Project Management:
Process, Technology, and Practice
Ganesh Vaidyanathan
Chapter 4
Project Initiation
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4-1
Learning objectives
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Select projects and set priorities
Select a project manager and project team
Write a project charter
Gather requirements for a project
Prepare and write a project scope
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Project Selection
Form upper management team
Identify, organize, and set criteria for all projects
including financial and qualitative factors
Gather data on all projects
Estimate time and resources required
Analyze and decide on projects
Implement initial project plans
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Project Selection Process
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Screening of Projects
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Project Selection
 Projects can be categorized as one of the following:
• Compliance: Projects that are essential to meet new
requirements imposed by internal and external entities
Internal entities may be executive management
External entities may be government regulations and
requirements
“Must do” projects; if not implemented, may face
penalties
• Emergency: Projects that are needed to meet emergency
conditions; may be “must-do” projects; if not
implemented, organizations may not be fully operational
to fulfill their core competencies
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Project Selection
• Mission Critical: Critical to the mission of a company
If not completed, would cause immediate,
unacceptably negative impact to business
• Operational: Projects that are needed to support current
operations
Increase process efficiency
Reduce product cost
Improve performance and other metrics
• Strategic: Projects that are essential to support longrange mission (increase revenue, increase market-share)
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NPV (Quantitative)
If you are investing $600,000 and expecting $750,000 a year
from now, Present Value = Discount factor * Future Value
 Where discount factor =
where r is the discount rate
 If the discount rate was 10%, the present value is:
750,000/1.10 = $681,818.
 The building is worth $681,818, your investment is
$600,000 and your NPV is $81,818.
Therefore, NPV = PV – investment.
n
Ct
(1 + r)t
NPV =
t=1
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NPV
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ROI
 For example, if you invest $100 today and if the $100 is
worth $105 next year, the ROI is: $105/$100 = 0.05 or 5%.
 ROI =
 5% is the ROI of that investment. For the two projects
Project 1 and Project 2 in Example 4-1, ROI can be calculated
as 58% and 59% respectively. Here, the higher the ROI, the
better for the organization.
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IRR
 IRR is used frequently and is defined as the return or
discount rate which makes NPV = 0. This means that in order
to find the IRR for a project lasting t years, we must solve for
IRR from the following expression:
 Project 1 and Project 2, IRR is calculated as 28% and 30%
respectively. Once again, the higher the IRR, the better the
financials return of a project.
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Payback analysis
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Payback analysis
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Project comparison
Project 1
NPV
ROI
$ 3.45 MM 58%
IRR
28%
Payback
3 years
Project 2
$ 3.47 MM 59%
30%
3½ years
Project 2 promises better revenues
What about benefits?
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Project Strategy
 Provides the intellectual frameworks, conceptual models, and
governing ideas that allow managers of an organization to
identify opportunities for bringing value to customers and for
delivering that value for a profit
 The way an organization defines its business for a better future
• Organizations need to take advantage of the opportunities that
projects represent.
 Dynamically guides project actions and decision making as the
project environment changes
• Projects need to be chosen and fielded to help achieve strategic
intent. It is important to note that projects must deliver a product,
service, or process that will provide the competitive advantage or
value envisioned by the strategies of organizations.
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Project Strategy
 In many projects, value cannot be attained without the use
of new technologies.
• Technology poses many risks and managers need to
evaluate such perceived risks well before the beginning of
projects.
• The skill requirements of using such technologies need to
be analyzed before project initiation as well.
• All risks need to be evaluated for future projects in order
to select the projects. Projects provide future
opportunities and opportunities mean more uncertainty
and greater risk.
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Project Strategy and Value
 Project strategic value is defined as the impact a project will
have on external entities like customers and suppliers.
 Competitive differentiation may depend upon:
• Economies of scale
• Product differentiation
• Capital Requirements
• Access to distribution channels
• Cost disadvantages independent of scale
• Government policies
• Perceived competitive reactions in the market, and
• Price of organization’s products and services.
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Project Strategy and Value
 Value of a project can be determined by cash benefits (both
magnitude and its timing).
• Magnitude and timing of cash benefits when compared to
investments made on the projects have to be evaluated in
project selection as well.
• If a project is not expected to bring some benefit to the
organization, then there is no point in implementing this
project.
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Scorecard analysis (Qualitative)
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Decision Trees
P – probability
PO – Payoff
EV – Expected Value
Two new products ProdA and ProdB have been proposed in
NewProd, Inc. and the leadership team is considering using a
decision tree analysis to decide on which product to invest before
making a commitment to the project. The investment is based on
estimated revenues of $1 million from the new product, ProdA and
$400K from ProdB. The development costs are estimated to be
$100K for ProdA and $10K for ProdB. Moreover, suppose recent
market analysis shows that the probability of high demand forecast
for both products is 0.5 and that of low demand is also 0.5.
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Decision Trees
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Decision Trees
ProdA payoff with high demand = Revenues – Cost = $1,000,000 $100,000 = $900,000
ProdA payoff with low demand = Revenues – Cost = $0 - $100,000 =
($100,000)
ProdB payoff with high demand = Revenues – Cost = $400,000 $10,000 = $390,000
ProdB payoff with low demand = Revenues – Cost = $100,000 $10,000 = $90,000
Using Equation 4-6, we can calculate EV:
The Expected Value (EV) for ProdA = ($1,000,000*0.5) +
($200,000*0.5) - $100,000 = $500,000
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Decision Trees
Forecast Initial
Prior
Conditional
Joint
Posterior
Demand Demand Probability Probability Probability Probability
High (h) High (H)
0.5
0.6
0.3
0.67
High (h) Low (L)
0.5
0.3
0.15
0.33
Low (l)) High (H)
Low (l)) Low (L)
0.5
0.5
0.3
0.7
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0.15
0.35
0.30
0.70
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Decision Trees
The new marketing survey (MS) will be the third analysis in this
example with ProdA and ProdB being the other two that we have
discussed in Example 4-2. Using the calculated posterior
probability, we can calculate the expected values of high and low
demands of ProdA and ProdB:
EV of ProdA for high demand:
($1,000,000*0.67)+($200,000*0.33) – 100,000 = $633,333
EV of ProdB for high demand: ($400,000*0.67)+($100,000*0.33)
– 10,000 = $290,000
EV of ProdA for low demand:
($1,000,000*0.30)+($200,000*0.70) – 100,000 = $340,000
EV of ProdB for low demand: ($400,000*0.30)+($100,000*0.70)
– 10,000 = $180,000
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Decision Trees
Now, the EV of the marketing survey option can be computed
using the bigger EV of ProdA and ProdB and the total joint
probability that we computed in the above table as:
($633,333*0.45)+(340,000*0.5)-$100,000 = $355,000.
When compared to the original EV of ProdA and ProdB that we
computed in Example 4-2, we can see that ProdA has the highest
EV of $500,000. Therefore, the decision should be with ProdA.
Even though the marketing survey did not work in an overall sense
with an EV of $355,000, it would certainly be beneficial to the
organization with the collected information.
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Project Charter
 A project charter is a document that formally recognizes a
project, includes a problem statement, project objectives,
benefits, process owners, and a project sponsor or a
champion.
• Project purpose or justification
• Project objectives
• Project success criteria
• Project description
• Project risks at a high level
• Key milestones
• Budget information
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Project Charter
• High level requirements of the project
• Project approval requirements
• Roles and responsibilities of the project manager and the
project team
• Level of authority of the project manager
• Sponsor and authorizing persons of the project charter
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PM selection
 The challenges for an organization to recruit effective project
managers include:
• Ensuring that only qualified individuals are assigned to
project management positions.
• Ensuring that an internal policy is designed, instituted,
and followed to foster professional growth and
development of such project management positions.
• Providing proper authority and accountability to project
managers.
• Providing necessary management support.
• Ensuring that necessary resources are available for
projects.
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PM characteristics
 Personal
• Is honest and has integrity
• Assertive and confident
• Friendly and optimistic
• Enthusiastic and motivated
• Has a high energy level
• Has a sense of humor
 Professional
• Able to work under uncertainty
• Adaptable to situations
• Well organized
• Understands business issues
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PM characteristics
 Relational
• Team player
• Good written and oral communication skills
• Able to listen actively
• Able to present outcomes effectively
• Able to work effectively in teams
• Able to be a facilitator
• Respected by others
• Patient and shows perseverance
• Able to motivate and bring out the best in others
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PM Skills
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Satisfying end user and customer requirements
Performing flawlessly
Satisfying a myriad of technical performance criteria
Being user friendly and cost effective
Designing and implementing with quality
Providing great value to an organization, its suppliers, and
its customers
 Making sure that products are easily maintainable and
services are easily accessible
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PM qualifications
Ability to plan project activities effectively
Ability to schedule meetings, take copious notes, distribute
meeting notes, and communicate effectively in meetings
Good people skills
Knows how to solve disputes
Knows how to deal with people from varied cultural and
technology backgrounds
Knows how to motivate team members to achieve
milestones
Ability to manage scope and ensure that the project scope
does not grow beyond negotiated requirements
Great attitude and enthusiasm
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PM qualifications
 Ability to manage change and exceptions in projects
effectively
 Ability to build teams
 Ability to maintain stakeholder satisfaction, especially
customer satisfaction
 Ability to monitor and control all the six factors of success
 Very familiar with financial and budgeting processes
 Manages time well
 Trained in project management principles
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Project Team
The size of a project team depends upon the size, the
complexity, and the duration of a project.
The scope of a project will determine the composition of the
team.
Technology employed in projects also determines the project
team member selection.
High visibility projects with big budgets may involve project
managers with many dedicated team members from various
functions.
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Project Team
 These big projects have to be equipped with team members
with technical, functional, administrative, business, and
financial skills.
• Functional skills include knowledge in various functions
inside the organization as well as processes, practices, and
procedures.
• Business skills may include contract management,
marketing skills, financial, cost accounting, and other skills
that are needed to run the business portion of a project.
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Stakeholder analysis
 Stakeholder characteristics
 The positions that may be taken by the stakeholders that
includes whether they are for or against the project
 Level of interest of the stakeholders in the specific project
 Level of influence of the stakeholders in the organization
 Association of the stakeholders with the members of upper
management
 Potential alliances of stakeholders with other stakeholders
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Stakeholder analysis
 Possible support by stakeholders for any changes in the
project
 Ability to affect the project policies through power and/or
leadership
 Ability to help the project team eliminate potential obstacles
 Ability to help mitigate the project risks
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Stakeholder register
ID
Stakeholder
Roles and Expectations
Influence Level of
level
Interest
A
Project
Sponsor or
Project
Champion
CFO
CIO; Looks for value, profits, and
ROI in projects; Expects that the
project is beneficial to the firm
High
B
C
Functional
Manager 1
Looks for IRR payback and overall High
profits of the organization; Expects
to meet the scope, budget, and
schedule
Looks for the most popular projects High
to allocate resources to; Expects to
use resources efficiently
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High
Neutral
Neutral
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Stakeholder register
ID
Stakeholder
Roles and Expectations
Influence Level of
level
Interest
D
Functional
Manager 2
Neutral
Neutral
E
Customer 1
High
High
F
Customer 2
Low
High
G
Users
Project
Management
Office
Neutral
to high
High
High
H
Looks for the performance of the
project; Interested in quality of
the project
Looks for the best value for the
money
Looks for the quality of the
delivered project
Look for ease of use and doing
their jobs with minimum effort
Policies have to be followed; CEO
and CFO are in favor of the this
office
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High
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Stakeholder register
Influence Level of
level
Interest
ID
Stakeholder
Roles and Expectations
J
Project
Manager and
Project Team
Public
Young, energetic, and optimistic High
crew; PM is knowledgeable about
project management techniques
Does not care about this project; Low
Not a very high-profile project
K
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High
Low
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Requirements gathering
 A requirement is a capability of a system, product, or service
to include the quantified and documented needs and
expectations of the sponsor, customer, and other
stakeholders
 Tools used:
• Brainstorming
• Delphi technique
• Mind mapping
• Affinity Diagrams
• Interviews, Focus Groups
• Facilitated workshops, and Nominal Grouping Technique
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Requirements gathering
 Joint Application Design/Development (JAD) is a process used
in prototyping to collect requirements while developing new
information systems.
 Joint Requirements Planning (JRP) is a structured group
meeting of stakeholders to gather requirements by actively
involving the stakeholders to replace individual interviews.
 Document analysis is a technique used in creating
requirements from “as-is” process documents.
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Requirements gathering
 A use case is a technique used in software projects to
document the potential requirements of a new system or
software by conveying how the system should interact with
the end user or another system to achieve a specific business
goal graphically.
 Interface analysis reviews various points where two or more
systems interact with each other.
 A prototype is a sample or a model built usually to test a
concept, a process, a system, or a product.
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Requirements gathering
 The Requirements Traceability Matrix is a table captured to
map all the requirements of all stakeholders in order to track
them until the project is complete.
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Project Scope
 How much can be achieved in the current project?
 When must the project be completed?
 When and for how long will resources (people, facilities,
equipment, etc.) be available?
 Project scope description
 Project acceptance criteria
 Project deliverables
 Project exclusions and constraints
 Project assumptions
Scope creep: Scope creep is the addition of scope after it is
defined in the scope document.
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Summary
 Project initiation focuses on project selection and creation of
project charters for selected projects.
 Organizations usually prepare project proposals as the first
means of starting a project. The proposal serves as an initial
understanding document when selecting projects. These
proposals will have a Statement of Work (SOW), the perceived
benefits by year, estimated budgets needed by year, a highlevel schedule request, and general information on the
project being proposed.
 Although every project begins with a proposal, not every
proposal can, should, or does become a project. Due to
limited resources, choices in projects have to be made.
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Summary
 The goal of the project selection process is to analyze
project viability, approve or reject project proposals based
on established criteria, and follow a set of structured steps
and checkpoints.
 For selection purposes, projects can be categorized as
compliance, emergency, mission critical, operational, and
strategy.
 Organizations usually use models and choose potential
projects by relying on both qualitative and quantitative
means.
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Summary
 Three models for project selection and prioritization are
presented including:
• Net Present Value, Return on Investment, Internal Rate
of Return, and payback analysis to select projects based
on value;
• Decision tree analysis to select projects based on
estimated value; and
• Scorecard analysis to select and prioritize values based
on qualitative criteria.
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Summary
 A project manager is the key to the success of a project and
has to set the vision, define the goals and measures, and
monitor and control the essential six factors of project
management to ensure project success.
 Organizations have to select a qualified project manager
during project initiation in order for a project to be on
schedule, under budget, within scope, and with available
resources to achieve expected performance and provide
value.
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Summary
 Project managers need to have skills to manage the senior
management as well as to remove obstacles and achieve
project objectives. They need to have the technical
management skills, the ability to solve problems, the ability
to work with users and customers, the knowledge of project
management tools and processes, and the ability to work in
uncertainty.
 In order to start collecting the detailed requirements of a
project, the organization needs to develop a project charter.
A project charter is a statement of scope and provides a
preliminary delineation of roles and responsibilities,
outlines the project objectives, and defines the authority of
the project manager.
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Summary
 Stakeholders have to be identified. Once the project charter
is completed, project managers and their project teams can
gather requirements from their customers.
 A requirement is a capability that must be met by a system,
product, or service to satisfy stakeholders. Using the
information from the project charter, the project team can
collect and gather required information. There are many
ways to gather requirements for projects, which we have
discussed in Chapter 3 . Apart from these techniques,
organizations use customer-focused surveys, observations
or job shadowing, and prototypes to gather requirements
for projects.
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Summary
 Project scope needs to be clearly defined at the beginning
of a project. Because senior management’s commitment to
support the project is an important factor in the success of a
project, a clear understanding of the purpose of a project
needs to be elaborated in a project scope, which is the next
step.
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Class discussions
 Should technology managers strategize technology
projects?
 Project selection always gets rid of some projects that are
not useful for an organization.
 Is there a best method to select and prioritize projects?
 Anyone can be trained as a project manager.
 A project manager should be paid for performance and not
for the size of the project.
 Technical experts can be good project managers.
 Project managers should share duties with team members.
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