The PMROISM Trifecta

The PM/ROI^SM Trifecta

To best measure the value of project management, we propose and are pursuing a process that combines an organization's project management maturity and its cash flow ROI from a project, what we call PM/ROI^SM. Benchmarking can determine a company's project management effectiveness and captures the non-quantitative measures that many turn to balanced measures to determine. However, our model is project management-specific, drawing on the PMBOK and established project management processes for its depth of analysis (see Figure 2). This allows non-financial and qualitative measures to be captured within the PM/ROI^SM fold.

Figure 2: Benchmarked Project Management Phases and Knowledge Areas (Ibbs 2000)

PM/ROI^SM has the added benefit of joining project management maturity with a quantifiable financial measure that determines its monetary value. The cash flow ROI, an established and trustworthy financial method, is used to calculate project management value. Cash flow ROI calculates the internal rate of return using risk and inflation-adjusted assets, asset life, capitalized operating leases, and so on, and it takes the weighted average cost of capital (WACC) into effect. While seemingly complex, it can be easily calculated with a spreadsheet and yields the most accurate financial measurement of value (Knight). ROI is then compared to a minimum attractive rate of return (MARR). If ROI is > MARR, the investment is feasible.

This method has the advantages of including the time value of money; it is a ratio approach, rather than an absolute number; it is well understand and tractable by chief executive officers (CEO), chief financial officers (CFO), and other senior executive audiences. By including the WACC in its calculation, organizations are able to take financial risk into consideration. ROI is also easily translatable across both companies experiencing rapid growth or those concentrating on capital or market preservation. Positive movements in ROI can be tracked by rapidly increasing returns (growth companies) and by increasing margins and/or decreasing capital (return companies) (Ferracone 2000). However, quantifying the benefits and costs can be tricky. Also, there are always competing requests for investment capital, and a ROI > MARR for project management does not automatically lead to an investment in project management.

Various factors can be used as risk surrogates and must be treated in a proper analysis. Often risk is handled by adjusting the MARR or WACC in line with the presumed and perceived risk of the investment. A pipeline project in Texas has an entirely different risk profile than the same project built in Nigeria. A software project using Microsoft Windows and Access is generally less risky than the same software project developed in a less popular software environment.

One way to measure the risk of a project management endeavor or project management department is to measure the ability to consistently deliver good cost, schedule, and quality performance. In other words, how able is a project management team to deliver superior performance and to deliver it reliably? The PM/ROI^SM process manages these issues.

The third and final pillar of the strength of PM/ROI^SM is that it allows organizations to capture the project management value generated from knowledge management. As previously stated, the fifth and highest level of project management maturity in the Berkeley model is based upon sustainable learning. Value creation, more than ever, is correlated with the knowledge-based organization, and the ability to learn translates into the ability to create seemingly insurmountable business advantages (Holland 1994). The Berkeley model is set up so that organizations with project management maturities approaching Level 5 are constantly adding new knowledge to their base of information, resulting in operations that improve themselves over time. The acquisition of knowledge begets new knowledge, all of which leads to super-competitive advantages (Hamel 2000). Intrepid organizations able to achieve higher project management maturities tend to create better returns on assets invested in project management, relating project management knowledge creation to project management economic value. The knowledge created and used by project management creates an additional lever from which competitive advantage can be exploited.