SELECTION CRITERIA FOR PROJECT CLASSIFICATION PDF

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Annotations of the selection criteria, financial models, non-financial criteria, the two multi-criteria selection models, checklist models, the multiple valuation scoring models, the application of the selection model, the selection of a model, the sources and solicitation of project proposals, resp...

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SELECTION CRITERIA FOR PROJECT CLASSIFICATION

One justification for checklist models is that they allow great flexibility when choosing from many types of projects and are easily used in different divisions and locations. Although many projects are chosen with a checklist-like approach, it must be recognized that the checklist has many shortcomings. The most relevant are that it does not clarify the relative importance of the value of a potential project to the organization and does not allow it to be compared to other potential projects. Each potential project will have a different group of positive and negative responses. How is the comparison established? It is difficult to rate and hierarchical projects because of their importance, perhaps impossible. This approach also leaves the door open to the potential opportunity for power games, politics and other forms of manipulation. In order to overcome these important gaps, experts recommend the use of a multi-valuation rating model to select projects, which is discussed below. It is necessary to determine the strategic value of a proposed project before it is deposited into the project portfolio. Rarely are there projects that should be "should" be chosen. This compliance with emergency projects is those that must be carried out, other than the company will fail or suffer terrible punishments and consequences. For example, a manufacturing plant must install an electrostatic filter on top of a chimney within six months; otherwise, you will need to close. U.S. courts try to force Microsoft to open its software architecture to enable competing companies to be compatible and interact with Microsoft. This decision could become a compliance project for Microsoft. Any project that is placed in the "mandatory" category ignores other selection criteria. A basic rule for locating a proposed project in this category is that 99 percent of those with interests in an organization would agree that the project should be carried out; there is no perceived choice, but the implementation of the project. The other projects are selected with criteria that relate to the company's strategy. Although there are many criteria for selecting projects, they can generally be financial and non-financial. Below is a brief description of each, followed by an analysis of its practical use. Financial models Most managers prefer the method that includes financial criteria for evaluating projects. These models are suitable when there is a high level of confidence associated with future cash flow calculations. Here are two models and examples: recovery period and net present value (VPN). 

In Project A, the initial investment is $700,000 and cash intries have been planned for $225,000 over five years.

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In Project B, the initial investment is $400,000 and the planned cash intries are $110,000 over five years.

Non-financial criteria While financial performance is relevant, it is not always a reflection of strategic importance. In the 1960s and 1970s companies expanded further by overdiversifying. Now, the prevailing thinking is that long-term survival depends on the development and conservation of key capabilities. Companies must have discipline to refuse projects with financial potentials that are beyond the scope of their core mission. This requires other criteria beyond direct financial performance. For example, a company may support projects that do not have high profit margins for other strategic reasons; these include:      

Capture a large market share. Make it difficult for competitors to enter the market. Develop an enabling product, the introduction of which increases sales in other, more profitable products. Develop core technology used in next-generation products. Reduce reliance on untrusted vendors. Avoid government intervention and regulation.

They can also apply less tangible criteria. Companies can support projects to restore corporate image or improve brand recognition. Many organizations have committed to corporate citizenship and support projects that seek community development. Since there is no single criterion that reflects strategic importance, multi-criteria selection models are required in portfolio management. They often value individual criteria so that projects that contribute to the most important strategic objectives are given greater consideration. Two multi-criteria selection models Since there is not a single criterion that can reflect strategic importance, multicriteria selection criteria are required for portfolio management. Checklist models The most commonly used method in project selection is that of the checklist. Above all, it uses a list of questions to review potential projects and determine their acceptance or rejection. Multiple valuation rating models Typically, they use several valuation criteria to evaluate project proposals. It is common for them to include qualitative and/or quantitative criteria. Each is assigned a weight. Grades are assigned to each criterion for the project, based on

its importance to the project. Weights and grades are multiplied to get a total rating rating for the project. With these multiple selection criteria, projects can be compared to the valuation grade. Those who get the highest grades will be considered better. Selection criteria need to reflect the crucial success factors of an organization. For example, 3M set a target that 25 percent of the company's sales would come from products less than four years old, instead of using the old 20 percent. Its priority system for project selection does strongly reflect this new objective. On the other hand, when the right factors are not chosen, the selection process will become "useless". At the top of the matrix are the selection criteria (for example, being within the key capabilities... IHR of 18 percent more). Management values each criterion (a value of 0 to a maximum of, for example, 3) for its relative importance for the objectives of the company and for the strategic plan. Project proposals are then submitted to a project priority analysis team or a project office. Each project proposal is then evaluated for its contribution/value relative to the selected criteria. Values from 0 to a maximum of 10 are assigned to each criterion per project. The value represents the adaptation of the project to the specific criteria. For example, it seems that Project 1 fits well into the organization's strategy, since it has a value of 8. Conversely, Project 1 does nothing to support reduction defects (in its value of 0). Finally, this model applies management valuations to each criterion for their importance, using a value of 1 to 3. For example, IHR and strategic adaptation weigh 3, while urgency and key capabilities have weights of 2. When applying weight to each criterion, the priority team derives the total points for each project. For example, project 5 has the highest value of 102 [(2 x 1) + (3 x 10) + (2 x 5) + (2.5 x 10) + (1 x 0) + (1 x 8) + (3 x 9) x 102] and project 2 has a low value of 27. If the available resources create a 50-point cut-off threshold, the priority team should delete projects 2 and 4. (Note: Project 4 appears to be urgent, but it is not classified as a "mandatory" project. Therefore, you are selected with all other proposals.) Project 5 should receive first priority, project n, second, and thereafter. Rarely, where resources are very limited and project proposals are similar in valuation range, it is appropriate to choose the project that has the least demand for resources. Multi-criteria valuation models similar to this are becoming very quickly the dominant choice for grouping projects. At this point in the analysis, it is appropriate to pause for a moment and put things into perspective. While selection models like the one above can provide many solutions to project selection determinations, models should not make the final decision, but the people who use them. There is no model, despite its complexity, that can capture everything it should represent. Models are tools that guide the evaluation process in such a way that decision makers take into account relevant aspects and reach a general conclusion regarding projects that should be

supported and those that should not. This is a much more subjective process than the calculations suggest. Applying the selection model Project classification It is not necessary to have the same criteria for the different types of projects that were analyzed (strategic and operations). However, experience shows that most organizations use similar criteria for all types of projects, with perhaps one or two criteria specific to the project type; for example, strategic progress compared to the operational one. No matter what the differences in criteria are between the different types of projects, the most important one to select them is how they fit the organization's strategy. Therefore, this criterion must be consistent across all projects and should be important in relation to others. This uniformity for all priority models used can prevent departments from underoptimizing enterprise resources. Anyone who generates a project proposal must classify it by type, so that the appropriate criteria can be used to evaluate it. Selecting a model In the past, financial criteria were used to such an extent that almost others were almost excluded. However, in the last two decades there has been a dramatic change that includes multiple criteria in project selection. Simply put, profitability itself is not an appropriate measure of contribution; however, it is an important criterion, especially for projects that underscore revenue and market share, such as research and development projects seeking significant progress. Today, senior management is interested in identifying the potential mix of projects that better leverage human and capital resources to maximize long-term investment recovery. Factors such as research into a new technology, public image, ethical position, environmental protection, key competencies and strategic adaptation can be important criteria in project selection. Valuation qualification criteria seem to be the best alternative to meet this need. Valuation rating models make projects better coordinated with strategic goals. If the qualification model is published and made available to the entire company, the selection of projects is given some discipline and credibility. It also reduces the number of wasted projects that use resources. "Sacred cow" projects and politics are exposed. It is easier to identify and communicate project goals when confirmed with selection criteria. Finally, using a valuation rating approach helps project managers understand how their project was selected, how it contributes to the organization's goals, and how it is placed compared to other projects. Project selection is one of the most important decisions that guide the future success of an organization.

In the criteria for project selection, the power of your portfolio begins to manifest itself. The new projects are in line with the strategic goals of the organization. If there is a clear method for selecting projects, it is possible to request their proposals. Sources and request for project proposals As needs to be assumed, projects must come from someone with the conviction that theirs will add value to the company. However, many organizations limit proposals to specific levels or groups within them. This may be a missed opportunity. Good ideas are not limited to certain types or classes of participants in the organization. Applications should be encouraged and kept open to all sources: to internal and external sponsors. In some cases, companies will ask for project ideas when knowledge requirements for the project are not available within them. Typically, the organization will issue a request for a proposal for RFP requirements to contractors or suppliers who have the appropriate experience to carry out the project. An example is that of a hospital requesting a proposal to design and build a new operating room using the most advanced technology. Several architecture companies submitted their proposals to the hospital. Proposals for the project were evaluated internally against other potential projects. When the project was accepted, other criteria were used to select the most qualified bidder. Classification of proposals and selection of projects Examining so many proposals and identifying the most valuable ones requires a structured process. Various data and information are collected to determine the value of the proposed project for the organization and as a future support. If the sponsor decides to continue with the project based on the collected data, it is sent to the team responsible for hierarchical the projects (or to the project office). Note that the sponsor knows what criteria will be used to accept or reject the project. Given the selection criteria and the current project portfolio, the team in charge of hierarchical projects rejects or accepts the project. In the latter case, execution begins. The form distinguishes between mandatory and desirable objectives. If a project does not meet the objectives designated as "mandatory", it is not taken into account and is deleted. The objectives of the company (or division) have been classified and assessed for their relative importance; for example, "improving service to external customers" has a relative weight of 83, compared to other "desirable" goals. The latter relate directly to the objectives set out in the strategic plan. Impact definitions represent a further refinement of the selection system. They are developed to assess the predicted effect that a specific project would have to

achieve a particular goal. You create a numeric scheme and are secured with the defining criteria. To show how this works, let's look at the $5 million goal in sales. A "0" is assigned if the project is not going to have any effect on sales or less than $100,000; "1" is allocated if the forecasted sales are greater than $100,000, but less than $500,000; "2" if they exceed $500,000. These impact assessments are combined with the relative importance of each objective to determine the overall predicted contribution of a project to strategic objectives. For example, Project 26 provides an opportunity to compose field problems, has no effect on sales, and will have a fundamental impact on customer service. For these three objectives, you should be assigned a rating of 265 [99 + 0 + (2 x 83)]. The total of the individual valuation qualifications for each project is obtained and used to rank the projects. Responsibility for establishing hierarchies Setting hierarchies can be a very awkward exercise for managers. It involves discipline, accountability, accountability, limitations, less flexibility and loss of power. The commitment of high administration means more than blessing the system of priorities; states that the administration will have to classify and assess, in concrete terms, the objectives and strategies that are considered to be most important to the organization. This public declaration of commitment can be risky if the stated objectives prove to be poor choices, but setting the course of the organization is a task for senior management. The good news is that if the administration really tries to steer the company towards a strong future position, a good system of project hierarchy will support its efforts and foster a culture in which everyone contributes to the goals of the organization. Portfolio system management Portfolio management leads the selection system to a higher level where the merits of a particular project are evaluated in the context of existing projects. It also involves monitoring and adjusting the selection criteria in a way that reflects the organization's strategic approach. This requires constant effort. In a small business, a small group of key employees may handle the priority system. In a large one, the priority system can be handled by the project office or the company management group. Contributions from senior management Managing a portfolio system requires two key contributions from senior management. The first is the guidance needed to establish selection criteria that are definitively coordinated with the strategies of the current organization. Second, there is the decision you must make each year to decide how to balance available organizational resources (human and capital) between different types of projects. Senior management must make a preliminary balancing decision (e.g. 20 per cent compliance, 50 per cent strategy and 30 per cent operation) prior to project selection; although the balance may change when the project to be presented is

reviewed. With these contributions, the priority team, or the project office, can carry out its many responsibilities, including supporting project sponsors and representing the interests of the entire organization. The responsibilities of the priority team The priority team, or the project office, is responsible for publishing the priority of each project and ensuring that the process is open and that it is not affected by the power policy. For example, most organizations that use a priority team, or a project office, use an electronic notice board to publish the project portfolio, the status of each of them, and current issues. This open communication prevents power games. Over time, the priority team evaluates the progress of portfolio projects. If this whole process is well managed, it can have a very important effect on an organization's success. It is imperative to constantly monitor the external environment to determine whether the organization's approach and/or selection criteria need to be modified. Priorities and changes need to be reviewed on a regular basis to keep up with the ever-changing environment and to preserve a unified view of the organization's approach. No matter what criteria are used for selection, each project must be evaluated with themselves. If projects are classified as mandatory, operational and strategic, each must be evaluated by the same criteria of each class. It is crucial to implement the priority system. And to maintain the integrity of the system and prevent young executives from turning it around, it's important to keep the whole system open and in a visible place. For example, communicating which projects are approved, their levels, the status of those in process, and any changes to priority criteria will discourage people from overlooking them. Balance portfolio based on risks and types of projects A key responsibility of the priority team is to balance projects according to their type, risk and demand for resources. This requires a company-wide perspective. Therefore, a proposed project that has high ratings in most criteria may not be selected because the organization's portfolio already includes too many with the same characteristics; for example, level of risk, use of key resources, high cost, non-revenue production, long duration. Balancing the portfolio of projects is just as important as the selection of them. Organizations need to evaluate each new project in terms of what it adds to the project mix. Short-term needs must be balanced with long-term potential. Resource usage should be optimized across all projects, not just the most important ones. There are two types of risks in projects. First there are those that are derived from the total portfolio of projects, which must reflect the risk profile of the organization. Then there are the specific risks that can inhibit project execution, such as program, cost, and technical aspects.

David and Jim Matheson studied research and development organizations. Thus, they developed a matrix that can be used to evaluate a portfolio of projects. The vertical axis refers to the possibility of success of the project. Horizontal, to potential commercial value. The grid has four quadrants, each with different dimensions of the project. Bread and butter projects generally involve improvements to the evolution of current products and services. For example, software improvements and efforts to reduce manufacturing costs. Pearls repr...