What We Liked
The author makes no bones about his intent. He says:[8]
"I will show you what you can do to increase the probability of a successful project, make your portfolio pay off as expected, and, critically, reduce the chances of the disaster project that loses all the capital investment and gets executives fired."
And:
"Capital projects actually create value when the benefits from the asset created or modified by the project exceed the project cost. The most common method for measuring the added value of a project is the net present value (NPV) generated by the project. ... [Simply put it] is the amount of shareholder wealth created from a capital investment after accounting for the total cost of the investment and the time value of money."[9]
Unfortunately,
"Most projects create less value than expected."[10]
Indeed, the author claims that in a study of 431 completed industrial sector capital projects, the average project delivered 22% less NPV than was forecast when the project was funded.[11] Further, schedule overruns are not the main culprit as might be expected. Rather, the breakdown of value erosion is attributable to three categories in descending order:
- Demand for the product was lower than expected
- The cost and/or schedule were overrun, or
- The facility did not perform as expected
- Or some combination of all three.
Author Paul Barshop insists that the Stage-Gate Process is the right and best way to optimize the probability that the project will deliver the value promised. As shown in Figure 1 presented earlier, the process is simple and straightforward. It starts when some one is assigned to investigate ways to produce a new product (for example). The process ends when the production capability is put into service.
"Moreover, the process works — when it is used correctly."[12]
Essentially, the intervening gates shown in the Figure 1:[13]
"... allow executives to control the project's progress through the process. The process is managed by a project governance structure that assigns different executives specific roles and responsibilities, creating checks and balances needed for good project decision making."
Paul then goes on to explain why "Causes of Value Erosion Often Start Early".[14] Executives throughout a company have a huge influence on how well the initial work on a project is done. Paul claims that the stage-gate process is the best tool for countering this situation and for achieving all the goals executives have for capital investment, namely:[15]
- Directing capital to the most attractive, most important investment opportunities
- Maximizing the value from each capital project that is funded, and
- Controlling the risk of financial loss or reputational damage.
Paul then goes on to explain how the whole front-end process should work and, as indicated by the book's Table of Contents quoted earlier, provides guidance on how to approach the many major issues that have to be faced. In doing so, he comes down heavily on the importance of the Project Sponsor's role, choosing the right type of person for the job and when that person should be appointed.[16]
8. Ibid, p3
9. Ibid, p6
10. Ibid, p7
11. According to a footnote on page 7, the projects were from 64 different companies in 11 different industrial sectors, located around the globe, and ranging in size from $100 million to $20 billion. Over confidence in the market forecast by executives is a common source of value erosion, page 9. In the Editor's experience, this so-called "over confidence" is often fueled by the desire of one or more executives to get the project approved and started.
12. Ibid, p11
13. Ibid
14. Ibid, p12
15. Ibid, p19
16. Ibid, see Chapter 4
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Book Structure
