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Investment Management

Stages in project investment management

Figure 4.3 Stages in project investment management

Investment management identifies projects that meet the organisation's strategic objectives, are cost-effective and have an acceptable risk profile. The process is carried out in two stages: the construction of a business case and the realisation of project benefits. A detailed business case is presented for consideration by the project sponsor to the steering committee and, once approved, it is handed to the project manager for project development. When development begins, value realisation processes provide assurance that project costs, benefits and risks materialise as estimated in the business case. Figure 4.3 provides an overview of investment management stages.

PRG plays an important role when decisions are made to invest in a project since risk and its impact are evaluated for each potential project. This requires each project to

• demonstrate that its risks are within the organisation's risk appetite and tolerance limits;

• identify value-creating and value-protecting risk strategies to enhance business success;

• construct a business case that provides a justification of the investment by identifying its costs, benefits and risk impacts;

• recommend procedures that ensure that promised values will be realised during project development and after completion.


A business case provides the best possible estimates of the costs and benefits of the proposed project and takes into account risks that could impact on those estimates. Estimates are quantified in financial terms and subjected to a cost-benefit analysis (CBA). The analysis calculates a net figure to indicate a potential positive return on the investment (benefits exceed costs) or a negative return, which could cause the business case to be rejected.

Tangible benefits within the CBA are relatively easy to quantify financially as they are mainly in the form of cost reduction. For example, the cost saving from an IT system which handles automated billing is the lower cost of the new system compared to the higher costs of the replaced billing clerks. Over time, the accounting-oriented CBA approach no longer sufficed since new benefits of an intangible nature emerged. Even though they are non-financial in nature they nevertheless contribute to the overall success of the organisation. Examples are improved customer satisfaction, better communications and decision-making quality, timely management information, and so on.

With non-financial analysis, measures are provided in the context of strategic goals and provide multiple dimensions of project value. There are a number of approaches that can be used, including the balanced scorecard (BSC) approach. This measures value along four dimensions: financial, customer, business process and learning. Each layer has specific organisationwide strategic objectives with defined metrics to indicate how well the organisation is performing along any given dimension. The approach is 'balanced' because it requires managers to focus on more than just financial performance.

Project risk plays a significant role within the business case since it has to deal with uncertainty associated with predicted outcomes. Two main types of project risk are recognised in the business case: delivery risk and benefits risk. The former concerns the ability of the project team to deliver the project. The business case assesses the likelihood of the project being developed according to the proposed development schedule taking into account factors such as past histoiy of on-time completions and the current level of project management skills and experience. The latter risk concerns the reliability of the estimates of costs and benefits used in the business case.

There are a number of approaches to conducting project risk analysis, as shown in Chapter 8. Among them is the 'expected monetary value analysis' in which 'best, most likely and worst case' estimates are used as determined by differences in their risk event probability and risk event consequence. The expected value or loss for each case is derived from the product of the probability and consequence; these are then compared to establish the most attractive option.

Appendix 2 provides greater detail about the construction of a business case. In summary, the information in a business case that is essential to the decision-maker is as follows: outcomes (net benefits, measurable, financial or non-financial, immediate, intermediate or ultimate), initiatives (business, processes, people, technology, organisation, projects) and assumptions (necessary conditions over which the organisation has little or no control). Since it lays out expectations of future events, the business case should be continually updated to reflect changed circumstances. It should be developed and owned by the project sponsor and key stakeholders.

Checklist: Project Risk Governance in Investment Management

• Are all project investment proposals supported by a business case?

• Are business cases reviewed for their cost-effectiveness?

• Is explicit attention given to the impact of project risk within business cases?

• Are project risks within the organisation's risk appetite and tolerance limits?

• Do business cases contain project risk strategies for value-protection and value-creation?

• Are project costs and benefits subjected to risk analysis?

• Are both tangible and intangible project benefits included in business cases?

• Are both financial and non-financial evaluation approaches used in business cases?

• Does the organisation use a template to construct business case reports?

• Are those responsible for business cases identified?

• Are business cases formally reviewed for their quality?

• Are business cases formally approved by steering committees and the board?

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