Ensuring Proposed Projects Deliver Value
Most CEOs and CFOs are presented with multiple opportunities during the course of a year to embark on new projects. One of the biggest challenges they face is deciding which proposed projects will deliver adequate value to justify moving forward.
As noted in a recent CFO.com article1, the CFO is ultimately responsible for performing detailed analysis of proposed projects that bridges the numbers to the value proposition. CFOs that lose sight of proposed project value propositions typically lose control over projects, which can throw off the balance of power internally and negatively impact the CFO’s relationship with other project stakeholders.
NPV: Going Beyond the Math
The first step in evaluating the proposed project value proposition is usually to perform a net present value (NPV) calculation of the known factors. Most software solutions providers have built-in formulas that support these calculations.
The article goes on to observe the issue isn’t the math, but the predictability and evaluations of the impact other assumed factors may have on the outcome and the ability to express this as a financial measurement.1 Assumptions must be made explicitly so the project verification process can answer questions to determine if a project is staying on track, markets are changing or threats from competitors can be exposed. If so, corrective actions will need to be taken.
These assumptions should be explicit to ensure further project verification, and the results of your analysis should be shared with everyone on the project team. This way, all team members will be prepared to speak up if they encounter any unexpected situations or scenarios.
Recommended in the article is that team members meet to analyze how much is known (and unknown) about the potential project and how much additional research (if any) needs to be performed. If a market doesn’t yet exist for a project, it will be difficult, if not impossible, to determine its NPV. In this scenario, you may have to view the project as an unknown experiment and be prepared to suffer any losses that result.1
Challenges & Solutions
The challenge for CFOs is to navigate a project’s components to ensure that accretive values are delivered. A number of negative impacts may occur if a CFO fails to meet this challenge, including the following:
- Resources will be misallocated.
- Confusion will result from uncertainty and wrong assumptions.
- Opportunities for projects that would have added value will be missed.
- The investment in the project will be jeopardized.
Fortunately, there are some solutions you can implement to avoid these negative impacts. Solutions contributing to delivery of proposed project value include the following:
- Conceptualize projects with tools such as value chain diagrams.
- Break down larger projects into smaller parts.
- Identify all project components and key variables at the outset.
- Distinguish between components that offer predictable value and those with uncertain characteristics.
- Assess each component’s importance to the project, as well as which components may be used in other projects.
Your company could realize a number of benefits by utilizing these types of solutions, such as:
- Improved competitiveness due to having well-versed, knowledgeable personnel throughout the organization.
- Greater control by exposing and addressing uncertainties or assumptions before a proposed project is approved.
- Better understanding and prioritization of the overall value of proposed projects.
- Enhanced situational awareness of work flow, cost structure and risks, which will help improve decision making, planning and resource allocations in the future.
One of the biggest challenges CFOs face is deciding which initiatives they’re presented with will deliver the proposed project value needed to justify moving forward. This involves performing detailed analysis of projects that bridges the numbers to the value proposition. CFOs that lose sight of the value proposition typically lose control over projects, which can throw off the balance of power internally. An on-demand CFO partner from an outsourced CFO services firm can help you navigate a project’s components to ensure that accretive values are delivered for your organization.
1 Don’t Lose Sight of Value; Chris Daniel; CFO.com; March 5, 2019
John W. Braine, Partner, CFO Edge, LLC