International Research Network on Organizing by Projects (IRNOP) 2017

11-14 June 2017

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**Citation:** Sabini, L., Muzio, D. and Alderman, N. 2017. Integrating sustainability into project management practices: the perspective of professional institutions. International Research Network on Organizing by Projects (IRNOP) 2017 , UTS ePRESS, Sydney: NSW, pp. 1-17. https:// doi.org/10.5130/ pmrp. irnop2017.5661

Published by UTS ePRESS | http://pmrp.epress.lib.uts. edu.au

#### CONFERENCE PAPER

# Integrating sustainability into project management practices: the perspective of professional institutions

#### **Luca Sabini1\*, Daniel Muzio2 , Neil Alderman3**

**1**Hertfordshire University, Hatfield, UK **2,3** Newcastle University Business School, Newcastle upon Tyne, UK

**\*Corresponding author:** Luca Sabini, Hertfordshire University<EMAIL_ADDRESS>
**Name:** International Research Network on Organizing by Projects (IRNOP) 2017

**Location:** Boston University, United States

**Dates:** 11-14 June 2017

**Host Organisation:** Metropolitan College at Boston University

**DOI:** https://doi.org/10.5130/pmrp.irnop2017.5661 **Published:** 07/06/2018

#### Abstract

This paper is based on a work-in-progress research project; therefore, results and conclusions are preliminary.

### Synopsis

*Sustainability*, in its broadest meaning, has acquired a great importance in modern society and consequently influences almost every aspect of social life. This paper analyses the transformation that the project management profession is undergoing towards the integration of sustainability into its core values and practices.

### Research design

This research uses qualitative data from a mix of semi-structured interviews and archival evidence – professional bodies of knowledge, codes of ethics, newsletters, websites, social media platforms, blogs, online databases and international standards – with the intention of

**DECLARATION OF CONFLICTING INTEREST** The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article. **FUNDING** The author(s) received no financial support for the research, authorship, and/or publication of this article.

answering the following research question: what is the influence of professional associations with regard to the institutionalizing of sustainability practices into project management (PM) tools and techniques?

### Main findings

Different players influence, in different ways, the PM profession. Our analysis reveals that the nature of these actors is very heterogeneous, and the influence of the professional world of PM on the institutionalization of sustainable project management (SPM) is manifested in the different actions carried on by the entities we highlighted above. Therefore, the shift towards SPM is the result of the combination of each actor's individual strategy (Muzio, Brock & Suddaby 2013).

### Research Implications

The analysis of sustainable project management (SPM) is aimed at contributing to the PM academic literature, describing the transformation of PM practices, and to the practitioner literature, engaging with PM professional associations on the way they introduce the set of new practices.

### **Keywords**

**Sustainability, Project Management, Professional Associations**

### Introduction

In the news, undoubtedly a growing attention is being paid to anything connected with sustainability initiatives.1 Moreover, a strong connection with project management (PM) is also evident from a review of academic publications (Brones, Carvalho & Zancul 2014; Chofreh et al. 2015; Fernández-Sánchez & Rodríguez-López 2010; Marcelino-Sádaba, Gonzalez-Jaen & Perez-Ezcurdia 2015; Martens & Carvalho 2015, 2016; Sabini 2013, 2016; Sabini & Muzio 2017; Sánchez 2015; Silvius & Schipper 2014) or by looking at the publications and announcements of the PM professional associations (IPMA 2015a; PMI 2011, 2016). In addition, there is also a set of new, and non-traditionally established, associations, such as Green Project Management (GPM 2016), and international entities, such as the United Nations Office for Project Services (UNOPS), which are also contributing to the development of new sets of tools and techniques to make projects more sustainable.

Given the importance of projects in modern society,2 it is to be anticipated that the PM profession will experience a growing pressure from society to balance social, environmental and economic interests in projects. This is happening even more powerfully since the link between

1 See the websites of major newspapers, which permanently host a section with these themes on their homepage, e.g. BBC news has a "Science & Environment" section (http://www.bbc.co.uk/news/science\_ and\_environment); *The Telegraph* has a "Science" section (http://www.telegraph.co.uk/science); The Guardian has a "Sustainability case studies" section (https://www.theguardian.com/sustainable-business/ ng-interactive/2015/may/13/guardian-sustainable-business-awards-sustainability-case-studies-database); and *The Economist* has a "Science and technology" section (http://www.economist.com/sections/sciencetechnology).

2 "One-third of the worldwide gross domestic product (GDP) in society is initiated by projects" (Turner, Huemann & Bredillet 2010) cited in (Eskerod & Huemann 2013, p. 44).

sustainability and PM (henceforth SPM) has grown in importance (Silvius & Schipper 2014). Something similar can be observed to have happened to the engineering profession, which has "begun to recognise its larger role in the environmental field and environmental policies" (Boyle 1999, p. 85). For engineers, it was a slow process of incorporating "environmental ethics" (Saad 1997) within all aspects of professional engineering as an essential component of the professional accreditation process.

Comparably, induced by a set of different actors (and primarily the professional associations), a pressure on PM is arising to recognize sustainability as part of PM professional DNA. This acknowledgement is leading slowly to a process of redefinition of PM professional traits (such as considering longer-term effects of projects), in a similar manner to that experienced in the engineering profession. This raises the importance of professional institutions and their position in injecting and disseminating new practices that are sustainability related. Indeed, regulatory agencies, such as professional associations, are "critically important in the theorization process because they enable the formation and reproduction of shared meanings and understandings" (Greenwood, Suddaby & Hinings 2002, p. 61). This means that professional associations can "legitimate change" either by fostering the discourse on sustainability themes (holding conferences and events, issuing newsletters, etc.), or by "reframing professional identities as they are presented to others outside the profession" (Greenwood et al. 2002, p. 59), such as awarding sustainability-oriented professional qualifications.

In this research, we argue that to integrate sustainability in PM, inputs from a broad ecology of actors (in which PM professional associations have a pivotal role) are needed. Therefore, we describe strategies and actions that the PM professional world is carrying out to integrate sustainability into PM. In particular, having collected a large amount of evidence (factual data through archival analysis, backed up by key players' opinions, through semi-structured interviews), we describe the governing mechanisms different actors use to impact the PM profession.

### Professional associations and other institutional agents

In this study, we apply Scott's (1995, 2008) theoretical framework to explain institutional pressure on organizations. He identifies analytically the three "pillars" which constitute a framework to determine institutional pressure on organizations. This framework stresses that, "although institutional elements – rules, norms, beliefs – are primarily symbolic in nature, to be of interest these symbols must impact social behaviour: they must be reflected in activities, relations, and resources" (Scott 2008, p. 222). Consequently, every institution is an expression of diverse elements (in Scott's terminology: "pillars") "that depend on different bases of compliance, employ varying mechanisms, evoke differing logics of action, are signaled by different indicators, and offer multiple bases for determining legitimacy" (Scott 1995, chap. 3).

These 'pillars' are grouped into three sets: the *regulative*, the *normative*, and the *culturalcognitive*. The regulatory pillar originates in coercive power from State laws and rules. The normative pillar relies on those 'social' or 'moral' obligations which are not strictly enforced by a law. Those obligations advocate a given set of behaviours, which are morally sanctioned if not reproduced in a 'legitimate' way. The cultural-cognitive pillar emphasizes those taken for granted or 'orthodox' conceptions which individuals assign to reality to make sense of it.

Therefore, drawing a parallel with the study of Scott et al. (2000), where pressure coming from a different set of institutional actors changed the traditionally established professional governance in healthcare in the San Francisco Bay area, we describe how different PM professional actors are influencing the shift of the PM profession towards sustainability.

In our analysis, we categorized actors' actions according to cultural-cognitive and normative pillars only, as regulatory elements tend to be non-existent. As highlighted briefly before, the regulatory pillar originates in coercive power from state sanctions, and PM is not subject to such sources of influence at present. This is because PM is a non-mandatory profession, and therefore it is not subject to or backed up by state laws and regulations. On the other hand, the normative pillar relies on "social" or "moral" obligations that are not strictly enforced by law but have to be complied with if a project manager is to be considered part of the profession. In our sample, actions displaying this element include professional codes of ethics which embrace SPM, the formal endorsement of international standards on sustainability and the creation of bespoke standards and certifications on SPM. Lastly, the cultural-cognitive pillar emphasizes those taken for granted or "orthodox" conceptions reflective of a recurring professional issue or theme. This suggests the use of "common schemas, frames, and other shared symbolic representations that guide behaviour" (Scott 2008, p. 222). Therefore, actors display these elements when they are involved in advertising SPM or organizing conferences and meetings with a focus on SPM or build training programs for SPM. These actions are oriented towards building a shared idea of what SPM is and how it could and should be integrated into PM practices.

In this way, we broaden the meaning of what Greenwood et al. (2002) label as "regulatory agencies." As such, professional associations (established and new ones), consultants, communities of practice, universities, public entities and individuals constitute the kind of "regulatory agents" that can "legitimate change by hosting a process of discourse through which change is debated and endorsed" (Greenwood et al. 2002, p. 59). The way they make sense of sustainability and PM and the pressure they exert on PM, as stakeholders with different (and sometimes conflicting) interests, determine the developmental trajectory PM will undertake.

In the following sections of the paper, we describe how institutions apply strategies and mediate interactions among the different actors involved (Muzio & Faulconbridge 2013; Sabini 2014), with the aim of defining the development of the topic of "sustainability" among PM practices.

### Methodology/data collection

This research was conducted in two separate temporal stages, mixing two kinds of data sources: semi-structured interviews and archival data.

In the first stage, we have conducted 14 semi-structured interviews, in the time span from May 2015 to September 2016. Respondents occupied key positions within a number of both new and established professional PM associations (see Table 1).

The interviews followed a standard protocol, lasted between 30 and 90 minutes, and were recorded, transcribed, anonymized and entered into NVivo11 for the subsequent analysis. The general interview outline (Appendix 1) presents questions that were designed to highlight the interviewees' point of view on sustainability, the strategic decisions that they had recently faced in the PM profession relating to SPM, relationships with other actors and issues and obstacles that they experienced regarding SPM.

In the second stage, we performed an archival analysis (from September to December 2016) verifying through factual data the elements which emerged from the semi-structured interviews. We examined documents from professional associations' websites, blogs, newsletters, social media and so on to make sense of the growing importance of SPM within PM discourses. This resulted in the identification of 78 activities performed by professional and non-professional agents; these records have been ordered into a spreadsheet database, and each record is then referenced with respect to its line number (e.g. something which referred to an APM action is labelled as "line 4 – APM").

#### DATA ANALYSIS

Following others researches (Muzio & Faulconbridge 2013), we coded the data according to Scott's (1995) institutional framework.

Table 2 Actions towards SPM undertaken by different entities grouped by their normative and cognitive element

This framework allows us to categorize actions according to their displayed cognitive, normative, and regulative element (Scott 1995). In this way, recognizing if an action is legally forced (regulative), is a social obligation (normative) or is a taken-for-granted way of doing things (cognitive), we can group actors' actions into different categories. These actions are illustrated in table 1, where the action and the actors performing it have been associated with

the type of institutional action (normative or cognitive). As is evident from the table, and as we highlighted in the second section, the regulatory element is missing.

The archival data have been organized in a database according to the actor performing the action ("PM professional associations", "non-established professional associations", "Individuals", "Communities of practices", "Consultants", "Public entities", "International bodies" and "Universities"), a brief description, a date, an illustrative quote from data and a web link. Where possible, we also coded archival data with codes derived from the interviews in order to support practitioners' opinions with factual data.

The result of this two-stage data collection and analysis resulted in the production of an empirical narrative to reveal actors involved in influencing the shift towards SPM and their weight behind this shift. Although the interviews were coded according to a grounded style approach, we decided to discuss findings following Scott's (2008) institutional framework, which allows us to place actors and actions according to their normative and cultural-cognitive elements.

Summarizing, the analysis revealed the importance of professional associations (established and new ones) in the shift of PM towards SPM; this happens despite external pressures coming from the society. Therefore, the following sections highlight forces pushing change (PM associations and other actors) and their respective actions.

### Forces pushing change

Different players influence, in different ways, the PM profession. Our analysis reveals that the nature of these actors is very heterogeneous, ranging from individuals (acting as a "guru") to associations at different levels (national chapters and corporate levels) and also to public bodies (government agencies such as the Cabinet Office in the UK) and international bodies (such as ISO committees). Therefore, we identified the actors in play in a deductive from archival data, looking at actors' actions and ways in which these actors push the change towards SPM.

However, to introduce each of the actors, we decided to divide them into two sets: PM professionals and "other actors." The first set includes people which work as PM professionals. The second set includes all those actors that are not in the PM world, but have some sort of relationship with it (individuals, consultants, public entities, international bodies and universities).

#### PM PROFESSIONALS

This section describes the SPM in relation to the influence exerted by the associations' world, which is composed mainly by traditionally established and new PM associations.

When introducing corporate-level PM professional associations, national chapters and non-established associations, an important contrast has to be underlined. Indeed, the landscape of PM associations with regard to SPM is characterized by the contraposition between established (PMI and IPMA) and more recent (GPM, EarthPM) associations. The second group is characterized by several associations, ranging considerably in size, which have been created with the express focus to tackle sustainability (see EarthPM and GPM mission statements later in this section).

Therefore, in the first sub-section are grouped the established PM professional associations (PMI and IPMA), their national chapters (the APM, IPMA Netherland, PMI – California, PMI France, PMI-USA), their communities of practice (PMI – Project Management Global

Sustainability); and in the second sub-section, recently established professional associations (EarthPM and GPM) have been described.

Looking first at traditional associations, the two largest traditional PM associations with the most widespread membership are PMI (Project Management Institute) and IPMA (International Project Management Association) with their numerous national chapters and, according to collected evidences from the archival analysis, their main activities are related to "advertising" SPM. This action is aimed purely at reporting news and signalling advancement on SPM practices. Indeed, to make the point, articles (Gareis, Huemann & Martinuzzi 2009; Gareis et al. 2011) a book (Gareis, Huemann & Martinuzzi 2013; p. X; line 46, PMI), a white paper (PMI 2011), a website definition (PMI 2016) and an annual report (PMI 2013) have been recognized. Basically, in this way there is a recognition that the topic is of rising importance, but without any direct action to amend PM practices. This recognition occurs also at a national level with the APM in the UK, which acknowledges publicly on its website how projects need to consider sustainability (line 4 – APM) and promotes several case studies that highlight SPM (line 7, 8, 9 – APM). Similarly, the IPMA Netherlands has adopted a motto inspired by SPM: "Better projects for a better world" (line 36 – IPMA Netherlands).

PMI and IPMA are not just involved in advertising mechanisms, but also demonstrate a desire to have a direct influence on SPM by organizing conferences and endorsing standards.

Interestingly, on the "conference" side, IPMA organized the "IPMA Research Conference" on PM and sustainability with an explicit focus to "shed light on the obstacles [to sustainability]". Furthermore, looking at IPMA's new "Individual" (IPMA 2015c),3 "Project" (IPMA 2016b) 4 and "Organizational" (IPMA 2016a) 5 competence baselines, it is possible to note how they all refer in some way to SPM.

PMI has also (through one of its chapters) endorsed the UN Global Compact, which is considered "the world's largest corporate sustainability initiative" (www.unglobalcompact.org). The chapter declared that it "supports the ten principles of the Global Compact with respect to human rights, labor, environment and anti-corruption" (line 59 – PMI France). Moreover, other PMI national chapters host meetings on the topic of sustainability in general or on SPM in particular. One notable example is the PMI – California with "I'm a Project Manager – Is Sustainability My Problem?" in 2016 (line 53 – PMI California 2016).

Perhaps the most important sign of professional associations' engagement in SPM is the creation of communities of practice (CoP) and special interest groups (SIG). CoPs and SIGs represent a number of individuals who are engaged in sustainability and advertise SPM (line 49 – PMI CoP 2008) or organize events (line 37 – PMI CoP 2011). Individuals in these groups express their vision on SPM though articles in PM association blogs (line 32, 33, 34 – IPMA blog 2016),6 social media (line 78 – list of LinkedIn groups 2016) and books (Taylor

3 "Identify, and ensure that the portfolio complies with relevant sustainability principles and objectives" (IPMA 2015c, p. 298).

4 "We now expect every excellent project to consider sustainability and the environment with a long-term perspective, not as an option but rather as the default" (IPMA 2016b, p. 47)

5 "Describes the concept of organizational competence and how this should be used to deliver organization's vision, mission and strategic objectives in a sustainable manner" (IPMA 2016a, p. Executive Summary).

6 "They all need to be managed in a coordinated way from a long-term perspective"; "This is why sustainability and resilience will be key concepts to be considered for the way we manage our projects"; "It also deals with the responsibility of project managers towards the wider society, including sustainability and the environment" (IPMA blog 2016 – lines 32, 33, 34).

2011, l. line 10). These tools create the possibility for project managers to exert an influence on SPM outside of the strict control of the corporate level of the professional associations.

The second category, in contrast the first, is comprised of new and/or informal associations. Under this label, we group new associations (i.e. GPM – Green Project Management), social movements (i.e. EarthPM) and online groups7 which have been established with the explicit intent of tackling SPM or sustainability in general.

Non-established professional associations such as GPM and EarthPM (both founded in 2009), as with more established ones, promote SPM in many ways. This seems to be quite normal, since their mission is "at the intersection of Sustainability and Project Management" and they have been established "to advance sustainability in Project Management" (GPM website 2016).

Nonetheless, pushing forwards respect to traditional and established PM associations, new ones advance SPM by developing bespoke SPM standards, methodologies, certifications and courses. GPM issued the "GPM® P5™ Standard for Sustainability in Project Management" (line 77 – GPM), which provides a measurable framework for projects useful for sustainability reporting. This bespoke standard "is a tool that supports the alignment of Portfolios, Programs, and Projects with organizational strategy for Sustainability" (GPM 2016, p. 13). Additionally, GPM issued in 2013 a process-based, structured methodology for managing change, the "PRiSM." This methodology helps organizations to change towards P5 standard as it underlines areas of "sustainability and integrates them into the traditional core project phases to reduce negative environmental and social impacts in all project types using the GPM P5 Standard" (Carboni, González & Hodgkinson 2013, l., line 73).

Moreover, training courses have been set by EarthPM and GPM to improve project managers' abilities in SPM ("Distinguish yourself! Get certified in Green Project Management" – line 18 – EarthPM 2012 and "GPM® Certification, PRiSM methodology" – line 19, 74 – GPM 2012). And also, very often, these courses end up with SPM certifications ("Earning the GPM™ Certification puts you in a special league, positioning you as a change agent with the know-how to apply sustainable methods to projects" – line 75 – GPM).

Another method non-established associations use to spread SPM tools that they have developed is through collaboration with universities. They build masters' programmes partnerships to "provide institutes of higher learning with a turnkey sustainable project management program that can be utilized for undergraduate, masters, or continuing education" (line 22, 23 – GPM).

The underlying idea for non-established associations is the marketization of tools they develop. Indeed, to sustain themselves, these associations need to supply their products to a wide set of individual, organizational and institutional actors ("we can help you cultivate value from sustainability" line 20 – GPM 2012).

#### OTHER ACTORS

In addition to actors strictly involved in PM, a multitude of different actors make an impact on the profession. Among actors which exert an influence towards SPM are listed consultants (e.g. APMG International, LIFE Academy, MIT/Sloan & BCGroup report, SustainAbilities,

7 I.e. Green Project Managers, Boston Area Sustainability Group (BASG), GreenBiz.com, Project Management and Global Sustainability, Sustainability Career Group, IISPM, Sustainable Business Management, Sustainability Professionals.

Sustainability Learning Centre, Sustainable Measures, The Economist, Isos Group), public entities (i.e. AXELOS, Cabinet Office, Office of Government Commerce, Salix Finance), international bodies (e.g. United Nations and ISO) and universities (e.g. Aberdeen University, Lille University, Malmo University).

Similar to PM professional associations, this set of actors pushes ahead its interests towards SPM with different strategies. Above all there is what we called before "advertising SPM," which is fulfilled mainly by consultants (through blogs and online articles, database line 64 – Sustainable Measures database line 69 – ISOS Group, 2016) and public entities (providing examples of best practices in public projects database line 14 – CabinetOffice, 2012).

Moreover, among the several strategies this set of actors put in place are also activities which indirectly affect SPM, such as sustainability conferences ("The Sustainability Summit 2017" line 68 – The Economist, 2017), certifications ("Project Management for Sustainable Development – PM4SD™ – is a specialised certification scheme for Project Managers working in the tourism sector" line 12 – APMG International), training (Master in "Project Management and Sustainability, line 67 – Malmo University), courses (see the online course "Green/Sustainability Project Management" (line 63 – SustainabilityLearningCenter, 2014) and standards (see ISO 21500 "Guidance on PM": "The benefit is to use the resources deployed in the most efficient way, or reaching more with less resources", line 39 – ISO 2012).

### Strategies adopted

The influence of the professional world of PM on the institutionalization of SPM is manifested in the different actions carried on by the entities we highlighted above. Therefore, the shift towards SPM is the result of the combination of each actor's individual strategy (Muzio, Brock & Suddaby 2013).

As anticipated, to describe the set of actions undertaken by professional actors we decided to use Scott's (1995) institutional framework. Some actors (i.e. professional associations, social movements and consultants) issue both normative (e.g. endorsing sustainability standards, developing codes of ethics which include SPM, etc.) and cognitive (e.g. advertising SPM, organizing conferences, meeting and trainings) actions, whereas others tend to issue actions belonging only to one institutional category (e.g. universities, communities of practice, public entities and individuals perform only actions with cognitive elements).

#### ACTIONS DISPLAYING CULTURAL-COGNITIVE ELEMENTS

Activities which display cognitive elements are those culturally supported values, beliefs and assumptions coming from a wide range of actors (see Figure 1). For instance, those focused on reporting news and signalling advancement of SPM practices are among the most widely diffused.

The process of advertising SPM ideas is led by a broad set of different actors, but with the common idea that "all kinds of work has to be directed or at least influenced by the concept of sustainability" (interview 6, PMI). PM professional associations, as well as consultants, public entities and individuals issue articles and carry out miscellaneous activities in order to raise awareness on this topic with the common underlying idea that "this is a big gap" (interview 13, EarthPM). Nonetheless, the acknowledgement of this "gap" in PM tools and techniques is seen as an expression of the newness of the topic ("I think that it is normal to have a gap exist when a topic is new and we can say that sustainability is quite a new topic in the project management arena" – interview 11, consultant).

Indeed, PMI supported ways of advertising SPM concepts by sponsoring research which then materializes in articles (Gareis et al. 2009) and books (Gareis et al. 2013). Also IPMA, through its blogs (line 32, 33, 34 – IPMA blog 2016),8 social media (line 78 – list of LinkedIn groups 2016), and books (Taylor 2011) has similarly contributed to support SPM advance.

This range of activities acknowledges the importance of SPM as a topic but exhibits no intent to analyse the concept further, as in the example of a UK public-owned body (AXELOS) publishing an article complaining about the absence of implementation of SPM.9 This article is recognizing that "sustainability clearly has a link in many aspects of management and many aspects of work actually in general" (interview 6, PMI); nonetheless, it calls for further implementation in project and portfolio management techniques. Furthermore, a UK public entity (Cabinet Office) mentions sustainability in different parts of a construction strategy document (line 14 – Cabinet Office 2012) as a way to publicize its importance in the projects.

As demonstrated, PM professional associations are not the only actors who analyse SPM concepts, as a number of new PM associations and consultants also provide reports or offer examples on how SPM can be unpacked and examined in its key concept (e.g. consider sustainability issues in the beginning of every project, include all the stakeholders in key project decisions). Here the reasons to analyse SPM will be slightly different from those of the established professional associations. For this kind of actor, the intent is to set a market around some service they provide. One example is the Boston Consulting Group (BCG) Report on "Investing For a Sustainable Future" (Unruh et al. 2016), where it is explicitly underlined that "a growing number of investors are paying attention to ESG10 performance, as evidence mounts that sustainability-related activities are material to the financial success of a company over time" (line 54 – BCG 2013). In this document BCG provides a report on how corporate leaders should respond to the growing interest in sustainability. Another report worth mentioning is the one from EarthPM which, through examples of SPM practices, explores how some companies adopting SPM improved their overall performances (line 58 – EarthPM 2016).

#### ACTIONS DISPLAYING NORMATIVE ELEMENTS

Actions which display a normative element are those morally governed and originating as a part of a social obligation and are mainly performed by professional associations, social movements and consultants. PM professional codes of ethics which address sustainability, issuing bespoke SPM standards or endorsing international ones, are all examples of this kind of voluntary activity which is socially and ethically dictated.

Indeed, among the reasons for giving sustainability an impetus in public opinion (and therefore also to SPM), undoubtedly there is an intrinsic ethical concern. Sustainability, in pursuing "ecological health," "social equity," and "economic welfare," raises huge ethical

8 "They all need to be managed in a coordinated way from a long-term perspective"; "This is why sustainability and resilience will be key concepts to be considered for the way we manage our projects"; "It also deals with the responsibility of project managers towards the wider society, including sustainability and the environment" (IPMA blog 2016 – line 32, 33, 34).

9 "Project management forms a part of portfolio management and in both there is currently a lot of talk about the issue of sustainability but not a lot of implementing sustainability in portfolio management" (line 13, AXELOS 2005).

10 (Environmental, social and governance).

challenges which are involved in its promotion and achievement. PM professional associations, social movements and consultants understood these social requirements and therefore issued direct actions to tackle them.

As per a common definition, ethics "seeks to address questions about morality, concepts like good and bad, right and wrong, justice, virtue, etc." (Moore 2012). Therefore, notions such as "good and bad" and "right and wrong" are embedded in ethics definition. These notions emerge very clearly from the discourse on sustainability in general: "organizations that separate the 'doing the right thing' from 'doing things right' tend to be more successful in the long term" (Gartner 2006), meaning that these two concepts are tied together. Consequently, in the world of PM, a strong connection between SPM and ethics it is also shared: "A project run with green intent is the right thing to do, but it will also help the project team do things right" (Maltzman & Shirley 2010, p. 54).

Ethical concerns are implied even more often in practitioners' discourses when considering the importance of SPM and referring to it as "a more general thing that everyone should observe as something that's good for the world" (interview 1, APM). Again, the discourse abounds with ideas of "doing the right thing," and "if project managers have that responsibility or that power in our hands we should make good use of it" (interview 11, consultant). Concerns about ethics arise so strongly in some discourses that the conditions driving the project may lead to some ethical warnings, wherein it is suggested that the project manager has to decline from taking on the project: "It's a matter of principle, so if we think it's unsustainable in what they're doing, then as a matter of principle we might refuse the project to go any further" (interview 2, APM); also: "I try to teach my younger project managers that there are some projects you need to walk away from.

PMI and IPMA identify SPM as part of their codes of ethics, advertising its main ideas publicly on their websites (line 34 – IPMA 2016, and line 50 – PMI 2016), and therefore recognizing that "there is a significant appetite for bringing sustainable principles into project management" (interview 1, APM). Furthermore, examining the presence of SPM in codes of ethics, it is revealing how strong the link between these two ideas is. Indeed, looking closely at the codes of ethics it is possible to find strong references to SPM.11 Interestingly, both the IPMA code and the PMI one, recognize the influence that projects have on "sustainability," but without mentioning the word explicitly, as only the three pillars of sustainability (environmental, social and economic) are named.

Among other morally governed actions, there is a notable example of PMI establishing a community of practice on SPM in 2010 (see the "Global Sustainability Community of Practice"). This community was founded with the aim to be recognized as the "global driving force for implementing Sustainability in Organizational PM" (line 37 – PMI). But, as seen before, there have been other ways for PMI to support SPM concepts as sponsoring research materialized in articles (Gareis et al. 2009) and books (Gareis et al. 2013). Furthermore, recently (beginning in 2017) even PMI national chapters have regional meetings making a business case out of SPM: "basic and advanced project management techniques will be

11 IPMA – "We recognize that our projects, programmes and project portfolios, affect people, society and the natural environment in various ways, both locally and globally" (IPMA 2015b).

PMI – "Ethics is about making the best possible decisions concerning people, resources and the environment" (line 56, PMI – Code of Ethics).

compared to sustainable methods used by many companies to remain competitive" (line 60 – PMI New Hampshire). Another established PM professional association, IPMA, with meetings and events (see IPMA Research Conference in 2016 [line 29] and Global Young Crew Workshop 2016 [line 57]), is fostering the discourse over SPM aiming at understanding and clarifying its concepts.

Behind these activities there is the recognition that the topic is growing fast (it "is a critical societal imperative", line 37 – PMI Community of Practice 2011), and there is the need to understand the implications for the PM profession in terms of expectations and responsibilities attached to the profession ("improve how practitioners of all levels manage the complexity and dynamics of organizations, projects and programs" [line 46 – PMI 2013]).

### Conclusions

To ultimately integrate sustainability into the PM profession, inputs from a broad ecology of actors are needed. This is the first conclusion that we draw from this analysis. While established PM professional associations (PMI and IPMA) play a pivotal role, influences from other actors (and especially non-established associations such as GPM and EarthPM) are fundamental.

In Figure 1, we describe actors from our sample, their interactions and their influence on the PM profession. In particular, this picture shows how different entities influence the PM profession with respect to SPM and which approaches they have implemented. This relationships map is derived from our evidence, and therefore its main limitation is that it is a preliminary and probably still incomplete picture of this field.

Figure 1 Actors and their relationships as "regulatory agents"

Indeed, some more detailed considerations from this analysis arise from the comparison between actions of established versus non-established associations. The first consideration relates to the overall strategy adopted by these actors; although non-established associations seem to have implemented an "active engagement" on the topic of SPM, the established ones are adopting more of a "wait-and-see" strategy. The second consideration is related to the way the topic of sustainability is dealt with.

#### ACTIVE ENGAGEMENT VS "WAIT AND SEE"

A fundamental difference between new and established PM professional associations is in the aim of the association. Associations such as GPM or EarthPM have been created as a response to the need of practitioners for guidelines and best practices on how to implement sustainability metrics within everyday practices, whilst established associations have a broad approach to PM, such as its professional advancement and the improvement of project success (see PMI "Core purpose" and IPMA vision).12

Although both sets of institutions have some kind of strategy towards sustainability, the strategies they pursue are diametrically opposed. The newest associations usually tend to show an active engagement towards sustainability: creating bespoke standards (GPM 2016), producing monitoring methods (Carboni et al. 2013) and issuing related certifications (line 75 – 'GPM Certifications'). The established associations adopt more of a wait-and-see strategy, contemplating the importance of sustainability and raising their members' awareness of the issue, but with few actions adopted to tackle the issue in a practical way (IPMA 2015c, 2016a, 2016b).

#### "SPLITTING' SUSTAINABILITY"

Sustainability is a very broad concept, and it is difficult to tackle holistically. The idea itself can hardly be introduced into professional practices simply by introducing the word *sustainability* in the professional bodies of knowledge. Instead it can more easily be injected into professional core practices, slowly and gradually, following a progressive approach. PM professional associations are therefore adopting a low-risk strategy by embracing gradual and adaptive changes to their practices and objectives. As an example, looking at statements in the code of ethics, such as the IPMA code, pillars of sustainability are mentioned, but without using the word itself: "Our projects, programmes and project portfolios, affect people, society and the natural environment in various ways, both locally and globally" (IPMA 2015b).

Although it is necessary to recognize that the last IPMA competence baseline (the ICB4) has a paragraph on sustainability (<IP_ADDRESS> "Identify, and ensure that the portfolio complies with relevant sustainability principles and objectives" – IPMA 2015a: 298), the well-known and most recognized PM body of knowledge, the PMBOK (2013), does not yet dedicate a section (or a paragraph) to it.

This reveals a cautious approach on the part of PM professional associations, which are concerned not to detract their members from other important responsibilities and constraints. Therefore, by introducing the concept of sustainability gradually, they recognize that the topic is important to the profession, but are not willing to turn upside down the set of techniques and standards that have been built during the development of the PM profession.

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#### About the Authors

 Luca Sabini is a Senior Lecturer at Hertfordshire University Business School. He has been a Marie Skłodowska-Curie Associate Researcher at Newcastle Business School, working on a research project on Sustainability and Project Management. His main research focus is on the study of dynamics of institutionalization of new practices, with

particular focus on sustainability within the new occupations (such as Project Management). My broad research interests are related with business organization, Information Technology, Project Management, Sociology of Profession.

 Daniel Muzio is Professor of Professions and Organization at Newcastle University Business School. His research interests include the sociology of the professions, the organisation and management of professional services firms, gender and diversity in professional contexts, and the interplay between professional occupations and professional organisations.

 Neil Alderman is a Senior Lecturer at Newcastle University Business School. His research interests include innovation and technology management, product design and development in engineering, innovation in large-scale projects, the management of complex projects and critical perspectives on project management.

## Appendix 1 – Interview protocol

	- And as a professional association member?
	- buying the idea of the need of integration of sustainability and PM, how much weight do you think could have a project manager in bringing the sustainability into the project? In comparison of clients, contractors, consultant designers…
	- If so, how can be the gap filled?

Published by Project Management Research and Practice

© 2018 by the author(s). This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International (CC BY 4.0) License (https:// creativecommons.org/licenses/ by/4.0/), allowing third parties to copy and redistribute the material in any medium or format and to remix, transform, and build upon the material for any purpose, even commercially, provided the original work is properly cited and states its license.

**Citation:** Nannini, G., Warburton, R. D. H. and De Marco, A. 2017. Improving the accuracy of project estimates at completion using the Gompertz function. International Research Network on Organizing by Projects (IRNOP) 2017, UTS ePRESS, Sydney: NSW, pp. 1-15. https://doi.org/10.5130/ pmrp.irnop2017.5670

Published by UTS ePRESS | http://pmrp.epress.lib.uts.edu.au

#### CONFERENCE PAPER

# Improving the accuracy of project estimates at completion using the Gompertz function

#### **Giulia Nannini1 , Roger D.H. Warburton2 \*, Alberto De Marco3**

**\*Corresponding author:** Roger D.H. Warburton, Boston University<EMAIL_ADDRESS>
**Name:** International Research Network on Organizing by Projects (IRNOP) 2017

**Location:** Boston University, United States

**Dates:** 11-14 June 2017

**Host Organisation:** Metropolitan College at Boston University

**DOI:** https://doi.org/10.5130/pmrp.irnop2017.5670 **Published:** 07/06/2018

### Synopsis

A nonlinear regression-based growth model based on the Gompertz S-shaped function is used to forecast cost profiles for ongoing projects experiencing overruns. Based on the standard approach to earned value management and earned schedule, a simple linear expression is derived for the forecast of the duration estimate, and the theoretical formula is validated by application to case projects. The model's predictions are shown to be accurate, stable and reliable. We conclude with practical guidance for project managers.

### Relevance for practice and education

An effective method of duration and cost forecasting is established and validated. The duration and cost error formulas are quite simple and practically useful to project management practitioners during project monitoring and control.

**DECLARATION OF CONFLICTING INTEREST** The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article. **FUNDING** The author(s) received no financial support for the research, authorship, and/or publication of this article.

### Research design

Using the standard definition of the earned schedule and Gompertz curve cost profiles, estimates of the final duration are found by using regression curve fitting on the first and last available earned value data. Validation is conducted on many synthetic project data sets.

### Main findings

It is found that a simple two-point curve-fitting estimation formula is effective in predicting the duration of an ongoing project.

### Research implications

This research broadens discussions on accuracy on nonlinear duration and cost estimates of ongoing projects, using different cost profiles and the standard definitions of the earned schedule.

### Keywords

**Duration Estimation, Cost Estimation, Gompertz function, Earned Value Management, Earned Schedule**

### Introduction

Earned value management (EVM) and earned schedule (ES) are widely recognised methodologies that are used to compute duration and cost estimates at completion for inprogress projects. Traditional EVM and ES methods use index-based formulae that are linear, but why should such models be assumed to be reliable when realistic cumulative cost curves are usually S-shaped (Khamooshi & Golafshani 2014)? As a result, nonlinear regression-based estimates have been developed to overcome some of the limitations of linear methods and to better model the S-curve cost profiles of projects in a variety of industries. Such methods are regarded as more sophisticated and are able to generate improved estimates for nonlinear cost growth patterns (Christensen & Heise 1992).

Several growth models are available to describe the S-shaped cost profile of a project (Narbaev & DeMarco 2014a). In particular, the Gompertz function is an interesting sigmoidal curve that is often used to describe phenomena inherent to data with a Sshaped growth pattern. Thus, project EVM datasets can be modelled using Sshaped Gompertz functions for their cumulative cost profiles. Previous research findings have revealed that the Gompertz function is a valid and useful nonlinear cost profile that helps in computing refined estimates of the actual, future duration and cost (Trahan 2009; Narbaev & DeMarco 2014a,b).

The solution to the nonlinear duration estimation problem was provided by Warburton and Cioffi (2016), who constructed a formal theory based on standard earned value management (EVM) and earned schedule (ES) assumptions, which applies to all projects, even those with nonlinear cost profiles. They showed that the standard duration estimation formula, which was previously believed to apply only to linear profiles, actually applies to several types of nonlinear cost profiles, which significantly extends its range of validity.

However, not all cost profiles result in the same, standard duration estimation formula, and therefore it is of interest to determine whether other profiles that have been used successfully

in the past in the prediction of cost and duration, result in the standard formula. Therefore, here we investigate the use of the Gompertz function to predict duration and cost estimates at completion.

#### Relevant literature

EVM provides early estimates of the project's final cost, which many studies have found be reliable in practice (Christensen & Heise 1992; Christensen 1993). ES is the basis for duration estimation (Lipke 2003, 2010) and has been shown to work well for many real-world projects (Batselier & Vanhoucke 2015c; Colina & Vanhoucke 2015). However, Evensmo and Karlsen (2006) pointed out that the standard duration and cost estimation formulas are based on linear cumulative cost curves. This was further clarified by Kim and Kim (2014), who showed that both forecast accuracies and early warning credibility are sensitive to S-curve profiles, especially early in a project. Therefore, the nonlinearity of the cost curves significantly affects future estimates.

Batselier and Vanhoucke (2015c) analysed three duration forecasting approaches: the planned value method (Anbari 2003); the earned duration method (EDM); and the earned schedule method (ESM). Lipke (2003, 2010) created the linear duration estimate formula by defining a geometrical construction procedure to determine ES. Khamooshi and Golafshani (2014) criticised ES, along with other EVM analyses, for using monetary measures as a proxy for the true duration and argued that such measures may not accurately represent the duration's progress. They proposed the EDM, which decoupled the cost and schedule dimensions by using actual durations rather than their monetary proxies.

According to Vanhoucke and Vandevoorde (2007), all forecasting methods yield similar results, regardless of the method used, which Jacob and Kane (2004) attributed to the high correlation among the methods and that they apply the same basic parameters. Teicholz (1993) compared three forecasting methods for final cost using data from 121 real projects.

Using the real-life project database constructed by Batselier and Vanhoucke (2015a), the three methods were evaluated by Batselier and Vanhoucke (2015b). Although all three methods were found to be practically useful, EDM performed the best. Lipke et al. (2009) studied 12 projects, and estimates of both the final cost and the duration were claimed to be sufficiently reliable for general application. Typically, forecast accuracy is reported as the mean absolute percentage error (MAPE) between the model's prediction and the actual project data (Chen, Chen & Li 2016; Batselier & Vanhoucke 2015b). However, the time over which the mean is taken varies among authors. Also, as Kim (2007) pointed out, an average measure of the error over the entire project's execution has little practical use, as project managers prefer early estimates.

Several researchers have enhanced the linear EVM model. Evensmo and Karlsen (2006) proposed a cubic polynomial cost curve, and Warburton (2011) developed a time-dependent EVM model for projects that follow the nonlinear Putnam-Norden-Rayleigh (PNR) profile (Putnam 1978). Cioffi (2006a) showed that a model often used in population dynamics can be applied to project S-curves, and gave an interesting example of its application to the development of the Oxford English Dictionary, a project spanning many decades (Cioffi, 2006b). Warburton (2014) used a trapezoidal labour profile, which can describe construction projects, to derive accurate duration estimates early in the project.

Elshaer (2013) suggested that although ES sometimes outperformed other methods, it failed when incorrect warnings emerged from non-critical activities. Vanhoucke (2012)

confirmed that the network topology is a significant driver of variability, that S-shaped curves degrade forecasting accuracy and that networks with greater parallelism have more variability. Warburton and Cioffi (2016) recently developed a formal, theoretical foundation for duration estimation that applies to nonlinear, S-shaped cost profiles, which provides a significant motivation for this research.

Chen et al. (2016) reported the accuracy of forecasts using MAPE, and though their model improved forecasting accuracy, it required a logarithm linear transformation of the planned value data and linear regression. Zwikael, Globerson and Raz (2000) evaluated five forecasting models using the mean square error, the mean absolute deviation and the mean absolute percentage error. Narbaev and DeMarco (2014b) proposed a Gompertz-based growth model, using nonlinear regression curve fitting, that improved forecast accuracy (as measured by MAPE) by including schedule progress as a factor in the cost performance.

Data from decades of completed US Department of Defense contracts established that the cost performance index (CPI) rarely changed by more than 10% once the contract had reached the 20% completion point, regardless of the type or phase of the defence contract, weapon system or military service involved (Christensen & Payne 1991). Therefore, in practice, the CPI seems to be a reliable indicator after the 20% completion point. Kim and Kim (2014) analysed timeliness by examining seven duration forecasting methods and showed that forecast accuracy and early warning credibility are very sensitive to S-curve patterns, especially early in a project.

#### The Gompertz Curve

The Gompertz function is often used to describe phenomena with inherently S-shaped growth patterns and has found wide application in many industries that feature population growth, such as biology and social sciences. As it is extensively used in curve fitting and forecasting, the Gompertz function can be useful in characterising the S-shaped cost profile of projects in a variety of industries, especially when it comes to estimating project overruns due to cost and duration growth (Trahan 2009; Narbaev & DeMarco 2014b). The Gompertz function has been proven as a statistically valid model able to generate more accurate schedule-integrated cost estimates than other nonlinear models, such as the logistic, Bass and Weibull functions (Narbaev & DeMarco 2014a).

The Gompertz curve is typically written as follows:

$$G(t) = \alpha \exp\left[-e^{\beta \cdot \gamma}\right],\tag{1}$$

where α, represents the asymptotic value (*t → ∞*) of the Gompertz function and therefore is related to the final budget of the project. That leaves two parameters to be determined, and in the above representation, neither have an obvious project management interpretation.

Therefore, we eliminate β, by defining, β = γ*T*, where *T* is the peak in the distribution function, *g*(*t*) = *G*ʹ(*t*). Differentiating *G*(*t*) with respect to *t* gives *g*(*t*), and differentiating again and setting the result to zero shows that *T* is the peak in the distribution function. Thus, *T* is a parameter that directly determines the duration of the project, and, in fact, we will show that it is directly related to the actual end time of the project. That leaves just one parameter, γ, which characterises the growth rate of the cumulative curve, and allows for the study of a wide variety of different project cost profiles. Figure 1 presents Gompertz functions with three different values of γ that are similar to real-world project databases (Narbaev & DeMarco 2014b).

Figure 1 Gompertz functions (solid) and Gompertz distributions (dashed) with the same value of *T* = 10; asymptote, α = 1l and different values for γ: blue = 0.15, red = 0.20 and green = 0.25

The Gompertz function and the distribution function are then:

$$\begin{aligned} G(t) &= \alpha \exp\left[-e^{-\gamma(t-T)}\right], \\ \mathbf{g}\left(t\right) &= \frac{dG\left(t\right)}{dt} = \alpha \gamma G\left(t\right) e^{-\gamma(t-T)}. \end{aligned} \tag{2}$$

The definition of the end of the project requires some care. The Gompertz function never reaches its asymptotic value, but the planned end of the project is defined to be at a specific time, *T*1. We can define the end of the project as some specific fraction of the asymptotic value, such as 95% or 99%, in which case, at the planned end of the project,

$$G(T\_1) = (1 - \varepsilon)G(t \to \infty) = (1 - \varepsilon)\alpha = \alpha \exp\left[-e^{-\gamma(T\_1 - T)}\right].\tag{3}$$

where ε is a constant. It is convenient to define *k* as

$$1 - \varepsilon = \exp\left[-e^{-\lambda}\right],\tag{4}$$

which gives,

$$k = \mathcal{Y}(T\_1 - T) \,\text{.}\tag{5}$$

Therefore, *k* is determined once we chose the specific end point of the project as, say, 99% of the asymptote, α. This relation also shows that there is a direct relation between the peak in the distribution function, *T*, and the end of the project. Further, this gives a practical project management interpretation to the parameter, *T*, which determines the duration of the project.

#### Duration and cost estimate formulas

We follow the standard approach to EVM and use Gompertz functions for the cumulative planned value, *Gp*(*t*), earned value, *Ge*(*t*), and actual cost, *Ga*(*t*):

$$\begin{aligned} G\_p\left(t\right) &= \alpha\_p \exp\left[-e^{-\gamma\_p\left(t-T\_p\right)}\right], \\ G\_\sigma\left(t\right) &= \alpha\_\sigma \exp\left[-e^{-\gamma\_s\left(t-T\_s\right)}\right], \\ G\_a\left(t\right) &= \alpha\_a \exp\left[-e^{-\gamma\_a\left(t-T\_s\right)}\right], \end{aligned} \tag{6}$$

The *p* subscripts denote planned parameters; the *e* subscripts denote earned parameters; and the *a* subscripts denote actual parameters.

The total planned cost is the budget, *B* = *Gp*(*T*1) and the cost estimate at completion is, *E* = *Ga* (*T*′1). The same budget, *B*, is used as the final cost for both planned and earned values. In this, we follow the standard EVM approach, which says that as each activity is completed, it earns its planned value, even if there is a cost increase or a delay in completing the activity (PMI 2013, 2011). Therefore, at the end of the project, when all the planned work has been completed (i.e. earned), the total earned value equals the total planned value, *Ge*(*T*′1) =t *Gp*(*T*1). If unplanned work is proposed (e.g. a scope increase), the project must be re-planned, which will generate a new planned cost profile and all formulas in this paper then apply with the new profile replacing the old.

In standard EVM, if no scope creep occurs, the standard cost estimate at completion, CEAC, is the ratio of the budget to the cost performance index, that is, *CEAC* = *Budget/CPI*  (PMI 2011).

We define the planned end point of the project as *T*1 and assume that, during execution, it ends at *T*′ 1 . If the project is delayed, *T*′ 1 > *T*1 , and if the project is accelerated, *T*′ 1 < *T*1 .

According to the standard EVM methodology, when each activity is completed, it earns its planned value, even if there is a delay in the execution or a cost increase. Therefore, at the end of the project the cumulative planned value, *C p* (*t*), is equal to the cumulative earned value, *Ce* (*t*),

$$C\_o(T\_1') = C\_p(\dot{T\_1}).\tag{7}$$

If the planned and earned value curves end at the same percentage of the asymptote (e.g. 99%), then using equation 5, gives

$$
\gamma\_p \left( T\_1 - T\_p \right) = \gamma\_\sigma \left( T\_1' - T\_n \right), \tag{8}
$$

Equation 8 is referred to as the 'end point condition' and is more usefully written as

$$T\_1' = T\_n + \frac{\gamma\_p}{\gamma\_o} \left( T\_1 - T\_p \right). \tag{9}$$

This equation determines *T*1 and *T′* 1 in terms of the peaks in the planned and earned value distribution functions, *Tp* and *Tn*.

If the project is delayed, at the current time, *t*, the delay, δ(*t*), is defined as the time difference represented by the horizontal projection back from the point on the earned value curve, at *t*, to its intersection with the planned value curve (see Figure 2). For accelerated projects, the projection is forward in time. The mathematical representation of this condition is (Warburton & Cioffi 2016)

$$G\_{\bullet}(t) = G\_p \boxed{t - \delta(t)} \,\tag{10}$$

Figure 2 Definition of the delay, *δ*(*t*), as the difference between the earned and planned value curves: +*δ*(*t*1) is an accelerated project, and **−***δ*(*t*2) is a delayed project. The corresponding earned durations are denoted as *Te*(*t*1) and *Te*(*t*2).

We now introduce a new quantity: the earned duration, *Te*(*t*), which is defined as a timedifference: the current time minus the delay, δ(*t*):

$$T\_\bullet(t) = t - \mathcal{S}(t). \tag{11}$$

So far, these equations are completely general and independent of the specific shape of the cost curves. Using the above Gompertz functions, equation 6, in the definition of the delay, equation 10, gives

$$\alpha\_{\boldsymbol{\sigma}} \exp\left[-e^{\neg \gamma\_{\boldsymbol{\sigma}}(\boldsymbol{\tau} - \boldsymbol{T}\_{\boldsymbol{\eta}})}\right] = \alpha\_{\boldsymbol{p}} \exp\left[-e^{\neg \gamma\_{\boldsymbol{p}}(\boldsymbol{\tau} - \boldsymbol{\mathcal{S}}(\boldsymbol{\tau}) - \boldsymbol{T}\_{\boldsymbol{p}})}\right],\tag{12}$$

which, upon using equation 11, gives

$$T\_o\left(t\right) = T\_p + \frac{\chi\_o}{\chi\_p}\left(t - T\_n\right). \tag{13}$$

Using the end point condition, equation 9, gives

$$T\_1' = t + \frac{\gamma\_\sigma}{\gamma\_p} \left( T\_1 - T\_\sigma(t) \right). \tag{14}$$

At time, *t*, equation 14 can be used to predict the delayed end point of the project, *T*′1, in terms of known quantities: the planned end point, *T*1; the earned duration, *Te* (*t*); and the growth parameters for the planned and earned value curves, γ*p* and γ*e* .

We can compare this prediction with that of Warburton and Cioffi (2016), who derived the following formula for the actual end of the project for several project profiles, including the

linear profile that is the basis for the traditional ES approach. Therefore, we refer to this as the 'standard' prediction of the project duration, *T*′ 1*std*,

$$T\_{1std}' = \frac{tT\_1}{Te(t)}.\tag{15}$$

Equation 14 shows that if one were to apply the standard formula (equation 15) when using Gompertz functions, one would not be using the correct expression for the duration estimate. In fact, applying the standard formula to projects represented by Gompertz functions would result in the following prediction for the final duration

$$T\_{1stt}'' = \frac{tT\_1}{T\_1 + \frac{\gamma\_o}{\gamma\_p}(t - T\_1')}.\tag{16}$$

We note that at the end of the project, *t → ∞*, the above prediction becomes

$$T\_{1std}^{\bullet} \left( \begin{array}{c} \bigcirc \\ \end{array} \right) = T\_{1std}^{\bullet} \left( t \rightarrow \multimap \right) = \frac{\gamma\_{\mathfrak{e}}}{\gamma\_{\mathfrak{e}}} \left( T\_1' \right), \tag{17}$$

and using the end point condition gives

$$T\_1' = T\_{1std}'' \left( \circ \right) + T\_1' - T\_1. \tag{18}$$

This interesting result suggests that the standard formula may not converge to the correct answer when using Gompertz functions to model the cost profiles. This result was previously found by Warburton and Cioffi (2016), who showed that the standard formula does not give the correct answer for a project that follows the Cioffi profile.

#### DURATION ESTIMATE WHEN *βp = βe*

If the β parameters for the planned and earned Gompertz curves are the same (*βp* = *βe*), equation 10, gives

$$T\_\bullet \left( t \right) = \frac{T\_p}{T\_n} t,\tag{19}$$

and using the end point condition gives

$$T\_1' = \frac{tT\_1}{Te(t)} = \frac{T\_1T\_n}{T\_p},\tag{20}$$

which is the standard duration estimation formula. Therefore, if one were to use Gompertz functions for the planned and earned values, one could only use the standard formula if the β parameters for the two curves were the same.

We obtain a different prediction estimate when γ*p* = γ*e*, and these results are summarised in Table 1.

#### **The two-point duration prediction formula**

In the early stages of the project, it is very important to be able to forecast a possible delay in order to support effective management decisions. From the above results, it is possible to construct a prediction formula that is easy to use and accurate. At the beginning of the project, we know all the parameters of the planned value curve, *Cp*(*t*). On the other hand, we must assume that we know little about the earned value curve, *Ce*(*t*), and so it appears wise to consider the general case. Therefore, in order to compute the duration estimates, we need to compute the parameters *Tn* and γ*e*.

We now introduce a method of calculating the earned value curve's parameters by using only two data points from the project's earned value execution data. The mathematical details are contained in the appendix. We investigated a number of approaches for selecting the two data points, but using the first and last data points consistently showed the best results. Using two data points, the system of equations can be solved, and the final duration can be estimated. When we have significantly more than two values of the cumulative earned value data, we can use nonlinear regression to fit the entire earned value data set to a Gompertz function, which determines its parameters. Then, a duration forecast can be determined. Therefore, we have two methods for estimating the final duration:

#### RESULTS

To test the effectiveness of the above methods, we generated synthetic data sets for the planned, earned and actual data rates. Planned value data rates were generated by using Gompertz distribution functions, *gp* (*t*), with parameters similar to those found in real projects (Narbaev and DeMarco, 2014b). We then added a random uniform distribution of noise to get the earned value profile, *ge* (*t*), and the actual profile, *ga* (*t*). Many example data sets were generated, and the duration and cost predictions analysed using the above methods.

A typical example of the cost rate profiles is shown in Figure 3, where significant randomness is evident in the earned value and actual cost rates. The corresponding cumulative cost profiles are shown in Figure 4, where the randomness is smoothed out by the effect of the cumulative computation.

Figure 3 An example of Gompertz distribution functions, with noise, for planned value rate, *gp* (*t*), (blue), earned value rate, *ge* (*t*), (red) and actual cost rate, *ga* (*t*), (green)

The accuracy of the two duration prediction methods is shown in Figure 5, which plots the errors in the duration and cost estimates as the project proceeds. For the two-point method, we used the first data point and the last data point available, that is, at the current time of the prediction (red curve). The regression method used a nonlinear regression fit to all available data at that time (blue curve). For comparison, the error in the standard cost estimate at completion (*CEAC* = *Budget/CPI*) is also shown (green curve).

There are several interesting features of fgure 5. The prediction errors generally decrease as the project proceeds and the duration error falls below about 10% after about 20% of the planned duration. The duration error falls to around 5% after about 30% of the planned duration.

Next, we varied the random contribution in the earned value and actual cost distributions. Somewhat surprisingly, addition of more randomness to the data did not significantly increase

Figure 4 Corresponding Gompertz functions to those of figure 3, for cumulative planned value, *Gp* (*t*), (blue), earned value, *Ge* (*t*), (red) and actual cost, *Ga* (*t*), (green)

Figure 5 Errors in the estimation of the final duration (two-point method, red; regression, blue) and cost (CEAC, green)

the prediction errors. This is shown in fgure 6, which summarises the results. It appears that the averaging effect of the cumulative data effectively smoothes out the deviations. This suggests that a major contribution to duration errors may be associated with biased deviations rather than random deviations, in the earned and actual cost data – a result that needs further exploration.

#### Conclusions

Using the standard definitions of EVM and ES, we established a sound theoretical basis for the prediction of the project duration when the cumulative cost profiles follow a Gompertz function. We derived formulas for the duration estimates and found the important and interesting result that a simple two-point estimation formula is effective in predicting the duration.

Table 2 summarises the results by providing the prediction errors over time through the project.

Table 2 The decline in the prediction error as a percent through the planned project

Because the entire theory was built on standard EVM and ES definitions, it is proposed as a familiar and accessible methodology for project management practitioners. Also, while the derivation of the error formula was moderately complex, the resulting two-point formula is quite straightforward, especially if compared to some previous studies that require three time points for curve fitting (Narbaev & DeMarco 2014b).

There are several issues that could be explored in future research. One might extend this work to other cost profiles, such as the Cioffi (2005) profile and the trapezoidal profile often used in construction (Warburton 2014). In addition, it might be possible to extend this theory to analyse the impact on the estimates of scope growth during execution. Typically, such methods incorporate estimates of extra work and scope changes needed to increase the project's expectations relative to its original performance. Further investigation might also provide guidance on the selection of appropriate cost profiles and, in particular, the effectiveness of using of Gompertz functions to characterise different categories of projects and industries.

In conclusion, we established a new, effective method of duration and cost estimation over time and validated the theory by comparing its predictions to many synthetic projects. The duration and cost error formulas are quite simple and require little additional effort to be practically useful to project teams during project monitoring and control.

#### Appendix: Mathematical details

We define two times for which we have earned value data, *t* 1 and *t* 2 (*t* 1 *, t*2 *>* 0 and *t* 1 *< t*2 ). We also know the earned value data at the two instants of time, *Ce* (*t* 1 ) and *Ce* (*t* 2 ). For these two time values, we calculate the earned duration, *Te* (*t*), from *Ce* (*t*) = *C p* (*t −* δ(*t*), as

$$T\_{\bullet} \left( t \right) = T\_p - \frac{1}{\gamma\_{\bullet}} \ln \left[ -\ln \left( \frac{C\_{\bullet} \left( t \right)}{\alpha} \right) \right]. \tag{21}$$

Once the *Te* (*t*) values are determined, we can calculate *Tn* and γ*e* and thus *T*′ 1 in two different ways, but the different approaches lead to essentially the same results.

The first method, called the two-point method, uses the properties of linear functions and allows defining the parameters *a* and *m* as

$$T\_\circ(t) = a + m\*t.\tag{22}$$

We develop a two-equation system where the *Te* (*t*) values are estimated from equation 21.

$$\begin{aligned} T\_\bullet \left( t\_1 \right) &= a + m \ t\_1 \\ T\_\bullet \left( t\_2 \right) &= a + m \ t\_2 \end{aligned} \tag{23}$$

After solving the system, we estimate *T*′ 1 as

$$T\_1' = \frac{T\_1 - a}{m}.\tag{24}$$

When we have several values for the cumulative earned value data, we perform a nonlinear regression on the entire earned value data set to determine the parameters of the Gompertz function. The estimate of the duration forecast then follows.

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### About the Authors

Giulia Nannini earned her master degree in Engineering&Management from Politecnico di Torino with a dissertation in cost and schedule nonlinear estimates at completion. She works at KPMG as a consultant in supply chain and operations management.

Roger Warburton, PhD, is an Associate Professor Emeritus. He teaches courses in supply chain management and project management in U.S. and Europe and conducts research in project management, having developed a model for including time dependence into Earned Value Management, to determine project costs and schedules early in their life. Previously,

Warburton was the MIS director for Griffin Manufacturing and vice president of the Software Technology Division of Jaycor, directing the technical analysis of very large information systems.

Alberto De Marco, PhD, is an Associate Professor. He teaches project management and operations management at various international institutions. He's been Visiting Professor at the Tongji University in Shanghai and the Massachusetts Institute of Technology. His research activities are in the areas of construction project management, project

control and public-private partnership for infrastructure and service projects.

International Research Network on Organizing by Projects (IRNOP) 2017

11-14 June 2017

© 2018 by the author(s). This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International (CC BY 4.0) License (https:// creativecommons.org/licenses/ by/4.0/), allowing third parties to copy and redistribute the material in any medium or format and to remix, transform, and build upon the material for any purpose, even commercially, provided the original work is properly cited and states its license.

**Citation:** Brasil, V. C., Gomes, L. A. V., Salerno, M. S. and de Paula, R. A. S. R. 2017. Multilevel approach for Real Options in the innovation management process: integrating project, portfolio and strategy. International Research Network on Organizing by Projects (IRNOP) 2017, UTS ePRESS, Sydney: NSW, pp. 1-14. https://doi.org/10.5130/pmrp. irnop2017.5680

Published by UTS ePRESS | http://pmrp.epress.lib.uts. edu.au

#### CONFERENCE PAPER

# Multilevel approach for Real Options in the innovation management process: integrating project, portfolio and strategy

#### **Vinicius Chagas Brasil1\*, Leonardo Augusto Vasconcelos Gomes2 , Mario Sergio Salerno3 , Rafael Augusto Seixas Reis de Paula4**

**1**Production Engineering Department. University of São Paulo, Brazil<EMAIL_ADDRESS>
**2**Business Administration Department. University of São Paulo, Brazil<EMAIL_ADDRESS>
**3**Production Engineering Department. University of São Paulo, Brazil<EMAIL_ADDRESS>
**4**Production Engineering Department. University of São Paulo, Brazil<EMAIL_ADDRESS>
**\*Corresponding author:** Vinicius Chagas Brasil, University of São Paulo, Brazil<EMAIL_ADDRESS>
**Name:** International Research Network on Organizing by Projects (IRNOP) 2017 **Location:** Boston University, United States

**Dates:** 11-14 June 2017

**Host Organisation:** Metropolitan College at Boston University

**DOI:** https://doi.org/10.5130/pmrp.irnop2017.5680 **Published:** 07/06/2018

### Synopsis

The Real Options approach used by innovative firms has been largely studied considering three different levels: strategy level, innovation portfolio level and project level. The theoretical discussion, however, is still unclear about how to integrate these three levels. The main goal is to identify how it is possible to integrate the Real Options approach on project, portfolio and strategy levels.

### Research design

Based on four in-depth case studies and on grounded research in companies in Brazil, where we have longitudinally accompanied specific projects, we propose a discussion on the main

**DECLARATION OF CONFLICTING INTEREST** The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article. **FUNDING** The author(s) received no financial support for the research, authorship, and/or publication of this article.

issues behind different forms of integrating strategy, portfolio and project, using the Real Options approach.

### Relevance for practice

We believe that the integration between these three levels in using Real Options is crucial to comprehend organizational aspects and mainly to capture the value of managerial flexibility. This value is added by the Real Options approach when compared to traditional financial approaches (as net present value and return on Investment).

### Main Findings

We provide links among the issues treated separately in the literature: strategy, portfolio and project management. For instance, we show how flexibility might increase (or not) in the three levels and the alignment (or not) among these levels. We also find that the managerial flexibility should not be treated exclusively at the project level (different from the current thinking on the innovation literature) and should be considered at different levels. Furthermore, we claim that the portfolio architecture should be linked and influenced by strategic Real Options, which implies important changes in the portfolio management process.

### Research implications

Our paper also indicates the open space for the development of contingency models that aim to align the use of Real Options in the three perspectives described and the refinement of the managerial mechanisms to balance the different arrangements each level has.

#### Keywords

**Real Options, Strategy, Innovation Portfolio, Project Management**

#### Introduction

The use of the Real Options approach to valuate projects with a higher innovation content has attracted the attention of academics and practitioners in recent years (Barnett 2005; McGrath 1997; Wang & Wu 2015). To conduct this study, we adopted the concept of Real Options set by Dixit and Pindyck (1994) and adapted by Adner and Levinthal (2004, p. 75): "Real options investments are characterized by sequential, irreversible investments made under conditions of uncertainty."

In this theme, the scholars have explored a vast agenda of research. For instance, enhancing the mathematical models to apply the approach to different kinds of innovation projects (Wang & Yang 2012); discussing the organizational aspects linked to the use of Real Options (Coff & Laverty 2007); and analysing the contributions of Real Options to understand strategic investments (Krychowski & Quélin, 2010). Furthermore, the literature has addressed the Real Options thinking in different streams of research, comprised in three different perspectives: project valuation and project management (at project level), innovation portfolio (at portfolio management level) and strategic investment management (at strategy level).

At the project level, for instance, Huchzermeier and Loch (2001) focused their work on employing Real Options as an alternative for valuating and managing R&D projects. At the

portfolio management level, Santiago and Bifano (2005) investigated how Real Options might be applied to support innovation portfolio. Paulson, Connor and Robeson (2007) proposed the insertion of Real Options logic on the elaboration of portfolio management tools. Klingebiel and Adner (2015) and other scholars looked at Real Options at the strategic level, developing analysis including not only the use of Real Options on the financial point of view but also the application of its underlying principles and logic – *Real Options Reasoning (ROR)*.

By Real Options Reasoning, we consider "a conceptual approach to strategic investment that takes into account the value of preserving the right to make choices under uncertain conditions" (McGrath & Nerkar 2004, p. 1). In this paper, we developed an approach integrating such different perspectives to support substantive and radical innovation management. This integration is necessary, once the Real Options approach has been used in several ways in the literature, thus proving its potential as a relevant project management approach (Adner & Levinthal 2004; McGrath, Ferrier & Mendelow 2004).

As consequence, the research question that guides this paper is as follows: How might the Real Options approach be integrated at the project, portfolio and strategy levels? We perform a literature review on Real Options in order to develop a comprehensive framework focused on the integration of the approach on strategic, portfolio and project levels. In addition, we conducted a multiple longitudinal case study in four Brazilian firms which pursued managerial mechanisms on their innovation management system that uses Real Options or Real Options Reasoning. After Perlitz, Peske and Schrank (1999) pointed out the implementation issues in applying Real Options for R&D valuation and questioned why the method was not the standard in industry, Barnett (2005) and Tong and Reuer (2007) recognized that the organizational and managerial aspects of using Real Options are frontiers in this research field.

Our work contributes to a discussion of the relationships between the different levels in which the Real Options approach is used in activities with regard to innovation management. We believe that the fit between the levels of analysis in using Real Options is crucial to comprehend the implementation issues related to organizational and managerial aspects and mainly to capture the value of managerial flexibility. This value is added by the Real Options approach when compared to traditional financial approaches (as net present value and return on investment). The main goal was to identify how it is possible to integrate the Real Options approach on project, portfolio and strategy levels. In the first section of this paper, we develop a literature review on Real Options, with sections on project level, program management level and portfolio level. Then we describe the methodological aspects of the research, present the results and discuss them and at last, we conclude arguing about theoretical and practical implications of our findings.

### Theoretical background

#### REAL OPTIONS AT THE PROJECT LEVEL

Because Options Theory was first set on financial markets (Black & Scholes 1973; Cox, Ross & Rubinstein 1979) and extended to the real environment (Dixit & Pindyck 1994; Luenberger 1998; Trigeorgis 1996), several scholars dedicated their work to developing new mathematical models derived from them, and applied them to different contexts. Conceptually, an option is a right, not the obligation to buy or sell a good at a point in the future. The possibility to wait for new information and make the decision more assertive generates so-called "managerial flexibility," which can be quantified and has a specific value. The idea

considers that the uncertainty on projects' payoffs increases the value of the "Real Option" and improves the general value of that project when compared to traditional valuations based on NPV – net present value (Huchzermeier & Loch 2001).

With respect to R&D projects, and more broadly innovation projects, the development of mathematical models based on Real Options had been appointed as an adherent to valuate the projects, highly surrounded by uncertainties (Perlitz et al. 1999). In this sense, Huchzermeier and Loch (2001) analyse the influence of different sources of uncertainty on innovation projects and the value of managerial flexibility. Santiago and Vakili (2005) continued on the same road in developing this model, and Santiago and Bifano (2005) used an approximated model to valuate a development project of electronic devices. Schwartz (2004) applied Real Options to valuate patents. McGrath and Nerkar (2004) looked at models to use Real Options on pharmaceutical firms. More recently, several scholars have worked on elaborating models for specific markets or technologies (Wang et al. 2015; Wang & Yang 2012).

In general, at the project level the use of Real Options is focused on developing and applying mathematical models intending to capture the managerial flexibility of a project and to produce a better value than traditional alternatives predicts (as NPV) to improve decisions during the project development process. Should the project be interrupted? Improved? Abandoned? The logic behind the methods, related to the elaboration of decision trees and the identification of critical uncertainties is aligned with the needs the innovation management imposes.

#### REAL OPTIONS AT THE PORTFOLIO LEVEL

The portfolio management of innovation projects has been discussed with a view to selecting projects on a portfolio and balancing resources on these projects in an optimal way (Cooper, Edgett & Kleinschmidt, 1999). The architecture of the portfolio involves considering its strategic buckets, the rules to characterize each portfolio and to rank the projects, the support to decisions and the resources re-allocation as some of the macro activities of portfolio management.

Regarding Real Options at the portfolio management level, the literature prescribes actions with respect to (i) the need for a concrete project valuation to compare different initiatives inside the same bucket and the possibility of Real Options to fit it (Cooper et al. 1999); and (ii) evaluation tools that internalize the assumptions of Real Options, but translate them to qualitative scores (Paulson et al. 2007; Terwiesch & Ulrich 2008). In this way, Mathews (2010a, 2010b) developed an algorithm and a managerial procedure based on Real Options parameters to classify and quantify pre-development ideas and product concepts.

Another stream of research focuses on developing Real Options mathematical models to optimize the project selection and to minimize risks and hedge against uncertainties. Wang and Hwang (2007) formulated the portfolio selection problem using fuzzy programming. Van Bekkum, Pennings and Smit (2009) analysed R&D projects as call options and studied the effect of project conditionality and correlation on the risk of a portfolio of projects. Lo Nigro, Morreale and Enea (2014) developed a Real Options model to select which project to finance in a portfolio, considering open innovation possibilities.

At the portfolio management level, Real Options approach is used not only to valuate a single project but also to analyse a portfolio of projects and support the decision-making on which the management should focus. Using analytical tools or Real Options mathematical models, the intention is to address the managerial flexibility – not that one present in one

project, but the flexibility in selecting and reallocating scare resources between projects. The project portfolio is seen as a Real Options portfolio.

#### REAL OPTIONS AT THE STRATEGIC LEVEL

A stream of research has been conducted on the use of options logic at the strategic level and is related to the strategic choices or investments an organization (McGrath & Nerkar 2004). The application of Real Options on strategy is called as Real Options Reasoning (ROR), considered as "a conceptual approach to strategic investment that takes into account the value of preserving the right to make choices under uncertain conditions" (McGrath & Nerkar 2004). The ROR considers the underlying principles that Real Options explicitly shows at the project level and translates it to a higher level of investment. As a consequence, a firm can "engage uncertainty and benefit by investing in options to respond to uncertain futures by managing the investment in a sequential fashion as uncertainty is resolved" (Tong & Reuer 2007, p. 3). Investments could be R&D, internationalization, diversification, new business development and so on.

Tong and Reuer (2007) discuss the contribution of Real Options to strategic management in three paths: (i) Real Options forces the re-analysis of the constituted wisdom and present specific predictions on a firm's choices; (ii) Real Options sets an imbalance in the structure of payoff for the potential investments that pursue options, reducing downside risks and favouring upside opportunities; (iii) Real Options influences and clear the resource allocation process of the company informing strategic decision-making.

Klingebiel and Adner (2015) and Barnett (2008) affirm that, because of the rigour and methodological complexity of Real Options mathematical valuation methods, this approach had its decision rationale of investments utilized as a heuristic and guide for management decisions and strategy formulation. Three elements of resource allocation regimes that characterize the ROR are (i) sequencing; (ii) low initial commitment; (iii) re-allocation (Klingebiel & Adner 2015). The use of options framing for decision-making under uncertainty, for instance by using small initial investments and assuming riskier projects, produces strategic flexibility, permitting managerial intervention that generates higher upside potential and contains downside losses (Barnett 2008). Instead of following the traditional decision-making framing, which indicates avoiding riskier projects, ROR drives to riskier investments; that is, in this case, uncertainty produces value.

#### REAL OPTIONS FRAMING: PROJECT, PORTFOLIO, STRATEGY

Each of the three different levels of analysis in which Real Options is applied has its dynamics and managerial processes. On the other hand, innovation management, especially that responsible for the inducement of more radical management, requires a complex system that comprehends project, portfolio and strategy levels (O'Connor, Leifer, Paulson & Peters 2008). As long as Real Options is appointed as an important approach to make viable the management of innovation (Barnett 2005; Huchzermeier & Loch 2001; Lo Nigro et al. 2014), there is the necessity of a better comprehension about the relationships between the use of Real Options logic, considering a vertical court on the three levels. To permit the analysis of Real Options at the different levels, Table 1 exhibits a summary of what has been discussed in the previous sections.

**Source:** The authors

#### Methodological aspects

We have proceeded to a multiple case studies. Our main research question was: how does the Real Options approach might be integrated at the project, portfolio and strategy levels?

Considering this focus, we investigate in deep the reasons why firms or, more specifically, some managers, are trying to adopted a Real Options approach, considering this three levels. We have proceeded to longitudinal studies and accompanied some projects during a large period. Regarding the methodological aspects, we followed the recommendations of Eisenhardt and Graebner (2007), Eisenhardt (1989) and Voss, Tsikriktsis and Frohlich (2002) to proceed multiple case studies, characterizing an inductive work, once we would like to build theory from empirical analysis. Because of the long time innovation projects take to be developed, we conducted longitudinal analysis, following the planning and execution of several innovation projects on four different Brazilian companies, recognized by their innovation driven actions.

The same company can have different innovation projects, some incremental, and some radical. Besides, often there are different portfolios (R&D projects, process or product improvements, etc.) and projects differently evaluated in the same portfolio (because of balancing objectives). Nevertheless, to study projects demands also to consider the company.

We intentionally selected companies with established innovation management systems and that had contact with the Real Options approach to valuate innovation projects. It was necessary understand how this approach was inserted on the management system and the relations for dealing with strategy, portfolio and project management. They were followed

#### Table 2 Research overview: cases and instruments

**Source:** The authors

longitudinally during a huge research project which investigated several aspects of the management of project with high uncertainty.

To collect data from the companies, we followed their activities longitudinally among the management of specific innovation projects, participated on selection and prioritization committees, and interviewed project managers and portfolio managers using semi-structured scripts. We have researched projects in five companies, as shown in Table 2.

#### Results and discussion

As the literature presented at the beginning of this work suggested, in our sample, we found firms with different capabilities associated with strategic planning, portfolio management and project management (see Table 3). We also observed that the firms have different aspects associated with the Real Options thinking and approach. In C1 and C2, the strategic planning involves scenario analysis, roadmapping process, market analysis and benchmarking and as a result, the strategic planning provides contingency plans for different markets and technology configurations. In these firms, the strategic planning was not conceived to explicitly increase the managerial flexibility (this is not an explicit concern of firms' board), but such process helps defining a temporal sequence for exploiting the opportunities, adopting well-defined

#### Table 3 Processes related to each level of analysis

**Source:** The authors

heuristics for resource allocation: following experimentation logic, the managers use low early commitment resources at the initial phases of exploiting opportunities. The opportunities are not treated as options.

Although C3 and C4 have not employed a well-structured strategic planning process, their outcomes of strategic planning also helped to define a temporal sequence for exploiting identified opportunities. At the portfolio level, we also found substantive difference among the firms. For instance, C2 has five different portfolios, include one (incubation) for exploring radical innovation opportunities. C2 also has clear rules for defining a temporal sequence for performing the projects and the allocation of resources following the logic of minimizing the losses (e.g. low early resources commitment). In three firms (except C4), there is a wellstructured process for reviewing the portfolio according to the evolution of projects and the emergence of new information.

We argue the integration (link) among strategy, portfolio and project management might be related to three aspects: managerial flexibility, managerial attention and deployment of options.

Our findings support that firms have different patterns of integration (link) among the strategy, portfolios and projects about managerial flexibility:

1. The strategic planning might generate limited flexibility, consequently impacting on the capacity of portfolio and project management to improve managerial flexibility. For instance, in C4 the strategic plan does not address new business and innovation opportunities, focusing on expanding the current market position and exploiting the current resource basis. Similarly, in C3 managers do not consider, during strategic

planning, opportunities for entering into new markets. In such cases, the strategic plan compromises the breadth of options and diversification of options. In all cases, managers have difficulties in investing in riskier projects. The managers have considerable difficulties in justifying investments on the opportunities related to radical innovation projects. Strategic planning does not offer proper heuristics to experiment without compromising a considerable amount of resources. In the four cases, managers do not have a well-defined heuristics for re-allocation of resources. Also, the managerial attention on the evolution of options is underdeveloped. There are not processes for identifying, analysing and taking decisions related to the options. Strategic reviews are only analysed during review moments, and the main concerns are the budget and time scheduling.

The second link identified among the three levels in our cases is related to managerial attention, which involves the ability to focus on the options, to identify and analyse the emergence of information and to change the course of action. It might occur between strategic and portfolio when the update of the portfolio does lead to an update in the strategic plan (e.g. C3) and vice versa (e.g. C4). Similarly, new information is identified at the project level, and the firm has proper communication chains and decision-making processes which allow analysing the impact on the portfolio and strategy.

The third link consists of the ability to deploy the strategic action as an option (or a portfolio of options); further, each strategic option should be treated at the project level as a set of other options. The update of new options that a project generates at each decision point and the changes performed at the strategic level should be linked in a flow of information and managerial mechanisms, to permit the company to keep its coherence. Regarding this aspect, the innovation portfolio and its management should ensure that the link is built. The strategic elements define and correct distribution of projects in them in a dynamic process, guaranteeing the value of managerial flexibility at the strategic level.

#### Conclusions

#### IMPLICATIONS FOR THEORY

Our findings have a number of implications for theory. First, we provide links among the issues treated separately in the literature: strategy, portfolio and project management. Based on the three cases, we found that managerial flexibility, managerial attention and the deployment of options bridge these three levels. We show how flexibility might increase (or not) in the three levels and the alignment (or not) among these levels. We also show that the managerial attention might be a useful link among these levels and these required appropriated communication chains and integrated decision-making processes. The misalignment in using the Real Options approach in each of the three levels and the different comprehension each of them has about the managerial logic behind the elaboration of the options are perceptive on the treatment of each theoretical perspective put on the theme.

We also find that the managerial flexibility should not be treated exclusively at the project level (different from the current thinking on the innovation literature), and should be considered at different levels. It is clear in the literature that the use of Real Options approach to structure and manage projects produce managerial flexibility (Huchzermeier & Loch 2001), but the consideration of the possibility to change the course of the projects and the implications it has to strategy and portfolio management might be extended.

Another point we indicated is that the portfolio architecture should be linked and influenced by strategic Real Options . This implies important changes in the portfolio management process. For instance, the portfolio might be organized in different project buckets, considering the options they can generate for the company (e.g. abandoned projects, improved projects, licensed projects). The portfolio balancing logic moves from the traditional incremental versus radical projects to a Real Options logic. The rule of balancing takes into account the different strategic options the firm constituted with its projects.

At last, we argue that project management should be organized according to Real Options logic. The project sequencing might consider different options instead of a predefined flow. The project management system should include, for instance, the draw of decision trees, evaluation and decision gates, and the process of changing direction the options logic requires.

Our work indicates, in the end, the open space for the development of contingency models that aim to align the use of Real Options in the three perspectives described and the refinement of the managerial mechanisms to balance the different arrangements each level has.

#### IMPLICATIONS FOR PRACTICE

Our work provides some relevant insights for practice. The disperse way Real Options are treated across different organizational levels entails the search for managerial mechanisms to link them. The strategic planning tools do not consider the presence of options, and are driven by competitive-advantage thinking. In dynamic environments, in which there is a need for taking more risky projects, this logic has no more adherence, making the Real Options approach an important heuristic for strategic formulation. To make it palpable, a competency to map strategic investments as a set of options and, more importantly, the organizational disposal to kill or abandon projects and established strategic actions are indispensable.

Translating strategic options to an innovation portfolio requires a well-designed configuration of project buckets. The buckets should address the significance of each strategic

option and support the alignment across projects in a way such that the strategy options can be visualized and achieved between them. The guarantee that each portfolio has resources and organizational protection makes the strategy possible, as the re-allocation of resources is feasible and manageable. In this sense, the link between the innovation portfolio and the strategy should be the deployment of the strategic options in buckets composed by the projects responsible for making the strategy achievable. The managerial flexibility at portfolio level only has value if the flow between portfolios occurs and if the portfolios represent specific strategic options.

Between the portfolio level and project level, the link is materialized, first, at the moment the projects are inserted in one of the portfolios, and second, when, during the sequential and "stage-gated" management of them – based, for instance, in decision trees – the decisionmaking directs the project to another portfolio or generates new options inside the projects. However, the project produces managerial flexibility individually, and this value only becomes real if it produces strategic value for the firm. The interaction between project and strategy levels also needs to be balanced, and the flow of projects fuelling the set of strategic options, as well as the strategic options becoming projects, may be constant and equalized by portfolio management.

Our work indicates that to migrate from the sustainable competitive advantage logic to a transitory competitive advantage, an important step is linking strategy, portfolio management and innovation project management. Real Options logic is a relevant approach to performing this task, integrating these three levels and establishing management mechanisms to produce and realize the value of managerial flexibility.

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#### About the Authors

 **Vinicius Chagas Brasil** received an undergraduate degree in production engineering from Pontifical Catholic University of Minas Gerais, Brazil, with an exchange program at the Hochschule Furtwangen University, Germany. He is a PhD candidate in production engineering at the Polytechnic School, University of São Paulo (Poli-USP), São

Paulo, Brazil. His research interests include innovation, innovation management, portfolio management, valuation of projects with high uncertainty, strategic and technology planning and the decision-making process under uncertainty and complexity.

 **Leonardo Augusto Vasconcelos Gomes** received an undergraduate degree in production engineering from Federal University of Minas Gerais, Belo Horizonte, Brazil, with an exchange program at the Ecole Superieure D'Ingenieurs en Eletrotechnique et Eletronique, Champs-sur-Marne, France, and a PhD in production engineering from

the Polytechnic School, University of São Paulo (Poli-USP), São Paulo, Brazil, with a research stage at IfM-Cambridge University, Cambridge, U.K. He is a lecturer with the Faculty of Economics, Management, and Accounting, FEA-USP. His research interests include innovation, technological entrepreneurship, strategic and technology planning, and technology road mapping and the decision-making process under uncertainty and complexity.

 **Mario Sergio Salerno** received an undergraduate degree in production engineering from the Polytechnic School, University of São Paulo (Poli- USP), São Paulo, Brazil; an M.Sc. degree in production engineering from the Federal University of Rio de Janeiro, Rio de Janeiro, Brazil, with specialization in technological innovation and development from