Post on 17-Dec-2015
OverviewOverview
Who is MBH Management?Who is MBH Management?Managing by ProjectManaging by ProjectNPV as a black boxNPV as a black boxMeasuring strategic valueMeasuring strategic valueNegative NPVsNegative NPVsPayback and investment time Payback and investment time horizonshorizonsUsing IRRUsing IRR
MBH Management Pty LtdMBH Management Pty Ltd
Founded in November 1999Founded in November 1999
Frustrations of modern consulting Frustrations of modern consulting practicespractices
Strong growth potential in project Strong growth potential in project management consulting industrymanagement consulting industry
MBH VisionMBH Vision
To be an Australian leader in business, To be an Australian leader in business, environmental and socio-political environmental and socio-political change management change management following a following a Managing by Project approach.Managing by Project approach.
MBH MissionMBH Mission
To position the MBH brand as the To position the MBH brand as the leader in facilitating business growth leader in facilitating business growth and change and change
What is Managing by Project?What is Managing by Project?
Vision – How a company should Vision – How a company should look in the long termlook in the long termStrategy – Approach to achieve the Strategy – Approach to achieve the visionvisionProject selection – Based on the Project selection – Based on the strategic alignment and value strategic alignment and value created by a projectcreated by a projectProject Management – The delivery Project Management – The delivery mechanism for each project mechanism for each project selectedselected
MbP – How does it work?MbP – How does it work?
Selection processSelection process
Prioritisation process Prioritisation process
Directly involves the customerDirectly involves the customer
Use of cross functional teamsUse of cross functional teams
Utilises a facilitated workshop Utilises a facilitated workshop approachapproach
P ro jec t P ro jec t
S tra teg y
Task Task Task
M ajo r Task M ajo r Task
S u b P ro jec t S u b P ro jec t
P ro jec t
S tra teg y
P ro jec t P ro jec t
S tra teg y
M iss ion
V is ion
MbP & project selection - WBSMbP & project selection - WBS
MbP – Why use this approach?MbP – Why use this approach?
Fewer resources (time, money, Fewer resources (time, money, people)people)
Fluid structureFluid structure
Short lifeShort life
Integrates multiple functionsIntegrates multiple functions
Minimises non value-addMinimises non value-addinging work work
Delivers visionDelivers vision
PLAN ACCOMPLISH
SOFT HARD
LEV
EL
OF
EF
FO
RT
TIME
PHASE 1
CONCEPTPHASE 2
DEVELOPMENTPHASE 3
IMPLEMENTATIONPHASE 4
TERMINATION
Project Life CycleProject Life Cycle
Removing the black boxRemoving the black box
Understand where +ve NPV comes Understand where +ve NPV comes fromfrom
Articulate benefit drivers (EVA)Articulate benefit drivers (EVA)
Align project to business strategyAlign project to business strategy
Only NPV is relevantOnly NPV is relevant
Not a black box Not a black box
Measures strategic valueMeasures strategic value
Incorporates riskIncorporates risk
Creates instant priority processCreates instant priority process
Calculating NPVCalculating NPV
Benefit driversBenefit drivers
Cost of the projectCost of the project
Ongoing costsOngoing costs
WACCWACC
DCF = NPVDCF = NPV
What is strategic value?What is strategic value?
Project must be more than Project must be more than “Strategic”“Strategic”
Must add strategic Must add strategic valuevalue
Results in competitive advantageResults in competitive advantage
Competitive advantage = +ve NPVCompetitive advantage = +ve NPV
Competitive advantage = strategic Competitive advantage = strategic valuevalue
How is strategic value achieved?How is strategic value achieved?
Build on existing strengthsBuild on existing strengths
Reduce weaknessesReduce weaknesses
Create new businessesCreate new businesses
Create new options/opportunitiesCreate new options/opportunities
Reduce riskReduce risk
Negative NPV projectNegative NPV project
Gut feel says yesGut feel says yes
Appears to have competitive Appears to have competitive advantageadvantage
Time horizon is longTime horizon is long
Possibilities of follow-on Possibilities of follow-on investmentsinvestments
Need to value optionsNeed to value options
Option pricing and NPVOption pricing and NPV
Value option of follow-on investmentValue option of follow-on investment
Estimate volatility of forecastsEstimate volatility of forecasts
Estimate time to investment decisionEstimate time to investment decision
Plug into Black-Scholes formulaPlug into Black-Scholes formula
Add option value to NPV valueAdd option value to NPV value
Positive number means project has Positive number means project has valuevalue
The danger of paybackThe danger of payback
Short term investment horizonsShort term investment horizons
The need for EPS growth nowThe need for EPS growth now
Forced by investment analysts time Forced by investment analysts time horizonshorizons
Investment horizons need to changeInvestment horizons need to change
Focus on 10 - 15 years rather than 1 - 3.Focus on 10 - 15 years rather than 1 - 3.
Remove going concern assumption!Remove going concern assumption!
Other assessment tools usedOther assessment tools used
IRRIRR
ROIROI
PaybackPayback
Gut feelGut feel
Political decisionPolitical decision
CEO says soCEO says so
Why not IRRWhy not IRR
Negative IRR for positive NPV Negative IRR for positive NPV projectsprojects
Multiple rates of return possibleMultiple rates of return possible
Excluding the wrong mutually Excluding the wrong mutually exclusive projectexclusive project
IRR means NPV = 0IRR means NPV = 0
Prefer NPV > 0!Prefer NPV > 0!