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On productivity in project organizations Tomas Blomquist and Timothy L. Wilson Umea˚ School of Business, Umea˚ University, Umea˚, Sweden

On productivity in project organizations 591 Received 28 January 2009 Accepted 9 June 2009

Abstract Purpose – The purpose of this paper is to look at the underlying unit cost considerations in project conduct at the firm level and an established business unit concept is extended to multi-project organizations. The approach and background are described along with apparent implications. Design/methodology/approach – The methodology developed by Gold is extended to cover multi-project organizations. The adaptation of the productivity network is demonstrated using a hypothetical case. Findings – The focus of the paper is on demonstrating an approach. Generally, productivity in an organization is found not to be dictated by a single input, but by the multiplicative outcome of each together. In particular, the number of projects handled each year appears to be of strategic importance in productivity. Research limitations/implications – The paper is conceptual, so applicability depends upon the nature of the particular organization to which it is applied. Implications, of course, will depend upon the degree to which actual data match the model. Practical implications – The approach permits managers to get a handle on productivity in their organizations. It is particularly attractive insofar as it largely depends upon available accounting information for input. This paper seeks to fuel greater interest and debate by practitioners and project management academics about the topic. Originality/value – Although the paper is conceptual, the authors believe that it may among the first to quantitatively treat productivity in multi-project organizations. The approach can be used to understand the productivity as well as some elements of effectiveness of multi-project organizations. Keywords Productivity rates, Project management Paper type Conceptual paper

1. Introduction The history of getting things done by projects and the study of project management itself is a long one. Smith (2004, p. 23), for instance, opined that the great pyramid of Egypt could not have been built without some form of formal project management – to the extent that a work breakdown structure most probably was used. There is also no lack of texts oriented toward managing projects efficiently, i.e. getting projects satisfactorily done within the goals of expressed timing and within original budgetary constraints (Nicholas, 2001). Although more recent, the topic of project marketing, which requires more emphasis among individual projects and the wider environment in which these projects occur, also has received attention (Cova and Salle, 2007; Skaates and Tikkanen, 2003). It would seem that this concern with regard to relationships among individual projects and their business environment deserves further examination. Clearly, recent

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surveys of the literature suggest a need. So¨derlund (2004), for instance, has shown that papers in a widely regarded journal of project management have devoted little attention to research on the contexts of multi-projects and multi-firms, which was asserted to be of great importance for the future of project studies. Specifically, recent developments illustrate the need to better integrate project management with the general developments in management and organization. Likewise, Artto and Wikstro¨m (2005) suggested that project business is contextually linked with the business environment. Consequently, in their search and analysis of project literature they focused on business, rather than project, literature. One conclusion reached from this study was that in theoretical research settings, an appropriate unit of analysis is the firm rather than the project. In this paper, we attempt to extend established business unit concepts to multi-project organizations. Specifically, we look at the underlying unit cost considerations in project conduct. The approach is quantitative and lends itself to identifying factors that may be of strategic importance in the conduct of the firm. An example is used to indicate how the approach can be used to understand efficiency in operations of the organization (productivity) as well as some strategic factors (effectiveness of the organization). 2. Background The approach follows the methodology developed by Gold (1977). Essentially the approach posits a productivity network of input factors associated with unit output. In its simplest form (Gold, 1977, Figure 8.2, p. 202) the relationship is of the form:   Total Cost Wages Fixed cost Material costs ¼f ; ; ð1Þ Output Output Output Output Briefly, the network is sketched with Total cost/output at the apex of a tetrahedron and the input factors at the corners on the base. The original methodology was developed for the production of physical goods – especially as affected by technological change, e.g. the production of blast furnace iron with the introduction of a sinter material innovation. By using an index stream for each of the inputs, productivity could be associated with: . modifications in material inputs; . changes in design of the operating process; . improvements in control systems; and . alterations in design of products. For our interest here, the special case of project management, the approach remains essentially the same. The adaptation of the productivity network is shown in Figure 1. In this figure, total cost is affected by the four project input variables: (1) wage cost of “common” labor (WCL); (2) wage cost of administration (WCA); (3) material cost essential to project completion (MC); and (4) some fixed cost representing assets employed by the firm in completing projects (FC).

On productivity in project organizations

Total cost Output

593

Material cost Output

Wage cost adm. Output

Figure 1. Productivity network and cost structure for inter-company comparisons

Fixed cost Output

Wage cost labor Output

Source: After Gold (1977)

In index nomenclature, equation (1) becomes operational in the form: I TC ¼ I WCL £ I WCA £ I FC £ I MC

ð2Þ

where IWCL, IWCA, IFC, IMC represent the indices for the relevant input variables and ITC is calculated from their products[1]. 3. Illustration Follow the money. That is a line that one frequently hears used within the context of politics and law. In other words, if one follows the “money trail,” one is likely to find the root causes, contributors, and/or essential influences in activities of interest. In this illustration, we attempt to follow the money. Table I shows a hypothetical case for a multi-project firm “A,” which over a ten-year period has conducted a varying number of projects per year shown in column 2. The next four columns capture the costs of the four relevant inputs. Wage cost is divided into labor and administration, including Year

No.

CWCL

CWCA

CFC

CMC

IWCL

IWCA

IFC

IMC

ITC

1 2 3 4 5 6 7 8 9 10

11 16 12 14 10 15 11 14 13 13

3,000 3,600 3,400 3,800 3,200 4,000 3,600 4,100 4,200 4,400

350 360 360 370 360 400 390 410 420 430

37 40 44 46 48 47 49 51 58 59

43 60 55 58 49 70 66 72 75 75

1 0.825 1.039 0.995 1.173 0.978 1.2 1.074 1.185 1.241

1 0.707 0.943 0.806 1.131 0.838 1.114 0.92 1.154 1.04

1 0.743 1.09 0.977 1.427 0.932 1.324 1.083 1.326 1.349

1 0.959 1.172 1.06 1.253 1.194 1.535 1.316 1.476 1.476

1 0.416 1.252 0.856 2.375 0.911 2.718 1.408 2.355 2.569

Table I. Ten year results for multiple-project Firm A

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project management. The base year is taken to be year one and indices are calculated for each of the cost components and a total cost index is calculated for each year from theses indices by equation (2). To illustrate use, in the base year the unit costs were 3,000/11, 350/11, 37/11, 43/11, respectively. The indices in the second year thus become IWCL ¼ (3600/16)/ (3000/11) ¼ 0.825; IWCA ¼ (360/16)/(350/11) ¼ 0.707; IFC ¼ (40/16)/(37/11) ¼ 0.743 and IMC ¼ (60/16)/(43/11) ¼ 0.959. It follows from equation (2) above that: I TC ¼ 0:825 £ 0:707 £ 0:743 £ 0:959 ¼ 0:416

ð3Þ

It is not the absolute magnitude of this index that specifically concerns us, but its change with time and also its dependence upon input indices. Figure 2 shows the time dependence of this index. Ostensibly, it would appear that although there is some year to year scatter, the index is a generally increasing function[2]. That is, productivity appears to be decreasing. That conclusion appears not too surprising because the underlying indices IWCL, IWCA, IFC and IMC also appear to be increasing. The mitigating factor in the analysis, however, is the number of projects that the hypothetical firm undertakes each year. Although the range is fairly narrow (ten to 16), there is not a monotonically increasing sequence. Thus, Figure 3 is shown that relates the total cost index to the number of projects done each year. In this figure, it is seen that the total cost index decreases within the range studied. In other words, other things being equal, the company is better-off doing 16 projects per year compared to 10 or 11. 4. Reflections The purpose of this paper has been to extend useful business unit concepts to the case of multi-project organizations. In this regard, the quantitative methodology developed 3.0

Total cost index ITC

2.5

2.0

1.5

1.0

0.5

Figure 2. Total cost index for Firm A over the ten-year period

0.0 1

2

3

4

5

6 Year

7

8

9

10

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3.0 2.718 2.569

2.5

Total cost index ITC

2.375

2.355

595

2.0

1.5

1.408 1.252

1.0

1 0.856

0.911

0.5

0.416

0.0 9

10

11

12 13 14 Number of projects

15

16

17

by Gold (1977) was modified and applied to a hypothetical multi-project organization to illustrate its potential use. In taking this approach, we are following Schumpeter’s (1933) classic argument of why a mathematical approach is absolutely necessary in economic analysis. That is, “The only way to a position in which our science might give positive advice on a large-scale to politicians and business men, leads through quantitative work.” Sadly, such a quantitative approach has been lacking emphasis in studies of multi-project firms to date. At the same time, we follow independent reviews of the literature (Artto and Wikstro¨m, 2005; So¨derlund, 2004) that suggest the topic should be an interesting one to follow. In presenting the illustration in this paper, no attempt was made to make any of the inputs exceptional. Put another way, no break-through changes such as new methods of management practice were introduced. Some comment is in order with regard to practices reflected in the input variables. If there had been a significant change in any of them, it is likely there would have been a more distinctive change in productivity. By “significant” we mean technological innovations for the firm – either original or adoptive. Gold (1977, pp. 200-201) indicated that: Each (input) may be the initial point of impact of technological innovations subject to managerial control. But a change in any component requires adaptive adjustments in other components of the integrated process, subject to both market constraints and constraints imposed by the nature of the industry’s technology. For example, the partial displacement of labor by new machinery tends to increase the ratio of actively utilized fixed investment to man-hours and, hence, output per man-hour. In turn, this would require either increasing materials input if output is raised in proportion to the gain in output per man-hour, or decreasing labor input if output remains the same.

Figure 3. Total cost index associated with the number of projects in a given year

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Thus, the index stream in which the innovation occurs may not fully affect the change in productivity but the one in which the trade-off occurs. Instead, costs were chosen to more or less increase with time as one would normally expect. Consequently, one sees that the overall changes in productivity are a result of the multiplicative effect of the four streams of input. In other words, it is not a single stream that determines efficiency in the operations of a multi-project firm, but the combination of inputs working together. We would be quick to note that in developing this approach, it is primarily accounting data from annual income statements that would be used in such an analysis. Thus, special effort and/or expense are not required to implement this analysis. The one piece of information that is needed to make the calculations is the number of projects that a firm works on each year. It would be rather surprising if administrators in a multi-project firm, no matter how large, did not know how many projects they handled in each given year. It was the number of projects, however, that permitted us to look at the information in another way. Here, the data suggested that within the range of projects handled, the conceptual firm tended to become more efficient the larger the number of projects (Figure 3). It is not clear that this direction in change had to occur. If the firm was working close to capacity, increases in the number of projects would be expected to decrease productivity. Thus, from a strategic point of view, this firm would want to pay attention to the type and number of projects that it committed itself to each year. From previous studies of actual practice in Sweden (Blomquist and Wilson, 2008, 2007) it was observed that the number of individuals involved in marketing projects was much less than those involved in conducting projects. Thus, a shift in productivity potentially could be made by focusing on marketing as compared to the process inputs to production. We are aware of the level of applicability of the approach noted here. It is at the company level and relates to ongoing, year-to-year activities. To some extent, in working at this level, we circumvent difficulties noted by Gold (1977, 204). In critiquing his own work, he noted: One of the major problems of analysis [. . .] is the use of measurements that are too aggregate to delineate the distinctive effects of particular technological innovations, thus yielding results that combine such effects with those of various other unspecified intrafirm and extrafirm developments.

By working at the firm level, the industry aggregation problem is minimized. There are other problems, of course, that one can contemplate. For one thing, there is the problem on multi-year projects, which can be common. When working with index streams, one would expect that this uncertainty would be minimized by consistent, year-to-year practice. The other major uncertainty that is introduced is the mix of projects on a year-to-year basis. In another study a firm was followed that conducted both engineering and turn-key projects (Ha¨llgren and Wilson, 2007). If that mix varied on an annual basis, then significant shifts would be noted. Two things might be said about this possibility[3]. First, if the mix remained fairly constant year-to-year, then abrupt changes would not occur. Second, if they did, then they might signal strategies the firm might employ in future practice. Whatever the case, we think that managers of multi-project firms would be better-off in appreciating their businesses, especially the productivity aspects by using the approach noted here. Further, independent reviews of the literature

(Artto and Wikstro¨m, 2005; So¨derlund, 2004) indicate academic understanding would be advanced. As Schumpeter (1933) long ago suggested, things tend to get better with quantitative treatment. 5. Conclusions In the interest of extending quantitative analyses of multi-project firms, the methods developed by Gold (1977) have been employed. Conceptual information has been used to illustrate the approach. Although there are problems that might be anticipated in using the methodology, it is asserted that managers of multi-project firms would be better-off in trying it. At the very least, it reflects on productivity of major inputs and the project mix of the firm. Notes 1. Note the algebra of indices provides that combinations may be multiplied or divided, but not added or subtracted. 2. The illustration can be interpreted as using current currency figures. Under normal circumstances, these would be adjusted to the base year by an appropriate deflator. OECD Stat Extracts (2009), for instance, has a rather complete data base via source OECD for 30 member countries. Clearly, the increase in the total cost index from 1.000 to 2.569 is greater than expected for most developed countries. For the USA, the relevant deflator was 15.8 percent for the recent ten-year period. 3. One might posit that the year-to-year swings in the conceptual example used here came from the annual project mix. References Artto, K.A. and Wikstro¨m, K. (2005), “What is project business?”, International Journal of Project Management, Vol. 23 No. 5, pp. 343-53. Blomquist, T. and Wilson, T.L. (2007), “Project marketing in multi-project organizations: a comparison of IS/IT and engineering firms”, Industrial Marketing Management, Vol. 36 No. 2, pp. 206-18. Blomquist, T. and Wilson, T.L. (2008), “Project marketing: strategy, tactics, differentiation and integration”, Projects & Profits, Vol. 8 No. 1, pp. 37-42. Cova, B. and Salle, R. (2007), “A comprehensive approach to project marketing and the marketing of solutions”, Industrial Marketing Management, Vol. 36 No. 2, pp. 138-46. Gold, B. (1977), “Proposed conceptual and analytical improvements”, in Gold, B. (Ed.), Research, Technological Change, and Economic Analysis, Lexington Books, Lexington, MA. Ha¨llgren, M. and Wilson, T.L. (2007), “Mini-muddling: learning from project plan deviations”, Journal of Workplace Learning, Vol. 19 No. 2, pp. 92-107. Nicholas, J.M. (2001), Project Management for Business and Technology: Principles and Practice, 2nd ed., Prentice-Hall, Upper Saddle River, NJ. OECD Stat Extracts (2009), available at: http://stats.oecd.org/WBOS/Index.aspx?QueryId¼14744 (accessed January 21, 2009). Schumpeter, J.A. (1933), “The common sense of econometrics”, Econometrics, January, pp. 5-12, (reprinted in Essays on Entrepreneurs, Innovations, Business Cycles and the Evolution of Capitalism, Clemence, R.V. (Ed.), pp. 100-107, see also the introduction by Swedberg, R., p. xv).

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Skaates, M.A. and Tikkanen, H. (2003), “International project management: an introduction to the INPM approach”, International Journal of Project Management, Vol. 21 No. 7, pp. 503-10. Smith, C.B. (2004), How the Great Pyramid was Built, Smithsonian Books, Washington, DC. So¨derlund, J. (2004), “On the broadening of the research in projects: a review and a model for analysis”, International Journal of Project Management, Vol. 22-8, pp. 655-67. Corresponding author Tomas Blomquist can be contacted at: [email protected]

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