Developing Strategic Projects
PMI Houston Presentation – July 2008
• A Strategy is a long term plan of action designed to achieve a
particular goal, most often "winning." Strategy is differentiated from
tactics or immediate actions with resources at hand by its nature of
being extensively premeditated, and often practically rehearsed.
Strategies are used to make the problem easier to understand and
solve.
• Strategy is about choice, which affects outcomes. Organizations can
often survive -- indeed do well -- for periods of time in conditions of
relative stability, low environmental turbulence and little competition
for resources. Virtually none of these conditions prevail in the
modern world for great lengths of time for any organization or sector,
public or private. Hence, the rationale for strategic management.
The presentation is an overview of systematically planning, developing
and executing strategic projects.
• Strategic projects are where the project is HOW one “implements
the strategy.”
• Strategic projects require significant differences in approach and
management, significant skills in all aspects of project management,
and skills not found in the PMBOK.
• For example, strategic projects can include
– capital intensive projects,
– new strategies for companies, and/or
– new business automation or ERP systems to increase competitiveness.
The presentation will address strategic issues in
• Development of the Strategic Decision – What is the STRATEGY?
• Decision Execution and decision management of that decision
• Life cycle planning in a strategic project development
• Project management within strategic project development
• Financing tools examples for a capital intensive strategic project
• Risk-based decision support packages in strategic projects
• Monitoring and delivering on the promise of sanction expectations
Solid strategic project execution in implementing the strategy.
The Strategic Decision Development and
Strategy Execution
Strategy execution has always been one of the more difficult problems in
business. Creating a brilliant strategy is nothing compared to executing it
successfully. It has always been much easier to create a strategy document
than to get employees to abide by it. Many employees don’t even know the
details of strategies. Plans by senior management are neither attended to
nor executed. Performance expectations aren’t met. You know the drill.
Strategy execution has for too long lurched between two extremes.
1. “strategic engineering,” envisions strategy execution as an engineering
exercise, and views employees as cogs in a machine well-oiled by
computers.
2. “strategic anarchy,” encourages executives to simply get out of the way of
their employees’ entrepreneurial and innovative energies. “Command and
control” organizational structures are a relic of the past, according to this
perspective.
Neither extreme, of course, is very useful for organizations attempting to
perform well in difficult and changing business environments. Obviously
the right answer to effective strategy execution lies somewhere in the
middle, but how can these extreme views be reconciled?
Development Evaluation & Economics
Rough Pro-Forma Go/No Go – Using a WBS Approach
At the very early stage, use this approach for evaluation TIME and MONEY.
Do a quick risk-based approach with SME’s to develop rough pro-forma and
stay with Level 1. Work down into Level 2 and lower as more info available.
Another good approach is to go at it from a “contract” point of view, i.e. what
would we contract out and in what form to who. They can provide SME info.
Strategic Project
Level 1
Level 1
Level 1
Strategic Project Development
Program at Rice University 2008
Developing Strategic Projects
Strategic Development – The Strategic Decision
The Strategic Decision
It starts with the RIGHT strategic decision…
What is the
Opportunity?
What are the
Alternatives?
Select the
Preferred
Alternative
Execution
Operations
Good
Execution
Good Strategic Decision
and Project Definition
Poor
Execution
Poor
Definition
IDM (Integrated Decision Management)*
builds higher quality into a decision process
A
Discovery
Screen
Opportunity
Process
Steps
Creation &
Framing of
Alternatives
• Clarify situation
• Define opportunity
• Criteria screen
Decision
Review Board
B
• Create options
• Quant. model
• ID Experts
Stop / Go
or do IDM
Evaluation
and
Agreement
C
• Assessments
• Analysis work
Framing
Review
Fully Develop
Selected
Alternative
D
• Optimize strategy
• Resource plan
• Scheduling
Select
Alternativ
e
Phase
Deliverables
• Business situation
• Stakeholder list
• Screening for
- strategic alignment
- benefits & risks
• IDM resource plan
•
•
•
•
•
•
Decision Hierarchy
Strategy Table
Qualitative analysis
Influence Diagram
Expert identification
Analysis plan
•
•
•
•
•
Financials
NPV / EVA
Sensitivity tornado
Risk profiles
Risk reduction &
contingency plan
•
•
•
•
•
•
•
•
Key
Participants
• Project Owner
• Project Manager
• IDM Facilitator
•
•
•
•
Project Owner
Project Lead
IDM Facilitator
Core team
•
•
•
•
•
Project Owner
Project Lead
IDM Facilitator
Core team
SME’s
• Project Owner
• Project Lead
• Implem. Team
Source: Copyright: 1994 – 2005 Decision Strategies, Inc. Includes material copyright 1994 – 2002 Kenneth R. Oppenheimer
E
• Resourcing
• Project Mgmnt.
• Tracking metrics
Funding
Approval
VOI/VOC
Hybrid
Options
Project work plan
Staffing plan
Budget
Schedule
Metrics
Source: * IDM (Integrated Decision Management) is a process of Decision Strategies , Inc.
Implement &
Monitor
Performance
•
•
•
•
•
•
Earned value
Metrics tracking
Periodic review
Communication
Learning
Quality audit
• Project Owner
• Project Lead
• Implem. Team
Development Projects Process Groups
Process Groups
Core Process Groups & Phases or Stage Gates
Strategic Decision (IDM)
Discovery &
Screen Opportunity
Decision Execution (IDE)
Project Management
Project Development
Project Finance
Troubled Projects
Risk Analysis&Mgt (PRAM)
Project Risk Management
Framing of
Alternatives
Evaluation &
Agreement
Fully Develop
Execute
Selected
Decision
Alternative
Fully Develop
Execute
Selected
Decision
Alternative
Operate &
Monitor
Decision
Development
Front-End
Loading
Optimized
Project
Execution
Acceptance
Operate &
Monitor
Performance
Initiating
Planning
Executing
Controlling
Closing
Feasibility
Concept
Business Plan
With Pro-formas
Triage
Define & Focus
RM Planning
Phase
Define
Develop
Offering
Memorandum
Contracts &
Structuring
Turnaround Plan
Recovery or Salvage
Identify & Structure
Implementation
Phase
Execute
Accept
Documentation
& Securitization
Turnaround
Execution
Ownership & Estimate
Three Strategic-Level Iterations
Identification
Qualitative
Assessment
Financial
Closing
Quantitative
Assessment
Operate
Monitoring
& Performance
Turnaround
Maintenance
Evaluiate
Evaluate &
& Plan
Plan
Risk Response
Plan & Mitigate
Manage
Execution
Risk Monitoring
& Control
Developing Strategic Projects
Strategic Decision Execution & Decision Management
Pictures from
“Katrina”
Strategic Decision & Decision Execution
Process - “Inception to Disposal”
Decision Management
Execution Management
Discovery &
Screen
Opportunity
Creation &
Framing of
Alternatives
Stop /
Go
or do
IDM
Framing
Review
Evaluation
and
Agreement
Fully
Develop
Selected
Alternative
Select
Alternativ
e
Execute,
Operate &
Monitor
Funding
Approval
Strategic Decision
Decision Review Board Activities
Execution
Input
Project
Decision
Development
Decision Execution
Execution Review Board Activities
Executable
Front-End
Loading
Optimize
Project
Execution
Notice to
Proceed
This provides a consistent terminology and information flow
Operate
& Monitor
Performance
Acceptance
Begin
Accept
Final
Accept
Strategic
Disposal
The Strategy Execution Model
Corporate
Corporate
Strategy
Structure/
Integration
Strategy Execution
operates within a
surrounding context.
Biz Unit
Biz Unit
Strategy & ST
Structure/
Op’g Obj
Integration
Incentives
& Control
Source: Strategy Execution by Hbrenick
The Strategy Execution Context
Power &
Strategy
Influence
Execution
Strategic Fit
Leadership
Check
Organizational
Strategy
Culture
Execution
Plan (SEP)
Ten Schools (of Strategy):
• Descriptive (3)
• Prescriptive (6)
• Hybrid (1)
Change
Management
Project
Development
Execution Results
Source: Strategy Execution by Hbrenick
Decision Execution
Discovery
Framing
Evaluation
Strategic Decision Execution
Develop
Alternative
Execute
Operate
& Monitor
Execute
Decision
Strategy
Decision
Strategy is implemented through projects. Every project
Execution
Execution
should have a clear link to the organization’s strategy.*
Decision
Development
Decision Execution
Decision
Execution
Major
Decision
Project
Development
Decisions
Project
Project
Project Risk
Project
Capital
Project
Project
Development
Management
Management
Finance
Stewardship
Governance
Strategies
Decision Hierarchy
Policy - Decisions already made (policies and strategic decision)
Strategic - Decisions needed - analyze and make now
Tactical (execution dependent) - Decisions to be Made Later
Decision Execution
Development Project strategies must be determined…
Project
Project
Strategies
Decision
You must FIRST establish which TWO you are
going to OPTIMIZE…and in what
order…and
then do the best you can with the last one.
Strategy
QUALITY
SOME COMMON PROJECT STRATEGIES
Negotiating
Financing
Contracting
Procurement
Operating
Maintenance
Constructability
Strategies
Strategies
Strategies
Strategies
Strategies
Strategies
Strategies
Partnering
Local Content
Host Country
Strategies
Strategies
Strategies
Alignment
Optimization
Strategies
Strategies
Human
Resource
Strategies
Risk
Management
Strategies
Sustainable
Development
Strategies
Economic
Incentives
Strategies
Tax
Strategies
Industrial
Relations
Strategies
Acceptance
Exit
Disposal
Strategies
Strategies
Strategies
Developing Strategic Projects
Life-cycle Planning
Life Cycle of the Development
1. Pre-Concept
2. Concept
3. Initial Business Case Plan - FEL 1*
4. Development of Alternatives - FEL 2*
5. Front End Engineering and Design of Alternative/s - FEED or FEL 3*
6. Transition Phase - Bridge Between Planning and Execution/Construction
7. Execute/Construct Phase – Understanding/Managing the Execution Phase
8. Acceptance Phase - Obtaining a complete and effective project acceptance
9. Operations Phase - Delivering the Performance/ Upgrades & Expansions
10. Salvage / Disposal Phase - Planning and Implementing
* FEL I, II. III are IPA (Independent Project Analysis) process names
1. Pre-Concept
•
Development Funnel
Pre-Concept
– Back of the Envelope Economics
1. Pre-Concept
– Strategic Fit?
– Does it make sense?
-30% / + 70%
2. Concept
3. FEL I – Business Plan
4. FEL II – Alternatives
5. FEL III – Select – Define
6. TRANSITION Phase
Execution
5-10% at Best
Financial Closing
Developing Strategic Projects
Project Management in Developing Strategic Projects
Project Development
Project
Development
Concept
Define
Develop
Execute
Executable
Optimize
Front-End
Project
Loading
Execution
Validate
Develop
Design Best
Transition
Opportunity
Best Scope
Execute Plan
To Execution
Accept
Operate
Operate
Acceptance
& Monitor
Performance
Integrated Decision Execution (IDE) ©
FEL 1
FEL 2
FEL 3
Bus. Case
Scope
Project Plan
Opportunity
Definition
F.E.E.D.
Independent Project Analysis (IPA) Processes
Objective: Maintain the “value of the strategic
decision and its options” created during IDM
while the decision and its project are being
executed. - David Skinner, Managing Director, DSI
Project Management Process Groups
IF this is not happening,…
You Do NOT have any
project management going on!
Project
Management
Initiating
Planning
Executing
Controlling
Planning
Initiating
Closing
Circutuitos and dynamic
activity “in each Phase.”
Phase
Phase
Controlling
Executing
Closing
Example of a Project Management Methodology
More than 45,000 people in 50 different countries currently use the
MPMM Project Life Cycle to deliver projects. MPMM project management
methodologies are based on the best practice industry standards for
project management: PMBOK® and Prince2®.
Life Cycle according to the MPMM Methodology
Initiation involves starting up the project, by
documenting a business case, feasibility
study, terms of reference, appointing the
team and setting up a Project Office.
Planning involves setting out the roadmap
for the project by creating the following
plans: project plan, resource plan, financial
plan, quality plan, acceptance plan and
communications plan.
Execution involves building the
deliverables and controlling* the project
delivery, scope, costs, quality, risks and
issues.
Closure involves winding-down the project
by releasing staff, handing over
deliverables to the customer and
completing a post implementation review.
Controlling – you don’t control a project; however
you “trend and adjust” – actions you take to bring
the project back on track is the control part.
You cannot control UNLESS you have already
planned for action using good risk management
AND the Risk & Opportunity Register Tool AND
set a Baseline (needed for Change Management).
Example of a Project Management Methodology
Project Initiation is the first phase in the Project Life Cycle and
essentially involves starting up the project. You initiate a project by
defining its purpose and scope, the justification for initiating it and the
solution to be implemented. You will also need to recruit a suitably skilled
project team, set up a Project Office and perform an end of Phase
Review. The Project Initiation phase involves the following six key steps:
Example of a Project Management Methodology
After defining the project and appointing the project team, you're ready to
enter the detailed Project Planning phase. This involves creating a suite
of planning documents to help guide the team throughout the project
delivery. The Planning Phase involves completing the following 10 key
steps:
Example of a Project Management Methodology
With a clear definition of the project and a suite
of detailed project plans, you are now ready to
enter the Execution phase of the project.
This is the phase in which the deliverables are
physically built and presented to the customer
for acceptance.
While each deliverable is being constructed, a
suite of management processes are undertaken
to monitor and control the deliverables being
output by the project.
These processes include managing time, cost,
quality, change, risks, issues, suppliers,
customers and communication.
Once all the deliverables have been produced
and the customer has accepted the final
solution, the project is ready for closure.
Example of a Project Management Methodology
Project Closure involves releasing the final deliverables to the customer,
handing over project documentation to the business, terminating supplier
contracts, releasing project resources and communicating project closure
to all stakeholders. The last remaining step is to undertake a Post
Implementation Review to identify the level of project success and note
any lessons learned for future projects.
Developing Strategic Projects
Financing Tools
Documentation (Security Packages) Risks for Financing
Organizational documents – such as partnership agreements, joint venture agreement
and shareholder agreement
Agreements with Host Country governments – such as a concession agreement,
governmental licenses, sovereign guarantee and implementation agreement
Real property agreements – such as title documentation, leases, easements, and
construction lay-down rights
Construction documents – such as a construction contract
Technology documents – such as a license agreement
Operation & maintenance documents – such as an operating agreement and a spare
parts supply agreement
Fuel supply documents – such as a fuel supply agreement
Utility documents – such as electricity, oil, gas and water agreements
Off-take revenue documents – such as production sale agreements, energy sale
agreements, and the like
Transportation documents – such as transportation agreements
Financing documents – such as loan agreements, inter-creditor agreements, and
collateral security agreements
© 2006 Paul Allen and Hossein Razavi
Risk Issues in Detail – Cross-Border (Political) - 1
•
Currency-related risk
–
–
Non-convertibility of currency
Currency transfer inability
•
•
•
•
–
•
•
–
Indexing revenues
Matching currencies - revenue and debt
Raising debt in local currency
Derivatives
Sharing of risks
Offshore accounts
Special currency problems in project
Advance approvals
Consent
exemption
Currency risk mitigation techniques
•
•
•
Payment in hard currency
Foreign exchange risk insurance
Indexed local currency payments
Permits, concession and license risks
Expropriation risk
Expatriation
Change of law
–
–
–
–
Currency devaluation risks
•
•
•
•
•
–
–
–
Exchange controls
Violation of exchange laws
Enforcement of transactions in case
Exchange permissions and consents
•
•
•
•
Import tariffs
Export tariffs
Production or consumption controls
Taxes
•
•
•
•
–
–
•
•
•
•
•
Taxes on income
Customs duties
Withholding tax on payment of interest
Nondiscrimination
Environmental controls
Regulation and deregulation
Political violence, civil unrest, war and
other political Force Majeure events
Political collapse and succession
Preemption and priority
Sovereign risk
Breach of undertakings (contract
repudiation)
© 2006 Paul Allen and Hossein Razavi
Risk Issues in Detail – Cross-Border (Political) - 2
•
Collateral risks
–
–
–
–
–
–
–
–
•
Types of collateral security allowed by
the Sovereign Government?
Local formality compliance?
Priority of liens?
How is lien enforced?
How does foreclosure process work?
Collateral trusts
Real property issues?
Interaction among risks?
•
•
•
•
•
Illiquidity of equity investment
Freezing or blocking orders
Export prohibitions
Price controls and regulation
Commercial or political – or both?
Law and Legal Systems risks
–
–
–
–
–
–
Choice of law?
Agent for process and submission to
jurisdiction?
Fees, approvals and filings
Legal expertise and experience
General business law and regulation
Waiver of Sovereign Immunity?
© 2006 Paul Allen and Hossein Razavi
Risk Issues in Detail – Commercial
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Probability of risks into problems
Due diligence
Feasibility study in Risk Identification
Credit risks
Increase in construction costs
Delay in completion
Force majeure in construction contracts
Experiences & resources of contractor
Building materials
Facility site
Technology
Construction of related facilities
Shortfalls in mineral reserves
Raw material supply & utilities
Creditworthiness of off-take purchaser
Market for product of services
Shortfalls in anticipated capacity, output,
and efficiency
Operator experience
•
•
•
•
•
•
•
•
•
•
•
•
General operating expenses
Sponsor commitment
Management experience
Permits and licenses
Political environment
Interest rate
Force majeure
Economic projection and feasibility
report inaccuracy
Environmental
Contract mismatch
Contract risks generally
Commercial risk mitigation
–
Construction Period Mitigation
•
–
Contractual undertakings; Contingency
reserve funds & equity & other; Insurance
Operations Period Mitigation
•
•
Contractual undertakings; Contractual
arrangements; Contingency reserve funds
Cash traps; insurance
© 2006 Paul Allen and Hossein Razavi
Modules in Strategic Project Finance
Module
Cost Estimate
Project Evaluation
Project Finance
Developer
takes
design basis
estimate basis
schedule basis
+ market survey
op costs, working
capital basis
+ funding basis,
accounting basis
taxation basis
and
produces
capital cost
estimate, draw
down of funds
project cash flows,
IRRs, NPVs, initial
working capital
after tax cash flows
IRRs, NPVs, and
financial statements
Cash Flows
Draw Down
120
100%
Cash Flows
150
150
100
100
50
50
90%
100
Revenues (Turnover)
Operating Costs
80%
70%
80
Left Scale
60%
U
S
60
50%
FC
0
Working Capital
Yemeni Rials
40%
Right Scale
Cumulative
40
30%
20%
20
Dividends
U
S
0
Tax & Production Share
Operating Costs
$ -50
$
Operating Phase
Revenues (Turnover)
U
S
Capital Cost
-100
Debt Service
$ -50
-----------------------------100
Construction Phase
Equity
-150
-150
Loan Draw Down
10%
-200
0
0%
Dec-93
Dec-94
Dec-95
Half Year Ending
Dec-96
1993
1998
2003
Year
2008
2013
-200
1993
1998
2003
Year
2008
2013
Paul’s “Rule of 1/6th” for Successful Development Projects
NTP
Contract
Contractor’s Contract
Reward Period
EPC or Design-Build
Uses THIS Completion Date
For Contract and Managing Expectations
IN the Money
Contract
Penalty Period
1/6 Buffer
Time & Money
Contractor
is OUT of
the money
NTP
Owner’s Project NPV
Basis of the Investment
Uses THIS Completion Date
For Economics and Managing Expectations
PROTECT
The Buffer!
Developing Strategic Projects
Risk-Based Decision Support Packages
Picture from a balcony of
a church in Bay St. Louis
Katrina 30+ ft storm surge
Decision Support Package A: Strategic Decision
Policy Decisions - Already Made
Capital is available from the parent company for good
investments
Financial guidelines include a 12% cost of capital discount
rate
Deadline for a recommendation is tomorrow
GasCo
Corporate Value - NPV
Return on Investment
Future Strategic Value
(10)
0
10
$ MM NPV
20
30
35
40
Strategic Decisions - for Team Focus
Plant size - 0, 25, 50, 75 or 100 mcf
Location - Deer Creek or Future Supply Area
Facility - Leverage Deer Creek or Build New
Meet Producer’s
Current and Future Needs
Plant Capacity
And Utilization
Utilization
Reputation
Tactical Decisions - to be made later
Operator ship - internal control or outsource
Specifications - electric or gas drive, etc.
Sulphur handling - production or injection
Capital
Risk
Producer
Contracts
Influence the
Competitor
Competitor’s Move
Design and
Operating Results
Fees / Volume
Operating Costs
•
•
•
•
•
•
Reserves - current deliverable and future
Capital costs of project
Economics of the operation
Competition in the area
Future projects and strategic value
Early abandonment costs
Capital Costs
Abandonment Costs
Current Contracts
Beat Competition
Forecasting
Strategic Planning
Reserves
For Future
Current Contracts
Beat Competition
Competitive
Intelligence
Future
Projects
Investment
Competitor
Actions
Marketing
Competitor Out
Strategic
Value-NPV
Wait for Future
12% WACC
$ 23.4 Capital
Competitor In
Corporate
Value
Operating
NPV
Competitor Out
Lifetime years
+ residual value
Fees
Capital
Investment
Operations
Costs to
Abandon
Fully Utilized
Fully Utilized
Partial Utilization
Beat Competition
$ 31.2 Capital
Forecasting
Fully Utilized
Partial Utilization
Operating
Costs
Current
Reserves
Utilization
Partial Utilization
Current Contracts
Contracts
(Utilization)
Operations
Competitor
Competitor In
Fully Utilized
Partial Utilization
NPV
$ 11 M
$6M
$1M
$ (4) M
$ 36 M
$ 21 M
$ 19 M
$ (2) M
Engineering
Wait for Future
$ 0 Capital
Source: Copyright: 1994 – 2005 Decision Strategies, Inc. Includes material copyright 1994 – 2002 Kenneth R. Oppenheimer
$0M
Decision Support Package B: Breakeven & NPV
Decision Support Package C: Risk & Cash Flow
Strategic Project Development
Program at Rice University 2008
Developing Strategic Projects
Monitoring & Delivering on the Promise!
The FIVE Points (Pareto way for Execution Monitoring)
1. Establish the Project Optimization Policy at the very beginning of the project
AND STICK WITH IT!
2. Establish a complete Project Execution Plan (PEP), ensure its clear link to the
Strategy Execution Plan for real support, and then keep it updated WEEKLY
keeping a register of updates.
3. Establish a thorough AND complete Risk & Opportunity Register including
the qualitative and quantitative risks & opportunities AND their mitigations with
contingencies and triggers for the immediate implementation of any
contingencies needed to protect the project.
4. Develop & Maintain* a Risk-Based Fully Integrated Master Schedule
5. Develop & Maintain* a Risk-Based Fully Integrated Master Budget
*Monthly during Planning, Weekly during Execution
www.projectexecutive.com/
Websites
Visit the following sites
– www.palisade.com – looking at Decision Tools (risks overall with full suite
of tools including decision tree - PrecisionTree)
– www.pertmaster.com – looking at Pertmaster (risks in schedules)
– www.crystalball.com – another modeling tool for risk
– www.mindtools.com – source of knowledge in various areas for free
– www.mindtools.com/dectree.html - basics of decision trees
– www.treeage.com – basics in creating decision trees
– www.managepro.com – srategy performance management software
– www.projectexecutive.com – Project Executive Group site for lots of info
Paul’s personal website specific pages for review
• http://members.aol.com/AllenWeb/index.htm
• http://members.aol.com/AllenWeb/decision.html - Decision Support Package
• http://members.aol.com/AllenWeb/change.htm - Managing Others’ Expectations
• http://members.aol.com/AllenWeb/planning.htm - see Scope of Feasibility - Financial
Analysis – …(analysis of the cash flow of the project),,,