In project management, there is nothing more important than making sure your projects come in on time?on quality and on budget. One?of the?key skills a project manager must have

chartering organization

Group that determines the need for the project.

mission

Statement of the purpose of an organization.

CHAPTER 4

Starting a Project

This chapter provides an overview of the selection and initiation of a project. Prior to the initiation of a project, the chartering organization—the organization that determines the need for the pro- ject—develops a justification for the project. Often, several initiatives compete for the resources of the organization, and potential projects are evaluated to see which ones are best aligned with the mission and goals of the organization. This evaluation process can be very simple, in which the ben- efits to the organization are obvious and the economics of the project are very favorable. On larger, more complex initiatives, the process of gathering and evaluating the data to justify the project can take a year or more. The information gathered during this evaluation process provides the basis for the project charter, the initial scope of work, and other information required to initiate the project.

4.1 Project Selection

Learning Objectives

1. Describe the difference between an organization’s mission, goals, and objectives.

2. Describe how the missions are different depending on the type of organization.

3. Define economic terms used for choosing projects.

4. Define a project champion and his or her role.

5. Describe the influences of funding, timing, and unofficial considerations on project selection.

Projects are chosen for a variety of reasons, and not all of them are apparent. The project manager must understand why a project was selected over other choices so that he or she can align the team toward justifying the choice that has been made by senior management.

Mission of the Organization

The mission of an organization is a statement of why it exists. For example, a police department might have its mission stated on the door of each patrol car—to protect and serve. A well-written mission statement is short and has the following sections:

• Purpose of the organization

• Primary stakeholders

• Responsibility of the organization toward the stakeholders

• Products or services offered

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goal

An end toward which effort is directed.

objective

An end toward which effort is directed that has a measurable outcome.

Police Department Mission Statement

The mission of the Philadelphia Police Department is to fight crime and the fear of crime, including terrorism, by working with our partners to enforce the laws, apprehend offenders, prevent crime from occurring, and improve the quality of life for all Philadelphians.[1]

The missions of organizations can be categorized as profit, not for profit, and government. A business that is created to make a profit for its owners and stockholders must consider the cost of each project and how much profit it is likely to generate. The mission statement of a not-for-profit organization like a charity would emphasize the service it provides. A not-for-profit organization must control its costs so that it does not exceed its funding, and it is always seeking funding and is in competition with other not-for-profit organizations for funding from the same sources. A gov- ernment agency, like a police department, is similar to a not-for-profit organization, but its sources of funding are usually taxes and fees. Its mission would include its responsibilities to the citizens it represents. Government organizations compete for funding from higher levels of government. Pro- jects are more likely to be funded if the proposal for the project is closely aligned with the mission of the organization. The project manager must be aware of that mission while building a team and aligning it behind the purpose of the project.

Goals and Objectives

Senior administrators of the organization decide on how to achieve the mission of the organization by choosing goals. For example, the director of a not-for-profit preschool that provides low-cost education for children of poor, single parents might set a goal of improving its reputation for qual- ity. A goal[2] is an end toward which effort is directed. The director meets with her staff, and they consider several ways of achieving that goal. They decide to seek certification by a nationally known group that evaluates the quality of preschool programs. Obtaining this certification is an objective.

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FIGURE 4.1 Relationships among Mission, Goals, and Objectives

In this text, we distinguish between the terms goals and objectives.The use of these terms is not standardized across the industry or in business, but we will be consistent within this text. For our purposes, goals are more aspiration. Goals are the first breakdown of the mission or the pro- ject purpose. Objectives are then developed to achieve the goals. As a subset of a goal, objectives are more detailed, have shorter time frames, and have specific measures.

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FIGURE 4.2 Cash flow

© 2010 Jupiterimages Corporation

cash flow

The movement of money in which income is positive and spending is negative.

interest

Charge for a loan.

simple payback

Time period it takes to recoup the original expense without considering interest payments or other complicating factors.

Economic Selection Criteria

If an organization’s mission is to make money, it will try to maximize the profits of the company by increasing the money coming in or decreasing the money going out. The flow of money is called cash flow. Money coming in is positive cash flow, and money going out is negative. The company can maximize profits by improving its operational efficiency or by executing projects. The company must raise money to fund projects. Companies can raise money in three ways:

1. Borrow it (government organizations, such as cities and schools, can sell bonds, which is a form of borrowing).

2. Fund the project from existing earnings.

3. Sell additional stock or ownership shares in the company.

If a company borrows money, it must pay back a portion of the amount it borrowed plus addi- tional interest. The interest is a percentage of the amount of the loan that has not been repaid. The repayment of the loan and interest is usually paid quarterly or annually. To qualify for selection, a project that is intended to make or save money must be able to do the following:

• Repay loans if money must be borrowed to fund the project

• Increase future earnings for shareholders

• Make the company stock more valuable

When senior managers at a for-profit company decide which projects to fund, they must con- sider these economic issues.

Simple Payback

To help managers choose between projects, they can use an unsophisticated measurement called simple payback. If the purpose of the project is to improve cash flow—make it more positive or less negative—the improved positive cash flow each year is applied to the original cost (negative cash flow) of the project to determine how many years it would take to pay back the original cost. It is assumed that after that date, the improved cash flow could be used for other purposes or paid out to owners. For example, if the company borrows $100,000 to fund the project and the project increases cash flow by $20,000 a year, the simple payback would be five years, as shown in Figure 4.3.

FIGURE 4.3 Simple Payback The cash flow from each year is summed up in the cumulative cash flow row. When the cumulative cash flow becomes zero or positive, it means that the original cost has been paid back by the increased income or savings created by the investment.

Companies can use simple payback to establish a cutoff for project consideration. For example, management could declare that no projects will be considered that have a payback of more than

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FIGURE 4.4 Weighing options requires financial tools.

© 2010 Jupiterimages Corporation

internal rate of return (IRR)

Average annual return on an investment that earns or saves money.

three years. For projects that meet this criterion, projects with shorter simple payback periods would have an advantage in the selection process. Not-for-profit or government organizations are likely to approve projects with longer simple payback periods because they are not compared to other not-for-profit or government agencies based on their profitability.

Internal Rate of Return

Companies whose mission is to make a profit are usually trying to make more profit than their competitors. Simply paying back the loan is not sufficient. If the project involves buying and installing equipment to make a profit, executives can use another method called internal rate of return (IRR). The IRR is like an internal interest rate that can be used to compare the profitability of competing projects. To calculate an IRR, the company considers the cash flow each year for the expected life of the product of the project. It assumes that some of the annual cash flows will be negative and that they can vary from year to year due to other factors, such as lost production dur- ing changeover, periodic maintenance, and sale of used equipment. For example, a company decides to upgrade a manufacturing line with new equipment based on new technology. They know that the initial cash flow—shown in year zero—will be negative due to the expense of the conversion. They know that the new equipment has an expected life of six years before newer technologies make it out of date, at which time they can sell it for a certain salvage value. The inputs to the IRR calculation are the net cash flow for each year in which at least one of them is negative and at least one of them is positive. The result is a percentage that indicates how well this project performs as an investment. Refer to Figure 4.5.

FIGURE 4.5 The internal rate of return measures the profitability of an investment.

The life of the equipment is part of the IRR calculation. If a project manager knows that senior management intends to sell the equipment in six years, team members can be made aware of that decision if it affects their choices.

Other Selection Criteria

Besides making money, there are many other reasons for a project to be selected, including the fol- lowing:

• Keeping up with competitors

• Meeting legal requirements, such as safety or environmental protection

• Improving the organization’s public image

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project sponsor

Influential person who is willing to use his or her influence to help the project succeed.

FIGURE 4.6 Project champion can help when a project is in trouble.

© 2010 Jupiterimages Corporation

The timing of the project can be very important. A project might be selected at a particular time of year for some of the following reasons:

• Accumulating a year-end budget surplus

• Increasing executive bonus for the year or quarter

• Funding or certification review deadline

If the project manager must make changes to the schedule at some point in the project that could affect its completion date, it is valuable to know if the project was selected because of timing.

Project Sponsor

In addition to knowing why a project was selected, it is valuable to know which senior executives supported or opposed the selection of the project and if the project manager’s supervisor was in favor of it or not. Because most project teams consist of people who do not report to the project manager but who report to other unit managers, they might not be available when you need them if their boss thinks other projects are more important. If a particular executive proposed the pro- ject and actively advocated for its approval, that person could be a source of support if the project runs into trouble and needs additional resources.

A project sponsor, sometimes called a project champion, is an influential person who is willing to use his or her influence to help the project succeed. Typically, this is a formal role with authority to approve project budgets, change orders, and supervise the project manager on behalf of the char- tering organization. The best project sponsor is a person with the necessary political power in the organization, someone invested in the project success, someone who can delegate (not assume the role of the project manager), and someone the project manager trusts. The role of the project spon- sor often includes: finding resources, clearing organizational roadblocks, reinforcing the team, helping develop the project story, communicating project success, and acting as an executive con- tact for the client.

To identify the advocates and opponents of the project, begin by reading public documents (if available), such as the minutes of the meeting at which the project was approved. Next, the project manager can use his or her unofficial network of trusted colleagues to get their opinions. Those discussions should be informal and off the record. Those opinions might be inaccurate, but it is valuable to know what misunderstandings exist about a project.

Project Champions Support an Aircraft Project

When Vought Aircraft won a contract with Boeing to build a significant portion of the fuselage for the new 787 Dreamliner in Charleston, South Carolina, there was no existing work force with air- craft experience. To give Vought Aircraft an incentive to locate the plant in South Carolina, Governor Mark Sanford, with the support of the legislature, committed to the recruitment and training of the work force needed for the plant to be successful. The legislature provided several million dollars and assigned the role of developing a trained work force to the South Carolina Technical College System and Trident Technical College, the local community college in Charleston, South Carolina.

Dr. Jim Hudgins, president of South Carolina’s Technical College System, assigned the most experienced project manager to the project and personally accepted the role of project sponsor.

Dr. Hudgins and Dr. Mary Thornley, president of Trident Technical College, met with the project leadership at least monthly to review project plans and progress. Each month both Dr. Hudgins and Dr. Thornley assigned resources and removed barriers to project success. Dr. Thornley assigned procurement personnel to the project to assure materials were purchased and delivered in time to support the project schedule. She reallocated space to provide training laboratories

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for the project and assigned a college leader to the project full time to coordinate actions with the college. Dr. Hudgins coordinated with the governor’s office to assure the project received the appropriate level of support.

Both Dr. Hudgins and Dr. Thornley had the political power and the resources to assure the project had the autonomy and the resources to succeed. The project met every milestone, exceeded every measurable goal, and received high praise from Vought management as the plant began operations on schedule.

Key Takeaways

• A mission statement declares the purpose of the organization and identifies the primary stakeholders, the products or services offered, and the responsibility toward the stakehold- ers. Goals are statements of direction for the organization, and objectives are activities that achieve those goals with measurable outcomes.

• Profit-making organizations exist to make profits for their owners while in competition with other companies. The goals of those companies are directed at making as much or more money than the competition. Not-for-profit organizations are directed at providing a service to a particular group. They must control costs to perform their tasks with the funds they have, and they compete with other not-for-profit organizations for donations and funding. A government agency is similar to a not-for-profit organization, but its sources of funding are usually taxes, fees, and funding from a higher level of government, and it has a responsibility to the citizens it represents. Government organizations must justify their expenditure of tax money to elected or appointed officials.

• Two economic tools for evaluating and comparing projects are simple payback and internal rate of return. Simple payback is a calculation of the year when the cumulative income or savings due to spending money on a project will meet or exceed the original cost of the pro- ject. Internal rate of return is a calculation of the average percentage of increased cash flow over the life of the project’s product.

• A project sponsor is an influential person who is willing to use his or her influence to help the project succeed. It is useful to know why the project champion wants the project to succeed and to be sure to accomplish that goal, even if it is not stated.

• Project selection depends on the availability of funds, which depends on the way each type of organization receives money for projects. Funds might be available at certain times and projects are selected that can take advantage of that opportunity. Projects might be initiated for reasons that are not stated, and investigating the source of funding and likely motivation of project champions can provide better understanding of the project’s chances for success.

Exercises

1. An end toward which effort is directed that has measurable outcomes is an __________ in this text.

2. A general statement of the direction an organization should take is a ______.

3. If a company has to make quarterly loan payments to the bank, this is an example of a neg- ative _______ ______ (two words).

4. If you borrow $1,000 and have to pay back $1,010 a month later, the $10 dollars is the _______.

5. If a company had to choose between installing two different pieces of expensive equipment that had different expected lifetimes, different salvage values, and different production capa- bilities, it would compare the _______ _____ __ ________ (four words) for each option.

6. On Google’s web pages, it says that they want to “organize the world’s information and make it universally accessible and useful.” This is an example of a _______ statement.

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7. An influential person who is in favor of a project is one of the project ________.

8. If upgrading the windows in a building costs $100,000 and it reduces heating and cooling costs by $5,000 a year, the investment in the window upgrade has a _____ ______ (two words) of twenty years.

9. The group that determines the need for a project is the ________ organization.

10. What are four parts of a well-written mission statement?

11. What is the primary mission of each of the following types of organizations: profit-making, not-for-profit, and government organizations?

12. What does it mean if the money spent on a project has a simple payback of five years?

13. Why is it important to identify project champions?

14. What is an example of funding for a project that is only available for a short period of time under special circumstances?

Internalize your learning experience by preparing to discuss the following.

Choose an example from outside the assigned reading of a mission, goal, and objective that demonstrates the characteristics of each and how they relate to each other. The example can be from a real organization or it can be fictional. Describe the characteristics of a mission, goal, and objective as defined in this chapter, and how the example demonstrates those characteris- tics.

4.2 Project Charter

Learning Objectives

1. Define the purpose of the project charter.

2. Describe the different components of the project charter.

The project charter is one of the most important documents on your project. A well-written charter provides every member of the project team, the project sponsor, and other prominent stakeholders a good understanding of the purpose and main components of the project. Developing a good pro- ject charter is often difficult. A good project charter is succinct and easy to read for leaders who are often not experts in project management. It is also comprehensive and provides sufficient detail for leaders to understand the scope of the project and the management approach.

The project charter is the document that authorizes the project. The development of the project charter can vary significantly depending on the organization chartering the project. The Project Management Institute recommends that the project sponsor author the project charter in collaboration with the project manager, and this is the ideal situation. The process of writing the project charter and facilitating input from various stakeholders provides a project sponsor with a good overview of the project and provides a good foundation for conversations with the assigned project manager. Often, the project manager facilitates the process of developing the charter and then goes to the project sponsors and other stakeholders to develop a group ownership of the pro- ject. This is a great opportunity for the project manager to clearly define the roles of the project sponsor and other major stakeholders in a way that supports the ongoing management of the pro- ject.

The components and the depth of the project charter are related to the profile of the project. Large, complex projects can have a very lengthy and detailed project charter, while less complex projects might have a one- or two-page charter. The Project Management Institute (2017) recom- mends the following:

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• Project purpose; why is this project authorized? What will it accomplish?

• Project goals and a description of how these goals will be measured. The goals should reflect the success criteria for the project.

• High-level requirements; requirements detail what must be accomplished for the project to be a success. Requirements include business requirements, stakeholder requirements, solution requirements, project requirements (such as acceptance criteria), and transition requirements. High level means listing those major requirements identified early in the project. Detailed requirements will be identified as the project progresses.

• High-level project description, boundaries, and key deliverables.

• High-level risks; what are the major risks that might impact project success. This is not a detailed risk analysis. This is the identification of the major risk known or suspected.

• Summary milestone schedule.

• Preapproved financial resources.

• Stakeholder list; identification of the stakeholders who can influence project success and stakeholders significantly affected by the project outcome.

• Project approval requirements.

• Project exit criteria; what conditions must be met to close the project or might occur that might cancel the project.

• Assigned project manager, responsibility, and authority level; this is your chance to indicate the requirement for executives and clients to approve project deliverables and changes in a timely manner.

• Name and authority of the sponsor; this is your chance to detail your expectations of your pro- ject sponsor and develop alignment on expectations.

Other items that are sometimes included in a project charter include:

• Major assumptions; what are the major assumptions made about the project, i.e., resource availability.

• Major constraints; what major constraints are known, i.e., the typhoon season on a project in India.

A project may have more or less than the suggestions listed here. The project profile will determine the appropriate components of the project charter. One of the primary purposes of the project charter is to provide an overview of the project. A good project charter reflects alignment of the goals of the major stakeholders and their commitment to project success.

Key Takeaways

• The project charter authorizes the project.

• The project charter describes the project purpose and basic project management approach.

• The typical components of the project charter include: purpose, goals, requirements, project description and deliverables, risks, milestone schedule, exit criteria, project manager and project sponsor approval requirements.

Exercises

1. Which of the following are not typically included in the project charter?

• Purpose

• Goals

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