Friday, October 7, 2011

Variance Analysis And Course Correction

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If there is a difference between the results which you projected (or budgeted), and your actual results, you have a variance. Calculating the amount and composition (isolating each of its contributing components) of that variance is important -- but the key to using it as an analytic tool for course correction is to understand how and why the disparity occurred. The most unproductive use of this data is to use it like a light switch, i.e., "This thing didn't work, so let's scrap it and start over with a different approach." Used properly, you can use the "how" and the "why" to minimize trail and error, minimize time and resources lost, and not, in essence sell your car because it has run out of gasoline.

Incidentally, by "variance" I absolutely refer to deviation from the expected result, and not deviation from a statistical mean. This is not a statistics exercise in standard deviation or sampling. This is a briefing on how to use information obtained through simple arithmetic and observation in order to find out precisely what might have gone wrong, and what may be done to get on the proper path. The process involves reasoning as well as computing.

Some Considerations For Business Planners And Project Managers:

1) Break the variance down. What was high? What was low? Did certain "winning" (better than budgeted) areas subsidize some "losing" (worse than budgeted) areas? This type of camouflaging often causes business to keep do unproductive things because their failings are 'covered' or 'hidden' by successes in other areas. Isolate before you generalize.

2) Examine each of the components on a line-by-line basis. If the variance is negative, was it performance-related, circumstantial or was it a function of unrealistic planning? Similarly, if the variance was positive, was it performance-related (and how may me further leverage this ability, if so), circumstantial (i.e., we were - phew - awfully lucky), or were we too conservative in our planning. The results of these analyses become course correction (or map correction) tools.

3) Compare month-to-month variance report results. The variances which are increasing should be given special attention and the fastest managerial intervention. These must be closely monitored and worked on as necessary. If they're favorable, we want to water them and watch them grow. If they're unfavorable, we want to treat them before they metastasize.

4) Every variance analysis should be followed by an agenda of actionable items, and swift implementation.

Variance Analysis as a means of monitoring and adjusting either project planning or management is one of the most valuable tools in your arsenal for victory.

Douglas E Castle []

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