Enterprise Navigator

While taping a PM Podcast interview with Cornelius Fichtner earlier, we brushed against the topic of risk and how to measure it. The subject had also come up a few weeks ago in a different conversation; in both cases, it seemed to stir some interest in how to quantify risk in financial terms.

Monetizing risk is nothing new conceptually, but I want to share some thoughts about it. Now, I know that certain standards talk about the existence of 'positive risk' but I am more inclined to treat such occurrences as rare and pleasant surprises (pessimists might consider positive risk as a product of overly conservative revenue forecasting).

Maybe I am just stubborn, but I find it much more useful to consider risk in strictly negative terms, as a form of cost. This enables risk management to be a function of cost management and it allows you to readily factor it in as part of the overall value equation.

The basic concept can be illustrated using a one dollar lottery ticket for the weekly mega-million drawing. Without the risk factor, the idea of spending a buck to gain a return of millions of dollars looks pretty sweet. But, when you factor in the probability of not winning at 99.9999 percent and impact of the risk as losing your total investment, then the net risk adjusted potential payback of 1 ten thousandth of a cent makes it a much less attractive opportunity. The bottom line is that it's probably not going to clear the steering committee's hurdle rate.

I submit that any risk, potential or actual, represents a cost of some kind. It might be reflected as extending the time to market, reduced potential revenue, the cost of increased resources, more capital, the cost of redesign, or the expense of mitigating actions. The way I figure it, if you can't put a monetized estimate on an identified risk, then you are not through researching yet. If it has no cost, then it isn't a risk; it's just an odd curiosity or mild distraction of some sort.

So, with that in mind, the next question becomes how to fairly value it. For example, let's say you have identified a risk that is estimated to have an impact of $100,000 in rework costs if it occurs. The probability of the risk occurring is anticipated to be 50%. Therefore, the cost of simply accepting that risk is $100,000 x 0.5 or $50,000. Now, what if you knew you could spend $10,000 to reduce the probability of occurrence by half? Now the cost of the risk is valued at ($100,000 x 0.25) + $10,000 in mitigation costs, or $35,000 total.

So, the cost of this particular risk is now defined in monetary terms, and can be treated as you would any other cost when assessing the potential value of an investment.

Things get much more philosophical when you start to consider whether you should further devalue an investment opportunity initially. Should you attempt to account for the potential costs of 'known unknown' risks that will undoubtedly emerge as the initiative progresses? That is a conversation best had after hours, over a tasty beverage.

If you consider taking this approach, don't forget to also adjust how you are doing valuation calculations if you are currently risk adjusting via discounted cash flow. If you risk adjust using a defined cost approach, then don't double-dip by generically risk adjusting again when you set discount rates, etc.

This approach actually makes both risk management and valuation a little simpler. Risk is no longer hidden in DCF calculations, and risk is defined in a way that makes it easier for everyone to comprehend. Finally, because risk is quantified in the same manner as the key parameters it is most likely to be associated with (labor costs, material costs, revenue, etc.), it now becomes a directly comparable and independent measure, rather than some amorphous 'relative risk factor' like 0.65. See section 4 of Taming Change with Portfolio Management for additional thoughts on investment valuation and managing investment risk.

Someone recently shared an interesting report from National Public Radio regarding the recent NASA budget hearings on Capitol Hill. Included in it was this fascinating exchange between Senator David Vitter of Louisiana and NASA administrator Charles Bolden:

"Somebody once told me a vision without resources is a hallucination," said Bolden. "If you look at where we were prior to the 2011 budget, we were living a hallucination."

But Vitter didn't find that convincing. "If vision without resources is a hallucination," he said, "resources without vision is a waste of time and money. And that's what I think this budget represents."

No doubt some version of this discussion is routinely re-enacted in board rooms around the world. Operational planning is all about enabling your vision. But, it is predicated upon a big assumption -- to be useful, that vision needs to represent getting to some future place as an organization. Too often, this basic premise can be a challenge.

Sure, someone may indeed have a grand plan, but does it constitute a clear destination or simply a loosely defined continuation of the journey? Consider a family trip to further illustrate the point:

"Come on kids, hop in the car!" "Where are we going Daddy?" "West. We're going west… and maybe a little north. Our goal is to get at least 25 miles per gallon, and to cover 500 miles a day." "But where are we GOING?" "Ah, don't worry about that, we'll know when we get there. The key is to make progress and get there efficiently."

In the case of NASA, it is a matter of convincingly defining its future objectives and strategies in the post-shuttle era as an inherent aspect of acquiring funding. The Constellation program had set its sights as returning to the Moon, but was under-funded. Now, Bolden is hinting towards Mars, but even he concedes he isn't sure how we will get there or what it will take.

For a corporation, such reconciliation is usually more pragmatic. In addition to being able to articulate in actionable terms where you want to be in 3, 5 or 7 years, you also have to assess if you can practically get there. It's all about defining your markets, producing the right products, and managing your capacities.

So, the key take-away is to make sure your operational planning process sets clear objectives, defines achievable strategy and allocates the needed funding and resources. Make it tangible; explain it in terms that establish why you would want to go there, and how it will be done. Then you can percolate it through the ranks to truly make your vision a commonly shared goal, and not just some hallucination.

This post reminds me of my childhood years as an overly-inquisitive and under-supervised twelve-year old with a proclivity for blowing things up. Now I know what you're thinking… "Every 12 year old boy has an appetite for that." Perhaps so, but I also had access. In retrospect, how enough little boys ever survive their own idiocy to propagate the human race is one of those amazing feats of nature; much like the way a few turtle hatchlings escape frigate birds as they scramble for the sea. By all rights, I should be minus at least one eye and some fingers.

Moving on…

This week we announced some powerful new features that are part of our new 10.1 release of Planview Enterprise. I will leave it to more appropriate vehicles to detail all of the new capabilities in this version, but there is one particularly significant element that bears further discussion, regardless of the tools you are using.

Although controlling money is arguably the most important management lever that you have, it is far from being the only one. In Taming Change, we define operational planning as the process of assessing performance, setting strategy, and managing human and financial resources. The interaction and information needed to analyze market and economic influences, determine product direction, shape new ideas into tangible opportunities and distribute enabling organizational capacities goes far beyond the ubiquitous annual budgeting exercise.

Operational planning does nothing less than set the future trajectory of your organization. Money is like organizational rocket fuel; you certainly want to use it efficiently and monitor its consumption, but it is just a means to a greater end. Somewhere, someone needs to be prepping the payload, setting a destination and controlling the flight. Otherwise you will simply waste fuel, accomplish nothing of value and end up somewhere other than where you intended.

In much the same way that early rockets were simply loaded with fuel and pointed in a general direction, some organizations still primarily manage their future by manipulating the budget. In both instances, the result is most often a lot of smoke, heat, noise and motion, but probably not expected results. Today, we plan the initiative and use sophisticated telemetry and guidance systems to ensure that we reach our intended target and achieve a specific goal. Fuel is only one consideration of the overall mission.

Effective, operational planning incorporates all of the information necessary to make wholly informed decisions by considering a number of different organizational perspectives. So, as you support how your organization sets its own trajectory, be careful that you don't lose an eye in the process -- you might end up taking a myopic approach that misses the target.

Be sure to check out how we are enabling organizations to do operational planning; I can safely say that it is unlike anything else on the market right now and a significant improvement over drowning in spreadsheets.

Here is a link to a good article by the ever-prolific and thoughtful Linda Tucci, for SearchCIO: Tactical decisions outweighed IT strategic planning for CIOs in 2009. In addition to being a well-written piece, it contains some numbers you can add to your list of informal benchmarks. The gist of the article is likely no big surprise; 'when money gets tight, you curtail discretionary spend.' It's like reducing the number of Friday movie nights at the Super 14 Cinemaplex, in favor of more DVD rentals and a bag of Pop-Secret when you tighten the household belt.

What this article illustrates however, is the importance of being able to see and respond to changes as they surface, not just for the CIO, but across the whole organization. So, what role should the PMO play in maintaining situational awareness? I contend that the PMO has a unique vantage point that allows it to spot certain emerging changes that others may not be able to see.

As a part of the organization that is usually sandwiched between the executive and working levels, the PMO is well-positioned to identify and alleviate disconnects between the two. The PMO also operates across organizational silos, enabling it to identify coordination issues between groups or departments. The PMO is also usually the broker of performance information; as a result, its analysis should be the first line of defense in identifying emerging trends.

Going back to Linda's story, the PMO also plays a significant role in how the organization responds to changes; deciding to pull back on strategic initiatives is one thing; reallocating resources, shifting tactical priorities around, and generally rearranging the furniture is another. Intent has to be translated into action.

It's just something to think about -- is your PMO actively posting lookouts as part of navigating the enterprise, or are you simply waiting to respond after you run aground?

I was on an advisory call recently with the CIO of a well-known furniture manufacturer and retailer. The topic dú Jour was best practices for project selection and investment decisions. While we covered a lot of different considerations, one area that really resonated with him was how to better manage the uncertainties and sometimes wild ROI claims that accompany new project requests.

Many of the organizations that we come in contact with do not do a great job of controlling the execution risk of their initiatives, despite the fact that they often have a lot of management flexibility to defer or eliminate a good portion of it. Investment decisions need not be a binary, all-or-nothing event.

There is no greater period of uncertainty around a project, program or strategy than at its point of initiation. Even though preliminary analysis may further validate the merits and costs of a proposed opportunity, most of the unknowns remain unknown when a decision is made on whether to initially proceed. When it comes to taking control of risk, the question on whether to proceed should always include a keen consideration for 'how far.'

We have all witnessed a governance committee or a single executive make a substantial up-front commitment of time, money and resources to an endeavor, even though there is significant doubt about the outcome. Such decisions can seem like stepping off a cliff, trusting that wings will somehow sprout during the fall. Often times the reasoning is that it is important to reach the destination below quickly.

(This reminds me of an old joke about watching a person repeatedly climb to the top of a tall staircase, only to violently fling himself backwards and tumble back down the stairs. When asked why he was doing this, he replied, "Because it feels so good when I finally land at the bottom.")

The point is, sometimes it makes a lot of sense to climb a bit down the side of mountain to get a closer look at the valley before committing with the drama of a 'Thelma and Louise' move. These concepts are effectively illustrated in a book I am currently digesting, Project Valuation Using Real Options, by Dr. Prasad Kodukula and Chandra Papudesu. (In many ways, the heavy statistics and math featured in this book make it the 'Anti-Maverick' approach when compared to Audry Apfel's suggestion of downplaying financial metrics in project selection that was highlighted my March 4th post. However, when consumed together, they offer a splendid 'point-counter point' debate.)

The Real Options approach to managing risk and uncertainty with calculation-based analysis may not always be the most appropriate mechanism or your particular cup of tea, but the underlying message is universally applicable: manage uncertainty and risk by applying a graduated method to making commitments. Such iterations can often be effectively applied using a qualitative approach as well -- it just takes some critical thought.

For example, let's say you are considering a somewhat risky project to implement a new and untested business application that is estimated to cost $5 million to design, develop and deploy. Why, why, why(!) would you ever commit to the total cost up front? What can be done to structure an initiative so that the bulk of the risk is mitigated before most of the money is sunk? Catalog the major risks as part of the initial analysis; consider the WBS and overall timeline, mapping when each significant risk can be eliminated or reduced. Look for ways to move up key activities to eliminate risk earlier in the project. Defer as much of the expense as long as possible while working feverishly to remove as many unknowns from the equation as soon as possible. Build in gate reviews at each milestone to formally reassess progress and risks and the decision to proceed. At each point, you will reach a higher level of confidence in the probability of the outcome and can decide whether to commit additional funding for the next phase. If it becomes a good idea gone bad, then you have successfully minimized sunk costs.

It's called active governance.

I know the urge to take that one great leap into the air may seem enticing -- "Why, what an exhilarating feeling! It's as if I could fly!" But eventually gravity and the laws of terminal velocity will have their way with you. Better to plot a potential path and climb down the side of the cliff; it's more work and perhaps a less rapid descent, but it is controlled. At least if you get stuck or begin to realize you are heading somewhere you don't want to be, you can always choose to climb back out. It sure beats drilling into the floor of the canyon that time forgot -- besides, you always have the option to jump the rest of the way down once you can verify a safe landing.

(…with all due apologies to Justice Stewart)

Lately I've been revisiting some content on benefit realization, thinking about the investment analysis process in general, and mulling over different approaches to making business decisions. As part of that, I reviewed a lengthy but interesting paper from Audrey Apfel of Gartner, titled, "A Maverick Approach to the Business Value of IT" (G00157347, dated 29 April 2008). While the paper was directed specifically at IT, many of the points she makes are more broadly applicable.

The common thread of all the aforementioned subjects is that defining value is much more elusive than defining costs, whether planning for them, forecasting outcomes or measuring the actual results. It is a good day when you have an initiative that has unambiguous linkage to quantifiable revenue generation, but those days can seem few and far between.

The key take-aways I got out of Audrey's work was:

• It is almost impossible to effectively and accurately convert all potential benefits to hard dollar values, and financials alone don't tell the whole story
• There are too many unknowns and variables to make an accurate up-front assessment
• Ultimately the value of any undertaking is substantially shaped by perceptions rather than by more objective measures
• Perceptions and objective measures often have strong correlations anyway…
• …so why not assess perceptions when it comes to determining potential and actual value?

Let me be quick to say that your take on the 18 pages may yield different results; closed course, professional driver, etc., etc. I never claimed to be an 'A' student.

Uh oh -- now I have that song stuck in my head; "don't know much about his-tor-y, don't know much about geog-ra-phy…"

Audrey offers an interesting (if somewhat jaded) view of current corporate valuation techniques, in that sometimes executives will send those doing valuation assessments back to the well until they arrive at the pre-conceived value that sponsors have in mind anyway. My question to you is, do you see that happen in your corner of the world?

Regardless, the underlying theme is clear, whether prioritizing work, making investment comparisons or measuring results, it sometimes takes a combination of subjective and objective considerations to measure business value; yet another example of the juncture between science and art along the highway of business management -- it's a craft, not a software application.

Don't calculate proposed initiatives to death with overly sophisticated and labor-intensive financial measures exclusively; they are probably fictitious numbers in the final analysis (literally), and could shorten your lifespan from sheer frustration. Make some room for a controlled mechanism to measure gut feel; whether you call it a Perception Index as Audrey does, or term it as the Right Lobe Wobble Factor, subjective assessments are a viable sanity check of the basic ROI/NPV/IRR math. If the two elements end up at opposing points on the value spectrum, that is cause for further rumination.

"…but I do know that I love you, and I know that if you love me too, what a wonderful world it would be…"

I'm not even going to try and wax philosophical about the current market -- there are plenty of others doing that and it is well past the point of finding any humor in it. It is what it is, and while the pundits banter about what 'it' is, the one thing we all know for sure is that it is getting pretty dicey out there for many organizations.

The whole situation can be quite depressing unless you put the nightly news in context; the most sensational failures, pessimistic guests and worrisome statistics are going to grab the headlines -- misery sells. But just like in politics, there are only local economics; some verticals are faring better than others, and many businesses are weathering the storm OK… so far. Nonetheless, even among the fortunate it pays to be realistic and assume that significant impacts are looming. I think it is a safe bet to say that any reasonably managed organization either already has, or is in the middle of creating contingency plans for several different and mostly negative long term scenarios.

As a result, even successful PMOs might find themselves between the stadia lines of the hidden cost control snipers that are scanning the horizon for likely targets. With that in mind, I thought it might be useful to discuss the measures that the PMO should already be taking to proactively support in-progress or potential future cost containment moves, even if you haven't been asked. Should some sniper start pulling the trigger, doing these things now just might help save your bacon, instead of them becoming your last act of defiance.

1. Make sure the leadership team has a clear view of what is going on. Managers need to know where Point A is, should they have to figure out how to get to Point B, as in Bummer. If your current report battery does not yet have work classified or graded by what is discretionary, mandatory or base work activities, make sure you have appropriate categories defined and work accurately flagged. Similarly, if not already done, now is the time to start looking at how that work lines up by market, product or service line, or similar dimensions appropriate to your environment and scope. Summarize the financial and resource capacities being consumed in each category and get it in front of the executive team, and be prepared to deliver supporting details on demand.
   
   
2. Identify what is the minimum required to keep the organization functional. This is when it pays to be a PMO that looks at ongoing operations as well as project portfolios. Assume that funding for transformational work is going to dry up for all but the most critical projects. This means that the leadership will turn their focus on what is left and how to conserve expenses further. Assess what it takes to just run the business as-is and nothing else, should the organization have to tread water a few quarters. If the storm worsens, map headcount and work activities further to denote scenarios for cutting first into the meat, and then to the bone.
   
   
3. Identify cost reduction opportunities and implications. With last weeks post in mind, do not forget that the PMO has a unique cross-functional perspective of the organization that is unlike any other. This is allows you to see things that others can't. Take the initiative to objectively assess the organization from your vantage point and offer any meaningful thoughts on how the belt might be tightened. The PMO is also in an excellent position to identify the possible consequences of any cost saving measures that either you or others uncover. Volunteer your analytical capabilities to the cause.
   
   
4. Get staffing and utilization information up-to-date and in the right hands. Resource costs make up the majority of spending in a knowledge worker environment, either directly as salary and benefits, or indirectly in supporting infrastructure and services that the staff needs to function. Sadly, as the unemployment figures bear out every month, people are bound to be affected as part of any significant cost control measures. Help the leadership team make these unbelievably difficult decisions wisely by making sure they understand how to best reduce the workforce with a least impact on operations. Leverage your insights into how staff is being used to identify critical skill sets required to maintain core functions viable, key resources that would be difficult to replace, and flag the areas where reductions can be made with minimum long term effects.
   
   
5. Identify & communicate the minimum operating requirements of the PMO. If you are successful at doing items 1 through 4, you will again remind the leadership team why they need the PMO to begin with. Regardless, if things break bad, the PMO will be impacted just like the rest of the organization, so be prepared when you see the train coming down your track. Start thinking now about what will be required in the PMO should some version of a worst case scenario eventually play out. Formulate options and the business case to negotiate something other than total disbandment and have these discussions with your sponsors well before decisions must be made. Here is your argument:
   
   There is a lot to be said for being able to maintain continuity of PMO assets and functions, even when greatly scaled back, rather than having to reinvent the wheel from scratch a year or two later while on the road to recovery. Prepare a list of critical services that the PMO can provide to help keep things operational in a lean environment, as well as how the PMO will speed up the bounce back -- being the first mover coming out of a recession has historically proven to be one of the greatest advantages a business can have. This means that all of the processes and infrastructure you have painstakingly put in place will need to be ready to rock when the arrow starts pointing up again. It is unlikely that a new manager tasked to restart the PMO 18 months from now will embrace past systems, tools and processes -- without PMO continuity, you lose the knowledge base as well as the ability to your keep management assets maintained in a functional state. In the end, it will cost far more in lost opportunity and PMO rework than the additional savings of cutting a few headcount.