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
