Three Ways to Factor Risk into the Decision to Fund a Project
SERIES ARTICLE
By Fernando Santiago
Ontario, Canada
Covid-19 has shown us how volatile external as well as internal assumptions can be in estimating project benefits. In part III of the article “Three ways to factor risk into the decision of funding a project,” concrete strategies are presented for compounding delivery and benefit risk, not only in terms of time and cost, but also in terms of quality/fitness for use, the perception of value from the point of view of the beholder: the “acid test” for a business case.
In the first installments of this three-part series we saw that, while risk is usually included as reference information in business cases, it is seldom used to adjust the calculation of value and financials (IRR, NPV), both from the investment and benefits side. This is particularly relevant in these times of unprecedented uncertainty caused by Covid-19. In this third installment, we present a concrete approach to compound the impact of delivery risk and benefit risk. Furthermore, we discuss the impact of quality, focusing on fitness for use.
As discussed in the first installment, delivery risk not only increases the time and cost for the project but can also impact the window for the realization of benefits, even to a point when benefits may not be realized at all (the hot-dog stand at the Olympics or the first to market assumption). We have all heard the story of the sponsor that tells the project manager: “you have delivered exactly what I asked, but…”
There is another way in which delivery risk can impact benefits, which is frequently overlooked, and that is fitness for use: does the product do what it is supposed to do? This is not functionality or requirements, which can be tested and fixed before the output is delivered. Fitness for use is more on the side of the perception of the customer. The best example I have found to understand this concept is the purchase of a dishwasher: when you go to the store you do not ask the salesperson if the appliance you are considering will leave the dishes clean; this is assumed. Requirements for a dishwasher are dimensions, finishing, cycles, etc. However, after it gets installed at home you run a first batch and, once it’s done, someone, likely the wife in the household, will pull one glass and put it against a light to see if there are spots on it or not. This is fitness for use; of course, it washes dishes, but does it leave them the way I expect?
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Editor’s note: This three-part series is by Fernando Santiago, co-author of the book The Outcome-Based Organization and Managing Director of P3M Solutions, a Canadian corporation specialized in benefits realization management that provides consulting and training in project, program, and portfolio management (P3M). See his profile at the end of this article.
How to cite this paper: Santiago, F. (2020). Three Ways to Factor Risk into the Decision to Fund a Project – Part III: The acid test for a business case, PM World Journal, Vol. IX, Issue X, October. Available online at https://pmworldlibrary.net/wp-content/uploads/2020/09/pmwj98-Oct2020-Santiago-III-acid-test-for-a-business-case.pdf
About the Author
Fernando Santiago
Ontario, Canada
Fernando Santiago, PMP has been a pioneer and innovator on the topic of benefits realization management for more than ten years. He is co-author of the book The Outcome-Driven Organization, as well as several white papers and articles, presentations and webinars. He has also developed original tools and a software application for benefits realizations management. He has worked in financial institutions, energy and technology companies, as well as educational and professional institutions in North America, South America, Asia and Europe. Fernando is a practitioner, consultant and trainer. He is an international public speaker and invited professor at the MBA level. Based in Ontario, Canada, Fernando can be contacted at fsantiago@p3msolutions.org
To view previous works in this series, visit Fernando’s author showcase in the PM World Library at https://pmworldlibrary.net/authors/fernando-santiago/
