Episode 466: Projects as Profit Centers - Part 2 (Free)

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This is part 2 of our webinar with Oliver Lehmann.

The world of project management is undergoing a fundamental change -- a collaborative revolution: Projects that would have been done internally in the past are more and more given to external contractors, who in turn may use subcontractors and sub-subcontractors, building complex project supply networks (PSNs).

This cross-corporate way of doing projects is the market for professionals in project business.

Based on specific expertise and assets, they have the intention to serve their project customers, make them happy, but also need to be profitable and consider cash-flow. Project business is high-risk business for all parties involved.

Our guest today is Oliver F. Lehmann to give us his insights into the specific challenges of doing Project Business and provides an example for methods managing it like Benefit Engineering

Project Management Professional (PMP)® Exam: PMP Exam prep

Episode Transcript

Below are the first few pages of the transcript. The complete transcript is available to Premium subscribers only.

Video Introduction

Cornelius Fichtner: In this episode of The Project Management Podcast™, we explore the Part 2 of how to run projects as profit centers.

Hello, and welcome back to The Project Management Podcast™ at www.pm-podcast.com. This is Episode number 466, and I’m Cornelius Fichtner. How nice of you for being with us today for Part 2 of Oliver’s presentation.

As a reminder, this is a video episode. So, if you are only getting audio then please look for the “Play video episode” link in your Podcast app or visit www.pm-pocast.com/466 where you can stream the video from this episode directly from the website.

So our guest today is Oliver Lehmann, who has been on the program many times before. He was joining our live stream in his role as the President of the Project Business Foundation to introduce the concept of project business management, in particular on how to run projects as profit centers.

Before we get started, here is a quick recap of Part 1. We started out by looking at the shift from internal projects to customer-facing projects where we met Clara Loft, a project manager who is thrown into the world of project business management and learned about the challenges that she is facing a new role when she has to manage customer-facing projects. Then we moved on to the challenges of project business in general and first discussed the three aspects of success. We ended Part 1 on the topic of project supply networks, and that is also where we will pick it up again. But, I am going to rewind one minute here and we’ll pick up minutes before we ended Part 1 to get us back into the topic.

Video Presentation

Oliver Lehmann: One reason why this happens is something like here, I was in exactly the same situation. It's not just one customer, one contractor. If you have such a situation from time to time, we buy something, that's for procurement. A section of the PMBOK® Guide describes this quite good. No big criticism on that, but that's what we have typically. And by the way, in automotive, there's an old term for that. This is the extended workbench. You normally do things internally. From time to time, you buy something from outside, because you can justify that. You have to justify as a project manager, if you buy something from outside.

Our situation that we have in many organizations today is not this extended workbench. It is complex project supply networks. We have the buyer, I talked about such a case. We have a seller, a contractor, meanwhile, at the moment that the contract is there, the seller becomes the contractor in here.

I have another one. And this seller is interesting because it's not just the contractor, it's a prime contractor. This contractor has subcontractors and they may have sub-subcontractors and so on. So we have now one project with already here, six companies involved, and there may be more than that. We see one direction is how the deliverables will flow. The sellers will sell their deliverables to the prime contractor. And the prime contractor will resell them to the buyer. But in the other way, we have the flow of money in here. And we have lots of contracts in here. That's the challenge with the agility, by the way. It may impact a change request. They impact many contracts. So you have to take care what happens in all these relationships.

Another interesting thing is with this company here, seller and buyer at the same time. A prime contractor is a contractor to the customer, but at the same time, the prime contractor is the customer of the subcontractors. And they may have sub subcontractors again. They may be in the same situation again. So we have a level of complexity in here that has so far not been described. No one takes care of that. The PMBOK® Guide definitely does not take care of that, does not describe project supply networks as we see it here. I think we should do them as well. We should engineer them as well, as production people do, as service people do. They have a discipline for that --- supply chain management, education, literature, certifications, everything. What do we have? One book by Oliver Lehmann, and that's it.

Right! Another thing, let’s talk about this interface. Let’s have a closer look at these interfaces. In a survey that I made some years ago, 302 responses. What are the most frequent causes of conflicts in this project supply networks between the parties at these interfaces? And you see, the first thing is conflicting business interest. People had a scale from zero to 5. This is almost a three. This was the longest bar in here and actually from hindsight, this is natural. And if I think back into my experience, into the years when I was in this busines as well, this is precisely what I saw the majority of conflicts were caused by different business interest. One organization wants this. The other one wants that.

Interesting, the next two, almost identical. A very, very small difference only. Diversity of cultures, legal systems, the parties don’t understand each other. I recently had such an example where a German company, a software provider works for an Arabic customer and they had so many misunderstandings because the Germans did not understand the Arabic culture and the Arabs did not understand the German culture. The moment when we clarified that, the world became immediately much, much easier because they could talk about that without allegations, without bad spirit. They could talk openly that and this helped really resolve the problem.

Then the egos. Blue is an organizational bar. Yellow here is an individual bar. We have individuals that don’t come together with distrust and with struggle and with quarrels and everything. And then some more. Interesting by the way one down here, it’s not that uncommon as the other ones. Where is it? Here! Dubious organizations, bribery, one of the things we have to look at is methods of corruption also because this is the dark part. That’s the dark side of the force, if you like, of project business management. There is a lot of corruption in certain industries and certain countries, not everywhere. But we have to take care of this as well. This is an area where corruption has such a ground much, much easier than in operational business. Operational business goes over a long time. The risk is very high to be found and bribery to be opened up but in projects, you can hide things very easily. Much, much easier than in other businesses.

Let’s briefly talk about these different business interests. Here’s an example for that. If we have an internal project, for instance the customer, for the customer and the project, it is still an internal project. They want to have the results. Benefit realization is typically in the future. You see in my first example in here, there’s a delivery moment. Left from the delivery is the project. Right from the delivery is operations that use the results of the project. This is a single delivery.

Think of a bridge. On the left hand side, the bridge is built and it is handed over to traffic and on the right hand side, we have business realization. By the way, that’s was defined in literature on topic such as financial calculations and investment calculations for projects. They always describe this model. It is existing of course but I think it has become comparatively rare. But bigger number of projects today actually has staged deliveries, incremental deliveries where you begin with a small one and then you have one more, you have one more, you have one more.

There’s even a bridge built like that. The Mario Cuomo bridge north of New York was built like that. They built a bridge with two spans. They first gave one span to traffic, had both directions on the same span, on the same piece of bridge if you like. And then they built a second span, south of that, and when the second span was finished, they separated the traffic. And now, one direction goes over the south span. The other direction goes over the north span. So they had incremental delivery for bridge building. I always thought it’s possible. For me, bridges, we have the standard example of project where you can have only one delivery. You cannot handover a half-finished bridge. You can, I was wrong. I stand corrected here.

Right, so internal projects. But now, look at the contractor. The contractor has a totally different way to realize benefits, at least monetary, benefits from the projects. They begin with a first payment from the customer and they end with a last payment from the customer, and the last payment maybe before the project has been finished. Sometimes it’s a bit after it but not too long after that. And when the last payment is done, the contractor will no more realize any benefit from that. It’s over. It’s done so the contractor has this time available to bring money home and to realize benefits for their own organization. For the customer, benefit realization is totally or mostly in the future. For the contractor, it's right now here and there. There is no future for benefit realization. There may be another project that we have, but benefit realization is today. This is one of the big differences between those two sides.

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