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Managing by Project: Unlocking NPV and Strategic Value

This presentation by Mark Heath provides an overview of MBH Management's approach to managing projects and how to measure their strategic value through NPV. It covers topics such as negative NPVs, payback and investment time horizons, and the use of IRR. The presentation also introduces MBH Management, its frustrations with modern consulting practices, and its vision and mission. Attendees will learn about the Managing by Project approach, its selection and prioritization processes, and the benefits of using this approach. The presentation concludes with insights on how to calculate NPV, understand strategic value, consider options, and avoid common pitfalls.

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Managing by Project: Unlocking NPV and Strategic Value

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  1. NPV and Strategic Value Presented by Mark Heath

  2. Overview • Who is MBH Management? • Managing by Project • NPV as a black box • Measuring strategic value • Negative NPVs • Payback and investment time horizons • Using IRR

  3. MBH Management Pty Ltd • Founded in November 1999 • Frustrations of modern consulting practices • Strong growth potential in project management consulting industry

  4. MBH Vision To be an Australian leader in business, environmental and socio-political change management following a Managing by Project approach.

  5. MBH Mission To position the MBH brand as the leader in facilitating business growth and change

  6. What is Managing by Project? • Vision – How a company should look in the long term • Strategy – Approach to achieve the vision • Project selection – Based on the strategic alignment and value created by a project • Project Management – The delivery mechanism for each project selected

  7. MbP – How does it work? • Selection process • Prioritisation process • Directly involves the customer • Use of cross functional teams • Utilises a facilitated workshop approach

  8. MbP & project selection - WBS

  9. MbP – Why use this approach? • Fewer resources (time, money, people) • Fluid structure • Short life • Integrates multiple functions • Minimises non value-adding work • Delivers vision

  10. Project Life Cycle PLAN ACCOMPLISH SOFT HARD PHASE 1 CONCEPT PHASE 2 DEVELOPMENT PHASE 3 IMPLEMENTATION PHASE 4 TERMINATION LEVEL OF EFFORT TIME

  11. Removing the black box • Understand where +ve NPV comes from • Articulate benefit drivers (EVA) • Align project to business strategy

  12. Only NPV is relevant • Not a black box • Measures strategic value • Incorporates risk • Creates instant priority process

  13. Calculating NPV • Benefit drivers • Cost of the project • Ongoing costs • WACC • DCF = NPV

  14. What is strategic value? • Project must be more than “Strategic” • Must add strategic value • Results in competitive advantage • Competitive advantage = +ve NPV • Competitive advantage = strategic value

  15. How is strategic value achieved? • Build on existing strengths • Reduce weaknesses • Create new businesses • Create new options/opportunities • Reduce risk

  16. Negative NPV project • Gut feel says yes • Appears to have competitive advantage • Time horizon is long • Possibilities of follow-on investments • Need to value options

  17. Option pricing and NPV • Value option of follow-on investment • Estimate volatility of forecasts • Estimate time to investment decision • Plug into Black-Scholes formula • Add option value to NPV value • Positive number means project has value

  18. The danger of payback • Short term investment horizons • The need for EPS growth now • Forced by investment analysts time horizons • Investment horizons need to change • Focus on 10 - 15 years rather than 1 - 3. • Remove going concern assumption!

  19. Other assessment tools used • IRR • ROI • Payback • Gut feel • Political decision • CEO says so

  20. Why not IRR • Negative IRR for positive NPV projects • Multiple rates of return possible • Excluding the wrong mutually exclusive project • IRR means NPV = 0 • Prefer NPV > 0!

  21. Conclusion • Utilise MbP approach to business management • NPV & option pricing only for project selection • Understand where the value comes from

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