Settling the Top-Down vs. Bottom-Up Budgeting Debate

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As a company expands and matures, leadership will eventually lose control over the Planning, Budgeting, and Forecasting (PB&F) process. Over time, different regions and functions will develop unique and siloed processes that provide the CFO budgets with varying levels of depth and flexibility. The CFO’s attempt to corral the process by notifying the organization that their group at HQ is now running the show inevitably launches the Top-Down(TD) vs Bottom-Up(BU) civil war.

Challenges

Effectively navigating the evolution from a pure BU to a pure TD approach is nearly impossible. Replicating the old ways with a TD process that budgets at the same level, even with allocations, presents well-documented challenges. Cost center owners disengage from the process because they do not feel like their input is valued, functional leads don’t fight for a potentially profitable project because they fear “Corporate,” and the finance guys in the ivory tower forecast inaccurately because “how would they know what goes on here in the field/plant/etc.”

Strategic Top-Down Target Setting

Predictably, the answer to the TD vs. BU debate is somewhere in-between. Instead of overhauling the current Bottom-Up process, the organization can leverage it and still give the CFO the control he or she covets by implementing Strategic Top-Down Target Setting. The CFO typically does not care that 401k expense is budgeted to stay flat, or that marketing expense is budgeted to rise 50 basis points. The CFO cares about top-line growth, margins, and cash flow. The finance organization can control these in the budgeting process without strangling the different regions with peanut butter spread allocations. Within the firm’s planning tool of choice, Finance will set various Key Performance Indicators (KPIs) that the current planning teams must achieve. Common budgeting KPIs are:

  • Gross Margin
  • /EBITDA
  • DSO, DPO
  • Inventory Turns

The Strategic Top-Down method generates the typical benefits an organization receives from the pure TD process (e.g. reduced cycle times, improved accountability, and removing personal interests), while allowing the different functions or regions of the organization to build their budget in the way that best works for them. As challenging as it may be for Finance to give up planning revenue growth down to the basis point, it is far more effective to work with the different commercial groups to set market and product growth expectations, instead of holding them to profitability metrics.

This budgeting strategy can also drive creative pursuits of revenue-generating activities and operational efficiencies to meet the KPIs set by finance. For example, instead of conforming to a headcount maximum, a commercial region is able to increase team size to meet new sales initiatives, while continuing to grow revenue in line with Finance’s margin targets.

Considerations

This process pushes the decision-making to the teams that will have to live and operate under the budgets. Importantly, the teams must trust the targets they have been given. They cannot feel like they are building up to meet margin targets pulled out of thin air. Cross-functional teams should present a strategic vision annually that includes:

  • Commercial/Sales groups presenting their expected market and product growth
  • Operations presenting expectations for inventory, manufacturing efficiency, and commodity price fluctuations
  • Finance presenting pricing and foreign exchange expectations

By maneuvering these levers, the CFO and his FP&A team can effectively set their revenue growth, margin, and cash flow expectations without the numerous reiterations that result from a pure TD or pure BU process.

5 Ways to Take Advantage of a Crisis: The Change Management Approach

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Whether it be a workplace accident, natural disaster, data breach, corporate scandal, or fraud, crisis is inevitable. What is done immediately after such an event is critical to the future well-being of the company. Everyone in the organization suddenly wakes up from the autopilot they have been able to operate on for years. All eyes look to management for direction. It is their responsibility to take lead, bring stability to the company and seize the opportunity for improvement. An organizational change management approach reevaluates the use of human capital, processes, and systems issues to overcome crisis and create a solid foundation for a successful future.

  1. Develop Leaders

After a crisis, people across the organization are willing to change their normal way of doing things in order to prevent a similar situation from happening in the future. Management must capitalize on that willingness to change by identifying the best people to motivate others and lead transformation initiatives. Natural leaders will arise during a crisis. Leveraging their strengths will help the company not only address current problems, but improve processes and prepare for the future.

  1. Renew the Culture

Company culture is a strong predictor of financial and operational health. When a company’s culture is in a bad state, it usually means their communication is poor, the processes are inefficient, work ethic is low, and many other crisis-provoking issues exist. The tone at the top drives company culture. A crisis presents the board and executives an opportunity to re-evaluate leadership styles and hit the “reset button” if needed. In overcoming crisis, it is critical to determine which leadership style the company must follow  post-crisis in order to renew the culture and effectively make business improvements.

  1. Resolve Process Issues

Management should focus on fixing process issues before making any other major changes. If a company waits to improve their processes until after the system implementations and organization alignment, they will most likely have to re-implement and restructure, costing the company a lot of time and money. Client-facing, retention-focused processes take precedent. Internal processes, like improved asset utilization and better productivity measures, are next. When made early, process improvements increase efficiency and effectiveness and usually require little investment compared to system and organization changes. In addition to process improvements, management should also implement new policies and controls.

  1. Improve Systems

Systems should be used to support the business processes and overall business strategies – not the other way around. In order to ensure systems are used in this manner, the project management office (PMO) within IT should be reviewed. Proper approval processes and project governance practices will resolve most issues around duplicate systems, misallocation of resources, and more. Improving PMO practices leads to greater discipline within the organization, resulting in more efficient utilization of IT assets. The time following a crisis is a perfect time to make those changes to the PMO. Additionally, it is an ideal time to rationalize the application architecture, ensure cybersecurity practices, and begin discovery for different or additional system solutions. System changes take a lot of time and hard work, so using a crisis to launch new system selection and implementation projects would be wise.

  1. Align the Organization

The organization structure is an aspect of the company that is often overlooked, but it is actually one of the most important factors supporting the core competencies of the business. Effective organization structures promote better communication and improved productivity, leading to a reduced risk of crisis. When the organization structure is considered during the planning phase, alignment with processes and systems is straightforward. Even though people are more open to change following a crisis, organization re-structuring can face push-back and lower employee morale. It is recommended to find outside change management experts to help make this less painful.

 

Trenegy is a management consulting firm that guides companies through crisis recovery by leveraging their project management and change management expertise.

Functional Control Implementation for the Construction Organization

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The typical construction project today faces ever tightening budget constraints, high pressure to conform to unrealistically short construction deadlines, and double-digit increases in material and labor costs.  Add to that the increased focus on safety and environmental concerns and many organizations feel they are starting out in a hole before they have even broken ground. With so many distractions, it is easy to lose focus on their controls framework among the chaos.

Today, more than ever, finance departments need help keeping the controls framework in place and operational in the face of emerging risks and opportunities. Finance doesn’t simply need more internal auditors to tell them what’s wrong, but the CFO needs a team that can:

  • Analyze emerging risk
  • Design effective processes and controls
  • Test controls and fix underlying deficiencies

Risk Environment

The risk environment is always changing, even more so as market volatility increases. A recent survey shows that only 5% of CFOs and Audit Committee chairs receive “informed perspective on emerging risk” from their Internal Audit department.

Market volatility, economic uncertainty, and an ultra-competitive environment has greatly enhanced the speed at which the risk landscape changes.  Additionally, with the added increase in merger and acquisition activity, companies now face exponential challenges when addressing risks.  In order to meet these challenges, companies must constantly examine their risk assessments and adjust to the new environment.  No longer is it adequate to simply prepare and present a risk assessment on an annual basis but rather this activity must be completed on an ongoing basis. The risks identified in previous assessments must constantly be reanalyzed as they pertain to the new set-up.

When performing this year’s risk assessment, be aware that the integrity of your controls environment may be threatened with each major event takes place within or outside the organization.  Companies who address the effect of each event and the risk it introduces to the overall risk environment will better be prepared to handle risks in a timely manner.

In order to adequately address risk, a privately held construction company recently added a member of internal audit group to the team responsible for mergers, acquisitions, and strategic partnerships.  A high-level risk assessment is prepared prior to making any strategic decisions and are part of the final financial package.  Additionally, the team runs a post transaction review to determine the accuracy and validity of the perceived risk and data is used to assess future risks.

Process Design

A control only functions if:

  • The process it exists within is effectively managed
  • All employees know which aspects of the control they own
  • The process is scalable to control for future risks

Mergers and acquisitions have become an integral part of the business strategy for most organizations today.  A firm may capitalize on a growth opportunity by purchasing a strategic target with seemingly similar business processes. However, if the company has only ever operated within a certain market, industry, or geographic landscape it is likely the two organizations do not share similar processes.  As a result, processes which worked for the old organization will fail to identify red flags in the new organization and controls will not address the risk they were designed to mitigate.

The best way to control the risks which have been introduced is through effective process management.  Clearly defining roles and responsibilities in the new organization and delineating between functions (accounting, operations, and legal), will allow the controls to function as they were designed.  Creating and implementing a clear set of processes for the newly formed organization reduces ambiguity and allows controls to function as designed.  This exercise must be completed each time a merger or acquisition is completed.

As part of the integration team, a publically held construction specializing in major infrastructure projects throughout the world, created a team responsible for process integration.  This team’s charter is to create a process gap analysis of the newly formed organization and design one organization-wise process.  The team then implements and tests controls within those processes to ensure the new controls are clearly defined, implemented, and functional.

Underlying Deficiencies

The fact pace of business today often leaves organizations in fire-fighting mode forcing them to concentrate on the crisis of the day.  As a result, many organizations allow a control deficiency to fester.  A deficient control creates a false sense of security and finding the underlying cause of a failure is critical. While the internal auditors can quickly discover control concerns, it is equally important that a team is in place to immediately address and remediate the deficiency.

Often control deficiencies appear to be isolated incidents with straightforward remedies. However, during remediation, material and systemic weaknesses such as “tone at the top”, resource availability, and technology flaws are often revealed. Alternatively, what may seem like a doom and gloom scenario – control deficiencies pervasive through your entire organization – might all link to one common cause.   Internal controls teams must analyze the root cause of each problem and search for trends that link them.  Often, eliminating one deficiency will address and eliminate others as a result.

 

The internal audit team, as part of their findings noticed repetitive failures within journal entry support, account analysis, and financial reporting key controls.  The natural response would be to conclude that there was a “failure of accounting governance”. The team however looked deeper, specifically, what precedes all of these processes: closing the books. They determined that by implementing an improved accrual process to facilitate closing the sub-ledgers on the first day of the month, accountants were given more time to create an accurate journal entry, analyze accounts, and provide managers more time to review final reports.

How Trenegy Helps

Trenegy provides a comprehensive review of an organization’s risk environment by drawing on years of experience advising both privately held and publically traded companies. We work across organizations through accounting, finance, HR and operations to help design and implement effective controls with a focus on efficiency and future flexibility.

Trenegy does not simply identify and report control deficiencies but once we have identified failures in the process, we develop a specific course of action to remediate the underlying causes of control failures. By leveraging our expertise in ERP implementation, process design, and COSO 2013, we build strong controls around the people and tools you have invested in.

We arrive with both an attack plan and an exit strategy. Whether you recently became a public company and need a controls framework built from scratch or are trying to maintain a stable control framework in a volatile market, our focus is on providing the finance organization deliverables and strategies that can be used long after we are gone.

Optimizing Organizational Performance through the Control Environment

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It has been said that a pessimist sees the difficulty in every opportunity whereas the optimist sees opportunity in every difficulty.  Similarly, the corporate executive can view regulatory requirements created by Sarbanes Oxley and the PCAOB with disdain or as a catapult for positive change throughout the organization.  Private companies, who today face increased pressure to implement a control environment from lenders, partners, and investors, will face challenges similar to their public counterparts.

A SOX 404 implementation program can be managed to gain organizational efficiencies and achieve more effective processes. In the same way, companies who implement a control environment to satisfy outside requirements, can benefit from efficient and effective processes that arise from this initiative.  The guidelines outlined below will allow organizations to realize benefits of organizational change while implementing a sound control environment.

Set Guiding Principles.

The transition to the 2013 COSO framework implies a more robust and daunting control environment. Developing a set of guiding principles for the organization and each of the business functions links policies to strategy and sets the foundation for an effective control environment. Guiding principles capture intent, establish the tone from the top, and rally the organization to implement the right control activities.

A mid-sized construction group used guiding principles as a motivation tool and a way to give each function a sense of purpose and identity in their new environment. The control, monitoring, and risk management activities and policies were then tied into the guiding principles to ensure a common tone was established and integrated.

LESSON LEARNED:  Undertaking large initiatives such as creating and implementing a control environment presents the perfect opportunity to re-unite the organization and the best place to start is the guiding principles.

 

Integrate Risk Assessment and Planning.

The mere sound of conducting a risk assessment wreaks drudgery. Organizations benefit when the risk assessment process is integrated with the business planning process as one seamless and forward-looking process is more efficient than two separate processes.

A key element of the business planning process is a financial budget for the upcoming year. Why not also make the risk assessment a product of the planning process? Recently, a large developer integrated the risk assessment with planning and budgeting adding only two weeks to the entire four-month planning and budgeting process.  Completing both initiatives simultaneously provided a more holistic approach to both processes and exposed risks and opportunities which would have been more difficult to discover by looking at each process separately.

LESSON LEARNED:  The total benefit gained by integrating the risk assessment and planning process is far greater the sum of the two initiatives completed separately.  Organizations can use this integration as a starting point for organization-wide, integrated process change.

 

Eliminate Waste.

During a controls and process mapping exercise, it is important to understand the purpose of each step in a process. Many fast-growing companies inherently have bad processes in place that worked for a small company but are unnecessary for the size of the organization they have become.

Often large construction organizations spend an inordinate amount of time physically matching vendor invoices to checks for the Controller’s signature. This step served the company well when they were small but as they grew into a larger public company, this was wasteful and did not serve a purpose. By implementing more efficient controls into the disbursement process, the company eliminated the paper matching process.

LESSON LEARNED:  Do not be afraid to look for ways to eliminate waste as a part of the SOX 404 implementation or review process. Along each step in the implementation / review process, ask yourself, “Is this a necessary step and does this step make sense for a company our size?”

 

Companies have no choice but to address the mounds of regulatory requirements to comply with SOX and SEC regulations and requirements from lenders, partners, and investors. Those who view these requirements as a catalyst to change across the organization will recognize benefits that far outweigh their costs. Organizations who chose to take the pessimistic viewpoint will continue to fight an uphill battle by focusing solely on the difficulties the requirements present.

The Keys to Construction Audit Success

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As companies continue to face tighter budgets, shorter construction cycles and rising labor and material costs, it is even more important to implement clearly defined functional controls. The construction audit helps companies quickly identify control and process issues and implement long term solutions.

A well-designed construction audit examines past, present and future projects for cost overruns, schedule discrepancies, documentation deficiencies, incomplete or inaccurate contracts, and incomplete tasks. The construction audit reviews current controls and, based on the findings, documents controls deficiencies, creates new controls, and develops an implementation plan to mitigate risks for future construction projects.

The construction audit focuses on five distinct development phases: plan, bid, design, construct and operate.

1. Plan

The construction audit begins with the planning phase.  A high level review of the feasibility study and business case is completed to ensure they are based on accurate, complete and timely cost estimates. A review of the baseline project plan will examine the completeness and accuracy of project budgets, timelines, and labor requirements.

Primary Focus: Feasibility Plan

  • Are feasibility studies and business cases complete and accurate?
  • Does the feasibility study include known factors which will impact project schedule and cost?

2. Bid

All bids packages are reviewed to ensure contractors prepare cost and timing estimates based on complete and clearly defined bid packages. A bid review ensures contracts are awarded based on pre-set, defined, selection criteria with clear terms and conditions.

Primary Focus: The Bid Package

  • Is the RFP process clearly defined and are changes / revisions released to all bidders in a timely manner?
  • Is the RFP package complete? Are bids based on information accessible to all bidders?
  • Do selected bid packages address the entire project and are exact specifications referenced?

3. Design

The design phase ensures that a complete project scope, plan, and budget (including contingencies) are developed and approved before construction begins. Additionally, the design phase will establish the change order and draw processes (including approval levels and workflows).  A signed contract completes the design phase.

Primary Focus: Final Project Budget

  • Was the budget set and approved before construction began?
  • Does the budget contain the proper amount of contingencies?
  • Can revised budgets be easily tracked to the original budget?

Primary Focus: The Bid/Contract

  • Does the contract include exact bid quantities, timeframes, specifications, and prices?
  • Does the contract clearly lay out the change order process and approval requirements?
  • Is the draw process clearly defined and based upon measurable milestones?

4. Construct

The construct phase of the construction audit examines progress reports, adherence to financial controls (draw requests, approvals, contractor payment processing), and complete and accurate status reporting. Critical to any successful development is a well-defined and followed change order process. As part of the construction phase, adherence to change order creation, approval and processing is reviewed for completeness. Finally the construct phase ends with the close out process. Key elements include the creation and completion of the final construction punch list (and contingencies) and the collection and maintenance of warranty information.

Primary Focus: Project Payments

  • Are payments based on pre-defined milestones and made only after the proper draw requests have been approved and submitted?
  • Have all change orders received proper approvals?
  • Are change orders incorporated into the original budget? Are revised budgets distributed?

5. Operate

A property will be put into operation once the certificate of occupancy documentation has been obtained.  Final punch list items will be completed and the property will be transitioned to property management or turned over to a third party.

Primary Focus: Punch List / Punch List Contingencies

  • Has a final project punch list and contingency been created?
  • Are charges correctly tracked and allotted to the closeout process?
  • Is the final project budget complete?

The ultimate goal of the construction audit is to address the causes of past deficiencies and create repeatable processes and controls to minimize project risks going forward.

Trenegy encourages clients to use the construction audit as a mechanism to ensure sound financial controls are implemented and followed to maximize profitability and reduce project risks.

Reporting Strategy: More than a Slimmed Down Report Stack

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Our research indicates management in large organizations can spend up to 50% of time developing, modifying and reviewing reports. For a company with over $1B in revenue, the quantity of reports can stack higher than the empire state building.  In many cases, the general perception is more information is better.  However, too many reports can have an adverse effect on overall efficiency.

The problem of excess reports is more common in publicly traded companies with complex structures, multiple lines of business and global operations. Organizations should seek to eliminate unnecessary reports and focus on enhancing the value of remaining reports by following three simple rules:

  1. Standardize data definitions. The root cause of inconsistent data definitions begins at the bottom of an organization.  Business functions tend to act in silos when defining metrics and reports for analyzing the business.  Employees are more concerned with supporting their own responsibilities instead of seeking to understand the other business functions. For example, operations classifies a hose and a coupling as two distinct products categorized in two separate product lines.  At the same time, the commercial team classifies the combined product, a hydraulic hose, in yet a third product line.  Inconsistent product line definitions force the operations and commercial management teams to create two reports to account for the difference in production and sales numbers.  A company must develop a cross-functional team to create standard data definitions and a global data model with consistent dimensions for analyzing the business, such as geography, division, customer or product line.                                                                                                                               
  1. Align shared processes. When more than one business function is involved in the same process, such as Sales and Operations Planning, common information is not always leveraged. For example, base numbers for revenue and capacity planning might be calculated differently. The sales team develops a revenue forecast to help the organization understand growth opportunities and the demand planners engage sales and marketing to develop a product demand plan to provide capacity requirements.  Additional reports are developed by finance to bridge the forecast gaps.  Two separate processes are driving the need to create multiple reports that likely only reconcile with heavy manual manipulation.  Alignment should begin at the process level with defining a standard, integrated process for shared information, communicating the changes and implementing policies and controls to ensure the new process is followed.
  1. Challenge reports. Often a one-time, ad-hoc request for information becomes an institutionalized report and added to a formal reporting process.  Employees fall victim to the ‘I’ve always done it this way’ syndrome and mindlessly create the same report over and over without questioning the value. Time and resources could be focused on value-added but are often wasted.  For example, the Treasury organization created a daily cash position report distributed to over a hundred managers. The value of the report was questionable. The Treasury manager decided to test the value by not sending the report for a week.  Nobody complained of a missing report.  If the purpose of a report cannot be explained and the report is not useful for business decisions, stop creating it.

A company can improve efficiencies and the effectiveness of its management team by streamlining the reporting process.  This is achieved by aligning data definitions and processes, as well as, eliminating valueless reports. Trenegy is a Management Consulting Firm that helps companies solve complex business problems and improve efficiencies by helping with Reporting and ERP Strategy, Business Process and Organizational Alignment and Internal Controls.

Is Your Cost Accounting System Draining Resources?

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Manufacturing companies struggle to effectively and efficiently design a cost accounting system to properly value inventory, provide data for profitable and competitive product pricing and enable operational control of costs.  As such, these companies find themselves unable to explain root causes of variances, lose business to competitors because of overpricing, lose money on sales due to underpricing and fail to accurately value inventory because of woefully inaccurate standards.

However, we have found many companies in this position are unwilling to modify their costing system.  After wrapping-up a recent assessment of a manufacturing company’s financial systems and processes, it finally struck me there was one common message received from the client after this assessment and the dozen I have done before it (and I’m paraphrasing): “Don’t touch my costing system.”

Regardless of the talk of change and blowing-up the status-quo, the costing system of yesteryear seems to always be off-limits, even though it fails to meet its primary objectives.  Why is this the case?

Primary Objectives

Let’s attempt to answer the question by acknowledging the primary objectives of any costing system:

  1. Produce financial and tax statements: Properly state inventory values and recognize costs of goods sold (at actuals) per GAAP at the end of a reporting period (may require manual allocations depending on costing approach used).
  1. Control costs: Enable cost visibility at the cost center and/or activity level to promote operational control of production related expenses.
  1. Capture product costs for pricing: Capture all relevant product costs throughout the value stream (e.g. design, manufacturing, marketing, back office support, etc.).

The vast majority of costing systems being utilized address one, maybe two, of the primary objectives, but very rarely all three.

Assessing

The most common mistake companies make is to accept the inefficiencies within the costing system to get the costing information required by the business.  Therefore, the assumption is the cost accounting system is functioning as designed. This is a false assumption.

Instead, companies need to delve a level deeper to understand the true accuracies (or inaccuracies) of the system and resources (time and money) required to maintain the system.  To do so, we ask our clients to complete the following survey:

cost accounting form 2

The output of this survey helps to shed light on where deficiencies may exist within the cost accounting system and creates the start of a business case for challenging the entire process.

Overhauling

Performing an adequate assessment of the costing system will help pinpoint weaknesses needed to be addressed.  There are times where a tweak here and there can address the gaps; however, a complete overhaul of the system is oftentimes required.

So where to begin?  Start by following these four steps:

  1. Gather requirements: Invest time to inventory and document the requirements for stakeholders and internal customers of the costing system. Take advantage of this opportunity to also standardize metrics used across the functions.
  1. Design from scratch: Design the costing process from scratch, assuming no constraints (e.g. technology), taking into account the requirements obtained from step one. Determining the right costing methods (standard, actual, average, activity based, etc.) should be evaluated during this step.  Note: More than one process or system may be required to fulfill all of the primary objectives.
  1. Align roles and responsibilities: Identify the roles within the organization who will be supporting the costing process and delivering information and communicate appropriately. Expected services to be delivered by the costing system should also be clearly defined and communicated.
  1. Create an implementation roadmap: The suggested approach for implementing a new costing system is to identify and prioritize all of the initiatives required to address existing gaps and meet the future state requirements. Breaking the implementation into smaller, more manageable projects, allows for the organization to attain benefits along the way. And it is often times easier for the business to absorb the changes.

It’s time to let go of the costing processes providing little to no value.  An effective costing process can provide a significant competitive advantage for the business.  Furthermore, the right costing process can act as a catalyst to break down organizational silos between the accounting, operations and commercial teams.  Trenegy has assisted a number of companies with implementing an effective and efficient costing system. For additional information, please contact us at: info@trenegy.com.

 

3 Warning Signs of a Never-Ending ERP Project

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This article first appeared on Peter Purcell’s blog, Tech and the Business of Change, on CIO.com.

Enterprise Resource Planning (“ERP”) implementations are never easy. Many projects start with excitement and high levels of participation but quickly devolve into run-on projects that are over budget and rife with change orders. Team members are deflated and often feel as if the project will never end.

Recovering and bringing the project to completion often costs as much as the original budget and end users do everything to work around the new system. ROI is nowhere near what was originally promised, key stake holders lose their jobs and the system is universally hated.

There are three warning signs that an ERP project is starting to spin out of control. Addressing them quickly helps avoid going through a project recovery cycle. The warning signs include:

  • Steering Committee Apathy
  • Out of Date Project Plan
  • Inconsistent Issue Tracking and Status Reporting

IT will have visibility to these signs long before key stakeholders become aware that a problem exists. IT needs to take responsibility to notify business partners and help make sure the weaknesses are addressed quickly and effectively.

1. Steering Committee Apathy

A steering committee comprised of key stakeholders with P&L responsibility provides a company-wide perspective when considering recommendations from project team members. The Committee needs to meet on a regular basis throughout the project to ensure the project stays on track.

The euphoria of creating a steering committee and kicking off a long-term ERP project is often replaced by indifference and apathy. Key stakeholders who were very active in the ERP selection and project kick off phases stop coming to meetings. Critical decisions made by the remaining attendees are second guessed. The steering committee no longer has power over the project and becomes ineffective.

Steering committee disengagement is a clear sign the project is at risk. The project team members will do their best to make business decisions, often in a silo. As a result, change orders will be generated on a regular basis, processes will not be efficient and end users will not be eager to accept the resulting changes in how day-to-day activities will be performed.

2. Out of Date Project Plan

Good project managers create an overall plan and budget at the beginning of the project then parse out one or two week chunks of work to responsible team members. The plan and budget is updated and communicated throughout the project to ensure team members understand how tasks are interrelated and do no lose sight of the overall end-goal. Most importantly, an updated plan and budget helps the team identify issues and road blocks early, preventing unnecessary surprises.

On many projects the overall plan and budget stop being updated on a regular basis as the manager starts focusing on managing day-to-day activities. Issues logs, team and company politics, status reporting, and integrator delivery problems take up the bulk of a project manager’s day, leaving little time to update the plan.

A lack of an updated project plan is a second sign the project will not be completed on time or on budget. Project team members will get lost focusing on tactical day-to-day activities that may not be necessary. Critical tasks are overlooked and the project seems to go on forever. Worse, third party participation never seems to end – the consultants just do not go home.

3. Inconsistent Issue Tracking and Status Reporting

Issue tracking and status reporting is a key tool for clear communications among all impacted by the ERP project. Steering committee members are kept up to date on key issues requiring decisions. Team members understand where to focus efforts to keep the project on track. Roadblocks are tackled as a team and the project is kept on track. End users clearly understand when to participate in the project and plan accordingly to help minimize overload.

Project issues logs and status reports can be tedious to create and can be easily overlooked when the steering committee loses interest in the project. Project managers expect issues to be resolved once identified and rely on ‘word of mouth’ to keep team members up to date. End users lose interest in the project.

Critical issues, configurations, enhancements and reports seem to get stuck at 80% and never get ‘complete’ when issues are no longer tracked. Project team members become frustrated because solving one problem creates another elsewhere. The systems integrators focus on completing simple configuration and development tasks, leaving critical project components incomplete.

Completing the Never-Ending Project

The three warning signs need to be addressed by revamping the overall project governance model to ensure project success. The project manager should start by updating the project issues log while gathering the latest status for on-going tasks. This information is then used to update the project plan, considering tasks that are behind schedule and the impact on project budget.

The team should use the updated information as a way to reengage the steering committee. The first sets of meetings should focus on confirming or redefining the meaning of success, and obtaining approval to necessary changes to the project budget and schedule. Once the changes have been approved, the Committee members need agreement on continued participation through project completion. Most importantly, the Committee members need to agree on a protocol to hold each other accountable going forward.

Don’t Let Your Major Capital Project be Like the Song that Doesn’t End

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When my kids were little we used to sing “The Song that Doesn’t End” together at the top of our lungs (much to the chagrin of their mother). If you don’t know the song, the lyrics at the end of the verse run into the lyrics at the beginning so that you can keep singing the song forever.

A recent study of energy “megaprojects” shows that 64% run over budget, and 73% have schedule delays.   But this doesn’t have to be the case if one follows some simple (although difficult to implement) rules.

1. Choose a prime contractor wisely.

Most companies do not have the expertise to manage a project with internal resources.  A prime contractor engages with the project owner and executes the project’s primary scope either by themselves or by hiring and managing sub-contractors.

Whether you are choosing a shipyard for a major rig upgrade, or a company like Trenegy for a major IT project, choosing the right prime contractor is key.  In this important role, picking the lowest bidder is not always the best choice.

Would you hire a company to install a pool in your backyard based strictly on price?  If you would not do that, why would you choose a prime contractor for your company’s major capital project that way?  You would be surprised how many companies take this approach and end up paying more in the long run.

2. Have a well-defined plan.

Have you ever started a home project only to find yourself making six trips to Lowe’s to get the right parts to finish the job? I know I have. Making a good plan prior to starting the “honey-do” project would have probably eliminated the additional time and cost.  Now multiply that effect by a thousand (or a million…or more!). That’s the effect of a poor plan on a major capital project.

A good plan should include some basic concepts:

  • A realistic time and cost estimate free of optimism bias. These estimates should include the possible effects (both positive and negative) of risks and opportunities identified during the risk assessment (see below).
  • A comprehensive risk assessment to identify potential risks and opportunities that could affect the project’s schedule and cost.
  • A detailed inventory of resources required to complete the project (including resources that may be needed to address the risks identified above) and a plan of how to acquire them.

3. Make sure your capital project is a capital project.

Many companies fall into the trap of accumulating deferred maintenance as they prepare for a capital project.  They think, “this small maintenance item won’t interfere with the project’s critical path, and we’ll have more time during the project than during operations.”  This line of thought is a fallacy. When possible, maintenance is better performed during operations.  Consider this example:

A home owner decides to change the air conditioner air filter while a contractor is in to do a major kitchen remodel.  He thinks, “I’ll be at home then and it is such a small project that it won’t affect the kitchen remodel.”  While the remodel is going on, the homeowner borrows the ladder to install the air filter – which forces the kitchen contractor to delay the installation of a cabinet and causes a day’s delay.  A few days later, the kitchen contractor paints the whole kitchen, fouling the air filter the home owner just installed (and causing the home owner to have to install another one after the project).

Although this example is extreme, it illustrates that the scope of capital projects should include only the capital work scope for which the project was planned.

4. Know where you are (and where you are going).

Great real-time tracking is necessary to ensure course corrections can be made during a project so it ends on time and under budget.  To know if your tracking is effective you should know the answer to these questions at any point during project execution:

  • Where are we today (against the schedule, the scope, and the budget)?
  • How much longer will it take to complete the remaining scope?
  • What will it cost to complete the project?

If you cannot answer these questions confidently, then your tracking needs to be improved.

5. Be complete at completion.

Almost everyone who has bought a new home has developed a list of “punch list items” (quality deficiencies or incomplete scope) to be corrected or completed by the home builder before closing on the home.  Many home owners have allowed these “punch list items” to roll past the closing date with the promise of the builder completing them sometime in the future.  If you have been in this situation, which of these “punch list items” was the builder more motivated to complete?

Your original plan and continuous tracking should include provisions for completion of “punch list items” during the planned execution of a major capital project. It is more likely that the prime contractor will act on these items prior to the project end date.  A project should be as complete as possible by the completion date.

Although these rules seem simple, they are not easy to implement and require discipline and a deliberate approach to realize the desired results.

This is the fourth in a series of articles on operational excellence. Trenegy helps companies successfully manage operational excellence using a proprietary methodology. We help our clients get value of out their new programs quickly and relatively painlessly.