According to Project Management: A Managerial Approach, Eighth Edition (2012), f

Question

According to Project Management: A Managerial Approach, Eighth Edition (2012), five non-financial project selection criteria that are typically used by organizations when choosing a project selection model are realism, capability, flexibility, ease of use and cost.

Discuss five non-financial project selection criteria that are typically used by organizations. Which criteria do you think is most important? Provide reasoning behind your selection. Can you think of a project situation in which selection criteria are not warranted?

Explanation / Answer

The five factors that you have mentioned in the question (i.e. realism, capability, flexibility, ease of use and cost) are NOT the criteria for project selection. They are, in fact, criteria for project selection 'model'. The non-financial criteria for project selection are meant for fulfilling the various non-financial long-term needs of an organization. Few such criteria are described below -

Strategic needs - When the owners, directors, or top management of a company thinks that the present way of business is not in sync with its intended strategy, they may change the business process by taking series of projects to establish that sync even at a high cash outflow. The strategic priority outweighs the financial perspective in this case. For example, a CEO changing the retail store layout for all the stores to match the offering with the business level strategy is doing this from a strategic perspective only.  

Operating necessity - When an organization finds that in the long-term, the operations of the firm cannot be supported by the existing process of equipment and a technological upgrade is necessary to survive in the market, then it may decide to carry out a project even when the financial outcomes in terms of NPV, IRR, Payback period, and RoI comes adverse. This is because of the necessity to sustain business in a long-term perspective. Financial goals are not important in these cases.

Legal or Social Requirement - Due to the pressure from the external environment imposed by the government or regulators, a project may be taken up by the company. For example, due to modification is the regulation for waste disposal, a firm may need to set up a new disposal unit. Here, the criterion is to satisfy the regulatory needs which are purely non-financial.

Competitive necessity - A company may need to launch a new product in response to a new product from its competitor to just remain relevant in the market and to protect the market share. Such criterion will be used even when the product may be launched and sold at a negative margin. Increasing geographic reach in another form of competitive necessity.

Fulfilling client's needs - When the client has ordered a particular new product/ service, to maintain the existing relationship with the client and to fulfill such order, financial objective of the project can be ignored. The project can be taken to improve the relationship with the client.

Pet Projects - Similar to the client's needs as mentioned above, there can be situations when the management is given with t project requirement from the owners and even when the financial objectives are not met, such projects are taken. These are known as pet projects for the owners.

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In my opinion, the 'strategic needs' is the most important factor. Without a clear strategy, it is impossible to succeed in a long-term. So, even with a large cash outflow, projects strengthening the chance of meeting the strategic objectives should be carried out. Once the strategic direction is clear, the operational and tactical projects can be planned which can be done based on financial criteria.

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To me, the 'pet project' criterion is not justified in any situation because they neither fulfill the financial objective, nor strategic goals - they are out of the halo, or whims and fancies of the owners and should be avoided. Organizations should have internal mechanisms to reject such criteria if they amount to major project selection.

Reference

Gray, C., & Larson, E. (2018). Project Management The Managerial Process. New York, NY: McGraw-Hill Education.

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