Saturday, July 17, 2010

Throughput accounting

Throughput accounting is a form of earned value measurement and it is closely aligned with the Theory of Constraints [TOC]. Throughput accounting can be summarized this way
Throughput accounting measures the value added to the business, process, or entity by virtue of project accomplishments

Value added is only measurable as an accomplishment, presumably an operational difference in the business, process, or entity that makes a meaningful difference.  In effect, what is being measured is how much more valuable is the entity now than before. If expenses are lower, than the business is a more valuable transformer of revenue into profit. If a public sector mission is more effectively accomplished, then the entity is a more valuable contributor to public "welfare".

Value added is a "difference calculation"; in EVM terms, it's a variance. The absolute values of each factor in the difference are less important that the difference itself.

So, what's not accounted for in this variance calculation? Answer: operating expenses [OE] of the project...expenses traditionally called 'actual cost' [AC]. Why exclude AC? The idea is that PMO's and project shops, particularly IT shops, have more or less fixed operating costs. If not this project, then some other will absorb resources. Also, most IT projects involve contributions from non-IT sales and operations staff that are 'fixed costs'. Unless there is some direct incremental expense, like a special tool or facility, or a direct contract for services...like a consultant...then the day-to-day OE of the project is not included in the value difference. If there are such direct and incremental expenses, then they are included as part of the value variance.

The figure below gives a pictorial of this idea. "A", "B", and "C" refer to different projects


What's the tie-in with the TOC? TOC is about managing limitations to throughput, where throughput is defined as something a customer or stakeholder would find valuable. Insofar as a constraint can be minimized or mitigated, throughput increases. Thus, the need for throughput accounting.

Some AGILE practitioners have adoped this idea also. In fact, there is a pretty good book on the subject: David J. Anderson's 2004 text "Agile Management for software engineering -- apply the theory of constraints for business results"

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26 comments:

  1. I would explain the throughput value more easily (I think): revenue minus variable costs of the project.

    By variable costs I mean the costs that were accrued BECAUSE the project was executed.

    By revenue I mean what the project brought to the organization in monetary value.

    Son Nguyen
    http://pmreviews.org

    ReplyDelete
    Replies
    1. Yes, you've pretty much captured the idea, insofar as the business has committed to the non-variable costs as a 'given': meaning, those non-variable costs will be there whether or not 'this' project or
      that' project is carried forward.

      Delete
  2. Son: in some situations, your definition could apply, but in the general case the definition has to account for the possibility--indeed, common possibility--there are no variable costs [at the business level], and there is no revenue [as in a public sector mission]. In fact, in the general case, there may not be a dollar value for throughput.

    The value difference, or throughput, is whatever accomplishment is valued by users or customers as a consequence of the project, where accomplishment is something that changes the before-after status.


    John

    ReplyDelete
    Replies
    1. If a business -- or agency -- does not commonly engage in projects, then your point is well taken, except that: all the project costs are variable to the commonly budgeted business expenses.

      It could also be the case that the business incurs no variable cost, but nonetheless accrues value-added benefits from the application of its 'fixed cost' resources to a common business problem.

      And, yes, there may be no revenue by a specific agency of government, but all governments have revenue sources ... the sources are just not tied directly to services or products except in the case where they are 'user fees'

      Delete
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