Programme and Project Portfolio Management Blog (PPM)

Portfolio selection, prioritisation and authorisation

One of the most significant challenges of PPM is to understand how the portfolio of projects is selected, prioritised and approved. The primary objectives are twofold:

a) to select and prioritise projects to deliver the highest value
b) to ensure that there is balance in the mix of projects

It is essential that priorities be based on both individual project benefits and the overall impact of the project portfolio. Every project will be treated differently, with some flying through the selection and prioritisation process and others that simply get bogged down.

The selection, prioritisation and approval process will allow the business to address the following key issues:

a) documenting a detailed inventory of projects
b) developing a value ranking for each project against tactical criteria and strategic objectives
c) analysing and identifying project risks vs benefits
d) developing an idea of an optimum or acceptable size of the project pipeline

The project portfolio comprises projects that offer widely differing value. Projects vary by their short and long term benefit, their synergy with corporate goals and their level of investment and anticipated payback. The business needs to develop selection, prioritisation and approval processes by which it is able to evaluate projects according to their health, cost and strategic contribution to the organisation over the short, medium and long term. This part of the PPM framework process brings all the work involved together for review and scrutiny. Projects that do not surface as a part of the process will not have a chance to make it into the final list of authorised work.

The key steps involved within the selection, prioritisation and approval are highlighted in the sub-sections which follow.

Building a project registry

During the gap analysis phase the business builds up a list of projects. This is continued in the selection and prioritisation process in which the business builds up a project registry that allows it to determine the overall complexity and challenge of the portfolio. In other words, the processsets out to answer these questions:

a) Is the project worth doing?
b) What is achievable?
c) Is there sufficient capability and capacity to do this?
d) What is the impact on the business?
e) What are the relative benefits of each programme/project?

Project value: scoring and prioritising

Determining a value for a given project is a crucial step. There is no single definition of the ‘right’ project; however, the project value must be superior to that offered by other projects. The scoring criteria used to select and prioritise projects will however be customised by the business that is implementing the PPM process. The methods that an organisation uses have a big impact not only on the projects that get chosen but also on the projects that get proposed and how they get prioritised. We now briefly explore some of the methods that are used to score and prioritise projects.

Balanced score carding methods
The balanced score card was developed in the early 1990s by Drs Robert Kaplan and David Norton of Harvard Business School. This method enables organisations to clarify their vision and strategy and translate them into action. It provides feedback around both internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced score card transforms strategic planning from an academic exercise into the nerve centre of an enterprise. The majority of currently available portoflio management software tools provide the capability for defining both financial and non-financial metrics.

Earned value analysis (EVA)
Earned value analysis is a measurement and management technique that integrated technical performance requirements and resource planning with schedules, while taking risk into consideration.

In other words, EVA is a management technique that relates resource planning to schedules and to technical cost and schedule requirements. All work is planned , budgeted, and scheduled in time phased ‘planned value’ increments, constituting a cost and schedule measurement baseline.

Earned value analysis also provides an objective measurement of how much work has been accomplished on a project. Using the EVA process, the management team can readily compare how much work has actually been completed against the amount of work it was planned to accomplish. Again, all work is planned, budgeted, and scheduled in time phased ‘planned value’ increments, constituting a performance measurement baseline.

Net present value (NPV)
The net present value of an investment (in this context, a project) is the difference between the sum of the discounted cash flows which are expected from the investment, and the amount which is initially invested. NPV is an effective way of expressing how much value a long term project investment will result in, and it has become an industry standard method. However, there are some limitations to NPV measurement:

a) Although it is widely used for making investment decisions, it does not account for flexibility or uncertainity after the project decision has been made.
b) NPV is unable to deal with intangible benefits. This inability decreases its usefulness for handling strategic issues and projects.

Cost/benefit analysis (CBA)
Cost/benefit analysis is the weighing-scale approach to decision making. All the positive elements (cashflows and other intangible benefits) are put on one side of the balance and all the negative elements (the costs and disadvantages) are put on the other. Whichever weighs the heavier wins. However, it can bring with it mistakes and problems:

a) A frequently made mistake in the CBA method is to use non-discounted amounts for calculating the costs and benefits.
b) Caution should be exercised with people who claim that ‘if you can’t measure it does not exist/has no value’.
c) Especially in more strategic investments, frequently the intangible benefits clearly outweigh the financial benefits.
d) Risk must often be considered as a factor in making the decision.

Other scoring and prioritisation models
Other types of models applicable to project scoring and prioritisation, as well as techniques employed to make ‘go/kill/hold/fix’ decisions include:

a) expected commercial value (ECV)
b) productivity index (PI)
c) strategic buckets method
d) risk-reward bubble diagram

For a full breakdown of scoring methods we recommend the excellent White Paper series written by Drs R Cooper and S Edgett of Stage Gate.

Identifying and measuring project risks

Every project has risks, so it is essential to identify mitigation procedures and contingenices. By identifying project risks, those managing the execution process are given advance warning of problems that might arise and are able to put in place adjustment steps. For example, the risks of implementing a multi-year, multinational project, complete with major process redesign, may be quite significant. The combination of project value and risk assessment allows the portfolio to be selected in a meaningful way, and enables the PPMT to compare and prioritise competing proposals.

Key risk variables include:

a) project interdependencies within the portfolio
b) resource capacity/capability vis-a-vis demand
c) changes in business strategy vis-a-vis operational activities
d) changes in business processes that conflict with the PPM process
e) governance risk in relation to board and management performance with regard to ethics, community stewardship, and company reputation
f) strategic risks resulting from errors in strategy, such as chosing a technology that can’t be made to work
g) operational risks, including those resulting from poor implementation, or process problems such as those of production and distriution
h) market risks, including in relation to competition, foreign exchange and commodity markets, interest rates, liquidity and credit
i) legal risks, arising from statutory and regulatory obligations, including contract risks and litigation brought against the organisation

Identifying portfolio risks starts with an evaluation of the specific project portfolio environment. What business decision criteria have been established? What working assumptions regarding the organisation’s current business processes and decision points might increase risk for the portfolio? Managers should refine this evaluation iteratively, as they plan, assess and manage their portfolio.

Prioritising. balancing and approving the project pipeline

By creating a ‘value proposition’ for each project and then evaluating projects according to their health, cost and strategic contribution to the organisation over the short and long term, the business is able to build a realistic picture of the project pipeline. Understanding project value and risk enables the business to construct a portfolio that is balanced. For example, high value projects are clearly the most sought after, but their risks, if too high, may dilute their attractiveness. Conservative projects may quell fears of losing an investment, but if the returns are too low, they may undermine the company’s ‘future state’ vision.

It is essential to eliminate overlapping and redundant projects and select the most value-producing projects for execution, ensuring that funds are directed towards the most deserving initiatives. However, it is also important to reorganise that the project portfolio will be comprised of projects that offer widely differing values but collectively strive to achieve the overall strategic objectives. Projects within the portfolio will have varying short and long term benefits, specifically as regards their synergy with corporate goals, and their level of investment and anticipated payback.

Use of scoring methods as outlined above will enable the PPMT to select clear criteria for how projects are to be prioritised. For example, the criteria need to include:

a) support for strategic goals
b) short and long term value to the business
c) risk/return/future payoffs
d) resource demand and impace
e) financial impact
f) timescale

The criteria should be defined, understood and able to be evaluated on a consistent basis form project to project. The prioritisation criteria therefore focus on both tangible and intangible benefits, allowing the PPMT to accurately measure the value of the business’s projects, and determine their long term strategic orientation as well as their operational impact. Prioritisation should aggregate new project ideas and categorise existing projects as mission-critical, highly desirable or desirable in order to compare their value and level of importance to the business. There are huge differences between projects, yet too often we see a failure to recognise the differences and handle each accordingly. Types of categorisation are:

a) Tactical projects deliver competitive advantage today. They have low risk, medium-skill requirements and deliver on the existing business plan.
b) Administrative projects deliver on currently promised service levels and support existing strategic projects. By their nature, they are low risk, low-ROI projects requiring moderate skills.
c) Strategic projects deliver competitive advantage in the future. They have high risk, high-skill requirements and look to reduce the gap between the business’s current state and its future vision.
d) Innovation projects are smaller, experimental projects that may deliver possible competitive advantage tomorrow. They are usually high risk and often require resources that the organisation does not yet possess.
e) Future vision projects are contingent upon strategic and innovation projects. These projects have a high risk and high-skill contingency.

Project types can also be categorised by level of importance, for example:

a) mission-critical projects are essential to successful delivery. If the project is not successful there are major implications for the business.
b) Highly desirable projects are important but not essential. If the project is not successful there are serious (but not major) implications.
c) Desirable projects are all those that do not meet the mission-critical or highly desirable criteria.

The approval step is where you determine the actual work to be funded. When this has been approved the projects concerned will then be included within the final portfolio plan. It is important to remeber that the business will never have enough funding to cover all of the proposed work and that not all of the projects prioritised will be approved. After projects have been categorised, prioritised, allocated funding, and resourced, the portfolio plan is ready to be approved and should be published to the business. It is essential to publish this plan at every level within the business so that the individual stakeholders understand the importance of what they are working on and its strategic value to the business. Once the portfolio plan is in place the PPMT and the PMO manage its delivery. The PMO feeds back metrics such as costs, risk, schedules and milestones to the PPMT. The PPMT continually reassesses project performance against strategic objectives and repriorities, adding new and terminating old projects where necessary. The PPMT also provides two-way feedback with executives, ensuring the planning cycle remains on track and aligned with the business’s objectives.

Next week, Portfolio execution and monitoring

Portfolio Definition, Strategy Alignment and Ideas Management

The portfolio definition process is where you define the terms, scope, domain and definition of your portfolio, and gain agreement on your basic portfolio model. It is essential to keep in mind that the portfolio framework is a collection of projects and resources that you are managing as a group in a way that maximizes the total collective business value.

Defining the Portfolio

The types of variables that need to be considered for defining the portfolio are:

1) Domain or scope of organisational coverage i.e. which business groups, units, division departments, teams to include within the portfolio. Understanding the total scope will enable you to set up more multiple portfolios that are more manageable, you may wish to set-up a portfolio definition of each major business unit or division.

For example:

Organizational -Wide Portfolio

a) Division and Departmental Portfolios
b) Multiple Portfolios per Organization
c) Smaller Portfolios Based on Scope of Work

2) Scope of work included within the portfolio and definition of categorisation scheme. In other words does the project supports business processes and administration such IT, finance, or contral services. Directly grows the business such as sales and marketing and / or drives the business such as R&D or new product development.

3) It is important from the out set to define the portfolios key performance indicators (KPIs) and types of scoring models. It is impossible to compare apples to apples if each project has a justification based on conflicting different models. You need to understand the models that your organization wants to utilize and make sure all projects are justified using those models. Most organizations are driven by financial or cost measures, such as Profit, Sales, Net Present Value (NPV), Internal Rate of Return (IRR), or Economic Value Added (EVA). Although financial metrics are extremely important and directly impact the bottom line, other key criteria should be included balanced score card, cost benefits analysis, checklists. The choice of model is also important and will depend very much on the type of organisation, and the compostion of the portfolio(s).

Defining Strategy Alignment

Decisions on project selection and prioritizing cannot be done without knowing what the company or organization feels is important. The value that a project brings to your business is based on the cost/benefit implications and how well it aligns with your organization’s goals and strategies. Therefore the definition process needs be to carefully embedded and reviewed against a series of short, medium and long-term strategic objectives.

What are strategic objectives? In there simplest form strategic objectives are high level statements that describe what your organization is trying to achieve and how you plan to achieve it. If you do not have organizational goals and strategies, you cannot evaluate projects for alignment. Moreover, if the project does not help you accomplish your goals, you may be wasting your resources.

Defining your businesses objectives and strategic alignment criteria is typically achieved by looking at where your organization is today “Current State Assessment” and where you want to be in the future “Future State Vision”, then determining how best to get there “Gap Analysis”. This process results in the validation (or creation) of your mission, vision, strategy, goals and objectives. In particular, your strategy and goals will provide the high-level direction that will help align and prioritize all the work for the coming business cycle.

Defining your business goals and strategies can be typically achieved by implementing the following process:

1. Current state assessment or “what is”: Without a clear understanding of your organization today, it is very difficult to put the other pieces into place. Current State Assessment tells you about your organization today, its describes your organization mission, vision, work processes, products, services, customers, stakeholders, values, etc.

2. Future state vision or “what should be”: This includes asking the same types of questions about where your organization should be in five years in terms of its capabilities, culture, products, services, etc.

3. Gap analysis or “how to”: This forms the basis of the portfolio selection process and determines those projects that will be for consideration. Gap analysis highlights all the necessary steps to get from your current state to your future state. The result of the gap analysis is a short-term and long-term strategic plan that describes the things that need to happen to move you toward your future state. These initiatives give you the foundation that you need to make rational decisions on the things that are important and the types of work that are more valuable than other work. One of the purposes of the Gap Analysis is to define a set of projects to close the gap and move you toward your desired state.

Ideas Management
Carving the future vision of your organization is inexorability linked to the development of new ideas for new produces and services, however brining them to market is extremely challenging. PPM has become the essential management discipline to enable organizations to create frameworks for idea generation – whether this is adding new or re-scoping old projects. The PPM process needs to have the capabilities for systematic idea management and concept (or business case) evaluation in order to continually evolve the future state vision of the business and also to ensure mis-alinged projects are able to be replaced by new initiatives. The PPM process harnesses this by enabling the business to ideas, assess their impact on your existing pipeline, create multiple what-if scenarios to determine the optimal impact on portfolio, and balance overall demand for resources across the entire portfolio.

When new ideas surface the typical steps for managing this process includes:

1) Creation: Capture suggestions and ideas for new products from all possible touch points (sales, service, resellers, partners, customers, consumers, marketing, and so on.
2) Categorization: Ensure idea follow-up and assessment by the appropriate business owners, such as the business developer for a specific category.
3) Consolidation: Develop a repository to collect documentation and information related to the product idea.
4) Exploration: Share ideas and undertake feasibility assessments with relevant project stakeholder.
5) Strategic Fit: Ensure business idea fits into the overall strategy and is feasible in terms of legal considerations, standards, and time and resource restrictions.
6) Business Case: Identify project, components, constraints and risk. Outline financials, assign deliverables, roles and processes for delivery.
7) Commercialization — Identify appropriate set of skills, partners, channels and teams.
Technology – Identify technical feasibility of proposed project.
9) Project Registry: Include ideas as part of the overall project portfolio inventory.
10) Submission: Feed ideas into to Project Portfolio plan for selection and prioritization.

Ideas management creates and prepares new initiatives by using a process that captures idea submission, classification, evaluation, consolidation, business case and feasibility development.

Next week Resource and Business Capability Analysis

What is the Project Portfolio Management (PPM) Process Framework

Where do we start and what is the make-up of the PPM Process? With in this chapter we will take a “high level view” of the PPM framework and discuss its various component areas.

The framework discussed below takes into account that that every business is different and possesses its own flavours and market idiosyncrasies. We recommend that the framework is used has a base line and that the different phases and steps will need to be morphed in different ways to suite the nature of your business. Delivering a workable PPM process is a difficult challenge. As we can see form figure x the implementation of a poorly defined method is has bad if not worse than not implementing any form of process to control project delivery

When implementing a PPM process the business is confronted with the typical challenges:

1) Disparate project and resource registry and information gives management an insufficient basis for making tough decisions. Much of the information required to make project selection decisions is therefore at best uncertain and at worst very unreliable. The results is that no one wants to be the one to kill a questionable project

2) Poor portfolio definition and missing strategic criteria means that projects are typically a poor fit with strategy and overall spending does not reflect the strategic priorities of the business.

3) Many companies suffer from poor project selection and prioritization criteria. This leads to too many mediocre projects finding their way into the pipeline. Those few good projects that do exist are usually starved of resources, end up taking too long to market and failing to achieve their full potential. The result is too many low risk and low value project.

4) Typically many PPM process have poor traffic light criteria’s for Go/Hold/Stop decisions. As a result, projects are simply added to the ‘active list’ of projects with no clear directional focus and little of no understanding of their impact on the business.

5) There is also a limit on the number of resources within a business and how thay are allocated across the organisations projects. A decision to fund a project may mean that resources must be taken away from another and resource transfers between projects are not totally seamless. Even when a large project does get started, available resources get sucked into the big one, often leaving other projects high and dry

6) Implementing PPM naturally enhances and results in hierarchies. Hierarchies have a tendency to breed bureaucracies and companies naturally interested in building a PPM infrastructure must find a balance between circulating top-level strategy throughout their structure and restricting workflow with red tape. Overly rigid and complex structures that ties your projects down risk choking off innovation that comes from bottom up

Component Areas of the PPM Framework

Effective PPM analysis involves measuring and comparing portfolio business results to determine whether the portfolio is meeting its objectives, as defined by the business decision criteria and portfolio definition. The assessment process needs to incorporate both a short- and long-term perspective, and should measure and examine both tactical and strategic parameters.
These include

1) Tactical Portfolio Parameters: Condition, health and performance of the individual projects.

2) Strategic Portfolio Parameters: Overall portfolio results and impact on the businesses strategic objectives

The management of an effective PPM framework is about the selection and prioritization of projects to deliver the highest value, based on the pre-established portfolio business definition and criteria. The definition and priorities need to be based on both individual project benefits and overall impact to the project portfolio. In addition, the resulting portfolio mix must not exceed the organisation’s resource capacity or capability.
A PPM framework needs to be designed to map the health / contribution of data for each project to the business decision criteria and needs to empower managers with the ability to see whether the project is either meeting or exceeding threshold indicators, thereby identifying portions of the portfolio that are out of compliance. The portfolio dashboard helps the PPMT to interpret portfolio information and analyse each project threshold as a status of green, yellow, or red, (RAG) and then develop reports that enable them to understand the health of their projects at a glance.

PPM is a repeatable process for defining, planning, prioritizing, approving and executing work as a business portfolio. The Project Portfolio Management framework needs to be able:

1) Identify, qualify, and fund projects / programs that address the business strategy.
2) Manage organisational resource demand, capacity, and capability. ·
3) Measure performance to ensure that projects / programmes are collectively meeting the portfolio strategy.
4) Identify and take corrective actions on projects / programmes not in compliance with portfolio objectives and commitments.
5) Balance the portfolio to ensure that the business has the right mix of short, medium and long term projects.
6) Establish effective communication and reporting mechanisms that enable timely, fact-based decision-making regarding projects, programmes, and the overall portfolio.
7) Implement a process to make continuous improvements to the portfolio.

PPM framework continually feeds back into itself and at a minimum should include the following processes:

1) Portfolio Definition, Strategy Alignment and Ideas Management
2) Resource and Business Capability Analysis
3) Portfolio Selection, Prioritization and Authorization
4) Portfolio Execution and Monitoring

Next week Portfolio Definition, Strategy Alignment and Ideas Management.

Dear Readers,

I came across an old article on Gantt Head dataing back to 2002. The article is an interview between the project and programme management web portal Gantt Head and Dr. Harry Markowitz titled

Gantt Head about Dr Harry Markowitz

Dr. Harry Markowitz, of the Harry Markowitz Company and a professor at the University of California at San Diego, has been credited as one of the creators of portfolio management theory. In the 1950s, he wrote that a portfolio of diverse investments is more likely than individual investments to reduce risks and produce a higher rate of return. His Modern Portfolio Theory (MPT) revolutionized the way investments were viewed. With new tools for estimating risks and returns, investment managers were able to create funds designed to suit investors’ individual risk thresholds while attaining desired returns. For his work, Dr. Markowitz was awarded the Nobel Prize in Economics in 1990.

Project Portfolio Management (PPM) arises largely from Dr. Markowitz’s work in portfolio theory. The treatment of projects as investments, managing groups of projects in portfolios and overseeing their execution and value to the organization as a group is at the core of PPM. In this light, Dr. Markowitz gives us some of his thoughts about the application of financial portfolio theory to corporate project management.

For your convenience the interview is detailed below.

gantthead: What are your thoughts regarding Project Portfolio Management (PPM)?
Markowitz: I’m not directly familiar with this management theory; my work has been primarily in the equities markets. The notion that projects can have expected returns, variances and covariances of return does appeal to me. However, when you apply MPT to a portfolio of securities, you mostly assume a budget constraint to indicate what transactions are allowed. Thinking about applying this to corporate projects, I have some concerns about doing this.

gantthead: What are those concerns?
Markowitz: With projects in corporations, there needs to be a matching on the production side that doesn’t happen in the securities market. Some projects may have human capital requirements that others may not. An example is an oil company that buys a department store. The oil company does this to be better diversified. But the management skills the oil company brings forward do not necessarily match the management needs of the department store. The time required for the oil company to learn how to run a department store may result in lost market share for the store.

Here is another example. Suppose I have a job shop that turns out products. I can’t necessarily take on work that does not fit the skills and capabilities of my shop. If my shop builds cabinets, I would not ask it to begin developing software simply because the company wants to diversify.

I would be cautious about applying MPT to corporate projects as though these are liquid assets. There are different constraints regarding projects, like management expertise, human skill sets, physical production capabilities and other factors that come into play. I’m not sure that the constraint side of the project portfolio problem has been properly modeled. Understanding how an organization’s experience in one product area may be applicable to other markets is not very clear.

gantthead: What about evaluating returns from projects?
Markowitz: As far as returns from these projects, part of the uncertainty is market uncertainty as with securities. But part of the uncertainty also has to do with skills available. In order to evaluate the potential of a project, the company must estimate whether it can design and produce a product of a quality and price sufficient to be sold in the face of present and future competition.

Also, projects in a portfolio may reinforce each other in a non-additive way. Microsoft is the 800-pound gorilla in software. They are known to use their dominance in the Windows operating system to reinforce their sales of other software products. Thus some projects may add to the business portfolio other than only by their contribution to the revenue stream.

gantthead: What about evaluating product risks?
Markowitz: With securities, what has become fairly popular are models of why things go up and down together. We see that sometimes certain industries do better than others, or large capitalization stocks do better than small capitalization stocks, or vice versa, and so on. The riskiness of the portfolio depends not only on the riskiness of its individual securities but also on the extent they tend to go up and down together: their correlation or covariance. Rather than estimating individual covariances, we build models of covariances. A lot of effort has gone into building such models.

Some kind of model of covariance may also be applicable to project portfolio selection. Project covariances might depend partly on market factors similar to those used in MPT. But they might also depend upon technology factors or management factors. For example, perhaps two projects depend on the same yet-to-be-proven technology. Or perhaps both depend upon prompt completion and both rely on the same person’s ability to estimate completion times, which may itself have yet to be tested.

gantthead: How do you think Portfolio Theory could apply to Corporate Management?
Markowitz: Perhaps portfolio theory–as is–is not applicable. An investment manager doesn’t have to run companies he purchases. Also, he doesn’t jeopardize the prospect of the companies whose shares he buys if he invests a small fraction of his portfolio in this one and a small fraction in that one. But if a company manager subdivides his resources too finely among many projects in order to diversify, he may give each project too little to succeed. The company (or Division) manager cannot pretend that he is selecting liquid assets subject to a budget constraint.

gantthead: How would you approach applying Portfolio Theory?
Markowitz: In the first instance at least, I wouldn’t think in terms of applying portfolio theory. I’d think in terms of doing a Systems Analysis or Operations Research analysis of the enterprise. In the past, I’ve applied various techniques–such as linear programming and simulation analysis–to various kinds of business decision-making problems. In the 1950s I applied quadratic programming to the portfolio selection problem. Now it is quite common to us a combination of quadratic programming and Monte Carlo analysis. I think this is a good idea.

When you approach a new area, you should start with a blank white-board and ask what’s essential in this problem. My first reaction to the problem of management of a multi-project department or enterprise is that it reminds me of a job shop in manufacturing. In a job shop, you apply resources—such as people and equipment—to perform tasks. When you succeed at one task, the job may require other tasks to be performed. There is always a chance of rejects; work may have to be scrapped. You can think of a division with projects involving design, manufacturing and marketing as a job shop. In engineering tasks, there is always a chance that you won’t succeed. And there is always a chance that someone else will do the design better or beat you to the marketplace. These are some of the project risks that must be considered in evaluating projects in a portfolio.

Before one could start building a Monte Carlo model of such an enterprise “job shop,” one would have to think about what kind of skill levels need to be distinguished, what kinds of details could be aggregated or ignored, what kinds of data bases are available or need to be developed. Just thinking about how to go about building such a simulation might provide worthwhile insights.

But let me emphasize that this is not my field. All I know is that in the typical investment situation one can finely subdivide one’s funds among many fairly liquid assets. The same cannot be said of portfolios of projects. But perhaps people who propose the analysis of portfolios of projects have figured ways to cope with this problem.