Unboxing PMBOK / PMP – Lesson#6 – Project selection methods

How do we select the right projects for execution? . Projects must have a solid business case to support it. A set of ratios comes in handy while picking up the right projects for execution. They are;

Net present value (NPV)
Payback period
Benefit cost ratio (BCR)
Internal rate of return (IRR)
The time value for money

The time value for money

Money has a time value. A rupee today is more valuable than a rupee year later. Why? There are several reasons. Capital can be employed productively to generate positive returns. In an inflationary period a rupee today represents a greater real purchasing power than a rupee a year later

Time lines and notations

When cash flows occur at different points in time, it is easier to deal with them using a time line. A time line shows the timing and the amount of each cash flow in a cash flow stream.  Cash flows can be positive or negative. A positive cash flow is called as cash inflow and a negative cash flow is called a s cash outflow.

Future value

Suppose you invest Rs.1000 for three years in a savings account that pays 10 percent interest / year. If you let your interest income be reinvested, your investment will grow as follows;

First yearPrincipal at the beginning1,000
Interest for the year  (1000×0.10)100
Principal at the end1,100
Second yearPrincipal at the beginning1,100
Interest for the year (1100*0.10)110
Principal at the end1,210
Third yearPrincipal at the beginning1,210
Interest for the year (1210*0.10)121
Principal at the end1,331

The process of investing money as well as re-investing the interest earned thereon is called compounding.  The future value, or compounded value of an investment after ‘n’ years, when the interest rate is ‘r’ percent is;

FV n = PV (1+r) ˆ n

In this equation, (1+r) ^ n is called future value factor

If we apply this formula;

FV n = 1000 (1+. 1)^3 = 1000 x 1.1 x 1.1 x 1.1 = 1331

Net present value

The net present value (NPV) of a project is the sum of the present values of all the cash flows , positive as well as negative , that are expected to occur over the life of the project. To illustrate the calculation of net present value, consider a project, which has the following cash flow stream;

YearCash flow
0Rs (1,000,000)
1200,000
2200,000
3300,000
4300,000
5350,000

The cost of capital, ‘r’ for the firm is 10 percent.

The net present value of the proposal is;

NPV =  (200000/1.10^1)  + (200000/1.10^2)  +  (300000/1.10^3)  +  (300000/1.10^4)  + (350000/1.10^5)  – 1000000 =  – 5,273

The net present value represents the net benefit over and above the compensation for time and risk. Hence the decision rule associated with the net present value criterion is, accept the project if the net present value of the project is positive and reject the project if the net present value is negative.

The benefit cost ratio

Benefit cost ratio BCR = PVB / I where

PVB = present value of benefits and I = initial investment

To illustrate the calculation of these measures, let us consider a project, which is being evaluated by a firm that has a cost of capital of 12 percent.

Initial investment100000
Benefits Year 125000
Benefits Year 240000
Benefits Year 340000
Benefits Year 450000

The benefit cost ratio measures for this project is;

BCR =  ((25000/1.12) + 40000/1.12^2) + (40000/1.12^3)  +  (50000/1/12^4)) / 100000 = 1.145

Decision rules

When BCR > 1 accept the project

When BCR < 1 reject the project

IRR – internal rate of return

The internal rate of return (IRR) of a project is the discount rate, which makes its NPV equal to zero. To illustrate the calculation of IRR, consider the cash flows of a project being considered;

Year01234
Cash flow(100,000)30000300004000045000

The IRR is the value of ‘r’, which satisfies the following equation;

100,000 = 30000/(1+r)^1 + 30000/(1+r)^2  + 40000/(1+r)^3 + 45000/(1+r)^4

The calculation ‘r’ involves a process of trial and error. We try different values of ‘r’ till we find that the right hand side of the above equation is equal to 100,000. In this case, the value lies between 15 and 16 percent.

The decision rule for IRR is as follows;

Accept, if the IRR is greater than the cost of capital

Reject, if the IRR is less than the cost of capital

Payback period

The payback period is the length of time required to recover the initial cash outlay on the project. For example, if a project involves a cash outlay of RS. 600000 and generates cash inflows of Rs. 100000, 150000, 150000 and 200000 in the first, second, third and fourth years respectively, its pay back period is 4 years because the sum of cash flows during the four years is equal to the initial outlay. According to the payback criterion, the shorter the payback period, the more desirable the project.

Opportunity cost

Opportunity cost (opportunity lost) is the NPV of the next best project, you are not doing, because you have decided to invest in a project.

Let us assume that you have 100,000 rupees and you are investing this money in project ‘A’, whose NPV=200,000 and because of this you are unable to do project ‘B’, whose NPV=150,000 or project ‘C’, whose NPV = 120,000, then the opportunity cost is 150,000, which is the NPV of project ‘B’, which is the next best option after ‘A’.

In personal life, these concepts of NPV, payback period, BCR, IRR and opportunity cost are really helpful, to protect yourself from unwanted expenses like buying a new flat, car or even mobile phone. Before committing to buy, just think about these ratios, and most probably you will restrain from your impulse to buy unwanted stuff.

The project management body of knowledge says that ‘Projects fail at the beginning and not at the end’. A project which does not have a good business case is a bubble, which can burst at any time. So, before starting a project, please ensure that the project has a solid business case, and if the business case is not clear, please document it as a risk.

The paradigm shift within PMBOK Version 6

So far, if a project got over on time, within budget and met it’s scope, then it was considered as successful. As per the PMBOK Version 6 on wards, projects are considered as successful only when they got completed on time, within budget, met their scope and satisfied the purpose for which it was initiated which includes the payback period. That makes the understanding of the business case of the project from day 1 of the project a critical success factor for the project manager.

Go to the master list of lessons

Unboxing PMBOK / PMP Post#4 – Adherence Professional ethics & Social responsibility – A safety net for project stakeholders

Professional ethics and social responsibility of project managers is one of the less discussed topics in the project management circles. Many see it as very idealistic hence feel that it is not practical to practice professional ethics in today’s work environment. Unfortunately, the fact is just the opposite. In today’s highly competitive world, it is much safer and sustainable if one follow the professional ethics in all transactions. Adherence to professional ethics at work place provides the much needed safety net for the project management team against major project risks. If you do not trust my words, please read the following headlines;

Fired city project manager, contractors arrested in Bloomington embezzlement scheme

Wykoff is charged with 24 counts of embezzlement and 1 count of conspiracy for false invoices on sidewalk jobs

U.S. Postal Service Facilities Project Manager Arrested on Corruption Charges

CBI arrests MECL Project manager for bribe…

Texas Rangers arrest recently fired San Marcos construction manager….

That is a huge list….

If you want to get the detailed list just google for ‘Project manager arrested’. So, it is not utopian stuff. If anything goes wrong with the project, as a project manager you are accountable. When the Delhi Metro Rail work was in progress, because of a sub-contractor issue, two people died in an accident. Instead of putting the blame on the sub-contractor, the chief project manager (Mr. Sreedharan) took responsibility and resigned. That was a great demonstration of professionalism and professional ethics. Following professional ethics is a good safety net for project managers and in the longer run, your reputation will increase and bigger opportunities will come your way.

The professional ethics of project managers are classified into four groups comprising of;

  • Responsibility
  • Respect
  • Fairness
  • Honesty

The following mind map depicts the professional ethics of project managers. Click on the diagram to zoom in.

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Agile Digital Marketing Management – How to improve your digital marketing program's effectiveness using scrum?

Did I say Digital Marketing Program instead of Digital Marketing Project?. Yes, I did, and that is intentional because most of the digital marketing initiatives meets all the criteria of programs than projects. Programs are a collection of inter-related projects, which when done together gives us more value than doing them one after the other. Majority of the digital marketing initiatives are programs comprising of multiple projects like;

  • Revamping the company web site
  • Creating good content
  • SEO optimization
  • Blogs
  • Case studies
  • Success stories
  • Voice of the customers
  • Training component
  • Webinars
  • Benchmarking
  • Research & Development etc

If these are not synchronized well, the entire initiative can turn out to be transaction oriented than result oriented. The team with which I was working very closely was no different, till we decided to follow a ‘light scrum’ based on the scrum elements like;

  • Weekly sprint planning meetings
  • Weekly reviews and retrospectives
  • Daily reviews
  • Tracking board

One may call it as a tailored version of Scrum. Any way, I call it as ‘Light Scrum’, a kind of loosely implemented most essential aspects of scrum framework envisaged by Ken Schwaber and Jeff Sutherland in their Scrum Guide.

Weekly sprint planning meetings

Quick 1 hour planning meetings, conducted immediately after the weekly review and retrospective. It was more of a pending from the previous week and new work. Was created using a tool (Microsoft Teams), so that all the stakeholders (many of them very senior) were aware of what is being planned, and their specific actions towards meeting the weekly sprint goals.

Weekly reviews and retrospectives

Even though the marketing team was working very hard, there was not any specific way to evaluate their progress. With the introduction of the weekly sprints, plan based review and retrospectives became possible. This in turn brought in lot of visibility into the marketing teams functioning to the key stakeholders.

Daily reviews

We never had those typical stand up meetings. We sat down together for 15 minutes every day to see where we are with respect to the weekly plan and for constraint removal.

Tracking board

First we created a dump of all the goals to be achieved and the activities required to achieve those goals. This resembled the classical product backlog. From this we created the weekly sprint backlogs. The weekly sprint backlogs were classified into;

  • To be done
  • Being done
  • Done

Resources were associated with tasks with a mix of volunteering and allocation. Based on the progress made, tasks were moved from “To be done’ to ‘Being done’ and then “done’. Tracking board was shared with all the relevant stakeholders so that everyone could see what was happening in the project at any point in time.

We do not maintain burn down charts to track progress. No task level estimates. There is no actual effort capture. There is no velocity calculations yet. Just by having a product backlog, sprint backlog, sprint planning meeting, sprint reviews and retrospectives the benefits are many.

Key Results

  • Improved result orientation
  • Higher motivation levels and job satisfaction
  • Better quality and effectiveness of the deliverables
  • Better stakeholder satisfaction

Daily scrum meeting rules

Sprint planning meeting guidelines

Agile mentoring program

Unboxing PMBOK / PMP master list

Do not love your work too much, else you will fail !

Love your work‘, I have been hearing this for more than three decades now. My actual experience is different. Too much attachment to work, for that matter to anything leads to stress and sub-optimal outcomes.  When my daughter got married, when my 1 year old grandson went back to Bangalore after staying with us for a couple of months, when I had to leave a position where I was very successful in order to move to a higher position, when I had to transfer my star performer whom I groomed for success to the next higher position where he is going to report to someone else, I felt the same pain,   I felt more sadness than joy. Everything we nurture closely will grow, and at some point in time, will leave us to grow further. Or, is it just the opposite?. We must learn to be attached in a detached way for growth of all involved. A kind of detached attachment. Sometimes I get too much obsessed with my work and I get very possessive about the product. I get really upset even with the very thought of someone else trying to change it from the way I perceived it. Learning and practicing ‘Detached attachment’ is the key to growth of the product and the owners. Everything and everybody must grow and flourish, and what took us till here, may not take us further. If we latch on to past, the future will elude us. Applicable to all passionate people, irrespective of whether you are an entrepreneur, architect, product owner, research associate, husband, wife, Dad, Mother…the pain of handing over something closer to your heart hurts, and at the same time it is very much required for growth. Learning to love everything in a detached manner, with the awareness that this also must pass away, to live up to the Grand plan our creator have for us and knowing that he is the only constant allows us to approach such situations  very normally. Live life to Love, lead and leave.

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Even the birds will come and pose for you…

While discussing many aspects of photography, the photographer is not discussed much. I mean, the ‘outlook / state of mind’ required by a good photographer is ignored. Can a disturbed soul visualize beauty and emotion?. This is the question daunting me for sometime now. The camera and other accessories do matter, if the photographer is able to visualize beauty and emotion before he presses on the trigger. Based on my experience, a compassionate heart is a must for photographers, so that they can ‘SEE’ things first, before clicking the trigger. Everyone, including the the birds like compassionate souls. Sometimes the sun comes out of the clouds just for you. While focusing on the flower, a bird comes from nowhere and poses for you….. Conversation happens with birds, people, animals, nature…. even without uttering a word. My interest in photography make me a better person click by click…trying to connect and see the best in everything and the perfect timing . I am grateful to the creator of heaven and earth for that….and for instilling in me a tender heart which is able to enjoy the beauty around….