Net Operating Value - A New Way to Look at Project Costs

Let’s take a step back and look at the historically most common path of projects.  During the budgeting process usually the year before an idea for a project is suggested.  Then this idea goes through some cycles and an estimated budget gets placed on the project list for the coming year.  When the project is kicked off, the budget is set to the estimated budget.  Few organizations go through a true project costing and just artificially constrain themselves to the suggested budget.

However, let’s say we are a forward-thinking organization that does a full project estimate and sets the budget.  Most projects run into delays, issues, and missed assumptions that inevitably puts a strain on the budget.  There is a fear to go over budget.  The project team compresses training, testing, or both to come in on the budget suggested.  This then leads to rework and enormous costs to repair something in production instead of fixing it right the first time. 

An additional issue is how the project is pitched in the first place.  It is pitched with a 5-year savings, ROI, NPV, IRR, or a payback period.  However, many companies do not validate if the project did in fact deliver the numbers suggested.  Does your company validate project savings for 5 years and report back? 

These are all antiquated problems and have been the way projects are done since I have been in the industry (over 25 years).  Yet we rinse and repeat.  Then comes Agile which throws organizations for a loop in how to track and report costs.  So far, I have not suggested anything new.

The business suggests numbers and does not always measure results and the project team suggests costs and must constrain something or blow the budget.  What if we applied a different mindset to tell the story?  What if there is a single number that could govern the decisions?  Enter Net Operating Value.

Net Operating Value makes budgeting a project a little more ancillary.  All the budgeting methodologies and controls still apply; however, the question becomes framed a bit differently.  Net Operating Value (NOV) is simply 12-month project benefit subtracted by project costs.  From a business context, what are we gaining for 12 months (revenue, cost savings, etc) minus the cost of the project?  If a project takes longer than a year than expand the benefit.

Taking this concept through a case study, let’s say there is a project that the business feels could generate $1M of revenue in the first 12 months, however, do not have the resources necessary to complete the project .  They could hire a vendor to complete the work for $100,000.  It can be painful to have to suggest the added cost of $100,000 to the budget if it was not planned for.  However, if we frame the conversation differently, then NOV comes into play.  Instead of what it would cost to do the project, we ask what is the net gain in the next 12 months of the project?  In this case, the net gain is $900,000.  The question becomes what are we willing to risk for $1M rather than what will it cost?  The answer could be $200,000 for a NOV of $800,000.  This aligns business and the project team.  The project team is signing up for getting the $1M of revenue and the project team is signing up for $200,000 in cost.  This changes how we approach change requests, scope creep, etc.  If the NOV is known and widely displayed, then decisions would be represented in the NOV instead of over budget.

For example, if an unknown was uncovered that would cost $50,000.  The question becomes is $250,000 acceptable to spend to get $750,000 of NOV?

What do you think?

Be the Hero of the Story

In every great story and conflict, there is generally a winner and a loser.  A hero and a villain.  Someone who wins the day and someone who loses the day.  For this story, I was the loser who created the situation.

I love to drive.  I love to have silence in the car and let my mind wander.  The bad part is that I can be very forgetful or do dumb things right after I drive.  In this case, I was returning a rental car.  I pulled in, followed the process, and then went to my car.  About halfway into the drive home, I realized I had left my iPad in the rental car.  I quickly turned around and told myself how dumb I was to do that.  I pull into the rental facility and find the person who checked in my car.  He said that the car had already been processed.  I asked if there was somewhere I could go or someone I could call.  He said that I had to go online and fill out a form and follow the process.  I thought, really?  It has only been 30 minutes.  He said that was the best of his ability.  I looked at him and asked, “I feel a story coming on are you going to be the hero of that story?”  What I meant is, there isn’t anything you can do to assist?  He said no.

I had another business trip going on the next day and I knew I couldn’t wait for the process.  Defeated, I pulled into an empty lot and filled out the form. The form said it could take 7-10 days to resolve the process.  I started saying things to myself like, “How can it take so long?  It has to be right around here somewhere.”  I then thought of the Find my iPhone app.  I pulled it up and it showed that my iPad was in a lot across the street from me.  I decided to try and go get it.  As I drove in the entrance, it was guarded and required a keycard.  The security lady came up to me and asked what I was doing.  I said, “Barbara (I read it from her name tag), I feel a story coming on, do you think you could be the hero of my story?”  At first, she was very resistant.  I told her the story that had transpired and about the business trip and then showed her that my iPad was in the guarded lot.  She thought about it for a bit and let me in.  I talked with the people in the office and retrieved my lost item.

As I reflected on the situation that I put myself in, I really liked the approach of asking someone to be the hero.  In terms of ethical influence, I needed to offer something that I could do in the realm of my influence.  Sharing with you Barbara’s act of kindness fulfills the contract I made with her.  She was the gatekeeper (literally) and let me in.  I tell you all of this to remind you that in process, procedure, and policy, there are two key factors:  People and Common Sense.  Although I wasn’t technically allowed in the area that I was in, common sense was to finish the issue right then instead of allowing a process to transpire over 7-10 days.  The other reflection was on the attendant.  He COULD have done something.  He just chose to hide behind policy.  As a loyal customer of that brand, it had the opportunity to cost long term business.  Barbara on the other hand weighed the possibilities and decided based on the human factor.

When your next customer service opportunity comes to pass, remember, the issue is a story.  Are you going to be the hero or the villain?  Are you doing everything you can to resolve a true issue or are you hiding behind policy and procedure?  What is your intent?  Barbara’s simple act resolved a huge issue that I had caused myself.  She is the hero of my story.

Who says it is about you?

I have been working quite a bit lately to build the business.  We are aligned with a RPA solution now, I have been writing my next book series “The Art of Ethical Influence” and launched a community transformation program called Transform Birmingham.  What I am excited about the most is the opportunity to work with people that I have known for 30 years.

To start the explanation, I started with a vision that consumed me a couple of years ago.  The market is shifting to individual knowledge products.  There are a ton of companies and well-known personalities that are creating blueprints for success.  The biggest issue in creating these products is the lack of content.  When I learned of the potential, I realized I had content.  Several books, articles, blog posts, speaking, etc.  I was sitting on a gold mine of content.  I immediately started doing what I normally do, I went after it in full force.  Entrepreneurs think that once content is created, then magically revenue appears.  I launched and sat back waiting for the revenue to flow in.

It didn’t meet my expectations.  I was discouraged and lost motivation.  I had been following a teaching through “Think and Grow Rich” of setting an intentional goal and repeating it to yourself every morning and night.  My mantra that I say is, “I am going to generate $X amount of revenue through the delivery of online informational products.”  I still say that mantra.

I was working an event where I was blessed to be the Executive Producer of the 30 Year Reunion of the All New Mickey Mouse Club.  As I sat there and worked with people that I have known and admired for 30 years, a thought came into my head.  My sub-conscious delivered a lingering question about my mantra.  The question said, “Who says it has to be YOUR products?”  What I didn’t realize in my discouragement is that I had learned key skills in developing, publishing, and setting up the online content.  Skills that could be valuable to bring other dreams to life. 

My mantra and dream remain the same.  The focus is answering the question, “How can I serve others in this space?”  One of my favorite quotes from John Maxwell says “You can be successful by yourself, but you can’t achieve significance without a team.  Once you taste significance, success will never satisfy.”  My journey over the last few years has shifted from a me mentality to a we mentality.  It is far more satisfying making your dream come true by ensuring others attain theirs.  Stay tuned as announcements and events are following, however, it’s not about me.

No Day But Today,

Rick