The Importance of Project Management

New research into the role of project management in a

modern developed economy like the UK.

by Dr Malcolm Wheatley BSc (Econ), MA, MBA, PhD

Project management as a management discipline underpins much

economic activity. In industries as diverse as pharmaceuticals,
software and aerospace, projects drive business. And in the public
sector, it is effective project management that translates politicians
promises of new roads, schools and hospitals into gleaming new
constructions that improve everyday life.
So youd imagine that it would be possible to place some sort of
figure on the importance of project management to the UK economy.
How much GDP does it drive? In which sectors of the economy? And as
the economy evolves, how fast is project managements prominence
increasing?
Think again. As a conversation with the UKs Office of National
Statistics reveals, the official Input-Output tables that record and
analyse the makeup of economic activity within the UK go into no finer
detail than at the level of individual industries. We know that the GDP
of the UK economy in 2002 amounted to some 1044bn, up 5% from
994bn the year before. We know which industries contributed the
most to that overall GDP figure, and which contributed least. But we
know nothing at least in terms of officially tabulated government
statistics about the extent of project managements contribution to
that GDP.
So what exactly is the contribution of project management to a
modern developed economy, like the UKs?

A statistic and a caution

American researchers employed by the Project Management Institute
have an answer of sorts. On the basis of data released by the
Bureau of Economic Analysis, part of the US Department of
Commerce, they estimated in 2001 that the US public and private
sectors combined spend some $2.3trn on projects every year, an
amount equivalent to a quarter of Americas GDP. Construction, R&D,
software development, organisational change, IT systems add it all
together and thats the price tag. Extrapolating further, they estimated
that project-related spending accounted for almost $10trn of the
worlds global GDP.

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 On that basis, given the UK GDP of 1044bn in 2002 (the latest year
for which figures are available), project-related expenditure of a
quarter of GDP yields a GDP figure of 261bn. This, of course, relies on
the UK economy being structurally similar enough to the American
economy for the American estimate of project managements
contribution to GDP to hold true. While there are undoubted
differences between the two economies, they are unlikely to be
significant enough to materially affect the extrapolated UK figure. A
10% deviation either way, for example, would indicate a range of
(say) 235bn to 287bn.
There is, however, one slight problem to address when considering
project management vis--vis GDP estimates. And it is here that a
note of caution must be injected.
Take two hypothetical projects, identical in all respects except the
calibre of their project management. One project comes in on budget,
having used the planned resources. The other dramatically exceeds its
budget, using far more resources than planned. Which has the greater
contribution to GDP? The latter. Overtime payments, additional
employees, replacements for materials wasted or otherwise found
faulty perversely, these additional expenditures contribute positively
to GDP, not negatively.
As a result, while GDP-based estimates of the value of project
management to the UK economy are useful starting points, a more
rounded insight into the value of project management to the UK
economy must come from more qualitative data.

Project management and innovation

Almost by definition, innovation relies on project management.
Irrespective of whether the innovation concerns a new product, or a
new process, or indeed a contribution to pure science, better project
management, on the whole, will see a successful outcome reached
more quickly, having consumed fewer resources.
And innovation is important to the UK economy. As a succession of
reports from the UK governments Department of Trade and Industry
(DTI) has highlighted over the years, innovative businesses are more
successful, and innovative industries grow faster, export more, are
more competitive, more productive, and have a better long-term
future.
Stating the benefits of innovation is one thing defining innovation
itself, or quantifying it, is another. As successive generations of
statisticians have found, the measurement of innovation is almost as
slippery a concept as the measurement of project management.
An interesting table (see Table 1) from the current DTI Innovation
Report breaks down the innovation carried out by a number of

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manufacturing industries based on one widely used proxy measure
R&D spending, commonly reported by companies in their annual
accounts.
Even so, this almost certainly understates the true level of
innovation activity, especially with respect to process innovation. The
engineering departments and process improvement groups of
manufacturing companies routinely make process improvements that
go unrecorded as R&D, for example.

R&D as percentage of
Industry value added (average
19912000)
Electrical & optical 6.6
of which computers and office equipment 5.5
communication equipment, TV, radio 12.9
Chemicals & man-made fibres 18.5
of which pharmaceuticals 44.2
Plastic and rubber products 0.8
Food, drink and tobacco 1.1
Textiles 0.4
Manufacturing total/average 7.0

Table 1: R&D inputs by manufacturing sector DTI Innovation Report, Competing in

the global economy: the innovation challenge (December 2003). Crown copyright
2004. Full report available at www.dti.gov.uk/innovationreport/innovation-report-
full.pdf

Overall, 7% of value added in manufacturing industry is project-based

innovation. More, of course, taking into account the argument that
some process-oriented improvement projects are overlooked. While
some industries fall far below this level such as textiles, where just
0.4% of value added takes the form of innovation others massively
exceed it: the pharmaceutical industry, for example, sees 44.2% of
value added generated through innovation. Put another way, almost
half the value added by the industry owes its immediate provenance to
projects a figure sure to increase once the planning, construction
and commission of the new equipment and facilities required to bring
successful innovations to market is accounted for.
Another government publication makes the case even more
tellingly: Productivity in the UK: 3 The Regional Dimension
(published by HM Treasury, November 2001; www.hm-
treasury.gov.uk/media/F2F/30/ACF1FBD.pdf). The report emphasises
that the invention and application of new technologies, products and
production processes is a key driver of productivity growth, which has
accounted for no less than two-thirds of overall UK economic growth

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over the past 50 years. Without effective project management even
using the more primitive project management methodologies of
yesteryear this would not have been possible.
Project management also underpins the regional economies. It is
the speed and efficiency with which innovations are spread and
adapted that differentiate regional performance, concludes the report.
GDP per head, for example, is 40% lower in the North East than in
London. But under-performing regions have significant barriers in
adapting and absorbing innovations, in particular lacking the highly
skilled workers and productive firms that invest in R&D. High levels of
innovation in a local economy have a multiplier effect in stimulating a
more enterprising indigenous business base and a more enterprising
society in the wider sense. In the UK overall, the report finds, there is
a strong statistical correlation between the regional pattern of R&D
(both public and private sector) and regional economic performance.
Again, it is project management that underpins that R&D, and
manages the process of turning ideas into actionable innovations.

Project management and project-intensive industries

Every business undertakes projects of some sort. But some undertake
far more than others. Similarly, some industries are more project-
intensive than others. Aerospace and defence, for example, are
extremely project-intensive, working for years on long-term contracts
or development projects that will eventually bring forth a new jet
aircraft, missile system, ship or piece of electronic wizardry. Likewise,
almost by definition, construction is another industry that exhibits a
high degree of project activity.
Food, retailing and textiles, on the other hand, are less project-
intensive. Even so, care must be taken. While corner shops may not be
prone to launching new projects, the major supermarkets are: each
year sees a number of new distribution depots, IT systems, retail
outlets and the like.
To get an indication of the importance to the UK economy of just
one project-intensive industry, look no further than aerospace. In
2003, the UKs aerospace industry enjoyed a 3.4% real increase in
turnover to 17.08bn compared to 2002, thanks to increased domestic
and global defence spending. Although civil aerospace revenue fell
6.3% in real terms, military export and domestic orders enjoyed a
substantial increase to 8.3bn, an improvement of 12% on the year.
Employment within the industry rose too, to 121,979, an increase of
over 4% on the previous year. Likewise, R&D investment increased by
almost 18% to 2.1bn, and employment in R&D rose to more than
17,700, an increase of over 15%. Turnover invested in R&D within the
industry climbed to 12.3%, the third consecutive strong increase in

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three years. Sixty-one per cent of the industrys output is exported,
resulting in a 2.55bn positive contribution to the balance of
payments.
The statistics go on. But the point is already made: an industry
underpinned by project activity makes a huge contribution to the UK
economy. And its just one of a number of project-intensive industries
construction, pharmaceuticals and electronics being just three
others.

Project management and inward investment

Every year foreign companies establish UK-based operations some,
in the case of high-tech electronics companies, costing tens or even
hundreds of millions of pounds. These plants dont just materialise
overnight: each must be project managed in a carefully choreographed
process, which begins with deciding on the location and proceeds
through land acquisition and construction through to fitting out,
installing IT equipment and recruiting a workforce.
In 2003 the UK attracted more inward foreign investment than any
other European economy, with overall inward investment rising by
14%. Investment and expansion projects by overseas companies
created more than 25,000 jobs, with the number of projects rising
from 709 to 811. Almost one-third of the projects were in
manufacturing, but other sectors with growing investment included IT,
software, electronics and biotechnology/pharmaceuticals.
But this is only the beginning of the impact on the economy. As The
Economist (12 July 2001) puts it, Foreign firms are a catalyst for
better economic performance. For one thing, they invest more, employ
more skilled people and are more productive. In manufacturing, for
example, foreign-owned firms produce about 40% more per worker
than indigenous companies. Foreign-owned firms now account for
almost a third of total R&D expenditure by businesses, double their
share ten years ago.
Clearly, as well as the positive effect that the ongoing wages and
salaries of employees have on local and national levels of demand, the
overall amount of investment in new plants is itself an injection of
demand into the economys circular flow, thus boosting the UKs GDP.
Especially in regions with above-average unemployment and below-
average per capita incomes, this is very useful. There is also a net
increase in the capital stock of the economy, which increases potential
output, thus providing an upward boost to long-run aggregate supply.
Operationally, too, there can be the effect of boosting productivity and
transferring technology to the UK supplier base the so-called Nissan
effect, where the development of a new overseas supplier requires an
increase in the productive efficiency of domestic component suppliers.

The Importance of Project Management 5

Project management and the public sector
Increasingly, the UK government outsources its project work, rather
than undertaking it itself, through armies of direct employees. This is
helpful, as it simplifies (albeit only slightly) the task of estimating the
contribution that public sector related project management makes to
the economy. For the 2005/06 fiscal year, for instance, estimates put
the public sectors procurement of goods and services from third
parties at 120bn 38.5% of total government spending.
Clearly, some proportion of that will be recurrent expenditure:
administrative services and supplies to enable local and national
government to do their job, or materials purchased as part of the
mission of a public agency fuel, supplies and munitions for the
Ministry of Defence, for example. In fact, estimates of the extent of
that 120bn represented by capital, non-recurrent, expenditure are
curiously hard to come by. A problem? Not really: in any case, within
the annual GDP statistics, those expenditures will already be
incorporated as part of the figures attributable to the sector of the
economy from which the relevant goods and services were sourced
such as the construction, IT and defence equipment industries, where
the government is a major source of contracts.
The public sector is a major end-customer of IT projects, for
example: in total, the public sector purchases some 16bn of third-
party IT services each year. Some of this is recurrent expenditure but
clearly, a significant proportion is also capital expenditure on projects.
Recent years have seen IT projects ranging from those costing
hundreds of millions of pounds (Passport Agency, Child Support
Agency, Swanwick Air Traffic Control Centre) to those costing billions
of pounds: computerising the NHS, for example, could wind up costing
12bn, according to latest estimates.
This element of double counting, whilst reassuring, is further
complicated by the distinction that should probably be made between
what might be termed project-intensive capital expenditure and non-
project intensive capital expenditure. Where the government orders
five Type 23 destroyers for the Navy, for example, the project is truly
neither each individual destroyer nor the whole batch, but somewhere
in between. Each destroyer must be project managed, but each clearly
brings with it lessons from earlier destroyers. While hospitals, schools
and other civilian-centric one-off capital projects dont suffer from this
duality, much military project-related capital expenditure clearly does.
But whatever the true figure for the amount of project-related
spending by local and national government, two things are clear. The
first is that the cost is huge certainly over 60bn, even before the
cost of projects directly managed by government agencies themselves

The Importance of Project Management 6

is taken into account. And secondly, the scope for improved project
management is also huge. Just as defence project has become
virtually synonymous with over-budget and late, so government IT
project has become synonymous with shambles. By contrast, the
construction industry, not one usually associated with the calibre of its
management, comes off comparatively well.

Project management and SMEs: an opportunity

Finally, lets turn to a project management opportunity: an area where
better or more effective project management could have an undoubted
and beneficial impact on the economy.
SMEs play a vital role in the economy, providing new ideas,
products, services and jobs, concluded a 2001 report jointly published
by two UK government departments, the Small Business Service and
the Performance and Innovation Unit of the Cabinet Office. Defined as
employing fewer than 250 people, having annual sales of less than
11.2m and/or net assets of less than 5.6m, this important sector of
the economy is almost certainly lacking the calibre of project
management expertise possessed by larger companies.
Full corroboration of this would require a skills inventory, perhaps
with a starting point of looking at the employment affiliations of
candidates successfully acquiring accredited certified project manager
status. Anecdotally, though, common sense and experience suggests
that you are more likely to meet a project manager employed by a
large firm than by a small firm.
And the report points to this, if elliptically. Productivity, it concludes,
is higher in larger firms than in smaller ones. R&D spending, too, is
lower in small firms than in large firms. There is, as we have seen, a
project management dimension underpinning both these
characteristics. Even more convincingly, when examining the
characteristics of particularly fast-growing SMEs, it found that of six
differentiators, fast-growing SMEs were more R&D intensive, were
twice as innovative, and were more likely to be working in alliances
with others. Again, there is a project management dimension
underpinning each of these characteristics.
But consider the impact on the economy if every SME were better at
managing the projects that it undertook. For their role in the economy
is far more significant than the one-man bands and corner shops that
sometimes come to mind.
Taken together, the UKs 3.7 million SMEs account for approximately
40% of the UKs GDP, and have combined sales revenues of 1trn.
Employing over 12 million people in the UK, they account for 85% of
the 2.3 million extra jobs created by new businesses in the period

The Importance of Project Management 7

199599, and over 50% of the 3.5 million jobs gained from expansion
of existing firms over the same period.
Impressive though these figures are, it is highly probable that
enhanced project management capabilities would have seen an even
greater transformation. That, in essence, is the scale of the
opportunity facing the UK, and indeed many other developed
economies.

Richard Pharro, managing director of accreditation and examination

body APMG, which commissioned this research, comments: At last we
are beginning to see research which proves how important project
management is to the UK and global economies. All kinds and sizes of
organisations in both the public and private sectors should sit up and
take note of this because without well-trained and capable project
managers the percentage of GDP spent through projects is inflated due
to many exceeding their budget through poor management.
Furthermore, considering the impact that successful project
management has on fast-growing SMEs, we hope to see more project
managers getting the recognition they deserve in helping to make
these organisations even more innovative and successful.

Further information about project management skills and training is

available from the APM Group on + 44 (0)1494 452450 or visit
www.apmgroup.co.uk.

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