The Disaster of Applying the Percent Solution to Project Estimates

Economic crunches can and do create chaos in all organizations. For the project manager, the worst situation is when senior management arbitrarily employs "the 10 percent solution," which is a budgetary reduction of 10 percent for each and every project, especially those that have already begun. The 10 percent solution is used to "create" funds for additional activities for which budgets are nonexistent. The 10 percent solution very rarely succeeds. For the most part, the result is simply havoc on top of havoc, resulting in schedule slippages, a degradation of quality and performance, and eventual budgetary increases rather than the expected decreases.

Most projects are initiated through an executive committee, governing committee, or screening committee. The two main functions of these committees are to select the projects to be undertaken and to prioritize the efforts. Budgetary considerations may also be included, as they pertain to project selection. The real budgets, however, are established from the middle-management levels and sent upstairs for approvals.

Although the role of executive committee is often ill-defined with regard to budgeting, the real problem is that the committee does not realize the impact of adopting the 10 percent solution. If the project budget is an honest one, then a reduction in budget must be accompanied by a trade-off in either time or performance. It is often said that 90 percent of the budget generates the first 10 percent of the desired service or quality levels, and that the remaining 10 percent of the budget will produce the last 90 percent of the target requirements. If this is true, then a 10 percent reduction in budget must be accompanied by a loss of performance much greater than the target reduction in cost.

It is true that some projects have "padded" estimates, and the budgetary reduction will force out the padding. Most project managers, however, provide re alistic estimates and schedules with marginal padding. Likewise, a trade-off between time and cost is unlikely to help, since increasing the duration of the project will increase the cost.

Cost Versus Quality

Everyone knows that reducing cost quite often results in a reduction of quality. Conversely, if the schedule is inflexible, then the only possible trade-offs available to the project manager may be cost versus quality. If the estimated budget for a project is too high, then executives often are willing to sacrifice some degree of quality to keep the budget in line. The problem, of course, is to decide how much quality degradation is acceptable.

All too often, executives believe that cost and quality are linearly related: if the budget is cut by 10 percent, then we will have an accompanying degradation of quality by 10 percent. Nothing could be further from the truth. In the table below we can see the relationship between cost, quality, and time.

Project Costs Tangible Qua] ily

10-15%

10«

The first 85-90 percent of the budget (i.e., direct labor budget) is needed to generate the first 10 percent of the quality. The last 10-15 percent of the budget often produces the remaining 90 percent of the quality. One does not need an advanced degree in mathematics to realize that a 10 percent cost reduction could easily be accompanied by a 50 percent quality reduction, depending, of course, where the 10 percent was cut.

The following scenario shows the chain of events as they might occur in a typical organization:

• At the beginning of the fiscal year, the executive committee selects those projects to be undertaken, such that all available resources are consumed.

• Shortly into the fiscal year, the executive committee authorizes additional projects that must be undertaken. These projects are added to the queue.

• The executive committee recognizes that the resources available are insufficient to service the queue. Since budgets are tight, hiring additional staff is ruled out. (Even if staff could be hired, the project deadline would be at hand before the new employees were properly trained and up to speed.)

• The executive committee refuses to cancel any of the projects and takes the "easy" way out by adopting the 10 percent solution on each and every project. Furthermore, the executive committee asserts that original performance must be adhered to at all costs.

• Morale in the project and functional areas, which may have taken months to build, is now destroyed overnight. Functional employees lose faith in the ability of the executive committees to operate properly and make sound decisions. Employees seek transfers to other organizations.

• Functional priorities are changed on a daily basis, and resources are continuously shuffled in and out of projects, with very little regard for the schedule.

• As each project begins to suffer, project managers begin to hoard resources, refusing to surrender the people to other projects, even if the work is completed.

• As quality and performance begin to deteriorate, managers at all levels begin writing "protection" memos.

• Schedule and quality slippages become so great that several projects are extended into the next fiscal year, thus reducing the number of new projects that can be undertaken.

The 10 percent solution simply does not work. However, there are two viable alternatives. The first alternative is to use the 10 percent solution, but only on selected projects and after an "impact study" has been conducted, so that the executive committee understands the impact on the time, cost, and performance constraints. The second choice, which is by far the better one, is for the executive committee to cancel or descope selected projects. Since it is impossible to reduce budget without reducing scope, canceling a project or simply delaying it until the next fiscal year is a viable choice. After all, why should all projects have to suffer?

Terminating one or two projects within the queue allows existing resources to be used more effectively, more productively, and with higher organizational morale. However, it does require strong leadership at the executive committee level for the participants to terminate a project rather than to "pass the buck" to the bottom of the organization with the 10 percent solution. Executive committees often function best if the committee is responsible for project selection, prioritization, and tracking, with the middle managers responsible for budgeting.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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