One thing that has struck me over many years of looking back at project economics is how the economics of so many projects turn out quite differently than forecasted. Now if that statement makes you wonder about your own experience, perhaps your company doesnt have a sufficient process for doing these project reassessments in hindsight. Remember that your budget (whether capital or operating) is a limited resource. You need to understand whether you are spending it well or not, and a process for project reassessments will give you some insight into that.
Which projects should you select for a look-back? I suggest you find ones which fit the following categories:
Most important and strategic projects.
Those with the highest learning value for the future, as related to new products, new markets, new ways of doing business, etc.
Those which you would categorize as a failure in some significant way – over budget, very late, quality issue, outcome did not materialize.
For the projects selected, youll need to pull together a final tally of all the key variables involved: investment, sales volumes and margins, operating costs, tax considerations, etc. It is best to undertake this reassessment a year or two after project completion so that a reasonably good set of data can be assembled. Of course the overall project economics may involve 10- or 15-year projections, but by year two you should have a good basis for such projections, and years one through five generally will determine project return.
Keep in mind that you need to set up the proper environment in your company for doing such reassessments. If done in the spirit of Shoot the Messenger or Punish the Guilty, you will find the reassessments quite difficult to do and you may well get results which do not teach you anything. Of course, on the other hand there must ultimately be some accountability for consistently poor project outcomes.
For the largest projects you may want to set up a reassessment team with representation from key areas and the proper level of resources to support the effort. Keep in mind that not only do you want to assess the project return against the projections, but you are also trying to get insight into the why behind any significant variation. The team may well need to interview key players to understand what changed over time.
In my experience the variables most often responsible for changes in project outcome are related to sales volumes and product margins, but your experience might well be different. It does pay to be a bit conservative when forecasting the ramp-up of new product sales, especially those not related to some industry-driven specification change.
You may want to pay special attention to systems and information technology projects. These kind of projects are hard to justify, and in order to so people often project efficiency savings which may not materialize. Projects in the systems area are also complex and can sometimes take longer to implement than originally forecasted. Of course this doesnt mean one should stay away from systems and IT projects – but understanding the past history should help you budget and implement more effectively in the future.
A consideration when doing a project look-back is that in addition to reassessing the project case, you also need to reassess the so called base case; e.g. what would have happened had you not implemented the project? Sometimes what changes is in fact the base case, rather than the project case.
In the lubricants and additives industry, it is worth reflecting on the nature of projects related to industrywide reformulations. These are generally large projects whether measured in time, people, capital or operating expenses. It is worth thinking about how you go about developing the financial case for such reformulations.
For example, if your base case is that you will lose all of your ILSAC GF-5 engine oil business should you not develop GF-6, then your project case will always look astonishingly attractive. Of course this is not an incorrect way to look at it; indeed once the industry moves to the next level, the prior quality level is going to decline very significantly. However you may want to consider setting your success targets in some more ambitious way, such as through achievement of higher sales or margins, or reduction in costs, or in some combination of financial elements.
So now you have identified your key projects from the last five years, put together your reassessment team(s), and have generated a comparison of actual project outcomes versus their intended outcomes. What next? Here are some ideas:
1) If your project costs are routinely higher (more than 10 percent) than forecasted, consider strengthening your process through the use of expert project consultants, or use of a different project execution and/or management process. You may also want to examine whether management are paying sufficient attention to this area, and asking the proper questions at each management level. Project cost overruns can also be related to schedule overruns, so this is an area to monitor as well.
2) If your sales and margin are consistently lower than forecasted, you should consider whether adequate customer and/or supplier input is solicited during the project development process. You may want to incorporate a sufficient range of volume and margin sensitivities in future projects. Of course it is very different if you projected a 100 percent return and achieved 70 percent, than if you projected a 30 percent return and got zero. Projects which would not have been implemented due to returns below your hurdle rate are clearly the ones which should attract the most attention.
3) If you find in your reassessment process that there were simply mistakes in the initial financial evaluations, you should establish a more rigorous process of financial evaluation and oversight.
4) If you find that your product development efforts fall short of the mark in terms of quality or benefits (thus leading to inadequate delivery of sales and margin), then you may want to investigate your process for product development and target setting.
Sometimes you need to look back in order to figure out how to do better in the future!
Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. E-mail her at firstname.lastname@example.org or phone (908) 400-5210.