An alternative approach to project portfolio management?
Associate and Consultant with the CSIR Building and Construction Technology Affiliated with the Department of Engineering and Technology Management of the University of Pretoria, South Africa
The fundamental issues in the management of an organisation's portfolio of projects have to do with the front or fuzzy end of the management process, entailing strategic planning and decision-making, and not with the implementation aspects, which are more routine and monitoring actions. Although the front-end stages of a project absorb less money than the building or manufacturing stages of projects, it is well known that the effort to change direction at a later stage will cost the organisation dearly. To make the right decision at the right time requires the best information that is available at the time. Each project in the portfolio will be in a different phase of its life cycle - some only ideas, some already approved but not implemented and others already in the process of implementation. The only way management can make good decisions is to have appropriate and reliable information on which to base their decisions. One method of ensuring this is to obtain and assess all the information that is available on the portfolio of projects and to manage the processes of strategic management, project portfolio management, and programme and project life cycle-management as an integrated process. A key success factor for such an integrated process is the use of a proper impact analysis of the portfolio of projects.
Many articles have been published on the issue of project portfolio management (PPM), with just as many approaches and theories of what PPM should be, proving that PPM is a dynamic environment and that one can expect many new ideas and theories to surface. It is said that the main activities of PPM are to identify, generate, evaluate, select and prioritise projects. PPM has also to do with the allocation of scarce resources and the management of processes to get to a desired end-result. Many tools and techniques have been developed to assist management in making good and effective decisions.
This paper describes an alternative approach to managing a portfolio of projects by integrating many variables into the PPM system and to make decisions that are based on an impact analysis of the long-term scheduling and resource allocation of a portfolio of projects: A public sector perspective.
Strong emphasis is put on the strategic aspects of projects: that there should be strategic fit, that money should be spent on the stated strategy, and that the correct mix of projects should be selected (Cooper, Edgett, and Kleinschmidt, 1997, pp 207-16; Cooper, Edgett, and Kleinschmidt, 1998, pp 20-33; Levine., 1999, pp 25-27; Sommer, 1998, pp 462-464). Processes have been proposed to effectively manage the PPM process, which includes gate control (Khurana, and Rosenthal, 1997, pp 103-119; Nelson,., Gill, and Spring, 1997, pp 67-72). Efforts have been made to integrate processes (Archer, and Ghasemzadeh., 1999, pp 207-16). Project selection is not an accidental event but should be carefully managed (Levine., 1999, pp 25-27). Selected projects should be prioritised (Brenner, M.S., 1994, pp 38-42; Cornbe 1998, pp 511-515). Research (Coetzee,1999; Coetze. and Du Preez, 1999; Coetzee and Du Preez, 1999), was done on an alternative method of scheduling a portfolio of projects over the long-term and determining the impact of the desired schedule of the portfolio on resources, taking into consideration the time value of money.
PPM entails a number of managerial aspects that should be understood in order to ensure effective and efficient management. These management aspects form part of the proposed alternative approach and are discussed in the next paragraphs.
Hunger and Wheelen [9, p7] state that the process of strategic management involves four basic elements, namely environmental scanning, strategy formulation, strategy implementation, and evaluation and control (see Exhibit 1). Important to PPM is the organisation's objectives, strategies, programming and budgeting.
The challenge is to determine the interface and relation between strategic management and PPM. A strategic plan should be developed that fits the organisation's strategy and that recognises the impact of the portfolio of projects.
Exhibit 1: Strategic Management Process
Project life-cycle planning
Project life cycle planning is an important aspect of PPM. Each industry has developed its own terminology and project life-cycle planning approach. It is well known that a project can be divided into its life-cycle phases. Depending on the industry (e.g. construction or manufacturing, information technology, research and development, etc), these life cycle phases can be customised, but the ones widely used are concept, definition, design and development, construction or manufacturing, operations, and termination (see Exhibit 2).
One important aspect of life cycle planning is the fact that the early phases (concept, definition and design/development) cost far less than the final phases (construction or manufacturing, and operations). Yet the impact of rectifying poor decisions made in the early phases can cost the client much more during the final phases. Moreover, a poor decision impacts not only on an individual project but, once the aggregate effect of the portfolio of projects is evaluated, also on scarce resources.
Exhibit 2: Project Life-cycle Phases
Another important aspect is the different types of resources that are utilised during each phase, for example, more input is required from project managers or other experts in the earlier phases than in the construction or manufacturing phase of a project. Human resource requirements for the operational phase differ from those for earlier phases. This means that each phase will have a different impact on the life cycle planning and eventually on the portfolio of projects.
Various definitions exist for a programme and a project. A programme has a longer duration than a project, consists of a number of projects, and could by multi-disciplinary. For the purpose of this paper project management consists of the conventional PMBOK requirements, that is scope, breakdown structure, scheduling, communication, and risks. Programme management is the management of the programme's projects and project managers as well as other issues related to the organisation (PPM), such as budgeting, approval of projects, communication between top management and project managers, and interaction with functional managers.
Baseline management or gate approval
Baseline management or gate approval is a process to manage a project over its life cycle and to allow the programme or project to move from one phase to the next. A high-level document is prepared (in presentation format) which covers most of the project information issues and includes, inter alia, objectives, strategy, schematic presentation, scope of work, requirements, contractual issues, master record index, master schedule, financial plan, risks, configuration management, quality and communication (see Exhibit 3).
Ehxhibit 3: Baseline Management Documentation
This high-level baseline document can be used for a number of purposes:
- A communication tool between the stakeholders and the programme/project team,
- A formal, approved document giving the terms of reference within which the programme/project should be managed,
- A document to be used by the PPM team to assess the impact of the individual programmes/projects and the aggregate impact of the portfolio.
Baseline documentation is dynamic and should be updated by the programme/project team and approved by a designated committee. Teams should not divert from the terms of reference unless changes have been formally communicated to the committee and approved. Top management should not be allowed to change the contents of the baseline documentation without the knowledge of the programme/project team and a proper impact analysis of the portfolio.
Exhibit 4: Project Portfolio Management
Project programme management
PPM takes place at corporate level and involves decisions concerning the identification, generation, evaluation, selecting and prioritising of individual projects and the assessment of the aggregate impact of the portfolio on the organisation and its business environment.
PPM includes aspects such as top management's strategic direction, functional management requirements, programme/project management and the availability and allocation of scarce resources (see Exhibit 4). PPM could be allocated to a corporate unit taking overall responsibility. Work includes the impact analysis of a desired schedule of projects on strategic objectives, resources and risks. The PPM unit should be in the position to advise top management, obtaining the necessary information from the programme/project and functional teams in order to do so. This unit also assesses each baseline management document and enters the required information into a PPM system.
Project portfolio impact analysis
Whoever makes decisions in an organisation should base them on the best available information. Information during the early phases of the project life cycle is not as accurate as information obtained during the final phases. Sometimes assessments are based on gut feeling without any substantiation. Other times more concrete information is available. Nevertheless, the project portfolio impact analysis is intended to provide the decision-makers with better and more reliable information In order to understand the principles of an impact analysis of a portfolio of projects, certain terminologies should be understood.
Nominal (current) versus real (constant) term values
Quite often, cash flows are a mix between nominal and real cash flows, which could result in incorrect interpretations as regards budgets and expenditure. Care should be taken to know whether values are given in constant (real) terms at a specific year or in current (nominal) terms. Nominal terms are sometimes referred to as ‘what you see is what you get’, and have already taken inflation into account.
Exhibit 5: Real versus Nominal Budget
It is important to state whether the budget is in real or in nominal terms. Annual budgets presented in real terms should be inflated (or deflated) with a factor that is derived from the predicted annual inflation rate. The example in Exhibit 5 shows how a budget in constant (real) terms is converted into current (nominal) terms. It should be noted that the growth rate of a budget is not necessarily the same as the rate at which the cost of a programme/project escalates.
Time value of money
Assuming the cost inputs for a project are obtained in year 0 but the financial planning for the project is done for a number of years. If the annual cash flow profile of this planning is of a parabolic nature and in real terms, it can be expected that work that must be done in later years will cost much more in nominal terms. Therefore, although project planning may be based on real term values in year 0 and because different inflation rates apply to the procurement projects from different countries, the real term values should be adjusted for inflation. This adjustment takes the time value of money into consideration (see Exhibit 6).
Exhibit 6: Project Cost due to Time Value of Money
Inflation and exchange rates
Due to globalisation, programme/project management takes place across countries and continents. A portfolio of projects may consist of a number of local projects as well as a number of projects procured/acquired from foreign countries. This will surely impact on the portfolio. A project may procure from country A with an inflation rate completely different to the local inflation rate, and with a currency of country B. This aspect should be considered when assessing the portfolio.
Cost and expenditure type per life-cycle phase
The portfolio of projects may impact on different resources during the different phases, which may be either internal or external to the organisation. Internal resources could be the different types of human resources that are allocated to a project, for instance, project managers, designers and quality assurance representatives. During the design/development phase external resources could typically be professional organisations such as consulting engineers or quantity surveyors. Likewise the construction or manufacturing phase could typically utilise contractors or manufacturers. It means that for every phase the cost and expenditure type should be identified on which the impact of the portfolio can be based.
Cash flow profiles
Different types of phases of different types of projects result in different types of cash-flow profiles. The more flexibility there is to simulate the cash flow, the better the overall cash flow of the portfolio of projects, and other impacts, can be determined.
Examples of cash-flow profiles are uniform, straight line, semi-parabolic with a zero-slope at the end, semi-parabolic with a zero-slope at the beginning, and parabolic profile. A parabolic cash-flow profile may suit the construction phase best, whereas a straight-line cash flow or uniform profile would best simulate the cash flow for the operational phase.
Exhibit 7: Selected Schedule of Portfolio of Projects and Impact Analysis
Once a project has been broken down into life-cycle phases, cost and expenditure types have been identified (see Exhibit 7), cash-flow profiles have been set and parameters such as inflation and exchange rates have been predicted, the expected impact of a specific impact parameter can be determined (e.g. programme/project managers, types of suppliers, organisation's divisions, engineering disciplines, etc). This is done by estimating the percentage of a phase that will impact on the specific impact type.
Impact analyses can be either quantitative (as focus of this paper) or qualitative, for example the aggregate impact of risk on the organisation. The final impact can only be determined after the schedule of the complete portfolio has been selected.
Scenarios of a schedule of portfolio of projects
In order to choose a schedule of portfolio of projects, it is necessary to construct a number of scenarios from which a desired schedule can be selected.
Variables to construct a scenario could include the annual budget for the portfolio, expected annual inflation and exchange rates, expected impacts, priority sequence in which the portfolio of projects should be completed, project starting dates and durations of each phase. Scenarios could be built by changing all or some of the above variables as well as increasing or decreasing the scope. Once the impact of the scenarios has been presented to the decision-makers, a desired scenario may be selected for implementation.
Exhibit 8: Main Project Portfolio Data
A simple example of a quantitative analysis
Owing to the complexity of the problem and the large amount of data that will be needed to demonstrate the problem comprehensively, a simple example is provided to demonstrate the basics of a quantitative project portfolio impact analysis. Exhibit 8 shows the portfolio data for this example.
Exhibit 9: Nominal Budget and Portfolio Cash Flow (Initial Schedule)
Exhibit 9 shows the projected nominal cash flow of the portfolio compared with the nominal budget. The initial schedule of the portfolio is based on the fact that all projects start in year 2003. An initial shortage of funds followed by a large deficit can clearly be seen.
This same schedule of projects also impacts negatively on the demand for resources. For different types of resources, the initial demand is high, followed by a large drop, as shown in Exhibit 10. This causes problems as it is not feasible to build up capacity for a type of resource in the industry to meet the demand, only to eventually have an oversupply.
Exhibit 10: Impact Results in Real Terms (Initial Schedule)
If the scheduling of each project is negotiated by the PPM team and other role players within the context of the organizational strategic objectives, the selected schedule for the portfolio may impact on the organisation and industry in a completely different manner. Exhibit 11 shows a much smaller deviation of the project nominal cash flow from the budget and also a five year increase in the overall duration.
Exhibit 11: Nominal Budget and Portfolio Cash Flow (Final Schedule)
An improved impact on resources is also predicted, as shown in Exhibit 12. Although it is extremely difficult to level out the impacts, it is still possible for the PPM team to advise the organisation and industry of the expected impact. Once known, these impacts can be managed to the advantage of all role players.
Exhibit 12: Impact Results in Real Terms (Final Schedule)
Integrated project portfolio management process
Now that we know how to establish the impact of a portfolio of projects, it is necessary to establish a process for managing the portfolio. In order to do so, an alternative PPM process is proposed, which links the decision-making committees at top management, PPM and the programme/project management levels, as well as the life-cycle management of individual projects/programmes.
It is assumed that any organisation has a portfolio of projects to manage and that at any stage a number of projects will enter the portfolio and a number will leave. The projects in the portfolio are all at different life-cycle phases.
The following steps describe an alternative PPM process and the most important functions of a PPM team (see Exhibit 13):
Exhibit 13: Alternative Project Portfolio Management Process
- Part of the strategic management process is the execution of an environmental analysis to establish which issues and objectives that must be resolved. The PPM team identifies initiatives that could become projects and distributes them to programme/project managers.
- A concept baseline is prepared for each initiative with ‘enough’ information so that the PPM team can conduct a project portfolio impact analysis.
- The PPM team conducts an impact analysis and measures the concept baselines against the set objectives and initiatives. A report on the project portfolio impact analysis and recommendation on which concepts to pursue are presented to top management or the delegated approval committee.
- The approval committee approves the selection of new projects and sets priorities after the PPM team has given its inputs regarding strategic fit, funds, and availability of resources.
- Programme/project teams prepare subsequent baselines (i.e. definition, design/development, construction or manufacturing, or operational).
- The PPM team updates the portfolio information and conducts the latest project portfolio impact analysis. Part of the analysis is to schedule the portfolio of projects according to the priorities and to determine the overall impact on resources. Baselines are further checked against previous baselines.
- After a presentation by the PPM team on the application for approval of the individual baseline and on the overall impact on the portfolio of projects, the approval committee decides whether the next phase of the project can proceed and whether amendments or changes are required.
- As the programme/project progresses, it is continuously measured against the approved baseline. The PPM team should also measure and control the portfolio and continuously predict its outcome against the strategic objectives.
Level of detail of required information
It is obvious that the level of available information varies along the life cycle of a project and that it will not be possible to execute a 100% design and benefit-cost analysis during the concept phase (unless the organisation is willing to pay for it). The trade-off is between the decision of a group of experts based on experience and gut feeling and the decision of the technical team's in-depth design and costing exercise. The further down the line of the project life cycle, the better the analysis because there is less risk and uncertainty.
Formality of process
PPM is a formal process, which needs the commitment and involvement of all stakeholders. Involvement by top management acts as a motivation for the programme/project managers to manage their programmes/projects within the approved baseline.
Programme and project (management) offices focus on individual projects, but who should manage the PPM process? Management involved in the PPM should have a corporate perspective, be able to think strategically, and work easily across functional lines. The integration team should understand the complexities of PPM and should be able to set requirements for the programme/project team to obtain project information that is ‘just enough’.
An alternative approach to PPM has been proposed. The complexities in managing a portfolio have been highlighted. The support of a quantitative portfolio impact analysis for decision-making has been demonstrated.
Project portfolio management should take a prominent place in an organisation's management structure.
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