1.5 Project Organization and Selection

Projects are the way organizations operationalize strategy and therefore executing a strategy effectively means pursuing the right projects. In other words, it is a matter of aligning projects and initiatives with the company’s overall goals. As we discussed earlier a portfolio is made up of programs and projects. An organization’s strategy is the game plan for ensuring that the organization’s portfolios, programs, and projects are all directed toward a common goal and prioritized appropriately.

Project selection proceeds on two levels: the portfolio level and the project level. On the portfolio level, management works to ensure that all the projects in a portfolio support the organization’s larger strategy. In other words, management focuses on optimizing its portfolio of projects.

On the project level, teams focus on selecting, refining, and then advancing or, if necessary, terminating individual projects that are not aligned with organizational goals. Many organizations find that they have three kinds of projects in their portfolios; compliance (emergency –must do), operational, and strategic projects. Compliance projects usually have penalties if they are not implemented.

Operational projects are those that are needed to support current operations. These projects are designed to improve efficiency of delivery systems, reduce product costs, improve performance etc. Strategic projects on the other hand are those that directly support the organization’s long-run mission. The goals of such projects are to increase revenue or market share and examples of strategic projects include new products, research and development.

It is important to note that some compliance-related projects have to be completed no matter what. But companies typically generate far more ideas for new projects than they can reasonably carry out. So to optimize its portfolio, every organization needs an efficient process for capturing, sorting, and screening ideas for new projects, and then for approving and prioritizing projects that are ultimately green-lighted. We will discuss the factors that influence project selection and some project-selection methods.

In any organization, project selection is influenced by the available resources. When money is short, organizations often terminate existing projects and postpone investing in new ones.

An organization’s project selection process is also influenced by the nature of the organization and its priorities. At a huge aerospace technology corporation, for example, the impetus for a project nearly always comes from the market, and is loaded with government regulations. Such projects are decades-long undertakings, which necessarily require significant financial analysis. At a consumer products company, the idea for a project often originates inside the company as a way to respond to a perceived consumer demand. In that case, with less time and fewer resources at stake, the project selection process typically proceeds more quickly.

Size is a major influence on an organization’s project selection process. At a large, well-established corporation, the entrenched bureaucracy can impede quick decision-making. By contrast, a twenty-person start-up can make decisions quickly and with great agility.

Accessing the value of the project to customers and other stakeholders and identifying the magnitude and impact of risks, as well as potential mitigation strategies, are key elements of the initial feasibility analysis of a project. Decision-makers will need such information to assess whether the potential value of the project outweighs the costs and risks.

Financial and Non-Financial Criteria

When you have a number of interesting and challenging projects to choose from, finding a project that is the right fit for the organization is the first step in effective project management. Project Selection Methods offer a set of time-tested techniques based on sound logical reasoning to choose a project and filter out undesirable projects with a very low likelihood of success. Project selection methods are an important concept for practicing project managers. The criteria can be classified as financial and non-financial.

Assuming the organization you are working for has been handed a number of project contracts. Due to resource constraints, the organization can not handle all the projects at once, so they need to decide which project(s) will maximize profitability. Note that financial return such as profitability while important does not always reflect strategic importance. Organizations have to be disciplined in saying no to potentially profitable projects that are outside the realm of their core mission. This may require the consideration of other criteria beyond profitability such as:

• To capture larger market share
• To make it difficult for competitors to enter the market
• To develop core technology that will be used in next-generation products
• To reduce dependency on unreliable suppliers

Financial Criteria

1. Cost/Benefit Ratio
   • Cost/Benefit Ratio, as the name suggests, is the ratio between the Present Value of Inflow or the cost invested in a project to the Present Value of Outflow, which is the value of return from the project. Projects that have a higher Benefit-Cost Ratio or lower Cost-Benefit Ratio are generally chosen over others. 
2. Payback Period
   • Payback Period is the ratio of the total cash to the average per period cash. It is the time necessary to recover the cost invested in the project. The Payback Period is a basic project selection method. As the name suggests, the payback period takes into consideration the payback period of an investment.  It is the time frame that is required for the return on an investment to repay the original cost that was invested. The calculation for payback is fairly simple:
   • Payback Period = Cost of the Project/Average Annual Cash Inflows
   • When the Payback period is used as the Project Selection Method, the project that has the shortest Payback period is preferred since the organization can regain the original investment faster. There are, however, a few limitations to this method: 
     • It does not consider the time value of money. 
     • Benefits accrued after the payback period are not considered; it focuses more on the liquidity while profitability is neglected. 
     • Risks involved in individual projects are neglected. 
3. Net Present Value
   • Net Present Value is the difference between the project’s current value of cash inflow and the current value of cash outflow. The NPV must always be positive. When picking a project, one with a higher NPV is preferred. The advantage of considering the NPV over the Payback Period is that it takes into consideration the future value of money. However, there are limitations of the NPV, too: 
     • No generally accepted method of deriving the discount value used for the present value calculation. 
     • The NPV does not provide any picture of profit or loss that the organization can make by embarking on a certain project. 
4. Discounted Cash Flow
   • As you know the future value of money will not be the same as it is today. For example, $20,000 will not have the same worth ten years from now. Therefore, during calculations of cost of investment and return on investment it is important to consider the concept of discounted cash flow.  
5. Internal Rate of Return (IRR)
   • The Internal Rate of Return is the interest rate at which the Net Present Value is zero. This is attained when the present value of outflow is equal to the present value of inflow. Internal Rate of Return is defined as the “annualized effective compounded return rate” or the “discount rate that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero.” The IRR is used to select the project with the best profitability; when picking a project, the one with the higher IRR is chosen. 
   • When using the IRR as the project selection criteria, organizations should remember not to use this exclusively to judge the worth of a project; a project with a lower IRR might have a higher NPV and, assuming there is no capital constraint, the project with the higher NPV should be chosen as this increases the shareholders’ profits. 
6. Opportunity cost
   • Opportunity cost is the cost that is given up when selecting another project. During project selection, the project that has the lower opportunity cost is chosen.

Non-Financial Criteria

There are non-financial gains that an organization must consider; these factors are related to the overall organizational goals. The organizational strategy is a major factor in project selection methods that will affect the organization’s choice in the choice of project. Organizations may support projects to restore corporate image or enhance brand recognition, community support development projects. Two models that allow multi-criteria screening are: Checklist Model and Multi-Weight Scoring Models

Checklist Model

The simplest method of project screening and selection is developing a checklist, or a list of criteria that pertain to the organization choice of projects, and then applying them to different possible projects. The approach uses a list of questions to review potential projects and to determine their acceptance or rejection. The justification for the checklist model is that they allow great flexibility in selecting among many different types of projects and are easily used across different divisions and locations.

The shortcomings of this project includes the fact that it fails to answer the relative importance or value of a potential project to the organization and fails to allow for comparison with other potential projects. This approach also creates opportunities for power, politics and other form of manipulations. To overcome some of theses problems the Multi-Weight Scoring is recommended by experts.

Multi-Weight Scoring Models

The scoring model in project management is an objective technique: the project selection committee lists relevant criteria, weighs them according to their importance and their priorities, and then adds the weighted values. Once the scoring of these projects is completed, the project with the highest score is chosen.

While selection models may yield numerical solutions to project selection decisions, models should not make the final decisions—the people using the models should.