Value Engineering – Project design and design of project elements
Value Analysis – Improvement of a construction, manufacturing or management process and post project review.
(Hammersley H (2002) Value Management in Construction [internet] Available from :< on 20th November 2009)
The Value Management Job Plan is a logical and sequential approach to Value Management. It has seven stages to be followed that form the basis of the Value Management Approach. These stages are:
- Orientation- Identify what has to be achieved, priorities and desirable characteristics.
- Information- Gathering data on stakeholder’s needs, wants, values, costs and other project constraints.
- Speculation- Generation of different ideas on how to satisfy clients needs within the stated requirements.
- Evaluation- Evaluation of the alternatives identified in the speculation stage.
- Development- Development of the most appealing options and their more detailed appraisal.
- Recommendation- Recommendation for action.
- Implementation and Feedback- Examination of how recommendations were implemented.
The VM job plan looks primarily at what the project aims to achieve before individual stakeholders needs are identified. Once the overall project aim and the stakeholder’s needs, wants, costs and constraints have been identified it then moves on to probably the most important speculation stage. This stage is probably the most important because the quality of the ideas generated determines the overall worth of the VM approach. Therefore a more creative organisational structure is more suitable as it encourages better communication and creativity. Once these ideas have been generated they are then evaluated and developed and the correct recommendations established.
The best time to use VM is in the earliest possible stages of any project as it offers greater potential for value creation. This is because if stakeholder’s needs and wants are identified in the concept phase of a project the project can be structured and defined as to achieve the most value.
Application to Scenario 1
- Orientation
Brief
The scenario is based on two accountancy companies who have recently merged in order to improve efficiency and increase market share. The newly formed company is in need of a new office to complete the merger as neither of their current offices is suitable for the increased numbers. The new company has talked about voluntary redundancies and guaranteed jobs for those who want to move to the new site.
Our existing Managing director has become the new MD of the joint company as does the new finance manager. The HR and marketing directors come from the other partner.
The Managing Director is keen to get on with the work as soon as possible, but the other directors want to make sure the right site is selected bearing in mind transport links etc. Options for the new site include renting a city centre office or a new office on a business park close to the motorway.
Project Requirements
- To provide a new office site suitable for the increased number of employees.
- Options for the new office site include renting either an existing city centre office or a new office on a business park close to the motorway.
- The new site must be selected bearing in mind transport links, local services and customer access.
- The Managing Director is keen to get on with the work as soon as possible.
- Information
Assumptions
The risk and value team have made the following assumptions regarding the scenario:
- The new office site on the business park close to the motorway will also be rented.
- That both of the potential offices are suitable for the increased number of employees.
- The cost of renting a city centre office will be greater than renting the office on the business park.
- That there is good transport links going in and out of the city centre for easy access.
- That there are a lot of local services near the city centre office.
- The new office on the business park will be in better condition than the existing city centre office.
- The business park office will have better parking facilities.
- The project must go ahead and doing nothing is not an option.
Constraints
- The new company is offering voluntary redundancies and has guaranteed a job for everyone who wants one. Therefore the team can only estimate how many employees there will be.
- The team hasn’t seen the offices so it is hard to tell which one is more suitable.
- The managing director and the other directors have conflicting interests.
- There is no mention of the specification or cost of either office.
Key Stakeholders and Value Requirements
A Stakeholder is anyone who has a proprietary interest in the business or project. The project aim and objectives should reflect the key stakeholder’s needs. Therefore it is important to identify stakeholder values and strive to achieve them. The following table identifies the key stakeholders and their values.
Functional Analysis
Why Why Why Why Why
How How How How How
The above diagram is a form of functional analysis which helps identify the functions of the new office project. It provides a good platform to build creative thinking on, and helps in identifying any risks associated with the project and any possible alternatives.
- Speculation
Problem / Opportunity
The problem that the project is trying to resolve is that there is no suitable office for the increased number of employees after the recent merger. The opportunity that the project strives to achieve is to create a good working environment, improve communication, efficiency and market share for the recently merged Accountancy firm.
Potential Solutions
- Rent an existing office in the city centre.
- Rent a new office on a business park close to the motorway.
- Extend one of the current offices.
- Do nothing and keep the two companies working separately under the same group.
- Evaluation
Rent city centre office- The city centre office will provide good transport links for employees and customers which give easier access. The city centre also means there will be lots of good services surrounding the office this also means there may be a lot of competition surrounding which could have both a positive and negative effect. The easy access and the good services surrounding may result in less people taking the voluntary redundancies. However, for employees and customers travelling by car it may mean there is no free parking available and there would be a lot of traffic during rush hour. Renting a city centre office will probably be very expensive which would increase costs and lower the company’s profits.
Rent new office on business park- The business park office provides good transport links for employees and customers who drive cars as it is right by the motorway and the business park will more than likely have free parking. The office is also new therefore it may be a lot more modern and the building will be in a mint condition. The business park may not have that many good services surrounding and therefore may not have that many competitors either. The poor transport links for those that don’t have cars and the lack of surrounding services may result in an increase in voluntary redundancies.
Extend one of current offices- This would mean that only one of the companies will have to relocate and therefore redundancies may be reduced. However, this method would be quite expensive and very time consuming.
Do nothing and keep companies separate- If the company decided to keep the offices separate and have the two companies operating separately under the same group they would be able to concentrate more on improving their efficiency and the group would still receive the increase in market share. This would eliminate un-necessary expenditure as the companies don’t need a new office in order to merge. This also means that neither company will lose their customer base as the companies will still operate separately and keep their original reputation however, they will still receive the benefits of working together as they will both be part of the same group and therefore can share knowledge and resource with each other in order to maximise profits and grow.
- Development
When comparing the ideas generated in the speculation stage with the stakeholder values identified in the information stage the two solutions that reflect the stakeholder values the most are:
- Rent existing city centre office
- Do nothing and keep companies separate
- Recommendations
After analysing the risks and stakeholder values the risk and value team are recommending the do nothing approach. The reason for this is because the overall values and functions that the project is aiming to achieve are increased efficiency, market share and complete merger. There is no need to move to a single office site in order to achieve these values as they can be achieved even when the companies are working in separate offices.
Risk Management Literature Review
Risk management has been around for hundreds if not thousands of years as there has always been risks and uncertainty that need to be managed. An example of the early development in risk management is in 1654 when a French nobleman called Chevalier de Mere developed a quantitative risk management technique by working out the probability and stakes between two players in an un-finished game of chance. The solution that he came to laid the base to all quantitative risk assessment that takes place today.
The 20th century started off with an abundance of wealth and relative peace along with rapid industrialisation. However, the world then spiralled into chaos with the break out of regional and worldwide wars along with other catastrophes. This resulted in the increased awareness of the un-certainty of our future and people started to think more about managing these uncertainties and therefore started to develop more tools and techniques to risk management.
In 1921 Frank Knight published Risk, Uncertainty and Profit, a book which has acted as the cornerstone to most risk management literature. Knight separates uncertainty into two types, one which is not measurable (Ambiguity), from risk, which is (Variability). The difference between these two types of uncertainty is that variability has data available and therefore mathematical probability can be calculated with certainty, however ambiguity has no data available. He states that an uncertainty is absolute but a risk is not an absolute measure, a risk must have a consequence and must therefore have a context. Therefore a risk is an uncertainty that matters to the subject in question.
In 1999 the government commissioned Professor Turnbull to write a report addressing the obligations that Directors have, in regard to keeping good internal controls of their companies. The report recommended, amongst other things, that all businesses should have in place a sufficient process for managing risks. As a result of the Turnbull report all UK companies are now required to show how their risks and opportunities are being monitored and managed in their annual statement of accounts. The reason for this decision is because a company’s objectives, its internal organisation and the economic environment of which it operates are constantly changing and as a result the risks that they face are also changing constantly.
The Institute of Risk Management defines risk as the combination of the probability of an event and its consequences (ISO/IEC Guide 73). This definition also refers to the fact that an uncertainty must have a consequence and therefore a context in order for it to be classed as a risk.
The association of project managers (APM) define risk as “an uncertain event or condition that, if it occurred, would have a positive or negative effect on at least one project objective” (APM Body of Knowledge, 2004). This definition mentions that a risk can have both a positive and a negative effect. The idea that there are both positive and negative aspects to risk is fairly modern and before 1997 all risk management standards only saw risks as a threat. However since then risk management has been increasingly recognised as having to address both positive and negative aspects of risks.
Hubbard (2009) defines risk management as the identification, assessment, and prioritization of followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events.
Figure 1.0
The Risk Management Process
(Adapted from APM PRAM Guide 2004)
Figure 1.0 shows a general risk management process. According to Dallas (2006) the risk management process is an iterative process, which means that it is a progressive management style which has a culture of continuous improvement. Therefore it is important to monitor and review risks regularly throughout a project or within a business. The reason for this is because the internal and external factors that influence risk are constantly changing so it is important that you constantly identify and monitor new risks that may occur.
The first stage of the risk management process is initiation. According to P. Langley this stage involves confirming the project objectives, identifying any constraints or assumptions and performing a stakeholder analysis to help identify any risks associated with them. This is also the time to decide what tools and techniques will be used to measure and manage the risks for example setting impact scales (personal communication, risk and value slides week 4, Monday 19th October 2009).
The next two stages of the risk management process are the Identification and Assessment stage. According to Smith (2008) these two stages involve creative techniques such as brainstorming to identify the risks associated with the project and then the analysis of these risks to work out the likelihood and impact. Using tools and techniques such as a Risk Matrix helps to prioritise risks by using a scale (usually 1= low risk 5= very high risk) to measure the likelihood and impact of the risk. This provides a qualitative method for measuring risks so they can be prioritised and managed accordingly (Dallas, 2006).
Once the risks have been identified and assessed the correct response to each risk is then planned paying close attention to higher level risks. Lock (2007) suggests that a way of avoiding the risk without compromising the project objectives must first be sought out. However, if there is no way of avoiding the risk then mitigation strategies must be established along with contingency plans in case the risk becomes an issue. These planned responses must then be implemented with immediate effect to increase the chance of delivering a successful project.
Risk Management Application to Scenario 1
Risk Register
Scale
The following table shows the scale used to calculate the probability and impact of the risks in the risk register shown on the previous page.
Risk Matrix
The risk matrix on the previous page takes into account the impact and the probability of each of the risk so that the more high profile risks can be identified. This enables you to prioritise the risks so that the more high profile risks can be monitored and managed more carefully. The risks that are in the red and orange section of the risk matrix are the higher profile risks with the biggest impact and the most likely to occur. The risks that are in the yellow and green section are the lower profile risks with the lowest impact and the least likely to occur.
Mitigation and Contingency
Linkages between Risk and Value Management
Thiry (1997) suggests that risk and value management go hand in hand and should be used in parallel with each other throughout the project life cycle. This is because when new ways of adding value to the project are thought of, there are new risks associated with them. Therefore, if value and risk management are practiced in parallel with each other the risks associated with adding value can be identified and assessed as to provide some feasibility on the different value solutions. This helps select the best approach as it enables you to compare stakeholder values with the risks involved in meeting those value requirements.
In relation to the project context, the proposed move to a new office site carries a lot of risk in relation to the values and functions that it is trying to cater for. By moving the employees to a new office in order to complete the merger and improve efficiency and market share, the company is risking losing a lot of their employees through voluntary redundancies. Also moving the two reasonably sized firms into the same office may cause conflict between the two and create a hostile working environment. There is also a risk of losing their customer base by moving offices as they may move too far away from their original customers or change the company image by merging.
The risk and value team therefore recommend that the employees do not move to a single office site as they overall functions of the project and the key stakeholders values can be satisfied by working separately under the same group. Therefore no un-necessary costs will be incurred and the companies can still reap the benefits of the merger through improving the communication between the two offices so that their knowledge and resources can be shared to benefit from economies of scale.
Bibliography
Dallas M (2006)Value and Risk Management: A Guide to Best Practice.1st ed. Blackwell Publishing
Hammersley H (2002) Value Management in Construction [internet] Available from :< on 20th November 2009
Hubbard D(2009)The Failure of Risk Management: Why It's Broken and How to Fix It John Wiley & Sons
Institute of Risk Management(2002)A Risk Management Standard [Internet]Available from:< http://www.theirm.org/publications/documents/Risk_Management_Standard_030820.pdf>Accessed on 1st December 2009
Lock D (2007) Project Management. 9th ed. Gower Publishing Ltd
Norton B & Elligott W M (1995) Value Management in Construction. Macmillan
Office of Government Commerce (2007)Achieving Excellence in Construction Procurement Guide[internet] Available from: <http://www.ogc.gov.uk/documents/CP0064AEGuide4.pdf> [Accessed 10th November 2009]
SkyMark Corporation (2006)Larry Miles and Value Engineering[internet] Available from:<http://www.skymark.com/resources/leaders/larrymiles.asp>[Accessed 10th November 2009]
Smith N J (2008) Engineering Project Management. 3rd Ed. London, Blackwell Publishing Ltd
Thiry M (1997) Value Management Practice, Pennsylvania, Project Management Institute.
University Of Texas (2002) A Short History of Risk Management 1900-2002[Internet] Available from :< http://www.mccombs.utexas.edu/dept/irom/bba/risk/rmi/arnold/downloads/Hist_of_RM_2002.pdf> Accessed on 1st December 2009
Woodhead R.M & Downs C (2001)Value Management, Improving Capabilities.1st ed. London, Thomas Telford
Office of Government Commerce (2007)Achieving Excellence in Construction Procurement Guide[internet] Available from: <http://www.ogc.gov.uk/documents/CP0064AEGuide4.pdf> [Accessed 10th November 2009]
Woodhead R.M & Downs C (2001)Value Management, Improving Capabilities.1st ed. London, Thomas Telford, pp. 75
Dallas M (2006)Value and Risk Management: A Guide to Best Practice.1st ed. Blackwell Publishing, pp. 12
SkyMark Corporation (2006)Larry Miles and Value Engineering[internet] Available from:<http://www.skymark.com/resources/leaders/larrymiles.asp>[Accessed 10th November 2009]
Woodhead R.M & Downs C (2001)Value Management, Improving Capabilities.1st ed. London, Thomas Telford, pp.84
Smith N J (2008) Engineering Project Management. 3rd Ed. London, Blackwell Publishing Ltd, pp.14
Smith N J (2008) Engineering Project Management. 3rd Ed. London, Blackwell Publishing Ltd, pp.14.
Hammersley H (2002) Value Management in Construction [internet] Available from :< on 20th November 2009
Smith N J (2008) Engineering Project Management. 3rd Ed. London, Blackwell Publishing Ltd, pp.14.
Norton B & Elligott W M (1995) Value Management in Construction. Macmillan.pp. 54
Dallas M (2006)Value and Risk Management: A Guide to Best Practice.1st ed. Blackwell Publishing, pp.35
University Of Texas (2002) A Short History of Risk Management 1900-2002[Internet] Available from :< http://www.mccombs.utexas.edu/dept/irom/bba/risk/rmi/arnold/downloads/Hist_of_RM_2002.pdf> Accessed on 1st December 2009.
Smith N J (2008) Engineering Project Management. 3rd Ed. London, Blackwell Publishing Ltd, pp.45
Dallas M (2006)Value and Risk Management: A Guide to Best Practice.1st ed. Blackwell Publishing, pp. 36
Institute of Risk Management(2002)A Risk Management Standard [Internet]Available from:< http://www.theirm.org/publications/documents/Risk_Management_Standard_030820.pdf>Accessed on 1st December 2009
Institute of Risk Management(2002)A Risk Management Standard [Internet]Available from:< http://www.theirm.org/publications/documents/Risk_Management_Standard_030820.pdf>Accessed on 1st December 2009
Hubbard D(2009)The Failure of Risk Management: Why It's Broken and How to Fix It John Wiley & Sons, pg. 46
Dallas M (2006)Value and Risk Management: A Guide to Best Practice.1st ed. Blackwell Publishing
Lock D (2007) Project Management. 9th ed. Gower Publishing Ltd
Thiry M (1997) Value Management Practice, Pennsylvania, Project Management Institute.