The value of stakeholder management

One of the questions I’m regularly asked is to outline the business case for using stakeholder management in a business or project. This is a difficult question to answer accurately because no-one measures the cost of problems that don’t occur and very few organisations measure the cost of failure.

The problem is not unique; it is very difficult to value the benefits of an effective PMO, of improving project delivery methods (eg, improving the skills of your schedulers), of investing in effective communication (the focus of my September column in PMI’s PM Network magazine) or of better managing risk. The costs of investing in the improvement are easily defined, but the pay-back is far more difficult to measure.

There are two reasons why investing in effective stakeholder analytics is likely to deliver a valuable return on investment (ROI).

• The first is by knowing who the important stakeholders are at any point in time, the expenditure on other processes such as communication can be focused where it is needed most, generating efficiencies and a ‘bigger bang for your buck’.
• The second is stakeholders are a major factor in the risk profile of the work, their attitudes and actions can have significant positive or negative consequences and understanding the overall community provides valuable input to a range of processes including risk identification, requirements definition and schedule management.

At the most fundamental level, improving the management of stakeholders is directly linked to improving the quality of the organisation’s interaction with the stakeholders and as a consequence, the quality of the goods or services delivered to the end users or client (ie, stakeholders) as a result of being better informed whilst undertaking the work.

Quality was defined by Joseph Juran as fit for purpose, this elegant definition applies equally to the quality of your management processes as it does to your production processes and to the deliverables produced. And the three elements are interlinked; you need good management systems and information to allow an effective production system to create quality outputs for delivery to the client. A failure at any point in the chain will result in a quality failure and the production on deliverables that do not meet client requirements.

Placing stakeholder management within the context of quality allows access to some reasonably well researched data that can be interpolated to provide a reasonable basis for assessing the ‘return’ likely to be generated from an investment in stakeholder management.

Philip B. Crosby invented the concept of the ‘cost of quality’ and his book, Quality Is Free set out four major principles:

1. the definition of quality is conformance to requirements (requirements meaning both the product and the customer’s requirements)
2. the system of quality is prevention
3. the performance standard is zero defects (relative to requirements)
4. the measurement of quality is the price of nonconformance

His belief was that an organization that established a quality program will see savings returns that more than pay off the cost of the quality program: “quality is free”. The challenge is knowing you fully understand who the ‘customers’ actually are, and precisely what their various requirements and expectations are, and having ways to manage mutually exclusive or conflicting expectations. Knowing ‘who’s who and who’s important’ is a critical first step.

Feigenbaum’s categorization of the cost of quality has two main components; the cost of conformance (to achieve ‘good’ quality) and the cost of poor quality (or the cost of non-conformance).

Derived from: Feigenbaum, Armand V. (1991), Total Quality Control (3 ed.), New York, New York: McGraw-Hill, p. 109, ISBN 978-0-07-112612-0.

The cost of achieving the required level of quality is the investment made in the prevention of non-conformance to requirements plus the cost of testing and inspections to be comfortable the required quality levels have been achieved.

The cost of poor quality resulting from failing to meet requirements has both internal and external components. The internal costs are associated with defects, rework and lost opportunities caused by tying people up on rectification work. External failure costs can be much higher with major damage to an organisation’s brand and image as well as the direct costs associated with fixing the quality failure.

The management challenge is balancing the investment in quality against the cost of quality failure to hit the ‘sweet spot’ where your investment is sufficient to achieve the required quality level to be fit for purpose; overkill is wasted $$$$. But first you and ‘right stakeholders’ need to agree on precisely what fit for purpose actually means.

Also, the level of investment needed to achieve the optimum cost of quality is not fixed. The better the organisation’s quality systems, the lower the net cost. Six sigma proponents have assessed the total cost of quality as a percentage of sales based on the organisations sigma rating.

This table demonstrates that as the quality capability of the organisation improves, the overall cost of quality reduces offering a major competitive advantage to higher rating organisations. Most organisations are rated at 3 Sigma so the opportunity for improvement is significant.

Within this overall framework, the costs and risks associated with poor stakeholder engagement are significant and follow the typical pattern where most of the costs of poor quality are hidden. Using the quality ‘iceberg metaphor’ some of the consequences of poor stakeholder engagement and communication are set out below:

 

Effective stakeholder analysis and management directly contributes to achieving the required quality levels for the organisation’s outputs to be fit for purpose whilst at the same time reducing the overall expenditure on the cost of quality needed to achieve this objective. The key components are:

• Effective analysis of the stakeholder community will help you identify and understand all of the key stakeholders that need to be consulted to determine the relevant aspects of fit for purpose.
• Understanding the structure of your stakeholder community facilitates the implementation of an effective two-way communication strategy to fully understand and manage the expectations of key stakeholders.
• Effective communication builds trust and understanding within a robust relationship.
  o Trust reduces the cost of doing business.
  o Understanding the full set of requirements needed for the work to be successful reduces the risk of failure.
  o Robust relationships with key stakeholders also contribute to more effective problem solving and issue management.
• Maintaining the stakeholder engagement effort generates enhanced information that will mitigate risks and issues across all aspects of the work.

Calculating the Return on Investment:

Effective stakeholder management is a facilitating process that reduces the cost, and increases the efficiency of an organisations quality and risk management processes. Based on observations of similar process improvement initiatives such as CMMI, the reduction in the cost of quality facilitated by improved stakeholder engagement and management is likely to be in the order of 10% to 20%.

Based on the typical ‘Level 3’ organisation outlined above, a conservative estimate of the efficiency dividend per $1million in sales is likely to be:

     Total cost of quality = $1,000,000 x 25% = $250,000
     Efficiency dividend = $250,000 x 10% = $25,000 per $1 million in sales.

Given the basic costs of establishing an effective stakeholder management system for a $5million business, using the Stakeholder Circle®, (See: http://www.stakeholder-management.com) including software and training will be between $30,000 and $50,000 the efficiency dividend will be:

      ($25,000 x 5) – 50,000 = $75,000
      (or more depending on the actual costs and savings).

The element not included above is the staff costs associated firstly with maintaining the ‘culture change’ associated with introducing an effective stakeholder engagement process and secondly with actually performing the stakeholder analysis and engagement. These costs are embedded in the cost of quality already being outlaid by the organisation and are inversely proportional to the effectiveness of the current situation:

• If current expenditures on stakeholder engagement are relatively low, the additional costs of engagement will be relatively high, but the payback in reduced failures and unexpected risk events will be greater. The overall ROI is likely to be significant.
• If the current expenditures on stakeholder engagement are relatively high, the additional costs will be minimal (implementing a systemic approach may even save costs), however, the payback in reduced failure costs will be lower because many of the more obvious issues and opportunities are likely to have been identified under the current processes. The directly measurable ROI will be lower, offset by the other benefits of moving towards a higher ‘Sigma level’.

Conclusion:

The introduction of an effective stakeholder management system is likely to generate a significant ROI for most organisations. The larger part of the ‘return’ being a reduction in the hidden costs associated with poor stakeholder engagement. These costs affect reputation and future business opportunities to a far greater extent than their direct costs on current work. For this reason, we feel implementing a system such as the Stakeholder Circle is best undertaken as a strategic organisational initiative rather than on an ad hoc project or individual workplace basis.

The path to organisational Stakeholder Relationship Management Maturity (SRMM®) is discussed at: http://www.stakeholdermapping.com/srmm-maturity-model