Newsletter Volume 4 No.1

Volume 4, No. 1

“Helping You Accelerate Your High-Tech Development Projects”

Welcome to the ANGOTTI PRODUCT DEVELOPMENT e-mail newsletter!

The goal of this monthly newsletter is to help you accelerate your development projects by sharing many of the tips, techniques, and strategies we’ve honed during two decades of providing high-tech consulting services.

This issue focuses on the almost inevitable project cost overruns that occur during the process of getting new, high tech, projects to market. These overruns produce significant concern and therefore must be taken into account.

THE COST RELATED SCENARIO

Have you noticed that New Product Development (NPD) engineering projects very rarely come in at the cost target set at the project beginning? Invariably, standard project management involves a set of tradeoffs between cost, schedule and scope with cost often being the least important one. In such a scenario, the order of importance is normally the following:

1. Scope – The product must work and must have the correct features.
2. Schedule – The product must enter the market within some specific, often critical, time window.
3. Cost – The development costs must be constrained.

Between these three, cost is the least important characteristic of a project because the product value in the market and the cost of late product introduction are often many times higher than the development costs.

That overruns occur is not surprising because there are a very large number of technical and marketing “unk-unks” (unknown-unknowns) at the beginning of any project. Also, in today’s rapidly changing environment, those who start a project often aren’t the same ones that finish it. This introduces additional delays due to required hand offs and ramp ups.

HAVE AN APPROACH FOR CONSTRAINING COSTS

All this means that you need to have an approach for handling project cost overruns. This involves the budget plan to have an effective cost tracking and review process built into it. Unfortunately, most upper managers do not want to consider a plan that focuses on budget overruns; they prefer instead to have an unspoken overrun dollar amount that isn’t shared with the working team. This gives managers more flexibility later in the project to make alternate choices regarding budget. Additionally, they can then continuously press the team to achieve the published cost target in hopes of containing the overall project cost.

USING FORMAL COST CONTAINMENT METHODS

In my experience, management and the team can only control costs if formal methods are created that track costs throughout the project. These formal methods will help control the magnitude of the potential overrun and at the same time lead to the creation of a better product.

A good approach to force the tracking of project cost is to schedule FORMAL project cost and status reviews. If timely and accurate cost tracking is available, you can implement alternate courses of action at the earliest possible time. This can be invaluable in containing costs.

THE BYWAYS OF FINISHING PROJECTS ON BUDGET

While overrun is the norm, some Project Managers claim to accurately hit cost targets for their projects. How do they do it? They often use a “project budget” to represent some budget set well after the project is underway, not at the beginning. This later budget includes additional costs and higher cost targets required by real life “change requests” as time goes on. In some instances, I have even noted that this purported “project budget” was in reality just a target set very near the end of a project, when it is much easier to predict the total cost. Be sure not to fall into this trap, since it misleads the team, management, and you.

PRACTICAL PROJECT COST TRACKING

You can very effectively track costs by creating a spreadsheet that breaks the project into 30 to 50 tasks, or sets of tasks. This level
of granularity will enable you to track costs at a practical level. No task should contain a large percentage of the total costs, or this will introduce inaccuracies. The costs projected for these tasks are then computed and listed in another column. A third column accumulates these costs at each phase along the way.

As the project moves forward, a fourth column can be reserved for the actual cost, and a fifth column holds the accumulated actual costs.

The estimated costs are placed into the actual cost column at the beginning of the project. The accumulated costs will now automatically be updated with each spreadsheet update of actual cost, showing the new projected cost as the actual cost plus the original estimate to complete from this point on.

This approach assumes that the best estimate of the final accumulated cost to complete is the current cost to date, plus the original
estimate to complete going forward. Of course, if the cost of future tasks is decreased by way of good planning, the estimate to complete can be modified accordingly. One note of caution, real future costs often tend to rise as time goes on, since they too were estimated when the project began when much less information was known. This means that the final cost to complete will likely be larger than is projected at any point in time.

TRY THIS APPROACH TO CONTROL COSTS ON YOUR PROJECTS
If you request it, I can send you a sample cost control spreadsheet to show how this might work. I suspect that once you use such a system to track costs, you will never go back to the normal “flying blind” approach used at many companies.