An Iterative Budgeting Process NegotiationinAction

In Chapter 5, we recommended an iterative planning process with subordinates* developing action plans for the tasks for which they were responsible. Superiors review these plans, perhaps suggesting amendments. (See also the latter part of Section 5.3.) The strength of this planning technique is that primary responsibility for the design of a task is delegated to the individual accountable for its completion, and thus it utilizes participative management (or "employee involvement"). If done correctly, estimated resource usage and schedules are a normal part of the planning process at all planning levels. Therefore, the individual concocting an action plan at the highest level would estimate resource requirements and durations for each of the steps in the highest level action plan. Let us refer to these as r, and t„ the resource and task time requirements for the ith task respectively. Similarly, the

•We use the terms "superior" and "subordinate" here for the sole purpose of identifying individuals working on different relative levels of a project's set of action plans. We recognize that in a matrix organization it is not uncommon for PMs ("superiors") to delegate work to individuals ("subordinates") who do not report to the PM and who may be senior to the PM on the parent firm's organizational chart.

subordinate estimates the resource and time requirements for each step of the lower-level action plan. Let us denote the aggregate resource and time requirements for the lower level action plan as r{ and ti', respectively.

In a perfect world, r, would equal r{. (As regards t( and t/, our argument holds for duration estimates as well as resource estimates.) We do not, however, live in a perfect world. As a matter of fact, the probable relationship between the original esti- . mates made at the different levels is r,« r,'. This is true for several reasons, three of ■ which are practically universal. First, as Gagnon has found |15), the farther one moves up the organizational chart away from immediate responsibility for doing the * work, the easier, faster, and cheaper the job looks to the superior than to the one who has to do it. This is because the superior either does not know the details of the task, or has conveniently forgotten the details, as well as how long the job takes and how many problems can arise. Second, wishful thinking leads the superior to underestimate cost (and time), because the superior has a stake in representing the project to senior management as a profitable venture. Third, the subordinate is led "* to build-in some level of protection against failure by adding an allowance for ' "Murphy's Law" onto a budget that already has a healthy contingency allowance. £

Assuming that the superior and subordinate are reasonably honest with one if another (any other assumption leads to a failure in win-win negotiations), the two ' parties meet and review the subordinate's action plan. Usually, the initial step to- / ward reducing the difference in cost estimates is made by the superior who is "edu- ' cated" by the subordinate in the realities of the job. The result is that r, rises. The * next step is typically made by the subordinate. Encouraged by the boss's positive -i response to reason, the subordinate surrenders some of protection provided for by , the budgetary "slop," and r' falls. The subordinate's cost estimate is still-greater than the superior's, but the difference is considerably decreased.

The pair now turn their attention to the technology of the task at hand. They-t-carefully inspect the subordinate's work plan, trying to find a more efficient way to s* accomplish the desired end; that is, they practice total quality management (TQM) ^ and/or value engineering. It may be that a major change can be made that allows a f; lower resource commitment than either originally imagined. It may be that little or $ no further improvement is possible. Let us assume that moderate improvement is^J made, but that rf is still somewhat greater than r,, although both have been altered^, by the negotiations thus far. What should the superior do, accept the subordinate's^ estimate or insist that the subordinate make do with r,? In order to answer thiSM-question, we must digress and reconsider the concept of the project life cycle. JjT

In Chapter 1, we presented the usual view of the project life cycle in Figure l-2s§f shown here as Figure 7-1 for convenience. It is important to note that this fi6urf|& shows "Percent project completion" as a function of "Time." The life-cycle function isv essentially unchanged if, for the horizontal axis, we use "Resources" instead, in ef feet, the life cycle shows what an economist might call "return on input"; that is, th§»n amount of project completion resulting from inputs of time and/or resources.

While this view of the life cycle reflects reality on many projects, it is seriously,.-, misleading for others. To understand the difference, let us consider the baking of-, a cake. Once the ingredients are mixed, we are instructed to bake the cake 350° (F) oven for 35 minutes. At what point in the baking process do we have "cake|j;

Experienced bakers know that the mixture changes from "goop" (a technical term well-known to bakers and cooks) to "cake" quite rapidly in the last few minutes of the baking process. The life cycle of this process looks like the curve shown in Figure 7-2. A number of actual projects have a similar life cycle; for example, some projects devoted to the development of computer software, or some projects in chemistry and chemical engineering. In general, this life cycle may exist for projects in which the output is composed or constructed of several subunits (or subroutines) that have little use in and of themselves, but are quite useful when put together. It would also be typical for projects where a chemical-type reaction occurs that rapidly transforms the project from useless to useful. For example, the preparation of the manuscript for the current edition of this book is such a project. A great deal of information must be collected, a great deal of rewriting must be done, new materials too g


Figure 7-2: Another possible project life cycle.

have to be gathered, but there is no visible result until everything is assembled at the last minute.

Figure 7-1 shows that, as the project nears completion, continued inputs of time or resources result in successively smaller increments of completion—diminishing marginal returns. Figure 7-2 shows the opposite. As these projects near com- v pletion, successive inputs of time or resources result in successively larger increments of completion—increasing marginal returns. In order to decide whether to adopt the subordinate's resource estimate, r{, or the superior's, rir we need to know which picture of the life cycle is representative of the task under consideration. Note that we are treating the subordinate's action plan as if it were a project, which is perfectly all right because it has the characteristics of a project that were described in Chapter 1. Also note that we do not need to know the shape of the life cycle with ; any precision, merely if its last stage is concave or convex to the horizontal axis.

Remember that the superior's and subordinate's resource estimates are not ♦ very far apart as a result of the negotiations preceding this decision. If the latter part > of the life-cycle curve is concave (as in Figure 7-1), showing diminishing marginal S returns, we opt for the superior's estimate because of the small impact on comple- f, tion that results from withholding a small amount of resources. The superior might say to the subordinate, "leremy, what can you get me for r,? We will have to live with J that." If, on the other hand, the life cycle curve is convex, showing increasing mar- ^ ginal returns, the subordinate's estimate should be chosen because of the poten- $ tially drastic effect a resource shortage would have on project completion. In this % event, the superior might say, "OK, Brandon, we have got to be sure of this job % We'll go with your numbers." If the disagreement had concerned schedule (dura-tion) instead of resources, the negotiation process and underlying logic would be "i unaltered. 'f

This is a time-consuming process. At the same time the PM is negotiating with £ ^ the several subordinates responsible for the pieces of the PM's action plan, each of the subordinates are negotiating with their subordinates, and so on. This multilevel •> process is messy and not particularly efficient, but it allows a free-flow of ideas up and down the system at all levels.

It is worth noting that ethics is just as important in negotiations within an organization as in negotiations between an organization and an outside party. In this case, the superior and subordinate have the responsibility to be honest with each other. For one thing, they must continue to work together in the future under the conditions of mutual trust. Second, it is ethically necessary to be honest in such negotiations.

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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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