Capital Projects. Barshop Paul

Figure 2.1 Stage-Gate Project Development and Delivery Process

      Negative reactions from executives about the stage-gate process, like the one I encountered, are not uncommon and are somewhat understandable. The objections include: “Why does it take so damn long?” Projects are complex and must be carefully planned and executed so that the asset created by the project meets specifications and is completed within a cost budget and time frame. The work required to achieve these goals just takes time. Executives can get frustrated by the time needed especially when they are racing to meet a market window or some other commitment. It may feel like it is taking longer because the work in the early stages is more deliberate, but using the stage-gate process effectively shaves about 25 percent off the project life cycle through better planning, reduced rework, and superior risk management.

      Another objection is: “Why must I spend so much money developing the project before I even know whether I want to do it?” The process is guilty as charged on this objection. As I will discuss later, a rule of thumb is that about 5 percent of the total project budget will be spent to get to the Define gate, where executives make the final authorization decision. That money has to be written off as an expense if the project is not funded. However, there are two counters to this objection. First, good use of the process will reduce the number of projects that get all the way to the Define gate before they are stopped. Projects with weak business cases are stopped early before much money is spent. Second, on a portfolio basis, the cost of an occasional project being canceled is quickly recouped by lower spending on projects that do make it to the Execute stage because the work is done more efficiently.

      Sometimes the objection is: “The project manager is always telling me I cannot make any changes once I make a decision on something.” This is not true. Executives can decide to make any changes they want. What the project manager is probably trying to tell you is that the change is going to be costly and may delay the project. The rub with the stage-gate process is that the definition of the project gets progressively more detailed through the project life cycle, with each step building on the previous work. Think about it this way. Say you were building a house. The whole design was complete, and you were ready to start building the house, but then you decided to rearrange the floor plan. Much of the work that was done to detail out the original floor plan would have to be redone, wasting money and time. Sometimes change is unavoidable. We live in a dynamic world, and unexpected events in the business environment can force changes to the project. However, used properly, the stage-gate process will reduce the frequency of late change to the absolute minimum.

      A final objection is: “The project manager tells me there is still a chance the project will overrun and the schedule will slip even though the process was followed!” This is also true. Cost and schedule estimates contain uncertainty. They are predictions or forecasts of what we think it will cost and how long we think it will take, not guarantees. However, the chances and magnitude of overruns are lower when the process is followed. As I showed in the previous chapter, projects that meet the requirements of the process typically deliver the promised value, while those that do not erode value.

      A Necessary Process

      The stage-gate process is the best tool for achieving all the goals executives have for capital project investment:

      ● Directing capital to the most attractive, most important investment opportunities

      ● Maximizing the value from each capital project that is funded

      ● Controlling the risk of financial loss or reputational damage

      Each goal is important for the long-term success of any business, large or small. The stage-gate process provides the platform for choosing the highest-priority projects and extracting as much as possible from each project that is funded, while protecting shareholders by keeping the risk profile for each project in check. Despite attempts to find a better way to develop and deliver capital projects, the result always ends up with the same stages, same gates, and same basic governance structure.

      How Does the Process Work?

      The process contains five distinct stages sequenced in a specific order. The process is easy to understand as a basic concept. This is how you would use the stage-gate process to plan and take a big vacation.

      Assess Answer some basic questions about the vacation. What do you want to do on vacation? Do you want to relax on a beach, climb a mountain, or some combination of both? When can you go on vacation? How much money do you want to spend? Using this information, you find three or four different locations that you think will provide the most enjoyment for your budget. If you are happy with the options and believe at least one of the options will work, move to the next phase.

      Select Evaluate the different locations by getting some more information, especially the cost for each. Then, chose a location and do a little more planning so that you get a good idea of the final cost. If the cost is still okay, move to the next phase.

      Define Finish planning the vacation by selecting flights, hotels, and transportation. You might even plan some excursions. At the end of this stage, if the cost is still acceptable, buy your tickets and make your deposits.

      Execute Take the vacation. Spend your money but stay on budget. Enjoy yourself but make sure you make it back to the airport in time for the flight home.

      Operate Go back to work refreshed and more productive than ever.

      Really, that is it in a nutshell. I just described the sequence of activities you should follow if you want the best chance of having a great vacation. You start out thinking broadly about what you want from a vacation and about some of your constraints like the budget and time available. Next, you think about different alternatives that will maximize the value (or give you the best bang for your buck). Then you evaluate and decide which one is best. You plan the vacation for the option you choose, and, finally, you take the vacation.

      1

      Results from Independent Project Analysis (IPA) project database.

      2

      Edward W. Merrow, Industrial Megaprojects: Concepts, Strategies, and Practices for Success (Hoboken, NJ: Wiley, 2011).

1

Results from Independent Project Analysis (IPA) project database.

2

Edward W. Merrow, Industrial Megaprojects: Concepts, Strategies, and Practices for Success (Hoboken, NJ: Wiley, 2011).

3

The projects were from 64 different companies in 11 different industrial sectors