Project Selection Overview

One of the topics for this week is the techniques that organizations use to select projects that
are a strategic match for their businesses.

In the workplace of today, managers increasingly use a project-approach to achieve business

goals. Managers think strategically and employ the use of projects, teams, collaboration,
empowered employees, and experimentation. Strategic management focuses on the major
goals and objectives that will make a company successful. Sample strategies for an
organization might include establishing a sales office in Hong Kong within 2 years, releasing
an innovative game console in the US prior to the holiday shopping season, or increasing
gross margins by 10% in the next Fiscal Year.

Strategic management is not "tactical." It does not focus on the day-to-day activities that are
necessary to keep a company running. Rather, strategic management thinks at a high level and
looks to the future and the big picture.

The project-approach plays an important role in strategic management by providing a

measured, structured way to reduce the uncertainty in strategic business activities. The
business activities might include events like establishing a new marketing department,
developing a new cosmetic product, launching an overseas sales office, building a
manufacturing facility, constructing a new Research & Development building, revamping a
sales campaign, and so on.

However, not all projects have the same benefits to an organization and their clients and that
is where a project selection process becomes valuable. The goal of this lesson is to explore the
methods for choosing the projects best aligned to the company strategy and to identify the
major steps in building the Project Portfolio--the set of projects that a company considers key
to its success.

Project selection is the process of evaluating projects and choosing to implement those that
are best aligned to the strategic goals of the organization and offer the most benefits to the
organization, their clients, and their employees. When choosing which projects to implement,
we would hope that an organization uses rational, logical decision criteria.

Why go through all of this? Undoubtedly, there are many projects a company would want to
launch, but as most companies have limited resources, they have two choices:

1. Spread available resources across a large number of projects, resulting in a small number
of resources working on each project and little to no progress made on each.
2. Be selective about the projects they undertake so that each can be fully staffed and
achieve their objectives in the desired time frame.

This means that there has to be a mechanism for evaluating the many projects that a company
would like to launch, but can't afford to. We will start by defining the most common financial
measures used to evaluate projects.
Financial Measures for Selecting
Projects
The most common financial measures used to evaluate projects are: Payback Period, Net
Present Value, and Profitability Index. Each of these measures provide a view into the
financial viability of a project based on different monetary approaches. Organizations use
these financial measures to prioritize projects as most organizations have limited resources
with which to work. Those projects with better financial indicators would typically be
prioritized higher than those with less attractive financials. This prioritization helps an
organization to narrow down the list of projects they will initiate and those that may have to
seek better options for viability.

The Payback Period calculates how long it will take

to return the initial investment of the project.
The formula for Payback Period is the initial investment divided by the periodic cash
flow.
Dividing by annual cash flow gives you the payback time in years.
The shorter the Payback Period, the quicker an organization can achieve financial
benefits.
For example, if you invest $10,000 in a new product and take in $1000 a year in cash
related
to the product, it will take you ten years to get back your initial investment.
Ten years times 1000 equals 10,000.
The drawback of using Payback Period as a reliable means
for determining the financial benefit of a project is that it does not take
into account the time value of money.
Because we know that over time the value of money deflates, any project that stretches
across multiple years should consider using financial calculations
that consider the time value of money.
Net Present Value and Profitability Index both consider
that the value of money decreases over time.
The value of ten dollars received in five years is less than if you receive ten dollars today.

Net Present Value, or NPV, determines the difference of the initial investment and the value
of the cash inflows over time, considering a rate of return and the time value of money. The
formula for NPV is shown here, where the initial cash investment, represented as a negative,
plus the sum from time period i to T of the cash inflows divided by the quantity (1 plus the
required rate of return) raised to the ith power. An NPV value of zero indicates that the
project will return enough money to meet the organization's required rate of return. Any value
above zero will indicate that the organization can achieve an even higher rate of return than
what is required. An NPV that is negative indicates that the organization will never a get a
return on the money invested and should consider not pursuing that project.
 Profitability Index is similar to NPV in that it also considers the time value of money in its
calculation. Profitability Index is expressed in the form of a ratio. That is, the ratio of the
present value of cash inflows to the initial investment. The formula for Profitability Index is
the present value of future cash flows divided by the initial investment required. A ratio of
greater than one is a sign that the project will return financial benefits to the organization. If
the ratio is less than one, this means the NPV is also less than zero, which means the
organization should consider not pursuing that project.
ACCURACY IN FINANCIAL MEASURES

It is important to note that the financial calculations we have discussed here are only as valid
as the estimates provided. For example, if the cash flow estimates are not accurate, such as the
initial investment is underestimated or the cash inflows are overestimated, this can have a
serious impact on the accuracy of the financial measures such as Payback Period,
Profitability, and NPV. As such, the estimates used to conduct the financial viability must be
done with great care so as to make them as accurate as possible. Wherever possible, experts'
opinions, past project histories, and even computer simulations should be used to verify the
estimates are as accurate as possible.

Non-Financial Criteria for Selecting

Projects
Although organizations will use financials to determine the viability of selecting a project,
financial measures are not the only criteria that an organization should consider when
investing money in a project. There are non-financial criteria that should be considered.
Sometimes, non-financial criteria may drive an organization to select a project with less than
desirable financial measures. Some examples are:

 To meet new government or legal regulations. For example, a new law that requires
the business to implement a new process or modify/upgrade their existing equipment to
not be in violation of the law.
 To gain competitive advantage. For example, to launch a new product ahead of a
competitor, or to invest in research and development projects to maintain or increase
market share.
 To invest in new technologies or processes. For example, to implement the latest
technology in the organization to improve the efficiency and productivity of their
workers, or to improve an existing process in the organization that would create cost
savings in future years.

Project Selection Process

Typically, organizations use a combination of both financial and non-financial criteria to
determine the best projects to select. A typical project selection process would likely include
the following steps:

1. Business plan identifies project opportunities aligned to the organization's strategy OR

an employee has an idea for a project and reviews it with their management team for
concurrence to proceed and get allocated funding.
2. Management submits project information on a standardized form. This form typically
includes basic level business criteria such as the project goals and deliverables, project
purpose, the business reason or business problem addressed by the project, and general
information about the project cash outflow, inflow, and market potential.
3. Project Portfolio team reviews the project suggestions and pre-selects projects based on a
set of criteria that best matches the strategic plans of the organization.
 4. Projects undergo additional feasibility studies to confirm viability and confirm the
financial and non-financial benefits. This typically includes a review of the project
resource requirements.
5. A final set of projects is prioritized and selected with Project Managers assigned to begin
Project Initiation.

Once the finalized projects are selected, they are incorporated into the organization's Project
Portfolio which typically undergoes regular reviews by management to ensure that the
portfolio as a whole contains the projects necessary for the overall success of the organization.
Organizations that utilize a process such as the one described above typically will not allow
rogue projects to be initiated within departments or functional units as this will dilute the
resource pool as well as possibly invest money in projects with less than desirable returns.
Although these types of rogue projects can and do exist, the more disciplined the organization
is in utilizing a project selection and Project Portfolio management process, the less likely
these types of projects will exist.

Project Structures Within

Organizations
Projects operate within organizations and as such, not all project structures are the same. Just
as organizations have different structures, so do projects. Businesses and corporations are
organized in various ways. Sometimes this is structured with a traditional organization--
functional, hierarchical, or vertical. In this type of structure there are functional heads or
department heads that manage a specific function in the organization (finance, engineering,
manufacturing, purchasing). Organizations can also be organized by strategic business units
(product line or customer base), geographic location (North American region, African region,
etc.), type of customer (consumer, commercial, governmental, educational, etc.), or some
combination of the above.

Usually, we find three different types of project structures within organizations in which
Projects and Project Managers must operate. They are Functional, Matrix, and Pure Project.
Functional organizations are also called Traditional, Hierarchical, or Vertical organizations.

Functional (aka Traditional, Hierarchical or Vertical) Organization

Most military organizations are organized using a traditional organization. In a structure such
as this, the function or the hierarchical leader has primary control, responsibility, and
authority over that function or department within that organization. And there is a clear
vertical chain of command.
Functional units are primarily responsible for maintaining the business operations related to
that function. A project manager that operates a project that stays within the boundaries of the
function will typically report to a functional leader and get resources from within that same
functional team.
An example of this would be an accounting project that only involves the resources and scope
from the accounting department. Most projects, however, work across functional groups.
For example, a project for new product development; it would involve sales, marketing,
engineering, manufacturing, finance, et cetera. In this case, the project manager must work
across the functional hierarchy to obtain the resources and support.
The project manager in the functional structure is typically the functional manager that has the
majority of the resources to deliver the project, or there is a project analyst or coordinator
assigned to work across the functions. There are typically part-time resources in such a
structure that share their time between operations work and project work.

In the illustration shown, the shaded area represents the percentage of the resource working on
a project. The project analyst is 100% allocated to the project, but the software engineer and
quality assurance tester are only allocated 50% to the project. And the product engineer and
quality assurance auditor are only allocated 25% to the project. Each person reports to their
functional manager.
The benefits of this structure is that it is fairly simple and provides easy access to the
resources needed to perform the work on the project. The disadvantages of working in the
structure for delivery of a project is that the more functions involved, the more difficult it is to
coordinate across the functions, as well as finding the right priority of work so that the project
work gets the attention needed and resources are not distracted with operational work.

These structures are good when projects are mostly contained within one functional area.
One of the important things to remember is that if you are a project analyst or coordinator in
a functional organization structure, you will have little to no authority in making project
decisions or managing the project budget and resources. The resources, budget, and authority
are controlled by the functional managers.
As a project analyst or coordinator in the functional organization structure, you will have to
use many different types of soft skills and networking to get the resources you may require for
your project to be successful. And you will always be competing against operational priorities
supported by the same resources.

Pure Project Organization

The pure project, or projectized organization, is a structure where every activity is treated as a
project and every activity is conducted by a project team. Pure project organizations are a
complete opposite from the traditional hierarchical functional structure.
If you are a project manager in a pure project organizational structure, you have full authority.
In pure project organizations, the project manager will control the resources and budget.
Project work is organized by project instead of by functional unit.

In this illustration, you see that all the resource boxes are shaded, meaning all the resources on
the project are full-time. They are dedicated to the project, and they report directly to the
project manager instead of a functional manager. Their boss is the project manager and all
they work on are the project deliverables. This structure is particularly suitable for long-term
multiyear projects that require dedicated effort to deliver a complex product or service that
needs focused effort to complete.
In this structure, the project manager has full authority.

It is a simple structure and there is significant team comradery created, as the whole team is
dedicated and focused on achieving the project goals and objectives. There are some
disadvantages in this structure, however. Since the resources are dedicated to this project, that
means they can't be made available to other projects that might also need that skill set.
So each project team would need to have their own tester or their own engineer as opposed to
sharing resources across multiple projects.
In addition, since projects are temporary, they have a start and an end.
At the end of the project, all the resources on the project must find other project work to move
to. This can be a very stressful time for the team and does consume a large amount of the
project manager's time in helping their team find other positions within the organization.

Matrix Organization
The matrix organization tries to take advantages of some aspects from both the pure project
and functional organizational structures. The matrix organization will have traditional,
functional units, and projects will draw team members from across the functions.
There are various levels of matrix organizations.
A weak matrix organization takes on more characteristics of a functional organizational
structure.
A strong matrix organization will resemble more of a pure project organizational structure.

In the matrix structure you see elements from both the functional structure and pure project
structure.There is typically a full-time project manager that reports to either a program
manager or, perhaps, a higher-level functional manager. They have some full-time resources,
shown here as fully-shaded resource boxes, such as the project manager, product engineer,
and software engineer. They also have some part-time resources that work for them on the
project, such as the quality assurance auditor, and quality assurance tester.

Notice, however, the solid line reporting structure for the functional resources, such as the
engineers, still report to their boss, the engineering manager. They also report along the dotted
line to the project manager, meaning, they have functional responsibility to their boss, the
engineering manager, and they also report to the project manager for project-related activities.
So, a key characteristic of a matrix structure is that resources have two bosses: their functional
manager and their project manager.
If the project manager is given more control over such things as the budget and resources,
then the matrix is considered strong. If the functional managers maintain control over the
budget and resources, the matrix is considered weak.
A balance matrix has more of an equally-shared responsibility between the functional and
project manager. The matrix structure has become very common in organizations as it
provides the greatest flexibility to organizations in the use of their resources. This structure
can be used for both short or long-term projects, and projects that require coordination across
multiple functional areas.
As you may guess, this structure pulls in the advantages of both the functional and pure
project structures. The advantages of such a structure is that it allows for greater sharing of
resources across projects, while still maintaining a project focus and shared responsibility for
project success. However, this structure also comes with its disadvantages as well. Most
employees don't favor having more than one boss. It can create work conflicts and stressful
situations if this is not well coordinated.

What Structure Works Best?

You will notice that none of the structures we have looked at are perfect - they each have
advantages and disadvantages. The key is to match the right structure to the needs, goals, and
objectives of the project. The organization should consider such elements such as:

 The length of the project: unless the project is contained to a single functional unit,
long term projects are best served with a strong matrix or pure project structure.
 How many functional areas need to be engaged: the more functional areas that need to
be engaged, the more advantageous the matrix or pure project structure will be.
 The dedicated project resources needed (including if a dedicated Project Manager
is needed): dedicated project resources are best served in a strong matrix or pure project
structure.
 The complexity of the project: the more complex a project, the more flexibility is
needed in the structure, so a matrix or pure project structure would be best.
 The technical or functional depth of the project: for technically deep and functionally
specific projects, the functional or weak matrix would be best.

In larger organizations, it is very common to see elements of all 3 organizational structures for
projects. The structures are adjusted for each project to meet the needs of that project. When a
Project Manager initiates a project, one element they should determine quickly is the type of
structure they believe will best fit the needs of the project. In this way, they can work with
management and the Project Sponsor to ensure the correct structure is utilized so as not to
create an undue burden on the Project Manager to deliver the project.

Project Management Office

Many companies use a specialized organizational structure to support Project Managers and
projects within the company. This structure is called a Project Management Office (PMO) or
Project Office (PO). The PMO structure has been implemented in many companies in an
effort to improve the overall success rate of projects. Their primary purpose is to provide
support to the projects and Project Managers within an organization.

A PMO can provide a wide variety of support options to projects including:

 Own and provide support for the organization's Project Management methods and
processes
 Provide Project Management expertise and coaching
 Provide Project Management education for the organization
 Provide project auditing
  Support the organization's project tools and techniques
 Serve as a repository for best practices
 Provide standards for reporting and measuring project progress
 Facilitate project reviews with Senior Management
 Assist with resource allocations across projects
 Assist with project selection and support the Project Portfolio management process

When organizations establish a PMO they often times are striving to standardize the Project
Management practice, methodology, and tools across the entire company. PMOs have become
quite popular as projects have become more and more complex to deliver in our global
economy. However, the success rate of PMOs is quite varied.

The ultimate goal of a PMO is to provide value to the organization, the projects, and the
Project Managers. And although Project Management has accepted methods based on the
standards from such organizations as the Project Management Institute, there are no industry
standard structures, functions, or goals of a PMO. Organizations that utilize PMOs design
them specifically for the functions and projects within that organization. As you might expect,
because of this variation, some PMOs are much more effective than others. The closer the
alignment of PMO objectives to the strategy and goals of the organization, the more likely the
PMO can be successful.