Book Review: Project Portfolio Management

This is the third in a series of reviews of books on the reference list of the Project Management Institute’s Portfolio Management Professional (PfMP) Credential Examination. The complete reference is:

Project Portfolio ManagementH.A. Levine. Project Portfolio Management: A Practical Guide to Selecting Projects, Managing Portfolios and Maximizing Benefits. (San Francisco: CA, John Wiley & Sons, Inc.; 538 pp.)

This book is edited by Harvey Levine, former President and Chairman of the Board of Directors of the Project Management Institute. It is formatted in 10 sections, each divided into chapters. The first part of the book is written by Levine himself and consists of 13 chapters. The second part of the book contains 21 contributed chapters and case studies. Various chapters focus on IT portfolio management; chapters 7.1 and 7.2 and case study 9.1 are specific to new product portfolio management.

Part One: A Practical Guide to Project Portfolio Management

What is project portfolio management, and why do we need it?

Project Portfolio Management (PPM) is a set of business practices tightly integrating the world of projects with other business operations. In the past, the lack of this integration has resulted in a large disconnect between project management and the rest of the business. Without this important connectivity, a lot of effort goes into doing projects right—even if they are the wrong projects.

PPM depends on the integrity of the underlying data. A risk of PPM is that advanced graphic techniques displaying extensive, multidimensional data may cause us to overlook the possibility that the data displayed may not sit on a solid foundation.

WHY DO WE NEED PROJECT PORTFOLIO MANAGEMENT?

Project managers are concerned with scope, time, cost and quality. Most executives are not engaged with those areas of measurement, they focus profitability, return on investment, delivery of benefits and taking advantage of windows of opportunity. PPM serves as a bridge between traditional operations management and project management.

WHAT IS PROJECT PORTFOLIO MANAGEMENT?

PPM can be divided into two main phases: the first dealing with the prioritization and selection of projects for the portfolio and the second focusing on the management of projects within the portfolio.

The fundamentals of a project portfolio management process

SELECTING PROJECTS FOR THE PIPELINE

Selection of projects cannot be based on value alone. You will also need to consider:

  • Strategic alignment
  • Balance between project types (e.g., maintenance vs. new products)
  • Allocation of R&D and marketing budgets and resources
  • Risks
  • Non-financial benefits

MAINTAINING THE PIPELINE

In the practice of PPM, it is fundamental that projects are treated as if their selection is conditional. This is due to the fact that numerous conditions could result in a project undergoing a change in priority or being canceled. Thus two types of evaluation occur periodically during the conduct of a project: review of the project in terms of status and performance, and assessment of the project relative to business needs and objectives.

Techniques for evaluating the status and performance of a project include earned value analysis, a stage gate process and, for non-linear projects, the bounding box approach. A stage gate process can also build in PPM review, depending on its design.

EXECUTING PROJECT PORTFOLIO MANAGEMENT

PPM is an enterprise-wide process involving a broad range of participants. Actors typically include the PPM governance council, made up of executive management or their designees, and the project management office. PPM integrates project performance with the larger objectives of the organization, asking how the project is contributing to growth, competitive advantage, revenue and cash flow, effective utilization of resources and strategic initiatives.

TOOLS FOR PROJECT PORTFOLIO MANAGEMENT

Effective PPM requires the adoption of new software tools to complement those already existing in the organization. In many cases, tool vendors have come at PPM by adding new capabilities to existing tool sets. Thus there are enterprise resource planning vendors offering PPM tools, critical path scheduling vendors offering PPM tools, analytical hierarchy process vendors offering PPM tools, data presentation vendors offering PPM tools and so on. As of the time this book was written, Levine concluded that no single vendor provided 100% of the functions available for PPM.

IMPLEMENTING PROJECT PORTFOLIO MANAGEMENT

The first step in a new PPM process is to assess the existing project inventory. Removing nonaligned, redundant or non-beneficial projects will make available scarce resources for better opportunities. Assessing the current pipeline has two steps: Reviewing the performance of the project against its objectives and evaluating the project against the criteria that were used to select it in the first place. Instead of deploying a new PPM process full on, it can be useful to begin with a pilot program. Exhibit 2.5-1 on p. 82 provides a useful pre-implementation checklist from United Management Technologies.

The finer points of portfolio project management

DEFINING PPM: A BRIDGE OR A HUB?

PPM is more than just a bridge between operations and project management. It is the hub of a project engine that drives the production of project deliverables to enhance the total health of the business.

A PREQUALIFICATION PROCESS FOR SELECTING PROJECTS FOR THE PORTFOLIO

Prequalification should be built into a company’s new project proposal template. This will inform project sponsors of the latest strategies, risk philosophy and financial and resource constraints, as well as causing many inappropriate proposals to be withdrawn before being issued, saving time and effort of the governance council. Companies will likely have different new project templates for different project types, e.g., transformation projects, growth projects and maintenance projects.

THE IMPACT OF UNCERTAINTY ON PROJECTS AND PORTFOLIOS

Risk is a normal component of all projects. Project plans need to evaluate the source and degree of risk. An attempt must be made to reduce uncertainty and contain the impact of risk events. The cost of risk mitigation should be factored into the project’s financials. Data should be presented as a range of values rather than a single precise value. The effects of risk should be considered at three different levels of review: (1) periodic project status reviews, (2) stage-gate reviews and (3) periodic project selection reviews.

IS THERE A GORILLA IN YOUR PORTFOLIO? TURNING OPPORTUNITY INTO VALUE

Gorillas are products that dominate a market, placing the company in a very powerful position. Companies with gorilla products or services can see 30 to 40 percent quarterly growth. Gorilla projects are highly sensitive to time to market; you must be first to reap the benefits.

WORK BREAKDOWN STRUCTURES FOR STRATEGIES AND RISKS

A work breakdown structure can be used to show the alignment of projects with strategies. Visualize a matrix with product line (e.g., Desktop computers, notebooks, printers, servers) on the vertical and business strategies (e.g., Generate income, Reduce costs, Reduce headcount, Establish new market) on the horizontal. Each proposed project is placed on the matrix to show alignment with a product line and a strategy. For instance, for Desktop Computers, under Reduce Headcount, the project “Outsource customer support to India” might appear. This same strategy could be used for other product lines, such as Printers.

The presentation can be more elaborate. Projects can be color coded to distinguish proposed projects from those already approved. Additional information can be added, such as project attractiveness score, in house vs. outsourced or internal or external client.

The matrix style display also indicates which strategies are not being supported and which product lines are not participating.

A risk breakdown structure (RBS) is a useful aid in evaluating project uncertainties. A sample RBS presented in the text in a ‘tree’ format shows seven categories of risk: Time, People, Costs, Deliverables, Quality, Contract and Market. For each category specific risks are listed, e.g., for Time: Schedule Delays, Force Majeure and Changes. The following steps should be taken to deal with identified risk issues: (1) Determine the probability of the event occurring, (2) Evaluate the impact of the event, (3) Determine the cost to mitigate the risk, (4) Put in place a schedule, cost or design contingency, (5) See if the impact can be shifted to others, e.g., through a cost plus contract.

AN INTRODUCTION TO EARNED VALUE ANALYSIS

An essential capability for project reviews is the process of Earned Value Analysis (EVA). EVA is based on seven measurements: the item budget at completion (BAC), the planned value of work to have been completed at a specific time (PV), the earned value of work performed (EV)—equivalent to the percent complete times the BAC, the actual cost to date (AC), the Cost Performance Index (CPI)—calculated as EV divided by AC, the schedule variance (SV)—calculated as EV minus PV, and the Schedule Performance Index—equal to EV divided by PV. Ideally CPI and SPI values are greater than one. Since a snapshot does not always tell the whole story, it can be useful to look at CPI and SPI trends plotted over time.

Part Two: Contributed Chapters and Case Studies

PPM techniques and issues: Portfolio planning

LINKING STRATEGY AND PORTFOLIO MANAGEMENT

Strategy is the means or approach an organization takes to accomplish its goals. For example, a goal might be to grow to $5 billion in sales and the strategies to achieve that goal are (1) Acquisitions and (2) Developing sales channels in Asia. Project candidates are typically ranked on degree of impact on strategy plus other evaluation criteria, such as NPV or risk, producing an initial prioritization. Then the governance body, which may be one person (i.e., the CEO) or a team (e.g., of functional vice presidents) will make the final decision about project prioritization. It is critical that the capacity of the organization be taken into account, committing to more projects than can be completed is perhaps the greatest risk to an organization’s ability to deliver on its strategies, goals and mission.

HOW TO DETERMINE THE VALUE OF A PROJECT

The value of the future cash flow of a project can be calculated as (Benefits minus Total Cost of Ownership minus Taxes) divided by risk factor. Benefits might include sales and avoided expenses, such as reductions in the cost of labor. Total Cost of Ownership includes both investment and operating costs throughout the project’s (or product’s) lifetime. Taxes are the net of incremental taxes due less deductions such as depreciation and amortization. Risk is reflected in the annual discount rate, which may be 50% or more for a high risk project, 10% for a low risk project. The further out in time a project’s useful life has to run, the greater the discount must be, since the risk compounds. Dividing the calculated value of a project by the number of outstanding shares gives an equivalent change in the price per share.

USING THE ANALYTICAL HIERARCHY PROCESS TO IMPROVE ENTERPRISE PROJECT PORTFOLIO MANAGEMENT

Analytical Hierarchy Process (AHP) was developed by Thomas L. Saaty in the 1970s. It helps decision makers to think clearly about complicated portfolio decisions, reach agreement on project priorities and evaluate portfolio performance. There are three major steps to AHP methodology: (1) Identify the decision components, (2) Prioritize the decision components using a simple paired comparison measurement system to determine their relative importance, (3) Synthesize to calculate component weightings; iterate to confirm that priorities make sense and conduct sensitivity analysis to consider what-if scenarios. AHP is better than traditional stage-gate scoring models because outputs incorporate information about the proportionality of judgments being made and can be used for calculation.

THE EFFICIENT FRONTIER TECHNIQUE FOR ANALYZING PROJECT PORTFOLIO MANAGEMENT

The Efficient Frontier Technique for analyzing PPM represents an economist’s way of thinking about investing in projects. The technique produces a curve that shows all of the best possible combinations of project portfolios and the value that can be created. The plot might reflect % of cumulative business value or discounted cash flows on the vertical axis and available budgets on the horizontal axis. Moving from left to right, the quantity of cost increases while the value increases. Portfolios along the curve are efficient because the organization is getting the maximum value from the available budget.

PPM techniques and issues: Organizing and implementing

MAKING THE CASE FOR PROJECT PORTFOLIO MANAGEMENT

When making the case for PPM, it is critical to identify real and urgent problems that the process will address, in order to obtain buy-in for change. This is best accomplished by:

  • Conducting structured interviews of employees to identify existing problems
  • Interpreting the feedback based on the sources and nature of the problems identified
  • Identifying the ways in which PPM can address the issue (where applicable)
  • Documenting and communicating finding to attain PPM acceptance

THE ROLE OF EXECUTIVES IN EFFECTIVE PROJECT PORTFOLIO MANAGEMENT

Executives are decision makers. Leveraging executives’ decision making capacities is critical to the success of PPM. Using the analogy to personal investment management can help clarify for executives their role. All executives have a personal financial portfolio. Based on their goals, they work with a financial portfolio manager to choose a target investment allocation. Then they may participate in the selection of individual investments or leave that to the investment team. The project portfolio manager functions like a financial portfolio manager, guiding executives through three stages:

  • Buying-in to the portfolio strategy and process
  • Transitioning to a preferred portfolio mix
  • Managing the portfolio to achieve strategy

PROJECT OFFICES ARE KEY COMPONENTS OF IT GOVERNANCE

The project management office (PMO) can serve as a key partner of the governance board in a PPM process. For the governance board to make effective decisions, the PMO will provide an accurate overall picture of the project portfolio, with reporting that is standardized across functional areas and business units. It can provide analysis and options prepared in advance of governance board meetings. Where there are important issues or opportunities, analysis and recommendations should be provided. The PMO typically handles the project request process.

PPM applications: Information technology

Two areas of application have received a very high level of attention in terms of PPM—information technology and new product development. Information technology is addressed in this section and new product development in the following section.

A SUMMARY OF FIRST PRACTICES AND LESSONS LEARNED IN INFORMATION TECHNOLOGY PORTFOLIO MANAGEMENT

In the United States, the Government Accountability Office (GAO) and the Office of Management and Budget (OMB) have been at the forefront in embracing PPM as a potential solution to IT performance difficulties. The Federal CIO Council has published a report on best practices in PPM for IT.

The US Federal IT budget is very large ($52 billion in FY 2003). Three key challenges exist to managing this investment: (1) Senior management buy-in for PPM is often lacking, (2) Selection criteria for IT expenditures very greatly between and within government agencies, (3) Buyers of IT are often unaware of what other people are buying and spending. PPM offers the potential to solve these problems. Use of PPM by Federal agencies is mandated by law.

Government agencies and private sector companies were interviewed for this report on PPM best practices. Lessons learned and insights include:

  • Understand the differences and relationship between portfolio management and project management and manage each one accordingly
  • Obtain and sustain the commitment of senior managers to make informed IT investment decisions at an enterprise level and hold them to it
  • Establish an enterprise architecture to support and substantiate IT investment decisions
  • Integrate IT PPM with organizational planning and budgeting policies, processes and practices
  • Clearly lay out and communicate the goals to be served by the IT portfolio and the criteria and methods for project selection
  • Purchase and use PPM, project management, decision support and collaborative methodologies and tools
  • Routinely gather and analyze data and information to evaluate portfolio performance and make adjustments, as necessary
  • Carefully consider the internal and external stakeholders and customers of the organization’s IT portfolio
  • Pay careful attention to what other organizations are doing with their IT portfolios

THE BACKBONE SYSTEM OF IT MANAGEMENT AND GOVERNANCE: IT MANAGEMENT AND GOVERNANCE 101

IT organizations find themselves challenged to do more with smaller budgets. Responding to this challenge requires a fresh approach to IT management and governance centered on PPM.

IT investment allocation categories might be revenue growth, cost reduction, regulatory mandate and business continuation. How much of the IT capital and operating budget should be allocated to each of these categories is an executive-level decision. The decision also needs to take into account risk, strategic alignment, and expected return, among others.

The next step in implementing PPM is generally conducting a current IT portfolio inventory. It often identifies expensive redundancies, such as an insurance company with ten billing systems, a manufacturer with four accounts payable systems, or a financial service provider with seven customer portals.

New projects always present themselves. Consider for example a fast-growing division with a significant new business initiative that must be resourced, another division that is being spun off, and yet another than is being acquired. A portfolio management system is needed to respond effectively to such dynamic circumstances.

IT governance, first and foremost, is the structured executive oversight of IT investment to ensure alignment with strategic goals.

The best strategy in the world—replete with a compelling mission, adequate budgeting and resource assignment and active executive sponsorship—will end a failure if the tactical programs required to execute it aren’t well managed.

IT charge backs and cost allocations are important to avoid undervaluing and overuse of IT. Aside from charge backs, American companies have found that reporting to ensure compliance with the SOP 98-1 standard has also emerged as a driver to accurately track labor and costs of IT projects.

An IT management and governance system melds portfolio management with program and process management, serving as the backbone for world-class IT returns.

PPM applications: New product development

Dr. Robert Cooper is a leading expert on the application of PPM to new product development. This section contains two chapters contributed by him. See also the review of the book Portfolio Management for New Products.

A STAGE-GATE® IDEA-TO-LAUNCH FRAMEWORK FOR DRIVING NEW PRODUCTS TO MARKET

Almost every top-performing company has in place a Stage-Gate process to drive new product projects through to market, according to an American Productivity and Quality Center (APQC) benchmarking study on product innovation management best practices.

The Stage-Gate framework is shown in Figure 1. The entry point to each stage is a gate, which controls the process and functions as a quality control and go/kill checkpoint. Stages are where the action is. The key stages are:

  • Discovery: Pre-work intended to uncover opportunities and general new product ideas
  • Scoping: A quick, inexpensive preliminary investigation based largely on desk research
  • Build the Business Case: A detailed investigation involving primary research, both commercial and technical, producing a business case. This is where most of the critical homework is done and most of the market studies are executed. The result is a business case with a product definition, a project justification and a project plan
  • Development: Design and development of the actual new product, along with some product testing. The deliverable of this stage is an alpha- or lab-tested product. Full production and commercialization plans are also prepared at this stage
  • Testing and Validation: Testing in the field, the lab and the plant to validate the proposed new product
  • Launch: Execution of marketing, production/operations, distribution, QA and post-launch assessment plans

Stage-Gate ProcessFigure 1. A typical stage-gate process. View full size: http://www.stage-gate.net/downloads/wp/wp_37.pdf

Gates have three types of criteria:

  • Readiness Check: Yes/no questions designed to confirm that all deliverables are in place
  • Must-Meet: Yes/no questions that include the minimum criteria that a project must meet to move forward. A single no response leads to a kill decision
  • Should-Meet: Questions about highly desirable characteristics that distinguish between superb and minimally acceptable projects. Typically in a scorecard format; result in a project attractiveness score used to make go/kill decisions and to rank projects at gates

The stage-gate process should build-in the following best practices:

  • Tough go/kill gates to weed out poor projects
  • Seek truly superior new products
  • Do it right the first time
  • Strong market orientation with voice-of-customer inputs
  • Fully define project up front
  • True cross-functional team approach
  • Parallel processing to expedite process
  • Eliminate any unnecessary work
  • Flexible, dynamic process responding to changing conditions and variable circumstances
  • Strong performance metrics in place
  • Consolidate stages for lower risk projects
  • Technology platforms have their own stage-gate process with three stages. New product projects resulting from technology projects feed into the standard stage-gate process

PORTFOLIO MANAGEMENT FOR PRODUCT INNOVATION

PPM is perhaps the most challenging decision process faced by corporations today because:

  • PPM deals with future events and opportunities; a good deal of the information required to make project selection decisions is at best uncertain and at worst highly unreliable
  • The decision environment is highly dynamic. The status and potential of projects in the portfolio are constantly changing as markets change and new information becomes available
  • Comparisons must be made between projects at different stages of completion and with different amounts and quality of information
  • Resources to be allocated across the portfolio are limited. Deciding to fund one project might mean that resources must be taken from another, yet resource transfers between projects are not seamless

Two approaches to strategic allocation of resources are strategic product road maps and strategic buckets. The strategic product road map lays out the business’s major new product and platform developments along a timeline, establishes place holders for these major initiatives and reserves resources for them. There are five steps to preparing a strategic roadmap:

  • Define strategy
  • Review portfolio to identify gaps and items to be pruned or replaced
  • Assess competitor’s current and probable future offerings
  • Technology trend assessment
  • Analysis of major market trends and shifts

The strategic buckets approach can be used alongside or instead of the product road map. With this approach senior management decides what percentage of the budget it wants to spend by category. The categories can be strategic (e.g., defending the base, diversifying, extending the base), arenas (product, market or technology areas in which the business wants to focus its new product efforts), product lines, project types (e.g., new products, platform projects, extensions), technology types (e.g., base, key, pacing, embryonic), familiarity matrix (technology newness vs. market newness) or geographic. An APQC benchmarking study showed that best performing companies invest more in new to world products, new to business products and major product revisions and less in promotional developments and package changes and incremental product improvements and changes compared to worst performing companies.

Tactical decisions regarding which projects should be undertaken or continued are made in two contexts: gate reviews and portfolio reviews. There the three goals of PPM are addressed: maximize value, achieve the right balance of projects and ensure strategic alignment.

Maximizing value can be achieved by ranking projects by their economic value or net present value, productivity index (NPV divided by R&D cost), expected commercial value (incorporates technical and commercial risk into the valuation) or project attractiveness score (using a balanced scorecard approach). Projects are approved from the top of the list moving down until the budget has been fully allocated.

Balance can be achieved using bubble diagrams such as the traditional Oysters-Pearls-Bread and Butter-White Elephants chart (Figure 2) or the newness to firm chart (which plots market newness against technology newness); pie charts showing resource breakdowns by project type, markets, products or technologies; or histograms of timing or cash flow.

Picture2Figure 2. Traditional Oysters-Pearls-Bread and Butter-White Elephants Bubble Diagram. View full size: http://www.stage-gate.net/downloads/wp/wp_13.pdf

A portfolio best practices study showed that financial methods are the most popular among companies for selecting projects, but also the worst performers. Scorecard models performed best at selecting high value projects and achieving a balanced portfolio.

Applications: PPM for theory of constraint advocates

APPLYING THE THEORY OF CONSTRAINTS TO PROJECT PORTFOLIO MANAGEMENT

The theory of constraints (TOC) offers a simple way to understand a complex system. The beginning hypothesis of TOC is that any system must have a constraint that limits its output. That constraint can be thought of as a bottleneck in a physical system, such as when a highway narrows down from two lanes to one. TOC offers a way to discover and utilize that constraint to improve overall system throughput.

TOC poses the theory that for any value chain, only one constraint limits throughput at any given time.

TOC considers the focus of contemporary accounting systems as ‘cost world thinking’, since they operate on the assumption that product cost is the main way to understand value and make business decisions. Cost world thinking demands the allocation of many expenses to products through processes such as activity-based costing. This requires assumptions that often lead to erroneous understanding and decisions.

TOC entails ‘throughput world thinking’, which emphasizes flow and rests on three definitions:

  • Throughput: All the money you receive from selling your product (revenue less raw material cost)
  • Inventory: All of the money you have invested in fixed assets to enable the throughput
  • Operating Expense: All of the money spent to generate the throughput

Major accounting authorities worldwide have endorsed the TOC method, but it has yet to enter the common terminology.

A key difference between cost world and throughput world thinking is the treatment of inventory. Cost world treats inventory as an asset. But inventory costs money to make and store, so it hurts cash flow and lowers disposable cash at the plant. Throughput world treats inventory as an expense.

Cost world says that in order to manage effectively, managers must control costs. Throughput world says that in order to manage effectively, managers must protect throughput.

Throughput thinking leads to the conclusion that a system operating with each step at optimum efficiency cannot be an efficient system. The optimum system must feed the bottleneck at its capacity and process the downstream parts at the bottleneck’s average processing rate.

TOC utilizes five focusing steps to get the most out of a system in terms of the system’s objective:

  • Identify the system’s constraints: The system’s constraint is similar to the weakest link of a chain; no matter what you do to improve other links of a chain, the chain is not strengthened until you improve the strength of the weakest link
  • Determine how to exploit the system’s constraint: In a production facility, for example, a way to improve throughput is to change the way the system puts things through the bottleneck
  • Subordinate everything else to the above decision: This is critical to focusing your effort
  • Elevate the system’s constraints: Apply resources to the constraint
  • Continue to evaluate for new constraints

Critical chain project management applies TOC thinking to traditional project management. It makes three radical assertions about project management:

You don’t have to finish each task on time to finish a project on time
Starting a project sooner doesn’t mean it will be completed sooner
Adding buffers reduces project duration and cost

Critical chain removes resource conflicts rather than considering resource limitations. Where a project plan might call for the same person to work simultaneously on three components, each requiring full time effort, the critical chain plan schedules these components sequentially. In addition, feeding buffers are added to help ensure that both inputs and resources are available to start critical chain tasks on time.

Critical chain project management utilizes buffer management during project execution to answer two key questions: (1) For project and task managers: “Which task should I work on next?” and (2) For the project manager: “When should I take actions to accelerate the project?”

Critical chain project management tracks projects by calculating how much of the project buffer has been used. Priority is given to tasks that cause the greatest amount of project buffer penetration.

TOC also applies directly to project management in a multi-project environment. It does this by identifying the multi-project constraint as the most utilized resource across all projects and staggering the projects so that resource can work full time on any task they are assigned to, like a runner in a relay race. The company constraint resource is the drum for scheduling across projects. In TOC production methodology, the drum sets the beat for the entire factory. Here the drum sets the beat for the company’s project portfolio. Consider the drummer on a galleon. What would happen if even one rower gets out of beat?

As in individual projects, buffers are used to protect the drum resource to ensure it never starves the capacity constraint for work. Synchronizing projects to a single drum resource does not prevent all cross-project resource conflict, but the use of buffers helps ensure there is time to resolve conflicts and keep the project on schedule.

At the time of writing, Concerto software was the only software that directly provided task level priority in a multi-project environment.

The first step in TOC portfolio selection is to generate an initial list of projects to choose from. Those projects should support the company goal and work on the company constraint. Selecting the project portfolio should consider the different types of projects a company can perform. One approach to categorizing projects is by their customer and time urgency. This is helpful because it influences the priority that will be assigned to each project.

The second step in portfolio selection is to generate a model of each project that will enable development of the required information to evaluate the projects against the existing portfolio and other proposed projects. Consideration should be given to alternative approaches to achieve the outcome of the proposed projects.

The TOC method for ranking projects can parallel conventional techniques, prioritizing according to risk adjusted return on investment (ROI), where Risk ROI=ROI x (1-R). Here R is the risk factor, ranging from 0 (no risk) to 1 (maximum risk).

ROI is calculated as:

ROI=(ΔT-ΔOE)/( ΔI), where

ΔT=Probable effect on throughput
ΔOE= Probable effect on operating expense
ΔI=Probable increase in investment required by project

TOC developed based on understanding of variation. Two projects can have identical estimates of mean investment and return, but very different estimated minimum and maximum returns. Which project a company selects will depend on the relative magnitude of the project compared to the financial position of the company and the degree of risk in the other projects currently in the portfolio.

Risk R can be calculated as the ratio of the standard deviation for the net return to the value of the net return. If one estimate (net profit or investment) is significantly more uncertain, it will dominate the risk calculated this way. This ratio approach will tend to rank low-risk projects higher than high-risk projects, regardless of absolute value of potential return. If an organization is risk seeking or risk averse, it can adjust the method used to determine the risk factor.

The TOC methodology for sequencing projects is called pipelining. It develops a schedule for the drum resource across all projects and translates that back to schedules for each individual project. Only the drum resource is resource-leveled in this way. There is often space to add many more projects that use little of the drum resource without impacting all of the other projects.

TOC portfolio management seeks to complete projects at the earliest possible time and answer two key management questions: “When will the project be completed?” and “How much is it going to cost?” The timing question is answered taking into account buffer consumption (projects with buffer penetration over 100% need to be examined) and the cost question can be answered through the use of a cost buffer, analogous to the schedule buffer.

Case studies

CROMPTON CORPORATION: IMPLEMENTATION OF PORTFOLIO MANAGEMENT SYSTEM

This case study tells the experience of Crompton Corporation implementing R&D portfolio management and evolving it over a 10 year period. Three key elements of the process that have contributed to its sustainability are: (1) Including the whole innovation pipeline, (2) Gaining the support and proactive participation of senior management and (3) Finding the right set of people to participate in the process. Useful displays/templates shared in the case study include:

  • Portfolio Management Review Process Flowchart
  • Project Information Form
  • Project Snapshot Form
  • Anchored Scales Categories for Rating Projects
  • Portfolio Management Black Book (Portfolio/project information shared with team members following biannual portfolio review meetings)

USE OF PPM IN THE HEWLETT-PACKARD-COMPAQ MERGER

On May 7, 2002, HP merged with Compaq to create a $70 billion company with an IT budget greater than $3 billion. In the first year following the merger, the global program management office focused on the IT organization. The global PMO was responsible for program operations, project management infrastructure, support for PPM, and management of communication within HP and with customers. An enterprise project management system –Primavera TeamPlay—was implemented and all projects were managed within that system.

PPM at HP sought to optimize the investment mix between maintenance and support work, infrastructure projects and innovation projects. Annually each organization at HP is responsible for developing a three-year strategic plan. Based on that plan, every six months, a tactical plan of major programs to be undertaken in the upcoming six-month period is defined. The process of selection of programs has three key steps: (1) Evaluate and score each program against nine evaluation criteria, (2) Sort programs by total score in ascending order, (3) Plot programs on a portfolio risk vs. value graph using total benefit and total risk scores from the evaluation criteria. The objective of the latter is to fund high value, low risk projects.

Evaluation criteria for business value included: Business priority, Integration priority and ROI. Evaluation criteria for risk consisted of: Magnitude of change risk, Organizational maturity risk, PMO risk, Interlock (interdependency) risk, Business process risk and Resource risk.

For the merger implementation, two hundred critical projects were identified as “must-starts,” about three hundred next tier projects were categorized as “must-do, ” and over one hundred projects were designated “must-stop.”

DEVELOPING A PPM CAPABILITY AT AMERICA ONLINE

Early in 2002, AOL formed a team to implement portfolio management. Expert Choice was selected as a software tool primarily for its ability to synthesize quantitative factors and qualitative judgments from a group of stakeholders. The implementation team developed a new scoring model based on a weighted hierarchy of goals and measures. Using this model, AOL for the first time was able to cross-prioritize project investments. The portfolio process was first piloted then rolled out to seven portfolio management teams. A cross-prioritized project list was developed in time for the 2004 planning cycle and over 80,000 hours out of an initial portfolio of about 200,000 hours was cut out, allowing resource capacity to be balanced with demand without adding to headcount. Three lessons learned were: (1) Keep it simple, (2) A solid resource management capability is needed, and (3) Build and sustain executive support.

EW SCRIPPS: A MEDIA GIANT’S PORTFOLIO MANAGEMENT SOLUTION

In 2002 EW Scripps, owner of the Home and Garden Television, Food Network, DIY Network and Fine Living brands, chose to streamline its information technology processes by implementing a portfolio management solution. PlanView software was selected for the implementation. EW Scripps implemented all components of the PlanView solution, including project management, resource management, investment analysis, portfolio management, and service and financial management. One department utilizing the software found a redundant project for online credit card processing, saving the company $1 million and instantly justifying the investment in PPM. The organization now makes business decisions down to the developer resource level and charges project managers to help drive those decisions using the PPM suite.

What others are saying about PPM

I find four of the chapters in this section to be redundant to information presented elsewhere in this book and will limit my reviews of those chapters to brief summaries.

BEYOND THE TRIPLE CONSTRAINT: DEVELOPING A BUSINESS VENTURE APPROACH TO PROJECT MANAGEMENT

In the future, project management will emerge as a standard management practice. For this to happen, the time-honored triple constraint of outcome, cost and timing will have to be expanded into broader measures of business success, such as the project’s overall contribution to organizational value.

The future of the triple constraint is one of uncertainty. Project outcomes start very vague and then continually change due to customer information gained from quick prototyping. Project success only becomes clear after the project is completed. Cost continually changes and may be considered irrelevant to the goal of contributing to economic value (Note to reader: as a former Finance Director I find this unlikely!). Schedule becomes increasingly externally driven; investment of time at the beginning of a project becomes the key to project success.

The new metrics for most organizations will be project contribution to business strategy and shareholder value. Both are extensions of the triple constraints. Achieving strategic alignment is important because if a project engages tactically in the wrong direction, it may subtract from long-term business value although it adds to economic value in the short term. Over the long run, shareholder value is the goal of a publicly owned company.

Project contribution to shareholder value depends on two factors: the internal charge for capital used to finance the project and the combined cash flow of the project. The internal charge for capital is based on the company’s weighted average cost of capital. Project managers can lower this in the long-term, by managing good projects with successful outcomes. The cost of the project, the revenues from the project outcome life cycle (POL) and the POL expenses affect the combined cash flow of the project.

FROM OVERLOAD TO PRODUCTIVITY VIA SYSTEMATIC DECISION MAKING

Many organizations suffer from project overload. The solution is portfolio management. Six steps are common to PPM initiatives:

  • Take a hard look at the current project environment
  • Develop project portfolio goals
  • Assess resource capacity
  • Collect and organize data on current and anticipated projects
  • Assess the project portfolio
  • Implement a complexity reduction system

Reducing the number of projects to a manageable level can dramatically increase output.

THE SEVEN HABITS OF HIGHLY EFFECTIVE PORTFOLIO MANAGEMENT IMPLEMENTATIONS

Three forces continue to drive the need for effective portfolio management: (1) Sarbanes Oxley legislation and other compliance and accountability requirements, (2) The need to ensure projects are aligned with business strategy—studies have shown that 40% of capital investments are wasted owing to lack of alignment with business strategy, (3) Economic downturn calls for thoughtful reallocation of resources.

Seven best practices were successfully used in more than one hundred PPM implementations at UMT:

  • Gain senior management buy-in
  • Roll out portfolio management incrementally
  • Develop a governance process
  • Implement a robust decision support tool
  • Develop a score card integrating quantitative and qualitative measures
  • Optimize the portfolio against constraints to generate the biggest bang for the buck
  • Monitor portfolio execution and benefits realization

PROJECT PORTFOLIO MANAGEMENT BASICS

Where project management ensures projects are done right, portfolio management focuses on doing the right projects. Interest in portfolio management is increasing, but a recent survey suggests that maturity levels are not very high at present.

Steps to implementing portfolio management include: (1) Developing a project inventory, (2) Developing project selection criteria, (3) Balancing the portfolio.

INTEGRATING PROJECT PORTFOLIO MANAGEMENT WITH PROJECT MANAGEMENT PRACTICES TO DELIVER COMPETITIVE ADVANTAGE

Sustainable competitive advantage cannot be achieved only from working efficiently on projects, organizations must also work on the right projects. PPM provides a consistent way to choose the right projects, those that together offer the greatest value and contribution to the strategic goals of the organization.

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