Organizations may choose to employ a formal project selection method wherein projects are thoroughly evaluated and approved. One possible selection method is composed of two approaches: Top-down and bottom-up.
The top-down approach, which I also call proactive project planning, is when a Corporate Planning Committee (CPC) convenes before the start of another period and evaluates all the possible projects that an organization may undertake. Those projects deemed most likely to yield significant benefits for the organization—given available resources—are selected for subsequent development activities. It is therefore a prerequisite for the company to understand where it is, what its vision is, and how it plans to make the transition to its desired state. Note that the top-down approach tends to happen within the strategic planning activity of the organization.
The second approach known as the bottom-up approach, or what I call the reactive project planning approach is a process that identifies and defines projects based on solving business problems or taking advantage of business opportunities as soon as they arise. Using this approach can be cheaper and faster and has the advantage of identifying urgent organizational problems.
The top-down approach tends to be time-consuming and considerably costly; at the same time it can overlook some business problems or opportunities before they arise. On the other hand the bottom-up approach, while it allows the organization to react to the organization’s immediate concerns, often fails to view the needs of the entire organization as a whole. By combining these two approaches the company will be able to proactively plan for the future and quickly react to the changing demands of its market.
Whatever the approach used to assess the merits of a certain project, the CPC should employ three types of justification techniques whenever possible. These techniques are as follows.
Economic. This technique is useful in evaluating the economic benefits provided by the project. It has the advantage of being unambiguous and relatively simple to understand since it directly answers how the project will affect the company’s bottom line. The disadvantage of using the economic technique is that it has a tendency to oversimplify the decision by relying on a single number in determining the project feasibility. Experience will show that most management decisions rarely are justified by looking at a single factor. Doing so could be detrimental to the organization.
Analytic. The analytical approach mitigates the shortcomings of the economic approach by considering more than one factor. There are many ways to conduct analytical project justification. For someorganizations, a practical means would be by using a weighted scoring system as shown in the table below.
In the weighted scoring system each factor is listed in the left-most column. These factors may be anything that the committee deems important when evaluating a project. Examples are “Reduce downtime by 50%”, “A Net Present Value of P 1M at a hurdle rate of 30%”, or “Improve employee morale”. Note that these factors may either be economic or non-economic. Afterwards, each factor is given a weight to signify its importance relative to the other factors identified. The total weight should be exactly 1.00. A helpful guide in determining the weights of each factor is the organization’s objectives. That is, it will be helpful to ask how important is this particular factor in achieving the company’s vision, mission, and goals?
Next each project is then listed in the following columns and given an Attractiveness Score (AS) for each corresponding factor. A project’s Attractiveness Score may have a value of 1 (not attractive), 2 (somewhat attractive), 3 (reasonably attractive), 4 (highly attractive). Afterwards, each Attractiveness Score is then multiplied with the corresponding factor’s weight to get the Weighted Score (WS). The Weighted Scores are then summed to get the project’s Total Weighted Score (TWS). These steps are then repeated for every listed project.
The CPC should then select projects having TWS of 3 or above. If budget constraints restrict the number of projects to be approved, only the projects with the highest scores may be accepted.
Strategic. A broader and less technical approach, this focuses more on identifying the project’s ability to help the organization achieve its goals as defined during the strategic planning process. A prerequisite of this method, therefore, is the formal identification of the organization’s vision, mission, and goals.
A sample justification technique using the strategic approach is by simply asking if the project is of technical importance. That is, is this project important for a follow-on activity that the organization plans to undertake in the future? Another means is by asking whether the project will provide the company with an advantage over its competitors.
While this approach has the advantage of directly relating the project with the organization’s goals, it also has the tendency to overlook the economic and tactical aspects. More importantly, it may not be able to detect the negative aspects of the project at the onset when planning against risk is most effective. Therefore, the strategic justification method is better off utilized in combination with economic and analytical techniques.