Project Initiation

Chapter 2
Questions in Initiation phase could be:
• Why this project?

• Is it feasible?

• Who are responsible partners in this project?

• What should the results be?

• What are the boundaries of the project?

• What is the scope of the project?

Project Initiation/Selection criteria
• Project selection is the process of evaluating proposed projects or group of projects, choosing to
implement some set of them so that objectives of parent organization will be achieved.

• This process can be applied to any area of the organization’s business in which choices must be
made compulsory between competing alternatives.

• Ex: A manufacturing firm can used evaluation techniques to choose which machine to adopt in a
part of fabrication process.

• A TV station can select which of the several syndicated comedy shows to rerun in its 7:30 pm
weekday slot.
Project Initiation/Selection criteria
• Each project will have different costs, benefits and risks. Rarely these are known with certainty.

• In the face of such differences , the selection of one project out of a set is a difficult task.

• Choosing several different projects , a portfolio is even more complex.

• Here several techniques are discussed that can be used o help senior managers to select projects.

• Project selection/initiation is one of many decisions associated with project management.

• To deal with all these problems ,we use models.

Project Initiation/Selection criteria
• The model allows us to strip away almost all the reality from a problem , leaving only one relevant

aspects of the “real” situations to dealt with.

• This process is called modelling the problem i.e, carrying away the unwanted reality from the

bones of a problem.
Two types of Project Selection models
• Numeric and non numeric models.
• Both are widely used.
• Following are the types of non numeric project selection models.
• The sacred cow
• The operating necessity
• The competitive necessity
• Comparative benefit model
• Q-sort model
• Non numeric models do not use quantifiable data. Numeric models use some
statistics to select the project.
 Two types of Project Selection models
Non Numeric Numeric Methods
• They are qualitative • Use quantitative method to analyze
the project quality.
• Types are: • Types can be
• Sacred cow • Payback Period
• Operating necessity • Average rate of return;
• Competitive necessity • Net present vales
• Comparative Benefit Model • Profitability index
• These methods are used in finance
to discuss investment details.
Sacred cow

• Preferred mostly in small organisations.

• Strongly recommended by single senior personal of an organisation.

• Can be officially terminated by boss (senior personnel)

• Used where centralised one person authority is there.

• The sacredness of the project reflects the fact that it will be continued until
ended or until the boss himself announces the failure of idea and ends it.
Operating Necessity
• Analysis or formal evaluation cannot be performed as the project is necessary to
operate.

• It is the situation where project is necessary to operate.

• Ex: Keeping sanitizers everywhere and temperature check of all individuals is necessary
for today’s world. This is something which needs to be done as per necessity.

• Another example could be natural disaster at any place or company where people need
help or company needs some policies or help to restart again. This needs to be done on
operating necessity.
Competitive Necessity
• The decision to undertake the project is based on a desire to maintain the
company’s competitive position in that market.

• Required to maintain competitive edge.

• Innovation or new implementation

• Modernisation
Comparative Benefit model
• When several projects are under consideration , the project having comparative
benefit will be accepted and performed.

• Critical and challenging task.

• Some projects are related to new products, some are related to computerisation
of records, others are related to make alterations in the method of production
and some of them may contain such areas that cannot be easily categorised.

• The project which gives higher benefits needs to be selected.

Q-Sort model
• Q sort is the method of classifying items according to the opinions of the group of persons.

• First the projects are divided into three groups as good,fair and poor.

• If any group has more than eight members’ opinion, then its divided into categories as fair plus
and fair minus.

• When all the categories have eight or fewer members , the projects within each category are
ordered from best to worst.

• Projects can be selected based on preference: may be evaluated financially before final selection.
Numerical Project Selection methods-
Profitability models
• Payback Period:
• The payback period is the time taken to gain a financial return equal to the original investment. This
time is usually expressed in years and months.

• The number of years needed by the project to refund its initial fixed investment is reflected in the ratio
of these quantities.

• Suppose a project costs $200,000 to operate and has annual net cash inflows of $ 40,000 then,

• Payback period=200,000/40,000 = 5 Years.

• The company faces less risks when it recovers initial investment fast.
Payback Period
• The manager must choose between machine A and machine B, what
will be his choice?
• Initial investment in both the machines is same ,but their cash flows
perform differently over the four-year period due to different labour,
material and maintenance costs.
Year Cash-Flow for machine A Cash-Flow for machine B

0 35,000 (Initial Investment) 35,000 (Initial Investment)

1 20,000 10,000
2 15,000 10,000
3 10,000 15,000
4 10,000 20,000
Payback Period _______Years _________Years
Average Rate of Return
• The ratio of average annual profit to the average or initial investment in the
project is referred to as the average rate of return.
• In Above example , suppose the average annual profits are $30,000, then
average rate of return = 30,000/200,000
• Average rate of return =0.15
• These two above models have major advantage in the shape of simplicity ,
but none of them cover the important concept of the time value of money.
Discounted Cash flows (DCF)
• There are two basic DCF techniques: Net present value and Internal rate of return.
• These discounting techniques enable the project manager to compare two projects with different
investments and cash flows.
• Lets look at NPV and IRR .
Net Present Value : NPV
• Net Present value method is also called as hurdle rate, cutoff rate.
• The net present value of all cash flows is determined by discounting them by the required rate of
return in this method.
𝐹𝑡
• NPV project = 𝐴0 + σ𝑛𝑡=1
(1+𝐾)𝑡

• Ft is net cash inflow, K is the required rate of return, A0 is initial cash investment.
• Net cash inflow is likely to be negative in the initial life of a project , as the project is successful ,
the cash inflows become positive.
• The project is acceptable if the sum of the net present values of all estimated cash flows over the
life of a project is positive.
Net Present Value : NPV
• NPV refers to the value derived by deducting the present value of all cash outflows in the
company from the present value of the total cash inflows.
• E.g.: For Company A ltd, the present value of all cash flows is $100,000 and the present value of
the total cash inflows is $120,000, so the net present value would be $20,000.
• Following table should be followed for calculating NPV.

Years Project Cash Flow Discount Factor Present Value

0
1
2
3
Total NPV

• Project Cash Flow= income-expenditure

• Present Value=discount factor * cash flow
NPV
• Discount factor is derived from the reciprocal of the compound
interest formula.
• Discount Factor is= 1/(1 + 𝑖)𝑛
where i = the forecast interest rate
n = the number of years from the start date.
NPV
Year Cash-Flow for machine A in Discount factor 20% (Use Present Value= cash flow*
dollars formula) discount factor
0 35,000 1 35,000
1 20,000 16,666
2 15,000 0.6944 10,416
3 10,000 0.5787 5,787
4 10,000 0.4823 4,823
Total NPV 2692

Note: Initial Investment to be taken as negative value. NPV should come as positive value
NPV

Year Cash-Flow for machine B Discount Factor 20%

0 35,000 (Initial Investment)
1 10,000
2 10,000
3 15,000
4 20,000
Total NPV
NPV

Year Cash-Flow for machine B Discount Factor 20%

0 35,000 (Initial Investment) 1 35,000
1 10,000 0.8333 8,333
2 10,000 0.6944 6,944
3 15,000 0.5787 8,681
4 20,000 0.4823 9,646
Total NPV -1396
More Numericals on NPV
• Company A ltd wanted to know their net present value of cash flow if
they invest 1,00,000 today, and their initial investment in the project
is 80,000 for 3 years of time. Expected rate of return is 10% yearly,
calculate NPV.
• NPV=Initial investment+( cashflow/(1-interest rate)^t)
• NPV=-8000+(100000/(1-10)^3)
• NPV= 57174.21
Advantages of NPV
• It introduces the time value of money.
• It expresses all future cash flows in today’s values , which enables
direct comparisons.
• It allows for inflation and escalation.
• It looks at the whole project from start to finish.
• It gives a more accurate profit and loss forecast than non DCF
calculations.
Internal Rate of Return-IRR
• NPV quantifies the profit in absolute terms.
• Managers tend to prefer profitability expressed as percentage.
• This can be addressed by another DCF method called Internal Rate of
Return-IRR.
Internal Rate of Return
• The IRR is the value of the discount factor when the NPV is zero.
• It is the discounting rate at which the present value of all future cash
flows is equal to the initial investment, that is the rate at which the
company investments break even.
IRR Example
Year Cash-Flow for machine A in Discount factor 22% (Use Present Value= cash flow*
dollars formula) discount factor
0 35,000 1 35,000
1 20,000 0.8197 16,394
2 15,000 0.6719 10,079
3 10,000 0.5507 5,507
4 10,000 0.4514 4,514
Total NPV 1494

To reduce NPV , increase the discounting factor in small steps until NPV becomes negative.
Discount factor= 22%, NPV is still positive, increase DR by 2% again
IRR Example
Year Cash-Flow for machine A in Discount factor 24% (Use Present Value= cash flow*
dollars formula) discount factor
0 35,000 1 35,000
1 20,000 0.8065 16,130
2 15,000 0.6504 9,756
3 10,000 0.5245 5,245
4 10,000 0.423 4,230
Total NPV 361

To reduce NPV , increase the discounting factor in small steps until NPV becomes negative.
Discount factor= 24%, NPV is still positive, increase DR further by 1%
IRR Example
Year Cash-Flow for machine A in Discount factor 25% (Use Present Value= cash flow*
dollars formula) discount factor
0 35,000 1 35,000
1 20,000 0.8 16,000
2 15,000 0.64 9,600
3 10,000 0.512 5,120
4 10,000 0.4096 4,096
Total NPV 184

When DR= 25%, NPV is negative , therefor IRR must lie between 24% and 25%.
Scoring models

• The numeric models have common limitation as they only look at the
financial element of the project.

• To broaden the selection criteria, a scoring model called the factor

model is introduced.

• Factor model uses multiple criteria to evaluate the project.

Scoring Models
• The factor model simply lists the number of desirable factors on a
project selection proforma along with columns of ‘Selected’ and ‘Not
selected’.
• The weighted column can be added to increase the score of the
important factors while reducing the scoring of the less important.
• The factors can be weighted simply from 1 to 5 to indicate 1: very
poor, 2: poor, 3:fair,4:good,5:very good.
Project Evaluation form
Advantages of scoring models
• Encouraging objectivity in decision making.
• Using multiple selection criteria to widen the range of evaluation.
• Simple structure , therefore easy to use.
• Selection factors re structured by senior management. This implies
that they reflect the company goals and objectives.
Project Portfolio Process (PPP)
• Organisations maintain a portfolio of projects .
• With limited resources management must choose between long term and short-
term projects, safe and risky projects, manufacturing and marketing projects and
so on.
• PPP attempts to link the organization’s projects directly to the goals and strategy
of the organization.
• PPP is also a means for monitoring and controlling the organisation’s strategic
projects.
PPP
• PPP can serve many purposes:
• Prioritize the list of available projects.
• To intentionally limit the number of overall projects being managed so the important projects get
the resources and attention they need.
• To identify projects that best fit the organization’s goals and strategy.
• To identify co-dependent projects.
• To eliminate projects that incur excessive risk and /or cost.
• To balance the resources with the needs.
• To balance short ,medium and long term returns.
Symptoms of a misaligned portfolio
• Many more projects than management expected.
• “Interesting projects” that don’t contribute to the strategy.
• Projects whose costs exceeds their benefits.
• Projects with much higher risks in portfolio; no risk analysis of
projects.
• Lack of tracking against the plan, at least quarterly
• No identified”client” for many projects.
Steps in PPP
• Establish a project council
• Identify the project categories and criteria
• Collect Project Data
• Assess Resource availability
• Reduce the project and the criteria set
• Prioritize the projects within categories
• Select the projects to be funded and held in reserve
• Implement the process.
PPP Steps
• Establish a project council:
• Senior managers play an important role in this council
• Without the commitment of senior management , the PPP will be incapable
of achieving its main objectives.
• The main purpose of project council is to establish and articulate a strategic
direction for those projects spanning internal and external boundaries of
organization, such as cross departmental and joint venture.
• The council is also responsible for allocating funds to projects that support
the organisational goals.
PPP Steps
• Establish a project council:
• Senior management people who can be members of council are:
• The Project Managers of various projects.
• The head of Project Management Office , if one exists.
• Particularly relevant general managers.
• Those who an identify key opportunities and risks facing the organisation.
PPP Steps
• Identify Project categories and Criteria:
• Various Project categories are identified so the mix of projects funded by the
organisation will be spread appropriately across those areas making major
contributions to the organisation’s goals.
• First step: list the goals of existing and proposed project.
• Know the mission or purpose of the project.
• Mapp Project goals to the organisation ‘s goals.
• Allow the council to identify a variety of categories that are important to
achieve the organisation’s goals.
PPP Steps
• Identify Project categories and Criteria:
• Four separate categories are identified like,
• Derivative Projects
• Platform Projects
• Breakthrough Projects
• R&D Projects
• Aggregate Project plan is made.
PPP Steps
PPP Steps

• The aggregate project plan can be used for many purposes:

• To analyse and adjust the mix of projects within each cateogory or aspect.
• To assess the resource demands on the organization , indicated by the size,
timing and number of projects shown.
• To identify and adjust the gap in categories , aspects, sizes and timing of the
projects.
• To identify the potential career paths for developing project managers, such
as team member of a derivative project, the team member of a platform
project, manager of a break through project and so on.
PPP Steps
• Collect Project Data:
• For each existing and proposed project, assemble the data appropriate to the
category’s criteria.
• Try to verify all the data , involve other people in validating the data .
• Data should include timing, both date and duration, expected benefits and
resource needs.
• Use project plan, schedule project activities , past experience, expert opinion ,
whatever is available to get good estimate of the data
• Screen out the weaker projects.
PPP Steps
• Reduce the Project and the Criteria Set:
• Here, multiple screens are employed to narrow down the number of
competing projects.
• First screen is each project’s support to the organisation’s goals.
• Other Possible screen may include:
• Whether the required competence exists in the organization
• Whether there is market for the offering and if there, then how profitable is it?
• How risky the project is?
• If there is potential partner to help with the project, whether right resources are available at
right times?
• Whether the project is a good technological fit with the organization, whether the project is
dominated by other existing or proposed project.
• In this step, the analyst has to maximize the variation among various projects
and eliminate similar projects.
PPP Steps
• Assess Resource Availability:
• Assess the availability of both internal and external resources, by type,
department and timing.
• While looking at labour availability , consider leaving time for vacations,
personal needs , illness, holidays and regular functional work(non project).
• Timing is important as resource needs vary over the entire life cycle of the
project.
• Full utilization of resources at some other place may doom the promising
project.
• Council will be trying to balance project resources over future periods looking
into timing and amount of maximum demand and availability.
PPP Steps
• Prioritize the projects within categories.
• Select the projects to be funded and held in reserve.
• Focus on fewer projects but with sufficient funding to allow the project
completion.
• Documents are prepared about why some projects were defunded or why
projects are delayed.
• One special type of delayed project is out-plan project : means the projects
that appear promising but are awaiting further investigation before a final
decision is made about their funding.
Result of funding step
PPP Steps
• Implement the Process
• Senior management must fully fund the selected projects.
• PPP process will need to be reported on regular basis.
• How often this process should take place is decided by council.
• The process should be flexible and improved continuously.
Project Charter
• The Project charter officially acknowledges the start of the project and should outline the
purpose of the project, the beneficial changes and key objectives , together with the
means of achieving them.
• Formal Project recognition is in the form of a project charter.
• Also called as ‘terms of reference’ ,or ‘project mission’ .
• Project charter takes the ideas of the project, background to the project, key
assumptions, business needs and other commercial needs.
• Scope of work
• Identify the key activities , budgets and dates.
• Comment on how the project is to be managed.
• Role of project manager and reporting structure.
Project Charter
• Project charter is not done by senior management but it is the
responsibility of project manager.
• Project charter makes the job easy for Project managers. It helps to
understand your authority, to know who’s on charge, what resources
are available to you when you manage a project.
Project Charter
Project Charter
Project Charter
• Project charter defines the project infrastructure
• Identifies the project manager,
• The project team,
• the stakeholders
• the roles each will play within the project.
• formalizes the project's MOV
• Scope
• supporting processes and controls
• required resources, risks, and assumptions.
MOV is measurable organizational value : It is the goal of the project and is used to
define the value that your project will bring to your client.
Project Charter
• Project ID
• Project Stakeholders
• Project Description
• Project Scope
• Project Schedule (summary)
• Project Budget (summary)
• Quality issues/standards/requirements
• Resources
• Assumptions & Risks
• Project Administration
• Acceptance & Approval
• References
• Terminology (acronyms & definitions)
The Project Team
• The Roles of the Project Manager
• Managerial role
• Leadership role
• Attributes of a successful project manager
• ability to communicate with people
• ability to deal with people
• ability to create and sustain relationships
• ability to organize
The Wisdom of Teams - Jon R. Katzenbach
Douglas K. Smith

• Work Groups
• Pseudo Teams
• Potential Teams
• Real Teams
• High Performance Teams
Work Groups

• Members interact to share information, best

practices, or ideas
• No shared performance goals (individual
performance)
• No joint work-products
• No mutual accountability
• Viable in many situations
• E.g., study group
Teams
• Bring complementary skills & experience
• Jointly defined clear goals & approaches improve
communication
• Improve decision-making
• Have more fun
Real Teams
1. Small number of people
2. Complementary skills
3. Committed to a common purpose
4. Common goals
5. Common approach
6. Hold themselves accountable
Pseudo Teams
• Weakest of all groups
• Not focused on collective performance (& not
trying to achieve it)
• No interest in shaping a common purpose
• Confusion & dysfunctional behaviours
Potential Teams
• Significant performance potential
• Requires more clarity about purpose, goals, work-
products, and common approach
High Performance Teams
• Meet all the conditions of a real team
• PLUS:
• Members are deeply committed
• Perform above all reasonable expectations
 Vital Signs for Evaluation

• 6 Project Team Basics

• Themes & Identity
• Enthusiasm & Energy Level
• Event-Driven Histories
• Personal Commitment
• Earned Membership
Team Leader (Project
Manager)
• Acts To:
• Clarify purpose & goals
• Build commitment & self confidence
• Strengthen team’s collective skills
• Remove external obstacles
• Create opportunities for others
• Creates the Project Environment
• Work space
• Team culture and values
• Project administration
• Ethical Conduct
Why Team work?
• Team work unifies the workplace environment
• Feeling of family, togetherness, friendship, supportive work environment.
• Team work allows team members to work together in an interactive , cooperative
manner which is far better and more satisfying than individuals working alone.
• Team work makes way for flourishment of ideas.
• Team work ensures successful completion of projects.
• Team work leads to improved productivity and efficiency.
Team Dynamics
• How team members dictinct roles and behaviour impact the other
team members and the team?
• Team dynamics are the unconscious , psychological factors that
influence the direction of team’s behaviour and performance.
• Team dynamics matter because they impact things like creativity,
productivity and effectiveness.
• Positive team dynamics tend to have team members who trust each
other, work towards collective decisions and are held accountable for
outcomes.
Strategies for boosting team dynamics
• Conduct a diagnosis and get to know your team.
• Work leadership, blocking behaviours, Free riding, Evaluation
aaprehension.
• Address problems quickly.
• Create a team charter.
• Enhance team culture
• Build communication
• Always pay attention