Banking

Good ROI doesn't guarantee project approval

A project may be cancelled despite decent return on investment projections. Here's how other factors, including costs, company priorities, and project alignment, play a part.

Each week, project management veteran Tom Mochal provides valuable advice about how to plan and manage projects. Tom first describes a common problem scenario, based on a real-life situation, and then offers a solution using practical project management practices and techniques.

The dilemma
I got a call from John yesterday. I have seen him twice over the last few weeks to discuss the planning and definition of a project for the Facilities Department to execute a major office move. However, he sounded a little depressed, so I went to his office.

“I finished the project definition,” John began. “It was a good document—maybe too good. Based on the more detailed information we uncovered, we were able to reestimate the project. Our new numbers were higher than the original estimate. My manager just told me this morning that the project looks like it will be cancelled.”

I was not sure if this was bad news or good news, but since John was down, I assumed that it was bad news from his perspective. “That’s too bad,” I said. “I didn’t see your new estimate. Did the cost estimates go up quite a bit?”

“Not really,” John said. “Our estimated cost did go up a little. I also worked with our Facilities manager to recalculate the return on investment. The ROI went down, but still it was very positive. For instance, we were going to be able to move people from a building we are leasing and save that yearly cost.”

“That sounds like a good benefit,” I agreed. “Surely they gave you a reason for the cancellation.”

“You know how upper management is,” John replied. “They said stuff about costs and priorities and alignment.”

I thought for a minute, since I heard those words a lot during the budgeting process. “Actually, that feedback is very helpful. I can’t speak for certain, but let’s make an educated guess as to what took place.”

Mentor advice
The focus of much of the project literature today is return on investment (ROI). It basically means that you determine what the cost of the project is, and subtract it from the benefits. For a very simple example, if the business benefit of a project is $1,000 in the first year and the cost is $500, then you have a very positive ROI.

John’s project has a positive ROI. In other words, they have determined that they will provide more value to the company than the cost of the project. John mentioned, for instance, that part of that value is the savings they would receive by not having to pay rent to lease space for some of the company employees. You might think that this is an obvious decision. Why wouldn’t a company want to execute a project where the value is greater than the cost?

Actually, there are many reasons, and it is true that projects with positive ROI are turned down in every company every year. Here are some other things that management keeps in mind when determining priorities:

1. How solid is the ROI? Many projects have hard dollar savings, or certain revenue increases. John’s project, for instance, has some hard dollar savings that are currently being paid to an outside company for office space. However, many benefits are intangible. We believe that certain value is delivered, but it’s hard to quantify the numbers. In John’s project, they’re counting on increased productivity based on teams working in the same physical location. This may, in fact, be a benefit, but it is impossible to precisely quantify.

2. What are the competing projects? Every company has a process for prioritizing projects. As you can imagine, projects with negative ROIs are rarely brought forward for consideration unless there is some sort of legal or regulatory requirement. However, no company can afford to execute every project with a positive ROI. Even if they have the money, the staff can only do so much in a year. So many projects with positive ROI get bumped because there are competing projects with even higher ROI.

3. Is the project aligned? Another point of separation is whether the project is aligned with the company’s goals and strategies. Your company sets strategies so that it can move toward its company vision. Projects should be approved that help the company achieve its goals and strategies. If a project does not align with the goals and strategies, why worry about it?

Why John’s project failed
Based on the feedback John received about “costs and priorities and alignment,“ I guess that all of these areas came into play. Their ROI was based on soft benefits, as well as hard numbers. There were probably other projects that have much higher (and firmer) ROIs. Lastly, the completion of this project probably doesn’t align well with the company’s goals and strategies. Given this reasoning, it makes sense that the project be cancelled so that the scarce resources can be focused on other projects.

Project management veteran Tom Mochal is director of internal development at a software company in Atlanta. Most recently, he worked for the Coca-Cola Company, where he was responsible for deploying, training, and coaching the IS division on project management and life-cycle skills. He's also worked for Eastman Kodak and Cap Gemini America and has developed a project management methodology called TenStep.

Editor's Picks