A Project Manager's Book of Tools and Techniques PDF

A Project Manager’s Book of Tools and Techniques A Project Manager’s Book of Tools and Techniques A Companion to the PMBOK® Guide – Sixth Edition Cynthia Snyder Dionisio Cover image: Abstract Background: © strizh-/iStockphoto; Color Wind Rose: © LongQuattro/iStockphoto Cover design: Wiley This book is printed on acid-free paper. Copyright © 2018 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Cataloging-in-Publication Data: Names: Snyder, Cynthia, 1962- author. Title: A project manager’s book of tools and techniques : a companion to the PMBOK Guide / Cynthia Snyder. Description: Hoboken : Wiley, 2018. | Includes index. | Identifiers: LCCN 2017036476 (print) | LCCN 2017057182 (ebook) | ISBN 9781119424840 (epdf) | ISBN 9781119424857 (epub) | ISBN 9781119423966 (paperback) Subjects: LCSH: Project management. | BISAC: TECHNOLOGY & ENGINEERING / Industrial Engineering. Classification: LCC HD69.P75 (ebook) | LCC HD69.P75 S616 2018 (print) | DDC 658.4/04—dc23 LC record available at https://lccn.loc.gov/2017036476 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Contents Acknowledgments vii 2.16 Variance Analysis / 72 2.17 What-If Analysis / 74 Introduction ix Part 3 Data Representation 77 Part 1 Data Gathering 1 3.0 Data Representation 1.0 Data Gathering Techniques / 78 Techniques / 2 3.1 Cause-and-Effect 1.1 Benchmarking / 3 Diagram / 79 1.2 Brainstorming / 6 3.2 Control Charts / 82 1.3 Check Sheets / 8 3.3 Flowcharts / 87 1.4 Checklists / 10 3.4 Histograms / 90 1.5 Focus Groups / 12 3.5 Logical Data Model / 93 1.6 Statistical Sampling / 14 3.6 Mind Mapping / 96 Part 2 Data Analysis 17 3.7 Probability and Impact Matrix / 98 2.0 Data Analysis Techniques / 18 3.8 Resource Breakdown 2.1 Alternatives Analysis / 19 Structure / 101 2.2 Cost Benefit Analysis / 24 3.9 Responsibility Assignment 2.3 Cost of Quality / 27 Matrix / 103 2.4 Decision Tree / 31 3.10 Scatter Diagrams / 106 2.5 Earned Value Analysis / 36 3.11 Stakeholder Mapping / 108 2.6 Influence Diagrams / 41 Part 4 Estimating 111 2.7 Make-or-Buy Analysis / 44 4.0 Estimating Techniques / 112 2.8 Performance Index / 46 4.1 Analogous Estimating / 113 2.9 Regression Analysis / 48 4.2 Bottom-Up Estimating / 116 2.10 Reserve Analysis / 51 4.3 Estimate at Completion / 119 2.11 Root Cause Analysis / 55 4.4 Estimate to Complete / 123 2.12 Sensitivity Analysis / 58 4.5 Parametric Estimating / 126 2.13 Stakeholder Analysis / 63 4.6 To-Complete Performance 2.14 SWOT Analysis / 67 Index / 128 2.15 Technical Performance 4.7 Three-Point Estimating / 131 Analysis / 70 4.8 Variance at Completion / 134 vi Contents Part 5 Interpersonal and Team Skills 137 6.4 Inspection / 172 5.0 Interpersonal and Team 6.5 Leads and Lags / 174 Skills / 138 6.6 Precedence Diagramming 5.1 Conflict Management / 139 Method / 177 5.2 Decision Making / 145 6.7 Prompt Lists / 181 5.3 Nominal Group 6.8 Prototypes / 184 Technique / 151 6.9 Resource Optimization / 186 5.4 Problem Solving / 153 6.10 Rolling-Wave Planning / 189 Part 6 Other Techniques 157 6.11 Schedule Compression / 192 6.0 Other Techniques / 158 Appendix: Case Study Scenarios 197 6.1 Context Diagram / 159 Index203 6.2 Critical Path Method / 161 6.3 Funding Limit Reconciliation / 170 Acknowledgments It was a wonderful experience working on this book. I have worked in project management a long time and there are still tools and techniques I needed to research. It is so great to always have new things to learn! I was fortunate to have Richard Avery as my technical editor. His input helped make this book more approachable. His technical and interpersonal skills are among the best. Richard, I appreciate your feedback and more importantly, your friendship. My passion for project management was only heightened by working with my team members on the PMBOK® Guide – Sixth Edition. My vice chair, David Hillson, helped me with many of the quantitative risk techniques in this book. I have brought my perspective to them, so for any risk gurus out there, any errors are on me, not David. Larkland Brown and Guy Schleffer helped me with the Agile forms. They are masters at working in both the traditional and Agile worlds. Lovely Lynda Bourne is the go-to person for anything hav- ing to do with Stakeholder Engagement. I always appreciate her generous input and support. Mercedes, Alejandro, Pan, Gwen, Mike, Kristin, and Roberta—your voices are always in the back of my mind when I write. Thank you for a wonderful experience in developing the Sixth Edition. I so appreciate the support, friendship, and love from my husband, Dexter Dionisio. You make every day a joy. The wonderful folks at Wiley are always a delight to work with. I feel so fortunate to have Margaret Cummins as an editor and a friend. Kalli Schultea, Lauren Freestone, Lauren Olesky, and Kerstin Nasdeo are wonderfully supportive. I am grateful for all you do. I appreciate Donn Greenburg, Barbara Walsh, Amy Goretzky, and Roberta Storer for the work you all do to support this book and the other publications we work on together. Thank you to all who purchase this book. I hope it brings clarity and understanding to the multiple tools and techniques we use to manage projects. May all your projects have a CPI of 1.0! Introduction Audience This book is written for practicing project managers, project management students, and for those studying for the Project Management Professional certification (PMP®). The book is meant to help clarify and explain some of the more common techniques we employ in project management. It also describes some of the more specialized techniques that are not used as often, but that can be very useful in certain situations. If you are a practicing project manager you may find it useful to read up on specific techniques to get a deeper understanding of how to apply them. You may want to find out more about a whole category of techniques, such as data representation or estimating. If you are a student of project management you can use this book to help you understand tech- niques presented in class and how to apply them. Professionals studying for the PMP will benefit by gaining an in-depth understanding of many of the techniques you will find on the exam. What’s in This Book There are more than 125 tools and techniques mentioned in the PMBOK® Guide – Sixth Edition. Many of them are in one of these six groups: Data gathering Data analysis Data representation Communication skills Decision-making skills Interpersonal and team skills This book uses some of the same categories, but not all. This book also adds a group of tech- niques we call Estimating. Techniques that are not in any category are put into a section called “Other.” You will see the following categories in this book: Data gathering Data analysis Data representation Estimating Interpersonal and team skills Other techniques x Introduction You will not see all the 125+ techniques that are in the Guide to the Project Management Body of Knowledge (PMBOK® Guide) described in this book. Some of the techniques are just too vague to describe, such as expert judgment, quality improvement methods, or meetings. Some tech- niques are so descriptive that you don’t really need anyone to explain them, such as ground rules, financing, or feedback. Some techniques are not included because they are general management techniques, for which volumes have already been written, for example, leadership, negotiation, and team building. What you will find in this book is a description of 57 techniques that are used in managing projects. Some of them are used on almost every project, such as analogous estimating and rolling-wave planning. Others are more specialized, such as what-if analysis and the to-complete performance index. The techniques in this book are focused on predictive life cycles; in other words, we did not include Agile or adaptive techniques. This decision was made based on survey- ing potential users who rated the Agile techniques as low value, because Agile techniques are best described in a book that is dedicated to the topic of Agile. Structure Each section starts out with an introduction. The techniques are then presented in alphabetical order. They are not shown in the order you would build on to learn about them. For example, to learn about scheduling you would probably read in this sequence: 1. Precedence diagramming method (Section 6.6) 2. Leads and lags (Section 6.5) 3. Some, or all, of the duration estimating methods (Sections 4.1, 4.2, 4.5, and 4.7) 4. Critical path method (Section 6.2) 5. Resource optimization (Section 6.9) 6. Schedule compression (Section 6.11) However, we needed to have a consistent way to present information, and alphabetically seemed like the best option, given the different people who will buy this book. Each technique starts with a description of what it is. Following this are step-by-step instruc- tions on how to use the technique. After the instructions you will see an example of how it can be used. There is some additional information, and then a listing of where you will see the technique used in the PMBOK® Guide. The examples are all based around one of eight scenarios. There is an appendix in the back of the book that provides a brief overview of each scenario. The scenarios are: Constructing a childcare center Meeting company growth needs Developing an exam preparation video Developing an intranet website Improving the process for an IT Help Desk Putting in a new backyard Expanding a PMO information system Constructing a community medical center Introduction xi Some of the scenarios reference previous techniques, especially those that explain earned value techniques. You don’t have to read them in order, but if you are new to the technique, the previous sections are useful to help you understand the background information. Every technique presented in this book can and should be tailored to your specific project, in your specific environment, and your specific organization. No two projects are alike. Use your expe- rience to help you tailor the approach and the techniques to meet your needs. For Lecture Slides of the Tools and Techniques, go to http://www.wiley.com/go/pmtools. Good luck and may all your variances be positive! Part 1 Data Gathering 1.0 Data Gathering Techniques Data gathering is often the first technique we employ in a process. Before we can transform pro- cess inputs into outputs we often need to gather additional information. In this context, an input is any document, information, or other item that is needed to conduct a process. An output is any document, information, product, or other item that is the result of a process. Some of the data gathering techniques entail collecting data from individuals or groups, such as focus groups and brainstorming. Some techniques entail collecting information by using tools such as checklists and check sheets. Benchmarking and statistical sampling collect data from proce- dures that have been performed many, many times by multiple people or even machines. The techniques described in this section include: Benchmarking Brainstorming Check sheets Checklists Focus groups Statistical sampling There are other data gathering techniques that are not described in this book because they are either not project specific, or they are in common use. For example, interviewing people, reviewing lessons learned and information from previous projects, and developing questionnaires and surveys are common techniques that are not applied in projects any differently than they would be in any other field. They are common enough that they don’t require further explanation or examples to clarify how they are employed. As with all techniques, you can use multiple methods to gather data. Use the methods that are easiest to gather the most complete and accurate information you need for your project. 1.1 Benchmarking What It Is Benchmarking is gathering data on the best in class, best in industry, or best in organization practices, processes, and products. The information is used as a target to improve processes, products, and results. Benchmarking is most often used in projects to collect requirements, establish quality metrics, establish cost and schedule targets, and establish stakeholder (especially customer) satisfaction targets. How to Use It Use the steps below as a guideline. Tailor the steps as necessary to work within your environment. 1. Identify the process or metric that you want to improve. If you are developing a new product or improving an existing one, identify the aspect of the product you are gathering data about. 2. If you are using benchmarks for improving performance, take a baseline measurement of your current performance. 3. Identify areas in your own company, leaders in the industry, or leaders in other industries with similar processes. These are your “targets” to measure against. You may need to talk with industry peers, consultants, vendors, associations, or other resources to help you discover the industry leaders (targets). 4. Depending on who and where your target is, and what you are benchmarking, you may be able to easily identify the best practices, such as when you are using a target that is internal to your organization. If the target is external, or even a competitor, you may need to gather business intelligence, work with a consultant, or find some other way to determine how they achieve their performance. This is where the data gathering aspect of benchmarking stops. If you are working on a process improvement project that is built around achieving the benchmarks, you would develop a plan to implement a process that would help you reach the benchmark. If you are using the information for collecting requirements, the benchmark will provide information that will be prioritized along with other requirements. Throughout the project, you can track how you are doing against the benchmark, especially if it is an easily measurable metric, such as cost per unit, time to produce, or quality defects. 4 1.1 Benchmarking Scenario: Your project is to help improve customer satisfaction with the phone support from the IT Help Desk. You start your project by looking at the data from the satisfaction survey. You notice that the IT area with the lowest scores is the Help Desk, specifically anything to do with calling the Help Desk. Employee Satisfaction Survey Please rate your degree of satisfaction on a scale of 1 to 5. 1 = very dissatisfied and 5 = very satisfied. Information Technology Help Desk 5 4 3 2 1 How satisfied are you with the quality of service from the Help Desk? 0.15 0.3 0.4 0.1 0.05 How satisfied were you with the hold time when you called the Help Desk? 0.05 0.1 0.3 0.4 0.15 How satisfied were you with the ability of the person to resolve your issue? 0.62 0.2 0.1 0.08 0 How satisfied were you with the timeliness of the issue resolution? 0.5 0.25 0.15 0.1 0 Do you feel the person on the phone understood your issue? 0.65 0.2 0.1 0.05 0 Did the person on the phone listen to you? 0.45 0.25 0.15 0.1 0.05 Could you understand what the person was saying? 0.55 0.2 0.2 0.05 0 If you left a message, was the return call timely? 0.25 0.25 0.35 0.1 0.05 Security Hotline 5 4 3 2 1 How satisfied are you with the quality of service from the hotline? 0.82 0.15 0.03 0 0 How satisfied were you with the hold time when you called the hotline? 0.75 0.15 0.1 How satisfied were you with the ability of the person to resolve your issue? 0.8 0.15 0.05 0 0 How satisfied were you with the timeliness of the issue resolution? 0.87 0.1 0.03 0 0 1.1 Benchmarking 5 Do you feel the person on the phone understood your issue? 0.8 0.1 0.1 0 0 Did the person on the phone listen to you? 0.85 0.05 0.05 0.05 Could you understand what the person was saying? 0.8 0.1 0.1 0 0 If you left a message, was the return call timely? 0.9 0.05 0.05 0 0 The satisfaction data shows only 62 percent of the people rate their experience in calling the Help Desk as a 4 or 5 on a scale of 1 to 5. You notice the security department has the highest satisfaction: 93 percent rate their experience as a 4 or 5 when calling the security hotline. You decide to use the security hotline as the benchmark for helping to improve the IT Help Desk practices. Additional Information This technique is often used with focus groups (Section 1.5), market research, academic research, surveys, and questionnaires. PMBOK® Guide – Sixth Edition References 5.2 Collect Requirements 8.1 Plan Quality Management 13.2 Plan Stakeholder Management 1.2 Brainstorming What It Is Brainstorming is used as a technique for generating ideas and options and solving problems. It is generally a group activity that has a facilitator to manage the process. Brainstorming focuses on generating quantity, with the assumption that having a good quantity of ideas will lead to having a good-quality outcome. In the brainstorming session there is no criticism, all ideas are equal, and all are welcome, including those that seem like they are wild ideas. Various techniques can then be used to evaluate ideas gathered in order to help identify viable alternatives. Often during the pro- cess ideas will build on each other and the synergy of the group will produce better results than one person, alone, could come up with. How to Use It Use the steps below as a guideline. Tailor the steps as necessary to work within your environment or to work with the brainstorming variation you choose. 1. Identify the problem, goal, or outcome for the brainstorming session. 2. All members of the group state their ideas. 3. Record all ideas. If time allows, the ideas can be elaborated, analyzed, or prioritized. Scenario: You are managing a project to develop a new company intranet site. As the project manager you want to get some ideas for content, design, and requirements. You bring in people from various departments to help brainstorm some ideas that you will later prioritize and send out for the rest of the organization to comment on. You decide to use some variations on the traditional brainstorming technique by using a group passing technique, some electronic brainstorming, and individual brainstorming. Group passing technique. To gather high-level requirements, you give each person a cat- egory of requirements to work on. You ask each person to write down his or her requirements 1.2 Brainstorming 7 and then pass it to the next person, who adds his or her requirements. This continues until everyone has commented on each category. Individual brainstorming. Rather than being done in a group, individual brainstorm- ing is done as an individual. This can take the form of free-writing, free-speaking, or drawing a mind map (Section 3.6). You ask your brainstorming group to come up with some ideas for the design and graphical user interface (GUI) for the website. You tell them they can use free- writing, picture creation, mind mapping, or any other form of communication for their ideas. Electronic brainstorming. In this brainstorming technique you ask the group to contrib- ute in an online environment. You post the content topic in an online bulletin board or chat room and people respond. Electronic brainstorming can permit a large number of ideas to be gathered very quickly because there is no turn-taking. People can respond as soon as they see other ideas, and the energy can build on itself. Electronic brainstorming has been found to generate more ideas and be of greater quality than in-person brainstorming. However, it requires a moderator to ensure anonymity does not lead to disrespectful interactions. Electronic brainstorming can also take place over a longer period of time, allowing for more reflection. You choose how long to allow the bulletin board to be posted, allowing people to log in and contribute as they are able. Additional Information Brainstorming can be used with focus groups (Section 1.5). Combining brainstorming with the nominal group technique (Section 5.3) allows the ideas to be prioritized for further elaboration or to reach a decision. PMBOK® Guide – Sixth Edition References 4.1 Develop Project Charter 4.2 Develop Project Management Plan 5.2 Collect Requirements 8.1 Plan Quality Management 11.2 Identify Risks 13.1 Identify Stakeholders 1.3 Check Sheets What It Is A check sheet is a tally sheet that is used to collect data. It can be used to collect data about defects or to keep track of completing steps in a process. How to Use It Use the steps below as a guideline. Tailor the steps as necessary to work within your environment. 1. Identify the types of defects (or other variables) you are looking to tally and enter these in Column 1 of a spreadsheet. You would start this in cell A2 and continue with A3, A4, and so on. 2. The top row can indicate either frequency (enter “Frequency” in cell B1) or, if you are tracking locations or days of the week, hours of the day, or some other variable, enter each of these in the top row starting with cell B2. Follow with B3, B4, and so on. 3. Observe the process, outputs, or deliverables. 4. Indicate the source of the defect and put a mark in the appropriate cell. 5. Tally the rows and columns. Scenario: Your project is to help improve customer satisfaction with the phone support from the IT Help Desk. To understand the reason behind the IT Help Desk complaints you create a check sheet to tally the number of complaints, by reason and by department. The number of complaints by reason are totaled, as are the number of complaints by department. IT Help Security Legal Maintenance Desk Hotline Info Line Trouble Line Total Call was dropped IIIIIII I III 0 11 Tech did not listen to me IIII 0 IIIII II 11 1.3 Check Sheets 9 IT Help Security Legal Maintenance Desk Hotline Info Line Trouble Line Total On hold too long IIIIIIIIIIIIIIIIIIIIII III IIIIII IIIIIIII 39 Couldn’t understand IIIIII II IIII III 15 technician Could not help with my issue IIIIIIIIII III IIIIIIII III 24 Did not return my call in a IIIIIIIIIIIII 0 II IIIII 20 timely manner Total 62 9 28 21 120 Additional Information Check sheets can be used to show the distribution of defects, and can then be arranged in a his- togram (Section 3.4) or Pareto chart showing the frequency of defects by cause, location, or other variable. PMBOK® Guide – Sixth Edition References 8.3 Control Quality 1.4 Checklists What It Is A checklist is a list of activities, steps, or procedures that need to be done. It is often used as a reminder. How to Use It In projects, checklists are used to reduce or eliminate risks or defects. They contain a series of steps that must be taken, or processes that must be completed. Scenario: You are managing a project to develop a new company intranet site. This example shows some of the items that must be completed in updating an intranet website. This is only an example; all checklists should be tailored to your specific environment. Collect stakeholder requirements Map inbound links Create new content as necessary Upload content to new site Develop tags and metadata Check all links Create XML/HTML sitemaps Test speed Check for mobile access User acceptance testing 1.4 Checklists 11 Additional Information A few of the downfalls associated with using checklists are: People can rely on the checklist and fail to look outside the items on the checklist for other risks or causes of failure. Use the checklist as a starting place, not an ending place. Over-reliance on checklists can replace common sense or critical thinking. A checklist can act as a prompt, but should not take the place of looking at a situation and taking appropriate actions. Therefore, checklists should only be used as a starting point in many project situations. Team members should continue to identify sources of risks and defects. PMBOK® Guide – Sixth Edition References 4.2 Develop Project Management Plan 8.2 Manage Quality 8.3 Control Quality 11.2 Identify Risks 1.5 Focus Groups What It Is A focus group is a group of prequalified people who are brought together to provide information about a product, service, or result. A professional moderator uses a question guide to focus the direction of the questions. The moderator also observes behaviors and nonverbal cues and records them in her observations. How to Use It Focus groups are most commonly used for new product or new service development. They may be part of a market research campaign to gather requirements or to provide insight into customer opinions, expectations, desired benefits, underlying assumptions, common views, and so forth. 1. Establish your goals or desired outcomes for the focus group. 2. Develop a discussion guide that provides a focus for the group, but also allows some open conversations that are not driven by the moderator. 3. Find a qualified moderator. You may want to hire a professional moderator to lead the group. Your moderator should have at least these qualifications: a. The ability to be friendly, nonjudgmental, flexible, and open. He or she needs to stay on topic, ask open-ended questions, and manage the conversation so it is productive and not combative. b. He or she should have some understanding of the new product or service, but not have a vested interest in the outcomes. 4. Determine how to record the session, either with video, audio, or a note-taker. 5. Set up the meeting logistics such as time, location, date, and duration. 6. Identify and invite the participants. Ideally you want a cross section of potential end users and customers. 7. At the opening of the meeting: a. Thank participants for attending. b. Review the purpose of the meeting. c. Review the flow of the meeting, guidelines, ground rules for participation, and so forth. 1.5 Focus Groups 13 8. During the meeting: a. Ask open-ended questions to start a topic; use closed-ended questions to gain clarity. b. Make sure everyone is participating. You may need to call on some people to get their feedback. c. Summarize information, rephrase questions if necessary, employ active listening, and ask for comments about responses. d. Ask if there are any other comments or thoughts before moving on, and before wrapping up the meeting. e. Thank the participants for coming. 9. Assess the data and look for patterns, themes, unexpected outcomes, and new questions that may have arisen. Scenario: You are the project manager for a project to implement a childcare facility for your organization’s employees. The Project Charter has been developed. You are meeting with 12 parents at your organization who currently use childcare facilities. They work in different departments, have children from three months old to four years old, and hold a variety of jobs. You want to use the focus group to understand the expectations and attitudes about the curriculum, play time activities, and food. You decide to be the note-taker and you have asked Roberta, the Director of Human Resources, to facilitate the session. Roberta doesn’t have a personal relationship with any of the participants and she is skilled in listening, drawing people out, and creating a nonjudgmental environment. You set up the meeting for lunch time two weeks in the future. You will provide pizza and soda for the participants. Roberta opens the meeting with general questions about what people are looking for in a childcare facility. From there she asks questions about the ratio of skill devel- opment versus playtime, the types of indoor and outdoor play time equipment the parents would like to see, and their thoughts on snacks and lunches. As the meeting closes the parents are excited about the new childcare center and make themselves available for any future questions. The information you gained will help you put together an RFP for playground equipment and food vendors. You will provide the information on the curriculum and skill development to the director of the childcare center to help him develop the roadmap for learning. Additional Information Some focus groups offer incentives, including cash for participation. Focus groups generally provide broad qualitative information. The interactions and body lan- guage provide a deeper understanding of people’s opinions than questionnaires. The qualitative information can then be analyzed and can be followed up with questionnaires and surveys to get quantitative data by asking ranking questions or closed-ended questions. PMBOK® Guide – Sixth Edition References 4.1 Develop Project Charter 4.2 Develop Project Management Plan 5.2 Collect Requirements 1.6 Statistical Sampling What It Is Statistical sampling is selecting a subset of a population to estimate characteristics and information about the whole population. Selecting a subset is a more time- and cost-efficient way to reach conclu- sions about a group instead of asking each member of the group, or testing every physical component. How to Use It Statistical sampling can be used to infer behavior of a group of people, or to infer the quality of a set of deliverables or components. 1. Identify the population of interest. 2. Identify the variables you want to measure. 3. Select the sample size and method for selecting the sample population. 4. Implement the sampling plan. 5. Measure the variables from the sample. The most effective ways to select your sample are to choose a random sample, or a systematic sample (such as every 15th person). Scenario: You have been asked to meet the physical growth needs of Top Dog Project Services. One of the options you are reviewing to meet the growth needs of all the offices is to develop a work-from-home program. Before establishing the requirements and policies for the program you want to get an idea of how many people work from home after hours or on weekends. You also want to see, on average, how many hours people are active on their computer during the workday. You think it would be useful to have this information broken out by department. First you identify the locations that have employees that will be eligible to work from home. You identify four locations that have employees who would be eligible for the program. You determine that the total number of employees who would be eligible to work from home is 1.6 Statistical Sampling 15 250 people. That is your population of interest. You decide that you need at least three people from each department as a minimum. For departments with more than 30 people, you decide to identify one person for every ten people in the department. You meet with the Corporate Director of Information Services and tell him your sampling parameters. He agrees that these are reasonable measures and confirms that he can provide the information anonymously so that no one’s personal work habits are identifiable. He runs the sample for four weeks to get an idea of activity over time. Additional Information When you are selecting your sample, try to ensure you don’t have over-coverage or under-coverage of a particular trait or bias in your sample. There is a wide body of information on selecting sample sizes for statistical sampling. For the most part, in project management we don’t have to be extremely precise. We mostly use the infor- mation to give us a general idea of a population’s characteristics. For projects that require Six Sigma–type measurements, you will need to be a lot more precise in selecting the sample and defining the variables you want to measure. PMBOK® Guide – Sixth Edition References 8.3 Control Quality Part 2 Data analysis 2.0 Data Analysis Techniques Data analysis techniques are used to assess and evaluate data in order to discover or gain deeper information about a topic. They can also be used to support decision-making. We use many differ- ent methods of data analysis in project management. Some of them are very broad, such as alter- natives analysis and decision trees. Others are specific to a particular knowledge area, such as a stakeholder analysis or a make-or-buy analysis. The techniques described in this section include: Alternatives analysis Cost benefit analysis Cost of quality Decision tree analysis Earned value analysis Influence diagrams Make-or-buy analysis Performance indexes Regression analysis Reserve analysis Root cause analysis Sensitivity analysis Stakeholder analysis SWOT analysis Technical performance analysis Variance analysis What-if analysis The techniques in this group can be some of the most challenging to master. Some of them can be quite complex, such as a sensitivity analysis or earned value analysis. Understanding what project data is telling you is critical to making good decisions. Therefore, the effort you put into data analysis can have a significant impact on the success of your project. This book does not describe data analysis techniques that are very general and easy to under- stand, such as document analysis or assumption and constraint analysis. It also does not cover techniques that require specialized knowledge or software, such as simulations (Monte Carlo analysis). The type of project you are working on, the availability of quality data, and in some cases specific software, will influence the data analysis techniques you can use on your project. 2.1 Alternatives Analysis What It Is Alternatives analysis is a technique used to evaluate and select options or approaches to execute and perform project work. An alternatives analysis can be used at a high level; or you can apply a more rigorous approach that incorporates a matrix that identifies rating criteria and weighting factors. This technique can be used in several processes and in a wide range of industries. How to Use It The steps below describe how to conduct an alternatives analysis using a matrix to weight evalu- ation criteria. Use the steps below as a guideline. Tailor the steps as necessary to work within your environment. For example, you can apply this technique without weighting the evaluation criteria, in which case you would omit Step 3.2. 1. Identify the problem or decision you are evaluating. For more information about decision- making, refer to Section 5.2. For more information about problem solving, refer to Section 5.4. 2. Define Solution Requirements. Often the Solution Requirements can be extracted from Requirements documentation, the Statement of Work, the Scope Statement, or other project documents. For information technology (IT) projects, “Use Cases” can also be used to identify the Solution Requirements. 3. Define Evaluation Criteria and Weightings. The relevant stakeholders should provide input on the criteria they need in a solution or outcome. They should also provide weight values for each criterion. The project manager or business analyst often facilitates this process. The following steps are used to define and weight the selection criteria. 3.1. Identify the selection criteria. 3.2. Develop a “weighted value” for each criterion. It is a best practice for all weights to add up to 100 percent, but this is not mandatory. 3.3. Define the scoring algorithms to determine how effectively each alternative meets the selection criteria. For example, if low cost of ownership is a selection criterion, define how you would rate alternatives on this criterion on a scale of 1 to 5, with 1 being the highest cost option and 5 being the lowest cost option. 3.4. Create a Scoring Matrix with a space for alternatives on one axis and the criteria and weighting on the other axis. 20 2.1 Alternatives Analysis 4. Identify Options and Conduct Market Research. To conduct market research, you can send out a Request for Information (RFI), hold meetings with vendors, perform Internet research, or talk with consultants. 5. Conduct Initial Assessment, Score and Evaluate, and Eliminate Options. The initial assess- ment can be used to narrow the field to the final one or two options, or it may provide you with the best solution, in which case you skip the next step. 6. Conduct a Cost Benefit Analysis with Risk Adjusted Costs to Eliminate More Options. This step is used to evaluate the highest scoring options considering the various risks that each option contains. Depending on the size of the investment, it may be appropriate to conduct an extensive risk analysis on the potential solutions before finalizing a recommendation. 7. Recommend Solution. The solution that scores the highest using the selection criteria and weighting, and has an acceptable risk profile, is presented to the stakeholder who has the authority to make the final decision. Sometimes this is the project manager, sometimes it is the sponsor or customer. The backup documentation and a summary of the process should be included with the recommendation. The following examples demonstrate a relatively simple use of alternatives analysis, followed by a more rigorous example that incorporates weighted criteria to analyze the options. Evaluating Time, Cost, and Resource Constraints Scenario: You are managing a project to develop a new company intranet site. You are analyzing whether to use in-house resources or outsource for higher-skilled resources that cost more per hour, and can accomplish the work faster. The relative importance of the schedule constraints, cost constraints, and resource availability are the solution requirements. Option 1 assumes you have a team member with adequate skills who can accomplish a task in 80 hours. Her hourly rate is $45. Option 2 assumes you can outsource the work and use a highly skilled resource that will only need 65 hours to accomplish the work. The higher-skilled resource has an hourly rate of $60. By multiplying the rate times the duration you determine the cost of the in-house resource is $3,600. The cost of the outsourced, higher-skilled resource is $3,900. If your solution requirements state that low cost is a higher priority than the schedule, or if you prefer to keep the work in-house, you should go with Option 1. If time is of the essence and you have room in the budget, you should go with Option 2. Selecting a Cafeteria Management Service Scenario: You are the project manager for a project to implement a childcare facility for your organization’s employees. This example focuses on selecting a vendor to provide the food service for the Childcare Center cafeteria. Weighted solution (evaluation) criteria are used to evaluate vendors against a set of requirements for the cafeteria services. 2.1 Alternatives Analysis 21 1. Define Solution Requirements. In this example, the requirements are: The service provider should have food options, with a preference toward fresh fruits and vegetables that are locally sourced. A reliable vendor, as determined by references. Pricing that is consistent with the market. Should be able to provide a healthy lunch for less than $5. 2. Define Evaluation Criteria and Weightings. The selection criteria and weights are as follows: Healthy food options: 50 percent Locally sourced where possible: 15 percent Good customer feedback: 25 percent Competitive pricing: 10 percent The scoring algorithms are: Healthy Food 5 = 75% of the menu includes fruits, vegetables, grains, legumes, and lean meat. 25% or less is frozen or processed. 4 = 66–74% of the menu includes fruits, vegetables, grains, legumes, and lean meat. 33% or less is frozen or processed. 3 = 50–65% of the menu includes fruits, vegetables, grains, legumes, and lean meat. 50% is frozen or processed. 2 = Most of the menu incorporates fried, frozen, or processed foods. 1 = Limited fresh options. Almost all food is fried, frozen, or processed. Locally Sourced 5 = More than 75% is locally sourced within 100 miles. 4 = 66–74% is locally sourced within 100 miles. 3 = 50–65% is locally sourced within 100 miles. 2 = Most of the food is transported from greater than 100 miles. 1 = Almost all the food is transported from greater than 100 miles. Good Customer 5 = 5 out of 5 references report they are happy with the vendor and would contract Feedback with them again. 4 = 4 out of 5 references report they are happy with the vendor and would contract with them again. 3 = 3 out of 5 references report they are happy with the vendor and would contract with them again. 2 = 2 out of 5 references report they are happy with the vendor and would contract with them again. 1 = 1 out of 5 references reports he is happy with the vendor and would contract with them again. Price Lowest average price Within 5% of lowest average price Within 10% of lowest average price Within 15% of lowest average price Greater than 15% higher than lowest average price (continued) 22 2.1 Alternatives Analysis (continued) Create a Scoring Matrix Vendor Criterion Weight Rating Score Rating Score Rating Score Healthy.50 Locally Sourced.15 Customer Feedback.25 Price.10 Total 1.0 3. Identify Options and Conduct Market Research. For this project you survey local busi- nesses that provide onsite cafeterias. You find some national brands and some local vendors. 4. Conduct Initial Assessment, Score and Evaluate, and Eliminate Options. There are three vendors that respond to your request for proposal. You evaluate the proposals and score them based on the criteria and scoring algorithm. Vendor National Foods Corp Jodi’s Kitchen Organic Options Criterion Weight Rating Score Rating Score Rating Score Healthy.50 2 1 3 1.5 4 2 Locally Sourced.15 3.45 5.75 4.60 Customer Feedback.25 4 1 3.75 3.75 Price.10 5.5 4.40 3.30 Total 1.0 2.95 3.40 3.65 5. Conduct Cost Benefit Analysis with Risk Adjusted Costs and Eliminate Options. Assume for this example that Organic Options had the highest score. You have learned that they have recently undergone a change in management. The previous management was not very responsive to customer requests. It appears that in the last four months with the new management, there has been a much higher satisfaction rating. This risk is evident by the fact that they only scored 3 for the customer feedback criteria. You decide that you can address this risk by developing a Service Level Agreement as part of the contract and that you can build in an exit strategy after six months if you are not satisfied with the customer service. 6. Recommend Solution. In this example, the scoring sheets and the recommendation for including the Service Level Agreement and the exit clause in the contract would be given to the decision maker. Additional Information Some organizations refer to the high-level identification of options as an alternatives analysis and the scoring and ranking as multi-criteria decision analysis. Alternatives analysis can be used at the start of the project to determine the best approach, during the project to assist in selecting a vendor, in quality management to identify options to respond to quality issues, and in risk manage- ment to determine an acceptable risk response. 2.1 Alternatives Analysis 23 PMBOK® Guide – Sixth Edition References 4.5 Monitor and Control Project Work 4.6 Perform Integrated Change Control 5.1 Plan Scope Management 5.3 Define Scope 6.1 Plan Schedule Management 6.4 Estimate Durations 7.1 Plan Cost Management 7.2 Estimate Costs 8.2 Manage Quality 9.2 Estimate Resources 9.6 Control Resources 11.4 Perform Quantitative Risk Analysis 13.4 Monitor Stakeholder Engagement 2.2 Cost Benefit Analysis What It Is A cost benefit analysis (CBA) is used to assess options that provide the best approach to achieving benefits while minimizing costs. It can be used to assess the viability of a project and to rank vari- ous approaches or alternatives for meeting project objectives. When looking from a short-range financial perspective, actual costs and benefits are assessed. When looking from the long-term perspective, the time value of money is taken into consideration. This is accomplished by converting future payouts and expenditures into the present value. Some projects take into consideration the life cycle cost of the product; others focus on the project costs. When assessing whether to do a project, such as when preparing a business case, the pres- ent value costs are subtracted from the present value benefits. The sum of benefits less the costs is called the net present value (NPV). If the NPV is positive, the project is expected to return a profit. The higher the NPV, the more profitable the project. When assessing various approaches to a project, or responses to a risk, you can rank the pref- erence of options by putting those with the highest NPV first. How to Use It Use the steps below as a guideline. Tailor the steps as necessary to work within your environment. 1. List the options you are evaluating. 2. Document the costs for each year, for each option. 3. Document the benefits (translated into currency) for each year, for each option. 4. Apply a discount rate (the expected cost of money) for each year. 5. Calculate the net present value by subtracting the costs from the benefits. 2.2 Cost Benefit Analysis 25 Scenario: Your organization is updating its current PMO information system infrastructure with all new software, cloud computing, collaboration sites, and real-time reporting software. The Director of Marketing wants to compare the benefits of the PMO information system with developing a new line of business by creating an online project management training curriculum. For the PMO information system the initial investment is $750,000 and $45,000 per year to maintain. The benefits would not be available until the second year. The enhanced infrastructure is expected to generate revenue, as shown in the table, for Years 2 through 5 before needing to be replaced. The online project management training investment is $325,000 in Year 1 and $35,000 in Years 2 through 5 to maintain. You expect to have $1,500,000 in sales the first year and $3,500,000 in Years 2 through 5. The table below shows the information presented above. PMO Upgrade Virtual Training Year Benefits Costs NPV Benefits Costs NPV 1 — 750,000 1,500,000 325,000 2 2,500,000 45,000 3,500,000 35,000 3 5,250,000 45,000 3,500,000 35,000 4 6,000,000 45,000 3,500,000 35,000 5 6,000,000 45,000 3,500,000 35,000 Total Total The discount rate is 5 percent. The table below shows the net present value, for Years 1 and 2, with the discount of 5 percent applied starting in Year 2. PMO Upgrade Virtual Training Year Benefits Costs NPV Benefits Costs NPV 1 — 750,000 (750,000) 1,500,000 325,000 1,175,000 2 2,500,000 45,000 2,338,095 3,500,000 35,000 3,300,000 3 5,250,000 45,000 3,500,000 35,000 4 6,000,000 45,000 3,500,000 35,000 5 6,000,000 45,000 3,500,000 35,000 Total Total Year 1 does not apply the discount rate, since all rates are based on current year informa- tion. Thus, the NPV for Year 1 is the benefits minus the costs. Year 2 calculates the benefits minus the costs and then divides that total by 1.05 to account for the 5 percent discount rate. Year 3 will take the benefits minus the costs and divide by 1.052. The following year, the divi- sor will be 1.053. The final year, the divisor will be 1.054. The completed table is shown below. (continued) 26 2.2 Cost Benefit Analysis (continued) PMO Upgrade Virtual Training Year Benefits Costs NPV Benefits Costs NPV 1 — 750,000 (750,000) 1,500,000 325,000 1,175,000 2 2,500,000 45,000 2,338,095 3,500,000 35,000 3,300,000 3 5,250,000 45,000 4,721,088 3,500,000 35,000 3,142,857 4 6,000,000 45,000 5,144,153 3,500,000 35,000 2,993,197 5 6,000,000 45,000 4,899,193 3,500,000 35,000 2,850,664 Total 16,352,530 Total 13,461,718 Given this information, the investment in the PMO upgrade is a better option because it has a higher net present value. Additional Information This technique is also known as a benefit cost analysis. You may see it used with a cost of qual- ity analysis (Section 2.3) or a make-or-buy analysis (Section 2.7). Sometimes a sensitivity analysis (2.12) is conducted on the option selected to see if it is stable, or subject to changes in variables. Some of the pitfalls to be aware of when conducting a cost benefit analysis include: Using estimates from outdated projects, or projects that are not similar, will lead to faulty estimates. Subjectivity or bias in cost or benefit estimates can make the estimates unreliable. Confirmation bias (looking for reasons to go forward with a project) can lead to more favorable estimates than are realistic. Exclusion of significant upfront or maintenance costs can misrepresent the outcomes. Be aware that the cost benefit analysis only looks at the financial impact of options. It does not take into account the intangible benefits and costs such as goodwill, morale, reduced turnover, social benefits, and so forth. Thus, the CBA is one technique to consider, but it is not the only method to assess the viability of a project or an approach. PMBOK® Guide – Sixth Edition References 4.5 Monitor and Control Project Work 4.6 Perform Integrated Change Control 8.1 Plan Quality Management 9.6 Control Resources 11.5 Plan Risk Responses 2.3 Cost of Quality What It Is Cost of quality analysis is used to find the appropriate balance for investing in quality prevention and appraisal to avoid defects or product failures. There are four categories of costs associated with quality: Prevention. Costs incurred to keep defects and failures out of a product. Appraisal. Costs incurred to determine the degree of conformance to quality requirements. Internal Failure. Costs associated with finding defects before the customer receives the product. External Failure. Costs associated with defects found after the customer has the product. The information below summarizes the types of costs and provides examples. This information is paraphrased from the American Society for Quality (ASQ).1 Prevention Prevention costs are incurred to prevent or avoid quality problems. These costs are asso- ciated with the design, implementation, and maintenance of the quality management sys- tem. They are planned and incurred before actual operation, and they could include: Product or service requirements—establishment of specifications for incoming materials, processes, finished products, and services Quality planning—creation of plans for quality, reliability, operations, production, and inspection Quality assurance—creation and maintenance of the quality system Training—development, preparation, and maintenance of programs Appraisal Appraisal costs are associated with measuring and monitoring activities related to quality. These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifica- tions. They could include: Verification—checking of incoming material, process setup, and products against agreed specifications Quality audits—confirmation that the quality system is functioning correctly Supplier rating—assessment and approval of suppliers of products and services (continued) 1 http://asq.org/learn-about-quality/cost-of-quality/overview/overview.html as of March 2, 2017. 28 2.3 Cost of Quality (continued) Internal Failure Internal failure costs are incurred to remedy defects that are discovered before the product or service is delivered to the customer. These costs are incurred when the results of work fail to reach design quality standards and are detected before they are transferred to the customer. They could include: Waste—performance of unnecessary work or holding enough stock to account for errors, poor organization, or communication Scrap—defective product or material that cannot be repaired, used, or sold Rework or rectification—correction of defective material or errors Failure analysis—activity required to establish the causes of internal product or service failure External Failure External failure costs are incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer. They could include: Repairs and servicing—of both returned products and those in the field Warranty claims—failed products that are replaced or services that are re-performed under a guarantee Complaints—all work and costs associated with handling and servicing customers’ complaints Returns—handling and investigation of rejected or recalled products, including transport costs How to Use It The costs associated with quality are often built into an organization’s infrastructure, policies, and procedures. It can be difficult to obtain that information for project analysis. Thus, for projects we usually use a cost of quality analysis when we are evaluating whether to invest more upfront for a more resilient product, or whether we want to get the work done quickly and absorb the time and cost associated with fixing issues later. This may be as simple as building in redundancy, going through an extra design or technical review, or outsourcing to a vendor to provide maintenance. Regardless of the outcome of your analysis, your decision needs to be aligned with organizational policies and stakeholder requirements. When you are conducting a cost of quality analysis for your project, don’t include the costs already associated with the quality policy of the organization. For example, if your organization hires a vendor to come out and calibrate and maintain certain pieces of equipment on an annual basis, don’t include those costs in your “appraisal” costs for the project. Only include costs that are spe- cific to the project. 1. Identify all the costs associated with preventing or avoiding defects or quality problems. This includes prevention and appraisal costs. Consider such costs as higher-quality materials, a more robust design and review process, documentation, training, inspections, and audits. 2. Identify all the costs associated with defects in the product. Include costs associated with scrap, rework, root cause analysis, warranty work, repairs, returns, and even possible law- suits and loss of customers. 3. Sum the costs of conformance (money spent to avoid failure) and the costs of nonconfor- mance (money spent during and after the project because of failure). 4. Choose the solution that shows the optimal balance for investing in cost of prevention and appraisal to avoid failure costs. 2.3 Cost of Quality 29 Scenario: Develop an eight-hour in-house training video to prepare employees for an industry certification. The organization expects 150 employees to take the certification over the next four years. You plan on using employees who have already passed the exam as subject matter experts (SMEs) to develop the materials. You will also use your employees to present the material on video. You assume this can be done in a classroom with two video cameras using the SMEs to present the material. You performed a 15-minute trial taping as a prototype (Section 6.8). The result was a video that had very poor sound quality. The material was acceptable and the employees did okay on camera, though they did require a few retakes to get acceptable results. Based on the 15-minute trial taping results, you solicited several quotes from videogra- phers, video studios, talent, editors, and directors. You will be presenting a cost summary and recommendations to the sponsor and want to justify your recommendations from a cost of quality perspective. The information in the table reflects the best value quotes based on the responses. Cost of Conformance Cost of Nonconformance Prevention Internal Failure Video package 1 $12,000 Addendum2 $1,500 Includes director, editor, cameraman, and studio time Talent $2,400 Appraisal External Failure Technical Reviewer $1,000 Re-testing3 $15,000 1. Assumes 16 hours of time to record 8 hours of video. 2. Assumes you would need to publish a paper addendum correcting the misinformation and distribute it to all potential exam takers. 3. Assumes a 20 percent failure rate if content or delivery is not clear. Each retake of the exam is $500. Based on these costs you are planning on recommending the video package and the tech- nical reviewer as an optimal investment in quality for this project. You believe that with the director and editor that, your SMEs will do a good job of presenting the information; therefore you are not recommending hiring outside talent. While you feel confident that your SMEs can develop good material, you think the investment in having an outside expert review the content is a wise decision. You assume that with the high-quality video production you will not have any external failure costs associated with poor quality. In other words, any failures will be based on the students’ lack of studying, not the company producing a poor product. This will result in the employee paying for the cost of retaking the exam. Thus, the cost of conformance is $13,000 (video package + technical reviewer) and the cost of nonconformance is $16,500. 30 2.3 Cost of Quality Additional Information A cost of quality (COQ) analysis is often used in parallel with or instead of a cost benefit analy- sis (Section 2.2). It may also be part of a make-or-buy analysis (Section 2.7). If you are using the COQ to evaluate multiple options, you may want to model the outcomes with a decision tree (Section 2.4). PMBOK® Guide – Sixth Edition References 7.2 Estimate Costs 8.1 Plan Quality Management 2.4 Decision Tree What It Is Decision tree analysis evaluates uncertainty using a diagram with branches that model various options or outcomes and their implications. In project management, we use it to evaluate which projects to invest in and which approaches to take, and to model uncertainty associated with cost, schedule, or risk events. How to Use It 1. Identify the various scenarios or outcomes that could occur. In some situations, none of the outcomes may occur; however, the point is to develop a model that represents what could happen given the information you have at the time. 2. Create a diagram where each option is a branch. 3. Determine the probability of each scenario in each branch so that the total for each branch is 100 percent. 4. Determine the monetary value associated with each outcome. 5. Multiply the probability times the monetary value of each outcome. 6. Sum the outcomes for each branch to derive the expected monetary value of each option. Remember, the decision tree is just a model of what could happen. It is not factual. It is a tech- nique used to model uncertainty. As with any model, the fidelity is only as good as the data behind it. In other words: garbage in, garbage out. Scenario: Your organization is updating its current PMO information system infrastructure with all new software, cloud computing, collaboration sites, and real-time reporting software. You are evaluating whether to purchase new reporting software and customize it or to develop it in-house. This is your initial branch. (continued) 32 2.4 Decision Tree (continued) Decision In-House vs. Purchase In-House Develop In- House or Purchase Purchase If you develop in-house, you risk losing resources to other projects. Based on the current environment, you assume there is a 50/50 chance that you’ll lose 40 percent of your staff. Decision In-House vs. Purchase Resource availability vs. Customization 50% Available In-House 50% Lose 40% Develop In- House or Purchase Purchase If you keep your staff, developing software will cost $172,000. If you lose staff, you have to hire outside contractors, and developing software will cost $208,000. 2.4 Decision Tree 33 Decision In-House vs. Purchase Resource availability vs. Customization 50% Available $172,000 In-House 50% Lose 40% $208,000 Develop In- House or Purchase Purchase By multiplying the probability of each branch times the value of each branch you get the expected monetary value of each branch. Add the value of each branch to get the expected monetary value of developing in-house. Decision In-House vs. Purchase Resource availability vs. Net Path Customization Value 50% Available $86,000 $172,000 In-House $190,000 50% Lose 40% $104,000 $208,000 Develop In- House or Purchase Purchase If you purchase ready-made software, there is uncertainty about the amount of customiza- tion you will have to do to get the software to work with your systems. There is a 60 percent chance that you will have to do only a little customization, which would bring the total cost to $152,000. There is a 40 percent chance that you will have to do a lot of customization, which would bring the total cost to $188,000. (continued) 34 2.4 Decision Tree (continued) Decision In-House vs. Purchase Resource availability vs. Net Path Customization Value 50% Available $86,000 $172,000 In-House $190,000 50% Lose 40% $104,000 $208,000 Develop In- House or Purchase 60% Little customization $152,000 Purchase 40% Much customization $188,000 To calculate the expected value, add the values of each branch under the “purchase” option. Decision In-House vs. Purchase Resource availability vs. Net Path Customization Value 50% Available $86,000 $172,000 In-House $190,000 50% Lose 40% $104,000 $208,000 Develop In- House or Purchase 60% Little $91,200 customization $152,000 Purchase $166,400 40% Much $75,200 customization $188,000 Your decision would be to purchase software because the expected monetary value is lower. 2.4 Decision Tree 35 Additional Information Remember, sometimes the monetary values and the probability estimates are not precise. To build a decision tree you need to develop a deterministic estimate, even though you may have a range of possible outcomes. A deterministic estimate is a single point estimate, rather than a range of estimates. The decision tree used in the example has a lot of uncertainty built into it. Some decision trees have more definitive information, such as interest rates associated with purchasing versus leasing or hiring versus using contract labor. A decision tree is often used to model “expected monetary value” information. You can also use it to model cost of quality (Section 2.3), make-or-buy decisions (Section 2.7), risk responses, and what-if scenarios (Section 2.17). PMBOK® Guide – Sixth Edition References 11.4 Perform Quantitative Risk Analysis 2.5 Earned Value Analysis What It Is Earned value analysis is a technique that integrates scope, schedule, and cost information into sin- gle measures to assess the status of project performance. A full-scale implementation of an earned value management system is a complex undertaking. For ease of explanation we will keep the descriptions simple. To conduct an earned value analysis you need to have planned the work so that each work package [the lowest level of the work breakdown structure (WBS)] has cost and duration estimates. The work is then scheduled and the costs are allocated to the time period in which the work is scheduled. The information below shows the work packages for landscaping a backyard. The work packages are on the left, the duration (in days) is shown in the shaded areas, and the costs associ- ated with the work are indicated in the duration. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Deck Frame $2,400 Deck Surface $2,400 Vegetables $1,500 Trees $1,800 Flowers $1,000 Grass $1,500 Hardscape $1,500 This integration of the approved scope, schedule, and cost for the project is called a perfor- mance measurement baseline (PMB). The PMB is used to measure cost and schedule progress. The PMB shows the planned value for each work package at a given point in time. Planned value (PV) is the authorized budget assigned to scheduled work. The planned value for the deck frame at the end of Day 4 is $2,400. Assuming an even distribution of work, the planned value for the deck surface is $800 at the end of Day 6 (assuming that each day $400 of work is scheduled). Thus, the cumulative PV at the end of Day 6 is $3,200. 2.5 Earned Value Analysis 37 How to Use It Once the PMB is complete you can start measuring progress against it. 1. Identify the value of the work that was accomplished during the work period. This is called the earned value. In the example above, if the deck frame was finished at the end of Day 3, the earned value (EV) at the end of Day 3 would be $2,400. That is because the value of the deck frame is $2,400 and it is complete, therefore you have earned $2,400 worth of value. 2. Analyze the schedule performance by comparing the earned value with the planned value. If you earned less than you planned, you are behind schedule. If you earned more than you planned, you are ahead of schedule. The mathematical equation is EV – PV = Schedule Variance (SV). 3. Determine the amount you spent to accomplish the work. You can do this by looking at invoices, hours spent and the rate per hour, bills of material, and any other costs that went into developing the budget for the work. The amount you spent is called the actual cost (AC). 4. Analyze the cost performance by comparing the EV and AC. If you spent more than you earned, you are over budget. If you spent less than you earned, you are under budget. The mathematical equation is EV – AC = cost variance (CV). Scenario: Build Twin Pines Medical Plaza, a new state-of-the-art medical resource center. The Twin Pines Medical Plaza (TPMP) has the following performance measurement baseline for construction. Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Groundbreaking 4,500,000 Foundation 7,500,000 7,500,000 Steel Frame 9,000,000 9,000,000 Shell 13,500,000 13,500,000 13,500,000 Interior Frame 6,000,000 6,000,000 6,000,000 Monthly Total 4,500,000 7,500,000 7,500,000 9,000,000 9,000,000 13,500,000 13,500,000 13,500,000 6,000,000 6,000,000 6,000,000 Cumulative Total 4,500,000 12,000,000 19,500,000 28,500,000 37,500,000 51,000,000 64,500,000 78,000,000 84,000,000 90,000,000 96,000,000 Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Plumbing 3,000,000 3,000,000 Electric 3,000,000 3,000,000 HVAC 2,250,000 2,250,000 Gas 1,500,000 Alarm 1,500,000 1,500,000 Telephone 1,500,000 1,500,000 Cable 1,500,000 1,500,000 Finish Work 1,500,000 1,500,000 Monthly Total 3,000,000 3,000,000 3,000,000 3,000,000 2,250,000 2,250,000 1,500,000 4,500,000 4,500,000 1,500,000 1,500,000 Cumulative Total 99,000,000 102,000,000 105,000,000 108,000,000 110,250,000 112,500,000 114,000,000 118,500,000 123,000,000 124,500,000 126,000,000 2.5 Earned Value Analysis 39 The cumulative total at the end is called the budget at completion (BAC). Thus, the BAC for the construction work is $126,000,000. Assume that it is the end of August in Year 1. Your PMB shows you have a cumulative planned value of $78,000,000. Your earned value shows you have completed the groundbreak- ing, the foundation, the steel frame, and 85 percent of the shell. The table below summarizes the results: Work Planned Value Percent Complete Earned Value Groundbreaking 4,500,000 100 4,500,000 Foundation 15,000,000 100 15,000,000 Steel Frame 18,000,000 100 18,000,000 Shell 40,500,000 85 34,425,000 Total 78,000,000 71,925,000 Notice that you haven’t indicated expenses for the work done, only the PV and the EV. The actual cost is determined by totaling the invoices to see what has been paid. In this case, the invoices show that the groundbreaking, which is on a fixed price contract, cost the same as the estimate ($4,500,000). The foundation had an overrun of $874,000. The steel frame and shell are also overrunning their cost estimates. The actual costs for the work to date are shown below: Work Planned Value Percent Complete Earned Value Actual Costs Groundbreaking 4,500,000 100 4,500,000 4,500,000 Foundation 15,000,000 100 15,000,000 15,874,000 Steel Frame 18,000,000 100 18,000,000 18,952,250 Shell 40,500,000 85 34,425,000 36,105,800 Total 78,000,000 71,925,000 75,504,150 By looking at the table above, you can intuitively determine that things are not going well. It is obvious that the project is earning less than planned and the cost is greater than the value earned. With earned value techniques, you can make some simple calculations to quantify the results. We will look at the cost and schedule variances to determine how far behind and how much overbudget the project is running. To measure schedule performance, compare the EV to the PV. To measure cost performance, compare the EV against the AC. We will apply the cumula- tive PV, EV, and AC information to the equations for cost and schedule variance to come up with the following: EV − PV = SV 71, 925, 000 − 78, 000, 000 = − 6, 075, 000 EV − AC = CV 71, 925, 000 − 75, 504,150 = − 3, 579,150 (continued) 40 2.5 Earned Value Analysis (continued) This tells us that we have accomplished $6,075,000 less work than we planned during the time we spent. We have spent $3,579,150 more than the amount of work we have accom- plished. In other words, we are behind schedule and overbudget. When looking at variances, any negative variance indicates that your performance isn’t going how you want. You’re either accomplishing less or spending more than you planned. Notice that looking at the earned value numbers doesn’t tell you what happened; it only points out that things aren’t going according to plan. It is important to determine root cause of the variance in order to take appropriate corrective action to get the project back on plan. Additional Information There is much more to earned value analysis. You will see another way to use earned value analysis when we look at performance indexes (Section 2.8), estimate to complete (Section 4.4), estimate at completion (Section 4.3), to-complete performance indexes (Section 4.6), and variance at completion (Section 4.8). PMBOK® Guide – Sixth Edition References 4.4 Monitor and Control Project Work 6.6 Control Schedule 7.4 Control Costs 12.3 Control Procurements 2.6 Influence Diagrams What It Is An influence diagram is a graphic that shows the relationship between variables, uncertainty, and the degree of influence of each variable on other variables, decisions, and the ultimate objective. They are used to build a common understanding of the variables that influence decisions and outcomes. Influence diagrams use various shapes to indicate nodes. The nodes are connected by arrows to show uncertainty, decisions, and objectives. Common shapes for nodes and their meanings are shown below. An oval node indicates an area of uncertainty. A rectangular node shows a decision. An octagonal node (or sometimes a diamond) indicates the objective or desired outcome. How to Use It Use the steps below as a guideline. 1. Identify the objective you want to achieve. This is your octagon. 2. Identify the decisions or choices you will need to make to achieve that objective. These are your rectangles. 42 2.6 Influence Diagrams 3. Determine all the variables that influence that decision or choice. Variables can be things inside your control (availability of resources), or outside your control (such as weather or regu- lations). These are your ovals. 4. Draw arrows that show the influence of each node on the other nodes. Scenario: You have been asked to meet the physical growth needs of Top Dog Project Services. Over the past four years the rate of employee growth and turnover has continued to increase in the Southern California location of Top Dog Project Services. You are looking for ways to accommodate the employee growth and reduce the amount of employee turnover. One of the recurring themes expressed in exit interviews is that employees want the freedom to work remotely. Top Dog Project Services is looking to run a pilot work-from-home program. Given the needs of your office, they have asked you to run a pilot program for the entire organization for working remotely. They have asked that you summarize the outcomes and make a recommen- dation to senior management. As part of your kickoff meeting, you lay out some of the variables that will influence your ability to roll out the program, thereby reducing the rate of turnover. Influence diagram Pilot Program Job Cost per Productivity satisfaction employee rate levels Sr. Mgmt. Approval Roll Out Reduced Program turnover This graph shows the pilot will produce variable results for job satisfaction (either increased or decreased), cost per employee (lower or higher), and productivity rate (lower or higher). Based on these results, senior management will decide to approve a rollout of the program across the company, as one way of reducing employee turnover. 2.6 Influence Diagrams 43 Additional Information An influence diagram is sometimes used in place of a decision tree because the proliferation of branches based on the nodes of uncertainty can quickly cause a decision tree to get overly com- plicated and difficult to interpret. The influence diagram also does a better job of showing causality between the various nodes than a decision tree does. PMBOK® Guide – Sixth Edition References 11.4 Perform Quantitative Risk Analysis 2.7 Make-or-Buy Analysis What It Is A make-or-buy analysis is used to determine which work or deliverables should be accomplished in-house, and which should be purchased from external sources. Factors such as resource avail- ability and skill sets, cost, proprietary information, risks, and other relevant factors are taken into consideration when conducting a make-or-buy analysis. How to Use It In some situations it is obvious you will need to procure something in support of project comple- tion, such as if you don’t have the skills available in your organization to develop the deliverable. Sometimes the reasons to keep work in-house are obvious, such as if the deliverable is your orga- nization’s core competency, if you need control over the process, or if you want the information to stay in-house. For those situations that fall in between, here are some factors to consider in your analysis. Use the information below as a guideline. You will need to tailor the information to fit within your environment. Reasons to Make Reasons to Buy Less costly1 Less costly2 Use existing capacity Use supplier skills Maintain direct control Small volume requirement Maintain design secrecy Limited in-house capacity Develop a new competency Maintain supplier relations Company’s core competency Transfer risk Available staff Readily available 1 When analyzing costs, don’t forget indirect costs. Indirect costs for making can include overhead, depreciation, tax, material handling and storage, and so forth. 2 Indirect costs for buying can include the time and cost of developing a Request for Proposal, and the time involved in source evaluation, selection, and management. 2.7 Make-or-Buy Analysis 45 Scenario: You are the project manager for developing an onsite childcare center for your organization’s employees. You need to determine whether you will hire people to run the center as staff, or whether you will outsource the staffing and management to Watch Us Grow, an organization that man- ages childcare centers. You identify the following reasons to hire staff and manage the center in-house: 1. You will save the 15 percent service fee that Watch Us Grow charges. 2. You won’t have to expend the time and effort involved with contract negotiation. 3. You will have more control over the curriculum, hours, policies, procedures, and day-to-day operations. You identify the following reasons to outsource the management of the childcare center: 1. No time or cost associated with job posting, interviewing, checking credentials, background checks, and the like. 2. This is not your core competency. You don’t plan to grow this employee benefit into a larger business. You only need five staff to manage the entire program. 3. All risks associated with staff liability are transferred to Watch Us Grow. 4. The time associated with negotiating the contract will be less than the time needed to hire the staff. The costs associated with the management fee versus the costs associated with managing the regulations, staffing, and other collateral costs are likely close to even. The relative impor- tance of the control over the childcare center operations compared to the reduced time and liability of outsourcing will help determine the decision. Additional Information A make-or-buy analysis is often used along with a cost benefit analysis (Section 2.2), net present value calculations, and payback period calculations to help determine the best approach. You can also use a decision tree (Section 2.4) to model different scenarios in a make-or-buy analysis. PMBOK®Guide – Sixth Edition References 12.1 Plan Procurement Management 2.8 Performance Index What It Is The performance index uses information from earned value analysis (Section 2.5) to determine the schedule and cost performance efficiency. The schedule performance index (SPI) is a measure of schedule efficiency shown as the ratio of earned value to planned value. It tells us the rate at which we are progressing compared to the

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