Figure of merit a powerful concept: Evaluating benefits, cost

Scenario: Your firm has just finished a strategic planning retreat, and your team has listed 15 projects they feel should be done. You sense you can only do six of them. How do you prioritize the 15 projects?

Ask 10 firms how they prioritize, and you will get 10 different answers. This is not bad, but there is a really cool way to prioritize key current and proposed new projects.

First, let me remind you of a distinction between two kinds of work: ongoing work and new initiative work. Ongoing work is the work in the functions, processes, geographies and corporate headquarters that keeps the bills paid and the lights turned on. New initiative work is work around brand new, big, strategic initiatives. I define these as projects large enough to directly influence the market value of the firm. These include new products and services, acquisitions, new support information technology, quality and customer service initiatives, and many others.

But how do or should we prioritize projects in ongoing work and strategic initiative work?

There is a powerful concept and measure to prioritize: Figure of Merit. It will change how you view prioritization.

The formula is the Benefit of what you expect a job or an initiative to accomplish divided by its Time to Complete divided by its Cost to Complete. Let’s discuss the pieces of this formula:

Benefit – can be expected revenue of a new product or the cost reduction in some aspect of ongoing work or the increase in quality. The Benefit must be quantified in dollars.

Time to Complete – the remaining time to complete the work or the initiative. I like to measure this in months.

Cost to Complete – the remaining cost to complete the work or the initiative. This is quantified in dollars.

A high FOM piece of work or initiative is where the Benefit is HIGH and Time to Complete and Cost to Complete are LOW. Making these divisions produces an index type of number. For example, say the expected Benefit of a proposed new product in $400,000 in revenue. Your expected time to complete is 18 months, and your cost to complete is $50,000. The FOM for this initiative would be 400,000/18/50,000 or .444. Say you are also considering a new software for accounting. The Benefit could be $250,000 in cost savings, and it will take 12 months to complete at a cost to complete of $120,000. Its FOM is 250,000/12/120,000 or .17. Of the two examples, the new product has a higher FOM than the software project, The list of 15 projects you are considering can be ranked High to Low in FOM. You can include projects in ongoing work and strategic initiative work together because the index nature of the FOM measure allows direct comparison.

So list your 15 projects High to Low in FOM. Say you have 800 hours of work capacity in the typical month (say five people at eight hours a day and five days per week). Simply add up all the Times to Complete in the 15 projects and draw a line after the initiative where you have consumed your time capacity. Pieces of work above the line are Active and are worked on. Those below the line are in Backlog. When you have finished a piece of Active work, the next highest FOM project moves to active.

A caveat: Key projects that have a high Benefit but huge Cost and Times to Complete will have low FOMs. These are typically “bet the company” kinds of initiatives. A decision by the team to do this anyway is called a “Strategic Override” and is simply a decision by the team.

This simple process works. I use it every week to prioritize my work. It will work for you, too.

This article is part of a series on what causes a firm’s value to increase.

Bill Bigler is director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent 25 years in the strategy consulting industry before returning to academia full time at LSUS. He is involved with several global professional strategy organizations and can be reached at bbigler@lsus.edu or www.billbigler.com.