We received a project request and defined and documented the high-level requirements, so it must be time to actually start working on the project—right? A little wishful thinking perhaps, because our project still needs to be approved. The good news is that it is time to move on to the final hurdle to get our project authorized: project selection.
Multiple projects compete for limited budget dollars and human resources. No organization we are familiar with has ever been in a position to complete all the requests for projects that it receives. The organization evaluates project requests to determine which projects will be approved to receive funding and resources. In some instances the client is the sole approver, but often approval is required at a cross-functional or executive level.
An organization can use a number of techniques to select new projects. You need to understand the basic concepts of these techniques, so that you understand how the project selection process works and are prepared to present the appropriate data for your project.
Project selection is used to determine which proposed projects are approved to move forward. It usually includes the allocation of high-level funding. Project selection may take place using formal documented guidelines, or it may be informal, requiring only the approval of a certain level of management.
Typically, a high-level board or committee will do project selection. This committee may be cross-functional in nature and accountable for corporatewide project selection, or selection can be done on a departmental basis. A committee at the corporate level is composed of representatives from all corporate departments such as IT, sales, marketing, networking, and customer service. In other companies, an internal IT committee may review and select all IT projects.
Complex projects, especially those involving new technology or a major business process change, may be required to undergo an additional step called a feasibility study prior to review by the project selection committee. This is a more detailed look at the request than what is normally required at initiation. All aspects of the request, including profitability, marketability, risks, and alternatives will be evaluated, typically by people not associated with the project request.
A project selection committee uses a set of criteria to evaluate and select proposed projects. The selection method needs to be applied consistently across all projects to assure the company is making the best decision in terms of strategic fit as well as the best use of limited resources. The exact criteria varies, but selection methods usually involve a combination of decision models and expert judgment.
A decision model is a formal method of project selection that helps managers make the best use of limited budgets and human resources. Requests for projects can span a large spectrum of needs, and it can be difficult to determine a priority without a means of comparison. Is an online order entry application for the sales team more important than the addition of online help for the customer support team? To the impacted departments, each project is probably viewed as a number one priority. The problem is there may not be adequate budget or staffing to complete both requests, and a decision must be made to approve one request and deny the other. Unless you can make an “apples to apples” comparison of the two requests, the decision will be very subjective. A decision model uses a fixed set of criteria agreed on by the project selection committee to evaluate the project requests. By using the same model to evaluate each project request, the selection committee has a common ground on which to compare the projects and make the most objective decision. You can use a variety of decision models, and they range from a basic ranking matrix to elaborate mathematical models.
Benefit Measurement Methods
Benefit measurement methods provide a means to compare the benefits obtained from project requests by evaluating them using the same criteria. Benefit measurement methods are the most commonly used of the two categories of decision models. Three common benefit measurement methods are cost-benefit analysis, scoring model, and economic model.
A cost-benefit analysis calculates the cost, projected savings, and projected revenue of a project. This model is a good choice if the project selection decision is based on how quickly the project investment will be recouped from either decreased expenses or increased revenue. The weakness of using just a cost-benefit analysis is that it does not account for other important factors like strategic value. The project that pays for itself in the shortest time is not necessarily the project that is most critical to the organization.
A scoring model has a predefined list of criteria against which each project is rated. Each criterion is given both a scoring range and weighting factor. The weighting factor accounts for the difference in importance of the various criteria. Scoring models can include financial data, as well as items such as market value, organizational expertise to complete the project, innovation, and fit with corporate culture. Scoring models have a combination of objective and subjective criteria. The final score for an individual project request is obtained by calculating the rating and weighting factor of each criteria. Some companies have a minimum standard for the scoring model. If this minimum standard is not obtained, the project will be eliminated from the selection process. A benefit of the scoring model is that you can place a heavier weight on a criterion that is of more importance. Using a high weighting factor for innovation may produce an outcome where a project with a two-year time frame to pay back the cost of the project may be selected over a project that will recoup all costs in six months. The weakness of a scoring model is that the ranking it produces is only as valuable as the criteria and weighting system the ranking is based on. The development of a good scoring model is a complex process that requires a lot of interdepartmental input at the executive level.
An economic model is a series of financial calculations that provide data on the overall financials of the project. A whole book can be dedicated to financial evaluation, so we will give you a brief overview of some of the common terms you may encounter when using an economic model: discounted cash flow, net present value, and internal rate of return.
Discounted Cash Flow (DCF) Discounted cash flow (DCF) compares cash inflows and outflows over the life of the investment. It uses the concept of opportunity cost in discounting the cash flows. There are several measurement methods associated with DCF.
Net Present Value (NPV) Net present value (NPV) is the discounted value of future cash flows associated with a business activity. NPV measures increase in wealth and assumes that cash inflows are re-invested as capital. It is a measure of marginal return.
Internal Rate of Return (IRR) Internal rate of return measures the rate of return earned on money committed to a capital investment. IRR states the profitability of an investment as an average percent over the life of the investment.
Constrained Optimization Models
Constrained optimization models are mathematical models, some of which are very complex and require specially trained resources. They are typically used in very complex projects and require a detailed understanding of statistics and other mathematical concepts. Further discussion of these models is beyond the scope of this book.
Expertise may be sought regarding the requested product. A project sponsor, key stakeholders, other departments, consultants, or industry groups can provide this expertise.
Expert judgment can be used in conjunction with one of the decision models. We have frequently seen a combination of decision models and expert judgment used if the top project request rankings obtained from a decision model are very close to each other.
Companies with an informal project selection process may use only expert judgment to make project selection decisions. Although using only expert judgment can simplify the data required to complete project selection, there are dangers in relying on this one technique. It is not likely that the project selection committee members will all be authorities on each of the proposed projects. Without access to comparative data, a project approval decision may be made based solely on who has the best slide presentation or who is the best salesperson.
Political influence can also be part of the expert judgment. An executive with a great deal of influence may convince the selection committee to approve a particular project.