A firm should phase and structure projects to deliver substantial value quickly and then follow up by providing the remaining requirements in a later phase. This approach is referred to as “quick wins.” Phasing and structuring allows projects and baseline efforts to deliver key requirements quickly to meet the stated business demand. Requirements that are less
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critical or simply harder to deliver will be scheduled for later phases of the project to allow progress on the immediate requirements. The quick win strategy, as a part of your project methodology, can increase customer satisfaction and reduce the project’s exposure to risk.
A project framework, form documents, and a quick win philosophy pro-
vide certain economies. They keep project teams from reinventing the wheel.
They allow you to identify, coordinate, and control project interdependencies. They help you move quickly to deliver value. But, perhaps most importantly, they allow the project teams to focus on the real issue, delivering the project, and improve the chances that the project will be on time, within budget, and deliver the expected value.
Project teams want to succeed. A project, however, is a minefield where ignoring principals of change management or working to the wrong requirements or underestimating the effort can make even a project that delivers what it promised look to its customers like a failure. A project framework rigorously applied can help avoid these mines. It also provides the project team comfort that it is proceeding properly and, as a result, instills an attitude of success.
A valid business justification should support every project undertaken at a law firm. This concept is easy to understand but oftentimes is hard to put into practice. Since projects cost money, it is best to justify them with money arguments. That approach is not, however, always feasible. A project might be justified because the firm’s biggest client demands it. A project might be justified because it fits the firm’s strategy. A project might be justified in that it makes life easier for the firm’s attorneys, even if there is no direct financial gain. In short, there is no one-size-fits-all solution to determining business justification. There are, however, some accepted and customary approaches that should be considered.
For projects that will provide a direct and readily measurable income stream or cost savings, a financial analysis may be appropriate. This analysis can take many forms, but usually it includes a spreadsheet of project and ongoing operating costs set against income and cost savings over time. The project may be justified from a business perspective if this analysis shows the project breaks even or shows gain within a reasonable time period. This does not mean, however, that other nonfinancial issues should be ignored; this financial analysis is one justification, not necessarily the whole story.
For example, assume a mid-size office is considering whether to implement an automated fax solution for an office. The solution has a project cost (hardware, software, personnel resource cost) and an ongoing cost (software and hardware maintenance and support). The solution also provides financial benefits. It replaces a mail room employee. It provides an income stream through cost recovery (net of what was previously charged, if any). Comparing the costs involved with the costs saved and potential income and factoring in the potential that e-mail is replacing faxing (this requires an assumption as to
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the replacement rate), the firm can calculate whether this project will make or cost them money. This is a financial analysis.
Some businesses apply various financial measures. Some apply a payback period analysis where there is a set time frame within which a project must show a net positive for project approval. Some businesses apply a net present value approach, which requires a calculation of potential income stream in the future and potential costs in the future. If the project has a net positive present value, it is more likely to be approved by the firm. While this distinction is interesting from a theoretical point of view and may be a good way to set thresholds in other industries, a professional service firm likely uses a simpler calculation by just determining whether the project has a net positive or negative cash f low.
While a financial analysis should be conducted where appropriate, nonfinancial considerations normally play a major role in justifying projects. For example, the payback on a knowledge management application is typically long and would likely have a net negative value. In this case, these types of projects would never be approved if qualitative improvements were to be made. One argument for a knowledge management system is that it will reduce the time to prepare work product and improve the quality of that work product. Since law firms sell time, billable hours, adopting such a system would reduce the number of billable hours sold while keeping the same number of production use (the producers) lawyers. Therefore, from both a net present value and a payback rule perspective, a knowledge management system would not be appropriate.
Another issue with financial analyses is making valid assumptions. If you include cost of funds or a discount rate, how do you select them? A small change in that rate can change the financial viability of the project. In our previous fax example, if you assume a rate that e-mail is replacing faxing, how do you determine the correct rate to apply? If you have a way to measure this historically, for example, using manually recorded historical data available in your accounting system (if you billed clients for your manual faxes), you likely have some valid basis for such an assumption. Otherwise, consider ignoring the variable in your actual financial analysis and noting it textually as part of the overall justification. This avoids being seen as selecting values to make the analysis work. (Remember the adage: “Figures don’t lie, but liars figure.”) In short, use financial analyses when there is good solid financial data, but don’t stretch to make such an analysis. When you do, present the numbers you are confident with, and note the other factors in your textual discussion.
We refer to a third method for valuing projects as the “obscenity” method after the U.S. Supreme Court’s Associate Justice Potter Stewart said,
“I can’t define obscenity but I know it when I see it.” 7 Many partners look at projects and have an intuitive belief as to whether the project is justified. The problem here is that partners’ intuition may not validly ref lect
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the true value of the potential benefits. Since there is no escaping this approach, however, it is incumbent on the IT staff to provide sufficient persuasive information to help the partner make an “informed” intuitive decision.
An intuitive belief coupled with other methods for analysis is probably a valid way of valuing projects. It should not, however, be the only way. Intuition only goes so far. It ignores nuances that the person appointing intuition might not be aware. It is not a rigorous analysis.
Another method that is often argued, but should seldom be persuasive, is
“loss of productivity.” The argument goes something like this: It takes a typical lawyer six minutes each day clearing the spam from his or her inbox. We have 1,000 lawyers. Therefore, we are spending 6,000 minutes (100 hours) each day clearing spam. Our average billable rate is $300 per hour. Therefore, we are spending $30,000 each day clearing spam. With 250 business days each year, we would make $7.5 million each year by implementing an effective spam protection. Nuts.
The problem with this analysis is that while apparently logical, it ignores real life. To make this type of claim, a firm must analyze objectively actual patterns. The presumption in this argument is that if you get rid of spam completely from the environment, each attorney will bill six minutes more each day and the firm will make $30,000 additional revenue for each day. If an IT staff argues this position, it should be graded on its ability to increase the firm’s bottom line by that amount.
We have seen the same arguments used to support redundancy and high
availability systems. “If the network is down for a day, we would lose a zillion dollars.” Is that a fact? There are, unfortunately, ways to accurately measure these claims. Every enterprise has suffered a major casualty where systems are unavailable for long periods of time, perhaps even a full day. Find one of these days and analyze the effect on the hours worked on client billable matters, compared with that normally worked on an average day. Compare not only the day of the casualty but also the week starting with the casualty.
Were any hours missed on the first day made up on later days? Only after conducting this type of analysis can a true loss of productively claim comprise a business justification.
Perhaps the best way to approach return on investment is by deploying a real option strategy. The best way to describe real options is to think of a poker game. You sit down at the table and ante one dollar for the option of receiving your first cards. For that dollar you receive two “hole” cards and one card face up. You are in the game, but you’re not required to stay in the game. If based on what you know (i.e., on your cards as compared to the other cards showing), you decide that you are in a favorable position, you can participate in the betting for that round and buy an option to proceed to the next round. If, however, you conclude that you are not favorably situated, you have