Examine the collection of your organization’s projects. If there is any rela- tionship established between the projects and the organization’s goals, it is often through a silo allocation of sub-goals to each functional area. For example, see Figure 4.1. The problem with this approach is that one silo can achieve its goal but at the same time do significant damage to other silos.
For example, if engineering cuts back its staff, it might achieve a great cost reduction. But what happened to those new products that the sales force needed this year to achieve its goals?
The Throughput Model implies the understanding that in order to meet the organization’s goals, the combined cooperation of all functional areas is needed. The entire concept that some parts of the organization generate cost while others have the exclusive right to claim revenues is eradicated. In- stead, there is recognition that projects must collectively be released to meet the organization’s goals. The picture changes to look like Figure 4.2. Note that this does not do away with accountability. It simply reflects that each part is held accountable for doing what is good for the system as a whole, not what is good for a silo.
An approach to managing the entire collection of an organization’s projects to drive value to the organization is illustrated in Figure 4.2. In this simplified example, the organization’s goal of increasing profit by $25 million is achieved through the implementation of an integrated collection of ideas.
Figure 4.1 The Silo Cost Model Approach to Projects
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The strategy begins with the implementation of market research to de- termine the market’s needs. From that, the R&D area develops a new prod- uct. In order to produce the new product in quantity, the manufacturing area must implement improvements. The result is more production capacity — enough to satisfy existing dealers and new dealers. However, in order to generate sales of a new product to existing dealers, the sales force must implement some promotion. In order to generate sales to new dealers, mar- keting and sales must put their heads together to identify a way to generate and close leads from new customers and perhaps even from new markets.
If and only if all of these ideas work together like clockwork, then the company’s target will be achieved. If one idea fails, the results will be less than needed. These effects are discussed extensively in the book Execution by Bossidy and Charan. The former executive of Honeywell cites cases where executives were unrealistic with their goals, since the actual initia- tives were not sufficient to achieve them.
Each of these ideas is translated into one or more projects, but now the difference is that each project is inextricably linked to the organization’s goal. This is illustrated in Figure 4.3.
Figure 4.2 The Throughput Model for Projects
One big difference between the Throughput Model and the Cost Model is in understanding the dependencies that exist between elements of cost and throughput.
In the Cost Model, a project manager looks at eliminating elements of project cost as inherently good. The impact on throughput is not visualized.
Each element of cost is not considered in light of its dependency or relation- ship to throughput.
In the Throughput Model, the relationship between T, I, and OE is con- stantly visualized. For example, in Figure 4.2, in the Throughput Model, if product development cost can be reduced in the R&D idea, but it will not deliver according to the needs identified in the market research or it will not deliver in time for sales to meet its goals, then the cost reduction may have a negative impact on the organization’s goals.
The Throughput Model has been tested in numerous organizations. A book published in 2000 details documented results in hundreds of articles, books, Web sites and videos.* The model works as long as the top execu- tive buys in.
Figure 4.3 Strategy Driving Projects
*See Victoria Mabin and Steven Balderstone, The World of the Theory of Constraints, St. Lucie Press, Boca Raton, FL, 2000.
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SUMMARY
There are two major philosophies to improving project management using a PMO or corporate project management expertise:
1. Focus the PMO on ways to reduce the cost and increase the effi- ciency of project management. The focus here is usually on tools and techniques to solve problems, increase efficiencies and decrease project expenditures and budgets. The PMO role is viewed prima- rily as training and consulting or, in the extreme cases, as a police force. The emphasis is to bring errant projects under control, reduce project budgets, squeeze more out of resources, use resources more efficiently, and enforce rigid methodologies to reduce rework. This is the Cost Model.
2. Use the PMO as the main strategic vehicle to drive company-wide improvement by helping the company to select the right projects, and by using the PMO as a vehicle to drive bottom-line value from the company-wide project management effort. This is the Through- put Model.
We do not claim that the first approach is irrelevant. It may be necessary where the company has huge project overruns and no one is following any standards.
We believe that the second approach, the Throughput Model, will have much greater executive and senior management appeal. There is a role for standards and efficiencies within a PMO, but it falls secondary to the over- all goal and comes only after the constraint of the organization is recog- nized.
In fact, our experience with PMO failures shows that people who focus on cost rather than bottom-line value as their top priority end up with their executives abandoning the PMO effort. With the Throughput Model, every project is evaluated according to its impact on T, I, and OE, the three global measurements of any organization. This provides a link between overall organizational strategy, specific strategies of each functional unit and the projects these strategies drive.
The Throughput Model ensures that the organization chooses a project mix that is balanced, with sufficient projects to meet the organization’s goals.
QUESTIONS
4.1 Name three characteristics of the Cost Model of project man- agement.
4.2 Which characteristics of the Cost Model might result in a “silo”
approach to initiating projects?
4.3 Most functional executives believe that the “silo” approach is good for them. It allows them to have autonomy over which projects they approve and initiate. Using Figure 4.3, explain to a vice president of manufacturing why the “silo” approach may not work well for the organization.
4.4 How does the Throughput Model propose to connect projects to an organization’s overall goals?
4.5 Define the three global measurements used in the Throughput Model.
4.6 If an organization was to invest $1 million in building a new product, and the product was expected to yield $5 million throughput in its first year with absolutely no increase in operat- ing expense, would this be a good investment for the company?
Who should be held accountable for the $5 million increase in throughput, and why?
4.7 A not-for-profit public electric utility has limited funding for new projects. It is considering two new projects. One project involves an investment of $1 million toward building power gen- erating stations. With this project, the utility would not have to purchase as much power from external sources. Its wholesale cost of electricity would be reduced by $500,000 per year. An- other project would also use a $1 million investment to reduce outages, making the power more reliable for its customers. This has been a major problem in the past few years, resulting in tangible losses for its customers of $2.5 million per year. How might the concept of throughput be used to determine which project is a better investment? Why?
4.8 In what way might an accounting system and cost allocations distort the benefits projected for a new product? How do the T, I, and OE measurements avoid these distortions?