G00247479

Build Your PMO to Manage Cost, but Maximize

Value
Published: 18 June 2013

Analyst(s): Lars Mieritz

PMO leaders are increasingly stating that they need to shift their focus
toward increasing value along multiple dimensions. Not only do they need to
ensure that project deliverables provide value for the money invested, but
they need to increase the perceived value of the service the PMO offers.

Key Findings
■ At lower levels of maturity, financial controls often prove difficult because delivering at a
specified "price" (within budget) requires a more disciplined approach to scope control and
resource management than organizations are used to operating under.
■ Value is a much more subtle concept than financial control, because value is always
contextualized by one or more specific frames of reference. At higher levels of maturity, project
management offices (PMOs) can struggle with how to ensure value in the face of multiple
definitions.
■ The "value statements" need to be defined at the beginning of a project to ensure that the
project actually delivers what it was intended to deliver and that the value is at least
conceptually measurable at the end.

Recommendations
■ Begin by building a cost-control process that focuses on capturing actual time spent.
■ From cost visibility, move up the maturity curve to ensuring cost reliability by rigorously defining
scope in the initial business case and sticking to it or cancelling the project if it was misdefined.
■ Once cost management is mastered, begin focusing on explicit value. What exactly is the
project delivering that will create value, and how can the impact of that deliverable be tracked?
■ As value-oriented skills become more common in the organization, begin increasing the level of
validation done prior to beginning a project. Ensure that the connection between action
(projection deliverable) and result (business capability) really are linked.
 Analysis
PMO leaders often struggle with a poorly constructed organizational definition of value that is
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difficult to express. As a result, investments and spending end up poorly directed. The value and
financial management dimension of the Program and Portfolio Management (PPM) Maturity Model
focuses on understanding how to ensure that projects and programs offer and deliver value for the
money invested.

Gartner's PPM Maturity Model is designed to align what's important to PPM leaders — such as
project management practices and processes, value management, staffing models, and portfolio
management — with what works organizationally. This model defines maturity as the ability of the
organization as a whole to embrace project management or portfolio management, and at what
level of complexity and with what level of effort.

Level Descriptions
Value and Financial Management at Level 1

Characteristics
Value and financial management is seldom a primary focus of Level 1 organizations. At this level,
most projects are done because a senior person in the organization believes it's the right thing to
do. Projects may have budgetary estimates, but often the project work is simply funded out of the IT
or other departmental budget without formal monitoring of costs.

On the way to Level 2, most organizations shift their focus from what we might call the "intrinsic
value" of a project at Level 1 toward cost control. At Level 2, people begin to notice that projects
are taking longer to get done and that there is less clarity around why this is happening. While the
root problem is generally poor resource management, organizations often find that it is easier to
focus instead on delivering on budget as a way of ensuring that the project is still delivering value,
even if it's later than desired. Of course, at this stage, value is rarely quantified by a specific set of
metrics or key performance indicators (KPIs), and the determination of success is still anecdotal if
it's even questioned at all.

Actions for Improvement

How organizations chose to approach the move from Level 1 to Level 2 is of enormous importance.
They can move up the scale by administering financial control, or they can move by focusing on
value.

For organizations that focus on value as their lever for improving this dimension, we suggest
building an approach that stresses understanding why the work is being done. Suggested questions
that can be asked are:

■ Why are we doing this?

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 ■ What will be the impact to our organization as a whole if we don't do this now?
■ How well do we understand what we need to accomplish this project?
■ What exactly is the business goal, and how will we know whether we are successful in meeting
that goal?

For organizations that chose to focus on financial control, we suggest the following practices be
adopted first:

■ Put a time-tracking system in place to capture costs only around relevant activities (total time
on a project, time spent on monitoring and evaluation or time spent on administration). Most
time-tracking systems fail because organizations drive them down to capturing work at the task
level. Instead, focus on capturing cost at this stage.
■ Build a culture where every project has an appropriate contingency planned from the beginning,
2
because Murphy's Law is a law for a reason.
■ Build a culture where change orders are very rarely granted, since every change order granted
increases the cost and, surprisingly, generally decreases the value (see Note 1).
■ Build a culture where project budgets are not to exceed contracts. If the work can't be done for
that price, then the project is canceled, and a new contract may or may not be negotiated.

The decision of which approach to take is often determined by the predominant culture/market
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environment the organization finds itself in. Our advice would be to cultivate a value-oriented
perspective from the beginning, because it makes moving through Level 2 much easier and faster,
but that is not always possible.

Value and Financial Management at Level 2

Characteristics
At Level 2, based on ITScore results, most organizations have some costing ability, but value and
4
financial management remains rudimentary. Once again, depending on the organizational culture,
the majority of organizations move further down the path of financial quantification. Business cases
begin emerging at this stage, and gate-adjusted funding approaches become a commonly accepted
practice.

Standardized processes or systems to capture project cost and labor hours, as well as to prioritize
projects, are generally coming into general use in Level 2. However, at this point, there is little
consistent monitoring of the accuracy of this data or tracking of financial variances from plans or
budgets.

While it is possible to produce a list of projects (and some of these lists may be referred to as
"project portfolios"), there is no official portfolio management process yet, which makes it nearly
impossible to make aggregate investment decisions on the basis of overall value.

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 Not uncommonly in the later stages of Level 2, PMOs are established, and some movement can be
found toward aligning projects with overall strategy. The advent of PMOs is commonly
accompanied by increased interest in performance indicators and metrics, but the early focus is
usually on generic "speeds and feeds" metrics, such as "on time, on budget." Collecting such
metrics is often time-consuming for the PMO, and provides little real knowledge in terms of actual
value delivered, but it is often part of the learning curve.

Actions for Improvement

Clients tell us all the time that business cases are often used only to get a project funded and then
are never referred to again. That means they have no impact whatsoever on what ultimately gets
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built and how much it costs. PMOs at Level 2 will typically have several objectives. First, they need
to encourage project managers to hold the value line over the life of the project. Second, they
should try to create an atmosphere for discussion about project value to encourage discussion that
says "this project is too costly; how can we change the solution such that the cost is in line with the
value?" Even doing this once or twice on a visible project can change the nature of the entire value
discussion.

Overall, the Level 2 organization should:

■ For those where costs were the driver at Level 1, adopt the practice of asking the appropriate
"why" questions with regard to projects.
■ Create room in the approval process for a real focus on nonfinancial value. The problem with
quantifying everything in financial terms is that most IT projects deliver capabilities rather than
hard dollar savings or revenue.
■ Look for and encourage clearly trackable project benefit statements, paving the way for future
evaluation of value contribution achieved.
■ Work toward aligning cost and value. The key issue is IT's perception of what it costs to deliver
what has been asked for at the quality and robustness that IT deems necessary. Fundamentally,
this creates a hard break between cost and real value.

Value and Financial Management at Level 3

Characteristics
At this "initial integration" maturity Level 3, basic cost control is assumed to be in place. Actuals
have been either captured or derived, and projects routinely prepare an estimate to complete
forecast. Internal accounting policy influences issues around "use it or lose it" thinking, but the
aspirational goal for Level 3 is to ensure that the total project budget plus contingency is never
impacted simply because spending in a quarter was less than the budgeted amount. To accomplish
this, organizations generally need to adopt more of a project orientation across the enterprise, and
the ownership or governance of projects becomes business-driven.

Deeper integration between projects and the business yields a number of benefits:

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 ■ The project list described in Level 2 now has a cost and a benefit component, which aids in
prioritization and forms the nucleus of portfolio management, recognizing goals or strategic
objectives.
■ Attempts at portfolio analysis and real-time changes are beginning to be incorporated into the
project list/portfolio.
■ Metrics are used to track and influence performance tailored to the needs of the organization.
■ The new project pipeline is addressed on at least a quarterly basis, although project
cancellation, or lack thereof, is often still a problem.

The goal at Level 3 is to provide a portfolio perspective such that the entire management structure
of the organization can understand what investments are being made, what the outcomes and
benefits expected are, and what the probability of success is. This drive for transparent decision
making not only creates a situation requiring consistent management reporting through an agreed
set of KPIs and metrics, but also offers the basis for some level of financial accountability.

Actions for Improvement

■ Understand that most of the truly important decisions about a project are made before the
project is even approved.
■ Adopt a portfolio process that mirrors the demand management process as outlined in "Toolkit:
Intake Process for Project Demand Management."
■ Empower project managers to ensure that the project delivers value. This means project
managers know exactly how their projects will deliver value and can control scope to ensure
value is delivered.

Value and Financial Management at Level 4

Characteristics
Level 4 assumes all the basic aspects of financial management are in place. At this stage, value
becomes the entire focus.

By the time organizations reach Level 4, integration is well-established and effective. The portfolio of
programs and projects is analyzed against a variety of variables to better understand value and risk,
and to help improve the investment decision-making process, with the portfolio perspective carrying
heavier weight than the project or program perspective.

Portfolio investment categories are established and risk is factored in when modeling the portfolio.
High-risk projects are automatically allowed different funding patterns. The benefits of this
integration can be seen in a number of ways:

■ Availability of full-project accounting, with all costs related to a project captured

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 ■ Regular benefits tracking of project and program to determine how much value was actually
created
■ The inclusion of funds for risk mitigation and contingency in project and program budgets
■ Acceptance of rolling wave spending — that is, approval of budgets tied to project milestones

Actions for Improvement

■ Embed value-tracking practices across projects, programs and portfolios because outcomes
will determine and drive future initiatives.
■ Formalize stakeholder or sponsor revalidation of project or program value and outcomes at key
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gate reviews.

Value and Financial Management at Level 5

Characteristics
At Level 5, the focus shifts toward an understanding of higher-risk investments that can offer real
innovation.

An innovation portfolio is established and project management practices and processes tailored to
high-risk, small-bet projects are put in place. A conscious decision to pursue higher returns by
investing in higher-risk, innovative projects may result in higher overall project failure rates than seen
7
at earlier levels.

Organizations at the Level 5 stage have reduced or eliminated many of the traditional organizational
boundaries and have become much more fluid and able to nimbly facilitate changes in processes
and strategies.

Actions for Improvement

■ Work to develop new approaches to innovation, both incremental and transformative. Much of
this should involve change management and application of techniques, such as crowdsourcing,
social media and relationship management, all targeted at supporting a continuous stream of
breakthrough innovation.
■ To maintain a virtuous circle, institutionalize learning, and reward sharing.

Recommended Reading
Some documents may not be available as part of your current Gartner subscription.

"ITScore for Program and Portfolio Management"

"Deciding Which of Four EPMO Styles Is Right for Your Organization"

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 "Business Performance Is the Value of IT: Things to Watch or Do"

"How Economic Conditions Influence PPM Maturity Level Progression"

Evidence
1P. Williams, "Optimizing Returns From IT-Related Business Investments," Information Systems
Control Journal, Vol. 5, 2005.

2 "Portfolio Risk: What It Is and Why We Should Care More"

3 "Economic Conditions Influence PPM Maturity Level Progression"

41,300 PPM maturity assessments have been undertaken by user organizations since the original
PPM Maturity Model was made available in December 2008.

5 From April 2011 through March 2013, the PPM research team completed 302 client interactions
involving maturity.

6 "Toolkit: The Processes and Components of Initiative Value Reviews"

7 "Predicts 2013: PPM Leaders Must Embrace Constant Innovation and Change"

Note 1 Change Order

A change order is defined here as increased scope, not changed scope. Waterfall projects
classically get it wrong during the requirements phase and then use change orders to "get it right"
as real needs emerge during the project. If all changes are additive, then cost goes up, and value
per unit of cost goes down.

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