Stock Shock - The effect of PPM on share price

Stock Shock:The effect of project and portfolio

management on share price

Written by Phil Thornton, Clarity Economics for The EPPM Board

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An economist turned journalist, Phil is a prolific writer on economic, industry and business issues. Phil has been economics correspondent at The Independent (1990 – 2007) and business editor at the Press Association, among other roles. In 2007 he won the

title of print Journalist of the Year in the WorkWorld Media Awards run by the Work Foundation, and in 2009 his work for Financial Director earned him the Feature Writer of the Year award. Phil Thornton is now lead consultant at Clarity Economics, a consultancy and freelance writing company he set up after a 15-year career as a business journalist for newspapers and news agencies. Clarity Economics (www.clarityeconomics.com) looks at all areas of business and economics including fiscal policy, tax and regulation, macroeconomics, world trade and financial markets.

Phil ThorntonClarity Economics for The EPPM Board

1 The effect of project and portfolio management on share price

IntroductionSenior executives are today more accountable, even vulnerable, than ever before to poor share price performance. There are numerous reasons for this, but the increasing negative impact for organisations means that senior executives need to take a more active role in making the right decisions throughout business operations.

According to research conducted by the global consulting firm Booz & Co.1, over the last decade the average tenure of a global chief executive has dropped from 8.1 years to 6.3 years. This analysis of the world’s top 2,500 publicly listed companies found that executive turnover had increased from around 12% in 2000 to 14.3% in 2009, with more than a third (36.7%) of departures in 2009 being dismissals rather than part of a planned succession.

For project-intensive organisations, there is even more intense pressure on executives to deliver forecasted returns on investment (ROI). With the current economic climate, shrinking margins and increased global competition, the impact of huge capital investment projects extending beyond their scope and budget carries significant consequences. This places even greater emphasis on capital planning, a core business process that remains fraught with difficulties.

In a survey conducted by the Economist Intelligence Unit in October 20102, only 11% of companies could claim they delivered expected ROI on major capital projects 90-100% of the time, and 12% reported planned ROI delivery less than half the time. These results highlight that organisations – irrespective of industry sector – are still struggling to manage risks, accurately predict levels of ROI and consistently deliver bottom line growth from their major capital investments.

Bad investment decisions can lead to huge financial losses, which serves to place the spotlight firmly on the capital planning process. It also places greater emphasis on executive decision-making capabilities to determine which potential investments deliver the greatest value and reliability, as well as providing the financial stability to attract funding. The danger of poor evaluation can quickly lead to a significant reduction in the value of the organisation’s overall portfolio and compromise long range capital planning goals. From here, it is a short journey to poor share price performance.

Stock Shock:The effect of project and portfolio management on share price

’These days senior executives have to think simultaneously in two timeframes: short-term, keeping an eye on their company’s share price; and long-term, focused on the projects and capital programmes on which future corporate profitability depends. This report will help them to understand the fundamental connections between capital investment and stock market performance - and how project and portfolio management can be managed most effectively.’

Romesh Vaitilingam, author of ‘The Financial Times, Guide to Using the Financial Pages’, Member of The EPPM Board

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By its very nature, programme management is a long-term undertaking that balances the promise of high rewards with exposure to a large number of potential risks that can affect progress at any stage of the work schedule. There are three challenges executives face when managing risk, based on an inability to:

• Predict long-term costs across multiple projects and programmes

• Assess and monitor expected ROI

• Effectively manage cash flow over the project lifecycle

Consolidated and integrated visibility into individual projects is the most practical solution to overcoming these challenges, which explains the increasing popularity of Project and Portfolio Management (PPM) technologies as an effective oversight and delivery platform.

Project and Portfolio Management (PPM)

“The corporate, strategic level process for coordinating successful delivery across an organisation’s entire set of programmes and projects.”Office of Government Commerce (OGC), May 2004

This paper looks at the intrinsic connection between long-term capital investment and short-term market performance, and how this can in turn affect the profit outlook for project-intensive organisations. It will examine existing research undertaken in this area, and highlight case examples where project management performance has impacted – whether positive or negative - the stock price and, in turn, the overall image of both the company and those in the C-suite of these organisations.

‘To really be successful companies need to manage this portfolio of types of project on a day-to-day basis against the original plan, investing where necessary, to ensure expected targets are met. The key action is the proactive management of the risk of each individual project, and the key mechanisms are up-to-date, accurate information and open and honest communication. The detailed monitoring of all the important elements to that business may include cash flow, work pipeline, resources, reputation with client or a whole raft of other key business KPIs (key performance indicators).’

Graham Cogswell, Ex-Chief Executive Officer, Capita Symonds, Member of The EPPM Board


‘Unfortunately failure is always a better story than success and the markets zero in on it remorsefully. Investors cannot be fooled and as the study shows, they’ll look for the logical reason behind any failure – and that’s usually down to poor project and portfolio management.’

Guy Barlow, Director of Industry Strategy, Oracle Primavera

Lessons from failureAnalysing the exact impact of project and portfolio performance on an organisation’s share price is difficult due to the wider level of internal and external factors at work. For example, the fiasco surrounding the opening of Terminal 5, British Airways’ gleaming new £4.3 billion home at Heathrow, resulted in a significant delay in moving the organisation’s complete flight schedule over to the new terminal. As The Independent states3, this project was plagued with problems that directly impaired operations and in turn contributed to cost pressures that impacted the share price. However, it was only one of a number of reasons that had led to the share price being halved, with profit warnings more concerned with the skyrocketing price of jet fuel and the economic slowdown in the UK and America.

Such analysis in most project-intensive industries is also a subjective exercise, to the extent that business success is invariably linked in some way or another to project and portfolio performance. However it is equally clear that project management does affect business performance and financial results. Having sound PPM strategies and techniques in place can mean the difference between winning a multi-million pound contract and seeing it go to a competitor. It can also mean the difference in weeks, months, or even years between the targeted unveiling of a new infrastructure project or a new product roll-out and its actual delivery.

For example, in the case of implementing large scale IT systems, a recent study has looked at examples of the apparent correlation between project failure and share price impact. An analysis of 213 media reports of IT failures by publicly traded firms in the United States showed a cumulative abnormal drop in the share price of 2% over a two-day trading window. The average loss in market value amounted to $490 million over that period.4

The study by academics at Emory University, the College of Business in Atlanta in the US and the Stockholm School of Economics found that when markets assess organisational performance, they pay special attention to the circumstances behind any instances of failure. Importantly, investors were reported to respond more negatively to implementation failures than to operating failures, while firms with a history of IT failures tended to suffer the most. “Investors behave quite rationally in their assessment of IT failures,” the authors concluded. “In essence, our findings indicate that the market cares enough and knows enough to assess IT failures differently depending on their nature and circumstances.”

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Case example: Keller seeks firm foundations

Digital Look5 recently reported on ground engineering specialist Keller - the company that built the foundations for London’s Olympic Stadium. Keller recently saw its share price fall 60p to £2.90 – a 17% drop – after warning its full year profit before tax would be below market expectations. Justin Atkinson, Chief Executive, blamed about half the £10 million ($16 million) shortfall on two project delays in India and increased competition from South Korean companies. At the same time, Keller announced that work on the £30 million Crossrail contract and an upgrade of Victoria station was not expected to contribute to results until 2012.

The company said: "In this environment, we will continue to exercise caution in our management of costs and to focus on risk management, the most efficient use of our resources and maximizing cash generation.”

While the impact of poor project delivery can be dramatic, it can also be long lasting. Greyhound Lines, the long distance US coach company, suffered a 25% crash in its share price after it emerged that a new reservation system had led to a 12% drop in ridership thanks to the tardiness of the computer system and the fact that it was prone to crashing. As further problems with the system, known as Trips, continued to emerge, the share price fell by another 60%.6

The examples quoted above relate to IT project schemes within companies that are involved in significant, longer-term projects and change programmes. However, project management also relates to major one-off schemes that dominate the activities of the sponsor company for several years. These can include the construction of major installations such as road systems, power stations and new high-value engineering projects such as a new model of aircraft.

These long-term programmes of work are by their very nature vulnerable to a number of risks that can increase costs, lead to delays and depress the company’s overall reputation. Problems can affect progress at any stage in the project lifecycle, from delays in design and supply chain issues, to construction difficulties and constraints to final product installation.

Bloomberg Australia7 recently reported on the recent overruns and delays faced by Woodside Petroleum Ltd., Australia’s second-largest oil producer, regarding their Pluto Liquefied Natural Gas (LNG) project.

The project is now due to be delivered in March 2012 and set to cost A$14.9 billion, which is a six month delay and a A$900 million (6.4%) overrun compared with their previous estimate.

The recent delays have been blamed on slow progress in commissioning onshore refineries and seven weeks of bad weather, but the project has previously been plagued by construction worker strikes, labour shortages and the reinstallation of flare towers that weren't cyclone-proof.


‘When companies get PPM right they find the flexibility to deal with potential pitfalls, the space to move resources around projects without a detrimental impact and the ability to take a considered view of the investment risks.’

Mike Sicilia, SVP GM, Oracle Primavera

The recent cost increase announcement is Woodside’s third since November 2009 and as a result Woodside’s share price has dropped by 3.8% and placed them under scrutiny from Moody’s Investors Service who are considering downgrading the company’s Baa1 credit rating as a result, citing: “[the delay] reflects a weakening in Woodside’s project execution capabilities”.

The delays are putting pressure on the newly-appointed CEO, Peter Coleman, to both deliver the project as quickly as possible, but also to remain cautious by announcing conservative and realistic targets that Woodside can deliver to in the future.

This example demonstrates not just the impact of delays to Woodside’s reputation and share price strength, but also to the wider reputation of Australian oil and gas venture planning projects, which by association may be affected.

Success and failure: a mirror image?While there is strong anecdotal evidence that problems with the management of major projects can hurt share prices and affect the longevity of executives at project-intensive organisations, is there an argument that the relationship also works in reverse? Not according to the authors of the US study of 213 IT projects discussed above who concluded: “While there are overlaps in factors that promote versus impede success in development and use, the dynamics of success and failure are different as are the consequences of success versus failure.”

There are a number of reasons for this. Stock markets tend to assume that companies will succeed in their ambitions and will usually factor expected future profits into the current share price. Secondly the contribution and value of successful PPM will manifest themselves gradually over a longer time period – benefits that are often difficult to attribute directly to sound PPM practices. These factors contrast sharply with responses to project failure, where markets are quick to react negatively to poor, unexpected news, and to focus on inadequate project and programme management as a central, systemic organisational concern.

While it might seem unfair, practicing good project management does not necessarily equate to an immediate upward movement of the share price - whereas suffering major delays in a long-term construction or installation project, bringing products to market late or missing key deadlines that incur financial penalties and cause long-term reputational damage can clearly have the potential to knock profits and the company’s equity price.

It is therefore harder to identify positive case examples. One project that does stand out as ‘a textbook example of project management and team building’8 is the construction by Sir Robert MacAlpine Ltd of the Emirates Stadium for Arsenal Football Club in London.

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The project was delivered amid intense scrutiny into the delays and overruns on the rebuilding of Wembley Stadium and the extension of the Jubilee tube line to Canary Wharf and Stratford in east London. The 60,000 seat venue, complete with 27,000m2 roof, represented a series of engineering challenges but was completed ahead of schedule and on budget. Sir Robert MacAlpine Ltd is a privately held company, so it is not possible to track share price impact, but the company certainly gained in terms of its reputation. Shortly after completion, the Chair of the Olympic Delivery Authority, Jack Lemley, told an international construction conference that the project demonstrated how good planning and effective project management, alongside an effective decision-making structure, were “integral to success”. He added: “It is inevitable that more attention is focused on construction projects which encounter difficulties than those that don't, but high profile problems should not be allowed to define an industry.” 9

Another positive example, as seen on Articlesbase.com10 , is the energy conglomerate Reliance Industries Limited (RIL), India’s biggest firm worth $55 billion – or a tenth of the country’s stock market. The success of the company has been built on implementing an on-going series of world-class projects. Between 2005-2009, RIL set up the Jamnagar Refinery – the world’s largest refinery complex – in record time with an investment of $6 billion. The KG D-6 oil and gas exploration project also set new milestones, taking two and a half years less to complete than the industry average, and at half the cost, despite a manifold rise in commodity, equipment and rig costs.

As a result of this performance, RIL shareholders have enjoyed handsome returns, with stock process only recently dropping due in part to unrealistic expectations; the company is so big that it simply cannot grow as fast as in previous years.

Then there’s Apple Inc, the consumer electronics manufacturer that embarked on an ambitious product development strategy in the 14 years from Steve Jobs’ return as CEO until his death in October 2011. During this period growth levels have been stunning. In the last five years alone the share price has risen from around $92 to almost $400 as the company revolutionised handheld computing with the launch of the iPhone, the ultra-thin MacBook Air laptop and, most recently, the iPad. These followed the iMac and iPod, which dramatically changed the personal computer and music download markets.

Apple share price 6/11/06 – 20/10/11

2008 2010 600.00

400.00

200.00

0.00

‘RIL’s project management expertise honed in India will have a positive impact on its ability to undertake multiple programmes across the world

– it’s a real PPM leader.’

Guy Barlow, Director of Industry Strategy, Oracle Primavera


‘Project and Portfolio Management is all about balancing risk, especially as programmes are always hostage to the time it takes to complete them. That’s magnified if you’re running multiple projects but with the right approach you can predict costs, cashflow and ROI far into the future.’

Mike Sicilia, SVP GM, Oracle Primavera

This steep rise in the company’s share price is directly attributable to effective project and portfolio management, across a series of major, consecutive projects. Writing after Jobs’ resignation but before his death, one industry writer said that Jobs had shown “project leadership”. “In the project management world, project vision plays the same role transforming project managers into project leaders. A project leader goes beyond the logistics and effectively communicates his or her sponsor’s vision and inspires his or her team by effectively communicating the ‘Big Picture’. A project management practitioner’s ability to effectively demonstrate leadership is probably the most telling sign of his or her ability to deliver superior results to project stakeholders.”11

Conclusion: managing successThere is strong anecdotal evidence that failure and success in PPM can affect both the company’s share price and the career outcomes of its leading executives. Reducing or eliminating failures and nurturing successful project management capabilities should therefore be at the top of a company’s strategic objectives – if they are not already.

But what are the ingredients of success?

A project carried out for the Chartered Institute of Management Accountants by academics at the Open University and Cranfield School of Management looked at five case studies that featured organisations differing in size and business sector: news and media, professional services, insurance, pharmaceuticals and IT services.12

The project found that successful PPM must be supported by strong governance processes, rigorous business cases and close monitoring of project progress and outcomes. The firms studied told researchers that PPM had improved investment decision-making and project delivery, which in turn had helped them respond to recent economic turbulence. These findings, alongside the best practice experiences of organisations who have implemented an effective PPM framework, point to the following recommendations for minimising the impact of project execution on share price volatility:

• Balance the portfolio – move the project selection process away from a focus on the greatest financial value or return, toward projects that can feasibly be delivered on time and on budget – the pursuit of a ‘right blend’ that is consistent with, and contributing toward, overall strategic objectives

• Eliminate surprises – formal portfolio and project oversight provide executives with a process to identify potential problems earlier in the project lifecycle, and the control visibility to take corrective action, before they impact financial results

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• Build contingencies into the overall portfolio – flexibility often exists within individual projects but, by integrating contingency planning across the entire portfolio of investments, executives are afforded greater flexibility around how, when and where they need to spend money, alongside the flexibility to adjust this spend in response to a crisis

• Maintain response flexibility – with in-depth visibility into resource allocation, executives can quickly respond to an escalating emergency by manoeuvring resources from other activities, while calculating the impact this will have on current projects and the wider business

• A balanced portfolio should include a range of reward/risk combinations – successful PPM will include a constant re-appraisal of long-term investments and current cash flow as both project and business conditions evolve. Executives are then able to consider investment risks both across the portfolio and within individual projects, and to stop any activities not delivering sufficient benefit

• PPM needs to be supported by rigorously applied governance mechanisms – regular appraisals of the project portfolio, as a pattern of investments to deliver the business strategy, is essential and relies on up-to-date and accurate reporting of project performance.

Project delivery is only one aspect of maintain reputation and share price stability. However, poor project management is becoming increasingly damaging, with over 60% share price drops, delays over a number of years and losses in the billions as real possibilities. Senior executives need to begin looking at effective project delivery not as a bonus, but as an essential facet of business success.

Hopefully these cautionary tales, combined with the examples of successful project delivery, highlight the importance of a focus on effective PPM by companies whose share price – and the careers of their executives – are at risk if their management strategy is shown to be deficient.

‘To achieve these goals, success hinges on timely access to information across the project portfolio. This type of management information needs to be provided by the right PPM system for that company on a live basis across all the projects.

However, this tool is only the starting point, the real secret is to have the right culture in place and the right governance and structure to challenge and support ...leading to delivery.’

Graham Cogswell, Ex-Chief Executive Officer, Capita Symonds, Member of The EPPM Board


References1Favaro, Ken et al, CEO Succession 2010: The Four types of CEOs. Issue 632011. Booz & Co

2“Prepare for the unexpected: investment planning in asset-intensiveindustries” Economist Intelligence Unit, January 2011

3http://www.independent.co.uk/news/business/analysis-and-features/terminal5-fiasco-the-new-heathrow-hassle-801787.html

4Anandhi Bharadwaj, Mark Keil, Magnus Mähring, “Effects of informationtechnology failures on the market value of firms” Journal of Strategic Information Systems. 18 (2009) 66-79

5http://www.digitallook.com/cgi-bin/dlmedia/securitycgi?csi=50066&action=news&sub_action=sharecast&story_id=5138589&rns=&username=&ac

6Robert Tomsho, "Real Dog: How Greyhound Lines Re-Engineered ItselfRight Into a Deep Hole," The Wall Street Journal, 20 October 1994.

7http://www.bloomberg.com/news/2011-06-17/woodside-raises-cost-forecastfor-pluto-project-sees-first-lng-in-march.html

8http://www.sir-robert-mcalpine.com/projects/?id=4899http://www.london2012.com/press/media-releases/2006/05/terminal-5-andthe-new-emirates-stadium-show-how-the-uk-.php

10http://www.articlesbase.com/economics-articles/reliance-industries-thesuccess-story-continues-1286043.html

11Neil Stolovitsky. Project Vision: the Apple Never Falls far from the Tree. 25August 2011. PMbox

12Elizabeth Daniel, John Ward & Arnoud Franken. “Project portfoliomanagement in turbulent times,” Research executive summary series. Volume 7, Issue 2. February 2011. CIMA

The EPPM Board is a prestigious new international steering group from Oracle. It brings together senior figures from leading organisations to discuss the business critical role of Enterprise Project Portfolio Management (EPPM) and establish how the challenge can be better tackled from the top. In a world where executive accountability, even vulnerability, is magnified – how can the necessary high-level visibility and control be delivered? From Oracle’s own perspective, facilitating these discussions is key to aligning our approach with real customer pain points and reinforcing our relationships with the world’s leading decision makers.

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Stock Shock - The effect of PPM on share price

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