Discussion Question: Describe project selection and what are the pitfalls?
A general rule of thumb for project identification is that a company should come up with about twice as many projects than they actually have time and resources to do. Project ideas should come from all areas of the company, from the operations staff to senior executives. Ideas can come from everywhere - industry magazines or communication with existing and potential clients is a good starting point.
We have to create a list of potential projects with brief description so the decision maker has a good understanding of the potential project. Then the hard part starts, the project selection - a prioritization of the projects and decisions what project should we move forward with and which project should we drop.
When evaluating projects, some aspects that must be considered are value for the company, availability of resources, support from internal champions and external potential clients and how it fits into the goal plan of the company.
For the actual selection, there are three different approaches, using financial and non-financial factors:
- Financial analysis of the potential project and only few non-financial aspects (p. 34)
- Initial financial screening of potential projects followed by a scoring process
- Multi-factor scoring process where financial aspects are just one of many equally important factors
For the financial approach (1) we usually have four different models (NPV, BCR, IRR, PP) and each is bearing its own set of risks and benefits. In general, the main problem with the financial models is that they do not consider how the projects align with the company’s strategic goal. A project that looks good financially but does not align with the general company idea can pull it into the wrong direction and make it a bad choice even if it is fiscally sound.
Approach (2) is a process that first applies approach (1) and then uses a scoring process like (3).
In approach (3) we use a scoring model, different potential criteria for example risk, timing, resource requirements, cost and orientation with company goals are identified [if this follows (1) then cost is not a factor here since that has been the initial sort criteria]. Those criteria have to be categorized by importance and mandatory criteria have to be identified. Next, the criteria are weighted in a selection and prioritization matrix that assigns ratings and weights. With this matrix, we can identify the priority of the projects and also run through a few “what if” scenarios.
The risks for (2) and (3) are minor if the analysis has been done properly. It can be a lengthy process and take up a lot of time and energy. While evaluating the different criteria, we have to make sure that our assumptions are accurate and that the rating and weighting factors are properly set.