Project governance framework

Revision as of 13:01, 22 February 2018

The PMI Guide on Project Management defines Project Governance as “the alignment of the project with stakeholders’ needs or objectives”. It is a critical function for the management of stakeholders and furthermore for the achievement of organizational objectives. Project governance provides the project managers and sponsors with a framework on how to make decisions to satisfy both stakeholder needs as well as organizational strategic objectives. ^[1] A guide by the Association of Project Management (APM) does not only consider single projects but aims to align the organization’s project portfolio to its goals. ^[2] A paper on a conceptual framework for project governance and the management of project management suggests that it has two key function. The first is to make decisions about which projects an organization should do and by this specify rights and responsibilities of project participants and define rules and procedures for making decisions in the projects. Secondly, project governance has an oversight and assurance function in order to support the organization’s strategy. ^[3] According to P. Renz, project governance closes the gap between corporate governance and the actual management of projects. It provides the project managers with more strategic and integrative solutions beyond standard project management methodologies and operationalizes the corporate governance strategy. There is not one single definition and approach for a framework that can be taken for each and every specific case. This article will define aspects of a framework, which are presented in the literature on project governance. While the APM bases its framework on adhering to different principles, P. Renz defines a Project Governance Model based on general governance theories and resulting key responsibilities. This article will define elements of a framework for project governance from different perspectives. ^[4]

Definition and Background

What is project governance?

"Project governance is a process-oriented system by which projects are strategically directed, integratively managed, and holistically controlled, in an entrepreneurial and ethically reflected way, appropriate to the singular, time-wise limited, interdisciplinary, and complex context of projects." ^[4] It has an oversight function which is aligned with the organization's governance model. A project governance framework provides the project manager and team with structure, processes, decision-making models and tools for managing the project, while supporting and controlling the project for successful delivery. ^[1] This high-level structure helps an organization to align it projects and their objectives with the organizational strategy as well as monitoring their performance. ^[5] Different actors and activities contribute to project governance and when effectively executed, project governance ensures that projects are delivered efficiently and sustainable while being in line with with the organization's objectives. It also includes instructions for the board and other major stakeholders on how relevant and reliable information are exchanged between them. Summarizing, project governance helps to:

• assure boards and executives that solid governance requirements are in place across all the past and ongoing projects in an organization
• optimize the project portfolio according to strategy
• avoid common mistakes and failures in project management resulting in insufficient performance
• improve the relationships with staff, customers and suppliers
• minimize risk originating from new projects
• while maximizing the benefits realized through projects
• assure a continuing development of the organization

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Why is project governance needed?

Project governance can support the successful outcome of a project in many ways. How to do project management is usually well defined within an organization and there are lots of information in- and externally on it. When it comes to more strategically problems, which are not covered within a project management framework, project managers are left without advice. The strategic and integrative nature of project governance bridges this so called "governance gap" and is going beyond standard project management methodologies. From a corporate level perspective, project governance helps to operationalize the strategy of an organization. It is linking corporate governance and strategy with the operational level, which is responsible for carrying out the projects. Through this, concerns on both levels are carried to the respective counterpart which brings them closer together. In a project oriented company, there is usually a asymmetry of information and knowledge between the project managers on the lower levels and governance boards on the upper level. Project governance overcomes this issue by being meaningful, value-adding link between project management and (corporate) governance. It institutionalizes a targeted information flow that enables the building of necessary knowledge. With this strategic orientation and a clear governance structure, it also handles multi-ownership of projects. ^[4]

Relation to Program, Portfolio and Corporate Governance

(1) Project governance between corporate governance and project management^[4]

Project governance is not one single function as e.g. a project management office. It is rather an integrative and integrating element, which is related to various aspects of program, portfolio and corporate governance as well as management. It is a linking element between all of the above, aiming to resolve the governance gap between project governance at the operational level and corporate governance at the executive level (see figure (1)). ^[5] According to the PMI standards on program and portfolio management, the governance functions on those levels have relatively similar goals for the respective levels. Common objectives shared by all of the above are e.g.:

• Monitoring and controlling activities
• Aligning projects, programs, portfolios with corporate strategy
• Standard communication procedures between different levels and components
• Approaches to decision-making

As each of the governance levels has relatively similar objectives, it can be considered as a top down structure, which has to be aligned starting from the big picture considered in corporate governance and going all the way down to the specific requirements for single projects. ^{[1] [6] [7]}

Theoretical Background: Governance Theories

As project governance originates from corporate governance, different organizational theories are considered to explain the theoretical background for the necessity of different key responsibilities in project governance. Based on these theories critical roles for project governance are identified.

Agency Theory

The agency theory analyses the relationship between two parties in an organization (a principal and an agent) and in general it implies that the principal faces difficulties in motivating the agent to work in a way the principal wants him to do. Because the agents need to be provided with a necessary level of decision-making authority by the principal, issues related to conflict of interest and moral hazard can arise due to asymmetric information. The fundamental assumption, this theory is based on, is that the agent is self-interested and will act opportunistically instead of just in the interest of the principal and that agents and principals may differ in their risk attitudes. The bottom line is, that agents need to get incentives, be monitored and controlled in some way.

In the context of project management and project governance, this theory is particularly used to identify a need for control between the owner and manager of a project.

^{[8] [5]}

Transaction cost economics

The theory of transaction cost economics is about opportunistic behavior, which may be caused by organizational actions driven by self-interest and an ambition to minimize costs. It implies that companies adapt their governance structures in order to pay the lowest possible transaction costs. Between the buyer and seller of a good is a complex relationship and behavioral factors are also considered when choosing a transaction. In general it helps to understand governance in relation to procurement and organizational decision making.

In the context of this article, the theory can e.g. explain and describe the process of assessing and selecting contractors or suppliers within a project. This implies, that there is a need in project governance for some kind of role which makes assessments and evaluations of actions within a project.

^{[9] [5]}

Stakeholder theory

The stakeholder theory, being based on a socially oriented perspective, focuses on a larger group than just the shareholders and it challenges assumptions of the agency theory, that the shareholder interests are primal. It implies that the management of a company should take the interests of all stakeholders (e.g. employees, suppliers, customers, environment) into account and suggests that conflicts and different interests need to be balanced between organizational shareholders

According to this theory, project governance is necessary as a strategy for project teams to understand and respond to different stakeholder groups and to coordinate with them.

^{[10] [5]}

Stewardship theory

In comparison to the agency theory, this theory describes human behavior in a alternative way and originates from psychology and sociology. Based on the assumption that not all organizational members (stewards) are dictated by self-interest but rather act in a collectivist way, it suggests that the stewards believe their value in the firm is increased and secured when the organization is performing good, thus try to improve organizational performance.

For the context of project governance, it can be assumed, that shareholders can be best served with empowering project managers and in the framework a role, which gives a strategic direction is necessary.

^{[11] [5]}

Resource dependency theory

This theory is about the allocation, prioritization and facilitation of organizational resources and implies, that success is linked to the ability of controlling interdependent external and internal resources. Resources dependency theory considers resources as they key driver in the governance structure of an organization.

It identifies the need for a linking role within project governance in order to account for the importance of allocating and prioritizing different resources, shared across projects, programs and portfolios.

^{[12] [5]}

Institutional theory

The institutional theory can help to understand governance in the context of social and cultural constraints, which are imposed on especially large organizations.

For project governance, it defines a "maintenance" or social role which has to handle the project in terms of societal and cultural expectations of an organization.

^{[13] [4]}

Framework

Since there is not one single framework, which can be taken for each specific organization and each project, the Association for Project Management (APM) defines thirteen principles instead, that should be fulfilled in order to attain successful governance for project management.

In the second part of this chapter, specific modules, which are corresponding to the governance theories and the identified roles, will be explained.

Principles

These thirteen principles are based on the general requirements of governance and project management and should be followed according to the APM guide to governance of project management.

1. The board has overall responsibility for the governance of project management.
2. The organisation differentiates between projects and non project-based activities.
3. Roles and responsibilities for the governance of project management are defined clearly.
4. Disciplined governance arrangements, supported by appropriate methods, resources and controls are applied throughout the project life cycle. Every project has a sponsor.
5. There is a demonstrably coherent and supporting relationship between the overall business strategy and the project portfolio.
6. All projects have an approved plan containing authorisation points at which the business case, inclusive of cost, benefits and risk is reviewed. Decisions made at authorisation points are recorded and communicated.
7. Members of delegated authorisation bodies have sufficient representation, competence, authority and resources to enable them to make appropriate decisions.
8. Project business cases are supported by relevant and realistic information that provides a reliable basis for making authorisation decisions.
9. The board or its delegated agents decide when independent scrutiny of projects or project management systems is required and implement such assurance accordingly.
10. There are clearly defined criteria for reporting project status and for the escalation of risks and issues to the levels required by the organisation.
11. The organisation fosters a culture of improvement and of frank internal disclosure of project management information.
12. Project stakeholders are engaged at a level that is commensurate with their importance to the organisation and in a manner that fosters trust.
13. Projects are closed when they are no longer justified as part of the organisation’s portfolio.

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Modules

P. Renz identifies the following six modules to address the principles and required roles in project governance. The following table gives an overview of the modules, which roles they fulfill and their main objectives. Additional information on the basics of each module will be displayed in the subsections.

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System Management

This module is mainly relying on two elements:

• Systemic thinking: As an integral part of the company culture, system-oriented thinking is broadly recognized. Five key characteristics are identified:

1. Holistic thinking in open systems
2. Analytical and synthetical thinking
3. Dynamic thinking in circled processes
4. Thinking in structures and information processes
5. Interdisciplinary thinking

• System model: In combination with systemic thinking, a system model allows a project to be configured and managed in best possible way according to system specific circumstances. The St. Gallen Management Model could e.g. be used as such a system. It comprises six key areas:

1. Environmental spheres
2. Stakeholders
3. Issues of interaction
4. Structuring forces
5. Processes
6. Modes of development

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Mission Management

The governance tasks corresponding to this module can be separated by the structuring force and project governance roles:

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Integrity Management

(2) Combined approach - recognizing ethics and discourse ethics ^[4]

P. Renz suggests a combined approach to Integrity Management incorporating comprising the recognition of ethics and discourse of ethical guidelines (see figure (2)).

1. Discourse ethics
   1. Communicative attitude: The discussing parties are ready to assert only those claims they regard as right, willing to substantiate their claims without reservations and try to arrive at a rational consensus.
   2. Interest for legitimate action: All participants are required to have a genuine interest in a communicative coordination of their actions.
   3. Differentiated responsibility: Being responsible in the sense of facing justification or solidarity and criticism of those being affected.
   4. Public binding: Processes of communication need an institutional context to take place, in order to be self-binding.
2. Recognizing ethics
   1. Emotional recognition: Lack of emotional recognition prevents a person from performing well and from developing her or his potential to the fullest.
   2. Legal and political recognition: It is represented by a set of basic rights as human beings and citizens.
   3. Solidarity: Each individual is considered as a person whose capabilities are of constitutive value.

^[4]

Extended Stakeholder Management

(3) Model for stakeholder management ^[4]

P. Renz suggests an approach to stakeholder management similar to one developed by Wilbers (2004) and Gomez et al. (2002). The approach is based on four steps (see figure (3)):

1. Identification of stakeholders: This task is not supposed to be a one-off activity but rather a periodically repeated one in order to adjust earlier phases. The main goal is to achieve a complete identification of as many stakeholders as possible.
2. Classification & assessment of stakeholders: Aims at building a basis for decision making regarding actions towards the stakeholders. Factors of influence and benefits or damages that are expected need to be assessed.
3. Actions: Some of the possible actions for stakeholders are: partnering, consulting, informing, avoiding, manipulating
4. Monitoring: Assess e.g. if relationships or interactions with stakeholders are within or outside an expected range.

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Risk Management

A system for risk management should create the following outputs:

1. Risk inventory: including low-probability, worst effect risks as well as high-probability, small effect risks
2. Risk identification: Based on participatory culture of creativity
3. Risk treatment process: Comprising elements like: mitigation, down-side planning, monitoring and communication
4. Strategically anchoring: integrative management providing upfront support and eliminating justification and miscommunication issues

^[4]

Audit Management

The main tasks of audit management within project governance are very similar to the ones of corporate governance:

1. Direction and control of internal and external auditing
2. Assessment of financial reports and interim reports
3. Legal compliance
4. Communicate audits with key stakeholders

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Limitations & Discussion

Limitations

• As the actual application of project governance in an organization is always an individual adoption, this article can only be focusing on critical key points that are needed in developing a framework for a specific organization. However, they only represent a broad range of possible approaches.
• The term "project governance" is still used by different researchers and institutes in different ways and though this there is not one single "standard" on how to use it. This limits the ability to draw one picture incorporating all the various definitions and ideas. Thus, this article focuses on the information gathered in the listed sources and acknowledges that there might be other approaches towards project governance.
• Approaches regarding e.g. risk or audit management are only explained in the basics as there are many more sources which specifically focus on them.

Discussion

The application of a project governance framework is advisable to some specific degree (corresponding to the level of projectification) as soon as projects are part of an organization. If adopted correctly, it provides various benefits even on a small scale. Commonly, project governance is applied in any way when projects are done as various elements (e.g. stakeholder, audit or risk management) are also important parts of project management. The nature of project governance being a link between project management and corporate governance supports this. For future research it would be interesting to which degree a standardized framework can be adopted and incorporated into the prevailing standards for project, program and portfolio management.

Key References

• P.S. Renz. Project Governance - Implementing Corporate Governance and Business Ethics in Nonprofit Organizations: This book goes through the whole process of implementing project governance. Though the title says, it focuses on nonprofit organizations, the book goes through each chapter first in general and then defining some specifics related to nonprofit organizations. Especially for further reading into the different modules that were explained, the book gives extensive information.
• Association of Project Management. Directing Change: APM Guide on Project governance: This guide by the APM gives a good overview over project governance and is the main source for the principles-section. However, it does not provide an extensive framework on how to apply project governance.
• Multi Level Project Governance: Trends and Opportunities: This paper is the main source for relating the different organizational theories to project governance and the relation between project, program, portfolio and corporate level governance.
• PMI-Standards: Though providing little information on project governance, for more extensive information on program and portfolio governance, they are very source.

1. ↑ ^{1.0 1.1 1.2} Project Management Institute. (2004). A guide to the project management body of knowledge (PMBOK guide). Newtown Square, Pa: Project Management Institute.
2. ↑ ^{2.0 2.1 2.2} PM Governance Specific Interest Group. (2011) Directing Change: A Guide to Governance of Project Management. 2nd edition. Pa: APM
3. ↑ E.G. Too, P. Weaver. The management of project management: A conceptual framework for project governance. International Journal of Project Management 32 (2014) p.1382–1394
4. ↑ ^{4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 4.12 4.13} P.S. Renz. Project Governance - Implementing Corporate Governance and Business Ethics in Nonprofit Organizations. Springer (2007)
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6} C. Biesenthal & R. Wilden. Multi Level Project Governance: Trends and Opportunities. 2014
6. ↑ Project Management Institute. (2008). The standard for Program Management. Newtown Square, Pa: Project Management Institute.
7. ↑ Project Management Institute. (2008). The standard for Portfolio Management. Newtown Square, Pa: Project Management Institute.
8. ↑ B.M. Mitnick. (1973). Fiduciary rationality and public policy: The theory of agency and some consequences. Paper presented at the 1973 Annual Meeting of the American Political Science Association, New Orleans, LA In Proceedings of the APSA, 1973
9. ↑ O. Williamson, (1998). Transaction cost economics: how it works; where it is headed. De Economist 146, 23–58.
10. ↑ Donaldson, T., Preston, L.E., 1995. The stakeholder theory of the corporation: concepts, evidence, and implications. Acad. Manag. Rev. 20, 65–91
11. ↑ Donaldson, L., Davis, J.H., 1991. Stewardship theory or agency theory:CEO governance and shareholder returns. Aust. J. Manag. 16, 49–64.
12. ↑ Pfeffer, J., Salancik, G.R., 1978. The External Control of Organizations: A Resource Dependence Perspective. Stanford University Press, Stanford, California
13. ↑ Hung, H. (1998). A typology of the theories of the roles of governing boards. In: Scholarly research and theory papers. 6/2. April 1998. pp. 101 – 111.