Utilizing Earned Value Management During Economic Downturn
By Kevin L. Smith, MBA, PMP
The current economic turmoil that is impacting the globe is forcing corporations to creatively identify opportunities to cut cost. CFOs are focusing investments on short-term paybacks rather than long-term strategic objectives. Projects that are not part of a company’s direct line of business are being reevaluated to determine immediate impact on profitability. As a result, corporate executives and PMO directors are being asked to tightening the checkbook on PMO projects.
According to research performed by the Standish Group, an international IT research firm with an expertise in project and value performance, 71 percent of IT projects are either over budget, over time, or under scope. Based on this historical data along with the troubling times of the U.S. economy, it is anticipated that CFOs and Procurement Managers will begin awarding contracts to firms that demonstrate a strong capacity to effectively manage project costs. Earned value management is a project management technique that promotes timely performance measurement and cost management controls.
Earned Value Management
What is Earned Value Management anyway? It is the process of integrating the project costs and the project schedule in order to measure actual performance and forecast future performance against the established baseline. With proper implementation of EVM, accurate measurement can occur at anytime throughout the project lifecycle. However, accuracy requires that a thorough Earned Value Management System is in place and is being utilized consistently throughout the project.
Successful use of an Earned Value Management Systems (EVMS) requires commitment, input, and agreement among all project stakeholders including the sponsor. Early involvement from senior leaders help to reduce team resistance and encourages more accurate reporting, resulting in more realistic data for better performance measurement. As the future of the U.S. economy unfolds, one thing is clear, measuring the money being spent against the products and services being received will be scrutinized more than ever before.
There are seven major factors that contribute to significant cost overruns. Identifying these factors and including mitigation plans to address them in response to RFPs, will give vendors the competitive edge by positioning themselves as thought leaders in Project Cost Management. The following answers the question, “Why do projects close over budget?”
- Lack of experienced Project Managers
- Lack of Commitment and Accountability of Project Sponsors
- Unclear Scope Definition
- Poor Project Planning
- Poor Costs and Schedule Estimates
- Inability to manage Scope Creep
- Inability to Manage Change and Project Risks
Project Management firms seeking contracts from U.S. corporations are being required to demonstrate its ability to effectively manage project costs. As a result, those firms that include Earned Value Management techniques in their proposals will likely be given more consideration than those without. The reason is because Earned Value Management answers the question, “What am I getting for the money being spent?”
Utilizing EVM techniques does not prevent project costs overruns, but it does provide project managers with data for more effective cost and risk management, which has become increasingly important to corporations. Risks that are identified through the use of EVM provide early warning signals that immanent project risks exist.
The early warning signals allow project managers to identify, analyze and mitigate these risks before project success is threatened. Therefore, Earned Value Management is an important tool in maintaining and managing total project performance and would prove beneficial to organizations seeking to minimize unnecessary project expenses.
Clear Scope Definition
An important requirement of EVM is a clearly defined scope. Without it, project success is impossible to quantitatively measure. Defining scope means to ensure the project team and project sponsors, have a common understanding of the requirements that are included and the opportunities that are excluded from a project.
While corporations are demanding project management firms to manage cost more effectively, they must also be prepared provide these firms with more detailed scope requirements and offer active and engaged sponsors.
To assist corporations in scope definition, the project manager must perform two important tasks – engage the appropriate resources and develop a work breakdown structure to graphically depict the work that needs to be accomplished into measurable work packages. From work packages, a project timeline can be created and the associated costs can be defined. With the scope, schedule and costs detailed and agreed upon, the project baseline can be created, allowing U.S. companies to measure project performance throughout the project lifecycle.
As the economy experiences unprecedented volatility, corporations must be positioned to avoid negative impact by reducing expenses. Many cost cutting measures result in staff reductions and postponing strategic projects. However, those projects that remain as “in-flight” projects are now more than ever expected to stay on budget. Effectively managing project cost is quickly becoming a more scrutinized prerequisite in awarding project management contracts to vendors. Offering Earned Value Management is an outstanding solution.
About the Author
Kevin Smith, MBA, PMP is the Director of Project Management at Provident Enterprises, a Business Management Consulting firm specializing in process optimization utilizing Six Sigma Techniques. Provident Enterprises prides itself in assisting organizations in cutting cost and increasing productivity. Throughout his career, Kevin has been instrumental in leading global IT infrastructure initiatives as well as in-house re-engineering solutions. He enjoys great depth of experience and expertise in project team leadership, portfolio management, and earned value management.