7 things that sailing taught me about project management

Sailing is a wonderful experience.

If you have never sailed in your life, you can hardly imagine the beauty of this sport.
The touch of the sun on the skin, the scent of saltwater, the splash of water on the hull, the majestic strength of the wind when it comes to the sail, and of course the sense of peace and freedom that you feel by rolling on the waves.

Whether you are passionate about sailboats, windsurf or, heaven forbids, kitesurf, I think you cannot deny the similarities that exist between sailing and managing a project.

I am not talking about the old team-work stuff, which is certainly genuine and undeniable but something more intrinsic to the experience itself.

1 - Route

You need one, definitely.
The need for a route is especially true if you are planning to go further than a few hundreds of meters from the beach. Also, take into account possible setbacks and think in advance to countermeasures (somebody said risk management?). What happens if the waves get high? Would you be still able to reach your destination? Would you be able to call for help?

What happens if the wind changes direction?
You have to be good and fast in drawing up a new course. The magic is not in the plan but in the planning effort.

2 - Knowledge of the environment

Investigate the environment you are moving into. Are there any rocks just below the water? Sometimes, a quick chat with a sailor (or a project manager) that has already been where you are going, it can be of the greatest help.

3 - The wind

You cannot sail without wind, no matter how big the sail you hoist.
The wind, for a project, is the sponsorship it gets inside a company.
If the project’s sponsor is not capable of offering adequate support and backing, the project will languish in the middle of nowhere. No matter how strong the business case or how well you organize and manage the activities.
Sometimes, there is nothing more you can do than sit and wait.

4 - Sailing Downwind

Who would ever let the opportunity of sailing downwind escape? Certainly not me.
You can have a lot of fun but pay attention, if the wind changes you run the risk to jibe accidentally and to have your heads knocked out by the boom.
Likewise, in project management, always stay focused and do not relax just because you feel that the project is perfectly aligned with the sponsorship. Projects are living being in an ever-changing environment. Always pay attention to what happens around you.

5 - Sailing Upwind

If necessary, It can be done.
Obviously, you cannot put your bow straight against the wind, but if you carefully plan your course, it is possible to reach virtually any location. Probably it will take more time and greater efforts, but still, you have the possibility to succeed.
Do not surrender to difficulties, think and plan carefully then act accordingly.  Still pay attention, if your bow gets exactly against the wind, be prepared to wait or to work hard. You won’t go anywhere.

6 - Steady See

When the sea is steady, any fool can be a good sailor.
This one is quite self-explanatory. Do not fool yourself not being realistic about your skills, and reach for help if you think you may need it. After all, sailing, especially if the boat is bigger than a Laser,  cannot be a one-man band activity.
Underestimate issues or overestimate your possibilities can lead to severe consequences.

7 - Where do you want to go?

Windsurf is great to have fun but if you plan to live for a 14-day cruise in the Mediterranean sea, well, maybe you should opt for a bigger boat and crew.
It is the same with projects. Small projects do not require significant infrastructure and, sometimes, the project management team and the project manager may coincide. Otherwise, when the size of the project increases, it is far better to create a project management team, supported by a well-structured project management methodology. When in doubt, refer to point 6.





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3 KPIs to Select a Project

In the last two posts, we talked about the utilization of KPIs in project management, identifying 10 simple KPIs, useful to keep a project under control from different perspectives.

In the present post, we will identify indicators, useful to select which projects in a portfolio are more worth to be executed.

Before diving into the world of indicators, we have to make a quick clarification.
It is common wisdom that one dollar today worths more than a dollar tomorrow. As a matter of fact, money’s values is affected by material factors, like inflation or borrowing interest rates, and by perceptional factors, like uncertainty related to collecting money.
Since in project management is quite common compare projects that span many years, with different cash flow statements, it is evident the necessity to have a method that makes possible compare cash flows and figures registered at various times. An actualization of numbers is the only fair way to compare different projects.
Fortunately, the needed method exists, it is called discounted cash flow and its mathematical formalization is quite straightforward.

Let’s assume we need to compare the value of 10 dollars today, with the value of 15 dollars three years from now, knowing that inflation rate is fixed at 5%. We can proceed in two ways, bringing the value of 10 dollars today in the future, or actualizing the value of 15 dollars three years from now.

Bringing the value of 10 dollars today, three years  in the future, considering a 5% fixed inflation rate

Actualizing the value of 15 dollars three years from now, considering a 5% fixed inflation rate

Having said that, please remember that, in the rest of the post, we will always refer to actualized values, when talking about figures and cash flows.

For your convenience, Figure 1 is a conversion lookup table that depicts how much is worth a dollar today, imagining a fixed discount rate (first column) and a given number of years (first row).

Figure1. Conversion lookup table. Rows are discount rates. Columns are years.

Net Present Value

You may have heard the adage “Cash is king!”, talking about a company’s balance sheet. It is almost the same about projects. When it comes to making a decision, an analysis of the cash flow generated by a project is almost always a good approach.
The purpose of net present value is to compare projects that accrue different expenditures and incomes in different times. The index is simply an algebraic summation of all the incomes/expenditures of a project for each year, actualized at a given time, using the discounted cash flow formula. In the following equation, C represents the cash flow accrued in year i, r the applied discount rate, and i the current year.

Let’s try a simple example, for the sake of clarity. We consider two projects which different cash flows, accrued in different times. Which of the two projects, making a decision based just on the net cash flow, would be more worth to be executed?
The foreseen cash flows generated by two projects are reported in Table 1, in thousands of Euros. From the presented view, it seems that both projects generate the same total amount of cash flow, even if displaced in time.

Table 1.

The actualization process will be performed on an annual basis, concerning 2017, considering a hypothetical, fixed discount rate of 5%. Remember, it is just an example. The rationale still holds if you do the math on a monthly basis, or if you apply compound and time-variable rates.
The actualized figures of the two projects are reported in Table 2. As we can see, Project B is preferable, since it is the only one that yields a positive return.

Table 2.

If you rely on the net present value as an indicator to select a project, choose the project with the highest value. Obviously, you cannot rely just on net present value to compose a sound portfolio of projects, still, is definitely an indicator to take in consideration.

Return on Investment

The first thing to know: it is return on investment and not return of investment.
The purpose of return on investment is to measure and evaluate the efficiency of one or more investments, taking into account returns and costs. What is a project, if not another kind of investment, which accrues costs and (hopefully) revenues?
The formula is a percentage, expressed as

The percentage form is incredibly useful to compare different projects easily.
Even in this case, revenues and costs shall be actualized using the discounted cash flow formula.
Applying the return on investment to the project described in the previous example, we obtain a -0.5% ROI for project A and a 2.15% ROI for project B.
If you rely on the return on investment as an indicator to select a project, choose the project with the highest value.
Again, my advice is not to rely on a single index, if you want to increase the opportunity to build a sound portfolio of projects.

Internal Rate of Return

The Internal rate of return is quite tricky an index to understand; at least, for me, it has always been.
Mathematically speaking, the internal rate of return is simply the discount rate that puts to 0 the value of the net present value of a project. So, to evaluate the IRR, you must solve the following equation for r (I know, it is not simple)

To simplify, think about the internal rate of return as the “velocity” with which the project will earn returns. The higher the index, the faster the company will receive the value provided by the project.
So, even for the internal rate of return, the higher the value, the better.
It is quite reasonable to use the internal rate of return as a companion for the net present value. The net present value shows how much the project will earn (or lose), the internal rate of return shows how fast the expected outcomes will be materialized.

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10 KPIs to Keep Your Projects Under Control

In the last post post of this series, we talked about the utilization of KPIs in project management.

We discussed the usefulness of KPIs to monitor the health status of a project, and we introduced some of the characteristics a KPI should have to be effective. 

We also stressed the point that, as project managers, we are not bonded to rigid financial formalisms. 

Obviously, when the time comes for proper financial reporting, it is better to rely on the financial and the accounting departments. Nonetheless, during day-by-day activity, there is no need to be ashamed by adopting a “quick & dirty” approach, even if just to understand when it is time to request a sound financial report.

In the following, we will skim through some KPIs, which you may find useful for monitoring purpose. 

We consider a project several months long, complex enough to have assets and a financial management more structured than a simple collection of invoices. In some case, an actualization of the figures before KPIs evaluation could be required.

Measures of efficiency

Area profitability ratio = Area revenues / Area expenditures

Where

• Area revenues are all the incomes accrued by the project in a single project management area (e.g. quality management, risk management…). The term revenue is used here in a very broad sense, considering actual incomes, avoided expenditures, cashable benefits, and monetization of not cashable benefits. 
• Area expenditures are all the expenditures accrued by the project in a single project management area (e.g. quality management, risk management…).

The ratio measures how many Euros the project gets back, for each Euro invested in a single project management area. The ratio should be greater than one; if it is smaller than one, you are losing money; if it is equal to one, you are at break even.

Work package profitability ratio = WP revenues  / WP expenditures

Where

• WP  revenues are all the incomes accrued by the work package. The term revenue is used here in a very broad sense, considering monetization of business value, actual incomes, avoided expenditures, cashable benefits, and monetization of not cashable benefits. 
• WP expenditures are all the expenditures accrued by the work package.

The ratio measures how many Euros the work package gets back, for each Euro invested in it. The ratio should be greater than one; if it is smaller than one, you are losing money; if it is equal to one, you are at break even.

The ratio could also be applied to iterations instead of work packages, provided you are using an Agile management methodology or framework.

Measures of productivity

Backlog of completed activities = Completed activities / Planned activities

Where

• Completed activities are all the activities comprised in the scope of the project and deemed as completed.
• Planned activities are all the activities comprised in the scope of the project.

The index represents the percentage of completed activities in the project’s scope.

In case there is a fair estimation of the effort of each activity (in man/hour or story points), these values can be proficiently used to evaluate the KPI. 

Late backlog = Activities behind schedule / Planned activities

Where

• Activities behind schedule are all the activities comprised in the scope of the project behind schedule.
• Planned activities are all the activities comprised in the scope of the project.

The index represents the percentage of activities that are running late and measures the efficiency of the management of the project, rather than the project status in term of schedule.

Measures of Financial Condition

Current ratio = Current assets / Current liabilities    

Where

• Current assets are cash plus assets of the project.
• Current liabilities are liabilities of the project.

The ratio measures the capability of the project to pay back its liabilities using its assets. 

If we consider just assets and liabilities that can be converted to cash in a short time (weeks), the ratio measures the capability of the project to generate enough cash to support operations under stress. 

A high ratio indicates that a project is able to face unexpected straits, even if it can suggest that the project is not putting enough capital at work to exploit a leverage effect.

If the value of the ratio is too low, the project run the risk to lose the great part of its assets quite fast. 

In any case, a current ratio below one is always something that demands further investigations.

Days sales outstanding = (Accounts receivable / Total supplied services)*Days

Where

• Accounts receivable are revenues to be collected, in front of products or services supplied by the project in the period.
• Total supplied services are the total value of products or services supplied by the project in the period.
• Days are the days in the evaluation period.

The index measures the average number of days in which the project is able to collect revenues. Obviously, a high value suggests low proficiency in collecting due credits and so, the smaller, the better.

Measures of Profitability

Gross margin = (Supplied services - Cost of services) / Supplied services

Where

• Supplied services are the total value of products or services supplied by the project.
• Cost of services is the total costs of products or services supplied by the project.

Measures the project’s capability to retain revenues as gross profits, and to cover its operating expenses. The index also accounts for the efficiency of the project in delivering its services and products. If project A has a better gross margin than project B, then project A is more efficiently managed than project B.

The higher the value of this KPI, the better.

Net profit margin = (Supplied services - Expenditures) / Supplied services

Where

• Supplied services are the total value of products or services supplied by the project.
• Expenditures are the total costs of products or services supplied by the project, expressed as a sum of expenses, cost of services, interests and taxes.

Measures the project’s capability to retain revenues and to generate profits. If project A has a better net margin than project B, then project A is more profitable than project B.

The higher the value of this KPI, the better.

Debt service coverage ratio = Supplied services / Debt obligations in the period

Where

• Supplied services are the total value of products or services supplied by the project.
• Debt obligations in the period are the regular payments that the project has to do.

The index measures the capability of the project to pay debt-related obligations, exploiting the revenues. 

A high value of this KPI suggests that the project will not face problem in repaying its debts, even if it may indicate a low working capital and an inefficient use of a leverage effect. A ratio smaller than 1 states that the project may be not able to generate enough cash flow to pay back its debts.

Return on equity = Net income / Invested money

Where

• Net income Revenues of the project detracting the costs.
• Invested money Money invested in the project.

The ratio measures the efficiency of the project in converting investments into profit.

In a future series of posts, we will dive into Earned Value Management (EVM), the prince technique to monitor the schedule and the budget of a project.

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6 questions about the use of KPI in project management

What is a KPI?

A Key Performance Indicator, or KPI, is an index that monitors the behavior of a process, be it the financial results of a corporation, the suitability of a mechanized production line, or the performances of a project.

Why use PKIs?

A KPI is a kind of medical check-up of a process, and, similar to medical tests, you get the maximum out of it if you perform a regular screening in time. The availability of historical values allows graphic representations, which easily shows past performances, current situations, and trends. 

Trends are powerful because they not just give you a clear insight into what has happened in the past, trends also give you clues about what is going to happen shortly. 

Exactly as it happens when you have to decide where to invest your savings, you do not want to rely on a single estimation, but you are likely to search for long time series. 

In addition, having clear benchmarks and opportunely chosen control limits, helps you in maintaining control over the process at hand.

KPIs and a non-financial approach?

Since you, as a project manager, do not have the restrictions and the formality required in a purely financial and economic environment, do not feel bound to stiff formalisms. Use what you need when you need it. If a KPI can give you the information you need, just use it. In some occasion, it is useful to have some easy tool to get a fast outlook of a project; even just to understand when it is time to require an appropriated financial report to the financial office.

Obviously, when you need an accurate and financially sound report, trust your controllers and accountants.

How many?

Few. This is the short answer.

The long answer is that too much information, if not well managed, could be a detriment to the project.

The more KPIs you got, the more it takes to evaluate them. Moreover, the more variables you try to control, the more it becomes complex to get a meaning out of them.

My advice is to select no more than 10 KPIs and to concentrate them in the most critical area of the project. 

If you need a better insight, once again, rely on controllers and accountants.

KPIs evaluation. How many times?

The answer, of course, depends on the time span of the project, and on the number and magnitude of the associated risks. Nonetheless, as a rule of thumb, I will recommend once a month. 

How should KPIs be?

Simple

A KPI should give a photography of a process understandable immediately. If you need ten minutes to figure out the meaning of a KPI, every time you look at it, well, you have defeated its purpose.

Keep it simple.

Self-contained

One KPI one information. 

If you need to compose two or more KPIs to get the information you need, well, you are not using a KPI anymore.

Timely

You need the information right when you need it. 

Otherwise, you are trying to predict tomorrow's weather with last week's forecasts.

Numeric

A number is a KPI.  A word is not. Enough can be interpreted in too many ways.

Look for information that can be represented by numbers. Quantitative information is the key.

Specific

One size fits all does not exist.

Be specific when it comes to choosing what you need to monitor.

In a future post, we will focus on a few KPIs that we could use to monitor different aspects of a project’s life cycle.

Quest' opera è distribuita con licenza Creative Commons Attribuzione - Non commerciale - Non opere derivate 3.0 Unported.

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