10-Step Earned Value Management: Implementation to Insurance Projects

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DEGREE PROJECT, IN PROJECT MANAGEMENT AND OPERATIONAL DEVELOPMENT, SECOND LEVEL

STOCKHOLM, SWEDEN 2014

10-Step Earned Value Management:

Implementation to Insurance Projects

Dias-Johnson Georgy, Frantzis Dionysios

KTH ROYAL INSTITUTE OF TECHNOLOGY INDUSTRIAL ENGINEERING AND MANAGEMENT

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10-Step EVM: Implementation to Insurance Projects

Abstract

This master thesis explores and quantifies the advantages and disadvantages of using the 10- Step EVM model compared to the forecasting methods applied at an international insurance company. The illustration of the aforementioned advantages and disadvantages is intended to entice the Company and possibly even other companies to consider replacing or complementing their existing method(s) with the one the paper suggests thus improving the effectiveness of their risk mitigation techniques and in extension their business model.

The aforementioned subject was approached by the application of the 10-Step EVM model to a Company project the researchers participated in and the comparison of the model’s results to those of the Company implemented counterpart. Observations resulting from the comparison were analysed and discussed with the Company’s top management, by conducting interviews and administering questionnaires. The drawn conclusions were then compared against and supported by relevant academic literature and scientific articles on EVM theory.

Based on the outcomes of the research, it is argued that the 10-Step EVM method could

potentially be comparatively better than what the Company applied in the examined project

and that adopting EVM practices could prove valuable in better safeguarding the Company’s

business model against the element of risk and its repercussions. It should be mentioned that

the applicability of the research’s conclusions is limited to the specific company and project the

authors studied.

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List of Figures

Figure 1: Eurostat’s Real GDP Growth Rate – Volume between 2003 and 2013 ... 1

Figure 2: PMI’s Percent of projects cancelled or delayed due to the economic conditions has increased since Q4 2011 ... 2

Figure 3: Antvik and Sjöholm’s The information gap ... 3

Figure 4: Antvik and Sjöholm’s The importance of the start of a project ... 4

Figure 5: Total Planned Value ... 13

Figure 6: Actual Cost ... 14

Figure 7: Earned Value ... 15

Figure 8: Cost Variance ... 16

Figure 9: Schedule Variance ... 17

Figure 10: Total Cost and Total Duration according to trends (CPI, SPI) ... 18

Figure 11: 10-Step EVM steps ... 19

Figure 12: Antvik’s Earned Value Management in 10 basic steps ... 22

Figure 13: Vanoucke’s EVM metrics ... 23

Figure 14: Block Model^TM and regular graph ... 24

Figure 15: Project’s Scope, Work Breakdown Structure (WBS) ... 25

Figure 16: Project’s Work Overview ... 26

Figure 17: Project’s Organisational Breakdown Structure (OBS) ... 27

Figure 18: Project’s Responsibility Assignment Matrix (RAM) ... 29

Figure 19: Project Overview ... 30

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Figure 20: Project Overview Chart ... 30

Figure 21: Project Planned Value/Cost ... 31

Figure 22: Project week 3 Planned Cost ... 32

Figure 23: Project week 3 Actual Cost ... 32

Figure 24: Project week 3 Earned Value ... 33

Figure 25: Project week 3 Extra Cost/Time ... 34

Figure 26: Project progression with current trends ... 35

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Chapter 1: Introduction

1.1 Introduction

Even though global economy continues its expansion it does so at a somewhat lethargic rate (UN, 2013).

According to Eurostat’s statistical data, the real Gross Domestic Product (GDP) growth rate of the European Union has been fluctuating significantly during the last decade as shown in the graph below.

Figure 1: Eurostat’s Real GDP Growth Rate – Volume between 2003 and 2013

According to European Commission’s winter forecast for 2014, Europe is expected to continue its way towards economic recovery, which began in the second quarter of 2013. It is stressed however that its state is expected to remain enfeebled and unstable, as is common in cases where the recovery happens after a major financial crisis (European Commission, 2014).

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It could be argued that contemporary economy’s ever changing and volatile nature makes business activities even more challenging, especially when considering that every business endeavour involves the element of risk (Antvik and Sjöholm, 2012: 95). In order to achieve financial gains one has to eliminate or mitigate losses and maximize the potential for and magnitude of profit (Kaplan and Mikes, 2012). One could argue that such a task could prove more difficult if it is also affected by the additional uncertainties resulting from a highly unpredictable economy.

According to the Project Management Institute (PMI) the number of organizations that adopt projects and project management practices as a way of conducting business to improve their competitiveness in the market is steadily increasing (PMI, 2013a). Furthermore the PMI estimates an increase in demand for project management professionals between 2010 and 2020, which will lead to approximately 6.2 million jobs in 2020 (PMI, 2013a). Projects are unique endeavours (Cooper et al, 2005: 1) in the sense that their deliverables are products and or services that have never been produced before (Heldman, 2011: 2) and like any other business endeavour they are subject to risk, especially early in their life-cycle (PMI, 2013c: 40). It could therefore be argued that projects are comparatively even more exposed to risk than traditional business endeavours.

A study conducted in 2011 by the PMI suggests that 36% of projects failed to meet their original goals (PMI, 2012). Furthermore according to PMI research (2013b) project success rates are in decline since 2008 and less than two thirds of projects achieve their pre-set goals while about 17% utterly fail.

Figure 2: PMI’s Percent of projects cancelled or delayed due to the economic conditions has increased since Q4 2011 (2013b)

One could argue that failed projects are missed opportunities and the very likelihood of loss represents money exposed to risk (PMI, 2013b). If one considers and combines those concepts with the increased levels of uncertainty originating from contemporary economy’s erratic behaviour, it is easy to see that high percentages of failure within a fast growing industry such as that of projects and project management is an issue that requires attention.

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1.2 Statement of the Problem

The PMI (2013c: 3) defines a project as “a temporary endeavour undertaken to create a unique product, service, or result”. Temporary means that the endeavour has a distinct starting point and end (Ibid: 3).

However the aforesaid characteristic does not extend to the project’s outputs (Ibid: 3). The unique nature of a project’s outputs and processes means that they have at least some characteristics that are not shared with any other venture (Ibid: 3). Projects are naturally risky endeavours (PMI, 2013c: 40), mainly because of the unique and novel nature of their deliverables (Heldman, 2011: 2). If left unattended risk could compromise the success of a project (Cooper et al, 2005: 2) especially early on in its life-cycle, when the project is in its most vulnerable state (PMI, 2013c: 40) due to lack of information (Antvik and Sjöholm, 2012: 93).

According to the International Organization for Standardization (ISO) 10006 standard (2003: 22), the term risk is commonly used to indicate the negative aspects of uncertainty. The term uncertainty also involves positive aspects known as opportunities (Ibid: 22), however for this thesis, emphasis will be directed to the negative aspects of uncertainty which will henceforth be referred to simply as risk.

Project risk could be described as the difference between the desired amount of information in contrast to the amount of information that is actually available at the moment when a choice has to be made and or something has to be done during a project (Antvik and Sjöholm, 2012: 93). As shown in the graph below, the gap between desired and available information decreases as the project progresses.

Figure 3: Antvik and Sjöholm’s The information gap (2012:94)

According to the PMI (2013b) quite a few projects do not meet their original goals and some of them even completely fail. Apart from the obvious, project failure means that stakeholders suffer monetary and market share losses and become less likely to fulfil their strategic goals, which could result in them losing their competitive edge (PMI, 2013b).

Even though it could be argued that the process of monitoring a project and forecasting the eventualities of the endeavour helps improve the probability of its success, it does not necessarily

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guarantee it. Furthermore conventional forecasting methods can sometimes prove insufficient in providing an accurate representation of the project’s state which could in turn limit their results’

usefulness (Cooper et al, 2005: 256 - 257).

In summation the problem under research revolves around inefficient monitoring of a project which could lead in project risk not being addressed in a timely manner (Antvik and Sjöholm, 2012: 133) which in turn could result in compromising the achievement of the performing organisation’s strategic goals (PMI, n.d.).

1.3 Background and Need

Managing project uncertainty by methodically identifying, analysing and assessing risk is an essential element of maintaining control over the project and ensuring good results (Cooper et al, 2005: 2). The earlier one addresses the possibility of risk in a project, the better the outcome will be (PMI, 2013c: 40) because the ability to make adjustments is at its greatest, since the aforesaid adjustments can be implemented at relatively low cost (Antvik and Sjöholm, 2012: 93). The relationship between the possibility of influencing and cost of influencing as time progresses is shown in the graph below.

Figure 4: Antvik and Sjöholm’s The importance of the start of a project. (2012:94)

According to Chapman and Ward (2004: 621), a case study conducted at a major North Sea oil project, where board approval was required for funding allocation to initiate operations, the implementation of project risk management effectively safeguarded the endeavour from the misuse of various resources and mitigated the risk of cost overruns by identifying possible eventualities and addressing them with appropriate measures. Furthermore in seven case studies concerning IT projects operating in several different industries, including government, energy, public utility, petrochemical and the food industry, risk management practices contributed to most of the projects’ success (de Bakker, Boonstra and Wortmann, 2012: 448). According to said projects’ various stakeholders and their opinion regarding

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their respective projects’ perceived success score, on a scale of 1 meaning “a big failure” to 7 meaning

“a big success”, five out of seven projects scored 6 (“a success”) or above (de Bakker, Boonstra and Wortmann, 2012: 449).

It is unavoidable to completely eliminate the likelihood of loss for each and every business endeavour, but one can take measures to reduce the impact of a probable loss by utilising various methods and techniques (Antvik and Sjöholm, 2012: 95) which may help in forecasting certain possibilities in a timely manner so that appropriate measures can be taken. Detecting a project’s budget and or schedule deviations and irregularities in a timely manner could allow for measures to be taken in order to enhance the probability of the endeavour’s success (Antvik and Sjöholm, 2012: 133), or even to terminate the project when needed, in order to avert major losses and or to reassign resources to other endeavours (PMI, n.d.).

On the topic of early project termination, there are two different case studies concerning Mitsubishi’s 380 car project and Saab’s 2000 aircraft project, where premature conclusion was the only viable option due to both companies being unable to see a return on their investments (Havila, Medlin and Salmi, 2013: 93). Despite the wide ranged repercussions in both cases, the decision to terminate the projects had a positive impact on the companies’ business model (Havila, Medlin and Salmi, 2013: 95). In the case of Mitsubishi, its sales remained unaffected and their market share even increased (Ibid: 95) and in Saab’s case, the company was able to contain the potential damage to its trustworthiness and even saved itself a possible 11 billion loss (Ibid: 95).

When indications of project problems start to become apparent, it is important to instantly address them and account for the likelihood of their occurrence (Nikander and Eloranta, 2001: 390). Despite the multitude of methods for engaging problems however, the variability of circumstances does not always allow for the application of a single solution in every case (Ibid: 390).

1.4 Purpose of Study

As more and more companies start conducting business in the form of projects in the volatile climate of contemporary economy, they could become exposed to increased levels of project risk in addition to the risk that business already involves. The most efficient way to address risk is not treating its repercussions, but rather approaching situations with forethought and preparation, prior to risk occurrence (GAO, 2009: 175), i.e. by forecasting. Without an efficient monitoring method there is no dependable way of forecasting the future state of a project and therefore possible eventualities of loss cannot be foreseen and addressed until it is already too late (Ibid: 175). The results could include, but are not limited to monetary losses, schedule mishaps as well as damage to the company’s credibility.

Even though there are several different forecasting methods used by different companies, according to the specific field that they operate in, said methods vary in complexity and application and are sometimes specific to each company’s inner workings (Kerzner, 2009: 788-789).

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The purpose of this study was to produce new literature in the research area as well as to examine the applicability of the 10-Step Earned Value Management (EVM) method and its possible benefits to a global insurance company’s business model (which will henceforth be referred to as ‘the Company’) in comparison with the already employed method.

In order to explore the applicability and possible benefits of the 10-Step EVM method, the authors conducted research which took place at the Swedish branch of the Company from which all the necessary information was received. Literature study was utilized in comparison with the obtained Company information which was collected during the researchers’ participation in Company operations.

Said information was acquired, documented and refined with the help of interviews and questionnaires that were answered by the Company’s top management. In addition 10-Step EVM was implemented to a Company project and its results were compared against those of the Company-implemented method.

The thesis conclusions were reached by the scientific analysis and evaluation of the resulting qualitative and quantitative data.

As a result of the 10-Step EVM method implementation, the Company was expected to witness the benefits of the method and possibly consider replacing or complementing its existing method with the one the paper suggests effectively improving the efficiency of its risk management techniques and in extension its business model.

1.5 Research Questions

1. What are the effects of the 10-Step EVM method on the efficiency of risk management on the project under research?

2. What are the main monitoring techniques implemented at the Company’s projects and how do their risk management results compare to the ones of the 10-Step EVM?

1.6 Significance to the Field

One of the challenges of writing this research paper was the limited availability of relevant 10-Step EVM literature. While there was a substantial amount of material covering EVM theory, the same did not apply for the specific model under research. Therefore this paper effectively expanded the available material which could aid future researchers who would endeavour to study the 10-Step EVM model.

The participants of this research enjoyed a number of short and long term benefits by conducting the study. Namely the researchers witnessed the implementation of the 10-Step EVM method, beyond a purely academic setting, in a real company and gained perspective regarding the method’s strengths,

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weaknesses, applicability and overall potential. In addition the authors of this report developed a degree of understanding as it pertains to the insurance industry’s inner workings. Furthermore the Company’s top management also witnessed the effects, advantages and disadvantages of the 10-Step EVM method’s implementation and results. Moreover with this new information the possibility that the Company might consider implementing the 10-Step EVM method, either alongside their current tools and techniques or as a stand-alone methodology, could help improve its risk management efficiency and business model. Finally a possible long term benefit of this research could be that other companies might become enticed to adopt 10-Step EVM practices in the future.

1.7 Limitations

There were a number of factors that limited the conducted research as well as the applicability of its findings.

1) Firstly the authors of this master thesis conducted their research according to KTH’s offered time frame which was rather restrictive as it pertains to the amount of depth they could delve into regarding the paper’s subject.

2) Secondly there was limited opportunity to quantify the possible long-term effects of 10-step EVM implementation.

3) In addition the amount of literature on the 10-step EVM model is fairly limited and therefore the study had to be based on what was available at the time of the authoring.

4) Furthermore the researchers’ access to Company information was not unlimited and in cases, where sensitive information was involved that could possibly have made a difference in the study’s outcome, said information was not possible to include.

5) Lastly the availability and or accessibility to Company employees were some additional factors that affected the conducted research and possibly its results.

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Chapter 2: Methods

2.1 Introduction

The ever-changing nature of contemporary economy renders project execution even more risky than it originally is. In addition, conventional risk management techniques do not always provide an accurate image of a project’s state and any probable project issues do not surface in a timely manner which makes their resolution more challenging.

This master thesis aims to study the aforementioned issue by addressing the following research questions:

1. What are the effects of the 10-Step EVM method on the risk management efficiency on the project under research?

2. What are the main monitoring techniques implemented at the Company’s projects and how do their results compare to the ones of the 10-Step EVM?

This study revolves around the efficiency of the 10-Step EVM model in providing forecasts that could contribute to and enhance the project risk managing effectiveness of the Company. The research was conducted with a mix of qualitative and quantitative methods and techniques to evaluate 10-Step EVM efficiency on a Company project that the researchers supported during their placement. Interviews and questionnaires answered from industry experts were used to assess the 10-Step EVM method’s results and compare them with the results of the Company-implemented counterparts.

2.2 Setting

The study took place at the offices of the Swedish branch of a global insurance company located in central Stockholm. The Company’s personnel consisted of individuals, from a diverse cultural and educational background, who the researchers closely cooperated with during their participation in the Company project. The arranged meetings took place within the Company’s conference rooms which were equipped with projectors as well as intercommunication systems. All interviews and questionnaires were conducted on Company premises with locally placed Company personnel.

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Chapter 2: Methods

2.3 Sample/Participants

The sampling procedure used by the researchers was convenience sampling, i.e. the participants were restricted to the individuals who were available and accessible at the time of the study. Participants of this study included the Company’s head of business unit, sales, implementation and account managers.

The aforementioned individuals were selected because of their significant experience and professional insights and knowledge within their respective areas of expertise which constitutes the validity and accuracy of their feedback and opinions regarding the efficiency of the 10-Step EVM model.

2.4 Measurement Instruments

The researchers collected Company project information and utilised questionnaires and interviews to complement and assess the acquired data. The purpose of conducting interviews and questionnaires was to create records of industry experts’ opinions and professional insights to help evaluate the 10- Step EVM method’s efficiency and possible benefits and provide answers for the research questions.

Questionnaire and interview forms as well as their answers were documented by using Microsoft Word 2010 which was installed on the two company provided Dell Latitude E6320 laptops, operating on Microsoft Windows 7 Enterprise, 32-bit operating system. The interview questions and procedure as well as questionnaire forms were common for all participants and were inspected by the university’s appointed thesis supervisor. The supervisor was selected because of their extensive project and 10-Step EVM experience which would allow for the assessment as it pertains to the precision of the questions as well as the relevance of the answers they were intended to obtain.

2.5 Validity and Reliability

As far as validity (how well a test measures what it is intended to measure) and reliability (the degree to which a test outputs repeatable and consistent results) are concerned there were a number of challenges to overcome. Namely the conducting of interviews can be compromised by the element of bias from both parties, i.e. interviewer and interviewee. It could be argued that one of the main reasons for bias is that “interviewers are human beings and not machines” (Sellitz, 1962: 583). The researchers endeavoured to address such issues by preparing prior to interviews in order to augment their knowledge of the Company and situational context. In addition a sufficient amount of information was provided to the interviewee to allow for educated assumptions and conclusions. Furthermore proper interview etiquette was practiced, including but not limited to informing the participants regarding the subject of the study, with respect to any and all confidentiality issues and using a neutral tone of voice while avoiding leading questions. Moreover the researchers demonstrated active listening to make sure the correct message was conveyed.

As far as the reliability of the questionnaires is concerned, the researchers practiced the test-retest theorem, whereby the questionnaire was administered on more than one occasion so as to yield

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Chapter 2: Methods

repeatable results with minimum variation. The validity of the questionnaire was assured by the formulation of questions that were directly relevant to the thesis’ emergent themes. Furthermore the questions’ context revolved around the specific project that all the participants were familiar with to help ensure a common understanding regarding the intended outputs without leading to any specific answers. The answers’ validity is constituted by the participants’ extensive knowledge and experience within their respective fields that gives credibility to their individual opinions

Finally by using both interviewing and questionnaires the researchers endeavoured to account for: a) the indirect component involved with questionnaires, and b) the likelihood that the researcher’s presence may introduce biased responses during interviews.

2.6 Data Collection/Procedures

The data were collected through observations, questionnaires and interviews. The researchers were present at the Company’s offices daily during work hours, i.e. between 8:00 and 17:00 and were assigned office space on Company premises to allow for instant accessibility to Company resources. The total duration of the researcher’s placement within the Company was from March the 24^th 2014 to June the 2^nd 2014. Company project information was provided in the form of computer files in various formats including text documents, spreadsheet files and project files created by Microsoft’s Office 2010 Suite programmes. The researchers accessed said information by using Microsoft Word 2010, Microsoft Excel 2010 and Microsoft Project 2003 respectively which the Company had installed on the previously mentioned laptops that were made available to the researchers. Interviews were conducted individually on Company premises, at the interviewee’s earliest convenience and their duration ranged from half an hour to an hour according to the interviewee’s schedule and general availability. During the interview the researchers asked their prepared questions and presented the 10-Step EVM method and its results on the project under examination. The interviewees’ opinions and observations were documented by one of the researchers while the other was asking the prepared questions. In the cases where Company staff was unavailable for interviewing due to time constraints or geographical differences, only the questionnaires were administered either in person or via e-mail respectively. Once the participants had answered the questionnaires, the answered physical or digital copies were collected and their contents were examined. In both cases the questionnaires were created using Microsoft Word 2010 and were either printed or attached to e-mails.

2.7 Data Analysis

The collected data were documented and categorised according to the thesis’ research questions and emergent themes. The interview and questionnaire forms’ content was matched to answer the two research questions. Furthermore quotations were selected from the interviews that illustrated the research’s themes. Moreover data from the questionnaires were compared against data from the interviews for similarities and or differences.

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Chapter 3: Review of Literature

3.1 Introduction

Modern economy’s erratic behaviour creates a rather hostile environment for business endeavours due to the increased levels of risk it involves. From all the types of business endeavours, projects are arguably amongst the riskiest of ventures because of the unique methods that are utilised for the achievement of their planned outcomes. Since the number of companies that are starting to adopt projects and project management practices to conduct business is steadily increasing, modern economy’s instability further increases the level of risk projects are exposed to. Therefore it is very important to address the issue of increased risk, preferably even before its occurrence, by forecasting and managing the eventualities of loss and or failure effectively safeguarding the stakeholders’ interest.

The literature review will be revolving around the 10-Step EVM model and the examination of its strengths and weaknesses in providing accurate forecasts. Said forecasts could give the necessary information required for timely decision-making which could safeguard the project from the element of risk. The first section will explain the basic concepts of EVM and in the second section a detailed explanation of the 10-Step EVM model will be provided. In the third section conclusions and implications regarding 10-Step EVM will be discussed and finally a summary of the chapter’s main points will be provided.

3.2 EVM Basic Concepts

As in most financial endeavours the role of early feedback plays a substantial role as it pertains to decision making. It is also necessary for project success, since timely feedback can enable those in positions of authority to make prompt decisions that can negate or mitigate the severity of loss (PMI, 2005: 1). If one takes a closer look at project management for instance, the project manager is responsible for cost, schedule and scope.

Within project management the project manager is employed to bring a project to its fruition (PMI 2013c: 16), in order to complete this task the manager must ensure that the scope is completed within the specific allotted time without exceeding the authorized budget (PMI, 2013c: 35). Thus the aforementioned scope, schedule and cost are of utmost importance since they are the proverbial nuts and bolts of project management (PMI 2013c: 217).

Earned Value Management (EVM) is a project management tool that assimilates the aforementioned cost schedule and scope into a forecasting methodology in order to give an accurate and objective measurement of the project while reducing the subjective and often misleading periodical progress report (Henderson, 2007).

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The concept of EVM can be traced back to 1966 when the United States Air Force was implementing it along with other tools and techniques to manage Air Force programmes (Humphreys & Associates, 2012). EVM is amongst the most effective methods for monitoring both the current and possible future state of a project according to the original plan (PMI, 2005: 1). Monitoring the state of a project is a task of paramount importance, because it allows for the timely identification of project issues and helps protect the endeavour from cost and or time overruns (Ibid: 1). According to the PMI (2005: 2) the efficiency of EVM is determined on whether or not a project is conducted according to “the principles of good project management” and its effective application elucidates a timely warning of project issues (Moslemi Naeni et al, 2013: 1).

The EVM methodology quantifies exactly where a project is proceeding in comparison to where it was intended to go, thus it can be summarized by saying that EVM uses a project’s past history as a predictor of a project’s eventual outcome (PMI, 2005: 1). Further EVM is a tool used within project management which provides an overview of transpiring trends within a project i.e. cost, schedule planning and project performance (EIA, 1998).

There are several questions that the methodology used within EVM can effectively answer which are crucial to project success, such as:

• Are we ahead of or behind schedule?

• How efficiently are we using our time?

• When is the project likely to be completed?

• Are we currently under or over budget?

• How efficiently are we using our resources?

• What is the remaining work likely to cost?

• What is the entire project likely to cost?

• Cost of being under or over budget at the end?

(PMI, 2005: 1)

EVM can also help determine:

• Where problems are occurring

• If the problems are critical

• What it will take to get the project back on its feet

(Ibid: 1)

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EVM is reliant upon three key variables:

• Planned Value

• Earned Value

• Actual Cost

(Ibid: 1)

For the sake of clarification of the aforementioned key variables, an example will be used to highlight their relative importance to the subject of EVM that the authors feel will be useful as a general key to explain the EVM methodology. The example is adapted from Antvik’s (2013: 34) own ”Dig a ditch”

example which involves the excavation of a 1000 m³ ditch, in 10 days for a budget of 100.000 SEK (i.e.

100 SEK/m³).

Planned Value (PV)

Planned Value PV is a description of how far the project work is supposed to be at a specific point within a project schedule, it is also the accredited budget for each report phase for each work module. Thus the budget that is created is referred to as Planned Value or Budgeted Cost of Work Scheduled (BCWS). As explained by the PMI (2013c: 218) “Planned Value (PV) is the authorized budget assigned to work to be accomplished for an activity or WBS component”. Planned value is illustrated with the cumulative resources as seen in the following figure:

Figure 5: Total Planned Value

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Actual Cost (AC)

Actual Cost (AC) is the actual incurred sum stemming from the accomplished work produced, which is also sometimes referred to as Actual Cost of Work Performed (ACWP). The following figure shows the actual cost incurred for project “Dig a ditch” after day 3, i.e. 25.000 SEK and it indicates that less money than planned has been spent to achieve the accomplished work to date.

Figure 6: Actual Cost

Earned Value (EV)

Earned Value EV quantifies the amount or volume of work completed to date, and is commonly known as the Budgeted Cost of Work Performed (BCWP). As explained by the PMI (Ibid: 218) “Earned Value (EV) is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or WBS Component”. The figure on the next page shows the actual cost incurred for project

“Dig a ditch” after day 3 and it indicates that less work than what was previously planned has been executed, outputting the accordant EV, i.e. 20.000 SEK.

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Figure 7: Earned Value

Budget at completion (BAC)

It must be mentioned that some of the reviewed literature makes mention of the term Budget At Completion (BAC) which incidentally refers to the total budget for the specified product, work package, or activity. It is essentially the highest value of PV (Anbari, 2003: 13).

To summarize the preceding paragraphs:

Planned value (PV), in laymen terms is the allocated (budgeted) cost for the work that needs to be completed.

Earned Value (EV) is the percentage of the budget that is actually complete to a specific chosen point in time and is calculated by the multiplication of percentage of progress of an activity with the budget for that activity.

Actual cost (AC) is the spent resources (money) for the work accomplished to date, which is known by the acronym ACWP which stands for Actual Cost of Work Performed (Anbari, 2003: 13).

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According to Philipson and Antvik (2012: 89) there are two different perspectives for EV calculations, i.e.

the efficiency (e) and the performance (p) perspective. While the efficiency perspective is more commonly used, according to Philipson and Antvik (2012: 89) the performance perspective better illustrates any increase in relative cost in a more direct manner (Ibid: 89). In the following paragraphs the authors will present both methods, but with a heavy emphasis on the efficiency perspective.

The formulas for calculating variances and performance indexes with the use of EV are as follows:

 Cost Variance: CVe = EV – AC, or CVp = AC – EV

 Schedule Variance: SVe = EV – PV, or SVp = PV – EV

 Cost Performance Index: CPIe = EV / AC, or CPIp = AC / EV

 Schedule Performance Index: SPIe = EV / PV, or SPIp = PV / EV

Cost Variance (CVe = EV – AC, or CVp = AC – EV)

Cost variance is denoted as the difference between earned value and the verified actual cost. It is the budget deficit at a specific chosen point. When the project has reached fruition it is the difference between the budget at completion and the actual spent monetary assets (PMI 2013c: 217-219).

Figure 8: Cost Variance

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Schedule Variance (SVe = EV – PV, or SVp = PV – EV)

Schedule variance pertains to the measurement of the actual schedule performance and it relates directly to whether the project is ahead or behind the estimated delivery date (Ibid: 217-219).

Figure 9: Schedule Variance

Cost Performance Index (CPIe = EV / AC, or CPIp = AC / EV)

Cost performance index is the measurement of the cost-wise efficiency of the budgeted resources. It is a highly important key EVM metric which measures cost efficiency for completed labour (Ibid: 217-219).

This in turn lends credence to CPI values. CPI values relate to either over-runs or under-runs for work completed.

Schedule Performance Index (SPIe = EV / PV, or SPIp = PV / EV)

The schedule performance index is the overview of the efficiency of the schedule which elucidates just how well time is being used by the project team (Ibid: 217-219). The optimum goal for the Schedule Performance Index is to have a score higher than 1 since this score illustrates that the project is at the very least adhering to the original schedule (Ibid: 217-219). In contrast, a less than 1 index score illustrates that the project is heading towards an untoward outcome (Ibid: 217-219).

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Figure 10: Total Cost and Total duration according to trends (CPI, SPI)

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3.3 10-Step EVM model

The 10-Step EVM model is a streamlined narrative of a project from start to finish, intended to provide a comprehensive description of the involved steps in rational succession (Antvik and Sjöholm, 2012: 43).

Generally speaking, the model could be broken down into two groups of steps, i.e. planning and implementation (Ibid: 43). Specifically speaking there are six planning and four implementation steps.

The entirety of the model’s steps can be seen in the following figure:

Figure 11: 10-Step EVM steps

1. Objectives

The 10-Step EVM model begins with the setting of the project objectives (Antvik and Sjöholm, 2012: 44).

This is a very important step because it establishes what the project aims to achieve the timeframe according to which it should be delivered as well as the assigned budget (Ibid: 44).

2. Scope (W.B.S.)

Once the objectives have been clearly established, the output or outputs of the project need to be defined (Ibid: 44). Each one of those outputs is then broken down into components the entirety of which constitutes the Work Breakdown Structure (WBS) (Ibid: 44). Those components are then further broken down (Ibid: 44) into work packages, which is the lowest level of WBS module (PMI, 2006: 3).

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3. Organisational Breakdown Structure

After the required project work is broken down into work packages, the next step is to determine the individuals that are responsible for the work packages’ delivery (Antvik and Sjöholm, 2012: 44). This assignment of organisational responsibility will result in the creation of an Organisational Breakdown Structure (OBS), which shows the connection between project tasks and their respective performing entities (PMI, 2013c: 548). According to Antvik (2013: 30) it is a common mistake that project planning starts with this step. There are a lot of cases where the 6 planning steps are ignored altogether which results in project failure (Ibid: 30).

4. Responsibility Assignment Matrix

The combination of WBS and OBS elements produces a Responsibility Assignment Matrix (RAM) which illustrates how each work package of the WBS is assigned to a specific performing entity of the OBS (Antvik and Sjöholm, 2012: 45). However it is not uncommon that some of the project work has already been executed in order for the creation of the RAM to be possible (Ibid: 45). According to Antvik and Sjöholm (2012: 45), the RAM is a valuable communication tool and helps in making sure that every project activity is accounted for.

5. Schedule

Once the objectives of the project have been organised into a RAM and resource allocation has been established, the time frame of the project, i.e. schedule can be created (Ibid: 45).

6. Budget

Based on the created schedule the project’s budget can be created (Ibid: 45) and monitored using the established WBS which also serves as a base for the project’s financial planning. According to Antvik and Sjöholm (2012: 46) each WBS component is assigned a budget which explains why WBS is considered the infrastructure of the project’s financial monitoring and planning. The calculation of the budget concludes the stage of planning (Antvik and Sjöholm, 2012: 43).

7. Actual Cost

The first step of the implementation stage is that of actual cost (Ibid: 43). Actual cost indicates the actual amount of funds that have been assigned to the project (Ibid: 46). It differs from the budgeted cost in that it shows the actual value of money that have been spent rather than the amount that was planned and therefore the subtraction of the actual cost from the planned cost provides information about the project’s monetary resource state (Antvik and Sjöholm, 2012: 46-47).

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8. Achieved Performance

According to Antvik and Sjöholm (2012: 47), the achieved performance value provides information pertaining to the technical result that has actually been performed. The difference between the planned and achieved performance indicates whether or not the project is being executed in an efficient manner (Ibid: 47). The regular monitoring of the project and the discovery of such irregularities early on is of paramount importance for the effective resolution of project issues before their occurrence or escalation (Ibid: 47).

9. Earned Value

Simply put earned value is an indication of whether or not one gets the full result of the resources assigned to complete a certain task (APM, n.d.). In the context of a project earned value is the monetary assessment of the achieved technical result and its comparison to the budgeted cost (Antvik and Sjöholm, 2012: 47). Alternatively earned value could be described as the budgeted cost of the performed technical result (Antvik and Sjöholm, 2012: 137).

10. Variance and Trends

During the final step of the implementation stage, cost and schedule variances and performance indexes can be calculated based on the earned value, actual cost and planned cost (Antvik and Sjöholm, 2012:

47). The aforementioned variances and performance indexes are an indication of project performance and can be used to forecast the project’s progress (Philipson and Antvik, 2012: 45-47).

Summary

A project’s performance can greatly vary for a multitude of reasons. The project could be behind or ahead of schedule, exceeding or under-running its budget or any variation of those possibilities (Antvik and Sjöholm: 47). According to Antvik (2013: 16) EVM allows for the “integrated control of technical results, time and cost” and can be used by customers and suppliers alike (Antvik and Sjöholm, 2012: 48).

EVM comparatively shows:

– Project overview, from its very beginning

– Actual project state and the deviation from the original plan (if applicable) – Forecasts all the way to project conclusion

– Estimates for cost and schedule at completion

(Antvik, 2013: 17)

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Figure 12: Antvik’s Earned Value Management in 10 basic steps (2013: 18)

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3.4 Conclusions/Implications

EVM is a tested highly efficient and relatively easy to implement method to monitor a project’s state and predict its future based on past observations. The method’s timely detection of cost and or schedule irregularities allows for prompt action to safeguard the project from the element of risk. The 10-Step EVM model boosts EVM’s effectiveness even more with the addition of six planning steps that ensure all necessary actions have been taken prior to EVM implementation, further mitigating the probability of project failure. Therefore it could be argued that the 10-Step EVM model is a highly efficient monitoring and forecasting technique that could be implemented in any endeavour, effectively mitigating project risk, provided that the right preparations have been made.

3.5 Summary

To summarize EVM is a methodology that quantifies where exactly the project is in relation to where it is supposed to be. The methodology uses performance indices as a means to elucidate a project’s past history as a predictor of its eventual outcome. The 10-Step EVM model adds six planning steps prior to EVM implementation and according to Antvik and Sjöholm (2012: 20) completing these steps greatly augments the possibility for project success. Further the planning steps are highly important and as such all information should be gathered in its entirety before proceeding to the implementation steps (Ibid:

20). All the metrics necessary to conduct EVM are shown in the following figure.

Figure 13: Vahoucke’s EVM metrics (2008)

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At this point it should be mentioned that Philipson suggest an alternative pictorial representation of EVM known as Philipson’s EVM Block Model ^TM(Philipson and Antvik, 2012: 34) which the authors will be using to illustrate some of the research’s results in the following sections. The difference between an EVM graphical representation with and without Philipson’s Block Model^TM can be seen in the following figure.

Figure 14: Block Model ^TM and regular graph

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Chapter 4: Company Case Study

4.1 Introduction

The project under examination was focused on the delivery of a new sales framework, the purpose of which was to facilitate the sales process for a number of the Company’s insurance products. The total budget of the endeavour was initially 180.000,00 SEK and the total duration was estimated to be nine weeks in length beginning on the 24^th of March 2014 and ending no later than May the 23^rd of the same year.

The next sections of this chapter will break down the project into the ten steps of the 10-Step EVM model beginning with the first six steps, i.e. planning steps and continuing with the four implementation steps before proceeding to the method’s results as well as the Company top management’s input, observations and assessments.

4.2 10-Step EVM (Planning)

Objectives and Scope (WBS): The project’s main objective was the delivery of the sales framework that was mentioned in the introduction, which involved the creation of templates and forms that were intended to facilitate the Company’s sales representatives in conducting a sale as well as the necessary follow up procedures. The deliverables could be broken down in the subcomponents shown in the Work Breakdown Structure (WBS) below.

Figure 15: Project’s Scope, Work Breakdown Structure (WBS) Sales Framework

Approach Phase

Implement Phase

Maintain Phase

Research Sub-Phase Probe

Sub-Phase

Offer Sub-Phase

Systems Sub-Phase Prepare

Sub-Phase

Apply Sub-Phase

Contact Sub-Phase Monitor

Sub-Phase

Improve Sub-Phase

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As can be seen in the previous figure the project’s scope was broken down in three main phases:

 Approach

 Implement

 Maintain

The first phase, i.e. the Approach Phase pertained to the initial contact with the customer and the phase’s deliverables involved creating templates that would guide the sales representative through the process of approaching a customer, ensuring their interest in a particular insurance product and finally securing an agreement that the customer would buy or commit to buy said product in the near future.

The second phase, i.e. Implement Phase involved the creation of the necessary implementation plans from preliminary and high level, to specific and detailed plans that would dictate how the secured sale from the Approach Phase would proceed from a concept to its actual application as well as the procedures that would support that application.

The final phase, i.e. Maintain Phase revolved around the creation of templates and procedures that would support the after-sales service. Deliverables included, but were not limited to: customer contact procedures, claims handling systems, event reporting systems etc.

Initially the researchers set a time frame for the duration of which they would conduct a mock sales process through all its phases (from Approach and Implement to Maintain) by meeting the accordant stakeholders asking appropriate questions and seeking guidance while documenting the feedback and finally refining the acquired information before using it to create the guides and templates for each phase. A summary of the procedure can be seen in the figure below.

Figure 1: Overview Chart

Figure 16: Project’s Work Overview

Week 1 - 3 Week 3 - 6 Week 6 - 9

Approach Phase Implement Phase Maintain Phase

Sales Mgr. BU &Impl.Mgr. BU & Sales Mgr.

Mock Sales Process

Meeting Document Refine Meeting Document Refine Meeting Document Refine

24/Mar – 11/Apr 14/Apr – 02/May 05/May – 23/May

Work Overview

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After creating all the necessary deliverables the sales framework would be delivered to the sales department where the sales representatives would be briefed regarding the framework’s inner workings and a testing period would follow. However that process was outside the scope of the project the researchers participated in.

OBS: Generally speaking the project involved the participation of several individuals from different departments including but not limited to: Head of Business Unit, Sales Manager, Implementation Manager and Account Manager. The researchers were supporting the process as consultants while working under the managers of different departments. An overview of the organisational structure can be seen in the following Organisational Breakdown Structure (OBS) graph.

Figure 17: Project’s Organisational Breakdown Structure (OBS) Project Sponsor

Steering Committee

Head of Business Unit

Sales Manager

Account Manager Implementation

Manager

Consultant Consultant

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According to the Company’s records, the various stakeholders’ roles and responsibilities were as follows:

Project Sponsor

1. Responsible for the success or failure of the project 2. Directs the project in line with business strategies 3. Chairs the steering group

4. Monitors and resolves business risks and issues

5. Scope Management – delivers the agreed benefits/deliverables 6. Monitors and briefs senior stakeholders on the project progress 7. Gains support for project from business senior management

8. Assesses the impact potential changes on the business case and project plan 9. Authorises expenditure of budget and any contingency spending

10. Authorises changes to business process

Head of Business Unit

1. Primary responsibility for communication to Business and IT leadership

2. Works directly with Implementation Manager, and others as necessary, during the project’s life cycle

3. Reviews project change requests

4. Monitors and reports progress to the Steering Group 5. Handles requests for senior management decisions

Implementation Manager

1. Responsible for the planning and management of the project within IT

2. Management of project risks and issues as well as escalation to appropriate parties 3. Promotes and maintains focus on the specified project outcome

4. Briefs and seeks advice from appropriate IT parties on matters concerning the project 5. Manages vendor delivery progress as well as risks and issues

6. Is responsible for managing the processes, planning and delivering the products of the project, on time and within budget

7. Adheres to the project approach

RAM: The combination of the WBS and OBS information helped create the Responsibility Assignment Matrix (RAM) which can be found on the following page.

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Sales Framework

Approach Phase

Implement Phase

Maintain Phase

Research Sub-Phase Probe

Sub-Phase

Offer Sub-Phase

Systems Sub-Phase Prepare

Sub-Phase

Apply Sub-Phase

Contact Sub-Phase Monitor

Sub-Phase

Improve Sub-Phase

Project Sponsor Steering Committee Head of Business Unit Sales Manager Account Manager

Implementation Manager Consultant

Consultant

Figure 18: Project’s Responsibility Assignment Matrix (RAM)

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Budget and Duration: An overview of the project’s budget and schedule information can be seen in the following table:

Project Overview

Planned

From To

Total Schedule 24-03-14 23-May-14

Duration: 60 *Days

(Approx.) 9 weeks

Total Cost SEK 180,000.00

Figure 19: Project Overview

Based on the collected information the status and possible progression of the project can be examined using Philipson’s EVM Block Model ^TM.

Figure 20: Project Overview Chart

Each block in the above chart represents either a phase or a sub-phase of the project under examination. Each sub-phase block is planned to take one week to produce at a cost of approximately 20.000,00 SEK. During the next section the researchers will apply the 10-Step EVM method to forecast the project’s probable outcome based on that information.

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4.3 10-Step EVM (Implementation)

After completing the six planning steps, there is sufficient information to create the metrics that are necessary to proceed to the four implementation steps and the conducting of EVM.

The process will begin by examining the recorded progress of the project on a specific date. According to that specific date’s recorded actual cost and achieved technical result, the earned value will be calculated. Once the earned value is known the process will proceed with the calculation of the cost and schedule variances and performance indexes with the help of which the possible future status of the project can be forecasted. All calculations will be done from the efficiency perspective.

Based on the information that was collected during the planning steps of the method, the process can proceed with the calculation of the necessary values to create its forecasts. Based on the data the nine sub-phase blocks are supposed to cost 180.000,00 SEK and take nine weeks to complete. A vertical line is entered in the chart to illustrate the aforementioned information.

Figure 21: Project Planned Value/Cost

According to the available data by the end of the third week, three sub-phase blocks of work should have been completed at a cost of 60.000,00 SEK and therefore, the Planned Cost (PC or PV) at that point in time is:

PV = 60.000,00 SEK

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Figure 22: Project week 3 Planned Cost

Despite the originally planned value for the cost the Company data indicates that the money that has been spent as of April the 11^th of 2014 is actually 62.000,00 SEK. Therefore the Actual Cost (AC) is:

AC = 62.000,00 SEK

Figure 23: Project week 3 Actual Cost

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Furthermore the achieved technical result was only two sub-phase blocks of work, instead of the three that were originally planned. The planned value for each block involves a cost of 20.000,00 SEK and a duration of one week to produce and therefore the Earned Value (EV) is:

EV = 40.000,00 SEK

Figure 24: Project week 3 Earned Value

Now that the Planned Cost, Actual Cost and Earned Value are known, the process can proceed with the necessary calculations to determine the state of the project:

 Cost and Schedule Variance (efficiency perspective)

CV

e

= EV - AC = 40.000,00 - 62.000,00 = – 22.000,00 SEK

SV

e

= EV - PV = 40.000,00 - 60.000,00 = – 20.000,00 SEK

According to the above values the project is performing 22.000,00 SEK less in terms of cost as well as 20.000,00 SEK less in terms of time.

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For another indication regarding the project’s state namely its performance, the following calculations have to be made:

 Cost and Schedule Performance Index (efficiency perspective)

CPI

_e

= EV / AC = 40.000,00 / 62.000,00 = 0,64 or 64%

SPI

e

= EV / PV = 40.000,00 / 60.000,00 = 0,66 or 66%

According to the above values the project is performing at only 64% efficiency in terms of cost performance and 66% in terms of schedule performance. The aforementioned effects on the project can be seen in the following chart:

Figure 25: Project week 3 Extra Cost/Time

According to the EVM calculations the project is overrunning on both cost and time. To see how the project will progress according to the current trends some additional calculations have to be made:

 Total Cost and Schedule on current trends (efficiency perspective)

Total Cost = Total Planned Cost / CPIe = 180.000,00 / 0,64 = 281.250,00 SEK Total Duration = Total Planned Duration / SPIe = 9 / 0,66 = 13,6 weeks

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According to the above calculations, if the project work continues to be executed in the same manner it will ultimately cost 281.250,00 SEK, or approximately 156,2% of its originally planned cost and it will take an additional four and a half weeks (approximately) to execute. The project’s forecasted extra cost and additional duration can be seen in the graph below:

Figure 26: Project progression with current trends

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4.4 Interviews & Questionnaires

This part of the Interview & Questionnaires section covers the interview results. Interviews were conducted on Company premises with the Company’s Implementation Manager and Head of Business Unit. The interview protocol form that was used to conduct the interview and collect information can be found under Appendix B in the Appendices chapter. This section will be structured according to the three main questions the interview revolved around.

How does the Company usually monitor their projects and how do they manage risk?

Implementation Manager:

The Implementation Manager informed the researchers that the Company has no unified system in place for monitoring and managing risk. She also stated that the case-by-case chosen method depends on who is on the project team and that usually there is no project manager and project coordination is done by each project’s business owner. However she explained that smaller mostly IT projects within the Company do have a unified method for monitoring and managing project risk. When asked about the benefits of using several different methods for monitoring and managing risk she suggested that this approach allows for increased flexibility, but it sometimes comes at the expense of inefficient cost and schedule tracking. She continued that this involves a lot of ‘surprises’ which usually leads to frustration.

Head of Business Unit:

The Head of Business Unit stated that there is no one method the company uses to monitor their projects and manage risk. He informed the researchers that the chosen method depends on both the project and the people involved, but usually for big projects a project manager is assigned, then a high level scope is created and all that information is collected in a project charter and or a project plan. He then added that “not all people have the same definition for the word project“ and that despite its size, the Company follows what he described as a “small business mentality”. He explained that the various stakeholders generally “drop by each other’s offices” and only in a few cases weekly meetings are arranged for project tracking purposes. As far as risk monitoring is concerned he said that the Company uses heat charts to track and evaluate risk. When asked about the described method’s pros and cons he said that it is mostly effective, mainly because of its flexibility. He then stressed how important flexibility is when the Company is dealing with a new customer and or product. As far as the cons of the Company’s method are concerned, he commented that tracking ability can sometimes be limited. He continued by saying that not all project members follow the set structure and that makes it difficult to set a project plan, which sometimes leads to frustration. He then suggested that project maturity differs from company to company and that the Company’s nature of business heavily depends on human interaction, “it is a people business”.

10-Step Earned Value Management: Implementation to Insurance Projects