In this special edition of EPM Live’s Project Portfolio Management (PPM) Briefing Series, Harvey Levine analyzes a leading oil company’s decision to indefinitely suspend a $1.5 billion project.
I hate to miss an opportunity for a little sermon (whoops! I mean discussion) about how Project Portfolio Management (PPM) delivers great results. Are you ready to toss out some of the old maxims that you’ve grown up with?
One of the benefits of the blog technology is to enable the quick development of a story that would be of immediate value to the readership. I often come across a headline telling of an incident that has a strong connection to the lessons to be learned about PPM. Here is one that popped up the other afternoon.
“BP suspends costly Alaska oil project”
What’s behind the headline?
Well, it seems that five years ago BP proposed a $1.5 billion project that was to be producing oil, some 40,000 barrels a day, by 2011. Now, after a delayed start, and 18 months of work, a planned company review disclosed significant cost overruns and technical difficulties (according to the Reuters report). The company review concluded that the project should not go forward as planned.
“The project, as it’s designed right now, doesn’t meet BP’s standards” said a company spokeswoman. It was noted that the standards had changed after the Deepwater Horizon incident in 2010. “BP has many opportunities in its global portfolio and projects must compete for resources,” the company said, adding that it was working with regulators to discuss potential ways to move the project forward.
Wow! Think of the money that must have been spent thus far. Think of the promises and bets that were made on this plan for production from the 100 million barrels of recoverable oil. Think of all the commitments that were made, of resources, of contracts, of benefits that will not be delivered.
Why is this important? Where is the lesson? There are at least three that I can think of. And all three challenge the conventional thinking about projects.
- Sunk costs don’t matter. Here’s something that we deal with almost every day, even in the normal routines of daily living. We make some kind of investment – it could be time or money – with some type of expected result. Then, half way through, it looks like the expected results won’t happen. Maybe the conditions changed. Maybe the costs were underestimated. Maybe the technology doesn’t work. Maybe the dog ate your blueprints. Doesn’t matter. The thing is that whatever you expected from the investment will not produce the expected results. Everything points to abandoning the effort. But what about all the money/time you’ve put into it? You can’t just walk away. Or can you? The thing about sunk costs (money you have already spent) is that it is, indeed, sunk. The only thing that matters is how much it is going to take, going forward, to produce the result you need (if that result is even still possible). Forget about the cost/benefits computations in the project proposal. The only thing that counts is the cost/benefits computation going forward from today.
- It’s okay to terminate, delay, or revamp a project. Oh! That’s blasphemy! Don’t you remember what they taught us? A successful project is one that delivers the expected scope and benefits, on schedule, and within budget. It doesn’t say anything about uncompleted projects. Changes to a project? Not on my watch! As a result of this thinking, too many bad projects continue to eat up funds and people until either the funds dry up or the project is no longer pertinent to the needs of the firm. The answer to both of these old axioms (sunk costs and project termination) can be addressed by the simple lyrics of a popular song: “You have to know when to hold em, and know when to fold em”. In PPM, we develop a prioritized list of qualified projects. Assuming that there are more projects that can be supported, we will have a waiting list of projects looking for funding and resources. If the expected benefits of a selected project are no longer supported, then consideration should be given to those in the stand-by category.
- Scheduled in-progress audits. Here, again, the conventional wisdom is way off the mark. We will normally hold an “end-of-project” review. Theoretically, this makes a lot of sense. But, in practice, it’s a waste. By the time the typical project is over, what is recorded is data relative to why the project failed to meet its targets. Maybe even why the project died. Why did we call these reviews a “post-mortem?” Furthermore, most of the key people involved in the project started moving on to other work about three-quarters of the way through the project. So the real important data is often irretrievable. The time to conduct a project review is periodically during the execution of the project. Conduct the project audit early enough to identify and fix things that need attention while there is still time. Or, if indicated, terminate, delay or change the project so that resource and cost losses are held to a minimum.
So kudos to BP for doing things right. This is the fundamental basis of PPM. That is; a project, even after approval, must be periodically tested for conformity to the substance of the original business case. If there are significant changes (in this case considerable increased costs to meet revised standards) then the business case has to be re-visited and the project value reconsidered. From what I can see from the limited information in the news release, this “project failure” is a victory for those who have adopted the new way of thinking about projects. It is a validation of the teachings that the PPM pioneers brought down from the mountain.
- Don’t be concerned with sunk costs.
- It’s okay to terminate (or delay/change) a project.
- Hold your project reviews during the project, not after.
It appears that the people at BP are not yet ready to throw out everything that they put into this project. But rather they will be looking at whether they can salvage some of the investment and still achieve reasonable (even if changed) benefits. Meanwhile, the resources can be diverted to other productive ventures, limiting losses and shifting to other projects with a better opportunity to deliver benefits to the firm.
This kind of thinking is at the core of PPM. Your methods, and the tools that you use to sustain these methods, should support this.
Harvey A. Levine, with 50 years of service to the project management industry, is a pioneer in the field of Project Portfolio Management (PPM). Mr. Levine is the author of three books, and over 275 articles, whitepapers and videos on Project Management. His 2002 book, “Practical Project Management: Tips, Tactics, and Tools”, is still available from John Wiley & Sons. Mr. Levine’s 2005 book, “Project Portfolio Management, A Practical Guide to Selecting Projects, Managing Portfolios, and Maximizing Benefits”, Jossey-Bass, is a Wiley best-seller. Mr. Levine is past president and chair of the Project Management Institute (PMI®) and a PMI Fellow. For more information on Harvey please visit http://theprojectknowledgegroup.sharepoint.com.