Project Charter & Business Case

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About this lesson

The Lean Six Sigma methodology encourages the use of a project charter and the creation of a business case to set boundaries on the project and to manage stakeholder expectations.

Quick reference

Project Charter & Business Case

The Lean Six Sigma methodology encourages the use of a project charter and the creation of a business case to set boundaries on the project and to manage stakeholder expectations.

When to use

These tools are used at the beginning of a project as part of project initiation and approval.

Instructions

The project charter is the document that acts as a contract between the stakeholders and the Lean Six Sigma project team. It captures the overall project goal and sets the project boundaries. One of the  differences between a charter on a Lean Six Sigma project and most other projects is that cost and schedule are not as important. The charter includes overall cost and schedule estimates, but the primary point is the business need or issue that the project is focused on.

Many organizations have templates that are used for completing the project charter on a Lean Six Sigma project. The presentation includes the template that I have used with several organizations. The specific format is not critical, however the charter should contain the attributes of the overall business goal, the key customer requirements or CTQs, a statement of the business case, project boundaries around scope, schedule and team resources.

An important aspect from IASSC’s perspective is the calculation of business benefit used in the business case. In my experience, the business case for Lean Six Sigma projects is commonly done at a portfolio level for the entire program and not for individual projects. However, when the business case is required for a project, the team must gather estimates for the project cost and the project benefit. There are several ways that the cost and benefit can be analyzed financially. I recommend that a simple payback be used. In the case the project costs must be estimated, usually these are the costs of the team over a period of weeks or months. There may also be some added cost for travel or training. As a contingency, the team may even want to include some costs for doing development and testing during the improve phase. First, the benefit is estimated on a “per unit” basis. This could be an estimate such as saving 25% of effort on every widget. The units could be an item in production, a savings per week, or a reduction in the hourly operating costs of equipment. Once the “per unit” rate has been estimated, it is multiplied by the number of projected units – such as full year if the rate was a savings per week. The value obtained from this calculation is used as the benefit. Be sure if there are new costs in addition to savings that you take the net effect as your rate.

Hints & tips

  • Charters are very handy if either the team or stakeholders “forget” the purpose of the project and try to get the Lean Six Sigma analysis to dig into side issues that are not part of the goal. Pull out the charter and remind everyone of the project’s purpose.
  • Don’t overly agonize over the project costs and benefits when doing a business case. They are just estimates and I have never had a case where someone came back to audit the estimates.
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  • 00:05 Hi I'm Ray Sheen.
  • 00:06 I wanna take a few minutes to discuss the preparation of
  • 00:10 a Lean Six Sigma Project Charter, and
  • 00:12 the establishment of a business case for the project.
  • 00:16 Let's start with the Project Charter.
  • 00:18 The Project Charter is usually the final result of project initiation.
  • 00:22 It is the handoff from the stakeholders to the project team of the project goals and
  • 00:26 project boundaries.
  • 00:28 Project Charters normally include a high-level schedule and budget or
  • 00:32 resource constraints.
  • 00:33 This is an area where Lean Six Sigma Projects differ from many other projects.
  • 00:37 There normally is not a set schedule or budget, or
  • 00:40 rather there is a general timeline, and the project team resources are identified.
  • 00:45 Once the analysis has determined the specific problems,
  • 00:47 these are then adjusted for the proposed solution.
  • 00:51 A Charter will also highlight major areas of risk.
  • 00:54 This usually is not a huge issue for Lean Six Sigma Projects.
  • 00:58 Many organizations have a standard template that they use,
  • 01:01 complete with signature blocks for the stakeholders and project leader to sign.
  • 01:05 It almost feels like a contract.
  • 01:08 That is not to say that it is just bureaucratic paperwork.
  • 01:11 A Charter can be a really big help to a team and
  • 01:14 not just because it is the formal authorization to start work.
  • 01:18 It clarifies expectations of the stakeholders and
  • 01:21 provides focus for the team.
  • 01:23 Lean Six Sigma Projects can sometimes start to drift off course
  • 01:26 as the team is chasing data and variation.
  • 01:29 The Charter will help you to keep them focused on the project purpose.
  • 01:34 I've included a template for
  • 01:35 a Lean Six Sigma Project Charter that I've used in the past.
  • 01:38 There are a few major sections to it.
  • 01:40 First, there’s a high level statement of the goal.
  • 01:43 We don’t yet know the root cause or causes, so we can’t say
  • 01:46 exactly what will be done, but we can at least talk about the business impact goal.
  • 01:51 Next are some high level customer critical to quality requirements.
  • 01:55 I’ll spend more time on critical to qualities in another session, but
  • 01:58 these are the things that are most important to the customers of the process.
  • 02:02 It is also helpful for
  • 02:03 the stakeholders to have the business case justification spelled out.
  • 02:07 This normally uses some financial or
  • 02:09 market metric depending upon the focus of the project.
  • 02:12 Then there are the typical project constraint boundaries.
  • 02:15 First is scope, I like to use the in scope and out of scope format to
  • 02:19 clarify what the team will address and what they will not be investigating.
  • 02:24 The schedule is loose, and I normally just put the likely milestones for
  • 02:27 the end of each phase.
  • 02:29 Finally, for budget and
  • 02:30 resources, normally all that is listed is the team members.
  • 02:35 Let's dig a little deeper into the business case,
  • 02:37 since that is something that ISSC tests.
  • 02:40 The purpose of a business case is to give stakeholders information
  • 02:43 they need to make decisions on how to best allocate resources.
  • 02:47 In this case, the question is whether it is worthwhile to devote
  • 02:50 to team resources to this project.
  • 02:52 I have found that many organizations do not create a unique business case for
  • 02:56 each Lean Six Sigma Project, but will instead create one for
  • 02:59 the portfolio of related projects.
  • 03:02 For instance, one company I worked with had several projects to improve their
  • 03:06 printed circuit board fabrication assembly, and
  • 03:08 that were all part of one business case.
  • 03:12 A business case attempts to quantify costs and benefits for the project and
  • 03:16 qualifies those costs and benefits by the risks in assessments with each.
  • 03:21 The primary project cost for
  • 03:22 these projects is the time of the team members until they get to the Improve
  • 03:26 phase where they may need to spend some money on equipment.
  • 03:29 The primary benefits are the reduction on the cost equality or
  • 03:33 possibly increased revenue.
  • 03:35 We will talk about the cost equality in another session.
  • 03:38 Then there are two types of risks, project risks that could cause delays or
  • 03:42 road blocks in implementing the solution, and
  • 03:44 the business risk of not doing the project and never getting the benefit.
  • 03:49 All of these are assessed and a trade off decision is made.
  • 03:52 One area where teams are especially challenged is the estimating benefits.
  • 03:57 Many team members have never had to do this before and
  • 04:00 they don't know how to go about it.
  • 04:02 There are a lot of sophisticated financial techniques, but most of these also require
  • 04:06 detailed project cost estimates which normally don't exist.
  • 04:10 So let's look at a quick and dirty way to estimate benefits.
  • 04:13 This is to come up with a savings rate on a per unit basis.
  • 04:18 The unit could be a production unit, a time unit, like a month or
  • 04:22 a week, or a reduction in processing time measured in minutes or hours.
  • 04:27 Example might be to reduce the return rate of
  • 04:30 products by 80%, from ten per week to two per week.
  • 04:34 We quantify the cost of processing returns and get a weekly saving of $1,000.
  • 04:40 We can then multiply weekly savings by the number of
  • 04:43 weeks to be used in our business case justification.
  • 04:46 Your stakeholders or finance should give you that time period, if they don't,
  • 04:50 use one year as your default condition.
  • 04:53 Be careful to use the correct calculation for your rate.
  • 04:56 In my illustration, we are saving $1,000 per week.
  • 05:00 But this may be off-set by having a quality check prior to shipping.
  • 05:04 This cost must be considered also.
  • 05:06 If that costs us $250 per week, the net savings is only $750 per week,
  • 05:11 and that is the rate that we'll use in multiplying to calculate our benefit.
  • 05:18 Let your Lean Six Sigma Project get off to a great start by creating a Charter.
  • 05:24 And if your stake holders need a business case, well estimate the cost and
  • 05:27 benefits, then run the numbers.

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