One of the great challenges for project-intensive engineering, procurement and manufacturing companies is the lack of visibility regarding potential risks in projects, which may have serious consequences not only for the project but also for the entire company.
ERP systems typically lack detailed support for running projects and project management systems are typically disconnected from procurement, human resources and financial information managed within the ERP. The end result is there is no system that provides real-time visibility into the current state of projects and their relationship with the organisation as a whole. This hampers both the work of senior management responsible for controlling the business and mitigating risks and project managers responsible for bringing projects in on time and on budget.
The simplest solution to this problem - and one that is becoming increasingly popular with fast-growing companies exposed to high levels of project risk - is to run both the business and projects from a single integrated business solution. With the project lifecycle in focus, the same business application can provide support for project and contract management, engineering, procurement, material management, fabrication, installation, finance, human resources and other ERP functions.
With a single business solution, the CFO and the financial management department will typically be more involved in areas such as project control, project accounting, risk minimisation and performance. Underpinning this, financial transactions can be automatically created within the system at the source event based on a single common business model. This minimises posting errors and ensures that costs and revenue are correctly posted on the work breakdown structure (WBS), cost breakdown structure (CBS) and to the general ledger in real time.
Combining measurements of scope, schedule, and cost in a single integrated system makes forecasting easier and more accurate. Earned Value Management (EVM), a recognised technique for measuring project progress, can be utilised to control projects. The most common approach is to regularly review the project and enter Estimate to Complete (ETC) figures, with budgeting and forecasting performed at a detailed activity level or on a sub-project or overall project level. Estimate at Completion (EAC) is then calculated based on actual cost, committed cost and entered ETC. The calculation can be graphically presented as an S-curve to identify any cost or schedule variance that has already occurred and to forecast the projected cost overspend or schedule slippage that will occur as a result.
A key advantage of this approach is the fact that it is based on real-time data, not historical reporting. In projects any delay or cost blow-out will almost always have knock-on effects which grow in seriousness until effective action is taken. With the growing use of external contractors to deliver projects, there is the potential for additional disconnects between parties and knock-on effects can be further magnified. An integrated approach provides both early identification of problems and risks to the business and the ability to do something about emerging issues before it is too late.
This ability to “operationalise” strategic risk management is designed not merely to create a list of potential problems, but to support a process of constant review, evaluation and actions. The objective is to understand risk at the earliest possible moment and then mitigate or avoid any impact. Managing operational project risks in an integrated business solution which also provides the functions of an ERP also puts organisations in a better position to deal with external risks.
So ask yourself: Do you struggle to get reliable forecasts for ongoing projects? Is project follow-up in your company merely a general ledger procedure at the end of each accounting period? Are you, in effect, controlling your projects by reading yesterday’s news?
By Rob Stummer, Managing Director, IFS Australia & New Zealand.