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Measuring Employee Performance the Earned Value Way Developed by Jim Greer Boise State University Fall 2003 Dr Tom Foster, Instructor

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Overview <ul><li>Link to Quality and Corporate Growth Objectives </li></ul><ul><li>Key Definitions and Importance of Earned Value </li></ul><ul><li>Discussion of Concepts </li></ul><ul><li>How Does Earned Value Work? </li></ul><ul><li>A Real World Example, and then another…. </li></ul><ul><li>Application of Earned Value </li></ul><ul><li>Training Development with an Exercise </li></ul><ul><li>Limitations </li></ul><ul><li>Summary </li></ul><ul><li>Readings </li></ul>

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The Link….to Growth and Quality <ul><li>Earned Value is a performance measurement tool. The knowledge from this measure increases a firm’s ability to boost performance. The bottom line is that performance improvements drive productivity. </li></ul>

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Key Definitions <ul><li>Performance is a dimension of quality that refers to the efficiency in which a product performs its intended purpose </li></ul><ul><li>Productivity indicates the output per man-hour of labor </li></ul>

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Productivity drives our Economy <ul><li>“ Worker productivity accelerated last year at the fastest rate in more than a half century. This high productivity means our workers receive higher wages, our nations exports get a competitive boost in world markets and our economic recovery gains momentum at a crucial time” </li></ul><ul><li>--President Bush, Labor Day 2003 Weekly Radio Address </li></ul>

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Productivity Impact at the Firm Level <ul><li>Productivity is producing more goods and services with the same resource inputs </li></ul><ul><li>Higher productivity lowers the cost of production. Lower costs increase competitiveness and build profits, and allow cost savings to pass on to consumers </li></ul><ul><li>To succeed, firms must continue to adopt practices that increase productivity. Earned Value is one such powerful tool. </li></ul>

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Earned Value from a Nuts and Bolts Perspective <ul><li>EV compares and measures… </li></ul><ul><ul><li>… the amount of work actually completed and resources actually consumed at a certain point in a project </li></ul></ul><ul><ul><li>… with the amount of work planned (budgeted) to be completed and resources planned to be consumed at that same point in the project </li></ul></ul>

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More nuts and bolts…. <ul><li>EV is a performance and productivity metric for projects </li></ul><ul><li>To refresh one’s knowledge, a project consists of a scope of work directed towards a specific goal. All projects are managed with a budget and schedule. In fact, budget and schedule are the two key quality measures in any project. The third is the actual quality of the work performed. </li></ul><ul><li>The schedule is a collection of work broken down into short, specific, and interrelated tasks. The budget represents the cost of the resources allocated to the project. </li></ul>

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Even more nuts and bolts….. <ul><li>The bottom line is that EV is a powerful tool for measuring the Actual performance of a project against its Planned performance. </li></ul><ul><li>…… .It’s that simple, really! So let’s dive into the concept…….. </li></ul>

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How does it work? Earned Value Concepts <ul><li>Earned Value consists of three key concepts >> </li></ul><ul><li>Budgeted Cost of Work Scheduled (BCWS) is the cost of the work scheduled or planned to be completed in a certain time period per the plan </li></ul><ul><li>Budgeted Cost of Work Performed (BCWP) is the budgeted cost of the work done up to a defined point in the project </li></ul><ul><li>Actual Cost of Work Performed (ACWP) is the actual cost of work up to a defined point in the project </li></ul>

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Earned Value Math <ul><li>Variance Metrics </li></ul><ul><li>Schedule Variance: SV = BCWP - BCWS </li></ul><ul><li>Schedule Performance Index: SPI = BCWP / BCWS </li></ul><ul><li>Cost Variance: CV = BCWP - ACWP </li></ul><ul><li>Cost Performance Index: CPI = BCWP / ACWP </li></ul><ul><li>Criteria </li></ul><ul><li>SV, CV = 0 Project On Budget and Schedule </li></ul><ul><li>SV, CV < 0 Over Budget and Behind Schedule </li></ul><ul><li>SV, CB > 0 Under Budget and Ahead of Schedule </li></ul><ul><li>CPI, SPI = 1 Project On Budget and Schedule </li></ul><ul><li>CPI, SPI < 1 Over Budget and Behind Schedule </li></ul><ul><li>CPI, SPI > 1 Under Budget and Ahead of Schedule </li></ul>

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Let’s work a real example…. <ul><li>Project Statement: </li></ul><ul><li>A supplier is contracted to install ten new testers at a semiconductor manufacturing plant. The project must be completed within 6 weeks duration. 600 manhours is the estimated labor resource commitment, at a $10 per hour fully loaded time and materials cost. </li></ul><ul><li>Goal Statement: </li></ul><ul><li>Use EV to measure project performance at week 3 </li></ul><ul><li>Use traditional methods to measure performance </li></ul><ul><li>Compare the results using both approaches </li></ul>

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Example Continued… <ul><li>Determine Project Status at Week 3 using traditional methods: </li></ul><ul><li>Given Information: </li></ul><ul><ul><li>At Week 3, 4 testers have been installed </li></ul></ul><ul><ul><li>400 manhours have been consumed </li></ul></ul><ul><li>3/6 weeks = 50% complete </li></ul><ul><li>4/10 testers installed = 40% complete </li></ul><ul><li>400/600 manhours “cost” budgeted = 67% complete </li></ul><ul><li>What is the project status at week 3? Is the project ahead or behind schedule and is it under budget or over budget? It is very difficult to tell </li></ul>

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Example Continued…EV is introduced <ul><li>Determine BCWP, BCWS, and ACWP: </li></ul><ul><li>BCWP = (600 mh*$10/hr )* (4 testers / 10 testers) = $2400 </li></ul><ul><li>BCWS = (600 mh*$10/hr)*(3 weeks / 6 weeks) = $3000 </li></ul><ul><li>ACWP = 400mh*$10/hr =$4000 </li></ul><ul><li>With this information, we can determine the metrics: </li></ul><ul><li>SV = BCWP – BCWS = $2400 – $3000 = - $600 </li></ul><ul><li>CV = BCWP – ACWP = $2400 – $4000 = -$1600 </li></ul><ul><li>SPI = BCWP / BCWS = 2400/3000 = .8 Criteria: .8<1 </li></ul><ul><li>CPI = BCWP / ACWP = 2400/4000 = .6 Criteria: .6<1 </li></ul><ul><li>Our project is behind schedule and over budget! </li></ul>

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Let’s try one more example… <ul><li>Project Statement: </li></ul><ul><li>One employee is tasked with developing six new procedures for a sales group. The project must be completed within 4 weeks duration. 200 manhours is the estimated labor resource commitment. </li></ul><ul><li>Goal Statement: </li></ul><ul><li>Use EV to measure employee performance week 2 </li></ul><ul><li>Use traditional methods to measure performance </li></ul><ul><li>Compare the results using both approaches </li></ul>

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Second Example Continued… <ul><li>Determine Project Status at Week 2 using traditional methods: </li></ul><ul><li>Given Information: </li></ul><ul><ul><li>At Week 2, 5 procedures have been written </li></ul></ul><ul><ul><li>100 manhours have been consumed </li></ul></ul><ul><ul><li>Assume a $1/hour rate. This will wash from equation. </li></ul></ul><ul><li>2/4 weeks = 50% complete </li></ul><ul><li>5/6 procedures have been written = 83% complete </li></ul><ul><li>100/200 manhours “cost” budgeted = 50% complete </li></ul><ul><li>What is the project status at week 2? Is the project ahead or behind schedule and is it under budget or over budget? It is still very difficult to tell </li></ul>

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Example using EV… <ul><li>Determine BCWP, BCWS, and ACWP: </li></ul><ul><li>BCWP = (200 mh)* (5 procedures / 6 procedures) = 167 mh </li></ul><ul><li>BCWS = (200 mh)*(2 weeks / 4 weeks) = 100 mh </li></ul><ul><li>ACWP = 100 mh </li></ul><ul><li>With this information, we can determine the metrics: </li></ul><ul><li>SV = BCWP – BCWS = 167 mh – 100 mh = 67 mh </li></ul><ul><li>CV = BCWP – ACWP = 167 mh – 100 mh = 67 mh </li></ul><ul><li>SPI = BCWP / BCWS = 167/100 = 1.67 Criteria: 1.67>1 </li></ul><ul><li>CPI = BCWP / ACWP = 167/100 = 1.67 Criteria: 1.67>1 </li></ul><ul><li>Our project is ahead of schedule and under budget! </li></ul>

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How is EV applied??? <ul><li>Powerful performance and productivity metric for a project team using project schedule and budget </li></ul><ul><li>Measures performance of an employee </li></ul><ul><li>Provide an integrated approach versus traditional methods for task and project evaluation </li></ul><ul><li>Useful for any type of project from small in-house office jobs to complex contracted projects. For projects with multiple tasks or activities, EV can be calculated for each task </li></ul>

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It’s time for an exercise… <ul><li>Project Statement: </li></ul><ul><li>One employee is tasked with developing three databases. The project must be completed within 10 weeks duration. 500 manhours is the estimated labor resource commitment. </li></ul><ul><li>Goal Statement: </li></ul><ul><li>Use EV to measure employee performance week 7 </li></ul><ul><li>Use traditional methods to measure performance </li></ul><ul><li>Compare the results using both approaches </li></ul>

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Walk through Exercise Process… <ul><li>Establish “givens” </li></ul><ul><li>Determine project status using traditional method </li></ul><ul><li>Determine BCWP, BCWS, and ACWP </li></ul><ul><li>Calculate SV, CV, SPI, CPI </li></ul><ul><li>Apply Criteria </li></ul><ul><li>6) Summarize project performance based on EV </li></ul>

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Exercise Solution <ul><li>Givens: At week 7, 350 manhours consumed and 2 databases completed </li></ul><ul><li>7/10 weeks = 70% </li></ul><ul><li>350 mh / 500 mh = 70% </li></ul><ul><li>2/3 databases complete = 67% </li></ul><ul><ul><li>Can you tell from this traditional method the project status??? </li></ul></ul><ul><ul><li>Apply EV…….. </li></ul></ul>

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Rest of Solution….. <ul><li>BCWP = 500 mh * (2/3 databases) = 333 mh </li></ul><ul><li>BCWS = 500 mh * (7/10 weeks) = 350 mh </li></ul><ul><li>ACWP = 350 mh </li></ul><ul><li>SV = BCWP – BCWS = 333-350 mh = -17 mh </li></ul><ul><li>CV = BCWP – ACWP = 333 – 350 mh = -17 mh </li></ul><ul><li>SPI = 333/350 = .95 </li></ul><ul><li>CPI = 333/350 = .95 </li></ul><ul><li>Bottom Line </li></ul><ul><li>Project is slightly behind schedule and over budget </li></ul>

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EV Limitations <ul><li>The EV math assumes linearity. Linearity doesn’t exist in the real world but is a good approximation when tasks in a project are broken into simple elements. </li></ul><ul><li>EV standing alone is a powerful measure, but only a measure. The knowledge derived from EV must be understood and used to actually drive performance and productivity improvements. </li></ul>

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Summary <ul><li>Earned Value provides an integrated, holistic approach to measuring performance of employees and projects </li></ul><ul><li>Use of the approach creates a framework for evaluating project status based on project quality objectives </li></ul><ul><li>Adoption of EV and application of the results will improve performance and drive up productivity </li></ul>

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Readings <ul><li>President Bush Weekly Radio Address, Aug 2003 </li></ul><ul><li>www.whitehouse.gov/news/releases/2003 </li></ul><ul><li>US Labor Sec Chao, Remarks to Joint American Enterprise Institute – US Dept of Labor Conference on Productivity in 21 st Century, ASI, Oct 23, 2002 </li></ul><ul><li>Dept of Labor Statistics Homepage, </li></ul><ul><li>www.bls.gov </li></ul><ul><li>“ Retailers Can Increase Productivity and Improve the Bottom Line with Labor Analytics”, John Andersen, </li></ul><ul><li>www.executivetechnology.com </li></ul>

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More Readings <ul><li>Managing Quality – An Integrative Approach, 2 nd Ed, 2004, S Thomas Foster </li></ul><ul><li>EconDash -- </li></ul><ul><li>www.econdash.net/definitions/laborprod.asp </li></ul><ul><li>“ Earned Value – Why be right when it’s so much fun to Guess?”, Ozzie Lomax, PMP, PMI KC Chapter May 2000 </li></ul><ul><li>“ Project can help you better understand Earned Value”, May 2003 </li></ul><ul><li>www.zdnet.com.au/builder/manage/project/story </li></ul><ul><li>Use of Earned Value Management to Mitigate Software Development Risk, Paul E Young, 21 April 1997, George Mason Univ </li></ul>