Do Projects Generate Benefits or Do Assets?
We have noticed that in many Agile process flow charts, it appears as though projects produce benefits directly see Figure 5.
Figure 5: Typical Benefits Realization Flow Chart
This is a gross over-simplification. Unless you are a contractor where a project is a profit center, no owner organization can realize "benefits" directly from a project. For an owner organization, a project is invariably a cost or an investment center. That is, owner organizations invest or spend (expense) money in a project.
Hence, the project creates an asset that falls under one or more of the Five Asset Classes shown earlier in Figure 4, and it is the asset that may (or may not) generate benefits in the future. However, before this asset can generate any net positive benefits, it must first payback the investment costs. Only after the revenues or savings from the asset have recouped the initial investment can we say that the project has made the organization "more valuable".
Figure 6 that originated with Gary Heerkens in his 2015 book "Fast Forward MBA", has been adapted by this author to better illustrate the fallacy of the four-phase model that the "benefits realization" crowd are pushing. This is a clear indication that many in the IT world do not fully understand the business case underlying all "organizational assets", not just IT software. Using cash flow analysis we can see very clearly that for owner organizations, projects are an investment or expenses (i.e. cost centers) and a project alone does not itself produce any "benefits" for an owner.
Figure 6: The "Real" or "True" Benefits Realization Flow Chart Using Cash Flow Analysis
[click to enlarge]
Only contractors who are paid for service can realize benefits directly from a project. This comes in the form of profits (financial assets), reputation (intangible assets) or perhaps knowledge or informational assets (cost or productivity updates to their databases). For an owner, each project creates an asset and only when put into service or made operational, does it either save money or increase revenues. (See previous section and Figure 4 for the definition of "asset".)
It is clear from Figure 6 that until the asset produced by the project has generated revenues or savings sufficient to cover the original cost or investment, no profit can be claimed. To this end, the owner organization may adopt one of the three "payback" or "break even" formulas that make the organization "more valuable". In financial circles, this is known as "economic added value" (EVA). The IT people call it "benefit realization". For those of us who are "Cost Engineers" or "Engineering Economists", we talk about Return on Assets, (RoA) or Return on Investment (RoI).