Insight No.36 : Apr 2012 : What's Coming Around the Corner?Pcubed Benchmarking: PMO Spending as a Ratio of Total Program Expenseby Ky Nichol

How much should your organization be spending on your program management office (PMO) operations if you want to maintain good control of your programs? Pcubed is often asked that question by its clients, and it's not very satisfactory to always respond, "Well, it depends..."

To more fully address the topic, we've compiled research on some fairly high-spend programs that were critical for the organizations running them. Our intent was to get a better understanding of the numbers. Knowing this specific metric can be helpful in several ways. Some of the PMO costs can be attributable to any project, no matter how simple or complex it is. But beyond those, dissecting PMO expense can give you a much clearer understanding of the drivers that will impact overall project spend. (Shortly, I'll share an example of this.)

To be honest, I went into this process expecting that PMO-related expenses would account for around five percent of project spend. What we found was different. The ratio of PMO expense compared to project management spend ranged in our benchmark from 0.8 percent to 3.7 percent. Where the numbers were available, we found that total project management spend ran from 4.4 percent to 10.4 percent.

To enable a rough test of the hypothesis that all of these examples are pertinent, we added an additional data field encompassing "applicability," to consider two factors: the complexity of the program; and "degrees of freedom," how much control the program had on budget based on the nature of the environment or work structure. For example, many public sector projects were being done in an atmosphere of heightened budget scrutiny, leading to a low degree of freedom and a tighter margin between total program spend and PMO-specific spend.

Our Results

What did we learn from this benchmarking exercise? There are a host of characteristics that determine how much the program will need to spend on its PMO. When you know a particular operation inside out because the organization has done it so often and so consistently, that PMO spend will be greatly reduced. If you don't know how to run a particular type of program because it's new to the organization, expect to spend more, sometimes a lot more. If you go into that program with the intent of building capability in-house, you'll find that as the organization's project and program management capabilities mature, that PMO gearing ratio will rapidly shrink.

Project Overhead at The European Space Agency

Bob Chesson understands this phenomenon well. For a decade he was the program manager for the human spaceflight operations for the International Space Station, which entailed running a large project organization with the European Space Agency (ESA). Now he's a senior advisor to the same operation.

ESA has programs for each of the different areas in which it works: human space flight, scientific satellites, communication satellites, navigation systems, etc. Each program has its own program management organization. And, says Bob, "A lot of these programs are very different in their nature. For instance the International Space Station with its involvement with international partners and a very integrated program with lots of different interfaces, is very different from the program management we'd set up for the average satellite mission, which is more or less self-contained."

The agency also has support directorates, the two main ones being a technical directorate, to manage the wide-ranging spacecraft technology initiatives taking place within ESA (the "heart and soul of the agency's technical core" says Bob), and the operations directorate, which operates satellites and develops the ground segment technology to support operations. The operations directorate also provides people to manage operations that ESA chooses to outsource. The programs draw from those two support directorates to staff up the projects.

ESA wishes to expand its footprint in space operations by taking on work for other entities to run parts of their space operations. Yet it has found that program management costs vary among the organizations competing for that work - sometimes dramatically - which can make for tough negotiations in winning contracts.

Bob believes the difference lies in the nature of the different organizations being compared. Some, he explains, "are more or less procurement agencies with no technical competence; whereas ESA is very much a technical organization that manages not only from the procurement standpoint but also from the technical standpoint. There's a very big element of technical oversight in all the work we do."

In fact, ESA is mature enough in its program management processes to know that there's a distinction between those programs it does completely internally and those it outsources.

Because ESA knows exactly what is involved in the work that it chooses to outsource, it can do that management with a very small overhead, Bob notes. "If an organization doesn't know what it's doing, PMO costs for managing the outsourcing will increase."

ESA type of work is "highly technical," Bob points out. "In the case of a development program, the program management team needs to understand what is involved in building a space craft, because there are masses of potential problems lurking there. If you haven't got a team that can manage that and has some understanding of it, it's almost impossible."

What ESA has discovered, he added, is that both models - small overhead, well managed and large overhead, learning-how-to-manage - are required in order to have a sustainable operation. "When we do a full outsourcing, that can work provided that we have a small team of people who are very competent," Bob says. "They've done the whole thing before; they know exactly how to manage the contracts; they understand the difficulties. They can do very efficient management of the outsource contracts. The question is, where do you get those people? There aren't schools that send these people out on a regular basis.

"That's why we need the second model. We need to have a series of programs that we more or less do ourselves, with a limited amount of outsourcing, so that we develop and retain the expertise in house, and we can use that technical expertise in the future to provide the management teams that run the more outsourced operations." In other words, ESA is continually building onto its talent base in order to grow its management capabilities to be able source work out most efficiently.

How Does This Relate to You?

By understanding its PMO spend as a percentage of its project expenses, ESA has developed a keen awareness of the need for its internal capability build program. Without that in-house expertise, the organization knows it would spend more on PMO operations.

How does all of this relate to your organization? Every organization is unique. Each has intrinsic issues or problems that don't exist in the others. In using a benchmark such as this, we encourage you to make sure that your comparisons are qualified. But given that qualification, we hope it will lead you to have a deeper understanding of the metrics driving your projects and programs.

It's important to understand what your baseline PMO spend is as a proportion of your overall program management expenses. Having that information can help you understand whether or not the proposed PMO spend for new programs is reasonable. For example, if it's double another comparable project, you'll want to look hard at the assumptions and see whether there are areas where you can bring those costs down. The underlying idea is to understand what's involved in running your programs to minimize surprise and maximize the potential for success.

Ky Nichol is an accomplished consulting leader with over 12 years of experience in delivering complex programs and business transformation in sectors including aerospace, oil and gas, financial services, IT, and more recently the UK government. He has led change programs in areas such as outsourcing at the International Space Station, restructuring at Accenture, HR alignment across Shell, IT systems development in financial services, and building manufacturing facilities. Influencing at the board level, he has extensive experience in organizational change, strategy development, program management, and performance improvement. Contact Ky at ky.nichol@pcubed.com.