Project gating? CFOs at Shell and Coca Cola really believe in it.

Shell CFO calls for open-minded approach to innovation – says the headline.
I was sent the article at the foot of this blog; it comes from Accountancy Age, Wednesday May 22nd, 2013 and shows that effective project management and accountancy are intertwined; you can’t have effective projects without having the financial systems to track them and you can’t honestly say you are in control of your business if you don’t have effective project accounting.

A good matrix accounting systems will ensure you understand the real business

A good matrix accounting systems will ensure you understand the real business

In the article, the CFOs of both Coca Cola and Shell praise the virtues of a gated approach to projects, where we see the whole project but give authorisation a stage at a time (depending on risk). These CFOs see gates as vital control points, being the decision point on whether to continue and terminate a project. It’s all about sensible business investment. Gates serve as points to:

  • Check the business case
  • Check the merits of the project against other work that could be done
  • Check we have the resources both to undertake the project and operate the outcome
  • Check the plan for the remainder of the work is achievable
  • And finally, provide the funding for the next chunk.

They are the BIG decision points and should not to be confused with what are often called “quality gates”, which look at, quality (believe it or not!). Like many terms in business, “gate” can be over-used and abused.

Properly applied, project gating can radically change business performance. I saw one case where product development output went up ten-fold due to effective gating, rather than the “shove it all in the hopper” approach. Time to market was also reduced dramatically.

To get this right, organisations need effective “project portfolio management”, where the project portfolio is effectively part of the business plan. This is where the business needs originate. If portfolio management is to work effectively, we need to be good at programme and project management as whilst the demands for projects come from the “portfolio”, the feedback on achieving the portfolio’s objectives depends on how well the projects are undertaken.

I was at the London Gartner Forum last year and the vital linkage of business strategy to portfolio to project kept coming out in the talks. Gating was seen as essential for this.

So what could this mean for your organisation?

Projects are the vehicles for change and making the business of tomorrow. A good strategy or business plan, without “good execution” is worth nothing. Programme, project and change management are vital disciplines in making it happen.

Programme and project performance can only improve so far through the efforts of project managers. It is only through effective portfolio management we can hope to improve further by making sure our projects really do meet the business need and ensure we stop authorising projects which we haven’t the resources to do – that just slows down everything and stresses our people.

If benefits result from projects, then it makes sense that funding goes to the projects and NOT to the departments who spend the money. . . and definitely not on an annual basis (unless you business is so old fashioned as to be based on the Venetian traders’ model). If you give any department money they will spend it, regardless, so really on cost centre budget control will prove disappointing!

If you are to give money to projects you need good project accounting capabilities which work on the “matrix” and not just down the silos.

The great thing is that companies like Coca Cola and Shell recognise this; the sad thing is that the state of corporate management is that such an approach is news worthy and that so many organisations are still tied to cost centre accounting and ad-hoc spreadsheet driven project “accounts” (if any). What sort of company are you in?

Learn more about this
To learn more about gates, see Part 2 of The Project Workout.
To learn more about effective project accounting, see Chapter 17 of the Project Workout.

Here is the article:
QUOTE: MANAGEMENT ACCOUNTANTS must be less “mechanistic” and take a more open-minded approach to innovation, according to the chief financial officer of Royal Dutch Shell. Writing in a report by CIMA and the AICPA on innovation in the finance function, Simon Henry, CFO of oil and gas giant Shell, has urged finance functions to play a greater role in driving company innovation.
Shell has an innovation programme that includes a $1.5bn (GBP 1bn) annual R&D budget and also invests around $4bn on innovation within the business. According to Henry, the role of finance within this is multifaceted.
“A finance function needs to be able to understand the business well enough to know what is a worthwhile activity, but also, in this part of the business, to have a bit more of an open mind. It is less mechanistic, and has the ability to live with ambiguity, to identify risk and to manage it,” Henry said.
“The business is all about proper evaluation of risk, whether it’s technological, market or otherwise. We want to encourage innovation and not stifle it, but not in a totally uncontrolled way.”
Describing Shell’s approach, Henry said the company has a ten stage “gate process” to provide funding for innovative projects.
“At each stage gate you can say, this is going to be funded by Shell through to the next four stage gates, at which point we’ll take another decision. Or we put it into a joint venture and we keep an equity stake. So there are different routes to commercialisation,” he said.
Similarly, Coca-Cola has adopted its own stage gate process to control how an idea gets prioritised and funded,
“We want to see the whole project and we want to budget for it, but those funds are not given at one go up front. Each stage has budgets allocated to it, and targets and metrics. If you get to the first gate and if you’re on track, you pass through that gate and get the funding for the next phase. And if you get through to launch, we can spend many, many millions of dollars,” said Doug Bonthrone, director of global services strategy at The Coca-Cola Company.
UNQUOTE