Taxonomy for project benefits part one – financial benefits

If project business cases had clear and consistent statements about the anticipated benefits, they’d be easier to compare and this might lead to a better balanced portfolio.

This blog looks at financial benefits – after my previous blog discussed the potential issue with conflating the (rather weak, in my view) definition of a benefit with its level of attraction for stakeholders, to be found in the various definitions of benefits published by industry bodies and others (specifically, APM, APMG, and AXELOS).

The reference to stakeholders is not without relevance; if a project’s business case lacks sufficient support, the project will not run.  This happens all the time: almost every organisation has less capacity to execute projects than the demand, and so must choose which projects to delay or discard.

It would perhaps help those who decide which projects will run (and those that won’t) if there were a clear taxonomy of benefits – especially if they got used in business cases!

Let’s first set aside all those projects that that must be run for regulatory reasons.  When they’re done, we’re pretty much where we were before the rules changed.  The same applies to risk avoidance projects (like upgrading a database system to ensure supplier support).  No improvement, so no benefit. (As the alternative is to cease trading, or risk embarrassing failure, we can’t not do them, but let’s not pretend we like them, and let’s do them as quickly and cheaply as possible so that we can get on to projects with real benefits).

Financial benefits are those which can (and must!) be expressed as a £number.  There are really only three choices:

Reduce costs

Achieving the same outcomes at lower cost, or more for the existing outlay, or something in between.  We may be doing this to avoid some cost in the future. Lean and six-sigma both have lots to say in this space.

Increase revenue

Sell more product.  This may be done by creating extra outlets or channels, increasing customer awareness and so (hopefully) market share, optimising our product price (for existing products), or by introducing new products or entering new markets.

Enhance asset values

Making something we already possess more valuable (by renovation, refurbishment, upgrade, etc.).

The categories above are listed in increasing order of risk, with cost savings being relatively certain (if we migrate off that software, we can definitely avoid the licence fees), while asset enhancement is more speculative, and, because the asset enhancement benefit is often not realised (but does look good in the accounts), it may be subject to market fluctuation in a way that cash isn’t.

While cost savings are more reliable, there are limits to what can be done (if costs are reduced to zero, we’re not doing a lot of business…), whereas expanding and exploiting markets has the sky as its limit, to within a bit.  The mighty MacDonald’s franchise (the world’s largest) is still only in slightly over half of the world’s countries (119 out of 224 or thereabouts), so there are still some new markets to invest in.

As we’ve noted before, decisions on investment direction (and, indeed, the size of the investment) are likely to reflect our organisation’s market position and market conditions, even if we’re only interested in financial project benefits.  Senior managers are much more likely to invest in expansion if they have confidence that sales will increase – the new product is a game changer – than in a troubled market, where managing costs downward is likely to be more attractive.  The organisational appetite for risk also has a bearing, and this is where one or other investment proposal “…is perceived as positive by one or more stakeholders…” starts to become very important.