TIME COST COMPONENT OF PROJECT ANALYSIS 1
Time Cost Component of Project Analysis
By
Clark C. Lowe
A MASTER’S THESIS SUBMITTED TO THE FACULTY OF
THE SCHOOL OF BUSINESS, MERCY COLLEGE
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS
ADMINISTRATION
JULY 2013
EDITED JUNE 2015
TIME COST COMPONENT OF PROJECT ANALYSIS 2
Table of Contents
Abstract 4
Acknowledgement 5
Dedication 7
Chapter 1 Introduction 8
Background 9
Problem Statement 12
Purpose and Significance 12
Research Questions and Hypothesis 13
Definition of Terms 14
Assumptions and Limitations 15
Chapter 2 Literature Review 20
Definition of Variables 21
Major Themes in Literature 23
Contextual review 29
Chapter 3 Methodology 35
Research Design 36
Data Collection 36
Appropriateness of Design 38
Sample and Scope 38
Validity and Reliability 39
TIME COST COMPONENT OF PROJECT ANALYSIS 3
Table of Contents
Chapter 4 Data 41
Process in Action 42
Method of Analysis 49
Findings 50
Chapter 5 Conclusions and Implications 52
Research Question Conclusions 53
General Conclusions 54
Implications 55
Recommendations 55
Further Study 56
References 60
TIME COST COMPONENT OF PROJECT ANALYSIS 4
Abstract
This study aims at examining the cost component of project analysis with respect to the
strategic budgeting and decision making process within corporate enterprises. This work
suggests the decision making and execution processes and cycles can be evaluated as cost
components of project analysis frameworks. If the decision making process can be executed in
a shorter period of time, unrealized gains in revenue or cost savings could then be realized
altering many of the risk frameworks and profiles enterprises currently use. The study examines
data provided by a 2012 Fortune 25 company that spans a diverse girth of cultures, industries,
and business units. The corporation donating the data, names of the projects and the actual
dollar figures used are concealed due to the extremely propriety nature of the data and
possible negative market implications of the data.
TIME COST COMPONENT OF PROJECT ANALYSIS 5
Acknowledgement
This study could not have taken place without the key inputs of people around me who
continue to see value in me beyond what I have proven. The importance to grow, mature, and
learn has always been a lifelong evolution for me. I have always encouraged those I lead to
become bigger thinkers as have those who have always lead me and impressed upon my life in
a positive way. Specifically, I would like to acknowledge the following for having profound
impacts on this work, my life and leadership styles:
Dr. Thomas Coughlan – For the always open ears and mind as I discuss the many crazy
ideas I present and want to pursue. For the encouragement provided in completing this
thesis.
Dr. Gilda Carle – Timely advice and observation of my skills and willingness to challenge
me beyond my current state.
Dr. Raymond Manganelli – For having the confidence in me to lead in the capacity I do
and for taking the time in mentoring my thinking, analysis and decision making
frameworks.
Manual Ron – For providing the contexts necessary in winning at both business and life.
I will never forget and will always remain in debt to the risk and leadership frameworks
you have provided me.
Maureen Cross – For providing candid feedback and being a second set of meticulous
eyes on projects, papers and resumes.
TIME COST COMPONENT OF PROJECT ANALYSIS 6
Chris Murphy and Lousette Cabrera – For teaching me the importance of focusing on
family and understanding how strength in family can relate to strength in academics and
career.
Steve Nilsen – For being a wonderful student which has expanded and developed my
own leadership skills and thoughts.
Danielle Van De Weert – For the thankless work you’ve done as a partner, friend and
mother to Avery. For supporting my long days in pursuit of my degree, the work on this
study and development of my business.
Darleen McAdoo – For being a courageous mother always willing to assert a son’s
humility when he grows too confident for his own good.
Lastly a warm thanks to the Strategic Consulting Institute, Mercy College and the entire
teaching staff who have given me an amazing perspective on business and education. Thanks
for the opportunities to express myself in ways that have allowed me to grow without
restrictions. Thanks for making the quality of my education your personal concern. I’m
appreciative for the endowment Mercy College has offered me for my success through
education and hands on learning.
TIME COST COMPONENT OF PROJECT ANALYSIS 7
Dedication
I’d like to dedicate this study to my father who always insisted I develop my brain over brawn,
remain a man of integrity, and always work hard.
RIP: Kenneth Ray Lowe
I’d also like to dedicate this work to my mother who has been a voice of determination in me
following my dreams and capitalizing on opportunities even if she didn’t agree.
Thanks: Darleen McAdoo
Lastly, I want to dedicate this to my children Hannah, Hayden and Avery who mean the world to
me. I hope this work signifies the importance of education, setting lofty goals, and finding the
resolute ambition required to succeed.
TIME COST COMPONENT OF PROJECT ANALYSIS 8
Chapter 1
Introduction
TIME COST COMPONENT OF PROJECT ANALYSIS 9
Chapter 1: Introduction
The introduction will lightly cover some background information and move into the
meat of what this study covers through problem statement, research questions and hypothesis.
This chapter should build a foundation into the topics that will be discussed in this study and
provide some relevant background information and premises on which the study is conducted.
Likely the most important portion of this chapter is towards the end where assumptions and
limitations of the study are discussed. Assumptions and limitations create the environment in
which this study is conducted. Specifically, the limitations highlight areas in which the study
may not be applicable.
Background
In the corporate arena, many organizations have portfolios of competing projects,
initiatives, and/or acquisitions that shape a portion of the strategic framework. Initiatives can
be comprised of, but is not limited to projects that relate to operations, information
technology, company acquisitions, distribution and logistics, sales, customer service or
satisfaction, procurement, real-estate, and human resources. Due to rapid changes in
technology and social and business trends, project benefits and horizons are evaluated on
shorter cycles. Specifically, the mismatch between economic and budgeting cycles, with project
analysis cycles present a complexity of contending urgencies within the corporate arena
("Playing to Win," 2012).
The corporate valuation process of projects has maintained the same principles for
decades. The academic foundations of net present value (NPV), internal rate of return (IRR) and
payback, have largely stayed the same. These evaluation techniques are found in most project
TIME COST COMPONENT OF PROJECT ANALYSIS 10
management and evaluation textbooks used by practitioners and academics alike. These
processes use forecasted cash flows and a discount rate in order to evaluate the profitability of
a project (Truett & Truett, 2004). Enterprises then compare the results of these models to
hurdle rates and key leaders decide the fate of these projects. These processes often differ
among corporate bodies and the tools they use are proprietary.
In deciding on a project, a predominant portion of the process begins with decision
theory. In most corporate arenas, Schelling’s Game Theory is the predominant driver of
decisions. While game theory is not the only driver in decisions being made, large strategic
decisions, either intentionally or inadvertently, align with the principles of game theory. In
simple connotation, game theory simple exercises the thought of “how will my competitor
[industry, market, etc.] react to the decision about to be made.” Those assumptions or
predictions of the reaction may have an impact on the decision, execution and/or process in
which the project is delivered (Baniak & Dubina, 2012; Dodge, 2012). Game theory is not the
sole influence on decisions. Finkelstein, Hambrick and Cannella (2009) discuss the intangibles
executives face when making decisions. With respect to hierarchical decision making, Kang
(2010) discerns the impacts organizational structure has on decisions.
Image theory accounts for aspects of personal image or brand and how decisions may
influence image. Image theory is another driver in the corporate decision making process.
(Kuehn, 2009). Lastly, prospect and economic theory also pair nicely in the arena of corporate
decisions. Prospect and economic theory simply state that decisions are based on the economic
gains or losses and not on the final outcome of a project (Paulson, 2009).
TIME COST COMPONENT OF PROJECT ANALYSIS 11
Risk is a sensitive subject in nearly all organizations. Some organizations have an
extraordinary appetite for risk while others are extremely risk averse. Like the project analysis
process, although much less precise, all organizations have a process which assess and measure
risk. The ideas and philosophies with respect to risk management will vary greatly among
organizations, academic texts, and personal beliefs. Risk is one of the areas in which corporate
leaders vary the most. Only one thing is certain and remains a consensus among enterprises:
risk must be evaluated and managed. The “how” this is done among corporate organizations is,
again, often proprietary information. Key principles of risk such as value (Wallis, 2012),
relationships between risk management and strategic planning (Kelly, 2012), quantifying risk
(Hampton, 2009) and individual bias (Achampong, 2010) outline some probable assumptions
with respect to risk and how companies evaluate, understand and accept risk.
Time is an age old principle in business that can be both an inhibitor and component of
success. Time value of money is a widely accepted principle and it should be noted, that further
exploration of this concept with regards to this study will only strengthen the position of the
study. Also the variations in which time value of money can be calculated and the realized gains
are too broad for this study. The important thing is to note that time value of money has not
been figured into any cost savings or revenue generation in the analysis that follows in this
work.
This study will aim to put these three concepts together, risk, project evaluation and
time to develop a new perspective on how projects are evaluated in today’s corporate arena. In
“Playing to Win”, 2012, Research-Technology Management’s interview with William Banholzer,
the Chief Technology Officer for The Dow Chemical Company, asserts that understanding the
TIME COST COMPONENT OF PROJECT ANALYSIS 12
competing priorities between business, planning and execution cycles is necessary to maintain
competitive in the current global landscape.
Problem Statement
Competing priorities between being strategic while developing competitive advantage
have led companies to lengthy processes ensuring everything is covered from risk, financials
and frameworks to execution, manpower, and expectations. Many organizations place little or
no value in the decision making process from a risk, economic cost, or competitive advantage
perspective. In essence, many companies measure their projects with a micrometer, mark them
with a crayon and cut with an axe.
While some studies and literature exists on all parts of the problem (risk, budgeting,
execution, decision theory, project management, etc.), a major deficiency in literature exists in
tying the fourth dimension, time, into the process. Time both possesses an economic cost and
an opportunity for creating strategic advantage. Strategy is no longer defined plans over
decades rather short term focuses that maximize competitive advantage over the short term in
an attempt to tie short term efforts into long term results.
Statement of Purpose
The purpose of this study is to quantify the decision making process and how this
process can potentially negatively and positively affect project assessment. The study will try to
tie time, risk and the decision making process together and provide recommendations on how
to optimize the decision making process in order to maximize potential for returns on
investments on corporate initiatives. The purpose of this study is also to create profound
TIME COST COMPONENT OF PROJECT ANALYSIS 13
evidence that the most important part of project and initiative evaluation may not lie in the
execution or the idea, but the process in which projects are decided.
Significance
The significance of this thesis is to ascertain significant quantifiable data to associate the
consequences (positive or negative) of the decision making process with respect to the true
economic costs of an initiative by percentage of cash flows. The actions taken out of this study
is for corporations and stakeholders to evaluate decision making processes and associate the
costs and risks. Companies that are able to shorten decision horizons will find significant
advantage over their competitors through strategic agility. The significance of the decision
making process can be argued in the fact that the difference between a project that generates
significant revenue and one that does not, can be determined simply by time. Time has the
ability to differentiate between a great idea changing the course of a company forever, and an
average idea yielding mediocre results. In the shortened playing field and time horizons of
strategic business in the 21st century, time has become the most valuable component of the
decision making process.
Research Questions
The research of this study will be aimed at answering three questions that develop a
quantitative understanding of how the decision making process affects the costs and revenues
of initiatives.
1. What are the impacts on Net Present Value (NPV) of the decision making process?
TIME COST COMPONENT OF PROJECT ANALYSIS 14
2. What would the impacts to NPV be if the decision making process were shorter?
3. In aggregate, how would a portfolio of projects change given a shorter decision
making process?
Hypothesizes
Hypothesis 1: The decision making process will have a significant impact on the NPV of a
project or initiative.
Hypothesis 2: A shorter decision making process will lead to larger realizations of NPV.
Hypothesis 3: A shorter decision making process will impact a portfolio of assets in a
positive way.
Definition of Terms
Some common terms are used throughout the study and may pose a different meaning
based on the readers’ backgrounds, industries of employment, and levels of education.
Common terms throughout this work are defined in order to maintain the clarity and integrity
of the message.
Cash flow(s) – The future revenues projected to be realized in a project or initiative.
Decision horizon – The time it takes for a project to be initiated until the first cash flow is
realized.
Decision making process [model] – The procedure in which all projects are evaluated,
accepted or rejected, budgeted, developed and deployed.
TIME COST COMPONENT OF PROJECT ANALYSIS 15
Economic cost(s) – The potential cost(s) realized or saved due to some lapse of time.
Economic revenue(s) – The potential revenue(s) gained or lost due to some lapse of
time.
Project [initiative] – A proposed venture in order to generate revenue (internal or
external) or cut costs within a company. A project can generate revenues or cut
costs in any organizational unit. A project could also improve an existing process,
develop a new process or be a product or service.
Strategic Agility – The time it takes an organization to reach a decision and the
availability for a member of management to make a decision.
Assumptions
Assumptions are generated within the study to generate a baseline framework in which
decisions are made. Recognition exists that all companies have different processes and models
for evaluating, budgeting, measuring, and comparing initiatives. For many assumptions, these
differences in processes carry no impact because the end result is the measured amount of
time it takes to complete a task. For instance, the time it takes an organization to initiate,
choose, fund and execute a project does not matter because all this study focuses on is the
start to finish time of six months.
The assumptions outlined in this study have much to do with experience, normal
strategic and fiscal patterns many companies exercise, and an understanding of popular
decision theory models that will be covered in more detail during the literature review. The
TIME COST COMPONENT OF PROJECT ANALYSIS 16
following assumptions are made for the integrity and congruence of this study’s message to
translate well to all organizations regardless of the types of initiatives or the process used in
evaluating them. The following assumptions should be maintained throughout the rest of this
study:
There are four quarters in a fiscal year and many companies close books and
measure success quarterly.
Companies meet and convene to discuss large scale planning for budgetary purposes
once a year to outline next year’s budget goals.
The average time it takes a company to create, execute and deploy, (meaning the
time it takes to generate the first real cash flows) a project or initiative, is six months
(this is my definition of the cost of execution).
The timeframe of measuring the success of a project and the lasting impacts of the
project are limited to about three to five years.
The tools to measure the validity of most projects are Net Present Value (NPV),
Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR), and
Payback methods.
Specific “hurdle rates” companies often have are not taken into consideration (this
study solely focuses on the processes as “hurdle rates” are largely proprietary
philosophy of an organization).
TIME COST COMPONENT OF PROJECT ANALYSIS 17
Every project is weighted equally as having significant importance to the
organization (meaning a project is not listed as vital to the success of an
organizations strategic success… obviously these types of projects will precede any
discussion around discretionary budget dollars).
The money used to fund the projects is of a capital budget nature where a certain
risk profile and asset portfolio are created – Not all projects or initiatives are funded
but some processes exists to extrapolate those that are and are not funded.
Project analysis and modeling happens in multiple business units, across multiple
planes of an organizational hierarchy.
The benefits of a project can be measured (either implicitly or explicitly – this can,
and is often done, through speculative cash flows).
Benefits of the project can be a combination of external revenue, internal revenue
or cost savings.
All dollars (revenue or cost, internal or external) are created equal (this may not be
the case in all organizations and would add another layer of complexity).
Time value of money does exist for every company but is not needed or computed
for the generalization of this study
Limitations
This study has some limitations and may not translate well to all businesses across all
industries. Limitations also exist in the availability of project data of companies across multiple
TIME COST COMPONENT OF PROJECT ANALYSIS 18
industries. As the principles of NPV, IRR, MIRR and payback all hold true across all industries,
the principles and frameworks outlined in this study will also hold true. However, like there are
limitations to the aforementioned valuation methods, the framework of this study has the
following limitations as perceived at the time of the study:
The framework does not transfer well with projects extremely long in nature or
projects that may have large amounts of research and development expense over
the course of many years. An example of this may be a pharmaceutical project that
may require five years of research and development to come up with the product
then another five years to test that product and get Food and Drug Administration
approval.
This study does not take into account the appreciation of assets. For instance, if an
initiative could be sold at a later date due to intellectual property patents. This
would vary greatly among organizations and is an estimation at best.
The study places a value on time that is equivalent to forecasted cash flows. The
value of time is different for every organization, however, in order to maintain
consistency, time is valued at the projected cash flow rates of a project.
The study does not compute the time value of money. The study is done under the
fact that a time value of money exists for every company.
Projects with over three to five years of cash flows do not fit into this framework. For
instance, the evaluation of buying a Boeing 747 or a huge real estate project (may have cash
flows that extend over 30 or 40 years). In extremely long term projects, a few quarters of a
TIME COST COMPONENT OF PROJECT ANALYSIS 19
decision making process have limited impact to the decision analysis of a project. Because
longer projects often forecast cash flows well over five years, the impacts of the decision
making process are absorbed more efficiently.
TIME COST COMPONENT OF PROJECT ANALYSIS 20
Chapter 2
Literature Review
TIME COST COMPONENT OF PROJECT ANALYSIS 21
Chapter 2: Literature Review
Definition of Variables
The study uses a variety of variables in order to evaluate the projects. Many of the
variables are independent to a project or initiative. The independent and dependent variables
are used to generalize conclusions across a wide variety of initiatives. The table below outlines
and defines the independent and dependent variables used.
Independent Variables
Variable Definition
Benefits The expected generation of a revenue or cost savings in a given quarter.
Net Present Value The Net Present Value (NPV) of the project
Cost Total cost (development, maintenance, materials, etc.) of the project
Dependent Variables
Variable Definition
Decision Cost The cost of the decision making process expressed as a loss of benefits.
Decision Cost Impact The impact of the decision making process expressed as a percentage of the cost.
Lost Value Value of unrealized benefits due to the decision making process.
Table 1
The independent variables are those that are related to each project as a measure of
the initiatives’ worth. Independent variables are those as estimated by doing the necessary
research for any project. The actual process of researching the impact of each of the variables is
not covered in this study and differs greatly among organizations. However the end value is
reached is regardless to the framework of this study. Also, the time to research these projects is
not considered in this thesis as this is a given cost for any project or initiative. However, some
discussion should be generated around any process consuming time as a resource to find or
negotiate ways to streamline this process. The estimations provided with regards to the
TIME COST COMPONENT OF PROJECT ANALYSIS 22
independent variables can be researched and proven in a relatively short period in most
business cases. The calculations for NPV and IRR do not follow any specific form and the
discount rates used are regardless of the results. While the value of NPV and IRR may change,
the percentage of change in the dependent variables will remain constant. Thus, the individual
rates used and values of cash flows are not determinates of the concept this work is seeking to
prove. Each enterprise will have a proprietary system in generating cash flows and interest
rates but the impact of the decision making process will remain the same.
The important notion to understand with respect to the independent variables, is the
computations of NPV and IRR will change from company to company but the philosophical
framework behind the execution of the initiatives will remain constant. To be clear, the value of
benefits, NPV, IRR and cost only mater in the respect as it pertains to a single initiative. Many of
the resulting dependent variables are all percentage based so the framework works on an
infinite array of independent variable values to outline the resulting theories and scopes within
the study.
The dependent variables are then calculated and manipulated using the independent
variables. Keeping the assumptions and limitations outlined in Chapter One in mind, the
dependent variables are all calculated based on the same weight and will be outlined further in
depth in the following sections. The dependent variables seek to create an understanding of the
value of time (different from time value of money) and equates this value of time as a cost
component of the project. For example, if a company takes one year to evaluate a project with
a lifespan of three years, then you could equivocate 25 percent of the cost of the original
project to the decision making process. In short, this study aims to quantify the decision making
TIME COST COMPONENT OF PROJECT ANALYSIS 23
process as an original cost of the project because the decision making process is a variable in
which cost savings and revenue generation can be realized. In the aforementioned example, if
the same company only needed one month to decide on the project, the cost of the decision
making process would be significantly less.
Major themes in literature
Much literature exits on the decision making process, who is involved, how to create
organizational structure around decision making, organizational leadership hierarchies, how to
quantify decisions, and the like. What no study has looked at is the cost of the actual decision
making process itself as a component of the total cost of a project. This piece of the puzzle can
drastically change the risk profile and frameworks of many projects. As strategic agility,
innovation and speed to market continue to be economic drivers in the current globalized
economy, the decision making process has become an equitable component of all tactical and
strategic processes. Before getting into the literature review, a few themes will be highlighted
here from a high level and will encompass the general thoughts of all works cited.
Decision theory
The overarching theme in decision theory that extends from behavior to economics to
project analysis and management is game theory. The framework in which this theory is applied
depends largely on the industry a company is associated and the impact on that industry they
have. Game theory has minimal relevance in perfectly competitive industries where many small
companies compete in a finite pool of resources and become more profound as the scale of
business increases. Large organizations such as Wal-Mart and Target make decisions that align
TIME COST COMPONENT OF PROJECT ANALYSIS 24
extremely well in game theory as they are true competitors in their market and industries. In
the last decade, the most prolific examples are the release of iTunes and the iPod.
While game theory remains at the heart of all decision making regardless of company or
industry, economic principles of analyzing potential projects still exist in quantifying where in
the framework of the decision a project rests. Net present value (NPV), internal rate of return
(IRR), and payback are all modules used to calculate the value of a project or initiative. What
these economic principles do is generate a risk profile in which the cost and returns are
compared and company weighs the benefits and then decides whether or not to accept the
project and associated risks. In the simple diagram below, the high level decision making
process is outlined and this is largely true for all companies. While each company may have a
different process or framework to evaluate value and the decision hierarchy may look wildly
different, every piece of the decision making process will fall into one of the following
categories:
Relationships of Frameworks
Figure 1
In understanding figure 1, the process is left to right and the top buckets drive initiation
and execution of the buckets underneath. For instance, company ethos will generate idea
Idea creation
Valuation Risk Decision Execution
TIME
Company Ethos Internal Processes Decision Theory Constraints
TIME COST COMPONENT OF PROJECT ANALYSIS 25
creation and part of the valuation process. A company focused on innovation will be seeking to
create new ideas and innovate which then has an impact on the valuation process. A different
company may focus on improving existing products which will lead to a different idea creation
and valuation process. Then internal processes kick in and begin speculating on value and risk.
These internal processes are almost always unique and proprietary to a company. Then the
frameworks of decision theory drive the decision. This internal conversation around how this
new or improved product will be responded to by competitors and consumers. Finally,
constraints will either allow a project to be accepted or rejected. Constraints often involve
resources (such as money, time and people) but can extend into other areas such as short and
long term strategy, perception, industry trends, etc.
Risk management
Risk management varies among enterprises and how risk is assessed and managed
depends on the tactical and strategic positioning of the organization. The basic framework of
risk is the same for all companies and the perception of risk among the leaders of a company
plays a large role in risk analysis. Each person analyzes risk differently based on a multitude of
factors including but not limited to life and work experience, professional and political beliefs,
ethics, vision, and innate generational attitude and leadership differences. An entire study
could be conducted on how risk is treated through different generations, personality types,
genders, race, upbringing, social status, and the like.
Every risk analysis follows this simple framework although the components and analysis
may be extremely complex. For the purpose of this study, only an overall understanding of the
risk architecture is necessary. An abundance of literature does exist for every point in the risk
TIME COST COMPONENT OF PROJECT ANALYSIS 26
matrix. A key component to keep in mind is, in the last 10 years, the idea and perception of risk
has changed drastically. Depending on the industry, companies may or may not have the same
level of emphasis on risk and reward. Due to the financial collapse of 2006 to 2008, many
companies have revisited their risk analysis processes and built constraints to prevent future
market failures. Constraining the risk process is a double edged sword as this theory has also
seen businesses go bankrupt. The necessity of risk in the market place is essential to the life of
Western economies.
Below is a simple version of a risk framework. Again, each piece may have a dedicated
process within a firm and the complexity of that process will change.
Risk Framework
Figure 2
In figure 2 above, one can understand how the risk process works with the
organizational hierarchy to get information from the bottom to decision makers at the top.
Info
rmat
ion
Tim
e
Organizational
Hierarchy
TIME COST COMPONENT OF PROJECT ANALYSIS 27
Depending on the organization, this process can be a quick straight forward process where
ideas go through a quick cascade of models and a decision is made, or extremely complex
where every box in the model has an owner and at the top of the process are a group of
decision makers that collaborate in making a decision. Again, time becomes a component and
cost within the process. Time can be present both as a cost and as a means of revenue
generation.
Time
A common phrase exists in business: “time is money.” The principle is derived from the
academic scope around time value of money. Essentially, the shorter the process or transaction
or the shortest time in which money is recognized or costs are saved, the better. Time is
extremely important in business especially as the global economy evolves and more businesses
are placing emphasis on speed to market and innovation. The overarching theme around time
is the same regardless as to what business context you read, less time, more profit.
The competing priority is that some perception exists that time can help delude risk. For
instance, due diligence that is completed in a week versus a month, some perception that
decision makers may have is that the project completed over a month will be much more
robust than those due diligence projects completed in a week. However, the question this study
asks is: “What if, a vast majority of the time, both types of analysis comes up with the same
answer?” It would be much more profitable to come to the same conclusion in a shorter period
of time. Shortening time will often alter the risk profile as discussed above. If decisions are
made quicker, companies may be willing to alter their risk profiles to account for some of the
savings of shorter process. A shorter process does not mean being less accurate or incomplete,
TIME COST COMPONENT OF PROJECT ANALYSIS 28
rather focus on those pieces of the process that add the most value in the quickest manner
possible.
Putting the pieces together
Understanding how decision theory, risk management and time all effect each other is
essential in building (or rebuilding) business processes to encompass the most value.
Associating a cost or revenue to the time it takes to get a proposed project from infant stages
to a profitable adulthood is a revolutionary thought. Much of literature dives into each of these
components on their own, but nothing develops an understanding of how cost may begin to
highlight proposals in a different, more colorful light. A simple value equation would look
something like this:
Projected cash flows – cost of time = true value
In the figure below, the equation will be broken down to encompass the three
overarching themes (decision theory, risk analysis and time) discussed above. Each theme has a
role to play in the entire process and each part of the process is considered critical (meaning an
entire role may not be removed to save time).
Value Equation
Figure 3
Cost and Execution
Initiation and
valuation Risk analysis
Decision
process
End to end
process
Projected cash flows (over X time periods)
End to end process time (over Y time
periods) Project Gains
TOTAL TIME
TIME COST COMPONENT OF PROJECT ANALYSIS 29
The visualization of the above model sheds some light on why many projects are
evaluated over a five year time period. Decades ago, during the era of conglomerates of the
1950’s and 1960’s, the strategic horizon may extend over 10 to 15 years, thus, further the roles
of project gains. The longer the scope of the project, the less impact the pieces of the end to
end process play on the cost of the project. As the decision horizon in the corporate world
continues to move closer to today, companies are finding that the time horizon on strategic
decisions may only be three to five years. Does it make sense to take 18 months to make a
decision that may only last three years? This area is where enterprises have significant updating
to do with respect to current processes and also where significant value and competitive
advantage can be obtained. Generally speaking, the cost and execution of a project is fairly
inelastic, but the process in which a decision is made is where the opportunity lies.
Contextual Review
The contextual review will cover two main topics: decision theory and risk. The
contextual review is designed to provide some background from stated sources that will
provide additional information to supplement the background information found in Chapter 1.
This review is a narrative that dives into more profound information from the sources. While
each of the sources has more in depth information, this section pulls the most pertinent
information for this study with keeping the assumptions and limitations in mind.
Decision Theory
Introduction to decision theory
Decision theory has a long lineage dating back to the beginning of mankind when
caveman had to make a decision on where to live, what to eat and how to sustain. The modern
TIME COST COMPONENT OF PROJECT ANALYSIS 30
ideas of decision can be described as eccentric mathematical models that vary in perception
depending on the researcher. The frameworks in which these theories work are generally the
same: a cause and effect bombardment of corporate decision making for competitive
advantage and industry position. For that point, the most relevant decision theory is game
theory (Buchanan & O’Connell, 2006).
The basics
Dodge (2012) showcases Schelling’s Nobel Laureate awarding winning work in
economics with respect to game theory and application. Dodge covers the foundations of game
theory and how organizations interact with each other both in the same industry and across
different industries. The themed concept is that no decision can be made without the
consideration of what competition will do in response to that decision. Like a large game of
organizational chess, this form of decision theory takes on huge act and react responses and
translates well on a large strategic scope. Within the scope of project evaluation, game theory
brings an interesting twist in rationally choosing one project over another.
Baniak and Dubina (2012) build a comprehensive review of game theory and the
impacts on the innovation process. Baniak and Dubina also discuss a varying degrees of
organizational interactions including how game theory applies to strategic competition and
cooperation. The main impacts develop the necessity for decision theory and how impacts of
innovation and business trends can be analyzed. Most notably, the authors dive into an
elaborate discussion on game theory and innovation. This is especially relevant given the global
condition of the economic and competitive world today where innovation has enormous
leverage.
TIME COST COMPONENT OF PROJECT ANALYSIS 31
A strategic perspective exists when making decisions. Many boards and executives have
a myriad of priorities when making decisions from organizational focus to shareholder
profitability. These decisions also have an intangible avenue that is difficult to measure.
Finkelstein, Hambrick and Cannella assert that an organization’s success or failure can be traced
back the actions or inactions of the organizations executives, top management teams and
boards of directors. Their work dives into the intangible areas of decision making such as
company ethos and aversion to risk and how these areas may impact strategy and success. The
authors also dive into less noteworthy areas such as business fatigue, social connections,
personality, and experiences, to name a few (Finklestein, Hambrick & Canell, 2009).
Tougher to measure
Decisions often depend on an individual’s appetite for risk. Individual perspectives to
risk essentially become the organizations acceptance towards risk. Many factors exist towards
the acceptance or aversion to risk. One study theorizes that children will assume more risk than
adults. This study adds some creative thought in the world of decision making and risk doing a
nice job tying the two subjects together. This may also lead to why organizations experience
different risk perspectives depending on the level of management and experience that is
responsible for managing risk (Grieggs, 2010).
With age often comes position, responsibility and influence. Another influence in
decision making can be found inside the hierarchical aspects of an enterprise. In an attempt to
optimize accuracy, organizational focus and innovation, all organizations install a process that
feeds information to the right levels of decision making process. Kang discerns the variation in
decision making and equates these variations to aspects such as a leader’s perceptions of
TIME COST COMPONENT OF PROJECT ANALYSIS 32
subordinates and the information they are providing and a view into predictability of human
nature (is someone choosing something because they have done so in the past). This work
breathes more color into the decision making process and help create a distinction that the
process may be as much art as it is science (Kang, 2010).
Kuehn (2009) asserts image theory provides an interesting paradox to decision theory
models. Essentially, image theory asserts that, a vast majority of the time, there are not many
alternatives but only one and the real choice is to either accept or reject that alternative. This
perspective is equally important to game theory in the idea that organizations may not have
alternatives or have the information readily available to fit into game theory. In this case, an
organization will likely accept or reject the alternative based on the merits of the alternative
alone. This devolves away from game theory and has a different strategic perspective.
Paulson (2009) researches prospect and economic theory and how these two theories
may impact individuals (the framework can be paralleled to the enterprise level). Paulson
relates prospect theory to economic theory and delves into utility theory, all of which are
relevant to enterprise decision making practices. This article further adds that evaluation
processes for proposals need to be robust covering a multitude of perspectives.
Risk
Introduction to risk analysis
This section of literature review is dedicated to business risk and how companies
identify, understand, process, mitigate, and absorb risk. Tolerance for risk will be different in
each organization. An understanding of how theories around risk affect organizations will help
develop a framework for which the decision horizon can be quantified. Risk is an unavoidable
TIME COST COMPONENT OF PROJECT ANALYSIS 33
fact in all facets of business so understanding how generational perceptions differ on risk will
be imperative to understanding why dissimilar generations make the choices they do.
Forming a foundation for risk
Enterprise risk management is how companies quantify risk in order to make business
decisions. Risk may mitigated through research, due diligence, and methodically making
decisions. Each process through measuring, assessing and deciding on an opportunity comes at
a cost. That cost may present itself as an economic cost (market study for example) or as an
opportunity cost (the time it takes to process risk). All of these areas require time and this is a
competing priority in today’s global arena where strategic organizations create competitive
advantage through strategic agility (Hampton 2009). Kelly (2012) asserts that risk should be
assessed in all phases of strategic planning and should align with organizational goals across all
platforms of an organizations.
Value and risk become difficult to measure especially when innovation is in the
discussion. Being able to develop a value proposition and maintain acceptable levels of risk can
be difficult. Wallis (2012) develops an understanding of value around risk management. Wallis
further develops a framework in which the decision horizon operates by quantifying the value
the decision making process has with respect to risk. The process will either add to or take away
from this value.
Achampong (2010) discusses key components to risk management and how risk relates
to strategic planning. The literature also discusses key pieces of risk theory such as SWOT
analysis. An understanding for both internal and external risk factors must exist in order to
TIME COST COMPONENT OF PROJECT ANALYSIS 34
understand how those variables may impede strategic planning. The SWOT analysis is a well-
established tool that aids in defining and understanding risk from both an inner and outer
organizational perspective.
Individual bias has an important role in risk management. Connecting personal
philosophy and human traits such as generational and cultural differences and beliefs to the
implications they have on risk management (Blaskovich & Taylor, 2011). Individual bias has a
unique role in a person’s willingness to take on risk. Taleb (2010) discusses highly improbable
events and how they affect the world. Taleb’s thoughts lend well to any section but when
looking at the literature through a risk framework, the book provides perspective around cause
and effect of events. This book both makes the case for and against ventures of great risk with
improbable results.
TIME COST COMPONENT OF PROJECT ANALYSIS 35
Chapter 3
Methodology
TIME COST COMPONENT OF PROJECT ANALYSIS 36
Chapter 3: Methodology
Research design
The research design evaluates the impacts of the decision making process on the NPV of
a project. The project uses data collected from a 2012 Fortune 25 United States based
company. Due to the nature of the projects, the names have been removed and the company
the data was received will not be named. The data encompasses projects from several
industries and span across all business units (human resources, information technology,
research and development, finance, operations, sales, and more). The data clearly has
limitations because the data is derived from a single organizations, however, it would be
reasonable to make some broad generalizations. The numerical figures of the data have also all
been equally multiplied to maintain integrity and agreement with non-disclosure contracts. The
research and design of the study will primarily talk in percentages to maintain equality of
numbers.
Data collection
The data was received from a 2012 Fortune 25 company (over $100 billion in sales). The
data was received as a table of projects and projected cash flows for either three or five years
(depending on variables of the project and speculated returns). The method in which the cash
flows are calculated and reached are unknown, but the same model was used in calculating all
cash flow value (as well as execution and run time (maintenance) costs of the project). This
portion of the data collection remains proprietary to the company and cannot be disclosed.
However, this process is consistent with nearly all businesses with respect to data collection
and processing for strategic projects. Since all projects went through the same framework, their
TIME COST COMPONENT OF PROJECT ANALYSIS 37
cash flows represent actual data the company uses to make high level tactical and strategic
decisions.
Here is a sample piece of data and a walkthrough of what each piece is (the data is
forecasted and repeated for subsequent years by quarter). For evaluation purposes, and
purposes of presentation within the paper, they will be consolidated into yearly cash flows
whenever possible. All value are in millions of United States Dollars.
Table 2
Execute cost – The cost in the first year to execute the project.
Cost under Q# - The run or maintenance cost of the project for that given quarter.
Income under Q# - Projected cash flows (revenue or cost savings) for the given quarter.
Year #:
o Cost – Total cost for the year (during year 1 the execute cost is also added in).
Though this cost may actually accumulate over the assumed six month execution
period, the expense falls into the first year of revenue realization.
o Income – Total income for the year
It should be noted, that beyond the first year, the cash flows are simply figured by subtracting
total cost for the year out of the revenue generation. This represents the yearly cash flow in
figuring net present value (NPV).
Cost Income Cost Income Cost Income Cost Income Cost Income
Project 1 3.65 0.62 1.43 1.46 3.01 1.46 4.71 0.62 6.41 7.82 15.56
Execute
Cost
Q1 Q2 Q3 Q4 Year 1
TIME COST COMPONENT OF PROJECT ANALYSIS 38
Appropriateness of the design
The design is relevant to business from both an academic and practiced perspective. All
companies use NPV, IRR, MIRR and/or payback methods to evaluate projects. Although each
company will have a different framework or module to plug data into, the results will yield the
same structure as seen above (obviously of different formats). The model will yield some sort of
cash flows that can be mathematically plugged into NPV, IRR, MIRR and payback calculators
(these calculators also differ among organizations, but the principles on which they are built are
the same). Because enterprises have different discount and interest rates, the results of each
project will be different. For instance, if these cash flows were placed into another companies
NPV tool, the results may look different because of the given variables. For this study, that is
inconsequential because the base of the information is the same.
This design spans across many industries and can take a myriad of projects from
operations to human resources. The reason for the project is not important but the
fundamental implementation of how the decision making process may affect the profitability of
a project is important. This study aims to value the impact of the decision making process on
the Net Present Value of a project.
Sample/Scope
The sample consists of 67 projects currently being considered for funding. This data
does represent that of only one company, however, the company is a significant organization
and the data represents a myriad of cultures and industries. The company operates
internationally across multiple industries and markets. The company also has an unusual variety
of business units which also strengthens the data in a dynamic way.
TIME COST COMPONENT OF PROJECT ANALYSIS 39
A unique perspective this data offers is that the data is all analyzed with the same
embodiment of corporate framework. Obtaining data from multiple companies may yield large
discrepancies in how the data was initially handled and presumed cash flows figured. The use of
one, multinational organization with a variety of business units and industries was necessary to
maintain the integrity of the data. While the scope of the data is with one company, the
significance of the company is also important to the validity of the data.
Some projects are international and risks such as exchange rate are not directly
evaluated in this context. The rates are converted to the United States Dollar for evaluation.
Because the data is taken from such a large company impacting many industries, this data is
relevant in speculating the costs of decision making across multiple markets, industries and
business units. Much like the frameworks of NPV, IRR, MIRR and Payback do not change among
markets, industries, and business units, only the decisions based on the results of these tools
will change. This data can and will work across a myriad of businesses both large and small
across a multiple array of markets and industries. As described in the limitations, the thought
processes of this type of project analysis is not designed for large projects that may have large
number of cash flows expected over decades. This sample and scope is limited to those projects
which have a relatively small yet relevant life cycle.
Validity and Reliability
The data is both valid and reliable because the data is real projects being considered by
a large Fortune 25 company. The data is most relevant because the data encompasses the
current business landscape on a global perspective. The data is not limited to a single business
division or unit and the data encompasses an array of projects. The reliability of the data lies in
TIME COST COMPONENT OF PROJECT ANALYSIS 40
the fact that many of these projects will go on to be funded ventures by this company in the
coming years. The company is making real time decisions of these projects as these study is
being conducted.
TIME COST COMPONENT OF PROJECT ANALYSIS 41
Chapter 4
Data
TIME COST COMPONENT OF PROJECT ANALYSIS 42
Chapter 4: Data
Process in action
The following is a walkthrough of the process and manipulation of data in order to reach
the conclusions. Each step will be spelled out in order to provide clarification through the
process and be specific through the handling of the data. Here is another look at Table 2 which
is a view of the initial data.
Figure 2
The original data is in the format as shown above. The data is extended out over 3-5
years as a projection of expected cash flows. When the data is consolidated the following was
formed summarizing the data into yearly cash flows.
Table 3
Notice, the highlighted zeros mean those projects are only analyzed over three years.
This table just summarizes the quarter data into years for ease of evaluation for the next set of
calculations. The negative cash flows on some projects may be an indication that projects are
Cost Income Cost Income Cost Income Cost Income Cost Income
Project 1 3.65 0.62 1.43 1.46 3.01 1.46 4.71 0.62 6.41 7.82 15.56
Execute
Cost
Q1 Q2 Q3 Q4 Year 1
TIME COST COMPONENT OF PROJECT ANALYSIS 43
no longer projecting profits or there may be intrinsic or intangible variables of those projects
that make them of intrinsic value versus a hard calculated value. There is no clear indication or
answer for the negative cash flows, but they remained in the data and evaluated. These
happened to be the first 10 projects of the data and other portions of the data will exclude
these “outliers” in projects.
Table 4
In the table above, Net Present Value is calculated. A rate of 5% (0.05) is used as a
baseline for all calculations. This rate should be an easily attainable rate for nearly all
corporations. The specific rate will differ between enterprises and a wide variety of theories
and recommendations exist regarding an applicable rate to use when in doubt. Likely, the most
relevant, many companies use Weight Average Cost of Capital (WACC) as the rate. Other
companies may adjust their rates depending on the business unit or division. These calculations
are very straight forward with no twists. The NPV of each project is stated in the right column.
TIME COST COMPONENT OF PROJECT ANALYSIS 44
Logic to continue
At this juncture some logic needs to take place in order to frame the next few
calculations. Currently, for many organization, the execution of the project will look something
like this:
Table 5
The decision cycle includes the time it takes to research, evaluate and decide if a project should
be funded. The execution cycle is the time it takes to initiate the project from ground zero to
recognizing cost savings or revenue generation. In all, the timeline of the projects would look
something like this:
Table 6
In the above table, the decision cycle is added into the cash flows because this is a
substantial portion of the process. This is where this study differs in the evaluation of projects
over other studies and thoughts around Net Present Value. The new costs for the projects begin
to take on a different look once the decision cycle is considered a cost of the project. The cost
of the execution cycle will often stay relatively inelastic because speeding up the process of
execution is often costly. The execution cycle is also much shorter and finding savings in this
cycle can be much more difficult.
TIME COST COMPONENT OF PROJECT ANALYSIS 45
Table 7
In the new logic, the decision cycle is greatly shortened, thus cash flows are realized three
quarters earlier. Essentially, over the same period of time, in a five evaluation, you gain three
extra quarters (a 15% gain) in revenue or cost savings. Looking at the decision cycle as a cost
and finding ways to shorten this cycle may provide significant increases in project evaluation. In
order to compute this, the numbers will be calculated in two ways. First, as realizing the entire
decision making cycle as a cost component of net present value. And secondly as realizing an
additional three quarters of revenue as an income and the impacts of the scenario on NPV.
Decision cycle as a cost
In defining the cost of the decision cycle, the first four quarters or revenues are
speculated as cost. These revenues can be thought of as an “opportunity cost” to the decision
making process.
Table 8
Cost Income Cost Income Cost Income Cost Income
Project 1 3.65 0.62 1.43 1.46 3.01 1.46 4.71 0.62 6.41 15.56 23.38
Project 2 5.42 1.48 5.41 2.07 5.41 1.37 6.24 0.75 6.24 23.31 34.39
Project 3 1.11 0.78 0.25 0.28 0.25 0.28 0.25 0.28 0.25 1.00 3.74
Project 4 0.00 0.00 5.07 0.00 6.10 0.00 11.22 0.00 11.57 33.97 33.97
Project 5 8.59 5.01 11.88 4.84 22.57 4.84 35.44 4.84 34.01 103.90 132.02
Project 6 12.21 5.02 2.59 5.25 4.40 5.48 5.24 5.25 8.74 20.98 54.20
Project 7 1.50 0.38 0.70 0.42 1.17 0.45 1.17 0.42 1.63 4.66 7.83
Project 8 6.04 1.94 0.42 2.20 1.04 2.26 9.77 1.99 14.75 25.97 40.41
Project 9 0.74 0.29 3.00 0.30 5.96 0.31 6.17 0.30 7.18 22.31 24.25
Project 10 3.84 0.25 0.90 0.27 0.90 0.29 8.09 0.27 8.09 17.98 22.88
New CostDC Cost
Execute
Cost
Q1 Q2 Q3 Q4
Current
New
TIME COST COMPONENT OF PROJECT ANALYSIS 46
In the above table, the “DC Cost” column represents the unrealized revenue gains or
cost savings of Q1 through Q4 and the “New Cost” column encompasses the cost of the
decision making process as well as the execution cost and first year Q1 through Q4 costs of the
project. To look at this idea another way, in order to generate $15.56 million in revenue, the
entire process (decision making and first year run and execute costs) actually cost the project
$23.38 million to generate. In doing this for the first year of realized incomes actually generated
a $7.82 million loss. While the subsequent years would generate a positive revenue, the
decision cycle has impacted the NPV of the project. In taking the new costs into account, the
new calculations for NPV would look like this:
Table 9
The newly figured NPV is significantly less than the original NPV as the costs of the
decision making cycle are now figured into the projects. The following table shows the delta
between the two NPV evaluations and what percentage of the original NPV was lost to the
decision making process.
TIME COST COMPONENT OF PROJECT ANALYSIS 47
Table 10
In aggregate, across the entire data set of 67 projects, the difference between these two
net present value calculations was $4.96 billion. This is a significant cost, even over five years,
for a company generating revenues of over $100 billion. This would relate to nearly $1 billion a
year in revenue or cost savings for a company just in the decision making cycle. Again, this
revenue and cost savings do not take time value of money or any reinvestment value into
account.
The new income
In this portion, the same projects will be evaluated with an extra three quarters of
income. Bringing back Table 7, this evaluation will use Q1 as an expense for the decision making
cycle, Q2 and Q3 as execution cycle and use the revenues of Q4, Q5 and Q6 as revenue
components of the NPV evaluation. We then can compare the difference, in this scenario, of
getting through the decision making process three quarters quicker to being realizing revenues
and cost savings earlier in the project life cycle.
NPV
Project 1 44.17 29.34 33.56%
Project 2 67.35 45.15 32.96%
Project 3 -2.91 -3.86 -32.74%
Project 4 140.03 107.68 23.10%
Project 5 345.87 246.92 28.61%
Project 6 -11.22 -31.20 -178.09%
Project 7 6.37 1.93 69.65%
Project 8 66.79 42.06 37.04%
Project 9 86.74 65.49 24.50%
Project 10 61.50 44.37 27.85%
New NPV
% Dec in
NPV
TIME COST COMPONENT OF PROJECT ANALYSIS 48
Table 7
In figuring the new NPV based on the new income, the new revenues (Q4 through Q6)
are added to the first year’s income. This will still keep the project ending on the same timeline,
yet add three additional quarters of income to the project. Since the project has already been
executed, the cost for Q4 through Q6 is also taken into account. The following table has the
new calculations:
Table 11
The “Q4-Q6 Revenue” column is the NPV calculation with the newly recognized
revenues of the new execution process. While the decision making process is still seen as a cost,
the cost has been significantly reduced. In Table 12 the differences in the NPV calculations are
listed below.
Q4-Q6
NPV Revenue
Project 1 44.17 29.34 52.25
Project 2 67.35 45.15 74.45
Project 3 -2.91 -3.86 -3.27
Project 4 140.03 107.68 161.41
Project 5 345.87 246.92 404.19
Project 6 -11.22 -31.20 -12.23
Project 7 6.37 1.93 8.08
Project 8 66.79 42.06 83.43
Project 9 86.74 65.49 100.53
Project 10 61.50 44.37 75.36
New NPV
Current
New
TIME COST COMPONENT OF PROJECT ANALYSIS 49
Table 12
In aggregate, making a decision in one quarter versus one year would net a $2.63 billion
increase over the original NPV of the projects. This type of revenue generation and cost savings
allows a company to take on a much different risk profile with respect to the decision making
process. In aggregate, the total revenue gains of an optimal decision making and evaluation
process would be worth over $7.5 billion over five years.
Method of analysis
The method of analysis was purely quantitative leaving all qualitative impacts out of the
analysis process. This method uses the traditional Microsoft Excel computation of Net Present
Value at a 5% (0.05) rate. The analysis simply compares what would happen to the NPV of
projects given the circumstances outlined above. An understanding does exist that shortening
decision making cycles may entail an enormous shift in corporate frameworks, budgeting and
accounting practices, and risk profiles. The aim of this study is to provide the framework that
significant value exists in making decisions in an optimal environment where risk profiles are
enhanced to encompass a shorter decision making timeframe.
Q4-Q6 % Inc
NPV Revenue NPV
Project 1 44.17 29.34 33.56% 52.25 18.31%
Project 2 67.35 45.15 32.96% 74.45 10.53%
Project 3 -2.91 -3.86 -32.74% -3.27 12.63%
Project 4 140.03 107.68 23.10% 161.41 15.27%
Project 5 345.87 246.92 28.61% 404.19 16.86%
Project 6 -11.22 -31.20 -178.09% -12.23 8.98%
Project 7 6.37 1.93 69.65% 8.08 26.78%
Project 8 66.79 42.06 37.04% 83.43 24.91%
Project 9 86.74 65.49 24.50% 100.53 15.90%
Project 10 61.50 44.37 27.85% 75.36 22.53%
New NPV
% Dec in
NPV
TIME COST COMPONENT OF PROJECT ANALYSIS 50
The method excludes other areas that could be further explored such as time value of
money, speed to market, and competitive advantage; all of which would strengthen the case of
this study. The study also limits the impacts of risk in the evaluation as risk could likely be
argued both for and against this study. An increased appetite for risk would need to exist to
make decisions in shorter timeframe, however, the significant increase in revenues may also
influence this appetite in a positive way.
Findings
The study was extremely conclusive in the idea, that regardless of the project, nature of
the project, costs, revenues or timeframes, the NPV of a project is significantly impacted when
the decision making process is also seen as a cost to the project. In some cases, the decision
making consumed any positive cash flow from the project. This may be an indication as to why
some companies experience negative cash flows within their finances while all numeric
research would suggest positive outcomes. The findings are summarized below and the
conclusions and recommendations will be outlined in the following chapter.
TIME COST COMPONENT OF PROJECT ANALYSIS 51
Table 13
As seen above, the original value of the portfolio of projects was $17.45 billion. When
considering the decision making process as a cost, the portfolio decreases nearly $5 billion in
value. When making a decision in one quarter versus one year, the value of the portfolio
increases $2.6 billion in value. One could argue, the long decision cycle costs $7.6 billion in
value of the portfolio. This is a significant opportunity for revenue enhancement among both
Fortune 500 corporations and midsized corporations that have large strategic projects in the
evaluation process.
Q4-Q6 % Inc
NPV Revenue NPV
Project 35 87.42 65.53 25.03% 108.26 23.84%
Project 36 158.76 107.01 32.59% 178.63 12.52%
Project 37 535.59 390.34 27.12% 616.79 15.16%
Project 38 112.94 73.09 35.28% 128.99 14.21%
Project 39 187.30 139.09 25.74% 214.30 14.42%
Project 40 476.23 344.19 27.73% 544.43 14.32%
Project 41 50.48 38.55 23.64% 55.45 9.85%
Project 42 90.98 66.24 27.19% 95.79 5.28%
Project 43 375.75 280.67 25.30% 404.30 7.60%
Project 44 47.21 30.40 35.60% 52.43 11.06%
Project 45 240.04 163.52 31.88% 270.38 12.64%
Project 46 1301.90 956.22 26.55% 1592.11 22.29%
Project 47 453.12 334.19 26.25% 499.53 10.24%
Project 48 42.79 27.57 35.57% 56.14 31.19%
Project 49 21.96 12.29 44.04% 25.41 15.74%
Project 50 120.03 89.33 25.58% 133.32 11.07%
Project 51 60.08 28.59 52.41% 67.37 12.13%
Project 52 603.15 451.87 25.08% 664.92 10.24%
Project 53 1208.98 937.06 22.49% 1337.44 10.63%
Project 54 510.03 375.88 26.30% 628.85 23.30%
Project 55 23.54 -1.20 105.11% 32.35 37.47%
Project 56 272.25 201.77 25.89% 298.67 9.70%
Project 57 2.05 -0.30 114.59% 1.95 -4.76%
Project 58 67.59 43.17 36.13% 80.39 18.94%
Project 59 31.39 -0.63 102.01% 39.99 27.41%
Project 60 253.17 182.76 27.81% 300.23 18.59%
Project 61 18.25 6.60 63.81% 23.05 26.34%
Project 62 -18.78 -24.38 -29.81% -20.59 9.66%
Project 63 302.52 213.09 29.56% 356.76 17.93%
Project 64 138.21 98.70 28.59% 172.68 24.94%
Project 65 445.38 330.25 25.85% 513.18 15.22%
Project 66 1377.77 1031.21 25.15% 1692.93 22.87%
Project 67 77.33 34.52 55.37% 82.28 6.40%
Totals 17451.02 12493.38 28.41% 20081.81 15.08%
New NPV
% Dec in
NPV
Q4-Q6 % Inc
NPV Revenue NPV
Project 1 44.17 29.34 33.56% 52.25 18.31%
Project 2 67.35 45.15 32.96% 74.45 10.53%
Project 3 -2.91 -3.86 -32.74% -3.27 12.63%
Project 4 140.03 107.68 23.10% 161.41 15.27%
Project 5 345.87 246.92 28.61% 404.19 16.86%
Project 6 -11.22 -31.20 -178.09% -12.23 8.98%
Project 7 6.37 1.93 69.65% 8.08 26.78%
Project 8 66.79 42.06 37.04% 83.43 24.91%
Project 9 86.74 65.49 24.50% 100.53 15.90%
Project 10 61.50 44.37 27.85% 75.36 22.53%
Project 11 202.79 140.93 30.50% 242.89 19.78%
Project 12 153.65 99.73 35.09% 166.94 8.65%
Project 13 731.50 478.35 34.61% 799.48 9.29%
Project 14 146.31 59.73 59.18% 207.31 41.69%
Project 15 717.00 542.56 24.33% 792.66 10.55%
Project 16 17.22 10.91 36.65% 20.94 21.60%
Project 17 149.35 113.51 24.00% 170.25 13.99%
Project 18 365.33 200.90 45.01% 422.18 15.56%
Project 19 17.27 10.92 36.73% 22.07 27.81%
Project 20 69.86 45.82 34.41% 86.12 23.29%
Project 21 30.35 17.98 40.76% 35.82 18.03%
Project 22 198.12 144.21 27.21% 219.54 10.81%
Project 23 115.73 84.58 26.91% 136.26 17.74%
Project 24 61.06 40.73 33.29% 65.15 6.69%
Project 25 166.35 127.46 23.38% 138.69 -16.63%
Project 26 86.81 62.69 27.79% 105.69 21.74%
Project 27 363.50 274.05 24.61% 403.30 10.95%
Project 28 17.23 5.52 67.96% 16.23 -5.81%
Project 29 224.34 144.11 35.77% 259.37 15.61%
Project 30 647.07 487.23 24.70% 731.65 13.07%
Project 31 13.18 -0.53 103.99% 9.78 -25.75%
Project 32 681.89 511.75 24.95% 761.34 11.65%
Project 33 488.35 349.60 28.41% 540.25 10.63%
Project 34 1306.67 965.52 26.11% 1534.99 17.47%
New NPV
% Dec in
NPV
TIME COST COMPONENT OF PROJECT ANALYSIS 52
Chapter 5
Conclusions and Implications
TIME COST COMPONENT OF PROJECT ANALYSIS 53
Chapter 5: Conclusions and Implications
Research questions conclusions
The conclusions for the research questions are interpreted from the data presented in
Chapter 4 as a general theme to the data. Because each project varies in cash flows and
expenses, the conclusions will aim to generalize the study in terms of percentages as an
aggregate portfolio of assets and use specific projects as an example.
What is the impact on Net Present Value (NPV) of the decision making process?
The decision making process negatively impacted (caused the NPV evaluation of the
initiative) to decrease in nearly all instances. While the sample size was limited, the conclusions
came from project across a broad range of industries but each company and industry would be
impacted differently based on the decision making process. On average, the drop in NPV was
28.41%. The largest drop was 114.59% completely taking the project out of profitability (there
were four projects that experienced a 100% or more decline in NPV).
What would the impacts to NPV be if the decision making process were shorter?
The NPV valuation had a positive impact given a shorter decision making process (one
quarter versus one year) in all evaluations. On average, the rise in NPV was 15.08%. The largest
increase was 37.47%. A reasonable conclusion can be made that an equitable portion of a
project’s cost is attributed to the decision making process. Depending on the cost to cash flow
ratio (as well as the rate used) will dictate the economic and opportunity cost of the decision
making process.
TIME COST COMPONENT OF PROJECT ANALYSIS 54
In aggregate, how would a portfolio of projects change given a shorter decision making
process?
The initial NPV valuation for all projects was $17.45 billion. Including the decision
making process as an expense, the entire portfolio was now worth $12.49 billion. This equated
to a 28.41% drop in portfolio value. This decrease means it cost this company almost $1 billion
per year to decide on these projects (over a five year time horizon). Under a shorter decision
making process, the same portfolio is worth $20.08 billion. The portfolio experienced a swing of
$7.59 billion in assets done under current decision making process versus a streamlined
decision making process.
General Conclusions
The decision making process has enormous impacts on NPV of the projects and
initiatives being examined. Since many enterprises make decisions based on yearlong cycles,
these general conclusions would suggest that enterprises may have opportunity to generate
increased revenues and cost savings by evaluating their decision making processes. Since the
study does not evaluate items such as speed to market, time value of money, market share
leverage, reinvestment potential and other intrinsic properties of money, the conclusions
would further be amplified through these analysis. This study can make the following general
conclusions under the assumptions and limitations outlined in chapter 1:
When the decision making process is assumed as the cost of a project, the NPV
evaluations experience a decline in value.
A shorter decision making process can lead to economic costs savings and revenues of
significant impact.
TIME COST COMPONENT OF PROJECT ANALYSIS 55
The nature of risk profile may change given shorter timelines due to increase in
aggregate portfolio performance.
Implications
The implications of this study may have corporate managers and executives evaluating
the time in which it takes to generate, research, analyze and execute projects. These
implications may also call enterprises to evaluate corporate finance and budgeting structure to
support more dynamic decision making process to support the findings of this thesis. Other
implications may include a review of how decisions are made from a hierarchal perspective and
evaluating the bodies involved during the process. The larger implications lie in enterprises who
are able to adopt shorter decision timelines and realize revenues and cost savings and shift risk
frameworks in a globalized market that reward this type of execution. Lastly, this study implies
that, to a certain degree, a large portion of project expense can be attributed to the decision
making process. While a shorter process may add more revenues, the implications of a shorter
strategic decision timeline may also add intrinsic value found in areas such as speed to market
and competitive advantage.
Recommendations
The recommendations from this study are threefold. While these recommendations
may look different and be executed different from enterprise to enterprise, the importance of
understanding the impacts of a corporation’s decision making process with respect to strategic
project evaluation is critical to success. For this reason, the following recommendations are
made based on the conclusions of the data:
TIME COST COMPONENT OF PROJECT ANALYSIS 56
1. Invest time in understanding the decision making process. In many corporations this
process came as a byproduct of the corporate finance and budget models and has gone
unchanged as the basic frameworks in which a corporation was rendered. Invest in
updating these process to flow with what the global economy rewards (speed,
ingenuity, and consistency).
2. Under the notions of game theory and hierarchical decision theory, don’t spend too
much time sizing up the competition. Often times, the largest delay in making project
decisions may be attributed to these areas. Time is money and these competitive
analysis studies in conjunction with the decision making process may not be adding as
much value as perceived.
3. Risk is another area that may be worth observing to see if an enterprise spends too
much time analyzing risk. In this study, the cost of the decision making process was
nearly $1 billion a year. That is an immense cost and risk profiles can be impacted in
large ways through unrealized revenues due to this process.
Further Study
Following study of this thesis could stem in a bunch of different directions. This section
will be framed in questions that compliment this study and may provide added value to the
decisions corporate executives make in regards. The areas this study could be further
broken down into may take two directions: (1) psychological/behavioral and (2) corporate
structure. Further study in other areas may exist, but these two areas will likely provide the
most impact.
TIME COST COMPONENT OF PROJECT ANALYSIS 57
Psychological and Behavioral
In this areas, studies could be conducted to answer a few overarching questions with
regards to this study as to why the decision making process exists the way it currently does
(again this would be different for every organization). This type of study would likely be best
conducted within each enterprise to fully grasp how psychological behaviors and attitudes
affect the critical processes of business. To some extent, Myers-Briggs type testing has given
some framework in this area, but specifically to project evaluation and decision making an
extension of the tool could be used. Here are some questions that would need to be
answered from this perspective:
What are the impacts of generational attitudes and experiences on the decision
making process?
How does risk aversion impact the decision making process?
What inherent company history impacts psychological and behavioral decisions?
How do company frameworks and hierarchical lines of communication impact the
decision making process?
Corporate Structure
No doubt exists that a change in strategic decision making timelines may have deep
impacts to corporate frameworks and structure. A large difference between old corporations
and those created in the 21st century, are that the newer corporations have the ability to create
a 21st century business framework that works well with the time in which the company
operates. Older corporations, do not have this commodity and they may be experiencing
friction from decades old frameworks that do not allow a company to operate as efficiently as
TIME COST COMPONENT OF PROJECT ANALYSIS 58
necessary to drive a shorter strategic decision making cycle. That being said, a follow on study
would examine the differences of corporate structures and provide insight to the following
areas:
Acquisition performance – Old structure versus new, how do newer companies perform
within larger and older firms once they are acquired? This would indicate the impact
that new business structures have versus those of older businesses. If a business is being
acquired, they are likely performing very well within their own corporate framework
and their performance under an “older” framework would be interesting to analyze.
Financial and budgetary – What impact does finance and budgeting cycles have on
decision making processes? What would need to change within these frameworks to
support a shorter decision making process?
Hierarchical – Does current business hierarchies support a succinct decision making
process? What hierarchical changes need to be made in order to do so? Are these
changes cost saving or revenue generating?
Summary
This study aims to explain the impact of the decision making process has on the
valuation of short term projects when the process is applied as a cost and an economic
opportunity to generate revenue. The study has concluded that opportunity exists in the
decision making process that may be worth further exploration in order to drive new revenues
or realize quicker cost savings. In the data evaluated in this study, the portfolio of assets
realized a 28.41% decline in value when the decision making process was applied as a cost.
Furthermore, a condensed decision making process (one quarter versus four quarters)
TIME COST COMPONENT OF PROJECT ANALYSIS 59
increased the valuation of the portfolio 15.08%. The net swing in economic cost was $7.6 billion
for this portfolio of assets. Over a five year span, the cost of project analysis is concluded to be
$1.52 billion or $380 million per quarter.
TIME COST COMPONENT OF PROJECT ANALYSIS 60
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