Category Archives: Justification

Spend it, Spend it – just a little bit

It is interesting that sometimes several seemingly unconnected bits of information provoke a new line of thought [or reopen an old one].

Last week, Management Today reported on-line that UK corporates were sitting on over £70 billion of cash reserves and quoted an influential forecaster as saying they needed to start investing.

This week we got the GDP figures for the first quarter and they’ve generally been welcomed as they suggest we’ve avoided a double dip recession [so far]. However, it was noticeable that the figures for the Construction Sector fell by 4.7% in the last quarter.

We also had an announcement that a severe shortage of component manufacturers was threatening the future of car production in UK. This suggests a need for developing some high quality modern manufacturing capability.

As long ago as February 2001, I together with my colleague Keith Plumb commented [in a paper presented to the Institution of Chemical Engineers] on the advantages of investing in capital projects during downturns. The key element of our argument was that you get better value for money and get your new capacity earning profits while your competition is still thinking about it.

Empire State Building 2007

(c) J A Yates 2007

We illustrated this point by reference to the best known structure of the Great Depression – The Empire State Building. The drawings for this were produced in 2 weeks [OK they were what I call “Blue Peter Engineering” – modified from “Here’s one I prepared earlier”. Hopefully, you get the point: people were keen to deliver] The building [all 105 floors of it] was built in just 410 days [it can take longer than that to get planning permission these days!] and the building cost came in at just under 50% of budget! Wouldn’t you love to get that?

Our estimates at the time was that those spending in the least busy parts of the cycle could expect average tender costs to be about 21% lower than those at the peak. Given the low interest rates and higher inflation rates, the cash in the bank is gradually becoming worth less, so surely it makes sense to invest in capital projects!

A future post will discuss the results of a survey I’ve done on LinkedIn which questioned the main reasons that good ideas don’t get implemented and it was notable that funding came well behind Organisational Culture, Business Systems, Policies and Processes and Risk Aversion / Self Confidence. This suggests that the barriers to investment are predominantly internal.

Now would also be a good time to invest in training and developing staff so that they have the skills needed for up turn when it comes.

So what’s the point of sitting on the cash – it won’t hatch!

Getting the right budget – its more than just cost cutting

A few days ago, I got a reminder about what seems to be a very useful meeting being run by my engineering institution [Institution of Chemical Engineers] and the Association of Project Managers entitled “Budget, what Budget”[] in London on 10th December. This focuses on the issues around getting the best budget for your project.

Whilst this is critical, I think it only tells part of the story.

I’ve worked on the front end of projects for many years and know that the initial budget is usually considered to be too high – the costs outweigh the benefits.

So it tends to get reviewed downward thorough a cost cutting exercise – Balancing the costs and benefits by reducing the costsI also know that much of the scope removed in this process tends to creep back in during or after the project – suggesting that it was really needed.

This got me thinking about whether projects are too costly or whether there is just not enough effort put into the justification process.

Balancing the costs and benefits by making the benefits more overt.There needs to be a balance between the two. Here are 10 tips to help you get the right budget for your project by paying attention to the justification process.

1.    It’s all about business

However technologically based the company is they only do projects to gain a business advantage. It may be to cope with changes in the business environment, to respond to competitor action or to meet their own objectives. If you are going to win support, it will be because of the strength of your business case, not the technological.

2.    Understand the process

Your business will have a set of policies, rules and procedures to authorise projects. These are designed to make sure that the right projects get approved and the right ones get rejected. If you don’t understand [and are not prepared to criticise] the process then you will struggle to make a winning case.

3.    Yours is not the only view

Projects involve many different groups, operations, maintenance, marketing, engineering etc. Each has a different perspective on what is important. If you are to win the support of others, you need to understand their perspective.

4.    See the big picture

Your project will be designed to contribute to one or more strategic objectives but may also contribute to other objectives. This may be intended or may be unintended. Make sure that all of the benefits of the project are allowed for in the analysis.

5.    Check sensitivity / assumptions

Virtually every project goes through a cost cutting stage in the justification phase but it is important to note that other assumptions contribute to the assessment of the feasibility of the project. Make sure you understand the contribution to each assumption on the feasibility of the project. Then concentrate your efforts on the right parameters.

6.    Understand the risks

Projects convey us from the present to the future; as a consequence they all involve risks. How you allow for the uncertainties has a big bearing on the outcome of the project. What you know is not that important, it is critical to understand what you don’t know and allow for that. Ideally, you should be using a structured risk identification and management technique.

7.     Don’t open the bidding too low

When the opportunity for a project opens up in our area of interest we naturally want to do all we can to ensure that it is approved and the investment comes our way. This tendency can lead us to suggest a low initial figure for the capital cost. The danger is that this will be cast in stone particular as the “± 30%” caveat we add is missed. It would be better to quote a higher figure and point out that there will be opportunities to reduce the costs. That way you are not painted into a corner.

8.     Value not cost

It is easy to focus on the cost of the various features of the proposed future asset and it is very easy to be drawn into drastic cost reductions to meet the approval hurdles. It is however much more important to concentrate on value and using creative approaches to achieve the desired results more economically.

9.    Market your ideas

However good your ideas are, they will only be accepted if you sell them to the other interested parties. This means spelling out the benefits in business terms [Tip 1] and tailoring your message to the audience[s]. You may need to use a different approach for each group. [Tip 3] You need to lobby for your ideas to be adopted; it won’t happen unless you take action.

10.   Don’t forget WIIFM

The easiest way to get people’s attention is to show them what is in it for them, so make sure that your message to each person or group is focused on “What’s in it for me”