False Comfort From Wasted Effort And Misleading Precision!

My experience as a project, programme and corporate (change) portfolio manager, is that the two pieces of information that are immediately and indelibly etched in the business’ memory are the budgeted cost and forecast end-date, both of which in the budgeting processes are almost certainly wrong. No wonder the perception is that most projects fail, when the the most common measures used to assess them were flawed at inception.
So my heart falls when I am asked to start a project and being told that the budget is a number (something like) £184,534 in 2012; this being a figure drawn out of a plan created about a year ago and then enshrined in the annual budget.  I will stress that the numbers are purely fabricated to illustrate the point, but many readers will recognise the truth they represent.

Being quoted to the nearest £1 creates an impression of superior planning and accuracy; interestingly I have in the past been in places where this figure included the pence too! In truth the supporting estimation process was little more than the proverbial “wet finger in the wind” or “gut feel” technique; and probably started as something like “4 man months plus £20k of other expenses” or it feels like "£600k and probably around seven months"

This was probably then subject to the addition of some additional overheads and spread over seven (or some other awkward number of ) months  and subsequently slipped partly into the next year. Then it was subject to a blanket 9% haircut (easier than having to challenge a pet project!) to get the overall total budget down to an acceptable number and rounded to the nearest £100k.

Apart from the wasteful effort required of the project and programme managers and PMO to create a sets of budget figures by project, by month, by cost category that conform to an accountants specification, this creates further problems during subsequent reporting (“please explain the variance this month against the budget number?”) and gives the business a false sense of confidence and indeed ownership of the money involved, such that should the project be delayed or cancelled or maybe come in under-budget, the business unit concerned will immediately believe that the unspent money is theirs to spend.

The behaviours around all this are so wrong, albeit most participants are doing what they see as the right thing. The problem is that it is driven by a simple belief that every number has to balance and the fact that spreadsheets make accurate computation very easy and there is a belief that finer precision is better.

As the head of corporate programme office I was and remain proud of some key changes I made.
There were two key foundations for victory (and it was a battle!).

The first was that we only provided detailed budget figures those projects that were already approved AND reasonably planned. The rest of the change budget was pooled into a single “pot” or cost centre (ie not a cost centre for each idea) that the Programme Office modelled, managed and allocated as identified projects were approved and planned.

As a PMO we analysed previous spending patterns, both seasonal and by category. They were surprisingly consistent over three years and gave us a starting model. We then looked at the nature of the upcoming portfolio and agreed how the "model" should be flexed, something we agreed with the Head of Change.

We then used these to spread the "pot" figure into the budget process, providing perfect transparency on our process and results.

Of course the numbers the Programme Office submitted in the budget process were also wrong, as in it was unlikely that they would be hit +/- 1%, but no more wrong than the alternative individual estimates and much easier to generate and manage.

In subsequent months as a new project was approved, a specific cost centre was established and a “correct” portion of the pool allocated to it.

The second foundation was that the PMO could hold a list, sub-ledger if you like, of the proposed projects that may not equal exactly the size of the pot/pool. In doing this we recognised that while there are critical links between business plans and the financial budgets, they are not the same thing. Applying a x% haircut across a set of projects does not mean they will all cost less to deliver!

The simplest way is to illustrate the process.

Existing/approved projects for next year require              £21.5m

Business identifies more initiatives estimated at               £48m

                                                                                                    ======

Total demand                                                                    £69.5m

FD sets limit at                                                                   £35m

           Funding available for new projects                                    £13.5m

A Serious challenge brings business demand down to     £15m (from £48m)

At this stage one could apply a haircut across either the new projects (10%) or the whole change portfolio (4%), but this does nothing that make some numbers add up and make an mid-level accountant’s life easier.

Instead we did this

 

             Budget                                                £35m

             Project List                                          £36.5m

             Broken into – Detail                            £21.5m
 
             Pot                                                      £13.5m
                                                                        ======
                                                                         £35m

The pool approach had the added advantage that until allocated, the money was a corporate asset and the project/change committee could invest it in the most appropriate propositions and not be held hostage by a business unit’s selfishness. We could report to the Change Board how well the remaining pot reconciled to the expected demand and consider new requirements caming out of left field on their merits without getting into a project dogfight about who gave up what - we made the best decision for the company.

I ran this way for three years and each year the financial management of the portfolio was a) easier and b) I believe we made better decisions.

The key reason is that we did not waste effort either creating or trying to manage to fictitious numbers. Instead we empowered those involved in governance and delivery to focus on the key decisions.

The most uncomfortable group initially were the accountants who ran the plan. They really did not like the idea of a list of projects that added up to something different from their spreadsheets, but after a year or so they found that it worked better for them too and after year two there were no objections.

This is one place that a PMO can add real value to the wider change community!