Increasing Project Value Through Risk Management

Writen by Ralph Dandrea

Most organizations have more project proposals and ideas than they can realistically fund. This means project teams are competing for project approval and funding. Consequently, project champions often conceal or exaggerate the true value of their projects. Teams and organizations typically focus on the up-front costs of a project and the expected return. Other costs are glossed over or ignored entirely, and risk assessment is treated as a perfunctory afterthought. This focus on the up-front costs and the net return is only half of the story, however.

It may be time to stop thinking of risk assessment as the killjoy exercise which drains the enthusiasm from your project and to start thinking of it as a tool for enhancing your project's value.

Understanding the Fundamentals:

A project risk is any problem that could cause some loss or threaten the success of the project1. Risks differ from issues because they refer to the future or to the potential for adverse outcome.

"A risk consists of a condition which is not currently true, the likelihood that the condition will materialize, and a consequence or impact on the project if the condition does materialize."

Risk management is the process of identifying, analyzing, and addressing project risks proactively to maximize positive consequences (opportunities) and minimize negative consequences (losses). Risks are addressed by formulating mitigation plans, which are aimed at reducing the likelihood that the condition will materialize, and contingency plans, which are aimed at addressing the condition when it does materialize.

As mentioned above, the value of a project is determined by its net return and its risks. The net return on the project is equal to the present value of the project minus the costs (return = present value - costs). This return assumes that the project will proceed as planned and budgeted - that is, it assumes a risk-free project. But projects are rarely risk-free. To get a true assessment of the project, the return must be evaluated against the risks.

Applying Risk Management:

Suppose I have a project proposal to unify two corporate databases. I estimate that this will save the organization $100,000 over five years and that it will cost $80,000 to implement. The return is $20,000 without factoring in any risks, but there are risks.

1. Due to some uncertainty in the requirements, there is a 50% likelihood that the development effort will cost an additional $10,000. This comes to a reduction of the return by $5,000 ($10,000 x .50).

2. Although the project team has assurance from sales that the impact upon the sales force will not be substantial, the team believes that there is still a 25% likelihood that upon seeing the changes, sales will require additional training, costing $8,000, thereby reducing the return by $2,000 ($8,000 x 25).

3. Due to some inherent uncertainties regarding the technologies, as well as the direction of the organization and some anticipated acquisitions, there is a 10% likelihood that the entire project will fail or be superseded by other efforts. This means a reduction of the return by $8,000 ($80,000 in overall project costs x .10).

When all risks are factored, the reduction on the return is $5,000 + $2,000 + $8,000 or $15,000. The return is now $20,000 - $15,000 or $5,000, making the project substantially less attractive than it originally appeared. But by managing the risks, the value of this project can be increased to a level that again makes it attractive.

1. First, the requirements could be tightened by first developing a proof-of-concept or simply by delaying the project until the uncertainties can be eliminated. By taking this approach, the value of the project can be increased by eliminating the $5,000 reduction for the risk of uncertainty.

2. A proof-of-concept could also be evaluated by the sales force to ensure that they will not need training, as feared, thereby eliminating the second risk and increasing the project's value by an additional $2,000.

3. Finally, although external uncertainties cannot be eliminated, mitigation and contingency plans can be put in place to reduce the overall impact on the project's value. For example, instead of structuring the project as an all-or-nothing proposition, perhaps it can be implemented so that parts or stages of it can be adapted to many different environments. Perhaps the data structures and encoding can be separated from the database implementation so that if organizational changes arise that undermine the implementation, the data structures can still be used in the implementation ultimately adopted by the organization. If a third of the work can be salvaged, the value of the project is increased by $2,640 ($8,000 x .33).

This brings the total increase in return as a result of risk management to $9,640.

After risk management, the value of the project is $14,640 ($5,000 return after risk assessment + total increase in return after risk management).

Conclusion:

The true value of a project cannot be evaluated without being realistic about the costs of the undertaking, including the risks. Risks that are simply acknowledged and built into the costs will always lessen the value of a project, motivating project managers to report overly optimistic outlooks, which undermines the very reason for considering risks. But if risks are actively managed by meeting them head-on, formulating mitigation and contingency plans and treating risk management as an ongoing process, risks can be minimized. As a result, project values can be increased, and organizations will get a more accurate and consistent understanding of project values.

About Ralph Dandrea:

Ralph Dandrea is the President of ITX Corp., and leads its Business Performance practice. He is experienced in business and information technology management and holds graduate degrees in business and law. http://www.processimpact.com/articles/risk_mgmt.html

About ITX®:

ITX Corp is a business consulting and technology solutions firm focused in eight practice areas including Business Performance, Internet Marketing, IT Staffing, IT Solution Strategies, IT Solutions Implementation, Technical Services, Internet Services, and Technology Research.

To learn more about what ITX can do for you visit our website at http://www.itx.net or contact us at (800) 600-7785.

Radical Creativity From Incremental Creativity Large Movements From Small Changes

Writen by Kal Bishop

Positive radical movement is the holy grail of nearly every decision maker. Every CEO wants to radically shift his profit and loss statement into the black, every inventor yearns to find the next killer gadget and every screenwriter wants to make the next significant leap in film.

Radical creativity (also known as transformational and disruptive) is the root of radical movement. The polar opposite of radical creativity is incremental creativity. A pervasive perception is that the two are separate and distinct, whereas in fact they are intricately linked.

There is significant data to suggest that radical creativity results from incremental changes:

a) The IT revolution took over sixty years. The first computers were monoliths made up of vacuum tubes and magnetic drums. Particular problems over a long period led to the development of the solid-state transistor. This in itself was a radical leap in technology and resulted in computers evolving into slightly smaller, faster, cheaper and energy efficient entities. The development of integrated circuits was the next leap, resulting in transistors being placed on silicon chips. The next radical leap was the coming of micro-processors which allowed thousands of integrated circuits to be placed onto silicon chips. The first Intel chip paved the way for Microsoft et al, but it still took years of incremental improvements before the first desktops arrived. Desktop computers led to their interconnectivity and the Internet was born. The Internet triggered e-commerce etc.

b) Many artists tend to incrementally experiment with certain ideas, after which new knowledge or other inputs will lead to radical shifts. This tendency exists with artists (review any artist over a period of time) and also on the macro level - cubism, German expressionism, Italian futurism, Russian constructivism, Dada and Surrealism and continuing to developments in American art (e.g. the Harlem renaissance, social realism, abstract expressionism).

c) The French Connection chain significantly boosted profits by a very small change – the FCUK campaign.

In conclusion, radical change results from incremental changes and the input of new knowledge, which itself will have been the result of incremental improvement. Through the use of organised, systematic and structured processes it possible to speed up positive radical movement.

This topic is covered in depth in the MBA dissertation on Managing Creativity & Innovation, which can be purchased (along with a Creativity and Innovation DIY Audit, Good Idea Generator Software and Power Point Presentation) from http://www.managing-creativity.com

Kal Bishop, MBA

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You are free to reproduce this article as long as no changes are made and the author's name and site URL are retained.

Kal Bishop is a management consultant based in London, UK. He has consulted in the visual media and software industries and for clients such as Toshiba and Transport for London. He has led Improv, creativity and innovation workshops, exhibited artwork in San Francisco, Los Angeles and London and written a number of screenplays. He is a passionate traveller. He can be reached on http://www.managing-creativity.com.

Is It A Fixed Asset

Writen by Donna MacMillan

I often am asked this question by bookkeepers and business owners alike. The Internal Revenue Service defines a fixed asset as property used in a trade or business or in an income producing activity that wears out or becomes obsolete and it must have a determinable useful life substantially beyond the tax year. This might include tangible real estate property and personal property and what is referred to as intangible property.

Examples of tangible real estate property would be of course buildings and the land they sit on as well as any improvements made to the property. And while land is considered a fixed asset, the IRS rules do not allow the value of the land to be depreciated. Therefore, with real estate property the value of the land is kept in a separate balance sheet account from the value of the building. Often in real estate transactions there are closing costs and legal fees. The IRS may consider these expenses to be part of the cost of buying the building and will expect those costs to be added to the value of the building and depreciated over the life of the building. Check with your tax preparer for further clarification.

If you rent space to operate your business in then the rent is an expense that can be written off in the accounting period it is paid or accrued. However, should you make improvements to your rental space then that expense is considered to be Leasehold Improvements and if your lease extends beyond a year then those improvements would be looked at as fixed assets. Be careful with this one as some business leases might go from year to year but if you are staying beyond the term of the one year lease (renewing your lease that is) those improvements could be looked at having a life that meets the definition of a fixed asset.

Some examples of personal tangible fixed assets are equipment, tools, office furniture, computer equipment, vehicles, etc. All purchases of these types of assets must be considered as fixed assets unless there will be no residual value to them after one year. When considering the cost of an asset include all costs involved in putting that asset into use. For example, if you purchase a computer system the fixed asset cost would include the CPU, monitor, and printer as well as any additional equipment purchased with the computer that defines its use.

Intangible property could include copyrights or patents that would expand beyond a tax year.

Remember the key to defining whether an item purchased is a fixed asset or an expense is the answer to this question: "Will this item have a monetary value after being used beyond one year?". And while a $5.00 screwdriver might have value to you far beyond one year I doubt you would be able to sell it hence it has no discernible monetary value. While making this decision think of the use of the item and the cost of purchasing the item. Usually items costing less than $500.00 have no residual value after a year's use. And of course should you have any question at all, check with your accountant or tax preparer.

Copyright 2006 Bookkeeping R Us All Rights Reserved

Copyright all rights reserved Bookkeeping R us 2006

Think Time Its Now Or Never

Writen by Cynthia Kyriazis

I recently read an article published in the June, 2005 issue of Fast Co. magazine. Linda Tischler wrote an essay entitled "Death to the Cubicle!" In it, she says 'Collaboration is great, but sometimes I'd kill for a door.'

With the advent of open offices and shared arenas for team communication, the issue of privacy and focus in an employee's workspace has become more than just privacy and focus. It's now about job performance and productivity.

The article goes on to quote Dr. Tom Davenport, professor of Management and Information at Babson College, who conducted a year long survey of a cross-section of professionals and found there were three factors that determined white collar performance:

Management and organization
Information technology
Workplace design

I would argue that all of these items are connected. Just as paper, time, space and digital file management are all connected. It's not one at the exclusion of the other. It is finding a way to connect the dots with all of these factors in order to live and work in a more harmonious environment.

Focus and concentration are key time management elements that are necessary to help execute on your priority tasks and achieve your personal and professional goals. Not only are focus and concentration difficult to achieve, but different styles require different levels of each. Some need to concentrate in shorter periods of time than others and some need to focus only on certain topics.

I have always advocated that each employee is entitled to 'think time'. When I say this during my workshop, some of the faces staring back at me look like they are waiting for the magic answer. But there is no magic answer.

It doesn't matter whether your think time is achieved in the shower, on the way to work or at your desk. As long as you get it and guard it on a daily basis. Even 15 minutes a day means you will have achieved over an hour of think time by the end of the week. One employee I saw put a short curtain on a spring-loaded curtain rod and placed it across her cubicle doorway. It was her way of saying to the world 'please don't bother me now because I need this time to concentrate and work on this project'.

You may not need a curtain rod, but find a way to carve out and protect your think time. You deserve it!

Copyright 2005 Cynthia Kyriazis. All rights reserved.

Cynthia Kyriazis is an organizing and time management consultant, trainer, speaker, coach and author with over 20 years management experience in multi-unit corporations. Organize it, a division of Productivity Partners, Inc. is an organizational training firm she founded in 1995 and has been serving Fortune 500 clients ever since. Cynthia works with business and their employees to help improve performance and realize productivity gains.

Cynthia has appeared in the Philadelphia Inquirer, Kansas City Star and the Legal Intelligencer. She currently serves as Secretary on the Board of Directors for the National Association of Professional Organizers (NAPO), member of the National Speakers Association (NSA), member of the Kansas City of the International Society for Performance Improvement – (ISPI-KC) and consultant to the American Coaching Association.

Tales From The Corporate Frontlines Finding The Perfect Balance

Writen by Josh Greenberg

This article relates to the Work/Life Balance competency, which investigates how your staff feels with regard to the balance between work and personal life. It explores issues such as priority of family and hours on the job, also covered in this competency. Organizations that enjoy a high satisfaction level in this area will normally exhibit a low rate of absenteeism and experience higher employee retention. Evaluating this competency is helpful in understanding issues relating to a workforce that is commonly tardy or absent from work.

This article, Finding the Perfect Balance, is part of AlphaMeasure's compilation, Tales from the Corporate Frontlines. It illustrates how one employee's evolving life circumstances required him to make some career changes in order to achieve a healthy balance between the demands of work and personal or family life.

Anonymous Submission

When I graduated from college and landed my first job within a month, I was understandably thrilled. This was my dream job, at a company I was familiar with that offered plenty of opportunity for growth and success for an ambitious sales associate.

I was more than ambitious. I worked 12 hour days routinely, hoarded my vacation time and sick days. I operated on a life philosophy that required plenty of hard work initially, with the assumption that when I was ready for marriage, family, home, etc. it would all come automatically. My nuclear family is small and distant, so I could pretty much devote my time to work without conflict.

Then I met a girl, became engaged. Suddenly I realized that my fiancé might not appreciate my twelve-hour days and absent weekends. She'd been accommodating so far, but how long would it last? She was a career person, but worked a strict 9 to 5 with very occasional overtime. One day, she asked if my hectic schedule would continue after we were married. I could tell from her tone of voice that it wouldn't.

The first to go was the weekend work. I lost a few accounts and the commissions attached. No problem. My new wife made a good salary so it didn't matter much. When I let go of 3 evenings per week, eyebrows around the office began to raise. My salary slipped from stellar to ordinary, and my boss was ready to transfer some of my best accounts to employees who were willing to work my former schedule.

My wife suggested I find a new company. I was reluctant at first, but we had the future - buying a home, paying for kids and college, preparing for retirement, to think of. So I searched. Within the year I found a new position with a more family oriented company. The commission structure requires only minimal overtime, and there are options like flex time, childcare savings accounts, retirement programs, and other benefits available. We are planning to start a family next year.

I discovered that the balance of career/personal life is important, and I need to work for the kind of company that supports my lifestyle so that I'm able to maintain that balance. The change was tough, but it was well worth the effort.

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© 2005 AlphaMeasure, Inc. - All Rights Reserved
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Josh Greenberg is President of AlphaMeasure, Inc.

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