So far I have focused on the individual. I showed that projects are the means by which organizations introduce change to achieve performance improvement, and described how to manage scope, project organization, quality, cost, time, risk, and the project process to deliver the identified change and achieve the desired performance improvement. Now my attention switches to the support the parent organization can give to the project to facilitate its management and increase its chance of success. In the first and second edition of this book, I presented these as project management procedures and administrative techniques the parent organization can create to support projects. I now see this as part of a wider issue of governance in the project-based organization.
In this chapter, I give an introduction to my model of governance in the project-based organization describing the structures and the roles they imply. I then describe the principal-agency relationship between the project sponsor and project manager, and what that suggests about the communication between them.
In the remaining chapters of this part I describe other governance issues. In Chap. 16, I describe program and project portfolio management. This is governance of the context of the organization, and linking project objectives to corporate strategic objectives to ensure the right projects are done. Then I describe how organizations can develop their project management capability. This is about ensuring that the organizations have the skills to do projects right. In Chap. 18, I describe how the company's board should and can take an interest in projects being undertaken in the organization. Under modern corporate governance regimes, such as those imposed by the Sarbanes-Oxley Act, boards of directors have responsibilities to their shareholders that make it essential for them to be able to forecast the outturn costs and expected revenue benefits of major projects being undertaken by, and so it is essential that boards of directors should take an interest in projects being undertaken by the organization. I describe an organizational governance model, including the use of end-of-stage reviews and auditing. Finally, in this part, I describe the management of international projects. This is not strictly a governance issue apart from the fact that organizations doing international projects should ensure they are done right.
Clarke defines corporate governance using a definition developed by the Organization for Economic Coopertaive Development, OECD:1
Corporate governance involves a set of relationships between a company's management, its Board (or management team), its shareholders, and other stakeholders.
It provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
There are two elements to this definition. The second element says what governance is about. It is about defining the objectives of the organization, defining the means of obtaining those objectives, and then monitoring progress to ensure they are achieved. At the organizational level, this means the governance committee is responsible for ensuring the structures exist to define the objectives for routine operations and projects, that is, the top levels in the cascades shown in Figs. 1.9 and 2.8. They are also responsible for ensuring that appropriate structures exist for delivering the objectives and ensuring that progress is tracked towards their achievement. The governance committee does this on behalf of the stakeholders of the corporation, and that is what the first part of the definition deals with. Clarke suggests there are two schools of governance:1
1. One school says the sole responsibility of the governance committee of the corporation (the company's board) is to maximize returns to shareholders. But even then there is a tension between achieving quick profits in the short term and growth in the long term.
2. The other school says the board must govern the company on behalf of a wider set of stakeholders, which includes the shareholders, but also includes staff, customers, and the local community.
Within the project-based organization there are three levels of governance:
1. First there is the level at which the board operates and the extent that they take an interest in projects. Under modern governance regimes, boards of directors should take a much greater interest in projects being undertaken in the business than they have in the past. I discuss this level in Chap. 18.
2. There is the context within which projects take place. Part of creating the means of achieving the objectives in the project-based organization is to ensure the organizational infrastructure exists to undertake projects effectively. There are two components of this. The first is creating an infrastructure of program and portfolio management to link projects to corporate strategy. This is ensuring the right projects are done (Chap. 16). The second is ensuring the capability exists within the organization to deliver projects successfully so that projects are done right (Chap. 17).
3. Finally, there is the level of the individual project. The project itself is a temporary organization and therefore needs governing, and so under the principle of fractal management, governance structures should exist at the level of the individual project. This is the topic of the rest of this chapter.
15.2 GOVERNANCE OF THE PROJECT
In the other chapters of this part, I describe the governance support the parent organization gives to the project, and what that means in terms of various administrative routines the parent organization implements. For the remainder of this chapter, I describe the governance of the individual project. The project is a temporary organization and so it too needs governance. With a little adaptation the definition of governance in the previous section can be applied to a project:
The governance of a project involves a set of relationships between the project's management, its sponsor (or executive board), its owner, and other stakeholders.
It provides the structure through which the objectives of the project are set, and the means of attaining those objectives and monitoring performance are determined.
As with the company, the project can be governed to maximise the returns to the owner only, or to all the stakeholders of the project. But with a project we find it is more important that all the stakeholders should feel they are winners. Ralf Müller2 and I have identified a necessary condition of project success is that all the project participants should view the project as a partnership, within which their objectives are aligned, and which is managed to achieve the best result for all. I discussed this in Chap. 3 when I said you should aim to balance the objectives of as many stakeholders as possible. Somehow with projects, they are more prone to failure if some of the stakeholders are not committed to the project's outcomes. Projects are coupled systems (Sec. 1.2) and so you must work to optimize the whole project and not individual elements of it. With a routine organization you ought to take care of your customers and staff, but it seems that it is possible to give primary focus to your shareholders. Not so on projects; it is essential to take care of all the stakeholders. I return to the principal-agency relationship later in the chapter. For now I wish to discuss the governance structures and roles on projects.
Figure 15.1 illustrates the governance structures and roles on projects. The inner loop shows the three steps of governance introduced above:
1. Define the objectives.
2. Define the means achieving the objectives.
3. Define the means of monitoring progress.
As illustrated by Fig. 1.9, the means at one level of breakdown helps to define the objectives at the next level. So we start with the need for performance improvement, and to solve the problems (or exploit the opportunities) that are stopping us from (or would enable us to) achieving it. That is the client need. It is shown on the right-hand side of the benefits map (Fig. 2.5) and is the goal at the top level of Fig. 1.1. From the goal we define the desired outcome to be obtained from operating the change (the new asset) introduced by the project. These are new capabilities that will help us solve the problems or exploit the opportunities, either directly or indirectly as illustrated by the benefits map. The outcome is the means of achieving the goal but is the objective at the next level of the project, the middle level in Fig. 1.1. From the outcome we define the change that will deliver it, that is, the new asset, the extreme left-hand side of the benefits map (Fig. 2.5). This is the project output or
FIGURE 15.1 Governance structures and roles.
deliverables. The output is the means to achieving the outcome but is the objectives of the bottom level in Fig. 1.1. In Sec. 2.3, I suggested that when drawing the benefits map a certain amount of iteration may be required where you redefine the problems or opportunities in the light of the new capabilities that can be delivered by the asset, but you may also redefine the asset and the new capabilities to solve the problems you actually have. Don't deliver the industry-standard computer system if your needs are slightly different but also recognize that the more changes you make, the more likely it is to go wrong and it may be better to redefine your problems and final goal to achieve something that may work better.
Having defined the required project output, you can define the project process to deliver it using the approaches described in this book. As you undertake the project you want to monitor progress to ensure you deliver the desired output at a time, cost, and level of performance that enables you to repay your investment. As you deliver the output you check it will deliver the desired outcome, you use the benefits map to ensure that the outcome is used to solve the problem or exploit the opportunity to realize your goals.
Figure 15.1 also illustrates that there are at least four project governance roles involved. (I don't count the client manager as a project governance role.)
Sponsor. The sponsor is somebody from the client or user department who identifies the need for performance improvement, and there is a change that can be made that will deliver that performance improvement in a cost-effective way (the benefit will justify the cost). He or she begins to identify the possible new asset and capabilities (outputs and outcomes) that will solve the problem or exploit the opportunity, and begins to draw the benefits map. The sponsor approves the definition of the objectives (goals, outcomes, and outputs) on behalf of the user or client organization and approves the statement of requirements.
He or she also becomes the ambassador for the project, persuading the organization that the project is a good idea and trying to win resources in the form of money and people. He or she may be the holder of the budget that pays for the project or be a first report to that person. The ambassadorial role should continue throughout the project winning resources at the start and maintaining resources throughout the project.
Steward. However the sponsor will not be a technical expert and so will not be able to finalize the definition of the new asset and new capabilities on his or her own. He or she will need to involve a senior manager from the technical department to help design the new asset and define the capabilities it can deliver through its operation. I call this role the steward. The sponsor and steward will work together to finalize the benefits map and go through the iteration I spoke of above, revising the benefits map to obtain the best definition of the new capabilities and the problem that will be solved (or opportunity exploited).
Project Manager. The project manager is responsible for defining and managing the project process to deliver the new asset, and defining how the project will be monitored and controlled. He or she will then be responsible for monitoring progress during project execution to ensure the asset is delivered and is fit for purpose, that is, to ensure it is capable of delivering new capabilities that will solve the problem or exploit the opportunity.
Owner or Business Change Manager. I said in Sec. 2.3, when discussing the benefits map, that I think the project manager's responsibility ends with the delivery of the new capabilities. It is then the responsibility of somebody from the user department to ensure the new capabilities are used to work through the benefits map and ensure change is embedded and the problems are ultimately solved. The benefits map is the means of monitoring progress for this last step of control, and so each step needs to be measurable. The owner of the new asset is ultimately responsible for this last step of control, but he or she may delegate it to a business change manager.
Filling the Roles. The sponsor is essentially a preproject role defining the objectives (goals, outcomes, and outputs). This role also defines, through the benefits map, how the change will be embedded and performance monitored postproject. The owner and business change manager are postproject roles, responsible for embedding the change and achieving the performance improvement postproject. The sponsor and owner may be the same person, but do not need to be. PRNCE2 suggests you need two roles,3 and calls the sponsor the project executive and the business change manager the senior user. Likewise the steward is a preproject role defining the objectives (outputs and outcomes), and the project manager is an intraproject role defining the means of obtaining the objectives and monitoring progress (through the project plan). The project manager and steward may be the same person, but don't need to be. On large, stand-alone projects, they are more likely to be the same person, but the steward may just be a senior manager from the technical or projects department. On small projects the steward tends to be the program or portfolio manager (Chap. 16). PRINCE2 calls the steward the senior user and the project manager just that.
I believe these four roles are essential. Particularly you need to know who is responsible for championing the project preproject and who is responsible for embedding the change and obtaining the desired benefit postproject (and that is not the project manager). Further, on anything but the simplest, smallest projects, there must be at least two people. The sponsor and owner should be from the user department and the project manager and steward from the technical or projects department. The sponsor must be an optimist and shoot for the moon; the steward must be a pessimist and bring the sponsor down to earth. If they are both optimists they will strive for the impossible; if they are both pessimists they won't strive to achieve what can be achieved. Tension between them is a good thing as long as it doesn't spill over into conflict.
15.3 THE PRINCIPAL-AGENT RELATIONSHIP
Ralf Müller and I2 demonstrated three necessary conditions for project success (Sec. 3.3):
1. The project participants, especially the project manager and sponsor, should work together in partnership to achieve mutually consistent objectives.
2. The project manager should be empowered but not given total licence. The sponsor should set parameters within which the project manager should work, but the project manager must be given flexibility to enable him or her to respond to risk. If the sponsor imposes too much structure, the project manager has no flexibility to deal with the unknown; if the sponsor imposes too little, the manager has no guidance.
3. The sponsor should take an interest in progress.
The first two of these are illustrated in Fig. 15.2. Ralf Müller and I found in our sample that successful projects were clustered in the area of high cooperation and medium structure. However to operate there requires significant trust between the project manager and sponsor. We found the lowest success in the area of low cooperation and low structure. That was the worst position to operate the project. We found the lowest predictability in the area of low cooperation and high structure. In that quadrant, the project outcome was quite variable but never as successful as the area of high cooperation and medium structure. But it is in the area of low cooperation and high structure that many projects take place. The sponsor doesn't trust the project manager so adopts confrontational behaviours and imposes strict rules on the project manager's behaviour.
FIGURE 15.2 Cooperation and structure on projects.
Most people, when they spend any time thinking about it, recognize that it is good practice to treat the project as a partnership, and to work to mutually consistent goals. They recognize that the best way of achieving a successful outcome is for all the project participants to gain from that outcome. If the project outcome is going to be detrimental to a given party, then you can expect that either they will be working for project failure, or they will be trying to change the project outcomes to be more beneficial for them and so may push the project in unintended directions. If you think about it, that is obvious, and so why is it that people adopt uncooperative behaviours on projects? The principal-agent relationship provides an answer.
Michael Jensen4 says that a principal-agent relationship exists if one party (the principal) depends on another (the agent) to undertake an action on their behalf. This is clearly the relationship between the sponsor (principal) and project manager (agent). Associated with this relationship are two problems called the adverse selection problem and the moral hazard problem, which lead to the lack of trust between the project manager and sponsor.
The Adverse Selection Problem. This problem receives its name from the fact that the principal (sponsor) has to choose the agent (project manager) to act on his or her behalf and has to do that on inadequate information. But then having appointed the agent, the principal cannot know for certain why they are taking the decisions they do, and whether the agent is acting in their (the principal's) best interest.
The Moral Hazard Problem. This problem arises because economic theory assumes that the rational human being will act rationally in any situation to maximize his or her beneficial outcome from the situation. That means the project manager will be taking decisions on the project to maximize his or her outcome and will only maximize the sponsor's outcomes en passant if their two sets of outcomes happen to be aligned. This is what I said above and is the need for the partnership. So if you are a sponsor on a project, don't expect the project manager to be working in your best interest if you have imposed a contract that will cause him or her to make a loss. He or she will cut corners or manufacture variations to turn his or her loss into a profit. Choose a form of contract that motivates the project manager to achieve your objectives.
In extremis, the moral hazard problem becomes opportunistic or even unethical behaviour. The project manager tries to make a profit wholly at the sponsors' expense. Usually, a desire for a long-term relationship with the customer or reputation within the industry stops the project manager doing this. His or her profit is maximized not just from this project, but over several projects, and so he or she behaves with propriety. But very occasionally it is truly just a once off relationship and the project manager may work to make maximum profit from this one job. It is a fear of that behaviour which causes the sponsor to adopt low cooperation and impose high structure. In the next section, I show how communication from the project manager can reduce that problem.
Bounded Rationaility. Often the project manager would like to work in the sponsor's best interests, but in fact it is human frailty that prevents him or her from doing so. Economic theory labels this "bounded rationality"5 and it is caused by three elements of human frailty:
1. Inability to gather all the information relevant to the decision
2. Inability to fully process that information which is gathered
3. Inability to foretell the future and so flawlessly predict all the risks
The project manager ends up doing the best they can with the information he or she has, which is known as satisficing.
Agency or Transaction Costs. Against this background, the sponsor starts to impose structures on the project which create additional costs, which are over and above the cost of doing the work of the project. These are known as agency costs4 or transaction costs.6Michael Jensen identifies four agency costs:
1. The cost of forming and managing the contract and the contractual relationship between the principal and the agent.
2. The cost of communication between the principal and the agent, and of reporting progress and controlling the work.
3. Bonding costs are things the agent does to win the principal's trust and support.
4. Residual losses arise because the project's outcomes are not exactly what the principal needs.
An example of a bonding cost is the agent's membership of professional bodies. Such membership gives the principal trust in both their competence and ethical behaviour. The agent had to prove their competence to get professional membership and needs to behave ethically to maintain it. This is why project managers want membership of organizations such as Project Management Institute (PMI). Other bonding costs are gifts and invitations to sporting events. Because the agent has to make a profit, the principal has to ultimately pay for all of these things through increased project costs. Residual loss occurs either because the project manager is acting in his or her own best interest and not the principal's or because of bounded rationality, or both. The new asset does not work exactly as the principal requires and they therefore fail to get the full benefit from the project either because the project manager cut corners to maximize their profit or because the project manager didn't fully and perfectly understand what was required. This leads on to the need for good communication.
15.4 COMMUNICATION BETWEEN
THE PROJECT MANAGER AND SPONSOR
Good communication is needed both to build trust between the owner and sponsor and reduce bounded rationality. I consider first what communication the project manager should give to the sponsor to help build his or her comfort and trust, and then what communication the sponsor should give the project manager to help him or her better understand the requirements and reduce bounded rationality.
Project Manager to Sponsor
I consider the content of communication, its frequency and form.
Content. The sponsor's lack of comfort is caused by the adverse selection problem and the moral hazard problem; he or she doesn't know for certain what decisions the project manager is taking or why, nor whether the project manager is taking the best decisions to maximize his or her (the sponsor's) outcomes. To help build the comfort of the sponsor, the project manager needs to give him or her information that will convince him or her that:
1. The new asset will function and be fit for purpose, that is, it will perform the desired new capabilities.
2. The right process has been adopted to deliver them in the optimum way.
3. It will be delivered within time, cost, and performance targets.
4. The project manager is behaving in a professional and trustworthy manner.
5. That appropriate controls are in place to achieve all of the above.
What data or information should the project manager give the sponsor to achieve the above? Bob Graham7 suggests that when designing an information system you shouldn't ask what data you need, but ask instead what questions you need answering. The questions the sponsor needs answering are
Questions of product: Will the new asset be fit for purpose and perform to deliver the new capabilities?
Questions of process: Has the right process been adopted to deliver it in the optimum way, within constraints of time, cost, and quality?
Questions of surprise avoidance: Is the project manager behaving in a professional and trustworthy way, and are there any nasty surprises in the form of risks or other issues that are going to prevent any of the above?
With this communication there are two types of sponsor: those who take an interest in progress and those who don't. Ralf Müller and I found that when the project sponsor takes an interest in progress the project usually turns out well, and when they don't the project turns out badly. This is the third necessary condition for success above: the sponsor should take an interest in progress. Further, when the sponsor takes an interest in progress, he or she thinks the project is performing less well than it actually is, whereas if he or she doesn't take an interest in progress, he or she thinks the project is performing better than it is. Finally when the sponsor takes an interest in progress he or she usually wants more information than the project manager is willing to give. There is a tension here and you need to achieve a balance between two agency or transaction costs. Providing too much information takes time and effort and so costs money, but not providing enough leads to the project failing to perform as well as it should, and so contributes to residual loss. So how much information is right and how should it be delivered?
Timing and Means of Communication
How often should the communication be given and by what means? As we have seen there is a tension between the sponsor wanting too much and the project manager wanting to give too little. There are two methods of determining the timing of communication: by calendar time or by project events or milestones. I used to say that for the project manager to report progress to the sponsor once every 6 weeks on a project lasting 9 to 18 months was enough. However, Ralph Müller and I found that sponsors who took an interest would ideally like written performance reports once a week, but recognized that was too frequent from the point of view of the cost of producing the reports, and so were willing to compromise on once every two weeks. Thus the main written progress report from the project manager to sponsor should be made once every two weeks. This is calendar driven. That is not to say that the project manager will not also make a formal written report on the completion of a project milestone or project stage. That is event driven. But the main written progress report should be calendar driven and made once every two weeks on a typical project.
Ralph Müller and I also found that clients or sponsors are fairly schizophrenic about the reports. They usually trusted the written progress reports to give an accurate and realistic representation of project progress, but they didn't trust the written reports to give a true picture of risks and issues. Sponsors wanted a face to face meeting with the project manager to get a feeling of risks and issues. But they didn't trust the face to face meetings to give a true picture of project progress; they wanted the written reports for that. So clients in fact want two forms of communication from their project managers:
1. Written reports, delivered once every two weeks, reporting project performance data: time, cost, and functionality
2. Verbal reports, delivered once a week, reporting on risks and issues
And project managers want feedback on those reports to show that the sponsor cares, trusts them, and approves the process being adopted.
Sponsor to Project Manager
The project manager's need for information changes throughout the life cycle.
Start-Up. At start-up project manager (PM) needs to know the vision, mission, and purpose of the project, and the requirements in terms of the definition of the new asset and capabilities. The benefits map shows how the capabilities will be used and the problems they are intended to solve. If the PM can understand those things, it will help the PM deliver a system that is fit for purpose. If, for instance, you tell the PM that you require a customer requirements management system and nothing more, don't blame the PM when he or she delivers an industry standard system that doesn't solve the actual problems you have. You need to show the PM the benefits map and explain the new capabilities actually required and how they will be used to solve the problems you actually have. It is not the PM's responsibility to define the problems and determine the new capabilities; it is the sponsor's and steward's. So it is the role of the sponsor, with the help of the steward, to properly inform the PM, so the system as delivered is fit for purpose.
Implementation. During implementation the PM's information needs become more prosaic. The PM wants approval from the sponsor for the project process adopted to deliver the project's objectives. The sponsor is overall responsible for project governance, and so must approve the adopted means of delivering the objectives and of monitoring progress, and let the PM be aware of that approval. The PM also wants to know that senior management cares, and perhaps the knowledge that senior management cares helps achieve a successful outcome. The PM also wants to know that he or she actually has the trust of senior management, and what their flexibility is. As I said above, it is important to give the PM flexibility so the PM can respond to risk, but the PM needs to know what that flexibility is.
1. Governance defines:
The objectives of the organization
The means of obtaining the objectives
The means of monitoring progress
2. There are two schools of governance:
The shareholder school, which says that the directors' sole responsibility is to maximize returns to shareholders.
The stakeholder school, which says they have responsibilities to other stakeholders as well including staff, customers, and the local community
3. In the project-oriented organization, there are three levels of governance:
Where the board's responsibility impacts on projects (Chap. 18).
Creating a context in which projects can thrive, including program and portfolio management (Chap. 16) and creating enterprise-wide project management capability (Chap. 17).
At the level of the individual project (this chapter).
4. The project is a temporary organization and so needs governance
5. There are four roles of governance of the project:
The sponsor who identifies the need for the project, defines the objectives and the means of embedding the change through the benefits map, and is ambassador for the project, winning resources for the project.
The steward who makes a technical input to the definition of the objectives bringing a pragmatic view.
The project manager who defines the project progress and is responsible for implementing the project and monitoring progress to delivery of the project's outputs.
The owner or business change manger who is responsible for embedding the change and ensuring the project's outputs and outcomes are used to achieve the desired performance improvement.
6. The sponsor and project manager are in a principal-agent relationship, which means their relationship is subject to:
The adverse selection problem
The moral hazard problem
7. The project manager may suffer bounded rationality which means he or she would like to precisely meet the client's requirements but can't because he or she:
Does not have all the information required
Cannot fully process that information he or she does have
Cannot foretell the future and so cannot predict all risks
8. The principal-agent relationship creates costs over and above the cost of works including:
The cost of forming and managing the contractual relationship
The cost of communication between project manager and sponsor, and vice versa
Bonding costs where the project manager binds the sponsor into the relationship
Residual loss because the new asset does not perform precisely as required
9. To be comfortable with project progress the sponsor wants answers to questions of:
Product: will the new asset be fit for purpose?
Process: has the optimum process been adopted to deliver it?
Surprise avoidance: are there any lurking issues and is the project manager professional and trustworthy?
10. The project manager needs to know:
As much information as possible to avoid bounded rationality
The client has approved the process and progress
The client cares
11. The project manager needs to make two types of reports, both calendar driven:
Written reports reporting project progress and performance data once every two weeks
Verbal reports on risks and issues once a week
1. Clarke, T. (ed), 2004, Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance, London: Routledge, 2004.
2. Turner, J.R. and Müller, R., "Communication and cooperation on projects between the project owner as principal and the project manager as agent," The European Management Journal, 22(3), 327–336, 2004.
3. Office of Government Commerce, Managing Successful Projects with PRINCE2, 4th ed., London: The Stationery Office, 2005.
4. Jensen, M.C., A Theory of the Firm: Governance, Residual Claims, and Organizational Forms, Boston, M.A.: Harvard University Press, 2000.
5. Simon. H., Models of Man, New York: John Wiley & Sons, 1957.
6. Williamson, O.E., The Mechanisms of Governance, New York: Oxford University Press, 1996.
7. Graham, R.G., "Managing conflict, persuasion and negotiation," in Turner, J.R. (ed), People in Project Management, Aldershot, U.K.: Gower, 2003.