There are many factors placing pressure on organizations today. Two of the most visible are the evolving Sarbanes-Oxley Act and the need to clearly create value.
Both of these combine to highlight the need for effective project management in organizations.
There are a number of good summaries of the Sarbanes-Oxley Act of 2002 (Sarbox) available on the Web (see end of article).
Revisiting the entire act here would not add value, but there are two sections in Sarbox that highlight the demand for effective project management: Internal Controls and Real Time Disclosure.
Section 404 – Management Assessment of Internal Controls
The final requirements for section 404 have not yet been defined and the existing wording is quite vague.
As a result, many businesses are holding their collective breath in anticipation as the section can have far-reaching impacts in both the financial and operations aspects of business.
In theory, section 404 will require firms to at least have appropriate controls in place to ensure the accuracy of financial systems.
In preparation, it is recommended that development activities associated with financial systems and/or systems that directly integrate to those systems follow a formal structured methodology.
For example, if the general ledger system is maintained in an ad hoc fashion today, then that method will need to change.
Even without Sarbox, best practices tell us that there must be a formal process to collect requirements, assess impacts, test, etc.
There is a litany of benefits related to formalized development methodologies, but it is vital that development efforts surrounding key systems at the very least be coordinated such that key controls are designed into the system and are effectively tested.
Hand in hand with development are project management methodologies. Whether buying new software or implementing new systems, there must be a defined process in place that has adequate controls to ensure a successful outcome.
As an example, many ERP system implementations fail not due to the software, but due to poor project management during the course of the project.
Regardless of what tool is being purchased or implemented, required controls must be identified prior to purchase, tested and implemented accordingly all within defined schedules, budgets and acceptable levels of risk.
Section 409 — Real Time Issuer Disclosure
In the case of unexpected material events that affect the financial or operational side of the business, a new 8-K form must be filed within two days, down from the current 15, according to June SEC comments.
This means that all aspects of the business must have streamlined and defined channels of communication to alert management of surprises, both positive and negative.
The main point is that there must be clearly defined risk management processes that include early risk identification and mitigation strategies coupled with disciplined communication in order to get any required updates to the appropriate level of management.
Sarbanes-Oxley in General
There are many aspects of Sarbox that will impact organizations, not to mention that it is still evolving.
If a Sarbox implementation team does not exist to weigh the requirements of the Act on the organization, there needs to be one comprised of the appropriate stakeholders, especially with section 404 still evolving.
Complying with new regulations can, and should, be managed just like any other project with risks, opportunities, benefits, costs, schedules and so on all being taken into account.
The Need For Value
In addition to the pressures from Sarbanes-Oxley, firms are being forced to demonstrate the creation of value for shareholders.
The days of free spending with little to no oversight are long gone. Today, there are multiple projects vying for limited resources while at the same time, numerous groups are scrutinizing management’s decisions and the organization’s financial status.
In short, organizations exist to maximize the return on shareholder equity and must carefully select and manage projects in order to achieve that goal.
Why Emphasize Project Management?
Proper project management methodologies put appropriate oversight controls in place to facilitate proper planning, risk management, review, and so on.
Furthermore, when properly implemented, project management methodologies have numerous mechanisms, such as work breakdown structures and control gates , to prevent run-away projects that destroy value.
Project management can help ensure that projects meet expectations and create value. However, this does assume that the best projects are selected and approved in the first place!
Without a doubt, in today’s economy, organizations must create value. In the business world, this means that projects must be planned and executed such that the total value exceeds the total costs to the organization.
In order to appropriately address this, there must exist both effective project management processes and oversight at an organizational level to coordinate efforts.
Without high-level oversight, it is far too easy for projects to fall into a “silo mentality” wherein costs and benefits are assessed at a departmental, or lower level, versus at the holistic organizational level.
For example, a project to reduce inventory may look great to finance but be a disaster for the production group and create a situation where the total costs far exceed the benefits.
In order to avoid this type of situation, organizations need project management offices (PMOs) where the entire organization’s needs are taken into consideration both when selecting and monitoring projects.
This systemic approach allows organizations to see redundant efforts, overall impacts, and which projects will maximize returns.
This enterprise-wide focus is where PMOs must focus their attention and coordinate with management to balance the organization’s project portfolio.
A great deal has been written about managing portfolios and is the topic of entire books. Hence, we will limit the discussion to say that the mix of projects that get approval and funding must be such that return on equity is both maximized and sustainable.
The Sarbanes-Oxley Act and the need for value are but two reasons for organizations to seriously evaluate their project management needs.
Organizations have a variety of stakeholders and project management processes must reflect not only the needs of the organization, but external stakeholders as well.