Sunday, 15 November 2015

How Should a Company Decide What Projects To Do

This could be achieved simply from having discussions between fellow employees, but as more people become involved reaching consensus is often difficult.

Or to a reach a consensus through analysis of ROI. However to derive accurate ROI you will need to produce accurate estimates of work to deliver a project and derive expected monetary benefits from projects, both of which will include assumptions. Such assumptions need to be assessed for their reliability and are themselves difficult to reach a consensus opinion.

Often companies attempt to run with the former approach because it is easy to implement, with varying degrees of success. In the early years of a company the leadership of the company can often have enough knowledge of every aspect of the company to make informed decisions of which projects to warrant. However as the company grows this becomes increasingly difficult and so keeping with same model brings less success. Companies eventually conclude that they must embrace the latter approach of a more scientific analysis of ROI etc.

However the difficulty to transition to such a model is huge.
A company must first estimate ROI, many factors can influence this making it difficult to estimate accurately. Such influencers include, how much will a company make from a new product when released and this can be influenced in turn by many factors such as how well a product is received by customers.

Once an ROI is estimated, the team needs to also estimate how much work is required to delivery the product. Companies and people vary on how accurate they are at estimating this, often caused by many influences such as employee turnover, or the business changing direction etc.

Lets say a company can fairly accurately estimate both ROI and the required work effort for ALL proposed projects. The business also needs to decide how it should allocate money to individual areas of the company. Lets say this is achieved as well, we now need to decide what work to do. Should this be solely based on the difference between the cost and ROI as a ratio. Well if 1 project will cost such a huge percentage of the overall budget many parts of the company will be neglected which will be detrimental to those parts of the company and good people may leave the company resulting in a long term sharper decline in ROI. Also if reputation building projects are declined in father of other higher ROI projects in the long term this can also have a huge negative affect, as the retention rate of customers drops. Then there are projects that can lead to the loss of important accreditations such as ISO, or projects which avoid the company receiving fines, or projects that are enablers for future expansion but provide little or no ROI now, and projects that reduces risk for the company but produces no ROI such as producing data backups of systems.

As you can see even if a company moves to a more ROI decision based model a company still needs to make many cognitive decisions that are not based on scientific analysis of numbers, and in actual fact the number of overall decisions can escalate.

Can a company even remove these decisions from the process. It is certainly possible if you decide how much of a percentage of the overall budget a project can consume, use some mathematical hypotheses testing of the assumptions, decide if you want to spread projects throughout the company rather than concentrating the budget on a select few projects; if you spread budgets throughout the company the approach of doing this affectively must be decided, either based on department size or department importance to the company or a mixture.

Dividing projects into logical groups can allow the company to select a diverse set of projects to provide benefit in various ways and not simply to solely focus on ROI, such as:

1. Positive ROI projects
2. Reputation building projects
3. Accreditation projects
4. Employee well being projects
5. Business risk reducing projects
6. Future positioning projects

As a company you can decide on percentage weightings of importance of the above categories.

Then you also need to decide on the spread of budgets to the departments, broadly speaking split into the following categories, but this will vary per company:

1. Finance
2. IT
3. Sales and Marketing
4. HR
5. Property
6. Legal
7. Customer Service
8. Media

Each of the above are usually sub-divided many times

Now you can start deciding what budgets can be provided to teams, making sure that the projects decided produce the even distribution of budget for the 6 type of projects outlined above.

Once you have run a year long or even longer sequence of releases analyse if the ROI produced is as expected and then further refine your model based on this input.

Since following the ROI approach requires a huge amount of analysis it requires a lot of resource to effectively derive to reliable decision making, consequently the cost of which can often prohibit smaller companies adopting this approach. And a company must decide during its natural evolution what is the appropriate stage when it should transgress to an ROI approach.

Also since the ROI approach is vastly more complex than the approach of simply trusting in the leadership to make the right decisions, and unless every aspect outlined above is scrutinised and analysed to a minute detail, for all proposed projects, the effectiveness of this decision approach is undermined. In summary if a company follows the ROI approach it must do it very well to make it effective.

The drawback of following this model of giving autonomy to departments to decide where and how to spend their budget is employees rarely consider that they will remain with their company in 5 or 10 years, so following this model employees will naturally have a more short term viewpoint when deciding where and how to spend their departments' budget.

There is however another model that a company can follow which takes a more democratic approach, taking everyone's voting of vision cards ( basic blueprints of ideas ). Only issues with this model is that very good ideas may not get supported and can become more of an employee popularity contest than an idea contest. Secondly, employees may simply not understand all vision cards and the benefits because a finance executive will have little understanding of the issues faced in IT and so how can that person vote on ideas presented by IT; of course you can limit what employees can vote on; but this then really drifts towards the 2nd model rather than this model. Thirdly, this model doesn't address employees having a more short term view, and only the 1st model addresses this.

What I am demonstrating here is that the simple decision of what should a company do is never simple, but actually is the most important decisions that a company makes, and inherently the approach it takes to make these decisions is crucial to the success of the company. And importantly the approach should be continually assessed and improved per year.

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