Financially Focused Project Management

Managing projects that lead to profitability requires that costs be

recognized and integrated at each step of the process.

Tom Cappels
Web Added Value
J. Ross Publishing

Financially Focused Project

Management

FFPM & Closed Loop Corrective Action

Traditional & Emerging Role of Finance
Financially Focused Mindset
FFPM Tools and Process
FFPM in Process Improvement
Financial Tutorial
Cost Analysis & Savings Estimate
FFPM & Project Negotiations
Machining Outsourcing Project

NEW THINKING DEMANDED

Some businesses
must keep quality in
the forefront of their
minds.

- Albert Einstein

Nuclear weapons / power

Pharmaceuticals

CLCA & Failure Mode

Monitor Manufacturing
Thousands of returns
Replace tuners.volume controls.power switches
FAILURE
FAILURE MODE:
MODE: Soldering
Soldering components
components on
on circuit
circuit boards
boards

CLCA: Corrective Actions

Lets make sure this problem is ELIMiNATED!!

THE IMPACT ON PROJECTS

The customer gets

Better Quality
Better reliability
MAGIC!!!

THE IMPACT ON ORGANIZATIONS

Increased effort for training department
Increased time in training for solderers
Increased receiving inspection costs
Added costs for supplier representative
CRC Contracts vs Fixed Price Contracts
Finance is trying to figure out What happened??
7

Traditional Role of Financial

Community
FINANCE
(Reacting)

IN-HOUSE
IN-HOUSE
OPERATIONS

SCIENTISTS/
ENGINEERS

CUSTOMERS

SUPPLIER
OPERATIONS

Emerging Role of Financial

Community
IN-HOUSE
IN-HOUSE
OPERATIONS

SCIENTISTS/
ENGINEERS/
FINANCE

CUSTOMERS

SUPPLIER
OPERATIONS

Financially Focused
Project Management

THE

Financially Focused
MIND-SET
PRO-ACTIVE

10

FFPM Tools
Project
Identification

Cost Analysis
- Pricing / Estimating
- Probabilities
- Decision tree

- Efficient
- Easy
- Effective

Basic
Financial
Concepts

Project Analysis
- Experts
- Thorough

Follow-up Plan
- Actual cost vs analysis
- Discontinue/reduce costs
- Ensure project successful

11

Financially Focused
Project Management
PROJECT
IDENTIFIER

COORDINATOR

FINANCIAL
POV

MEETING

EXPERTS
FOCUS GROUP
OTHER

RECOMMENDATION

ACTIONS
COSTS

PLAN
CLOSURE

SUPPORT

12

Identifier

Notice

Coordinator

Improvement

Cost
Analysis

Support
Follow-up
Plan

Finance

Closure
Notice

FFPM Process Improvement Coordination

13

Identifying a Project
* Environments
- Customer/Warranty service
- Inspection & manufacturing
- Board of Directors
* Market Research
- Focus Groups
- Questionnaires
* Start with:

THE

Project Recommendation
14

Manag
er
Project
Identifier

Manager

Finance

Meeting

Project
Recommendation

Cost
Analysis

Process

Product
Support
Follow-up
Plan/Closure
Notice

15

FFPM & Employee recommendation/suggestion programs

Project Recommendation

Name:

#:

Date:

P
R

roject

Dept:

Ext:

ECOMMENDATION

Concern:
Project:

CACN attached

16

FFPM & Employee recommendation/suggestion programs

Process
Improvement/Corrective Action
Cost Analysis
Name:
Dept:

New

PIR #:

Old

Labor

Labor

Non-labor

Non-labor

Sub-total

Sub-total

Date:
Ext.:

Savings

Implementation
Sub-total

Sub-total

Total

17

Process Improvement Follow-up

Plan
Name:

CA #:

Dept:

P
I
F
P

Date:

rocess

mprovement

Ext:

OLLOW-UP
LAN

Follow-up #1:
Date:
Date:

Cost
Cost Analysis:
Analysis:

Proceed w/CAFP

Ext:
Ext:
Modify CA

Issue CACN

Follow-up #2:
Date:

Cost Analysis:

Proceed w/CAFP

Ext:
Modify CA

Issue CACN

Follow-up #3:
Date:

Cost Analysis:

Proceed w/CAFP

Ext:
Modify CA

Issue CACN

18

Corrective Action Closure Notice

Name:

Dept:

CA #:

Date:

Ext:

C
A
C
N

ORRECTIVE
CTION
LOSURE
OTICE

Narrative:

Page __ of __

19

Financially Focused Project Management

Basic Finance 1A

20

THE COMPANY PROFIT - THE BOTTOM LINE

CORPORATE
HEADQUARTERS

Annual
Operating
Budget

Various
Companies

Products
and
Services

Departments /
Business Units
Financial
Forecasts

Customers

CORPORATE PROFIT
Debt Service

Capital Assets

Dividends

Shareholder Equity

21

Classification - Why they are used

Examples
* Accounting systems
* United States
* Library systems

UA

22

Accounting Classifications

Costs

Direct

Labor

Nonlabor

Indirect
(overhead)

Labor

Nonlabor

23

Forecasting Personnel
Statistically average
Direct employee

Criteria
Yield/Realization

Hours/day

* Straight time (S/T

8.0
* Vacation/sick leave

-0.7

* S/T available for work

7.3

* S/T work on overhead

-0.5

* S/T available for contracts

6.8
* Overtime (O/T) at 2%

0.1

* S/T+OT available for contracts

6.9

24

Rates per Direct Labor Hour

Direct Labor Rate Per
Hour
$25.15 Employee direct wage
10.52 Fringe benefits
9.45 Computer costs
3.66 Management
8.20 Indirect labor
3.78 Indirect fringes
4.91 Occupancy
5.30 New Business
11.54 Other
82.51 Total Cost
8.25 Fee or Profit (10% est)
90.76 Total Cost Per Hour

Management Customer
Employee

$90.7
6

$90.7
6

$25.1
5

25

Econometrics
Measure of Inflation

16.2% CPI

Consumers
Price Index

Personal
12.9% PCE Consumption
Expenditure
Index
1

t s

d
3

r
d

17.6% PPI

Producer
Price Index

9.7% GNP

Gross
National
Product

Weighted
? Company Average
Composite
Index

26

Forecasting Personnel - Example

How many Statistically average

employees do you need to deliver
690 hours in one day?

Contract hours/day
ST + OT available/day
690 hours/day
6.9 hours/day

= Required direct
employees/day

= 100 direct employees

27

Straight Time Yield Pattern

+2.5%
Base
-2.5%

JAN FEB
DEC

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

28

Overhead - Composition
Rates per Direct Labor Hour
Indirect labor - Nurses, receptionists,
secretaries, administration

$.20

Fringe Benefits

$.16

Facilities - Heat, light, water,

power, rental, equip depreciation

$.34

New Business - Independent

research & development, marketing

$.22

Other - Taxes & insurance, travel,

phone, supplies, training, conferences

$.24

Total

$1.16

29

Overhead - Patient Distribution

Overhead Expense
Direct Labor Dollars

Overhead Rate (% per direct labor

dollar)

Example
Example:
=

$3

$2
Patient 1

Patient 2

$16 Expense
$8 Direct Labor

$1
Patient 3

= 200%

$16
$8

$2
Patient 4

Patient 1 = $2 x 200% = $4
Patient 2 = $3 x 200% = $6
Patient 3 = $1 x 200% = $2
Patient 4 = $2 x 200% = $4
$8
$16

30

Cycle of Financial
Activities
Accounts
Payable
Cost
Accounting

Financial
Management

Reporting

Generatio
n of
Profits

Financial
Forecasting

Accounts
Receivable

31

Equity
De b t

Liabilities

Equit
y

Assets

32

Primary Services
Accounting Information
Balance Sheet / Statement
Work in process
Financial accounting
Cost Accounting
Accounts payable
property accounting
payroll

33

Primary Services
Project Pricing and Cost Control
Estimating
Negotiating
Cost Control

34

Primary Services
Financial Forecasting, analysis,
O/H, ADC, fixed asset budgeting
Financial forecast
management budget
overhead, negotiations and budgeting
ADC negotiations and budgeting
fixed asset budgeting

35

Primary Services
Internal Accounting Controls
safeguard assets
Reliable financial records
Financial information provided to:
Company/sector management
Government agencies
Business Units

36

Indirect Costs - Overhead

Plant Protection
(indirect)
Plant Services
Indirect management
functions
Facilities / Occupancy
costs
Legal counsel

37

Pricing
* In-medical facility

Direct Labor
Dollars

Overhead

Profit

Profit

= Price

* Suppliers

Suppliers Selling
Price

Overhead

= Price

38

COST ANALYSIS

Cost/Benefit
Estimating:
Raw resources: Hours for labor
Raw resource: dollars for nonloabor
Rates for overhead / labor / allocated costs
Percentages for probabilities

Decision Tree

39

COST ESTIMATING

Labor:
5 hours a week for 100 weeks = 500 hours
$70/hour this year
$73.50/hour next year

Nonlabor
Supplier quote
LABOR + NONLABOR =

40

SAVINGS ESTIMATING

Failure costs:
Cost per average failure (rework, replacement, lawsuit)
Anticipated improvement in failure rate
Project failures: varying scenarios

Previous cost

41

42

FFPM: PROCESS
IMPROVEMENT
RECOMMENDATION

Name:
Dept:

PIR #:

Date:
Ext.:

43

COST/BENEFIT TRADE-OFF

PICA-type analysis
Pricing/proposal methodology:
Raw resources (hours/dollars)
Rates

Mgt judgement / probability factors

Contrast / compare
Present!!
HE WHO HESTITATES IS LOST!

44

Indirect Costs - Overhead

Office Protection (security/alarm

system/etc.)
Insurance
Employee moral (e.g., Christmas Party!!)
Facilities / Occupancy costs
Advertising / Marketing
Legal counsel

45

Focus on Financial
Ramifications!

46

Penguin-in-a-Helmet

47

Penguin-in-a-Helmet:
Financial Focus

Follow-up Plan
Eliminate Supplier
Representative
Revert to Sampling
48

FFPM & PROJECT

NEGOTIATIONS

49

Why Negotiation Efforts Fail

Error #1:
Error #2:
Error #3:
Error #4:
Error #5:
Error #6:
Error #7:

Not establishing sufficient sense of urgency

Not creating powerful leadership coalition
Not creating a vision
Undercommunicating by a factor of 10
Not removing obstacles to the vision (Paradigm)
Not systematically planning and executing
Not showing the cost/benefit trade-off: VALUE!

50

THE
SECRETS
OF
BEHAVIOR

51

THE FIVE IN-BORN NEEDS

OF
CONTROL THEORY

Survival/
Reproduction

Fun

Belonging/
Love

Power

Freedom

52

EXTERNAL CUSTOMERS: GOVERNMENT

Contract modes:
Cost-reimbursable
Fixed price

Taxation
Auditors: Full-time jobs
Legal aspects

To be thus is NOTHING but to be safely thus!

53

ALL EXTERNAL CUSTOMERS

including commercial

Partnering / alliances
First impressions
Respecting customers & their property
Listening skills
Questioning skills
Meeting customers' needs
Empathy vs sympathy
Interpersonal skills
Communication skills
Bring out your best
Who pays the bills?

54

Initiating the
Proposal
Three Types of Proposals
Follow-on contracts
New business
Unsolicited

55

Proposal Preparation
Flow
Requirements
Meeting:
Resp. orgns
Contracts
Accounting
Program office

Schedule / proposal
Focus on ground rules, premises, and
schedule!

56

Why Should you Want It / Need It?

57

INTERNAL CUSTOMERS
There is only so much budget...
EVERYTHING (?) is getting cut...
The times they are a changin...
Obsolescence..
Attract talented IS professionals...
Is it really needed?
Lets find out what happens without it!

58

INFORMATION SYSTEMS REQUIREMENTS

Year 2000 compliance
Accounting 2000
Enterprise data integration and management (EDIM)
Managed desktop project
Electronic data and management system (EDAMS)
Automated real-time material system (ARMS)
Welcome to the 21st Century

59

COST/BENEFIT TRADE-OFF

PICA-type analysis
Pricing/proposal methodology:
Raw resources (hours/dollars)
Rates

Mgt judgement / probability factors

Contrast / compare
Present!!
HE WHO HESTITATES IS LOST!

60

Managed Desktop Support Project

OBJECTIVES
Enable cost-effective computing infrastructure reducing user support service delivery
Define site-specific 1) Windows NT architecture plan, 2) Automated software distribution plan, 3)
Remote desktop management plan, 4) Automated computer asset management / tracking

Define / develop computer asset database w/interface to financial systems

Execute / evaluate pilot for UNIX workstations to execute Windows-based applications

CONSEQUENCES IF NOT DONE

BUSINESS BENEFITS

Redundant point solution implemen-tations

driving PC migration costs

Campus-wide desktop access to common

file/print services

Minimize ease & utility of standards

(SW/HW, processes) & best practices
Unable to quantify cost driver &
opportunities w/o inventory visibility

Eliminate 60% of local user support labor

($5.8M/yr savings)
Purchase service agreement /vendors
UNIX systems to execute PC applications

61

Accounting
OBJECTIVES
Bring A2K into production - turn over to2000
Service Center control by 3-2-99
Upgrade A2K to a standard CA-Masterpiece platform
Phase out current data archiving / data warehousing systems. Common environment.

CONSEQUENCES IF NOT
DONE
Must maintain 35 legacy systems (with
faulty data)
A2K NOT on a platform sup- ported by
system manufacturer
Maintain multiple archiving and data
warehousing systems

BUSINESS BENEFITS
Accurate/timely finance info -reduced penalties
Reduce accounting process cycle times, monthly and
quarterly from 20 to 5 days
57 process changes save 32 EPs ($2.9M/yr)
Eliminate 35 legacy systems
Migrate from unstable systems to new flexible
client/server applications

62

Machining
Outsourcing
Project

63

Initiative Charter

Satisfy Sector requirements for machined components with the best value
to our customers through:

Integrated Sector Make-or-Buy Policy

Standardized Outsourcing process (Sector Purchase Agreements)

S.P.A.'s

Development of strategic partnerships with Best-In-Class suppliers

Consolidation of in-house resources to provide lean agile

development/modification capability

64

Schedule
1995

MOI Integrated Schedule

1996
O N

M A

1997
A

O N

M A

O N

MAJOR MILESTONES
MOI Business Plan Release

10/95

LOPS Site Business Planning Complete

2/9/96

LOPS Phase 1 Complete: FBM & Space Station (Release #1)

3/31/96

LOPS Phase 2 Complete: Milstar & START ADP (Release #2)

6/30/96

LOPS Phase 2 Complete: FBM & THAAD (Release #3)

3/30/97

LOPS Phase 3 Complete

9/8/97

Machining Outsourcing Transition Complete

9/30/97

LOPS BUSINESS PLANNING

7/1/95
Review Sector Make-or-Buy & Procurement Policies for Alignment
to MOI
Develop Supplier Plan & Procurement Pilot

6/29/96

7/18/95

12/29/95

8/19/95

Develop MOI Metrics

1/30/96

9/21/95

Develop Benchmarking Plan

11/30/95

9/18/95
11/1/95

2/28/96
2/28/96

FORECAST & CONTROLS PLANNING

...
7/1/95
Identify Machined Part Types and Process for Outsourcing

9/27/96

7/1/95

11/21/95
1/22/96

Develop Make-to-Buy Cost Model

2/14/96

Procurement Pilot Parts Identified

ONGOING LOPS SITE ACTIVITIES

Phase 1 Site Activities (Quantify savings)

10/8/95

Develop Facility Reduction Plan

10/19/95

3/31/96
12/14/95

Phase 1 Site Activities (Idle B/103 machines)

Reduce SSD Headcount 26, Recover 22K Sq. Ft.)
Environmental Remediation

4/1/96

12/29/96
12/30/96

3/30/97
3/31/97

Relocate machines from B/170 to B/103

9/8/97

Close B/170
M

O N

M A

O N

M A

65
A

O N

Initiative Savings
Goals
Original
Current

Wichita Value Added Summary by Savings Opportunity

Projection
Personnel Savings

$10,332,000

Equipment & other assets

30,000

Support Services

48,000

Process Improvements

48,000

Cycle Time Reductions

24,000

Material

48,000
Total

Projection

$10,530,000

Value Added Summary by Year

1996
LOPS

$3,305,000

1997

1998

1999

Total

$2,872,000 $2,334,000 $2,019,000 $10,530,000

66

Savings Breakdowns
Sector Savings Summary By Site
Astro Turf

Savings Summary By Type

Equipt & other savings
Support Services
Process Improvements
0.2 Cycle Time Reductions
Material

Other
Programs

1.1
1.8

2.7
Radio
Wave

3.7

10.5
11.0

Space
Age

LOPS
Astrowilliams

1.9
TADDY

67

MOI Cost Breakdown

Building Closure /
Consolidation

Severance
10

Implementation
Planning

300

215

Implementation
Expense
?
1,179

Facilities Environmental
Remediation

COST $1,400,000 (excluding severance & environmental remediation)

(1995 - 1997)

68

Implementation Cost
Performance to Date
MOI Implementation Cost Performance

800
700
600

Cumulative Dollars (in

Thousands)

500
400
300
200
100

Jul96

Jun-96

May-96

Apr-96

Mar-96

Feb96

Jan96

Dec95

Nov95

Oct95

Sep.95

Aug.95

Jul.95

Mont
h
Cumulative Budget

Jul-95
Missiles & Space Budget
Missiles & Space Actual

10
10

Aug-95
25
20

Sep-95
45
46

Oct-95
65
82

Nov-95
100
140

Cumulative Actual

Dec-95

Jan-96

142
200

213
260

Feb-96
284
30505

Mar-96

Apr-96

May-96

Jun-96

Jul-96

375
105

430
130

485

585

640

200

300

69

Site Planning Team

Machining Outsourcing Project Steering Committee
W. L. Budor / D. L. McMurphy / etc.
SITE LEAD
62616
G. Tubbs

BUSINESS
DEPUTY
32460
T. M. Cappels
SCHEDULES
30503
G. Horby
ESTIMATING
& PROPOSALS
29086
J. T. Martin
SYSTEMS
DESIGN
29269
J. A Stiller

BLANKET
CONTRACTING
25296
M. L. Surray

PRODUCT
PROCESSING
21769
R. R. Binapoli

M&P Engineering, T. E. Van Cook

Systems Engineering, L. R. Groon
Material Support, C. K. Smoots

PRODUCT
QUALITY SUPPORT
30580
D. G. Howack

FBM TRANSITION
PLANNING
68185
T. D. Shern
TECH REQMTS
& SUPPORT
X28886
Mike Grock
ESTIMATING &
PROPOSALS
X24831
J. V. Vibaly
QUALITY
SUPPORT
X30488
Phil Kosmen

70

ILLUSTRATION
* Management explains FFPM process
* Employee recognizes need for change
* Mandatory management
involvement

FFPM & Employee recommendation/suggestion program

71

PROJECT
* Employee establishes goal
* Management input / recognition
* Productivity increases

FFPM & Employee recommendation/suggestion programs

72

CONCERN
* Employee receives recognition
* Management leads cost effective analysis
* Productivity increases

FFPM & Employee recommendation/suggestion programs

73

SUCCESS STORIES
* Concerns
- Common Minor Material
- Pool Burden Center Chart Enhancements
- Allocation of Thermal Barrier Prep Costs

FFPM & Employee recommendation/suggestion programs

74

SUCCESS STORIES
* Projects
- 12 month moving average for FPRAs
- Quarterly Generation of Reports
- CMM Chart Enhancements

FFPM & Employee recommendation/suggestion programs

75

Financially Focused Project

Management

COMPLETE
THE
CYCLE
Employee Participation

Suggestion Systems

Managers as Team Builders

Communications Events

Effective Meetings

Mission Statement

Brainstorming

Process Improvement

Total Quality Management

Process Management

Cost Reduction/Avoidance Programs

ESOPs

76

Financially Focused Project

Management

FINANCIAL TRAINING
Decision
Maker

New
Project

FINANCIAL
POV

Analysis

ACTIONS
Costs/Savings
Follow-up &
Closure Plan

EXPERTS

SUPPORT

Financially Focused Project Management

Reducing costs / eliminating waste

TQM / CQI / Leaning: Name doesnt matter
EASE OF USE MATTERS!
COST ANALYSIS MATTERS!
MANAGEMENT-DRIVEN!
PROFITABLE PROJECTS mean

SUCCESSFUL PROJECTS!
78

Increase Profitability!!!

Reduce costs / eliminate waste

EASY PROCESS...

COST ANALYSIS...

MANAGEMENT DRIVEN...

STOP LOSING ON PROJECTS

START SELLING VALUE

Financially Focused
Project Management!79