Copyright © 2005 by Edward J. Fern & Vladimir Liberzon 1 FINDING OPPORTUNITIES IN PROBLEMS Edward J. Fern, MS, PMP Time-to-Profit Inc. Vladimir Liberzon,

1Copyright © 2005 byEdward J. Fern & Vladimir Liberzon

FINDING OPPORTUNITIESIN PROBLEMS

Edward J. Fern, MS, PMPTime-to-Profit Inc.

Vladimir Liberzon, PMPSpider Management Technologies


LATERAL THINKING

"You cannot dig a hole in a different place by digging the same hole deeper"

This means that trying harder in the same direction may not be as useful as changing direction. Effort in the same direction (approach) will not necessarily succeed.


LATERAL THINKING

"Lateral Thinking is for changing concepts and perceptions"

With logic you start out with certain ingredients just as in playing chess you start out with given pieces. But what are those pieces? In most real life situations the pieces are not given, we just assume they are there.


LATERAL THINKING"The brain as a self-organizing

information system forms asymmetric patterns.”

In such systems there is a mathematical need for moving across patterns. The tools and processes of lateral thinking are designed to achieve such 'lateral' movement. The tools are based on an understanding of self-organising information systems.


LATERAL THINKING

"In any self-organizing system there is a need to escape from a local optimum in order to move towards a more global optimum.”

The techniques of lateral thinking, such as provocation, are designed to help that change.


NORTHRIDGE


NATURAL DISASTERan opportunity

At 4:31 A.M., Pacific Standard Time, on Monday, January 17, 1994, a moderate but very damaging earthquake with a moment magnitude (Mw) of 6.7 struck the densely populated San Fernando Valley, in northern Los Angeles.


PROBLEM


GRIDLOCKWithout the Santa Monica Freeway, traffic on neighboring freeways became unbearable.


URGENCY

Local, State, and Federal authorities recognized the urgency of repairing the Santa Monica Freeway.

Tax revenues would be down.


RECOVERY

February 5, 1994 - Reconstruction on Santa Monica Freeway begins

Contract approval took one day, as opposed to the typical 30 to 60. The winning firm was northern California-based C.C. Myers, which pledged to complete the project in the allotted 140 days.


PROBLEMGridlock would slow the delivery of equipment and materials to the reconstruction sites.


OPPORTUNITYThe contractor chartered a private train to move equipment and materials, by-passing the gridlocked freeway system.


RECOVERYApril 11, 1994 - Santa Monica Freeway

Opens 74 days ahead of scheduleIn fact, the company reopened the freeway in

just 66 days. To achieve this miracle, contractor Clint Myers radically expanded his workforce, hiring more than 200 carpenters (65 is average for such a project) and 134 iron workers (the average: 15). Myers's employees and subcontractors worked 24 hours a day, 7 days a week, regardless of the weather.


RECOVERYPrime contractor earns $200,000

bonus per day - 14.8 million dollarsC.C. Myers Construction Company,

which pledged to complete the project in the allotted 140 days. In fact, the company reopened the freeway in just 66 days, earning an additional $14.8 million in incentive pay on top of the $14.9 million it had bid in construction costs.


Olympic Village Construction Project



• Olympic Village construction project for the First International Youth Games in Moscow had very tight schedule.

• Construction site was very crowded – 17 main contractors, many people, a forest of cranes, and a lot of other machines.

• Each week construction site was visited by Moscow mayor or the head of the Moscow Government Construction Department.



• Project started with the earthmoving for building foundations and soon there was a request of the construction manager to Moscow mayor that sounded like this:

• We had excavated 200000 cubic meters of earth and need to move it from the construction site. Please help us to receive a permission to move the earth to some landfill at Moscow outskirt.



• An answer was unexpected:

• Why do you ask me to throw away this wealth?

• Use this ecologically pure soil to create some landscape, build artificial mountains, create mountain bike lanes, make this site more attractive!



• In two weeks construction project manager showed to Moscow mayor fresh landscape design and addressed to him with the new request:

• We need additional 100000 cubic meters of earth to create this landscape.

• Please help us to get it!



• After the Games the flats in the Olympic Village buildings were sold very quickly and for higher price than was expected.

• Landscape became an additional valuable attraction.


BETTING A COMPANY


OPPORTUNITYThe 1990’s saw the spread of the Internet to nearly universal availability in the developed world. The spread was accompanied by two major trends in information technology:

1. Companies were moving applications and databases from the old mainframe-and-terminal mode to the new client/server mode.

2. Companies were transforming themselves to interact directly with their customers and suppliers in new and previously unimagined ways: via the Internet and through integrated supply chains, auction mechanisms, and dis-intermediated transactions.


THREATS

Exploiting the opportunity posed threats:• Learning new technologies• Developing a new organizational

structure• Building new security infrastructure• Hiring many new people• Customers could choose not to move• Customers may leave for competitors


UNCERTAINTY

The investment in a new way of doing business might be wasted if customers were unimpressed and chose to stay with the old way of doing business.


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Merrill-Lynch

Schwab


TIME TO PROFIT

• The time required to finish a project is less important than the time required to recover its costs.

• Profits are necessary to fund new projects that create more new advantages.


TIME TO PROFIT


MEASURING SUCCESS• Project success criteria should be defined

by project business goals.

• The traditional approach, on time and within budget, is not perfect especially for profit-oriented projects.

– What if the project will finish earlier but exceeding budget?

– What if the project will be late but will save a lot of money?


SUCCESS CRITERION• We suggest to use only one project

success criterion – total project NPV or NPV at some moment in future.

• Using this criterion project managers will be able to make proper decisions oriented on company’s business goals.


EXAMPLELet’s consider the following sample project.

• It is planned to build a residential building and to sell the flats.

• On the following slide you will see the project schedule and the expected project cash flow.


EXAMPLE

Project NPV = 1,640

Construction Duration = 270 days

Payback Time = 16.03.2006 12:00

IRR = 76.67%


EXAMPLEInstead of flats, we may decide to build and to sell shops on the ground floor:NPV = 2,240KDuration = 275 dPayback Time =18.01.2006 12:00IRR = 127.61%

This decisionIs worth making!


EXAMPLE

• You may notice that the construction will have 5 days longer duration and will cost more but future profits justify the decision.


MEASURING FAILURE

• Time-to-Profit approach to new product development project management means that project manager is responsible not only for achieving project goals but also for timely project termination if the project has a low chance of being successful.

• From the very beginning, not only project success criterion, but also project failure criterion should be defined.


MEASURING FAILURE

• Project failure should be measured in the same way as project success:

• If the expected NPV will become lower than a specified value then the project manager should suggest project termination.


ARM DEFINITIONActive Risk Management is a system for:

– Identifying future events that are important,

– Evaluating their potential impact,

– Planning our responses,

– Taking action in advance when appropriate,

– Monitoring events that give us warning.


RISKFuture events that may or may not occur that may have either positive and/or negative effects.

– Events that have positive effects are opportunities

– Events that have negative effects are threats

– Most events are both


ESTIMATING RISKS

Estimate costs and benefits at the same time and to the same degree of precision.

– Establish separate teams to estimate the opportunities and the threats.

– Require the teams to document their findings before they see the other team’s report.


ESTIMATING RISKSEstimate uncertainty about costs and benefits at the same time and to the same degree of precision.

– Establish separate teams to estimate the opportunities and the threats.

– Require the teams to document their findings before they see the other team’s report.

Estimates are not facts. The future is not knowable.


ESTIMATING RISKS

Estimate alternative risks in the same way.

– Establish a standard for estimate precision.

– Establish quantifiable ways of talking about uncertainty. Avoid vague terms:

• Big

• Small


ESTIMATING RISKSCommit to using risk estimates as the basis for decision making.

– If risk estimates are often ignored, they will be poorly prepared.

– If risk estimates are used for decision making, they will receive attention and effort in their preparation.


ESTIMATING RISKS

Evaluate results. – Compare anticipated threats to threats

that materialized.

– Compare anticipated opportunities to opportunities that materialized.

Give estimators feedback to help them improve their accuracy.


SETTING PROJECT TARGET AND THRESHOLD

Project Targets. – Simulate project risks and uncertainties and set project

targets (usually NPV at some moment in future) that have reasonable initial probability to be achieved.

Project Thresholds. – Define Project Failure criteria and set project threshold

(usually minimal acceptable NPV at the same moment in future).

– Define project termination rules (i.e. current probability of meeting project threshold became lower that some specified value).


SUCCESS DRIVEN PROJECT MANAGEMENT

• During project execution project managers should regularly recalculate and control probabilities of meeting project targets (success probability) and project failure as well.

• Negative success probability trends require corrective actions.


SUCCESS DRIVEN PROJECT MANAGEMENT

• High probability of project failure (or low probability of meeting the least acceptable NPV – project threshold) requires consideration of project termination.

• The next slide shows probability trends of meeting target NPV and project threshold for a sample project.


SUCCESS PROBABILITY TRENDS

In this sample project, the current probability of meeting project threshold is very high though achieving target profit is uncertain.


CONCLUSIONS

• Small risks bring small threats but small opportunities.

• Large risks bring large opportunities but large threats.

• While we are alive, we cannot avoid risk.


THE BIGGEST RISK“It is not enough to think outside the box. We must learn to live outside the box.”

A competitor, usual or unexpected, may accept a bigger risk than we have, manage the threats and realize the opportunities.

Each of us has 6.3 billion potential customers and 6.3 billion competitors.


THANK YOU!

• We will appreciate your feedback and future discussions.

• Ed Fern [email protected]

• Vladimir [email protected]

Documents

Copyright © 2005 by Edward J. Fern & Vladimir Liberzon 1 FINDING OPPORTUNITIES IN PROBLEMS Edward J. Fern, MS, PMP Time-to-Profit Inc. Vladimir Liberzon,