type of estimate. Recall that one of the attributes of a successful project manager is the ability to live with ambiguity. One method that will help when assigning a score is to consider the two extremes. For each factor in the DPCI, consider what the simplest—least complex—scenario would look like, which would be a 1 on the DPCI scale. Next consider what the most complex scenario would be, which would describe a 5. Then, compare actual projects to those two extremes. If it is close to, but not as simple as, the least complex, you would give it a 2. If it is close to, but not as complex as, the most complex scenario you would give it a 4. If it is about in the middle, it rates a 3.
Key Takeaway
• Scores range from 1 to 5, where 1 is the lowest level of complexity and 5 is the highest. In each situation, consider what the two extremes would look like and then judge where the current situation lies between those extremes.
Exercises
1. If a project is about 20 percent larger or smaller than projects previously done by most of the team members, it should be rated as a ____ for size complexity.
2. If the organizational structure is simple and involves few people and no new relationships need to be formed, the project rating for organizational complexity should be a ___.
3. If the technology is in an early testing phase, your organization is one of the test sites, and problems are expected, the technology newness complexity rating should be a ______.
4. If the technology is new to some of the team members who are not in key positions, but standardized training is available to teach them what they need to know about it to do their jobs, the technology familiarity complexity rating should be a ____.
5. Why does the newness of a project’s technology increase its complexity?
6. The project controls manager decides to change the software his team uses to track project activities from Microsoft Project to Primavera. Few of the staff in that department are familiar with Primavera. How would this change affect the project technology complexity index score? Explain your answer.
Techniques for Assigning Scores
• >Refer to the tips for assigning scores to answer the following questions:
1. How does the ability to live with ambiguity relate to assigning scores using the DPCI? ___________
2. How does considering extremes help to assign a score? ___________
Choosing a Complexity Score
• >Consider a project that involves the merger of computer systems of two banks. The acquiring bank wants to convert the other bank’s computer system to its own software, and the project is to convert all the client account files. The software used by the acquiring bank is relatively new, and only about a third of the project team is familiar with it. Your task is to determine a DPCI rating for the familiarity of the project team with the technology.
1. Describe a scenario that would qualify for a rating of 1.
2. Describe a scenario that would qualify for a rating of 5.
3. Indicate the rating you would choose and explain your choice. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/03%3A_Project_Phases_and_Organization/3.03%3A_Using_the_Darnall-Preston_Complexity_Index_to_Measure_Organizational_Complexity.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. In June 2009, the CEO of Fiat took on the management of Chrysler and began a project with the objective of joining the two companies. He chose to “flatten” the management organization by increasing the number of people who report to him from a “handful” to twenty-three. Video conferences between the Chrysler and Fiat management teams take place from a conference room in Chrysler headquarters in Michigan where there are twenty-three seats and microphones for the Chrysler team members (Boudette, 2009). What do you think are the pros and cons of changing the CEO’s span of control in this manner? Will this increase or decrease the complexity of the organization? Your answer should display an understanding of span of control and organizational complexity.
2. The DPCI™ and the Myers-Briggs Type Indicator® (MBTI): The human personality is more complex than a project; an evaluation system developed by Isabel Myers-Briggs based on the work of psychologist Carl Jung attempts to provide a simple profile based on four ranges of personality traits: introverted versus extroverted, intuitive versus sensing, thinking versus feeling, and judging versus perceiving. How does the Myers-Briggs profile compare and contrast with using the DPCI to determine the strengths and challenges of a project?
Discussion
The exercises in this section are designed to promote an exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Controls and procurement. Under what circumstances would the responsibilities of the controls manager and the procurement manager overlap? Describe the situation. Your description should indicate an understanding of the roles and duties of each manager. Consider the examples provided by your classmates and compare them with your example to determine if you correctly understand these two roles.
2. Describe the four phases of a project in your own words. Pick a project that would have a score of 1 on the Darnall-Preston Complexity Index in the areas of size, organizational complexity, technology newness, and technology familiarity. Consider the examples provided by your classmates and compare them with your example to determine if you correctly understand how to score a project’s complexity in these areas.
3.05: Web Exercise
Learning Objective
1. Locate, download, and analyze project templates.
• Use Templates to Standardize Project Development
Many organizations standardize their project development process using templates. The use of templates makes it easier to compare projects and to assure that all the requirements are met. In this exercise, you locate and download a template for creating a scope statement and its completion instructions. The template is used by the State of Virginia. This template and its instructions for completion provide an overview of the structure of a project because the main parts of a project are clearly identified.
• How to Download a Project Template and Its Instructions for Completion
1. Start a web browser program and go to the Office of Enterprise Technology for the State of Virginia at http://www.vita.virginia.gov/oversight/projects/default.aspx?id=567. A list of templates displays, as shown in Figure 3.6 “State of Virginia Project Management Templates”.
2. Under Project Initiation, in the Project Charter row, in the Instructions column, click the Word icon. Save the file to your computer. Notice the folder in which you choose to save the file so you can find it again later.
3. Open the file. Scroll down to page 2 and display section E, steps 1 through 3, as shown in Figure 3.7 “Description of the Project and Its Scope, Milestones, and Deliverables”.
4. Read each of the three items. Capture this screen to the computer’s memory.
5. Start a word processing program and open a new document. On the first line, type your name. Below your name, paste the screen capture.
6. Save that document as Ch03ScopeStudentName in the .doc format used by Microsoft Word 2003.
7. Return to the Scope Statement Development Instructions document. Scroll to item F and then read the instructions for describing the project authority.
8. Capture this screen to the computer’s memory. Switch to Ch03ScopeStudentName.doc and paste the screen below the first screen capture image.
9. Return to the Scope Statement Development Instructions document. Scroll to item G and then read the instructions for describing the project organization.
10. Capture this screen to the computer’s memory. Switch to Ch03ScopeStudentName.doc and paste the screen.
11. Switch to the web browser program. On the Project Charter row, in the Word Template column, click the Word icon. Save this document to the same folder as the instructions. Open this document.
12. In the Scope Statement Template, scroll through all eleven pages to review the elements of the project.
13. Scroll to the top of page 7. In section F, below item 2, enter your name as the project manager. Capture this screen to the computer’s memory. Switch to Ch03ScopeStudentName.doc and paste the screen below the other screen images.
14. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch03ScopeStudentName.doc Word 2010 version using .docx Another file name
Locate, download, and analyze project templates Name on first line followed by screen captures of sections E, F, and G of the instructions and page 7 of the template with your name as the project manager Same as Best Some screens missing or name not shown as the project manager in the template
15. Save Ch03ScopeStudentName.doc and submit it as directed by the instructor. Close all documents and programs. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/03%3A_Project_Phases_and_Organization/3.04%3A_Exercises.txt |
Learning Objectives
1. Describe what the client needs to know about changes in management style during different phases of a project.
2. Identify advantages and disadvantages of including the client on project teams.
To appreciate the skill and effort expended by the project team in achieving the objectives of the project, the client needs to know more about what the team does.
• Educate the Client from the Beginning
Often the client does not have the project management experience of the project manager or project team. An experienced project manager understands the phases of the project and the requirements of the different phases. A less experienced client may become frustrated at the changes in the management approach required for the different phases of the project. For example, during the early phases, the project leadership is encouraging creative approaches to accomplishing the project goals. As the project proceeds and the project plan becomes more firm, the project leadership focuses on accomplishing the project goals. The types of meetings, the agenda of the meetings, and the general project atmosphere change as the project moves from the planning phase to the production mode of the execution phase of the project.
During the last phases on a project, project team members are often tired and beginning to anticipate the transition that will take place at the end of the project. The motivational approach that worked during the early phases of the project is less effective during the final phases, and the project manager applies different approaches to motivating the project team. These changes can be disconcerting on a person’s first project. By explaining what to expect and planning with the client a process to minimize the impact of these changes, the project manager prepares the client for these events and reduces the frustration.
• Include the Client on Selected Project Teams
The project client translates the needs of the organization through chartering the project and defining the project scope to the project manager and the project team. The client also has an oversight role. This oversight is often accomplished through regular project reviews and reports from the project team. Depending on the complexity level of the project, the reviews can vary significantly. On less complex projects, the review might be conducted in a one-hour meeting with a one-page summary document serving as the project progress report. On more complex projects, a full-day meeting might be necessary for the project progress to be fully understood, and the project report may be one hundred pages or more.
In addition to providing the formal overview of the project, most clients would like to actively participate in the success of the project. This is a delicate balance. The participation of the client can have undue influence on project decisions. The advantage of including the client in project activities is to gain the client’s personal investment in the project plan, to create a better understanding for the client of the problems the project encounters during the life of the project, and to gain the insights and contributions of the client in problem solving.
Involving the client in teams where the client’s special knowledge can add value to the team discussions and activities contributes both to the success of the team and the satisfaction of the client. During the construction of a chemical plant in Tennessee, the project team struggled with a very tight project schedule. A team was established to explore ways to reduce the approval process for the drawings of the plant design. It was taking two weeks for the design review, and even though this was within the normal time frame for design reviews, the project management team believed there were opportunities to reduce this time and shorten the length of the project.
The client’s engineering manager participated in the brainstorming sessions that explored ways to reduce the design review time. Several good ideas were developed and put into place. The client’s engineering manager took these ideas back to the client’s team and instituted many of the same ideas. The result was a shortened schedule that saved two weeks by the end of the plant design. The other result was a client that contributed to the project success and was emotionally engaged in the positive outcomes.
Key Takeaways
• The project manager’s style changes with each phase of the project. The client could be surprised when the style changes from one that is open to any new idea in the initiation phase to a more task-oriented style during execution or a more demanding style during closeout.
• Client participation in project teams can have undue influence on decisions, but this is offset by the buy-in of the client and the insights the client can offer when special knowledge is needed or schedules need to be changed.
Exercises
1. The client might be surprised when the project manager’s style changes from inviting new ideas during the conceptual phase to discouraging them during the ________ phase.
2. One problem with client participation in project teams is that a client can have ______ influence.
3. What should the client know about the different management styles used in the initiation, execution, and closeout phases of the project?
4. What is an advantage of having the client participate in some project teams?
Client Influence
• >Consider a project you have been involved in which the client took part in meetings and decision making. If you were to do the project again, describe how you would manage the client’s involvement. Specifically, describe the positive aspects that you would repeat and the negative aspects that you would try to avoid. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/04%3A_Understanding_and_Meeting_Client_Expectations/4.01%3A_Including_the_Client.txt |
Learning Objectives
1. Identify methods for determining client expectations.
2. Identify methods for clarifying values and determining differences.
3. Describe the importance of dealing fairly with the client.
Two of the sources of dissatisfaction in personal and business interactions are unmet expectations and a misunderstanding or ignorance of the values held by the other party. The project manager needs to avoid having a dissatisfied client due to a clash of values or a failure to meet expectations.
• Clarify Expectations
Client expectations are expressed in chartering documents such as the scope of work, the project purpose statement, and the list of project deliverables. Other expectations exist that are more difficult to express in written documents.
Managing Expectations
One project client had such a difficult time with the billing processes on her previous project that significant project management time and resources were expended on reconciling billing issues. This client has an expectation in the next project that project accounting and billing processes operate effectively and efficiently. Another client had been constantly surprised by changes and nonplanned events happening on the project. This client wanted to participate early in the discussion of problems that arise during the life of the problem and contribute to finding solutions and minimizing the negative impact on project performance.
Understanding and capturing these expectations in a written document is an important step in effectively meeting client expectations. Often it is the next question that enables a project manager to discover the less obvious expectations. The next question is the one the project manager asks after the initial response to inquiries about expectations. In our example, the client may express that he or she wants project billings to be accurate and timely. This is an easily understandable expectation, but when the project manager asked the next question—“Can you tell me more about what you mean?”—the client revealed the problems on her previous project, and the project team developed a better understanding of the client’s concern. The project team developed measures for tracking project billings that measured both timeliness and accuracy. This process enabled the project team to understand the client’s concern, develop work processes that demonstrated a response, and provide data to the client on the timeliness and the accuracy of the billing processes.
For the client that expected to hear about problems early and participate in the problem-solving discussions, the project team shared the project action item register and highlighted issues the team felt may be important to the client. The project manger also discussed potential concerns with the client during their weekly project update.
After the project team captures the client expectations, the team then develops a method for tracking performance against expectations. In our example, the project team defined accuracy and timeliness in measurable terms and tracked the team performance. The project team developed a survey to track the client’s perception of inclusion in the problem-solving process and tracked the client’s response. These measures were then presented in the project review meetings with other measures of project performance such as cost and schedule.
As the project team meets and exceeds the client expectations, these expectations tend to change. If the goal is 85 percent accuracy on all project billings, and the project team begins to perform with an average of 95 percent accuracy or higher and never falls below 90 percent, then the client begins to expect 95 percent accuracy. This is a realistic expectation of the client; it also changes the expectation so that meeting the client’s expectation becomes harder. Even if expectations change, it is important to maintain the original goal. This reminds the client at the end of the project that the project team not only met expectations but also raised them during the life of the project.
• Clarify Values
Values are desirable principles or qualities (Merriam-Webster Unabridged Online Dictionary, 2009). Disagreements based on differences in values are extremely difficult to resolve because compromising means compromising your values. Organizations often have developed a list of corporate values. Sometimes these are real and sometimes they are more important to the corporate brand. The project manager needs to understand the real organizational and personal values related to the project.
On construction projects, safety is an important consideration in the planning and execution of a project. Every construction company will assert a strong safety value. The value is tested when safety rules are developed. Is the organization willing to terminate or sanction an employee for a major safety violation? This is not a yes or no question but the beginning of a dialogue. Everyone on the project needs to understand safety rules, and consistent application of the approach to safety is critical to establishing a safety culture on the project. Agreeing on a safety program based on a value for safety at the beginning of a project will prevent serious confrontations later.
Phone Etiquette
A large project in Washington had a client that valued communications. All the members of the client’s team had the newest phone technology and took calls during project meetings. The project team saw this behavior as rude and interfering with the effectiveness of the project. The client was very comfortable in this chaotic environment and saw constant communication as a value that helped the organization identify and respond to opportunities. This provided the organization with a competitive advantage in their marketplace. The same behavior was preventing the project team from developing a common understanding and agreeing on a project plan because they could not focus on the needs of the project long enough to develop this common understanding. The project manager and the lead client recognized the potential conflict for the project and developed a list of project meetings that would be “cell-less,” which meant that the team members would turn cell phones off for that meeting. Other meetings would follow the cultural standards of the client.
Developing a mutual understanding of the personal and organizational values and dealing with differences during the early phases of the project will significantly reduce the potential for insolvable conflicts. This becomes more important on a large, complex project where the likelihood of a diverse project team is high, and the team may have to deal with different laws, customs, and cultural values. Developing an understanding of these differences and developing an appreciation for the value of this diversity for project team members can prevent conflict later in the project.
• Deal Fairly with the Client
During the life of the project, the project manager will often have the opportunity to take advantage of the client, either because a clause in the contract is not written accurately or because the project manager has access to more detailed information. For example, a client finds a mistake in the original documents provided to the project team. The project team analyzes the new information to access the potential impact on the project cost and schedule. A skilled project manager can demonstrate a negative impact and increase project profits by requesting a change order. A skilled project manager can also usually find an innovative approach to finding a solution without increasing the cost or schedule. In most cases, the client wants to be treated fairly. Fairness is characterized by impartiality and honesty that is free from self-interest, prejudice, or favoritism (Merriam-Webster Unabridged Online Dictionary, 2009). If the client interprets the change order as fair, then the project manager has the opportunity to create a satisfied client. If the client believes the behavior of the project manager is unfair, then it is difficult to create a satisfied client.
Key Takeaways
• To identify client expectations, review written documents, but have a dialogue with the client to uncover unwritten expectations by asking questions and listening. Manage increasing expectations by reminding the client of the original objectives.
• Determine the stated corporate values by reviewing written documents and review actions related to those stated values to see which ones are the basis for action. Attempt to avoid conflicts of values by identifying the differences before they become problems.
• Do not take advantage of clients’ mistakes, but help them meet their objectives in spite of their errors. Live your own values of fairness.
Exercises
1. If a project is regularly exceeding the stated goal for quality, it is important to remind the client of the __________ objective.
2. Values are desirable _______ or qualities.
3. Treating a client fairly means avoiding _______, prejudice, or favoritism.
4. What are some written sources of client expectations?
5. What is an example of a corporate value?
6. What does it mean to treat a client fairly?
Organizational Values
• >Choose an organization with which you are familiar that proclaims to support a particular set of values. Describe actions that it has taken that either support or differ from its stated values. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/04%3A_Understanding_and_Meeting_Client_Expectations/4.02%3A_Understanding_Values_and_Expectations.txt |
Learning Objectives
1. Describe standards and procedures for dealing with problems.
2. Describe the advantages of dealing with difficult issues as soon as they arise.
3. Describe the importance of establishing methods for revising major decisions.
Projects always experience unexpected problems that produce stress. Dealing with problems with competence is vital to maintaining a good relationship with clients.
• Establish Standards and Procedures for Decisions
There are competing interests on projects, and the larger and more complex the project, the greater the number of issues and concerns that need to be addressed.
Competing Interests
It’s 7:30 in the morning and the client called and wants you to have coffee in an hour with the new CEO, who flew in last night, to give him an update on the project. The concrete trucks were supposed to be on site at 7:00, but they have not arrived. A storm is predicted for tomorrow, and the concrete has to be in and covered before the storm hits. A news reporter called and said she has an unnamed source who claims that there is contamination of a nearby river coming from the project site.
• >The project manager decided to postpone a team meeting about project scheduling and cancelled lunch plans with his wife. It was going to be a busy day.
• On large, complex projects, hundreds of decisions are made every day. Most of the decisions focus on the day-to-day operation of the project. Early in the project, decisions focus on choosing between alternative options for accomplishing project goals and determining how the project will be executed. Later, the focus is typically on solving problems. The project team develops solutions to deal with the barriers that emerge and develops alternative plans to meet project goals. The authority to make decisions is typically established early in the project and identified in a responsibility matrix—a table of people and types of problems that might require decisions—as shown in Figure 4.5 “The Responsibility Matrix”.
Figure 4.5 The Responsibility Matrix
• >The responsibility matrix identifies roles and client involvement.
• Title Scope Statememtn Work Breakdown Structure Budget Quality Change Management Procedures Change Approvals
Project Chartering Committee X
Client Representative X X X X X X
Project Manager X X X X X
Technology Team X X
Finance Team X X
Schedule Coordination Team
X X X
Decisions that influence the outcome of the project, such as a delay to the project completion date or an increase in the project costs, typically involve the client. Some clients prefer to make the final decision, with the project manager developing alternative solutions with a cost-benefit analysis of each of the alternatives. Others prefer to be involved in discussions to better understand the barriers, developing alternative solutions and making decisions in a team environment. Understanding the client’s decision-making preference and developing procedures and processes that support that preference is important to meeting client expectations.
Develop processes and methods that encourage both client and team members to identify issues and concerns early. Develop processes for dealing with these issues and concerns effectively. Define how and when decisions are made.
On projects with a low complexity level, the project manager and team leaders can make decisions informally, with short meetings or phone calls. Weekly or monthly staff meetings are appropriate for more complex decisions. Even though the decision-making process may be simpler on less complex projects, it is still important to understand the client’s expectation for inclusion in the decision-making process and recording decisions and changes in project plans.
On more complex projects, the use of action item registers, weekly staff meetings, responsibility matrices, and other tools foster the decision making on a timely basis. For project teams operating in diverse locations, Internet-based tools for recording and tracking action items can provide a location for capturing issues and concerns.
• Deal with Difficult Issues Early
Project managers typically have a high degree of confidence in their ability to deal with issues and concerns as they arise. The delivery of some equipment is delayed a week, causing changes in the project schedule, or the beta test of a software program identified far more problems than expected. The project manager knows the problems, the team developed a solution, and the project has a plan for recovering. The project will be back on track soon. Should the project manager inform the client? The answer seems like an easy yes, yet many project managers often believe there is no reason to bother the client with a problem they have under control.
Then the second delay occurs on the equipment delivery or the fixes for the beta test are more costly than expected. Now the problems have elevated to the point the clients should be informed. The greater the distance between the time of the event and the time the client knows about the events, the greater the client’s frustration and mistrust. Including the client in the processes for analyzing project issues or concerns as well as the recovery planning enables the client to develop confidence that problems are being addressed. Including the client early in the process for dealing with problems enables the client to contribute with solutions and builds confidence that he or she is aware of critical issues on the project.
New Estimates Increase Cost Projections
On a large, complex project in South America, the project team was reestimating the project cost and schedule projections after the project design was complete. The team was also conducting a new risk analysis, and the results of the cost and schedule projections, together with the risk analysis, provided the client with better cash flow projections. Early in the process, the project team understood that the cost projections would significantly increase, and the final project cost would be significantly above the contingency set aside for the project.
The client looked for an early indication of the results of the analysis, and the project manager kept reporting it was too early to know. The project team debated how much contingency the project needed and how to inform the client. When the client was told the results of the cost projections, the response was a combination of frustration and anger. The project manager was removed from the project and a new project manager assigned.
The project manager should have dealt with the increased cost of the project early on. When first indications suggested that estimates were low and several items in the budget needed extra funds, the project manager should have had conversations with the client. Including one or more members of the client’s team in the reevaluation effort would have kept the client informed of the progress regularly and built trust in the new numbers. The project team could have offered suggestions and contributed to possible solutions for addressing the concerns that were developing, as costs were higher than expected. Dealing openly and early with the client is critical to client satisfaction.
• Provide Mechanisms for Revisiting Major Decisions and Issues
The project environment moves fast, and decisions are made and implemented to keep pace. Decisions made in the conceptual phase of the project seem less effective during the design phase. It is not that the decision was necessarily wrong; based on the data at the time, most decisions are understandable. With new information, it is sometimes important to revisit and change decisions made earlier in the project. As obvious as this sounds, many project teams are reluctant to challenge earlier decisions. Without a mechanism in place to revisit decisions, decisions may be seen as final. This sense of finality may slow down the decision-making process to make sure every decision is right. Delays in decisions can put activities behind schedule and affect the project completing on time.
Mechanisms for revisiting decisions are similar to project change orders. Similar to a change order, a request to revisit a decision must be initiated by someone on the team. The formality of methods used by the project to revisit a decision depends on the complexity profile of the project. On less complex projects, an informal discussion in project meetings can develop the awareness that a decision needs to be revisited. On more complex projects, the action item register and the weekly project meetings provide a venue for revisiting decisions.
Sometimes people asked that decisions be revisited because they did not like the decision that was made.
Revisiting Decisions
On an engineering project, the electrical design schedule was changed to support the completion of the activities on the critical path by a project milestone date. The change increased the number of hours needed to complete the work because of the change in work processes. The project manager accepted the costs of the change to achieve the milestone date, but the manager of the electrical engineering team objected because the change would cause their part of the job to exceed the budgeted amount. The project manager decided not to revisit the decision because no new information was available that would cause the decision to change.
Clients are often involved in major decisions on the project. For example, if the project invested another million dollars, the project could be completed a month early. The client will conduct the cost-benefit analysis and decide if the extra expense is worth the gain in time. Once this decision is made, the necessary changes are made in the execution plan and new goals are established through the change management process. Later, for reasons outside the control of the project, the project will not experience the time savings from the additional investment of funds. It is important to revisit the decision. A culture that encourages project team members to bring up the need for revisiting decisions and a mechanism that makes it easy to surface issues and concerns will increase the likelihood that these issues will come to the attention of the management team.
Vendor Decision Not Revisited
On a major pharmaceutical project in Ireland, a United States–based company was building a new plant to produce a new drug, and the priority was completing the plant to get the drug to the marketplace. The client was involved in the process to select major equipment, and after an expedited bidding process, an equipment vendor was selected for a critical piece of the plant equipment. Later, members of the project team learned that this vendor was overcommitted, and there was a high risk that the vendor would not be able to meet the schedule dates. Because it was the client’s decision, the project leadership was not warned of the possible risk. Weeks later, the vendor began missing critical dates, and the leadership became aware of the risks.
• >The client was furious that the decision was not revisited earlier in the project. Even though changes were made that brought the project back on track, the client did not trust the project team again. The project finished on time and within budget while meeting all quality specifications, but the client was not pleased.
• Establishing a culture and a mechanism for revisiting project decisions is important for meeting client expectations.
Emergency Button
An experienced project manager came up with a clever idea to enable his clients to capture the attention of the project team. He gave the client’s team a bright red index card and said, “This is your emergency button.” The card was a symbol. It empowered the client with the ability to capture the complete attention of the project team. When the client presented the red button, the project manager instantly stopped current activities and focused on the client. The red button meant the project leadership focused on understanding the issue or concern presented by the client and developing project priorities to meet the client’s concerns.
• >Although the red button was rarely used, it gave a sense of power to the client and communicated that the client was important. One project manager used the “red button” on four projects, and on two of the projects the card was never used. On one project, the client used the card to get the project ready for a visit from the client’s boss, and on the fourth project, the client used the card often. Although the project manager believed the card was overused to get the total attention of the project leadership team, he never regretted providing the client with the card. The “red button” card provided them a method to distinguish the really important needs of the client.
• Key Takeaways
• Determine who should be included in decisions for each category using a decision matrix
• Decide at what level of problem the client should be involved by discussing the threshold with the client. Involve the client early in the process to give them a chance to contribute to the solution before the problem gets worse.
• Decide what criteria to use to determine when a decision should be revisited. Additional information that is developed during the design and planning phase can require that decisions made during the conceptual phase need to be reconsidered.
Exercises
1. A table that displays who should be included in making different types of decisions is a decision ______.
2. A client should be involved in decisions ______ in the process of dealing with a problem.
3. Information that is developed in the planning phase can require reconsidering decisions that were made in the _________ phase.
4. Describe a responsibility matrix and how it is used.
5. Why is it important to inform a client early in the process of resolving a problem?
6. Why should earlier decisions be revisited?
Threshold for Client Involvement
• >Consider a project with which you are familiar where the client was not included in making day-to-day decisions. Describe a type of problem that would be too small to take to the client for input and another problem that would be just large enough to require client involvement. If you were trying to communicate the reasons for your decision to another team member, describe the threshold that had to be crossed for the second problem to qualify for client involvement. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/04%3A_Understanding_and_Meeting_Client_Expectations/4.03%3A_Dealing_with_Problems.txt |
Learning Objectives
1. Describe the advantages of using project milestones.
2. Describe the advantages of including the client in celebrations and guidelines for doing so.
• Manage around Project Milestones
Project milestones represent significant events on the project. Some project milestones signify external events that provide critical information or resources to the project or an external event that requires information or deliverables from the project.
Board of Directors Meeting
The client’s board of directors meets on March 15, and the client must report the project progress and submit the project final budget for approval. The project team develops the information needed for the project progress report and finalizes the project estimate by March 10 to provide the client with five days to review the information and make any changes.
Recall that a milestone is an event that consumes no time or resources. In this example, the Provide Client with Report is the milestone event. All the activity to develop and deliver the report takes place before the milestone event.
Extra Effort to Meet a Milestone
On March 8, the project team determines that the progress report and estimate cannot be completed by March 10. The team will need one more day to complete the report and estimate. Should the project manager ask the client for a one-day extension? The client may be able to review and revise the information before it goes to the board in four days, but the message to the client has a bigger impact on the project. By missing the deadline, the client can develop the perception that client deadlines are less important, that the project team is unable to complete critical tasks on time, or that the project team is not dedicated.
• >Instead of asking the client for one more day, the project manager pulls together the project team and asks what it will take to make the milestone date. If the estimator works overtime tonight and the project controls team starts a few hour early on March 9, then the project controls team can work late on March 9 to finish the report. The project administrative staff can come in early on March 10 to do the revisions and make copies, and the reports can be ready by noon. Other activities will have to be delayed and critical staff will work overtime, but the client will get the needed information by the promised date.
• Making the extra effort to deliver by the milestone date communicates to the client and the project team the importance of meeting milestones. The client develops confidence that the project team is dedicated to meeting client expectations and that deadlines are important. The extra efforts by the team to meet the client’s critical dates will often result in the client making an extra effort to help the project team meet critical dates.
During the life of a project, the project team encounters a large number of small problems that can cause small delays. A thunderstorm caused the loss of electricity in the office building, and the bidders’ conference had to be delayed one day; a computer virus shut down the use of computers, causing the loss of another day; and the airplane flights were late, so the project reviews were one day late. None of these events caused significant problems for the project, but together they add up to delays that could affect the end date of the project.
If these delays continue to add up, then the project end date will begin to slip. As the project nears the completion date, the team will work overtime, decisions will be rushed, and resources will be added to the project to avoid missing the project end date. This type of end-of-project atmosphere will leave a strong lasting impression with the client and usually does not produce a satisfied client.
Project milestones provide the opportunity for the project manager to spread the end-of-project pressure over the life of the project. Project managers add resources, authorize overtime, and expedite work to accomplish what is required to meet the milestone. The project work increases in intensity, motivating project team members to accomplish the work on time until the milestone is achieved. After the milestone is achieved, the project celebrates and acknowledges the success of the team and then begins working toward the next milestone. Project managers use milestones to increase this intensity and focus to keep the project on schedule and prevent the delays of hard decisions to the end of the project.
This approach allows the project manager to lower the intensity of the project after a milestone is accomplished. After celebrating the successful completion of the milestone, a project manager will often review the future plans and allow the team to reflect on finding new ways of approaching the project work. Adjustments are made to the project work plan and the milestone cycle begins again.
Milestones are rarely evenly distributed over the length of the project. Project managers often select key events and make them milestone events to create roughly equal spacing between milestone dates. On large, multiyear projects, managing to a milestone each quarter provides good timing for the project. On shorter projects, monthly milestones can provide the right timing. On larger, more complex projects, typically a large number of activities can be designated as milestones for the project. On smaller projects, the project manger may need to artificially create milestones.
• Include the Client in Celebrations
Project celebrations are a time when the project manager and the management team can thank the project team members for their contribution to the project’s success at various stages of the project. Celebrations for successfully accomplishing project milestones are good examples of creating the opportunity to honestly celebrate. Some projects have birthday celebrations for the team or holiday celebrations, and although these events can be a positive contribution to the project morale, they are not connected to the success of the team in accomplishing project objectives.
Successful celebrations reinforce the effort and activities that created the success. Successful celebrations communicate appreciation for the energy and commitment of the team, focused on team goals. Successful celebrations communicate progress and confidence to project stakeholders, and successful celebrations share the success of the project with the client and reinforce the meeting of client expectations.
Successful celebrations result from good planning and the application of some basic principles for celebrations. The following are some of the basic principles for developing a successful celebration:
• What was accomplished and why it was important to the overall success of the project should be communicated to the team. Discuss the goals that were accomplished and the milestones met and how that advanced the project. For example, the civil design team on a construction project completed the site work design early, the bids for the site work were on the street early, and the project met the milestone of moving dirt on the site by May 1. Starting the site work early helps assure that the construction work will be under a roof before the bad weather hits in the late fall.
• Appreciation should be expressed specifically. A general statement that the project met all the goals does not carry the same meaning as “the project team completed the development of the new training curriculum by December 1.” People associate their activities with meeting the milestone and take pride in their contribution to the project’s success. Team members appreciate it when the project manager and others recognize their contribution.
• Celebrations should occur in the work area where the accomplishments were achieved. Celebrating holidays in the cafeteria is appropriate. Celebrating the accomplishments of the project in the project task force area brings a stronger association of the work of the project with the accomplishments being celebrated.
• Accomplishments of the team should be celebrated shortly after the milestone is achieved. The more time elapsed between the accomplishments and the celebrations, the less the impact.
• The persons that publicly recognize the team are important. The project leadership expressing personal appreciation reinforces the recognition of the work and effort to achieve project goals. Senior managers of the company reinforce the importance of the project to company goals and recognition of the role of individual project team members’ contribution to company success.
• In many cultures, food is associated with times of reflection, such as the dinner table discussion or lunch meetings. Serving food communicates that this event is special. Serving food also communicates that someone took the time to prepare and serve the project team as a form of appreciation.
• Clients play a special role in celebrations, and celebrations play a special role in meeting client expectations. A client expression of appreciation to the project team is often more significant than the appreciation expressed by senior managers. Clients in most commercial organizations are acknowledged as the source of profits, bonuses, and future business. A client expressing appreciation to the project team, especially in front of the company’s senior management, gives the project team special status for creating goodwill with clients.
When clients speak at a celebration, their remarks usually provide high praise for the work of the project team. This event provides an opportunity for the client to reflect and appraise the progress of the project team. Often the client concludes that the team is meeting or exceeding expectations. The celebration reinforces that conclusion.
If the client has doubts about some of the project performance but still speaks at the celebration and praises the team, the client may experience cognitive dissonance. The client will typically reevaluate the perception of the project team’s performance and conclude the team really has done a good job. The perception is now consistent with the client’s remarks and the end result is a client perception of a project as meeting expectations.
Understanding and meeting client expectations is a proactive process. The project manager and the project team develop plans and processes that focus on defining both specifications and expectations that are often difficult to quantify. The team executes the project in a way that meets both the specifications of the client and also the more subtle expectations not reflected in the measured data.
Key Takeaways
• Making extra efforts to meet milestone dates keeps the project on track and avoids large problems at the end of the project. It allows for lessening of intensity after a milestone to provide stress relief for team members, and it builds confidence in the client that the project will be completed on time.
• If the client is included in milestone celebrations, he or she has a better understanding of what effort it takes to keep the project on track. If asked to say something at the celebration, the client will usually say positive things that have an effect on his or her perception of the project. Celebrations should communicate the importance of the milestone to the project and praise specific accomplishments. The celebration should occur in the workplace. Get high-ranking people to praise the project team in front of each other to reinforce a sense of satisfaction and include food in the celebration to make it more social.
Exercises
1. Managing a project using ___________ keeps the project on track and allows for periodic celebrations of achieving interim objectives.
2. Clients should be encouraged to ___________ in celebration of project achievements.
3. Why should extra effort be expended to meet a milestone when the final project’s due date is months away?
4. Why should the client be included in milestone celebrations?
Milestone Celebrations
• >Consider a workplace with which you are familiar. If it utilizes milestone celebrations to mark completion of special tasks or phases of work, compare the components of the celebration with those recommended in the text. If it does not, describe how you would use milestone celebrations in this workplace. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/04%3A_Understanding_and_Meeting_Client_Expectations/4.04%3A_Nurturing_a_Feeling_of_Satisfaction.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Describe a project with which you are familiar that resulted in a dissatisfied client. The project can be personal or professional if it serves to illustrate the concepts in this chapter. Identify how the client was included or excluded from project teams and how they were informed of problems. Analyze the situation and draw a conclusion regarding how a similar client might be satisfied on a future project.
2. Describe a project with which you are familiar that resulted in a satisfied client. The project can be personal or professional if it serves to illustrate the concepts in this chapter. Identify how the client was included or excluded from project teams and how they were informed of problems. Analyze the situation and draw a conclusion regarding which aspect of client relations was most effective in achieving client satisfaction.
3. Describe a project with which you are familiar where early decisions had to be changed based on information that became available later in the project. Analyze the process by which the decision was made and at what point the client was informed of the need for a change. Describe any changes you would make in the process or timing that might improve client satisfaction.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Milestone celebrations. Consider celebrations of milestone events in your life and how those celebrations affected your memory and attitudes toward achieving those objectives. Do you think using milestone celebrations can be a useful tool for projects? Express your opinion and support it with examples.
2. Client participation. Where would you place the threshold for involving a client in a decision? What criteria would you use and how would you involve the client with that process of establishing the threshold?
4.06: Web Exercises
Learning Objectives
1. Locate and analyze information online related to managing client relationships.
2. Locate, download, and analyze a project milestone analysis and then create your hypothetical project milestone analysis for distribution to your team and client.
• Locate and Analyze Information Online Related to Managing Client Relationships
Managing relationships with clients is a challenging task, and it is often discussed online. In this exercise, you locate online articles and other publications dealing with client relationships and then compare and analyze them.
• How to Read about Client Relationships
1. Start a web browser program and go to the an idea website at anidea.com/etc/how-to-create-a-cooperative-relationship-between-account-and-project-management.
2. Review the five topics listed in this article.
3. Start a word processing program and open a new document. On the first line, type your name. Below your name, write a brief summary of the points made in each of the five major topics.
4. Save the word processing document as Ch04ClientStudentName using the Word 2003 .doc file format.
5. In the web browser, use a search program such as Google to search for a combination of key terms such as Project Management Client Relationships.
6. Review the results of the search and choose a site that addresses some of the same points. Consider the similarities and differences between this site and the article from an idea.
7. Copy the web address from the browser’s address bar.
8. Switch to Ch04ClientStudentName. Paste the web address into the document.
9. Switch to the browser. Capture the screen and paste it into Ch04ClientStudentName.
10. Below the screen image, compare the content of the two sites point by point using a separate paragraph for each point. Be specific. If the site does not address one of the five points in the first site, briefly mention that it does not.
11. Save the document.
12. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch04ClientStudentName.doc Word 2010 version using .docx Another file name
Locate and analyze information online related to managing client relationships Summary of the five points; web address; screen capture; comparison of each point Same as Best Summary not accurate; missing web address or screen; all five topics not addressed
13. Save the file and submit it as directed by the instructor. Close all documents and programs.
• Project Milestone Analysis[1]
Morale and psyche are an important component in any project; this includes both the team and the client. Project milestones represent significant events within the project. Some project milestones signify external events that provide critical information or resources to the project or an external event that requires information or deliverables from the project. Nonetheless, the proper creation and distribution of this information can be an integral part of the overall success of your project.
• How to Download a Project Milestone Analysis
1. Open a blank word processing document and type Milestone and your name and date on the first line. Save the file as Ch04MilestonesStudentName using the Word 2003 file format that ends with .doc.
2. Start a web browser program and go to the Orion Crew Exploration Vehicle Project Milestones page for NASA at http://www.nasa.gov/pdf/479023main_Orion_2010_Milestones.pdf. A screen capture of this milestone analysis is shown in Figure 4.9 “Orion Milestone—NASA”.
Figure 4.9 Orion Milestone—NASA
3. Add this website to your browser’s favorites list, in a folder named Milestones.
4. Capture a screen that shows a link to this site in the Projects folder of your bookmarks or favorites and then paste it into the word processing document.
5. Within the PDF file locate the milestone attribute within the analysis that you feel to be most significant, capture the screen of that milestone accomplishment, and paste it in the Word document.
6. Below the Word document, include a brief summary (250 words) as to why you think this accomplishment is of merit and utilize references from the reading in Chapter 4 “Understanding and Meeting Client Expectations” to correlate this accomplishment to things you’ve learned in the text. Describe the advantages of using project milestones.
• How to Create an Analysis
1. Now that you have familiarized yourself with the reading on the importance of project milestones and witnessed a firsthand account of a project milestone analysis on behalf of NASA, create your hypothetical 1,000-word milestone analysis document including a minimum of four digital images. Make sure that the analysis is pertinent and consistent—maintain a common theme.
2. Use appropriate verbiage that will be comprehendible by everyone who may read this analysis: team members, clients, and so on.
3. Insert this 1,000-word analysis with imagery below the final screen capture from the NASA website.
4. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch04MilestonesStudentName.doc Ch04MilestonesStudentName Another file name
Locate, download, and analyze a project milestone analysis and then create your hypothetical project milestone analysis for your team and client Milestone and name/date on first line; screen captures that show the web link in the Milestone folder of your browser’s favorites and an image of the initial screen capture of the NASA milestone analysis; your perceived, most important aspect and rebuttal (250 words); a hypothetical 1,000-word milestone analysis that is entirely consistent Milestone and name on first line; screen captures that show the web link in the Milestone folder of your browser’s favorites and an image of the NASA milestone analysis; a brief rebuttal (150 words or less) as to why you think this is the most important aspect of the milestone; a hypothetical 500-word milestone analysis that is somewhat consistent Missing or incomplete screen captures; a rebuttal that is too general and lacks significant educational correlation from the text; a hypothetical milestone analysis that is not consistent and lacks evidence of thought provocation
5. Save Ch04MilestoneStudentName and submit it as directed by the instructor. Close all documents and programs.
1. Written by Eric Ouellette as his additional project for graduate credit, December 2010, Eastern Michigan University. Edited by Professor Preston on June 20, 2012. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/04%3A_Understanding_and_Meeting_Client_Expectations/4.05%3A_Exercises.txt |
Learning Objectives
1. Describe emotional intelligence.
2. Describe personality types and tools used to describe them.
3. Describe the relationship between leadership style and personality types.
4. Describe people skills that are necessary for negotiation and conflict resolution.
5. Describe how work is delegated.
6. Describe individual goals that are related to personality types.
Working with other people involves dealing with them both logically and emotionally. A successful working relationship between individuals begins with appreciating the importance of emotions and how they relate to personality types, leadership styles, negotiations, and setting goals.
• Emotional Intelligence
Emotions are neither positive nor negative. Emotions are both a mental and physiological response to environmental and internal stimuli. Leaders need to understand and value their emotions to appropriately respond to the client, project team, and project environment. Daniel Goleman (Goleman, 1995) discussed emotional intelligence quotient (EQ) as a factor more important than IQ in predicting leadership success. According to Robert Cooper and Ayman Sawaf, “Emotional intelligence is the ability to sense, understand, and effectively apply the power and acumens of emotions as a source of human energy, information, connection, and influence” (Cooper & Sawaf, 1997).
Emotional intelligence includes the following:
• Self-awareness
• Self-regulation
• Empathy
• Relationship management
Emotions are important to generating energy around a concept, to building commitment to goals, and to developing high-performing teams. Emotional intelligence is an important part of the project manager’s ability to build trust among the team members and with the client. It is an important factor in establishing credibility and an open dialogue with project stakeholders. Emotional intelligence is a critical ability for project managers, and the more complex the project profile, the more important the project manager’s EQ becomes to project success.
• Personality Types
Personality types refer to the difference among people. Understanding your personality type as a project manager will assist you in understanding your tendencies and strengths in different situations. Understanding personality types can also help you understand the contributions of various members of your team and the various needs of your client.
There are a number of tools for helping people assess personality types, such as the DISC acronym, which stands for the following:
• Dominance—relates to control, power, and assertiveness
• Influence—relates to social situations and communication
• Steadiness—relates to patience, persistence, and thoughtfulness
• Conscientiousness—relates to structure and organization
These four dimensions are then grouped to represent various personality types.
The Myers-Briggs Type Indicator (MBTI) is one of most widely used tools for exploring personal preference, with more than two million people taking the MBTI each year. The MBTI is often referred to as simply the Myers-Briggs. It is a tool that can be used in project management training to develop awareness of preferences for processing information and relationships with other people.
Based on the theories of psychologist Carl Jung, the Myers-Briggs uses a questionnaire to gather information on the ways individuals prefer to use their perception and judgment. Perception represents the way people become aware of people and their environment. Judgment represents the evaluation of what is perceived. People perceive things differently and reach different conclusions based on the same environmental input. Understanding and accounting for these differences is critical to successful project leadership.
The Myers-Briggs identifies sixteen personality types based on four preferences derived from the questionnaire. The preferences are between pairs of opposite characteristics and include the following:
• Extroversion (E)-Introversion (I)
• Sensing (S)-Intuition (N)
• Thinking (T)-Feeling (F)
• Judging (J)-Perceiving (P)
Sixteen Myers-Briggs types can be derived from the four dichotomies. Each of the sixteen types describes a preference: for focusing on the inner or outer world (E-I), for approaching and internalizing information (S-I), for making decisions (T-F), and for planning (J-P). For example, an ISTJ is a Myers-Briggs type who prefers to focus on the inner world and basic information, prefers logic, and likes to decide quickly.
It is important to note that there is no best type and that effective interpretation of the Myers-Briggs requires training. The purpose of the Myers-Briggs is to understand and appreciate the differences among people. This understanding can be helpful in building the project team, in developing common goals, and communicating with project stakeholders. For example, different people process information differently. Extraverts prefer face-to-face meetings as the primary means of communicating, while introverts prefer written communication. Sensing types focus on facts, and intuitive types want the big picture.
On larger, more complex projects, some project managers will use the Myers-Briggs as a team-building tool during project start-up. This is typically a facilitated work session where team members take the Myers-Briggs and share with the team how they process information, what communication approaches they prefer, and what decision-making preferences they have. This allows the team to identify potential areas of conflict, develop communication strategies, and build an appreciation for the diversity of the team.
Personality Type Badges
One project team in South Carolina used color-coded badges for the first few weeks of the project to indicate Myers-Briggs type. For this team, this was a way to explore how different team members processed information, made decisions, and took action.
Some people use a description of personality types that is based on research that shows that some functions of thinking and perception are localized on the left or right side of the brain. In this system, the left side of the brain is associated with recalling specific facts and definitions and performing calculations, while the right side of the brain is associated with emotions, estimates, and comparisons. The attraction of this system is that it categorizes people into just two categories—left or right brain dominance—but it should be used cautiously to avoid oversimplification.
Understanding the differences among people is a critical leadership skill. This includes understanding how people process information, how different experiences will influence the way people perceive the environment, and how people develop filters that allow certain information to be incorporated while other information is excluded. The more complex the project, the more important the understanding of how people process information, make decisions, and deal with conflict.
• Leadership Styles
Leadership is a function of both the personal characteristics of the leader and the environment in which the leadership must occur. Several researchers have attempted to understand leadership from the perspective of the characteristics of the leader and the environment of the situation. Robert Tannenbaum and Warren Schmidt (Tannenbaum & Schmidt, 1958). described leaders as either autocratic or democratic. Harold Leavitt (Leavitt, 1986) described leaders as pathfinders (visionaries), problem solvers (analytical), or implementers (team oriented). James MacGregor Burns (Burns, 1978) conceived leaders as either transactional (focused on actions and decisions) or transformational (focused on the long-term needs of the group and organization).
Fred Fiedler (Fiedler, 1971) introduced contingency theory and the ability of leaders to adapt their leadership approach to the environment. Most leaders have a dominant leadership style that is most comfortable. For example, most engineers spend years training in analytical problem solving and often develop an analytical approach to leadership.
A leadership style reflects personal characteristics and life experiences. Although a project manager’s leadership style may be predominantly a pathfinder (using Leavitt’s taxonomy), most project managers become problem solvers or implementers when they perceive the need for these leadership approaches. The leadership approach incorporates the dominant leadership style and Fiedler’s contingency focus on adapting to the project environment.
No particular leadership approach is specifically appropriate for managing a project. Each project has a unique set of circumstances because, by definition, projects are unique endeavors. The leadership approach and the management skills required to be successful vary depending on the complexity profile of the project. The Project Management Institute published research that studied project management leadership skills (Shi & Chen, 2006) and concluded that project managers needed good communication skills and the ability to build harmonious relationships and motivate others. Beyond this broad set of leadership skills, the successful leadership approach will depend of the profile of the project.
A transactional project manager with a strong command and control leadership approach may be very successful on a small software development project or a construction project, where tasks are clear, roles are well understood, and the project environment is cohesive. This same project manager is less likely to be successful on a larger, more complex project with a diverse project team and complicated work processes.
Matching the appropriate leadership style and approach to the complexity profile of the project is a critical element of project success. Even experienced project managers are less likely to be successful if their leadership approach does not match the complexity profile of the project.
Each project phase may also require a different leadership approach. During the start-up phase of a project, when new team members are first assigned to the project, the project may require a command and control leadership approach. Later, as the project moves into the conceptual development phase, creativity becomes important, and the project management takes on a more transformational type leadership approach. Most experienced project managers are able to adjust their leadership approach to the needs of the project phase. Occasionally, on very large, complex projects, some companies will change project managers after the conceptual phase of the project to bring in a different project leadership approach or change project managers to manage the closeout of a project. Changing project managers may bring the right level of experience and the appropriate leadership approach but is also disruptive to a project. Senior management must balance the benefit of matching the right leadership approach with the cost of disrupting the project.
Multinational Chemical Plant Project
On a project to build a new chemical plant that produced dyes for paint, the project manager led a team that included members from partners that were included in a joint venture. The design manager was Greek, the construction manager was German, and other members of the team were from various locations in the United States and Europe. In addition to the traditional potential for conflict that arises from team members from different cultures, the design manager and construction manager were responsible for protecting the interest of their company in the joint venture.
• >The project manager held two alignment or team-building meetings. The first was a two-day meeting held at a local resort and included only the members of the project leadership team. An outside facilitator was hired to facilitate discussion, and the topic of cultural conflict and organizational goal conflict quickly emerged. The team discussed several methods for developing understanding and addressing conflicts that would increase the likelihood of finding mutual agreement.
• >The second team-building session was a one-day meeting that included the executive sponsors from the various partners in the joint venture. With the project team aligned, the project manager was able to develop support for the project’s strategy and commitment from the executives of the joint venture. In addition to building processes that would enable the team to address difficult cultural differences, the project manager focused on building trust with each of the team members. The project manager knew that building trust with the team was as critical to the success of the project as the technical project management skills and devoted significant management time to building and maintaining this trust.
• Negotiation and Conflict Resolution
Einsiedel (Einsiedel, 1987) discussed qualities of successful project managers. The project manager must be perceived to be credible by the project team and key stakeholders. The project manager can solve problems. A successful project manager has a high degree of tolerance for ambiguity. On projects, the environment changes frequently, and the project manager must apply the appropriate leadership approach for each situation.
The successful project manager must have good communication skills. Barry Posner (Posner, 1987) connected project management skills to solving problems. All project problems were connected to skills needed by the project manager:
• Breakdown in communication represented the lack of communication skills.
• Uncommitted team members represented the lack of team-building skills.
• Role confusion represented the lack of organizational skills.
The research indicates that project managers need a large numbers of skills. These skills include administrative skills, organizational skills, and technical skills associated with the technology of the project. The types of skills and the depth of the skills needed are closely connected to the complexity profile of the project. Typically on smaller, less complex projects, project managers need a greater degree of technical skills. On larger, more complex projects, project managers need more organizational skills to deal with the complexity. On smaller projects, the project manager is intimately involved in developing the project schedule, cost estimates, and quality standards. On larger projects, functional managers are typically responsible for managing these aspects of the project, and the project manager provides the organizational framework for the work to be successful.
• Listening
One of the most important communication skills of the project manager is the ability to actively listen. Active listening takes focus and practice to become effective. Active listening is placing yourself in the speaker’s position as much as possible, understanding the communication from the point of view of the speaker, listening to the body language and other environmental cues, and striving not just to hear, but to understand.
Active listening enables a project manager to go beyond the basic information that is being shared and to develop a more complete understanding of the information.
Client’s Body Language Indicates Problems at a Board Meeting
A client just returned from a trip to Australia where he reviewed the progress of the project with his company’s board of directors. The project manager listened and took notes on the five concerns expressed by the board of directors to the client.
• >The project manager observed that the client’s body language showed more tension than usual. This was a cue to listen very carefully. The project manger nodded occasionally and clearly demonstrated he was listening through his posture, small agreeable sounds, and body language. The project manager then began to provide feedback on what was said using phrases like “What I hear you say is…” or “It sounds like.…” The project manager was clarifying the message that was communicated by the client.
• >The project manager then asked more probing questions and reflected on what was said. “It sounds as if it was a very tough board meeting.” “Is there something going on beyond the events of the project?” From these observations and questions, the project manager discovered that the board of directors meeting did not go well. The company had experienced losses on other projects, and budget cuts meant fewer resources for the project and an expectation that the project would finish earlier than planned. The project manager also discovered that the client’s future with the company would depend on the success of the project. The project manager asked, “Do you think we will need to do things differently?” They began to develop a plan to address the board of directors’ concerns.
• >Through active listening, the project manager was able to develop an understanding of the issues that emerged from the board meeting and participate in developing solutions. Active listening and the trusting environment established by the project manager enabled the client to safely share information he had not planned on sharing and to participate in creating a workable plan that resulted in a successful project.
• The project manager used the following techniques:
1. Listening intently to the words of the client and observing the client’s body language
2. Nodding and expressing interest in the client without forming rebuttals
3. Providing feedback and asking for clarity while repeating a summary of the information back to the client
4. Expressing understanding and empathy for the client
The active listening was important to establishing a common understanding from which an effective project plan could be developed.
• Negotiation
Negotiation is a process for developing a mutually acceptable outcome when the desired outcome for parties in the negotiation is sufficiently different that both cannot achieve the desired outcome. A project manager will often negotiate with a client, with team members, with vendors, and with other project stakeholders. A larger and more complex project will have a large number of stakeholders, often with conflicting desired outcomes. Negotiation is an important skill in developing support for the project and preventing frustration among stakeholders, which could delay or cause project failure.
Vijay Verma (Verma, 1996) suggests that negotiations involve four principles:
1. The first principle is to separate people from the problem. If the person is seen as the problem, then finding a mutually acceptable solution will be difficult. Framing the discussions in terms of desired outcomes enables the negotiations to focus on finding new outcomes.
2. The second principle is to focus on common interests. By avoiding the focus on differences, both parties are more open to finding solutions that are acceptable.
3. The third principle is to generate options that advance shared interests. Once the common interests are understood, solutions that do not match with either party’s interests can be discarded, and solutions that may serve both parties’ interests can be more deeply explored.
4. Verma’s final principle is to develop results based on standard criteria. The standard criterion is the success of the project. This implies that the parties develop a common definition of project success.
For the project manager to successfully negotiate issues on the project, he or she should first seek to understand the position of the other party. If negotiating with a client, what is the concern or desired outcome of the client? What are the business drivers and personal drivers that are important to the client? Without this understanding, it is difficult to find a solution that will satisfy the client. The project manager should also seek to understand what outcomes are desirable to the project. Typically, more than one outcome is acceptable. Without knowing what outcomes are acceptable, it is difficult to find a solution that will produce that outcome.
One of the most common issues in formal negotiations is finding a mutually acceptable price for a service or product. Understanding the market value for a product or service will provide a range for developing a negotiations strategy. The price paid on the last project or similar projects provides information on the market value. Seeking expert opinions from sources who would know the market is another source of information. Based on this information, the project manager can then develop an expected range from the lowest price that would be expected within the current market to the highest price.
Additional factors will also affect the negotiated price. The project manger may be willing to pay a higher price to assure an expedited delivery or a lower price if delivery can be made at the convenience of the supplier or if payment is made before the product is delivered. Developing as many options as possible provides a broader range of choices and increases the possibility of developing a mutually beneficial outcome.
The goal of negotiations is not to achieve the lowest costs, although that is a major consideration, but to achieve the greatest value for the project. If the supplier believes that the negotiations process is fair and the price is fair, the project is more likely to receive higher value from the supplier. The relationship with the supplier can be greatly influenced by the negotiation process and a project manager that attempts to drive the price unreasonably low or below the market value will create an element of distrust in the relationship that may have negative consequences for the project. A positive negotiation experience may create a positive relationship that may be beneficial, especially if the project begins to fall behind schedule and the supplier is in a position to help keep the project on schedule.
Negotiation on a Construction Project
After difficult negotiations on a construction project in Indiana, the project management team met with a major project supplier and asked, “Now that the negotiations are complete, what can we do to help you make more profit?” Although this question surprised the supplier, the team had discussed how information would flow, and confusion in expectations and unexpected changes always cost the supplier more money. The team developed mechanisms for assuring good information and providing early information on possible changes and tracked the effect of these efforts during the life of the project.
• >These efforts and the increased trust did enable the supplier to increase profits on the project, and the supplier made special efforts to meet every project expectation. During the life of the project, the supplier brought several ideas on how to reduce total project costs and increase efficiency. The positive outcome was the product of good supplier management by the project team, but the relationship could not have been successful without good faith negotiations.
• Conflict Resolution
Conflict on a project is to be expected because of the level of stress, lack of information during early phases of the project, personal differences, role conflicts, and limited resources. Although good planning, communication, and team building can reduce the amount of conflict, conflict will still emerge. How the project manager deals with the conflict results in the conflict being destructive or an opportunity to build energy, creativity, and innovation.
David Whetton and Kim Cameron (Whetton & Cameron, 2005) developed a response-to-conflict model that reflected the importance of the issue balanced against the importance of the relationship. The model presented five responses to conflict:
1. Avoiding
2. Forcing
3. Collaborating
4. Compromising
5. Accommodating
Each of these approaches can be effective and useful depending on the situation. Project managers will use each of these conflict resolution approaches depending on the project manager’s personal approach and an assessment of the situation.
Most project managers have a default approach that has emerged over time and is comfortable. For example, some project managers find the use of the project manager’s power the easiest and quickest way to resolve problems. “Do it because I said to” is the mantra for project managers who use forcing as the default approach to resolve conflict. Some project managers find accommodating with the client the most effective approach to dealing with client conflict.
The effectiveness of a conflict resolution approach will often depend on the situation. The forcing approach often succeeds in a situation where a quick resolution is needed, and the investment in the decision by the parties involved is low.
Resolving an Office Space Conflict
Two senior managers both want the office with the window. The project manager intercedes with little discussion and assigns the window office to the manager with the most seniority. The situation was a low-level conflict with no long-range consequences for the project and a solution all parties could accept.
Sometimes office size and location is culturally important, and this situation would take more investment to resolve.
Conflict Over a Change Order
In another example, the client rejected a request for a change order because she thought the change should have been foreseen by the project team and incorporated into the original scope of work. The project controls manager believed the client was using her power to avoid an expensive change order and suggested the project team refuse to do the work without a change order from the client.
This is a more complex situation, with personal commitments to each side of the conflict and consequences for the project. The project manager needs a conflict resolution approach that increases the likelihood of a mutually acceptable solution for the project.
One conflict resolution approach involves evaluating the situation, developing a common understanding of the problem, developing alternative solutions, and mutually selecting a solution. Evaluating the situation typically includes gathering data. In our example of a change order conflict, gathering data would include a review of the original scope of work and possibly of people’s understandings, which might go beyond the written scope.
The second step in developing a resolution to the conflict is to restate, paraphrase, and reframe the problem behind the conflict to develop a common understanding of the problem. In our example, the common understanding may explore the change management process and determine that the current change management process may not achieve the client’s goal of minimizing project changes. This phase is often the most difficult and may take an investment of time and energy to develop a common understanding of the problem.
After the problem has been restated and agreed on, alternative approaches are developed. This is a creative process that often means developing a new approach or changing the project plan. The result is a resolution to the conflict that is mutually agreeable to all team members. If all team members believe every effort was made to find a solution that achieved the project charter and met as many of the team member’s goals as possible, there will be a greater commitment to the agreed-on solution.
Project Goals Accomplished
In our example, the project team found a new way to accomplish the project goals without a change to the project scope. On this project, the solution seemed obvious after some creative discussions, but in most conflict situations, even the most obvious solutions can be elusive.
• Delegation
Delegating responsibility and work to others is a critical project management skill. The responsibility for executing the project belongs to the project manager. Often other team members on the project will have a functional responsibility on the project and report to a functional manager in the parent organization. For example, the procurement leader for a major project may also report to the organization’s vice president for procurement. Although the procurement plan for the project must meet the organization’s procurement policies, the procurement leader on the project will take day-to-day direction from the project manager. The amount of direction given to the procurement leader, or others on the project, is the decision of the project manager.
If the project manager delegates too little authority to others to make decisions and take action, the lack of a timely decision or lack of action will cause delays on the project. Delegating too much authority to others who do not have the knowledge, skills, or information will typically cause problems that result in delay or increased cost to the project. Finding the right balance of delegation is a critical project management skill.
When developing the project team, the project manager selects team members with the knowledge, skills, and abilities to accomplish the work required for the project to be successful. Typically, the more knowledge, skills, abilities, and experience a project team member brings to the project, the more that team member will be paid. To keep the project personnel costs lower, the project manager will develop a project team with the level of experience and the knowledge, skills, and abilities to accomplish the work.
On smaller, less complex projects, the project manager can provide daily guidance to project team members and be consulted on all major decisions. On larger, more complex projects, there are too many important decisions made every day for the project manager to be involved at the same level, and project team leaders are delegated decision-making authority. Larger projects, with a more complex profile will typically pay more because of the need for the knowledge and experience. On larger, more complex project, the project manager will develop a more experienced and knowledgeable team that will enable the project manager to delegate more responsibility to these team members.
Construction Project in Peru
A construction project in Peru was falling behind schedule, and the project manager decided to assign a new construction manager for the construction site that was the most behind schedule. An experienced project manager from the United States with a reputation for meeting aggressive schedules was assigned to the construction site and delegated the authority to meet scheduled milestones.
• >The construction manager did not have experience outside the United States and began making decisions that would have worked in the United States but met cultural resistance in Peru. The project began falling further behind and another construction manager was assigned to the site.
• The project manager must have the skills to evaluate the knowledge, skills, and abilities of project team members and evaluate the complexity and difficulty of the project assignment. Often project managers want project team members they have worked with in the past. Because the project manager knows the skill level of the team member, project assignments can be made quickly with less supervision than with a new team member with whom the project manager has little or no experience.
Delegation is the art of creating a project organizational structure with the work organized into units that can be managed. Delegation is the process of understanding the knowledge, skills, and abilities needed to manage that work and then matching the team members with the right skills to do that work. Good project managers are good delegators.
• Setting Individual Goals
The Myers-Briggs rates an individual’s preferences—not their limitations. It is important to understand that each individual can still function in situations for which they are not best suited. For example, a project leader who is more Thinking (T) than Feeling (F) would need to work harder to be considerate of how a team member who is more Feeling (F) might react if they were singled out in a meeting because they were behind schedule. If a person knows their preferences and which personality types are most successful in each type of project or project phase, they can set goals for improvement in their ability to perform in those areas that are not their natural preference.
Another individual goal is to examine which conflict resolution styles are least comfortable and work to improve those styles so that they can be used when they are more appropriate than your default style.
Key Takeaways
• Emotional intelligence is the ability to sense, understand, and effectively apply emotions.
• Two common tools for describing personality types are DISC (Dominance, Influence, Steadiness, and Conscientiousness) and the Myers-Briggs Type Indicator (MBTI). The MBTI is the most common. It rates personalities on the position between extremes of four paired terms: Extroversion (E)-Introversion (I), Sensing (S)-Intuition (I), Thinking (T)-Feeling (F), and Judging (J)-Perceiving (P).
• Leadership styles are usually related to the personality of the leader. The type of leadership style that is most effective depends on the complexity and the phase of the project.
• Negotiation and conflict resolution require skill at listening and an understanding of emotional intelligence and personality types.
• Delegation is the art of creating a project organizational structure that can be managed and then matching the team members with the right skills to do that work.
• Individual goals can be set for improving abilities that are not natural personality strengths to deal with projects and project phases.
Exercises
1. Ability to sense and understand emotions is called _____ _______ (two words).
2. A personality assessment tool that is commonly used that identifies preferences between pairs of terms is the MBTI, or more commonly known as the ________-________.
3. What is emotional intelligence?
4. What do the letters INTJ stand for in a Myers-Briggs personality profile?
5. How does delegation involve the organization and its people?
Internalize your learning experience by preparing to discuss the following.
• >Identify which leadership style you think is most suitable for your personality and which is least suitable. Next, identify a level of project complexity or project phase where your preferred style is least suitable. Describe an individual goal and how you might pursue that goal for strengthening your ability to lead on that type of project or during that phase. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/05%3A_Working_with_People_on_Projects/5.01%3A_Working_with_Individuals.txt |
Learning Objectives
1. Describe the value of trust and how it relates to contracts and complex projects.
2. Identify four types of trust.
3. Describe how a project manager can build trust.
4. Identify three common meeting types and then describe how they differ.
5. Identity types of teams.
6. Describe the HUMM method of measuring project performance.
7. Describe the importance of developing a project story.
A team is a collaboration of people with different personalities that is lead by a person with a favored leadership style. Managing the interactions of these personalities and styles as a group is an important aspect of project management.
• Trust
Trust is the foundation for all relationships within a project. Without a minimum level of trust, communication breaks down, and eventually the project suffers in the form of costs increasing and schedules slipping. Often, when reviewing a project where the performance problems have captured the attention of upper management, the evidence of problems is the increase in project costs and the slippage in the project schedule. The underlying cause is usually blamed on communication breakdown. With deeper investigation, the communication breakdown is associated with a breakdown in trust.
• Filters
On projects, trust is the filter through which we screen information that is shared and the filter we use to screen information we receive. The more trust that exists, the easier it is for information to flow through the filters. As trust diminishes, the filters become stronger and information has a harder time getting through, and projects that are highly dependent on an information-rich environment will suffer from information deprivation.
• Contracts and Trust Relationships
The project typically begins with a charter or contract. A contract is a legal agreement that includes penalties for any behavior or results not achieved. Contracts are based on an adversarial paradigm and do not lend themselves to creating an environment of trust. Contracts and charters are necessary to clearly establish, among other things, the scope of the project, but they are not conducive to establishing a trusting project culture.
A relationship of mutual trust is less formal but vitally important. When a person or team enters into a relationship of mutual trust, each person’s reputation and self-respect are the drivers in meeting the intent of the relationship. A relationship of mutual trust within the context of a project is a commitment to an open and honest relationship. There is nothing that enforces the commitments in the relationship except the integrity of the people involved. Smaller, less complex projects can operate within the boundaries of a legal contract, but larger, more complex projects must develop a relationship of mutual trust to be successful.
• Types of Trust
Svenn Lindskold (Lindskold, 1978) describes four kinds of trust:
1. Objective credibility. A personal characteristic that reflects the truthfulness of an individual that can be checked against observable facts.
2. Attribution of benevolence. A form of trust that is built on the examination of the person’s motives and the conclusion that they are not hostile.
3. Nonmanipulative trust. A form of trust that correlates to a person’s self-interest and the predictability of a person’s behavior in acting consistent in that self-interest.
4. High cost of lying. The type of trust that emerges when persons in authority raise the cost of lying so high that people will not lie because the penalty will be too high.
• Creating Trust
Building trust on a project begins with the project manager. On complex projects, the assignment of a project manager with a high trust reputation can help establish the trust level needed. The project manager can also establish the cost of lying in a way that communicates an expectation and a value for trust on the project. Project managers can also assure that the official goals (stated goals) and operational goals (goals that are reinforced) are aligned. The project manager can create an atmosphere where informal communication is expected and reinforced.
The informal communication is important to establishing personal trust among team members and with the client. Allotting time during project start-up meetings to allow team members to develop a personal relationship is important to establishing the team trust. The informal discussion allows for a deeper understanding of the whole person and creates an atmosphere where trust can emerge.
High Cost of Lying in a Charleston Project
On a project in Charleston, South Carolina, the client was asking for more and more backup to information from the project. The project manager visited the client to better understand the reporting requirements and discovered the client did not trust the reports coming from the project and wanted validating material for each report. After some candid discussion, the project manager discovered that one of the project team members had provided information to the client that was inaccurate. The team member had made a mistake but had not corrected it with the client, hoping that the information would get lost in the stream of information from the project.
• >The project manager removed the team member from the project for two main reasons. The project manager established that the cost of lying was high. The removal communicated to the project team an expectation of honesty. The project manager also reinforced a covenant with the client that reinforced the trust in the information the project provided. The requests for additional information declined, and the trust relationship between project personnel and the client remained high.
• Small events that reduce trust often take place on a project without anyone remembering what happened to create the environment of distrust. Taking fast and decisive action to establish a high cost of lying, communicating the expectation of honesty, and creating an atmosphere of trust are critical steps a project manager can take to ensure the success of complex projects.
Project managers can also establish expectations of team members to respect individual differences and skills, look and react to the positives, recognize each other’s accomplishments, and value people’s self-esteem to increase a sense of the benevolent intent.
• Managing Team Meetings
Team meetings are conducted differently depending on the purpose of the meeting, the leadership style that is appropriate for the meeting, and the personality types of the members of the team.
• Action Item Meetings
Action item meetings are short meetings to develop a common understanding of what the short-term priorities are for the project, individual roles, and expectations for specific activities. This type of meeting is for sharing, not problem solving. Any problems that emerge from the discussion are assigned to a person, and another meeting is established to address the issue. Action item meetings focus on short-term activities, usually less than a week in duration.
The action item meeting is fact based and information oriented. It is a left-brain-type focus. The action item meeting has very little dialogue except to ask clarification questions. If discussion is needed or disagreement is not easily resolved, another problem-solving meeting is established to deal with that issue. On smaller topics, that meeting might take place immediately after the action item meeting and only include those people with an interest in the outcome of the discussion.
The project manager keeps the successful action item meeting short in duration and focused on only those items of information needed for the short-term project plan. The project manager will restate the common understandings of what activities are priorities and who will be responsible for the activities. Often these meetings can include a review of safety procedures or security procedures when these issues are important to the project. The leadership approach to action item meetings focuses on data, actions, and commitments. Although the project manager may observe stresses between project team members or other issues, they are not addressed in this meeting. These are fact-based meetings. If issues begin to arise between people, the project manager will develop other opportunities to address these issues in another forum. Using the Myers-Briggs descriptions, team members who favor thinking more than feeling and judging more than perceiving are more comfortable with this type of meeting.
• Management Meetings
Management meetings are longer in duration and are focused on planning. They are oriented toward developing plans, tracking progress of existing plans, and making adjustments to plans in response to new information.
These meetings include focused discussion on generating a common understanding of the progress of the existing plan. This discussion is based on quantitative information provided on the progress of the schedule and other data, but the discussion is qualitative in evaluating the data to develop a more complete understanding of the data. The experience and opinions of the project leaders are solicited, and disagreement about meaning of the data is even encouraged to develop a deeper understanding of the data. Through this discussion, a common understanding of the status of the project should emerge, and the project manager invites discussion, includes people to offer their thoughts, and assures that disagreements are positive discussions about interpretation of the information and that disagreements do not become personal.
Management meetings also focus on developing midterm goals. For larger, more complex projects, the goals may be monthly or even quarterly. For smaller or less complex projects, weekly goals will provide the focus. The project manager focuses the discussion on the broad priorities for the next period and includes all the functional leaders in the discussion. The goals that emerge from the discussion should represent a common understanding of the priorities of the project for the next term.
For example, during the early phases of a project, the team is focused on developing a conceptual understanding of the project. A major milestone on complex projects is typically the completion of the conceptual plan. The project manager would lead a discussion on what needs to be accomplished to meet the project milestone and asks what potential barriers exist and what key resources are needed. From the discussion, the project team develops a few key goals that integrate the various functions of the project team and focus the team on priorities.
The following are some examples of goals during the conceptual phase:
• Developing a list of the procurement long lead items and defining critical dates
• Developing a human resources plan that identifies critical positions
• Developing and building agreement with the client on the project scope of work
Each of these goals is measurable and time framed. They can be developed as positive motivators and will take the project leaders and most of the project team to accomplish. They develop a general understanding of the priorities and are easy to remember.
Management meetings are a combination of left-brain thinking, which is fact based, and right-brain thinking, which is creative and innovative. Using the Myers-Briggs terminology, team members who prefer feeling over thinking and perceiving over judging can contribute ideas and perspectives on the project that the more fact-oriented members might miss.
The project manager allows and encourages conversation in developing and evaluating the goals but focuses the discussion on the goals and obstacles. Management meetings take on a different focus during the month. Meetings at the beginning of the month spend time addressing the progress and potential barriers to the goals developed the previous month. During the middle of the month, the project manager leads the team to develop next month’s goals as the team also works on the current month’s goals. Toward the end of the month as the goals for the month are accomplished, the meeting focuses more on the next month, enabling the team to remain goal focused during the life of the project.
Management meetings are also an opportunity to discover obstacles to goal achievement. The project team reallocates resources or develops alternative methods for accomplishing the goals. As the project team discusses the progress of project goals, the project manger explores possible obstacles and encourages exposing potential problems in achieving goals. The project manager focuses the team on finding solutions and avoids searching for blame.
The project manager uses a facilitative leadership approach, encouraging the management team to contribute their ideas, and builds consensus on what goals will bring the appropriate focus. The project manager keeps the focus on developing the goals, tracking progress, identifying barriers, and making adjustments to accomplish the management goals. Although there are typically meetings for scheduling and procurement and other meetings where goals are established and problems solved, the management meeting and the goal development process create alignment among the project leadership on the items critical to the project’s success.
• Leadership Meetings
Leadership meetings are held less frequently and are longer in length. These meetings are used by the project manager to reflect on the project, to explore the larger issues of the project, and to back away from the day-to-day problem solving. The project manager will create a safe environment for sharing thoughts and evaluations of issues that are less data oriented. This is a right-brained, creative meeting that focuses on the people issues of the project: the relationship with the client, vendors, and project team. Team members who favor feeling, perceiving, and intuition often contribute valuable insights in this type of meeting. The team might also share perceptions by upper management and perceptions of the community in which the project is being executed. Where the time frame for action item meetings is in weeks and management meetings is in months, the time frame for leadership meetings is longer and takes in the entire length and impact of the project.
The project manager’s meeting management skill includes creating the right meeting atmosphere for the team discussion that is needed. For discussions based on data and facts, the project manager creates the action item type meeting. The conversation is focused on sharing information and clarification. The conversation for leadership meetings is the opposite. Discussion is more open ended and focused on creativity and innovation. Because each type of meeting requires a different meeting atmosphere, mixing the purposes of a meeting will make it difficult for the project manager to develop and maintain the appropriate kind of conversation.
Skilled project managers know what type of meeting is needed and how to develop an atmosphere to support the meeting type. Meetings of the action item type are focused on information sharing with little discussion. They require efficient communication of plans, progress, and other information team members need to plan and execute daily work. Management type meetings are focused on developing and progressing goals. Leadership meetings are more reflective and focused on the project mission and culture.
These three types of meetings do not cover all the types of project meetings. Specific problem-solving, vendor evaluation, and scheduling meetings are examples of typical project meetings. Understanding what kinds of meetings are needed on the project and creating the right focus for each meeting type is a critical project management skill.
• Types of Teams
Teams can outperform individual team members in several situations. The effort and time invested in developing a team and the work of the team are large investments of project resources, and the payback is critical to project success. Determining when a team is needed and then chartering and supporting the development and work of the team is another critical project management ability.
Teams are effective in several project situations:
• When no one person has the knowledge, skills, and abilities to either understand or solve the problem
• When a commitment to the solution is needed by large portions of the project team
• When the problem and solution cross project functions
• When innovation is required
Individuals can outperform teams on some occasions. An individual tackling a problem consumes fewer resources than a team and can operate more efficiently—as long as the solution meets the project’s needs. A person is most appropriate in the following situations:
• When speed is important
• When one person has the knowledge, skills, and resources to solve the problem
• When the activities involved in solving the problem are very detailed
• When the actual document needs to be written (Teams can provide input, but writing is a solitary task.)
In addition to knowing when a team is appropriate, the project manager must also understand what type of team will function best.
• Functional Teams
A functional team refers to the team approach related to the project functions. The engineering team, the procurement team, and the project controls team are examples of functional teams within the project. On a project with a low complexity profile that includes low technological challenges, good team member experience, and a clear scope of work, the project manager can utilize well-defined functional teams with clear expectations, direction, and strong vertical communication.
• Cross-Functional Teams
Cross-functional teams address issues and work processes that include two or more of the functional teams. The team members are selected to bring their functional expertise to addressing project opportunities.
Cross-Functional Teamwork on Concrete Project
A cross-functional project team in Tennessee was assigned to develop a project approach to procuring, delivering, and erecting precast concrete without storing the concrete on the site. Although the complexity of this goal is primarily related to delivering the precast concrete in a sequence that will allow erection from the delivery trucks, the planning involved coordination of the design, procurement, and project controls. Team members from each of these functions developed and tracked a plan to meet the project goal. The cross-functional team was successful in designing a process and executing the plan in a way that saved three weeks on the schedule and several thousand dollars in cost.
• Problem-Solving Teams
Problem-solving teams are assigned to address specific issues that arise during the life of the project. The project leadership includes members that have the expertise to address the problem. The team is chartered to address that problem and then disband.
Problem-Solving Teamwork on Equipment Manufacturing
On a project in Indiana, a company selected to design and build a critical piece of equipment began having financial problems, and the delivery of the equipment on the date needed by the project was at risk. A problem-solving team was chartered to assess the problem and develop a solution for the project. The team brought in some accounting expertise from the parent company and assessed the status of the vendor. The engineering team assessed the current state of the design, and the construction team developed an alternative schedule to allow for a late delivery of the equipment. The team developed a plan to support the vendor with funds and expertise that allowed the project to complete on time. The problem-solving team was organized to address a specific problem, developed and executed a plan to address the problem, and then was disbanded.
• Qualitative Assessment of Project Performance
Project managers should provide an opportunity to ask such questions as “What is your gut feeling about how the project going?” and “How do you think our client perceives the project?” This creates the opportunity for reflection and dialogue around larger issues on the project. The project manager creates an atmosphere for the team to go beyond the data and search for meaning. This type of discussion and reflection is very difficult in the stress of day-to-day problem solving.
The project manager has several tools for developing good quantitative information—based on numbers and measurements—such as the project schedules, budgets and budget reports, risk analysis, and goal tracking. This quantitative information is essential to understanding the current status and trends on the project. Just as important is the development of qualitative information—comparisons of qualities—such as judgments made by expert team members that go beyond the quantitative data provided in a report. Some would label this the “gut feeling” or intuition of experienced project managers.
The Humm Factor is a tool developed by Russ Darnall (Caudron, 1995) to capture the thoughts of project participants that are not reflected in the project reporting tools. The Humm Factor derived its name from a project manager who always claimed he could tell you more by listening to the hum of the project than reading all the project reports. The tool developed qualitative information for the project manager and leadership team.
The Humm Factor is essentially a survey that is developed during the early phases of the project. A series of questions are selected from a database of questions that are designed to elicit responses that require reflection and do not require data. “Do you feel the project is doing the things it needs to do to stay on schedule?” and “Is the project team focused on project goals?” are the types of questions that can be included in the Humm Factor. The qualitative responses are converted to a quantitative value as a score from 1 to 10.
Someone on the project or assigned to support the project is responsible for distributing the survey on a weekly or less frequent basis depending on the complexity profile of the project. A project with a high level of complexity due to team-based and cultural issues will be surveyed more frequently.
Responses are tracked by individual and by total project, resulting in qualitative comparisons over time. The project team reviews the ratings regularly, looking for trends that indicate an issue may be emerging on the project that might need exploring.
Humm Survey Uncovers Concern About a Vendor
On a project in South Carolina, the project surveyed the project leadership with a Humm Survey each week. The Humm Factor indicated an increasing worry about the schedule beginning to slip when the schedule reports indicated that everything was according to plan. When the project manager began trying to understand why the Humm Factor was showing concerns about the schedule, he discovered an apprehension about the performance of a critical project supplier. When he asked team members, they responded, “It was the way they answered the phone or the hesitation when providing information—something didn’t feel right.”
• >The procurement manager visited the supplier and discovered the company was experiencing financial problems and had serious cash flow problems. The project manager was able to develop a plan to help the supplier through the period, and the supplier eventually recovered. The project was able to meet performance goals. The Humm Factor Survey provided a tool for members of the project team to express concerns that were based on very soft data, and the project team was able to discover a potential problem.
• >Another project team used the Humm Factor to survey the client monthly. The completed surveys went to a person who was not on the project team to provide anonymity to the responses. The responses were discussed at the monthly project review meetings, and the project manager summarized the results and addressed all the concerns expressed in the report. “I don’t feel my concerns are being heard” was one response that began increasing during the project, and the project manager spent a significant portion of the next project review meeting attempting to understand what this meant. The team discovered that as the project progressed toward major milestones, the project team became more focused on solving daily problems, spent more time in meetings, and their workday was becoming longer. The result was fewer contacts with the clients, slower responses in returning phone calls, and much fewer coffee breaks where team members could casually discuss the project with the client.
• >The result of the conversation led to better understanding by both the project team and client team of the change in behavior based on the current phase of the project and the commitment to developing more frequent informal discussion about the project.
• Developing a Project Story
Every project develops a story. It is the short explanation that project team members give when asked about the project. This is also called the elevator speech, which is the explanation a person would give if he or she were in the elevator with the CEO and the CEO asked him or her to describe the project. Project stories often express important aspects of the project and can create a positive picture of the project or one that is less appealing.
A project story will develop, and creating a positive project story is a project management skill that helps the project. A positive project story is inviting to people and helps with the recruitment of talent to the project. A positive project story also helps when services are needed from functional departments within the company and in developing management support for the project.
Creation of the project story is an active process. The project manager actively sets out to create the story. Every project, by definition, is unique. Creating the positive story entails identifying those unique aspects of the project and building a positive outcome.
Project Story of a Drug to Save Lives
A pharmaceutical project team in Colorado was building a plant to produce a drug that would save lives. The faster the plant was completed, the more lives would be affected by the drug. One story addressed the challenges of designing and building a plant in record time. A second story emerged: the balance of safety against speed. Safety procedures limited the number of subcontractors and people working in the same area.
• >To accomplish the work, the project team found creative ways of accomplishing the work off-site and scheduling work to minimize safety problems while meeting aggressive timelines. The story became the challenge. People identified with the challenge and wanted to be part of the success.
• Building a Reputation for Project Completion Speed
A project manager in South Carolina always challenged people with speed. He identified the last project with similar characteristics and challenged the team to beat the time by weeks or months. The story became, “If you want a project done on time, this is the project team you need.” The project manager created a spirit of competition and fun. The project manager was a high-energy person, and the idea of finding a way to finish a project early seemed a natural outcome.
Every project manager can find the unique aspect of the project and build a sense of specialness about the project. The project becomes a good place to work, provides the team with a sense of accomplishment, and becomes the story created by the project manager.
Key Takeaways
• Trust is important to reduce delays caused by excessive filtering and fact checking. Contracts are specific about the project scope, but personal relationships of mutual trust are necessary on complex projects.
• Four types of trust are objective credibility, attribution of benevolence, nonmanipulation, and a high cost of lying.
• To create trust, the project manager needs a reputation for trustworthiness and needs to align official goals with operational goals, establish a high cost of lying, and create an atmosphere of respect and benevolent intent.
• Meeting types are action item, management, and leadership. Action item meetings focus on specific short-term priorities. Management meetings focus on planning, and leadership meetings focus on larger issues.
• The types of teams are functional, cross-functional, and problem solving.
• The Humm Factor measures project performance and uses a questionnaire to identify qualitative information about project performance.
• A short statement of the purpose and character of the project is useful in recruiting and obtaining support for a project.
Exercises
1. A type of trust that is formed by observing that a person’s truthfulness is supported by observable facts is called ________ _________ (two words).
2. A type of trust that is formed by knowing that the other person would not risk the penalties for being untruthful is called the high cost of ________.
3. A type of trust that is formed by knowing that the other person is acting in his or her own self-interest is called ___-________ trust.
4. A type of trust that is formed by evaluating a person’s motives and concluding that they are not hostile is called an attribute of ________________.
5. To create trust, a manager should align official goals with ______ goals.
6. The Humm Factor is a method to collect ________ information about a project that indicates the “gut feeling” that the project team has about a project.
7. A short statement about the project that captures its purpose and character that could be relayed in less than a minute is called an _________ story.
8. How does lack of trust affect filtering of information, and how does that affect the project?
9. What are four types of trust?
10. How can a manager create trust?
11. What are three main meeting types and what are their characteristics?
12. How do functional, cross-functional, and problem-solving teams differ from each other?
13. What is the purpose of the Humm Factor?
Internalize your learning experience by preparing to discuss the following.
• >Consider someone you met recently and whom you felt you could trust. Which of the four types of trust do you think you have for this person? Is there a relationship of mutual trust between you? If so, what would be an example of something each of you would trust the other to do? What would be an example of a project team function or type of team where this trust would be beneficial? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/05%3A_Working_with_People_on_Projects/5.02%3A_Working_with_Groups_and_Teams.txt |
Learning Objectives
1. Describe how project culture is developed and enforced.
2. Describe how differences in culture between stakeholders can influence the project.
3. Describe the role of innovation on projects.
Project managers have a unique opportunity during the start-up of a project. They create a project culture, something organizational managers seldom have a chance to do. In most organizations, the corporate or organizational culture has developed over the life of the organization, and people associated with the organization understand what is valued, what has status, and what behaviors are expected. Edgar Schein defined culture as a pattern of basic assumptions formed by a group on how to perceive and address problems associated with both internal adaptation and external integration (Schein, 1990). Schein also described organizational culture as an abstract concept that constrains, stabilizes, and provides structure to the organization. At the same time, culture is being constantly enacted, created, and shaped by leadership behavior.
• Characteristics of Project Culture
A project culture represents the shared norms, beliefs, values, and assumptions of the project team. Understanding the unique aspects of a project culture and developing an appropriate culture to match the complexity profile of the project are important project management abilities.
Culture is developed through the communication of
• the priority
• the given status
• the alignment of official and operational rules
Official rules are the rules that are stated, and operational rules are the rules that are enforced. Project managers who align official and operational rules are more effective in developing a clear and strong project culture because the project rules are among the first aspects of the project culture to which team members are exposed when assigned to the project.
Operational Rules on a Project in India
During the start-up of a project in India, members of the project team were given a policy that stated all travel expense claims must be submitted within three days of completion of travel. During the first few weeks, the administrative team began to understand that this was a difficult policy to enforce without creating morale problems on the project. Instead of changing the official rule, it was seldom enforced. The official rules and operational rules differed.
• >Later on in the project, a worker was injured after crossing an area that was marked as unsafe. Workers indicated that they knew the official rules but it took too much time to go around the unsafe area. They assumed that official rules could be ignored if they were difficult to obey. The difference between official rules and operational rules of the project created a culture that made communication of the priorities more difficult.
• In addition to official and operational rules, the project leadership communicates what is important by the use of symbols, storytelling, rituals, rewards or punishments, and taboos.
Creating a Culture of Safety
A project manager in South America who wanted to create a strong safety culture on a construction project with significant safety concerns used several methods to create the desired culture. In the first meeting that project team members attended upon joining the project was a safety orientation. Members were issued a card—a symbol—after the meeting granting permission to participate on the project. The project leadership team told stories of previous projects where people were fired for breaking safety rules and often warned that the fastest way to get fired on the project was to break a safety rule—an example of storytelling. Every project meeting started with a discussion of a safety topic—a ritual—and any discussion of lessening the safety rules was forbidden—taboo—and was quickly and strongly cut off by the project leadership if it occurred.
Culture guides behavior and communicates what is important and is useful for establishing priorities. On projects that have a strong safety culture, team members feel free to challenge anyone who breaks a safety rule, even managers. The safety aspects of culture are stronger than the cultural aspects of the power of management.
• Culture of Stakeholders
When project stakeholders do not share a common culture, project management must adapt its organizations and work processes to cope with cultural differences. The following are three major aspects of cultural difference that can affect a project:
1. Communications
2. Negotiations
3. Decision making
Communication is perhaps the most visible manifestation of culture. Project managers encounter cultural differences in communication in language, context, and candor. Language is clearly the highest barrier to communication. When project stakeholders do not share the same language, communication slows down and is often filtered to share only information that is deemed critical. The barrier to communication can influence project execution where quick and accurate exchange of ideas and information is critical.
The interpretation of information reflects the extent that context and candor influence cultural expressions of ideas and understanding of information. In some cultures, an affirmative answer to a question does not always mean yes. The cultural influence can create confusion on a project where project stakeholders share more than one culture.
Culture Affects Communication in Mumbai
A project management consultant from the United States was asked to evaluate the effectiveness of a U.S. project management team executing a project in Mumbai, India. The project team reported that the project was on schedule and within budget. After a project review meeting where each of the engineering leads reported that the design of the project was on schedule, the consultant began informal discussions with individual engineers and began to discover that several critical aspects of the project were behind schedule, and without a mitigating strategy, the project would miss a critical window in the weather between monsoon seasons. The information on the project flowed through a cultural expectation to provide positive information. The project was eventually cancelled by the U.S.-based corporation when the market and political risks increased.
Not all cultural differences are related to international projects. Corporate cultures and even regional differences can create cultural confusion on a project.
Cultural Differences between American Regions
On a major project in South America that included project team leaders from seven different countries, the greatest cultural difference that affected the project communication was between two project leaders from the United States. Two team members—one from New Orleans and one from Brooklyn—had more difficulty communicating than team members from Lebanon and Australia.
• Innovation on Projects
The requirement of innovation on projects is influenced by the nature of the project. Some projects are chartered to develop a solution to a problem, and innovation is a central ingredient of project success. A project to develop a vaccine in response to a recent flu outbreak is an example of a project where innovation is important to achieving the purpose of the project.
Innovation is also important to developing methods of lowering costs or shortening the schedule. Traditional project management thinking provides a trade-off between cost, quality, and schedule. A project sponsor can typically shorten the project schedule with an investment of more money or a lowering of quality. Finding innovative solutions can sometimes lower costs while also saving time and maintaining the quality.
Innovation on a Steel Plant Project
On a project to design and build a plant to make steel using new technology, the project leadership was committed to generating cost savings on the project that would allow needed technical modifications later on during the project. The project was in the early design phase, and the project leadership established a goal for generating \$1 million in cost saving suggestions. The goal was established in early fall, and the project manager declared that he would swim the lake on the day of the project review in February if the project met its goal.
• >A process was established to track cost saving ideas using highly visible green paper for documenting ideas, and a chart was placed on the project communication wall recognizing people and teams that submitted ideas. Each team was allocated a specific cost savings goal, and a team lunch was provided when the goals were met. The project manager created a balance between the message that this is a serious goal and that the project will have some fun with the process.
• >On one occasion, the project manager talked with the electrical engineering lead to understand why no suggestions were emerging from the electrical design team. The electrical design team was struggling to maintain the project schedule and did not have time to focus on project contests. The project manager emphasized that the project had several goals, and generating the cost savings for the client was an important project goal.
• >The electrical engineering lead gathered some senior electrical engineers into a small conference room, and for the next three hours, this impromptu team reviewed electrical drawings and concepts and began to generate ideas on how to accomplish the design specifications and cut costs. The electrical engineering lead maintained a flip chart in the front of the conference room, and as soon as the team found enough savings to meet the electrical target, the team disbanded and went back to working on the electrical design.
• >The team exceeded the goal prior to the February project review. The project manager swam the lake during an enjoyable project celebration.
• Innovation is a creative process that requires both fun and focus. Fun reduces the amount of stress on the project. Stress is a biological reaction to perceived threats. Stress, at appropriate levels, can make the work environment interesting and even challenging. Many people working on projects enjoy a high-stress, exciting environment. When the stress level is too high, the biological reaction increases blood flow to the emotional parts of the brain and decreases the blood flow to the creative parts of the brain, making creative problem solving more difficult. Project managers recognize the benefits of balancing the stress level on the project with the need to create an atmosphere that enables creative thought.
Stress Managed on Steel Project
The electrical lead engineer on the steel project was able to create the environment for the electrical team to focus on the electrical design and explore alternative designs that could generate cost savings. The electrical lead also saw the investment in creating cost savings as an addition to the job. The electrical team stopped to contribute to the project goal and went back to the design work once the electrical cost-saving target was met.
Exploring opportunities to create savings takes an investment of time and energy, and on a time-sensitive project, the project manager must create the motivation and the opportunity for creative thinking.
Key Takeaways
• Project culture is developed by communicating priority, status, and the alignment of official and operational rules. It is enforced through use of symbols, storytelling, rituals, rewards or punishments, and taboos.
• Differences in culture between stakeholders can affect communications, negotiations, and decision making.
• Innovation can be the main focus of the project, or it can be used to achieve improvement in goals that are usually mutually exclusive, such as lowering costs and shortening schedule.
Exercises
1. The project ________ is developed by communicating what is important, communicating what gives status, and aligning operational and official rules.
2. How can innovation achieve improvement in goals?
Internalize your learning experience by preparing to discuss the following.
• >Describe a team project with which you are familiar where the objective was to find an innovative solution. What was the level of stress and how was it managed to support an innovative atmosphere? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/05%3A_Working_with_People_on_Projects/5.03%3A_Creating_a_Project_Culture.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Describe two situations that involve delegating work to other people. The first is a positive example that worked well, and the other is one that did not. Analyze the reasons for the success and failure of the two examples using the information about trust and personality types from this chapter.
2. Choose a project with which you are familiar that does not have a good elevator story. Attempt to create one and explain how it could be used to promote the project.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Describe a project where trust or distrust became a major factor in the success or failure of the project. Using the four kinds of trust described by Lindskold, explain how trust was formed or lost. Consider the descriptions offered by other students of their trust experiences and identify a situation where one of the same types of trust was established or lost. Compare the effects on both projects.
2. Describe a project where differences in culture affected communications, negotiations, or decision making.
5.05: Web Exercises
Learning Objectives
1. Describe the characteristics of the Myers-Briggs personality profile.
2. Describe the characteristics of emotional intelligence.
3. Locate, download, and analyze meeting agenda examples.
• Explore Personality Testing
A popular tool for categorizing personality types is the Myers-Briggs Type Indicator (MBTI). In this exercise, you learn about the MBTI and other tests based on the personality types described by psychologist Carl Jung.
• MBTI
1. Start a web browser and go to the Myers and Briggs Foundation website by typing http://www.myersbriggs.org/my-mbti-personality-type/mbti-basics.
2. Read the section titled MBTI Basics.
3. Scroll down to the table of sixteen personality types. Move the mouse pointer over one of the types to display the pop-up window that shows the explanation of that type.
4. Point to one of the other types in the table and then capture the screen.
5. Open a Word document. In the first line, type your name. Below your name, paste the screen capture.
6. Save that document as Ch05MBStudentName.doc using the Word 2003 .doc file format.
7. Switch back to the web page. Below the table, click All types are equal to move to that web page. Read the page.
8. Capture a portion of the All types are equal page and paste it into the Word document.
9. Leave the word processing document open.
• Free Online Personality Tests
The Myers-Briggs test is administered and interpreted by trained and certified people who help explain the meaning of the results. This is an important function because terms like introvert do not mean what many people normally assume them to mean, and self-evaluation can be misinterpreted. It can still be instructive to take one of the free, online tests that are similar to the MBTI.
1. In a web browser, type http://www.humanmetrics.com/cgi-win/jtypes1.htm.
2. Follow the directions to take the Jung Typology Test (it consists of seventy-two Yes/No questions).
3. Display the test score, as shown in Figure 5.13 “Example of a Result”, except it may be any of the sixteen types.
Figure 5.13 Example of a Result
4. Notice the brief explanation in bulleted list format. Capture this screen and paste it into the word processing document.
5. Return to the Myers and Briggs Foundation website by typing http://www.myersbriggs.org/my-mbti-personality-type/mbti-basics. Scroll down to the table of types and click the one that corresponds to your score from the other website. Capture the screen and paste it into the word processing document.
6. Below the screens, reflect on what you learned about the MBTI and the Jung personality types. Relate any experiences you might have had with this personality typing and your impressions of its accuracy in describing your personality.
7. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch05MBStudentName.doc Ch05MBStudentName.docx Another file name
Describe the characteristics of the Myers-Briggs personality profile First line with name; four screen captures that show one of the types in the table, a screen from the All types are equal page, the results of your test, and that type on the table Same as Best Some screens missing or not matching the test result
8. Save the file and submit it as directed by the instructor.
• Emotional Intelligence: Developing a Strong Mind[1]
In the project management profession, developing strong people skills helps management understand how to deal with personality types, like the Myers-Briggs test uses the emotional intelligence test site to develop strong career building skills. Mind Tools helps develop strong people skills.
1. Start a web browser and go to the Mind Tools website at http://www.mindtools.com/pages/article/newCDV_59.htm.
Read the first page, including the sections titled
• Developing Strong “People Skills”
• What Is Emotional Intelligence
• Characteristics of Emotional Intelligence
• How to Improve Your Emotional Intelligence
Figure 5.14 Mind Tools homepage
2. Open MS Word and save a new document as Ch5EQStudentName.doc.
3. Click the Play button on the video. Capture a screen that shows the video playing and then paste it into your Word document.
4. In a browser, type www.ihhp.com/testsite.htm.
Figure 5.15 Institute for Health and Human Potential homepage
5. Begin the test and fill out the first few questions. Copy the screen and then paste it into your Word document.
6. Complete the test and then click the Evaluate button.
7. In the Word document below the screen captures, reflect on what you learned about emotional intelligence (EQ) and then describe how being more aware of EQ might improve the work environment on a project.
8. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch05EQStudentName.doc Ch05EQStudentName.docx Another file name
Describe the characteristics of emotional intelligence First line with name; four screen captures that show the video playing and the first few questions of the EQ test; a reflective essay of two hundred to three hundred words in which you describe what you learned and how it might be useful on a project Correct screen captures with a reflective essay between one hundred and two hundred words Some screens missing; very brief essay that did not cover both objectives
9. Save the document, and then submit it as directed by your instructor.
• Use Templates to Standardize Project Development
Different types of meetings have different objectives. To achieve those objectives, it helps to organize the agenda of the meeting around those objectives and to sequence them properly. Studying examples used by other organizations will assist in choosing an agenda that suits the purpose of a meeting.
• How to Download a Meeting Agenda
1. Open a blank word processing document and type your name and date on the first line. Save the file as Ch05MeetingsStudentName using the Word 2003 file format that ends with .doc.
2. Start a web browser program and go to the Project Management Guidebooks and Templates page for the State of North Dakota at www.nd.gov/itd/standards/project-management/project-management-guidebooks-and-templates. A list of links displays, as shown in Figure 5.16 “North Dakota Projects”
Figure 5.16 North Dakota Projects
3. Add this website to your browser’s favorites list, in a folder named Projects.
4. Capture a screen that shows a link to this site in the Projects folder of your bookmarks or favorites, and then paste it into the word processing document.
5. On the web page, under Managing Projects, click Project Kickoff Meeting Agenda Template (25kb rtf). Notice the file is labeled “25kb rtf,” which means that it is a small file saved in rich text format (rtf). The rtf format is a standard format that virtually all word processing programs can read.
6. Save the file to your computer and then open it.
7. Review the topics and the time allowed for each topic.
8. Near the top of the page, select the placeholder text to the right of Project, and then type Classwork for StudentName, where you use your name.
9. Capture a screen that shows your modification to the agenda and paste it into the word processing document.
• Analysis
1. Compare this agenda with the concepts described in the text. Address the following questions:
• What type of meeting is this (action item, management, or leadership)? Support your analysis with references to the sample agenda and quotations from the text.
• Is this agenda designed to build trust? Compare this agenda to the section in the text titled Creating Trust.
2. At the bottom of the word processing document, write an essay of between two hundred and five hundred words that consists of two parts that address these two questions.
3. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch05MeetingsStudentName.doc Ch05MeetingsStudentName Another file name
Locate, download, and analyze meeting agenda examples Name on first line; screen captures that show the web link in the Project folder of your browser’s favorites and an image of the agenda with your name next to Project; a two-part essay that addresses the two questions with specific references in the text and in the sample agenda to support your analysis Name on first line; screen captures that show the web link in the Project folder of your browser’s favorites and an image of the agenda with your name next to Project; a single paragraph that addresses the two questions with paraphrased references in the text and in the sample agenda to support your analysis Missing or incomplete screen captures; an essay that is too general and that doesn’t address the questions or does not demonstrate an intimate familiarity with the text or sample
4. Save Ch05MeetingsStudentName and submit it as directed by the instructor. Close all documents and programs.
1. Based on a graduate project by Bonnie Jankovic, December 2011. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/05%3A_Working_with_People_on_Projects/5.04%3A_Exercises.txt |
Learning Objectives
1. Identify characteristics and examples of synchronous communication.
2. Identify characteristics and examples of asynchronous communication.
3. Identify questions to answer when considering new communications technologies.
Completing a complex project successfully requires good communication among team members. If those team members work in the same building, they can arrange regular meetings, simply stop by each other’s office space to get a quick answer, or even discuss a project informally at other office functions. Many projects are performed by teams that interact primarily through electronic communication and are, therefore, called virtual teams (Business Dictionary, 2010). To avoid miscommunication that can harm trust and to include team members in a project culture, the project team needs a plan for communicating reliably and in a timely manner. This planning begins with understanding two major categories of communication.
• Synchronous Communications
If all the parties to the communication are taking part in the exchange at the same time, the communication is synchronous. A telephone conference call is an example of synchronous communication. When the participants are not interacting at the same time, the communication is not synchronous, or asynchronous.
The following are examples of synchronous communications:
• Live meeting. Gathering of team members at the same location.
• Audio conference. A telephone call between two individuals or a conference call where several people participate.
• Computer-assisted conference. Audio conference with a connection between computers that can display a document or spreadsheet that can be edited by both parties.
• Video conference. Similar to an audio conference but with live images of the participants. Some laptop computers have built-in cameras to facilitate video conferencing, as shown in Figure 6.1 “Video Conferencing by Laptop”.
Figure 6.2 Instant Messaging Pop-Up Window
• Time Zones
The worldwide communication network makes it possible to assemble project teams from anywhere in the world. Most people work during daylight hours, which can make synchronous meetings difficult if the participants are in different time zones, where they start, end, and take meal breaks at different times. It can be an advantage in some circumstances. For example, if something must be done by the start of business tomorrow, team members in Asia can work on the problem during their normal work hours while team members in North America get some sleep.
As the earth turns, the sun appears to move across the sky from east to west. Local noon occurs when the sun is at its highest position in the sky. Cities and countries to the north or south of each other all observe local noon at the same time. For example, noon in New York occurs at the same time as it does in Bogotá, Colombia, in South America. Be aware that many well-educated people in the United States think of South America as directly south of North America. As you can see in Figure 6.4 “World Time Zones”, most of South America is one or two time zones east of the United States.
To prevent confusion between a.m. and p.m., times are given using a twenty-four-hour clock. Noon is 12:00 and 1 p.m. is 13:00, and parts of an hour are divided by colons. For example, 13:25:21 is thirteen hours, twenty-five minutes, and twenty-one seconds.
• Local Time
Local time is compared to the time zone that is centered at the historically significant naval observatory at Greenwich, England. The time at that location is Greenwich Mean Time (GMT). More recent references use UT for Universal Time (UT) instead of GMT.
Conference Call between New York and Paris
A project manager in New York is five time zones west of the reference zone, so the time is given as UT –5 (or GMT –5). If it is noon in the reference zone, it is 7 a.m. (five hours earlier) in New York. The manager would like to contact a project team member in Paris, France. Paris is one time zone west of the reference zone (UT +1 or GMT +1). If it is noon (12:00) in the reference zone, it is 13:00 (1 p.m.) in Paris.
• >This means that there is a six-hour difference between New York and Paris. If the project manager waits until after lunch to place the call (1 p.m. in New York), it might be too late in the day in Paris (7 p.m.) to reach someone.
• Asynchronous Communications
Getting a team together at the same time can be a challenge—especially if they are spread out across time zones. Many types of communication do not require that the parties are present at the same time. This type of communication is not synchronous; it is asynchronous. There are several choices of asynchronous communications.
• Mail and Package Delivery
Many companies prefer that final contracts are personally signed by an authorized representative of each party to the agreement. If several signatures are required, this can take weeks to get all the signatures if the contracts are transferred by the postal service. If this process is holding up the start of the project, you can use an overnight delivery service to minimize the time spent transferring the documents.
• Fax
A telefacsimile (fax) machine is a device that scans a document a narrow band at a time converting it into tones that can be conveyed over traditional telephone lines to a receiving device that reproduces a facsimile—exact duplicate—of the document. A fax machine typically has a paper feeder that can be used for feeding multiple-page documents, a telephone key pad and handset, and a status display, as shown in Figure 6.5 “Fax Machine”.
Transmission rates of fax machines are typically limited by the use of traditional telephone lines. The data transmission uses the same method as a dial-up computer modem. A Group 3 fax machine has a maximum data rate of 14.4 kilobits per second (Kbps), but if the phone connection is poor, it will drop down to lower speeds automatically until it can establish a reliable connection between machines.
The Group 3 fax machine digitizes data in a form that is compatible with computers and the fax function is often integrated with other computer functions. A multifunction device, such as the one shown in Figure 6.6 “Multifunction Printer, Scanner, Fax, and Copier”, can scan a document and save it as an image, send it as a fax, or print multiple copies.
Fax machines have been around a long time and enjoy a high level of trust for transmitting documents accurately. In many countries, a fax of a signed contract is legal, but a computer-scanned image is not.
• Electronic Mail
Electronic mail (e-mail) is widely used to coordinate projects and to communicate between team members. It has several valuable characteristics for project management:
• Copies can be sent to a list of team members.
• A preconference-call e-mail can list the agenda items of the conference call.
• A postconference e-mail can summarize the results of the discussion on each topic.
• Messages can be saved to document the process in case of a misunderstanding or miscommunication.
• Files can be attached and distributed.
• Project Log and Web Log (Blog)
A Web log is typically called a blog. It is an online journal that can be private, shared by invitation, or made available to the world. Some project managers keep a journal in which they summarize the day’s challenges and triumphs and the decisions they made. They return to this journal at a later date to review their decision-making process after the results of those decisions are known to see if they can learn from their mistakes. Many decisions in project management are made with incomplete knowledge, and reflecting on previous decisions to develop this decision-making skill is important to growth as a project manager.
• Really Simple Syndication (RSS)
Some projects are directly affected by external factors such as political elections, economic trends, corporate mergers, technological or scientific breakthroughs, or weather. To keep informed about these factors, you can subscribe to online news sources. A method that facilitates this process is Really Simple Syndication (RSS). To use an RSS feed, team members download a free news reader on the Internet. Web pages with RSS news feeds have labeled links, as shown in Figure 6.7 “Link to RSS Feed on a Web Page”.
Figure 6.7 Link to RSS Feed on a Web Page
If the user clicks on the RSS feed, news from the Web site is automatically sent to the user’s news reader. The news reader can be set to filter the news for key words to limit the stories to those that are relevant to the project.
The following are examples of asynchronous communications:
• Mail and package delivery. Transfer of objects and contracts that need signatures.
• Fax. Document transmittal over telephone. Facsimiles are accepted for some documents.
• Electronic mail (e-mail). Text messages with attachments can be distributed and managed by computer programs.
• Web log (blog). An online journal may be used to record events, thoughts, and lessons learned.
• Really Simple Syndication (RSS). News feeds that push relevant content to a reader to keep the manager informed of new events that could affect the project.
• Assessing New Communication Technologies
New technologies for communicating electronically appear with increasing frequency. Using a new technology that is unfamiliar to the team increases the technology complexity, which can cause delays and increase costs. To decide if a new technology should be included in a communications plan, seek answers to the following questions:
• Does the new communication technology provide a competitive advantage for the project by reducing cost, saving time, or preventing mistakes?
• Does the project team have the expertise to learn the new technology quickly?
• Does the company offer support such as help desk and equipment service for new communication technology?
• What is the cost of training and implementation in terms of time as well as money?
Key Takeaways
• Synchronous communications take place when all the parties are present at the same time. Examples are telephone calls and video conferencing.
• Asynchronous communications take place when the parties are not present at the same time. Examples are e-mail, fax, package delivery, blogs, and RSS feeds.
• Determine if a new technology can save time, reduce cost, or prevent mistakes and if the increased complexity can be handled by the team and support staff for an affordable cost in time and money.
Exercises
1. Communications methods that do not require both parties to participate at the same time are called _______________.
2. A telephone call is an example of __________ communication.
3. An exchange of e-mail messages is an example of _______________ communication.
4. A __________ is an online journal used to share an individual’s thoughts and experiences.
5. A video conference is an example of _____________ communications.
6. What are two examples of synchronous communications technologies that you have used?
7. What are two examples of asynchronous communications technologies that you have used?
8. What is a virtual team?
9. Where is the reference time zone and why is it sometimes referred to as both GMT and UT?
10. Why are fax machines still used for legal documents?
Internalize your learning experience by preparing to discuss the following.
• >If you were managing a functional team that included people from three other countries, which synchronous communications technologies would you include in your communications plan and for what purposes? Which asynchronous technologies would you use and for what purposes? What new technologies would you consider? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/06%3A_Communication_Technologies/6.01%3A_Types_of_Communication.txt |
Learning Objectives
1. Identify the types of software that are appropriate for projects of low complexity.
2. Identify the types of software that are appropriate for projects of medium complexity.
3. Identify the types of software that are appropriate for projects of high complexity.
4. Describe strategies for sharing documents that can be edited by a team.
Part of a communications plan is determining the type of computer software that will be used to create documents, spreadsheets, diagrams, and reports. The choice of software is related to the complexity of the project.
• Simple Projects
Basic projects can be managed using some of the features available in general-purpose software that is available in most offices.
• Word Processing
Even the most basic project will generate numerous documents using word processing software. A communications plan can specify standards for these documents that makes it easier to create, edit, combine, store, and retrieve the documents. Document standards include the following:
• Specifying the file format
• Using templates for commonly used forms
• File Format
Word processing software programs display a document on a computer’s screen and allow the user to enter and edit text. When the file is saved to a storage device, the text and all the various formatting such as font and font size are converted to a code for efficient storage. The code varies from one word processing program to another and even between releases of the same program.
The most common word processing program, by a wide margin, is Microsoft Word (MS Word). Several releases of MS Word run on the Windows operating system and on the Macintosh operating system. Versions of MS Word released prior to 2007 save files in a proprietary format. The format is indicated by a period and a three-letter extension—.doc—that is automatically attached to the file when it is saved. Beginning with MS Word 2007 for Windows and MS Word 2008 for Macintosh, files are saved using a different format that is indicated by a period and a four-letter extension—.docx—that identify the newer format.
Almost all word processing programs have the ability to save files in the .doc file format, and it is a common standard for word processing files. Newer versions of word processing programs, including MS Word 2007 and MS Word for Mac 2008, can save files in the older .doc format. There are new features in MS Word 2007—such as the ability to format citations in a variety of styles, including APA, MLA, and Chicago—that are lost when the file is saved in the .doc format. Older versions of MS Word can be adapted to read the newer .docx file formats by downloading and installing a compatibility program that is available at no cost from Microsoft’s Web site. Display of document file extensions is hidden by default in the Windows operating system. They can be displayed by turning off this feature. Instructions for displaying the file extensions are available from the operating system’s help menu. In the Windows Vista operating system, the option is found on the Control Panel, in Appearance and Personalization, in Folder Options, on the View tab, under Advanced Settings, as shown in Figure 6.8 “Displaying File Name Extensions”.
Figure 6.8 Displaying File Name Extensions
When a list of files is displayed in a dialog box, choose the Details option. In Windows Vista, the Details option is on the View button, as shown in Figure 6.9 “File Extensions Displayed in Details View”.
Figure 6.9 File Extensions Displayed in Details View
• Styles
The combination of formatting, including font, font size, font color, shading, and other attributes used to display a segment of text and to identify its level of importance, is called a style. A style can be given a name and applied repeatedly to different portions of a document. Predefined styles are available in MS Word 2007 on the ribbon, on the Home tab, in the Styles group, as shown in Figure 6.10 “Style Choices”. Users can define their own styles and give them names. Some organizations prefer that all of their documents have similar fonts and styles for headings, body text, and figure captions.
Figure 6.10 Style Choices
• Outlines
An outline of a document consists of topic headings and subheadings, and it is useful when organizing or reorganizing a document. The Styles group in MS Word 2007 includes predefined styles for nine levels of headings. In addition to using different fonts, each heading is assigned a level of importance. A document that uses headings with assigned levels can be viewed in the Outline view, such as the book outline shown in Figure 6.11 “Outline View in MS Word 2007”. In this view, the level of detail displayed in the outline is selected to display the first two levels of the outline. The headings and the hidden text associated with each heading can be moved by selecting and dragging headings from one location in the outline to another.
Figure 6.11 Outline View in MS Word 2007
• Templates
If a particular type of document will be used repeatedly, it might be worth the time to create an example document—a template—that is formatted using the appropriate styles with blanks or placeholder text where the user can insert the information that describes a particular situation. A variety of templates are already available for download at no additional cost. For example, when a new document is created in Microsoft Word 2007, there is an option to choose a template such as the invoice template shown in Figure 6.12 “Standardized Document Used as a Template”.
Figure 6.12 Standardized Document Used as a Template
The template may be customized and used repeatedly for all the documents of that type, or the organization can design its own.
• Diagrams
Reporting relationships and the flow of work are often described using diagrams that consist of boxes connected by arrows. Recent releases of popular word processing programs include drawing tools that can be used for basic diagrams. In MS Word 2007, a variety of shapes and connectors are available on the Insert tab, in the Illustrations group on the Shapes button, as shown in Figure 6.13 “Menu of Diagramming Shapes and Connectors in Word 2007”.
Figure 6.13 Menu of Diagramming Shapes and Connectors in Word 2007
Adaptable connecting lines and arrows can be used that redraw automatically when the shapes are moved. This feature facilitates rapid revisions when the shapes must be moved, because the connecting arrows do not need to be redrawn.
A feature named SmartArt was introduced in Microsoft Office 2007 that has a variety of charts that can be used for displaying organization and relationships that use more sophisticated and artistic graphics, as shown in Figure 6.14 “SmartArt Feature in Microsoft Word”.
Figure 6.14 SmartArt Feature in Microsoft Word
• Spreadsheets
Another commonly available software creates a spreadsheet—a display of data in row and column format—in which financial or numerical data can be manipulated. The intersection of the rows and columns are cells into which numbers, text, dates, and formulas can be entered. The formulas can utilize values found in other cells and display the results in the cell in place of the formula. If the value in a cell to which the formula refers is changed, all the formulas that use that cell’s value are immediately recalculated. This feature makes it convenient to examine several options quickly. Spreadsheets are often used to manage data on simple projects instead of a dedicated database or project management software.
• Organizing Data in Rows and Columns
If a spreadsheet is used to store data, such as a list of project activities or a list of expenses, it is prudent to arrange the data in some way that would be used by more sophisticated data management software. Most data management programs arrange data in such a way that each type of data is represented by a column with a label at the top and each row contains the specific data for one type of item. A collection of data arranged in rows and columns is a table. For example, a list of expenses would be arranged so that individual expenses are recorded on each row, and each column would be a type of information related to the expenses, as shown in Figure 6.15 “Expenses Arranged in a Table in a Spreadsheet”.
Figure 6.15 Expenses Arranged in a Table in a Spreadsheet
• File Format
The most common spreadsheet program, by a wide margin, is Microsoft Excel (MS Excel). There have been several releases of MS Excel that run on the Windows operating system and on the Macintosh operating system. Versions of MS Excel released prior to 2007 save files in a proprietary format. The format is indicated by a period and a three-letter extension—.xls—that is automatically attached to the file when it is saved. Beginning with MS Excel 2007 for Windows and MS Excel 2008 for Macintosh, files are saved using a different format that is indicated by a period and a four-letter extension—.xlsx—that identifies the newer format.
Almost all spreadsheet programs have the ability to save files in the .xls file format, and it is a common standard for spreadsheet files. Newer versions of spreadsheet programs, including MS Excel 2007 and MS Excel for Mac 2008 can save files in the older .xls format. There are a few new basic features in MS Excel 2007 that would be lost by saving files to the older file format.
• Using a Spreadsheet to Manage Project Data
If the data in the spreadsheet is arranged in simple rows of the same type of data, it can be manipulated to provide reports for basic projects.
If one or more of the columns in a table contain labels, identification numbers, or other descriptions, those labels can be used to specify sorting and filtering options. For example, if the spreadsheet has a list of expenses, the rows of data can be sorted in decreasing or increasing value by one of the data types such as the due date or the amount of the expense. The display can be restricted—filtered—to display only those rows that meet criteria specified by the user. For example, the table could be filtered to display the expenses for a particular department that were incurred between two dates. This ability facilitates the preparation of monthly progress reports and budgets.
In MS Excel 2007, the sorting and filtering options are on the Data tab, in the Sort and Filter group under the Sort or Filter button. Once a filter is applied, option buttons are placed at the top of each column to facilitate changes in the sorting or filtering options. For example, the list of expenses shown in the previous figure can be sorted by the labels in the Category column and filtered to show only costs that are more than \$20, as shown in Figure 6.16 “Sorting and Filtering in Microsoft Excel 2007”.
Figure 6.16 Sorting and Filtering in Microsoft Excel 2007
• Subtotals
If the user wants to find a subtotal of the values that belong in a particular group, the groups must be identified by a label in one of the columns. Finding subtotals is a two-step process. First, the table is sorted by that column to bring all the rows in each group together. Next, the subtotal feature is applied. In Excel 2007, the subtotal option is found on the Data tab, in the Outline group. A dialog box allows the user to choose the columns to subtotal and the columns that contain the labels of the groups. A subtotal is inserted below the last row for each group, as shown in Figure 6.17 “Using Subtotals”.
Figure 6.17 Using Subtotals
In a panel at the left of the screen are lines and symbols that indicate the level of detail that is displayed. By clicking on the boxes with minus signs, the rows containing the data can be hidden, leaving the subtotals or grand total, as shown in Figure 6.18 and Figure 6.19. This feature allows a manager to view summary data very quickly without the visual clutter of the details.
Figure 6.18
• >Third level details are hidden.
• Figure 6.19
• >All details in rows 2–16 are hidden.
• Graphics for Bar Charts and Milestones
Spreadsheets can be used for basic progress reports that show activities, dates, and horizontal bars that represent the duration of an activity. A sequence of dates can be created as column labels by entering the first two dates in the sequence, selecting both dates, and then dragging the fill handle—a small square in the lower right corner of the selected cell, as shown in Figure 6.20 “Creating a Sequence of Dates”—to extend the pattern.
Figure 6.20 Creating a Sequence of Dates
The program is sophisticated enough to correctly fill date sequences between months that have a different number of days and even account for leap years in February. Because more sophisticated project management software uses a table design in which the first two columns are description and duration, a similar structure, in which those two columns are adjacent and in that order will make it convenient to transfer the list of activities in a low-complexity project into the project management software at a later date if the spreadsheet is not sufficient. In the duration column, use the following abbreviations:
• d for days
• wk for weeks
• mons for months
The duration of each activity and the relationships between activities can be illustrated using the drawing shapes. In Excel 2007, the same set of shapes and connector arrows are available as those in Word 2007. A long rectangle can represent a bar whose length represents the duration of the activity. Events or significant dates in the project are identified with a diamond. The diamond can be created by using a small square shape and rotating it. Arrows can be drawn between the shapes to indicate their relationships, as shown in Figure 6.21 “Diagram of Activities”. Unfortunately, the arrows in Excel 2007 connect to handles on the sides of the rotated squares instead of the corners. This detail may be overlooked in a simple project diagram.
Figure 6.21 Diagram of Activities
This type of diagram is useful for projects with low complexity where a simple chart of a few activities will suffice.
• Software for Moderately Complex Projects
More complex projects involve more people who are often separated geographically and who contribute to the same documents. Complex projects have more tasks with more complex relationships. To manage those tasks and relationships, using dedicated project management software and more sophisticated diagramming software is justified.
• Sharing Team Documents
If more than one person on a team will be contributing to a document, the document must be accessible to them. To manage documents that are created by a team, it is necessary to control the edits so that work is not lost or confused.
• Version Control
Files such as word processing documents and spreadsheets may be stored on an individual’s computer and copies sent to participants who then make changes and return the revised version to the person who is responsible for the final version of the document. If more than one person is editing his or her own copy of a document at the same time, different versions of the document with different additions or corrections are created. Word processing programs such as MS Word 2007 have a feature that can compare two documents and identify the differences to help bring the two different documents back together. This feature is found on the Review tab, in the Compare group, as shown in Figure 6.22 “Compare Documents Feature”.
Figure 6.22 Compare Documents Feature
Most software programs make periodic backups to protect from accidental power loss. One of the ways that a user can still lose a lot of work is by replacing a newer version of a document with an older version. It is possible to display the date on which the file was last saved using the Details view. If more than one version of the file exists in two different locations, the dates can be compared to determine which is the most recent. These techniques are useful for simple projects with very few participants.
• File Storage and Access Control
Managing versions of documents that are edited by more than one person can be done more effectively by placing the file in a location that can be accessed by all the team members. This can be a shared drive on the company’s computer or on a document sharing service. People who need to use the document are grouped by their need for access. Three groupings are common:
1. View only
2. Edit only
3. Ownership/administrator
The owner or administrator of the document can set the access levels. These levels of access can be assigned to each individual, or they can be assigned to named groups and the person can be made a member of a group. The owner of the document can choose to accept or reject changes made by those with edit-only permission.
The advantage of this method is that there is only one version of the file. If a file is being edited, it is usually locked so that other team members may view the file but cannot edit it until the first editor closes the file.
If the file is stored on a computer that is on a secure network within an organization, it can be difficult for team members who do not have direct connections to the company’s network to get access to the files. To protect the security of the company’s network, the network administrator can grant an outside user permission to access the network from anywhere on the Internet using a virtual private network (VPN) connection. A VPN uses encryption—replacing readable content with a code—to protect the communication between the network and the user to make it secure. The VPN connection gets the user onto the company network as if they were directly connected, but they still need the appropriate passwords to access the shared documents.
• Tracking Changes and Adding Comments
One of the features that is particularly useful for keeping track of the changes made to a document by several users is called Track Changes. In Microsoft Word 2007, it is found on the Review tab, in the Tracking group. Changes may be shown in the document or in balloons at the side.
If a team member wishes to explain a change, it is very important that they do not insert their explanation as text into the document. Such explanations might not be deleted and would end up in the final version of the document with potentially damaging results. Instead, team members can use a form of electronic sticky note to make comments. This feature is found in MS Word 2007 on the Review tab, in the Comments group. A change and a comment are shown in Figure 6.23 “Tracking Changes and Adding Comments”. The document owner must go through the document and accept or reject each change and delete all the comments before the document is released as a finished product. The Next, Accept, and Reject options are found in Microsoft Word 2007 on the Review tab, in the Changes group.
Figure 6.23 Tracking Changes and Adding Comments
• Diagramming Software
The processes and relationships in medium- and high-complexity projects usually require more sophisticated software tools for creating reporting diagrams and workflow charts. The market for diagramming software is more diverse than for word processing and spreadsheets, and it is not as likely that most team members will have the same programs that save files in the same formats. Microsoft Viseo 2007 is available as a stand-alone program that sells for several hundred dollars. For medium-complexity projects, a free alternative to Viseo is Open Office Draw. Open Office is a free software alternative that includes a word processing, spreadsheet, presentation, and drawing programs. The Open Office Draw program, and others like it, can create diagrams such as the one shown in Figure 6.24 “Diagram Created Using Open Office Draw”.
Figure 6.24 Diagram Created Using Open Office Draw
The files created by the various drawing programs might not be compatible with each other, but all the programs can create static image files that can be pasted into word processing documents.
• Project Management Software
The relationships between project activities can become complicated in medium- and high-complexity projects. Dedicated project management software can compute the sum of activity durations along several different paths through complex relationships and recalculate them immediately if any of the durations or starting times are changed. Similarly, charts and reports are updated automatically based on the new data. The most popular software for medium-complexity projects is Microsoft Project. If a project manager begins work on the project in the belief that it can be managed using a list of activities in a word processing program or in a spreadsheet, the list of activities and their durations can be copied and pasted, or imported, into the project management software’s table of activities, if the original document or spreadsheet was designed with that possibility in mind, as shown in Figure 6.25 “List of Activities Transferred to a Project Management Program”.
Figure 6.25 List of Activities Transferred to a Project Management Program
Once the data are placed in the project management software, the relationships can be defined and reports created. Organizations on a tight budget might consider using an open source program named OpenProject. Open source software is usually available at no cost for individual users and with fewer restrictions than proprietary software like Microsoft Project. OpenProject is similar to Microsoft Project, as shown in Figure 6.26 “Open Source Project Management Software”, and could be used on low- and medium-complexity projects that do not need the more advanced features available in Microsoft Project.
Figure 6.26 Open Source Project Management Software
• Software for Complex Projects
Complex projects can involve thousands of individual activities and a company might have several projects going at the same time. Large, complex projects are common in the construction industry. A software that is commonly used for complex projects in construction is P3 or P6 from Primavera. It has the ability to produce sophisticated reports that help project managers to anticipate problems and make projections.
Word processing documents often contain data that could be aggregated and analyzed. Beginning with Microsoft Word 2007 and the .docx file format, it is possible to insert characters called tags on either side of a particular section of a form or document and assign a data label. For example, the name of the supplier on an invoice could be enclosed between two tags: <supplier>Thompson Hardware</supplier>. These tags resemble those used in the hypertext markup language (HTML) to identify how to display text on a Web page, but instead of telling a Web browser how to display the name of the supplier, it identifies Thompson Hardware as the supplier. These tags are can be created by following a set of rules called the extensible markup language (XML). Forms created using XML can be scanned for the content that is marked by tags. The data can be imported into a spreadsheet or database for analysis. Creating documents that use XML to identify data in the forms can be done using Microsoft InfoPath. An example that identifies key facts in a document that was prepared using InfoPath is shown in Figure 6.27 “InfoPath Form with XML Tags”. Because it takes extra effort to learn to use InfoPath, or a similar XML authoring program, and to create the forms, this approach is normally limited to complex and sophisticated organizations that have the need to manage large amounts of data.
Figure 6.27 InfoPath Form with XML Tags
Key Takeaways
• Low-complexity projects might be managed using general purpose word processing and spreadsheet software by using the special features for outlining, managing data, and inserting graphic objects
• Medium-complexity projects need special purpose software for managing project activities, such as Microsoft Project, and graphic software such as VISEO. Open source software such as OpenProject and Open Office Draw may suffice.
• High-complexity projects need more sophisticated project management software like P6 from Primavera. Forms can be created using XML tags that allow data to be extracted from the documents.
• Files can be stored at a location that is accessible by all the team members. They can be granted different levels of access, including view only, edit only, and ownership. Features like track changes and compare documents can help manage edits.
Exercises
1. General purpose word processing and spreadsheet software might be sufficient for managing _____ (low-, medium-, high-) complexity projects.
2. Three features that are available in spreadsheet programs such as Microsoft Excel to manage tables of data are subtotal, sort, and _________.
3. If outline levels are assigned in a word processing document, the outline may be _________ or expanded to hide or display different levels of detail.
4. ______-________ (two words) software is often available at no cost, and its use is less restricted than proprietary software.
5. A VPN connection uses ___________ to protect the content of the communication.
6. How are XML tags similar to HTML tags and how are they different?
7. How should activity information be organized in a spreadsheet to make it easier to transfer to a project management program?
8. What are three options for creating a diagram that displays a project’s reporting hierarchy for low- or medium-complexity projects?
9. What is an example of a software product that is commonly used for highly complex projects?
10. What are three levels of file access and editing permissions that can be assigned, and what are examples of user groups that would be assigned to each level?
Internalize your learning experience by preparing to discuss the following.
• >Describe an experience you might have had with editing the same word processing document and how you managed the revisions. If you used some of the features described above, how well did they work? What features were described that might have been helpful? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/06%3A_Communication_Technologies/6.02%3A_Selecting_Software.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Assume that you are the leader of a virtual team that includes members who are in New York, Bogotá, Honolulu, and Tokyo. You would like to choose a day and time for a weekly conference call to keep the project on track. Choose a day and time and explain your choice and the compromises and problems it might cause for each member. Use the term “synchronous” correctly and identify the specific time zone for each participant.
2. From the list of available templates in your word processing or spreadsheet software, choose a template and describe it. Fill it out and then describe how it could be modified to meet the needs of a particular situation or organization.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Consider the newer synchronous and asynchronous communications technologies with which you are familiar. Describe how they might be used on projects in new and innovative ways. Relate these ideas to what you learned about project cultures—specifically about innovation on projects—and describe how the new communications technologies could be used to innovate.
2. Describe your experience using Excel to manage data such as lists of purchases. Discuss how the features of sorting, filtering, and subtotaling could help answer questions about that list.
6.04: Web Exercise
Learning Objective
1. Determine the local time for team members in other time zones given GMT or UT zone designations.
• Using an Online Time Zone Map
Fortunately, there are several websites that provide the information you need to schedule a conference call so that all the participants know the correct time and day of the week regardless of where they are in the world.
• How to Use a Website to Help Find Local Time
1. Open a word processing document. Save it as Ch06TZStudentName.doc. Use the .doc file format.
2. On the first line, type Chapter 6 study documentation by and then type your name. Press Enter to move the insertion point to the next line
3. Open a web browser and go to http://www.worldtimezone.com.
4. The map will display the world’s time zones at the time you visit the site. See Figure 6.28 “World Times Compared to 6:40 p.m. EST”. The example in Figure 6.28 “World Times Compared to 6:40 p.m. EST” was displayed on the author’s computer at 6:40 p.m. EST on Thursday, December 18 (23:40 GMT).
Figure 6.28 World Times Compared to 6:40 p.m. EST
5. Capture the screen that displays the World Time Zone Map with your current time and date.
6. Switch to the word processing document and paste the screen capture below the first line of text.
7. Below the image, type The time and date in India would be and then type the time and date in India for your current time and date.
8. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch06TZStudentName.doc Ch06TZStudentName.docx Different file name or incompatible format
Determine the local time for team members in other time zones given GMT or UT zone designations Title; screen capture with current date and time; correctly calculated day and time in India. Same as Best Incomplete or an error in the time or date
9. Save the file and submit it as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/06%3A_Communication_Technologies/6.03%3A_Exercises.txt |
Learning Objectives
1. Locate the dialing codes for making international telephone calls.
2. Identify dialing techniques used with cell phones to make international telephone calls.
3. Select the appropriate times and methods for making international calls.
4. Subscribe to a news service using a newsreader and RSS.
• International Telephone Calls Using Wired Phones
The telephone may be used for two-person synchronous communication or in a multipart conference call. Using a telephone to make long-distance and international calls involves using international telephone numbering conventions.
• Calls within North America and the Caribbean
The telephone companies in North America use the North American numbering plan (NANP) that includes the United States, its territories, Canada, Bermuda, and sixteen Caribbean nations.
Figure 6.29 Rotary Dial Telephone
Erica Hargreave – Dialed in – CC BY-NC 2.0.
Wired telephones are connected physically to a local switch that can handle up to ten thousand connections represented by the last four-digit numbers in a telephone number from 0000 to 9999. Each switch is identified by a three-digit number such as 555. A local telephone number consists of the switch number and one of the ten thousand four-digit numbers such as 555 0112. This system can provide up to ten million different unique phone numbers,[1]
but it does not have the capacity to provide service to billions of people.
The switches are grouped into areas and assigned a group number or area code. Area codes in North America were assigned at a time when numbers were converted to a sequence of electrical pulses by inserting your finger in a rotary disc—the dial—and pulling it to a stop on a phone like the one shown in Figure 6.29 “Rotary Dial Telephone”.
As a spring returns the dial to its original position, it opens and closes a set of electrical contacts to create a series of pulses that match the number dialed. Because it takes longer to dial higher numbers like 8 or 9, area codes that could be dialed quickly like 212 and 213 were assigned to densely populated areas like Manhattan (212) and Los Angeles (213). Higher numbers were assigned to rural areas or to newer areas. As a result, it is difficult to determine where a telephone is located by its area code. Do not assume that numbers with similar area codes in North America are located in the same time zone—they may be thousands of miles apart. To initiate a call to a different area code, the number 1 is dialed first. This is the national direct dialing (NDD) code for NANP members.
• Calling from North America to a Country outside the NANP
The IDD code for the United States is 011.
To make an international call from an NANP member such as the United States to another country, you need to provide two codes: the international direct dialing (IDD) code and the country code. The IDD code for the United States is 011. For example, if you wanted to place a call to a number in Rio de Janeiro, you would enter 011 55 21 xxx xxxx, where 011 is the IDD code for the United States, 55 is the country code for Brazil, 21 is the area code for Rio de Janeiro, and xxx xxxx represents the final seven digits of the number.
• Calling to North America from a Country outside the NANP
The IDD and the country code are not simply reversible. The country code for the United States is 1 (not 011).
If you traveled to Rio de Janeiro for a meeting and wanted to call back to a number in the United States from a local phone, you would have to look up the IDD code for the local service provider in Brazil. In Brazil, there is a different code for each of the five phone companies. The IDD for Brasil Telecom is 0014.
The IDD and the country code are not simply reversible. The country code for the United States is 1 (not 011), so you would enter 0014 1 xxx xxx xxxx, where the last ten digits are the area code and telephone number in the United States.
• Reading the Phone Number on a Business Card in North America
It is commonly understood in the United States that you do not enter the hyphens, parentheses, spaces, or periods that are used to make a telephone number more readable and that you dial 1 first—even though it is not included—for a call destined for a different area code. For example, if the phone number on the business card shows (555) 222-1111, you know that you would enter 2221111 if you are calling from within the 555 area code[2]
or 15552221111 for a call from a different area code, but you would not attempt to enter the parentheses, space, or hyphen. Spaces are used in some instances in the following discussion to make the numbers easier to read in this text, but it will be understood that they are not entered when dialing the number.
• Reading the Phone Number on an International Business Card
Unlike those countries participating in the NANP, other countries use different numbers for the national direct dialing (NDD) code and the country code. They might use a different number of digits for the area or city code. A business card from a team member in Rio de Janeiro might be +55 (0)21-xxxx xxxx where 55 is the country code and 0 is the NDD code. To call this team member from the United States on a wired telephone, you would enter 011 55 21 xxxx xxxx, where 011 is the IDD for the United States, 55 is the country code for Brazil, and 21 is the code for Rio de Janeiro.
Notice the zero between 55 and 21 is not included when calling from outside the country. This is the NDD code that is used for calls between areas within the country. For example, if you land in the airport at Sao Paulo, Brazil, and want to call the person in Rio de Janeiro from a local phone, you would enter 0 21 xxxx xxxx (without the spaces) where 0 is the NDD code—like 1 in the United States—and 21 is the area/city code.
• Finding International Telephone Codes
1. Open a word processing document. Save it as Ch06PhoneStudentName.doc. Use the .doc file format.
2. On the first line, type Chapter 6 study documentation by and then type your name. Press Enter to move the insertion point to the next line
3. Open a web browser and go to http://www.kropla.com. This site provides information on international dialing codes.
4. Near the middle of the page, click the International Dialing Codes link.
5. On the CountryCode.org page, in the Country column, scroll down and click Brazil. A list of country codes and city codes is displayed next to a map of the country.
6. Use the browser’s Back button to return to the CountryCode.org web page. Add the address for this page to the Project Management folder in your browser’s favorites or bookmarks.
7. Switch back to the browser. In the Country column, scroll down and click one of the country names other than Brazil.
8. Capture the screen that shows the country’s code and map, paste it into a blank document, and then save the document as Ch06Exercises6.5.doc.
• Making International Telephone Calls Using a Mobile Phone
To place an international call to a country outside the NANP using a mobile phone, you use the plus sign (+) instead of the IDD code. For example, the number of the British Museum is +44 (0) 20 7323 8000. To call this number from a wired phone in the United States, you would dial 011 44 20 7323 8000. If you make the call from a mobile phone, you dial +44 20 7323 8000. Notice the plus sign takes the place of the IDD code.
• Finding the Plus Sign on a Mobile Phone
Wired phones do not have a plus sign on their keypads, but recent model mobile phones include a method to dial a plus sign. Unfortunately, the method varies by brand of telephone.
• International Telephone Calls Using a Mobile Phone
1. Open a web browser and go to http://www.howtocallinternationally.com. This site has a step-by-step demonstration of how to make calls using wired and mobile phones.
2. At the right of the page under Shortcuts, click From a mobile (cellphone). The How to call internationally from a mobile (cellular) telephone page displays. Read this page.
3. Scroll down to the video and click the play button.
4. During the video, when a telephone number with a plus sign is displayed on the cell phone, pause the video and capture the screen.
5. Paste the screen into Ch06PhoneStudentName.doc.
6. Switch back to the browser window and then watch the rest of the video.
7. Add a link to this web page in your browser’s favorites or bookmarks.
8. Capture a screen that shows the links to CountryCode.org and Howtocallinternationally.com in the Project Management folder in your browser’s favorites or bookmarks and then paste it into the Ch06PhoneStudentName.doc.
Element Best Adequate Poor
File name Ch06PhoneStudentName.doc Ch06PhoneStudentName.docx Different file name or incompatible format
Choose the correct dialing codes for making international telephone calls Title; screen capture showing the country code and map of one of the countries other than Brazil Same as Best Incomplete or used Brazil
Identify dialing techniques used with cell phones to make international telephone calls A screen capture from the video on how to enter a plus sign on a cell phone; a screen capture that shows the links to CountryCode.org and Howtocallinternationally.com in the Project Management folder in the favorites or bookmarks Same as Best Cell phone screen capture does not show a plus sign or shows only one of the two required sites in the bookmarks folder
9. Save the file and submit it as directed by the instructor.
• Practice Using International Dialing Codes
Selecting the appropriate numbers to use from a business card for placing an international call requires practice. In this exercise, you practice using your knowledge of international calling codes to compare your answers to reference answers that are hidden on a spreadsheet.
• Using a Spreadsheet for Practice
1. Navigate to the location where the student files for chapter exercises are located and then open 6.3.3_PhonePractice.xls. Save the file as Ch06PhonePracticeStudentName.xls using the Excel 2003 file format.
2. Use the skills you practiced in this chapter and in previous exercises to answer the first question in cell C2. You are allowed to open a browser and refer to websites for assistance.
3. Notice that if you type and enter the correct answer, in exactly the format indicated, the cell background turns green, as shown in Figure 6.30 “Background Turns Green If Correct”.
4. Observe that column D is hidden. It contains a set of correct answers. The spreadsheet’s conditional formatting feature is used to change the background color if the cell content matches the hidden answer.
5. Use your web references and personal knowledge to answer the remaining questions. Place the answers in column C. If some of the answers do not turn green, check your work. If you cannot determine the error, move on to the next question. Answer all the questions, even if some of the answers are wrong or do not match the reference answer exactly.
6. Select columns C through E. To accomplish this, you may click and drag the column headings from C through E, or you can click the column C heading, hold the Shift key, and click the column E heading. Columns C, D, and E are selected, even though column D is hidden, as shown in Figure 6.31 “Columns C, D, and E Selected”.
7. Move the pointer onto either column, then right-click. On the shortcut menu, click Unhide. The answers in column D are displayed.
8. Locate any answers that are still displayed in red. Compare your answer to the reference answer. In the Analysis column on the same row, analyze and explain why your answer did not match the reference answer. Use this opportunity to correct misunderstandings.
9. Save the spreadsheet. Check your work to assure that it is complete using the following table:
Element Best Adequate Poor
File name Ch06PhonePracticeStudentName.xls Ch06PhonePracticeStudentName.xlsx Different file name or incompatible format
Select the appropriate times and methods for making international calls All incorrect answers are analyzed; the cause of the error correctly identified All correct Analysis does not correctly identify the cause of the error
10. Save the file and submit it as directed by the instructor.
• Using a Newsreader
Some projects are directly affected by external factors such as political elections, economic trends, corporate mergers, technological or scientific breakthroughs, or weather. To keep informed about these factors, you can subscribe to online news sources. A method that facilitates this process is Really Simple Syndication (RSS). To use this service, you need a newsreader so you can subscribe to RSS feeds. For this activity, you need a Google account. If you do not have one, go to Google.com and create one for no cost.
1. The three-digit area code plus the next four digits make up a seven-digit number. A seven-digit number has ten million possible combinations from 000 0000 to 999 9999. In practice, some area codes are reserved for special purposes such as trouble-shooting, emergencies, directory assistance, and maintenance, so the maximum is less than ten million per area code. For example, numbers 555-0100 through 555-0199 are reserved for fictional use and are not assigned to real customers.
2. Some area codes cover large geographic areas, and the NDD code is required to dial a number from within the same area code if they are far apart. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/06%3A_Communication_Technologies/6.05%3A_Software_and_Technology_Exercises.txt |
Learning Objectives
1. Describe the difference between an organization’s mission, goals, and objectives.
2. Describe how the missions are different depending on the type of organization.
3. Define economic terms used for choosing projects.
4. Define a project champion and his or her role.
5. Describe the influences of funding, timing, and unofficial considerations on project selection.
Projects are chosen for a variety of reasons and not all of them are apparent. The project manager must understand why a project was selected over other choices so that he or she can align the team toward justifying the choice that has been made by senior management.
• Mission of the Organization
The mission of an organization is a statement of why it exists. For example, a police department might have its mission stated on the door of each patrol car—to protect and serve. A well-written mission statement is short and has the following sections:
• Purpose of the organization
• Primary stakeholders
• Responsibility of the organization toward the stakeholders
• Products or services offered
Police Department Mission Statement
The mission of the Philadelphia Police Department is to fight crime and the fear of crime, including terrorism, by working with our partners to enforce the laws, apprehend offenders, prevent crime from occurring, and improve the quality of life for all Philadelphians (Philadelphia Police Department, 2009).
The missions of organizations can be categorized as profit, not for profit, and government. A business that is created to make a profit for its owners and stock holders must consider the cost of each project and how much profit it is likely to generate. The mission statement of a not-for-profit organization like a charity would emphasize the service it provides. A not-for-profit organization must control its costs so that it does not exceed its funding, and it is always seeking funding and is in competition with other not-for-profit organizations for funding from the same sources. A government agency, like a police department, is similar to a not-for-profit organization, but its sources of funding are usually taxes and fees. Its mission would include its responsibilities to the citizens it represents. Government organizations compete for funding from higher levels of government. Projects are more likely to be funded if the proposal for the project is closely aligned with the mission of the organization. The project manager must be aware of that mission while building a team and aligning it behind the purpose of the project.
• Goals and Objectives
Senior administrators of the organization decide on how to achieve the mission of the organization by choosing goals. For example, the director of a not-for-profit preschool that provides low-cost education for children of poor, single parents might set a goal of improving its reputation for quality. A goal is an end toward which effort is directed. The director meets with her staff and they consider several ways of achieving that goal. They decide to seek certification by a nationally known group that evaluates the quality of preschool programs. Obtaining this certification is an objective.
Figure 7.1 Relationships between Mission, Goals, and Objectives
In this text, we distinguish between the terms goals and objectives. An objective must have a measurable outcome. In this example, it is easy to measure whether or not the organization receives the certification, which is the distinguishing characteristic of an objective. The use of these terms is not standardized across the industry or in business, but we will be consistent within this text. To determine whether a statement is a goal or an objective, simply ask if there is a measurable outcome. Seeking the certification is an objective that can be met by treating it as a project that has a measurable outcome and a limited time frame.
• Economic Selection Criteria
If an organization’s mission is to make money, it will try to maximize the profits of the company by increasing the money coming in or decreasing the money going out. The flow of money is called cash flow. Money coming in is positive cash flow, and money going out is negative. The company can maximize profits by improving its operational efficiency or by executing projects. The company must raise money to fund projects. Companies can raise money in three ways:
1. Borrow it (government organizations, such as cities and schools, can sell bonds, which is a form of borrowing).
2. Fund the project from existing earnings.
3. Sell additional stock or ownership shares in the company.
If a company borrows money, it must pay back a portion of the amount it borrowed plus additional interest. The interest is a percentage of the amount of the loan that has not been repaid. The repayment of the loan and interest is usually paid quarterly or annually. To qualify for selection, a project that is intended to make or save money must be able to do the following:
• Repay loans if money must be borrowed to fund the project
• Increase future earnings for shareholders
• Make the company stock more valuable
When senior managers at a for-profit company decide which projects to fund, they must consider these economic issues.
• Simple Payback
To help managers choose between projects, they can use an unsophisticated measurement called simple payback. If the purpose of the project is to improve cash flow—make it more positive or less negative—the improved positive cash flow each year is applied to the original cost (negative cash flow) of the project to determine how many years it would take to pay back the original cost. It is assumed that after that date, the improved cash flow could be used for other purposes or paid out to owners. For example, if the company borrows \$100,000 to fund the project and the project increases cash flow by \$20,000 a year, the simple payback would be five years, as shown in Figure 7.3 “Simple Payback”.
Figure 7.3 Simple Payback
Year 0 1 2 3 4 5 6
Expense \$(100,000)
Income/Savings \$20,000 \$20,000 \$20,000 \$20,000 \$20,000 \$20,000
Annual Cash Flow \$(100,000) \$20,000 \$20,000 \$20,000 \$20,000 \$20,000 \$20,000
Cumulative Cash Flow \$(100,000) \$(80,000) \$(60,000) \$(40,000) \$(20,000) \$ — \$20,000
• >The cash flow from each year is summed up in the cumulative cash flow row. When the cumulative cash flow becomes zero or positive, it means that the original cost has been paid back by the increased income or savings created by the investment.
• Companies can use simple payback to establish a cutoff for project consideration. For example, management could declare that no projects will be considered that have a payback of more than three years. For projects that meet this criterion, projects with shorter simple payback periods would have an advantage in the selection process. Not-for-profit or government organizations are likely to approve projects with longer simple payback periods because they are not compared to other not-for-profit or government agencies based on their profitability.
• Internal Rate of Return
Companies whose mission is to make a profit are usually trying to make more profit than their competitors. Simply paying back the loan is not sufficient. If the project involves buying and installing equipment to make a profit, executives can use another method called internal rate of return (IRR). The IRR is like an internal interest rate that can be used to compare the profitability of competing projects. To calculate an IRR, the company considers the cash flow each year for the expected life of the product of the project. It assumes that some of the annual cash flows will be negative and that they can vary from year to year due to other factors, such as lost production during changeover, periodic maintenance, and sale of used equipment. For example, a company decides to upgrade a manufacturing line with new equipment based on new technology. They know that the initial cash flow—shown in year zero—will be negative due to the expense of the conversion. They know that the new equipment has an expected life of six years before newer technologies make it out of date, at which time they can sell it for a certain salvage value. The inputs to the IRR calculation are the net cash flow for each year where at least one of them is negative and at least one of them is positive. The result is a percentage that indicates how well this project performs as an investment. Refer to Figure 7.5.
Figure 7.5
Year 0 1 2 3 4 5 6
Equipment Cost, Maintenance, Salvage \$(100,000) \$10,000
Income/Savings \$20,000 \$20,000 \$20,000 \$20,000 \$20,000 \$20,000
Annual Cash Flow \$(100,000) \$20,000 \$20,000 \$20,000 \$20,000 \$20,000 \$30,000
Cumulative Cash Flow \$(100,000) \$(80,000) \$(60,000) \$(40,000) \$(20,000) \$ — \$30,000
Internal Rate of Return (IRR) 8%
• >The internal rate of return measures the profitability of an investment.
• The life of the equipment is part of the IRR calculation. If a project manager knows that senior management intends to sell the equipment in six years, team members can be made aware of that decision if it affects their choices.
• Other Selection Criteria
Besides making money, there are many other reasons for a project to be selected, including the following:
• Keeping up with competitors
• Meeting legal requirements, such as safety or environmental protection
• Improving the organization’s public image
The timing of the project can be very important. A project might be selected at a particular time of year for some of the following reasons:
• Accumulating a year-end budget surplus
• Increasing executive bonus for the year or quarter
• Funding or certification review deadline
If the project manager must make changes to the schedule at some point in the project that could affect its completion date, it is valuable to know if the project was selected because of timing.
• Project Champions and Opponents
In addition to knowing why a project was selected, it is valuable to know which senior executives supported or opposed the selection of the project and if the project manager’s supervisor was in favor of it or not. Because most project teams consist of people who do not report to the project manager but who report to other unit managers, they might not be available when you need them if their boss thinks other projects are more important. If a particular executive proposed the project and actively advocated for its approval, that person could be a source of support if the project runs into trouble and needs additional resources. A project champion, sometimes called an executive sponsor, is an influential person who is willing to use his or her influence to help the project succeed.
To identify the advocates and opponents of the project, begin by reading public documents (if available), such as the minutes of the meeting at which the project was approved. Next, the project manager can use his or her unofficial network of trusted colleagues to get their opinions. Those discussions should be informal and off the record. Those opinions might be inaccurate, but it is valuable to know what misunderstandings exist about a project. If executives in an organization are assigned as project sponsors, the project champion might be a different person.
Project Champions Support an Aircraft Project
When Vought Aircraft won a contract with Boeing to build a significant portion of the fuselage for the new 787 Dreamliner in Charleston, South Carolina, there was no existing workforce with aircraft experience. To give Vought Aircraft an incentive to locate the plant in South Carolina, Governor Mark Sanford, with the support of the legislature, committed to the recruitment and training of the workforce needed for the plant to be successful. The legislature provided several million dollars and assigned the role of developing a trained workforce to the South Carolina Technical College System and Trident Technical College, the local community college in Charleston, South Carolina.
• >Dr. Jim Hudgins, president of South Carolina’s Technical College System, assigned the most experienced project manager to the project and personally accepted the role of project sponsor.
• >Dr. Hudgins and Dr. Thornley, president of Trident Technical College, met with the project leadership at least monthly to review project plans and progress. Each month both Dr. Hudgins and Dr. Thornley assigned resources and removed barriers to project success. Dr. Thornley assigned procurement personnel to the project to assure materials were purchased and delivered in time to support the project schedule. She reallocated space to provide training laboratories for the project and assigned a college leader to the project full-time to coordinate actions with the college. Dr. Hudgins coordinated with the Governor’s office to assure the project received the appropriate level of support.
• >Both Dr. Hudgins and Dr. Thornley had the political power and the resources to assure the project had the autonomy and the resources to succeed. The project met every milestone, exceeded every measurable goal, and received high praise from Vought Management as the plant began operations on schedule.
• Key Takeaways
• A mission statement declares the purpose of the organization and identifies the primary stakeholders, the products or services offered, and the responsibility toward the stakeholders. Goals are statements of direction for the organization, and objectives are activities that achieve those goals with measurable outcomes.
• Profit-making organizations exist to make profits for their owners while in competition with other companies. The goals of those companies are directed at making as much or more money than the competition. Not-for-profit organizations are directed at providing a service to a particular group. They must control costs to perform their tasks with the funds they have, and they compete with other not-for-profit organizations for donations and funding. A government agency is similar to a not-for-profit organization, but its sources of funding are usually taxes, fees, and funding from a higher level of government, and it has a responsibility to the citizens it represents. Government organizations must justify their expenditure of tax money to elected or appointed officials.
• Two economic tools for evaluating and comparing projects are simple payback and internal rate of return. Simple payback is a calculation of the year when the cumulative income or savings due to spending money on a project will meet or exceed the original cost of the project. Internal rate of return is a calculation of the average percentage of increased cash flow over the life of the project’s product.
• A project champion is an influential person who is willing to use his or her influence to help the project succeed. It is useful to know why the project champion wants the project to succeed and to be sure to accomplish that goal even if it is not stated.
• Project selection depends on the availability of funds, which depends on the way each type of organization receives money for projects. Funds might be available at certain times and projects are selected that can take advantage of that opportunity. Projects might be initiated for reasons that are not stated, and investigating the source of funding and likely motivation of project champions can provide better understanding of the project’s chances for success.
Exercises
1. An end toward which effort is directed that has measurable outcomes is an __________ in this text.
2. A general statement of the direction an organization should take is a ______.
3. If a company has to make quarterly loan payments to the bank, this is an example of a negative _______ ______ (two words).
4. If you borrow \$1,000 and have to pay back \$1,010 a month later, the \$10 dollars is the _______.
5. If a company had to choose between installing two different pieces of expensive equipment that had different expected lifetimes, different salvage values, and different production capabilities, it would compare the _______ _____ __ ________ (four words) for each option
6. On Google’s Web pages, it says that they want to “organize the world’s information and make it universally accessible and useful.” This is an example of a _______ statement.
7. An influential person who is in favor of a project is one of the project ________.
8. If upgrading the windows in a building costs \$100,000 and it reduces heating and cooling costs by \$5,000 a year, the investment in the window upgrade has a _____ ______ (two words) of twenty years.
9. The group that determines the need for a project is the ________ organization.
10. What are four parts of a well-written mission statement?
11. What is the primary mission of each of the following types of organizations: profit-making, not-for-profit, and government organizations?
12. What does it mean if the money spent on a project has a simple payback of five years?
13. Why is it important to identify project champions?
14. What is an example of funding for a project that is only available for a short period of time under special circumstances?
Internalize your learning experience by preparing to discuss the following.
• >Choose an example from outside the assigned reading of a mission, goal, and objective that demonstrates the characteristics of each and how they relate to each other. The example can be from a real organization or it can be fictional. Describe the characteristics of a mission, goal, and objective, as defined in this chapter, and how the example demonstrates those characteristics. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/07%3A_Starting_a_Project/7.01%3A_Project_Selection.txt |
Learning Objectives
1. Define scope and describe how it is affected by project complexity.
2. Identify the uses of a scope document.
3. Describe how a scope document is developed and changed.
The project scope identifies the total work of the project.
• Definition of Scope and the Effects of Complexity
The scope document defines what tasks the project team is expected to accomplish and, just as importantly, what is not part of the project. Depending on the complexity level of the project, the scope document can be as short as one page or as long as several hundred pages. On more technical projects, such as a project to design an offshore wind-turbine farm, the scope would include a significant amount of technical specifications, with a focus on the electrical output from the wind turbines. The size and character of the project scope document is related to the project complexity. Higher scores on the Darnall-Preston Complexity Index indicate the need for more detailed scope documents.
• Uses of a Scope Document
A well-developed project scope statement provides the project team with information the team needs to design and implement the project execution plan. The well-developed project scope also provides the team with an understanding of the purpose of the project and the basis for defining project success.
Scope Document for Training Auto Workers
An automotive company is building a new plant to produce electric passenger cars in the southeast United States. As the plant nears completion, the plant’s manager issues a contract to train the new plant workers. The training of workers who will be maintaining the production equipment will be done by the equipment suppliers and will not be in the scope of the training contract.
• >The scope of work for the training project will include the identification of the knowledge, skills, and abilities needed by each classification of worker and the development of the delivery methodology that will effectively and efficiently develop the identified knowledge, skills, and abilities (online, classroom, hands-on). The scope will also include delivery of the training, evaluation of the workers after training, and the development of training records. Items not included in the project scope are items that will be the responsibility of the automotive company, such as the selection and hiring of the workers and the provision of the automotive tools and equipment needed for training. These exclusions are specifically stated in the scope document.
• >During the design of the plant, the Human Resources Division of the company explored different workforce models. The plant will be a typical assembly operation working three shifts. Experience in other plants indicated that a team-based approach combined with a lean manufacturing philosophy produced the highest productivity. This information was included in the documents provided to the team developing the training project’s scope. The plant manager, the human resources manager, and the plant engineer reviewed and occasionally made changes to the draft training scope.
• >The scope of work for the training project was developed from a combination of information from experts with previous experience, documents that reflected the plant operation philosophy, and selected managers from operations and human resources. All the knowledge needed to develop the scope was within the automotive project team. Sometimes outside consultants are needed to develop a complete project scope. For example, if the team in our automotive training example did not have experience in the start-up of another automotive plant, then the hiring of a consultant with that experience might have been required to understand the entire scope of activities needed for training the automotive workforce.
• The automotive project described above is a typical example of the types of information and the people involved in developing a project scope. From the information in the project description, the project team could develop a project scope document.
• Development of a Scope Document
The project manager will often develop the first draft of the project scope and then solicit feedback and suggestions from the project team, client, and sometimes key vendors. The project manager will attempt to develop consensus around the project scope, but the final approval belongs to the project client or sponsor. Depending on the complexity profile of the project, the development of the project scope document can be a short discussion between the project manager and the client, or on a large, complex project, the process can take weeks.
• Managing Changes to the Scope Document
The project scope is not a stagnant document, and changes are to be expected. Changes to the project scope are necessary to reflect new information. Changes to the project scope also create the opportunity for new purposes to emerge that will change the end results of the project. In some cases, these new results represent a positive outcome for the chartering organization.
• Deviation versus Change
If a minor change is made to the schedule that does not affect the completion date of the project, it is a deviation from the schedule. As long as the end date of the project or major objectives are not delayed, a formal change request to the client is not needed. Recording and communicating these schedule deviations is still important for coordinating resources and maintaining the client’s awareness of the project’s progress.
Deviation of Labor Cost
The labor cost was estimated at fifteen dollars per hour for cleaning the project office once per week. The winning bid for the contract was at sixteen dollars per hour. The cost deviated from the estimate and a change was made to the budget. This was a cost deviation, not a change in scope. The additional cost for the contract was covered from the project contingency reserves, and the budget was revised to reflect the changes.
Truck Crash Causes a Deviation to the Schedule
Installation of a fence around the project site was delayed when the truck delivering the fence was wrecked on the way to the job site. The fence project was delayed by one week and the delay did not affect any other activity on the project. This deviation from the original schedule did not cause a delay in the project, and the schedule was adjusted as a deviation to the schedule—not a change request.
• Documenting Changes
It is important to have a written record of changes to the scope of a project. On the least complex projects, an e-mail message can be sufficient, but on larger projects a standard form is normally used. The following steps are paraphrased by Tom Mochal (Mochal & Mochal, 2003), and they have the necessary components of a change documentation process:
• Inform project stakeholders of the change request process.
• Require that the change request is made in writing, including the business value of the change to the project.
• Enter the request in the scope change log.
• Estimate the time needed to evaluate the change. If the evaluation process is time consuming and would affect activity completion dates by diverting management resources, get approval from the project sponsor to evaluate the change request. If the evaluation is not approved, record the decision in the scope change log.
• Evaluate the change and its impact on the schedule and budget if the evaluation is approved.
• Present the change request to the project sponsor for approval. Record the decision in the scope change log with the recommended course of action.
• Distribute the scope change log periodically to team members so they know what changes are being considered and what happened to those that were not approved or evaluated.
• If the change is approved, update the project charter or other initiation documents.
• Update the work plan.
• Distribute the revised work plan to stakeholders and team members.
Key Takeaways
• Scope is a description of the major tasks that are included in the project and some of the tasks that are specifically not included. More complex projects require more detailed and specific scope documents.
• A scope document is used to provide the project team with the information it needs to design and implement the project plan. It provides understanding of the purpose of the project and what project success would be.
• The scope document begins as a draft that is circulated for comments by the team, client, and in some cases, key vendors. The final draft is approved by the client or sponsor. Changes to the scope are documented carefully using standard forms and processes and approved by the project sponsor or client.
Exercises
1. How is the scope statement affected by the complexity of the project?
2. What negative aspect of the scope statement is important?
3. What are the uses of a scope statement?
4. Once a scope statement is agreed to, how is it changed and what is always required when a scope statement is changed?
Internalize your learning experience by preparing to discuss the following.
• >Describe a situation where the elements of the project scope did not specifically exclude an activity that caused a misunderstanding. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/07%3A_Starting_a_Project/7.02%3A_Project_Scope.txt |
Learning Objectives
1. Identify the major activities included in project start-up.
2. Explain how the project start-up activities may differ on a highly complex project.
The parent organization’s decision-making process influences when start-up activities of the project will take place. The transition from planning to project initiation is typically marked by the decision to fund the project and selection of the project manager. However, selection of the project manager is not always the defining event. Some organizations will have the project manager involved in project evaluation activities, and some select the project manager after the decision to fund the project has been made. Including the project manager in the evaluation process enables the project manager to have an understanding of the selection criteria that he or she can use when making decisions about the project during later phases. Selecting the project manager prior to a complete evaluation also includes some risks. The evaluation of the project may indicate a need for project manager skills and experiences that are different from the project manager who is involved in the evaluation.
Selecting the best project manager depends on how that person’s abilities match those needed on the project. Those skills can be determined using the Darnall-Preston Complexity Index (DPCI). If the project profile indicates a high complexity for external factors and a medium complexity for the project’s technology, the profile would indicate the preference for a project manager with good negotiation skills and an understanding of external factors that affect the project. Because of the technological rating, the project manager should also be comfortable in working with the technical people assigned to the project. The project manager involved in the project selection process may not be the best match for the project execution.
During the start-up of a project, the project manager focuses on developing the project infrastructure needed to execute the project and developing clarity around the project charter and scope. Developing the project infrastructure can be a simple task on a project with a low complexity level. For example, the project manager of a worker training project in South Carolina who works for a training college has existing accounting, procurement, and information technology (IT) systems in the college that he or she can use. On large complex projects, a dedicated project office, IT system, and support staff might be needed that would be more challenging to set up. For example, on a large construction project in South America, the design and operations offices were set up in Canada, Chile, and Argentina. Developing compatible IT, accounting, and procurements systems involved a high degree of coordination. Acquiring office space, hiring administrative support, and even acquiring telephone service for the offices in Argentina required project management attention in the early phases of the project.
The project manager will conduct one or more kickoff meetings to develop plans for the following activities:
• Establish the project office.
• Develop project policies and procedures.
• Begin refining the scope of work, the schedule, the budget, and the project execution plan.
Depending on the complexity level of the project, these meetings can be lengthy and intense. Tools such as work flow diagrams and responsibility matrices can be helpful in defining the activities and adding clarity to project infrastructure during the project start-up.
Typically, the project start-up involves working lots of hours developing the initial plan, staffing the project, and building both internal and external relationships. The project start-up is the first opportunity for the project manager to set the tone of the project and set expectations for each of the project team members. The project start-up phase on complex projects can be chaotic, and the project manager must be both comfortable in this environment and able to create comfort with the client and team members. To achieve this level of personal comfort, the project manager needs appropriate tools, one of which is an effective alignment process. This is one of the reasons there are a large number of meetings during the start-up of projects with a high-complexity profile.
Key Takeaways
• The major activities included in project start-up are selecting the project manager; establishing funding; developing project infrastructure such as accounting, procurement, and IT; holding a kickoff meeting, determining staffing; and building relationships.
• The start-up activities for small projects can utilize existing infrastructure for support functions and can have a single start-up meeting, while larger projects require more dedicated infrastructure and full-time staff, and the start-up meetings can take longer and involve more people.
Exercises
1. What are four of the major activities that occur during project start-up?
2. What is one type of start-up activity that is affected by the difference in a project’s complexity? Describe the difference in that activity between low-, medium-, and high-complexity projects.
Internalize your learning experience by preparing to discuss the following.
• >How does the choice of project manager affect the start-up of the project? Include a discussion of the point in the process at which the project manager is assigned and how the personality of the manager affects the match between the manager and the complexity of the project. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/07%3A_Starting_a_Project/7.03%3A_Project_Start-Up.txt |
Learning Objectives
1. Identify the purpose of the alignment process.
2. Identify the components of the alignment process.
3. Identify the effects of a lack of trust on a project.
Developing a common understanding among the key stakeholders of the purpose and goals of the project and the means and methods of accomplishing those goals is called the alignment process. It is important to accomplish this alignment during the initiation phase. Project managers usually conduct a start-up meeting that is sometimes called a kickoff meeting. The agenda and duration of the start-up meeting depends on the complexity level of the project. Projects with a limited scope and short duration may engage in a session start-up meeting over lunch. A medium-complexity project will require a four-hour meeting or more while a high-complexity project cannot achieve alignment in a single meeting. Alignment can require several days of activities.
Five-Day Alignment Meeting on a Horse Ranch
On one large, complex project, the project alignment required a five-day process. Over twenty members of the project team and client participated in this alignment. To create a relaxed atmosphere and facilitate an open discussion, the alignment meetings and activities were held on a horse ranch in Argentina.
A number of companies specialize in designing and facilitating alignment sessions for large complex projects. Although designed to meet the needs of each project, alignment sessions have some common agenda items:
• Developing a common understanding of the project purpose
• Agreeing on the means and methods for accomplishing the purpose
• Establishing trust among team members
• Common Understanding
A common understanding does not mean building a consensus. People may disagree with the direction being developed, but they have the same basic understanding as those who agree. For a project plan to be effective, there must be a critical mass or sufficient commitment among the critical stakeholders. Therefore, disagreement is not fatal to the project execution, but a unified team with a common understanding is much more powerful and increases the likelihood of success. If disagreement does exist, an open and forthright discussion will enable the project leadership to address the disagreement in developing the project plan. If the disagreement stays hidden and is not openly discussed, problems will emerge later in the project.
Developing a common understanding can be as easy as an informal discussion that lasts a few hours, or it can be a lengthy, complex process. The methods and processes employed to develop a common understanding are directly related to the complexity of the project. The more complex projects will require more intense discussions around those issues that score high on the complexity profile.
Developing a common understanding among the key project stakeholders requires the following:
• Defining project success
• Determining potential barriers to success
• Establishing key milestones
• Identifying decision makers and the decision-making process
It is difficult to execute a successful project without first defining what makes a successful project. The first part of this discussion is easy: the project must be completed on time, within budget, and to all specifications. The next level of the discussion requires more reflection. During this discussion, reflection on the organization’s mission, goals, and related issues such as safety and public perception of the project emerge.
After the team develops a common understanding of project success, a discussion of barriers to achieving that success enables team members to express skepticism. On more complex projects, the goals of a project often seem difficult to achieve. A discussion by the team of the potential barriers to project success places these concerns out in the open where team members can discuss and develop plans to address the barriers. Without this discussion, the perception of these barriers becomes powerful and can have an effect on project performance.
• Project Purpose
The project purpose is sometimes reflected in a written charter, vision, or mission statement. These statements are developed as part of the team development process that occurs during the project initiation phase and results in a common understanding of the purpose of the project. A purpose statement derived from a common understanding among key stakeholders can be highly motivating and connects people’s personal investment to a project purpose that has value.
A purpose statement—also called a charter, vision, or mission—provides a project with an anchor or organizational focus. Sometimes called an anchoring statement, these statements can become a basis for testing key decisions. A purpose statement can be a powerful tool for focusing the project on actions and decisions that can have a positive impact on project success. For example, a purpose statement that says that the project will design and build an airplane that will have the best fuel efficiency in the industry will influence designs on engine types, flight characteristics, and weight. When engineers are deciding between different types of materials, the purpose statement provides the criteria for making these decisions.
Developing a common understanding of the project’s purpose involves engaging stakeholders in dialogue that can be complex and in-depth. Mission and vision statements reflect some core values of people and their organization. These types of conversations can be very difficult and will need an environment where people feel safe to express their views without fear of recrimination.
• Goals
Goals add clarity to the anchor statement. Goals break down the emotional concepts needed in the development of a purpose statement and translate them into actions or behaviors, something we can measure. Where purpose statements reflect who we are, goals focus on what we can do. Goals bring focus to conversations and begin prioritizing resources. Goals are developed to achieve the project purpose.
Developing goals means making choices. Project goals established during the alignment process are broad in nature and cross the entire project. Ideally, everyone on the project should be able to contribute to the achievement of each goal.
Goals can have significantly different characteristics. The types of goals and the processes used to develop the project goals will vary depending on the complexity level of the project, the knowledge and skills of the project leadership team, and the boldness of the project plan. Boldness is the degree of stretch for the team. The greater the degree of challenge and the greater the distance from where you are to where you want to be, the bolder the plan and the higher the internal complexity score.
• Roles
Role clarity is critical to the planning and execution of the project. Because projects by definition are unique, the roles of each of the key stakeholders and project leaders are defined at the beginning of the project. Sometimes the roles are delineated in contracts or other documents. Yet even with written explanations of the roles defined in documents, how these translate into the decision-making processes of the project is often open to interpretation.
A discussion of the roles of each entity and each project leader can be as simple as each person describing their role and others on the project team asking questions for clarification and resolving differences in understanding. On less complex projects, this is typically a short process with very little conflict in understanding and easy resolution. On more complex projects, this process is more difficult with more opportunities for conflict in understanding.
One process for developing role clarification on projects with a more complex profile requires project team members, client representatives, and the project’s leadership to use a flip chart to record the project roles. Each team divides the flip chart in two parts and writes the major roles of the client on one half and the roles of the leadership team on the other half. Each team also prioritizes each role and the two flips charts are compared.
This and similar role clarification processes help each project team member develop a more complete understanding of how the project will function, how each team member understands their role, and what aspects of the role are most important. This understanding aids in the development or refinement of work processes and approval processes. The role clarification process also enables the team to develop role boundary spanning processes. This is where two or more members share similar roles or responsibilities. Role clarification facilitates the development of the following:
• Communication planning
• Work flow organization
• Approval processes
• Role boundary spanning processes
• Means and Methods
Defining how the work of the project will be accomplished is another area of common understanding that is developed during the alignment session. An understanding of the project management methods that will be used on the project and the output that stakeholders can expect is developed. On smaller and less complex projects, the understanding is developed through a review of the tools and work processes associated with the following:
• Tracking progress
• Tracking costs
• Managing change
On more complex projects, the team may discuss the use of project management software tools, such as Microsoft Project, to develop a common understanding of how these tools will be used. The team discusses key work processes, often using flowcharts, to diagram the work process as a team. Another topic of discussion is the determination of what policies are needed for smooth execution of the project. Often one of the companies associated with the project will have policies that can be used on the project. Travel policies, human resources policies, and authorization procedures for spending money are examples of policies that provide continuity for the project.
• Trust
Trust on a project has a very specific meaning. Trust is the filter that project team members use for evaluating information. The trust level determines the amount of information that is shared and the quality of that information. When a person’s trust in another person on the project is low, he or she will doubt information received from that person and might not act on it without checking it with another source, thereby delaying the action. Similarly, a team member might not share information that is necessary to the other person’s function if they do not trust the person to use it appropriately and respect the sensitivity of that information. The level of communication on a project is directly related to the level of trust.
Trust is also an important ingredient of commitment. Team member’s trust in the project leadership and the creation of a positive project environment fosters commitment to the goals of the project and increases team performance. When trust is not present, time and energy is invested in checking information or finding information. This energy could be better focused on goals with a higher level of trust (Willard, 1999).
Establishing trust starts during the initiation phase of the project. The kickoff meeting is one opportunity to begin establishing trust among the project team members. Many projects have team-building exercises during the kickoff meeting. The project team on some complex projects will go on a team-building outing. One project that built a new pharmaceutical plant in Puerto Rico invited team members to spend the weekend spelunking in the lime caves of Puerto Rico. Another project chartered a boat for an evening cruise off the coast of Charleston, South Carolina. These informal social events allow team members to build a relationship that will carry over to the project work.
Key Takeaways
• The purpose of the alignment process is to develop a common understanding of the purpose, agree on the means and methods, and establish trust.
• The components of the alignment process are discussions of the purpose, goals, participant roles, methods of tracking progress and costs, methods of managing change, and building trust.
• The effects of a lack of trust are delays caused by fact checking or missing information that was not shared because the person’s discretion was not trusted to handle sensitive information.
Exercises
1. The initial meeting that is designed to build understanding and consensus around the goals and objectives of the project is the __________ meeting.
2. What are the objectives of the alignment process?
3. What are five of the seven components of the alignment process?
4. How can lack of trust between team members adversely affect the project?
Internalize your learning experience by preparing to discuss the following.
• >Why is an alignment meeting important? What needs to be accomplished, and what are two examples of things that could go wrong if the alignment meeting does not meet its objectives? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/07%3A_Starting_a_Project/7.04%3A_Alignment_Process.txt |
Learning Objectives
1. Describe the differences between communications in an existing organization compared with a new project.
2. Describe how the detail of the communications plan is related to the complexity of the project.
3. Describe a communication matrix and its function.
4. Describe conventions for naming files to indicate their content and the version.
The flow of information between team members and stakeholders is managed by rules set forth in a communications plan.
When a person joins an existing organization, one of the early tasks is to learn the work processes of the organization, including where to find information, the meeting schedule, and what reports are required. In existing organizations, new members discover the gatekeepers of information: those persons in the organization who know how to generate or find information. Typically, the generation, flow, and storage of information reflects the organizational culture, and to effectively communicate in an organization, a person must be able to develop communication styles and processes consistent with that organization.
Projects do not have the advantage—or sometimes the disadvantage—of an existing organizational culture or communication structure. The project leadership team develops an understanding of the information needs of the various members and stakeholders of the projects and develops a communications plan that provides the right information, at the right time, to the right people.
The detail of the communications plan is related to the complexity level of the project. Highly complex projects require a detailed communications plan to assure that the information needed by the project team and stakeholders is both generated and distributed to support the project schedule and project decisions. Crucial information can be lost or delayed in a complex project if the communications plan is not functioning properly.
Communicating Priorities
During a project in Tennessee, the project management team was exploring ways to complete the project earlier to meet the changing requirements of the project’s client. The team identified a number of actions that could create an earlier completion date. The plan required an early delivery of critical equipment by a supplier, and the team visited the supplier’s senior management and agreed to pay a bonus for early delivery of the equipment.
• >Two weeks later, during a review of the project procurement team progress, the project manager discovered that the organization’s procurement department had delayed approvals needed by the supplier because the engineering design was not submitted in the required format. This action effectively delayed the project two weeks and reduced the possibility of the project team meeting milestone requirements for earning a bonus.
• >The organization’s procurement team did not understand the critical nature of this supplier’s contribution to an early completion of the project. All the information needed by the organization’s procurement team was in the meeting minutes distributed to the entire team. The procurement team did not understand the implications of their work processes, and the result was a delay to the project schedule and a reduction in client satisfaction and project profitability.
• Effective communication on a project is critical to project success. The Tennessee project is a typical example of errors that can be created by the breakdown in communication flow. Highly complex projects require the communication of large amounts of data and technical information that often changes on a frequent basis. The project manager and the leadership team are responsible for developing a communications plan that provides the right information, at the right place, at the right time. The Tennessee project example demonstrates that even when the information is at the right place and at the right time, the project procurement leader must assist the procurement team in understanding the priorities of the project. On large, complex projects, that procurement lead would not be in the daily communication to subcontractors or vendors. In the Tennessee project example, the procurement leader’s unique understanding that came from participation in the project leadership meeting required a more direct involvement with those subcontractors and vendors that impacted the project goals.
Just as important, an effective project communications plan does not overload team members and project systems with information that is not useful. Some project managers will attempt to communicate everything to the entire project team. Although this assures that each team member will receive critical information, the large influx information can make the distillation of the information to the critical and relevant people more difficult for each team member.
• Communication Matrix
A Guide to the Project Management Body of Knowledge (PMBOK Guide) describes tools and techniques for identifying project stakeholders, defining their information requirements, and determining the appropriate communication technology. The project includes developing a list of all the people impacted by the outcome of the project and people who can influence the execution of the project, including project team members. The project leadership then generates a list of information needed or requested by each stakeholder.
The project leadership team develops a list of communication methods for gathering and communicating project information. These include a list of reports, meetings, and document flowcharts. The leadership team then typically develops a communication matrix that details who is included in each project meeting and the distribution of major documents in a table format.
Figure 7.13 Simple Communication Matrix
Project John (Client) Sally (Proj Mgr.) Robert (Technical Mgr.) Jose (Executive Sponsor) Isiah (Client Consultant) Jorge (Procurement Mgr.)
Project Scope A R R A R R
Changes A A A A I R
Meeting notes I A A I I A
RFIs R R A I R
RFQs R R A I R A
Schedule updates R A A I I R
Technical reviews I R A I R A
A = Approval required. R = Review and comment. I = For information only.
• Document Control
On large, complex projects, organizing the creation, distribution, and storage of documents is a major and important activity. Organizations that execute a large number of complex projects will often have project document control systems that the project leadership team will adapt for their project. Document control systems distribute, store, and retrieve information that is needed by the project team. Documents originate from the various team members during the planning and execution of the work and then are transmitted to the document team for cataloging, distributing, and storing.
Document control systems have a systematic numbering system that allows a team member to derive information about the document through the document number.
Document Naming Provides Information about the Content
On a complex project, document names were chosen to indicate the category, location, purpose, author, and date. For example, a file named 323RFQDewateringPump_Darnall_10.08.2012 rev 3. contains five pieces of information about the content of the file. The first digit of the first number was used to indicate the category of the document. For example, all documents related to the project scope started with a 100 number and documents related to procurement started with 300. In this file name, the 3 indicates the document refers to procurement, the next two digits—23—refer to a location on the project (the south pumping station). The naming convention was distributed to team members so that when they saw this file name, they could interpret it to mean that the document refers to a procurement document, specifically a request for a quote for a dewatering pump for the south pumping station and that the document was prepared by the procurement team member (Darnall) on August 10, 2012. One of the naming conventions that was specifically described was the use of date formats in the international format of dd/mm/yyyy instead of the American format of mm/dd/yyyy, so team members know this document was created on August 10 rather than October 8.
When files are stored on a computer, the names can be sorted alphabetically. The beginning of the name is used as the primary sorting criteria. In the example above, sorting a list of document names would place all the documents together by category (e.g., scope and procurement), because all the documents related to scope would begin with a 1 and all those that are related to procurement would begin with a 3.
When a document is expected to be revised over the course of the project, version control becomes important. Version control means labeling each revision to enable the team to understand the latest activity and status of the document (or the activity behind the document). For example, on engineering and construction projects, document control tracks the development and distribution of documents. Each drawing is given a unique identification that reflects the type of drawing (electrical, civil, etc.), the location (first floor, mechanical room, etc.), and the version number. Because the design process includes several iterations of the drawings as more information is developed, document control uses an identification that indicates the version of the document.
For example, a project will use letters to indicate the version of the document until the document is approved for construction, and then it is given a number after approval. Therefore, a document with revision D will be the fourth version of the document. The same document with revision 3 means that this is third revision after the project was approved for construction.
To assure that everyone who should either review or approve the document received a copy, document control develops a distribution list for each type of documents. Each person reviews and signs the distribution list and then sends the document to the next person on the list. The design documents, distribution lists, and other project documents are archived by document control for future reference. In the example above, the document was the third revision after the design was approved for construction.
Naming conventions for files and the versions of files should be consistent with the practices of the parent organization or with the client organization so that the files may be archived with files from other projects. For example, California Road Construction Projects require a specific file naming convection.
Document Naming Convention in California
All Highway Construction Projects (Roadway) are required to be named in accordance with the following naming convention:
• >d12345ppXXX
• d = District code. The district code represents the district where the project is being constructed (not the district creating the CADD drawings). Districts 1–9 use a single numeric character (1–9, respectively). Districts 10 through 12 use a single alpha character (a–c, respectively).
• 12345 = First five characters of the project expenditure authorization.
• pp = Print Sequence Code (two alpha characters).
• XXX = Respective sheet numbers (numerical characters) for each Print Sequence Code used in the project.
• >For example,
• >512121ic007.dgn
• 5 = District 05.
• 12121 = First five characters of the project expenditure authorization.
• ic = Print Sequence Code (Drainage Details).
• 007 = Sheet number (seventh Drainage Detail sheet).
• Key Takeaways
• In an existing organization, there are gatekeepers of information who know how to find it, when meetings are scheduled, and what reports are required. In a new project, the project manager can create a new flow of information and reporting requirements.
• More complex projects require more sophisticated communications plans.
• A communication matrix is a table that shows the names of people as column or row headings and the types of documents as row or column headings. In the cells where the name and document type intersect, a symbol indicates the person’s responsibility or access with regard to that type of document.
• File names can be used as codes to describe the contents of the file. Parts of the name can be used to identify the category, location, subject, author, and date. File name conventions should be used that match those used by the parent organization or by the client.
Exercises
1. A table that relates types of documents, people, and their responsibilities and access is a communications ____________.
2. How do communications on a new project differ from communications in an existing organization?
3. How does the communications plan differ for a complex project compared to a simple project? Provide an example.
4. What is the purpose of using a document naming convention? Describe at least three types of information that the file name could contain.
Internalize your learning experience by preparing to discuss the following.
• >What is the purpose of a communications plan and what is an example of a problem that might arise if the communications plan is not complete and an example of a problem that might arise if the communications plan is not followed? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/07%3A_Starting_a_Project/7.05%3A_Communications_Planning.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Choose an organization of which you are a member. Identify the type of organization (profit, not-for-profit, government) and locate its mission statement. Quote the mission statement and then analyze it to determine if it has the four elements described in this chapter as necessary for a well-written mission statement. Revise the mission statement, if necessary, so that it addresses all four of the elements of a well-written mission statement.
2. Describe the pros and cons of assigning a project manager to the project during the design phase. Describe how the complexity of the project might affect that decision.
3. Describe a project with which you are familiar that suffered from lack of alignment. Identify the component of alignment that was missing and its effects.
4. Describe the function of a communication matrix and provide an example of how it would be used to create, edit, approve, and distribute a particular type of document.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Effects of lack of trust: Relate an example of a project on which you worked where the participants did not know each other well enough to trust each other, and describe the effect of this lack of trust on the project. Describe alignment activities that could have increased trust on that project.
2. Describe an example of a project with which you have been personally involved that suffered from undocumented changes in scope. Consider an example provided by a classmate and determine if their example is a deviation or a scope change and if it requires a scope change, how should it have been handled? Demonstrate your knowledge of the steps for making scope changes described in the text.
3. What is the mission statement of your college or university? Give an example of a recent project undertaken by the organization. Determine if the project directly supports the stated mission and explain your opinion.
4. Do you think a communication matrix is necessary on a small project that only involves six people? Be prepared to support your opinion with examples.
7.07: Software and Technology Exercise
Learning Objective
1. Use a spreadsheet to calculate cash flow, payback, and Internal Rate of Return (IRR).
• Create a Worksheet to Calculate Cash Flow, Payback, and IRR
Projects that purport to save money or earn additional money in the future as a result of spending money now can be evaluated and compared using basic financial tools. A simple payback analysis determines how long it will be before the result of the project pays off the initial investment, and the Internal Rate of Return (IRR) is a percentage similar to an interest rate that can be compared to other projects or investment opportunities.
• How to Set Up a Spreadsheet to Show Cash Flow, Simple Payback, and Calculate IRR
1. Start Excel 2007. In cells A1 through A5, type Payback and Internal Rate of Return, Year, Expense, Income/Savings, Annual Cash Flow, Cumulative Cash Flow, and Internal Rate of Return (IRR). Drag the boundary between column A and B to the right to increase the width of column A, as shown in Figure 7.14 “Widen Column to Fit Labels”.
Figure 7.14 Widen Column to Fit Labels
2. In cell B2, type 0, and in cell C2, type 1. Click and drag across cells B2 and C2 to select them both. Identify the fill handle at the lower right corner of C2 as shown in Figure 7.15 “Use Fill Handle to Extend a Pattern of Intervals”. Selecting the first two numbers in a sequence determines the interval of the sequence.
3. Click and drag the fill handle to the right to cell H2. The sequence of years from zero to six is filled into cells B2 through H2.
4. In cell B3, type \$(100,000) and then press the Enter key. Typing a number with the dollar sign and comma sets the formatting automatically. The parentheses indicate a negative number that the computer may display in red.
5. In cell C3, type \$(2,000) and then press Enter. Click cell C3 again to select it. Drag the fill handle to the right to cell H3. Because a single value was selected, the same value is filled into cells D3 through H3, as shown in Figure 7.16 “Initial Expense in Year Zero Followed by Annual Expenses”.
6. In cell C4, type 25,000 and then press Enter. Use the procedure you practiced in step 5 to fill this value into cells D4 through H4.
7. In cell B5, type =B4+B3 and then press Enter. This formula adds the positive and negative cash flows in the two cells above its location to find the annual cash flow.
8. Click cell B5 and then drag the fill handle to cell H5 to fill this formula into the adjacent cells. The formulas adapt to their new locations to add the two cells immediately above. Click cell D5 to observe how the formulas change to sum the cells above, as shown in Figure 7.17 “Formula to Calculate a Running Total”.
9. In cell B6, type =B5 and then press Enter. This formula transfers the value for the initial expense to cell B6 so the next formula can be used in the remaining cells.
10. In cell C6, type =B6+C5 and then press Enter. This formula sums the value from the previous year with the annual cash flow for the current year.
11. Click cell C6 and then drag the fill handle to cell H6. Observe from the change in color or from the missing parentheses that the cumulative cash flow becomes positive in year five, as shown in Figure 7.18 “Initial Investment Paid Back in Year Five”.
12. In cell B7, type =IRR(B5:H5) and then press Enter. The spreadsheet program uses a built-in program named IRR to calculate the internal rate of return using the annual cash flows in cells B5 through H5 and determines the rate of return is 10 percent, as shown in Figure 7.19 “IRR Can Be Used to Choose between Very Different Projects”. Notice that the IRR function uses the annual cash flows in row 5 and not the cumulative cash flow in row 6.
13. Click cell A1. Type Payback and Internal Rate of Return and then press Enter. Click and drag cells A1 through H1 to select them. On the ribbon, in the Alignment group, click the Merge and Center button. The new title is centered across the columns, as shown in Figure 7.20 “Center the Title”. This worksheet can be used and extended to determine simple payback and IRR for a variety of projects.
14. In cell A9, type your name.
15. Check your formulas and calculations. Change the initial expense in cell B3 to \$(90,000). The values that depend on the initial expense should all change and produce new cash flows and a different IRR of 14 percent.
16. Click cell B7 to select it and to show the IRR function on the formula bar.
17. Capture a screen that shows the recalculated values, the IRR function, and your name. Open a word processing file and paste the screen into the document. Save the word processing file as Ch07FinanceStudentName.doc and close it.
18. Save the worksheet and close it. Keep it where you can find it to demonstrate the provenance of your work, if necessary.
19. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch07FinanceStudentName.doc Ch07FinanceStudentName.docx Other name
Use a spreadsheet to calculate cash flow, payback, and Internal Rate of Return (IRR) Screen capture of spreadsheet after the value in B3 is changed to negative \$90,000, with cell B7 selected to show the IRR function on the toolbar Same as Best Incorrect formulas; incorrect range for the IRR function; negative numbers not formatted; name not shown
20. Save the file and submit it as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/07%3A_Starting_a_Project/7.06%3A_Exercises.txt |
Learning Objective
1. Define the types of project schedules.
The schedule develops as the project moves from its early conceptual phase into the execution phase.
• Conceptual
When the scope of the project is being determined, a simple schedule that shows the major tasks and approximate start and end dates is developed to allow senior management to make decisions about the scope of the project. Detail is not required at this stage because entire tasks might be dropped from the scope, or the whole project might not be approved.
• Master
If the project is chosen, a master schedule is created. It has major events and dates such as the starting date and the completion date. The master schedule is often part of a contract. Changes to the master schedule must be approved using a documented change process with approval by the project sponsor and client.
• Detail
To execute the master schedule, the major activities are broken down into smaller activities and resources are assigned to those activities. The most detailed versions or portions of the schedule may be developed a few weeks prior to the execution of those activities and are called two-week plans. Portions of the master schedule that affect particular vendors might be sent to them so they can provide detailed activities that they would perform.
Key Takeaway
• Types of schedules vary in detail. A broad, general conceptual schedule is used in the earliest phases of the project design. A master schedule with start date, milestones, and completion date becomes part of the contract and is changed by mutual agreement using a formal change process. Details are added to the master schedule as needed to perform the work of the project activities.
Exercises
1. A _________ schedule identifies major types of activities and approximate start and end dates for use in decision making about the scope of the project.
2. A schedule of activities that is prepared every two weeks is the _______ schedule.
3. How does a conceptual schedule differ from a master schedule?
Conceptual Schedule
• >Choose an activity that you are considering and describe a conceptual schedule for it. Limit the schedule to between five and ten major sections. Make a rough estimate of the duration and cost of each phase.
8.02: Elements of Time Management
Learning Objectives
1. Describe a work breakdown structure and how it relates to activities.
2. Describe the use of graphic representations for time management.
According to the Project Management Institute (PMI), project time management includes the following elements (Project Management Institute, Inc., 2008):
• Define activities
• Sequence activities
• Estimate activity resources
• Estimate activity durations
• Develop schedule
• Control schedule
The list of activities, their relationship to each other, and estimates of durations and required resources comprise the work breakdown structure (WBS). The project WBS is a hierarchical—classified according to criteria into successive levels—listing and grouping of the project activities required to produce the deliverables of the project. The WBS represents a breakdown of the project into components that encompass the entire scope of the project. Each level of the WBS hierarchy represents a more detailed description of the project work so that the highest level represents broad categories, and the lower levels represent increasing amounts of detail.
Larger and more complex projects often require a larger WBS. The size of the WBS is directly related to the amount of work on the project and how that work is divided into work packages. The WBS can be developed around the project phases or the project units or functions that will be performing the work. A WBS organized around the project phases facilitates the understanding of the amount of work required for each phase of the project. A WBS developed around the project units or functions of the project facilitates the understanding of the amount of work required for each function.
The following example, named John’s move, has a low level of complexity compared to a larger project. Normally, this project would not receive the amount of detailed planning described in the following examples, but the authors chose to use a basic project that is familiar to most students to help them focus on learning the new concepts.
Changing Jobs
John has a small but important project. He has accepted a job in Atlanta and now has to move from Chicago to Atlanta and be there, ready to work, right after the Christmas holidays. If the furniture arrives in good condition at least two days before John starts work, and for less than Five thousand dollars, the project will be a success. The move to Chicago five years ago cost five thousand dollars, but John is smarter now and will use his friends to help, so he is confident he can stay within budget.
Developing a WBS begins by defining and developing lists of all activities—work performed on the project that consumes project resources, including cost and time—needed to accomplish the work of the project. The first draft of the WBS includes activities at the highest level of the hierarchy or the management level and typically includes the major activities or summary activities required to accomplish the deliverables identified in the project scope of work.
Top-Level Activities in Move Planning
On John’s move project, these top-level activities are numbered 1, 2, 3, and so on. For example, a plan for the move is the major deliverable from 1 Plan Move, as shown below.
Figure 8.3 Top Level of WBS
1. Plan Move
2. Prepacking
3. Packing
4. Moving
5. Unpacking
6. Project Closeout
The work breakdown structure is then decomposed—broken down into smaller units. The 1.1, 1.2, and 1.3 numbers are the first subdivision of the work. For example, one of John’s Summary Level Activities is Packing (3.0). Although some minor packing (delicate items: 2.4) are packed under another summary activity, 3.3 is the major packing and includes the coordination and support of labor (friends Dion and Carlita). The activity is then decomposed—separated into basic elements—to the next level by listing the individual rooms that need packed, as shown below.
Figure 8.4 Major Activity Decomposed into Smaller Activities
3. Packing
3.1. Confirm Dion’s and Carlita’s help
3.2. Pick up donuts and coffee
3.3. Pack apartment
3.3.1. Pack kitchen
3.3.2. Pack living room
3.3.3. Pack bedroom
3.3.4. Pack remaining items
The WBS could be decomposed further to a greater level of detail by listing the tasks needed for each activity. For example activity 3.3.3, Pack Bedroom, can be decomposed into additional tasks, such as 3.3.3.1 Pack Closet, 3.3.3.2 Pack Drawers, and 3.3.3.3 Pack Blankets. This type of numbering of the activities is called intelligent numbering. In intelligent numbering, the numbering system has meaning so that a member of the project team knows something about the activity by the number of the activity. For example, any activity associated with packing begins with a 3; even picking up donuts can be an activity that supports packing. The donuts are a form of payment for the labor of Dion and Carlita.
The WBS is developed or decomposed to the level that the manager needs to control or manage the project. Typically, larger and more complex projects require a more detailed WBS.
• Estimation of Duration
After the project team has created the WBS, each activity is reviewed and evaluated to determine the duration (how long it will take to accomplish from beginning to end) and what resources (time, materials, facilities, and equipment) are needed. An estimate is an educated guess based on knowledge, experience, and inference—the process of deriving conclusions based on assumptions. The accuracy of the estimate is related to the quality of the knowledge and how that knowledge is applied. The person with the most knowledge may not be the most objective person to provide duration estimates. The person responsible for the work may also want to build in extra time. Multiple inputs into the duration estimate and a more detailed WBS help reduce bias—the making of decisions based on a prejudged perspective.
The unit of time used to develop the activity duration is a function of the level of detail needed by the user of the schedule. The larger and more complex the project, the greater the need for detail, which usually translates into shorter durations for activities.
Duration Estimate for Training
On a new plant start-up, the plant manager may need to know when the new employees will start training, when they will be fully trained, and when they can begin working in the plant. The plant human resources manager may need to know what skills workers need and how much time each training class will take. The schedule detail the HR manager needs will include activities to locate facilities, schedule training, write contracts for trainers, and manage the initiation of training classes. The trainer will need an even greater level of detail, which could be measured in days or even hours.
On our John’s move example, the project schedule may have been just as effective without detailing the packing of the individual rooms in the old apartment. If we deleted these items, would John know when he needed to pack each one of these rooms? If the answer is yes, then we may not need that level of detail.
The activity duration is the length of time the activity should take to complete from beginning to end. The unit of duration is typically working days but could include other units of time such as hours, weeks, or months. The unit chosen should be used consistently throughout the schedule.
An important event, such as a ground-breaking ceremony or receipt of occupancy from the building inspector, is called a milestone. A milestone has no duration or resources. It is simply an indicator of an important point in the project.
• Resource Allocation and Calendars
A common resource constraint is availability. To consider the availability of team members, consultants, and key pieces of equipment, you can create a resource calendar for each that indicates which days are available and which are days off for a group, an individual, or a project asset such as a piece of important equipment. A calendar for team members from the same company could be the company calendar that shows working days, weekend days, and holidays. Individual team members can have individual calendars that show their vacation days or other days off, such as parental leave days. If major pieces of equipment are only available for certain periods of time, they can be given a resource calendar. Resource calendars become important tools when changes must be made to the schedule. When a resource calendar is applied to a duration estimate, the duration in days is distributed across the available calendar days. For example, if the duration is three days and the start date of the activity is Thursday, the activity would begin on Thursday and end on Monday of the following week, assuming the resource calendar shows that the person has the weekend off. If the weekend included an extra day off for a holiday like Labor Day, shown in the calendar in Figure 8.6, the completion day of the same three-day activity would be pushed to Tuesday.
Figure 8.6
• >Nonworking days can be designated in a calendar.
• Activity Sequencing
Determining the schedule of a project begins by examining each activity in the WBS to determine its relationship to the other activities.
• Project Logic
The project logic is the development of the activity sequence or determining the order in which the activities will be completed. The process for developing the project logic involves identifying the predecessors—activities that come before—and successors—the activities that come after.
Project Logic for John’s Move
In our example of John’s move, contacting Dion and Carlita—activity 1.1—comes before the lunch meeting is scheduled. You must logically contact Dion and Carlita before you schedule your Host Planning Lunch—activity 1.2. Your conversation with Dion and Carlita will provide you with dates they are available and establish their commitment to help you move. Therefore, the conversation with Dion and Carlita is a predecessor to the Host Planning Lunch Activity. This relationship is diagramed below.
Figure 8.7 Relationship between Two Activities
These terms define a relationship that is similar to a family relationship like father and son. The father exists in time before the son. Similarly, each element of the diagram can have predecessor-successor relationships with other elements, just like a father can be the son of someone else. Unlike the biological father-son relationship, activities can have more than one predecessor.
The relationship between a predecessor activity and a successor activity is called a dependency. The successor activity starts after and is dependent on the predecessor activity. Because the conversation with Dion and Carlita must take place before a planning meeting can be scheduled, this is called a natural dependency because the relationship can be inferred logically. Activities that have predecessor-successor relationships occur sequentially—one after the other. Another term for this type of relationship is finish-start, which means the first activity must finish before the next one can start. Refer to the figure above.
Some activities take place concurrently—at the same time. If they must begin at the same time, they have a start-start relationship. If the activities can start at different times but they must finish at the same time, they have a finish-finish relationship. Refer to Figure 8.8.
Figure 8.8
• >Concurrent activities can be constrained to finish at the same time or start at the same time.
• Predecessor Relationships in John’s Move
The figure below shows the activities in John’s move with the predecessors identified for the Plan Move and Prepacking groups of activities. Because the finish-start relationship is by far the most common, the type of relationship is assumed to be finish-start unless otherwise mentioned.
Figure 8.9 Outline of Activities with Predecessors Identified
(Predecessors are in parentheses)
1. Plan Move/Project Start
1. Contact Dion and Carlita
2. Host planning lunch (1a)
3. Develop and distribute schedule (1b)
4. Make hotel arrangement in Atlanta (1a)
2. Prepacking
1. Gather packing material
2. Select moving van company and sign contract
1. Contact 3 moving van companies and get bids (1c)
2. Select company and negotiate a final price (2bi)
3. Sign moving contract (2bii)
3. Pack small delicate items (1c, 2a)
• Lag and Lead Times
Most activities in a network diagram have a finish-start relationship. If a certain amount of time must go by before a successor activity can begin, the required delay is called lag time. For example, concrete does not reach its full strength for several days after it is poured. Lag time is required between the end of the pouring process and the beginning of construction that puts stress on the concrete as diagrammed in Figure 8.10. Similarly, you must allow lag time for payment checks to be processed by the banking system before you can spend the money.
Figure 8.10
• >Required time between activities is lag time.
• In some cases, the successor activity can overlap the end of its predecessor activity and begin before the predecessor is finished. This is called lead time.
Lead Time in John’s Move
In John’s move, you might begin separating the small and delicate items that will be packed in step 2.3 before you get the packing materials in step 2.1 so that when the materials are available, step 2.3 is already partially completed. If the preparing the small items for packing can overlap its predecessor and shortens the time it takes to accomplish both tasks by a day, it has a lead time of one day.
Figure 8.11
• >Overlap is called the lead time of the successor activity.
• The characteristics and identifiers of an activity are its attributes.
At this point in the process of analyzing John’s move, each activity has an identifying code, a short description, predecessors, and lead or lag times, as shown in a partial table of activities in Figure 8.12 “Table of Attributes”.
Figure 8.12 Table of Attributes
Code Description Predecessors Relationships Lead/Lag
1a Contact Dion and Carlita None 0
1b Host planning lunch 1a FS (Finish/Start) 0
1c Develop and distribute schedule 1b FS 0
1d Make hotel arrangement in Atlanta 1a FS 0
2a Gather packing material None 0
2bi Contact moving van companies and get three bids 1c FS 0
2bii Select company and get final price 2bi FS 0
2biii Sign moving contract 2bii FS 0
2c Pac small and delicate items 1c and 2a FS and FS 1
• Milestones
Milestones are significant events in your project. An effective milestone schedule will capture the major constraints to the project schedule and provide a summary level overview of the project. Even though milestone events are significant to the project, they consume no resources and have no duration. Milestones are usually indicated on the project schedule with a diamond and often have a vertical line on a time-scaled graph to show the relationship of various schedule paths to the milestone.
In our John’s move project, we might create a milestone called “all packing complete” to represent the date when everything is packed and ready for the moving van. Any delay in this date will mean a delay in the arrival of the moving van in Chicago, a delay in the arrival of the moving van in Atlanta, and a delay of all the unpacking and other downstream activities. See Figure 8.13 “Gantt Chart”.
• Graphic Representations
Relationships between activities are easier to recognize if they are presented using graphics such as bar charts or a network of connected boxes.
• Bar Charts
The type of bar chart used to illustrate activity relationships in a project is the Gantt chart. The Gantt chart was developed by Henry Gantt and used on major projects, including building the Hoover Dam and the U.S. interstate highway system (Reference.com, 2009). The Gantt chart, also called a bar chart, is a time-scaled graphic that represents each activity with a bar that reflects the duration, start, and finish time, as shown in Figure 8.13 “Gantt Chart”.
Figure 8.13 Gantt Chart
A Gantt chart is easy to read and provides sufficient information for project team members to plan activities within a short time frame. For many larger projects, a two-week bar chart, extracted from the larger master schedule, provides the information needed for team members and contractors to coordinate activity details. The Gantt chart provides information for simple planning but is limited because a Gantt chart does not illustrate complex relationships well.
• Network Diagrams
People recognize relationships and patterns more effectively when they look at diagrams like the one in Figure 8.14 “Project Network Diagram”. The precedence diagram method (PDM) is a technique for graphically displaying the logic of the schedule by placing the activities in boxes with arrows between them to show the precedence-successor relationships. The boxes in this type of diagram are called nodes and the arrows indicate finish-start relationships. Compare the diagram in Figure 8.14 “Project Network Diagram” to the outline in Figure 8.9 “Outline of Activities with Predecessors Identified” to see how much easier it is to trace a sequential path from one activity to the next in the precedence diagram. This type of diagram is also called a project network diagram.
Figure 8.14 Project Network Diagram
Key Takeaways
• The work breakdown structure is a list of activities, including estimates of their durations, their relationships with others, and the resources assigned to them.
• Bar charts are used to indicate durations and sequencing where the relationships are simple. Network diagrams are used to show complex relationships between activities.
Exercises
1. What is work breakdown structure?
2. If two activities are concurrent and they have the same completion date, they have a _______-_______ relationship.
3. A calendar that shows when a person, facility, or key piece of equipment is available is a __________ calendar.
4. What is the advantage of a network diagram over a bar chart for illustrating the critical path?
Compare Charts
• >Perceptions of graphic representations of data differ among individuals. Consider the bar chart and network diagram in this section. Describe which type of chart conveys the important aspects of the project best to you personally and why you think that is the case. Alternatively, describe which aspects of the project are conveyed to you best by which type of chart. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/08%3A_Project_Time_Management/8.01%3A_Types_of_Schedules.txt |
Learning Objective
1. Calculate critical path, project float, early start dates, and late start dates.
The critical path is the path through the network that results in the latest completion date of the project.
If any activity on the critical path is delayed, the completion of the project will be delayed by an equal amount. It is the path with the greatest total duration. To determine the critical path, add the amount of time estimated for the duration of each activity to the previous activity to determine which path through the network has the longest total duration, as shown in Figure 8.15 “Critical Path”. Durations are indicated in days. The critical path through these tasks takes at least eight days. Activities on the critical path are shaded.
Figure 8.15 Critical Path
• Early Start Dates
Starting dates can be assigned to each activity by doing a forward pass proceeding from left to right in the network diagram beginning with the project start date. The dates derived by this method are the early start (ES) dates. The early start date for an activity is the earliest date the activity can begin. The estimate considers durations and resource availability calendars. To calculate early start dates, begin with the project start date and assign that date as the start date of activities that have no predecessor activities. Follow these steps to calculate the early start dates of subsequent activities, assuming finish-start relationships:
• Add the predecessor activity’s duration to its start date.
• Add the lag time or subtract the lead time.
• Refer to the resource calendar (or calendars) that applies to the people and equipment necessary for the activity, and add the number of off-days that the activity would span on those calendars.
• Assign the calculated date as the early start date of the successor activity.
Forward Pass for John’s Move
John begins planning his move to Atlanta the same day he accepts the job. The start date in this example is Monday, November 29, 2010. Tasks 1.1 and 2.1 can both start on that day, so the early start dates for tasks 1.1 and 2.1 are November 29. John calculates the early start date for the activities. A partial list is provided below. Compare the figure below and the figure in the next sidebar. Observe that John is willing to work on weekends, but activity 2.2.3 is delayed by two days because one of the moving companies did not provide bids on the weekend. Observe that activity 2.3 has a lead time of one day, but that relationship is between activity 2.1 and 2.3. The network path from activity 1.3 is longer, so the lead time with activity 2.1 is not considered in calculating the early start date of 2.3.
Figure 8.16 Early Start Dates Determined by a Forward Pass
Code Description Predecessors Relationships Lead/Lag Resources Duration Early Start Date
1a Contact Dion and Carlita None 0 J,D,C
.25 hr each
2 d 11/29
1b Host planning lunch 1a FS
(Finish/Start)
0 J,D,C
2 hr each
1 d 12/1
1c Develop and distribute schedule 1b FS 0 J 2 hr 1 d 12/2
1d Make hotel arrangement in Atlanta 1a FS 0 J .5 hr 1 d 11/30
2a Gather packing material None 0 D 2 hr 1 d 11/29
2bi Contact van companies and get 3 bids 1c FS 2 d 12/3
2bii 2bi FS 0 J .5 hr 1 d 12/7
2biii Sign moving contract 2bii FS 1 d 12/8
2c Pack small and delicate items 1c
2a
FS
FS
-1 C 6 hr 1 d 12/3
Doing this process manually is error prone and time consuming. Fortunately, there are computer programs to assist in the process, but the project manager must understand the process well enough to recognize computer errors. Computer software must be combined with common sense or good judgment.
• Float
Float, sometimes called slack, is the amount of time an activity, network path, or project can be delayed from the early start without changing the completion date of the project.
• Total Float
Total float is the difference between the finish date of the last activity on the critical path and the project completion date. Any delay in an activity on the critical path would reduce the amount of total float available on the project. A project can also have negative float, which means the calculated completion date of the last activity is later than the targeted completion date established at the beginning of the project.
Float in John’s Move
The last activity in John’s move has an early start date of December 28 and a duration of one day. John could start work on Wednesday, December 29. John’s first day at work is Monday, January 3, so the project has a total float of five days.
Figure 8.17 Total Project Float
• Late Start Dates
The next step is to work through the network diagram from right to left beginning with the mandated completion date, which is a milestone that is set in the project plan. Subtract the duration of each activity in each path to determine the latest date the activity could begin and still meet the project completion date. Resource calendars must be considered in the backward pass as well as the forward pass.
To calculate late start dates, begin with the project completion milestone and assign that date as the finish date of its predecessor activities. Follow these steps to calculate the late start dates of predecessor activities, assuming finish-start relationships:
• Subtract the predecessor activity’s duration from its late finish date.
• Subtract the lag time or add the lead time to the late finish date.
• Refer to the resource calendar (or calendars) that applies to the people and equipment necessary for the activity, and subtract the number of off days that the activity would span on those calendars.
• Assign the calculated date as the late start date of the predecessor activity.
The difference between the early start date and the late start date for activities on the critical path is usually the same as the total float, unless the activities are affected by the resource calendars differently in the forward and backward pass. For example, if a piece of key equipment is only available for a few days, activities that depend on it have the same start and finish dates in the forward and backward passes.
• Free Float
If activities that are not on the critical path have a difference between their early start date and their late start date, those activities can be delayed without affecting the project completion date. The float on those activities is called free float.
Key Takeaway
• To calculate total project float, begin at the start date and add the duration of each activity in each possible path through the network diagram, including nonworking days from the resource calendars, to determine the early project end date. The longest path through the network is the critical path. The difference between the early end date and the required completion date of the project is the total project float, and the start date of each activity is the early start date. To calculate the late start dates, begin with the required project completion date and work backward, subtracting the duration of each activity through each possible pathway.
Exercises
1. The path through the network diagram that has the longest total duration is the __________ path.
2. The difference between the sum of the activity durations along the critical path and the project completion date is the project _______.
3. If two sequential activities overlap and the successor activity can begin three days before the predecessor begins, those three days are called _________ time.
4. If the last activity in the critical path has a completion date that is five days later than the project completion date, the project has a _______ _________ (two words) of five days.
5. What is the difference between free float and project float?
6. If an activity has a duration of three days, how do you calculate the finish date in a way that considers availability of the resources for that activity?
7. What would be an example of lag time between two activities?
Project Float
• >Consider a project in which you have been involved that experienced unexpected delays. Describe how the project’s manager dealt with the delays. Specifically, consider if the delay was due to an activity that was on the project’s critical path, if people or resources were diverted from other tasks, or if free float existed in the original schedule. Describe the ultimate effect on the project’s completion date. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/08%3A_Project_Time_Management/8.03%3A_Critical_Path_and_Float.txt |
Learning Objectives
1. Describe methods of tracking and reporting progress.
2. Define resource leveling.
3. Describe methods of accelerating the schedule.
To manage a schedule, the project manager must know how the work is progressing compared to the master schedule and, if necessary, make changes to keep the project on time.
• Tracking and Reporting Progress
Tracking the schedule performance involves measuring the work performed against the work expected to be performed with a given expenditure of resources. Periodic reporting on the progress of the project provides the project management team with information on how the project is performing against expectations and to make decisions and corrections. Accurate measurement of schedule performance requires planning during the early stages of the project to determine the unit of measure and process for tracking progress.
• Reporting Percentage Completed
To determine the percentage of a project that has been completed, the project manager must determine what to measure. Some percentages are misleading. For example, a project that has completed 25 percent of the scheduled activities does not mean that the project is 25 percent complete. In our John’s move example, four rooms were to be packed. After the bedroom was packed, packing was not 25 percent complete. The kitchen contained five times as many items and required more delicate, time-consuming packing. John estimated that 40 percent of the items to be packed were in the kitchen, 20 percent in the living room, 20 percent in the bedroom, and the remaining 20 percent in miscellaneous locations. If the unit of measure for these activities is items packed, the packing is only 20 percent complete instead of 25 percent if rooms are the unit of measure.
The unit of measure for tracking schedule progress is related to the estimate. If hours of labor are used as the unit of measure, the percentage of packing is even less because more time is estimated to pack each item in the kitchen. As the project management team estimates the duration for each activity, the amount of work to accomplish the tasks is captured in both resources expended and a unit of measure for tracking progress. The unit of measure is related to the type of project. On a software development project, the unit of measure may be lines of code written. The unit of measure that is chosen can affect the quality of the work.
Units of Measure on a Programming Project
Steve Ballmer of Microsoft recalls early clashes with IBM over the unit of measure used to determine how much Microsoft would get paid for its work.
In IBM there’s a religion in software that says you have to count K-LOCs, and a K-LOC is a thousand lines of code. How big a project is it? Oh, it’s sort of a 10 K-LOC project. This is a 20 K-LOCer. And this is 50 K-LOCs. And IBM wanted to sort of make it the religion about how we got paid. How much money we made off OS/2, how much they did. How many K-LOCs did you do? And we kept trying to convince them—hey, if we have—a developer’s got a good idea and he can get something done in 4 K-LOCs instead of 20 K-LOCs, should we make less money? Because he’s made something smaller and faster, less KLOC. K-LOCs, K-LOCs, that’s the methodology. Ugh anyway, that always makes my back just crinkle up at the thought of the whole thing (Cringely, 2009).
In this case, IBM’s insistence on using thousands of lines of code as the unit of measure did not reward Microsoft for writing smaller code that would run faster. Microsoft and IBM cancelled their joint project for writing an operating system named OS/2. Microsoft wrote Windows, and IBM’s OS/2 operating system was not able to compete with it successfully.
On a construction project, a unit of measure may be yards of concrete poured, and on a training project, the unit of measure may be the class curriculums developed or the students taught.
• Managing Schedules Using Milestones
Milestones provide the opportunity for project management to focus on completing activities that will have the greatest impact on the schedule. On complex projects, focusing on the milestones is useful for communicating important dates to the entire project team. Project team members can then adjust their efforts to complete the activities connected to the milestone events.
Many project leaders believe that time lost on early activities can be made up toward the end of the project. Hard decisions about paying overtime and working weekends are often delayed until the end of the project when the pressure to complete the project on time becomes much stronger. Project managers who focus on milestone events create a sense of urgency to meet the milestone deadlines and spread the urgency to complete the project over the life of the project. Projects that meet milestone dates are more likely to meet project completion dates.
• Informing Stakeholders
A schedule update is distributed regularly to provide project stakeholders with an assessment of the progress of the project against the master schedule. This updated schedule is called the current schedule. The current schedule provides new start and end dates for all activities and the project. Calculations based on the current schedule may result in a new critical path and subsequent changes in the project execution plan.
The project team develops an understanding of the project productivity by comparing the current schedule to the original schedule. If the schedule is behind original estimates, the project team conducts an assessment of the causes of the schedule slippage and develops a plan to address the changes to the project. The project management team typically has several alternatives for addressing changes to the project situation. Selecting the right alternative requires good information.
• Resource Leveling
The schedule of activities is constrained by the availability of resources. If you apply the resource calendar to each activity to be sure the people and equipment are available on those dates, you can still miss an important constraint. If there are several activities that use a particular person’s time on the same days, that person could end up with too many activities scheduled for the same days and very little on other days. If key people are overloaded, the activities to which they are assigned might not be completed on time. Managing the schedule of activities to ensure that enough resources are available to complete each task by distributing the work load is called resource leveling. Activities to which that person is assigned and that have free float can be delayed to reduce work overload of key people.
• Accelerating the Schedule
The project manager must know how to accelerate a schedule to compensate for unanticipated events that delay critical activities or to accommodate changes in the project completion date. Compressing or crashing the schedule are terms used to describe the various techniques used to shorten the project schedule. Project managers utilize several techniques to keep projects on schedule.
• Contingency Resources
One method of accelerating the schedule is to add activities to the critical path that are empty or that are optional. If the project is behind schedule, the time can be made up by dropping these activities. This extra time that is built into the schedule is called contingency time, buffer, or reserve time.
• Reassigning Resources
Activities that are not on the critical path that have free float can be delayed without delaying the end date of the project if they start by the late start date. Project managers can divert some resources from activities with free float to activities on the critical path without delaying the completion of the project.
• Changing Scope
The unit cost of work to be performed on a project is calculated at the beginning of the project based on the execution strategy of the project to meet the project completion date. If the project completion date is moved up, then the unit cost of work will likely increase. Conversely, a project team may be able to save money by extending the project end date. With more time, the project team may be able to schedule activities in such a way to reduce their costs. For example, an activity requiring overtime to be paid can now pay the labor at normal rates, saving the overtime premium. Changing elements of the master schedule means a change in scope. Scope changes often affect costs and require agreement by the parties who signed the original scope documents.
• Additional Resources
Another option is to allocate funds that can be used to add resources if necessary. Available resources can be increased by adding overtime to existing resource calendars or by hiring additional contract workers or renting additional equipment.
Adding Resources to the Dreamliner Project
When Boeing sales of the new 878 Dreamliner Airplane exceeded expectations, contractors who were building the plane were asked to increase production while maintaining all quality and safety requirements. All contractors involved in the plane production were affected by this change.
• >One project team was responsible for developing and delivering training to the new employees who would be building the fuselage of the Dreamliner. Training for new employees had to be complete three months early and the project team developed an execution strategy to meet the new deadlines. The project had a month of float, so the project accelerated the schedule by two months. The team authorized overtime from forty to fifty hours a week for team members working activities on the critical path. The project team leased additional space and hired contractors to perform selected work packages on the critical path and delayed the production of library quality documents until after the critical dates on the project. Authorizing overtime and hiring contractors added a 15 percent cost to the project. Overtime and the procurement of additional contract help was authorized only for work packages on the critical path because work not on the critical path would not accelerate the schedule.
• >A concrete contractor on a construction project may be scheduled to lay one thousand yards of a building foundation by pouring one hundred yards a day for ten days. Foundations are on the critical path, and because of rain, the project is three days behind schedule. The project manager asked the concrete contractor to bring in a second crew and pour two hundred yards a day, and the work is complete in five days.
• Changing Quality
Another option for accelerating the schedule is the changing of the quality specifications of the product. This is usually done as a scope change.
Making Up Time by Reducing Quality
At a midwestern university, a new building was being built, but it was behind schedule. To speed up the installation of the heating and cooling equipment, it was decided to make the zones of control larger, which meant that each floor would have fewer points where temperature was sensed and controlled and fewer air flow control boxes. The contract did not specify the zone size or how many control points were required on each floor of the building, so this change did not require a change in scope. As a result, when the sun is coming in on the south side of the building, those rooms get as much heat or cooling as the rooms on the north side, so they are often too hot. If the single temperature controller on each floor is set to a lower temperature, the rooms on the north side are too cold. The client for the building did not realize this change had been made until they were in the building for several months and the project was completed.
Key Takeaways
• Progress can be measured by determining the percentage of resources expended, completion of activities by scheduled dates, milestones achieved, or fraction of activities accomplished. Standards used to measure progress, particularly when partial payment to contractors is concerned, should be specified in contract documents.
• Resource leveling is reallocating people and equipment to remove periods of overuse or underuse.
• Unplanned delays and costs can be anticipated by including contingency time and budget amounts where needed to keep the schedule on time. Resource allocation and resource calendars should be examined to determine if a resource is overcommitted. Free float can be used to delay noncritical activities that use the same resource to allocate its time more evenly. If it is necessary to accelerate the schedule, activities that are not on the critical path can be delayed using their free float and their resources can be moved to activities on the critical path to complete them sooner. Contingency resources can be committed to speeding up the activities. If necessary, the scope can be changed to bring in additional resources or lower the quality.
Exercises
1. Accelerating the project schedule is also known as ________ the project.
2. Extra amounts of time and money that are built into the schedule to buffer against delays and extra costs are called ___________ time or funds.
3. What might be a drawback to a reporting method that stated project progress as a fraction of activities completed?
4. How does a manager accelerate a project by using free float?
Progress Reports
• >From the client’s point of view, describe what you think would be the advantages of each type of progress measurement. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/08%3A_Project_Time_Management/8.04%3A_Managing_the_Schedule.txt |
Learning Objectives
1. Describe the relationship between the choice of software and project complexity.
2. Identify the features that should be considered when selecting software for project management.
Low-complexity projects can be managed with lists of activities on paper or by using an outline in word processing or spreadsheet software. This software is inadequate for tracking complex projects. Fortunately, there are several dedicated software programs that keep track of the complex relationships between activities and resources.
• Appropriate to Project Complexity
Simple projects can be tracked using general purpose word processing and spreadsheet software like those available in Microsoft Office or OpenOffice. Medium-complexity projects benefit from dedicated project management software such as Microsoft Project and OpenProject. Complex projects require software that can track the interactions of thousands of tasks and produce sophisticated reports such as Oracle’s P6.
• Features
There are dozens of computer software programs available with a wide range of prices. Some open source software programs are free, but others cost up to a thousand dollars. There are several considerations for selecting a project management software besides price.
• Currently Used Software
Use software that is already in use and with which most team members are already familiar. If software that is used by most team members is appropriate to the complexity of your project, it is the default choice. It is also valuable to know what software is used by key vendors or project partners so files can be exchanged electronically in the same format.
• Basic Features
Any project management software that is selected must have the ability to track and display basic features such as the following:
• Durations
• Relationships
• Milestones
• Start and end dates
• Resource calendars
• Graphic displays using Gantt and network charts
• Collaboration
Team members should be able to view the project schedule. Some software products require the use of expensive proprietary software that runs on the company’s server and that will allow several different team members to use the same schedule and restricts the use of the software to team members who have access to the company’s computer system. Other software products use a server on the Internet that is open to team members and vendors who have valid passwords.
• Advanced Features
For more complex projects, look for advanced features, such as the following:
• Issue tracking that tracks problems, actions, and resolutions
• Project portfolio management that tracks and compares groups of related projects
• Automatic resource leveling and alerts when a resource is overscheduled
• Document management feature that tracks contracts, bids, scope changes, and incidents
Key Takeaways
• Medium- to high-complexity projects usually require the use of software that is designed specifically for managing projects.
• Features to look for when choosing project management software include (1) compatibility with existing software at the company or its vendors, (2) basic features for managing medium-complexity projects, (3) a method for collaboration between team members, and (4) if needed, advanced features for managing multiple projects.
Exercises
1. When choosing software, the new software should be __________ with the software currently in use and with the software used by vendors and partners.
2. How does the complexity of the project affect the choice of software used to manage it?
3. What is an example of an advanced feature that is available for managing the most complex projects? Explain why this feature is needed for complex projects.
Learning New Software
• >Describe the methods that work best for you when you learn a new computer program, such as self-directed exploration, a textbook, self-paced tutorials, or organized classes with an instructor. If you wanted to require that all the members of your ten-person team use project management software that was new to all of them, how would you recommend that they learn the software?
8.06: Exercises
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Compare the Gantt and Network charts. Describe the uses of each type of chart.
2. Choose a project with which you are familiar (it could be a simple project like John’s move) and describe how the project could be crashed using each of the methods described in the text.
3. Describe what size project could be done using general purpose word processing and spreadsheet software and how you could structure the data in those documents to make it easier to transfer that data into a project management software, if necessary.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Describe a personal experience where the average amount of work required of you was appropriate but the scheduling of that work was so uneven that there were periods when you could not get the work done on time and other periods when you did not have enough to do. Describe how you would have used resource leveling and free float to distribute your workload if you had been the manager. Consider the situations and solutions offered by classmates and suggest other ways they could have distributed their workloads more evenly.
2. Describe your experience working with a spreadsheet to manage data such as expenses or activities. How would the ability to treat them like data by sorting and filtering help you to prepare reports? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/08%3A_Project_Time_Management/8.05%3A_Project_Scheduling_Software.txt |
Learning Objectives
1. Use dedicated project management software to manage changes to the work breakdown structure (WBS).
2. Use the outline and subtotal features in a spreadsheet to create a low-complexity WBS.
3. Use the outline feature in a word processor to create a low-complexity WBS.
• Using Dedicated Project Management Software
General purpose software such as word processing or spreadsheet programs are not capable of managing changes in relationships between activities or determining the critical path. They might suffice for the simplest projects, but more sophisticated interactive programs are needed for determining the effects of changes to interconnected activities. Small projects performed by groups with limited budgets can use open-source software such as OpenProj.
To complete this exercise, you must have permission to download and install software on your computer or use a computer that has OpenProj installed on it.
• Install OpenProj
Complete the exercise by following these instructions:
1. Open a web browser and go to http://openproj.org. The program may be downloaded from this site, as shown in Figure 8.18 “Single User and Collaborative Versions”.
Figure 8.18 Single User and Collaborative Versions
2. >OpenProj is an open-source project management software that resembles Microsoft Project.
3. Click the Download now button. You must have administrative privileges to install software on the computer you are using.
4. Click the arrow next to the Save button, and then save this program to your computer in a location where you can find it again.
5. Open Windows explorer or your file finder program, locate the file you downloaded, and then double-click on it. Run the installation program and follow the directions on the screen.
Figure 8.19 Single User and Collaborative Versions
6. Open Windows explorer or your file finder program, locate the file you downloaded, and then double-click on it. Run the installation program and follow the directions on the screen.
7. After OpenProj is installed, start the program. Choose to create a new project. In the New Project dialog box, in the Project Name box, type Ch08StudentName replacing StudentName with your name without spaces.
8. In the Manager box, enter your name. The current date will display in the Start Date box by default. Your date will differ from the example shown in Figure 8.20 “Identify the Project and Its Manager”.
Figure 8.20 Identify the Project and Its Manager
9. Capture this screen. Paste it into a blank word processing document named Ch08OpenProjStudentName and save the file using the Word 2003 .doc file format.
10. In OpenProj, click OK. Leave this program running for use in the next section.
• Import WBS from Excel
1. Use Windows Explorer to navigate to the location where the supplemental files for this chapter are stored. Download the Excel spreadsheet Ch08JohnsMove.xls and then open it in Excel.
2. Select cells B3 through C36, as shown in Figure 8.21 “List of Activities and Their Durations Selected in a Spreadsheet”.
3. Copy this range of cells to the clipboard. (Use CTRL+C in Windows.)
4. Switch to the OpenProj window. In row 1, below Name, click the empty box. Paste the content. (Use CTRL+V in Windows.) The activities and their durations are placed in the project window, as shown in Figure 8.22 “List of Activities and Their Durations Pasted into OpenProj”.
Figure 8.22 List of Activities and Their Durations Pasted into OpenProj
5. Capture this screen and paste it into Ch08OpenProjStudentName.doc.
6. In OpenProj, move the pointer to the vertical line to the right of the Start column heading. Drag this line to the left to minimize the width of the Start column. Repeat this process to minimize the width of the End column to minimize both columns, as shown in Figure 8.23 “Reduce Size of Start and End Columns”.
Figure 8.23 Reduce Size of Start and End Columns
7. In the first column, click the cell with a 2 in it. Press and hold the Shift key. In the first column, click the cell with a 5 to select rows 2 through 5.
8. On the toolbar, click the Indent button. The four selected activities are indented as subordinate activities, and the activity in the row above becomes the group name. A black group symbol spans the group in the chart at the right, as shown in Figure 8.24 “Group Defined”.
Figure 8.24 Group Defined
9. In the Predecessor column, in rows 3–5, type 2, 3, and 2.
The Gantt chart at the right adjusts the positions of the bars automatically and connects them with arrows to indicate their finish-start relationship, as shown in Figure 8.25 “List of Activities and Their Durations Selected in a Spreadsheet”. Notice that Saturdays and Sundays are gray. They are not included as workdays. This will be addressed in a later step.
Figure 8.25 List of Activities and Their Durations Selected in a Spreadsheet
10. Repeat this process to indent the activities under the Prepacking, Packing, Moving, Unpacking, and Project Closeout headings.
11. Indent activities 16–19 another level to make them subactivities under Pack Apartment.
12. Fill in the remaining predecessors. Refer to the Predecessors column on the John’s Move worksheet or Figure 8.25 “List of Activities and Their Durations Selected in a Spreadsheet” . Notice where two predecessors are indicated, they are separated by a semicolon. Notice that activities that span the weekend days are extended by two days, as shown in Figure 8.26 “Bar Chart Showing Durations and Relationships”.
Figure 8.26 Bar Chart Showing Durations and Relationships
13. Capture this screen and paste it into Ch08OpenProjStudentName.doc.
14. In OpenProj, on the menu bar, click File and then click Save. Navigate to a folder where you save your files for this class and save the project file. Notice the project file name extension is .pod. Leave the project open.
15. Review your work in OpenProj and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch08StudentName.pod Ch08StudentName.pod Used a different name
Use dedicated project management software to manage changes to the WBS Activities imported from Excel; correct groups; correct predecessors; dates will differ from figures Same as Best Mistakes with multiple predecessors; incorrect groupings
16. Review your work in Ch08OpenProjStudentName.doc and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch08OpenProjStudentName.doc Same name saved as .docx file Used a different name
Use dedicated project management software to manage changes to the WBS Three screen captures that show the development of the WBS in OpenProj Same as Best Missing screens or lack of student name in first screen
17. Save the files and submit them as directed by the instructor.
• Using the Subtotal and Outline Features in Excel 2007 for a Low-Complexity Work Breakdown Structure
Some advanced spreadsheet programs such as Microsoft Excel can sort tables of text and data. If the text is used as category labels, the sorting feature can be used to bring all the same type of expenses together, after which they can be subtotaled by category. The individual rows in each category can be hidden, and the category text and a subtotal for each column that contains numeric data such as durations or costs are displayed. This feature may be used to manage the costs or durations associated with each item in a work breakdown structure for a low-complexity project.
Create a WBS using the subtotal and outline features of Microsoft Excel 2007:
1. Navigate to the folder where the student files for this chapter are located and then open Ch08JohnsMove.xls. Do not save the file—it will not be submitted.
2. Observe that a group name has been given to each row of the WBS in column E.
3. Click cell E1, and then type your name.
4. On the Data tab, in the Outline group, click Subtotal. The Subtotal dialog box displays.
5. Under At each change in click the arrow button. The program shows a list of column headings, as shown in Figure 8.27 “Subtotal Dialog Box”.
6. On the list of column headings, click Group. A subtotal is calculated each time the label in this column changes.
7. In the Subtotal dialog box, under Use function, click the arrow button and then click Sum.
8. In the Subtotal dialog box, under Add subtotal to, next to Duration, click the check box. Click to remove any other check boxes under Add subtotal to if necessary. The durations will be summed for each group. Refer to Figure 8.28 “Subtotal Dialog Box Set to Sum the Durations for Each Type of Group”.
9. Capture this screen. Open a blank word processing document and save it as Ch08WBSExcel2007StudentName.doc using the Word 2003 file format. On the first line, type your name and the current date. Below the date, paste the screen capture. Leave the file open.
10. In Ch08JohnsMove.xls, in the Subtotal dialog box, click OK. Subtotals are inserted below each type of group label, as shown in Figure 8.29 “Subtotal Dialog Box Set to Sum the Durations for Each Type of Group”.
11. Capture this screen and then paste it into Ch08WBSExcel2007StudentName.doc.
12. In Ch08JohnsMove.xls, at the upper left corner of the worksheet, click the number 2. The detail of each type of group is hidden and the subtotals are displayed, as shown in Figure 8.30 “WBS Subtotaled and Collapsed”.
13. Capture this screen and then paste it into Ch08WBSExcel2007StudentName.doc.
14. At the upper left corner of the worksheet, click 3. The outline is expanded.
15. On the Data tab, in the Outline group, click Subtotal. In the Subtotal dialog box, click the Remove All button. The subtotals and outline are removed.
16. Close the spreadsheet. Do not save the changes.
17. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch08WBSExcel2007StudentName.doc Same as Best Chapter number or student name missing
Use the outline and subtotal features in a spreadsheet to create a low-complexity work breakdown structure Name and date in first row; three screen captures that show the use of subtotal and outline Same as Best Name not in first line; name not shown in screen captures
18. Save the file and submit it as directed by the instructor.
• Using the Outline Feature in Word 2007 for a Low-Complexity Work Breakdown Structure
Advanced word processing software includes an outlining feature that allows the user to work in an outline format with collapsible headings. This feature may be used to define a work breakdown structure in a low-complexity project.
Create a WBS using an outline in Microsoft Word 2007:
1. Open MS Word 2007 and open a blank document. Save the file as Ch08WBSStudentName.docx using the Word 2007 document format that uses the .docx file extensions.
2. On the Home tab, in the Styles group, scroll to display the Title option, and then click Title.
3. Type John’s Move and then press Enter. The text is formatted using the title style as shown in Figure 8.31 “Title Style”.
4. On the second line, type your name and then press Enter.
5. On the third line, type the date and then press Enter. Notice that the title style does not apply to the following lines. The program’s default style is called the normal style.
6. On the Home tab, in the Styles group, scroll and click Heading 1. Type Plan Move and then press Enter. The Heading 1 style is applied.
7. On the Home tab, in the Styles group, click Heading 2. Type Contact Dion and Carlita and press Enter. Repeat this process to enter the following items formatted as Heading 2. Refer to Figure 8.32 “Title, Body Text, Heading 1, and Heading 2”.
• Host Planning Lunch
• Develop and Distribute Schedule
• Make Hotel Arrangement in Atlanta
• Prepacking
8. Open a new blank word processing document. On the first line, type your name and the date. Save the new document as Ch08OutlineWord2007StudentName.doc using the Word 2003 file format.
9. Switch to Ch08WBSStudentName.docx. Capture the screen that shows the outline at this point in the development of the exercise. Paste the screen into Ch08OutlineWord2007StudentName.doc. Save the file but leave it open.
10. In Ch08WBSStudentName.docx, at the end of the line that begins with Contact Dion and Carlita, click to place the insertion point and then press Enter.
11. Type Phone numbers are: Dion 555-0125, Carlita 555-0234. Observe that the additional text is formatted in normal style, similar to the name and date, as shown in Figure 8.33 “Screen Capture and Phone Numbers Added”.
12. Select the line that begins with Pre-packing. On the Home tab, in the Styles group, click Heading 1. The Heading 1 style is applied.
13. Use this process to fill in the remaining items in the WBS, as shown in Figure 8.34 “WBS with Three Levels”, using heading styles 1, 2, and 3.
14. On the View tab, in the Document Views group, click the Outline button. Change the zoom, if necessary, to display all the document text, as shown in Figure 8.35 “WBS in Outline View”. Each heading is also formatted with a corresponding outline level of the same number.
15. Capture this screen and paste it into Ch08OutlineWord2007StudentName.doc.
16. In Ch08WBSStudentName.docx, on the Outlining tab, in the Outline Tools group, click the Show Level button, and then click Level 2. Text that is formatted with Headings 1 and 2 are displayed while the title, normal text, and lower-level headings are not. Plus signs indicate the presence of hidden text, as shown in Figure 8.36 “Display of Levels 1 and 2”.
17. Capture this screen and paste it into Ch08OutlineWord2007StudentName.doc. Save Ch08OutlineWord2007StudentName.doc.
18. In Ch08WBSStudentName.docx, on the Outlining tab, in the Close group, click the Close Outline View button. Save the document.
19. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch08OutlineWord2007StudentName.doc Same as Best but in .docx format Chapter number or student name missing
Use the outline feature in a word processor to create a low-complexity WBS Name and date on first line; three screen captures that show the development and use of the WBS in Word 2007’s outline form using Heading styles 1, 2, and 3 Same as Best Missing information or screens
File name Ch08WBSStudentName.docx Same as Best Chapter number or student name missing
Use the outline feature in a word processor to create a low-complexity WBS Title style applied to the first line; normal style used for name, date, and phone numbers; heading styles 1, 2, and 3 used as directed; can be collapsed and expanded using the Outline view Same as Best Incorrect styles applied to some lines
20. Save the files and submit them as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/08%3A_Project_Time_Management/8.07%3A_Software_and_Technology_Exercises.txt |
Learning Objectives
1. Describe methods of estimating costs.
2. Identify the effects of project phase and complexity on the choice of estimating method.
3. Describe the method of combining cost estimates with a schedule to create a budget.
• Estimating Costs to Compare and Select Projects
During the conceptual phase when project selection occurs, economic factors are an important consideration when choosing between competing projects. To compare the simple paybacks or internal rates of return between projects, an estimate of the cost of each project is made. The estimates must be accurate enough so that the comparisons are meaningful, but the amount of time and resources used to make the estimates should be appropriate to the size and complexity of the project. The methods used to estimate the cost of the project during the selection phase are generally faster and consume fewer resources than those used to create detailed estimates in later phases. They rely more on the expert judgment of experienced managers who can make accurate estimates with less detailed information. Estimates in the earliest stages of project selection are usually made using estimates based from previous projects that can be adjusted—scaled—to match the size and complexity of the current project or by applying standardized formulas.
• Analogous Estimate
An estimate that is based on other project estimates is an analogous estimate. If a similar project cost a certain amount, then it is reasonable to assume that the current project will cost about the same. Few projects are exactly the same size and complexity, so the estimate must be adjusted upward or downward to account for the difference. The selection of projects that are similar and the amount of adjustment needed is up to the judgment of the person who makes the estimate. Normally, this judgment is based on many years of experience estimating projects, including incorrect estimates that were learning experiences for the expert.
Analogous Estimate for John’s Move
In the John’s move example, John asked a friend for advice about the cost of his move. His friend replied, “I moved from an apartment a little smaller than yours last year and the distance was about the same. I did it with a fourteen-foot truck. It cost about \$575 for the truck rental, pads, hand truck, rope, boxes, and gas.” Because of the similarity of the projects, John’s initial estimate of the cost of the move was less than \$700 and he decided that the cost would be affordable and the project could go forward.
Less experienced managers who are required to make analogous estimates can look through the documentation that is available from previous projects. If those projects were evaluated using the Darnall-Preston Complexity Index (DPCI), the manager can quickly identify projects that have similar profiles to the project under consideration even if those projects were managed by other people. Comparing the original estimates with the final project costs on several previous projects with the same DPCI ratings gives a less experienced manager the perspective that it would take many years to acquire by trial and error. It also provides references the manager can use to justify the estimate.
• Parametric Estimate
If the project consists of activities that are common to many other projects, average costs are available per unit. For example, if you ask a construction company how much it would cost to build a standard office building, they will ask for the size of the building in square feet and the city in which the building will be built. From these two factors—size and location—the company’s estimator can predict the cost of the building. Factors like size and location are parameters—measurable factors that can be used in an equation to calculate a result. The estimator knows the average cost per square foot of a typical office building and adjustments for local labor costs. Other parameters such as quality of finishes are used to further refine the estimate. Estimates that are calculated by multiplying measured parameters by cost-per-unit values are parametric estimates.
Parametric Estimate for John’s Move
To estimate the size of the truck needed for John’s move, the parameter used by a truck rental company is the number of bedrooms, as shown below.
Figure 9.1 Number of Bedrooms Used for Parametric Cost Estimate
The moving company assumes that the number of bedrooms is the important parameter in determining how big a truck is needed for a move. For John’s move, he has a one-bedroom apartment, so he chooses the fourteen-foot truck. Once the size is determined, other parameters, such as distance and days, are used to estimate the cost of the truck rental.
• Estimating Costs to Initiate Projects
Once the project is selected, more accurate estimates are often needed to raise funds and agree on contracts with vendors in the initiation phase.
Estimate During the Initiation Phase of John’s Move
John recalled that his friend also told him how tiring it was to do all the packing, loading, and driving himself, and some items were damaged when the load shifted inside the truck during the trip. John decides to call in favors from two friends, Dion and Carlita, to help him pack in Chicago and to hire some of the skilled labor like that needed to load the truck properly.
• Vendor Bid Analysis
If services or products will be provided by vendors, the cost of those services can be determined by issuing a request for proposal (RFP). The RFP describes the work, service, or product to be provided by the vendor and the quality level required. The RFP is sent to a list of vendors who are qualified—meet standards of reliability and capability—to perform this type of work. They respond with a proposal for completing the work described in the RFP, including an estimate of the cost. Some government organizations are required to use the qualified vendor with the lowest bid. Other organizations are not bound to take the lowest bid but are usually required to justify their reasons for not doing so.
Using RFPs to Make Estimates on John’s Move
John wants to find out how much it would cost to hire a skilled crew to load and secure the furniture in the truck and then have another crew from the same company meet him in Atlanta to unload the truck and help him unpack. He is not sure if any companies offer this option, so he decides to ask three moving companies for bids. He also decides to ask for bids on a standard move that includes all phases of packing, loading, transportation, and unloading as a comparison to see if his cost-saving plan is worth the extra effort.
The project management team can review the responses by several vendors to the RFP to determine if their estimate of the cost of that aspect of the project is close to the estimate made during the project selection stage. If the estimates by the vendors are much higher than expected, and if the project cannot be completed for the cost that was used to select the project, the selection decision might have to be reconsidered. Reconsidering the selection of the project should take into consideration the economic ratings of the competing projects that were not chosen and who the project champions are for the projects that would be affected.
Some vendors may suggest an alternative way to meet the objective of the RFP in a more cost-effective manner that does not match the specifics of the RFP. Such alternatives can reduce costs if they are acceptable.
• Bottom-Up Estimating
The most accurate and time-consuming estimating method is to identify the cost of each item in each activity of the schedule, including labor and materials. If you view the project schedule as a hierarchy where the general descriptions of tasks are at the top and the lower levels become more detailed, finding the price of each item at the lowest level and then summing them to determine the cost of higher levels is called bottom-up estimating.
Bottom-Up Estimate for John’s Move
After evaluating the bids by the moving companies, John decides the savings are worth his time if he can get the packing done with the help of his friends. He decides to prepare a detailed estimate of costs for packing materials and use of a rental truck. He looks up the prices for packing materials and truck rental costs on company Web sites and prepares a detailed list of items, quantities, and costs, as shown below.
Figure 9.2 Detailed Cost Estimate
Category Description Quantity Unit Price Cost
Packing Materials Small Boxes 10 \$1.70 \$17.00
Packing Materials Medium Boxes 15 \$2.35 \$35.25
Packing Materials Large Boxes 7 \$3.00 \$21.00
Packing Materials Extra Large Boxes 7 \$3.75 \$26.25
Packing Materials Short Hanger Boxes 3 \$7.95 \$23.85
Packing Materials Box Tape 2 \$3.85 \$7.70
Packing Materials Markers 2 \$1.50 \$3.00
Packing Materials Mattress/Spring Bags 2 \$2.95 \$5.90
Packing Materials Lift Straps per Pair 1 \$24.95 \$24.95
Packing Materials Bubble Wrap 1 \$19.95 \$19.95
Packing Materials Furniture Pads 4 \$7.95 \$31.80
Truck Rental \$400.00
Truck Gas at 10mpg 200 \$2.25 \$45.00
• >This type of estimate is typically more accurate than an analogous or parametric estimate. In this example, the sum of packing materials and truck expenses is estimated to be \$661.25.
• The detail can be rolled up—subtotaled—to display less detail. This process is made easier using computer software. On projects with low complexity, the cost estimates can be done on spreadsheet software.
Rolling Up a Detailed Cost Estimate for John’s Move
For example, the subtotal feature could be used in Excel and collapsed to show the subtotals for the two categories of costs, as shown below.
Figure 9.3 Sum of Detailed Costs by Type
On larger projects, software that manages schedules can also manage costs and display costs by activity and by category.
• Activity-Based Estimates
An activity can have costs from more than one vendor plus costs for labor and materials from internal sources. Detailed estimates from all sources can be reorganized so those costs that are associated with a particular activity can be grouped by adding the activity code to the detailed estimate, as shown in Figure 9.4 “Detailed Costs Associated with Activities”.
Figure 9.4 Detailed Costs Associated with Activities
Category Description Activity Quantity Unit Price Cost
Packing Materials Small Boxes 2a 10 \$1.70 \$17.00
Packing Materials Medium Boxes 2a 15 \$2.35 \$35.25
Packing Materials Large Boxes 2a 7 \$3.00 \$21.00
Packing Materials Extra Large Boxes 2a 7 \$3.75 \$26.25
Packing Materials Short Hanger Boxes 2a 3 \$7.95 \$23.85
Packing Materials Box Tape 2a 2 \$2.85 \$7.70
Packing Materials Markers 2a 2 \$1.50 \$3.00
Packing Materials Mattress/Spring Bags 2a 2 \$2.95 \$5.90
Packing Materials Lift Straps per Pair 2a 1 \$24.95 \$24.95
Packing Materials Bubble Wrap 2a 1 \$19.95 \$19.95
Packing Materials Furniture Pads 2a 4 \$7.95 \$31.80
Truck Rental 2b \$400.00
Truck Gas at 10mpg 2b 200 \$2.25 \$45.00
• >The detailed cost estimates can be sorted by activity and then subtotaled by activity to determine the cost for each activity.
• Establishing a Budget
Once the cost of each activity is estimated, it is possible to determine how much money is needed for each group of tasks and for the whole project.
• Cost of Tasks
The cost of each group of activities of the project can be estimated by summing the costs of the components of each activity in the group. This process of subtotaling costs by category or activity is called cost aggregation.
• Budget Timeline
Because the costs are associated with activities and each activity has a start date and a duration, it is possible to calculate how much money needs to be spent by any particular date during the project. The money needed to pay for a project is usually transferred to the project account shortly before it is needed. These transfers must be timed so that the money is there to pay for each activity without causing a delay in the start of the activity. If the money is transferred too far in advance, the organization will lose the opportunity to use the money somewhere else, or they will have to pay unnecessary interest charges if the money is borrowed. A schedule of money transfers is created that should match the need to pay for the activities. The process of matching the schedule of transfers with the schedule of activity payments is called reconciliation. Refer to Figure 9.5 “Fund Transfers and Expenditures” that shows the costs of ten major activities in a project. Funds are transferred into the project account four times. Notice that during most of the project, there were more funds available than were spent except at activity 6 when all the available funds were spent.
Figure 9.5 Fund Transfers and Expenditures
In the project budget profile shown in Figure 9.5 “Fund Transfers and Expenditures”, there is no margin for error if the total of the first six activities exceeds the amount of funding at that point in the project.
Contractual agreements with vendors often require partial payment of their costs during the project. Those contracts can be managed more conveniently if the unit of measure for partial completion is the same as that used for cost budgeting. For example, if a contractor is pouring concrete for a large project, their contract may call for partial payment after 25 percent of the total volume of concrete is poured as determined by cubic yards of concrete.
Key Takeaways
• Analogous estimating scales an estimate from a similar project to match the current project. Parametric estimating multiplies a standard cost-per-unit value by the number of units in the project. Bids from contractors can be compared to estimate costs. Bottom-up estimating determines the cost of each detail and aggregates them to determine activity cost estimates.
• During the project selection and approval stage, rough estimates are used that are usually obtained using analogous and parametric methods. Vendor bid analysis and detailed bottom-up estimates are used in the initiation phase to estimate project costs.
• Detailed estimates are associated with activities and aggregated during the planning phase to create an activity-based budget. Funding transfers are arranged to reconcile money spent to money from funding sources in a timely manner.
Exercises
1. An estimate that is obtained by scaling up an estimate from a similar project is a(n) ___________ estimate.
2. An estimate that uses standard costs per unit such as price per square foot or price per cubic yard is a ____________ estimate.
3. Matching the transfer of funds into the project account with the money spent is called __________________.
Estimates
• >Consider a project in which you have been involved that used an estimating technique to provide numbers for the conceptual plan. Briefly describe the type of project and identify the estimating method used. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/09%3A_Estimating_and_Managing_Costs/9.01%3A_Estimating_Costs.txt |
Learning Objectives
1. Describe methods to manage cash flow.
2. Describe the terms and relationships of budget factors used in earned value analysis.
3. Calculate and interpret budget and schedule variances.
4. Calculate and interpret the schedule performance index and the cost performance index.
5. Calculate and interpret estimates to complete the project.
6. Calculate the revised final budget.
Projects seldom go according to plan in every detail. It is necessary for the project manager to be able to identify when costs are varying from the budget and to manage those variations.
• Managing Cash Flow
If the total amount spent on a project is equal to or less than the amount budgeted, the project can still be in trouble if the funding for the project is not available when it is needed. There is a natural tension between the financial people in an organization, who do not want to pay for the use of money that is just sitting in a checking account, and the project manager, who wants to be sure that there is enough money available to pay for project expenses. The financial people prefer to keep the company’s money working in other investments until the last moment before transferring it to the project account. The contractors and vendors have similar concerns, and they want to get paid as soon as possible so they can put the money to work in their own organizations. The project manager would like to have as much cash available as possible to use if activities exceed budget expectations.
• Contingency Reserves
Most projects have something unexpected occur that increases costs above the original estimates. If estimates are rarely exceeded, the estimating method should be reviewed because the estimates are too high. It is not possible to predict which activities cost more than expected, but it is reasonable to assume that some of them will be. Estimating the likelihood of such events is part of risk analysis, which is discussed in more detail in a later chapter.
Instead of overestimating each cost, money is budgeted for dealing with unplanned but statistically predictable cost increases. Funds allocated for this purpose are called contingency reserves (Project Management Institute, Inc., 2008). Because it is likely that this money will be spent, it is part of the total budget for the project. If this fund is adequate to meet the unplanned expenses, then the project will complete within the budget.
• Management Reserves
If something occurs during the project that requires a change in the project scope, money may be needed to deal with the situation before a change in scope can be negotiated with the project sponsor or client. It could be an opportunity as well as a challenge. Money can be made available to the project to be used at the discretion of the manager to meet needs that would change the scope of the project. These funds are called management reserves. Unlike contingency reserves, they are not likely to be spent and are not part of the project’s budget baseline, but they can be included in the total project budget (Project Management Institute, Inc., 2008).
• Evaluating the Budget During the Project
A project manager must regularly compare the amount of money spent with the budgeted amount and report this information to managers and stakeholders. It is necessary to establish an understanding of how this progress will be measured and reported.
Reporting Budget Progress on John’s Move
In the John’s move example, he estimated that the move would cost about \$1,500 and take about sixteen days. Eight days into the project, John has spent \$300. John tells his friends that the project is going well because he is halfway through the project but has only spent a fifth of his budget. John’s friend Carlita points out that his report is not sufficient because he did not compare the amount spent to the budgeted amount for the activities that should be done by the eighth day.
As John’s friend points out, a budget report must compare the amount spent with the amount that is expected to be spent by that point in the project. Basic measures such as percentage of activities completed, percentage of measurement units completed, and percentage of budget spent are adequate for less complex projects, but more sophisticated techniques are used for projects with higher complexity.
• Earned Value Management
A method that is widely used for medium- and high-complexity projects is the earned value management (EVM) method. EVM is a method of comparing the budgeted and actual costs of a project periodically during the project. It combines the scheduled activities with detailed cost estimates of each activity. It allows for partial completion of an activity if some of the detailed costs associated with the activity have been paid but others have not. The earned value analysis method compares the anticipated cost of work that is scheduled to be done at a given point in time against what has been done and how much it actually cost.
• The Budgeted Cost of Work and Planned Value
The budgeted cost of work scheduled (BCWS) comprises the detailed cost estimates for each activity in the project. The amount of work that should have been done by a particular date is the planned value (PV). These terms are used interchangeably by some sources, but the planned value term is used in formulas to refer to the sum of the budgeted cost of work up to a particular point in the project, so we will make that distinction in the definitions in this text for clarity.
Planned Value on Day Six of John’s Move
On day six of the project, John should have taken his friends to lunch and purchased the packing materials. The portion of the BCWS that should have been done by that date (the planned value) is listed in Figure 9.6 “Planned Value for Lunch and Packing Materials”. This is the planned value for day six of the project.
Figure 9.6 Planned Value for Lunch and Packing Materials
Description Quantity Cost
Lunch 3 \$45.00
Small Boxes 10 \$17.00
Medium Boxes 15 \$35.25
Large Boxes 7 \$21.00
Extra Large Boxes 7 \$26.25
Short Hanger Boxes 3 \$23.85
Box Tape 2 \$7.70
Markers 2 \$3.00
Mattress/Spring Bags 2 \$5.90
Lift Straps per Pair 1 \$24.95
Bubble Wrap 1 \$19.95
Furniture Pads 4 \$31.80
Total \$261.65
• Budgeted Cost of Work Performed and Earned Value
The budgeted cost of work performed (BCWP) is the budgeted cost of work scheduled that has been done. If you sum the BCWP values up to that point in the project schedule, you have the earned value (EV).
• Actual Cost
The amount spent on an item is often more or less than the estimated amount that was budgeted for that item. The actual cost (AC) is the sum of the amounts actually spent on the items.
Comparing PV, EV, and AC in John’s Move on Day Six
Dion and Carlita were both trying to lose weight and just wanted a nice salad. Consequently, the lunch cost less than expected. John makes a stop at a store that sells moving supplies at discount rates. They do not have all the items he needs, but the prices are lower than those quoted by the moving company. They have a very good price on lifting straps so he decides to buy an extra pair. He returns with some of the items on his list, but this phase of the job is not complete by the end of day six. John bought half of the small boxes, all of five other items, twice as many lifting straps, and none of four other items. John is only six days into his project, and his costs and performance are starting to vary from the plan. Earned value analysis gives us a method for reporting that progress. Refer to the figure below.
Figure 9.7 Planned Value, Earned Value, and Actual Cost
Project Earned Value Analysis–Day 6
Budgeted Cost of Work Scheduled (BCWS) Budgeted Cost of Work Performed (BCWP) Actual Cost (AC)
Description Quantity Cost Quantity Cost Quantity Cost
Lunch 3 \$45.00 3 \$45.00 3 \$35.00
Small Boxes 10 \$7.00 5 \$8.50 5 \$9.50
Medium Boxes 15 \$35.25 15 \$35.25 15 \$28.00
Large Boxes 7 \$21.00
Extra Large Boxes 7 \$26.25
Short Hanger Boxes 3 \$23.85
Box Tape 2 \$7.70 2 \$7.70 2 \$5.50
Markers 2 \$3.00 2 \$3.00 2 \$2.00
Mattress/Spring Bags 2 \$5.90 2 \$5.90 2 \$7.50
Lift Straps per Pair 1 \$24.95 1 \$24.95 2 \$38.50
Bubble Wrap 1 \$19.95
Furniture Pads 4 \$31.80 4 \$31.80 4 \$28.50
PV \$261.65 EV \$162.10 AC \$154.50
• >The original schedule called for spending \$261.65 (PV) by day six. The amount of work done was worth \$162.10 (EV) according to the estimates, but the actual cost was only \$154.50 (AC).
• Schedule Variance
The project manager must know if the project is on schedule and within the budget. The difference between planned and actual progress is the variance. The schedule variance (SV) is the difference between the earned value (EV) and the planned value (PV). Expressed as a formula, SV = EV − PV. If less value has been earned than was planned, the schedule variance is negative, which means the project is behind schedule.
Schedule Variance on John’s Move
Planning for John’s move calls for spending \$261.65 by day six, which is the planned value (PV). The difference between the planned value and the earned value is the scheduled variance (SV). The formula is SV = EV − PV. In this example, SV = \$162.10 − \$261.65 = \$(99.55) A negative SV indicates the project is behind schedule.
The difference between the earned value (EV) and the actual cost (AC) is the cost variance (CV). Expressed as a formula, CV = EV − AC
Cost Variance on John’s Move
The difference between the earned value of \$162.10 and the actual cost of \$154.50 is the cost variance (CV). The formula is CV = EV − AC. In this example, CV = \$162.10 − \$154.50 = \$7.60.
A positive CV indicates the project is under budget.
• Variance Indexes for Schedule and Cost
The schedule variance and the cost variance provide the amount by which the spending is behind (or ahead of) schedule and the amount by which a project is exceeding (or less than) its budget. They do not give an idea of how these amounts compare with the total budget.
The ratio of earned value to planned value gives an indication of how much of the project is completed. This ratio is the schedule performance index (SPI). The formula is SPI = EV/PV. In the John’s move example, the SPI equals 0.62 (SPI = \$162.10/\$261.65 = 0.62) A SPI value less than one indicates the project is behind schedule.
The ratio of the earned value to the actual cost is the cost performance index (CPI). The formula is CPI = EV/AC.
Cost Performance Index of John’s Move
In the John’s move example, CPI = \$162.10/\$154.50 = 1.05 A value greater than 1 indicates the project is under budget.
Figure 9.8 Schedule Variance and Cost Variance on Day Six of the John’s Move Project
• >The cost variance of positive \$7.60 and the CPI value of 1.05 tell John that he is getting more value for his money than planned for the tasks scheduled by day six. The schedule variance (SV) of negative \$99.55 and the schedule performance index (SPI) of 0.62 tell him that he is behind schedule in adding value to the project.
• During the project, the manager can evaluate the schedule using the schedule variance (SV) and the schedule performance index (SPI) and the budget using the cost variance (CV) and the cost performance index (CPI).
• Estimated Cost to Complete the Project
Partway through the project, the manager evaluates the accuracy of the cost estimates for the activities that have taken place and uses that experience to predict how much money it will take to complete the unfinished activities of the project—the estimate to complete (ETC).
• Atypical Cost Variance
To calculate the ETC, the manager must decide if the cost variance observed in the estimates to that point are representative of the future. For example, if unusually bad weather causes increased cost during the first part of the project, it is not likely to have the same effect on the rest of the project. If the manager decides that the cost variance up to this point in the project is atypical—not typical—then the estimate to complete is the difference between the original budget for the entire project—the budget at completion (BAC)—and the earned value (EV) up to that point. Expressed as a formula, ETC = BAC − EV
Estimate to Complete John’s Move
In John’s move, John was able to buy most of the items at a discount house that did not have a complete inventory and, he chose to buy an extra pair of lift straps. He knows that the planned values for packing materials were obtained from the price list at the moving company where he will have to buy the rest of the items, so those two factors are not likely to be typical of the remaining purchases. The reduced cost of lunch is unrelated to the future costs of packing materials, truck rentals, and hotel fees. John decides that the factors that caused the variances are atypical. He calculates that the estimate to complete (ETC) is the budget at completion (\$1,534) minus the earned value at that point (\$162.10), which equals \$1,371.90. Expressed as a formula, ETC = \$1,534 − \$162.10 = \$1,371.90.
• Typical Cost Variance
If the manager decides that the cost variance is caused by factors that will affect the remaining activities, such as higher labor and material costs, then the estimate to complete (ETC) needs to be adjusted by dividing it by the cost performance index (CPI). For example, if labor costs on the first part of a project are estimated at \$80,000 (EV) and they actually cost \$85,000 (AC), the cost variance will be 0.94. (Recall that the cost variance = EV – AC).
To calculate the estimate to complete (ETC) assuming the cost variance on known activities is typical of future cost, the formula is ETC = (BAC – EV)/CPI. If the budget at completion (BAC) of the project is \$800,000, the estimate to complete is (\$800,000 – \$80,000)/0.94 = \$766,000.
• Estimate Final Project Cost
If the costs of the activities up to the present vary from the original estimates, it will affect the total estimate for the project cost. The new estimate of the project cost is the estimate at completion (EAC). To calculate the EAC, the estimate to complete (ETC) is added to the actual cost (AC) of the activities already performed. Expressed as a formula, EAC = AC + ETC.
Estimate at Completion for John’s Move
The revised estimate at completion (EAC) for John’s move at this point in the process is EAC = \$154.50 + \$1,371.90 = \$1,526.40.
Refer to Figure 9.9 “Summary of Terms and Formulas for Earned Value Analysis” for a summary of terms and formulas.
Figure 9.9 Summary of Terms and Formulas for Earned Value Analysis
Term Acronym Description Formula John’s Move
Actual Cost AC The money actually spent on projects up to the present \$154.50
Budget at Completion BAC Original budget for the project (same as BCWS) \$1,534.00
Cost Performance Index CPI Ratio of earned value to actual cost CPI = EV / AC 1.05
Cost Variance CV Difference between earned value and actual cost CV = EV – AC \$7.60
Earned Value EV Sum of estimates for work actually done up to the present \$162.10
Estimate at Completion EAC Revised estimate of total project cost EAC = AC + ETC \$1,526.40
Estimate to Complete ETC Money to complete the project if early cost variance is atypical ETC = BAC – EV \$1,371.90
Estimate to Complete ETC Money to complete the project if early cost variance is typical ETC – (BAC – EV) / CPI N/A
Planned Value PV Sum of the estimates for work done up to the present \$261.65
Schedule Performance Index SPI Ratio of earned value to planned value SPI = EV / PV .62
Schedule Variance SV Difference between earned value and planned value SV = EV – PV \$(99.55)
Key Takeaways
• Extra money is allocated in a contingency fund to deal with activities where costs exceed estimates. Funds are allocated in a management reserves in case a significant opportunity or challenge occurs that requires change of scope but funds are needed immediately before a scope change can typically be negotiated.
• Schedule variance is the difference between the part of the budget that has been done so far (EV) versus the part that was planned to be completed by now (PV). Similarly, the cost variance is the difference between the EV and the actual cost (AC).
• The schedule performance index (SPI) is the ratio of the earned value and the planned value. The cost performance index (CPI) is the ratio of the earned value (EV) to the actual cost (AC).
• The formula used to calculate the amount of money needed to complete the project (ETC) depends on whether or not the cost variance to this point is expected to continue (typical) or not (atypical). If the cost variance is atypical, the ETC is simply the original total budget (BAC) minus the earned value (EV). If they are typical of future cost variances, the ETC is adjusted by dividing the difference between BAC and EV by the CPI.
• The final budget is the actual cost (AC) to this point plus the estimate to complete (ETC).
Exercises
1. Money that is allocated for dealing with unplanned but predictable expenses is _________ reserve.
2. The formula used to calculate the cost performance index is ____________.
3. The formula used to calculate the estimate to complete for atypical cost variances is _________________________.
4. The sum of the budgeted amounts for the tasks that have been performed is the _______ _______ (two words).
5. Schedule variance is the ____ minus the _____ and cost variance is the ____ minus the _____ (use acronyms).
6. Schedule performance index is ____ / _____ and the cost performance index is _____ / ______ (use acronyms).
7. The revised final budget is the ____ plus the _____ (use acronyms).
Estimating Earned Value
• >Consider a project you are familiar with in which the contractor or service provider who was performing the work needed to be replaced before the job was completed. Describe how the value of the contractor’s efforts up to that point was determined and how that evaluation compared to an earned value analysis. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/09%3A_Estimating_and_Managing_Costs/9.02%3A_Managing_the_Budget.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Short Answer Questions
The questions in this section refer to the project budget shown below.
Figure 9.10 Example for Short Answer Questions
• >This project has three completed activities whose durations are indicated by the blue bars in row 2. The budgeted cost of work scheduled for each task is shown on the bar in row 2. The budgeted cost of work scheduled for each week is shown on row 3. Notice that the amounts in row 3 add up to the amounts shown on the bars. Rows 4 and 5 indicate the budgeted cost of work performed and actual cost. Notice that the second task started a week late.
1. What is the planned value (PV) at the end of week three?
2. What is the earned value (EV) at the end of week three?
3. What is the actual cost (AC) at the end of week three?
4. What is the cost variance (CV) at the end of week three?
5. What is the schedule variance (SV) at the end of week three?
6. What is the planned value (PV) at the end of week seven?
7. What is the earned value (EV) at the end of week seven?
8. What is the actual cost (AC) at the end of week seven?
9. What is the cost variance (CV) at the end of week seven?
10. What is the schedule variance (SV) at the end of week seven?
11. What is the cost performance index (CPI) at the end of week seven?
12. What is the schedule performance Index at the end of week seven?
13. If the budget at completion (BAC) for this project is \$500,000, what is the Estimate to Complete (ETC) at the end of week seven if the cost and schedule variances experienced are typical of the remainder of the activities?
14. Based on your answer to the previous question, what is the estimate at completion (EAC) for this project?
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. A project is about a third of the way through its scheduled activities, and an earned value management report has been prepared. The summary indicates that it has a CPI of 0.9 and an SPI of 0.8. What do these two values tell you about the project?
2. A project is about half done with a CV of \$(4,000) due to atypical costs in the first half of the project. Its project manager provides an ETC of \$50,000. Interpret this statement in your own words.
3. Give an example of an analogous estimate and a parametric estimate that are different from those described in the text.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Describe an experience of your own that involved a parametric estimate. Describe the parameter and how it was used. Compare the estimate with the actual cost.
2. As an inexperienced project manager, how do you develop expert knowledge? Interview someone who would qualify as an expert in estimating costs and ask them to describe the process they went through. Ask them for advice on how to become an acknowledged expert in estimating and then share what you learn with your classmates. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/09%3A_Estimating_and_Managing_Costs/9.03%3A_Exercises.txt |
Learning Objective
1. Create a spreadsheet to perform an earned value analysis.
• Earned Value Analysis
In this exercise, you apply the formulas of earned value (EV) analysis to the John’s Move project. Complete the exercise by following these instructions:
1. Navigate to the location where the student supplement files are stored and open Ch09EV.xls in a spreadsheet program such as MS Excel. Save the file on your computer as Ch09EVStudentName.xls. Four tasks span four weeks. The budgeted cost of work scheduled (BCWS) is shown at the beginning of each bar, as shown in Figure 9.11 “EV Analysis for John’s Move”.
2. In cell C25, type =C4+C7+I10+L12 and then press Enter. The sum of the budgeted amounts for each task is the budget at completion (BAC).
3. Click cell C25 to select it. In the Number group, click the Increase Decimal button two times, if necessary, to display two decimal places. See Figure 9.12 “BAC Calculation”.
4. Click cell E15. Type =C4+C7/2. The planned value (PV) for the first week is the BCWS for the week. In this example, that is all the BCWS for planning and half of the BCWS for packing. The packing task is scheduled to take two weeks. Without further instructions, the budgeted amount is divided equally between the two weeks.
5. Move the mouse pointer to the Enter button on the Formula bar. See Figure 9.13 “PV Calculation for Week 1”. Entering formulas by using this button keeps the selection on the current cell.
6. On the Formula bar, click the Enter button. The PV is calculated and displayed in cell E15.
7. Capture this screen and paste it into a blank word processing document. Save the word processing document as Ch9EVStudentName using the Word 2003 .doc file format.
8. In the spreadsheet, click cell E16. Type =D5+D8 and then, on the Formula bar, click the Enter button. The EV is the sum of the budgeted work that has been performed up to that point in the project. See Figure 9.14 “EV Calculation for Week 1”.
9. Click cell E17. Type =E5+E8 and then, on the Formula bar, click the Enter button. The actual cost (AC) for week 1 is the sum of the AC for planning and packing that occurred in week 1.
10. Click cell E18. Type =E16−E17 and then, on the Formula bar, click the Enter button. The cost variance (CV) for week 1 is the EV minus the AC.
11. Click cell E19. Type =E16−E15 and then, on the Formula bar, click the Enter button. The schedule variance (SV) for week 1 is EV minus the PV. See Figure 9.15 “AC, CV, and SV Calculations for Week 1”.
12. Refer to the definitions of CPI and SPI. Enter formulas in cells E20 and E21 to calculate the CPI and SPI. Recall that formulas begin with an equal sign and use cell names instead of the numbers in those cells. Use the Decrease Decimal or Increase Decimal buttons as needed to display two decimal places. See Figure 9.16 “CPI and SPI Calculations for Week 1”.
13. Refer to the definitions of estimate to complete (ETC) for typical and atypical variances in AC. Enter formulas in cells E22 and E23 to calculate the ETC for typical and atypical CV. Recall that the BAC value is in cell C25. Compare your results to Figure 9.17 “ETC at the End of Week 1 for Typical and Atypical AC”.
14. Click cell H15. Type =E15+C7/2 and then, on the Formula bar, click the Enter button. The PV at the end of week 2 is the sum of PV from the previous week plus the PV for the current week. In this case, the PV for week 2 is the second half of the packing task.
15. Click cell H16. Type =E16+G8 and then, on the Formula bar, click the Enter button. The EV at the end of week 2 is the sum of EV from the previous week plus the budgeted cost of work performed (BCWP) for the current week.
16. Click cell H17. Type =E17+H8 and then, on the Formula bar, click the Enter button. The AC at the end of week 2 is the sum of AC from the previous week plus the AC for the current week.
17. Refer to the definitions for CV, SV, CPI, SPI, and ETC and write formulas in cells H18 through H23 to calculate those values at the end of week 2. See Figure 9.18 “Calculations for Week 2”.
18. Capture the screen and paste it into Ch09EVStudentName.doc.
19. In the spreadsheet, apply what you have learned to perform similar calculations for weeks 3 and 4. See Figure 9.19 “Calculations for Weeks 3 and 4”.
20. Click cell E5. Type 30 and then, on the Formula bar, click the Enter button. Notice that all the calculations that depend on the AC in this cell are recalculated. See Figure 9.20 “Values That Depend on the AC in Cell E5 Change”.
21. Capture the screen and paste it into Ch09EVStudentName.doc.
Prepare the worksheet for printing:
1. In the spreadsheet, on the menu bar, click Page Layout. In the Page Setup group, at the lower right corner, click the Expand button.
2. In the Page Setup dialog box, on the Page tab, click the Landscape button and the Fit To button. See Figure 9.21 “Printout Oriented Horizontally and Forced to Fit on One Page”.
3. In the Page Setup dialog box, on the Header/Footer tab, click the In the Header dialog box, click the Left section, and then type your name. Click the Center section and then type John’s Move. Click the Right section box and type For InstructorName, substituting your instructor’s name. See Figure 9.22 “Your Name and Your Instructor’s Name in the Header”.
4. Click OK to close both dialog boxes. Close the print preview, if necessary.
5. Review your work in Ch09EVStudentName.xls and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch09EVStudentName.xls Ch09EVStudentName.xlsx Did not include student name
Create a spreadsheet to perform an EV analysis Formulas that produce the values shown in Figure 9.16 “CPI and SPI Calculations for Week 1” and Figure 9.17 “ETC at the End of Week 1 for Typical and Atypical AC”, depending on the value in cell E5; names in header for printout Same as Best Could do formulas for weeks 1 and 2 but could not apply knowledge to weeks 3 and 4; errors in formulas; missing header
6. Review your work in Ch09EVStudentName.doc and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch09EVStudentName.doc Same name saved as .docx file Used a different name
Use dedicated project management software to manage changes to the WBS Three screen captures that show the development of the spreadsheet Same as Best Missing screens
7. Save the file and submit it as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/09%3A_Estimating_and_Managing_Costs/9.04%3A_Software_and_Technology_Exercise.txt |
Learning Objectives
1. Define quality.
2. Define and explain statistics terms used in quality control.
3. Estimate the likelihood of samples falling within one, two, or three standard deviations of the mean given a normal distribution caused by random factors.
• Definitions of Quality and Grade
Quality is a relative term, which means that something is of high or low quality compared to what it is required to be. According to the International Organization for Standardization (ISO), quality is “the degree to which a set of inherent characteristics fulfill requirements” (International Organization for Standardization, 2005; Project Management Institute, 2008). The requirements of a product or process can be categorized or given a grade. The quality is determined by how well something meets the requirements of its grade. Consider the following examples.
Quality of Gasoline Grades
Petroleum refiners provide gasoline in several different grades based on the octane rating because higher octane ratings are suitable for higher compression engines. Gasoline must not be contaminated with dirt or water, and the actual performance of the fuel must be close to its octane rating. A shipment of low-grade gasoline graded as 87 octane that is free of water or other contaminants would be of high quality, while a shipment of high grade 93 octane gas that is contaminated with dirt would be of low quality.
Quality of Furniture Packing in John’s Move
John has antique furniture that is in excellent condition that was left to him by his grandmother. The pieces are important to John for sentimental reasons and they are also valuable. John decides to hire movers (high-grade professionals) to load his furniture into the truck using appropriate padding and restraints to prevent dents and scratches during the long trip to Atlanta and then to unload the truck in Atlanta. John’s standard for high quality is that no observable damage occurs to his large pieces of furniture, especially the antiques. If the furniture arrives in his new apartment without a single dent, scratch, or other damage, the activity will be of high quality.
• >John’s standard for packing his kitchen is lower. His dishes are old and cheap, so he decides to trust his inexperienced friends (low-grade amateurs) to help him pack his kitchen. If a few of the dishes or glassware are chipped or broken in the process, the savings in labor cost will more than make up for the loss, and the dishes can be easily replaced. If John has a few chipped dishes and a broken glass or two by the time he is unpacked in Atlanta, he will consider the kitchen packing to be of high quality.
• For most people, the term quality also implies good value—getting your money’s worth. For example, even low-grade products should still work as expected, be safe to use, and last a reasonable amount of time.
• Statistics Terminology
Determining how well products meet grade requirements is done by taking measurements and then interpreting those measurements. Statistics—the mathematical interpretation of numerical data—is useful when interpreting large numbers of measurements and is used to determine how well the product meets a specification when the same product is made repeatedly. Measurements made on samples of the product must be between control limits—the upper and lower extremes of allowable variation—and it is up to management to design a process that will consistently produce products between those limits.
Setting Control Limits in Gasoline Production
A petroleum refinery produces large quantities of fuel in several grades. Samples of the fuels are extracted and measured at regular intervals. If a fuel is supposed to have an 87 octane performance, samples of the fuel should produce test results that are close to that value. Many of the samples will have scores that are different from 87. The differences are due to random factors that are difficult or expensive to control. Most of the samples should be close to the 87 rating and none of them should be too far off. The manufacturer has grades of 85 and 89, so they decide that none of the samples of the 87 octane fuel should be less than 86 or higher than 88.
If a process is designed to produce a product of a certain size or other measured characteristic, it is impossible to control all the small factors that can cause the product to differ slightly from the desired measurement. Some of these factors will produce products that have measurements that are larger than desired and some will have the opposite effect. If several random factors are affecting the process, they tend to offset each other most of the time, and the most common results are near the middle of the range. This idea is called the central limit theorem.
If the range of possible measurement values is divided equally into subdivisions called bins, the measurements can be sorted, and the number of measurements that fall into each bin can be counted. The result is a frequency distribution that shows how many measurements fall into each bin. If the effects that are causing the differences are random and tend to offset each other, the frequency distribution is called a normal distribution, which resembles the shape of a bell with edges that flare out. The edges of a theoretical normal distribution curve get very close to zero but do not reach zero.
Normal Distribution of Gasoline Samples
A refinery’s quality control manager measures many samples of 87 octane gasoline, sorts the measurements by their octane rating into bins that are 0.1 octane wide, and then counts the number of measurements in each bin. Then she creates a frequency distribution chart of the data, as shown in Figure 10.1 “Normal Distribution of Measurements of Gasoline Samples”.
If the measurements of product samples are distributed equally above and below the center of the distribution as they are in Figure 10.1 “Normal Distribution of Measurements of Gasoline Samples”, the average of those measurements is also the center value that is called the mean and is represented in formulas by the lowercase Greek letter µ (pronounced mu). The amount of difference of the measurements from the central value is called the sample standard deviation or just the standard deviation. The first step in calculating the standard deviation is subtracting each measurement from the central value and then squaring that difference. (Recall from your mathematics courses that squaring a number is multiplying it by itself and that the result is always positive.) The next step is to sum these squared values and divide by the number of values minus one. The last step is to take the square root. The result can be thought of as an average difference. (If you had used the usual method of taking an average, the positive and negative numbers would have summed to zero.) Mathematicians represent the standard deviation with the lowercase Greek letter σ (pronounced sigma). If all the elements of a group are measured, it is called the standard deviation of the population and the second step does not use a minus one.
Figure 10.1 Normal Distribution of Measurements of Gasoline Samples
• >The chart shows that the most common measurements of octane rating are close to 87 and that the other measurements are distributed equally above and below 87. The shape of the distribution chart supports the central limit theorem’s assumption that the factors that are affecting the octane rating are random and tend to offset each other, which is indicated by the symmetric shape. This distribution is a classic example of a normal distribution. The quality control manager notices that none of the measurements are above 88 or below 86 so they are within control limits and concludes that the process is working satisfactorily.
• Standard Deviation of Gasoline Samples
The refinery’s quality control manager uses the standard deviation function in his spreadsheet program to find the standard deviation of the sample measurements and finds that for his data, the standard deviation is 0.3 octane. She marks the range on the frequency distribution chart to show the values that fall within one sigma (standard deviation) on either side of the mean. See the figure below.
Figure 10.2
• >Most of the measurements are within 0.3 octane of 87.
• For normal distributions, about 68.3 percent of the measurements fall within one standard deviation on either side of the mean. This is a useful rule of thumb for analyzing some types of data. If the variation between measurements is caused by random factors that result in a normal distribution and someone tells you the mean and the standard deviation, you know that a little over two-thirds of the measurements are within a standard deviation on either side of the mean. Because of the shape of the curve, the number of measurements within two standard deviations is 95.4 percent, and the number of measurements within three standard deviations is 99.7 percent. For example, if someone said the average (mean) height for adult men in the United States is 5 feet 10 inches (70 inches) and the standard deviation is about 3 inches, you would know that 68 percent of the men in the United States are between five feet seven inches (67 inches) and six feet one inch (73 inches) in height. You would also know that about 95 percent of the adult men in the United States were between five feet four inches and six feet four inches tall, and that almost all of them (99.7 percent) are between five feet one inches and six feet seven inches tall. These figures are referred to as the 68-95-99.7 rule.
Almost All Samples of Gasoline are Within Three STD
The refinery’s quality control manager marks the ranges included within two and three standard deviations, as shown below.
Figure 10.3 The 68-95-99.7 Rule
Some products must have less variability than others to meet their purpose. For example, if one machine drills a hole and another machine shapes a rod that will slide through the hole, it might be very important to be sure that if the smallest hole was ever matched with the widest rod, that the rod would still fit. Three standard deviations from the control limits might be fine for some products but not for others. In general, if the mean is six standard deviations from both control limits, the likelihood of a part exceeding the control limits from random variation is practically zero (2 in 1,000,000,000). Refer to Figure 10.4 “Meaning of Sigma Levels”.
Figure 10.4 Meaning of Sigma Levels
Standard Deviations between Mean and Either Control Limit Sigma Level Percentage Inside Control Limits Percentage Outside Control Limits Parts Outside Control Limits (approximate)
1 1 68.3% 31.7% 32 per 100
2 2 95.4% 4.6% 5 per 100
3 3 99.7% .3% 3 per 1,000
4 4 99.9937% .0063% 4 per 100,000
5 5 99.99994% .00006% 6 per 10 million
6 6 99.9999998% .0000002% 2 per billion
• >
• A Step Project Improves Quality of Gasoline
A new refinery process is installed that produces fuels with less variability. The refinery’s quality control manager takes a new set of samples and charts a new frequency distribution diagram, as shown below.
Figure 10.5 Smaller Standard Deviation
• >
• >The refinery’s quality control manager calculates that the new standard deviation is 0.2 octane. From this, he can use the 68-95-99.7 rule to estimate that 68.3 percent of the fuel produced will be between 86.8 and 87.2 and that 99.7 percent will be between 86.4 and 87.6 octane. A shorthand way of describing this amount of control is to say that it is a five-sigma production system, which refers to the five standard deviations between the mean and the control limit on each side.
• Key Takeaways
• Quality is the degree to which a product or service fulfills requirements and provides value for its price.
• Statistics is the mathematical interpretation of numerical data, and several statistical terms are used in quality control. Control limits are the boundaries of acceptable variation.
• If random factors cause variation, they will tend to cancel each other out—the central limit theorem. The central point in the distribution is the mean, which is represented by the Greek letter mu, µ. If you choose intervals called bins and count the number of samples that fall into each interval, the result is a frequency distribution. If you chart the distribution and the factors that cause variation are random, the frequency distribution is a normal distribution, which looks bell shaped.
• The center of the normal distribution is called the mean, and the average variation is calculated in a special way that finds the average of the squares of the differences between samples and the mean and then takes the square root. This average difference is called the standard deviation, which is represented by the Greek letter sigma, σ.
• About 68 percent of the samples are within one standard deviation, 95.4 percent are within two, and 99.7 percent are within three.
Exercises
1. According to the ISO, quality is the degree to which a set of inherent characteristics fulfill ___________.
2. The upper and lower extremes of acceptable variation from the mean are called the __________ limits.
3. The odds that a sample’s measurement will be within one standard deviation of the mean is ____ percent.
4. How is quality related to grade?
5. If the measurements in a frequency distribution chart are grouped near the mean in normal distribution, what does that imply about the causes of the variation?
6. If you have a set of sample data and you had to calculate the standard deviation, what are the steps?
7. If a set of sample measurements has a mean of 100, a normal distribution, a standard deviation of 2, and control limits of 94 and 106, what percentage of the samples are expected to be between 94 and 106? Explain your answer.
Using Statistical Measures
• >Choose two groups of people or items that have a measurable characteristic that can be compared, such as the height of adult males and females. Describe the distribution of the measurements by stating whether you think the groups have a relatively small or large standard deviation and whether the distributions overlap (e.g., some women are taller than some men even though the mean height for men is greater than the mean height for women). Demonstrate that you know how to use the following terms correctly in context:
• Normal distribution
• Standard deviation
• Mean | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/10%3A_Managing_Project_Quality/10.01%3A_Quality_and_Statistics.txt |
Learning Objectives
1. Describe the historical events and forces that led up to today’s emphasis on quality as a competitive requirement.
2. Describe quality awards in Japan and the United States.
3. Describe quality programs and standards such as TQM, Six Sigma, and ISO 9000.
4. Describe and calculate the cost of quality.
Quality management is an approach to work that has become increasingly important as global cooperation and competition have increased. A review of the history of quality management explains why it is so important to companies and why clients often require projects to document their processes to satisfy quality standards.
• Statistical Control Before World War II
Prior to the late 1700s, products such as firearms and clocks were made as individual works where the parts were adjusted to each other so they could work together. If a part broke, a new one had to be made by hand to fit. In 1790 in France, Honoré Blanc demonstrated that he could make musket parts so nearly identical that a musket could be assembled from bins of parts chosen at random (Alder, 1997). The practice of making parts to a high level of accuracy in their dimensions and finishes made the parts interchangeable. The use of interchangeable parts became the founding principle of assembly line manufacturing to produce all manner of goods from sewing machines to automobiles. The manufacturers of firearms and weapons were often the leaders in improving quality because reliable and safe operation of weapons and their rapid repair is a matter of life and death.
• Statistical Control in the United States During World War II
During World War II, factories were converted from manufacturing consumer goods to weapons. War plants had to make large numbers of parts as fast as possible while doing it safely for the workers and for the service members who used them. Important improvements in quality control (QC)—the management of production standards through statistical interpretation of random product measurements, which emphasizes consistency and accuracy—were made during this period. A key figure in the history of quality management who was an important person in the war effort was Walter Shewhart at Bell Telephone Laboratories. Shewhart recognized that real processes seldom behaved like theoretical random distributions and tended to change with time. He separated causes of variation into two categories: chance cause and assignable cause. Chance causes could be ignored if they did not cause too much variation, and trying to eliminate them often made the problem worse, but assignable causes could be fixed. To help distinguish between variations caused by random events and trends that indicated assignable causes, Shewhart introduced the control chart, which is also known as a type of run chart because data are collected while the process is running. A control chart has time on the bottom axis and a plot of sample measurements. The mean, upper control limit, lower control limit, and warning lines that are two sigma from the mean are indicated by horizontal lines.
Control Chart Shows Production Variation of Gasoline
The refinery quality control manager takes samples each day of the 87 octane gasoline for twenty days and charts the data on a control chart, as shown below.
Figure 10.6 Control Chart Displaying Variations Due to Chance Causes
• >She recognizes that the highest and lowest measurements are not part of a trend and are probably due to chance causes. However, the control chart from the next twenty days, as shown below, indicates an upward trend that might be due to an assignable cause. She alerts the process manager to let him know that there is a problem that needs to be fixed before the product exceeds the upper control limit. This might indicate the need to initiate a project to fix the problem.
Figure 10.7 Control Chart Displaying Variations That Might Be Due to an Assignable Cause
• Deming and Postwar Japan
The most influential person in modern quality control was an American who was a hero in Japan but virtually unknown in the United States. W. Edwards Deming worked with Shewhart at Bell Labs and helped apply Shewhart’s ideas to American manufacturing processes during World War II. Following the war, American factories returned to the production of consumer goods. Many of the other major manufacturing centers in the world had been damaged by bombing during the war and took time to recover. Without the safety needs of wartime and with little competition, quality control was not a high priority for American companies (Dowd, 2006). Management in the United States focused on increasing production to meet demand and lowering costs to increase profits.
After the war, while the United States occupied Japan, Deming was asked by the U.S. Department of the Army to assist with the statistics of the 1950 census in Japan. Kenichi Koyanagi, the managing director of the Union of Japanese Scientists and Engineers and a very influential industrialist, asked Deming to speak to twenty-one top industrial leaders on the topic of global strategy for Japanese industry. Deming went beyond Shewhart’s work and talked about his philosophy of quality manufacturing and how the responsibility for quality begins with management. He explained that a corporate culture devoted to producing high-quality products would result in less waste, lower costs, greater client loyalty, and greater market share. With Koyanagi’s support, Deming’s ideas were widely adopted by these influential leaders.
Deming described his philosophy as a system of profound knowledge, which has four parts:
1. Appreciation of a system. Understanding how suppliers, producers, and clients interact
2. Knowledge of variation. Understanding statistical variation
3. Theory of knowledge. Understanding what can be known and what cannot
4. Knowledge of psychology. Understanding human nature
In 1950, the Japanese created the Deming prize in Deming’s honor, which is awarded to an individual and a company for major advances in quality improvements. In 1960, Deming was awarded the Order of the Sacred Treasure, Second Class by the Prime Minister on behalf of Emperor Hirohito.
• Quality Management in America
By the 1970s, Japanese companies had a reputation for high quality and were taking market share from American companies, but Deming’s teachings were virtually unknown in his own country. It was not until 1980 that America became aware of Deming when his work was described in an NBC documentary titled If Japan Can, Why Can’t We? (Dowd, 2006) By then, Deming was eighty years old and the producer of the show originally assumed he was dead (Boardman, 1994).
In 1982, Deming’s book was published and later retitled Out of Crisis, in 1986 (Deming, 1982). It was aimed at explaining his system to American manufacturers and the American public. In the book, Deming described fourteen principles of management to guide the implementation of his philosophy. Some of them were challenges to Western managers and very different from the thinking that was prevalent at the time. In brief, they are as follows:
1. Create constancy of purpose toward improvement of product and service.
2. Adopt a new philosophy. We are in a new economic age. Western management must awaken to the challenge, learn their responsibilities, and take on leadership for a change.
3. Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.
4. End the practice of awarding business on the basis of price tag. Instead, minimize cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.
5. Improve constantly and forever the system of production and service to improve quality and productivity and thus constantly decrease costs.
6. Institute training on the job.
7. Institute leadership. The aim of supervision should be to help people and machines and gadgets to do a better job. Supervision of management is in need of overhaul, as well as supervision of production workers.
8. Drive out fear, so that everyone may work effectively for the company.
9. Break down barriers between departments.
10. Eliminate slogans, exhortations, and targets for the workforce asking for zero defects and new levels of productivity.
11. Eliminate work standards (quotas) on the factory floor. Substitute leadership.
12. Remove barriers that rob the hourly worker of his right to pride of workmanship.
13. Institute a vigorous program of education and self-improvement.
14. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.
Between 1979 and 1982, Ford Motor Company lost \$3 billion, and they were looking for solutions to their problems. They chose to apply Deming’s approach to develop the new Taurus-Sable model and by 1986 had become the most profitable American auto company (Gabor, 2001).
Ford adopted a Japanese approach to quality known in America as total quality management (TQM). TQM in Japan has four major components:
1. Kaizen. Improvement must involve all members of a company (Encyclopedia Britannica, 2009).
2. Atarimae hinshitsu. Make things work the way they are supposed to work (NationMaster.com, 2009).
3. Kansei. Learn from the way a user applies the product to make improvements (WASEDA University, 2010).
4. Miryokuteki hinshitsu. Things should have an aesthetic quality and be pleasing to use (NationMaster.com, 2009).
According to Peter B. Petersen (Petersen, 1999), TQM differs from the Deming approach in four fundamental ways:
1. The Deming approach represents one philosophy that is used in its entirety or not at all. In contrast, TQM can be tailored to a particular environment.
2. Both agree that a long-term commitment is required by top management. However, Deming would drop clients if they started to wane, while TQM consultants were less demanding.
3. Deming insists on constancy of purpose, while TQM adapts to the situation, which results in lack of constancy.
4. Deming requires adoption of his principles of profound knowledge, while TQM lacks this unified philosophy.
Many poorly qualified consulting firms provided training in TQM to American companies. The approach worked in some cases but not in others where it was applied superficially, and the movement’s credibility was diminished.
Another approach to quality management in the United States was formulated at Motorola in 1986 and was named Six Sigma (6σ). The Six Sigma practices were based on Deming’s work, TQM, and others and had similarities regarding continuous efforts at improvement involving everyone at the company. It emphasized a clear focus on achieving quantifiable financial returns from any Six Sigma project. To determine the financial return on a quality initiative, the cost of quality (COQ) must be determined. The cost of quality has two parts: the cost of prevention and the cost of failure (or nonconformance). The cost of quality is the sum of the cost of prevention and the cost of failure. If spending more on prevention reduces the cost of failure by an even greater amount, the total cost of quality is reduced.
• Cost of prevention
1. Cost of conformance. Cost to improve quality
2. Cost of appraisal. Cost to measure and evaluate quality
• Cost of failure
1. Internal costs. Repairing bad parts before shipment or retooling a manufacturing line to reduce failures
2. External costs. Managing returns, lawsuits, product recalls
Six Sigma identified individuals as experts in quality and awarded titles like Champion and Master Black Belt. The name Six Sigma refers to a process that has six standard deviations from the mean to either control limit that would ensure virtually zero defects. (In practice, the Six Sigma approach allows for a 1.5 sigma drift, so it is really a 4.5 sigma standard that allows approximately 3.4 defects per million products.) This approach was adopted by Jack Welch at General Electric with great success. By the late 1990s, about two-thirds of the top five hundred companies in the United States had begun Six Sigma projects, including Ford, which had allowed its quality programs to slip. To provide encouragement and a consistent standard, the U.S. government created the Malcolm Baldrige National Quality Award in 1987 to encourage companies to improve quality; the award was named for Malcolm Baldrige who was the U.S. secretary of commerce from 1981 to 1987 (National Institute of Standards and Technology, 2008). The criteria used to determine award winners are as follows:
1. Leadership of senior executives
2. Strategic planning
3. Customer and market focus
4. Measurement, analysis, and knowledge management
5. Workforce focus
6. Process management
7. Results
• Trade and International Standards
Trade between countries increased as countries recovered from WWII and began producing consumer goods. In 1948, the General Agreement on Tariffs and Trade (GATT) established the rules for international trade in the postwar world. Through years of negotiations based on GATT, the World Trade Organization (WTO) was created in 1995. The WTO is a negotiating forum where governments can discuss ways to help trade flow as freely as possible (World Trade Organization, 2009).
Increases in trade forced companies to improve the quality of their products to compete for clients and to exchange parts reliably between companies that used parts suppliers. To assist in developing standards for quality that would be the same between countries, an organization of 158 national standards groups formed the International Organization for Standardization (ISO), which is headquartered in Switzerland. For example, a company might require a parts supplier to meet certain ISO standards if it wants to bid on contracts. There are thousands of ISO standards, and they are grouped by their numbers. The ISO 9000 group of standards relate to quality:
• ISO 9000. Fundamentals and vocabulary for this group of quality standards.
• ISO 9001. Standards for evaluating the quality management processes in an organization. It has five parts:
1. Overall requirements for the quality management system and documentation
2. Management responsibility, focus, policy, planning and objectives
3. Resource management and allocation
4. Product realization and process management
5. Measurement, monitoring, analysis, and improvement
• ISO 9004. Ways to extend benefits of ISO 9001 to employees, owners, suppliers, partners, and society in general. It is a guide for top management for overall quality improvement.
• ISO 9011. Guidance for auditing a quality system.
Recommended steps for implementing a quality management system (QMS) are as follows:
1. Fully engage top management.
2. Identify key processes and the interactions needed to meet quality objectives.
3. Implement and manage the QMS and its processes.
4. Build your ISO 9001-based QMS.
5. Implement the system, train company staff, and verify effective operation of your processes.
6. Manage your QMS—focus on client satisfaction, strive for continual improvement.
7. If necessary, seek third-party certification and registration of the QMS, or alternatively, issue a self-declaration of conformity (International Organization for Standardization, 2005).
Key Takeaways
• The need for production of safe, reliable weapons that could be mass produced led to use of methods to assure that parts were manufactured within controlled limits. An early example is the interchangeable musket parts produced in France in 1790 and, later, the quality control methods introduced by Shewhart in the United States during World War II.
• Following World War II, Japanese companies followed advice from Deming and others to make quality a top priority for management. Higher-quality products gave Japan a competitive advantage with U.S. consumers that forced U.S. firms to respond with similar quality programs.
• The Deming award is given by Japan to companies doing business in Japan for high-quality standards. Similarly, the Baldrige National Quality Award is given to U.S. companies and individuals for their contribution to quality.
• Total quality management is a flexible program that is adapted from Japanese practices that emphasize kaizen, participation by all; atarimaie hinshitsu, making things work the way they should; kansei, learning from the way the client uses the product to make improvements; and miryokuteki hinshitsu, giving products an aesthetic quality to make them pleasing to use. Six Sigma identifies specialists within the organization and assigns titles like Master Black Belt. Each quality project must evaluate the cost of quality to gain approval.
• The International Standards Institute devises guidelines for establishing practices. The ISO 9000 group are guidelines for establishing practices that are likely to create quality products.
• The cost of quality has two parts: the cost of prevention and the cost of failure. The cost of prevention includes costs to establish quality practices and the costs to verify them. The cost of failure includes internal costs before the product is sold, such as waste and fixing products, while external costs include those that occur after the product is sold, such as returns and lawsuits.
Exercises
1. Quality control is very important in the manufacturing of _______ because the safe and reliable operation of those products is a matter of life and death.
2. The prize for quality in Japan is named after _________ (last name).
3. The quality program created at Motorola and adopted by Jack Welch at General Electric is __________.
4. The cost of quality considers the cost of prevention and the cost of ___________.
5. What is the purpose of having an international quality standard like ISO?
6. Describe benchmarking.
7. If a quality program costs \$10,000 to plan and \$50,000 to administer, what is the COQ if the program reduces waste by \$30,000 and returns of bad products by \$40,000? Explain how you calculated the answer.
Balancing Cost of Prevention to Cost of Failure
• >Describe a project activity where the cost of prevention might be much higher than the cost of failure and unlikely enough to accept the risk of its failure rather than pay the cost of prevention. Similarly, describe a project activity where the cost of prevention is smaller than the cost of failure. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/10%3A_Managing_Project_Quality/10.02%3A_Development_of_Quality_as_a_Competitive_Advantage.txt |
Learning Objectives
1. Identify the similarities between process quality management and project quality management.
2. Identify the differences between process quality management and project quality management.
Project quality refers to two distinct aspects of the project. Project quality can refer to the quality of the product or service delivered by the project. Does the end product meet client specifications? For example, does a software development project develop a program that performs to the client’s requirements? A software program that performs the basic work functions but does not integrate with existing software would not be considered a quality product, as long as the client specified that the software must interface with existing software.
Project quality can also refer to managing the project efficiently and effectively. Almost any client specification can be met if the project manager has unlimited time and resources. Recall that high quality means meeting the requirements for a particular grade while providing value. Meeting project deliverables within the time and resource constraints is also a measure of project quality. Developing a project execution plan that matches the complexity level of the project is the most critical aspect in developing a project plan that meets project specifications within the time frame and at the lowest costs. These two aspects of project quality have similarities and differences to quality as applied to parent organizations.
• Similarities
All successful quality programs have (1) a requirement for commitment to quality by all the employees and their partners and (2) an emphasis on error prevention and client satisfaction. To comply with TQM, Six Sigma, ISO, or other quality standards required by the client or by the project management firm, the project manager must engage in quality programs and provide documents that specifically comply with the quality standards in use. For example, a project is typically required to follow the parent organization’s work processes related to procurement and document management. Any project processes that interface with the organization’s quality processes will be required to meet the quality standards of the organization.
If a large project involves repetitive processes such as welding or pouring concrete, statistical processes control methods can be used to maintain the quality of the product. These processes control methods are similar to those used by process managers in the manufacturing environment. The intent is for the work of the project to meet design specifications. The welding tools and equipment must be sufficient to perform the welds established in the welding specifications, and the welds must be tested, usually by an independent tester, to assure the end product meets the design specifications. The civil engineers design a concrete pour to meet certain criteria that will support a structure. The criteria, detailed in the design specifications, provide the parameters that the construction crew must meet when pouring the concrete. On large projects, which sometimes have thousands of welds and hundreds of yards of concrete to pour, the use of quality control tools and methods are critical to meeting design specifications
• Differences
Because projects are temporary, spotting trends in samples produced by repetitive processes is not as important as considering quality in the planning of the project. Instead, the project manager must be able to provide documentation that demonstrates that the correct processes are in place to prevent quality failures.
The cost of quality (COQ) must be considered in the scope document and the project budget. If the group or company that is providing the project management is separate from the client, the project budget will bear the cost of prevention while the client will reap the rewards of avoiding the costs of failure. If senior management does not recognize the benefit to the organization of reducing cost of failure by spending more on prevention during the project, the project manager can be placed in the position of producing a product or service that he or she knows could be of higher quality.
If the cost of quality is not specifically considered and approved by senior management in the scope of the project, quality might be sacrificed during the project to meet budget goals.
Cost of Quality in an Energy Management System
At a midwestern university, a new building was being built, but it was over budget. To reduce the cost of the energy management system and avoid a late penalty, the project manager installed a cheaper energy management system. The less expensive system could not reduce power to the air circulation fans during peak electrical price periods, and it was not compatible with other campus systems. Five years after the building was built, when a central control unit was installed to coordinate building energy consumption, the incompatible system was replaced because it could not communicate with the central campus energy control system or save as much in electrical costs. The university did not take the time to specify the quality of the building control system in the scope statement and was not aware of the implication of the substitution at the time it was made. As a result, the cost of quality was lower in the prevention category but much higher in the cost of failure category. Because the parties acted in their own interests instead of the interest of the total university and quality was not a team effort, waste occurred and total cost increased.
Some separation of responsibility for quality is necessary. For example, if a project is undertaken to build a facility that makes something, it is important to distinguish between the quality of the work done by the project team and the quality of the items produced after the project is over. The client provides specifications for the facility that should result in production of quality products. It is the client’s responsibility to provide appropriate project requirements that will result in a facility that can produce quality products. It is the project manager’s responsibility to meet the project requirements. The project manager must focus on meeting requirements for project activities, but as part of the quality team, opportunities to improve the quality of the final product should be discussed with the client. If the final products fail to meet quality standards, someone will be blamed for the failure. It could be the project manager, even if he or she met all the requirements of the project specified by the client.
Cost of Prevention in Safety Training
An electronic parts manufacturer chooses to expand operations and needs to hire and train fifty employees. It uses its own human resources department to handle the selection and hiring of the employees, but it contracts with a nearby technical college to provide some of the training. The technical college is responsible for designing and delivering training on the topic of plant safety practices. The objective of the training project is to reduce the number of workplace accidents, but that is not the characteristic by which the quality of the training program is determined because the rate of accidents for employees who go through the training will not be known until after they have been employed for months or years. The criteria for determining the quality of the training must be something that can be controlled and measured by the project manager during the project.
Because projects are time sensitive, meeting activity finish dates is a common characteristic of quality work on a project that is not typical of a requirement of a process manager.
Timely Delivery Part of Quality
At a remote mining site in South America, the gasoline and diesel fuel must be brought in by truck over poorly maintained roads to run the trucks and heavy equipment used to set up an ore processing facility. The vendor for supplying fuel is required to provide fuel in the right grades for the various vehicles, in the appropriate quantities, and in a timely manner. If fuel of the right type and grade, with acceptable levels of impurities, is delivered a week after the vehicles have run out of fuel, the work on the fuel-delivery activity is of low quality.
Key Takeaways
• Both project and process quality management require commitment from all employees, including top management. They are both client oriented and prevention oriented.
• Projects are temporary and allow fewer opportunities to improve repetitive processes. Cost of prevention is often part of the project budget, but the cost of failure usually happens after the project is completed. This separation of costs and benefits can lead to taking short-term savings on the project at the expense of higher cost of failure after the project is complete.
Exercises
1. How is quality control of a project different from quality control of a manufacturing process?
Cost of Failure after the Project
• >Consider a project you have been involved in, in which the cost of prevention would be part of the project budget but the cost of failure would be incurred after the project was completed. Describe why you think top management would have to be involved to make the best decision for the company. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/10%3A_Managing_Project_Quality/10.03%3A_Relevance_of_Quality_Programs_to_Project_Quality.txt |
Learning Objectives
1. Define statistical measurement terminology.
2. Identify sources of information for the planning process.
3. Identify and describe the techniques for controlling project quality.
4. Describe the results of planning and controlling quality.
High quality is achieved by planning for it rather than by reacting to problems after they are identified. Standards are chosen and processes are put in place to achieve those standards.
• Measurement Terminology
During the execution phase of the project, services and products are sampled and measured to determine if the quality is within control limits for the requirements and to analyze causes for variations. This evaluation is often done by a separate quality control group, and knowledge of a few process measurement terms is necessary to understand their reports. Several of these terms are similar, and it is valuable to know the distinction between them.
The quality plan specifies the control limits of the product or process; the size of the range between those limits is the tolerance. Tolerances are often written as the mean value, plus or minus the tolerance. The plus and minus signs are written together, ±.
Tolerance in Gasoline Production
The petroleum refinery chose to set its control limits for 87 octane gasoline at 86 and 88 octane. The tolerance is 87 ± 1.
Tools are selected that can measure the samples closely enough to determine if the measurements are within control limits and if they are showing a trend. Each measurement tool has its own tolerances. For example, if a machine is making rods whose diameters should be 10 mm ± 0.01 mm, you need a measuring device that can accommodate a rod that is 10 mm wide but can measure that width to a much smaller tolerance than 0.01 mm, such as 0.001 mm.
The choice of tolerance directly affects the cost of quality (COQ). In general, it costs more to produce and measure products that have small tolerances. The costs associated with making products with small tolerances for variation can be very high and not proportional to the gains. For example, it might double the manufacturing cost to improve a process from a 4 σ to a 5 σ (lower tolerances from 25 percent of control limits to 20 percent), which might only reduce the number of parts that are out of control from 4 per 100,000 to 6 per 10 million (see Figure 10.4 “Meaning of Sigma Levels”). The cost of failure of only 4 parts per 100,000 might be much less than the cost of prevention.
• Defining and Meeting Client Expectations
Clients provide specifications for the project that must be met for the project to be successful. Meeting project specifications is one definition of a project success. Clients often have expectations that are more difficult to capture in a written specification. For example, one client will want to be invited to every meeting of the project and will then select the ones that seem most relevant. Another client will want to only be invited to project meetings that need client input. Inviting this client to every meeting will cause unnecessary frustration. Listening to the client and developing an understanding of the expectations that are not easily captured in specifications is important to meeting the client’s expectations.
Project surveys that capture how the client perceives the project performance provide the project team with data that is useful in meeting client expectation. If the results of the surveys indicate that the client is not pleased with some aspect of the project, the project team has the opportunity to explore the reasons for this perception with the client and develop recovery plans. The survey can also help define what is going well and what needs improved.
• Sources of Planning Information
Planning for quality is part of the initial planning process. The early scope, budget, and schedule estimates are used to identify processes, services, or products where the expected grade and quality should be specified. Risk analysis is used to determine which of the risks the project faces could affect quality.
• Techniques
Several different tools and techniques are available for planning and controlling the quality of a project. The extent to which these tools are used is determined by the project complexity and the quality management program in use by the client.
• Quality Management Methodology
The quality management methodology required by the client is used. The project manager must provide the documentation the client needs to prove compliance with their methodology. There are several different quality management methodologies, but they usually have characteristics that are similar to the ones described previously in the text.
• Flowcharting
Many processes are more complicated than a simple sequence of related events that include several different paths. A flowchart uses standard symbols to diagram a process that has branches or loops. Diamonds indicate decisions, and arrows indicate the direction of the flow of the process, as shown in Figure 10.8 “Flowchart of a Quality Control Process”.
Figure 10.8 Flowchart of a Quality Control Process
The process used to plan and assess quality can be described using flowcharts. They are useful for communicating processes that have logical branches that can be determined by simple yes or no questions. Flowcharting is also useful for discovering misunderstanding in project roles and responsibilities and communicating responsibility for work processes.
• Benchmarking
When products like shoes were made by hand, artisans would seek some degree of standardization by marking standard lengths for different parts of the product on their workbench. In modern management practice, if a particular method or product is a standard of quality, comparing your organization’s quality plan to it is called benchmarking. If a product or service is similar to something that is done in another industry or by a competitor, the project planners can look at the best practices that are used by others and use them as a comparison.
• Cost-to-Benefit Analysis
Because the cost of prevention is more often part of the project budget, the case must be made for increasing the project budget to raise quality. Some quality management programs, like Six Sigma, require that expenditures for quality are justified using a cost-to-benefit analysis that is similar to calculating the cost of quality, except that it is a ratio of cost of increasing quality to the resulting benefit. A cost-benefit analysis in some quality programs can take into account nonfinancial factors such as client loyalty and improvements to corporate image and the cost-to-benefit analysis takes the form of a written analysis rather than a simple numeric ratio. It is similar to determining the cost of quality (COQ).
• Design of Experiments
Measuring for quality of manufactured products or use of repetitive processes requires taking samples. Specialists in quality control design a test regimen that complies with statistical requirements to be sure that enough samples are taken to be reasonably confident that the analysis is reliable. In project management, the testing experiments are designed as part of the planning phase and then used to collect data during the execution phase.
• Control Charts
If some of the functions of a project are repetitive, statistical process controls can be used to identify trends and keep the processes within control limits. Part of the planning for controlling the quality of repetitive processes is to determine what the control limits are and how the process will be sampled.
• Cause and Effect Diagrams
When control charts indicate an assignable cause for a variation, it is not always easy to identify the cause of a problem. Discussions that are intended to discover the cause can be facilitated using a cause-and-effect or fishbone diagram where participants are encouraged to identify possible causes of a defect.
Diagramming Quality Problems
For example, a small manufacturing firm tries to identify the assignable causes to variations in its manufacturing line. They assemble a team that identifies six possibilities, as shown in the fishbone diagram below.
Figure 10.9 Cause and Effect Diagram
• >Each branch of the diagram can be expanded to break down a category into more specific items.
• >An engineer and the electrician work on one of the branches to consider possible causes of power fluctuation and add detail to their part of the fishbone diagram, as shown below.
Figure 10.10 Possible Causes of Power Fluctuation
• Check Sheets, Histograms, and Pareto Charts
When several quality problems need to be solved, a project manager must choose which ones to address first. One way to prioritize quality problems is to determine which ones occur most frequently. This data can be collected using a check sheet, which is a basic form on which the user can make a check in the appropriate box each time a problem occurs or by automating the data collection process using the appropriate technology. Once the data are collected, they can be analyzed by creating a type of frequency distribution chart called a histogram. A true histogram is a column chart where the width of the columns fill the available space on the horizontal axis and are proportional to the category values displayed on the x axis, while the height of the columns is proportional to the frequency of occurrences. Most histograms use one width of column to represent a category, while the vertical axis represents the frequency of occurrence.
Charting Electrical Problems
The engineer and electrician place a recording meter on the electrical supply to the manufacturing area and instruct the building automation system to keep a log of voltage coming into the plant from the local utility and when it starts and stops large electrical fan motors. They create a check sheet to track the number of times that power dips or spikes due to lighting strikes or electric space heater malfunctions. They collect the data, count the number of occurrences in each category, and then chart the number of occurrences in a histogram, as shown below.
Figure 10.11 Histogram Showing Frequency of Power Problems by Likely Cause
A variation on the histogram is a frequency distribution chart invented by economist Vilfredo Pareto known as a Pareto chart, in which the columns are arranged in decreasing order with the most common on the left and a line added that shows the cumulative total. The combination of columns and a line allows the user to tell at a glance which problems are most frequent and what fraction of the total they represent.
Using Pareto Chart to Analyze Voltage Problem
The engineer creates a Pareto chart by sorting the data and adds a line to show total problems, as shown below. He concludes that about half of the electrical voltage problems are caused when one of the large electrical fan motors on the same circuit as the manufacturing line is shut down to conserve electricity by the energy management system and then restarted.
Figure 10.12 Pareto Chart with Problems in Decreasing Order and a Line Showing a Cumulative Total
• Planning and Control Results
The quality plan is produced during the initiation phase. The methods, procedures, and logic are described to demonstrate a commitment to a project of high quality. The plan identifies the products or services that will be measured and how they will be measured and compared to benchmarks. A flowchart demonstrates the logic and pathways to improve the plan.
During the execution phase, data are collected by measuring samples according to the design specified in the plan. The data are charted and analyzed. If variations are due to assignable causes, change requests are created.
Key Takeaways
• Statistical control terms that are commonly used are tolerance (the range between control limits), flowchart (a diagram showing decision branches and loops), benchmarking (comparison to best practices), fishbone diagram (shows possible causes of quality problems), check sheet (form used to record frequency of problem occurrences), histogram (column chart that shows frequency of problems), and Pareto chart (histogram sorted by frequency from highest to smallest with a line that shows total cumulative problems).
• The quality planning process uses initial scope, budget, and schedule estimates to identify areas that need quality management.
• Control of quality in repetitive processes use statistical control methods that involve designing testing while considering the cost of quality, taking measurements, and then analyzing the data using run charts that show control limits and trends. Methodologies are compared to the best practices by competitors, which is called benchmarking. Errors are documented using check sheets and analyzed using fishbone diagrams, histograms, or Pareto charts.
• The products of planning and controlling quality are a quality management plan, data, analysis documents, and proposals for improvement
Exercises
1. The range from the mean to either control limit is the __________.
2. A diagram that shows branches and loops based on decisions is a ____ _____. (two words)
3. The best practices in an industry to which a company can compare its practices are called ___________.
4. What is the difference between a histogram and a Pareto chart?
Quality Management Plan
• >Consider a project in which you have been involved where there was a quality management plan or where such a plan was missing. Describe the effect of having or not having such a plan. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/10%3A_Managing_Project_Quality/10.04%3A_Planning_and_Controlling_Project_Quality.txt |
Learning Objective
1. Describe the purpose and methods of quality assurance.
The purpose of quality assurance is to create confidence that the quality plan and controls are working properly. To assure quality, time must be allocated to review the original quality plan and compare that plan to how quality is being created during the execution of the project.
• Process Analysis
The flowcharts of quality processes are compared to the processes followed during actual operations. If the plan was not followed, the process is analyzed and corrective action taken. The corrective action could be to educate the people involved on how to follow the quality plan or to revise the plan.
The experiments that sample products and processes and collect data are examined to see if they are following statistically valid sampling techniques and that the measurement methods have small enough tolerances to detect variation within control limits.
Because projects are temporary, there are fewer opportunities to learn and improve within one project if it has a short duration, but even in short projects, the quality manager should have a way to learn from experience and change the process for the next project of a similar complexity profile.
Analyzing Quality Processes in Safety Training
The technical college responsible for training employees in safe plant practices evaluates its instructor selection process at the end of the training to see if it had the best criteria for selection. For example, it required the instructors to have Masters degrees in manufacturing to qualify as college instructors. The college used an exit survey of the students to ask what they thought would improve the instruction of future classes on this topic. Some students felt that it would be more important to require that the instructors have more years of training experience, while others recommended that the college seek certification as a training center by the Occupational Safety and Health Administration (OSHA) (Occupational Safety and Health Administration, 2007). The college considered these suggestions and decided to retain its requirement of a Masters degree but add a requirement that the instructor be certified by OSHA in plant safety.
• Quality Audit
For additional confidence and assurance, an outside group can come in and review the quality procedures and accuracy of the data. This process is similar to a financial audit and is called a quality audit. The purpose of a quality audit is to compare the stated quality goals of the project against the actual practice and procedures that are used. It is not a certification of the quality of the products themselves.
Key Takeaway
• The purpose of quality assurance is to build confidence in the client that quality standards and procedures are being followed. This is done by an internal review of the plan, testing, and revisions policies or by an audit of the same items performed by an external group or agency.
Exercises
1. How is a quality audit different from a quality plan?
Customer Confidence
• >Consider a product that has suffered from a failure in its quality. Describe how the company handled the problem and its effect on your personal perception of the company and your confidence in buying its products.
10.06: Exercises
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Describe the difference between chance cause and assignable cause. How do these terms relate to Deming’s system of profound knowledge?
2. According to the text, why did the quality of manufactured goods decline in the United States after World War II, and how did Japan take advantage of that situation?
3. Describe the four Japanese terms used in TQM and give an example of how they might apply to a particular product.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. The auto industry has been a highly visible battleground for international competition in which quality and the public’s perception of a company’s quality have played an important role. Deming stresses that management is 85 percent of the problem and the solution to a company’s quality. What are specific examples with which you are familiar from the news or personal experience that demonstrate management leadership (or lack of leadership) toward improving quality.
2. Consider how the four Japanese concepts of quality included in TQM are applied in your educational institution. Based on your experience with the management of your school, does the management use the principles of kaizen, atarimae hinshitsu, kansei, and miryokuteki hinshitsu? Provide an example (or counter example) of each. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/10%3A_Managing_Project_Quality/10.05%3A_Assuring_Quality.txt |
Learning Objectives
1. Predict likely range of values in a normal distribution.
2. Recognize assignable and unassignable causes of statistical variation.
• Predicting Value Ranges Using Standard Deviation
Real production processes are never perfect. In some cases, a few products that are too small or that do not work will just cause inconvenience, but in other cases they might be life threatening. Samples of the production process will show how much variation occurs. If it appears that the variations are distributed equally above and below the mean (average), it might be assumed that the statistics of a normal distribution can be used to predict the percentage of products that will be defective when many of them are produced even if none of the samples are defective.
Some projects are initiated to increase the quality by reducing the variation in production. To understand the language of statistics and how it is used to justify a project, it is useful to gain a “feel” for how the distribution of samples is described by the standard deviation. A spreadsheet can be used to simulate samples of production runs where the mean and standard deviation can be chosen to show their relationship in a normal distribution. By trying different values for the standard deviation and observing the effect on the distribution of estimated samples in a chart, you can develop a sense of how the two are related.
Recall that a standard deviation is called a sigma and represented by the Greek letter σ and the 68-95-99.7 rule refers to the percentage of samples that will be within one, two, and three standard deviations of the mean.
• Examine a Normal Distribution
Complete the exercise by following these instructions:
1. Navigate to the directory location where the exercise files for this unit are located and open Ch10STD.xls in a spreadsheet program such as MS Excel.
2. In cell A2, replace StudentName with your name.
3. This worksheet is designed to simulate a set of sample values that vary from the mean for random reasons and form a normal distribution. The data and calculations in columns A through F are hidden. They are used to calculate the values in column G on which the chart is based.
4. Notice the following features of the spreadsheet:
• Column A has bins. In this example, the bins are .1 units wide. The size of the bin and the horizontal scale of the chart are determined by the value in cell L5.
• This simulation uses forty-two bins that are distributed equally above and below the mean. The mean value can be specified in cell L4.
• The usual method is to sample a sequence of products, count the number that fall into each bin, and then calculate the standard deviation. In this simulation, you can specify the standard deviation in cell L3, and the percentage of samples that are likely to occur in each bin is calculated and displayed in column G. The display is rounded to a whole percent. The display of decimal places can be increased using the spreadsheet’s controls.
• The percentage of estimated samples that occur in each bin is charted using a column chart. The scale at the left side of the chart indicates the percent of the samples in each bin.
5. Compare the chart in the spreadsheet to the chart in Figure 10.13 “Normal Distribution of Gasoline Samples” that was used in the text. Observe that the standard deviation, σ, is .2 and that almost all the sample values occur between 86.4 and 87.6—three σ on either side of the mean.
6. Open a word processing document and then save it as Ch10STDStudentName.doc. Switch back to the spreadsheet and capture the screen. Switch to the word processing document and paste the screen into the document.
7. Switch back to the spreadsheet. To see the effect of a better production process that would have a σ of .1 instead of .2, click cell L3. Type .1 and then, on the Formula bar, click the Enter button. The distribution narrows so that almost all the estimated samples are within .3 on either side of the mean (87.0), as shown in Figure 10.14 “Normal Distribution with Smaller Standard Deviation”.
8. Capture the screen showing in the narrow distribution and paste it into the word processing document.
9. In the spreadsheet, in cell L3, type .4 and then, on the Formula bar, click the Enter button. Notice that a larger standard deviation means the distribution is more spread out. Three standard deviations is 1.2 (3 × .4), so almost all the samples will be within 1.2 on either side of the mean, as shown in Figure 10.15 “Normal Distribution with Larger Standard Deviation”.
10. Capture this screen and paste it into the word processing document.
11. Change the value in cell L3 to 1. Almost all the samples will be above 84 (87−3) and below 90 (87+3), but the horizontal scale is too small to show all the values.
12. Change the value in cell L5 to .3.
13. Capture the screen and paste it into the word processing document.
• Use the Spreadsheet for a Different Example
The effects of a lower-than-expected octane rating in a passenger car might be engine knock during acceleration and less power climbing a hill, but the effect of lower-than-expected octane fuel in a military aircraft might mean that the plane could not achieve the desired altitude or speed in a critical situation. Aviation gasoline is designed for use in high-performance engines that require 100 octane fuel. Use the spreadsheet to examine the estimated distribution of gasoline samples with a different mean and σ.
• Examine a Normal Distribution
Complete the exercise by following these instructions:
1. Change the value in cell L4 to 100 and the standard deviation in cell L3 to .1. Notice that a standard deviation of .1 means that 99.7 percent of the gasoline samples will be between 99.7 and 100.3 octane.
2. Practice changing the mean and standard deviation values in the spreadsheet. Each time you do so, predict the high and low values that represent three σ above and below the mean and use the spreadsheet to check your prediction. If the values extend beyond the sides of the chart, increase the increment value in cell L5.
3. Capture the screen that shows one of your estimates that is different from the examples shown in the previous steps and paste it into the word processing document.
4. In the word processing document, below the last screen, write between one hundred and two hundred words to describe what you learned about the relationship between the standard deviation and the distribution of likely values. Specifically describe how you predict the upper and lower limits of the range.
5. Close the spreadsheet. Do not save the changes.
6. Save the word processing document as Ch10STDStudentName.doc.
7. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch10STDStudentName.doc Same or .docx file format Student name missing
Predict likely range of values in a normal distribution Five screen captures plus a reflective essay on what you learned about predicting the upper and lower limits defined by 3 σ Same as Best Missing pictures; essay does not describe how the upper and lower limits of 3 σ are calculated
8. Revise the document, if necessary. Save the document and submit it as directed by the instructor.
• Recognizing Variations Due to Unassignable and Assignable Causes
W. Edwards Deming teaches that some variation is inevitable due to chance cause. A manager needs to recognize the difference between variations that are due to chance and those that indicate the presence of an assignable cause or a trend. If it appears that there is an assignable cause for variation in quality, a project manager might be required to identify and fix the problem. To communicate with process managers who are monitoring and sampling production, it is useful to understand the use of control charts.
A run chart is a type of chart that shows variations from the mean as a function of time. The value of each sample is plotted to show the day it was taken and how it differs from the mean. If the variation is random, there will be roughly the same number of points above and below the mean.
A spreadsheet can be used to simulate random variations in production. In this exercise, the spreadsheet uses its random number function to pick two numbers that are positive and two that are negative and adds them to the mean. Each number represents a variation that is between the control limits. Most of the time the positive and negative numbers cancel each other out and result in a sum that is close to the mean, but occasionally the four random factors add up to values that are far from the mean.
In this part of the exercise, you observe variations in a run chart and frequency distribution chart that are due to random effects. You generate the random numbers several times to see what production runs with random (unassignable) variations look like.
• Examine a Run Chart with Random Effects
Complete the exercise by following these instructions:
1. Navigate to the directory location where the exercise files for this unit are located and open Ch10ControlChart.xls in a spreadsheet program such as MS Excel.
2. Observe that in cells B4 through B23 the RAND function is used to simulate the effects of four random influences on each day of production for a twenty-day period.
3. Scroll the screen or adjust the zoom so that you can see both charts. See Figure 10.16 “Screen Adjusted to Show Both Charts”.
4. On your keyboard, near the top, press the F9 key. The random functions pick new numbers. Observe how the samples on the run chart change and how the frequency distribution changes.
5. Press the F9 key several more times until you get a set of samples that are grouped close to the mean like the example shown in Figure 10.17 “Most Samples near the Mean”.
6. Open a word processing document and then save it as Ch10RunChartStudentName.doc. Switch back to the spreadsheet and capture the screen. Switch to the word processing document and paste the screen into the document. Your values will differ from those in the figure.
7. According to Deming, it is not productive to hold employees to quality standards that they do not control. Consider the effect on employee moral if this set of samples was taken as the standard by which the next run would be judged.
8. Press the F9 key again and stop at a set of samples that has a greater variation, such as the example shown in Figure 10.15 “Normal Distribution with Larger Standard Deviation”.
9. Capture this screen and paste it into Ch10RunChartStudentName.doc. Because of the chance-cause random factors, this set of data has more variation. If employee performance were punished or rewarded based on this data, they would become discouraged because they do not control the quality. Leave both files open.
• Examine a Run Chart with Assignable Cause
Complete the exercise by following these instructions:
An assignable cause can be mixed in with the chance-cause random effects. In this part, you introduce a factor that causes the samples to display a trend. You run the simulation several times to learn how to recognize a set of data that is a mix of random (chance-cause) factors and a trend that is probably from an assignable cause.
1. In the spreadsheet, click cell B2. Type .03 and then, on the Formula bar, click the Enter button. The random functions are recalculated, but each value is increased by .03 over its predecessor.
2. Press the F9 key several times and observe how this trend appears within the samples such as the example in Figure 10.19 “Trend That Is Probably Due to an Assignable Cause”.
3. It is clear that action must be taken soon to prevent the next batch of samples from exceeding the control limit. The process manager might create a project to identify the assignable cause and take the necessary action, such as replacing a worn-out piece of equipment. Choose an example where the upward trend is most apparent. Capture the screen and paste it into the word processing document.
4. Close the spreadsheet without saving the changes.
5. In the word processing document, below the last picture, write a reflective essay of between one hundred and two hundred words that describes how you would recognize the difference between run charts that show assignable and unassignable causes. Discuss the effect on morale if one of the runs with random values that are close to the mean is chosen as the standard of performance by which workers would be measured.
6. Leave the word processing document open.
7. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch10RunChartStudentName.doc Ch10RunChartStudentName.docx Did not include name in file name
Recognize assignable and unassignable causes of statistical variation Three screen captures that show two random causes and one assignable cause; an essay that describes how to recognize the difference and the effect on worker morale if a run with low random variation is chosen as a standard Same as Best Missing screen; essay does not address both requirements
8. Save the file and submit it as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/10%3A_Managing_Project_Quality/10.07%3A_Software_and_Technology_Exercises.txt |
Learning Objectives
1. Define project risk.
2. Define the difference between known and unknown risks.
3. Describe the difference between the business risk of the organization and project risk.
Risk is the possibility of loss or injury (Merriam-Webster Online, 2009).Project risk is an uncertain event or condition that, if it occurs, has an effect on at least one project objective (Project Management Institute, Inc., 2008).Risk management focuses on identifying and assessing the risks to the project and managing those risks to minimize the impact on the project. There are no risk-free projects because there is an infinite number of events that can have a negative effect on the project. Risk management is not about eliminating risk but about identifying, assessing, and managing risk.
Tzvi Raz, Aaron Shenhar, and Dov Dvir (Raz, Shenhar, & Dvir, 2002). studied the risk management practices on one hundred projects in a variety of industries. The results of this study suggested the following about risk management practices:
• Risk management is not widely used.
• The projects that were most likely to have a risk management plan were those that were perceived to be high risk.
• When risk management practices were applied to projects, they appeared to be positively related to the success of the project.
• The risk management approach influenced the meeting of project schedules and cost goals but exerted less influence on project product quality.
• Good risk management increases the likelihood of a successful project.
Risk deals with the uncertainty of events that could affect the project. Some potential negative project events have a high likelihood of occurring on specific projects. Examples are as follows:
• Safety risks are common on construction projects.
• Changes in the value of local currency during a project affect purchasing power and budgets on projects with large international components.
• Projects that depend on good weather, such as road construction or coastal projects, face risk of delays due to exceptionally wet or windy weather.
These are examples of known risks. Known risks are events that have been identified and analyzed for which advanced planning is possible. Other risks are unknown or unforeseen.
Terrorist Attack
On September 11, 2001, project team members were flying from various locations to a project review meeting in South Carolina when all flights were cancelled because of the attacks on the World Trade Center. Members of the leadership team could not make the meeting or return to their home base, and progress on the project, like many projects that day, was delayed.
Sudden Family Death
Just before a project meeting in Texas, the engineering lead received word that his father had died in the middle of the night. The team delayed making decisions on some critical engineering events without the knowledge and judgment of the engineering manager.
Whole Crew Fails Drug Test
On a project in Texas, the entire twelve-member masonry crew failed the drug screening test even though they had been told that drug screening was required on the project.
These events were unforeseen by the project team, and in all three cases the projects experienced schedule delays and additional costs.
Project risks are separate from the organizational risks that are associated with the business purpose of the project.
A project was chartered to design and construct a copper mine at a cost not to exceed \$1.2 billion. If a project is completed on time, within budget, and meets all quality specifications, the project is successful. If the price of copper drops below the profit threshold for the company, the organizational goals of the project may not be achieved. The price of copper is an organizational or business risk. The copper mining company authorized the project based on assumptions about the future price of copper. The price of copper is not a project risk on this project.
Key Takeaways
• Project risk is the possible outcome that planned events on the project will not occur as planned or that unplanned events will occur that will have a negative impact on the project.
• Known risks can be identified before they occur, while unknown risks are unforeseen.
• Organizational risks are associated with the business purpose of the project and assumed by the client when deciding to do the project.
Exercises
1. According to PMI, project risk is a(n) ___________ event or condition that, if it occurs, has an effect on at least one project objective.
2. A risk such as the future market price of a commodity is an example of a(n) _________ risk.
3. Define risk in your own words.
4. Give an example of a known risk and an unknown risk that are different from those in the text.
5. Describe the difference between organizational risk and project risk in your own words and give an example of each that is not used in the text.
Planning for Known and Unknown Risks
• >Consider a trip that you might be planning. Describe at least five risks that are associated with taking the trip. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/11%3A_Managing_Project_Risk/11.01%3A_Defining_Risk.txt |
Learning Objectives
1. Identify the major elements in managing project risk.
2. Describe the processes for identifying project risk.
3. Describe the processes for evaluating risk.
4. Describe the processes for mitigating risk.
Managing risks on projects is a process that includes risk assessment and a mitigation strategy for those risks. Risk assessment includes both the identification of potential risk and the evaluation of the potential impact of the risk. A risk mitigation plan is designed to eliminate or minimize the impact of the risk events—occurrences that have a negative impact on the project. Identifying risk is both a creative and a disciplined process. The creative process includes brainstorming sessions where the team is asked to create a list of everything that could go wrong. All ideas are welcome at this stage with the evaluation of the ideas coming later.
• Risk Identification
A more disciplined process involves using checklists of potential risks and evaluating the likelihood that those events might happen on the project. Some companies and industries developed risk checklists based on experience from past projects. The Construction Industry Institute (Construction Indistry Institute Cost/ Schedule Task Force, 1989) developed a detailed checklist of potential risks based on the experience of several large construction companies executing major construction projects. These checklists can be helpful to the project manager and project team in identifying both specific risks on the checklist and expanding the thinking of the team. The past experience of the project team, project experience within the company, and experts in the industry can be valuable sources for identifying potential risk on a project.
Identifying the sources of risk by category is another method for exploring potential risk on a project. Some examples of categories for potential risks include the following:
• Technical
• Cost
• Schedule
• Client
• Contractual
• Weather
• Financial
• Political
• Environmental
• People
The people category can be subdivided into risks associated with the people. Examples of people risks include the risk of not finding the skills needed to execute the project or the sudden unavailability of key people on the project. David Hillson (Hillson, 2003) uses the same framework as the work breakdown structure (WBS) for developing a risk breakdown structure (RBS). A risk breakdown structure organizes the risks that have been identified into categories using a table with increasing levels of detail to the right.
Risks in John’s Move
In John’s move, John makes a list of things that might go wrong with his project and uses his work breakdown structure as a guide. A partial list for the planning portion of the RBS is shown below.
Figure 11.1 Risk Breakdown Structure (RBS)
Level 1 Level 2 Level 3
Plan Move Contact Dion and Carlita Dion backs out
Carlita backs out
No common date available
Host planning lunch Restaurant full or closed
Wrong choice of ethnic food
Dion or Carlita have special food allergies or preferences
Develop and distribute schedule Printer out of toner
Out of paper
Make hotel arrangements in Atlanta City hotels full due to major event
Lost reservation
The result is a more obvious understanding of where risks are most concentrated. Hillson’s approach helps the project team identify known risks but can be restrictive and less creative in identifying unknown risks and risks not easily found inside the work breakdown structure.
• Risk Evaluation
After the potential risks have been identified, the project team then evaluates the risk based on the probability that the risk event will occur and the potential loss associated with the event. Not all risks are equal. Some risk events are more likely to happen than others, and the cost of a risk event can vary greatly. Evaluating the risk for probability of occurrence and the severity or the potential loss to the project is the next step in the risk management process.
The Construction Industry Institute conducted a study of large construction project risk evaluation and categorized risk according to the potential impact of project costs. High-impact risk consisted of risks that could increase the project costs by 5 percent of the conceptual budget or 2 percent of the detailed budget. Only thirty potential risk events met these criteria. These were the critical few potential risk events that the project management team focused on when developing a project risk mitigation or management plan. Risk evaluation is about developing an understanding of which potential risks have the greatest possibility of occurring and can have the greatest negative impact on the project. These become the critical few.
Figure 11.2 Risk and Impact
There is a positive correlation—both increase or decrease together—between project risk and project complexity. A project with new and emerging technology will have a high-complexity rating and a correspondingly high risk. The project management team will assign the appropriate resources to the technology managers to assure the accomplishment of project goals. The more complex the technology, the more resources the technology manager typically needs to meet project goals, and each of those resources could face unexpected problems.
Risk evaluation often occurs in a workshop setting. Building on the identification of the risks, each risk event is analyzed to determine the likelihood of occurring and the potential cost if it did occur. The likelihood and impact are both rated as high, medium, or low. A risk mitigation plan addresses the items that have high ratings on both factors—likelihood and impact.
Risk Analysis of Equipment Delivery
For example, a project team analyzed the risk of some important equipment not arriving to the project on time. The team identified three pieces of equipment that were critical to the project and would significantly increase the costs of the project if they were late in arriving. One of the vendors, who was selected to deliver an important piece of equipment, had a history of being late on other projects. The vendor was good and often took on more work than it could deliver on time. This risk event (the identified equipment arriving late) was rated as high likelihood with a high impact. The other two pieces of equipment were potentially a high impact on the project but with a low probably of occurring.
Not all project mangers conduct a formal risk assessment on the project. There are barriers to identifying risks. David Parker and Alison Mobey (Parker & Mobey, 2004) found in a phenomenological study of project managers that there was a low understanding of the tools and benefits of a structured analysis of project risks. The lack of formal risk management tools was seen as a barrier to implementing a risk management program. The level of investment in formal risk management was also associated with managerial psychological dimensions.
Some project managers are more proactive and will develop elaborate risk management programs for their projects. Other managers are reactive and are more confident in their ability to handle unexpected events without prior planning, while some managers are risk averse and prefer to be optimistic and not consider risks or to avoid taking risks whenever possible.
On projects with a low complexity profile, the project manager may informally track items that may be considered risk items. On more complex projects, the project management team may develop a list of items perceived to be higher risk and track them during project reviews. On projects with greater complexity, the process for evaluating risk is more formal with a risk assessment meeting or series of meetings during the life of the project to assess risks at different phases of the project. On highly complex projects, an outside expert may be included in the risk assessment process, and the risk assessment plan may take a more prominent place in the project execution plan.
On complex projects, statistical models are sometimes used to evaluate risk because there are too many different possible combinations of risks to calculate them one at a time. One example of the statistical model used on projects is the Monte Carlo simulation, which simulates a possible range of outcomes by trying many different combinations of risks based on their likelihood. The output from a Monte Carlo simulation provides the project team with the probability of an event occurring within a range and for combinations of events. For example, the typical output from a Monte Carol simulation may reflect that there is a 10 percent chance that one of the three important pieces of equipment will be late and that the weather will also be unusually bad after the equipment arrives.
• Risk Mitigation
After the risk has been identified and evaluated, the project team develops a risk mitigation plan, which is a plan to reduce the impact of an unexpected event. The project team mitigates risks in the following ways:
• Risk avoidance
• Risk sharing
• Risk reduction
• Risk transfer
Each of these mitigation techniques can be an effective tool in reducing individual risks and the risk profile of the project. The risk mitigation plan captures the risk mitigation approach for each identified risk event and the actions the project management team will take to reduce or eliminate the risk.
• Risk Avoidance
Risk avoidance usually involves developing an alternative strategy that has a higher probability of success but usually at a higher cost associated with accomplishing a project task. A common risk avoidance technique is to use proven and existing technologies rather than adopt new techniques, even though the new techniques may show promise of better performance or lower costs. A project team may choose a vendor with a proven track record over a new vendor that is providing significant price incentives to avoid the risk of working with a new vendor. The project team that requires drug testing for team members is practicing risk avoidance by avoiding damage done by someone under the influence of drugs.
• Risk Sharing
Risk sharing involves partnering with others to share responsibility for the risk activities. Many organizations that work on international projects will reduce political, legal, labor, and others risk types associated with international projects by developing a joint venture with a company located in that country. Partnering with another company to share the risk associated with a portion of the project is advantageous when the other company has expertise and experience the project team does not have. If the risk event does occur, then the partnering company absorbs some or all of the negative impact of the event. The company will also derive some of the profit or benefit gained by a successful project.
Risk Sharing on Pipeline in Peru
One example of risk sharing is a large United States construction firm that won a contract to build a pipeline in Peru. The company partnered with a construction company in Peru with a reputation for performing on time. The Peruvian company brought local expertise and the U.S. company contributed the latest construction methods. If the project had not successfully completed on time, both companies would have received less profit, but the project was successful and both companies met profit targets.
• Risk Reduction
Risk reduction is an investment of funds to reduce the risk on a project. On international projects, companies will often purchase the guarantee of a currency rate to reduce the risk associated with fluctuations in the currency exchange rate. A project manager may hire an expert to review the technical plans or the cost estimate on a project to increase the confidence in that plan and reduce the project risk. Assigning highly skilled project personnel to manage the high-risk activities is another risk reduction method. Experts managing a high-risk activity can often predict problems and find solutions that prevent the activities from having a negative impact on the project. Some companies reduce risk by forbidding key executives or technology experts to ride on the same airplane.
• Risk Transfer
Risk transfer is a risk reduction method that shifts the risk from the project to another party. The purchase of insurance on certain items is a risk transfer method. The risk is transferred from the project to the insurance company. A construction project in the Caribbean may purchase hurricane insurance that would cover the cost of a hurricane damaging the construction site. The purchase of insurance is usually in areas outside the control of the project team. Weather, political unrest, and labor strikes are examples of events that can significantly impact the project and that are outside the control of the project team.
• Contingency Plan
The project risk plan balances the investment of the mitigation against the benefit for the project. The project team often develops an alternative method for accomplishing a project goal when a risk event has been identified that may frustrate the accomplishment of that goal. These plans are called contingency plans. The risk of a truck drivers strike may be mitigated with a contingency plan that uses a train to transport the needed equipment for the project. If a critical piece of equipment is late, the impact on the schedule can be mitigated by making changes to the schedule to accommodate a late equipment delivery.
Roof Left Unfinished for Late Equipment
On one project, the project team left a section of a roof unfinished to allow the installation of equipment after the building was done and the roof installed. The equipment was late, and the project would have been delayed if the building was not completed. The project team left a section of the roof unfinished to allow the equipment to be placed in the building with the use of a crane. The roof was then completed, and the project finished on time.
• >In this example, the equipment arriving on time to meet the project schedule was considered a high risk. One option was to delay the end of the project. The team developed a contingency plan to install the roof in two phases to allow the installation of the equipment, if it was late. The contingency plan was more expensive and contingency funds were placed in the budget to cover the possibility that the equipment would be late.
• Contingency funds are funds set aside by the project team to address unforeseen events that cause the project costs to increase. Projects with a high-risk profile will typically have a large contingency budget. Although the amount of contingency allocated in the project budget is a function of the risks identified in the risk analysis process, contingency is typically managed as one line item in the project budget.
Some project managers allocate the contingency budget to the items in the budget that have high risk rather than developing one line item in the budget for contingencies. This approach allows the project team to track the use of contingency against the risk plan. This approach also allocates the responsibility to manage the risk budget to the managers responsible for those line items. The availability of contingency funds in the line item budget may also increase the use of contingency funds to solve problems rather than finding alternative, less costly solutions. Most project managers, especially on more complex projects, will manage contingency funds at the project level, with approval of the project manager required before contingency funds can be used.
Key Takeaways
• Risk management is a creative process that involves identifying, evaluating, and mitigating the impact of the risk event.
• Risk management can be very formal, with defined work processes, or informal, with no defined processes or methods. Formal risk evaluation includes the use of checklists, brainstorming, and expert input. A risk breakdown structure (RBS) can follow the work breakdown structure (WBS) to identify risk by activity.
• Risk evaluation prioritizes the identified risks by the likelihood and the potential impact if the event happens.
• Risk mitigation is the development and deployment of a plan to avoid, transfer, share, and reduce project risk. Contingency planning is the development of alternative plans to respond to the occurrence of a risk event.
Exercises
1. A risk ___________ plans eliminates or minimizes the impact of risk events.
2. Risk management is a creative process that involves identifying, evaluating, and __________ the impact of risk events
3. A process for risk assessment that is parallel to the WBS is a _________ _______ _______ (three words).
4. Choose a project risk that could be related to the John’s move example that is not described in the text and describe a mitigation plan for that risk. You may choose from any part of the John’s move example that has been described in previous chapters.
5. If you are planning a party at your residence, list three project risks and rate each of them for their potential impact and likelihood. Use high, medium, and low.
6. Describe the similarities and differences between risk transfer and risk sharing.
Risk Management
• >Assume that you are involved in planning a wedding. What are three risks that might affect the ceremony or reception, and how would you mitigate the impact of those risks? For example, if you are planning an outdoor wedding, describe the backup plan in case of rain. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/11%3A_Managing_Project_Risk/11.02%3A_Risk_Management_Process.txt |
Learning Objectives
1. Describe the elements of risk management during the initiation phase.
2. Describe the elements of risk management during the planning phase.
3. Describe the elements of risk management during the execution phase.
4. Describe the elements of risk management during the closeout phase.
Project risk is dealt with in different ways depending on the phase of the project.
• Initiation Phase
Risk is associated with things that are unknown. More things are unknown at the beginning of a project, but risk must be considered in the initiation phase and weighed against the potential benefit of the project’s success in order to decide if the project should be chosen.
Risks by Phase in John’s Move
In the initiation phase of John’s move, John considers the risk of events that could affect the whole project. He identifies the following risks during the initiation phase that might have a high impact and rates the likelihood of their happening from low to high.
1. His new employer might change his mind and take back the job offer after he’s given notice at his old job: Low.
2. The current tenants of his apartment might not move out in time for him to move in by the first day of work at the new job: Medium.
3. The movers might lose his furniture: Low.
4. The movers might be more than a week late delivering his furniture: Medium.
5. He might get in an accident driving from Chicago to Atlanta and miss starting his job: Low.
• >John considers how to mitigate each of the risks.
1. During his job hunt, John had more than one offer, and he is confident that he could get another job, but he might lose deposit money on the apartment and the mover. He would also lose wages during the time it took to find the other job. To mitigate the risk of his new employer changing his mind, John makes sure that he keeps his relationships with his alternate employers cordial and writes to each of them thanking for their consideration in his recent interviews.
2. John checks the market in Atlanta to determine the weekly cost and availability of extended-stay motels.
3. John checks the mover’s contract to confirm that they carry insurance against lost items, but they require the owner to provide a detailed list with value estimates and they limit the maximum total value. John decides to go through his apartment with his digital camera and take pictures of all of his possessions that will be shipped by truck and to keep the camera with him during the move so he has a visual record and won’t have to rely on his memory to make a list. He seals and numbers the boxes so he can tell if a box is missing.
4. If the movers are late, John can use his research on extended-stay motels to calculate how much it would cost. He checks the moving company’s contract to see if they compensate the owner for late delivery, and he finds that they do not.
5. John checks the estimated driving time from Chicago to Atlanta using an Internet mapping service and gets an estimate of eleven hours of driving time. He decides that it would be too risky to attempt to make the drive by himself in one day, especially if he didn’t leave until after the truck was packed. John plans to spend one night on the road in a motel to reduce the risk of an accident caused by driving while too tired.
• >John concludes that the high-impact risks can be mitigated and the costs from the mitigation would be acceptable in order to get a new job.
• Planning Phase
Once the project is approved and it moves into the planning stage, risks are identified with each major group of activities. A risk breakdown structure (RBS) can be used to identify increasing levels of detailed risk analysis.
Risk Breakdown Structure for John’s Move
John decides to ask Dion and Carlita for their help during their first planning meeting to identify risks, rate their impact and likelihood, and suggest mitigation plans. They concentrate on the packing phase of the move. They fill out a table of risks, as shown below.
Figure 11.5 Risk Breakdown Structure (RBS) for Packing John’s Apartment
Legend:
RA: Risk Avoidance; RS: Risk Sharing; RR: Risk Reduction; RT: Risk Transfer
Level 1 Level 2 Level 3 — Risks Mitigation
Packing Pack Kitchen Cuts from handling sharp knives Buy small boxes for packing knives (RR)
Cuts from cracked glasses that break while being packed Discard cracked glasses (RA)
Transporting alcoholic beverages Give opened bottles to Dion or Carlita (RA)
Pack Living Room Damage to antique furniture Supervise wrapping and loading personally (RR) and require movers to insure against damage (RT)
Lose parts while taking apart the entertainment center Buy box of large freezer bags with a marker to bag and label parts (RR)
Break most valuable electronics — TV, DVD, Tuner, Speakers Buy boxes of the right size with sufficient bubble wrap (RR)
Pack Bedroom Break large mirror Buy or rent a mirror-box with Styrofoam blocks at each corner (RR)
Lose prescription drugs or pack them where they cannot be found quickly Separate prescription drugs for transportation in the car (RA)
Pack Remaining Items Damage to house plants Ask Carlita to care for them and bring them with her in her van when she visits in exchange for half of them (RS)
Transportation of flammable liquids from charcoal grill Give to Dion or Carlita and buy replacements in Atlanta (RA)
• Execution Phase
As the project progresses and more information becomes available to the project team, the total risk on the project typically reduces, as activities are performed without loss. The risk plan needs to be updated with new information and risks checked off that are related to activities that have been performed.
Understanding where the risks occur on the project is important information for managing the contingency budget and managing cash reserves. Most organizations develop a plan for financing the project from existing organizational resources, including financing the project through a variety of financial instruments. In most cases, there is a cost to the organization to keep these funds available to the project, including the contingency budget. As the risks decrease over the length of the project, if the contingency is not used, then the funds set aside by the organization can be used for other purposes.
To determine the amount of contingency that can be released, the project team will conduct another risk evaluation and determine the amount of risk remaining on the project. If the risk profile is lower, the project team may release contingency funds back to the parent organization. If additional risks are uncovered, a new mitigation plan is developed including the possible addition of contingency funds.
• Closeout Phase
During the closeout phase, agreements for risk sharing and risk transfer need to be concluded and the risk breakdown structure examined to be sure all the risk events have been avoided or mitigated. The final estimate of loss due to risk can be made and recorded as part of the project documentation. If a Monte Carlo simulation was done, the result can be compared to the predicted result.
Risk Closeout on John’s Move
To close out the risk mitigation plan for John’s move, John examines the risk breakdown structure and risk mitigation plan for items that need to be finalized. He makes a checklist to be sure all the risk mitigation plans are completed, as shown below.
Figure 11.6 Closeout of Risk Mitigation Plan for John’s Move
Risk Mitigation Closeout
Items lost by movers Mover’s insurance plus digital image inventory Confirm all of the numbered boxes are present and still sealed
Antique furniture damaged Mover’s insurance plus personal supervision of wrapping and loading Supervise unloading and unwrapping; visually inspect each piece
House plants Ask Carlita to bring half of them in her van when she visits Confirm that the plants are healthy and that Carlita brought about half of them
Risk is not allocated evenly over the life of the project. On projects with a high degree of new technology, the majority of the risks may be in the early phases of the project. On projects with a large equipment budget, the largest amount of risk may be during the procurement of the equipment. On global projects with a large amount of political risk, the highest portion of risk may be toward the end of the project.
Key Takeaways
• During the initiation phase, risks are identified that could threaten the viability of the project. Mitigation options are considered to see if they would be sufficient to protect the project.
• During the planning phase, risks are identified and analyzed for each activity group in a risk breakdown structure, and mitigation is planned for each risk
• During the execution phase, risks are checked off as activities are completed or mitigation is performed if loss does occur. New risks are identified and added to the plan.
• During the closeout phase, insurance contracts are cancelled and partnerships terminated. A summary of actual costs associated with risks are compared with initial estimates to refine estimating capabilities. The successes and failures of the risk management plan are summarized and saved with the project documentation to add to the company’s corporate knowledge.
Exercises
1. High-risk events that require expensive mitigation options threaten the choice of the project during the _________ phase.
2. A risk breakdown structure is developed during the _______ phase.
3. Risk transfers and risk sharing arrangements are terminated during the ___________ phase.
4. If you plan an outdoor wedding, what is a risk that would threaten the project in the initiation phase and a mitigation plan that would allow the project to proceed?
5. In your own words, describe risk management during the planning phase.
6. In your own words, describe risk management during the closeout phase?
Risk Assessment
• >Recall a project that you considered at one time but decided against during the initiation phase because the risks were too great or the mitigation plan was insufficient to proceed. Describe the project, the risks, the mitigation plan, and why you chose not to go forward. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/11%3A_Managing_Project_Risk/11.03%3A_Project_Risk_by_Phases.txt |
Learning Objective
1. Identify the relationship between project risk and external, internal, technical, and environmental complexity.
Risk seems to have a positive correlation to complexity. High-risk projects are in most cases highly complex. The process of conducting a risk analysis focuses on understanding what can go wrong and the likelihood that it will go wrong. The project team then develops a project mitigation plan that addresses the items that were identified as high risk. The complexity analysis explores the project from the perspective of what elements on the project add to project complexity. The result of this analysis is the information needed by the project leadership to develop an appropriate execution plan. This execution plan also contains the risk management plan.
Although increased complexity on a project increases the project risk profile, risk is only one component of the complexity profile, and the manageability of the risk is also reflected in the complexity level of the project. For example, the organizational component of the project may be extremely complex with decision making shared among several independent clients. The project management team will develop an execution plan that includes developing and maintaining alignment among the various clients. Although the organizational risk of the project decreases with the development of the execution plan, the organizational approach of the client did not change the complexity level of the project. If the Darnall-Preston Complexity Index (DPCI) is used to rate the project, high ratings in each category carry their own types of increased risks.
• External Complexity
Projects that have a high score in the external complexity category in the DPCI are larger and longer than usual for the project management group and the project manager and the available resources are lacking. Due to lack of experience on this size project, unknown risks are significant. The inadequacy of resources will cause risks that are more predictable.
• Internal Complexity
Projects with high scores for internal complexity have risks to the budget, schedule, and quality due to organizational complexity and changes of scope due to lack of clarity in project and scope statements.
• Technological Complexity
High scores in technological complexity are associated with high levels of risk due to unknown flaws in the technology and lack of familiarity with it. These problems result in risks to the schedule, budget, and quality.
• Environmental Complexity
Environmental complexity includes legal, cultural, political, and ecological factors. High scores for complexity in this category imply high risks for delay and expensive resolution to lawsuits, public opposition, changes for political considerations, and unforeseen ecological impacts.
Key Takeaways
• There is a positive correlation between the complexity of a project and the risk. Increased levels of complexity imply more people, newer technologies, and increased internal and external unknown factors.
• High scores for external complexity imply high risks to the schedule, budget, and quality due to unknown factors and limited resources.
• High scores for internal complexity imply high risks to the budget, schedule, and quality due to organizational complexity and changes of scope due to lack of clarity in project and scope statements.
• High scores for technological complexity imply high risks to the budget, schedule, and quality due to unknown flaws in the technology and lack of familiarity with it.
• Environmental complexity includes legal, cultural, political, and ecological issues. High scores for complexity in this category imply high risks for delay and expensive resolution to lawsuits, public opposition, changes for political considerations, and unforeseen ecological impacts.
Exercises
1. There seems to be a ______ correlation between project complexity and risk.
2. One complexity category that is likely to have high risks due to unknown causes is _______, due to lack of experience with the size of project.
3. How does a high degree of complexity in a project’s environment affect the level of risk?
Environmental Risks
• >Identify a project with which you are familiar or one that has been in the news recently where the external environmental complexity caused increased costs or delays. Describe the impact of the risk, and the mitigation and its effectiveness. If the mitigation was ineffective, describe how you might have prepared a different mitigation plan.
11.05: Exercises
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Choose a simple project with which you are familiar and describe a risk that is typical of each phase of the project and a mitigation plan for those four risks.
2. Assume that you are considering the purchase of a house. What are examples of each of the four types of risk mitigation that are associated with buying a house? Explain your choice of each example and relate it to the definition of each type of risk mitigation.
3. Assume that you are working on a complex project to add a wing to a hospital that is next to a natural wetland. Using the four categories of the Darnall-Preston Complexity Index, identify a high-impact risk and explain your choice.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Choose a situation with which you are familiar where a risk event occurred that had a high impact on a project causing it to exceed the contingency allowances in the schedule or budget. Do you think this event was an unknown or known risk? What additional mitigation efforts (if any) should be used on a similar project in the future? Consider situations described by your classmates and contribute ideas for mitigation of events in their projects.
2. Consider your personal health. What are two examples of known risks and a mitigation plan for those two risks? Describe your mitigation plan for unknown risks. Consider the risks and plans described by your classmates and make suggestions for other mitigation options. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/11%3A_Managing_Project_Risk/11.04%3A_Project_Risk_and_the_Project_Complexity_Profile.txt |
Learning Objective
1. Describe the benefits of estimating risk using a Monte Carlo simulation.
• Monte Carlo Risk Simulations
Planning for risks is a form of betting on the future. An accomplished gambler knows the odds of drawing a certain combination of cards in a poker hand or of a ball landing on a number at a roulette wheel. If a project has several risk factors, they are not likely to all occur on the same project, but it is important to know the odds of that happening and to compare them to the potential profit of the project. If several risks do materialize on the same project, it might cause the company to lose money on the project, and senior management must decide if the benefit is worth the risk.
Computers can generate random numbers that can be used to simulate the likelihood of combinations of risk factors occurring and the impact on the project’s profitability. These simulations calculate odds like those a gambler would use before placing a bet, and the process is named after a famous gambling center in Europe.
To use a Monte Carlo simulation, you have to decide how the frequency of occurrences is distributed. Three types of distributions are most common: normal, skewed, and equal. If they are governed by the central limits principle, the occurrences will have a normal distribution.
Figure 11.7 Normal Distribution
If the likely frequency of occurrences of a risk factor is more likely to be distributed to either side of the middle of the range, it is a skewed distribution.
Figure 11.8 Skewed Distribution
If the likelihood of occurrence is evenly distributed across the range where each possibility has the same odds of occurring, it is an equal distribution.
Figure 11.9 Equal Distribution
A computer can choose numbers for each risk factor that represent a possible outcome for that risk on the project according to its distribution. Those numbers are fed into a spreadsheet that determines the effect on the project and its costs. This process is repeated thousands of times, and the result of each iteration—repeated process—is stored in a table of possible outcomes. This table is summarized in a histogram that shows how many of the iterations produced profit (or loss) in each range (bin).
The outcome of a Monte Carlo simulation gives managers an idea of how much the project could make or lose and the odds of that happening. Monte Carlo simulations are often used to predict the likelihood of a new product making a profit or loss. The same methods can be applied to predicting the profit or loss on a project.
• Learn More about Monte Carlo Simulations
Complete the exercise by following these instructions:
1. Open a blank document in a word processing program and then save the document as Ch11MonteCarloStudentName.doc. Leave the document open.
2. Start a web browser and then to go to A Practical Guide to Monte Carlo Simulations at http://www.vertex42.com/ExcelArticles/mc/MonteCarloSimulation.html.
3. Read the first screen to review the concepts.
4. Near the bottom of the first screen, click the arrow labeled Sales Forecast Example, as shown in Figure 11.10 “Next Page Button”.
Figure 11.10 Next Page Button
5. Scroll down past the advertisements and begin reading at Step 1. Capture a screen that shows Step 1 and paste it into Ch11MonteCarloStudentName.doc.
6. Read the explanation of how to create a model.
7. Use the Next button at the bottom of the screen to go to step 2, Generating Random Inputs.
8. Read steps 2, 3, and 4 on this screen.
9. Continue reading and advancing screens until you get to the histogram as shown in Figure 11.11 “Estimated Loss or Profit”.
Figure 11.11 Estimated Loss or Profit
10. The green line is the cumulative probability. The red lines are intended to help you find the 5 percent and 95 percent probability points on the green line.
11. Capture this screen and paste it into Ch11MonteCarloStudentName.doc.
12. Refer to Figure 11.11 “Estimated Loss or Profit”. Notice a spot on the green line is circled. According to the horizontal scale, this is the spot on the cumulative percentage line that marks the difference between negative and positive income for the project. In the word processing document, below the last screen capture, describe how you would use this chart to predict the percentage chance that this project will lose money. Leave the document open.
• Learn about Using Dedicated Monte Carlo Simulation Software
Complete the exercise by following these instructions:
1. Use your web browser to go to Monte Carlo Simulation Tutorial at http://www.solver.com/simulation/monte-carlo-simulation/tutorial.htm.
2. Read each of the first seven screens. Capture screens where indicated in the following list and paste them into Ch11MonteCarloStudentName.doc:
• Introduction (Capture the section titled The Flawed Average Model.)
• Introducing Uncertainty
• Introducing Uncertainty (cont.)
• Uncertain Functions and Statistics
• Using Interactive Simulation (Capture the table near the bottom.)
• Viewing the Full Range of Profit Outcomes
• Focusing on Profitable Outcomes (Capture the simulation results histogram at the bottom of the screen.)
3. The authors make the case that a simple average of the risks produces an estimate that is too high. If they run a thousand combinations of risk outcomes, they predict a lower profit and a certain likelihood of losing money. In the word processing document, below the last screen capture, review the screens and answer the following questions:
• What does a simple average model predict for a net profit?
• What does the simulation predict is the “True Average” profit?
• If most of the risk factors occur, how much money could the project lose?
• Analysis
1. At the bottom of Ch11MonteCarloStudentName.doc, write between one hundred and two hundred words to describe the benefits of estimating risk using a Monte Carlo simulation versus a simple average of the risks. Use specific references to the assigned reading in the text and in the web pages in the previous two parts of this exercise.
2. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch11MonteCarloStudentName.doc .docx version Student name not included
Describe the benefits of estimating risk using a Monte Carlo simulation Two screen captures plus a description of how the chart is used to estimate the percentage chance of losing money; three screen captures and answers to the three questions; description of the benefits of a Monte Carlo simulation Same as Best Missing screens; inaccurate estimates; incorrect answers to the three questions; description without specific references
3. Save the file and submit it as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/11%3A_Managing_Project_Risk/11.06%3A_Web_Exercise.txt |
Learning Objectives
1. Identify the factors that are considered when deciding whether to buy goods from within the organization or to obtain them from outsiders.
2. Identify what factors are considered when deciding to outsource or perform the work within the organization.
The project team decides the work that will be self-performed—performed by members of the project team—and the work that will be outsourced to others. The procurement strategy focuses on the work that will be outsourced—performed by outsiders.
Luu, Ng, and Chen (Luu, Ng, & Chen, 2003) studied project procurement selection priorities and identified budget and schedule as the most important considerations in the decision to outsource activities. This study of construction projects also identified other items that project managers must consider in developing a procurement strategy, including quality, risk, complexity, and flexibility. Some outsourcing decisions are easy.
Outsourcing Steel and Concrete in New York
A construction company has a contract to build a large building in downtown New York. Most, if not all, the construction materials, such as steel and concrete, will be purchased from companies that specialize in steel and concrete. Existing companies that produce and sell steel can provide the steel the project needs at a much lower cost and faster than if the project manager’s organization attempted to build the capacity itself.
Some outsourcing decisions—sometimes called make or buy decisions—are more difficult. On the same building construction project, new construction materials and methods are required that will make the building more energy efficient. The project manager can outsource this portion of the project to companies that have this expertise or develop this expertise on the project and self-perform the work. The costs of developing this expertise within the project will be more expensive and may take more time than outsourcing this work.
Self-performing this work also has benefits. The project team would develop this expertise and the additional expertise would add value to the parent company and save money on future projects. The project management team would have greater control over the work because the work would be performed by members of the project team instead of outsiders. Self-performing and outsourcing the work have both benefits and risks.
This decision is primarily influenced by the following:
• Cost (budget)
• Schedule
The following factors also influence outsourcing decisions:
• Risk
• Quality
• Flexibility
Outsourcing Versus Self-Performing
On the New York building construction project, the project manager decided to outsource the portion of the work that required new methods and materials. The project team assigned engineers from the project team to evaluate the work during the project and to assess the appropriate methods and costs for the parent company to develop this capacity within the company. The additional costs of developing the capacity and the additional risks of implementing a new method with existing resources outweighed the benefits of developing the capacity within the organization.
The project procurement strategy begins with these self-perform or buy decisions.
New York Construction Project
On the New York building construction project, the basic engineering and construction activities are core expertise of the parent company, and the project team had access to the qualified resources to perform the work. The decision to self-perform this portion of the work was easy because the company had a cost and schedule advantage by using the existing resources. The purchase of the steel, concrete, and other commodities was also easy because the costs of developing those resources far outweighed the benefit of purchasing them.
Some of the procurement decisions are not so obvious and the project team evaluates the cost, schedule, quality, flexibility, and risk implication of self-performing versus outsourcing the work.
Key Takeaways
• The factors that influence procurement are primarily cost and schedule but also include risk, quality, and flexibility.
• To determine whether to outsource or do the work within the organization, consider which option is less costly and which option can deliver the work on time.
Exercises
1. The primary factors that influence procurement are cost and ____________.
2. In addition to the two primary factors that influence procurement, what are three other important factors?
3. What is one advantage of doing the work within the organization instead of outsourcing it?
Internalize your learning experience by preparing to discuss the following.
• >Choose a situation with which you are familiar where you or your organization chose to hire someone outside your organization instead of developing the skill yourselves. What factors were most important in making the choice and how do they relate to the factors described in this section? | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/12%3A_Project_Procurement_and_Closure/12.01%3A_Identifying_the_Need_for_Resources_Outside_the_Organization.txt |
Learning Objectives
1. Describe the role of suppliers.
2. Describe the role of vendors.
3. Describe the role of partners.
After the outsourcing versus self-performing decisions are made, the procurement team develops the purchasing plan.
The method of purchasing products or services depends on the uniqueness and importance of the product or service. One way to organize the procurement plan is by the type of relationship with the providers of the outsourced goods or services.
• Suppliers
Some of the goods or services are commonly available with little variation in quality or availability. Such goods and services are called commodities. The providers of commodities are suppliers and there are usually several from which to choose. Purchasing commodities from suppliers focuses on achieving the lowest cost. Cost of commodities can often be found in the supplier’s catalog. On smaller, less complex projects, supplies can be purchased as needed from the supplier’s catalog.
Additional cost savings are often available if large quantities of a commodity are purchased from the same supplier. On larger, more complex projects, a list of materials and supplies is developed from the project cost estimate. This list is provided to suppliers as a request for quote (RFQ), and the suppliers respond with their lowest price. To avoid choosing a bid from a company that will make a promise it cannot keep, many organizations will maintain a list of suppliers that meet the organization’s requirements. These requirements usually include the proven ability to meet the quality and schedule specifications.
The project management team develops a procedure for requesting a quote. On smaller projects, the parent purchasing organization may process all RFQs. On larger projects, a procurement organization is established with expertise in purchasing. The purchasing team will develop a list of all procurement requirements for the project and develop a procurement schedule that assures the materials will be available to the project when needed.
The project team develops an RFQ based on the quantity and schedule needs of the project and sends the RFQ to the identified qualified suppliers. The suppliers then develop a quote that lists the specific materials to be provided, the price for each, and a schedule for delivery. The project team evaluates each quote from suppliers and determines that the supplier bid meets all the requirements, and in most cases, the supplier with the lowest price will be awarded the bid.
RFQ for Housing Contractor
A housing contractor who is building ten identical houses develops a materials list that includes all the carpentry, plumbing, and electrical supplies needed to build all ten houses. The housing contractor develops an RFQ for all these materials, including the construction schedule, and submits the RFQ to the four largest building supply companies in the region. Each of the supply companies decides to bid on the project and provides a bid for the materials in the RFQ. One of the bidders has the lowest price but is unable to deliver the materials to the job site. The project team calculates the cost of transporting the materials to the job site. After the cost of transportation is added to the bid, it is no longer the lowest total cost. The bidder with the total lowest total cost is awarded the contract.
Some organizations that do a large number of projects will develop a relationship with one or two suppliers based on developing cost savings for both organizations. This relationship is commonly called a key supplier relationship.
Key Supplier for Housing Supplies
The housing contractor develops a key supplier relationship with one or two of the building supply companies. The building supply company would guarantee a 10 percent discount on all materials and the contractor would promise to purchase exclusively from the key supplier. Both organizations save the cost and time associated with preparing the bid. The building supply company plans on a consistent volume of business from the contractor and the contractor can expect priority treatment when supplies are scarce.
• Vendors
Vendors often provide a unique product or service that cannot be readily purchased in the marketplace. The vendor typically provides a product or service that is designed for the project. The following are examples of products or services provided by vendors:
• A large military contract to design and build a new fighter aircraft
• A new software program design to improve the efficiency of a hospital emergency room
• The design and construction of a blast furnace for a new steel mill
Products and services from vendors need input and insight from the vendor. Instead of issuing a request for quote (RFQ) for a list of commodities, the project team issues a request for proposal (RFP). Companies responding to an RFP are invited to provide creative approaches to adding value to the project. Bidders are encouraged to offer design alternatives, alternative uses of materials, and scheduling alternatives that meet all the project requirements and also reduce the total project cost. The bids are evaluated on the total value to the project, including the contribution to the project goals.
RFP for Mining Operation
A copper mining project in Argentina included the design and construction of the mine site, the extraction of copper from the raw materials, the building of a pipeline to transport the copper ore to the Atlantic coast, and the construction of a port to enable the loading of the copper ore into various size ships. The construction materials, such as lumber, steel, and concrete, were purchased through suppliers, including key suppliers.
• >Some of the equipment used to extract the copper ore from the raw materials costs several million dollars and is only fabricated by a few companies. The project team designs the equipment to meet characteristics of the mining environment in Argentina: size, hardness, and composition of the raw material. The bid documents sent to the mining equipment vendors included the design specification and performance specification of the equipment, the project schedule, and the mining process. A request for proposal (RFP) was issued to each of the vendors.
• Because vendor performance is critical to the success of the project, the management of the vendor relationship is a project management priority. Project management will often implement processes that encourage the vendors to submit suggestions that will reduce total project cost, shorten the schedule, or improve the performance. The project management team will often assign someone from the team to monitor the relationship and provide support from project resources to help assure vendor success.
• Partners
If the parent organization lacks key skills or relationships, it might work with other organizations as partners—especially on international projects.
Partnership on Mining Project
In the Argentina mining project example, the United States parent organization had project management, engineering, procurement, construction, and mining technology expertise. The company also had relationships with major mining equipment vendors. The U.S. construction company partnered with an Argentinean company that had expertise and relationships important to the success of the project.
• >The Argentinean company contributed local knowledge of the construction workforce; local engineering and construction practices, knowledge, and expertise in the government permitting processes; and an existing relationship with potential key suppliers and local vendors.
• A partnership is a formal arrangement to execute the project with each party contributing resources. In most partnerships, both parties benefit from the success of the project and share the costs associated with a less successful project. Critical to the success of a partnership is the clear definition of roles and responsibilities on the project, a common understanding of the project goals, and a scope of work for each partner.
Building the relationship between major partners on the project is similar to building relationships with clients. On a large, complex project, a partnership alignment session is often required to build the trust required for open communication channels. Maintaining the relationship permits more effective problem solving and coordinated action on the project. A well-managed partnering relationship can contribute to the achievement of project goals, reduce overall costs, and shorten the project schedule. In most cases, the parent organization is aware of weaknesses in the project resources or skills and searches for a potential partner that has the needed resources or skills. In our Argentinean example, the parent company knew that construction experience in Argentina would be important to a successful project. Both companies will research the capability of the other company to assure that the partnership is appropriate for both companies.
Biotech Plant Partnership in Puerto Rico
On a project to build a new biotech plant in Puerto Rico, a large engineering and construction company selected a Puerto Rican civil engineering company to design the site work on the project. Because the plant was needed quickly, the project schedule was an important component of every discussion and meeting the project end date was a major goal. The Puerto Rican Company was asked to begin developing the civil drawings early, before much of the needed information had been developed. This was a situation where a partnering relationship would benefit the project. Both companies would mutually support each other to achieve project goals and both would benefit from project success.
• >In this situation, the project procurement plan specified the development of a subcontract for the civil engineering, and a contract was developed with a clear scope of work and a cost based on completing the work in the contract on time and according to specification. Because the aggressive project schedule required the civil engineering company to begin work before all the needed information was available, change orders were required when new information became available. The contract allowed several days to evaluate the impact of the change on cost and schedule, and the time evaluation process began to cause delays in the project.
• >Eventually, a new contract was developed to make the Puerto Rican company a partner. These new partnering arrangements allowed the engineers to get early information and contribute ideas that would shorten the schedule. This case is an example of the need to evaluate the project goals and environment and develop a procurement strategy that matches the conditions of the project.
• Key Takeaways
• Commodities are purchased through suppliers using a request for quote (RFQ) and selected on the basis of price. An exception is the key supplier relationship where the supplier-organization relationship is long term and the supplier passes along some of the savings of avoiding the bidding process.
• Vendors provide products and services that are designed for the project based on a request for proposal (RFP) that invites the vendors to meet the goals of the request using their products and skills.
• If the organization lacks key skills or relationships, it might form a partnership arrangement with another company to share the benefits and risks of the project.
Exercises
1. Commodities are described in an ______ (three-letter acronym).
2. The objectives of the work are described in an _____________ (three-letter acronym), and the details of how to accomplish those objectives is proposed by the vendor.
3. If a project takes place in a different country, the project team might seek a _________ with a local company to provide local contacts and expertise in local issues.
4. What is different about a key supplier relationship?
5. What is the difference between an RFP and an RFQ?
6. How is a partnership different from a vendor relationship?
Internalize your learning experience by preparing to discuss the following.
• >If you were building your own house, what would be an example of something that would be procured using an RFQ and something that would be procured with an RFP? Describe how your choices meet the descriptions of products or services procured from suppliers or vendors. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/12%3A_Project_Procurement_and_Closure/12.02%3A_Procurement_Plan.txt |
Learning Objectives
1. Identify factors that determine which type of contract to select.
2. Describe the types of fixed cost contracts.
3. Describe the types of cost reimbursable contracts.
An agreement between the organization and an outside provider of a service or materials is a legal contract. To limit misunderstandings and make them more enforceable, contracts are usually written documents that describe the obligations of both parties.
Because legal agreements often create risk for the parent organization, procurement activities are often guided by the policies and procedures of the parent organization. After the project management team develops an understanding of what portions of the project work will be outsourced and defines the type of relationships that are needed to support the project execution plan, the procurement team begins to develop the contracting plan. On smaller, less complex projects, the contract development and execution is typically managed through the parent company or by a part-time person assigned to the project. On larger, more complex projects, the procurement team can consist of work teams within the procurement function with special expertise in contracting. The contract plan defines the relationship between the project and the subcontractors (supplier, vendor, or partner) and also defines a process for making changes in the agreement to accommodate changes that will occur on the project. This change management process is similar to the change management process used with the project agreement with the project client.
The contracting plan of the project supports the procurement approach of the project. The following are some factors to consider when selecting the type of contract:
• The uncertainty of the scope of work needed
• The party assuming the risk of unexpected cost increases
• The importance of meeting the scheduled milestone dates
• The need for predictable project costs
There are several types of contracting approaches and each supports different project environments and project approaches. The legal contracts that support the procurement plan consist of two general types of contract: the fixed price and the cost reimbursable contracts, with variations on each main type.
• Fixed Price Contracts
The fixed price contract is a legal agreement between the project organization and an entity (person or company) to provide goods or services to the project at an agreed-on price. The contract usually details the quality of the goods or services, the timing needed to support the project, and the price for delivering goods or services. There are several variations of the fixed price contract. For commodities and goods and services where the scope of work is very clear and not likely to change, the fixed price contract offers a predictable cost. The responsibility for managing the work to meet the needs of the project is focused on the contractor. The project team tracks the quality and schedule progress to assure the contractors will meet the project needs. The risks associated with fixed price contracts are the costs associated with project change. If a change occurs on the project that requires a change order from the contractor, the price of the change is typically very high. Even when the price for changes is included in the original contract, changes on a fixed price contract will create higher total project costs than other forms of contracts because the majority of the cost risk is transferred to the contractor, and most contractors will add a contingency to the contract to cover their additional risk.
Fixed price contracts require the availability of at least two or more suppliers that have the qualifications and performance histories that assure the needs of the project can be met. The other requirement is a scope of work that is most likely not going to change. Developing a clear scope of work based on good information, creating a list of highly qualified bidders, and developing a clear contract that reflects that scope of work are critical aspects of a good fixed priced contract.
• Fixed Total Cost Contract
If the service provider is responsible for incorporating all costs, including profit, into the agreed-on price, it is a fixed total cost contract. The contractor assumes the risks for unexpected increases in labor and materials that are needed to provide the service or materials and in the quantity of time and materials needed.
• Fixed Price with Price Adjustment
The fixed price contract with price adjustment is used for unusually long projects that span years. The most common use of this type of contract is the inflation-adjusted price. In some countries, the value of its local currency can vary greatly in a few months, which affects the cost of local materials and labor. In periods of high inflation, the client assumes risk of higher costs due to inflation, and the contract price is adjusted based on an inflation index. The volatility of certain commodities can also be accounted for in a price adjustment contract. For example, if the price of oil significantly affects the costs of the project, the client can accept the oil price volatility risk and include a provision in the contract that would allow the contract price adjustment based on a change in the price of oil.
• Fixed Price with Incentive Fee Contract
Fixed price with incentive fee is a contract type that provides an incentive for performing on the project above the established baseline in the contract. The contract might include an incentive for completing the work on an important milestone for the project. Often contracts have a penalty clause if the work is not performed according to the contract. For example, if the new software is not completed in time to support the start-up of a new plant, the contract might penalize the software company a daily amount of money for every day the software is late. This type of penalty is often used when the software is critical to the project and the delay will cost the project significant money.
Incentive Fee on Copper Mine Project
A project in South America to design and construct a copper mine would supply copper to several companies throughout the world. The copper that would be produced by the mine was sold before the mine was complete and ships were scheduled to make the delivery dates to processing plants.
• >Any delay in the project would mean a delay in shipping and significant loss to the mine, the shipping company, and the plants that were expecting the copper. Including an incentive fee for completing the project on time and including the important subcontracts increased the likelihood that the mine would make copper deliveries on time.
• Fixed Unit Price
If the service or materials can be measured in standard units, but the amount needed is not known accurately, the price per unit can be fixed—a fixed unit price contract. The project team assumes the responsibility of estimating the number of units used. If the estimate is not accurate, the contract does not need to be changed, but the project will exceed the budgeted cost.
Fixed Unit Price Contract for Concrete
An example of a fixed price contract is a contract for the concrete needed for the foundation of a building. The project contracted for the concrete company to supply 1,000 cubic yards (CY) at 5,000 PSI (hardness standard) of concrete at the project site according to, and in support of, the project schedule for \$70 per square yard. This is an example of a unit price contract. If the project only uses 970 CY, then the total costs will be lower. If the project uses 1,050 CY, then the costs will be higher.
• >An alternative pricing would be to establish a fixed price of \$70,000 (1,000 CY × \$70.00). Both the unit price approach and the total costs approach are fixed price contracts.
• Figure 12.7 Table of Fixed Price Contracts and Characteristics
Type Known Scope Share of Risk Incentive for Meeting Milestones Predictability of Cost
Fixed Total Cost Very High All Contractor Low> Very High
Fixed Unit Price High Mostly Project Low High
Fixed price with Incentive Fee High Mostly Project High Medium-high
Fixed Fee with Price Adjustment High Mostly Project Low Medium
• Cost Reimbursable Contracts
In a cost reimbursable contract, the organization agrees to pay the contractor for the cost of performing the service or providing the goods. Cost reimbursable contracts are also known as cost plus contracts. Cost reimbursable contracts are most often used when the scope of work or the costs for performing the work are not well known. The project uses a cost reimbursable contract to pay the contractor for allowable expenses related to performing the work. Since the cost of the project is reimbursable, the contractor has much less risk associated with cost increases. When the costs of the work are not well known, a cost reimbursable contract reduces the amount of money the bidders place in the bid to account for the risk associated with potential increases in costs.
The contractor is also less motivated to find ways to reduce the cost of the project unless there are incentives for supporting the accomplishment of project goals. Cost reimbursable contracts also require good documentation of the costs that occurred on the project to assure that the contractor gets paid for all the work performed and to assure that the organization is not paying for something that was not completed.
Cost Reimbursable Contract to Drill Wells
A project to build a new plant in an area that did not have sufficient water included the drilling of water wells to produce several thousand gallons of water a day for the new plant. Although geological surveys indicated there was sufficient water to meet the plant’s requirements, the number of wells needed was unknown. The project developed a cost reimbursable contract that paid the well drilling contractor for allowable costs associated with drilling the wells.
• >Allowable costs included the costs associated with locating all the equipment and materials to the project site, the labor and materials used to drill the wells, daily costs for the use of the drilling rigs, routine maintenance of the drilling equipment, the room and board for the workers, and administrative fees and profit. The contractor collected the costs associated with drilling the wells each month and submitted a bill to the project accountant.
• The contractor is paid an additional amount above the costs. There are several ways to compensate the contractor.
• Cost Reimbursable Contract with Fixed Fee
A cost reimbursable contract with a fixed fee provides the contractor with a fee or profit amount that is determined at the beginning of the contract and does not change.
Fixed Fee for Providing Water
On the new water plant project, the project accountant reviewed each bill, including time cards for labor, invoices for materials, and other documents that supported the invoice. The contractor was then reimbursed for the allowable costs plus the administrative fee and a fixed amount for his profit.
• Cost Reimbursable Contract with Percentage Fee
A cost reimbursable contract with a percentage fee pays the contractor for costs plus a percentage of the costs, such as 5 percent of total allowable costs. The contractor is reimbursed for allowable costs and is paid a fee.
Percentage Fee to Evaluate Dam in West Virginia
A small community in West Virginia was worried about the structural integrity of a dam above the town. The county council was worried the dam would break and cause loss of life and property. They contracted with a civil engineering firm to evaluate the dam structure and attest to the structural soundness. The firm hired an expert from outside the area and paid the expert \$1,000.00 per day plus expenses such as meals, travel, and lodging. The civil engineering firm billed the community for the expert’s fees and expenses plus 10 percent of the total.
• Cost Reimbursable Contract with an Incentive Fee
A is used to encourage performance in areas critical to the project. Often the contract attempts to motivate contractors to save or reduce project costs. The use of the cost reimbursable contract with an incentive fee is one way to motivate cost reduction behaviors.
Incentive Fee for Road Project
A road construction company won a contract to build a small road to the new county courthouse. The estimate to complete the road was \$10 million. The contract received a cost reimbursable contract that would pay all costs plus a 3 percent fee. The contactor could also earn an incentive by performing the work for less than \$10 million. The contract might include a fee that would pay the contract 20 percent of all savings below the estimated \$10 million. In this case, the county got the road at a lower cost, and the contractor made more money.
• >The contract could have focused on schedule and paid a bonus for completing ahead of schedule. This type of contract requires that the project management team has the capability to assure the quality of work performed meets project specifications and the savings was not generated through reducing the quality of the work.
• Cost plus Contract with Award Fee
A cost plus contract with award fee reimburses the contractor for all allowable costs plus a fee that is based on performance criteria. The fee is typically based on goals or objectives that are more subjective. An amount of money is set aside for the contractor to earn through excellent performance, and the decision on how much to pay the contractor is left to the judgment of the project team. The amount is sufficient to motivate excellent performance.
The following Reuters story is about the use of an award fee to incentivize the contractor’s performance in maintaining the ship’s performance during transfer to other owners.
VSE Corporation (NASDAQ GS: VSEC) reported today that it has been awarded a \$249 million cost-plus award fee contract option modification by the Naval Sea Systems Command that can be exercised by the Navy to provide one additional year of continued support to NAVSEA PMS 326 and 333 for ex-U.S. Navy ships that are sold, leased or otherwise transferred through the Foreign Military Sales (FMS) program to FMS clients.
This contract provides for services supporting U.S. ships that are sold, leased or otherwise transferred to FMS clients by providing engineering, technical, procurement, logistics, test, inspection, calibration, repair, maintenance and overhaul support services, including reactivation and modernization.
Since 1995, VSE’s International Group, GLOBAL Division (formerly BAV Division) has transferred 42 ships to foreign governments. VSE is currently reactivating EX-USNS Andrew J. Higgins (TAO-190) for transfer to Chile. Additionally, VSE actively supports various countries through the follow-on technical support requirements of the contract, providing training, maintenance, repair, and in-country infrastructure improvement assistance in support of transferred ships. Countries currently supported by VSE include Bahrain, Egypt, Japan, Mexico, Taiwan, Turkey, Poland, Philippines, Italy and Romania.
“We are extremely pleased to have won this award. It is a testament to the confidence and trust we have earned from the U.S. Navy and their foreign clients for the past 14 years,” said VSE CEO/COO/President Maurice “Mo” Gauthier. “We look forward to continuing to deliver excellence and innovative technology solutions to the world’s navies for years to come” (VSE Corporation, 2009).
• Time and Materials Contracts
On small activities that have a high uncertainty, the contractor might charge an hourly rate for labor, plus the cost of materials, plus a percentage of the total costs. This type of contract is called time and materials (T&M). Time is usually contracted on an hourly rate basis and the contractor usually submits time sheets and receipts for items purchased on the project. The project reimburses the contractor for the time spent based on an agreed-on rate and the actual cost of the materials. The fee is typically a percent of the total cost.
Time and materials contracts are used on projects for work that is smaller in scope and has uncertainty or risk, and the project rather than the contractor assumes the risk. Since the contractor will most likely include contingency in the price of other types of contracts to cover the high risk, T&M contracts provide lower total cost to the project.
Figure 12.9 Table of Contract Types and Characteristics
Cost Reimbursable (CR) Known Scope Share of Risk Incentive for Meeting Milestones Predictability of Cost
CR with Fixed Fee Medium Mostly Project Low Medium-high
CR with Percentage Fee Medium Mostly Project Low> Medium-high
CR with Incentive Fee Medium Mostly Project High Medium
CR with Award Fee Medium Mostly Project High Medium
Time and Materials Low All Project Low Low
To minimize the risk to the project, the contract typically includes a not-to-exceed amount, which means the contract can only charge up to the agree amount. The T&M contract allows the project to make adjustments as more information is available. The final cost of the work is not known until sufficient information is available to complete a more accurate estimate.
Archeological Site Evaluation
On a road construction project, the survey team discovers an archeological site. Contractors are required to preserve archeological sites and the project team explores ways to advance the schedule while a decision is made on how to handle the site. The project issues a T&M contract to an archeologist to determine the nature of the site and develop a plan to preserve the integrity of the site. A T&M contract is awarded because the size and character of the site is unknown and the amount of time and the type of equipment needed to explore the site is also unknown.
• >An archeologist from the local university was issued a T&M contract to cover the labor and expenses to explore the site and develop a plan. An hourly rate was established for each member of the five-person archeological team. Equipment rental fees plus 15 percent was paid on all equipment rented and supplies used. The archeological team’s profit was incorporated into the labor rates.
• >A not-to-exceed amount was also included in the contract to capture the team’s estimate of the amount of work. A contract change order would increase the not-to-exceed number when more information was available.
• Progress Payments and Change Management
Vendors and suppliers usually require payments during the life of the contract. On contracts that last several months, the contractor will incur significant cost and will want the project to pay for these costs as early as possible. Rather than wait until the end of the contract, a schedule of payments is typically developed as part of the contract and is connected to the completion of a defined amount of work or project milestones. These payments made before the end of the project and based on the progress of the work are called progress payments. For example, a concrete supplier on a construction project may bill the contract for the amount of concrete poured the previous month plus the profit earned during that period. On a training project, the contract might develop a payment schedule that pays for the development of the curriculum, and payment is made when the curriculum is completed and accepted. In each case, there is a defined amount of work to be accomplished, a time frame for accomplishing that work, and a quality standard the work must achieve before the contractor is paid for the work.
Just as the project has a scope of work that defines what is included in the project and what work is outside the project, vendors and suppliers have a scope of work that defines what they will produce or supply to the company. (Partners typically share the project scope of work and may not have a separate scope of work.) Often changes occur on the project that require changes in the contractor’s scope of work. How these changes will be managed during the life of the project is typically documented in the contract. Capturing these changes early, documenting what changed and how the change impacted the contract, and developing a change order (a change to the contract) are important to maintaining the progress of the project. Conflict among team members will often arise when changes are not documented or when the team cannot agree on the change. Developing and implementing an effective change management process for contractors and key suppliers will minimize this conflict and the potential negative effect on the project.
Key Takeaways
• Contract selection is based on uncertainty of scope, assignment of risk, need for predictable costs, and the importance of meeting milestone dates.
• Total fixed cost is a single price where the scope is well defined. A fixed price with incentive contract offers a reward for finishing early or under budget or a penalty for being late. A fixed price with adjustment allows for increases in cost of materials or changes in currency values. A fixed unit price contract sets a price per unit, but the exact number of units is not known.
• In a cost reimbursable contract, the project pays for costs. A cost plus fixed fee contract assures the contractor of a known fee. A cost plus percentage fee calculates the fee as a percentage of the costs. A cost plus incentive fee sets goals for the contractor to achieve that would result in a bonus. A cost plus award fee is similar, but the goals are more subjective. Time and materials contracts pay for costs plus an hourly rate for the contractor’s time.
Exercises
1. A key factor in choosing the type of contract is the uncertainty of the ______, risk, cost, or schedule of the activity.
2. A contract with an _____________ fee might reward the contractor for finishing early.
3. Contracts that pay the contractor’s costs are ____________ contracts.
4. Which type of contract is most appropriate to use if the scope is extremely well known, and which type is most appropriate if the scope is very uncertain? Explain your choices.
5. Why would a water well drilling company prefer a cost reimbursable contract versus a fixed cost contract?
Internalize your learning experience by preparing to discuss the following.
• >If you were a contractor, which type of contract would you prefer most and which would you like least? Explain your choices. Your explanation should demonstrate that you are familiar with the definitions of the contracts you chose and at least one similar type of contract. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/12%3A_Project_Procurement_and_Closure/12.03%3A_Selecting_the_Type_of_Contract.txt |
Learning Objectives
1. Describe the components of the procurement plan.
2. Identify the decisions made when selecting the type of contract.
3. Describe how bidders are qualified, solicited, and chosen.
4. Identify the methods used to manage the contracts.
The project procurement cycle reflects the procurement activities from the decision to purchase the material or service through the payment of the bills and closing of procurement contracts.
• Procurement Plan
After the decision has been made to purchase goods or outsource services, the procurement team develops a plan that includes the following:
• Selecting the appropriate relationships and contract approaches for each type of purchased goods or outsourced service
• Preparing RFQs and RFPs and evaluating partnership opportunities
• Evaluating RFQs, RFPs, and partnerships
• Awarding and signing contracts
• Managing quality, timely performance, and contract changes
• Closing contracts
Depending on the complexity level of the project, each of these steps can take either hours or sometimes weeks of work to complete. Each of these steps is also included in the project master schedule. The time involved in the procurement cycle can influence the scheduling of critical activities, including the decision to self-perform the work or contract the work to others. The equipment and materials deliveries and completion of contracted work dates are placed on the project schedule and any procurement activities that create a project delay or fall on the project critical path may require special attention.
• Selecting the Contract Approach
The technical teams typically develop a description of the work that will be outsourced. From this information, the project management team answers the following questions:
• Is the required work or materials a commodity, customized product or service, or unique skill or relationship?
• What type of relationship is needed: supplier, vendor, or partnership?
• How should the supplier, vendor, or potential partner be approached: RFQ, RFP, or personal contact?
• How well known is the scope of work?
• What are the risks and which party should assume which types of risk?
• Does the procurement of the service or goods affect activities on the project schedule’s critical path and how much float is there on those activities?
• How important is it to be sure of the cost in advance?
The procurement team uses the answers to the first three questions listed above to determine the approach to obtaining the goods or services and the remaining questions to determine what type of contract is most appropriate.
A key factor in selecting the contract approach is determining which party will take the most risk. The team determines the level of risk that will be managed by the project and what risks will be transferred to the contractor. Typically, the project management team wants to manage the project risk, but in some cases, contractors have more expertise or control that enable them to be better positioned to manage the risk associated with the contracted work.
Weather Risk on Concrete Contract
On a construction contract, the concrete supplier will not be penalized for schedule delays caused by weather because the project team has more options for making up weather delays than the concrete supplier. The risk associated with weather remains with the project and not transferred through the contract.
• >The contractor knows more about the risks associated with obtaining the raw materials used to make concrete and assumes the risk of delays caused by shortages of those materials.
• Soliciting Bids
A solicitation is the process of requesting a price and supporting information from bidders. The solicitation usually takes the form of either a request for quote (RFQ) or a request for proposal (RFP). Partnerships are pursued and established on a case-by-case basis by senior management.
• Qualifying Bidders
Potential bidders are people or organizations capable of providing the materials or performing the work required for the project. On smaller, less complex projects, the parent company typically has a list of suppliers and vendors that have successfully provided goods and services in the past, and the project has access to the performance record of companies on that list. On unique projects, where no suppliers lists exist, the project team develops a list of potential suppliers and then qualifies them to become eligible to bid on project work. Eligible bidders are placed on the bidders list and provided with a schedule of when work on the project will be bid.
The eligibility of a supplier is determined by the ability to perform the work in a way that meets project requirements and demonstrates financial stability. Ability to perform the work includes the ability to meet quality specifications and meet the project schedule. During times when economic activity is high in a region, many suppliers become busy and stretch their resources. The project team investigates the potential suppliers to assure they have the capacity and the track record of meeting deadlines before they are included on the bidder’s list.
The potential supplier must also be financially stable to be included on the bidders list. A credit check or a financial report from Dun and Bradstreet (D&B)—a provider of financial information about individual companies—will provide the project with information about the potential bidder’s financial status. D&B services include the following:
• D&B proprietary rankings and predictive creditworthiness scores
• Public filings, including suits, liens, judgments, and UCC filings—standardized financial disclosure documents that conform to the uniform commercial code
• Comprehensive payment history, including D&B’s Paydex Scores
• Company financial statements and history
• Request for Quote
A request for quote focuses on price. The type of materials or service is well defined and can be obtained from several sources. The bidder that can meet the project quality and schedule requirements usually wins the contract by quoting the lowest price.
• Request for Proposal
A request for a proposal accounts for price but focuses on meeting the project quality or schedule requirements. The process of developing a proposal in response to an RFP can be very expensive for the bidder, and the project team should not issue an RFP to a company that is not eligible to win the bid.
• Evaluating Bids
Evaluation of bids in response to RFQs for commodity items and services is heavily graded for price. In most cases, the lowest total price will win the contract. The total price will include the costs of the goods or services, any shipping or delivery costs, the value of any warranties, and any additional service that adds value to the project.
The evaluation of bids based on RFPs is more complex. The evaluation of proposals includes the price and also an evaluation of the technical approach chosen by the bidder. The project team evaluating the proposal must include people with the expertise to understand the technical aspects of the various proposal options and the value of each proposal to the project. On more complex projects, the administrative part of the proposal is evaluated and scored by one team, and the technical aspect of the proposal is evaluated by another team. The project team combines the two scores to determine the best proposal for the project.
• Awarding the Contract
After the project team has selected the bidder that provides the best value to the project, a project representative validates all conditions of the bid and the contract with the potential contractor. Less complex awards, like contracts for building materials, require a reading and signing of the contract to assure the building materials supplier understands the contract terms and requirements of the project schedule. More complex projects require a detailed discussion of the goals, the potential barriers to accomplishing those goals, the project schedule and critical dates for the contract to make, and the processes for resolving conflicts and improving work processes.
Planning Session Follows Contract Award
On a design and construction project to build a major industrial plant in the Chicago area, the project invited two critical partners to a three-day planning session after the project contracts were awarded.
• >The project manager began the session by stating that the project leadership intended to create an environment that enabled each of the partners to exceed profit expectations on the project and that the only way to accomplish this goal was through a mutually supportive team where everyone contributed to improve project performance and everyone benefited from better performance. The session then focused on developing ways to resolve problems and increase performance. Although this may appear to be a simple process of focusing contractors on project success, the process took several days of lengthy discussion and conflict resolution. The effort invested in developing alignment between the project team and contractors can significantly improve project performance.
• Managing the Contracts
The contract type determines the level of effort and the skills needed to manage the contract. The manager of supplier contracts develops detailed specifications and assures compliance to these specifications. The manager of vendor contracts assures the contractors that bid the work have the skills and capacity to accomplish the work according to the project schedule and tracks the vendor’s performance against the project needs, supplying support and direction when needed. The manager of partnering arrangements develops alignment around common goals and work processes. Each of these approaches requires different skills and various degrees of effort.
Items that take a long time to acquire—long lead items—receive early attention by the project leadership. Examples of long lead items are equipment that is designed and built specifically for the project, curriculum that is created for training a new workforce, and a customized bioreactor for a biotech project. These items might require weeks, months, and sometimes years to develop and deliver to the project site. Long lead items that are procured through the normal procurement cycle may cause delays in the project, and the project team identifies these items early to begin the procurement activities as soon as possible.
After the contract is awarded, the project team tracks the performance of the contractor against performance criteria in the contract and his contribution to the performance of the project. Typically, the contractors deliver the product or service that meets the quality expectations and supports the project schedule. Typically, there are also one or two contractors that do not perform to project expectations. Some project managers will then pull out the contract and attempt to persuade the contractor to improve performance or be penalized. Other project managers will explore with the contractor creative ways to improve performance and meet project requirements. The contract management allows for both approaches to deal with nonperforming contractors and the project team must assess what method is most likely to work in each situation.
Building Support with Vendor on Chemical Plant Project
Eastman Chemical was building a new plant at their Kingsport, Tennessee location when a critical vendor began falling behind schedule. The project team analyzed the situation and determined the vendor had taken on more work than it was capable of completing by the project’s required due dates. This was an important vendor to the project and any delay in delivery from the vendor meant a delay in the completion of the project.
• >The project manager and Eastman executives flew to the vendor’s plant in New Jersey and brought a large bar graph of the project schedule. The discussion focused on the critical project dates and the importance of the equipment delivery dates. Eastman offered technical support to the team and resources from the project to expedite the delivery. During lunch, Eastman executives and managers from the project walked with the plant manager around the plant floor, talking with the skilled labor working on the equipment. Eastman managers left Eastman hats and other small gifts as tokens of appreciation for their effort in supporting the Eastman project.
• >The effort by the Eastman project team to improve the vendor’s schedule performance was successful. The vendor was able to make critical dates and the project completed on time.
• Managing contractor performance on a project is as important to the overall project outcomes as the work performed by the project team.
• Logistics and Expediting
Equipment and materials that are purchased for use on the project must be transported, inventoried, warehoused, and often secured. This area of expertise is called logistics. The logistics for the project can be managed by the project team or can be included in the RFP or RFQ. On international projects, materials may be imported, and the procurement team manages the customs process. On smaller projects, the logistical function is often provided by the parent company. On larger projects, these activities are typically contracted to companies that specialize in logistical services. On larger, more complex projects, that procurement team will include logistical expertise.
The project work often depends on materials procured for the project. The delivery of these materials influences the scheduling of the project, and often some materials are needed earlier than normal procurement practices would deliver. On long lead items, the project schedule is included in the contracting plans and contractors must explain how they will support the project schedule.
On large, complex projects, critical items might be scheduled for delivery after they are needed on the project. The procurement team then explores ideas with the contractor to expedite—speed up—the manufacturing or transportation of the equipment or materials. The contract can often place a priority on the fabrication of the equipment and delivery of the equipment to meet the project schedule. The project logistics team can also explore ways of shortening the transportation time. For example, a project in Argentina flew some critical equipment from Sweden rather than transport the equipment by ship to save several weeks in transit. The logistics costs were higher, but the overall value to the project was greater.
Key Takeaways
• The procurement plan includes determining the category of materials or services, choosing the type of contractual relationship, soliciting bids, selecting bidders, managing the work, and closing the contracts.
• The decisions made when selecting the type of contract are based on whether the materials can be provided by suppliers, vendors, or partners; how well defined the work is; how the risk will be shared; the importance of the task to the schedule; and the need for certainty of the cost.
• Companies that bid on contracts are evaluated on past performance and current financial status. RFQs and RFPs are sent to those companies. RFQs are evaluated on price and RFPs are evaluated on price and method.
• Long lead time items are identified and monitored. Items that are critical to the schedule or delayed are assigned to an expediter. The logistics of handling delivery, storage, and transportation are determined. Work and materials are inspected for quality.
Exercises
1. Materials that are widely available with standardized quality are ____________, which are provided by ______________.
2. The financial soundness of a vendor can be measured by the ratings provided by __________ (company name).
3. If an item takes a long time to deliver or if it is an important item, an _________ might be assigned to be sure it is delivered on time.
Internalize your learning experience by preparing to discuss the following.
• >Assume that you are managing a project to replace the heating and cooling system in an old building and you would like to consider alternatives that are more environmentally sustainable in addition to the typical systems. How would you go about it? Describe what type of relationship you think you need, what type of contract you would choose, and how you would identify and select a provider. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/12%3A_Project_Procurement_and_Closure/12.04%3A_Procurement_Process.txt |
Learning Objectives
1. Describe the procedures for closing out contracts.
2. Describe the elements and purpose of the postproject review process.
3. Identify the types of documents that should be archived.
4. Identify the objectives of the project closeout celebration.
Team members who were excited by the project in its early stages may find it difficult to maintain their focus to complete the project. They might already be looking forward to the next project. Bringing a project to an end requires a different management style that focuses on details as well as an analysis of the decisions that were made.
• Closeout Procurement Contracts
The last stage of the project procurement cycle includes the payment of the bills and closing of procurement contracts.
• Contracts with Suppliers
Suppliers provide commodities that should meet standards of quality. The project team must check the records of deliveries made and determine that they were acceptable quality. If any items were rejected for poor quality or not delivered, the final payment is adjusted accordingly.
• Punch Lists and Performance Tests
If a vendor is providing a service or building something for the project, there are usually items that must be fixed or mistakes that must be corrected before the contract is complete. On a software project, performance tests are run on the software, usually by the people who will be using the software, and any performance expectations not met are noted. Sometimes the expectations were not captured in the project scope of work and sometimes the performance did not meet the expectations established in the scope. If the items were not in the scope of work and the owner wants the work done, then the owner typically issues a change order. If the expectations were in the scope of work, the contractor is still responsible for completing the work.
On a project to build a new house, the owner might go through the house looking for minor items not completed by the contractor. Before the contract is closed, any minor items that need to be repaired or completed are placed on a punch list, which is a list of all the items found by the owner that still remain to be done. The project team will then work on all of the items on the list, building a small schedule to complete the remaining work.
If the number of items on the punch list is too large or the amount of work is significant, the project team continues to work the project. Once the punch list becomes smaller, the project manager begins closing down the project, maintaining only enough staff and equipment to support the team that is working the punch list.
• Transfer to Customer or Sponsor
If the product of the project is a building, software system, or something that must be operated and maintained by someone else, it must be turned over to the people who will be responsible for it after the project is complete. They might perform their own inspection to determine if the project team has met its goals for quality and that all elements of the project are complete. These performance tests are typically identified in the original project contract.
• Final Payments
The final payment is usually more than a simple percentage of the work that remains to be completed. Completing the project might involve fixing the most difficult problems that are disproportionately expensive to solve, so the final payment should be large enough to motivate the vendor to give the project a high priority so that the project can be completed on time.
If the supplier has met all the contractual obligations, including fixing problems and making repairs as noted on a punch list, the project team signs off on the contract and submits it to the accounting department for final payment. The supplier is notified that the last payment is final and completes the contractual agreement between the supplier and the project.
Overtime Needed to Complete Project and Earn Final Payment
The building automation vendor devoted additional personnel and paid them overtime wages to troubleshoot the problems and get them resolved so the building could open on time. When the project team was satisfied, they approved the system and the final payment.
• Postproject Evaluations
Before the team is dissolved and begins to focus on the next project, a review is conducted to capture the lessons that can be learned from this project, often called a lessons learned meeting or document. The team explores what went well and captures the processes to understand why they went well. The team asks if the process is transferable to other projects. The team also explores what did not go well and what people learned from the experience. The process is not to find blame but to learn.
Quality management is a process of continuous improvement that includes learning from past projects and making changes to improve the next project. This process is documented as evidence that quality management practices are in use. Some organizations have formal processes for changing work processes and integrating the lessons learned from the project so other projects can benefit. Some organizations are less formal in the approach and expect individuals to learn from the experience and take the experience to their next project and share what they learned with others in a very informal way.
• Project Profile Evaluation
One of the first activities was to create a project profile to determine where the challenges were most likely to occur. If the Darnall-Preston Complexity Index (DPCI) was used, each of the complexity evaluations is reviewed and compared to actual events that occurred during the project. The team explores the changes in the complexity level during the life of the project and how the team managed the complexity during the life of the project. Learning from this exercise develops expertise that is useful in making the next project profile. The DPCI rating is adjusted, if necessary, for reference purposes on future projects.
• Trust and Alignment Effectiveness
The project leadership reviews the effect of trust—or lack of trust—on the project and the effectiveness of alignment meetings at building trust. The team determines which problems might have been foreseen and mitigated and which ones could not have been reasonably predicted. What were the cues that were missed by the team that indicated a problem was emerging? What could the team have done to better predict and prevent trust issues?
• Schedule Management
The original schedule of activities and the network diagram are compared to the actual schedule of events. Events that caused changes to the schedule are reviewed to see how the use of contingency reserves and float mitigated the disruption caused by those events. The original estimates of contingency time are reviewed to determine if they were adequate and the estimates of duration and float were accurate. These activities are necessary for the project team to develop expertise in estimating schedule elements in future projects—they are not used to place blame.
• Budget Management
A review of budget estimates for the cost of work scheduled is compared to the actual costs. If the estimates are frequently different from the actual costs, the choice of estimating method is reviewed.
• Risk Mitigation
After the project is finished, the estimates of risk can be reviewed and compared to the events that actually took place. Did events take place on the project that were unforeseen? What cues existed that may have allowed the team to predict these events? Was the project contingency sufficient to cover unforeseen risks? Even if nothing went wrong on this project, it is not proof that risk mitigation was a waste of money, but it is useful to compare the cost of avoiding risk versus the cost of unexpected events to understand how much it cost to avoid risk.
• Procurement Contracts
The performance of suppliers and vendors is reviewed to determine if they should still be included in the list of qualified suppliers or vendors. The choice of contract for each is reviewed to determine if the decision to share risk was justified and if the choice of incentives worked.
• Customer Satisfaction
Relationships with the client are reviewed and decisions about including the client in project decisions and alignment meetings are discussed. The client is given the opportunity to express satisfaction and identify areas in which to improve. Often a senior manager from the organization interviews the client to develop feedback on the project team performance.
• Reports
The results of the postproject evaluations are summarized in reports for external and internal use.
• Stakeholders
A general report that provides an overview of the project is created to provide stakeholders with a summary of the project. The report includes the original goals and objectives and statements that show how the project met those goals and objectives. Performance on the schedule and budget are summarized and an assessment of client satisfaction is provided. A version of this report can be provided to the client as a stakeholder and as another means for deriving feedback.
• Senior Management
The report to senior management contains all the information provided to the stakeholders in a short executive summary. The report identifies practices and processes that could be improved or lessons that were learned that could be useful on future projects.
• Document Archival
The documents associated with the project must be stored in a safe location where they can be retrieved for future reference. Signed contracts or other documents that might be used in tax reviews or lawsuits must be stored. Organizations will have legal document storage and retrieval policies that apply to project documents and must be followed. Some project documents can be stored electronically.
Care should be taken to store documents in a form that can be recovered easily. If the documents are stored electronically, standard naming conventions should be used so documents can be sorted and grouped by name. If documents are stored in paper form, the expiration date of the documents should be determined so they can be destroyed at some point in the future. The following are documents that are typically archived:
• Charter documents
• Scope statement
• Original budget
• Change documents
• DPCI ratings
• Manager’s summary—lessons learned
• Final DPCI rating
• Project Celebration
A symbolic ending of a project can be a final celebration to mark the end of the project and perhaps the dissolution of the team. The end of a major project is often a time to reflect. Project team members and stakeholders have typically invested a great deal of time and emotional energy into the success of the project. Because of this investment and because of the close relationships that develop during a project, project closure in often sad. Project managers stay tuned into the project team environment and use celebrations and team recognition to ameliorate the effects of project closure.
This is an opportunity to improve client satisfaction and team member satisfaction. Awards or recognition plaques might be given out to individuals who made an outstanding contribution to the project. Celebrating and reviewing the challenges and successes of the project creates a positive memory of the project and reinforces the learning that can be transferred to future projects. Groups or teams can be recognized and instances where trust between team members made a positive difference can be rewarded.
The client can be praised for contributions during planning and execution of the project.
Key Takeaways
• To close contracts, systems are tested, materials are inspected, and punch lists of work to be completed are made.
• The purpose of the postproject review is to examine decisions that were made with partial knowledge with the way the project actually developed to learn from the experience and to improve future decisions. It is also used to identify processes that can be improved.
• Original project documents, such as the charter, scope statement, and budget, are stored. Documents developed during the project, such as change agreements, are stored. Postproject reviews, including a summary of lessons learned and a final project profile description—DPCI rating—are saved.
• At the project closeout celebration, positive behavior is awarded for individuals, and groups and the client or sponsor is invited to speak to enforce a sense of satisfaction.
Exercises
1. Why is a postproject review valuable to future projects?
2. Which documents should be archived?
3. Why should the project have a closeout celebration?
Internalize your learning experience by preparing to discuss the following.
• >Consider why it would be important to withhold a significant amount for the final payment. If you are familiar with a situation where a contractor had to spend extra to fix or finish items to complete a job, describe why they might need a financial incentive to get those jobs done. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/12%3A_Project_Procurement_and_Closure/12.05%3A_Project_Closure.txt |
Exercises at the end of the chapter are designed to strengthen your understanding and retention of the information recently acquired in the chapter.
Essay Questions
Write several paragraphs to provide more in-depth analysis and consideration when answering the following questions.
1. Describe an activity that would require an RFP and why it should be handled with an RFP instead of a RFQ or a partnership.
2. Describe a procurement task. Rate it for the amount of uncertainty of the scope, cost, schedule, and risk. Choose a contract type and explain why that contract type would be an appropriate choice for that set of uncertainties.
3. Describe requirements of a particular quality method, and describe how a postproject review would meet that standard.
Discussion
The exercises in this section are designed to promote exchange of information among students in the classroom or in an online discussion. The exercises are more open ended, which means that what you find might be completely different from what your classmates find, and you can all benefit by sharing what you have learned.
1. Research the document retention standards at an organization of your choice that apply to normal business records. Describe how those standards would or would not meet the needs of project document archival. Be prepared to compare the standards of the organization you described with those described by your classmates.
2. Describe a situation with which you are familiar where conflicts arose over completion of punch list items or fixing items to complete a project.
12.07: Web Exercises
Learning Objectives
1. Locate commodities in online catalogs.
2. Use an RFQ template obtained online.
3. Use an RFP template obtained online.
4. Describe and interpret D&B financial reports using definitions from the D&B website.
• Locate Commodities in Online Catalogs
Commodities can be purchased from online catalogs if the buyer knows exactly what is needed for the task.
• Learn More about Using an Online Catalog to Buy Commodities
Complete the exercise by following these instructions:
1. Open a blank document in a word processing program and then save the document as Ch12CommoditiesStudentName.doc. Leave the document open.
2. Use your web browser and go to http://www.eastmfg.com. The catalog is provided in PDF format. This format is not easily changed by the viewer.
3. Click the Parts menu and then click the link to the Hardware Catalog shown in Figure 12.11 “Parts Catalog”.
Figure 12.11 Parts Catalog
4. In the Search box, type Lynch Pin and then press Enter. Refer to Figure 12.12 “Searching for a Part”.
Figure 12.12 Searching for a Part
5. Notice the following characteristics:
• The price is not listed. Separate price lists are often maintained for different classes of customer, and discounts are usually available for large orders.
• There is a unique catalog number for each type of anchor. This number is used for placing orders.
• The part’s capacity, size, and weight are provided.
• Some labels require knowledge of the product to understand; for example, Side Swing Pin.
6. Capture this screen and paste it into Ch12CommoditiesStudentName.doc.
• Analysis
1. At the bottom of Ch12CommoditiesStudentName.doc, write between one hundred and two hundred words to describe how to navigate and interpret an online catalog that is provided in PDF format.
2. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch12CommoditiesStudentName.doc .docx version Student name not included
Locate commodities in online catalogs Two screen captures; a description of how to navigate an online catalog in PDF format Same as Best Missing screens; inaccurate description
3. Save the file and submit it as directed by the instructor.
• Use an Online RFQ Template
Commodities can be services that are specifically defined and common enough to have standardized descriptions and quality. In this exercise, you download a template for writing an RFQ from the state of Massachusetts for requesting quotes on testing software for accessibility compliance.
• Locate and Download an RFQ Template
Complete the exercise by following these instructions:
1. Open a blank document in a word processing program and then save the document as Ch12RFQStudentName.doc Leave the document open.
2. Use your web browser to type www.mass.gov/dep/recycle/reduce/rmrfq.pdf.
3. Scroll to the Preface page, as shown in Figure 12.13 “Description of RFQ Template”.
4. Add this web address to your browser’s bookmarks or favorites list in the Project Management folder.
5. Capture a screen that shows the address in the Project Management folder in the favorites or bookmarks and then paste it into Ch12RFQStudentName.doc.
6. Scroll through appendices at the end of the document. Capture a screen from one of these appendices pages and then paste it into Ch12RFQStudentName.doc.
• Analysis
1. At the bottom of Ch12RFQStudentName.doc, write between one hundred and two hundred words to describe the advantages of using a template. Make specific reference to at least two sections of the RFQ template used in the first part of this exercise, including page references.
2. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch12RFQStudentName.doc .docx version Student name not included
Use an RFQ template obtained online A screen capture that shows a link to the template in the Project Management folder in the bookmarks or favorites; screen capture of one of the first eight pages; reflective essay between one hundred and two hundred words on use of a RFQ template Project Management folder does not show links from previous exercises Missing screens; only one feature discussed; no page references
3. Save the file and submit it as directed by the instructor.
• Use an Online RFP Template
If you need to rely on the vendor’s experience and expertise to solve a problem, you can request companies to submit proposals on how they would go about it. The state of Maryland provides a template for RFPs.
• Locate and Download an RFP Template
Complete the exercise by following these instructions:
1. Open a blank document in a word processing program and then save the document as Ch12RFPStudentName.doc. Leave the document open.
2. In a browser, type energy.maryland.gov/documents/ProcurementConsultingServicesRFPFINAL.pdf. An RFP template used by the Maryland Energy Administration displays as a PDF file, as shown in Figure 12.14 “Source of RFQ Template”.
Figure 12.14 Source of RFQ Template
3. Add this web address to your browser’s bookmarks or favorites in the Project Management folder.
4. Capture a screen that shows the address in the Project Management folder in the favorites or bookmarks and then paste it into Ch12RFPStudentName.doc.
5. Scroll to section 1.7 Pre-Proposal Conference. Observe that many organizations give contractors an opportunity to meet and ask questions before they prepare a proposal.
6. Scroll back to page ii, Project No. Observe that the state asks the contractors who decide not to bid to explain why.
7. Capture the screen that shows the list of reasons why the contractor chose not to bid, and then paste it into Ch12RFPStudentName.doc.
8. Explore the other sections of this RFP template and choose one that is new to you or that you find most interesting.
• Analysis
1. At the bottom of Ch12RFPStudentName.doc, write between one hundred and two hundred words to describe what you learned from each of the three sections: the pre-proposal conference, the refusal to bid, and the third section of your choice. Make specific reference to each of the three sections of the RFP template used in Part I including page references.
2. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch12RFPStudentName.doc .docx version Student name not included
Use an RFP template obtained online A screen capture that shows a link to the template in the Project Management folder in the bookmarks or favorites; screen capture of the preproposal conference; reflective essay between one hundred and two hundred words on the conference, refusal, and one other section with specific page references Project Management folder does not show links from previous exercises Missing screens; four sections not discussed individually; no page references
3. Save the file and submit it as directed by the instructor.
• Interpret D&B Financial Ratings
The relationship between the project and its suppliers and vendors involves trust that both parties will keep their financial commitments. This trust may be based on past experience, but it can also be based on a third party’s rating of the financial health of the organization and its past behavior. For example, organizations with better credit ratings can negotiate lower prices with suppliers and vendors because there is less risk. One of the most popular rating agencies is D&B. In this exercise, you locate and review the types of financial reports that are available from D&B.
• Locate and Review the Financial Reports Available from D&B
Complete the exercise by following these instructions:
1. Open a blank document in a word processing program and then save the document as Ch12DBStudentName.doc. Leave the document open.
2. In a browser, type www.dnb.com/us/customer_service/scores.html. The D&B web page displays, as shown in Figure 12.15 “D&B Ratings”.
3. Add this web address to your browser’s bookmarks or favorites in the Project Management folder.
4. Capture a screen that shows the address in the Project Management folder in the favorites or bookmarks and then paste it into Ch12DBStudentName.doc.
5. Scroll down the page to the D&B Rating Interpretation table. The rating in the first column indicates the worth of the company, and the numbers 1 through 4 indicate its general credit worthiness, where 1 is high and 4 is low. For example, a rating of 1A-4 indicates a company with a worth between \$500,000 and \$749,999 with a low credit worthiness rating.
6. Capture this screen and paste it into Ch12DBStudentName.doc.
7. Scroll down to the US Employee Range Designation table. Notice this rating indicates the number of employees, where ER1 is more than 1,000.
8. Capture this screen and paste it into Ch12DBStudentName.doc.
9. Scroll down to the D&B PAYDEX Value table. Observe that the PAYDEX score indicates when the company pays its debts. Notice that paying off debts sooner than is contractually required earns a PAYDEX score above 80.
10. Capture this screen and paste it into Ch12DBStudentName.doc.
11. Scroll down to the Financial Stress Score table. Notice that companies with a score of 1 are estimated to have a probability of failure of .03 percent (3 per 10,000) of failing in the next twelve months, while a rating of 5 means a probability of failure of 4.7 percent (almost 1 in 20).
12. Capture this screen and paste it into Ch12DBStudentName.doc.
• Analysis
1. At the bottom of Ch12DBStudentName.doc, write between one hundred and two hundred words to describe the function of these four tables.
2. Explain what it would mean if a company had the following D&B ratings:
• BB-1
• ER3
• PAYDEX 80
• Financial stress: 4
3. Review your work and use the following rubric to determine its adequacy:
Element Best Adequate Poor
File name Ch12DBStudentName.doc .docx version Student name not included
Describe and interpret D&B financial reports using definitions online A screen capture that shows a link to the template in the Project Management folder in the bookmarks or favorites; four screens that show the four tables; reflective essay between one hundred and two hundred words on use of D&B ratings; interpretation of example scores Same as Best Missing screens; incorrect interpretation of table; incorrect interpretation of ratings
4. Save the file and submit it as directed by the instructor. | textbooks/biz/Management/Project_Management_from_Simple_to_Complex/12%3A_Project_Procurement_and_Closure/12.06%3A_Exercises.txt |
The Twenty-First-Century Small-Business Owner
Frank Trotta III is a recent college graduate, class of 2009, and an excellent example of the twenty-first-century small business owner. At 23, he is already running his own business and planning to open a second. This may be second nature because Frank III is a third-generation small business owner. His grandfather, Frank Trotta Sr., opened a supermarket in 1945. His son, Frank C. Trotta Jr., began his career by working in the supermarket. Soon he had his own hardware department within the store and was beginning to understand what it takes to be a successful grocer. He observed his dad interacting with his customers and providing value through customer service.
Frank Jr. now owns and operates one of Long Island’s most successful travel companies: the Prime Time Travel Club. The experience Frank Jr. garnered from his father in customer service became the tenet of his business philosophy: give customers value through personal attention and service. At an early age, Frank III worked in his dad’s office when he was not busy with school activities. He had a strong entrepreneurial leaning and became very interested in the travel industry. In high school, Frank III worked for his dad and learned different facets of the travel business. While attending a Connecticut university, Frank III reached out to other students on campus and started his own side business: booking spring break trips. The same people are now repeat customers who call him to book their vacations, honeymoons, and family trips.
In his junior year, Frank III created a travel site of his own: Cruisetoanywhere.com. He is involved with every aspect of the site: he takes all calls from the customer service number, produces all the marketing campaigns, and works on contracts with both major and smaller cruise lines. Although the site is still young, it has been very successful. Frank III is learning how larger competitors do business and from their successes and mistakes. Customer service and attention are his first priority. Frank III believes his competitive business edge comes from what he learned from his father’s company and business skills such as planning and managing cash flow from his professors. In addition to his cruise website, Frank III plans to launch another site, Tourstoanywhere.com. He exemplifies the skill set that will characterize the twenty-first-century small business owner: a clear focus on creating value for his customers, a willingness to exploit the benefits of digital technology and e-commerce, and the ability to apply basic business skills to the effective operation of the firm.
1.02: Small Business in the US Economy
LEARNING OBJECTIVES
1. Explain the significance of small business in American history and the US economy.
2. Define small business.
3. Explain how small business contributes to the overall economy.
4. Explain how small business impacts US employment
It’s an exciting time to be in small business. This is certainly not anything new, but you might not know it. Scan any issue of the popular business press, and in all probability, you will find a cover story on one of America’s or the world’s major corporations or a spotlight on their CEOs. Newspapers, talk radio, and television seem to have an unlimited supply of pundits and politicians eager to pontificate on firms that have been labeled as “too big to fail.” Listen to any broadcast of a weekday’s evening news program, and there will be a segment that highlights the ups and downs of the Dow Jones Industrial Average and the Standard and Poor’s (S&P) 500. These market measures provide an insight into what is going on in Wall Street. However, they are clearly biased to not only large firms but also huge firms. This creates the false notion that “real” business is only about big business. It fails to recognize that small businesses are the overwhelming majority of all businesses in America; not only are the majority of jobs in small businesses, but small businesses have also been the major driving force in new job creation and innovation. Small business is the dynamo of innovation in our economy. In 2006, Thomas M. Sullivan, the chief counsel for advocacy of the Small Business Administration (SBA), said, “Small business is a major part of our economy,…small businesses innovate and create new jobs at a faster rate than their larger competitors. They are nimble, creative, and a vital part of every community across the country.”“Small Business by the Numbers,” National Small Business Administration, accessed October 7, 2011, www.nsba.biz/docs/bythenumbers.pdf.
This text is devoted to small business, not entrepreneurship. There has always been a challenge to distinguish—correctly—between the small business owner and the entrepreneur. Some argue that there is no difference between the two terms. The word entrepreneur is derived from a French word for “to undertake,” which might indicate that entrepreneurs should be identified as those who start businesses.“A Definition of Entrepreneurship,” QuickMBA.com, accessed October 7, 2011, www.quickmba.com/entre/definition. However, this interpretation is too broad and is pointless as a means of distinguishing between the two. Some have tried to find differences based on background, education, or age. Nick Leiber, “The Anatomy of an Entrepreneur,” Bloomberg BusinessWeek, July 8, 2009, accessed October 7, 2011, www.BusinessWeek.com/smallbiz/running_small _business/archives/2009/07/anatomy_of_an_e.html. Often one finds the argument that entrepreneurs have a different orientation toward risk than small business owners. The standard line is that entrepreneurs are willing to take great risks in starting an enterprise and/or willing to start again after a business failure.“Entrepreneur vs. Small Business Owner: What’s the Difference?,” Mills Communication Group, July 22, 2009, accessed October 7, 2011, www.millscommgroup.com/blog/2009/06/entrepreneur-vs-small-business-owner-whats-the-difference. Others try to make the distinction based on the issue of innovation or the degree of innovation. Given this focus, entrepreneurs need not even work for small business because they can come up with innovative products, services, production, or marketing processes in large organizations.Dale Beermann, “Entrepreneur or Small Business Owner? Does It Matter?,” Brazen Careerist, January 30, 2009, accessed October 7, 2011, www.brazencareerist.com/2009/01/29/entrepreneur-or-small-business-owner-does-it-matter.Perhaps the most common interpretation of the entrepreneur is an individual involved in a high-tech start-up who becomes a billionaire. That is not the focus of this text. It centers on the true driving force of America’s economy—the small business.
This chapter gives a brief history of small business in the United States, the critical importance of small business to the American economy, the challenges facing small business owners as they struggle to survive and prosper, the requisite skills to be an effective small business owner, the critical importance of ethical behavior, and how these businesses may evolve over time. In addition, three critical success factors for the twenty-first-century small business are threaded through the text: (1) identifying and providing customer value, (2) being able to exploit digital technologies with an emphasis on e-business and e-commerce, and (3) properly managing your cash flow. These three threads are essential to the successful decision making of any contemporary small business and should be considered of paramount importance. They are everyday considerations.
A Brief History of Small Business
Throughout American history, from colonial times until today, most businesses were small businesses, and they have played a vital role in America’s economic success and are a forge to our national identity. It would not be an exaggeration to say that the small businessperson has always held an important—even exalted—position in American life. Americans in the early republic were as suspicious of large economic enterprises as threats to their liberty as they were of large government. The historian James L. Houston discussed American suspicion of large economic enterprises: “Americans believed that if property was concentrated in the hands of a few in the republic, those few would use their wealth to control other citizens, seize political power, and warp the republic into an oligopoly.”Jack Beatty, The Age of Betrayal: The Triumph of Money in America 1865–1900 (New York: Alfred A. Knopf, 2007), 11.In fact, much of the impetus behind the Boston Tea Party was the fear on the part of local merchants and tradesmen that the East India Company, at that time the world’s largest corporation, was dumping low-priced tea in the colonies, which would have driven local business to ruin.Ted Nace, The Gangs of America: The Rise of Corporate Power and the Disabling of Democracy (San Francisco: Berrett-Koehler Publishers, 2003), 44. Jefferson’s promotion of the yeoman farmer, which included small merchants, as the bulwark of democracy stemmed from his fear of large moneyed interests: “The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations.”Bob Higgins, “Like Lincoln, Jefferson, Madison—Americans Fear Corporate Control of Public Policy,” TPMCafe, February 17, 2011, accessed October 23, 2011, tpmcafe.talkingpointsmemo.com/talk/blogs/r/l/rlh974/2010/02/like-lincoln-jefferson -madison.php. So great was the fear of the large aggregation of wealth that the colonies and the early republic placed severe restrictions on the creation of corporate forms. In the first decades of the nineteenth century, state governments restricted the corporate form by limiting its duration, geographic scope, size, and even profits.Ted Nace, The Gangs of America: The Rise of Corporate Power and the Disabling of Democracy (San Francisco, Berrett-Koehler Publishers, 2003), 44. This was done because of the concern that corporations had the potential of becoming monopolies that would drive entrepreneurs out of business.
Eventually, however, some businesses grew in size and power. Their growth and size necessitated the development of a professional management class that was distinct from entrepreneurs who started and ran their own businesses. However, not until the post–Civil War period did America see the true explosion in big businesses. This was brought about by several factors: the development of the mass market (facilitated by the railroads); increased capital requirement for mass production; and the 1886 Supreme Court case of Santa Clara County v. Southern Pacific Railroad, which granted corporations “personhood” by giving them protection under the Fourteenth Amendment.
The growth of corporations evoked several responses that were designed to protect small businesses from their larger competitors. The Interstate Commerce Act (1887) was a federal law designed to regulate the rates charged by railroads to protect small farmers and businesses. Other federal laws—the Sherman Act (1890) and the Clayton Act (1914)—were passed with the initial intent of restricting the unfair trading practices of trusts. In the early years, however, the Sherman Act was used more frequently against small business alliances and unions than against large businesses. Congress continued to support small businesses through the passage of legislation. The Robinson-Patman Act of 1936 and the Miller-Tydings Act of 1937 were designed to protect small retailers from large chain retailers.Mansel Blackford, The History of Small Business in America, 2nd ed. (Chapel Hill, NC: University of North Carolina Press, 2003), 4.
The Depression and the post–World War II environments posed special challenges to small business operations. The Hoover and Roosevelt administrations created organizations (the Reconstruction Finance Corporation in 1932 and the Small War Plants Corporation in 1942) to assist small firms. The functions of several government agencies were subsumed into the Small Business Administration in 1953. The designated purpose of the SBA was to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”“What We Do,” Small Business Administration, accessed October 7, 2011, www.sba.gov/about-sba-services/what-we-do. The SBA functions to ensure that small businesses have a fair chance at securing government contracts. It also has the responsibility of defining what constitutes a small business.
If anything is to be learned from the passage of all this legislation, it is that, as Conte (2006) eloquently put it, “Americans continued to revere small businesspeople for their self-reliance and independence.”Christopher Conte, “Small Business in U.S. History,” America.gov, January 3, 2006, accessed October 7, 2011, www.america.gov/st/business-english/2008/July/20080814215602XJyrreP0.6187664.html.
Definition of Small Business
The SBA definition of a small business has evolved over time and is dependent on the particular industry. In the 1950s, the SBA defined a small business firm as “independently owned and operated…and not dominant in its field of operation.”Mansel Blackford, The History of Small Business in America, 2nd ed. (Chapel Hill, NC: University of North Carolina Press, 2003), 4. This is still part of their definition. At that time, the SBA classified a small firm as being limited to 250 employees for industrial organizations. Currently, this definition depends on the North American Industry Classification System (NAICS) for a business. The SBA recognizes that there are significant differences, across industries, with respect to competitiveness, entry and exit costs, distribution by size, growth rates, and technological change. Although the SBA defines 500 employees as the limit for the majority of industrial firms and receipts of \$7 million for the majority of service, retail, and construction firms, there are different values for some industries. Table 1.1 "Examples of Size Limits for Small Businesses by the SBA" presents a selection of different industries and their size limits.
Table \(1\): Examples of Size Limits for Small Businesses by the SBA
NAICS Code NAICS US Industry Title Size Standards (Millions of \$) Size Standards (Number of Employees)
111333 Strawberry farming 0.75
113310 Timber tract operations 7.00
114112 Shellfish fishing 4.00
212210 Iron ore mining 500
236115 New single family housing construction 33.50
311230 Breakfast cereal manufacturer 1,000
315991 Hat, cap, and millenary manufacturing 500
443111 Household appliance store 9.00
454311 Heating oil dealers 50
483111 Deep sea freight transportation 500
484110 General freight trucking, local 25.50
511130 Book publishers 500
512230 Music publishers 500
541214 Payroll services 8.50
541362 Geophysical surveying and mapping services 4.50
541712 Research and development in physical, engineering, and life sciences 500
Except aircraft 1,500
722110 Full-service restaurants 7.00
722310 Food service contractors 20.50
811111 General automotive repair 7.00
812320 Dry cleaning and laundry services 4.50
813910 Business associations 7.00
Source: “Table of Small Business Size Standards Matched to North American Industry Classification System Codes,” US Small Business Administration, August 22, 2008, accessed June 1, 2012, http://www.sba.gov/content/small-business-size-standards
The SBA definition of what constitutes a small business has practical significance. Small businesses have access to an extensive support network provided by the SBA. It runs the SCORE program, which has more than 12,000 volunteers who assist small firms with counseling and training. The SBA also operates Small Business Development Centers, Export Assistance Centers, and Women’s Business Centers. These centers provide comprehensive assistance to small firms. There can be significant economic support for small firms from the SBA. It offers a variety of guaranteed loan programs to start-ups and small firms. It assists small firms in acquiring access to nearly half a trillion dollars in federal contracts. In fact, legislation attempts to target 23 percent of this value for small firms. The SBA can also assist with financial aid following a disaster.
Small Business in the American Economy
In 1958, small business contributed 57 percent of the nation’s gross domestic product (GDP). This value dropped to 50 percent by 1980. What is remarkable is that this 50 percent figure has essentially held steady for the last thirty years.Katherine Kobe, “The Small Business Share of GDP, 1998–2004,” Small Business Research Summary, April 2007, accessed October 7, 2011, archive.sba.gov/advo/research/rs299tot.pdf. It is interesting to note that the contribution of small businesses to the GDP can vary considerably based on particular industries. Table 1.2 "Small Businesses’ Component of Industry Contribution to GDP" presents data for selected industries for the period 1998–2004. It can be seen that in some industries—construction and real estate—80 percent or more of that industry’s contribution to the GDP comes from small businesses, while in the information industry that number is 20 percent or less.
Few people realize that the overwhelming majority of businesses in the United States are small businesses with fewer than five hundred employees. The SBA puts the number of small businesses at 99.7 percent of the total number of businesses in the United States. However, most of the businesses are nonemployee businesses (i.e., no paid employees) and are home based.
Table \(2\): Small Businesses’ Component of Industry Contribution to GDP
Year Construction (%) Real Estate and Leasing (%) Wholesale Trade (%) Transportation and Warehousing (%) Information (%)
1998 88.0 80.4 59.1 39.1 26.4
1999 87.2 80.0 57.5 39.4 25.4
2000 85.4 79.8 56.8 39.0 22.7
2001 85.1 80.3 55.3 41.1 19.7
2002 84.6 79.4 56.3 41.0 20.3
2003 85.4 79.5 54.6 39.1 20.3
2004 85.6 79.6 55.4 38.6 18.0
Source: Katherine Kobe, “Small Business Share of GDP (Contract No. SBAHQ-05-M-0413),” SBA Office of Advocacy, April 2007, accessed October 7, 2011, archive.sba.gov/advo/research/rs299tot.pdf.
One area where the public has a better understanding of the strength of small business is in the area of innovation. Evidence dating back to the 1970s indicates that small businesses disproportionately produce innovations.Zoltan J. Acs and David B. Audretsch. “Innovation in Large and Small Firms: An Empirical Analysis,” American Economic Review 78, no. 4 (1988): 678–90. It has been estimated that 40 percent of America’s scientific and engineering talent is employed by small businesses. The same study found that small businesses that pursue patents produce thirteen to fourteen times as many patents per employee as their larger counterparts. Further, it has been found that these patents are twice as likely to be in the top 1 percent of highest impact patents.“Small Business by the Numbers,” National Small Business Administration, accessed October 7, 2011, www.nsba.biz/docs/bythenumbers.pdf.
It is possible that small size might pose an advantage with respect to being more innovative. The reasons for this have been attributed to several factors:
• Passion. Small-business owners are interested in making businesses successful and are more open to new concepts and ideas to achieve that end.
• Customer connection. Being small, these firms better know their customers’ needs and therefore are better positioned to meet them.
• Agility. Being small, these firms can adapt more readily to changing environment.
• Willingness to experiment. Small-business owners are willing to risk failure on some experiments.
• Resource limitation. Having fewer resources, small businesses become adept at doing more with less.
• Information sharing. Smaller size may mean that there is a tighter social network for sharing ideas.Jeff Cornwall, “Innovation in Small Business,” The Entrepreneurial Mind, March 16, 2009, accessed June 1, 2012, http://www.drjeffcornwall.com/2009/03/16/innovation _in_small_business/.
Regardless of the reasons, small businesses, particularly in high-tech industries, play a critical role in preserving American global competitiveness.
Small Business and National Employment
The majority—approximately 50.2 percent in 2006—of private sector employees work for small businesses. A breakdown of the percentage of private sector employees by firm size for the period 1988 to 2006 is provided in Table 1.3 "Percentage of Private Sector Employees by Firm Size". For 2006, slightly more than 18 percent of the entire private sector workforce was employed by firms with fewer than twenty employees. It is interesting to note that there can be significant difference in the percentage of employment by small business across states. Although the national average was 50.2 percent in 2006, the state with the lowest percentage working for small businesses was Florida with 44.0 percent, while the state with the highest percentage was Montana with a remarkable 69.8 percent.“Small Business by the Numbers,” National Small Business Administration, accessed October 7, 2011, www.nsba.biz/docs/bythenumbers.pdf.
Table \(3\): Percentage of Private Sector Employees by Firm Size
Year 0–4 Employees 5–9 Employees 10–19 Employees 20–99 Employees 100–499 Employees 500+ Employees
1988 5.70% 6.90%% 8.26% 19.16% 14.53% 45.45%
1991 5.58% 6.69% 8.00% 18.58% 14.24% 46.91%
1994 5.50% 6.55% 7.80% 18.29% 14.60% 47.26%
1997 5.20% 4.95% 6.36% 16.23% 13.73% 53.54%
2000 4.90% 5.88% 7.26% 17.78% 14.26% 49.92%
2003 5.09% 5.94% 7.35% 17.80% 14.49% 49.34%
2006 4.97% 5.82% 7.24% 17.58% 14.62% 49.78%
Source: US Census Bureau, “Statistics of U.S. Business,” accessed October 7, 2011, www.census.gov/econ/susb.
Small business is the great generator of jobs. Recent data indicate that small businesses produced 64 percent of the net new jobs from 1993 to the third quarter of 2008.“Statistics of U.S. Businesses,” US Census Bureau, April 13, 2010, accessed October 7, 2011, www.census.gov/econ/susb. This is not a recent phenomenon. Thirty years of research studies have consistently indicated that the driving force in fostering new job creation is the birth of new companies and the net additions coming from small businesses. In the 1990s, firms with fewer than twenty employees produced far more net jobs proportionally to their size, and two to three times as many jobs were created through new business formation than through job expansion in small businesses.William J Dennis Jr., Bruce D. Phillips, and Edward Starr, “Small Business Job Creation: The Findings and Their Critics”, Business Economics 29, no. 3 (1994): 23–30. The US Census Bureau’s Business Dynamics Statistics data confirm that the greatest number of new jobs comes from the creation of new businesses. One can get a sense of the extent of net job change by business size in Table 1.4 "Job Creation by Firm Size".
An additional point needs to be made about job creation and loss by small businesses in the context of overall economic conditions. Government data show that of the “net 1.5 million jobs lost in 2008, 64 percent were from small firms.”Brian Headd, “An Analysis of Small Business and Jobs,” Small Business Administration, March 2010, accessed October 7, 2011, www.sba.gov/advo/research/rs359tot.pdf (p. 10). However, the same study had some interesting results from the past two recessions. In the 2001 recession, small businesses with fewer than 20 employees experienced 7 percent of the total reduction in jobs, firms with between 20 and 500 employees were responsible for 43 percent of the job losses, and the rest of the job losses came from large firms. As the economy recovered in the following year, firms with fewer than 20 employees created jobs, while the other two groups continued to shed jobs. Following the 1991 recession, it was firms with 20 to 500 employees that were responsible for more than 56 percent of the jobs that were added.
Table \(4\): Job Creation by Firm Size
Years
1–4 5–9 10–19 20–99 100–499 500+
2002–2003 1,106,977 307,690 158,795 304,162 112,702 (994,667)
2003–2004 1,087,128 336,236 201,247 199,298 66,209 (214,233)
2004–2005 897,296 141,057 (11,959) (131,095) 83,803 262,326
2005–2006 1,001,960 295,521 292,065 590,139 345,925 1,072,710
Source: “Small Business Profile,” SBA Office of Advocacy, 2009, archive.sba.gov/advo/research/data.html.
One last area concerning the small business contribution to American employment is its role with respect to minority ownership and employment. During the last decade, there has been a remarkable increase in the number of self-employed individuals. From 2000 to 2007, the number of women who were self-employed increased by 9.7 percent. The number of African Americans who were self-employed increased by 36.6 percent for the same time range. However, the most remarkable number was an increase of nearly 110 percent for Hispanics. It is clear that small business has become an increasingly attractive option for minority groups.“Statistics of U.S. Businesses,” US Census Bureau, April 13, 2010, accessed October 7, 2011, www.census.gov/econ/susb. Women and Hispanics are also employed by small businesses at a higher rate than the national average.
KEY TAKEAWAYS
• Small businesses have always played a key role in the US economy.
• Small businesses are responsible for more than half the employment in the United States.
• Small businesses have a prominent role in innovation and minority employment.
EXERCISES
1. Throughout this text, you will be given several assignments. It would be useful if these assignments had some degree of consistency. Select a type of business that interests you and plan on using it throughout some of the chapter assignments. After selecting your business, go to www.sba.gov/content/table-small-business-size-standards and determine the size of the business.
2. In the United States, 50 percent of those employed are working for small businesses. There are considerable differences across states. Go to www.census.gov/econ/susb/ and compute the percentage for your state. What factors might account for the differences across states? | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/01%3A_Foundations_for_Small_Business/1.01%3A_Chapter_Introduction.txt |
LEARNING OBJECTIVES
1. Be able to explain what is meant by business success.
2. Be able to describe the different components of business failure.
3. Understand that statistics on business failure can be confusing and contradictory.
4. Understand that small business failure can be traced to managerial inadequacy, financial issues, and the external environment.
5. Understand that small business owners need to be able to formally plan and understand the accounting and finance needs of their firms.
There are no easy answers to questions about success and failure in a small business. The different points of view are all over the map.
What Is a Successful Small Business?
Ask the average person what the purpose of a business is or how he or she would define a successful business, and the most likely response would be “one that makes a profit.” A more sophisticated reply might extend that to “one that makes an acceptable profit now and in the future.” Ask anyone in the finance department of a publicly held firm, and his or her answer would be “one that maximizes shareholder wealth.” The management guru Peter Drucker said that for businesses to succeed, they needed to create customers, while W. E. Deming, the quality guru, advocated that business success required “delighting” customers. No one can argue, specifically, with any of these definitions of small business success, but they miss an important element of the definition of success for the small business owner: to be free and independent.
Many people have studied whether there is any significant difference between the small business owner and the entrepreneur. Some entrepreneurs place more emphasis on growth in their definition of success.William Dunkelberg and A. C. Cooper. “Entrepreneurial Typologies: An Empirical Study,” Frontiers of Entrepreneurial Research, ed. K. H. Vesper (Wellesley, MA: Babson College, Centre for Entrepreneurial Studies, 1982), 1–15. However, it is clear that entrepreneurs and small business owners define much of their personal and their firm’s success in the context of providing them with independence. For many small business owners, being in charge of their own life is the prime motivator: a “fervently guarded sense of independence,” and money is seen as a beneficial by-product.“Report on the Commission or Enquiry on Small Firms,” Bolton Report, vol. 339 (London: HMSO, February 1973), 156–73.,Paul Burns and Christopher Dewhurst, Small Business and Entrepreneurship, 2nd ed. (Basingstoke, UK: Macmillan, 1996), 17.,Graham Beaver, Business, Entrepreneurship and Enterprise Development (Englewood Cliffs, NJ: Prentice Hall, 2002), 33.Oftentimes, financial performance is seen as an important measure of success. However, small businesses are reluctant to report their financial information, so this will always be an imperfect and incomplete measure of success.Terry L. Besser, “Community Involvement and the Perception of Success Among Small Business Operators in Small Towns,” Journal of Small Business Management 37, no 4 (1999): 16.
Three types of small business operators can be identified based on what they see as constituting success:
1. An artisan whose intrinsic satisfaction comes from performing the business activity
2. The entrepreneur who seeks growth
3. The owner who seeks independence M. K. J. Stanworth and J. Curran, “Growth and the Small Firm: An Alternative View,” Journal of Management Studies 13, no. 2 (1976): 95–111.
Video Clip \(1\):
The story of Popchips, a small business success.
Failure Rates for Small Business
When discussing failure rates in small business, there is only one appropriate word: confusion. There are wildly different values, from 90 percent to 1 percent, with a wide range of values in between.Roger Dickinson, “Business Failure Rate,” American Journal of Small Business 6, no. 2 (1981): 17–25.Obviously, there is a problem with these results, or some factor is missing. One factor that would explain this discrepancy is the different definitions of the term failure. A second factor is that of timeline. When will a firm fail after it starts operation?
The term failure can have several meanings.A. B. Cochran, “Small Business Failure Rates: A Review of the Literature,” Journal of Small Business Management 19, no. 4, (1981): 50–59. Small-business failure is often measured by the cessation of a firm’s operation, but this can be brought about by several things:
• An owner can die or simply choose to discontinue operations.
• The owner may recognize that the business is not generating sufficient return to warrant the effort that is being put into it. This is sometimes referred to as the failure of opportunity cost.
• A firm that is losing money may be terminated to avoid losses to its creditors.
• There can be losses to creditors that bring about cessations of the firm’s operations.
• The firm can experience bankruptcy. Bankruptcy is probably what most people think of when they hear the term business failure. However, the evidence indicates that bankruptcies constitute only a minor reason for failure.
Failure can therefore be thought of in terms of a cascading series of outcomes (see Figure 1.1 "Types of Business Failures"). There are even times when small business owners involved in a closure consider the firm successful at its closing.Don Bradley and Chris Cowdery, “Small Business: Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www.sbaer.uca.edu/research/asbe/2004_fall/16.pdf. Then there is the complication of considering the industry of the small business when examining failure and bankruptcy. The rates of failure can vary considerably across different industries; in the fourth quarter of 2009, the failure rates for service firms were half that of transportation firms.“Equifax Study Shows the Ups and Downs of Commercial Credit Trends,” Equifax, 2010, accessed October 7, 2011, www.equifax.com/PR/pdfs/CommercialFactSheetFN3810.pdf.
Figure 1.1 Types of Business Failures
The second issue associated with small business failure is a consideration of the time horizon. Again, there are wildly different viewpoints. The Dan River Small Business Development Center presented data that indicated that 95 percent of small businesses fail within five years.Don Bradley and Chris Cowdery, “Small Business: Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www.sbaer.uca.edu/research/asbe/2004_fall/16.pdf. Dun and Bradstreet reported that companies with fewer than twenty employees have only a 37 percent chance of surviving four years, but only 10 percent will go bankrupt.Don Bradley and Chris Cowdery, “Small Business: Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www.sbaer.uca.edu/research/asbe/2004_fall/16.pdf. The US Bureau of Labor Statistics indicated that 66 percent of new establishments survive for two years, and that number drops to 44 percent two years later.Anita Campbell, “Business Failure Rates Is Highest in First Two Years,” Small Business Trends, July 7, 2005, accessed October 7, 2011, smallbiztrends.com/2005/07/business-failure-rates-highest-in.html. It appears that the longer you survive, the higher the probability of your continued existence. This makes sense, but it is no guarantee. Any business can fail after many years of success.
Why Do Small Businesses Fail?
There is no more puzzling or better studied issue in the field of small business than what causes them to fail. Given the critical role of small businesses in the US economy, the economic consequences of failure can be significant. Yet there is no definitive answer to the question.
Three broad categories of causes of failure have been identified: managerial inadequacy, financial inadequacy, and external factors. The first cause, managerial inadequacy, is the most frequently mentioned reason for firm failure.T. C. Carbone, “The Challenges of Small Business Management,” Management World 9, no. 10 (1980): 36. Unfortunately, it is an all-inclusive explanation, much like explaining that all plane crashes are due to pilot failure. Over thirty years ago, it was observed that “while everyone agrees that bad management is the prime cause of failure, no one agrees what ‘bad management’ means nor how it can be recognized except that the company has collapsed—then everyone agrees that how badly managed it was.”John Argenti, Corporate Collapse: The Causes and Symptoms (New York: McGraw-Hill, 1976), 45. This observation remains true today.
The second most common explanation cites financial inadequacy, or a lack of financial strength in a firm. A third set of explanations center on environmental or external factors, such as a significant decline in the economy.
Because it is important that small firms succeed, not fail, each factor will be discussed in detail. However, these factors are not independent elements distinct from each other. A declining economy will depress a firm’s sales, which negatively affects a firm’s cash flow. An owner who lacks the knowledge and experience to manage this cash flow problem will see his or her firm fail.
Managerial inadequacy is generally perceived as the major cause of small business failure. Unfortunately, this term encompasses a very broad set of issues. It has been estimated that two thirds of small business failures are due to the incompetence of the owner-manager.Graham Beaver, “Small Business: Success and Failure,” Strategic Change 12, no. 3 (2003): 115–22. The identified problems cover behavioral issues, a lack of business skills, a lack of specific technical skills, and marketing myopia. Specifying every limitation of these owners would be prohibitive. However, some limitations are mentioned with remarkable consistency. Having poor communication skills, with employees and/or customers, appears to be a marker for failure.Sharon Nelton, “Ten Key Threats to Success,” Nation’s Business 80, no. 6 (1992): 18–24. The inability to listen to criticism or divergent views is a marker for failure, as is the inability to be flexible in one’s thinking.Robert N. Steck, “Why New Businesses Fail,” Dun and Bradstreet Reports 33, no. 6 (1985): 34–38.
Ask many small business owners where their strategic plans exist, and they may point to their foreheads. The failure to conduct formal planning may be the most frequently mentioned item with respect to small business failure. Given the relative lack of resources, it is not surprising that small firms tend to opt for intuitive approaches to planning.G. E. Tibbits, “Small Business Management: A Normative Approach,” in Small Business Perspectives, ed. Peter Gorb, Phillip Dowell, and Peter Wilson (London: Armstrong Publishing, 1981), 105.,Jim Brown, Business Growth Action Kit (London: Kogan Page, 1995), 26. Formal approaches to planning are seen as a waste of time,Christopher Orpen, “Strategic Planning, Scanning Activities and the Financial Performance of Small Firms,” Journal of Strategic Change 3, no. 1 (1994): 45–55. or they are seen as too theoretical.Sandra Hogarth-Scott, Kathryn Watson, and Nicholas Wilson, “Do Small Business Have to Practice Marketing to Survive and Grow?,” Marketing Intelligence and Planning 14, no. 1 (1995): 6–18. The end result is that many small business owners fail to conduct formal strategic planning in a meaningful way.Isaiah A. Litvak and Christopher J. Maule, “Entrepreneurial Success or Failure—Ten Years Later,” Business Quarterly 45, no. 4 (1980): 65.,Hans J. Pleitner, “Strategic Behavior in Small and Medium-Sized Firms: Preliminary Considerations,” Journal of Small Business Management 27, no. 4 (1989): 70–75. In fact, many fail to conduct any planning;Richard Monk, “Why Small Businesses Fail,” CMA Management 74, no. 6 (2000): 12.,Anonymous, “Top-10 Deadly Mistakes for Small Business,” Green Industry Pro 19, no. 7 (2007): 58. others may fail to conduct operational planning, such as marketing strategies.Rubik Atamian and Neal R. VanZante, “Continuing Education: A Vital Ingredient of the ‘Success Plan’ for Business,” Journal of Business and Economic Research 8, no. 3 (2010): 37–42. The evidence appears to clearly indicate that a small firm that wishes to be successful needs to not only develop an initial strategic plan but also conduct an ongoing process of strategic renewal through planning.
Many managers do not have the ability to correctly select staff or manage them.T. Carbone, “Four Common Management Failures—And How to Avoid Them,” Management World 10, no. 8 (1981): 38–39. Other managerial failings appear to be in limitations in the functional area of marketing. Failing firms tend to ignore the changing demands of their customers, something that can have devastating effects.Anonymous, “Top-10 Deadly Mistakes for Small Business,” Green Industry Pro 19, no. 7 (2007): 58. The failure to understand what customers value and being able to adapt to changing customer needs often leads to business failure.Rubik Atamian and Neal R. VanZante, “Continuing Education: A Vital Ingredient of the ‘Success Plan’ for Business,” Journal of Business and Economic Research 8, no. 3 (2010): 37–42.
The second major cause of small business failure is finance. Financial problems fall into three categories: start-up, cash flow, and financial management. When a firm begins operation (start-up), it will require capital. Unfortunately, many small business owners initially underestimate the amount of capital that should be available for operations.Howard Upton, “Management Mistakes in a New Business,” National Petroleum News 84, no. 10 (1992): 50. This may explain why most small firms that fail do so within the first few years of their creation. The failure to start with sufficient capital can be attributed to the inability of the owner to acquire the needed capital. It can also be due to the owner’s failure to sufficiently plan for his or her capital needs. Here we see the possible interactions among the major causes of firm failure. Cash-flow management has been identified as a prime cause for failure.Rubik Atamian and Neal R. VanZante, “Continuing Education: A Vital Ingredient of the ‘Success Plan’ for Business,” Journal of Business and Economic Research 8, no. 3 (2010): 37–42.,Arthur R. DeThomas and William B. Fredenberger, “Accounting Needs of Very Small Business,” The CPA Journal55, no. 10 (1985): 14–20. Good cash-flow management is essential for the survival of any firm, but small firms in particular must pay close attention to this process. Small businesses must develop and maintain effective financial controls, such as credit controls.Roger Brown, “Keeping Control of Your Credit,” Motor Transportation, April 2009, 8. For very small businesses, this translates into having an owner who has at least a fundamental familiarity with accounting and finance.Arthur R. DeThomas and William B. Fredenberger, “Accounting Needs of Very Small Business,” The CPA Journal 55, no. 10 (1985): 14–20. In addition, the small firm will need either an in-house or an outsourced accountant.Hugh M. O’Neill and Jacob Duker, “Survival and Failure in Small Business,” Journal of Small Business Management 24, no. 1 (1986): 30–37. Unfortunately, many owners fail to fully use their accountants’ advice to manage their businesses.Arthur R. DeThomas and William B. Fredenberger, “Accounting Needs of Very Small Business,” The CPA Journal 55, no. 10 (1985): 14–20.
The last major factor identified with the failure of small businesses is the external environment. There is a potentially infinite list of causes, but the economic environment tends to be most prominent. Here again, however, confusing appears to describe the list. Some argue that economic conditions contribute to between 30 percent and 50 percent of small business failures, in direct contradiction to the belief that managerial incompetence is the major cause.Jim Everett and John Watson, “Small Business Failures and External Risk Factors,” Small Business Economics 11, no. 4 (1998): 371–90. Two economic measures appear to affect failure rates: interest rates, which appear to be tied to bankruptcies, and the unemployment rate, which appears to be tied to discontinuance.Jim Everett and John Watson, “Small Business Failures and External Risk Factors,” Small Business Economics 11, no. 4 (1998): 371–90. The potential impact of these external economic variables might be that small business owners need to be either planners to cover potential contingencies or lucky.
Even given the confusing and sometimes conflicting results with respect to failure in small businesses, some common themes can be identified. The reasons for failure fall into three broad categories: managerial inadequacy, finance, and environmental. They, in turn, have some consistently mentioned factors (see Table 1.5 "Reasons for Small Business Failure"). These factors should be viewed as warning signs—danger areas that need to be avoided if you wish to survive. Although small business owners cannot directly affect environmental conditions, they can recognize the potential problems that they might bring. This text will provide guidance on how the small business owner can minimize these threats through proactive leadership.
Table \(1\): Reasons for Small Business Failure
Managerial Inadequacy Financial Inadequacy External Factors
• Failure in planning (initial start-up plan and subsequent plans)
• Inexperience with managing business operation
• Ineffective staffing
• Poor communication skills
• Failure to seek or respond to criticism
• Failure to learn from past failures
• Ignoring customers’ needs
• Ignoring competition
• Failure to diversify customer base
• Failure to innovate
• Ineffective marketing strategies
• Cash-flow problems
• Insufficient initial capitalization
• Inadequate financial records
• Not using accountants’ insights
• Inadequate capital acquisition strategies
• Failure to deal with financial issues brought about by growth
• Downturn in economy
• Rising unemployment
• Rising interest rates
• Product or service no longer desired by customers
• Unmatchable foreign competition
• Fraud
• Disaster
Ultimately, business failure will be a company-specific combination of factors. Monitor101, a company that developed an Internet information monitoring product for institutional investors in 2005, failed badly. One of the cofounders identified the following seven mistakes that were made, most of which can be linked to managerial inadequacy:Roger Ehrenberg, “Monitor 110: A Post Mortem—Turning Failure into Learning,” Making It!, August 27, 2009, accessed June 1, 2012, http://www.makingittv.com/Small-Business-Entrepreneur-Story-Failure.htm.
1. The lack of a single “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much public relations, too early
4. Too much money
5. Not close enough to the customer
6. Slowness to adapt to market reality
7. Disagreement on strategy within the company and with the board
"Entrepreneurs Turn Business Failure into Success"
Bloomberg Businessweek's 2008 cover story highlights owners who turn business failure into success.
http://www.businessweek.com/magazine/content/08_70/s0810040731198.htm
KEY TAKEAWAYS
• There is no universal definition for small business success. However, many small business owners see success as their own independence.
• The failure rates for small businesses are wide ranging. There is no consensus.
• Three broad categories of factors are thought to contribute to small business failure: managerial inadequacy, financial inadequacy, and external forces, most notably the economic environment.
EXERCISES
1. Starting a business can be a daunting task. It can be made even more daunting if the type of business you choose is particularly risky. Go to www.forbes.com/2007/01/18/fairisaac-nordstrom-verizon-ent-fin-cx_mf_0118risky_slide.html?thisSpeed=undefined, where the ten riskiest businesses are identified. Select any two of these businesses and address why you think they are risky.
2. Amy Knaup is the author of a 2005 study “Survival and Longevity in the Business Employment Dynamics Data” (see www.bls.gov/opub/mlr/2005/05/ressum.pdf). The article points to different survival rates for ten different industries. Discuss why there are significant differences in the survival rates among these industries. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/01%3A_Foundations_for_Small_Business/1.03%3A_Success_and_Failure_in_Small_Businesses.txt |
LEARNING OBJECTIVES
1. Define the five stages of small business growth.
2. Identify the stages of the organizational life cycle.
3. Characterize the industry life cycle and its impact on small business
Small businesses come in all shapes and sizes. One thing that they all share, however, is experience with common problems that arise at similar stages in their growth and organizational evolution. Predictable patterns can be seen. These patterns “tend to be sequential, occur as a hierarchical progression that is not easily reversed, and involve a broad range of organizational activities and structures.”“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. The industry life cycle adds further complications. The success of any small business will depend on its ability to adapt to evolutionary changes, each of which will be characterized by different requirements, opportunities, challenges, risks, and internal and external threats. The decisions that need to be made and the priorities that are established will differ through this evolution.
Stages of Growth
Understanding the small business growth stages can be invaluable as a framework for anticipating resource needs and problems, assessing risk, and formulating business strategies (e.g., evaluating and responding to the impact of a new tax). However, the growth stages will not be applicable to all small businesses because not all small businesses will be looking to grow. Business success is commonly associated with growth and financial performance, but these are not necessarily synonymous—especially for small businesses. People become business owners for different reasons, so judgments about the success of their businesses may be related to any of those reasons.B. Kotey and G. G. Meredith, “Relationships among Owner/Manager Personal Values, Business Strategies, and Enterprise Performance,” Journal of Small Business Management 35, no. 2 (1997): 37–65. A classic study by Churchill and Lewis identified five stages of small business growth: existence, survival, success, take-off, and resource maturity.Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. Each stage has its own challenges.
• Stage I: Existence.Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. This is the beginning. The business is up and running. The primary problems will be obtaining customers and establishing a customer base, producing products or services, and tracking and conserving cash flow.Darrell Zahorsky, “Find Your Business Life Cycle,” accessed October 7, 2011, sbinformation.about.com/cs/marketing/a/a040603.htm. The organization is simple, with the owner doing everything, including directly supervising a small number of subordinates. Systems and formal planning do not exist. The company strategy? Staying alive. The companies that stay in business move to Stage II.
• Stage II: Survival.Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. The business is now a viable operation. There are enough customers, and they are being satisfied well enough for them to stay with the business. The company’s focal point shifts to the relationship between revenues and expenses. Owners will be concerned with (1) whether they can generate enough cash in the short run to break even and cover the repair/replacement of basic assets and (2) whether they can get enough cash flow to stay in business and finance growth to earn an economic return on assets and labor. The organizational structure remains simple. Little systems development is evident, cash forecasting is the focus of formal planning, and the owner still runs everything.
• Stage III: Success.Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. The business is now economically healthy, and the owners are considering whether to leverage the company for growth or consider the company as a means of support for them as they disengage from the company.Shivonne Byrne, “Empowering Small Business,” Innuity, June 25, 2007, accessed October 7, 2011, innuity.typepad.com/innuity_empowers_small_bu/2007/06/five -stages-of-.html. There are two tracks within the success stage. The first track is the success-growth substage, where the small business owner pulls all the company resources together and risks them all in financing growth. Systems are installed with forthcoming needs in mind. Operational planning focuses on budgets. Strategic planning is extensive, and the owner is deeply involved. The management style is functional, but the owner is active in all phases of the company’s business. The second track is the success-disengagement substage, where managers take over the owner’s operational duties, and the strategy focuses on maintaining the status quo. Cash is plentiful, so the company should be able to maintain itself indefinitely, barring external environmental changes. The owners benefit indefinitely from the positive cash flow or prepare for a sale or a merger. The first professional managers are hired, and basic financial, marketing, and production systems are in place.
• Stage IV: Take-off.Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. This is a critical time in a company’s life. The business is becoming increasingly complex. The owners must decide how to grow rapidly and how to finance that growth. There are two key questions: (1) Can the owner delegate responsibility to others to improve managerial effectiveness? (2) Will there be enough cash to satisfy the demands of growth? The organization is decentralized and may have some divisions in place. Both operational planning and strategic planning are being conducted and involve specific managers. If the owner rises to the challenges of growth, it can become a very successful big business. If not, it can usually be sold at a profit.
• Stage V: Resource Maturity.Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. The company has arrived. It has the staff and financial resources to engage in detailed operational and strategic planning. The management structure is decentralized, with experienced senior staff, and all necessary systems are in place. The owner and the business have separated both financially and operationally. The concerns at this stage are to (1) consolidate and control the financial gains that have been brought on by the rapid growth and (2) retain the advantage of a small size (e.g., response flexibility and the entrepreneurial spirit). If the entrepreneurial spirit can be maintained, there is a strong probability of continued growth and success. If not, the company may find itself in a state of ossification. This occurs when there is a lack of innovation and risk aversion that, in turn, will contribute to stalled or halted growth. These are common traits in large corporations.
Organizational Life Cycle
Superimposed on the stages of small business growth is the organizational life cycle (OLC), a concept that specifically acknowledges that organizations go through different life cycles, just like people do.Carter McNamara, “Basic Overview of Organizational Life Cycles,” accessed October 7, 2011, http://managementhelp.org/organizations/life-cycles.htm. “They are born (established or formed), they grow and develop, they reach maturity, they begin to decline and age, and finally, in many cases, they die.”“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. The changes that occur in organizations have a predictable pattern,Robert E. Quinn and Kim Cameron, “Organizational Life Cycles and Shifting Criteria of Effectiveness: Some Preliminary Evidence,” Management Science 29, no. 1 (1983): 33–51.and this predictability will be very helpful in formulating the objectives and strategies of a small business, altering managerial processes, identifying the sources of risk, and managing organizational change.“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html.,Yash P. Gupta and David C. W. Chin, “Organizational Life Cycle: A Review and Proposed Directions for Research,” The Mid-Atlantic Journal of Business 30, no. 3 (December 1994): 269–94. Because not all small businesses are looking to grow, however, it is likely that many small companies will retain simple organizational structures.
For those small businesses that are looking to grow, the move from one OLC stage to another occurs because the fit between the organization and its environment is so inadequate that either the organization’s efficiency and/or effectiveness is seriously impaired or the organization’s very survival is threatened. Pressure will come from changes in the nature and number of requirements, opportunities, and threats.“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html.
Four OLC stages can be observed: birth, youth, midlife, and maturity.Carter McNamara, “Basic Overview of Organizational Life Cycles,” accessed October 7, 2011, http://managementhelp.org/organizations/life-cycles.htm. In the birth stage, a small business will have a very simple organizational structure, one in which the owner does everything. There are few, if any, subordinates. As the business moves through youth and midlife, more sophisticated structures will be adopted, and authority will be decentralized to middle- and lower-level managers. At maturity, firms will demonstrate significantly more concern for internal efficiency, install more control mechanisms and processes, and become very bureaucratic. There are other features as well that characterize the movement of an organization from birth to maturity, which are summarized in Table 1.6 "Organizational Life Cycle Features".
Table \(1\): Organizational Life Cycle Features
Feature Birth Cycle Youth Cycle Midlife Cycle Maturity Cycle
Size Small Medium Large Very large
Bureaucratic Nonbureaucratic Prebureaucratic Bureaucratic Very bureaucratic
Division of labor Overlapping tasks Some departments Many departments Extensive, with small jobs and many descriptions
Centralization One-person rule Two leaders rule Two department heads Top-management heavy
Formalization No written rules Few rules Policy and procedure manuals Extensive
Administrative intensity Secretary, no professional staff Increasing clerical and maintenance Increasing professional and staff support Large-multiple departments
Internal systems Nonexistent Crude budget and information Control systems in place: budget, performance, reports, etc. Extensive planning, financial, and personnel added
Lateral teams, task forces for coordination None Top leaders only Some use of integrators and task Frequent at lower levels to break down bureaucracy
Source: Richard L. Daft, Organizational Theory and Design (St. Paul, MN: West Publishing, 1992), as cited in Carter McNamara, “Basic Overview of Organizational Life Cycles,” accessed October 7, 2011, http://managementhelp.org/organizations/life-cycles.htm.
A small business will always be somewhere on the OLC continuum. Business success will often be based on recognizing where the business is situated along that continuum and adopting strategies best suited to that place in the cycle.
Industry Life Cycle
The industry life cycle (ILC) is another dimension of small business evolution, which needs to be understood and assessed in concert with the stages of small business growth and the OLC. All small businesses compete in an industry, and that industry will experience a life cycle just as products and organizations do. Although there may be overlap in the names of the ILC stages, the meaning and implications of each stage are different.
The industry life cycle refers to the continuum along which an industry is born, grows, matures, and eventually experiences decline and then dies. Although the pattern is predictable, the duration of each stage in the cycle is not. The stages are the same for all industries, but every industry will experience the stages differently. The stages will last longer for some and pass quickly for others; even within the same industry various small businesses may find themselves at different life cycle stages.“Industry Life Cycle,” Inc., 2010, accessed June 1, 2012, www.inc.com/encyclopedia/industry-life-cycle.html.However, no matter where a small business finds itself along the ILC continuum, the strategic planning of that business will be influenced in important ways.
According to one study, the ILC, charted on the basis of the growth of an industry’s sales over time, can be observed as having four stages: introduction, growth, maturity, and decline.“Industry Life Cycle,” Inc., 2010, accessed June 1, 2012, www.inc.com/encyclopedia/industry-life-cycle.html. The introduction stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. finds the industry in its infancy. Although it is possible for a small business to be alone in the industry as a result of having developed and introduced something new to the marketplace, this is not the usual situation. The business strategy will focus on stressing the uniqueness of the product or the service to a small group of customers, commonly referred to as innovators or early adopters. A significant amount of capital is required. Profits are usually negative for both the firm and the industry.
The growth stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. is the second ILC stage. This stage also requires a significant amount of capital, but increasing product standardization may lead to economies of scale that will, in turn, increase profitability. The strategic focus is product differentiation, with an increased focus on responding to customer needs and interests. Intense competition will result as more new competitors join the industry, but many firms will be profitable. The duration of the growth stage will be industry dependent.
The maturity stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. will see some competition from late entrants that will try to take market share away from existing companies. This means that the marketing effort must continue to focus on product or service differentiation. There will be fewer firms in mature industries, so those that survive will be larger and more dominant. Many small businesses may move into the ranks of midsize or big businesses.
The decline stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. occurs in most industries. It is typically triggered by a product or service innovation that renders the industry obsolete. Sales will suffer, and the business goes into decline. Some companies will leave the industry, but others will remain to compete in the smaller market. The smaller businesses may be more agile for competing in a declining industry, but they will need to carefully formulate their business strategies to remain viable.
KEY TAKEAWAYS
• Small-business management should consider the growth stages, the OLC, and the ILC in its planning.
• There are five stages of small business growth: existence, survival, success, take-off, and resource maturity. The success stage includes two substages, growth and disengagement. Ossification may result if a mature small business loses its entrepreneurial spirit and becomes more risk averse.
• Some small businesses may not be looking to grow, so they may remain in the survival stage.
• The OLC refers to the four stages of development that organizations go through: birth, youth, midlife, and maturity.
• Some small businesses may stick with the very simple organizational structures because they are not interested in growing to the point where more complicated structures are required.
• The ILC is the time continuum along which an industry is born, grows, matures, declines, and dies.
• There are four stages in the ILC: introduction, growth, maturity, and decline.
EXERCISE
1. Interview the owners of three small businesses in your community, each a different type and size. Where would you put each business with respect to the five stages of small business growth? Justify your answer. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/01%3A_Foundations_for_Small_Business/1.04%3A_Evolution.txt |
LEARNING OBJECTIVES
1. Define ethics.
2. Explain business ethics.
3. Describe small business ethics.
4. Understand why a small business should have an ethics policy.
Ethics are about doing the right thing. They are about well-based standards of right and wrong that prescribe what humans ought to do—usually in terms of rights, obligations, benefits to society, fairness, or specific virtues.Manuel Velasquez et al., “What Is Ethics?,” Santa Clara University: Markula Center for Applied Ethics, 2010, accessed October 7, 2011, www.scu.edu/ethics/practicing/decision/whatisethics.html. They serve as guidelines for making decisions about how to behave in specific situations; they also guide us in evaluating the actions of others.Daniel J. Brown and Jonathan B. King, “Small Business Ethics: Influences and Perceptions,” Journal of Small Business Management 11, no. 8 (1982): 11–18. Hopefully, they will provide us with a good understanding of how to react to situations long before those situations occur.
What Ethics Are Not
It is important to understand what ethics are not.“A Framework for Thinking Ethically,” Santa Clara University: Markula Center for Applied Ethics, 2009, accessed October 7, 2011, www.scu.edu/ethics/practicing/decision/framework.html.
• Ethics are not the same as our feelings. Our feelings are not always accurate indicators about a particular action being unethical (e.g., taking a long lunch or spending too much personal time on the Internet while at work). We all develop defense mechanisms to protect ourselves, so we may not feel badly about a particular unethical act. Some people may actually feel good about behaving unethically.
• Ethics are not the same as religion. Most religions champion high ethical standards, but not everyone is religious. Ethics apply to everyone.
• Ethics are not necessarily synonymous with the law. There will be instances in which ethical behavior and the law are the same (e.g., in the cases of murder, discrimination, whistleblower protection, and fraud). Such instances are illustrative of a good legal system. There will, however, be times when the law takes a different path than ethics—the result being ethical corruption that serves only the interests of small groups.
• Ethics are not about following cultural norms. Following cultural norms works only for ethical cultures. Although most cultures probably like to see themselves as ethical, all societies have been and will be plagued with norms that are unethical (e.g., slavery in the United States prior to the Civil War and sweatshops in developing countries).
• Ethics are not synonymous with science. Science cannot tell us what to do. The sciences can provide us with insights into human behavior, but ethics provides the reasons and the guidance for what we should do.
• Ethics are not the same as values. Although values are essential to ethics, the two are not synonymous. Values are enduring beliefs that a given behavior or outcome is desirable or good.Milton Rokeach, The Nature of Human Values (New York: Free Press, 1973), 5, as cited in Wayne D. Hoyer and Deborah J. MacInnis, Consumer Behavior (Boston: Houghton Mifflin, 2001), 416. They create internal judgments that will determine how a person actually behaves. Ethics determine which values should be pursued and which should not.Jeff Landauer and Joseph Rowlands, “Values,” Importance of Philosophy, 2001, accessed October 7, 2011, www.importanceofphilosophy.com/Ethics_Values.html.
Why Ethics Are Important
Ethics are important because they provide structure and stabilization for society. They help us to understand what is good and bad, and this helps us to choose between right and wrong actions. Without ethics, our actions would be “random and aimless, with no way to work toward a goal because there would be no way to pick between a limitless number of goals.”Jeff Landauer and Joseph Rowlands, “Values,” Importance of Philosophy, 2001, accessed October 7, 2011, www.importanceofphilosophy.com/Ethics_Values.html. Ethics do not provide easy answers to hard questions, but they do provide a framework within which to seek the answers.
Business Ethics
Business ethics is applying the virtues and discipline of ethics to business behavior. They set the standard for how your business is conducted and define the value system of how you operate in the marketplace and within your business.“Business Ethics,” Small Business Notes, accessed October 7, 2011, www.smallbusinessnotes.com/operating/leadership/ethics.html. They are relevant to any and all aspects of business conduct: workplace issues, product and brand, corporate wrongdoing, professional ethics, and global business ethics. They apply equally to the individual who works for the company and to the company itself because all ethical and unethical business behavior eventually finds its way to the bottom line. It is almost a certainty that someone will encounter an ethical dilemma at some point in his or her professional life.
VIDEO LINK 1.1
Business Ethics in the Twenty-First Century
A PBS documentary about business ethics and social responsibility.
http://watch.wliw.org/video/1316867588
Do Business Ethics Pay?
Asking whether business ethics pay may be the wrong question to ask. Behaving ethically should happen because it is the right thing to do. However, companies large and small are in the business of making money, so the question is not an unreasonable one. Good ethics carry many benefits, not the least of which is financial good health. Companies that “outbehave” the competition ethically will also tend to outperform them financially.Richard McGill Murphy, “Why Doing Good Is Good for Business,” CNNMoney.com, February 2, 2010, accessed October 7, 2011, money.cnn.com/2010/02/01/news/companies/dov_seidman_lrn.fortune. According to an Institute of Business Ethics report, companies with a code of conduct generated significantly more economic value added and market value added than those companies without a code, experienced less price to earnings volatility, and showed a 50 percent increase in average return on capital employed.Simon Webley and Elise More, “Does Business Ethics Pay?,” Institute of Business Ethics, 2003, accessed October 7, 2011, www.ibe.org.uk/userfiles/doesbusethicpaysumm.pdf.
Business ethics also pay in other ways that will improve the workplace climate and, ultimately, positively impact the bottom line. They can “reduce incidents of corruption, fraud, and other malpractices; enhance the trust of customers, suppliers and contractors; enhance the credibility of buyers and salespersons; and enhance the loyalty and goodwill of employees, shareholders and customers.”Simon Webley and Elise More, “Does Business Ethics Pay?,” Institute of Business Ethics, 2003, accessed October 7, 2011, www.ibe.org.uk/userfiles/doesbusethicpaysumm.pdf.
The Costs of Unethical Business Conduct
By contrast, the costs of unethical business behavior can be staggering. Some of the costs include the loss of physical assets, increased security, the loss of customers, the loss of employees, the loss of reputation, legal costs, the loss of investor confidence, regulatory intrusion, and the costs of bankruptcy. According to a report by the Josephson Institute,“The Hidden Costs of Unethical Behavior,” Josephson Institute, 2004, accessed October 7, 2011, josephsoninstitute.org/pdf/Report_HiddenCostsUnethicalBehavior.pdf. unethical business behavior has an adverse impact on sales, stock prices, productivity, the performance of the highly skilled employees, efficiency, communication, and employee retention and recruiting plus the risks from scandal and employee fraud.
The costs of employee theft are particularly daunting. An estimated 75 percent of employees steal from the workplace, and most do so repeatedly. One third of all US corporate bankruptcies are caused directly by employee theft; US companies lose nearly \$400 billion per year in lost productivity due to “time theft” or loafing; and an estimated 20 percent of every dollar earned by a US company is lost to employee theft.Terrence Shulman, “Employee Theft Statistics,” Employee Theft Solutions, 2007, accessed October 7, 2011, www.employeetheftsolutions.com. Office supplies, money, and merchandise are the most frequently stolen items.Leslie Taylor, “Four in 10 Managers Have Fired Employees for Theft,” Inc., September 1, 2006, accessed October 7, 2011, www.inc.com/news/articles/200609/theft.html?partner=rss. Employee theft may be even more of a concern to small businesses because many small businesses operate so close to the margin. It has been estimated that theft by small business employees totals nearly \$40 billion each year.Mary Paulsell, “The Problem of Employee Theft,” MissouriBusiness.net, October 10, 2007, accessed October 7, 2011, www.missouribusiness.net/sbtdc/docs/problem_employee_theft.asp.
Video Clip \(1\):
Business Ethics with Sound
Do not steal time at work
Small Business Ethics
In business, it is common for there to be conflicts between business success and ethical behavior. When faced with an ethical dilemma, the decision may be unduly influenced by profits and legality. This challenge is particularly acute for small business owners because they are so much closer to the employees and the customers. The results of ethical decisions will be felt more immediately by the entire company.Karen E. Klein, “Making the Case for Business Ethics,” Bloomberg BusinessWeek, April 26, 2010, accessed October 7, 2011, www.BusinessWeek.com/smallbiz/content/dec2008/sb20081230_999118.htm.
Small-business owners will find themselves confronted more often with ethical choices because of the decision-making autonomy that they have; there is no need to answer to a large number of employees, corporate management, or a corporate board. The ethical choices that are made will likely impact a far greater number of people than will the ethical decisions of individual employees. Many business decisions will pose ethical challenges—examples being whether to use inferior materials to produce products because of competition with larger businesses, employee and workplace problems, product quality and pricing, legal problems, and government regulatory concerns.Jeffrey S. Hornsby et al., “The Ethical Perceptions of Small Business Owners: A Factor Analytic Study,” Journal of Small Business Management 32 (1994): 9–16, adapted. The pressure to make an unethical choice on behalf of the small business can be very powerful, especially when the health and vitality of the business may be at stake.“Business Ethics,” Answers.com, 2001, accessed October 7, 2011, www.answers.com/topic/business-ethics. Fortunately, the chances of an unethical decision being made in a small business are lower because the individual or individuals who are harmed will always be more visible. It is more difficult for the small business owner to be unethical. Ultimately, small business owners will behave in accordance with “their own moral compass, sense of fair play and inclination to deal in good faith.”Jim Blasingame, “Small Business Ethics,” Small Business Advocate, August 13, 2001, accessed October 7, 2011, www.smallbusinessadvocate.com/motivational-minutes/small-business-ethics-22.
According to one study,Daniel J. Brown and Jonathan B. King, “Small Business Ethics: Influences and Perceptions,” Journal of Small Business Management 11, no. 8 (1982): 11–18. small businesses see norms and pressures from the community and peers as having more influence on their ethics than moral or religious principles, the anticipation of rewards, upholding the law, or the fear of punishment. This leads to the conclusion that small business is influenced significantly by the communities in which their businesses are located. Socially responsive behavior is visible and it is “rewarded or sanctioned by local residents through changes in employee morale, performance, and turnover; customer loyalty; and positive interactions with business service professionals, suppliers, local government officials, and business colleagues. These local sanctioning mechanisms [in turn affected] the success of the business.”Terry L. Besser, “Community Involvement and the Perception of Success among Small Business Operators in Small Towns,” Journal of Small Business Management 37, no. 4 (1999): 16–29.
Because of this community influence, customer relationships are and must be based on trust and the relatively immediate visibility of ethical behavior. It is perhaps not surprising that people in small business are ranked number one on ethical standards ahead of physicians, people in big business, and government officials.Daniel J. Brown and Jonathan B. King, “Small Business Ethics: Influences and Perceptions,” Journal of Small Business Management 11, no. 8 (1982): 11–18.
Developing an Ethics Policy
The small business owner is in a unique position to set the ethical tone for the business. Employees will follow the lead of the owner when executing their duties and tending to their responsibilities, so it is critical that the owner establish an ethical work environment.“Business Ethics,” Answers.com, 2001, accessed October 7, 2011, www.answers.com/topic/business-ethics. Establishing an ethics policy (code of conduct or code of ethics) is an important step in creating that environment. Employees who work in companies with active ethics programs; who observe leaders modeling ethical behavior; and who see honesty, respect, and trust applied frequently in the workplace have reported more positive experiences that include the following:Natalie Rhoden, “Ethics in the Workplace,” Articlesbase, November 5, 2008, accessed October 7, 2011, www.articlesbase.com/human-resources-articles/ethics-in-the -workplace-629384.html.
• Less pressure on employees to compromise ethics standards
• Less observed misconduct at work
• Greater willingness to report misconduct
• Greater satisfaction with their organization’s response to misconduct they report
• Greater overall satisfaction with their organizations
• Greater likelihood of “feeling valued” by their organizations
These positive work experiences would be even more notable in small businesses because of the smaller number of employees.
Employee perceptions of their organization’s ethical leadership may well be the most important driver of employee trust and loyalty.Jennifer Schramm, “Perceptions on Ethics,” HR Magazine, November 2004, 176. Having an ethical culture should, therefore, be a top priority for every small business.
Many small business owners may feel that a code of ethics is unnecessary. However, the benefit of having such a code is higher employee morale and commitment, more loyal customers, and a more supportive community. Even the nonemployee small business benefits. A code of ethics puts your business in a more positive, proactive light, and it spells out to customers and employees what behavior is and is not appropriate.Jeff Wuorio, “Put It in Writing: Your Business Has Ethics,” Microsoft Small Business, 2011, accessed October 7, 2011, www.microsoft.com/business/en-us/resources/management/leadership-training/put-it-in-writing-your-business-has-ethics.aspx ?fbid=WTbndqFrlli.
There is no recipe for developing an ethics policy. Its development may involve no one other than the small business owner, but it should involve several people. The contents should be specific to the values, goals, and culture of each company, and it should be “a central guide and reference for users in support of day-to-day decision making. It is meant to clarify an organization’s mission, values, and principles, linking them with the standards of professional conduct.”“Why Have a Code of Conduct,” Ethics Resource Center, May 29, 2009, accessed October 7, 2011, www.ethics.org/resource/why-have-code-conduct. Small-business owners must decide what will make the most sense for their companies. Jeff Wuorio offered the following eight guidelines:Jeff Wuorio, “Put It in Writing: Your Business Has Ethics,” Microsoft Small Business, 2011, accessed October 7, 2011, www.microsoft.com/business/en-us/resources/management/leadership-training/put-it-in-writing-your-business-has-ethics.aspx ?fbid=WTbndqFrlli.
1. Focus on business practices and specific issues. The content of one company’s code of ethics will differ from that of another.
2. Tailor it to fit your business. One size does not fit all. Make sure your code of ethics reflects the values and mission of your company.
3. Include employees in developing a code of ethics. A mandate from the small business owner will not be effective. Get input from your employees whenever possible. They will be more accepting of the ethics policy.
4. Train your people to be ethical. The extent and nature of employee education and training will depend on the size of the small business. Even the smallest business, however, will benefit from some ethics training.
5. Post your code of ethics internally and set up a reporting system. Employees need a way to let someone know about ethics violations. Both an open-door policy and an anonymous reporting system will be helpful.
6. Consider appointing a compliance person. This would probably not be appropriate for the very small businesses. However, it would be worth considering if the business has fifty or more employees. Having someone to whom employees can report suspected ethical problems would make things much simpler.
7. Follow up on any ethics violations you uncover. Make sure that everyone understands the ramifications of ethics policy violations. Include an appeals process. If a small business owner fails to act on ethics violations, employees will not take the policy seriously.
8. Live it from the top down. The small business owner must walk the talk. No one should appear to be above the code of ethics. Good role modeling is critical.
The actual development of a code of ethics can be done by starting from scratch, hiring a consultant, or customizing a code from another organization. Before making a choice, it would be worth doing some research. A good place to start would be www.conductcode.com, a website that looks at codes of conduct from a practitioner approach. A search of the Internet will provide examples of codes of ethics, but there is a bias toward larger companies, so small business owners will have to pick and choose what will be best suited to their respective companies.
Ethical Behavior Survey
The Ethics Resource Center conducted a survey of employees at large and small businesses and found the following:
• Fifty-six percent of the employees had witnessed misconduct by other employees that violated the firm’s ethics standards or policies or the law.
• Fifty-four percent of the employees who had witnessed misconduct believed that reporting the misconduct would not lead to corrective action.
• Forty-two percent of the employees who had witnessed misconduct reported it. The percentage rose to 61 percent for employees whose employers have a well-implemented ethics and compliance program.
• Thirty-six percent of the employees who had witnessed misconduct but did not report it cited fear of retaliation as their reason for not reporting it.Reported in Jeff Madura, Introduction to Business (St. Paul, MN: Paradigm Publishing, 2010), 52.
KEY TAKEAWAYS
• Ethics are about doing the right thing. They are about standards that help us decide between right and wrong. They are not the same as our feelings, religion, the law, cultural norms, science, or values.
• Ethics are important because they provide structure and stabilization for society.
• Business ethics are about applying the virtues and discipline of ethics to business behavior. They set the standard for how your business is conducted and define the value system of how you operate in the marketplace and within your business.
• Companies that “outbehave” the competition ethically tend to outperform them financially.
• Ethical behavior in business improves the workplace climate and will ultimately improve the bottom line. The cost of unethical behavior can be staggering.
• Small-business owners have the opportunity to set the ethical tone for their companies. Modeling ethical behavior is key. The community and peers heavily influence small business ethics.
• Establishing an ethics policy is critical for creating an ethical work environment. The contents of the policy should be specific to the values, goals, and culture of each company. One size does not fit all.
EXERCISES
1. MaryAnn’s marketing team just presented a “Less Sugar” ad campaign to the cereal brand manager for three of her brands. The packages shouted “75% LESS SUGAR” in large and colorful type so that it would catch the parent’s eye and increase sales. With all the recent attention about childhood obesity, the company thought that parents would purchase the cereal to help their children attain and keep a healthy weight. A side-by-side comparison of the less-sugar and the high-sugar versions of the cereals, however, revealed that the carbohydrate content of the cereals was essentially the same. At best, the less-sugar version had only ten fewer calories per bowl. It offered no weight-loss advantage. The brand manager correctly concluded that the marketing campaign was unethical.J. Brooke Hamilton III, “Case Example 1: ‘Less Sugar’ Marketing,” Operationalizing Ethics in Business Settings, 2009, accessed June 1, 2012, ethicsops.com/LessSugarMarketingCase.php. Was the campaign illegal? What should the cereal brand manager do?
2. An office supplies business with fifty employees has been doing well, but lately there have been suspicions by some of the employees. No names are known, but it is known that merchandise has been disappearing without explanation, and expensive gifts have been accepted from some vendors. The owner thinks it is time to create and implement a code of ethics. She has asked you for advice. You told her that it would be important to involve the employees in the development of the code, but you committed to do two things for her in preparation for that involvement: (1) search the Internet for a code of ethics that could be tailored to her needs and (2) prepare a preliminary list of topics that should be included in the code. She thanked you and asked that you submit your ideas within the week. She reminded you that her business is small, so a code of ethics for a large corporation would not be suitable. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/01%3A_Foundations_for_Small_Business/1.05%3A_Ethics.txt |
LEARNING OBJECTIVES
1. Define customer value and explain why it is important to small business competitiveness.
2. Define digital technology and explain its role in small business competitiveness.
3. Define e-business and explain why e-business is important to small businesses.
4. Define e-commerce and explain why e-commerce should be integrated into small businesses.
There are three threads that flow throughout this text: customer value, cash flow, and digital resources and e-environments. These threads can be likened to the human body. Cash flow is the circulatory system, without which there can be no life. Digital technology and e-business are the internal organs that carry out daily processes. E-commerce is the sensory system that enables business to observe and interact with the external environment. Customer value is overall health. These threads must figure prominently in all small business decision making. Although they are necessary but not sufficient conditions for small business survival, the chances for survival will be reduced significantly if they are not used.
Customer Value
In 1916, Nathan Hanwerker was an employee at one of the largest restaurants on Coney Island—but he had a vision. Using his wife’s recipe, he and his wife opened a hot dog stand. He believed that the combination of a better tasting hot dog and the nickel price, half that of his competitors, was his recipe for success. He was wrong. Unfortunately for Nathan, Upton Sinclair’s book The Jungle a decade before had made the public suspicious of low-cost meat products. Nathan discovered that his initial business model was not working. Customers valued taste and cost, but they also valued the quality of a safe product. To convince customers that his hot dogs were safe, he secured several doctors’ smocks and had people wear them. The sight of “doctors” consuming Nathan’s hot dogs gave customers the extra value that they needed. It was all about the perception of quality. If doctors were eating the hot dogs, they must be OK. Today there are over 20,000 outlets serving Nathan’s hot dogs.John A. Jakle and Keith A. Sculle, Fast Food (Baltimore: Johns Hopkins University Press, 1999), 163–64.
In principle, customer value is a very simple concept. It is the difference between the benefits that a customer receives from a product or a service and the costs associated with obtaining that product or service. Total customer benefit refers to the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a product or a service because of the products, services, personnel, and images involved. Total customer cost, the perceived bundle of costs that customers expect to occur when they evaluate, obtain, use, and dispose of the product or use the service, include monetary, time, energy, and psychological costs.Philip Kotler and Kevin Lane, Marketing Management (Upper Saddle River, NJ: Pearson Prentice-Hall, 2009), 121. In short, it is all about what customers get and what they have to give up.
In reality, the creation of customer value will always be a challenge—particularly because it almost always needs to be defined on the customer’s terms.H. Whitelock, “How to Create Customer Value,” eZine Articles, March 16, 2007, accessed October 7, 2011, ezinearticles.com/?How-to-Create-Customer-Value &id=491697. Nonetheless, “the number one goal of business should be to ‘maximize customer value and strive to increase value continuously.’ If a firm maximizes customer value, relative to competitors, success will follow. If a firm’s products are viewed as conveying little customer value, the firm will eventually atrophy and fail.”Earl Nauman, Creating Customer Value: The Path to Sustainable Competitive Advantage (New York: Free Press, 1995), 16. This will certainly be true for the small business that is much closer to its customers than the large business.
The small business owner needs to be thinking about customer value every day: what is offered now, how it can be made better, and what the competition is doing that is offering more value. It is not easy, but it is essential. All business decisions will add to or detract from the value that can be offered to the customer. If your product or service is perceived to offer more value than that of the competition, you will get the sale. Otherwise, you will not get the sale.
Cash Flow
Revenue is vanity…margin is sanity…cash is king.
- Unknown.
Most people would define success with respect to profits or sales. This misses a critical point. The survival of a firm hinges not so much on sales or profits, although these are vitally important, as it does on the firm’s ability to meet its financial obligations. A firm must learn to properly manage its cash flow, defined as the money coming into and flowing from a business because cash is more than king. It is a firm’s lifeblood. As the North Dakota Small Business Development Center put it, “Failure to properly plan cash flow is one of the leading causes for small business failure.”“Why Is Cash Flow So Important?,” North Dakota Small Business Development Center, 2005, accessed October 7, 2011, www.ndsbdc.org/faq/default.asp?ID=323.
An understanding of cash flow requires some understanding of accounting systems. There are two types: cash based and accrual. In a cash-based accounting system, sales are recorded when you receive the money. This type of system is really meant for small firms with sales totaling less than \$1 million. Accrual accounting systems, by contrast, are systems that focus on measuring profits. They assume that when you make a sale, you are paid at that point. However, almost all firms make sales on credit, and they also make purchases on credit. Add in that sales are seldom constant, and you begin to see how easily and often cash inflows and outflows can fall out of sync. This can reduce a firm’s liquidity, which is its ability to pay its bills. Envision the following scenario: A firm generates tremendous sales by using easy credit terms: 10 percent down and one year to pay the remaining 90 percent. However, the firm purchases its materials under tight credit terms. In an accrual accounting system, this might appear to produce significant profits. However, the firm may be unable to pay its bills and salaries. In this type of situation, the firm, particularly the small firm, can easily fail.
There are other reasons why cash flow is critically important. Firms need to have the money to buy new materials or expand. In addition, firms should have cash available to meet unexpected contingencies or investment opportunities.
Cash-flow management requires a future-focused orientation. You have to anticipate your future cash inflows and outflows and what actions you may need to take to preserve your liquidity. Today, even the nonemployee firm can begin this process with simple spreadsheet software. Slightly larger firms could opt for the user-dedicated software. In either case, cash-flow analysis requires the owner to focus on the future and to develop effective planning skills.
Cash-flow management also involves activities such as expense control, receivables management, inventory control, and developing a close relationship with commercial lenders. The small business owner needs to think about these things every day. Their requirements may tax many small business operators, but they are essential skills.
• Expense control requires owners or operators to think in terms of constantly seeking out efficiencies and cost-reduction strategies.
• Receivables management forces owners to think about how to walk the delicate balance of offering customers the benefits of credit while trying to receive the payments as quickly as possible. They can use technology and e-business to expedite the cash inflow.
• Effective inventory control translates into an understanding of the ABC classification system(sorting inventory by volume and value), and determining order quantities and reorder points. Inevitably, any serious consideration of inventory management leads one to the study of “lean” philosophies. Lean inventory management refers to approaches that focus on minimizing inventory by eliminating all sources of waste. Lean inventory management inevitably leads its practitioners to adopt a new process-driven view of the firm and its operations.
• Lastly, attention to cash-flow management recognizes that there may well be periods when cash outflows will exceed cash inflows. You may have to use commercial loans, equity loans (pledging physical assets for cash), and/or lines of credit. These may not be offered by a lender at the drop of a hat. Small-business owners need to anticipate these cash shortfalls and should already have an established working relationship with a commercial lender.
A small business needs to be profitable over the long term if it is going to survive. However, this becomes problematic if the business is not generating enough cash to pay its way on a daily basis.Barry Minnery, “Don’t Question the Importance of Cash Flow: Making a Profit Is the Goal but Day-to-Day Costs Must Be Met in Order to Keep a Business Afloat,” The Independent.com, May 28, 2010, accessed October 7, 2011, www.articlesezinedaily.com/dont-question-the-importance-of-cash-flow/. Cash flow can be a sign of the health—or pending death—of a small business. The need to ensure that cash is properly managed must therefore be a top priority for the business.Barry Minnery, “Don’t Question the Importance of Cash Flow: Making a Profit Is the Goal but Day-to-Day Costs Must Be Met in Order to Keep a Business Afloat,” The Independent.com, May 28, 2010, accessed October 7, 2011, www.articlesezinedaily.com/dont-question-the-importance-of-cash-flow/. This is why cash-flow implications must be considered when making all business decisions. Everything will be a cash flow factor one way or the other. Fred Adler, a venture capitalist, could not have said it better when he said, “Happiness is a positive cash flow.”Fred Adler, QuotationsBook.com, accessed October 7, 2011, quotationsbook.com/quote/18235.
Digital Technology and the E-Environment
Digital technology and the e-environment continue to change the way small and large businesses operate. Digital technology refers to a broad spectrum of computer hardware, software, and information retrieval and manipulation systems. The e-environment is a catchall term that includes e-business and e-commerce. The Internet in particular has had a powerful impact on the demands of customers, suppliers, and vendors, each of whom is ready—perhaps even expects—to do business 24/7.
Why Digital Technology?
With the advent of the personal computer and the Internet, small firms may be able to compete on a more equal footing with larger firms through their intelligent use of digital technologies. It would be impossible to list all the types of software that can enhance small business operations, so the focus will be on the major types of aids.
Today, even the smallest of firms can acquire a complete accounting system at a reasonable price. These packages can be tailored for specific industries and are designed to grow with the company. They not only generate standard accounting and financial reports but also assist with management decision making. Information about accounting software for small businesses is easily available on the Internet.
Small-business operations have also benefited greatly from affordable software that can handle forecasting, inventory control and purchasing, customer relations, and shipping and receiving. In fact, the software has advanced to the point where a small firm can cost-effectively possess its own enterprise resource planning (ERP) system. Only a few years ago, ERP systems were out of reach for all but the largest firms. ERP systems integrate multiple business functions, from purchasing to sales, billings, accounting records, and payroll (see Figure \(1\). These advances now give small firms the capability and opportunity to participate in global supply chains, thus broadening their customer base.
Touch screen computers, smartphones, or iPads can bring a new level of sophistication to data entry and manipulation and communications. Smartphones can boost productivity, especially when out of the office.Christopher Elliott, “5 Ways Smartphones & Servers Boost Productivity,” Microsoft Small Business Center, 2010, accessed October 7, 2011, www.microsoft.com/business/en-us/resources/technology/communications/smartphones-and-business -productivity.aspx?fbid=WTbndqFrlli. It is predicted that the iPad will change how we build business relationships, particularly with respect to connecting with prospects in a more meaningful way.Brent Leary, “The iPad: Changing How We Build Business Relationships,” Inc., accessed October 7, 2011, www.inc.com/hardware/articles/201005/leary.html. Inventory control may soon be revolutionized by a technology known as radio-frequency identity devices (RFIDs). These small devices enable the tracking of inventory items. These same devices may change retailing by curtailing time at checkout and eliminating pilferage.Kevin Bonsor, Candace Keener, and Wesley Fenlon, “How RFID Works,” HowStuffWorks.com, accessed October 23, 2011, electronics.howstuffworks.com/gadgets/high-tech-gadgets/rfid.htm.
Using Smartphones in Your Business
Lloyd’s Construction is a 100-person demolition and carting firm in Eagan, Minnesota. This small, family-owned business is not your typical candidate for a firm that exploits cutting-edge technology. At the suggestion of the president’s 17-year-old daughter, the firm switched to a smartphone system that allows for integrated data entry and communication. This system allowed the firm to reduce its routing and fuel costs by as much as 30 percent. The firm was also able to further reduce accounting and dispatch costs. On an investment of \$50,000, the firm estimated that it saved \$1 million in 2007.Jonathan Blum, “Running an Entire Business from Smartphones: Mobile Software Helps Track Equipment, Accounts—and Employee Lunch Breaks,” CNNMoney.com, March 12, 2008, accessed October 7, 2011, money.cnn.com/2008/03/11/smbusiness/mobile_phone_software.fsb/index.htm
RFID Technology
How RFIDs work.
Video Clip \(1\)
The Future Market
How grocery shopping may change with RFID
All these technologies, and others, are within the reach of the small business, but careful analysis must determine which technologies are best suited for a company. Given the speed of digital technology development, this analysis is something that should be conducted on a frequent basis. It is in the best interest of every small business to introduce digital technologies into the business as quickly as is practical and affordable. There should always be an interest in doing things better and faster. Through technology, a small business owner will be able to do so much more: grow the business (if desired), work smarter, attract more customers, enhance customer service, and stay ahead of the competition.“Technology: Your Roadmap to Small Business Success,” Intel, 2009, accessed October 7, 2011, www.intel.com/content/www/us/en/world-ahead/world-ahead -small-business-success-article.html.
The smaller the business, the more efficient it needs to be. Digital technology can help. Digital technologies, with their relatively low cost, ease of implementation, and power, can offer small businesses the rare opportunity to compete with larger rivals. If smaller firms are able to fully use the capabilities of these technologies along with exploiting their faster decision-making cycle, they can be the ones that secure competitive advantage.
Why E-business?
E-business is a term that is often used interchangeably with e-commerce, but this is not accurate. E-business uses the Internet and online technologies to create operational efficiencies, thereby increasing value to the customer.Kelly Wright, “E-Commerce vs. E-Business,” Supply Chain Resource Cooperative, November 27, 2002, accessed October 7, 2011, scm.ncsu.edu/public/lessons/less021127.html. Its focus is internal—for example, online inventory control systems; accounting systems; procurement processes; supplier performance evaluation processes; tools to increase supply chain efficiency; processing requests for machine repairs; and the integration of planning, sourcing, and manufacturing. Critical business systems are connected to critical constituencies—customers, vendors, and suppliers—via the Internet, extranets, and intranets.Elias M. Awad, Electronic Commerce: From Vision to Fulfillment (Upper Saddle River, NJ: Pearson Education, 2004), 4. No revenue is generated, but “e-business applications turn into e-commerce precisely when an exchange of value occurs.”Kenneth C. Laudon and Carol Guercio Traver, E-commerce: Business, Technology, Society (Upper Saddle River, NJ: Pearson Prentice Hall, 2007), 11.
E-business processes should be introduced wherever there is a process that is currently working OK but is costing unnecessary time and money to implement via paper. This would certainly apply to the small business that finds itself drowning in paperwork. Small businesses should always consider that e-business processes could improve their operational and cost efficiencies overall, so thinking about e-business implications should be part of many decisions. E-business can work for any small business “because it involves the whole business cycle for production, procurement, distribution, sales, payment, fulfillment, restocking and marketing. It’s about relationships with customers, employees, suppliers and distributors. It involves support services like banks, lawyers, accountants and government agencies.”“Making Money on the Internet,” BizBeginners.biz, accessed October 23, 2011, bizbeginners.biz/e_business.html. The way you do business and your future profitability will be affected by e-business. Converting your current business into e-business may require some redesign and reshaping, depending on the size of your company. However, e-business integration should be seen as an essential element in the efforts of a small business to increase its agility in responding to customer, market, and other strategic requirements.William M. Ulrich, “E-Business Integration: A Framework for Success,” Software Magazine, August 2001, accessed October 7, 2011, findarticles.com/p/articles/mi_m0SMG/is_4_21/ai_78436110.
Why E-commerce?
E-commerce, the marketing, selling, and buying of goods and services online, is a subset of e-business. It generates revenue, whereas other areas of e-business do not. E-commerce has experienced extraordinary and rapid growth and will continue to grab more market share.Heather Green, “US Ecommerce Growth to Pick up in 2010, But Hit Mature Stride,” Bloomberg BusinessWeek, February 2, 2009, accessed June 1, 2012, http://www.businessweek.com/the_thread/the_thread_05272011/blogspotting/archives/2009/02/us_ecommerce_gr.html.
In a survey of 400 small businesses, each with fewer than 100 employees, it was reported that the Internet had significantly improved growth and profitability while helping to reduce costs. Some businesses even indicated that they rely on the Internet to survive. Interestingly, the survey participants themselves took advantage of e-commerce to purchase computers and office technology online (54 percent), capital equipment and supplies (48 percent), and office furnishings (21 percent); one third bought inventory for online resale, and 59 percent purchased other business-related goods online.Robyn Greenspan, “Net Drives Profits to Small Biz,” ClickZ, March 25, 2004, accessed October 7, 2011, www.clickz.com/clickz/stats/1719145/net-drives-profits-small-biz. E-commerce offers many benefits to small businesses, including the following:“E-commerce: Small Businesses Become Virtual Giants on the Internet,” SCORE, accessed October 7, 2011, www.score.org/system/files/become_a_virtual_giant.pdf.
• Lower business costs. It may not be necessary to maintain as much physical space and staff.
• Greater accessibility. Customers can shop when they want to.
• The ability to provide customized service. Like Amazon.com, companies can address their customers on a personal level by recognizing and greeting repeat shoppers.
• Increased customer loyalty. Companies can give information to customers while offering something of value (e.g., a coupon for use on the next purchase or helpful hints about using a product).
These benefits make it possible for a small business to compete with, perhaps even overtake, larger companies that do not have the agility and innovation of a smaller company.
The realities of Internet usage make a strong case for small businesses to integrate e-commerce into their operations, including the following:
• Seventy-four percent of American adults use the Internet.
• Eighty-one percent use the Internet for information online about a service or product they are thinking of buying.
• Seventy-one percent buy products online.“Trend Data: What Internet Users Do Online,” Pew Internet & American Life Project, May 1, 2011, accessed June 1, 2012, http://www.pewinternet.org/Trend-Data-%28Adults%29/Online-Activites-Total.aspx.
• Sixty-six percent of adults have home broadband.“Home Broadband Adoption Since 2000,” Pew Internet & American Life Project, 2010, accessed June 1, 2012, http://www.pewinternet.org/Static-Pages/Trend-Data-(Adults)/Home -Broadband-Adoption.aspx.
• American small businesses have embraced broadband.Robyn Greenspan, “Small Biz Gets Up to Speed,” ClickZ.com, January 26, 2004, accessed October 7, 2011, www.clickz.com/clickz/stats/1704631/small-biz -gets-up-to-speed.
• Fifty-five percent of American adults connect to the Internet wirelessly.Lee Rainie, “Internet, Broadband, and Cell Phone Statistics,” Pew Internet & American Life Project, January 5, 2010, accessed October 7, 2011, pewinternet.org/~/media/Files/Reports/2010/PIP_December09_update.pdf.
• All income groups have high Internet usage, from 65 percent (less than \$30,000 per year) to 98 percent (\$75,000 per year or more).“Demographics of Internet Users,” Pew Internet & American Life Project, 2012, accessed June 21, 2012, http://www.pewinternet.org/Static-Pages/Trend-Data-%28Adults%29/Whos-Online.aspx.
• Forty-six percent of small business owners plan to grow their businesses by creating or improving their company’s online presence.“Small Biz Plans to Grow with Social,” eMarketer.com, 2010, accessed October 7, 2011, www.emarketer.com/Article.aspx?R=1007706.
• Almost half (49 percent) of online adults have used online classified ads.Sydney Jones, “Online Classifieds,” Pew Internet & American Life Project, 2010, accessed June 1, 2012, www.pewinternet.org/Reports/2009/7--Online-Classifieds/1-Overview.aspx.
We live in a society of 24/7 immediacy, where the equivalent of foot traffic is increasingly becoming eyeballs on a website.Sramana Mitra, “The Promise of E-Commerce,” Forbes.com, April 9, 2010, accessed October 7, 2011, www.forbes.com/2010/04/08/retailing-entreprenuers-online -intelligent-technology-ecommerce.html. People and businesses turn to the Internet to solve problems and address the needs that they have. Embracing this change and moving existing small business practices to include e-commerce would not seem to be an option. Rather, it is increasingly becoming a requirement for survival. Even so, small business must think carefully about how to enter the e-commerce world or, if already there, how to best take advantage of the opportunities. Both situations will require careful and deliberate decision making that takes e-commerce implications into consideration regularly.
KEY TAKEAWAYS
• The creation of customer value must be a top priority for small business. The small business owner should be thinking about it every day.
• Cash flow is a firm’s lifeblood. Without a positive cash flow, a small business cannot survive. All business decisions will have an impact on cash flow—which is why small business owners must think about it every day.
• A cash-based accounting system is for small firms with sales totaling less than \$1 million. Accrual accounting systems measure profits instead of cash.
• Digital technologies are very important to small businesses. They can improve efficiencies, help create greater customer value, and make the business more competitive. Digital technology integration should be something that small business owners think about regularly.
• It is not correct to use the terms e-business and e-commerce interchangeably. E-commerce is a subset of e-business.
• E-business can work for any small business.
• E-commerce generates revenue. E-business does not.
• Moving existing small business practices to e-commerce is increasingly becoming a requirement for survival.
EXERCISES
1. A customer calls L.L. Bean about a favorite jacket he purchased more than 10 years ago and has recently lost. In a matter of minutes, the sales agent identifies the old jacket, locates a replacement model in the current catalog, suggests a matching size and color, and orders the jacket. The replacement jacket arrives three days later.”Peter Kolesar, Garrett van Rysin, and Wayne Cutler, “Creating Customer Value through Industrialized Intimacy,” Strategy + Business, July 1, 1998, accessed October 7, 2011, www.strategy-business.com/article/19127?gko=81aa7. How has L.L. Bean added to the customer’s perception of value?
2. When thinking about customer value, you should plan to address three questions: (a) What do my customers truly value? (b) What do I provide? and (c) How does what I provide differ from my competitors? Select a small business and interview the owner to see how he or she answered these questions. Pay particular attention to the first question.
3. Intuit QuickBooks, Peachtree, and AccountEdge are three popular accounting packages. Gather information from their websites and conduct a comparative analysis as though you were a new small business looking to buy one of them. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/01%3A_Foundations_for_Small_Business/1.06%3A_The_Three_Threads.txt |
Cheshire Package Store
Robert Brown has been the owner and operator of the Cheshire Package Store for 25 years. It is one of several liquor stores in this town of 25,000 people. Some of his competitors are smaller or approximately the same size, and one is significantly larger. Robert is very clear in his understanding of what gives his store a competitive edge. He believes his establishment provides the setting that makes a customer feel at home. “My feeling has always been that small businesses must have a feeling of comfort. If your customers do not feel that they can ask you questions about the product or if they feel that they are imposing on you, then they are not likely to return.”
Robert took every opportunity available to better understand his customers and provide them with value. One way his business does this is by developing a personal relationship with its customers. This may mean carefully looking at checks or credit cards, not for security reasons, but to identify customers by name. Robert points out that he always pays careful attention to what customers like and dislike; by doing so, they develop confidence in his suggestions. To foster this confidence, he and his family actively engage their customers in conversations. Customers, Robert, and the employees share stories, which is a key way to build better customer relationships. By listening to his customers, Robert can identify what they are looking for and assist him in knowing what new products he might offer.
In addition to this personalized level of service, the Cheshire Package Store also recognizes the importance of other factors. Robert talks about the importance of maintaining a well-lit store with spacious aisles, making it an inviting place in which to shop. He is careful about even minor details, such as assuring that there are open parking spaces near the entrance to his store. He recognizes that even walking short distances to or from the store might be a burden or deterrent for his customers. Robert’s store possesses a cutting-edge inventory software package designed specifically for liquor stores. It enables him to track inventory levels, which can provide estimates for future inventory levels of different products; however, he sees this as a guide only. As he puts it, “Your knowledge of your customers will be the key determinant for your success.”
Robert also strongly believes that the success of a small business depends on the owner being there. Stores have their own personality, in his view, and that personality is created by the owner. This personality imparted by the owner impacts all operational aspects of the business—“Your employees will pick up on what you expect, and they will know what your customers deserve.”
2.02: Defining the Customers Concept of Value
LEARNING OBJECTIVES
1. Define customer value.
2. Understand the five sources of perceived customer benefits.
3. Understand the three sources of perceived costs.
Look beneath the surface; let not the several qualities of neither the thing, nor its worth escape thee.
Marcus Aurelius Antoninus
In the previous chapter, Peter Drucker and W. Edward Deming placed the customer at the center of their definitions of the purpose of a business. They used the customer as being at the core of that purpose rather than focusing on financial measures such as profit, return on investment (ROI), or shareholders’ wealth. Drucker’s logic was that if a business did not create a sufficient number of customers, there never would be a profit with the business. Deming argued that delighting customers would become the basis for them to consistently return, and loyalty would ensure that the business would have a higher probability of surviving in the long term. The clearest way of doing that is by focusing on providing your customers with a clear sense of value. This emphasis on value will produce economic benefits. Gale Consulting explains the notion of value this way, “If customers don’t get good value from you, they will shop around to find a better deal.”“Why Customer Satisfaction Fails,” Gale Consulting, accessed December 2, 2011, www.galeconsulting.com/index.php?option=com_content&view=article&id= 18&Itemid=23. A recent study put it this way, “These firms have been successful…by consistently creating superior customer value—and profiting handsomely from that customer value.”George Day and Christine Moorman, Strategy from the Outside In (New York: McGraw Hill, Kindle Edition, 2010), 104–10.
Strong evidence indicates that this focus on making the customer central to defining the business translates into economic success. It has been estimated that the cost of gaining a new customer over retaining a current customer is a multiple of five. The costs of regaining a dissatisfied customer over the cost of retaining a customer are ten times as much.Forler Massnick, The Customer Is CEO: How to Measure What Your Customers Want—and Make Sure They Get It (New York: Amacom, 1997), 76. So a key question for any business then becomes, “How does one then go about making the customer the center of one’s business?”
What Is Value?
It is essential to recognize that value is not just price. Value is a much richer concept. Fundamentally, the notion of customer value is fairly basic and relatively simple to understand; however, implementing this concept can prove to be tremendously challenging. It is a challenge because customer value is highly dynamic and can change for a variety of reasons, including the following: the business may change elements that are important to the customer value calculation, customers’ preferences and perceptions may change over time, and competitors may change what they offer to customers. One author states that the challenge is to “understand the ever changing customer needs and innovate to gratify those needs.”Sudhakar Balachandran, “The Customer Centricity Culture: Drivers for Sustainable Profit,” Course Management 21, no. 6 (2007): 12.
The simple version of the concept of customer value is that individuals evaluate the perceived benefits of some product or service and then compare that with their perceived cost of acquiring that product or service. If the benefits outweigh the cost, the product or the service is then seen as attractive (see Figure 2.1 "Perceived Cost versus Perceived Benefits"). This concept is often expressed as a straightforward equation that measures the difference between these two values:
customer value = perceived benefits − perceived cost.
Some researchers express this idea of customer value not as a difference but as a ratio of these two factors.M. Christopher, “From Brand Value to Customer Value,” Journal of Marketing Practice: Applied Marketing Science 2, no. 1 (1996): 55. Either way, it needs to be understood that customers do not evaluate these factors in isolation. They evaluate them with respect to their expectations and the competition.
Firms that provide greater customer value relative to their competitors should expect to see higher revenues and superior returns. Robert Buzzell and Bradley Gale, reporting on one finding in the Profit Impact through Marketing Strategy study, a massive research project involving 2,800 businesses, showed that firms with superior customer value outperform their competitors on ROI and market share gains.Robert D. Buzzell and Bradley T. Gale, The PIMS Principles—Linking Strategy to Performance(New York: Free Press, 1987), 106.
Given this importance, it is critical to understand what makes up the perceived benefits and the perceived costs in the eyes of the consumer. These critical issues have produced a considerable body of research. Some of the major themes in customer value are evolving, and there is no universal consensus or agreement on all aspects of defining these two components. First, there are approaches that provide richly detailed and academically flavored definitions; others provide simpler and more practical definitions. These latter definitions tend to be ones that are closer to the aforementioned equation approach, where customers evaluate the benefits they gain from the purchase versus what it costs them to purchase. However, one is still left with the issue of identifying the specific components of these benefits and costs. In looking at the benefits portion of the value equation, most researchers find that customer needs define the benefits component of value. But there still is no consensus as to what specific needs should be considered. Park, Jaworski, and McGinnis (1986) specified three broad types of needs of consumers that determine or impact value.C. Whan Park, Bernard J. Jaworski, and Deborah J. MacInnis, “Strategic Brand Concept Image Management,” Journal of Marketing 50 (1986): 135.Seth, Newman, and Gross (1991)Jagdish N. Seth, Bruce I. Newman, and Barbara L. Gross, Consumption Values and Market Choice: Theory and Applications (Cincinnati, OH: Southwest Publishing, 1991), 77. provided five types of value, as did Woodall (2003), although he did not identify the same five values.Tony Woodall, “Conceptualising ‘Value for the Customer’: An Attributional, Structural and Dispositional Analysis,” Academy of Marketing Science Review 2003, no. 12 (2003), accessed October 7, 2011, www.amsreview.org/articles/woodall12-2003.pdf. To add to the confusion, Heard (1993–94)Ed Heard, “Walking the Talk of Customers Value,” National Productivity Review 11 (1993–94): 21. identified three factors, while Ulaga (2003)Wolfgang Ulaga, “Capturing Value Creation in Business Relationships: A Customer Perspective,” Industrial Marketing Management 32, no. 8 (2003): 677. specified eight categories of value; and Gentile, Spiller, and Noci (2007) mentioned six components of value.Chiara Gentile, Nicola Spiller, and Giuliana Noci, “How to Sustain the Customer Experience: An Overview of Experience Components That Co-Create Value with the Customer,” European Management Journal 25, no. 5 (2007): 395. Smith and Colgate (2007) attempted to place the discussion of customer value in a pragmatic context that might aid practitioners. They identified four types of values and five sources of value. Their purpose was to provide “a foundation for measuring or assessing value creation strategies.”J. Brock Smith and Mark Colgate, “Customer Value Creation: A Practical Framework,” Journal of Marketing Theory and Practice 15, no. 1 (2007): 7. In some of these works, the components or dimensions of value singularly consider the benefits side of the equation, while others incorporate cost dimensions as part of value.
From the standpoint of small businesses, what sense can be made of all this confusion? First, the components of the benefits portion of customer value need to be identified in a way that has significance for small businesses. Second, cost components also need to be identified. Seth, Newman, and Gross’s five types of value provide a solid basis for considering perceived benefits (see Figure 2.2 "Five Types of Value"). Before specifying the five types of value, it is critical to emphasize that a business should not intend to compete on only one type of value. It must consider the mix of values that it will offer its customers. (In discussing these five values, it is important to provide the reader with examples. Most of our examples will relate to small business, but in some cases, good examples will have to be drawn from larger firms because they are better known.)
The five types of value are as follows:
1. Functional value relates to the product’s or the service’s ability to perform its utilitarian purpose. Woodruff (1997) identified that functional value can have several dimensions.Robert B. Woodruff, “Customer Value: The Next Source of Competitive Advantage, Journal of the Academy of Marketing Science 25, no. 2 (1997): 139. One dimension would be performance related. This relates to characteristics that would have some degree of measurability, such as appropriate performance, speed of service, quality, or reliability. A car may be judged on its miles per gallon or the time to go from zero to sixty miles per hour. These concepts can also be seen when evaluating a garage that is performing auto repairs. Customers have an expectation that the repairs will be done correctly, that the car will not have to be brought back for additional work on the same problem, and that the repairs will be done in a reasonable amount of time. Another dimension of functional value might consider the extent to which the product or the service has the correct features or characteristics. In considering the purchase of a laptop computer, customers may compare different models on the basis of weight, battery lifetime, or speed. The notion of features or characteristics can be, at times, quite broad. Features might include aesthetics or an innovation component. Some restaurants will be judged on their ambiance; others may be judged on the creativity of their cuisine. Another dimension of functional value may be related to the final outcomes produced by a business. A hospital might be evaluated by its number of successes in carrying out a particular surgical procedure.
2. Social value involves a sense of relationship with other groups by using images or symbols. This may appear to be a rather abstract concept, but it is used by many businesses in many ways. Boutique clothing stores often try to convey a chic or trendy environment so that customers feel that they are on the cutting edge of fashion. Rolex watches try to convey the sense that their owners are members of an economic elite. Restaurants may alter their menus and decorations to reflect a particular ethnic cuisine. Some businesses may wish to be identified with particular causes. Local businesses may support local Little League teams. They may promote fundraising for a particular charity that they support. A business, such as Ben & Jerry’s Ice Cream, may emphasize a commitment to the environment or sustainability.
3. Emotional value is derived from the ability to evoke an emotional or an affective response. This can cover a wide range of emotional responses. Insurance companies and security alarm businesses are able to tap into both fear and the need for security to provide value. Some theme parks emphasize the excitement that customers will experience with a range of rides. A restaurant may seek to create a romantic environment for diners. This might entail the presence of music or candlelight. Some businesses try to remind customers of a particular emotional state. Food companies and restaurants may wish to stimulate childhood memories or the comfort associated with a home-cooked meal. Häagen-Dazs is currently producing a line of all-natural ice cream with a limited number of natural flavors. It is designed to appeal to consumers’ sense of nostalgia.“Maturalism,” Trendwatching.com, accessed June 1, 2012, http://trendwatching.com/trends/maturialism/.
4. Epistemic value is generated by a sense of novelty or simple fun, which can be derived by inducing curiosity or a desire to learn more about a product or a service. Stew Leonard’s began in the 1920s as a small dairy in Norwalk, Connecticut. Today, it is a \$300 million per year enterprise of consisting of four grocery stores. It has been discussed in major management textbooks. These accomplishments are due to the desire to turn grocery shopping into a “fun” experience. Stew Leonard’s uses a petting zoo, animatronic figures, and costumed characters to create a unique shopping environment. They use a different form of layout from other grocery stores. Customers are required to follow a fixed path that takes them through the entire store. Thus customers are exposed to all items in the store. In 1992, they were awarded a Guinness Book world record for generating more sales per square foot than any food store in the United States.“Company Story,” Stew Leonards, accessed October 7, 2011, www.stewleonards.com/html/about.cfm. Another example of a business that employs epistemic value is Rosetta Stone, a company that sells language-learning software. Rosetta Stone emphasizes the ease of learning and the importance of acquiring fluency in another language through its innovative approach.
5. Conditional value is derived from a particular context or a sociocultural setting. Many businesses learn to draw on shared traditions, such as holidays. For the vast majority of Americans, Thanksgiving means eating turkey with the family. Supermarkets and grocery stores recognize this and increase their inventory of turkeys and other foods associated with this period of the year. Holidays become a basis for many retail businesses to tap into conditional value.
Another way businesses may think about conditional value is to introduce a focus on emphasizing or creating a sociocultural context. Business may want to introduce a “tribal” element into their customer base, by using efforts that cause customers to view themselves as a member of a special group. Apple Computer does this quite well. Many owners of Apple computers view themselves as a special breed set apart from other computer users. This sense of special identity helps Apple in the sale of its other electronic consumer products. They reinforce this notion in the design and setup of Apple stores. Harley-Davidson does not just sell motorcycles; it sells a lifestyle. Harley-Davidson also has a lucrative side business selling accessories and apparel. The company supports owner groups around the world. All of this reinforces, among its customers, a sense of shared identity.
It should be readily seen that these five sources of value benefits are not rigorously distinct from each other. A notion of aesthetics might be applied, in different ways, across several of these value benefits. It also should be obvious that no business should plan to compete on the basis of only one source of value benefits. Likewise, it may be impossible for many businesses, particularly start-ups, to attempt to use all five dimensions. Each business, after identifying its customer base, must determine its own mix of these value benefits.
As previously pointed out, the notion of perceived customer value has two components—perceived value benefits and perceived value costs. When examining the cost component, customers need to recognize that it is more than just the cost of purchasing a product or a service. Perceived cost should also be seen having multiple dimensions (see Figure 2.3 "Components of Customer Value").
Perceived costs can be seen as being monetary, time, and psychic. The monetary component of perceived costs should, in turn, be broken down into its constituent elements. Obviously, the first component is the purchase price of the product or the service. Many would mistakenly think that this is the only element to be considered as part of the cost component. They fail to consider several other cost components that are quite often of equal—if not greater—importance to customers. Many customers will consider the operating cost of a product or a service. A television cable company may promote an introductory offer with a very low price for the cable box and its installation. Most customers will consider the monthly fees for cable service rather than just looking at the installation cost. They often use service costs when evaluating the value proposition. Customers have discovered that there are high costs associated with servicing a product. If there are service costs, particularly if they are hidden costs, then customers will find significantly less value from that product or service. Two other costs also need to be considered. Switching cost is associated with moving from one provider to another. In some parts of the country, the cost of heating one’s home with propane gas might be significantly less than using home heating oil on an annualized basis. However, this switch from heating oil to propane would require the homeowner to install a new type of furnace. That cost might deter the homeowner from moving to the cheaper form of energy. Opportunity cost involves selecting among alternative purchases. A customer may be looking at an expensive piece of jewelry that he wishes to buy for his wife. If he buys the jewelry, he may have to forgo the purchase of a new television. The jewelry would then be the opportunity cost for the television; likewise, the television would be the opportunity cost for the piece of jewelry. When considering the cost component of the value equation, businesspeople should view each cost as part of an integrated package to be set forth before customers. More and more car dealerships are trying to win customers by not only lowering the sticker price but also offering low-cost or free maintenance during a significant portion of the lifetime of the vehicle.
These monetary components are what we most often think of when we discuss the term cost, and, of course, they will influence the decision of customers; however, the time component is also vital to the decision-making process. Customers may have to expend time acquiring information about the nature of the product or the service or make comparisons between competing products and services. Time must be expended to acquire the product or the service. This notion of time would be associated with learning where the product or the service could be purchased. It would include time spent traveling to the location where the item would be purchased or the time it takes to have the item delivered to the customer. One also must consider the time that might be required to learn how to use the product or the service. Any product or service with a steep learning curve might deter customers from purchasing it. Firms can provide additional value by reducing the time component. They could simplify access to the product or the service. They may offer a wide number of locations. Easy-to-understand instructions or simplicity in operations may reduce the amount of time that is required to learn how to properly use the product or the service.
The psychic component of cost can be associated with those factors that might induce stress on the customer. There can be stress associated with finding or evaluating products and services. In addition, products or services that are difficult to use or require a long time to learn how to use properly can cause stress on customers. Campbell’s soup introduced a meal product called Souper Combos, which consisted of a sandwich and a cup of soup. At face value, one would think that this would be a successful product. Unfortunately, there were problems with the demands that this product placed on the customer in terms of preparing the meal. The frozen soup took twice as long to microwave as anticipated, and the consumer had to repeatedly insert and remove both the soup and the sandwich from the microwave.Calvin L. Hodock, Why Smart Companies Do Dumb Things (Amherst, NY: Prometheus Books, 2007), 65.
In summary, business owners need to constantly consider how they can enhance the benefits component while reducing the cost components of the value equation. Table 2.1 "Components of Perceived Benefit and Perceived Cost" summarizes the subcomponents of perceived value, the types of firms that emphasize those components, and the activities that might be necessary to either enhance benefits or reduce costs.
Table \(1\): Components of Perceived Benefit and Perceived Cost
Component Aspects Activities to Deliver
Components of Perceived Benefit
Functional
• Measurable quality
• Performance
• Reliability
• Support network
• Quality assurance in product and services
• Superior product and process design
• Selection of correct attributes
• Ability to improve product and operations
• Management of value chain
Social
• Builds identification with social, ethnic, or class group
• Emphasize lifestyle
• Development of interaction among people
• Build bonds within groups
• Market research correctly identifies customer base(s)
• Ability to build social community among customers
Emotional
• Assist in making one feel good about themselves
• Attachment to product or service
• Produces a change in how others see the user
• Trustworthiness
• Profound customer experience
• Aesthetics
• Market research understands psychological dimensions of customer base(s)
• Marketing content emphasizes desired psychological dimensions
• Reliability between marketing message and delivery
Epistemic
• Novelty
• Fun
• Evoke interest in product or service
• Interest in learning
• Produces a willing suspension of disbelief
• Creative personnel
• Creative product or process development
• Commitment to innovation
• Willingness to experiment
Conditional
• Produces meaning in a specific context
• Tied to particular events
• Tied to holidays
• Demonstrates social responsibility
• Flexibility (can alter physical facilities or marketing message depending on context)
• Management commitment to responsible action
Components of Perceived Cost
Monetary
• Reduce purchase price
• Reduce operating costs
• Reduce maintenance costs
• Reduce opportunity costs
• Superior design
• Operational efficiency
• Cost containment
• Quality control and assurance
• Easy acquisition
Time
• Reduce time to search for product or service
• Reduce time to purchase
• Reduced learning curve
• Broad distribution channels
• Web-based purchasing option
• Web-based information
• Superior design
Psychic
• Simplified use
• “Comfortable” feeling with regard to product or service use
• Superior design
• Ability to write clear instructions
Video Clip \(1\):
Customer Value
What creates a customer experience of value?
Video Clip \(2\):
Creating Customer Value
Creating value is the essence of a start-up. This video reviews the product and value created by a watch with no hands.
Video Clip \(3\):
Simple Rules: Three Logics of Value Creation
o)
Three core logics of the value proposition.
Video Clip \(4\):
Articulating Your Value Proposition
A video on how to better articulate your value proposition. This is informative but very long (about one hour).
Different Customers—Different Definitions
It is a cliché to say that people are different; nonetheless, it is true to a certain extent. If all people were totally distinct individuals, the notion of customer value might be an interesting intellectual exercise, but it would be absolutely useless from the standpoint of business because it would be impossible to identify a very unique definition of value for every individual. Fortunately, although people are individuals, they often operate as members of groups that share similar traits, insights, and interests. This notion of customers being members of some type of group becomes the basis of the concept known as market segmentation. This involves dividing the market into several portions that are different from each other.“Market Segmentation,” NetMBA Business Knowledge Center, accessed October 7, 2011, www.netmba.com/marketing/market/segmentation. It simply involves recognizing that the market at large is not homogeneous. There can be several dimensions along which a market may be segmented: geography, demographics, psychographics, or purchasing behavior. Geographic segmentation can be done by global or national region, population size or density, or even climate. Demographic segmentation divides a market on factors such as gender, age, income, ethnicity, or occupation. Psychographic segmentation is carried out on dimensions that reflect differences in personality, opinions, values, or lifestyle. Purchasing behavior can be another basis for segmentation. Differences among customers are determined based on a customer’s usage of the product or the service, the frequency of purchases, the average value of purchases, and the status as a customer—major purchaser, first-time user, or infrequent customer. In the business-to-business (B2B) environment, one might want to segment customers on the basis of the type of company.
Market segmentation recognizes that not all people of the same segment are identical; it facilitates a better understanding of the needs and wants of particular customer groups. This comprehension should enable a business to provide greater customer value. There are several reasons why a small business should be concerned with market segmentation. The main reason centers on providing better customer value. This may be the main source of competitive advantage for a small business over its larger rivals. Segmentation may also indicate that a small business should focus on particular subsets of customers. Not all customers are equally attractive. Some customers may be the source of most of the profits of a business, while others may represent a net loss to a business. The requirements for providing value to a first-time buyer may differ significantly from the value notions for long time, valued customer. A failure to recognize differences among customers may lead to significant waste of resources and might even be a threat to the very existence of a firm.
Video Clip \(5\):
Tom Peters: The Biggest Underserved Markets
Tom Peters, a self-described “professional loudmouth” who has been compared to Ralph Waldo Emerson, Walt Whitman, Henry David Thoreau, and H. L. (Henry Louis) Mencken, declares war on the worthless rules and absurd organizational barriers that stand in the way of creativity and success. In a totally outrageous, in-your-face presentation, Peters reveals the following: a reimagining of American business; two big markets—underserved and worth trillions; the top qualities of leadership excellence; and why passion, talent, and action must rule business today.
KEY TAKEAWAYS
• Essential to the success of any business is the need to correctly identify customer value.
• Customer value can be seen as the difference between a customer’s perceived benefits and the perceived costs.
• Perceived benefits can be derived from five value sources: functional, social, emotional, epistemic, and conditional.
• Perceived costs can be seen as having three elements: monetary, time, and psychic.
• To better provide value to customers, it may be necessary to segment the market.
• Market segmentation can be done on the basis of demographics, psychographics, or purchasing behavior.
EXERCISES
Frank’s All-American BarBeQue
Robert Rainsford is a twenty-eight-year-old facing a major turning point in his life. He has found himself unemployed for the first time since he was fifteen years old. Robert holds a BS degree in marketing from the University of Rhode Island. After graduation, a firm that specialized in developing web presences for other companies hired him. He worked for that firm for the last seven years in New York City. Robert rose rapidly through the company’s ranks, eventually becoming one of the firm’s vice presidents. Unfortunately, during the last recession, the firm suffered significant losses and engaged in extensive downsizing, so Robert lost his job. He spent months looking for a comparable position, yet even with an excellent résumé, nothing seemed to be on the horizon. Not wanting to exhaust his savings and finding it impossible to maintain a low-cost residence in New York City, he returned to his hometown in Fairfield, Connecticut, a suburban community not too far from the New York state border.
He found a small apartment near his parents. As a stopgap measure, he went back to work with his father, who is the owner of a restaurant—Frank’s All-American BarBeQue. His father, Frank, started the restaurant in 1972. It is a midsize restaurant—with about eighty seats—that Frank has built up into a relatively successful and locally well-known enterprise. The restaurant has been at its present location since the early 1980s. It shares a parking lot with several other stores in the small mall where it is located. The restaurant places an emphasis on featuring the food and had a highly simplified décor, where tables are covered with butcher paper rather than linen tablecloths. Robert’s father has won many awards at regional and national barbecue cook-offs, which is unusual for a business in New England. He has won for both his barbecue food and his sauces. The restaurant has been repeatedly written up in the local and New York papers for the quality of its food and the four special Frank’s All-American BarBeQue sauces. The four sauces correspond to America’s four styles of barbecue—Texan, Memphis, Kansas City, and Carolina. In the last few years, Frank had sold small lots of these sauces in the local supermarket.
As a teenager, Robert, along with his older sister Susan, worked in his father’s restaurant. During summer vacations while attending college, he continued to work in the restaurant. Robert had never anticipated working full-time in the family business, even though he knew his father had hoped that he would do so. By the time he returned to his hometown, his father had accepted that neither Robert nor Susan would be interested in taking over the family business. In fact, Frank had started to think about selling the business and retiring. However, Robert concluded that his situation called for what he saw as desperate measures.
Initially, Robert thought his employment at his father’s business was a temporary measure while he continued his job search. Interestingly, within the first few weeks he returned to the business, he felt that he could bring his expertise in marketing—particularly his web marketing focus—to his father’s business. Robert became very enthusiastic about the possibility of fully participating in the family business. He thought about either expanding the size of the restaurant, adding a takeout option, or creating other locations outside his hometown. Robert looked at the possibility of securing a much larger site within his hometown to expand the restaurant’s operations. He began to scout surrounding communities for possible locations. He also began to map out a program to effectively use the web to market Frank’s All-American BarBeQue sauce and, in fact, to build it up to a whole new level of operational sophistication in marketing.
Robert recognized that the restaurant was as much of a child to his father as he and his sister were. He knew that if he were to approach his father with his ideas concerning expanding Frank’s All-American BarBeQue, he would have to think very carefully about the options and proposals he would present to his father. Frank’s All-American BarBeQue was one of many restaurants in Fairfield, but it is the only one that specializes in barbecue. Given the turnover in restaurants, it was amazing that Frank had been able to not only survive but also prosper. Robert recognized that his father was obviously doing something right. As a teenager, he would always hear his father saying the restaurant’s success was based on “giving people great simple food at a reasonable price in a place where they feel comfortable.” He wanted to make sure that the proposals he would present to his father would not destroy Frank’s recipe for success.
1. Discuss how Robert should explicitly consider the customer value currently offered by Frank’s All-American BarBeQue. In your discussion, comment on the five value benefits and the perceived costs.
2. Robert has several possible options for expanding his father’s business—find a larger location in Fairfield, add a takeout option, open more restaurants in surrounding communities, incorporate web marketing concepts, and expand the sales of sauces. Review each in terms of value benefits.
3. What would be the costs associated with those options? | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/02%3A_Your_Business_Idea-_The_Quest_for_Value/2.01%3A_Chapter_Introduction.txt |
LEARNING OBJECTIVES
1. Understand that in order to provide customer value, firms must be able to listen to the voice of the customer.
2. Comprehend that businesses must attempt to identify those customers’ needs that are not being met by competitors.
3. Understand that businesses should segment their customers to better meet their needs.
4. Understand that businesses should consider the lifetime value of their various customer segments.
5. Understand that although some businesses can create products and services based on their intuitive insights, others need to conduct careful analyses.
6. Comprehend that new product or service development requires that organizations support creativity and innovation.
The perceived value proposition offers a significant challenge to any business. It requires that a business have a fairly complete understanding of the customer’s perception of benefits and costs. Although market segmentation may help a business better understand some segments of the market, the challenge is still getting to understand the customer. In many cases, customers themselves may have difficulty in clearly understanding what they perceive as the benefits and costs of any offer. How then is a business, particularly a small business, to identify this vital requirement? The simple answer is that a business must be open to every opportunity to listen to the voice of the customer (VOC). This may involve actively talking to your customers on a one-to-one basis, as illustrated by Robert Brown, the small business owner highlighted at the beginning of this chapter. It may involve other methods of soliciting feedback from your customers, such as satisfaction surveys or using the company’s website. Businesses may engage in market research projects to better understand their customers or evaluate proposed new products and services. Regardless of what mechanism is used, it should serve one purpose—to better understand the needs and wants of your customers.
Video Clip \(1\):
Robin Lawton—Voice of the Customer—What Do Customers Value?
International Management Technologies introduces Robin Lawton on the topic of “What Do Customers Value?”
Video Clip \(2\):
Robin Lawton—Voice of the Customer—Basis for Satisfaction Keynote
The customer-centered organization begins the transformation process by understanding how to uncover and understand the VOC.
Research
The chapter on"Marketing Basics" of this text will focus on the topic of marketing for small business. Naturally, it will include significant materials on the subject of market research. In this section, the focus will be on how a business may gain better insight into what constitutes the benefits and the costs for particular customers. It will take a broad view and leave the details of market research for "Marketing Basics".
Good research in the area of customer value simply means that one must stop talking to the customer—talking through displays, advertising, and/or a website. It means that one is always open to listening carefully to the VOC. Active listening in the service of better identifying customer value means that one is always open to the question of how your business can better solve the problems of particular customers.
If businesses are to become better listeners, what should they be listening for? What types of questions should they be asking their customers? Businesses should address the following questions when they attempt to make customer value the focus of their existence:
• What needs of our customers are we currently meeting?
• What needs of our customers are we currently failing to meet?
• Do our customers understand their own needs and are they aware of them?
• How are we going to identify those unmet customer needs?
• How are we going to listen to the VOC?
• How are we going to let the customer talk to us?
• What is the current value proposition that is desired by customers?
• How is the value proposition different for different customers?
• How—exactly—is our value proposition different from our competitors?
• Do I know why customers have left our business for our competitors?
Who Your Customer Is—and Is Not
At the beginning of this chapter, it was argued that your central focus must be the customer. One critical way that this might be achieved is by providing a customer with superior value. However, creating this value must be done in a way that assures that the business makes money. One way of doing this is by identifying and selecting those customers who will be profitable. Some have put forth the concept of customer lifetime value, a measure of the revenue generated by a customer, the cost generated for that particular customer, and the projected retention rate of that customer over his or her lifetime.Jack Schmid, “How Much Are Your Customers Worth?,” Catalog Age 18, no. 3 (2001): 63.,Jonathon Lee and Lawrence Feick, “Cooperating Word-of-Mouth Affection Estimating Customer Lifetime Value,” Journal of Database Marketing and Customer Strategy Management 14 (2006): 29.
This concept is popular enough that there are lifetime value calculator templates available on the web. The Harvard Business School created the calculator used in Exercise 2.1. It looks at the cost of acquiring a customer and then computes the net present value of the customer during his or her lifetime. Net present value discounts the value of future cash flows. It recognizes the time value of money. You can use one of two models: a simple model that examines a single product or a more complex model with additional variables. One of the great benefits in conducting customer lifetime value analysis is combining it with the notion of market segmentation. The use of market segmentation allows for recognizing that certain classes of customers may produce significantly different profits during their lifetimes. Not all customers are the same.
Let us look at a simple case of segmentation based on behavioral factors. Some customers make more frequent purchases; these loyal customers may generate a disproportionate contribution of a firm’s overall profit. It has been estimated that only 15 percent of American customers have loyalty to a single retailer, yet these customers generate between 55 percent and 70 percent of retail sales.“Loyalty Promotions,” Little & King Integrated Marketing Group, accessed December 5, 2011, www.littleandking.com/white_papers/loyalty_promotions.pdf. Likewise, a lifetime-based economic analysis of different customer segments may show that certain groups of customers actually cost more than the revenues that they generate.
Having segmented your customers, you will probably find that some require more handholding during and after the sale. Some customer groups may need you to “tailor” your product or service to their needs.“Determining Your Customer Perspective—Can You Satisfy These Customer Segments?,” Business901.com, accessed October 8, 2011, business901.com/blog1/determining-your-customer-perspective-can-you-satisfy-these-customer-segments. As previously mentioned, market segmentation can be done along several dimensions. Today, some firms use data mining to determine the basis of segmentation, but that often requires extensive databases, software, and statisticians. One simple way to segment your customers is the customer value matrix that is well suited for small retail and service businesses. It uses just three variables: recency, frequency, and monetary value. Its data requirements are basic. It needs customer identification, the date of purchase, and the total amount of purchase. This enables one to easily calculate the average purchase amount of each customer. From this, you can create programs that reach out to particular segments.Claudio Marcus, “A Practical yet Meaningful Approach to Customer Segmentation,” Journal of Consumer Marketing 15, no. 5 (1998): 494.
Video Clip \(3\):
Customer Lifetime Value
Jack Daly presents the “client for life” concept, featuring Continuity Programs BCL programs of customer loyalty outsourced service.
Video Clip \(4\):
Lifetime Customer Value
Patrick McTigue explains how critical the lifetime value of a customer is to your business. He covers some tips to integrate superb customer service into your business model.
What Your Gut Tells You
The role of market research was already discussed in this chapter. For many small businesses, particularly very small businesses, formal market research may pose a problem. In many small businesses, there may be a conflict between decision making made on a professional basis and decision making made on an instinctual basis.Malcolm Goodman, “The Pursuit of Value through Qualitative Market Research,” Qualitative Market Research: An International Journal 2, no. 2 (1999): 111. Some small business owners will always decide based on a gut instinct. We can point to many instances in which gut instinct concerning the possible success in product paid off, whereas a formal market research evaluation might consider the product to be a nonstarter.
In 1975, California salesman Gary Dahl came up with the idea of the ideal pet—a pet that would require minimal care and cost to maintain. He developed the idea of the pet rock. This unlikely concept became a fad and a great success for Dahl. Ken Hakuta, also known as Dr. Fad, developed a toy known as the Wallwalker in 1983. It sold over 240 million units.“What Are Wacky WallWalkers?,” DrFad.com, accessed December 2, 2011, www.drfad.com/fad_facts/wallwalker.htm. These and other fad products, such as the Cabbage Patch dolls and Rubik’s Cube, are so peculiar that one would be hard pressed to think of any marketing research that would have indicated that they would be viable, let alone major successes.
Sometimes it is an issue of having a product idea and knowing where the correct market for the product will be. Jill Litwin created Peas a Pie Pizza, which is a natural food pizza pie with vegetables baked in the crust. She knew that the best place to market her unique product would be in the San Francisco area with its appreciation of organic foods.Susan Smith Hendrickson, “Mining Her Peas and Carrots Wins Investors,” Mississippi Business Journal 32, no. 21 (2010): S4.
This notion of going with one’s gut instinct is not limited to fad products. Think of the birth of Apple Computer. The objective situation was dealing with a company whose two major executives were college dropouts. The business was operating out of the garage of the mother of one of these two executives. They were producing a product that up to that point had only a limited number of hobbyists as a market. None of this would add up to very attractive prospect for investment. You could easily envision a venture capitalist considering a possible investment asking for a market research study that would identify the target market(s) for its computers. None existed at the company’s birth. Even today, there is a strong indication that Apple does not rely heavily on formal marketing research. As Steve Jobs put it,
It’s not about pop culture, it’s not about fooling people, and it’s not about convincing people that they want something they don’t. We figure out what we want. And I think we’re pretty good at having the right discipline to think through whether a lot of other people are going to want it, too. That’s what we get paid to do. So you can’t go out and ask people, you know, what’s the next big [thing.] There is a great quote by Henry Ford, right? He said, “If I had asked my customers what they wanted, they would’ve told me ‘A faster horse.’”Alain Breillatt, “You Can’t Innovate Like Apple,” Pragmatic Marketing 6, no. 4, accessed October 8, 2011, www.pragmaticmarketing.com/publications/magazine/6/4/you_cant_innovate_like_apple.
The Voice of the Customer—QFD
Quality function deployment (QFD) is an approach that is meant to take the VOC concept seriously and uses it to help design new products and services or improve existing ones. It is an approach that was initially developed in Japan for manufacturing applications. It seeks “to transform user demands into design quality, to deploy the functions forming quality, and to deploy methods for achieving the design quality into subsystems and component parts, and ultimately to specific elements.”Yoji Akao, Quality Function Deployment: Integrating Customer Requirements into Product Design (New York: Productivity Press, 1990), 17. To put it more clearly, QFD takes the desires of consumers and explores how well the individual activities of the business are meeting those desires. It also considers how company activities interact with each other and how well the company is meeting those customer desires with respect to the competition. It achieves all these ends through the means of a schematic; see Figure \(1\): , which is known as the house of quality. The schematic provides the backbone for the entire QFD process. A comprehensive design process may use several houses of quality, moving from the first house, which concentrates on the initial specification of customer desires, all the way down to developing a house that focuses on the specification for parts or processes. Any house is composed of several components:
• Customer requirements (the whats). Here you identify the elements desired by customers; this section also contains the relative importance of these needs as identified by customers.
• Engineering characteristics (the hows). This is the means by which an organization seeks to meet customer needs.
• Relationship matrix. This illustrates the correlations among customer requirements and engineering characteristics. The degree of the correlation may be represented by different symbols.
• “Roof” of the house. This section illustrates the correlations among the engineering characteristics and reveals synergies that might exist among the engineering characteristics.
• Competitive assessment matrix. This is used to evaluate the position of a business with respect to its competition.
• “Basement.” This section is used for assessing the engineering characteristics or setting target values. The “basement” enables participants to instantly see the relative benefits of the activities undertaken by a company in meeting consumer desires by multiplying the values in each cell by the weight of the “why” and then adding the values together.
Although it might initially appear to be complex, QFD provides many benefits, including the following: (1) reduces time and effort during the design phase, (2) reduces alterations in design, (3) reduces the entire development time, (4) reduces the probability of inept design, (5) assists in team development, and (6) helps achieve common consensus.Gerson Tontini, “Deployment of Customer Needs in the QFD Using a Modified Kano Model,” Journal of the Academy of Business and Economics 2, no. 1 (2003).
Unfortunately, QFD is most often associated with manufacturing. Few realize that it has found wide acceptance in many other areas—software development, services, education, amusement parks, restaurants, and food services. (For examples of these applications of QFD, go to http://www.mazur.net/publishe.htm.) Further, company size should not be seen as a limitation to its possible application. The QFD approach, in a simplified form, can be easily and successfully used by any business regardless of its size.Glen Mazur, “QFD for Small Business: A Shortcut through the Maze of Matrices” (paper presented at the Sixth Symposium on Quality Function Deployment, Novi, MI, June 1994). Its visual nature makes it extremely easy to comprehend, and it can convey to all members of the business the relative importance of the elements and what they do to help meet customers’ expectations. Figure \(2\): illustrates this by providing a simplified house of quality chart for a restaurant.
Video Clip \(5\):
Quality Function Deployment Tutorial
This gives a brief overview of QFD.
QFD Analysis and Excel
Some companies provide Excel-based software that can assist in conducting a QFD analysis. This shows a template in the QI Macros software to help structure your thinking, making sure nothing is left out. For more information and to download a 30-day trial of the QI Macros, including the QFD template, see www.qimacros.com/six-sigma-articles.html.
How to Become a Better Listener
Although some succeed by listening to their instincts—their inner voices—it is highly advisable to all businesses to be proactive in trying to listen to the VOC. Listening to the customer is the domain of market research. However, it should not be surprising that many small businesses have severe resource constraints that make it difficult for them to use complex and sophisticated marketing and market research approaches.David Carson, Stanley Cromie, Pauric McGowan, Jimmy Hill, Marketing and Entrepreneurship in Small and Midsize Enterprises (Hemel Hempstead, UK: Prentice-Hall, 1995), 108. To some extent, this is changing with the introduction of powerful, yet relatively low cost, web-based tools and social media. These will be discussed in greater detail in Section 2.4.2 "Digital Technology and E-Environment Implications" of this chapter. Another restriction that a small business may face in the area of marketing is that the owner’s marketing skills and knowledge may not be very extensive. The owners of such firms may opt for several types of solutions. They may try to mimic the marketing techniques employed by larger organizations, drawing on what was just mentioned. They may opt for sophisticated but easy to use analytical tools, or they may just simply take marketing tools and techniques and apply them to the small business environment.Malcolm Goodman, “The Pursuit of Value through Qualitative Market Research,” Qualitative Market Research: An International Journal 2, no. 2 (1999): 111.
The most basic and obvious way to listen to customers is by talking to them. All businesses should support programs in which employees talk to customers and then record what they have to say about the product or the service. It is important to centralize these observations.
Other ways of listening to customers are through comment cards and paper and online surveys. These approaches have their strengths and limitations (see Note 2.31 "Video Clip 2.11"). Regardless of these limitations, they do provide an insight into your customers. Another way one can gather information about customers is through loyalty programs. Loyalty programs are used by 81 percent of US households.Shallee Fitzgerald, “It’s in the Cards,” Canadian Grocer 118, no. 10 (2004/2005): 30. Social media options—see Section 2.4.2 "Digital Technology and E-Environment Implications"—offer a tremendous opportunity to not only listen to your customer but also engage in an active dialog that can build a sustainable relationship with customers.
Video Clip \(6\):
Listen to Your Customers and Express How Much You Care
This video details how easy and simple it is to show that you listen to your customers and care about them.
Video Clip \(7\):
Ask, Listen, and Retain Video #4: Listening and Analyzing What Your Customers Say?
This is the fourth in a series of videos on listening to customers. This video covers how to analyze any disengaged or disgruntled customers. Once a customer is identified, our process ensures that action is taken to reengage the customer by dealing with the concerns at hand. But most importantly, the process encourages the development of a relationship between the customer and branch level management.
Website
Cisco Website for Innovation
A web forum for small businesses to share information: communities.cisco.com/community/technology/collaboration/business/blog/tags/innovation.
KEY TAKEAWAYS
• Businesses must become proactive in attempting to identify the value proposition of their customers. They must know how to listen to the VOC.
• Businesses must make every effort to identify the unmet needs of their customers.
• Businesses should recognize that customer segmentation would enable them to better provide customer value to their various customers.
• Businesses should think in terms of computing the customer lifetime value within different customer segments.
• Intuition can play an important role in the development of new products and services.
• Tools and techniques such as QFD assist in the design of products and services so that a business may be better able to meet customer expectations.
• Innovation can play a key role in creating competitive advantage for small businesses.
• Innovation does not require a huge investment; it can be done by small firms by promoting creativity throughout the organization.
• Small businesses must be open to new social and consumer trends. Readily available technology can help them in identifying such trends.
EXERCISES
1. The Harvard Business School provides an online customer lifetime value calculator at hbsp.harvard.edu/multimedia/flashtools/cltv/index.html. You provide some key values, and it computes the net present value of customer purchases. Go to the site and use the following data. What impact does changing the customer retention have on the value of the customer?
Average spent per purchase \$250.00
Average number of purchases per period 4
Direct marketing cost per period per year \$30
Average gross margin 20%
Average retention rate 25%, 35%, 50%, 70%, 80%, and 90%
Annual discount rate 10%
2. Imagine you are planning to open a boutique clothing store in the downtown section of a major city in the United States. You are interested in using a QFD chart to help you design the store. Identify the customer requirements (whats) in the engineering characteristics (hows). You need not to conduct a full-blown QFD analysis but at least show the degree of relationship between customer requirements and engineering characteristics.
3. You are the owner of a children’s clothing store in a prosperous suburban community. What methods and techniques might you use to become more adept at listening to the VOC? Outline specific programs that go beyond just talking to your customer that might enable you to better understand their notion of value. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/02%3A_Your_Business_Idea-_The_Quest_for_Value/2.03%3A_Knowing_your_customers.txt |
LEARNING OBJECTIVES
1. Understand that creativity and innovation are critical for small businesses.
2. Realize that innovation need not be limited to the creation of new products and services. It may involve seeing new uses for a product, new ways of packaging a product, or new ways of marketing a product.
3. Understand that creativity and innovation must be nurtured in any organization and that there are several areas small businesses must learn to avoid in order to promote creativity.
4. Realize that small businesses should be aware of social and consumer trends, which has been made easier because of the existence of online data sources.
Small businesses have always been a driver of new products and services. Many products and inventions that we might commonly associate with large businesses were originally created by small businesses, including air-conditioners, Bakelite, the FM radio, the gyrocompass, the high resolution computed axial tomography scanner, the outboard engine, the pacemaker, the personal computer, frozen food, the safety razor, soft contact lenses, and the zipper.Jerry Katz and Richard Green, Entrepreneurial Small Business, 2nd ed. (New York: McGraw-Hill, 2009), 17. This creativity and innovative capability probably stems from the fact that smaller businesses, which may lack extensive financial resources, bureaucratic restraints, or physical resources, may find a competitive edge by providing customers value by offering new products and services. It is therefore important to consider how small businesses can foster a commitment to creativity and innovation.
Creativity and Innovation
One way smaller firms may compete with their larger rivals is by being better at the process of innovation, which involves creating something that is new and different. It need not be limited to the creation of new products and services. Innovation can involve new ways in which a product or a service might be used. It can involve new ways of packaging a product or a service. Innovation can be associated with identifying new customers or new ways to reach customers. To put it simply, innovation centers on finding new ways to provide customer value.
Although some would argue that there is a difference between creativity and innovation (see Note 2.38 "Video Clip 2.13"), one would be hard pressed to argue that creativity is not required to produce innovative means of constructing customer value. An entire chapter, even an entire book, could be devoted to fostering creativity in a small business. This text will take a different track; it will look at those factors that might inhibit or kill creativity. Alexander Hiam (1998) identified nine factors that can impede the creative mind-set in organizations:Alexander Hiam, Creativity (Amherst, MA: HRD Press, 1998), 6.
1. Failure to ask questions. Small-business owners and their employees often fail to ask the required why-type questions.
2. Failure to record ideas. It does not help if individuals in an organization are creative and produce a large number of ideas but other members of the organization cannot evaluate these ideas. Therefore, it is important for you to record and share ideas.
3. Failure to revisit ideas. One of the benefits of recording ideas is that if they are not immediately implemented, they may become viable at some point in the future.
4. Failure to express ideas. Sometimes individuals are unwilling to express new ideas for fear of criticism. In some organizations, we are too willing to critique an idea before it is allowed to fully develop.
5. Failure to think in new ways. This is more than the cliché of “thinking outside the box.” It involves new ways of approaching and looking at the problem of providing customer value.
6. Failure to wish for more. Satisfaction with the current state of affairs or with the means of solving particular problems translates into an inability to look at new ways of providing value to customers.
7. Failure to try to be creative. Many people mistakenly think that they are not at all creative. This means you will never try to produce new types of solutions to the ongoing problems.
8. Failure to keep trying. When attempting to provide new ways to create customer value, individuals are sometimes confronted with creative blocks. Then they simply give up. This is the surest way to destroy the creative thinking process.
9. Failure to tolerate creative behavior. Organizations often fail to nurture the creative process. They fail to give people time to think about problems; they fail to tolerate the “odd” suggestions from employees and limit creativity to a narrow domain.
One of the great mistakes associated with the concept of innovation is that innovation must be limited to highly creative individuals and organizations with large research and development (R&D) facilities.“Innovation Overload,” Trendwatching.com, accessed December 2, 2011, trendwatching.com/trends/pdf/2006_08_innovation_overload.pdf. The organization’s size may have no bearing on its ability to produce new products and services. More than a decade ago, studies began to indicate that small manufacturing firms far exceeded their larger counterparts with respect to the number of innovations per employee.A. Roy Thurik, “Introduction: Innovation in Small Business,” Small Business Economics 8 (1996): 175.
A more recent study, which covered the period from 2003 to 2007, showed that R&D performance by small US companies grew slightly faster than the comparable performance measures for larger US firms. During that period, small firms increased their R&D spending by more than 40 percent, compared to an approximate 33 percent increase for large companies. These smaller firms also increased their employment of scientists and engineers at a rate approximately 75 percent greater than larger companies. Further, the results of this study, which are presented in Figure \(1\), illustrate that particularly since 2004, smaller businesses have outpaced their larger rivals with respect to R&D intensity. The term R&D intensity refers to the current dollars spent on R&D divided by a company’s reported sales revenue.L. Rausch, “Indicators of U.S. Small Business’s Role in R&D,” National Science Foundation (Info Brief NSF 10–304), March 2010.
It cannot be over emphasized that innovation should not be limited to the creation of products or services. The following are just a few examples of innovation beyond the development of new products:
• In 1965, Thomas Angove, an Australian winemaker, developed the idea of packaging wine in boxes that had a polyethylene bladder. The package was not only more convenient to carry but also kept the wine fresher for a longer period of time.Jancis Robinson, “The Oxford Companion to Wine,” 2nd ed., Wine Pros Archive, accessed October 8, 2011, www.winepros.com.au/jsp/cda/reference/oxford _entry.jsp?entry_id=430.
• Apple’s iPod was certainly an innovative product, but its success was clearly tied to the creation of the iTunes website that provided content.
• Baker Tweet alerts customers via Twitter any time a fresh batch of baked goods emerge from a participating baker’s oven.“Innovation Jubilation,” Trendwatching.com, accessed December 2, 2011, trendwatching.com/trends/innovationjubilation.
• Patrons at Wagaboo restaurants in Madrid can book specific tables online.“Transparency Triumph,” Trendwatching.com, accessed December 2, 2011, trendwatching.com/trends/transparencytriumph.
• Restaurants often mark up bottles of wine by 200 percent to 300 percent. Several restaurants in New York, Sydney, and London have developed relationships with wine collectors. The collectors may have more wine than they can possibly drink, so they offer the wine for sale in the restaurant, with the restaurant selling it at a straightforward markup of 35 percent. This collaboration with customers is beneficial for the wine collector, the restaurant, and the customer.
Video Clip \(1\):
Vijay Govindarajan: Innovation Is Not Creativity
An interview with Vijay Govindarajan on the difference between creativity and innovation.
Video Clip \(2\):
Where Good Ideas Come From
(click to see video)
This cartoon was developed for Steven Johnson’s book on innovation. He concluded that with today’s tools and environment, radical innovation is extraordinarily accessible to those who know how to cultivate it. Where Good Ideas Come From is essential reading for anyone who wants to know how to come up with tomorrow’s great ideas.
Video Clip \(3\):
Steven Johnson: Where Good Ideas Come From
This relatively long presentation (eighteen minutes) by Steven Johnson maps out the ideas presented in his book.
Video Clip \(4\):
Encouraging Innovation with Employees: Innovators Forum Guest Danika Davis
Danika Davis, Innovators Forum guest and CEO of the Northern California Human Resources Association, discusses the ways to reward innovation among employees and how to foster innovation in your small business. Discuss this and other topics at http://blogs.cisco.com/category/smallbusiness.
Video Clip \(5\):
Creating an Innovation Mind-set
Vijay Govindarajan discusses that to create an innovation mind-set, managers must bring in fresh voices from outside the company, encourage collaboration, and consider how emerging market needs can spur ideas for innovative offerings.
Video Clip \(6\):
Tom Peters: Innovation Is Actually Easy!
Tom Peters declares war on the worthless rules and absurd organizational barriers that stand in the way of creativity and success.
Video Clip \(7\):
How to Spot Disruptive Innovation Opportunities
Disruptive innovation occurs when an innovator brings something to market that is simple, convenient, accessible, and affordable. Here are some tips to help you pinpoint disruptive opportunities within your organization.
Social and Consumer Trends
Not all businesses have to concern themselves with social and consumer trends. Some businesses, and this would include many small businesses, operate in a relatively stable environment and provide a standard good or service. The local luncheonette is expected to provide standard fare on its menu. The men’s haberdasher will be expected to provide mainline men’s clothing. However, some businesses, particularly smaller businesses, could greatly benefit by recognizing an emerging social or consumer trend. Small businesses that focus on niche markets can gain sales if they can readily identify new social and consumer trends.
Trends differ from fads. Fads may delight customers, but by their very nature, they have a short shelf life. Trends, on the other hand, may be a portend of the future.MakinBacon, “Why and How to Identify Real Trends,” HubPages, accessed October 8, 2011, hubpages.com/hub/trendsanalysisforsuccess. Smaller businesses may be in a position to better exploit trends. Their smaller size can give them greater flexibility; because they lack an extensive bureaucratic structure, they may be able to move with greater rapidity. The great challenge for small businesses is to be able to correctly identify these trends in a timely fashion. In the past, businesses had to rely on polling institutes for market research as a way of attempting to identify social trends. Harris Interactive produced a survey about the obesity epidemic in America. This study showed that the vast majority of Americans over the age of 25 are overweight. The percentage of those overweight has steadily increased since the early 1980s. The study also indicated that a majority of these people desired to lose weight. This information could be taken by the neighborhood gym, which could then create specialized weight-loss programs. Recognizing this trend could lead to a number of different products and services.“Identifying and Understanding Trends in the Marketing Environment,” BrainMass, accessed June 1, 2012, http://www.brainmass.com/library/viewposting.php?posting_id=51965.
In the past, the major challenge for smaller businesses to identify or track trends was the expense. These firms would have to use extensive market research or clipping services. Today, many of those capabilities can be provided online, either at no cost or a nominal cost.Rocky Fu, “10 Excellent Online Tools to Identify Trends,” Rocky FU Social Media & Digital Strategies, May 9, 2001, accessed October 8, 2011, www.rockyfu.com/blog/10-excellent-online-tools-to-identify-trends. Google Trends tracks how often a particular topic has been searched on Google for a particular time horizon. The system also allows you to track multiple topics, and it can be refined so that you can examine particular regions with these topics searched. The data are presented in graphical format that makes it easy to determine the existence of any particular trends. Google Checkout Trends monitors the sales of different products by brand. One could use this to determine if seasonality exists for any particular product type. Microsoft’s AdCenter Labs offers two products that could be useful in tracking trends. One tool—Search Volume—tracks searches and also provides forecasts. Microsoft’s second tool—Keyword Forecast—provides data on actual searches and breaks it down by key demographics. Facebook provides a tool called Lexicon. It tracks Facebook’s communities’ interests. (Check out the Unofficial Facebook Lexicon Blog for a description on how to fully use Lexicon.) The tool Twist tracks Twitter posts by subject areas. Trendpedia will identify articles online that refer to particular subject areas. These data can be presented as a trend line so that one can see the extent of public interest over time. The trend line is limited to the past three months. Trendrr tracks trends and is a great site for examining the existence of trends in many areas.
Online technology now provides even the smallest business with the opportunity to monitor and detect trends that can be translated into more successful business ventures.
Websites
• Google Trends: www.google.com/trends
• Microsoft AdCenter Labs: adlab.microsoft.com
• Microsoft AdCenter Labs Keyword Forecast: adlab.microsoft.com/Keyword-Forecast/default.aspx
• Unofficial Facebook Lexicon Blog: www.facebooklexicon.com
• Twitter Grader: http://tweet.grader.com
• Trendpedia: www.attentio.com
• BuzzMetrics: www.nmincite.com/wp-content/uploads/2010/06/MyBuzzMetrics.pdf
• NielsenBuzzMetrics: nielsen-online.com/products_buzz.jsp?section=pro_buzz
• Trendrr: www.trendrr.com
• Google Analytics: code.google.com/apis/checkout/developer/checkout_analytics_integration.html
KEY TAKEAWAYS
• Small businesses must be open to innovation with respect to products, services, marketing methods, and packaging.
• Creativity in any organization can be easily stifled by a variety of factors. These should be avoided at all cost.
• Small businesses should be sensitive to the emergence of new social and consumer trends.
• Online databases can provide even the smallest of businesses with valuable insights into the existence and emergence of social and consumer trends.
EXERCISES
1. Generate a new product or service idea. You should be able to describe it in two or three sentences. Work with your fellow students in groups of three to four and then ask them to review their ideas and select one for presentation in class. At the end of the presentation, everyone should write what he or she saw as occurring during the process of group decision making. Did it make the process more creative? Did it allow for the better evaluation of ideas? Do they see problems with this type of group innovation thinking?
2. In Exercise 1, students were asked to develop a new product or service. Repeat this exercise but now ask students to think up an innovation for an existing product in the area of either packaging or marketing. Again, ask them the following questions after the group decision-making process: (a) Did it make the process more creative? (b) Did it allow for the better evaluation of ideas? (c) Do they see problems with this type of group innovation thinking?
3. Consider that you are at the gym mentioned earlier in this section. This gym is considering adding a weight-loss program. Use some of the online tracking programs with respect to the term weight loss program. What useful information could be extracted from these searches? | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/02%3A_Your_Business_Idea-_The_Quest_for_Value/2.04%3A_Sources_of_Business_Ideas.txt |
LEARNING OBJECTIVES
1. Understand that providing customer value can have a tremendous positive impact on a firm’s cash flow.
2. Understand that determining customer value is critical to the survival of any business. Customer relationship marketing software, which previously was available only to the largest firms, is now priced so that even small firms can extract their benefit.
In Chapter 1 "Foundations for Small Business", customer value, cash flow, and digital technology and the e-environment were compared to various parts of the human body and overall health. This analogy was made because these themes are viewed as essential to the survival of any small business in the twenty-first century. Individually, these threads may not ensure survival, but taken together, the probability of surviving and prospering increases tremendously. Their importance is so great for a twenty-first century enterprise that they are not only embedded in each chapter but also highlighted in each chapter. Throughout the text, each chapter’s topic will be reviewed through the prism of these three threads.
Focusing on Providing Value to the Customer
The entire thrust of this chapter has been on the topic of customer value. The essence of the argument presented in this chapter has been that any business that fails to provide perceived customer value is a business that will probably fail.
Value’s Impact on Cash Flow
It is not that difficult to envision how the successful creation of customer value can significantly enhance a firm’s cash flow (see Figure 2.7 "Superior Cash Flow as a Result of Superior Customer Value"). Firms that are successful in correctly identifying the sources of value should be able to provide superior customer value. This may produce a direct relationship with their customers. These relationships produce a back-and-forth flow of information that should enable the business to further enhance its ability to provide customer value. A successful relationship enhances the probability of customer loyalty, hopefully building a strong enough relationship to produce a customer for life.
Customer loyalty can have several positive outcomes. Loyalty will result in increased sales from particular customers. This does more than generate additional revenue; as the business comes to better understand its loyal customers, the cost of serving those customers will decrease. Increased sales, with declining costs, translate into a significant boost in cash flow. Customer loyalty also has the benefit of generating positive word-of-mouth support for a business. Word-of-mouth advertising can be one of the most powerful forms of advertising and can be seen as a form of free advertising. It has been estimated that word-of-mouth advertising is the primary factor in 20–50 percent of all purchasing decisions. A study by the US office of consumer affairs (formally known as the Federal Trade Commission) indicated that satisfied customers are likely to tell five other customers about their positive experiences.James L. Heskitt, W. Earl Sasser, and Leonard A. Schlesinger, The Service Profit Chain (New York: Free Press, 1997): 88. It is particularly powerful in the case of first-time buyers or with expensive items and those items that require extensive research before purchase.Colette Weil, “Word-of-Mouth Marketing,” Home Care Magazine 33, no. 1 (2010): 49. Positive word-of-mouth advertising coming from loyal customers can generate additional sales, which in turn enhances cash flow. The creation of superior customer value combined with an intelligent cost control system inevitably produces superior cash flow.
Digital Technology and E-Environment Implications
In the last decade, firms desiring to better understand the customer’s notion of perceived value relied on customer relationship management (CRM) software. Customer relationship management refers to a service approach that hopes to build a long-term and sustainable relationship with customers that has value for both the customer and the company. It is a generic term covering different software and browser applications that collect information about customers and organize it in a way that may be used effectively by management. This term will be referred to repeatedly throughout this text. CRM can assist small businesses with respect to customer value in the following ways:“CRM (Customer Relationship Management,” About.com, accessed October 8, 2011, sbinfocanada.about.com/cs/marketing/g/crm.htm.
• It can assist in identifying and targeting the best customers of a business.
• It can help a company develop individualized relationships with customers, thus improving customer satisfaction.
• It can improve customer service, particularly with the best customers.
• It can help management and employees better understand customers and therefore deliver better value to them.
Although originally designed for large corporations with large budgets, CRM is now available to many firms in the small business environment. In addition to being expensive, original fees-first CRM packages were far too complex for small businesses.Maria Verlengia, “CRM for the Small Business, Part 1: When Is It Time to Invest?,” CRMBuyer, February 16, 2010, accessed October 8, 2011, www.crmbuyer.com/story/69349.html. Now there are many CRM packages that are specifically dedicated to the small business environment.
To maximize the benefits of the CRM package, several factors should be considered. Small businesses should have a clear idea as to their requirements for the CRM solution. Some questions that should be considered are as follows:Maria Verlengia, “CRM for the Small Business, Part 2: Choosing the right CRM Tool,” CRMBuyer, February 23, 2010, accessed October 8, 2011, www.crmbuyer.com/story/69402.html.
• Is our focus on increasing the number of customers?
• Are we attempting to improve our relationships with our customers?
• Will the CRM package help us with e-mail marketing?
• How are we seeking to more effectively use the Internet to communicate with our customers?
• Will we be able to integrate social media?
In some ways, integrating the CRM package may be easier in the small business than in large business because you can overcome some bureaucratic hurdles. However, you must always recognize that the successful implementation of any software package is highly dependent on your employees.Maria Verlengia, “CRM for the Small Business, Part 4: Getting the New System Up and Running,” CRMBuyer, March 9, 2010, accessed October 8, 2011, www.crmbuyer.com/story/69502.html%22.
Perhaps the greatest incentive for small businesses to adopt CRM packages is the advent of cloud computing. Cloud computing, also known as SaaS (software as a service), refers to the situation in which vendor software does not reside on the computer system of a small business.“Great Customer Relations Management Tools,” St. Germane, accessed June 1, 2012, http://www.stgermaine.ca/great-crm-customer-relationship-management-tools/. All aspects of the system, from maintenance to backups, are the responsibility of the vendor. This minimizes the need for computing capability by the small business. Cloud computing can significantly reduce the course of acquiring and maintaining such computer programs.
KEY TAKEAWAYS
• Focusing on customer value improves customer loyalty, which improves cash flow.
• Customer loyalty can translate into positive word-of-mouth advertising, which increases sales and cash flow.
• Customer value can be improved through the correct use of CRM software.
• CRM software was formerly so complex and expensive that it was suitable for large corporations only. Now it can be used by the smallest of businesses to improve customer value.
EXERCISE
1. Assume you are managing a small business that is experiencing a very rapid increase in sales. Unfortunately, this increase in sales has been accompanied by an increase in customer complaints that your company is letting “things slip between the cracks.” You recognize that the old way of interacting with customers is no longer sufficient. You have a sales force of ten, and you would like to supply each with access to a basic CRM package. Go online and identify several CRM packages that might be appropriate for your business. Specify each package’s capabilities and cost. How would you go about selecting one of these packages? Write a report outlining the information you collected and the logic of your selection.
Disaster Watch
The failure to accurately understand a customer’s notion of perceived value is the surest recipe for complete disaster. This may be a large requirement because in many cases customers may be quite unsure about their own notion of value or have difficulty in explicitly articulating that notion. One would think that larger firms—those with much greater resources—would be in a better position to clearly identify their customers’ notion of value. This does not seem to be the case, however, with all large firms. Even they may stumble in attempting to develop products and services that they believe will meet their customers’ concept of value. In this feature, several noticeable product failures are identified. Almost every failure came from a large corporation. This is because we are much more familiar with the failures of large corporations that invest considerable time and effort into the introduction of new products and services. There is far less press given to the failures of small businesses that misread or misunderstand their customers’ notion of perceived value.
When Your Notion of Value Is Not the Same as Your Customer’s
Perhaps the most famous company failure to adequately gauge customers’ notion of value revolved around the introduction of New Coke. In 1985, Coca-Cola was under great pressure, losing market share to its major rival, Pepsi. In an effort to recapture market share, particularly among the younger segment of the market, Coca-Cola initiated one of the largest market research projects of its time. It conducted extensive taste tests throughout the nation and investigated the possibility of introducing a new formula for Coke. The results from the taste tests were positively skewed toward a sweeter version. There was some debate whether this should be an additional option to the Coke line of products or whether it should replace the standard formula for Coke. Although there were some negative indications about this new formula from focus groups, Coke decided to begin a major introduction of New Coke, but it was universally considered a major disaster. Public reaction, particularly in the South, was very negative toward New Coke. A lot of this negative reaction stemmed from the fact that Coke had become an iconic product in the nation, particularly in southern regions. Hundreds of thousands of people called and wrote to Coca-Cola expressing their dissatisfaction with this decision.Constance L. Hayes, The Real Thing: Truth and Power at the Coca-Cola Company (New York: Random House, 2004), 211. Coca-Cola failed to recognize the emotional and social components of value for a significant number of its customers.
Many firms fail to realize that they have established, in the eyes of customers, a very strong sense of how a particular company provides value. These companies may wish to diversify their product or service line while at the same time attempting to exploit their brand name. However, customers may perceive the companies as being so closely identified with the original product that any attempt at diversification may be difficult, if not guaranteed to be a failure. Some examples of this are as follows: Smith & Wesson, noted for handguns, attempted to sell a line of mountain bikes in 2002; Coors beer attempted to sell bottled water; and Colgate toothpaste tried to produce a line of products known as Colgate Kitchen Entrées.“The Top 25 Biggest Product Flops of All Time,” Daily Finance, accessed December 2, 2011, www.dailyfinance.com/photos/top-25-biggest-product-flops-of-all-time.
Companies may produce products that run directly counter to their customers’ notion of perceived value. McDonald’s produces value for its customers by offering fast food and a family-friendly environment. Several years ago, in an effort to capture a different segment of the market, McDonald’s introduced the Arch Deluxe hamburger, which was supposedly designed for more adult tastes. Even with a \$100 million marketing campaign, McDonald’s was unable to “sell” this product to its customers.
One health management organization invested more than one third of \$1 million on a computerized member information service. The intention was that this would be more efficient, thus providing greater benefit value to customers. Their mistake was not recognizing that members preferred conversing with human beings. Customers did not want to use a computerized system.Scott MacStravic, “Questions of Value in Healthcare,” Marketing Health Services 17, no. 4 (1997): 50. Although customers of health-care organizations appreciate factors such as ease of access and reliability, they tend to view with greater importance and value the perceived expression of human compassion.
The dry cleaning business industry in the United States is extremely fragmented. The largest 50 firms control only 40 percent of the total industry’s business. This translates into a simple fact: dry cleaning is still the domain of small business owners, with nearly 35,000 establishments throughout the United States. A decade ago, two firms wanted to change the structure of the industry. Both companies thought that they would be able to provide unique sources of value to customers. Mixell Technologies operates a franchise—Hanger’s Cleaners—that focuses on environmentally responsible dry cleaning. Dry cleaning normally involves some fairly volatile chemicals. Hanger’s Cleaners used a new process developed by Mixell Technology. The belief was that customers would respond to this much more environmentally friendly technology. Initially, the cost of this technology was two to three times the cost of normal dry cleaning equipment. One of the major investors in this firm was Ken Langone, a cofounder of Home Depot. In the same time frame, Tom Stemberg, the founder of Staples, was investing in a dry cleaning franchise called Zoots. Their focus on customer value was the ability to have employees pick up clothes for dry cleaning and drop off the clean clothes at the customer’s home residence or work.“An Analysis of the Competitiveness Strategies of Zoots,” Cebu Ecommerce Writing Consultancy, accessed June 1, 2012, cebuecommerce.info/an-analysis -of-the-competitive-strategies-of-zoots-the-cleaner-cleaner/. Neither business prospered. Mixell has moved on to other applications of its technologies. Zoots has significantly reduced its number of outlets. The reality was that dry cleaning establishments produce low margins and require long hours and close identification with customers. Unfortunately for both businesses, even though they had an experienced executive staff, they failed to correctly identify the true sources of customer value.Companydatabase.org, accessed June 1, 2012, http://companydatabase.org/c/ recyclables-pick-up-service/products-services/zoots-corporation.html. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/02%3A_Your_Business_Idea-_The_Quest_for_Value/2.05%3A_The_Three_Threads.txt |
Westbrook Lobster
Source: Used with permission, Michael Larivere, manager, Westbrook Lobster, Wallingford, CT.
In 1957, Westbrook Lobster opened in Westbrook, Connecticut, as a specialized lobster and fish market. As time went on, the company expanded to offer a comprehensive range of fish, shrimp, and prepared foods. In 1989, Larry Larivere, who grew up near the docks of New Bedford, Massachusetts, bought the business and had a dream of expanding the business with a seafood restaurant.
Fast forward to 2004. Larry and his two sons, Michael (an environmental science major) and Matthew (a business major), opened up their second restaurant in Wallingford, Connecticut. It overlooks the Quinnipiac River in the historic Yale Brother’s Mill built in the late 1670s. Originally a grain mill, later converted to a German and Britannia silver spoon factory, and finally converted into a restaurant, the building was rich with history.
Michael speaks easily about the value that Westbrook Lobster offers its customers: high quality food, great service…and visiting the tables while people are dining. He sees these visits as an important part of the relationships that he has built with his customers over the years. Westbrook customers eagerly await the monthly postcards that are sent out that feature dining specials, discounts, and coupons. He tries to get the postcards out early and actually receives phone calls if they are not received early. Many people have come to depend on them. Michael says that these postcards definitely give the restaurant its greatest return. The restaurant has a presence on Facebook, but that is geared to the bar crowd—a younger crowd.
Technology plays an important but mixed part in the restaurant’s operations. Michael says that it is tough to run a restaurant these days without technology tools like POS (point of service) systems. These systems include touch screens for placing orders and paying for food items. Interestingly, however, most food vendors still do their business face to face (or telephone to telephone), choosing to stick with personal relationships. Only a few suppliers, such as liquor vendors, accept orders online.
The current Westbrook Lobster website was created by Michael and Matthew using services from intuit.com. They built the site themselves and are proud to note that restaurant gift cards can now be purchased directly from the site. This is a perfect example of Web 2.0 capabilities.
As far as running the business, currently fifty employees strong, Larry Larivere (Dad) is brought in on the big decisions. Otherwise, Michael and Mathew run the restaurants on their own. There are currently no other family members in the business.
Westbrook Lobster continues to provide the freshest seafood available at competitive prices. The daily selection includes everything from locally harvested shellfish to fresh fish from waters up and down the East Coast. They also offer several “healthy” options that are made without butter or bread crumbs. These menu items are very popular and are especially attractive for people with food allergies or people who just want to eat a bit lighter. All their efforts continue to pay off. Westbrook Lobster was voted “Best Seafood Restaurant Statewide” in Connecticut Magazine 2009 and “Best Seafood in New Haven County” in Connecticut Magazine 2009 and 2010.
Larry, Michael, and Matthew invite you to Westbrook Lobster when you are in the area. Once you are there, you are family.
Source: “The Lobster Tale,” www.westbrooklobster.com/Wall...ally_home.html (accessed on October 8, 2011) and interview with Michael Larivere, October 11, 2010. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/03%3A_Family_Businesses/3.01%3A_Chapter_Introduction.txt |
Learning Objectives
1. Explain what a family business is.
2. Understand the role that family businesses play in the US economy.
3. Explain the advantages and disadvantages of family businesses.
“Family businesses are different.” “Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf.
BDO 2009 Report: “Focusing on Business Families”
There is no agreed-on definition of a family business. The percentage of ownership, the strategic control, the involvement of multiple generations, and the intention for the business to remain in the family are among the many criteria that experts use to distinguish family businesses from other types of businesses. Joseph H. Astrachan and Melissa Carey Shanker, “Family business’s Contribution to the U.S. Economy: A Closer Look,” Family Business Review 16, no. 3 (2003): 211–19. For the purposes of this chapter, however, a family business is defined as a business that is actively owned and/or managed by more than one member of the same family.“Family Businesses,” Entrepreneur, 2010, accessed October 8, 2011, www.entrepreneur.com/encyclopedia/term/82060.html. A family business can also be defined as the result of someone’s dream:
The story of every successful family business starts with someone who has the passion, confidence and courage to put his [or her] money where his [or her] mouth is…[These entrepreneurs] work incredibly hard, make things happen, are positive without being unrealistic and possess the resourcefulness to overcome all sorts of hurdles. They are also socially adept, capable of communicating effectively and good at inspiring others…“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.
Family business owners know that their roles are different from that of shareholders in companies owned by many public investors. In addition, “employees in family businesses know the difference that family control makes in their work lives, the company culture, and their career. Marketers appreciate the advantage that the image of a family business presents to customers. And families know that being in business together is a powerful part of their lives.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 1.
Market and Employment Presence
Because of the private nature of most family businesses, it is difficult to obtain accurate information about them. Joseph H. Astrachan and Shanker, “Family business’s Contribution to the U.S. Economy: A Closer Look,” Family Business Review 16, no. 3 (2003): 211–19. Complicating the situation is that most data sources do not distinguish between small family businesses, such as the local pizza parlor or deli, and large family businesses, such as Walmart, Mars, and Ford. “The reality is that family-based operations are represented across the full spectrum of American companies, from small businesses to large corporations.” “Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm. Within this context, the following has been observed: “Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm; and Stacy Perman, “Taking the Pulse of Family Business,” February 13, 2006, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/feb2006/sb20060210_476491.htm.
• Family businesses account for a staggering 50 percent of the gross domestic product (GDP).
• Although it may seem that this GDP contribution comes from thousands of small operations, 35 percent of the Fortune 500 companies are family companies.
• Family businesses account for 60 percent of US employment and 78 percent of the new jobs created.
• Family businesses represent one of the fastest growing sectors of the economy because their new job requirements outpace their current employment rates when compared to other types of businesses.
What this means is that family businesses continue to be a powerful economic force, no matter what their size and no matter how they are defined. “Family firms are the most common form of business structure; they employ many millions of people; and they generate a considerable amount of the world’s wealth.” “Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.
The focus of this chapter is on the small family business.
Video Link \(1\):
Mothers and Daughters Partner in Family Business
Advantages and Disadvantages of the Family Business
There are benefits to a family business, but there are disadvantages that must be considered as well. Starting a family business is not for everyone.
Advantages
A family business offers the following advantages:
• One of the popular misconceptions about family businesses is that they are unable to adapt easily to increasing competitiveness and technological progress. The reality is that family businesses frequently have the advantage of entrepreneurial spirit, flexibility, and opportunism.“Myths and Realities of Family Business,” 2002, accessed October 8, 2011, www.insead.edu/discover_insead/publications/docs/IQ03.pdf.
• It is believed by some that family firms are “too soft” and rarely reach their potential. The reality is that family businesses actually outperform public companies. Oftentimes, the marketplace forces public companies to make short-term decisions, whereas a family business has the advantage of having more freedom to make its decisions. Family businesses can adapt to market fluctuations more easily because they can afford to be patient. They have common goals, shared values, and a commitment to brand building.“Myths and Realities of Family Business,” 2002, accessed October 8, 2011, www.insead.edu/discover_insead/publications/docs/IQ03.pdf.
• Family-owned businesses are often seen as ideal because family members form a “grounded and loyal foundation” for the company, and family members tend to exhibit more dedication to their common goals. “Having a certain level of intimacy among the owners of a business can help bring about familiarity with the company and having family members around provides a built-in support system that should ensure teamwork and solidarity.”Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html.
• The culture of a family business is very different from that of a company you will find on Wall Street. “Family businesses frequently take a very long-term point of view. They’ll make investments that they don’t expect to pay off for 5 or 15 or 25 years…Culture in a family business is more frequently based on very personal and emotional values. It’s stronger because there are deeper roots and closer connections to the history of the company.”Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• Family businesses are becoming more and more attractive to undergraduate business students who face a bleak job and salary outlook for new grads. These undergrads are choosing to return to their family businesses directly after graduation instead of trying to find a job in corporate America or on Wall Street.Alison Damast, “Family Inc.: The New B-School Job Choice,” Bloomberg BusinessWeek, April 12, 2010, accessed October 8, 2011, www.BusinessWeek.com/print/bschools/content/apr2010/bs20100412_706043.htm.
• There is a common misperception that family businesses are less professional and rigorous in their behavior because of the relational nature of the businesses.“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. However, like all other businesses, family businesses face global competition and rapidly changing markets. This creates more pressure on those who join to make sure that they produce. “This emphasis on professionalism has made family businesses both more daunting and more attractive—and has created new interest in them, from family members, outsiders, and business school students.”Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• Many family-owned businesses tend to be stable and optimistic, even when economic times are uncertain. They seem to be better able to weather economic difficulties and stabilize the economy than their nonfamily counterparts.“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. However, this is a function of the industry and the size of the business.
• In general, family businesses feel that they are stronger because family members are involved in their activities. Family owners believe that their family members can be trusted, will work harder, and care more.“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, praxityprod.awecomm.com/News/...essSurvey.aspx. This can help create competitive advantage in the marketplace.
• Family businesses may be more open to flexible or part-time schedules or choosing your hours. This presents a very attractive work environment for people who need to tend to children, parents, or other family members in need.Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html.
• Family businesses tend to operate more ethically. In fact, many family businesses believe that their ethical standards are more stringent than those of their competitors. In addition, family businesses are often deeply embedded in their communities, and this proximity is seen as an important factor that increases the likelihood of ethical decision making and moral behavior.“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. As members of the local community, any ethical problems with a family business will be quickly visible.
• Family businesses also exhibit more social responsibility than their competitors. This has been attributed to their concern about image and local reputation“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf. as well as their closeness to the community.
• Family businesses may incur lower costs because of the greater willingness of family members to make financial sacrifices for the sake of the business. Accepting lower pay than they would get elsewhere to help the business in the longer term or deferring wages in a cash-flow crisis are examples of family altruistic behavior.“Advantages of Family Businesses,” Business Link, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?itemId=1073792650&type= RESOURCES.
• Family businesses, in general, have greater independence of action because they have less (or no) pressure from the stock market and less (or no) takeover risk.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Family businesses tend to be more resilient in hard times because they are willing to plow profits back into the business.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Family businesses are less bureaucratic and less impersonal, which allows for greater flexibility and quicker decision making.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Family businesses offer the possibility of great financial success.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. This can manifest itself in interesting ways. “As the family of a media conglomerate once mentioned, ‘The name I have has certainly helped me to get access to top executives of companies, persons who under other circumstances would have kept their doors shut.’”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Family members have the chance to learn the business early. This extensive expertise can create an important competitive advantage.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. “One executive recalled how as a child he would take long walks with his father, during which they would visit stores to look at competitor’s products. Afterwards, his father would ask him which products he liked most, and this would lead to lengthy arguments about each product’s quality. This man felt that the expertise he gained during those informal outings proved invaluable later in life.”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
Video Link \(2\):
The futurre of family business
Why Family Businesses Are So Special
“If family businesses are so common, how can they also be special? When Freud was asked what he considered to be the secret of a full life, he gave a three-word answer: ‘Lieben und arbeiten [to love and to work].’ For most people, the two most important things in their lives are their families and their work. It is easy to understand the compelling power of organizations that combine both. Being in a family firm affects all the participants. The role of chairman of the board is different when the company was founded by your father and when your mother and siblings sit around the table at board meetings, just as they sat around the dinner table. The job of a CEO is different when the vice president in the next office is also a younger sister. The role of partner is different when the other partner is a spouse or a child. The role of sales representative is different when you cover the same territory that your parent did twenty-five years earlier, and your grandparent twenty-five years before that. Even walking through the door on your first day of work on an assembly line or in a billing office is different if the name over the door is your own.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 2–3.
Disadvantages
As attractive as family businesses are on many fronts, they have the following disadvantages:
• Family businesses tend to be stable organizations. Although this is a good thing in many instances, stability can also make it difficult to change. A new, younger family member coming into the business will find tradition and structure. Changing that is not simple. The key to changing a family business lies in defining tradition in terms of the company’s core values, not in specific ways of doing things.Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• Family closeness can lead to sibling rivalry or problems when both the parent and the child want control. By the third or fourth generation, with many cousins possibly sharing ownership, governance can become very complicated.Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, accessed June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• There may be times when the interests of a family member conflict with the interests of the business. One family member may want to expand the business, but other family members may not share this person’s desire. The needs of the business are not in sync with the needs of the family.
• Family ties have a downside. Family members will frequently be expected to work harder, make more of a commitment, and get paid less than other employees in the business.“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, praxityprod.awecomm.com/News/...essSurvey.aspx.
• Family business owners may automatically promote someone from the family or give family members a job even if they do not have adequate skills for the job. A nonfamily employee may be better qualified.Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html. This can cause dissension and resentment among other employees.
• Relationships between parents and children or among siblings have a tendency to deteriorate due to communication problems. “This dysfunctional behavior can result in judgments, criticism and lack of support.”Alexis Writing, “Pros and Cons of Family Business,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/pros-cons-family-business-409.html.
• The family business may be a breeding ground for jealousies, resentment, anger, and sabotage. Family problems may spill over into the workplace.“Advantages and Disadvantages of a Family Business,” September 6, 2009, accessed October 8, 2011, pinoynegosyo.blogspot.com/2009/09/advantages-and -disadvantages-of-family.html.
• The business may be plagued with managerial incompetence, the lack of exposure to other businesses, and the inability to separate family and work.“Advantages and Disadvantages of a Family Business,” September 6, 2009, accessed October 8, 2011, pinoynegosyo.blogspot.com/2009/09/advantages-and -disadvantages-of-family.html.
• Some family businesses may have difficulty attracting and keeping highly qualified managers. “Qualified managers may avoid family firms due to the exclusive succession, limited potential for professional growth, lack of perceived professionalism, and limitations on wealth transfer.”David G. Sirmon and Michael A. Hitt, “Managing Resources: Linking Unique Resources, Management, and Wealth Creation in Family Firms,” Entrepreneurship Theory and Practice, Summer 2003, 339–58. Succession refers to passing the business to the next generation.
• Family businesses have limited sources of external capital because they tend to avoid sharing equity with nonfamily members.David G. Sirmon and Michael A. Hitt, “Managing Resources: Linking Unique Resources, Management, and Wealth Creation in Family Firms,” Entrepreneurship Theory and Practice, Summer 2003, 339–58. Having less access to capital markets may curtail growth.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Not all children of owner-managers may want to join the business. According to one study,Sue Birley, “Attitudes of Owner-Managers’ Children towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19. 80 percent of those who did not work in the family business did not intend to go into the business. This reluctance comes from several directions, such as the following:
• My parents would not want me to join.
• I could not work for my parents.
• There are already too many family members in the business.
• I am not interested in this particular business.
• The business is too small for me.
• The business would not allow me to use my talents.
• The business would not allow me to use my training.
• I can earn more elsewhere.
• I am not interested in a business career.Sue Birley, “Attitudes of Owner-Managers’ Children towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.
In Their Own Words
Why Some Children of Owner-Managers Do Not Want to Join the BusinessSue Birley, “Attitudes of Owner-Managers’ Children towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.
I see the pressure my dad is under—this does put me off slightly. I want to enjoy my job as well as enjoying life outside work.
A larger factor when working under a relative is the problem of self-worth. It is hard to feel like you are worth something when your father is an MD.
A business relationship with your father makes your family relationship harder.
I do not look to go into the family business straight away, as I feel this is giving a commitment to work there for the rest of my life.
I would join only because I am genuinely qualified, not because I am the owner’s daughter.
The difference in my father’s education and mine is a factor affecting why I have decided not to go into the business. I have more choice over what I want to do as a career, and my personal interests would not be met by my father’s company. I am sure it would not have been his choice had he had the same educational choices as me.
As much as the route into the family business is seen by outsiders as an “easy route to wealth and inheritance,” in my case it was also a liability. At 17, was I to be the fourth generation after 100 years that could not keep the company going?
• The “spoiled kid syndrome” often occurs in a family business. The business owner may feel guilty because his devotion to the business takes away from the attention he should be giving to his children. Out of a sense of guilt, he or she starts to bribe the children, “a kind of pay-off for not being available emotionally or otherwise.”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
• Financial strain emanating from “family members milking the business and a disequilibrium between contribution and compensation”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. can have a significant negative impact on the business.
• Nepotism that results in the “tolerance of inept family members as managers, inequitable reward systems, [and] greater difficulties in attracting professional management”Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. can easily lead to low morale among nonfamily members of the business, and it can ultimately result in business failure.
• Family businesses frequently have a confusing organization, with “messy structure and no clear division of tasks.” Authority and responsibility lines are unclear; jobs may overlap; executives may hold a number of different jobs; and the decision-making hierarchy may be completely ignored, existing only to be bypassed.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71. This can create a dysfunctional working environment.
• Family businesses frequently have paternalistic or autocratic rule that is characterized by a resistance to change, secrecy, and the attraction of dependent personalities.Manfred F. R. Kets de Vries, “The Dynamics of Family Controlled Firms: The Good and the Bad News,” Organizational Dynamics 21, no. 3 (1993): 59–71.
KEY TAKEAWAYS
• Family businesses account for 50 percent of the GDP, 60 percent of US employment, and 78 percent of the new jobs that are created.
• A family business offers both advantages and disadvantages. It is important to understand both.
EXERCISE
1. In Chapter 2 "Your Business Idea: The Quest for Value", Robert Rainsford was introduced in the Frank’s All-American BarBeQue case. He has returned to the family business and is very enthusiastic about expanding the business. He has identified four options: (a) expanding the restaurant either at its current site or elsewhere in Fairfield; (b) opening several similar-sized restaurants in nearby towns; (c) using the Internet to expand sales; and (d) expanding the sales of Frank’s sauces from a local store to a regional supermarket chain. Any one of these ideas would represent a change from his father’s business model. Given that he had not expressed any interest in the management of the business, how should he go about approaching his father with these ideas? If the company expands, should Robert approach his sister and her husband about taking a more active role in the business? What should their roles be? | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/03%3A_Family_Businesses/3.02%3A_Family_Business_-_An_Overview.txt |
Learning Objectives
1. Explain why communication, employing family and nonfamily members, professional management, employment qualifications, salaries and compensation, succession, and ethics are important issues for all family businesses.
Looking at the vision and hard work of the founders, family businesses “take on their unique character as new members of the family enter the business. At best, the environment can be inspiring and motivating. At worst, it can result in routine business decisions becoming clouded by emotional issues.”“Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf.
The owners and managers of family businesses face many unique challenges. These challenges stem from the overlap of family and business issues and include communication, employing family and nonfamily members, professional management, employment qualifications, salaries and compensation, and succession.
Communication
Communication is important in any business, but the complexities of communication in a family business are particularly problematic. Experts say that communication is one of the most difficult parts of running a family business.Christine Lagorio, “How to Run a Family Business,” Inc., March 5, 2010, accessed October 8, 2011, www.inc.com/guides/running-family-business.html. The approach to communication needs to include commitment, the avoidance of secrecy, and an understanding of the risks of bad communication.
Commitment
In a family business, it is critical that there be a commitment to communicate effectively with family and nonfamily members of the business. “Business leaders should be open about their awareness of the potential for communication issues to evolve and their willingness to accept feedback and input from all employees about opportunities for improvement and areas of concern.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed June 1, 2012, smallbusiness.chron.com/family-owned -business-communication-3165.html.
One important issue is whether there should be a line drawn between family and business discussions. Some suggest that setting up strict guidelines from the start that draw a clear line between the different types of discussions is a good approach.Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html. By contrast, the Praxity Family Business Survey“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, praxityprod.awecomm.com/News/...essSurvey.aspx. found that it is considered OK to talk about the business anywhere and at any time, whether at work or at home:
• Nineteen percent of the family businesses in the survey reported talking about business at home.
• Thirty-seven percent talk about it in the workplace.
• Forty-four percent talk about it when and wherever.
Secrecy
In family businesses, it is particularly important not to convey the impression that family members are more in the know than other employees. “…Even when this is not the case, the potential for the perception of exclusivity may exist. Steps should be taken to address any issues that may arise openly, honestly, and without preference for family members.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html.
Risks of Bad Communication
If good communication channels are not in place, the following can occur:
• “Family members assume they know what other family members feel or want.”
• “Personal ties inhibit honest opinions being expressed.”
• “The head of the family may automatically assume control of the business even if they don’t have the best business skills.”
• “One family member ends up dominating the business.”
• “Family-member shareholders not active in the business fail to understand the objectives of those who are active and vice versa.”
• “Personal resentments become business resentments and vice versa.”“Communication and Family Businesses,” Business Link, 2010, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId= 1073792652.
These difficulties can be overcome if the family business makes a concerted effort to create and maintain an environment of open communication where people feel comfortable voicing opinions and concerns. It is important that family and nonfamily members have an equal opportunity to express their views.
Employing Family and Nonfamily Members
It is natural for a family business to employ family members, especially in management positions. Family members tend to be the first people hired when a small business gets started, and as the business grows, so do their roles.Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the -family-business-a220028. There are both pros and cons to hiring family members. Both need to be considered carefully. Who to hire may well be the biggest management challenge that a family business owner faces.
Pros
On the positive side of things, several advantages can be identified for hiring family members:Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html; and Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the-family -business-a220028.
• Improved customer relations through family contact
• Intergenerational continuity
• Long-term stability
• Shared values
• Loyalty and commitment
• Inherent trust
• Willingness to sacrifice for the business
• Emotional attachment to the business; more willing to contribute to its success
• Share the same culture
“A family whose members work well together can also give the business a welcoming and friendly feel. It can encourage employees who aren’t in the immediate family to work harder to gain acceptance by those employees who are.”Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the -family-business-a220028.
Cons
There are also quite a few disadvantages to hiring family members:Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html; Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the-family-business -a220028; Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69; and Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
• Families are not perfect, so a dispute among family members can spill from home into the workplace.
• There is always the possibility of managerial incompetence.
• It may not be possible to separate family and work.
• Patterns of conflict will be rooted in early family experiences.
• Communication may break down.
• Sibling rivalry may create problems.
• Newly hired family members may feel that they do not have to earn their positions; their success will be seen as linked to their name instead of their abilities.
• The company may be subject to charges of discriminatory hiring practices if job openings are not published.
• Nonfamily members of the business may feel that family members get hiring preference.
• Nonfamily members may feel that they will be automatically outvoted in decision making.
• Hiring primarily family members for management positions may lead to hiring suboptimal people who cannot easily be dismissed. This could lead to greater conflict because of promotion criteria that are not based on merit.
Hiring Nonfamily Members
There will be times when the better decision may be to hire a nonfamily person for a particular job. Experience has shown that a family business is less likely to be successful if it employs only family members; bringing in the fresh thinking that comes with external expertise can be valuable at all levels of a business.“Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf. In addition, nonfamily members can offer stability to a family business by offering a fair and impartial perspective on business issues. The challenge is in attracting and retaining nonfamily employees because these employees “may find it difficult to deal with family conflicts on the job, limited opportunities for advancement, and the special treatment sometimes accorded family members. In addition, some family members may resent outsiders being brought into the firm and purposely make things unpleasant for nonfamily employees.”“Family Owned Businesses Law and Legal Definition,” USLegal.com, 2010, accessed October 8, 2011, definitions.uslegal.com/f/family-owned-businesses. Because it is likely that a growing family business will need to hire people from the outside, it is important that the business come to terms with that necessity. Policies and procedures can help with the transition, but the most important thing is to prepare the family culture of the business to accept a nonfamily member. Not surprisingly, this is much easier said than done.
Professional Management
The decision to hire a professional manager is likely one of the most important and difficult hiring decisions that a family business owner will have to make. The typical definition of professional managers equates them with external, nonfamily, nonowner managers, thus declaring professional management and family management as mutually exclusive.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. “A typical argument…is that professional nonfamily managers should be brought in to provide ‘objectivity’ and ‘rationality’ to the family firm.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
There are several problems with this way of thinking. First, it perpetuates the outdated notion that family members are not professional, that the smartest thing for a family business to do is to bring in professional management—as quickly as possible.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
Second, professional managers are not always prepared to deal with the special nature of family-owned businesses. “The influence of families on businesses they own and manage is often invisible to management theorists and business schools. The core topics of management education—organizational behavior, strategy, finance, marketing, production, and accounting—are taught without differentiating between family and nonfamily businesses.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 4. This does an injustice to the unique workings of a family-owned business.
Third, a professional manager from the outside is not always prepared, perhaps not even most of the time, to deal with the special nature of family companies. The dominant view on professional management downplays the importance of the social and the cultural context. “This is a problem in family firms where family relations, norms, and values are crucial to the workings and development of the business.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. It is argued that the meaning business families attach to their businesses is guided by family values and expectations—so much so that “anything or anyone that interrupts this fragility could send the business into chaos.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
The hiring of an outside manager, therefore, should include an assessment of both formal competence and cultural competence. Formal competence refers to formal education, training, and experience outside the family business. Although it is certainly helpful and appropriate, formal competence is not sufficient for managerial effectiveness. It needs to be supplemented with cultural competence, an understanding of the culture of a specific firm. Interestingly, most family businesses look only to formal competence when selecting a CEO.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
Culture and Nonfamily CEOs
It is extremely important to understand the culture of the family firm. It means that as a leader you have to be sensitive to the organization’s reactions on the things you say and do. I have a long-term employee on my management team, and she is my guide in these issues. She can tell me how the organization will react and how things are likely to be received. We have to build on the past even though we have to do a lot of things in new and different ways. But because of the culture, this might be very sensitive. (The words of a nonfamily CEO in a family business.)
As a nonfamily CEO, you have to have in-depth respect for the invisible forces among the employees in the family firm. You cannot escape the fact that there will always be special bonds between the family firm and the owner. Always. (The words of a nonfamily CEO in a family business.)Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
One concern of family businesses may be that the hiring of a nonfamily manager will result in the loss of their “familiness.” However, one study found that, even with nonfamily managers bringing nonfamily management activities, styles, and characteristics, “the special and unique aspects and forces of the system of the family, its individual family members, and the business itself provide a synergistic force that offsets the outside influences of the [nonfamily managers].”Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209. This same study acknowledged, however, that their research did not focus on understanding at what point, or percentage of nonfamily members, the feeling of “familiness” will begin to erode.Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209.
Employment Qualifications
One of the more difficult challenges that a family business must face is determining employment qualifications for employees, both family and nonfamily. The lack of a clear employment policy and process can lead to major conflicts in the company. Unfortunately, it would appear that, despite their benefit, most family businesses have a family employment policy.“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf. As a result, many family businesses may end up with more employees from the family than the company needs, and some of these people may not even be qualified or suitable for the jobs they have been given. “Some family businesses even find themselves acquiring businesses that have no relationship with their original business or keeping some unprofitable business lines just to make sure that everybody in the family gets a job within the company.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1 -SABIS%C2%AE-. This kind of situation benefits no one.
A written family-business employment policy can solve a myriad of problems because it spells out the specific terms for family and nonfamily members with respect to recruiting, hiring, promoting, compensating, and terminating. One recommendation is that an ideal family employment policy should include the following:“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf.
• “Explain the family employment policy’s purpose and philosophy.”
• “Describe how family members will apply and be considered for positions.”
• “Cover the general conditions of employment, including compensation and supervision.”
• “Outline the approach to be taken in developing and promoting family business members.”
• Make clear that family members will be completing the same applications that other candidates will complete.
• Include an inspiring and upbeat reminder that the policy’s purpose is to help the family business succeed and to support, develop, and motivate family members to lead successful and productive lives.
• Have all family business owners sign the policy, indicating they have read and agreed to it.
Others have recommended “that family members meet three qualifications before they are allowed to join the family business on a permanent basis: an appropriate educational background; three to five years’ outside work experience; and an open, existing position in the firm that matches their background.”Craig E. Aronoff and John L. Ward, Family Business Succession: The Final Test of Greatness (Marietta, GA: Business Owner Resources, 1992), as cited in “Nepotism,” Reference for Business.com, 2010, accessed October 8, 2011, www.referenceforbusiness.com/small/Mail-Op/Nepotism.html.
There are no rules that dictate the content of a family business employment policy, so differences from one family business to another can be expected. However, it is very important “to set employment conditions that do not discriminate against or favor family members. This would help establish an atmosphere of fairness and motivation for all employees of the family business.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1-SABIS%C2% AE-.
The benefits of an employment policy notwithstanding, the idea may be met with resistance. There may be the feeling that hiring decisions for family members should be separate from the hiring decisions for nonfamily members because being a family member provides special qualifications that cannot be matched by someone outside the family. How to proceed will ultimately fall on the shoulders of the family business owner.
Salaries and Compensation
As difficult as hiring decisions may be for the family business, decisions about salaries and compensation are probably even worse. No matter how well intentioned and well designed the company’s compensation plan may be, there will still be jealousies, hard feelings, severed sibling relationships, and even lawsuits, particularly among those family members who feel they have been treated unfairly.“Family Owned Businesses: Compensation in Family Businesses,” Gaebler.com Resources for Entrepreneurs, 2010, accessed October 8, 2011, www.gaebler.com/Compensation-in-Family-Businesses.htm. This presents a daunting challenge: how to develop a compensation plan that will be fair to family members and good for the business:
One of the greatest struggles of operating a family business is separating the family from the business. Oh yes, there are many great benefits to having family in the business and to being a family member in a family business, but the most difficult problems result when “family values” and issues take over, leaving business values and needs wanting. There is no greater source for family business problems—nor more fertile ground for their cure—than the family business compensation systems.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344.
Some of the Problems
Family businesses often make several common mistakes when developing their compensation plans.
• They consider fair compensation to be equal compensation for all family members, sometimes even for the owner. This creates a very sticky situation because all family members are not created equal. “It is sometimes difficult to assess and compare the talents of family members who are also employees. Nor do all family members contribute equally to the business. As a result of the stress that this causes, many family business owners ignore the problem and let compensation become a breeding ground for dissension in the family.”Kathy Marshack, “How to Arrive at Fair Compensation in a Family Business,” American Chronicle, February 29, 2008, accessed October 8, 2011, www.americanchronicle.com/articles/view/53757.
• They do not compensate wives for the work they do. The reason often given? It saves on taxes. Not surprisingly, this approach leaves wives isolated from the business, invisible in the decision-making process, and unappreciated. This problem extends to the compensation of sons and daughters as well. A survey by Mass Mutual Insurance CompanyReferenced in Kathy Marshack, “How to Arrive at Fair Compensation in a Family Business,” American Chronicle, February 29, 2008, accessed October 8, 2011, www.americanchronicle.com/articles/view/53757. reported a big discrepancy among the salaries of sons and daughters in family businesses across America. The average salary of the typical son in a family business was \$115,000, while his sister earned only \$19,000. This may be due to the tendency of sons being groomed for leadership, while daughters are groomed for the supportive roles that command lower salaries.
• The compensation for family members is higher than that for nonfamily members, but the differential is not tied to the actual job requirements or performance. This situation can lead to anger, reduced motivation, resentment, and eventual departure of the nonfamily member from the firm.
• The business overpays family members—for a variety of reasons:Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
• “Guilt, because mom & pop were so busy working when the kids were young.”
• “Fear of conflict, because someone’s wife threatens not to come to the family picnic.”
• “Resistance to change, because ‘That’s the way we’ve always done it.’”
• “Inability to confront family members who feel ‘entitled’ to inflated salaries.”
• “Determination to minimize estate taxes by transferring wealth through compensation.”
• Emotional pressures are allowed to determine compensation policies. What this means is that compensation is not correctly determined by job requirements and performance in those jobs. When this happens, small problems develop centrifugal force:Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
• “Fighting between sibling/cousin partners increases.”
• “Hard-working family members and employees lose morale.”
• “Well-motivated competent employees leave the company.”
• “The company loses its competitive edge and growth potential.”
• “Family harmony decreases.”
• “The value of the company declines, or it is sold—for the wrong reasons.”
Some of the Solutions
Developing a fair compensation plan for the family business is not easy. It requires good faith, trust, and good business sense. The dollar amounts offered to family members will be critical, but the more pressing issue is fairness.Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html. Unfortunately, fairness is often construed as equality. This must be avoided.
There is no template for designing a compensation plan for family businesses, but there are several recommendations:Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344.
• Develop accurate job descriptions for each employee that include responsibilities, level of authority, technical skills, level of experience and education required for the job, and goals for an annual performance review. In a performance-based company, the amount of stock owned by a family member will not be related to his or her compensation.
• Develop a clear philosophy of compensation so that everyone understands the standards that are used to pay people. The following is a sample of a written compensation plan philosophy that was developed by one family.
Family members employed in the business will be paid according to the standards in our region, as reported by our trade association, for a specific position, in companies of our size. In order to retain good employees we will pay all employed family members and other managers within the top quartile of our industry’s standards. Additional compensation will be based on success in reaching specific company goals, with bonuses shared among all members of the management team. Individual incentives will be determined according to measurable goals for job performance determined each year, and reviewed by the appropriate manager.Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
• Gather information about the salaries of similar positions in the industry of the family business in the applicable region of the country. Look at companies that are similar in the number of employees, revenue, and product. If possible, obtain salary and benefit information.
• Have the base salary for each position be consistent with the salaries and wages paid for comparable positions at similarly sized businesses. Paying at this market value will have an excellent effect on nonfamily members because they will feel that they are on an even playing field. There will be a positive effect on business morale.
• The family business owner might consider seeking outside help in determining compensation levels for individual family members. However, this assistance must be seen as truly objective, with no reason to favor one viewpoint over another.
Oh, Those Sleepless Nights!
A recent family business survey“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, praxityprod.awecomm.com/News/...essSurvey.aspx. reported that the following things keep family business owners awake at night.
Rank The Nightmare Percentage Citing as a Significant Concern (%)
1 Family members can never get away from work. 18
2 Business disagreements can put strain on family relationships. 17
3 Emotional aspects can get in the way of important business decisions. 16
4 Transition to the next generation is more difficult than a third-party sale. 10
5 There can often be conflicts regarding the fairness of reward for effort. 9
6 The business rewards are not necessarily based on merit. 8
7 Family members find it difficult to be individuals in their own right. 5
8 Difficulties arise in attracting professional management. 5
9 Children can be spoiled through inequitable rewards. 4
10 Outside shareholders do not contribute but take payouts from the business. 3
11 The family is always put before the business and therefore can be less efficient. 3
12 Past deeds are never forgotten and are brought up at inappropriate times. 2
Other urgent issues identified by a different family business survey included, in order of importance, the following:“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf.
• Labor costs
• Health-care costs
• Finding qualified employees
• Foreign competition
• Labor union demands
• Domestic competition
• Oil prices
• Availability of credit from lenders
• Estate taxes
Succession
Another important issue that is particularly difficult for family businesses is succession. As mentioned earlier in this chapter, succession is about passing the business to the next generation. Decisions have to be made about who will take over the leadership and/or ownership of the company when the current generation dies or retires.“Family Owned Businesses Law and Legal Definition,” USLegal.com, 2010, accessed October 8, 2011, definitions.uslegal.com/f/family-owned-businesses. Interestingly, “only a third of all family businesses successfully make the transition to the second generation largely because succeeding generations either aren’t interested in running the business or make drastic changes when they take the helm.”“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm. There are family businesses that manage the transition across generations quite easily because the succession process chooses only the children willing and able to join and work with the prevailing family, business values, and goals. Unfortunately, there are also instances in which children have had to leave school as soon as legally allowed, not equipped to manage either the business, their lives, or their family. These children spend many resentful years in the business until it fails.Sue Birley, “Attitudes of Owner-Managers’ Children Towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.
Passing the family business to the next generation is a difficult thing to do, but succession is a matter of some urgency because 40 percent of US businesses are facing the issue of succession at any given point in time.Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf. This urgency notwithstanding, there are several forces that act against succession planning:Ivan Lansberg, “The Succession Conspiracy,” Family Business Review 1 (1981): 119–44, as cited in Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf.
1. Founder
• Fear of death
• Reluctance to let go of power and control
• Personal loss of identity
• Fear of losing work activity
• Feelings of jealousy and rivalry toward successor
2. Family
• Founder’s spouse’s reluctance to let go of role in firm
• Norms against discussing family’s future beyond lifetime of parents
• Norms against favoring siblings
• Fear of parental death
3. Employees
• Reluctance to let go of personal relationship with founder
• Fears of differentiating among key managers
• Reluctance to establish formal controls
• Fear of change
4. Environmental
• Founder’s colleagues and friends continue to work
• Dependence of clients on founder
• Cultural values that discourage succession planning
These are powerful forces working against succession planning, but they need to be overcome for the good of the founder, the family, and the business. It will be tricky to balance the needs of all three and fold them into a good succession plan.
The Succession Plan
Voyageur Transportation, a company in London, calls its successful succession planning program, “If you got hit by a beer truck, what would happen to your department?”“Sample Succession Planning Policy,” accessed October 8, 2011, www.experienceworks.ca/pdf/successionpolicy.pdf. As a family business owner, you should pose this question in terms of yourself and your business. Hopefully, this will provide the impetus you need to develop a succession plan.
A good succession plan outlines how the succession will occur and what criteria will be used to judge when the successor is ready to take on the task. It eases the founder’s concerns about transferring the firm to someone else and provides time in which to prepare for a major change in lifestyle. It encourages the heirs to work in the business, rather than embarking on alternative careers, because they can see what roles they will be able to play. And it endeavors to provide what is best for the business; in other words, it recognizes that managerial ability is more important than birthright, and that appointing an outside candidate may be wiser than entrusting the company to a relative who has no aptitude for the work.“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.
A good succession plan will recognize and accept people’s differences, not assume that the next generation wants the business; determine if heirs even have enough experience to run the business; consider fairness; and think and act like a business. The plan should also include a timetable of the transition stages, from the identification of a successor to the staged and then full transfer of responsibilities, and a contingency plan in case the unforeseen should happen, such as the departure or death of the intended successor or the intended successor declining the role.“Family-Run Businesses: Succession Planning in Family Businesses,” Business Link, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type =RESOURCES&itemId=1074446767. It would also be helpful to get some good professional advice—from company advisors who have expertise in the industry as well as other family-run businesses.“Avoid Feuds When Handing Down the Family Business,” 2010, AllBusiness.com, 2010, accessed October 8, 2011, www.allbusiness.com/buying-exiting-businesses/exiting-a-business/2975479-1.html.
Although each succession plan will be different, the following components should be seen as necessary for a good succession plan:“Components of a Good Business Succession Plan,” April 18, 2011, accessed October 8, 2011, www.entrepreneurshipsecret.com/components-of-a-good-business -succession-plan.
1. Establish goals and objectives. As the family business owner, you must establish your personal goals and vision for the business and your future role in its operation. You should include your retirement goals, family member goals, goals of other stakeholders (e.g., partners, shareholders, and employees), and goals relating to what should happen in the case of your illness, death, or disability.
2. Family involvement in the decision-making process. If the family and stakeholders who are involved in the decision-making process are kept informed of the decisions being made, many of the problems related to inheritance, management, and ownership issues will be alleviated. Communication, the process for handling family change and disputes, the family vision for the business, and the relationship between the family and the business should be addressed. The surest path to family discord is developing the succession plan on your own and then announcing it.Susan Ward, “Six Business Succession Planning Tips,” About.com, 2011, accessed October 8, 2011, sbinfocanada.about.com/cs/buysellabiz/a/succession1_2.htm.
3. Identify successor(s). This section of the plan will address the issue of who takes over ownership and management of the business. Identification of the potential successor(s), training of the successor(s), building support for the successor(s), and teaching the successor(s) to build vision for the business are included here. Working with your successor(s) for a year or two before you hand over the business will increase the chances for success.Susan Ward, “Six Business Succession Planning Tips,” About.com, 2011, accessed October 8, 2011, sbinfocanada.about.com/cs/buysellabiz/a/succession1_2.htm.
4. Estate planning. Estate planning is important if you are planning to retire or want to take precautionary measures regarding the future of the business in the event you are unable to continue operation of the family business due to illness, disability, or death. You should consult a lawyer, an accountant, a financial/estate planner, and a life insurance representative so that your benefits will be maximized. You will need to consider taxation, retirement income, provisions for other family members, and active/nonactive family members.
5. Contingency planning. Contingency planning is about unforeseen circumstances. It is about strategizing for the most likely “what if” scenarios (e.g., your death or disability). By thinking in terms of the unforeseen, you will be taking a proactive rather than reactive approach.
6. Company structure and transfer methods. This section of the succession plan involves the review and updating of the organizational and structural plan for the organization taking into account the strengths and weaknesses of the successor. The following needs to be identified: the roles and the responsibilities of the successor, the filling of key positions, structuring of the business to fit the successor, the potential roles for the retiring owner, any legal complications, and financial issues.
7. Business valuation. This section is relevant only if the business is being sold. Passing the business to a family member would not involve a business valuation.
8. Exit strategy. With any succession, ownership will be transferred, and you will remove yourself from the day-to-day operations of the business. Alternatives will be compared, and a framework for making your final choices will be developed. The transfer method and the timelines are decided. The exit plan should then be published and distributed to everyone who is involved in the succession process.
9. Implementation and follow-up. The succession plan should be reviewed regularly and revised as situations change. It should be a dynamic and a flexible document.
As difficult as the planning process can be, the goal should be a succession plan that will be in the best interests of all—or most—of the parties involved. Business interests should be put ahead of family interests, and merit should be emphasized over family position.“Family Succession Plan First Then the Succession Plan for the Family’s Business,” Family Business Experts, 2011, accessed October 8, 2011, www.family-business-experts.com/family-succession-plan.html.
The Family Business and Technology
In 2008, when R. Michael Johnson—Mikee to everyone who knows him—took over the pressure-treated lumber company his grandfather founded in 1952, he had a great idea: laptops for all managers and sales staff.
“‘You would have thought the world was coming apart,” says Johnson, CEO and president of Cox Industries in Orangeburg, South Carolina. One salesman—convinced that the computer would be used to track his movements outside the office—up and quit. A buyer who had been with the company for thirty-five years said he would like a fax machine but could not see why he needed a computer when he had managed just fine without one for so long.
And that was just the beginning. In an industry where some businesses still write delivery tickets by hand and tote them up on calculators, Johnson recently led the company through an ERP (enterprise resource planning) software conversion and distributed iPhones to the sales team so they can use the company’s new customer relationship management (CRM) system.
“‘Let’s just say I have spent quite a few Sunday lunches after church explaining technology acronyms to Granddad and Grandmom,” Johnson says.
The resistance to new technology quieted, however, after Johnson was able to point to market share growth of 35 percent at the \$200 million business in the past year. “The numbers are starting to resonate,” he says. “Five years ago, I couldn’t even say what our market share was because we didn’t have the technology to figure it.”Karen E. Klein, “When the Third Generation Runs the Family Biz,” Bloomberg BusinessWeek, April 9, 2010, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/apr2010/sb2010049_806426.htm.
KEY TAKEAWAYS
• Important family issues include communication, employing family and nonfamily members, professional management, employment qualifications, salaries and compensation, and success. Each issue can create conflict.
• It is very important to understand the culture of the family business, especially by nonfamily CEOs.
• Succession planning is critical to the success of passing a business to family members.
EXERCISES
1. Select a family business in your area. Make arrangements to speak with three members of the family who work in the business. Develop a list of ten questions that cover a broad range of issues, such as the approach to compensation (but do not ask for specific salary or wage numbers), the process for hiring family and nonfamily members, and the plans for passing the business to the next generation. Ask each member of the business the same questions. Pull the answers together and compare them. Where did you find similarities? Where did you find differences? Did everyone know the answer to each question? Where were people reluctant to answer? Prepare a three- to five-page report on your findings.
2. The family business is looking to expand, and some members of the family, but not all, feel that it might be worth bringing in someone from the outside to fill one of the new management positions because the family talent has been pretty much exhausted. Design a process for hiring an external manager. What things should be considered? How might you get buy-in from all family members? | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/03%3A_Family_Businesses/3.03%3A_Family_Business_Issues.txt |
Learning Objectives
1. Explain what conflict is.
2. Explain why positive or constructive conflict can be helpful to a family business.
3. Explain why negative or destructive conflict can damage a family business.
4. Identify sources of negative conflict in a family business.
5. Identify some ways in which negative conflict can be avoided.
All businesses have conflict. It can be a good thing or it can be a bad thing. Positive or constructive conflict can be beneficial to a family business when it increases opportunity recognition, produces high-quality decisions, encourages growth, strengthens groups and individuals, increases the learning necessary for entrepreneurial behavior, and increases the levels of commitment to the decisions being made.George Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011; Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84; and Suzi Quixley, “Understanding Constructive & Destructive Conflict,” May 2008, accessed June 1, 2012, www.suziqconsulting.com.au/free_articles_files /CON%20-%20Constructive%20&%20Destructive%20-%20May08.pdf. An example of positive conflict is a disagreement between family members on the strategic direction of the family business, the result being a much-needed rethinking of the business plan and a new agreed-on vision for the company.“Managing Conflict in Family Businesses,” Business Link, 2010, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId= 1073792653.
By contrast, negative or destructive conflict can hurt a business by damaging the harmony and relationships of family members in the family business, discouraging learning, causing ongoing harm to groups and individuals in the business, frustrating adequate planning and rational decision making, and resulting in poor quality decisions.Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84; and Suzi Quixley, “Understanding Constructive & Destructive Conflict,” May 2008, accessed June 1, 2012, www.suziqconsulting.com.au/free_articles_files /CON%20-%20Constructive%20&%20Destructive%20-%20May08.pdf. “The absence of good conflict makes it that much harder to accurately evaluate business ideas and make important decisions…But conflict does not mean browbeating.”Professor Michael Roberto from Harvard Business School, quoted in George Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011. An example of a negative conflict would be arguments over the successor to the business. Ultimately, the failure to adequately control negative conflict may contribute to the high mortality rate of family-owned businesses.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262.
Because of the clash between business and emotional concerns in a family business, the potential for negative conflict can be greater than for other businesses.“Managing Conflict in Family Businesses,” Business Link, 2010, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId= 1073792653. The tension that exists among the personal lives and career pursuits of family members creates an interrole conflict (occurring when a family member has simultaneous roles with conflicting expectations) in which the role pressures from work and home are incompatible.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262. This conflict is difficult—if not impossible in some instances—to resolve. “Due to the interconnection and frequent contact among family members working in the business with those who are not but may still have an ownership stake, recurring conflict is highly probable in family firms.”Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84.
Sources of Conflict
The specific causes of conflict in a family business are many. Because the typical understanding of conflict in family businesses is that conflict refers to negative conflict that is unhealthy and disruptive, negative conflict is the focus of this section.
The PricewaterhouseCoopers Family Business Survey“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf. identified a core group of issues that are likely to cause tension.
Issue Causing Tension Causes Some Tension (%) Causes a Lot of Tension (%)
Discussion about the future strategy of the business 25 9
Performance of family members actively involved in the business 19 8
Decisions about who can and cannot work in the business 19 7
Failure of family members actively involved in the business to consult the wider family on key issues 16 7
Decisions about the reinvestment of profits in the business versus the payment of dividends 15 7
The setting of remuneration levels for family members actively involved in the business 14 7
The role in-laws should or should not play in the business 14 7
Decisions about who can and cannot hold shares in the business 13 6
Discussions about the basis on which shares in the business should be valued 12 5
Rejection of chosen successor by other family members 10 5
Add to this the fact that “family firms are prone to psychodynamic effects like sibling rivalry, children’s desire to differentiate themselves from their parents, marital discord, identity conflict, and succession and inheritance problems that nonfamily businesses do not suffer from,”Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84. and it’s easy to see how the family business is a fertile field for negative conflict.Michael Harvey and Rodney E. Evans, “Family Business and Multiple Levels of Conflict,” Family Business Review 7, no. 4 (1994): 331–48, as cited in Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84.
Several other sources of conflict can occur in a family-owned business. A sampling of those sources is discussed here. All have the potential to adversely impact family relationships, business operations, and business results.
• Rivalry. Harry Levinson from the Harvard Business School maintains that, “the fundamental psychological conflict in family businesses is rivalry, compounded by feelings of guilt, when more than one family member is involved.”Harry Levinson, “Conflicts That Plague Family Businesses,” Harvard Business Review 71 (1971): 90–98. This rivalry can occur between father and son, siblings, husband and wife, father and daughter, and in-laws with members of the family that own the business.
• Differing vision. Family members will often disagree with the founder and with each other about the vision and strategy for the business. These differences “can create fear, anger, and destructive attempts to control decisions that are divisive and counter-productive to making and implementing sound decisions.”“Common Sources of Dysfunctional Conflict in Family Businesses,” RJW Consulting, accessed October 8, 2011, www.rjweissconsulting.com/businessDevelopmentNewsDetail.asp?ID=2. Rivalries that spill into the workplace can get nasty, leading to destructive behaviors.
• Jealousy. There is always the potential for jealousy in the family business. It can arise from feelings of unfairness in such things as compensation, job responsibilities, promotions, “having the ear” of the business founder, and stock distributions. It can also arise with respect to the planned successor when there is a difference of opinion about who it should be. If it is not resolved, jealousy has the potential to divide the family and destroy the business.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262.
• Succession. Succession is always a big obstacle for a family business. In some cases, the founder may feel that his or her children are not capable of running the business. This will cause obvious tension between the parent and the child/children, such that the child or children may leave the business in frustration.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262. This, in turn, becomes problematic for succession. “Who gets what type of equity, benefit, title, or role can be major sources of explicit conflict or implicit but destructive behaviors.”“Common Sources of Dysfunctional Conflict in Family Businesses,” RJW Consulting, accessed October 8, 2011, www.rjweissconsulting.com/businessDevelopmentNewsDetail.asp?ID=2. It is also true that while the founder of the business wants to continue family ownership and leadership of the business, this may not be true of his or her immediate family or later-generation family members. Peter S. Davis and Paula D. Harveston, “The Phenomenon of Substantive Conflict in the Family Firm: A Cross-Generational Study,” Journal of Small Business Management 39, no. 1 (2001): 14–30. This can create substantive conflict during succession planning.
• Playing by different rules. This cause of negative conflict “often presents itself as a form of elitism or entitlement that exists simply by virtue of being in a family that owns a business. Examples show up in allowing one or more family members to exhibit deficient standards of conduct or performance that violate sound business practices or important requirements that all other employees are expected to follow. Such behaviors can be divisive and demoralizing to all employees and customers as well as harmful to the reputation of the business.”“Common Sources of Dysfunctional Conflict in Family Businesses,” RJW Consulting, accessed October 8, 2011, www.rjweissconsulting.com/businessDevelopmentNewsDetail.asp?ID=2.
• Decision making. If roles and responsibilities are not clearly defined, conflict will arise over who can make decisions and how decisions should be made. This will lead to confusion, uncertainty, and haphazard decisions that will put the company at risk.
• Compensation and benefits. “This is one of the most frequent sources of conflict, especially among members of the younger generation.” A person’s compensation is inextricably linked to his or her feelings of importance and self-worth. Compound that with the emotions associated with being a member of the family that owns the business, and you have the potential for explosive negative conflict. Clearly, this is not in the best interests of the business. Wayne Rivers, “Top 15 Sources of Conflict in Family Businesses,” Family Business Institute, 2009, accessed October 8, 2011, www.familybusinessinstitute.com/index.php/volume-6-articles/top-15-sources-of-conflict-in-family-businesses.html.
Avoiding Conflict
Some measure of family squabbling is expected in a family business. Some of the arguments will be logical and necessary. However, “it’s important that they remain professional and not personal, because squabbling among family members in a work environment can make the employees and customers feel extremely uncomfortable, and can give them grounds for legal claims against the business.” “How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150. The negative effects of family squabbling are as follows: “How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.
• Unprofessional image. Family squabbling conjures up images of children—immaturity and pettiness. This sends a signal to customers and other employees that they are not in a professional environment that focuses on the right things.
• Uncomfortable environment. It is embarrassing to witness squabbling. No one likes to be in an awkward atmosphere; squabbling can cost you customers and employees, and it may result in expensive and unpleasant lawsuits. This can affect your bottom line very quickly.
• Discrimination. Nepotism is one of the biggest dangers of working in a family business. Arguing with relatives will only reinforce to other employees that they are in a family business. This can quickly lead to feelings of disparate treatment which, in turn, can lead to discrimination charges.
• Legal troubles. In the worst cases of family squabbling, disagreements over business can lead to lawsuits. If one family member’s role is minimized and his or her authority is restricted, this is violating the person’s rights as a shareholder. This can lead to an oppressed minority shareholder suit against the family business. This would be expensive, it would be ugly, and it could lead to the demise of the company.
Avoiding conflict is no easy feat. However, there are several things that a family business should consider. First, there are consultants who engage in conflict resolution for a living. The possibilities should be checked out. If the budget can handle the costs of a consultant, it could be the best choice. A consultant, having no reason to take one side or the other, will bring the necessary objectivity to resolution of the conflict.
Second, emotional reactions should be differentiated from problem-solving reactions. Family members need to take a professional perspective rather than that of an irritated sibling, parent, son, or daughter.“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150. It will probably be difficult to do this, but it is important that it be done.
Third, focus on the professional role instead of the family role. “Make sure it’s clear what the expectations and attitudes of all your employees are…Because you’re a small business, you might not have as strict a policy as a large corporation, but it would still be helpful to put it in writing, such as in an employee handbook, which carries legal responsibilities to both family and outside employees.” “How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.
Fourth, encourage honesty from the beginning. When first starting to work together, it is important that family members sit down together to talk about potential conflicts that might arise. Acknowledging that it will be more difficult to work together because of being family is a good beginning. Treating family members and the professional environment with respect and expecting honesty when someone steps over the line should make for a smoother process.“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.
Last, the founder should try to keep the conflict constructive. This means stimulating task-oriented disagreement and debate while trying to minimize interpersonal conflicts. George Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011. This will require a fair decision-making process. For people to believe that a process is fair, it means that they mustGeorge Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011.
• “Have ample opportunity to express their views and to discuss how and why they disagree with other [family] members”;
• “Feel that the decision-making process has been transparent, i.e., deliberations have been relatively free of secretive, behind-the-scenes maneuvering”;
• “Believe that the leader listened carefully to them and considered their views thoughtfully and seriously before making a decision”;
• “Perceive that they had a genuine opportunity to influence the leader’s final decision”; and
• “Have a clear understanding of the rationale for the final decision.”
KEY TAKEAWAYS
• Conflict can be either positive or negative. Negative conflict can potentially harm the business.
• There are many sources of negative conflict in a family business. The fundamental psychological conflict in family businesses is rivalry.
• It is important to avoid negative conflict. In particular, family squabbling that is witnessed by others can cause damage to the firm. Employees and customers will feel uncomfortable, and there may ultimately be grounds for a lawsuit.
EXERCISE
1. The founder of XYZ company has decided to retire. He wants one of three children to take over leadership of the business—and he knows exactly who it should be. Other members of the family have their ideas as well. One segment of the family wants the oldest son, Michael, to take over, but the founder thinks Michael is a melon head. The second son, Christopher, is a well-meaning and hard-working part of the business, but he just does not have what it takes to be a leader. Nonetheless, he is favored by another group of family members. Samantha, the youngest child, is as sharp as a tack, with solid experience and accomplishments under her belt. On an objective basis, Samantha would be the best choice for the business. She is the founder’s choice to take over the company and has other family supporters as well, although not as many as for Michael or Christopher. This is a situation tailor-made for conflict. How does the founder finesse the selection of Samantha and minimize the conflict that is bound to occur? Can he win? | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/03%3A_Family_Businesses/3.04%3A_Conflict.txt |
Learning Objectives
1. Explain how a family business adds to customer value.
2. Explain how being a family business can positively and negatively impact cash flow.
3. Explain how technology and the e-environment are impacting family businesses.
Customer Value Implications
When people think about family businesses, they usually think friendly, “quality, wholesome, and continuity.” Customers feel that they have a connection to the business because they also have a family. It is something customers feel they can trust.“Promoting Family Brand Linked to Companies’ Financial Success,” Austin Family Business Program, September 15, 2008, accessed October 8, 2011, www.familybusinessonline.org/index.php?option=com_content&view+article&id =38:promoting-family-brand-linked-to-companies-financial-success-&catid=13:latest -news&Itemid=39. Customers are reminded that there is a family behind the business, not a faceless corporate entity.Sahil Nagpal, “Family Businesses Perceived of Greater Value by Customers,” Top News, August 15, 2008, accessed June 1, 2012, topnews.in/family-businesses -perceived-greater-value-customers-259364. These are important sources of customer value.
The high priority that family businesses place on community involvement and the “reputational capital attributed to the family name” also translate into a perception of greater value by the customer.Sahil Nagpal, “Family Businesses Perceived of Greater Value by Customers,” Top News, August 15, 2008, accessed October 8, 2011, topnews.in/family-businesses -perceived-greater-value-customers-259364. “Family business’s identification with the family name motivates a greater emphasis on serving customers and consumers effectively, such as through providing quality products and customer services.”Justin B. Craig, Clay Dibrell, and Peter S. Davis, “Leveraging Family-Based Identity to Enhance Firm Competitiveness and Performance in Family Businesses,” Journal of Small Business Management 46, no. 3 (2008): 351–71. The emphasis of the family business on its family identity may, in fact, contribute to its competitive advantage. “It is conceivable that family businesses who promote their familiness build a reputation in the market place related to customers’ positive perception of the family.”Justin B. Craig, Clay Dibrell, and Peter S. Davis, “Leveraging Family-Based Identity to Enhance Firm Competitiveness and Performance in Family Businesses,” Journal of Small Business Management 46, no. 3 (2008): 351–71. The long-term source of value for the customers of family businesses may rest with the belief that the businesses are customer-focused.
Cash-Flow Implications
A family business can help or hurt its cash flow depending on whether it compensates family members at market value. If a family member’s compensation is based on “family values,” such that the parents’ compensation is excessive and the children’s compensation is much less than their fair market value, this would give an inflated picture of the company’s profitability.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344. However, it will help the company’s cash flow because they will have more money to spend on the business. If, however, the children’s compensation is excessive, often based on housing and family needs of the family members as opposed to their worth to the business, this would give an unrealistically low portrayal of the profitability of the business.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344. This will hurt the company’s cash flow because the amount of money available to spend on the business will be reduced.
Digital Technology and E-Environment Implications
It is estimated that about 40 percent of US family-owned businesses survive into second generation businesses, but only about 13 percent are passed down successfully to a third generation. One of the main reasons for this is that technological change moves so swiftly that it bypasses the older generation. “Unless the next generation is poised to update, and can get buy-in from longtime employees wedded to ‘the way we always did it,’ a business can quickly become obsolete.”Karen E. Klein, “When the Third Generation Runs the Family Biz,” Bloomberg BusinessWeek, April 9, 2010, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/apr2010/sb2010049_806426.htm. It is understood that family businesses will have different technology needs depending on their size, industry, and growth objectives. For many family businesses, however, the move to greater technology integration should be seen as a natural part of business evolution.
With respect to e-business and e-commerce, the commitment of a family business to digital technology will be a necessary precursor to the integration of e-business solutions. E-business is discussed in more detail in Chapter 4 "E-Business and E-Commerce". The commitment to e-commerce should also be seen as a natural part of business evolution and a necessary response to the ubiquitous nature of the Internet. E-commerce for the small business is also discussed in greater detail in Chapter 4 "E-Business and E-Commerce".
KEY TAKEAWAYS
• Family businesses offer increased customer value because they are associated with families instead of impersonal corporate entities.
• Not all family businesses may choose to integrate digital technology, e-business, and e-commerce into their planning and operations. The level of integration will occur on a continuum. Given the extent to which digital technology pervades business, however, it will be difficult to ignore it. The same is true for e-business and e-commerce.
• Overpaying or underpaying family members has an effect on cash flow.
EXERCISES
1. Select two family businesses in your area. Interview each business owner about how he or she currently uses technology in the business and what the plans are for future technology integration. Prepare a three- to five-page report on your findings.
2. Select three family businesses that you patronize. Think about what you see as the source(s) of customer value for each business. Interview the owner(s) of each business and ask them to describe the customer value that they offer. Compare your thoughts with what the owners said. Are they different? How? If they are different, what might account for the differences?
Disaster Watch
What Happens Now?
“From the day he opened his jewelry store in 1980, Michael Genovese, 57, expected his son Joseph, now 32, to come into and eventually take over the business. Joe started working there part time while still in junior high, engraving and polishing. ‘Dad offered me a job, and I jumped at it,’ he recalls. He did repairs, made jewelry, and worked in sales. ‘He worked hard and did the dirtiest jobs’ as he learned the business from the bottom up, says Mike.”
“After graduating from college, Joe returned to the store, although Mike had urged him to first ‘get some different experience working in another job.’”
“Back in the store, Joe was soon out-selling the other salespeople. Mike also began gradually training him in management duties—i.e., buying, working with vendors, personnel duties (like hiring and firing), financial matters, and managing sales staff—as he groomed him to lead the business. ‘I never had a written [transition] plan, says Mike, ‘but in my mind I planned this from the time he was a kid working here.’”
Then disaster struck. Mike had a serious heart attack. He was incapacitated by bypass surgery and months of recovery. Everything started going haywire. Joe’s older brother, who never before had any interest, has now expressed an interest in the business. He has had several years of experience in another job and feels that it would be appropriate to come into the business at a high salary. In the meantime, the other salespeople are beginning to express dissatisfaction with their compensation and benefit plans, feeling that Joe has always received special treatment. There is a lot of dissension at the jewelry store. Joe is ready to tear his hair out. What should he do?William George Shuster, “Family Business in Crisis: Letting Go,” JCK Magazine, March 2003, accessed October 8, 2011, www.jckonline.com/article/282706-Family _Business_in_Crisis_Letting_Go.php. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/03%3A_Family_Businesses/3.05%3A_The_Three_Threads.txt |
Vermont Teddy Bear Company
In 1980, John Sortino got the idea for making teddy bears. He was playing with his young son, Graham, and noticed that none of Graham’s 38 stuffed animals was made in the United States. This inspired John to make a teddy bear for Graham—named Bearcho. John then went on to make others, falling in love with the idea of making them by hand. Bearcho was soon followed by Buffy, Bearazar, and Fuzzy Wuzzy, all made in his wife’s sewing room. By 1983, John was selling his bears from a gift cart at an open-air market in Burlington, Vermont. The sale of his first bear took 4 days, and it took 1 year to sell 200 bears.“The Vermont Teddy Bear Story,” Vermont Teddy Bear Company, accessed March 24, 2012, www.vermontteddybear.com/Static/Our-Story.aspx; “Vermont Teddy Bear Company,” Score.org, accessed March 24, 2012, www.score.org/success-stories/vermont-teddy-bear-company. Today, the Vermont Teddy Bear Company produces about 300,000 bears a year.
The Vermont Teddy Bear Company has tapped into America’s long-standing love affair with teddy bears by creating a wide variety of customized teddy bears and shipping them to customers via the well-recognized Bear-Gram, “…a customized bear placed in a colorful box with an air hole and game printed on the inside, and enclosed with a personalized greeting and candy treat.”“The Vermont Teddy Bear Story,” Vermont Teddy Bear Company, accessed March 24, 2012, www.vermontteddybear.com/Static/Our-Story.aspx. The company has experienced many changes, including John’s departure in 1995 to pursue other interests and the addition of Pajamagram and Calyx Flowers as additional unique brands, but the Vermont Teddy Bear Company remains a household name and a Vermont icon.
Jay Bruns, vice president of branding, talks about the importance of knowing how to present the product so the company can grow further. Right now, a Vermont Teddy Bear is a unique gift item that promises quality for life, but the dynamics of gifting have changed. Same day or overnight delivery is not special anymore, so a Vermont Teddy Bear must offer something more than convenience. It needs to be a “go-to” gift of choice rather than an emergency or “last-minute” gift. This requires presenting the product as fresh and special.Telephone interview with Jay Bruns, vice president of branding, Vermont Teddy Bear Company, March 9, 2012. E-commerce is an integral part of Vermont Teddy Bear’s marketing strategy, with online sales accounting for more than one-half of its total sales. The company saw the growth in online buying and launched its website in October 1996 in an effort to reach the online consumer base. Elisabeth Robert, the CEO at the time, saw the potential synergy between radio and the Internet and used the power of the company’s radio advertising “…to direct customers to the company’s website where they could actually see the bears they were ordering.”Portland Helmich, “Not Your Average Bear,” Business People Vermont, 2002, accessed March 24, 2012, www.vermontguides.com/2002/2-feb/teddybear.htm.
Victor Castro, director of e-commerce, describes the company’s e-commerce strategy as direct marketing with a focus on easy ordering and the customer being able to interact with the brand. Convenience has become even more convenient, and the Vermont Teddy Bear Company makes things simple. As the consumer becomes more proficient online, it will be necessary to communicate properly what the Vermont Teddy Bear gift is all about (i.e., the experience of owning the bear). Castro says that the company has been very successful at that. However, the company’s e-commerce strategy must evolve with changes in the online customer. Telephone interview with Victor Castro, director of e-commerce, Vermont Teddy Bear Company, March 9, 2012.
To learn more about the Bear-Gram, go to www.vermontteddybear.com/Static/Bear-Grams.aspx. To take the online factory tour, go to www.vermontteddybear.com/Static/tour-welcomestation.aspx.
Video Clip \(1\):
PBS Curiosity Quest—Vermont Teddy Bear
A tour of the Vermont Teddy Bear factory. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/04%3A_E-Business_and_E-Commerce/4.01%3A_Chapter_Introduction.txt |
Learning Objectives
1. Define e-business and e-commerce and explain the difference between them.
2. Understand that there are several different types of e-commerce and that a business can be engaged in more than one type at the same time.
3. Explain what a business model is and why the model that is selected is so important.
As stated in "Foundations for Small Business", e-business and e-commerce are terms that are often used interchangeably. But e-business and e-commerce are not the same. This section will elaborate on the differences between the two and some of the foundational knowledge that is critical to understanding and using e-commerce in particular.
E-Business
"Foundations for Small Business" talked about e-business in terms of using the Internet and online technologies to create operational efficiencies, thereby increasing customer value. Kelly Wright, “E-Commerce vs. E-Business,” Poole College of Management, November 27, 2002, accessed October 10, 2011, scm.ncsu.edu/scm-articles/article/e-commerce-vs.-e-business. It is important that small businesses understand the nature of e-business and how it can facilitate operations as well as growth—if growth is desired. It has been said on other occasions, and it will continue to be said, that not all small businesses look for growth, choosing instead to happily remain small. For the small businesses that do want to grow, however, e-business can help them do it.
E-Business Components
E-business involves several major components: Terri C. Albert and William B. Sanders, e-Business Marketing (Upper Saddle River, NJ: Prentice-Hall, 2003), 2–4; and Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 4. business intelligence (BI), customer relationship management (CRM), supply chain management (SCM), enterprise resource planning (ERP), e-commerce, conducting electronic transactions within the firm, collaboration, and online activities among businesses.
Business intelligence is about the activities that a small business may undertake to collect, store, access, and analyze information about its market or competition to help with decision making. When conducted online, BI is efficient and quick, helping companies to identify noteworthy trends and make better decisions faster. BI has been described as “the crystal ball of the 21st century.”Lena L. West, “Business Intelligence: The Crystal Ball of Champions,” Small Business Computing.com, April 11, 2006, accessed October 10, 2011, www.smallbusinesscomputing.com/biztools/article.php/3598131/Business -Intelligence-The-Crystal-Ball-of-Champions.htm.
As defined in Chapter 2 "Your Business Idea: The Quest for Value", customer relationship management (CRM) refers to “…a customer service approach that focuses on building long-term and sustainable customer relationships that add value for the customer and the company.”Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 759. It is a company-wide strategy that brings together information from all data sources within an organization (and sometimes from external data sources) to give one holistic view of each customer in real time. The goal is to reduce costs and increase profitability while providing customer satisfaction.“What Is CRM?,” cestinationCRM.com, February 19, 2010, accessed October 10, 2011, www.destinationcrm.com/Articles/CRM-News/Daily-News/What-Is-CRM-46033.aspx. CRM applications are available for even the smallest businesses.
Every small business has a supply chain, the network of vendors that provide the raw components that are needed to make a product or deliver a service. The management of this network is known as supply chain management (SCM). SCM is about efficiently and effectively improving the way that a company finds those raw components and then delivers the product or the service to the customer. Thomas Wailgum and Ben Worthen, “Supply Chain Management Definition and Solutions,” CIO, November 20, 2008, accessed October 10, 2011, www.cio.com/article/40940/Supply_Chain_Management_Definition_and_Solutions. SCM applications are now available for small businesses. More details about SCM are presented in Chapter 12 "People and Organization".
Enterprise resource planning (ERP), as mentioned in Chapter 1 "Foundations for Small Business", is about integrating all departments and functions across a company (sales, marketing, human resources, finance, accounting, production, engineering, etc.) into a single computer system that can serve the particular needs of each department. The objective is to provide information quickly and efficiently to those who need it. Small businesses have many vendor choices for ERP systems. There are more than thirty vendors in the field, and they are looking to small and midsize businesses as their primary growth market. Mary O. Foley, “ERP for Small Business: The Time is Ripe,” Inc., October 1, 2007, accessed October 10, 2011, technology.inc.com/2007/10/01/erp-for-small-business -the-time-is-ripe. More details about ERP are provided in Chapter 12 "People and Organization".
E-commerce, as defined in Chapter 1 "Foundations for Small Business", is the marketing, selling, and buying of goods and services online. It generates revenue, which e-business does not. E-commerce is typically associated with e-marketing, discussed in Chapter 8 "The Marketing Plan", but most of this chapter is dedicated to the operational, nonmarketing dimensions of e-commerce.
Conducting electronic transactions within a firm can occur through an intranet, e-mail, and instant messaging. An intranet is a private network within a business that is used for information sharing, processing, and communication. The goal is to “streamline the workplace and allow easy information exchange within an organization.”Dachary Carey, “What Is Intranet Technology Used For?,” Life123, accessed October 10, 2011, www.life123.com/technology/internet/intranet/what-is-intranet.shtml.
Collaboration can occur internally or externally, and it often involves business partners. The goal is to help teams or business partners communicate with each other more effectively and efficiently, manage projects and shared materials, save companies the costs of travel, and reduce travel-related productivity losses. Gerry Blackwell, “Altogether Now: Comparing Collaboration Software,” Small Business Computing.com, January 28, 2008, accessed October 10, 2011, www.smallbusinesscomputing.com/buyersguide/article.php/10729_3724501_/Altogether-Now-Comparing-Collaboration-Software.htm. E-mail, instant messaging, newsgroups, bulletin boards, discussion boards, virtual team rooms, online meetings, and wikis are common means of collaboration. A wiki is a web page that can be viewed and modified by anybody with a web browser and access to the Internet unless it is password protected.“7 Things You Should Know about Wikis,” Educause Learning Initiative, July 2005, accessed October 10, 2011, net.educause.edu/ir/library/pdf/ELI7004.pdf. The most well-known wiki is Wikipedia.
Online activities between businesses focus on information sharing and communication via e-mail, online meetings, instant messaging, and extranets. An extranet is the part of an intranet that is made available to business partners, vendors, or others outside a company. It allows a business “to share documents, calendars, and project information with distributed employees, partners, and customers” and “it enables 24/7 private, secure access to collaborative tools with just an Internet connection.” “Communicate Quickly and Efficiently Through Intranets, Extranets and Portals,” Gozapit Interactive, 2009, accessed October 10, 2011, www.gozapit.com/intranet-extranet.htm. They make communication easier, eliminate redundant processes, reduce paperwork, increase productivity, provide immediate updates and information, and provide quick response times to problems and questions.“Communicate Quickly and Efficiently Through Intranets, Extranets and Portals,” Gozapit Interactive, 2009, accessed October 10, 2011, www.gozapit.com/intranet-extranet.htm. The result is money and time saved for employees, the company, vendors, and your customers. Commercial transactions typically do not take place on extranets.
As integral as e-business may be to many small businesses, however, there will be small businesses that choose not to go the e-business route. Small businesses that are nonemployers and/or are very small operations that choose to stay that way—for example, local delis, gift shops, restaurants, dry cleaners, and ice cream shops can be and are successful without having to make a commitment to e-business. Therefore, a small business can choose to incorporate all, some, or none of the e-business components. Given the ways in which the Internet continues to transform small businesses, however, it would be virtually impossible for a small business to operate totally outside the realm of e-business.
E-Commerce
The moment that an exchange of value occurs, e-business becomes e-commerce. Elias M Awad, Electronic Commerce: From Vision to Fulfillment (Upper Saddle River, NJ: Pearson Education, 2005), 4. E-commerce is the revenue generator for businesses that choose to use the Internet to sell their goods and services. Some small businesses rely on the Internet to grow and survive. As stated in Chapter 1 "Foundations for Small Business", many small businesses also look to e-commerce for their own business needs, such as computers and office technology, capital equipment and supplies, office furnishings, inventory for online sale, or other business-related goods.“E-commerce: Small Businesses Become Virtual Giants on the Internet,” accessed October 10, 2011, www.score.org/system/files/become_a_virtual_giant.pdf. This is not surprising considering the pervasiveness of the Internet for business transactions of all shapes and sizes.
Types of E-Commerce
Every Internet business is either pure-play or brick-and-click. A pure-play business, such as Amazon and Zappos, has an online presence only and uses the capabilities of the Internet to create a new business. Brick-and-click businesses, such as Barnes and Noble and Vermont Country Store, combine a physical presence with an online presence. These businesses use the Internet to supplement their existing businesses. Sandeep Krishnamurthy, E-Commerce Management: Text and Cases (Mason, OH: South-Western, 2003), 73.
There are several different types of e-commerce. A common classification system is with respect to the nature of transactions or the relationships among participants. Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 8. There are seven major types of e-commerce:
1. Business-to-business (B2B) e-commerce, where businesses focus on selling to other businesses or organizations, is the largest form of e-commerce. Kenneth C. Laudon and Carol G. Traver, E-commerce: Business, Technology, Society (Upper Saddle River, NJ: Prentice Hall, 2007), 58; Turban et al., 2008, 8. Cisco, Staples, and Spiceworks (information technology [IT] and IT networks for the small- and medium-sized business) are all B2B companies.
2. Business-to-consumer (B2C) is the earliest form of e-commerce, but it is second in size to B2B. It refers to retail sales between businesses and individual consumers. Consumers gather information; purchase physical goods, such as books and clothing; purchase information goods, such as electronic material or digitized content, such as software; and, for information goods, receive products over an electronic network. Zorayda Ruth Andam, “e-Commerce and e-Business,” Asia and Pacific Training Centre for Information and Communication Technology for Development, May 2003, accessed June 21, 2012, www.unapcict.org/ecohub/resou...ad/attachment1.
3. Consumer-to-consumer (C2C) e-commerce is where consumers sell products and personal services to each other with the help of an online market maker to provide catalog, search engine, and transaction-clearing capabilities so that products can be easily displayed, discovered, and paid for. The most well-known C2C business is eBay, but there are many other online market makers as well. Craigslist is an extremely popular small e-commerce business for placing classified ads.
4. Business-to-government (B2G) e-commerce can generally be defined as transactions with the government. The Internet is used for procurement, filing taxes, licensing procedures, business registrations, and other government-related operations. This is an insignificant segment of e-commerce in terms of volume, but it is growing.
5. Consumer-to-business (C2B) e-commerce is between private individuals who use the Internet to sell products or services to organizations and individuals who seek sellers to bid on products or services.Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 8.Elance is an example of C2B where a consumer posts a project with a set budget deadline and within hours companies and/or individuals review the consumer’s requirements and bid on the project. The consumer reviews the bids and selects the company or individual that will complete the project. Elance empowers consumers around the world by providing the meeting ground and platform for such transactions.“Ecommerce Definition and Types of Ecommerce,” DigitSmith, accessed October 10, 2011, www.digitsmith.com/ecommerce-definition.html. Priceline.com is a well-known example of C2B e-commerce.
6. Mobile commerce (m-commerce) refers to the purchase of goods and services through wireless technology, such as cell phones, and handheld devices, such as Blackberries and iPhones. Japan has the lead in m-commerce, but it is expected to grow rapidly in the United States over the next several years. eMarketer predicts mobile content revenues will grow to more than \$3.53 billion in 2014, a compound annual growth rate of nearly 20 percent for the period 2009–2014, with the fastest growth coming from mobile music.“Mobile Content Soars Thanks to Device and Network Advances,” eMarketer, August 31, 2010, accessed October 10, 2011, www.emarketer.com/Articles/Print.aspx?1007899.
7. Peer-to-peer (P2P) technology makes it possible for Internet users to share files and computer resources directly without having to go through a central web server. P2P began with Napster offering free music downloads via a file-sharing system.Free Encyclopedia of Ecommerce, “Peer-to-Peer Technology (P(2P),” accessed June 1, 2012, ecommerce.hostip.info/pages/8...ology-P2P.html. Tamago launched the world’s first P2P commerce system in 2005, which allowed people to sell every type of digital media directly from their computers to customers all over the world. People who publish videos, photos, music, e-books, and so forth can earn royalties, while buyers earn commissions for distributing media to others.“Tamago Launches First Peer-to-Peer eCommerce System,” PR Leap, October 15, 2006, accessed October 10, 2011, www.prleap.com/pr/51931.
Although these types of e-commerce have been discussed individually, there are many instances in which one company engages in multiple types. Office Depot and Staples are brick-and-click businesses that engage in B2B, B2C, and perhaps B2G e-commerce. Carbonite and Gourmet Gift Baskets are both pure-play small businesses that engage in B2C and B2B e-commerce.
E-Commerce Business Models
The decision to engage in e-commerce is an important one. The advantages are clear: lower business costs; 24/7 accessibility anywhere; the potential for stronger customer service; the ability to introduce a niche product; the ability to reach global markets on a more equalized basis with larger firms, making mass customization possible; and greater customer loyalty. But the risks are there as well. Internet problems, website problems, security and privacy breaches, intellectual property theft, legal liability, product and/or service failure, customer deceit, and customer dissatisfaction are but a few of the risks. Therefore, the choice of an e-commerce business model must be made carefully. Each model will have different implications in terms of business planning and strategy.
An e-commerce business model is the method that a business uses to generate revenue online. “The business model spells out how a company makes money by specifying where it is positioned in the value chain. Some models are quite simple. A company produces a good or service and sells it to customers. If all goes well, the revenues from sales exceed the cost of operation and the company realizes a profit. Other models can be more intricately woven.”Michael Rappa, “Business Models on the Web,” DigitalEnterprise.org, January 17, 2010, accessed October 10, 2011, digitalenterprise.org/models/models.html. Another way to look at a business model is that it “reflects management’s hypothesis about what customers want, how they want it, and how the enterprise can organize to best meet those needs, get paid for doing so, and make a profit.”David J. Teece, “Business Models, Business Strategy and Innovation,” Long Range Planning 43, no. 2–3 (2010): 172–94. There are many models to choose from, and new models will continue to emerge as technology evolves and businesses look for new and creative ways to generate revenue. Some of the many e-commerce business models are as follows:For additional discussions of business models, see Michael Rappa, “Business Models on the Web,” DigitalEnterprise.org, January 17, 2010, accessed October 10, 2011, digitalenterprise.org/models/models.html; and Robert D. Atkinson et al., “The Internet Economy 25 Years After .Com: Transforming Commerce & Life,” Information Technology & Innovation Foundation, March 2010, accessed October 10, 2011, www.itif.org/files/2010-25-years.pdf.
• The virtual merchant model is used by online retailers that operate over the Internet only. FreshDirect is a small business that offers fresh food and brand-name groceries for home delivery in New York. Amazon is another example of a virtual merchant.
• The brokerage model brings buyers and sellers together and facilitates transactions. Supply Chain Connect is a small business that helps “companies optimize their purchasing and sales purchasing and sales processes through the use of e-commerce across a broad range of products including chemicals, plastics, wire and cable, and manufactured goods.” “About Supply Chain Connect,” Supply Chain Connect, accessed October 10, 2011, www.supplychainconnect.com.
• The incentive marketing model is a “customer loyalty program that provides incentives to customers such as redeemable points or coupons for making purchases from associated retailers.”Michael Rappa, “Business Models on the Web,” DigitalEnterprise.org, January 17, 2010, accessed October 10, 2011, digitalenterprise.org/models/models.html. Cool Savings, a small business that uses this model, wants to be its customers’ free resource for valuable coupons, discounts, and special offers from their favorite brands and stores.
Because the business model will be at the center of the business plan, the model must be designed carefully. If a successful model is to be built, the model should effectively address the eight key elements listed in Table \(1\):. Although value proposition and the revenue model may be the most important and easily identifiable aspects of a company’s business model, the other six elements are equally important. Kenneth C. Laudon and Carol G. Traver, E-Commerce: Business, Technology, Society (Upper Saddle River, NJ: Prentice Hall, 2007), 58; Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 8.
Table \(1\): Key Elements of a Business Model
Components Key Questions
Value proposition Why should the customer buy from you?
Revenue model How will you earn your money?
Market opportunity What market space do you intend to serve, and what is its size?
Competitive environment Who else occupies your intended market space?
Competitive advantage What special advantages does your firm bring to the market space?
Market strategy How do you plan to promote your products or services to attract your target audience?
Organizational development What types of organizational structures within the firm are necessary to carry out the business plan?
Management team What kinds of experiences and background are important for the company’s leaders to have?
Source: Kenneth C. Laudon and Carol G. Traver, E-commerce: Business, Technology, Society (Upper Saddle River, NJ: Prentice Hall, 2007), 59.
E-Commerce Trends
For businesses already engaged in e-commerce and for those that are thinking about it, being aware of the latest e-commerce trends is important because they could have a long-term influence on the future of a company’s market. This influence, in turn, could mean life or death for your e-commerce operations. Several general e-commerce trends can be identified, and they are relevant to all e-commerce operations.
• E-commerce will continue to grab more market share. Heather Green, “US Ecommerce Growth to Pick Up in 2010, But Hit Mature Stride,” Bloomberg BusinessWeek, February 2, 2009, accessed October 10, 2011, www.BusinessWeek.com/the_thread/blogspotting/archives/2009/02/us _ecommerce_gr.html.
• It is expected that, in some way, the web will influence 53 percent of all purchases made in 2014. Geoffrey A. Fowler, “E-Commerce Growth Slows, But Still Out-Paces Retail,” Wall Street Journal, March 8, 2010, accessed October 10, 2011, blogs.wsj.com/digits/2010/03/08/e-commerce-growth-slows-but-still-out-paces-retail.
• The lines between online and offline commerce will become less defined. If somebody buys from a mobile device in your store, is that a web sale or a store sale? Retailers need to think of some new ways that they can take the web’s influence into account. Geoffrey A. Fowler, “E-Commerce Growth Slows, But Still Out-Paces Retail,” Wall Street Journal, March 8, 2010, accessed October 10, 2011, blogs.wsj.com/digits/2010/03/08/e-commerce-growth-slows-but-still-out-paces-retail.
• B2B e-commerce will continue to significantly outpace B2C e-commerce, representing more than 85 percent of all e-commerce.
• M-commerce is the fastest growing segment of visitors to e-commerce websites. If a business does not allow customers to both browse its catalog and conduct transactions on a mobile device, customers will seek out other brands that offer such experience. Frank Gruber, “Exploring the Latest E-Commerce Industry Trends,” Tech Cocktail, June 3, 2010, accessed October 10, 2011, techcocktail.com/exploring-the-latest-e -commerce-industry-trends-2010-06.
• Many businesses have increased their social marketing initiatives through a combination of Facebook pages, Twitter tweets, YouTube fan videos, and blogs. Any business that sells its products or services online without having a social strategy will suffer.“Recap of Ecommerce Trends from the Internet Retailer 2010 Conference,” Tealeaf, June 22, 2010, accessed October 10, 2011, tealeaf.typepad.com/blog/2010/06/recap-of-ecommerce-trends.html.
The following e-commerce trends specifically apply to small businesses:
• The Internet will continue to create opportunities for small businesses. It is now possible to buy a wide range of specialized products and services that are not available elsewhere. The Internet has provided a lifeline for many small producers and has allowed entrepreneurs to enter retailing without having to invest heavily in physical outlets.“E-Commerce Industry,” QFinance, accessed October 10, 2011, www.qfinance.com/sector-profiles/e-commerce. Small businesses can easily enter the e-commerce arena as pure-play businesses. Take Socrata, an online service that makes it easy to share data—anything from crime statistics to football schedules. This small start-up business discovered that federal agencies were the site’s biggest users. “It became clear that a really good place for our technology was helping government organizations share data in the interest of transparency.”John Tozzi, “Gov 2.0: The Next Internet Boom,” Bloomberg BusinessWeek, May 27, 2010, accessed October 10, 2011, www.BusinessWeek.com/smallbiz/content/may2010/sb20100526_721134.htm.
• Broadband and wireless networks will be everywhere. Small businesses will need to factor in the effect of the broadband revolution on their businesses. Steve King et al., “INTUIT Future of Small Business Report: Technology Trends and Small Business,” Intuit, June 2007, accessed October 10, 2011, http-download.intuit.com/http.intuit/CMO/intuit/futureofsmallbusiness/SR-1037B _intuit_tech_trends.pdf. Consider the case of the small, ten-person shop in Seattle that engraves plaques and trophies. Today, 60 percent of its business is conducted online, with customers who live outside the Seattle area. Secretary of Commerce Gary Locke, “Remarks at Organization for Economic Cooperation and Development (OECD) Conference,” December 9, 2009, accessed October 10, 2011, www.commerce.gov/news/secretary-speeches/2009/12/09/remarks -organization-economic-cooperation-and-development-oecd-conference.html.
• The Internet will continue to be a platform that provides small businesses with a wide range of new tools, services, and capabilities. Small businesses will find new ways to use the Internet, contributing to the blurred distinctions between the physical and the virtual worlds. Steve King et al., “INTUIT Future of Small Business Report: Technology Trends and Small Business,” Intuit, June 2007, accessed October 10, 2011, http-download.intuit.com/http.intuit/CMO/intuit/futureofsmallbusiness/SR-1037B _intuit _tech_trends.pdf.
• Small business relationships will become increasingly virtual as online social networks expand.Steve King et al., “INTUIT Future of Small Business Report: Technology Trends and Small Business,” Intuit, June 2007, accessed October 10, 2011, http-download.intuit.com/http.intuit/CMO/intuit/futureofsmallbusiness/SR-1037B _intuit_tech_trends.pdf. Many small businesses are promoting their presence on Facebook and Twitter. Westbrook Lobster and Arisco Farms are both small businesses in Connecticut that have an online social presence. Naked Pizza in New Orleans has a presence on Twitter that has proven to be a boon to its business.Abbey Klaasen, “Twitter Proves Its Worth as a Killer App for Local Businesses,” Advertising Age, May 18, 2009, accessed October 10, 2011, adage.com/article/digital/twitter-proves-worth-a-killer-app-local-businesses/136662.
Video Clip \(1\):
Naked Pizza on Twitter
Naked Pizza can now be followed on Twitter.
Is E-Commerce for All Small Businesses?
Despite the popularity and pervasiveness of e-commerce, not all small businesses may be interested in pursuing e-commerce as a part of their businesses. Many small businesses survive without an online presence. However, business analysts have agreed for a long time “that for any company larger than a local mom and pop store, e-commerce is now a business requirement.”Beverly Kracher and Cynthia L. Corritore, “Is There a Special E-Commerce Ethics?,” Business Ethics Quarterly 14, no. 1 (2004): 71–94.
KEY TAKEAWAYS
• E-business and e-commerce are not synonymous terms. E-commerce generates revenue. E-business does not.
• E-business and/or e-commerce may not be of interest to all small businesses. However, using technology well is proving to be one of the most prominent drivers of business success.
• E-business consists of several major components, one of which is e-commerce.
• Every Internet business is either pure-play (an Internet presence only) or brick-and-click (having both a physical and an online presence).
• The seven major types of e-commerce are B2B, B2C, C2C, B2G, C2B, m-commerce, and P2P.
• An e-commerce business model is the method that a business uses to generate revenue online. Some models are very simple; others are more complicated. New business models are being introduced all the time.
• E-commerce will continue to grab more market share, and the line between online and offline commerce will become less defined.
EXERCISES
1. In the Frank’s All-American BarBeQue case in Chapter 2 "Your Business Idea: The Quest for Value", the son, Robert Rainsford, wants to bring his expertise to improving the operations of the business. What other elements of digital technology, e-business, and e-commerce could be used to improve operations?
2. Joan Watson is the owner of Joan’s Gourmet Baskets, a small brick-and-mortar business that specializes in gourmet gift and picnic baskets. Joan has been keeping up with the fancy food and gourmet food trends (being a great fan of the Fancy Food Show that is held several times a year), and she thinks she should tap into this sector by creating an online business that will complement her physical business. This would make her baskets available to a wider market. She is proud of the quality of her products and the customer loyalty that she has earned through her hard work and hopes she will be able to be just as successful in the e-commerce environment.
Joan knows that she needs more information before proceeding further. She has asked you to prepare a report that answers the following questions: How will her physical business compare to her online business; that is, where will things be the same, and where will they be different? What business model should she use? What are the special challenges and obstacles she will face as she moves from traditional commerce to e-commerce? What is Web 2.0 all about and does she need to be concerned about it? She expects that you will do additional gourmet foods research to support your ideas. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/04%3A_E-Business_and_E-Commerce/4.02%3A_E-Business_and_E-Commerce_-_The_Difference.txt |
Learning Objectives
1. Explain the issues associated with whether a small business should buy or build its website.
2. Explain some of the legal issues that are relevant to e-commerce.
3. Discuss the need for an ethical website, particularly in terms of security, privacy, and trust.
4. Explain why order fulfillment is such an important part of successful e-commerce.
There are multiple parts to the creation of an e-commerce website: the infrastructure (the nuts and bolts building of the site), the e-marketing side (the design and creation of a web presence, which is discussed in Chapter 7 "Marketing Strategy"), and the operational side. The operational side is the focus of this section.
The Website: Buy or Build?
Unless a small business owner is technologically savvy or employs someone who is, building the company’s website in-house from the ground up is not a particularly good idea. An effective website presence requires a good looking, professionally designed website. There are several approaches to having someone else build that website. Two are described here.
• Full-service web developers provide design, programming, support, hosting, search engine optimization, and more. Any combination of the services can be selected. Having the developer perform all the services would be the most expensive alternative. Hosting is the housing, serving, and maintaining of the files for one or more websites.“What Is Hosting (Web Site Hosting, Web Hosting, and Webhosting)?,” accessed October 21, 2011, searchsoa.techtarget.com/definition/hosting.Search engine optimization refers to the strategies intended to position a website at the top of search engines such as Google, Yahoo!, and Bing.Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 758.
• A much lower-priced option is to select one of the many companies online that can help you to design your website. Typically these sites provide a choice of website design templates that can be easily edited; design services that are available if none of the templates meet your needs; hosting; domain name selection (your business address or name on the Internet, e.g., gone.2012books.lardbucket.org) and domain name registration (registering your domain name with a domain name registrar and paying a fee that must be renewed annually); Christopher Heng, “How to Register Your Own Domain Name,” Thesitewizard.com, 2010, accessed October 10, 2011, www.thesitewizard.com/archive/registerdomain.shtml. and search engine placement (submitting your website to specific search engines of your choice). Intuit.com and Webs.com are two companies that offer these and other services. The lowest level of services are often free.
Video Clip \(1\)
Domain Name Dollar Store
A humorous look at getting a URL for your website at a rock bottom price.
The ultimate cost for a website will be a function of its size, complexity, and the level of design. No two projects will cost the same. Part of the process of building a website, however, should be conducting some research and talking with website designers. The Internet offers a variety of sources on how to determine how much a website should cost. WebpageFX.com offers a historical perspective on website costs, a cost calculator to find out how much a web project would cost, and examples of specific web design and website development projects with cost figures.“How Much Should a Web Site Cost?,” 2010, accessed October 10, 2011, www.webpagefx.com/How-much-should-web-site-cost.html.
Consider the following two scenarios:
• “A small business needs a website for their business so they have a presence on the Internet. The site is simple—about 5 pages with information about the business, the services they provide, and a form that can be submitted and the information received via email. The budget isn’t available for creating a graphic ‘look,’ and existing images will be used. A smaller, less experienced designer may take on a project like this for a few hundred dollars. A medium sized firm might quote \$3000 to \$4000 depending on variables. A larger firm would probably not take a project this small.”“How Much Does a Website Cost?,” Planetlink.com, accessed October 10, 2011, www.planetlink.com/articles/how_much_does_website_cost.html.
• “A mail order company wants to get into online sales. They currently have no website. They have a narrow mix of about 200 products with a broad target market; it’s also time to update their image. Depending on a wide range of variables, a project like this could start at about \$7000 and go into six figures.”“How Much Does a Website Cost?,” Planetlink.com, accessed October 10, 2011, www.planetlink.com/articles/how_much_does_website_cost.html.
There is no easy answer to the question of how much a website will cost. “A simple answer is that it will cost whatever a business is willing to spend—anywhere from free to millions of dollars.”“How Much Does a Website Cost?,” Planetlink.com, accessed October 10, 2011, www.planetlink.com/articles/how_much_does_website_cost.html. A better way to address cost is to answer the following questions:“How Much Does a Website Cost?,” Planetlink.com, accessed October 10, 2011, www.planetlink.com/articles/how_much_does_website_cost.html.
• What are your needs, goals, and expectations?
• What are the needs and expectations of your visitors, customers, and clients?
• Is your business already established with its unique brand or identity?
• What is required in terms of the skills, experiences, and level of design?
• Do you want to hire a high-profile design shop, a medium-sized design studio, a small company, or a student?
• What can you afford to budget for your project?
Legal
There is nothing easy about the law. It is complex under the best of circumstances, but it is necessary to protect the rights and privileges of people and businesses. Companies that choose to engage in e-commerce must be aware of the legal environment because “a lack of awareness…can lead to missteps as well as missed opportunities….”Kathleen Mykytn and Peter P. Mykytn, “The Importance of the Law for E-Commerce Strategies,” Information Systems Management 22, no. 2 (2005): 50–56. A summary of important legal issues for e-commerce is in Table \(1\. However, the focus here is on three areas: electronic transactions, intellectual property, and jurisdiction.
Table \(1\: Important Legal Issues for E-Commerce
Issue Description
Jurisdiction The ability to sue in other states or countries.
Electronic transactions All transactions that take place online.
Liability The use of multiple networks and trading partners makes documenting responsibility difficult. How can liability for errors, malfunctions, or fraudulent use of data be determined?
Identity fraud The Identity, Theft, and Assumption Deterrence Act of 1998 makes identity fraud a federal felony carrying a three- to twenty-five-year prison sentence.
Defamation Is the Internet service provider liable for material published on the Internet because of services it provides or supports? (Usually not.) Who else is liable for defamation? What if the publisher is in another country?
Intellectual property law Protects creations of the human mind.
Digital signatures Digital signatures are recognized as legal in the United States and some but not all other countries.
Regulation of consumer The United States allows the compilation and sale of customer databases. The European Union does not.
Time and place An electronic document signed in Japan on January 5 may have the date January 4 in Los Angeles. Which date is considered legal if a dispute arises?
Electronic contracts If all the elements to establish a contract are present, an electronic contract is valid and enforceable.
Taxation Taxation of sales transactions by states is on hold in the United States and some but not all other countries. Expect this issue to be revived because the potential for increased revenue to the states is significant.
Source: Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 795.
Electronic transactions are the many kinds of transactions that take place online, including contractual dealings, buying and selling of goods and services, information exchange, financial transactions (credit card payments; payor services, such as PayPal; and money transfers), and communications. When developing a website, the small business owner must ensure that all online business transactions will be secure, particularly those involving money. This discussion must take place with whomever is developing your website.
Intellectual property is “a creation of the mind, such as inventions, literary and artistic works, and symbols, names, images, and designs, used in commerce.”Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 774. Music, photos, videos, digital news, and artwork are forms of intellectual property that can be transmitted over the Internet. All small business owners need to be concerned about the theft of intellectual property. They are afforded multiple protections, which are summarized in Table \(2\.
Table \(2\ Intellectual Property Protections
Law Protection Provided by the Law
Intellectual property law Protects creations of the human mind
Patent law Protects inventions and discoveries
Copyright law Protects original works of authorship, such as music and literary works and computer programs
Trademark law Protects brand names and other symbols that indicate source of goods and services
Trade secret law Protects confidential business information
Law of licensing Enables owners of patents, trademarks, copyrights, and trade secrets to share them with others on a mutually agreed-on basis
Law of unfair competition dealing with counterfeiting and piracy Protects against those who try to take a free ride on the efforts and achievements of creative people
Source: Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 779.
It is important to protect intellectual property because businesses will not realize the full benefits of their inventions and would be inclined to focus less on research and development. Additionally, without intellectual property protections, “exporters face unfair competition abroad, non-exporters face counterfeit imports at home, and all businesses face legal, health and safety risks from the threat of counterfeit goods entering their supply chains.” “Why Protect Intellectual Property?,” StopFakes.gov, accessed June 1, 2012, origin.www.stopfakes.gov/lear...-protect-my-ip. Unfortunately, US small businesses are at a disadvantage because“Why Protect Intellectual Property?,” StopFakes.gov, accessed June 1, 2012, origin.www.stopfakes.gov/lear...-protect-my-ip.
• They may lack the knowledge, expertise, or resources necessary to prevent the theft of their ideas and products.
• Many small businesses do not have personnel and operators overseas, so they do not have the necessary eyes and ears needed to be vigilant. The theft of their ideas and products often goes undetected.
• Small businesses generally do not have the kinds of access and resources that are likely available to larger companies (e.g., specialized legal counsel).
Because of the complexities of intellectual property protections, this area requires the services of an attorney, preferably one experienced and knowledgeable in cyberlaw.
Jurisdiction refers to the right and power that a court has to interpret and apply the law in a particular geographic location.Peter LaSorsa, “Selling Products Online: What Legal Jurisdiction,” Practical eCommerce, November 5, 2008, accessed October 10, 2011, www.practicalecommerce.com/articles/860-Selling-Products-Online-What-Legal -Jurisdiction-Applies-. “A court must have jurisdiction over the litigants and the claims before it entertains a lawsuit. In the context of Internet commerce, this issue erupts when a dispute arises between businesses from different states [or countries].”Elias M. Awad, Electronic Commerce: From Vision to Fulfillment (Upper Saddle River, NJ: Prentice-Hall, 2005), 387. Many small businesses will be selling products online in other states and in other countries, so it is important to understand the jurisdictions that might be applicable to any online transaction. “In many cases, laws from the customer’s state are the ones that will apply in the event a problem arises. This is equally true regarding the laws of other countries.”Peter LaSorsa, “Selling Products Online: What Legal Jurisdiction,” Practical eCommerce, November 5, 2008, accessed October 10, 2011, www.practicalecommerce.com/articles/860-Selling-Products-Online-What-Legal -Jurisdiction-Applies-. From the perspective of any business, but particularly a small business, it would be much easier from both a time and a money perspective to have an issue litigated in the home state of a business. Although there are no guarantees, these steps can be taken to increase the chances of a dispute being settled in the home state of a business: Peter LaSorsa, “Selling Products Online: What Legal Jurisdiction,” Practical eCommerce, November 5, 2008, accessed October 10, 2011, www.practicalecommerce.com/articles/860-Selling-Products-Online-What-Legal -Jurisdiction-Applies-.
1. If using a contract with another party, make sure the contract says that any dispute must be filed in your home state and that both parties to the contract agree to jurisdiction in that state.
2. When a customer is purchasing an item on the website of a business, one of the terms and conditions of the transaction should be that the customer agree to jurisdiction in the home state of that business. This can be done with a check box next to the statement. Make the customer check it off before completing the purchase.
3. A less effective way is to include a disclaimer on the website that any transaction will convey jurisdiction to the home state of a business, and any dispute must be heard by a court of competent jurisdiction in the home state of the business.
All these steps should also be considered when selling to other countries. However, the laws in other countries will undoubtedly introduce complications into protecting the US-based business. Take the example of Yahoo! and the sale of Nazi memorabilia on one of its auction websites. A French court ruled that such sales breached French law against the display of Nazi items. Yahoo! took steps to remove and ban all such hate paraphernalia from its auction sites, but it continued to fight jurisdiction of the French ruling in American courts.Kathleen Mykytn and Peter Mykytn, “The Importance of the Law For E-Commerce Strategies,” Information Systems Management 22, no. 2 (2005): 50–56. It would be very easy for a small business to inadvertently find itself in a similar situation. That is why a business needs to be careful when selling outside its home country. Be familiar with foreign laws. This is not an easy task because the minute a business website goes live, the business goes global. The laws of the world suddenly become relevant.
Ethical Issues
It is known that “ethical factors do play a significant role in e-consumers’ purchasing decisions.”Avshalom M. Adam, Avshalom Aderet, and Arik Sadeh, “Do Ethics Matter to E-Consumers?,” Journal of Internet Commerce 6, no. 2 (2007): 19–34. Therefore, ethical factors should be of major concern in e-commerce and, accordingly, in the information and protections offered by an e-commerce website.
It has been observed that the “Internet represents a new environment for unethical behavior,” and “ethical transgressions are more likely to happen in e-transactions as compared to face-to-face transactions.”Sergio Roman, “The Ethics of Online Retailing: A Scale Development and Validation from the Consumer’s Perspective,” Journal of Business Ethics, 72 (2007): 131–48. To a large extent, this is due to the absence of physical and interpersonal cues that are present in traditional retailing or business settings. The implication is that e-commerce operations should focus more specifically and explicitly on the ethics messages that are being conveyed by the website. Thus the focus of this ethics discussion is on three major components of e-commerce ethics: security, privacy, and trust.
Security and Privacy
Website security (the protection of a company, its suppliers, its customers, and its employees from criminal activity) is a critical consideration for any small business engaged in e-commerce. The Internet is a global playground for criminals. It is less risky to steal online because “the potential for anonymity on the Internet cloaks many criminals in legitimate-looking identities, allowing them to place fraudulent orders with online merchants, steal information by intercepting e-mail,…shut down e-commerce sites by using software viruses,” Kenneth C. Laudon and Carol G. Traver, E-commerce: Business, Technology, Society (Upper Saddle River, NJ: Prentice Hall, 2007), 248. and steal financial information and money. This new type of crime is referred to as cybercrime, and it is a serious threat to e-commerce.
Cybercrime refers to any criminal activity that is done using computers and the Internet,“Cybercrime,” TechTerms.com, accessed October 10, 2011, www.techterms.com/definition/cybercrime. and it includes a wide range of offenses. Downloading illegal music, stealing from online bank accounts, stealing credit card numbers and personal information, stealing identities, posting confidential business information on the Internet, and creating and distributing viruses on other computers are only some of the thousands of crimes that are considered cybercrimes.“Cybercrime,” TechTerms.com, accessed October 10, 2011, www.techterms.com/definition/cybercrime. Cybercrimes can take place anytime and anyplace. It has cost American companies a median loss of \$3.8 million a year, and data protection and information technology (IT) practitioners from 45 US organizations from various sectors reported that, across their companies, 50 successful attacks were experienced over a four-week period.Alejandro Martinez-Cabrera, “Cybercrime Costs Firms \$3.8 Million Yearly,” Computer Crime Research Center, August 3, 2010, accessed October 10, 2011, www.crime-research.org/news/03.08.2010/3807.
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The Business of Cybercrime
Cybercrime today.
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The State of Cybercrime
Do not be fooled. Cybercrime is on the rise.
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Cybercrime Trailer
New cybercrime threats.
Cybercrime is more profitable than the illegal drug trade (more than \$100 billion globally per year). Every three seconds an identity is stolen, and without security, an unprotected PC can become infected within four minutes of connecting to the Internet.“What Is Cybercrime?,” Symantec, accessed October 10, 2011, us.norton.com/cybercrime/definition.jsp; and “Cyber Crime ‘More Profitable Than Drugs’,” 9News, June 9, 2009, accessed October 10, 2011, news.smh.com.au/breaking-news-national/cyber-crime-more-profitable-than-drugs-20090609-c1qm.html. A Microsoft security intelligence report maintains that cybercrime is fast maturing as a profession, with cybercriminals becoming more sophisticated and packaging online threats that can be sold to others.Rudolph Muller, “Cybercrime Getting More Sophisticated,” Mybroadband, June 24, 2010, accessed October 10, 2011, mybroadband.co.za/news/internet/13279-Cybercrime-getting-more-sophisticated.html.
Examples of Cybercrimes“Computer Crime & Intellectual Property Section,” US Department of Justice, accessed October 10, 2011, www.cybercrime.gov.
The Computer Crime & Intellectual Property Section of the US Department of Justice keeps a running list of press releases related to cybercrimes. Here are three examples.
1. A Miami man pled guilty to one count of conspiracy to traffic in and possess unauthorized credit card numbers with intent to defraud, and one count of trafficking in unauthorized credit card numbers.
2. A Rhode Island man pleaded guilty to Internet sales of unregistered, unlabeled pesticides for cats and dogs while infringing on the trademark of two well-known national brand names, “Frontline” and “Frontline Plus.” The man made more than 3,500 sales through eBay.
3. A Canadian man was sentenced to 33 years in prison for selling counterfeit cancer drugs using the Internet.
Cybercrime hurts the bottom line of any business, but small and medium-sized businesses are the new cybercrime target. “Hackers and computer criminals…are taking a new aim—directly at small and midsize businesses…Smaller businesses offer a much more attractive target than larger enterprises that have steeled themselves with years of security spending and compliance efforts.”Tim Wilson, “Small Business: The New Black in Cybercrime Targets,” Dark Reading, March 19, 2009, accessed October 10, 2011, www.darkreading.com/security/perimeter-security/215901301/small-business-the-new-black-in-cybercrime -targets.html. Small businesses are potentially very lucrative targets for several reasons:
• Nearly one fifth of small businesses do not use antivirus software.
• Two thirds of small businesses do not have a security plan in place.
• Sixty percent of small businesses do not use encryption on their wireless links.
• Only about 60 percent of mom-and-pop shops have met the credit card industry’s data security standards for protecting credit card data. Compliance at the smallest businesses is even worse.
• Two thirds of small and medium-sized businesses believe that large companies are the main target for cybercrime,…yet 85 percent of the fraud seen in business occurs in small and medium-sized businesses.Tim Wilson, “Small Business: The New Black in Cybercrime Targets,” Dark Reading, March 19, 2009, accessed October 10, 2011, www.darkreading.com/security/perimeter-security/215901301/small-business-the-new-black-in-cybercrime -targets.html.
The cybercriminal is looking to steal and disrupt. Securing a website should be a top priority for any company—small, medium, or large—that uses the Internet to conduct its business.
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How SSL Security Works on E-Commerce Websites
How Amazon.com grew so fast by incorporating SSL security.
Given the state of cybercrime, assuring the security and the privacy of e-consumers (the protection of the personal information of customers on the Internet) are necessary to build and maintain confidence in the e-market, particularly because the risk of privacy invasion and security flaws is significant.Avshalom M. Adam, Avshalom Aderet, and Arik Sadeh, “Do Ethics Matter to E-Consumers?,” Journal of Internet Commerce 6, no.2 (2007): 19–34. Further, such assurances have been found to have a significant impact on the willingness to purchase.Naresh K. Malhotra, Sung S. Kim, and James Agarwal, “Internet Users’ Information Privacy Concerns (IUIPC): The Construct, the Scale and a Causal Model,” Information Systems Research 15, no. 4 (2004): 289–304, as cited in Avshalom M. Adam, Avshalom Aderet, and Arik Sadeh, “Do Ethics Matter to E-Consumers?,” Journal of Internet Commerce 6, no.2 (2007): 19–34.
E-customers voice their privacy concerns in different ways. Here are some examples:Sergio Roman, “The Ethics of Online Retailing: A Scale Development and Validation from the Consumer’s Perspective,” Journal of Business Ethics, 72 (2007): 131–48.
• “I don’t like websites that ask you for personal information that is not necessary for the purchase to be made.”
• “All privacy notices contain the same information, and besides, how do I know that the website actually follows the privacy policy.”
• “I’m not comfortable at all with the idea of the online retailer having my personal information and selling it to other companies for marketing purposes.”
The scope of failure in protecting customers’ personal information can be potentially devastating because of the global reach of the Internet; the effect can easily reach millions of people.Beverly Kracher and Cynthia L. Corritore, “Is There a Special E-Commerce Ethics?,” Business Ethics Quarterly 14, no. 1 (2004): 71–94. Heartland is a payment processor responsible for handling about 100 million credit card transactions every month. They disclosed in June 2009 that thieves had used malicious software in its network in 2008 to steal an unknown number of credit card numbers.Eric Larkin, “Massive Theft of Credit Card Numbers Reported,” PCWorld, January 20, 2009, accessed October 10, 2011, www.pcworld.com/article/158003/massive _theft_of_credit_card_numbers_reported.html.
Fortunately, the theft of credit card and other personal information originating from websites accounted for only about 11 percent of the identity theft or fraud that affected 11 million Americans in 2009.“Javelin Study Finds Identity Fraud Reached New High in 2008, but Consumers Are Fighting Back,” Javelin Strategy and Research, February 10, 2010, accessed October 10, 2011, www.javelinstrategy.com/news/831/92/Javelin-Study-Finds-Identity-Fraud -Reached-New-High-but-Consumers-are-Fighting-Back/d,pressRoomDetail. This is why the act of providing credit card information on a website for a purchase is still considered by some people to be so risky that they refuse to conduct any Internet transactions. This has obvious implications for any small company that hopes to do business online.
Fortunately, there is a very straightforward way to provide the security and privacy that online customers seek: the use of Secure Sockets Layer (SSL), a security protocol that is used by web browsers and web servers to help users protect their data during transfer.“FAQ: SSL Basics,” VeriSign Authentication Services, 2011, accessed October 10, 2011, www.verisign.com/ssl/ssl-information-center/ssl-basics. Companies like VeriSign offer SSL protection certificates, and the placement of its icon on a website can offer security and privacy assurances to online customers. The inclusion of SSL protection should be discussed with your website designer.
Trust
Trust is about believing—believing that someone will do what they say and that they will not intentionally do something to hurt you. Trust is an important part of all business relationships. Without trust, all e-commerce would come to a halt. “Trust is central to establishing successful e-commerce ventures and to ensure the continued success of this business paradigm into the future.”Albert J. Marcella, Establishing Trust in Virtual Markets (Altamonte Springs, FL: The Institute of Internal Auditors, 1999), as cited in Beverly Kracher and Corritore, “Is There A Special E-Commerce Ethics?,” Business Ethics Quarterly 14, no. 1 (2004): 71–94. Trust will improve competitiveness, reduce the costs of doing business, build loyalty, and increase the effectiveness of websites. In short, trust can be an important source of competitive advantage. Trust is essential.
In the physical world, trust is much easier to develop. Physical cues from spaces and buildings, face-to-face voice and body language, and salesperson effectiveness can translate easily into trust relationships. In the online world, however, trust develops as a result of the complex interaction of multiple factors that have design implications for the website. Here are some examples of trust: Avshalom Adam, Avshalom Aderet, and Arik Sadeh, “Do Ethics Matter to E-Consumers?,” Journal of Internet Commerce 6, no. 2 (2007): 19–34; Andrea Everard and Dennis F. Galletta, “How Presentation Flaws Affect Perceived Site Quality, Trust, and Intention to Purchase from an Online Store,” Journal of Management Information Systems 22, no. 3 (2005–6): 55–95; William Hampton-Sosa and Marios Koufaris, “The Effect of Web Site Perceptions on Initial Trust in the Owner Company,” International Journal of Electronic Commerce 10, no. 1 (2005): 55–81; Beverly Kracher and Cynthia L. Corritore, “Is There a Special E-Commerce Ethics?,” Business Ethics Quarterly 14, no. 1 (2004): 71–94; and Sergio Roman, “The Ethics of Online Retailing: A Scale Development and Validation from the Consumers’ Perspective,” Journal of Business Ethics 72 (2007): 131–48.
• The customer observes the seller to be honest, fair, responsible, and benevolent.
• The customer expects that the company behind the website will not engage in opportunistic behavior.
• The customer is confident about the site’s security and privacy protection (security and privacy having been shown to be an important determinant of a customer’s willingness to buy online).
• The customer perceives the company’s website as appealing (linked to layout, typography, font size, and color choices)—the belief being that an appealing website reflects a company has the capabilities and resources to fulfill its promises.
• The customer experiences a site that is easy to use (i.e., easy to navigate, easy to search, easy to gather information) and has relevant content, interactivity, site consistency, and site reliability.
• The customer perceives presentation flaws (e.g., poor style, incompleteness, language errors, conflicting colors, delay, and confusing terminology) as indicators of a low-quality, untrustworthy website.
Another element of trust is order fulfillment. Order fulfillment is all about meeting expectations, and some argue that this is the most important element of trust.Terry Newholm et al., “Multi-Story Trust and Online Retailer Strategies,” International Review of Retail, Distribution and Consumer Research, 14, no. 4 (2004): 437–56. Delays in the delivery of a product, the delivery of the wrong product, and the hassles of returning merchandise are stresses that can contribute to a less-than-satisfactory Internet buying experience. Such experiences contribute to a lack of trust. In contrast, satisfied consumers express themselves this way:Sergio Roman, “The Ethics of Online Retailing: A Scale Development and Validation from the Consumers’ Perspective,” Journal of Business Ethics 72 (2007): 131–48.
• “Products at this site are a bit pricey, but it is worth purchasing from this site since you get what you order and within the promised delivery time.”
• “I keep purchasing from this site because they always have the items I want in stock.”
Buying some products online, such as clothing, furniture, and toys, does not offer buyers the opportunity to touch and feel the product before buying. As a result, order fulfillment becomes even more important to customer satisfaction.
Linked closely to order fulfillment is product reliability. Product reliability refers to “the accurate display and description of a product so that what customers receive is what they thought they ordered.”Sergio Roman, “The Ethics of Online Retailing: A Scale Development and Validation from the Consumers’ Perspective,” Journal of Business Ethics 72 (2007): 131–48. Online retailers should provide a complete and realistic description of the product and its benefits—with high-quality pictures and perhaps even demonstration videos if possible, appropriate, and affordable—along with product availability and likely ship dates. Customers should be notified by e-mail of order acceptance, and the anticipated delivery date with phone and e-mail contacts for any needed assistance.
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Inflatable Fruitcake, the "Perfect" Christmas Gift?
We've all seen this on TV.
What all this says is that website owners must proceed carefully to create their online presence in a way that will inspire trust. “If consumers trust online merchants and have confidence in the reliability and integrity of merchants, they will likely feel more at ease making purchases and disclosing sensitive information online. Therefore, the success of online merchants and the future of e-commerce may depend heavily on online trust.”Ye Diana Wang and Henry H. Emurian, “Trust in E-Commerce: Consideration of Interface Design Factors,” Journal of Electronic Commerce in Organizations 3, no. 4 (2005): 42–60.
Payment Options
Nowhere are security, privacy, and trust more necessary than at the point of payment. Without this transaction, there is no e-commerce, so it is imperative that small businesses selling online take the necessary steps to reduce customer concerns about shopping online. A recent survey found that retailers operating online may have lost more than \$44 billion dollars over a one-year period as a result of transaction problems on their websites; in addition, 27 percent of online shoppers would turn to an offline or online competitor if they encountered an online transaction issue.“Tealeaf Survey Reveals That Online Retailers Potentially Lost More Than \$44 Billion Due to Transaction Problems on Their Sites,” Tealeaf, September 27, 2010, accessed October 10, 2011, www.tealeaf.com/news/news-releases/2010/Tealeaf-Survey -Reveals-Online-Retailers-Potentially-Lost.php. More specifically, online shoppers who encountered a transaction problem would react as follows:“Tealeaf Survey Reveals That Online Retailers Potentially Lost More Than \$44 Billion Due to Transaction Problems on Their Sites,” Tealeaf, September 27, 2010, accessed October 10, 2011, www.tealeaf.com/news/news-releases/2010/Tealeaf-Survey -Reveals-Online-Retailers-Potentially-Lost.php.
• Sixty-six percent would contact customer service, including
• Fifty-three percent calling customer service; and
• Thirty-six percent e-mailing or logging a web complaint with customer service.
• Thirty-two percent would abandon the transaction entirely, including
• Twenty-seven percent turning to an online or offline competitor.
To make matters even worse, the potential for lost revenue when customers have a negative online shopping experience is amplified by the rising use of social media like Facebook and Twitter; the voicing of displeasure on social networks can significantly damage a company’s reputation.“Tealeaf Survey Reveals That Online Retailers Potentially Lost More Than \$44 Billion Due to Transaction Problems on Their Sites,” Tealeaf, September 27, 2010, accessed October 10, 2011, www.tealeaf.com/news/news-releases/2010/Tealeaf-Survey -Reveals-Online-Retailers-Potentially-Lost.php. The message is clear. Online transactions must run smoothly.
But there is another important issue: the number of payment options that are offered to the customer. Research shows that the more payment options customers have, the more likely they will complete their purchase.Delilah Obie, “Choosing a Vendor to Process Your Online Transactions,” SCORE, accessed October 10, 2011, www.score.org/resources/online-transactions-vendor; “How to Increase Sales with Online Payment Options,” March 22, 2010, accessed October 10, 2011, www.openforum.com/idea-hub/topics/money/article/how-to -increase-sales-with-online-payment-options-thursday-bram; “More Payment Options Can Mean More Business,” MivaCentral, 2009, accessed October 10, 2011, mivacentral.com/articles/payment.mv; T. Brandon, “Multiple Payment Processing Options Increase Sales,” eZine Articles, October 21, 2007, accessed October 10, 2011, ezinearticles.com/?Multiple-Payment-Processing-Options-Increase-Sales&id= 793303; and Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008).
• Merchants offering multiple payment methods have lower cart abandonment rates.
• If you can afford it and maintain your profit margin, offering multiple payment options is a means to increase your sales by increasing customer confidence and convenience.
• North American online businesses with four or more options for payment see an average sales conversion rate of 72 percent. The sales conversion rate is the percentage of site visitors that make a purchase.
• Each new payment option added at the point of checkout results in a sales increase of 5–20 percent.
Customers shopping online expect convenience and a variety of payment options. Credit cards are by far the most popular means for making an online payment, with one survey indicating that 70 percent of online consumers used this payment method.“Online Retail Payments Forecast 2010–2014: Alternative Payments Growth Strong but Credit Card Projected for Comeback,” Javelin Strategy and Research, February 2010, accessed October 10, 2011, www.javelinstrategy.com/research/Brochure-171. Any small business that does not have its website set up to accept credit cards will lose 60–80 percent of its potential orders. Further, offering a credit card option will increase the number of orders, and those orders will be substantially larger because credit cards enable impulse buying, reassure customers of your legitimacy, and simplify your billing.Delilah Obie, “Choosing a Vendor to Process Your Online Transactions,” SCORE, accessed October 10, 2011, www.score.org/resources/online-transactions-vendor.
Consistent with credit cards being the online payment method of choice, it has been reported that 99 percent of online businesses offer a general purpose credit card, which include Visa, MasterCard, American Express, and Discover.“More Payment Options Can Mean More Business,” MivaCentral, 2009, accessed October 10, 2011, mivacentral.com/articles/payment.mv. However, debit cards are growing in popularity ahead of other payment alternatives.
Table \(3\ Payment Options Consumers Used to Make Online Purchases in 2009
Payment Option % Used
Major credit card usable anywhere 70
Major debit card usable anywhere 55
Online payment service, such as PayPal or Google Checkout 51
Gift card good only at a specific merchant 41
Store-branded credit card good only at the merchant that issued the card 27
Prepaid card or payroll card usable anywhere 17
Online credit service such as BillMeLater 17
Store-branded debit card good only at merchant that issued the card 16
The implications of this for small business are that credit cards should be the first payment method that should be set up for online sales. Additional payment methods should be added as quickly as the budget allows because it is clear that more payment options translate into a greater likelihood of purchase. However, the choice of alternative payment methods should be in keeping with the growth strategy of the business. It may be that offering one method of payment provides a satisfactory level of sales, thereby eliminating the need for additional methods for sales growth.
KEY TAKEAWAYS
• It is important to protect intellectual property.
• Ethics influence consumer purchases.
• Small businesses are the new target for cybercrime. As a result, small businesses must pay attention to their website security because it will protect the business and influence customer trust.
EXERCISES
1. Find three small business websites. Analyze each website in terms of its trustworthiness. Discuss why you would or would not trust each site. Be specific.
2. Discuss whether you think an unintelligible privacy policy is ethical. Be specific in your arguments. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/04%3A_E-Business_and_E-Commerce/4.03%3A_E-Commerce_Operations.txt |
Learning Objectives
1. Explain what an e-commerce platform is.
2. Discuss the importance of a CRM solution to a small business.
3. Explain m-commerce and why small businesses should consider incorporating it into their e-commerce strategy.
4. Explain the significance of Web 2.0 to a small business.
As discussed in Chapter 1 "Foundations for Small Business", digital technology has put small business on a more equal footing with its larger competitors. Although it is certainly true that a commitment to technology is not for every small business, it is also true that technology is transforming small business in important ways: (1) businesses are easier to find online than ever before; (2) communicating with customers is shifting to e-mail marketing and social media; (3) e-mail and mobile phones are improving productivity; (4) collaboration among employees who are working in multiple venues is easier; (5) outsourcing is easier; and (6) more companies are shifting their attention to how they can sell products and services online. Using technology well is proving to be one of the most prominent drivers of business success. Ross Dawson, “Six Ways Technology Is Transforming Small Business,” Ross Dawson Blog, November 18, 2009, accessed October 10, 2011, rossdawsonblog.com/weblog/archives/2009/11/six_ways_techno.html.
Technology specifically related to e-commerce is a large umbrella. E-commerce platforms, customer relationship management (CRM), going mobile, and Web 2.0 will be discussed in this section.
E-Commerce Platforms
An e-commerce platform is the software that makes it possible for a business to sell online. In general, the core e-commerce platform should support basic requirements such as custom styling, search engine optimization, credit card processing, promotions, catalog management, analytics, product browsing, checkout, and order management. Additionally, e-commerce platforms should provide self-service content management systems (CMS), support multiple languages, and support multiple stores.“Ecommerce Integration,” Treehouse Logic, May 20, 2010, accessed October 10, 2011, blog.treehouselogic.com/2010/05/20/ecommerce-integration. These requirements may vary slightly depending on which type of e-commerce is being conducted. Analytics refer to the tools that can track the different ways people use your website and then make sense of the data. Justin Whitney, “What Is Web Analytics?,” AllBusiness.com, 2010, accessed October 10, 2011, www.allbusiness.com/marketing-advertising/marketing-advertising/11382028 -1.html. Analytics will be discussed in further detail in Chapter 8 "The Marketing Plan".
The all-in-one e-commerce platform solution has become more popular with online merchants. This solution provides everything: the core e-commerce platform plus hosting, accounting, analytics, and marketing tools such as e-mail management. Because all the tools are integrated, they work together.James Macguire, “Starting Your Own E-Business, Pt 2: Choosing a Platform,” ecommerce-guide.com, September 26, 2005, accessed October 10, 2011, www.ecommerce-guide.com/solutions/building/article.php/3551461. It has also been reported that e-commerce platforms are now enabling online retailers to better reach consumers through mobile devices and social media sites.“E-commerce Platforms Offer Retailers New Social and Mobile Features, Internet Retailer, April 22, 2010, accessed October 10, 2011, www.internetretailer.com/ECTR/article.asp?id=34549. This is great news for the small business that wants to tap into these growing markets.
The list of e-commerce software providers is always growing, but there are many products that are tailored specifically for small to medium-sized businesses. Some of the names that come up frequently for small business are BigCommerce, Magento, Affinity Internet, ProStores (for the smaller merchant), and Miva Merchant. However, this list is not exhaustive, and new products enter the marketplace all the time.
Customer Relationship Management
Customer relationship management, as mentioned in Chapter 2 "Your Business Idea: The Quest for Value", refers to “a customer service approach that focuses on building long-term and sustainable customer relationships that add value for the customer and the company.”Efraim Turban et al., Electronic Commerce: A Managerial Perspective (Upper Saddle River, NJ: Pearson/Prentice Hall, 2008), 75. Some small businesses may wonder whether they really need the added complexity of a small business CRM solution. The answer will depend to a large extent on the size of the business and its growth objectives. However, it has been observed that there is no small business out there that, “sometimes in spite of themselves, didn’t benefit from implementing a…CRM or its watered down equivalent—a simpler Contact Management software solution.”Perry Norgarb, “Does Your Small Business Even Need a CRM Software Solution?,” SmallBizCRM, accessed October 10, 2011, www.smallbizcrm.com/does-your -small-business-need-a-software-solution.html. Recent studies have revealed that CRM applications account for the following: Peter Norgarb, “So Where Do You Start? How Do You Start?,” 2010, www.smallbizcrm.com.
• Revenue increases of up to 41 percent per salesperson
• Decreased sales cycles of over 24 percent
• Lead conversion rate improvements of over 300 percent
• Customer retention improvements of 27 percent
• Decreased sales and marketing costs of 23 percent
• Improved profit margins of over 2 percent
It has also been noted that companies can boost their profits by almost 100 percent by retaining just 5 percent of their customers. Peter Norgarb, “So Where Do You Start? How Do You Start?,” 2010, www.smallbizcrm.com. What does this mean for the small business that chooses to go with a CRM solution? As long as the solution is well implemented and actually used, there should be an immediate payoff and productivity improvement throughout the company. Additionally, choosing to engage in e-commerce makes the selection of a CRM solution even more important because the quality of customer relationships is so important to online success.
Although there was a time when CRM solutions were not feasible for small business, they are available today for even the smallest businesses. These CRM solutions are priced and designed with the small business in mind.
Going Mobile
As defined earlier in this chapter, mobile e-commerce (m-commerce) refers to the purchase of goods and services through wireless technology, such as cell phones and handheld devices. It consists of two primary components: “…the ability to use a wireless phone or other mobile device to conduct financial transactions and exchange payments over the Internet…and the ability to deliver information that can facilitate a transaction—from making it easy for your business to be ‘found’ via a mobile Web browser to creating mobile marketing campaigns such as text promotions and loyalty programs.”Laurie McCabe, “Mobile Commerce: Coming to Ecommerce Sites Near You,” ecommerce-guide.com, September 14, 2010, accessed October 10, 2011, www.ecommerce-guide.com/news/trends/article.php/3903526/Mobile-Commerce -Coming-to-Ecommerce-Sites-Near-You.htm. It is predicted that in 2015 m-commerce revenues will make up 8.5 percent of all US e-commerce revenue and 20 percent of global e-commerce revenue. In the United States, that will represent only one half of 1 percent of all retail revenues.Ian Mansfield, “US Mobile Ecommerce Revenues Set to Rise to \$23.8bn in 2015, Cellular-News, April 14, 2010, accessed October 10, 2011, www.cellular-news.com/story/42841.php. However, even though m-commerce is lagging behind other mobile uses, wireless devices and m-commerce are expected to create another revolution in e-commerce. The most important thing that online retailers can do is to “…take action soon because the mobile environment is adapting much more quickly than the web.”Brendan Gibbons, “To Tap Mobile Buyers, First Determine Their Needs,” Practical eCommerce, March 16, 2010, accessed October 10, 2011, www.practicalecommerce.com/articles/1732-To-Tap-Mobile-Buyers-First-Determine -Their-Needs.
Small businesses need to sort out the hype from what’s real. What’s real are the facts and the trends. Jim Jansen, “Online Product Research: 58% of Americans Have Researched a Product or Service Online,” September 29, 2010, accessed October 10, 2011, pewinternet.org/Reports/2010/...-Research.aspx; “Majority of Online Retailers Plan to Have Mobile Ecommerce Websites by 2011,” Deluxe for Business, August 20, 2010, accessed October 10, 2011, deluxesmallbizblog.com/web-de...bsites-by-2011; Laurie McCabe, “Mobile Commerce: Coming to Ecommerce Sites Near You,” ecommerce-guide.com, September 14, 2010, accessed October 10, 2011, www.ecommerce-guide.com/news/trends/article.php/3903526/Mobile-Commerce -Coming-to-Ecommerce-Sites-Near-You.htm; Ian Mansfield, “Mobile Internet Devices Expected to Surpass One Billion by 2013,” Cellular-News, December 9, 2009, accessed October 10, 2011, www.cellular-news.com/story/40997.php; John Lawson, “75% of Online Retailers Are Ramping Up Mobile Strategies,” ColderICE, accessed June 1, 2012, colderice.com/75-of-online-re...le-strategies/; Aaron Smith, “Mobile Access 2010,” Pew Internet & American Life Project, July 7, 2010, accessed October 10, 2011, www.pewinternet.org/Reports/2010/Mobile-Access-2010.aspx; and Ian Mansfield, “US Mobile Ecommerce Revenues Set to Rise to \$23.8bn in 2015, Cellular-News, April 14, 2010, accessed October 10, 2011, www.cellular-news.com/story/42841.php.
1. From the second quarter 2009 through the second quarter 2010, Amazon’s customers around the world used mobile devices to buy more than \$1 billion in products. This is a trend that any small business with an e-commerce website should watch closely.
2. Mobile devices connected to the Internet are reshaping the way people are going about their personal and professional lives.
3. One of the fastest growth areas in e-commerce will be using mobile devices to make online purchases.
4. Close to 80 percent of organizations plan to have mobile websites by the end of 2011. Online retailers without an m-commerce strategy will be in the minority.
5. Handheld devices are increasingly being used to research products, compare prices, and buy online while shopping.
6. A central driver to m-commerce growth is smartphone ownership and the corresponding mobile Internet use.
7. Nearly 58 percent of Americans have researched a product or a service online.
8. Among cell phone owners, 11 percent purchased a product or a service using their phones.
Video Clip \(1\)
Mobile E-Commerce Capabilities
Gene Alvarez, Gartner Group, discusses m-commerce.
Major retailers have been able to easily offer remote access to customers who want to make purchases using mobile devices (e.g., Target and Nordstrom). Software is now available for small businesses to offer some of the same bells and whistles, giving their online customers the ability to shop via smartphones.Stuart J. Johnston, “Small Business Ecommerce Trends: Shop by Smartphone,” Small Business Computing.com, September 7, 2010, accessed October 10, 2011, www.smallbusinesscomputing.com/news/article.php/3902136/Small-Business -Ecommerce-Trends-Shop-by-Smartphone.html.
Mobile e-commerce may not be for all small businesses, but a small business owner who is already in e-commerce or has plans to do so should give it consideration. Multichannel shoppers tend to purchase more, so small companies need to think of ways to “effectively engage customers by delivering consistent, rich experiences across all channels, including mobile, to maintain and fuel double-digit ecommerce industry growth rates.”“Majority of Online Retailers Plan to Have Mobile Ecommerce Websites by 2011,” Deluxe for Business, August 20, 2010, accessed October 10, 2011, deluxesmallbizblog.com/web-design/search-marketing/majority-of-online-retailers -plan-to-have-mobile-ecommerce-websites-by-2011. Online customers are ready and increasingly interested in using mobile devices to make purchases.
Web 2.0
There is no agreement about an exact definition of Web 2.0 but, in general, it refers to websites that are more interactive, engaging, and interesting than before. A Web 2.0 site is one where visitors can engage with you, your business, and your site by doing things like the following:Steve Strauss, “Maximizing Your Web Presence Is Key to Building Your Small Business,” USA Today, April 11, 2010, accessed October 10, 2011, www.usatoday.com/money/smallbusiness/columnist/strauss/2010-04-11-building-web-presence_N.htm.
• Posting comments on your blog or your articles or chatting in a forum
• Retweeting your content, sharing it on Facebook, or Digging it
• Watching a video, listening to a podcast, or participating in a webinar
• Taking a quiz or responding to a poll
Web 2.0 is about having a conversation with your customers. This is very different from Web 1.0, where websites were static and all you could do was read. Web 2.0 sites are collaborative and interactive. The small business that creates a site that engages and interacts with people, that makes people want to stick around, will be giving people more of a chance to create a connection with the business.Steve Strauss, “Maximizing Your Web Presence Is Key to Building Your Small Business,” USA Today, April 11, 2010, accessed October 10, 2011, www.usatoday.com/money/smallbusiness/columnist/strauss/2010-04-11-building-web-presence_N.htm. These closer ties will increase customer awareness and consideration of the company’s products and services, improve customer satisfaction, increase the chances of loyalty, increase the chances for sales, and add to the bottom line. There will also be significant benefits realized between the small business and its suppliers and partners: lowering the costs of communication and doing business.
A much smaller percentage of small businesses have adopted elements of Web 2.0 as compared to large enterprises and midsize companies.Heather Claney, “Small Businesses Apparently Slow to Adopt Web 2.0 Philosophies,” IT Knowledge Exchange, June 29, 2008, accessed October 10, 2011, itknowledgeexchange.techtarget.com/channel-marker/small-businesses-apparently -slow-to-adopt-web-20-philosophies. However, many small businesses are using Web 2.0 in a variety of positive ways.Anita Campbell, “Real Life Examples of Business Owners Using Social Media,” Small Business Trends, July 3, 2008, accessed October 10, 2011, smallbiztrends.com/2008/07/real-life-examples-of-business-owners-using-social-media.html.
• One business owner operated a Facebook group, attracted interest in the business, and developed loyalty through the group.
• Another business routinely put press releases online and attested to their value at getting the company’s website found in search engines.
• The owner of a product company reported good results with videos that were loaded on YouTube and on the company’s website. The video attracted people to the site and also engaged existing visitors on the site.
• A small real-estate company has a Facebook page, a blog, and a property value calculator that allows homeowners to calculate an approximation of their home’s value without having to speak with a realtor. The information is then sent via e-mail.
As Web 2.0 keeps evolving, the value and opportunities it will bring to small businesses will continue to grow. “The increased flow of two-way information between business and customer, the increase in information distribution through blogs and wikis, and the increased participation of customers in product improvement and even design will continue. By adopting Web 2.0 technologies and tools, small businesses can improve market share, profit, and reputation, now and in the future.”Sang-Heui Lee, David DeWester, and So Ra Park, “Web 2.0 and Opportunities for Small Businesses,” Service Business 2, no. 4 (2008): 335–45.
Video Clip \(2\)
Web 2.0
Evolution of website technology to Web 2.0.
KEY TAKEAWAYS
• E-commerce platforms make it possible for businesses to sell online. The all-in-one platform solution has become more popular with online merchants. There are many platforms that are tailored specifically for small and medium-sized businesses.
• Small businesses should think about CRM. CRM solutions are now available for even the smallest of businesses.
• Even though m-commerce is lagging behind other mobile uses, wireless devices and m-commerce are expected to create another revolution in e-commerce.
• Web 2.0 is important. It is about having a conversation with your customers. Small businesses need to learn about it and strongly consider incorporating it into their e-commerce strategies.
• Web 2.0 keeps evolving, so the value and opportunities it will bring to small businesses will continue to grow.
EXERCISES
1. Select three small business websites. Identify the features that are examples of Web 2.0.
2. Find three CRM solutions (software products) online that are geared to small businesses. Compare the features. If you owned a small business, which one would you choose? Why? | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/04%3A_E-Business_and_E-Commerce/4.04%3A_E-Commerce_Technology.txt |
Learning Objectives
1. Explain how e-business and e-commerce contribute to customer value.
2. Explain how e-business and e-commerce can benefit a company’s cash flow.
3. Explain why e-business and e-commerce are becoming increasingly necessary for small business survival.
Customer Value Implications
E-business in general and e-commerce in particular can both contribute to increased customer value. In the case of e-business, moving operations to digital technology can improve productivity, reduce or eliminate duplicative processes, streamline supply chain management and enterprise resource planning, improve customer and vendor relationships, improve business intelligence, increase and improve internal collaboration while doing the same with external business partners. In all instances, the customer, the vendor, and the business partner should realize increased value from doing business with the company in terms of greater efficiency, speed of information flows and transactions, and overall satisfaction.
In the case of e-commerce, customer value is provided via convenience, a greater selection of products, the ability to easily compare prices and services, 24/7 availability, privacy protection, multiple payment options, and reliable order fulfillment processes. Web 2.0, in particular, presents “consumers with a whole array of options in searching for value products and services and finding exactly what they need and want with minimum efforts, in line with the current customer desire for personalization, individual approach and empowerment.”Efthymios Constantinides and Stefan J. Fountain, “Web 2.0: Conceptual Foundations and Marketing Issues,” Journal of Direct, Data and Digital Marketing Practice 9, no. 3 (2008): 231–44.
Cash-Flow Implications
The cash flow of a small business should benefit from all the sources of value just mentioned because they should result in lower operating costs, improved customer relationships, and higher sales. In particular, cash flow should increase as a result of the following:
• Prepaid purchases by business-to-business (B2B) customers. This may apply to other e-commerce customers as well.
• Multiple payment options. The greater the number of options, the higher the number of sales and the higher the average order size.
• Lower costs of sales as a result of the reduced need for telephone, travel expenses, and live salespeople.
• Eliminating many steps in business processes and cutting out the middlemen. Tamir Dotan, “How Can eBusiness Improve Customer Satisfaction? Case Studies in the Financial Service Industry,” University of Amsterdam, accessed October 10, 2011, www.tamirdotan.com/e-business%20Article.html.
• Saving money on employees and salaries because of customer outsourcing (i.e., anything that the customer does individually, things like searching for product or service information, entering his or her billing information, and signing up for an e-mail confirmation. These are things that customer service representatives do not have to do.Dave Roos, “Advantages of E-commerce,” How Stuff Works, 2010, accessed October 10, 2011, communication.howstuffworks.com/advantages-e-commerce.htm.
• Increased sales as a result of selling niche products. “It turns out that most small businesses (and start-ups) have relatively niche-y products…The Internet disproportionately favors small businesses since it enables them to position their niche goods to people shopping for that particular niche good.”Brian Halligan, “Four Ways the Internet Is Transforming Small Business,” HubSpot Blog, October 2, 2006, accessed October 10, 2011, blog.hubspot.com/blog/tabid/6307/bid/50/Four-Ways-the-Internet-Is-Transforming-Small-Business.aspx.
This is not an exhaustive list. However, it is illustrative of the many ways in which e-business and e-commerce can impact the cash flow of a small business in a favorable way.
Digital Technology and E-Environment Implications
Although not all small businesses may choose to go the route of digital technology and the e-environment (e-business and e-commerce), it has been advised on many fronts that small businesses seriously consider creative ways in which to incorporate them all into their operations. Digital technology is difficult to avoid, whether it be computers, smartphones, or iPads (see the story of Lloyd’s Construction in Chapter 1 "Foundations for Small Business"). Even on a small scale, digital technology can help improve business processes and keep costs down.
The importance of e-business and e-commerce to small business has been the focus of this chapter. Realistically, neither can be avoided by small businesses that want to grow. E-commerce in particular has opened up the world to small business. Websites have “created a flattening effect in the sense that small businesses and large businesses [are] suddenly on a level playing field…The web [allows] small companies to have the same reach as a large firm. A small company’s web site [can] be viewed a million times just as easily as a large firm’s web site, and that information [is] available worldwide, 24 hours a day. Small businesses [can] now have some of the same abilities as large companies to reach customers with rich content of information about their products nationally or internationally.”Sang-Heui Lee, David DeWester, and So Ra Park, “Web 2.0 and Opportunities for Small Businesses,” Service Business 2, no. 4 (2008): 335–45. The small business that wants to grow will ignore e-business and e-commerce at its peril.
KEY TAKEAWAYS
• E-business and e-commerce both contribute to increased customer value.
• The cash flow of a small business should benefit from the customer value offered by e-business and e-commerce.
• Even though some small businesses may choose not to go the route of digital technology, e-business, or e-commerce, it has been suggested that small businesses seriously consider creative ways in which to incorporate them into all operations.
EXERCISES
1. Select three small businesses that engage in e-commerce. Interview the owners and ask them to describe (1) how e-commerce has added customer value and (2) the positive and negative impacts on cash flow.
2. Locate at least one small business that is a nonemployer (i.e., consists of only the owner). Interview the owner about the role that digital technology plays in the business and what his or her plans are, if any, to increase its incorporation. Find out if the business has a website. If it does, are there plans to engage in e-commerce? If the business does not have a website, find out why not and whether there are any plans to create one.
Disaster Watch
I’ve Been Hacked!
Not discouraged by the bad economy, Marnie McCormick opened “The Country Store” in the local shopping center. McCormick had done her homework. She originally leased the store front for a temporary stint, selling a line of unique handcrafted products and locally made foods while asking people what sort of products they wished were available in the area. In this way, she was able to build the kind of store that was needed, using the existing demand to decide what kinds of products she would offer.
McCormick had a myriad of concerns at start-up—inventory, suppliers, marketing, outfitting the store, and administrative systems. What she did not know was that someone had hacked into her computer system. From somewhere unknown, the hard drive of her computer in the store had been hacked. The hackers had downloaded a key-logging program (a virus that makes it possible for the hacker to record all your keystrokes, gaining access to passwords and other sensitive information). The hackers were able to see everything that she typed into the computer: e-mails, communications with vendors and customers, passwords—everything. The hackers only had to wait until she logged into her online bank account before they had all the information they needed for the payoff. She soon discovered that someone had been in her bank account, transferring money at will. The hackers had changed the password. The system crashed immediately.
As soon as she had opened the doors to her new store, McCormick had to close them. What should she do to get her store up and running again? How can she prevent this from happening in the future? Jake Lynch, “Hackers Set Sights on Small Businesses, Households,” Issaquah Reporter, August 19, 2010, accessed October 10, 2011, www.pnwlocalnews.com/east_king/iss/news/101077494.html. | textbooks/biz/Management/Small_Business_Management_in_the_21st_Century/04%3A_E-Business_and_E-Commerce/4.05%3A_The_Three_Threads.txt |
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