Introduction
Project
portfolio management (PPfM) is fundamentally different from project and
program management. Project and program management are about execution
and delivery---doing projects right. In contrast, PPfM focuses on doing
the right projects at the right time by selecting and managing projects
as a portfolio of investments. It requires completely different
techniques and perspectives.
Good portfolio management increases
business value by aligning projects with an organization’s strategic
direction, making the best use of limited resources, and building
synergies between projects. Unfortunately, organizations often do
portfolio management poorly. As a result, they fail to deliver strategic
results because they attempt the wrong projects or can’t say “no” to
too many projects.
This paper summarizes current techniques for
selecting, prioritizing, and coordinating projects as a portfolio to
increase value to an organization.
The Business Problem
Nearly
all organizations have more project work to do than people and money to
do the work. Often the management team has difficulty saying “no.”
Instead, they try to do everything by cramming more work onto the
calendars of already overworked project teams or by cutting corners
during the project.
Despite a heavy investment of people and
money in projects, the organization still gets poor results because
people are working on the wrong projects or on too many projects. Trying
to do too much causes
all projects to suffer from delays, cost overruns, or poor quality.
The Solution
Effective
project organizations focus their limited resources on the best
projects, declining to do projects that are good but not good enough.
PPfM enables them to make and implement these tough project selection
decisions.
PPfM is a funnel that connects strategic planning to
the execution of projects, making the strategic objectives executable.
Exhibit 1 shows the PPfM funnel.
Exhibit 1: Portfolio Management Connects Strategy with Execution
The
mouth of the funnel takes in all of the ideas for projects that the
organization might do. These ideas may come from strategy, customer
requests, regulatory requirements, or ideas from individual
contributors. The purpose of the funnel is to select only those projects
that meet certain criteria and to say “no” to the others. The resulting
collection of projects is a focused, coordinated, and executable
portfolio of projects that will achieve the goals of the organization.
PPfM
complements project and program management. It aims the organization in
the right direction by selecting the best projects to do. The selected
projects are turned over to program and project management, which is the
engine that initiates and completes them successfully. Doing projects
right, doing projects together, and doing the right projects: Project
organizations must excel at all three to have long-term success (Exhibit
2).
Exhibit 2
The Portfolio Management Process
Exhibit 3 shows the five primary steps of the portfolio management process. (Figure 3-2 in
The Standard for Portfolio Management shows a more detailed breakdown of these steps (Project Management Institute, 2006, p. 25):
- Clarify business objectives
- Capture and research requests and ideas
- Select the best projects using defined differentiators that align, maximize, and balance
- Validate portfolio feasibility and initiate projects
- Manage and monitor the portfolio
Exhibit 3--Portfolio Management Process Follows Five Steps
This
process identifies the most important differentiators between projects,
such as Return On Investment, risk, efficiency, or strategic alignment.
Then it uses these differentiators to select the high impact projects,
clear out the clutter, and set priorities. Trade-offs are made in a
disciplined way, rather than by allowing the loudest voice to win.
The PPfM process accomplishes three things (Oltmann, 2006, p. 2):
- Aligns
execution with strategy. Each selected project must play a role in
carrying out the strategy of the organization. No more pet projects!
- Maximizes
the value of the entire portfolio of projects to get the “most bang for
the buck.” Taken together, the projects must have a high return on the
organization’s investment. This may be in terms of dollars or other
measures that are important to the organization.
- Balances the portfolio. Makes sure that it is not lopsided---for example, by being too risky or too focused on short-term results.
The following sections describe each step in more detail.
PPfM Step 1: Clarify Business Objectives
First, Aim the in the Right Direction
Before selecting the right projects, you must know where you want to go! As Alice of
Alice in Wonderland discussed with the Cheshire Cat,
Would you tell me, please, which way I ought to walk from here?
That depends a good deal on where you want to get to, said the Cat.
I don’t much care where -, said Alice.
Then it doesn’t matter which way you walk, said the Cat. (Carroll, 1920, p. 89)
Similarly,
you must be able to clearly state your organization’s strategic
objectives before starting portfolio management. This is often the first
obstacle people run into when trying to implement PPfM. If you can’t
determine the strategic objectives, stop working on portfolio management
and fix that problem first.
As an example, a very popular
framework for strategic planning is the strategy map, based on the
strategic perspectives developed by Kaplan and Norton (Kaplan &
Norton, 1996). A strategy map derives and links initiatives in a cause
and effect hierarchy so that they support each other Kaplan &
Norton, 1996, p. 149). The top level of the hierarchy is financial
objectives, because creating financial returns for shareholders and
owners is a priority at for-profit companies. The supporting levels of
the hierarchy are:
- Customer value: what value can the company create for the customer that will translate into financial results?
- Processes: what internal processes will generate that customer value?
- Learning and growth: what capabilities and internal learning must the company have to make the processes work effectively?
Decide What Value Means
Portfolio
management requires a systematic method of differentiating between
candidate projects to determine which ones are “best.” What does “best”
mean? The definition is unique to every organization. For example, one
company might value environmental stewardship most highly, while another
places top priority on ROI. Select a critical few criteria that will
measure each project’s true value to your unique organization.
Rigorously limit the number of criteria to four to ten to keep the
amount of data manageable.
The right criteria are critical,
because poor criteria will cause you to select the wrong projects. There
are two primary approaches to defining valuation criteria: financial
and scoring. Exhibit 4 shows examples of both types of criteria.
Exhibit 4 Valuation Criteria Divide into Two Approaches
The
financial approach to valuation uses quantitative monetary measures,
such as net present value, to define the differences between projects.
Unfortunately, a financial approach may mislead portfolio managers to
mistake precision for accuracy. Robert Cooper says,
In spite of
the fact that financial methods are theoretically correct, the most
rigorous of all methods, and the most popular of all tools, of all the
methods we studied in a large sample survey of practices versus results,
they yielded the poorest results on just about every portfolio
performance metric. The sophistication of these methods far exceeds the
quality of the data! (Cooper, Edgett, & Kleinschmidt, 2001, p. 46).
Valuation
by scoring takes a different approach. In many fields, researchers
understand which characteristics of projects correlate with success.
Scoring uses these predicting factors as the criteria for
differentiating between candidate projects. For example, Cooper (
Cooper, Greenberg, & Zuk, 2002, p. 47) lists three factors in new
product development that correlate well with eventual product success:
- Unique, differentiated product that offers superior value to customers
- Product is targeted at an attractive market
- Product and project leverages internal company strengths
Regardless
of theoretical superiority, use a valuation method that fits with the
executive decision making style in your organization. Some companies are
more comfortable with financial analysis, while others prefer the
framework for voting and discussion that scoring brings. Yet others
combine financial and scoring criteria into a single system. Most of my
clients prefer at least some scoring criteria in their evaluation
process. Using either approach is better than having no structured
evaluation criteria at all!
PPfM Step 2: Capture and Research
Step
1 of the PPfM process builds a foundation for creating a portfolio. It
requires all of the decision makers to agree on strategic objectives and
the vital few valuation criteria, so initially it can be difficult and
time consuming. Fortunately, only periodic review and update is needed
after that.
Step 2 builds on this foundation by starting to build
a specific portfolio. Exhibit 5 shows the steps for constructing a
tentative portfolio (Oltmann, 2007, p. 36). The first two steps are
research:
- Create
an inventory of candidate projects for the portfolio. Include
in-progress projects as well as ideas for new projects. Sources can
include customer requests, initiatives from strategic planning,
regulatory requirements, and good ideas from employees and project
managers.
- Gather data for each candidate project on the
inventory. These include data that will allow you to rate the projects
against the criteria that you have developed. It may also include early
estimates of dependencies and high-level resource requirements.
Exhibit 5 - Constructing a Tentative Portfolio Leads to Valuable
At
first, identifying and gathering data on all of the candidate projects
may be a major challenge, requiring much investigation and interviewing.
As your organization matures at PPfM, this step will get faster and
easier.
PPfM Step 3: Select the Best Projects
Maximize the Portfolio’s Value
With
project data from Step 2 in hand, determine which combination of
projects creates the highest total value for the portfolio, given
high-level resource constraints. This is called
portfolio maximization.
First,
rate each candidate project against the valuation criteria to compute
the value of each project (the fourth step in Exhibit 6). This will be
either a weighted score or a financial value. Next, rank the candidates
from highest to lowest value. See Exhibits 6 and 7 for examples
(Oltmann, 2007, p. 42).
Exhibit 6-Use Scoring Criteria to Rank Candidate Projects
Starting
with the highest value projects, allocate available resources until
they are exhausted. Draw the “cut line” at this point, creating a
tentative portfolio. (Exhibit 7) The portfolio is tentative because no
valuation criteria, no matter how good, can capture all of the
subtleties that must go into real-world funding decisions. The cut line
becomes a starting point for vigorous discussion among the members of
the portfolio management team, as they use their real-world experience
and judgment to tune the tentative portfolio. The process, criteria, and
data form a framework that guides this discussion, instead of selecting
projects by “loudest voice wins.”
Exhibit 7-Use NPV and Resource Data to Draw a Cut Line
Balance the Portfolio
A
maximized portfolio may be out of balance in important ways. For
example, it may have an inappropriate risk profile, subjecting the
organization to either too much or too little risk. According to Cooper
(Cooper, Edgett, & Kleinschmidt, 2001, p. 73), balance is the second
weakest element in portfolio construction, after “too many projects.”
Use
balance displays to check the balance of a tentative portfolio across
important dimensions. Exhibit 8 shows a bubble chart that displays risk
versus reward in a small portfolio, where each bubble represents a
project. Some popular balance displays are:
- Risk versus reward
- Strategy---tactical range
- Market or product-line segmentation
- Distribution of time to completion or time to profit
Exhibit 8-Balance Display Compares Portfolio Risk and Reward
PPfM Step 4: Validate and Initiate
To
keep the amount of data manageable, a portfolio is initially
constructed at high level of abstraction. The resulting portfolio
ignores some important constraints and details about its projects. For
example, a portfolio’s demand for resources often appears feasible when
analyzed at the FTE (full-time equivalents) level. However, this masks
bottlenecks caused by limited availability of certain skill sets
(Exhibit 9). Thus, a portfolio may not be feasible to execute even
though it is maximized and balanced.
Before starting execution,
validate that a tentative portfolio appears to be feasible. Team up with
the people who will run the projects and thus know them
best---generally line and project managers, perhaps coordinated by the
project management office (PMO).
When looking at portfolio feasibility, consider the following:
- Interproject dependencies
- Knowledge and capabilities of the performing organizations
- Time-phased resource demand and availability, including considerations of key skill sets
- Budgetary constraints
Exhibit 9-Availability of a Specific Skill Set Causes a Bottleneck in
PPfM Step 5: Manage and Monitor
After
validating the portfolio, put it into execution. Initiate the new
projects and programs, inserting them into the project management
system. Although the project manager is responsible for day-to-day
execution of each project, the portfolio manager’s job continues. He or
she monitors the execution of the portfolio and its component projects,
ensuring that it continues to meet its original design objectives.
In this step, the portfolio manager works closely with the project managers or the PMO to:
- Gather information to monitor the performance of the portfolio
- Identify and resolve issues within the portfolio, including reallocating resources
- Steer the portfolio, making changes when necessary to rescue, re-scope, cancel, or introduce new projects
- Manage escalations and midcycle requests for changes to portfolio composition---for example, adding new projects
- Initiate a full portfolio review and reconstruction on a scheduled basis, such as quarterly or annually
Portfolio Governance
This
paper focuses on the process and tools for PPfM. However, knowing the
process and tools is not enough. PPfM must have a governance framework.
Governance specifies who has responsibilities in each process step and
how these individuals will work together to make good decisions about
projects. PPfM is about sharing power and decision making at very senior
management levels, so clear governance is vital. As an example, Exhibit
10 shows an IT organization’s governance structure for implementing the
PPfM process discussed in this paper (Oltmann, 2007, p. 140).
Exhibit 10- Portfolio Governance and Process Work Together
End Point
Based
on my experience managing portfolios and helping clients, the following
are attributes of a good portfolio management system:
- Encourages structured investment decision making based on effective criteria
- Helps decision makers make hard trade-offs, including saying “no” to some projects
- Ensures that strategy and execution are aligned
- Backed by strong, long-term executive participation
- Is an on-going process with frequent looks at the “big picture”
- Favors process simplicity and transparency
- Strongly tied to governance
Organizations that combine effective project portfolio management with good project management achieve these results:
- Faster time to market
- Higher productivity
- Less chaos
- Strategy that actually gets implemented
For
example, the IBM Institute for Business Values scored the performance
of over 20 electronics and high-technology manufacturers from 1996 to
2001. Leaders in portfolio management delivered earnings performance
that was 46% more predictable than the performance of poor performers.
The authors say, “Leaders in portfolio management stand in stark
contrast to many companies, where portfolio management only occurs when
poor business performance and reduced budgets force crisis-mode cuts to
projects” (Cooper, Greenberg, & Zuk, 2002, p. 12).
The next
time that you hear the complaint “We’re spread too thin,” look below the
surface. Are your projects unfocused and misaligned? Do too many “good”
projects compete for too few resources? Combining project portfolio
management with project management will help you “do the right projects
and do them right.”
