• Learning Objectives for Project Managers and Innovation Personnel
• To understand what is meant by business value
• To understand the importance of measuring and reporting business value
• To understand that there are many metrics available for reporting innovation value
• To understand how to create a value metric based on value attributes

INTRODUCTION

In earlier chapters, we discussed how new versions of project management, such as PM 2.0 and PM 3.0, focused on the creation of more business-oriented metrics for project management and how information warehouses and knowledge management systems now include more supporting data for project management decision making. All of these activities are providing innovation project managers with additional information for creating the business value outcomes expected from innovation. Business value will most likely be the driver for all new forms of project management. Value-in-use may be the driver for all new forms of innovation. We now have the capability of creating and monitoring business value metrics throughout the life of an innovation project.

Any metric can be regarded as a value metric based on how and when it is used. The number of deliverables produced may not be considered as a value metric in the fuzzy front end of a project, but perhaps so during commercialization. Effective governance can be a value metric if it favorably affects the culture of the organization. Some value metrics, as shown later in this chapter, can be composed of several other metrics that act as attributes of a value metric.

For years, the traditional view of project management for projects that did not include innovation was that, if you completed the project and adhered to the triple constraints of time, cost, and performance (or scope), the project was successful. Perhaps in the eyes of the project manager, the project appeared to be a success. In the eyes of the customer or the stakeholders, however, the project might be regarded as a failure.

Innovation projects must be looked at differently. If the results of the innovation activities were unsuccessful, meeting the budget and financial constraints could be meaningless or just a low level of importance. The only true measure of innovation success is if business value was created and the company gained from it economically. While time, cost, and scope are still important when managing innovation projects, metrics must be established for measuring innovation benefits and value. Time, cost, and scope may be treated as value attributes based on how and when they are used.

Project managers are now becoming more business oriented. Projects are being viewed as part of a business for the purpose of providing value to both the ultimate customer and the parent corporation. Project managers are expected to understand business operations more so today than in the past. As the project managers become more business oriented, our definition of success on a project now includes both a business and value component. The business component may be directly related to value.

• Situation: The IT group of a large public utility would always service all IT requests without question. All requests were added to the queue and would eventually get done. The utility implemented a PMO that was assigned to develop a template for establishing a business case for the request, clearly indicating the value to the company if the project were completed. In the first year of using the business case template, one-third of all projects in the queue were tossed out. Value became the driver for both measuring performance and ultimately success.

Projects must provide some degree of value when completed as well as meeting the competing constraints. Perhaps the project manager's belief is that meeting the competing constraints provides value, but that's not always the case. Why should a company work on innovation projects that provide no near-term or long-term value? Too many companies either are working on the wrong projects or simply have a poor project portfolio selection process, and no real value appears at the completion of the projects even though the competing constraints have been met.

Assigning resources that have critical skills that are in demand on other projects to projects that provide no appreciable value is an example of truly inept management and poor decision making. Yet selecting projects that may appear to guarantee the creation of business value or an acceptable ROI is very challenging because some of today's projects do not provide the targeted value until years into the future. This is particularly true for innovation and new product development, where as many as 50 or more ideas must be explored to generate one commercially successful product. Predicting the value at the start and tracking the value during execution is difficult.

There are multiple views of the definition of value. For the most part, value is like beauty; it is in the eyes of the beholder. In other words, value may be viewed as a perception at project selection and initiation based on data available at the time. At project completion, however, the actual value becomes a reality that may not meet the expectations that had initially been perceived.

Another problem is that the achieved innovation value of a project may not satisfy all the stakeholders, since each stakeholder may have had a different perception of value as it relates to his/her business model. Because of the money invested in some innovation projects, establishing value-based metrics is essential. The definition of innovation value, along with the metrics, can be industry-specific, company-specific, or even dependent on the size, nature, and business base of the firm. Some stakeholders may view innovation value as job security or profitability. Others might view value as image, reputation, or the creation of intellectual property. Satisfying all stakeholders is a formidable task often difficult to achieve and, in some cases, may simply be impossible. In any event, value-based metrics must be established along with the traditional metrics. Value metrics show whether value is being created or destroyed.

VALUE OVER THE YEARS

Before discussing value-based metrics, it is important to understand how the necessity for value identification has evolved. Surprisingly enough, numerous research on value has taken place over the past 20 years. Some of the items covered in the research include:

• Value dynamics
• Value gap analysis
• Intellectual capital valuation
• Human capital valuation
• Economic value-based analysis
• Intangible value streams
• Customer value management/mapping
• Competitive value matrix
• Value chain analysis
• Valuation of IT projects
• Balanced scorecard

Following are some of the models that have occurred over the past 20 years of research:

• Intellectual capital valuation
• Intellectual property scoring
• Balanced scorecard
• Future Value Management™
• Intellectual Capital Rating™
• Intangible value stream modeling
• Inclusive Value Measurement™
• Value Performance Framework (VPF)
• Value measurement methodology (VMM)

The reason why these models have become so popular in recent years is because we have developed techniques for the measurement and determination of value. This is essential in order to have value metrics on projects.

There is some commonality among many of these models such that they can be applied to project management. For example, Jack Alexander (2007, 5–6) created a model titled Value Performance Framework (VPF). The model focuses on building shareholder value, which some consider as the ultimate purpose of innovation, and is heavily biased toward financial key performance indicators (KPIs). However, the key elements of VPF can be applied to innovation project management, as shown in Table 7-1. The first column contains the key elements of VPF from Alexander's book, and the second column illustrates the application to innovation project management.

VALUE AND LEADERSHIP

The importance of value can have a significant impact on the leadership style of project managers. Historically, project management leadership was perceived as the inevitable conflict between individual values and organizational values. Today, companies are looking for ways to get employees to align their personal values with the organization's values. One way of accomplishing this is to create leadership metrics that can measure the leadership performance of innovation project managers.

Several books have been written on this subject, and the best one, in this authors' opinion, is Balancing Individual and Organizational Values by Ken Hultman and Bill Gellerman (2002, 105–106). Table 7-2, adapted from Hultman and Gellerman, shows how our concept of value has changed over the years. If you look closely at the items in Table 7-2, you can see that the changing values affect more than just individual versus organizational values. Instead, it is more likely to be a conflict among four groups, as shown in Figure 7-1. The team members and stakeholders also include people that are part of the co-creation team.

The needs of each group might be:

Project Manager

• Accomplishment of objectives
• Demonstration of creativity
• Demonstration of innovation

Team Members

• Achievement
• Advancement
• Ambition
• Credentials
• Recognition

Organization

• Continuous improvement
• Learning
• Quality
• Strategic focus
• Morality and ethics
• Profitability
• Recognition and Image

Stakeholders

• Organizational stakeholders: Job security.
• Product/market stakeholders: Quality performance and product usefulness.
• Capital markets: Financial growth

There are several reasons why the role of the innovation project manager and the accompanying leadership style have changed. Some reasons include:

• We are now managing our business as though it is a series of projects.
• Project management is now viewed as a full-time profession.
• Project managers are now viewed as both business managers and project managers and are expected to make decisions in both areas. This includes decision making during innovation efforts.
• The value of a project is measured more in business terms, such as business benefits and value, rather than solely in technical terms.
• Project management is now being applied to parts of the business that traditionally haven't used project management such as innovation activities.

COMBINING BENEFITS AND VALUE

Benefits and value are related. A benefit is an outcome from actions, behaviors, products or services that are considered to be important or advantageous to specific individuals, such as business owners, or a group of individuals, such as stakeholders or end-user consumers. Generic benefits might include:

• Improvements in quality, productivity, or efficiency
• Cost avoidance or cost reduction
• Increase in revenue generation
• Improvements in customer service

Benefits, whether they are strategic or nonstrategic, are normally aligned to the organizational business objectives of the sponsoring organization that will eventually receive the benefits. The benefits appear through the deliverables or outputs that are created by the project. It is the responsibility of the project manager to create the deliverables.

Benefits are identified in the project's business case. Some benefits are tangible and can be quantified. Other benefits, such as an improvement in employee morale, may be difficult to measure and therefore treated as intangible benefits.

There can also be dependencies between the benefits where one benefit is dependent on the outcome of another. As an example, a desired improvement in revenue generation may be dependent on an improvement in quality.

Benefits realization management is a collection of processes, principles, and deliverables to effectively manage the organization's investments. Project management focuses on maintaining the established baselines whereas benefits realization management analyzes the relationship that the project has to the business objectives by monitoring for potential waste, acceptable levels of resources, risk, cost, quality, and time as it relates to the desired benefits.

Project value is what the benefits are worth to someone. Project or business value can be quantified whereas benefits are usually explained qualitatively. When we say that the ROI should improve, we are discussing benefits. But when we say that the ROI should improve by 20 percent, we are discussing value. Progress toward innovation value generation is easier to measure than benefits realization, especially during project execution. Benefits and value are generally inseparable; it is difficult to discuss one without the other.

RECOGNIZING THE NEED FOR VALUE METRICS

The importance of the value component in the definition of innovation success cannot be overstated. Consider the following eight postulates:

• Postulate #1: Completing a project on time and within budget does not guarantee success if you were working on the wrong project.
• Postulate #2: Completing a project on time and within budget is not necessarily success.
• Postulate #3: Completing a project within the triple constraints does not guarantee that the necessary business value will be there at project completion.
• Postulate #4: Having the greatest enterprise project management methodology in the world cannot guarantee that value will be there at the end of the project.
• Postulate #5: Price is what you pay. Value is what you get (Warren Buffett).
• Postulate #6: Business value is what your customer perceives as worth paying for.
• Postulate #7: Success is when business value is achieved.
• Postulate #8: Following a project plan to conclusion is not always success if business-related changes were necessary but never implemented.

These eight postulates lead us to believe that perhaps value may become the dominating factor in the selection of projects for an innovation project portfolio. Project requestors must now clearly articulate the value component in the project's business case or run the risk that the project will not be considered. If the project is approved, then innovation value metrics must be established and tracked. However, it is important to understand that value may be looked at differently during the portfolio selection of projects because the tradeoffs that take place are among projects rather than the value attributes of a single project.

In Postulate #1, we can see what happens when management makes poor decisions during project selection, establishment of a project portfolio, and when managing project portfolios. We end up working on the wrong project or projects. What is unfortunate about this scenario is that we can produce the deliverable that was requested but:

• There's no market for the product.
• The product cannot be manufactured as engineered.
• The assumptions may have changed.
• The marketplace may have changed.
• Valuable resources were wasted on the wrong project.
• Stakeholders may be displeased with management's performance.
• The project selection and portfolio management process are flawed and needs to be improved.
• Organizational morale has diminished.

Postulate #2 is the corollary to Postulate #1. Completing a project on time and on budget:

• Does not guarantee a satisfied client/customer
• Does not guarantee that the customer will accept the product/service
• Does not guarantee that performance expectations will be met
• Does not guarantee that value exists in the deliverable
• Does not guarantee marketplace acceptance
• Does not guarantee follow-on work
• Does not guarantee success

• Situation: During the initiation of the project, the project manager, the stakeholders and members of the co-creation team defined project success and established metrics for each of the competing constraints. When it became obvious that all of the constraints could not be met, the project manager concluded that the best alternative was a tradeoff on value. The stakeholders and the co-creation team members became irate on hearing the news and decided to prioritize the competing constraints themselves. This took time and delayed the project.

Postulate #3 focuses on value. Simply because the deliverable is provided according to a set of constraints is no guarantee that the client will perceive value in the deliverable. The ultimate objective of all projects should be to produce a deliverable that meets expectations and achieves the desired value. While we always seem to emphasize the importance of the competing constraints when defining the project, we spend very little time in defining the value characteristics and resulting metrics that we expect in the final deliverable. The value component or definition must be agreed on jointly by all involved parties during the initiation stage of the project. This can be difficult if using a co-creation team.

Most companies today have some type of project management methodology in place. Unfortunately, all too often there is a mistaken belief that the methodology will guarantee project success. Methodologies:

• Cannot guarantee success
• Cannot guarantee value in the deliverable
• Cannot guarantee that the time constraint will be adhered to
• Cannot guarantee that the quality constraint will be met
• Cannot guarantee any level of performance
• Are not a substitute for effective planning
• Are not the ultimate panacea to cure all project ills
• Are not a replacement for effective human behavior

Methodologies can improve the chances for success but cannot guarantee success. Methodologies are tools and, as such, do not manage projects. Projects are managed by people and, likewise, tools are managed by people. Methodologies do not replace the people component in project management. They are designed to enhance the performance of people. The methodology used on innovation projects may be different from the methodology used on non-innovation projects.

In Postulate #5, we have a quote from Warren Buffett that emphasizes the difference between price and perceived value. Most people believe that customers pay for deliverables. This is not necessarily true. Customers pay for the value they expect to receive from the deliverable. If the deliverable has not achieved value or has limited value, the result is a dissatisfied customer.

Some people believe that a customer's greatest interest is quality. In other words, “Quality comes first!” While that may seem to be true on the surface, the customer generally does not expect to pay an extraordinary amount of money just for high quality. Quality is just one component in the value equation. Value is significantly more than just quality.

When customers agree to purchase a deliverable, the customer is actually looking for the value in the deliverable. The customer's definition of success may be “value achieved” or, as we stated previously, value-in-use.

Unfortunately, unpleasant things can happen when the project manager's definition of success is the achievement of the deliverable (and possibly the triple constraint) and the customer's definition of success is value-in-use. This is particularly true when customers want value and the project manager focuses on the profit margins of the project.

Postulate #7 is a summation of Postulates #1 through #6. Perhaps the standard definition of success using just the triple constraints should be modified to include a business component such as value, or even be replaced by a more specific definition of value.

Sometimes the value of a project can change over time, and the project manager may not recognize that these changes have occurred. Failure to establish value expectations or lack of value in a deliverable can result from:

• Market unpredictability
• Market demand that has changed, thus changing constraints and assumptions
• Technology advances or inability to achieve functionality
• Critical resources were that were not available or resources who lacked the necessary skills

Establishing value metrics early on can help identify if a project should be canceled. The earlier the project is canceled, the quicker we can assign the resources to those innovation projects that have a higher perceived value and probability of success. Unfortunately, early warning signs are not always present to indicate that the value will not be achieved. The most difficult metrics to establish are value-driven metrics.

THE NEED FOR EFFECTIVE MEASUREMENT TECHNIQUES

Selecting metrics and KPIs is not that difficult, provided they can be measured. This is the major obstacle with the value-driven metrics. On the surface, they look easy to measure, but there are complexities. However, even though value appears in the present and in the future, it does not mean that the value outcome cannot be quantified. Table 7-3 illustrates some of the metrics that are often treated as value-driven KPIs.

Traditionally, business plans identified the benefits expected from the project, and the benefits were the criteria for project selection. Today, portfolio management techniques require identification of the value as well as the benefits. However, conversion from benefits to value is not easy (Phillips et al. 2002, Chapter 13).

There are shortcomings in the conversion process that can make the conversion difficult. Figure 7-2 illustrates several common shortcomings.

There are other shortcomings with the measurement of KPIs. KPI are metrics for assessing value. With traditional project management, metrics are established by the enterprise project management methodology and fixed for the duration of the project's life cycle. With value-driven project management, however, metrics, can change from project to project, during a life-cycle phase and over time because of:

• The way the customer and contractor jointly define innovation success and value at project initiation
• The way the customer and contractor come to an agreement at project initiation as to what metrics should be used on a given project
• The way the company defines innovation value
• New or updated versions of tracking software
• Improvements to the enterprise project management methodology and the accompanying project management information system
• Changes in the enterprise environmental factors

Even with the best possible metrics, measuring value can be difficult. Benefits less costs indicate the value and determine if the project should be done. The challenge is that not all costs are quantifiable. Some values are easy to measure, while others are more difficult. The easy value metrics to measure are often called soft or are established by the enterprise project management methodology and fixed for the duration of the project's life-cycle. The hard values to measure are often considered intangible value metrics. Table 7-4 illustrates some of the easy and hard value metrics to measure. Table 7-5 shows some of the problems associated with measuring both hard and soft value metrics.

Measurement techniques have advanced to the point where we believe that we can measure anything. Projects now have both financial and nonfinancial metrics, and many of the nonfinancial metrics are regarded as intangible metrics. For decades, we shied away from intangibles. As stated by Bontis (2009, 8), “The intangible value embedded in companies has been considered by many, defined by some, understood by few, and formally valued by practically no one.” Today, we can measure intangible factors as well as tangible factors that impact project performance.

An intangible asset is non-monetary and without physical substance. Intangible assets can be the drivers of innovation. Intangibles may be hard to measure, but they are not immeasurable. In an excellent article, Ng et al. (2011) discuss various key intangible performance indicators (KIPIs) and how they can impact project performance measurements. The authors state:

[T]here are many diverse intangible performance drivers which impact organizational [and innovational] success such as leadership, management capabilities, credibility, innovation management, technology and research and development, intellectual property rights, workforce innovation, employee satisfaction, employee involvement and relations, customer service satisfaction, customer loyalty and alliance, market opportunities and network, communication, reputation and trust, brand values, identity, image, and commitment, HR practices, training and education, employee talent and caliber, organizational learning, renewal capability, culture and values, health and safety, quality of working conditions, society benefits, social and environmental, intangible assets and intellectual capital, knowledge management, strategy and strategic planning and corporate governance.

Today, there are measurement techniques for these. In dynamic organizations, both KPIs and KIPIs are used to validate innovation performance.

With innovation project management (IPM), we will need significantly more metrics, especially many of the above-mentioned intangibles, to track innovation and business applications. IPM metrics are a source of frustration for almost every firm. There are no standards set for innovation metrics. Companies may have a set of “core” metrics they use and then add in other metrics based on the nature of the project. Metrics for disruptive innovation are probably the hardest to define. However, companies are beginning to develop models to measure innovation (Ivanov and Avasilcăi 2014; Zizlavsky 2016).

The intangible elements are now considered by some to be more important than tangible elements. This appears to be happening on IT projects where executives are giving significantly more attention to intangible values. The critical issue with intangible values is not necessarily in the end result, but in the way that the intangibles were calculated. Phillips et al. (2002) emphasize that the true impact on a business must be measured in business units.

Tangible values are usually expressed quantitatively whereas intangible values may be expressed through a qualitative assessment. There are three schools of thought for value measurement:

• School #1: The only thing that is important is ROI.
• School #2: ROI can never be calculated effectively; only the intangibles are important.
• School #3: If you cannot measure it, then it does not matter.

The three schools of thought appear to be an all-or-nothing approach, where value is either 100 percent quantitative or 100 percent qualitative. The best approach is most likely a compromise between a quantitative and qualitative assessment of value. It may be necessary to establish an effective range, which is a compromise among the three schools of thought.

The timing of value measurement is critical. During the life cycle of a project, it may be necessary to switch back and forth from qualitative to quantitative assessment of the metric, and the actual metrics or KPIs may then be subject to change. Certain critical questions must be addressed:

• When or how far along the project life cycle can we establish concrete metrics, assuming this can be done at all?
• Can value be simply perceived and, therefore, no value metrics are required?
• Even if we have value metrics, are they concrete enough to reasonably predict actual value?
• Will we be forced to use value-driven project management metrics on all projects or are there some projects where this approach is not necessary?
  • Well-defined versus ill-defined projects
  • Strategic versus tactical projects
  • Internal versus external projects
• Can we develop a criterion for when to use value-driven project management, or should we use it on all projects but at a lower intensity level?

For some innovation projects, using metrics to assess value at project closure may be difficult. We must establish a time frame for how long we are willing to wait to measure the final or real value or benefits from a project. This is particularly important if the actual value cannot be identified until sometime after the project has been completed. Therefore, it may not be possible to appraise the success of a project at closure if the true economic values cannot be realized until sometime in the future. As an example, consumers may need to use a project for some time to determine its true value to them.

Some practitioners of value measurement question whether value measurement is better using boundary boxes instead of life-cycle phases. For value-driven projects, which include several forms of innovation projects, the potential problems with life-cycle phase metrics include:

• Metrics can change between phases and even during a phase.
• Inability to account for changes in the enterprise environmental factors.
• Focus may be on the value at the end of the phase rather than the value at the end of the project.
• Team members may get frustrated at not being able to quantitatively calculate value.

Boundary boxes, as shown in Figure 7-3, have some degree of similarity to statistical process control charts and can assist in metric measurements. Upper and lower strategic targets for the value of the metrics are established. As long as the KPIs indicate that the project is still within the upper and lower value targets, the project's objectives and deliverables may not undergo any scope changes or tradeoffs.

Value-driven projects must undergo value health checks to confirm that the project will contribute value to the company. Value metrics, such as KPIs, indicate the current value. What is also needed is an extrapolation from the present into the future. Using traditional project management combined with the traditional enterprise project management methodology, we can calculate the time at completion and the cost at completion. These are common terms that are part of earned value measurement systems. However, as stated previously, being on time and within budget is no guarantee that the perceived value will be there at project completion.

Therefore, instead of using an enterprise project management methodology, which focuses on earned value measurement, we may need to create a value management methodology (VMM), which stresses the value variables. With VMM, time to complete and cost to complete are still used, but we introduce a new term entitled value (or benefits) at completion. Determination of value at completion, which is critical for innovation projects, must be done periodically throughout the project. However, periodic reevaluation of benefits and value at completion may be difficult because:

• There may be no reexamination process.
• Management is not committed and believes that the reexamination process is unreal.
• Management is overoptimistic and complacent with existing performance.
• Management is blinded by unusually high profits on other projects (misinterpretation).
• Management believes that the past is an indication of the future.

CUSTOMER/STAKEHOLDER IMPACT ON VALUE METRICS

For years, customers and contractors have been working toward different definitions of project success. The project manager's definition of success was profitability and tracked through financial metrics. The customer's definition of success was usually the quality of the deliverables. Unfortunately, quality was measured at the closure of the project because it was difficult to track throughout the project. Yet quality was often considered the only measurement of success.

Today, clients and stakeholders appear to be more interested in the value they will receive at the end of the project. If you were to ask 10 people, including project personnel, the meaning of value, you would probably get 10 different answers. Likewise, if you were to ask, “Which critical success factor has the greatest impact on value?” you would get different answers. Each answer would be related to the individual's work environment and industry. Today, companies seem to have more of an interest in value than in quality. This does not mean that we are giving up on quality. Quality is part of value. Some people believe that value is simply quality divided by the cost of obtaining that quality. In other words, the less you pay for obtaining the customer's desired level of quality, the greater the value to the customer.

The problem with this argument is that we assume that quality is the only attribute of value that is important to the client and, therefore, we need to determine better ways of measuring and predicting just quality. Throughout this chapter, when we refer to a “client,” the client could be internal to your company, external to your company, or the customers of your external client. You might also consider stakeholders as your clients or members of a co-creation team.

Unfortunately, there are other attributes of value and many of these other attributes are equally as difficult to measure and predict. Customers can have many attributes that they consider as value components, but not all of the value attributes are equal in importance.

Unlike the use of quality as the solitary parameter, value allows a company to better measure the degree to which the innovation project will satisfy its strategic business objectives. Quality can be regarded as an attribute of value along with other attributes. Today, every company has quality and produces quality in some form. This is necessary for survival. What differentiates one company from another, however, are the other attributes, components, or factors used to define value. Some of these attributes might include price, timing, image, reputation, customer service, and sustainability.

In today's world, customers make decisions to hire a contractor based on the value they expect to receive and the price they must pay to receive this value. Actually, it is more of a “perceived” value that may be based on tradeoffs on the attributes of the client's definition of value. The client may perceive the value of your project to be used internally in their company or pass it on to their customers through their customer value management program. If your organization does not or cannot offer recognized value to your clients and stakeholders, then you will not be able to extract value (i.e., loyalty) from them in return. Over time, they will defect to other contractors.

Project managers in the future must consider themselves as the creators of value. The definition of a project that is used in project management courses is “a set of values scheduled for sustainable realization.” As a project manager, you must, therefore, establish the correct metrics so that the client and stakeholders can track the value that you will be creating. Measuring and reporting customer value throughout the project is now a competitive necessity. If it is done correctly, it will build emotional bonds with your clients.

CUSTOMER VALUE MANAGEMENT PROGRAMS

For decades, many companies believed that they had an endless supply of potential customers. Companies called this the “door knob” approach, whereby they expected to find a potential customer behind every door. Under this approach, customer loyalty was nice to have but not a necessity. Customers were plentiful, often with little regard for the quality of your deliverables. Companies also believed that that either frequent innovation was not necessary or that most of their innovation attempts would be successful. Those days may be gone.

The focus of most CRM programs was to: (1) find the right customers, (2) develop the right relationships with these customers, and (3) retain the customers. This included stakeholder relations management and seeking out ways to maintain customer loyalty. Historically, sales and marketing were responsible for CRM activities. Today, project managers are doing more than simply managing a project; they are managing part of a business. Therefore, they are expected to make business decisions as well as project decisions, and this includes managing activities related to CRM. Project managers soon found themselves managing projects that now required effective stakeholder relations management, as well as customer relations management. Satisfying the needs of both the client and various stakeholders was difficult.

As CRM began to evolve, companies soon found that there were different perceptions among their client base as to the meaning of quality and value. In order to resolve these issues, companies created customer value management (CVM) programs. Customer value management programs address the critical question, “Why should customers purchase from you rather than from the competition?” The answer was most often the value that you provided through your products and deliverables. Loyal customers appeared to be more value sensitive than price sensitive. Loyal customers are today a scarce resource and also a source of value for project managers and their organizations. Value breeds loyalty.

There are other items, such as trust and intangibles, that customers may see as a form of value. As stated by a technical consultant:

The business between the vendor and the customer is critical. It's situational but in technical consulting for instance the customer may really value only the technical prowess of a vendor's team; project management is expected to be competent in this case. If project management itself is adding value, then isn't that really a matter of the customer's view of the project manager providing services above and beyond the normal view of functional responsibility? That would come down to the relationship with the customer. Ask any customer what they truly value in a vendor and they will tell you it is trust because there is a reliance on the customer's business strategy succeeding based on how well the vendor executes.

For example, in answer to the question, Why do you value vendor X?, you could imagine the following answers from customers: “So and so always delivers for me, and I can count on them to deliver a quality (defined however) product on time and at the agreed price,” or “Vendor X really helped me be successful with my management by pulling in the schedule by x weeks,” or “I really appreciated a recent project done by vendor Y because they handled our unexpected design changes with professionalism and competence.”

Now most project management is within the sphere of operations in a vendor's organization. The customer facing business relationship is handled by some company representative in most cases. The project manager would be brought in once the work is underway and typically the direct reporting is to someone underneath the person who authorized the work; so, in this case, the project manager has the opportunity to build value with the underling but not the executive.

We discount the personality of the project managers as though this isn't an issue. It is a major issue and people need to realize that it is. Understanding one's own personality and the personality of the customer is vital to getting a label of value added from a customer. If the project manager isn't flexible in this area, then creating value with the customer becomes more difficult.

Anyway, there are as many variations to this theme as there are projects since personality and other interpersonal relationship nuances are involved. However, so much of successful [innovation] project management is all about these intangibles.

CVM today focuses on maximizing customer value, regardless of the form. In some cases, CVM must measure and increase the lifetime value of the deliverables of the project for each customer and stakeholder. By doing this, the project manager is helping the customer manage their profitability as well.

CVM performed correctly can and will lead to profitability but being profitable does not mean that you are performing CVM correctly. There are benefits to implementing CVM effectively as shown in Table 7-6. CVM is the leveraging of customer and stakeholder business relationships throughout the project. Because each project will have different customers and different stakeholders, CVM must be custom fit to each organization and possibly each project.

If CVM is to be effective, then presenting the right information to the client and stakeholders becomes critical. CVM introduces a value mind-set into decision making. Many CVM programs fail because of poor metrics and not measuring the right things. Just focusing on the end result does not tell you if what you are doing is right or wrong. Having the correct value-based metrics is essential. Value is in the eyes of the beholder, which is why there can be different value metrics.

CVM relies heavily on customer value assessment. Traditional CVM models are light on data and heavy on assumptions. For CVM to work effectively, it must be heavy on data and light on assumptions. Most successful CVM programs perform “data mining,” where the correct attributes of value are found along with data that supports the use of those attributes. However, we should not waste valuable resources calculating value metrics unless the client perceives the value of using the metric. Project management success in the future will be measured by how well the project manager provides superior customer value. To do this, you must know what motivates the customers as well as the customers' customers.

Executives generally have a better understanding of the customers' needs than do the workers at the bottom of the organizational chart where the work takes place. Therefore, the workers may not see, understand, or appreciate the customer's need for value. Without the use of value metrics, we focus on the results of the process rather than the process itself and miss opportunities to add value. Only when a crisis occurs do we put the process under a microscope. Value metrics provide the workers with a better understanding of the customer's definition of value.

Understanding the customer's perception of value means looking at the disconnects or activities that are not value-added work. Value is created when we can eliminate non-value-added work rather than looking at ways to streamline project management processes. As an example, consider the following situation:

• Situation: A company had a project management methodology that mandated that a risk management plan be developed on each and every project regardless of the magnitude of the risk. The risk management plan was clearly defined as a line item in the work breakdown structure and the clients eventually paid the cost of this. On one project, the project manager created a value metric and concluded that the risks on the project were so low that risk should not be included as one of the attributes of the value metric. The client agreed with this, and the time and money needed to develop a risk management plan was eliminated from the project plan. On this project, the risk management plan was seen as a disconnect and eliminated so that added value could be provided to the client. The company recognized that the risk management plans might be a disconnect on some projects and made the risk management plan optional at the discretion of the project manager and the clients.

This situation is a clear example that value is created when outputs are produced using fewer inputs or more outputs are created with the same number of inputs. However, care must be taken to make sure that the right disconnects are targeted for elimination.

Project managers must work closely with the customers for CVM to be effective. This includes:

• Understanding the customer's definition of satisfaction and effective performance
• Knowing how the customer perceives your price/value relationship (some clients still believe that value is simply quality divided by price)
• Making sure that the customers understand that value can be expressed in both nonfinancial and financial terms
• Seeing if the client can tell you what your distinctive competencies are and determining if they are appropriate candidates for value attributes
• Being prepared to debrief the customer and stakeholders on a regular basis for potential improvements and best practices
• Validating that the client is currently using or is willing to use the value metrics for their own informed decision making
• Understanding which value attributes are most important to your customers
• Building a customer project management value model or framework possibly unique for each customer
• Making sure that your model or framework fits the customer's internal business model
• Designing metrics that interface with the customer's business model
• Recognizing that CVM can maximize your lifetime profitability with each customer
• Changing from product-centric or service-centric marketing to project management-centric marketing
• Maximizing the economics of customer loyalty

THE RELATIONSHIP BETWEEN PROJECT MANAGEMENT AND VALUE

Companies today are trying to link together quality, value, and loyalty. All of this begins during innovation activities. These initiatives, which many call customer value management initiatives, first appeared as business initiatives performed by marketing and sales personnel rather than project management initiatives. Today, however, project managers are slowly becoming more involved in business decisions, and value has become extremely important.

Quality and customer value initiatives are part of CVM activities and are a necessity if a company wishes to obtain a competitive advantage. Competitive advantages in project management do not come just from being on time and within budget at the completion of each project. Offering something that your competitors do not offer may help. However, true competitive advantage is found when your efforts are directly linked to the customer's value initiatives, and whatever means by which you can show this will give you a step up on the competition. Projects managers must develop value-creating strategies.

Customers today have become more demanding and are requiring the contractor to accept the customer's definition of value according to the attributes selected by the customer. Each customer can, therefore, have a different definition of value. Contractors may wish to establish their own approach for obtaining this value based on their company's organizational process assets rather than having the customer dictate it. If you establish your own approach to obtaining the desired value, do not assume that your customer will understand the approach. They may need to be educated. Customers who recognize and understand the value that you are providing are more likely to want a long-term relationship with your firm.

To understand the complexities with introducing value to project management activities, let's assume that companies develop and commercialize products according to three life-cycle phases; innovation, development and commercialization. Once the innovation and development phases are completed, the deliverables are turned over to someone in marketing and sales responsible for program management and ultimately commercialization of the product. Program management and commercialization may be done for products developed internally for your own company or they may be done for the client, or even for the client's own customers. In any event, it is during or after commercialization when companies survey their customers as to feedback on customer satisfaction and the value of the product. If the customers are unhappy with the final value, it is an expensive process to go back to the project stage and repeat the project in order to try to improve the value for the end-of-line customers.

The failures often found in these three life-cycle phases can be attributed to:

• Project managers are allowed to make only project decisions rather than both project and business decisions.
• Project managers are not informed as to the client's business plans as they relate to what the project manager is developing.
• Customers do not clearly articulate to the project manager, either verbally or through documented requirements, the exact value that they expect.
• Customers fund projects without fully understanding the value needed at the completion of the project.
• Project managers interface with the wrong people on the project.
• No value-based metrics are established in the project. management phase whereby informed decision making can take place to improve the final value.
• Tradeoffs are made without considering the impact on the final value.
• Quality and value are considered as synonymous; quality is considered as the only value attribute.

We are now in the infancy stage of determining how to define and measure value. For internal projects, we are struggling in determining the right value metrics to assist us in project portfolio management with the selection of one project over another. For external projects, the picture is more complex. Unlike traditional metrics used in the past, value-based metrics are different for each client and each stakeholder. In Figure 7-4, you can see the three dimensions of values: your parent company's values, your client's values, your client's customers' values, and we could even add in a fourth dimension, namely, stakeholder values. It must be understood that the value that the completion of the project brings to your organization may not be as important as the total value that the project brings to the client's organization and the client's customer base.

For some companies, the use of value metrics will create additional challenges. As stated by a global IT consulting company:

This will be a cultural change for us and for the customer. Both sides will need to have staff competent in identifying the right metrics to use and weightings; and then be able to explain in layman's language what the value metric is about.

The necessity for such value initiatives is clear.

As stated by a senior manager:

I fully agree on the need for such value initiatives and also the need to make the importance clear to senior management. If we do not work in that direction, it will be very difficult for the companies to clearly state if they are working efficiently enough, providing value to the customer and the stockholders, and in consequence being sufficiently predictive with regard to its future in the market.

The window into the future now seems to be getting clearer. As a guess as to what might happen, consider the following:

• Your clients will perform CVM activities with their clients to discover what value attributes are considered as important. Your client's success is achieved by providing superior value to their customers.
• These attributes will be presented to you at the initiation of the project such that you can create value-based metrics on your project using these attributes if possible. You must interact with the client to understand their value dimensions.
• You must then create value metrics. Be prepared to educate your client on the use of the metrics. It is a mistake to believe that your client will fully understand your value metrics approach.
• Interact closely with your client to make sure you are fully aware of any changes in the value attributes they are finding in their customer value management efforts.
• Since value creation is a series of key and informed decisions, be prepared for value attribute tradeoffs and changes to your value metrics.

Value is now being introduced into traditional project management practices.

Value management practices have been with us for several decades and have been hidden under the radar screen in many companies. Some companies performed these practices in value engineering departments.

SELECTING THE RIGHT METRICS

Because of innovations in measurement techniques, companies are now tracking a dozen or more metrics on projects. While this sounds good, it has created the additional problem of potential information overload. Having too many performance metrics may provide the viewers with more information than they actually need, and they may not be able to discern the true status or what information is really important. It may be hard to ascertain what is important and what is not, especially if decisions must be made. Providing too few metrics can make it difficult for the viewers to make informed decisions. There is also a cost associated with metric measurement, and we must determine if the benefits of using this many metrics outweigh the costs of measurement. Cost is important because we tend to select more metrics than we actually need.

There are three generic categories of metrics:

1. Traditional metrics. These metrics are used for measuring the performance of the applied project management discipline more so than the results of the project and how well we are managing according to the predetermined baselines (e.g., cost variance and schedule variance). These metrics are common to all types of projects, including innovation.
2. Key performance indicators (KPIs). These are the few selected metrics that can be used to track and predict whether the project will be a success. These KPIs are used to validate that the critical success factors (CSFs) defined at the initiation of the project are being met (e.g., time-at-completion, cost-at-completion, and customer satisfaction surveys). These KPIs can be unique to a particular project such as innovation.
3. Value (or value reflective) metrics. These are special metrics that are used to indicate whether the stakeholders' expectations of project value are being or will be met. Value metrics can be a combination of traditional metrics and KPIs (value-at-completion and time to achieve full value).

Each type of metric has a primary audience, as shown in Table 7-7.

There can be three information systems on a project:

• One for the project manager
• One for the project manager's superior or parent company
• One for the each of the stakeholders or members of a co-creation team

There can be a different set of metrics and KPIs for each of these information systems.

Traditional metrics, such baselines as the cost, scope, and schedule, track and can provide information on how well we are performing according to the processes in each knowledge area or domain area in the PMBOK® Guide. Project manager must be careful not to micromanage their project and establish 40 to 50 metrics where most of them may not provide useful information.

Typical metrics on traditional projects may include:

• Number of assigned versus planned resources
• Quality of assigned versus planned resources
• Project complexity factor
• Customer satisfaction rating
• Number of critical constraints
• Number of cost revisions
• Number of critical assumptions
• Number of unstaffed hours
• Percent of total labor hours on overtime
• Cost variance
• Schedule performance index
• Cost performance index

This is obviously not an all-inclusive list. These metrics may have some importance for the project manager but not necessarily the same degree of importance for the client and the stakeholders.

Clients and stakeholders are interested in critical metrics or KPIs. These chosen few metrics are reported to the client and stakeholders and provide an indication of whether or not innovation success is possible; however, they do not necessarily identify if the desired value will be achieved. The number of KPIs is usually determined by the amount of real estate on a computer screen. Most dashboards can display 6–10 icons or images where the information can be readily seen with reasonable ease.

To understand what a KPI means requires a dissection of each of the terms:

• Key: A major contributor to success or failure
• Performance: Measurable, quantifiable, adjustable, and controllable elements
• Indicator: Reasonable representation of present and future performance

Obviously, not all metrics are KPIs. There are six attributes of a KPI, and these attributes are important when identifying and selecting the KPIs.

• Predictive: Able to predict the future of this trend
• Measurable: Can be expressed quantitatively
• Actionable: Triggers changes that may be necessary
• Relevant: The KPI is directly related to the success or failure of the project
• Automated: Reporting minimizes the chance of human error
• Few in number: Only what is necessary

Applying these six attributes to traditional metrics is highly subjective and will be based on the agreed-on definition of success, the critical success factors (CSFs) that were selected, and possibly the whims of the stakeholders. There can be a different set of KPIs for each stakeholder based on each stakeholder's definition of project success and final project value. This could significantly increase the costs of measurement and reporting, especially if each stakeholder requires a different dashboard with different metrics.

THE FAILURE OF TRADITIONAL METRICS AND KPIS

While some people swear by metric and KPIs, there are probably more failures than success stories. Typical causes of metric failure include:

• Performance being expressed in traditional or financial terms only
• The use of measurement inversion; using the wrong metrics
• No link of performance metrics to requirements, objectives, and success criteria
• No link to whether the customer was satisfied
• Lack of understanding as to which metrics indicate project value
• No feedback from customers on value-in-use

Metrics used for business purposes tend to express all information in financial terms. Project management metrics cannot always be expressed in financial terms. Also, in project management we often identify metrics that cannot effectively predict project success and/or failure and are not linked to the customer's requirements.

Perhaps the biggest issue today is in which part of the value chain metrics are used. Michael Porter, in his book Competitive Advantage (1985), used the term value chain to illustrate how companies interact with upstream suppliers, the internal infrastructure, downstream distributors and end-of-the-line customers. While metrics can be established for all aspects of the value chain, most companies do not establish metrics for how the end-of-the-line customer perceives the value of the deliverable. Those companies that have developed metrics for this part of the value chain are more likely doing better than those that have not. These are identified as customer-related value metrics.

THE NEED FOR VALUE METRICS

In project management, it is now essential to create metrics that focus not only on business (internal) performance but also on performance toward customer satisfaction. For innovation projects, this is critical. If the customer cannot see the value in the project, then the project may be canceled and repeat business will not be forthcoming. Good value metrics can also result in less customer and stakeholder interference and meddling in the project.

The need for an effective metrics management program that focuses on value-based metrics is clear:

• There must be a customer/contractor/stakeholder agreement on how a set of metrics will be used to define innovation success or failure; otherwise, you have just best guesses. Value metrics will allow for more confidence in the ability to track and report value.
• Metric selection must cover the reality of the entire project; this can be accomplished with a set of core metrics supported by a value metric.
• A failure in effective metrics management, especially value metrics, can lead to stakeholder challenges and a loss of credibility.

We need to develop value-based metrics that can forecast stakeholder value, possibly shareholder value, and most certainly project value. Most models for creating this metric are highly subjective and are based on assumptions that must be agreed on upfront by all parties. Traditional value-based models that are used as part of a business intelligence application are derivatives of the QCD model (quality, cost, and delivery).

CREATING VALUE METRICS

The ideal situation would be the creation of a single value metric that the stakeholders can use to make sure that the project is meeting or exceeding the stakeholder's expectation of value. The value metric can be a combination of traditional metrics and KPIs. Discussing the meaning of a single value metric may be more meaningful than discussing the individual components; the whole is often greater than the sum of the parts.

There must be support for the concept of creating a value metric. According to a global IT consulting company:

There has to be buy-in from both sides on the importance and substance of a value metric; it can't be the latest fad—it has to be understood as a way of tracking the value of the project.

Typical criteria for a value metric may be:

• Every project will have at least one value metric or value KPI. In some industries, it may not be possible to use just one value metric.
• There may be a limit, such as five, for the number of value attributes that are part of the value metric. As we mature in the use of value metrics, the number of attributes can grow or be reduced. Not all attributes that we would like to have will be appropriate or practical.
• There will be weighting factors assigned to each component. The weighting factors and the component measurement techniques will be established by the project manager and the stakeholders at the onset of the project. There may be company policies on assigning the weighting factors.
• The target boundary boxes for the metrics will be established by the project manager and possibly the project management office (PMO). If a PMO does not exist, then there may be a project management committee taking responsibility for accomplishing this, or it may be established by the funding organization.

To illustrate how this might work, let's assume that you are using innovation project management for creating a new product for consumers, and the agreed on value attributes will be:

• Quality (of the final product)
• Cost (of commercialization)
• Safety protocols (for product liability concerns)
• Features (functionality)
• Schedule or timing (time to market)

These attributes, which can be unique for each project, are agreed to by you, the client, and the stakeholders at the onset of the project. The attributes may come from your metric/KPI library or may be new attributes. Care must be taken to make sure that your organizational process assets can track, measure, and report on each attribute. Otherwise, additional costs may be incurred, and these costs must be addressed up front so that they can be included in the contract price.

Time and cost are generally attributes of every value metric. However, there may be special situations where neither time, nor cost, nor both are value metric attributes:

• The project must be completed by law, such as environmental projects, where failure to perform could result in stiff penalties.
• The project is in trouble, but necessary, and we must salvage whatever value we can.
• We must introduce a new product to keep up with the competition regardless of the cost.
• Safety, aesthetic value, and quality are more important than time, cost, or scope.

Other attributes are almost always included in the value metric to support time and cost.

The next step is to set up targets with thresholds for each attribute or component. This is shown in Figure 7-5. If the attribute is cost, then we might say that performing within ±10 percent of the cost baseline is normal performance. Performing at greater than 20 percent over budget could be disastrous, whereas performing at more than 20 percent below budget is superior performance. However, there are cases where a +20 percent variance could be good and a –20 percent variance could be bad.

The exact definition or range of the performance characteristics could be established by the PMO if company standardization is necessary or through an agreement with the client and the stakeholders. In any event, targets and thresholds must be established.

The next step is to assign value points for each of the cells in Figure 7-5, as shown in Figure 7-6. In this case, two value points were assigned to the cell labeled “Performance Target.” The standard approach is to then assign points in a linear manner above and below the target cell. Nonlinear applications are also possible, especially when thresholds are exceeded.

In Table 7-8, weighting factors are assigned to each of the attributes of the value metric. As before, the weighting percentages could be established by the PMO or through an agreement with the client (i.e., funding organization) and the stakeholders. The use of the PMO might be for company standardization on the weighting factors. However, it sets a dangerous precedence when the weighting factors are allowed to change indiscriminately.

Now, we can multiply the weighting factors by the value points and sum them up to get the total value contribution. If all of the value measurements indicated that we were meeting our performance targets, then 2.0 would be the worth of the value metric. However, in this case, we are exceeding performance with regard to quality, safety protocols and time to market, and therefore the final worth of the value metric is 2.7. This implies that the stakeholders or consumers are receiving additional value that is most likely meeting or exceeding expectations.

There are still several issues that must be considered when using this technique. We must clearly define what is meant by normal performance. The users must understand what this means. Is this level actually our target level or is it the minimal acceptable level for the client? If it is our target level, then having a value below 2.0 might still be acceptable to the client/consumers/stakeholders if our target were greater than what the requirements asked for.

The users must understand the real meaning of the value metric. When the metric goes from 2.0 to 2.1 how significant is that? Statistically, this is a 5 percent increase. Does it mean that that the value increased 5 percent? How can we explain to a layman the significance of such an increase and the impact on value?

Value metrics generally focus on the present and/or future value of the project and may not provide sufficient information as to other factors that may affect the health of the project. As an example, let's assume that the value metric is quantitatively assessed at a value of 2.7. From the customer's perspective, they are receiving more value than they anticipated. But other metrics may indicate that the project should be considered for termination. For example,

• The value metric is 2.7, but the remaining cost of development or commercialization is so high that the product may be overpriced for the market.
• The value metric is 2.7, but the time to market will be too late.
• The value metric is 2.7, but a large portion of the remaining work packages have a very high critical risk designation.
• The value metric is 2.7, but significantly more critical assumptions are being introduced.
• The value metric is 2.7, but the project no longer satisfies the client's needs.
• The value metric is 2.7, but your competitors have introduced a product with a higher value and quality.

In Table 7-9, we reduced the number of features in the deliverable, which allowed us to improve quality and safety as well as accelerate the time to market. Since the worth of the value metric is 2.4, we are still providing additional value to the stakeholders and customers.

In Table 7-10, we have added additional features as well as improving quality and safety. However, to do this, we have incurred a schedule slippage and a cost overrun. The worth of the value metric is now 2.7, which implies that the stakeholders are still receiving added value. The stakeholders/customers may be willing to incur the added cost and schedule slippage because of the added value.

Whenever it appears that we may be over budget or behind schedule, we can change the weighting factors and overweight those components that are in trouble. As an example, Table 7-11 shows how the weighting factors can be adjusted. Now, if the overall worth of the value metric exceeds 2.0 with the adjusted weighting factors, the stakeholders may still consider the continuation of the project. Sometimes, companies identify minimum and maximum weights for each component, as shown in Table 7-12. However, there is a risk that management may not be able to adjust to and accept weighting factors that can change from project to project, or even during a project. Also, standardization and repeatability of the solution may disappear with changing weighting factors.

Companies are generally reluctant to allow project managers to change weighting factors once the project is under way and may establish policies to prevent unwanted changes from occurring. The fear is that the project manager may change the weighting factors just to make the project look good. However, there are situations where a change may be necessary:

• Customers and stakeholders are demanding a change in weighting factors possibly to justify the continuation of project funding.
• The risks of project have changed in downstream life cycle phases and a change in weighting factors is necessary.
• As the project progresses, new value attributes are added into the value metric.
• As the project progresses, some value attributes no longer apply and must be removed from the value metric.
• The enterprise environment factors have changed requiring a change in the weighting factors.
• The assumptions have changed over time.
• The number of critical constraints has changed over time.

We must remember that project management metrics and KPIs can change over the life of a project and, therefore. The weighting factors for the value metric may likewise be susceptible to changes.

Sometimes, because of the subjectivity of this approach, when the information is presented to the client, we should include identification of which measurement technique was used for each target. This is shown in Table 7-13. The measurement techniques may be subject to negotiations at the beginning of the project.

The use of metrics and KPIs has been with us for decades, but the use of a value metric is relatively new, especially on innovation projects. Therefore, failures in the use of this technique are still common and may include:

• Is not forward looking; the value metric focuses on the present rather than the future
• Does not go beyond financial metrics and, thus, fails to consider the value in knowledge gained, organizational capability, customer satisfaction, and political impacts
• Believing that value metrics (and the results) that other companies use will be the same for your company
• Not considering how the client and stakeholders define value
• Allowing the weighting factors to change too often, to make the project's results look better

As with any new technique, additional issues always arise. Typical questions that we are now trying to answer in regard to the use of a value metric include:

• What if only three of the five components can be measured, for example, in the early life cycle phases of a project?
• In such a case where only some components can be measured, should the weighting factors be changed or normalized to 100 percent, or left alone?
• Should the project be a certain percent complete before the value metric has any real meaning?
• Who will make decisions as to changes in the weighting factors as the project progresses through its life-cycle phases?
• Can the measurement technique for a given component change over each life-cycle phase or must it be the same throughout the project?
• Can we reduce the subjectivity of the process?

INDUSTRY EXAMPLES OF INNOVATION VALUE METRICS

This section provides examples of how various companies use innovation value metrics. The number of companies using value metrics is increasing each year. The hard part in using innovation metrics is in determining the attributes as well as the weighting factors innovation. Examples of value attributes commonly used appears in Table 7-14.

What is important to recognize in Table 7-14 is that several of the entries are intangibles rather than tangibles. Intangibles, and their accompanying importance to innovation, may be tough to measure in some firms, but they are not immeasurable. Measuring intangibles is dependent on management's commitment to the measurement techniques used. Measuring intangibles does improve performance as long as we have valid measurements free of manipulation.

The value of intangibles can have a greater impact on long-term considerations than short-term factors. Management support for the value measurements of intangibles can also prevent short-term financial considerations from dominating decision making. Intangibles are long-term measurements and most companies focus on the short-term results.

There is resistance to measuring intangibles:

• Companies argue that intangibles do not impact the bottom line.
• Companies are fearful of what the results will show.
• Companies argue that they lack the capability to measure intangibles.

When managing innovation using co-creation, selecting the value attributes can be difficult because the attribute may have a different to the customers and the customers' customers. This is shown in Table 7-15.

If the definition of innovation success is based on the customer's recognition of value in use, then the consumer's value attributes in Table 7-15 may be more important during project execution than the project manager's value attributes.

ALIGNMENT TO STRATEGIC BUSINESS OBJECTIVES

Because of advances in metric measurement techniques, models have been developed by which we can show the alignment of all projects, including innovation, to strategic business objectives. One such model appears in Figure 7-7. Years ago, the only metrics we would use were time, cost, and scope. Today, we can include metrics related to both strategic value and business value. This allows us to evaluate the health of the entire portfolio of projects as well as individual projects such as those in innovation.

Since all metrics have established targets or forecasted expectations, we can award points for each metric based on how close we come to the targets. Figure 7-8 shows that the project identified in Figure 7-7 has received thus far 80 points out of a possible 100 points. Figure 7-9 shows the alignment of projects to strategic objectives. If the total score in Figure 7-8 is 0–50 points, we would assume that the project is not contributing to strategic objectives at this time, and this would be shown as a zero or blank cell in Figure 7-9. Scores between 51 and 75 points would indicate a “partial” contribution to the objectives and shown as a one in Figure 7-9. Scores 76–100 points would indicate fulfilling the objective and shown as a two in Figure 7-9. Periodically, we can summarize the results in Figure 7-9 to show management Figure 7-10, which illustrates our ability to create the desired benefits and final value.

METRICS FOR INNOVATION GOVERNANCE

Governance personnel managing the innovation portfolio of projects need to address three important questions:

1. Are we doing the right things?
2. Are we doing the right things right?
3. Are we doing enough of the right things?

These three questions can then be broken down in more detailed questions:

• Is project and portfolio value being created?
• What are the risks and are they being mitigated?
• When should the innovation portfolio PMO (IPPMO) or other governance personnel intervene in any project decision making?
• How will innovation performance affect future corporate strategy?
• Are the projects still aligned to strategic objectives?
• Do we need to perform resource reoptimization?
• Do we have any weak investments that need to be canceled or replaced?
• Must any of the projects be consolidated?
• Must any of the projects be accelerated or decelerated?
• Do we have the right mix of projects in the portfolio?
• Does the portfolio have to be rebalanced?

A simple classification for innovation metrics is product, service, and transformational metrics, which can then be broken down further into categories such as process measures, growth measures, and profitable growth measures.

Some typical innovation metrics that the governance personnel might use include:

• Percent of projects in radical innovation
• Percent of projects in incremental innovation
• Percent of workers with the required competencies
• Revenue generated by new products over a given period
• Profit growth rate
• Profit and loss impact of innovation projects
• Profit and loss impact per customer
• Percent of projects in various life-cycle phases
• Project success rate
• Speed-to-market if applicable
• Number of innovation projects in the pipeline
• Number of patents
• Number of ideas generated
• Number of ideas killed (i.e., kill rate)
• Time to go from idea generation to project approval
• Process improvements such as in time to market

INNOVATION METRICS IN ACTION: INNOVATIONLABS

“Measure what is measurable and make measurable what is not so.”

– Galileo

Like everything in business that involves the investment of capital and time, innovation should be a disciplined process that has to be measured so that it can be genuinely managed. This isn't news, but it is nevertheless problematic, because measuring innovation in the wrong way, or measuring the wrong aspects of it, can be a genuine detriment to its progress.

Further, there are a lot of ways to measure innovation productivity so choosing the right metrics requires some selectivity. Process-oriented metrics typically consider the means, such as the number of new ideas proposed, or new ideas introduced. They also consider organizational outcomes such as increased capabilities with existing or new technologies, which makes them potentially useful as indicators. Financial metrics are focused on ends, the results, and include ROI-based models to track financial performance, or the proportion of sales or profits from new products. Given the many possibilities, it takes some effort to sort it all out, which is my purpose in this section.

Twelve Particularly Useful Innovation Metrics

In exploring the measurement of innovation, we found that across the seven stages of the Agile innovation process (see Figure 7-11 later in this section) there are at least 92 metrics. About a third of the total are qualitative, or conceptual, and the rest are quantitative. Since 92 is of course a ridiculous number, far too many for any organization to use, you'll have to choose the ones that will serve you best and leave the others aside.

Before we look at the full set, however, I'll highlight the 12 that we've found to be most consistently useful for our clients.

External Metrics: Impact on Brand and Image

1. The outputs of the innovation system significantly enhance the brand. They accelerate the acquisition of new customers, contracts, and/or clients, as measured by the “rate of new customer acquisition.” This is evident in new sales to new customers.
2. The opinion that customers have of our company, as indicated through brand image surveys, customer feedback, and analyst rankings, improves consistently and significantly.

External Metrics: Impact on Ecosystem

3. The innovation system engages a large and growing set of external partners, customers, suppliers, and others, creating a broad, comprehensive, and thriving open innovation ecosystem.

Internal Metrics: Impact on Growth and Revenue

4. The innovation system results in a significant increase in the number of attractive, new, internally sourced investment opportunities that are available for consideration by senior managers and the board of directors.
5. Valuation of the total innovation portfolio increases significantly compared to prior period, year over year. Financial valuation methods would include NPV, asset valuation, and /or option value. Incremental innovation metrics would include percent of products/services revenue attributable to innovation within existing product/services lines.
6. The net portfolio valuation increase is at least 5x to 10x greater than the capital invested. Financial valuation methods would include NPV, asset valuation, and /or option value.
7. The number and percentage of projects that are in the innovation pipeline that are judged to be high quality increases steadily.
8. The proportion of projects in the pipeline that are not incremental projects (i.e., these are breakthroughs and new business model innovations), increases significantly year over year.
9. The number of nonincremental projects delivered as innovations to the market increases significantly year over year.

People Metrics: Impact on Culture

10. Speed of innovation project completion increases year over year.
11. The number of people who are participating in all aspects of innovation efforts increases significantly year over year.
12. The quality of the contribution by each person increases steadily, and over time more people are contributing more valuable ideas and efforts in the innovation process.

In summary, successful development of the innovation process will steadily enhance your company's overall capability in many areas of performance including innovation, and the innovation results themselves will also get better and better.

These 12 perspectives are mutually reinforcing, so, for example, because of more breakthroughs and new business model innovations being developed and brought to market (#8), the opinion that customers have of the company should improve (#2), etc.

Since at root the innovation process is all about learning, improvement of innovation performance over time is to be expected as you invest effort in developing innovations and at the same time you are investing in improving the process itself.

THE DARK SIDE OF INNOVATION METRICS

Financial metrics are usually easy to determine because the information is readily available. Most financial metrics generally do not capture all the value to the firm. Value-based or value-reflective metrics are more difficult to determine but there are techniques available (Kerzner 2017) and (Schnapper and Rollins 2006). Another challenge with value metrics is whether the value can be measured incrementally as the project progresses or only after the project's outcomes or deliverables have been completed (Kerzner 2018).

The dark side of financial metrics is that it is usually looked at assuming linear value creation:

• Financial statements generally report linear value creation.
• Linear value creation is based on investments in plants, equipment, raw material purchases, work-in-progress, finished goods inventories, and product sales.
• Linear value measurement looks only at the short-term effects.
• We tend to ignore measurements of innovation and performance values, which are intangible competencies that influence future value.

Intangible assets are more than just goodwill or intellectual property. They also include maximizing human performance.

All metrics have strengths and weaknesses. As an example, market share is a poor metric because anyone can capture market share if the price is low enough. As another example, looking at the number of patents implies that the firm is creating technology for new products. But how did the number of patents affect the business? “The most important thing to remember is that … innovation is a means to an end, not the end itself, and therefore the most important metric is the contribution innovation and product development make to the business” (Lamont 2015). The timing of the measurement is also important. A common argument is that revenue generating metrics such as sales and profits should be looked at over a predetermined time such as two or three years.

Some metrics may be used as linkages. As an example, there can be a linkage between innovation and compensation. The measurement system that links intangible assets to compensation is often subjective and a judgment call. Because of this subjectivity, and the desire to link intangible assets to compensation and incentive pay, there exists the risk that the numbers can be manipulated.

Some metrics are often ignored such as those related to changes in culture and processes (Linder 2006). Another innovation metric that has been ignore until now is innovation leadership effectiveness (Ng et al. 2008). Muller et al. (2005) have created a framework that includes innovation leadership metrics:

• Resource view: allocation of resources
• Capability: company competencies
• Leadership: leadership support for innovation

The use of innovation metrics has appeared in the literature for more than 15 years, but its acceptance has been quite slow because people tend to resist change especially when it removes them from their comfort zone. People tend to be fearful of using new metrics. We knew decades ago that more metrics than just the triple constraints were needed to determine the health of projects, but measurement techniques were in the infancy stages. We then took the simplest approach and trained everyone on the three metrics that were the easiest to measure and report. With innovation project management, the constraints may be on shareholder value created, technology created and strategic business fit. This may remove many team members from their comfort zone.

Some firms start out with good intentions but either select the wrong metrics or measurement techniques, use misaligned metrics or have a poor approach for innovation metric identification. Reasons for the struggle with innovation metrics is attributed to:

• Lack of a consistent definition of innovation
• Poor understanding of metrics and measurement techniques
• Lack of guidelines on how to interpret and use the metrics
• Being unsure about the costs for metric measurement

Kuczmarski (2001) provides additional mistakes often made:

• Too many metrics
• Too focused on outcomes
• Too infrequent usage
• Too focused on cost-cutting
• Too focused on the past

In the future, innovation and business value metrics may become as common as time and cost metrics. However, the IPPMO must guard against “metric mania,” which is the selection of too many metrics, most of which may lead to confusion and provide no value. When metric mania exists, people have difficulty discovering which metrics provide the valuable information.

ESTABLISHING A METRICS MANAGEMENT PROGRAM

The future of innovation project management must include metrics management. What many people neglect to consider is that the selection of metrics is often based on the constraints imposed on the innovation team:

• Having too few constraints gives the innovation team too much freedom and management may not be able to track performance
• Having too many constraints may lead to severe limitations
• The imposed constraints must be supported by metrics that are relatively easy to measure
• Constraints (and the accompanying priority) can change over the life cycle of an innovation project thus causing changes in the metrics selected

We can now identify certain facts about metrics management:

• You cannot effectively promise deliverables to a stakeholder unless you can also identify measurable metrics.
• Good metrics allow you to catch mistakes before they lead to other mistakes.
• Unless you identify a metrics program that can be understood and used, you are destined to fail.
• Metrics programs may require change, and people tend to dislike change.
• Good metrics are rallying points for the project management team and the stakeholders.
• There are also significant challenges facing organizations in the establishment of value-based metrics:
• Project risks and uncertainties may make it difficult for the project team to identify the right attributes and perform effective measurement of the value attributes.
• The more complex the project, the greater the difficulty is in establishing a single value metric.
• Competition and conflicting priorities among projects can lead to havoc in creating a value metrics program.
• Added pressure by management and the stakeholders to reduce the budget and compress the schedule may have a serious impact on the value metrics.

Metric management programs must also consider relationships with suppliers and contractors as well, especially if a co-creation approach is being used.

• Suppliers, contractors and stakeholders must understand the metrics being used.
• The metrics must be in a form that all parties can understand in order to take effective corrective action if needed.
• Some decision-making metrics must be sufficiently detailed rather than high level.
• If possible, the metrics should be real time metrics such that governance personnel can react rapidly to changing market conditions.
• A sufficient number of metrics must be selected such that changes in the marketplace can be determined.
• A combination of metrics may be necessary to understand the marketplace and competitive positioning. One metric by itself may not suffice.
• For partnerships and joint ventures, knowledge transfer metrics must be established and tracked throughout the project life cycle to validate that the alliance is working well.
• Metrics allow us to validate that we have consensus building and systematic planning cooperation rather than complexity and rigidity.
• Terminating alliances can be costly.

Metric management programs must be cultivated. Some facts to consider in establishing such a program include:

• There must be an institutional belief in the value of a metrics management program.
• The belief must be visibly supported by senior management.
• The metrics must be used for informed decision making.
• The metrics must be aligned with corporate objectives as well as project objectives.
• People must be open and receptive to change.
• The organization must be open to using metrics to identify areas of and for performance improvement.
• The organization must be willing to support the identification, collection, measurement, and reporting of metrics.

There are best practices and benefits that can be identified as a result of using metrics management correctly and effectively. Some of the best practices include:

• Confidence in metrics management can be built using success stories.
• Displaying a “wall” of metrics for employees to see is a motivational force.
• Senior management support is essential.
• People must not overreact if the wrong metrics are occasionally chosen.
• Specialized metrics generally provide more meaningful results than generic or core metrics.
• The minimization of the bias in metrics measurement is essential.
• Companies must be able to differentiate between long-term, short-term, and lifetime value.
• The benefits of metrics include:
  • Companies that support metrics management generally outperform those that do not.
  • Companies that establish value-based metrics are able to link the value metrics to employee satisfaction and better business performance.

IMPLICATIONS AND ISSUES FOR PROJECT MANAGERS AND INNOVATION PERSONNEL

Project managers need to understand that the way we look at projects today has changed significantly. Words such as project value, value-in-use and customer value management initiatives are extremely important. Some of the critical issues and challenges that may be new for project managers include an understanding of the following:

• Measuring value is important.
• Time, cost, and scope may not be regarded as important as other value attributes.
• Benefits and value are not the same.
• The type of innovation selected can be regarded as a form of benefits realization management.
• Measuring value is complex, but that there are techniques available for value measurement.
• Financial business metrics are not the only ways of reporting business value.
• The intangible assets may be more important than the tangible assets when predicting long-term business success.
• There are a great many metrics available, and metric selection must be based on how and when the metric will be used.
• There is a need for a corporate metrics management program that includes value metrics.

REFERENCES

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