The chapter returns to the idea that a company must make good selections when it considers what projects to take on. It makes a distinction between internal and external projects.
Page 224 presents a table of questions that apply to project selection. Some of the important questions are:
The text waffles on what are important criteria for project selection, explaining several times that the proper criteria will vary with the company making the selection. The bullet point on page 225 repeats the idea that there must be a return on investment, that the organization undergoing the project must support it, and that it must make financial sense to conduct the project.
Without offering any detail on them, the text offers a list of selection models on page 226. They are not of much value without a discussion of how to use them. It continues with a list of reasons to conduct a project that may not return a profit.
The text offers a formula on page 227 for Return on Investment (ROI). It is revenue divided by cost. This is not the only formula for ROI. The Entrepreneur web site has a similar formula: revenue divided by total assets. The Finance Formulas web site says it differently: (Earnings minus Initial Investment) divided by Initial Investment. This method seems to say we must consider our net profit, compared to our costs, as opposed to the text's interpretation.
Let's consider that as the start of an assignment. See assignment 1 below.
The text also suggests that we could look at the return on a project differently when that return will not be realized for a significant time period. The first concept in this case is Net Present Value (NPV). The text explains it well: if we expect to receive $100 dollars today, its NPV is $100. If we expect to wait for a year to receive that sum, its NPV is reduced by the amount of inflation that year will cost us. The general rule for using NPV to make a decision is that we accept the deal if the NPV is positive.
The text tells us to use NPV to calculate Internal Rate of Return (IRR), but it is not clear on how to do this. Let's look at a video on the two concepts. The instructor in this video tells us to take the Return that we will gain, divided by the Discount Rate plus 1, then subtract the Initial Investment from it. The Discount Rate corresponds to the inflation rate in the text's example.
As the video explains, we are comparing a calculated rate that would give us no value (the IRR) to the known discount rate. If the calculated rate is greater than the discount rate, we are turning a profit, and we accept the deal.
The last analysis method presented in the text is Cash Flow Analysis. This is the simplest method. We calculate the difference between revenues and expenses for each of several important time periods. In the example in the text, the company is having financial trouble, and wants to calculate cash flow each month. There is an initial investment, income each month, and a gradual removal of the deficit and growth toward a profit.
The text moves on to the idea of feasibility, which concerns measuring whether a project is possible. The text takes several paragraphs to say this, then provides us with a list of kinds of feasibility. Some studies may look at all types, others may be focused on one or a few types:
The text lists a procedure for conducting a feasibility study, and it is the same as it has always been. I suspect that we are seeing so much repetition because the authors assume that people will use this text as a reference, reading only the section they are concerned with at any given moment. To its credit, this version of the process, starting on page 232, is more detailed that the previous ones. Students will be amused by the fact that it is adapted from a U.S. Army Field Manual.
We turn to legal considerations for projects on page 236. We are cautioned about general areas in which legal problems have been known to occur:
The text mentions four types of contracts that might be used when setting up a project. Each has a different approach to payment.
A list of standard methods of resolving disputes:
The text briefly discusses project startup concerns. As usual, it recommends that we review problems and goals, develop all the pertinent facts and documents, and gather support for the project. It adds the concept of a project diary, which is a record of events that are part of the project. It mentions a kickoff meeting which is used to establish a formal start of the project and to establish who is in charge of it.
The text moves on to the topic of writing proposals for projects. As usual, the text presents a simple plan that it expands past comprehension. Let's consider the four bullet points on page 246:
This method is short, understandable, and can probably be followed by most people. Compare this to the thirty day plan on page 247 for preparing a proposal. It is much more detailed, but it covers the same points. The text tells us that the proposal should have three main sections:
After a proposal is accepted, the customer and the contractor should create a statement of work, which is a detailed contract specifying what will be done, when it will be done, etc. We are presented with a generic list of points to be included:
We will skip the section about project management software. It is beyond the scope of this class.
The text cautions us that contract negotiation and administration is a specialty field, but we will consider some of the points that most project managers should know about negotiating and enforcing contracts.
We turn to quality issues for a few pages. The text quotes fourteen points from Dr. W. Edwards Deming, the father of the study of Quality Improvement. As the text states, the principles in Dr. Deming's work apply to any quality program. They also apply to improving management programs.
The text talks about the cost of quality on page 268. It presents what it calls five cost areas. Three have to do with quality control:
The other two areas have to do with the cost of lack of quality in our products:
The text talks about continuous improvement on page 269. It is repeating some of Dr. Deming's fourteen points. On the next page, it lists groups who should be involved in the quality improvement process. The short version is that everyone needs to be involved in improving quality.
The text turns to the last point in the chapter, project termination on page 271. It is talking about the end of a project, either because of its success or its failure. The text offers a set of reasons for project termination, but only one falls on the good side of that divide:
The point of this section is that sometimes there are good reasons to stop pursuing a project, but many project managers ignore those reasons in order to complete a job. The text recommends that a hard look at the facts be given to every project to determine whether it should continue or should be stopped.