Metrics … Are You Interpreting Them Correctly?
Metrics make my day! They are the foundation for many of the management decisions I make on a daily basis. Capturing the right metrics and properly interpreting them is my challenge. I used to think that the most fundamental metric was the “bottom line.” After all, a business needs to generate profit. The return on investment (ROI) tends to be the driving factor for implementing specific projects and ultimately the measure of their success. If the $$ return is good, then obviously it is a good project and a smart decision to implement it. Right? Well …
After reading numerous articles and publications on approaches for evaluating value, I am slowly altering my perspective.
In trying to understand a specific business approach, I generally relate it to a more familiar environment – my family. I have three daughters who loved volleyball. They not only played for their high schools, but also with the local club teams. Club volleyball can get very expensive (relatively speaking). So I took a business perspective and agreed to invest in developing their volleyball skills. Our thought was that if we invest now, they will probably end up getting scholarships and our return on this investment will be great! As it turned out, none of my daughters received a volleyball scholarship. If my measure was strictly the ROI, the absence of a scholarship would deem this investment a failure. However, they received so many intangible benefits! From a broader and more balanced view, this investment was a success and the “return” has been obvious to me in the life skills they learned, which helped make them successful in their careers.
Many executives are turning toward this “balanced scorecard approach” to determine the value of project management in their organizations. Certainly ROI plays a critical role, measuring how effectively assets are used to earn income. Financial measures alone, though, do not present a clear picture of total value. To truly evaluate effectiveness, financial measures must be supplemented with nonfinancial ones.
This is nothing new: When our research division looked at this issue back in 2000, we found that companies that stressed shareholders, customers, and employees outperform firms that did not. (Over an eleven-year period, the former increased revenues by an average of 682 percent versus 166 percent for the latter, expanded their workforces by 282 percent versus 36 percent, grew their stock prices by 901 percent versus 74 percent, and improved their net incomes by 756 percent versus 1 percent (in J. Kent Crawford and James S. Pennypacker, “The Value of Project Management: Why Every 21st Century Company Must Have an Effective Project Management Culture,” PMI Seminars & Symposium Proceedings, Project Management Institute, 2000).
A balanced family of measures for determining the value of project management might include:
- Financial Measures: economic value-added, return on capital employed, sales growth, productivity, cost savings, earnings per share.
- Customer Measures: customer satisfaction, customer retention, customer acquisition, customer profitability, market share, customer use.
- Project/Process Measures: cost performance, schedule performance, meeting technical specifications, quality, resource utilization, time-to-market, project completions, project risk
- Learning and Growth Measures: employee satisfaction, employee turnover, training time, employee productivity, employee motivation, employee empowerment, information system availability.
Effective metrics are leading indicators; they forecast future trends inside and outside the organization. They need to be inexpensive to collect, appropriate, comprehensive, quantifiable, and statistically reliable. If you can balance your scorecard with these measures, you will have the perfect measure to evaluate your project management effectiveness.
Throughout 2017, I will be teaching a course titled Measuring Project Management Performance for PMI’s Seminars World … check it out, if you want to set up a performance measurement program for your organization!
[Editor's Note: The Houston Seminars World course is posted here: subsequent courses will be offered at PMI's events in Orlando, New Orleans and San Francisco. See you there!]