Before the initialization of any project, a number of activities takes place. Initialization of the project depends on the organizational objectives. One of the main reasons to start the project is to cater to the company’s business needs. The product may change due to the customers’ requirements and also due to the technology updates. These updates lead the organizations to remove an old system and introduce a new one.
The standard definition of project, as stated in the guide of Project Management PMBOK, 5th Edition, “a project is a temporary endeavor undertaken to create a unique product, service or result”.
A project must be managed in a scholarly manner to get proper results. A project defines the beginning and ending time, and therefore it has limited scope and resources. A project has operations, which have specific goals. As per the guidelines of the project management PMBOK, 5th Edition, the key reasons for creating a project are as follows-
- Organizational needs– Sometimes, the organisations face new problems, which give rise to the initialization of the new project. It is also called ‘Business need’. Mostly, projects solve the problems internally in the organizations. For example, if the company grows in terms of employees, there might be the need to make a transition from manual finance set-up to automated finance set-up.
- Demand in the Market– The projects are created by the company due to the high market demands.
- Customer Request– Sometimes the project is created on the customer’s request. If customers want to add some new features to the existing product, it leads to the creation of the project.
- Advanced Technology– This requirement is fully based on the adoption of the technology by the company. In today’s technology bound world, organizations should be ready to readily embrace the latest technologies.
Selection of the Right Project–
The most important task before embarking on a project is to do the Feasibility Study. This study is all about whether the project is possible to implement if it is in the context. The project basically requires the ‘resources’ and ‘investment’. One should proceed only if all the requirements in the project are in line with the resources. For this reason, Feasibility Study is important. While performing Feasibility study, we much focus on 2 entities-
- The Body who is doing Feasibility study,
- List of criteria for project selection
To address the first one, following are the studies performed by the bodies to study Feasibility-
- PMO: As per Project Management Institute, a group or department within a business, agency or enterprise that defines and maintains standards for project management within the organization is known as a project management office (PMO). PMO also responsible for introducing financial analysis into the projects and also liable for standardization and the execution of the projects.
- Project Portfolio Committee: This committee is also known as project selection or Project Evaluation committee. This committee is responsible for selecting the new projects, prioritizing them, making closure decisions related to project etc. This committee also analyzes the financial and non-financial decisions regarding the project.
Project Selection Criteria:
Many things have to be considered while selecting a project. The project selection depends on the criteria set by the organization. Here is a list of criteria for selection of the project:
- The project should be aligned to the company’s planned agreement
- Should consider environmental factors also
- Look up for the expected financial benefits
- Check whether adequate funding is available or not
- Pool the resources for the project
- Risk analysis and forecast
- Checks the volume of the project (too large or too small or approximate)
Methods of Project Selection:
While doing feasibility study, the selection team also focuses on measuring the values of analysis. Their findings should be in terms of the proper financial metrics. They can use appropriate Project Selection methods to measure the values of the product, service and the output of the project. Let us talk about a few Finance related terms, which will be useful to measure the values.
- Present Value– Present value is the value of the sum of present money as compared to the value in future, when an interest is charged upon investment. It calculates what portion of the money obtained in future is utilizable today.
- Opportunity Cost– Opportunity cost is the value of the project specified when picking another project over it. When an organization selects between the two projects, they present some money on the project they did not chose. In simple terms, Opportunity cost is the cost which we pay for choosing one project over another.
- Sunk Cost– Sunk cost is the cost which is already spent and cannot be retrieved.
- Depreciation– It is the decreased value of the assets(resources) over time. This value can be found due to loss of efficiency, becoming out of date etc.
Through a balanced integration of the above techniques, organizations can select their projects using Quantitative Approach, which will also help you validate your decisions based on accurate calculations.