Have you recently overspent on a CapEx project? Be honest. We’ve had a client who, for example, planned to develop a project plant at a cost of €200 million and ended up spending twice as much because it didn’t have proper project controls in place.
It’s a problem for life sciences and engineering firms. They’re needlessly losing money because of a careless approach to project controls. A huge business opportunity – and savings of millions of euros on the bottom line – is possible with a smart project controls process. Allow me to explain.
CapEx and OpEx: Where Is All the Money Going?
We know there is a fundamental law when it comes to CapEx and OpEx spend. There’s typically a 70-30 ratio spend on CapEx projects against OpEx projects. It means that 30% of an organization’s money will be spent on 70% of its projects, and vice versa, which obviously means that the CapEx projects will be a lot more expensive.
A big part of the problem we’re encountering with our life sciences and engineering clients is that they’re misunderstanding the nature of construction projects. The way you manage construction projects is different from the way you manage normal, everyday PMO projects. There’s a much lighter touch required in the PMO (e.g. for scheduling, risks & issues, dashboards, etc. on smaller projects).
On the CapEx side, you’re focused on schedule, risk, documents, cost management, claims management, project progress, S curves, and so on. Information is often dispersed across five to 20 separate systems. Reports are typically monthly – and out of date. You’re banjaxed if you’ve got poor visibility into your portfolio. Decision-making will be based on hunches and good luck. It’s management by chance. Ideally, the CEO wants one view of his portfolio, a simple dashboard, so he can manage by exception, adhere to compliance strictures, have control – and ultimately peace of mind.
Do Any of These Project Controls Issues Sound Familiar?
- Projects range from small to large and the same process is not required for the full range of projects. It, therefore, becomes inefficient to manage all projects in the same way (but you still need consistent reporting points across all projects)
- Poor upfront planning results in overrunning on cost and schedule
- Cost management is very MS Excel-based and does not allow roll-up to program/portfolio level
- Project profitability is not measured closely or not measured at all
- Dispersed teams struggle to communicate/collaborate effectively
Value of Rigorously Evaluating Your Portfolio
When you’re evaluating a portfolio of projects, you need to assess a host of variables, including ROI (Return on Investment), net present value, risk, compliance, capacity. What happens is that the pharma provider is running with these projects when suddenly somebody comes in with another 50 projects. What you have to do now is evaluate your portfolio. You’ve got live projects on one side as well as a set of new project ideas that have to be evaluated. A top pharma company will be cut-throat here. They will do one of three things. They either:
A) Develop it into a product that creates new revenue streams
B) Bring it to a certain point and sell the rights to somebody else
or C) Bin it.
There might be too much risk to take on a project. How do you evaluate all these factors? You might be too late to get to market in, say, two years’ time when one of your competitors already has a foothold in the market with its offering. You need to stop now because we have other good products that you can be first to market with instead.
You need to have a good spread of your projects over different stages. If every project you had was at the deliver stage or the initiation stage, it would obviously be a disaster. It’s a chain. It has to have balance. Also, look at your plant spread. A typical global client of ours will have, for example, 65 plants worldwide. They need to be sure that projects are appropriately spread across all of those plants.
It gets expensive to keep going through the phases. You’re better off to fail early – than to fail late. Our clients want to identify the “losers” before they start working on them. They want to focus on the “winners” the whole way through the process. This is why you need rigorous portfolio planning.
Portfolio Planning Techniques – A Four-Step Approach
There is a standard process for good portfolio planning. It has to be formalized. You need to prioritize. You need to get rid of the “loser” projects. Here are four steps to take:
- Inventory – Begin by identifying strategic objectives and getting all the information you need around projects to help you evaluate those projects, to classify it, i.e. a list of information associated with a project which could range from, say, 50 to 80 data points, e.g. financial, plant location, country, franchise, CARs (capital authorization requests), etc.
- Analyze – you’re starting to logically put the project information into buckets. Set it out by timing, budget, business units, etc. This is where we’re finding our clients have struggled.
- Align/Balance – Next, you can assess the breakdown. Say one of your regions “Slovenia” has 10 projects on the go whereas another region like “Ireland” has 55 yet they are the same size plants. You need to balance the spread. Otherwise, you’ll end up with a bottleneck in your Ireland plant. Those first three pieces help you to ensure that you’ve “winners” not “losers” in the pipeline. Then you move to step 4.
- Manage – you’re up and running and you’re managing projects. You’re doing your Gantt, assessing risks & issues, the day-to-day work of a PMO.
Why Good On-Boarding of Projects Makes Life Easier
The single, most difficult problem we’re encountering with our clients – is their challenge to get all the information associated with a project together so they can be evaluated properly. This element cannot be underestimated. You need to ensure there are no errors in the data coming on board to assess the portfolio accurately.
What we do with a solution like Cora SPM is that we allow our clients to press a button and export out an Excel template, with built-in formulas, that is sent to, say, your 65 plants worldwide. Each project manager is told to load their projects into it, i.e. the 50 to 80 pieces of information associated with what could be 100 projects in a portfolio. They send that back to the global project controls coordinator at headquarters who can vet and import a final portfolio of projects.
For example, if a project director in Slovenia wants to do Product X. But the company might have a colleague in Austria who is also keen to do Product X. They’re the same pharma product. You can’t have two plants worldwide doing the same product. You can dive in and make a selection. Now you can balance your portfolio.
This is the key element. Because Cora PPM has controlled the format of on-boarding the project data now the global project controls coordinator can easily decide what projects should be culled and what ones should proceed over the next year. If, for example, there is an error in the Excel spreadsheet, the system will do an error check on it and return it for correction.
Now you’re not going to make the mistake of developing two similar products in different plants in parallel. Crazy as it sounds, this happens. The left-hand doesn’t know what the right hand is doing without quality project controls. A solution like Cora SPM makes sure this breakdown doesn’t happen.
The solution is fail-safe and it leads to huge cost savings. Now you’re starting to get better value out of your resources. You’re getting better value from the product lines you’re pursuing. You’re spreading yourself better across your target markets. You don’t have any redundant work being done. Instead, you’re working with a portfolio of “winners” not “losers”.
Find Out More
Cora SPM helps users to allocate the most profitable use of resources select and manage the optimum set of strategically aligned projects. Our free Portfolio Planning guide “Portfolio Planning Can Save Millions on Your Bottom Line” examines the topic in more detail.
In his latest blog, Paul Rees looks at how project controlling and monitoring can help manage a project’s cost and schedule.