Shareholder Value is the main goal for any corporation. If the company is not increasing the value for its shareholders, then it is not succeeding. Any company functions via Operations and Projects. The day to day work is done by its operational teams and work that needs special focus and is of a limited duration is done via projects. These projects can be used to deliver results that have a multiplier effect on the value of the company. That is why it is imperative that three-steps are taken done to maximize the Shareholder value.How Can a Strategically Aligned #PMO Increase Shareholder Value #projectmanagement Click To Tweet
- Plan the project well: No matter how sophisticated and large the corporations are, most of them still evaluate projects based on IT urgency and cost trade-offs. If the IT needs to move to a new application – whether due to app sunset issues or loss of support from the vendor – then it is taken up as the urgent need of the PMO to initiate and create the project for that system migration or implementation. The projects, on the other hand, should be evaluated by finding out the impact they have on the shareholder value and not just the cash flow or payback criteria. That would decide how our projects are decided.
- Align with the Corporate Strategy: For this part to be useful, it is important that the company aligns it corporate strategy with the shareholder value. Whatever direction the corporate strategy points towards should be on the path of increased shareholder value. If the two are not linked, then no matter what you align with your strategic objectives and KPIs, it will amount to nothing. This is where the entire chain of events start – aligning corporate strategy with the shareholder value. Once we have done that, then every project should be an output of the strategic goals. For example, if the company is looking to increase customer engagement and enhanced customer satisfaction, then one needs to ensure that they have a CRM system that is agile, flexible and real-time in transactions and reporting. If the company has many acquisitions, then such a system should be easily able to integrate with the new system. So migration to a good CRM solution – whether Salesforce or Siebel or SAP product – becomes an important project to consider. Of course, its cost and time details need to be such that they are indeed enhancing the corporate value in the end.
- Scorecard based approach: At the end of the day, it is not enough to align the initial intent via the numbers and plans. One needs to closely monitor and manage the numbers through the years. Shareholder value is not a one-time deal. It is a continuous thing to be managed closely. This requires cascading scorecards that have specific KPIs from the top of the organization to the bottom. And project numbers need to dovetail into the complete organizational scorecard.
The problem with most companies is that they keep managing the monthly/quarterly earnings even when that means their corporate value may be going down in medium and long-term. Here is an excellent description by Alfred Rappaport, who popularized the concept of shareholder value as the basis of decision-making.
Indeed, most companies evaluate and compare strategic decisions in terms of the estimated impact on reported earnings when they should be measuring against the expected incremental value of future cash flows instead. Expected value is the weighted average value for a range of plausible scenarios. (To calculate it, multiply the value added for each scenario by the probability that that scenario will materialize, then sum up the results.) A sound strategic analysis by a company’s operating units should produce informed responses to three questions: First, how do alternative strategies affect value? Second, which strategy is most likely to create the greatest value? Third, for the selected strategy, how sensitive is the value of the most likely scenario to potential shifts in competitive dynamics and assumptions about technology life cycles, the regulatory environment, and other relevant variables?
Rappaport also came out with 7 drivers that help increase the shareholder value. They are:
- a growth in sales;
- an increase in the operating profit margin;
- a reduction in the cash tax rate;
- a reduction in the working capital investment;
- a reduction in the fixed asset investment;
- a reduction in the weighted average cost of capital;
- an increase in the competitive advantage period.
One can look at how the different value levers contribute to the overall shareholder value.
This linkage between a strategically aligned PMO and overall corporate performance is not just theory but something that has been measured and studied. A Forrester Consulting study commissioned by the Project Management Institute (PMI) titled Strategic PMOs Play A Vital Role in Business Outcomes found that by working towards a strategically aligned PMO, companies experienced tangible benefits. 66% of the companies studied saw improved performance in less than 6 months and realized the value of investing in the PMO within two years. The study found 4 distinct differences in companies which used PMO effectively. They were:
They have a seat at the executive table. Strategic results require strategic positioning. PMOs that are highly effective in driving business growth report to varying levels of executive management, ranging from senior vice president to the C-level, and are regarded as members of executive management. Champions are strategically positioned, too. The majority of the leaders interviewed have highly visible sponsorship at the C-level.
They are a vital part of the strategic planning team. Since portfolio management is a core competency, PMOs actively participate in strategic planning and help shape strategy by providing feedback to executives about performance, labor costs, and customer feedback.
They embrace core competencies. Excellence in project management remains a critical capability for PMOs. The most successful organizations recognize the specific role of the project manager and build significant learning and development programs to mature project management skills.
They use consistent objectives across industry and regions. Customer-facing or business-facing, strategic PMOs share the same objectives: Drive success through alignment with business stakeholders and operational excellence. Meeting these objectives is differentiated by such factors as orientation, region, and culture.
The main difference between PMO which adds to the Shareholder Value and one which does not ultimately is decided during both the planning (decision making) and the monitoring of the project. In such projects, Change Management and Performance Management (reporting with scorecards and dashboards) become the most critical components of PMO’s work.
If such a culture of maximizing shareholder value pervades the company, all the decisions of the company from the top management through the middle management to the lowest executive are aimed at value maximization.