Benefits-led Decision Making Drives Value Maximisation.
Author: Matt Williams
Managing Director - Connexion Systems
The benefits and value management process transcends organisational boundaries and capabilities, requiring active and ongoing management that is embedded in the business culture. A project business case ordinarily includes a comprehensive, analytically derived Cost/Benefit Analysis. The basis for approval of a business case is that the capital investment required to deliver the project scope will be outweighed by the financial and/or non-financial benefits that will be delivered.
We need only ask ‘what would happen to organisational value if we don’t proactively and collaboratively deliver program benefits?’ to appreciate that best practice corporate governance must encompass a proactive benefits and value management regime throughout the business case lifecycle.
While a multitude of PPM disciplines have helped develop tracking tools and better techniques for administering benefits, there is still a lack of good guidance on governance and management. For decades, the responsibility for benefits and value management has blurred the lines between the business, finance and program or projects management (PPM) teams. Collaboration is about creating enabling environments and cultures that foster collaborative teams, not designing new governance processes. The creation of such environments requires an appreciation that organisations differ in function and culture, so collaborative behaviours need to be fostered rather than prescribed via boilerplate guidelines.
Below we discuss some of the key factors that contribute to the erosion of organisational value throughout the PPM and benefits and value management lifecycle. This erosion occurs in three stages, exaggeration, destruction and decay. We also highlight some of the preventative measures that can help eliminate this value erosion.
In the early stages of program planning, the desire or need for change combined with the enthusiasm that typically accompanies project endeavours, often leads to an optimistically biased estimation of the business value that will ensue from the delivery of the program scope. This, coupled with the need to secure funding can often lead to a behaviour known as ‘cost matching’. Cost matching occurs where the cost of a program is first estimated and benefits are retrospectively identified, within the defined scope, to match that cost. These behaviours can lead to significant exaggeration of the program value.
Value exaggeration can also occur where a program has expressed strategic objectives in financial terms, such as “increasing customer profitably” or “uplift in revenue streams” or improving “non-financials” such as customer experience, safety or sustainability where reliable metrics for the estimation of their value in financial terms are not readily available. In this instance, valuation of benefits requires projections to be based on a number of forecast organisational assumptions or hypotheses; which are often made at the highest level without detailed understanding of the operational change required for realisation. Exaggeration can inadvertently occur when benefits are stated in abstract concepts; remember, you don’t need to over analyse it but you do need to understand it at the appropriate level of detail.
Example: The marketing division of a clothing retailer wanted to implement a business intelligence (BI) capability to help improve customer profitability. The cost of implementing the BI system was estimated and the business case was approved based on research showing that an 8 to 10% increase in margin could be achieved. It was realised soon after implementation that the targeted margin increase first required 2 years of customer data which was not planned for and to achieve targeted margins would require additional investment in supply chain processes.
The core origin of value destruction is the over-emphasis placed on cost and schedule in the decision-making process during a program delivery phase. The objective of any program is to create organisational value, however during program delivery, decisions are largely made with the objective of maintaining or even reducing program costs and timelines rather than on maximising value generation.
Decisions to change program scope or timelines can be made solely on a cost basis without conducting a benefit impact assessment. The question must always be asked, ‘if we change our baseline, what value are we adding or destroying relative to the savings we anticipate?’
Additional value destruction comes in the form of delays due to the time-value of money. In larger programs and those where significant benefits are realised in the shorter term, approving changes based on the nominal value of the benefit can be misleading with respect to the actual value created. Decisions being made during the program must be evaluated on the basis of cash flows, and in real not nominal values.
Example: 6 weeks before a new software game was due to be launched, the development team requested that tutorials and help content be changed from online to “in game” as a result of internal technical resource constraints. Because the change did not impact the schedule or cost it was approved by the project manager. The game was launched but the benefits were not as projected, following analysis it was discovered that the marketing department had made assumptions that the visits to the website to access tutorials and help content would allow for cross-selling of game merchandise and earlier game releases of the franchise.
The most common mistake made at the end of a program is the failure to properly transition the delivery of benefits, and with it the realisation of their value, into the operational business.
While the finance division may often be tasked with maintaining benefit forecasts, tracking actual benefits and highlighting variances to the ROI metrics, these tasks are usually performed in isolation, instead of leveraging collaborative team and stakeholder inputs. This results in a lack of corrective action or value optimisation actions post program closure and in turn leads to value decay.
Even when a program has been completed for some time, the realisation of its benefits may well be ongoing. Coupled with these benefits are the assumptions stated in the business case that underpinned their logic to begin with, so any unforeseen changes to these assumptions could undermine the required value realisation. It is for this reason that benefits must be continually evaluated and managed from within the business and from within the enterprise performance management systems.
Example: A new CRM system was implemented to help transition customers to an online portal; with the desired benefit of reducing the cost of customer service operations. An assumption was made about the organic rate at which customers would migrate. Six months later, the program was deemed a success due to its completion on time and within budget. However, the variance in the benefit realisation showed that the organic migration rate achieved was far lower than forecast and the project benefits were significantly less than anticipated.
While many organisations may only experience one or two of the issues discussed, these can lead to significant value erosion within the organisation over time. To help counteract this value erosion, a number of key preventative measures may be taken. These include:
- Linking benefits maps to a documented and agreed organisational value map (also known as a “driver tree”). This ensures that when benefits are workshopped and profiled, the organisational and/or stakeholder impact of the change is fully understood and that each individual benefit is unbiased in its financial projection. It also helps with program scoping and removes the likelihood of double-counting benefits;
- Systematising benefits management and governance processes will reduce data errors and also improve the ability to make benefit-led decisions during the program. This is especially important for larger programs of work where there are many stakeholders. While spreadsheets may be appropriate for small projects, they will significantly contribute to data integrity issues, complex and difficult to execute governance processes, administrative overheads and inflexible reporting.
- Improved collaboration and integration of program, business and finance teams involved in benefits administration and management. Proactively and effectively managing benefits requires differing perspectives and skill sets. Providing a collaborative, intuitive and accessible benefits management environment not only improves resource productivity but also increase the likelihood of benefits realisation and value generation.