Sunday, July 15, 2012

Six Methods for Prioritising Projects

Six methods for prioritising projects

Net Present Value (NPV): Much favoured by the public sector to compare the discounted value of a stream of future costs or benefits, this defines the difference between the present value of a stream of costs (NPC) and a stream of benefits. A positive NPV would indicate that a project should be profitable and pursued whilst a negative value would indicate that the project should be abandoned.

Payback Period: By using this fairly straightforward method, managers can calculate how long it will take for project benefits to match cost, that is, recoup the initial cost. Projects with a quick payback period are naturally more appealing than those with a longer payback period during which more can go wrong; all the time bearing in mind that a fast payback period does not guarantee a higher rate of return. It is worth noting that whilst payback’s simplicity is its strength, some might consider it over-simplistic to be used alone.

Internal Rate of Return (IRR): This calculates the estimated rate of return of a project, with a higher rate of return making investment more probable. Organisations will generally set a minimum rate of return below which they will not normally consider a project.

Earned Value Analysis (EVA): Viewed with caution by some because it is associated with large projects and requires, amongst other things, a culture of reporting within a company, this can be a helpful technique. Organisations can manage and measure a project to get an integrated view of its cost, spend and progress so allowing them to estimate resources that will have been used at completion. Managers can use EVA to help them keep an eye on project performance and correct variances, put a project on ice or ditch it if necessary.

Balanced Scorecard (BSC): Organisations employ this to align vision with business activities by viewing the company from four perspectives. For a financial perspective companies might look at everything from return on investment to cash flow. To gain a perspective on internal business processes managers might assess factors such as process automation or alignment. To realize high customer satisfaction levels factors like customer retention rate might be examined. Through the learning and growth angle firms can focus on areas such as employee expertise and job satisfaction.

Business Case: The Business Case provides a programme or project with its raison detre and is an important component of both PRINCE2 and Managing Successful Programmes. It outlines reasons for investing in a project, furnishes a framework for bringing about business change and runs for the life of the project to ensure that it stays on track. A detailed Business Case has five main parts. Strategic fit considers issues such as business need and strategic benefits; options appraisal focuses on benefits and risk quantification and sensitivity analysis, and similar; evaluating a project’s commercial aspects would involve scrutinizing the financial case and looking at areas such as implementation timescales; an assessment of affordability centres on the financial aspect too this time focussing on things like budget based on whole life costs; decisions about the final ingredient, achievability of a project, would require an in-depth look at, for example, similar projects, project roles, procurement and, in short, the project management case.