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

Portfolio management – the next frontier?

Earlier this month I was speaking at the “Passion for Projects” conference in Sweden. I must say it was a really well organised event and I was delighted to have been invited to speak there. The topic I chose to talk about covered portfolios, project, projects, matrices and maturity. I’ll go into it more in some later blogs. I’ll assume you know a little about portfolio management. Just to recap, portfolio management is all about making sure you pick the right projects to do.  In “The Project Workout” i call them “business programmes” as at the time I wrote the book, the term “portfolio” hadn’t really settled down in the way it has now.  So, in portfolio management you have to make decisions on what to do and which meet the following criteria:

  1. It is aligned to your strategy
  2. You have the resources to undertake it and operate its outcome
  3. The risks are acceptable  (i.e. robust business case)
  4. The portfolo, as whole is still balance if you take this on
  5. The organisation can absorb the change.

So, the decision makers need to bbe able to make those decisions and have the data available to verify the criteria.

I was asked a question about this: “If a programme has been approved as part of a portfolio, has the programme sponsor the authority to authorise the project within the programme, or do they all have to be referred to the decision maker at portfolio level?”

My instincts were that if the programme as a whole has been approved, then the programme sponsor should be able to make the decisions . . . however it is not that simple. It all comes down to shared impact. For example, if the programme team has all their own “ring-fenced” resources, then they can make decisions relating to criteria 2. If they share resources with other programmes or components of the portfolio, then they can’t. Similarly, if they are the only ones impacting a “target user group” (change absorbtion) then they can verify criteria 5. If niot, then the decision has been elevated.

Further, the degree of to which there is knowledge of the programme, its resources and impacts at the time it was approved also matters. It may be that the first chunks of work are pretty weel known and as long as these stay in the bounds expected, decision making can be at programme level.

As you see, what appears to be a simple question is actually very complex. The more you ring-fence resources, the greater you can delegate decisions to programme sponsors but, you lose potential efficiencies for using those resources on other work. It’s a balance. Whatever you choose, remember:

  1. What ever you do must align with your strategy
  2. There is little point in authorising work that cannot be undertaken – in fact it is really damaging
  3. You need to ensure the risks of adding this to your work-stack are acceptable
  4. You nee to ensure your portfolio remains balanced, when you add the new work in
  5. There is little point in doing work, which the operational teams, customer etc cannot accommodate in terms of change.

You’ll find a lot more about this in The Project Workout, section 3. Many organisations are only just starting to “get it”; it’s all applied common sense.

 

Functional thinking destroys business value

In my blog, Enemies within, I highlighted 10 reasons why projects continue to

People get cross with each other and, often, it's not their fault.

People get cross with each other and, often, it’s not their fault.

fail, despite all the methods, standards and training we throw at our people.  basically business leaders get the project performance they deserve as most inhibitors are institutional. This is what I said:

Functional thinking – not taking the helicopter, the organisation-wide view. This often happens when executives’ or individuals’ bonuses are based on targets which are at odds with the organisation’s needs, e.g. sales bonus rewarded on revenue, regardless of profit or contribution.

Let’s look at another aspect of this – cost management.  Most organisations set their annual budgets, top-down, based on an expectation of revenue and costs. The costs then trickle down to cost centres and managers of departments of functional specialists, or other segments of the organisation They have a budget for the year to work within. Sounds familiar? On top of that we put time recording and ever more rigorous (onerous?) procurement systems – after all, we must be hard nosed business people and make sure we only spend what is needed. Finance people then monitor the costs and do all sorts of jiggery-pockery to deal with their fiscal needs, accruals, internal transfers, prudence concept etc.

All this budget setting is done for a financial year, 12 to 15 months in advance.

Actually, that approach can work well for steady state bureaucracies, where next year tends to look rather like last year. It is what most people are familiar with and yet, how many people, nowadays, work in such a predictable, steady state organisation?  What if you are in a fast-moving, unpredictable sector where you are not sure what will make up your order book and what mix of resources you will actually need? They also realise that they need to deal with cross-functional projects and so they “interlock” the demands of the projects with the cost centre budgets.

A budget set to  12 to 15 months in advance on this basis looks rather optimistic. So what happens is this:

  1. department managers spend their all budgets (so they don’t lose it next year) regardless of the overall business need – after all they are targeted on their cost spend.
  2. projects get starved of resources, as the mix of resources and costs change as work is won (if customer facing) or initiated (if for internal transformation). This can be despite the “project budget” having enough funds, as all too frequently the departmental budget takes precedence.
  3. project managers get cross with functional managers who unilaterally withdraw their resources, despite the project budget being adequate
  4. department managers get cross with project managers for not predicting exactly what they will need up to 12 to 15 months in advance.
  5. it becomes a blame game
  6. the company and customer suffer

Managers:

  • who exceed their budgets are told they are bad managers
  • who undershoot their budgets are told they are bad at forecasting
  • who hit their budgets are told the budget was probably not stretchy enough.

So how can you deal with this?  The first thing is to realise that the above scenario describes a matrix organisation, where resources are shared across many projects and business activities. If you have a matrix organisation, the controls of the simple bureaucracy (cost centres) are totally inadequate – you need to have a full, matrix infrastructure in terms of portfolio, programme and cost management and for resource planning and assignment:

  1. Manage the business across the organisation not down the cost centres
  2. Allocate budgets and funds to projects (or other cross-company entities) not to cost centres.
  3. Create governance which crosses, the organisation, taking power off the costs centre managers
  4. Only give cost centre managers funds for training, management, holidays, sickness etc.
  5. Have a rolling monthly forecast, spanning financial years (“interlock” resets half yearly or even quarterly of often not enough).
  6. Let any person work on any work, anywhere in the company.

Done right, you will have a flexible, self correcting organisation, which is simpler to run and focused on business value not discrete costs centres. You will have tipped the balance of power away from the “silo” cost centres towards managing business value across the organisation.

Want to know more?

See the Project Workout, 4th edition:

  • Chapters 14 and 15 on matrix governance
  • Chapter 16 on resourcing
  • Chapter 17 on matrix systems to make it work