Abstract
Most infrastructure capital project portfolio managers are under conflicting pressures over which projects or programs deserve more attention and resources. Often, the allocation of attention and resources is not based on auditable criteria, but the influence and power of the project sponsor. Is there an effective methodology for a portfolio manager to convert either the organizational or respective project sponsor’s subjective one-dimensional assessment of project priority into a two-dimensional objective assessment, which is based on both importance and the relative percentage cost of each project to the total value of the portfolio? Can this methodology be used to prioritize a portfolio of projects assigned to an infrastructure project portfolio manager by more than one sponsor? This study reviewed the existing portfolio management strategies and finds their respective strengths and weaknesses, with a particular focus on infrastructure projects. It adapted the BCG chart to develop a two-dimensional objective assessment tool and methodology based on both the importance and the relative cost of a project, for management of an infrastructure capital projects portfolio. It further translated this assessment into an objective, auditable, and consistent two-dimensional assessment based on a quadrant category ranking from both sponsors’ and organizational perspectives.
Introduction and Background
According to the Project Management Institute’s A Guide to the Project Management Body of Knowledge (PMBOK® Guide), a portfolio is a collection of projects or programs and other works that are grouped together to facilitate effective management of that portfolio to meet strategic business objectives. The projects or programs in the portfolio may not necessarily be interdependent or directly related. The entire portfolio, however, is focused on achieving the established organizational objectives.
Project management has to do with managing individual projects that are temporary endeavors, whereas program management has to do with managing interrelated projects. These two disciplines are fairly well studied. On the other hand, project portfolio management is still a new and emerging discipline. Portfolio management is the coordinated management of portfolio components to achieve specific organizational objectives. It is focused more on executing good projects than on good project execution. It includes processes to identify, categorize, evaluate, select, prioritize, balance, authorize, or eliminate components within the portfolio. Amaral and Araujo (2009) submit that the three main well-known objectives of portfolio management are increasing the value of the portfolio, linking the portfolio to the strategy, and the continuous monitoring/assessment of the portfolio. PMI’s portfolio management standard identifies 14 Processes for portfolio management, which are further grouped into two main Process Groups: Aligning, and Monitoring and Control. Portfolio management, according to PMI, has only two Knowledge Areas: Portfolio Governance and Portfolio Risk Management. Laslo (2009) observed that the relationship between projects is becoming a major issue for corporations, such that a good project portfolio management discipline is required to avoid wastage of resources and maintain agility. The question of how to optimally manage a project portfolio is therefore still contemporary in the academic space and lacking extensive discussion.
Literature Reviews and Trends in Project Portfolio Management
Portfolio management started to gain prominence between the 1950s and1970s. It has grown to become one of the hot topics in the field of project management. Most companies that implemented it have reported improvements in turnover and performance in terms of project delivery. Dickson, Thornton, & Graves (2001) noted that even though the tools and uses have changed over time, the basic needs remain the same—companies must allocate a limited set of resources to projects in a way that balances risk, reward, and alignment with corporate strategy. This will require efficiency in selection and allocation of resources to the projects in the portfolio aimed at realizing the corporate strategic business objectives. Project portfolio management has also been described in terms of cycle and phases, which is the overall interplay of steps, processes, and deliverables toward the achievement of a successful portfolio management. Hill (2008), and Amaral & Araujo, concluded that setting the business strategic direction is part of the project portfolio management cycle. Several authors contend that the project portfolio management cycle does have sequential phases that linked business strategic management to project management.
Infrastructure Projects Portfolio Management, Key Roles, Problems, and Challenges
Infrastructure projects or capital projects are significantly different from new product development projects. In most infrastructure intensive industries, like oil and gas, military and public sectors, projects are originated and sponsored by different operational or support units with a particular person in such units, often a senior person from the unit who may be on the decision board, serving as the project sponsor with an incentivized interest in the project completion. Projects in these sectors are often not directly linked to revenue generation. In some cases, they are evaluated as a constituent part of the economics for a larger business development opportunity or altogether selected based on non-economic or financial measures. As such, the most interesting factors used in characterizing these projects are the cost and importance. The cost sometimes reflects the scope, complexity, and risk of the project, whereas the importance is reflected in terms of urgency and criticality of the project.
Another key characteristic of these sectors is the aggregation of several projects classified as major projects, small or minor projects, and so forth, under different portfolios assigned to different portfolio managers after their eventual selection by the governance board or decision board. The portfolio manager takes responsibility for a focused implementation of a project management methodology, prioritization, and resource allocation to ensure that the project portfolio delivers on the established business objectives. Other key roles in infrastructure project portfolio management include (1) the project authorization board, also termed the decision or governance board ,which consists of the senior executives that make strategic business decisions for the organization, sets the strategic direction and objective, which is translated into a set of project prioritization criteria and requirements for the portfolio manager to satisfy; (2) the project sponsor who may be an internal or external executive who assumes ultimate responsibility for the project, may have incentivized objectives that conflict with the organizational objectives, and in most cases, are also part of the governance board or has strong influence on the board members, and (3) the project management office (PMO), which is the organizational structure that enforces a project management methodology in the organization. This office coordinates all the projects in an organization’s portfolio. It enforces portfolio governance and works closely with the project portfolio managers.
Project portfolio management has been faced with several challenges. According to Amaral and Araujo, the key challenges facing its successful implementation are: (1) No link between strategy and project selection, (2) Poor quality portfolios, (3) Reluctance to kill projects, (4) Scarce resources, (5) Selecting short-term and easy projects, (6) Information overflow and lacking quality of information, (7) Decision making based on power play, and (8) Conflict between sponsors and the portfolio manager. Stretton (2010) identified that key benefits management, as linked to the organization at large, is significantly different from the way they are linked to key individual stakeholders or stakeholder groups. But, as stated by Mikkola (2001), “In analyzing a portfolio, the desired combination is a balanced portfolio defined as an assortment of projects that enables a company to achieve the growth and profit objectives associated with its corporate strategy without exposing the company to undue risks”. Effective project prioritization and resource allocation in this circumstance are therefore necessities.
Portfolio Management Tools/Techniques and Applicability to Infrastructure Projects
There are several tools and techniques for new products portfolio management currently applied to infrastructure project portfolio management. Some authors like Amaral and Araujo present the tools and techniques under the different phases, especially evaluation, selection, and monitoring and control phases. However, predominant and most comprehensive is the grouping of these tools and techniques into three main categories by Cooper, Edgett, and
Kleinschmidt (1999); Crow (2004) and Dickinson et al. (2001): (1) Heuristic models or mathematical programming, (2) Scoring techniques or classical, and (3) Visual or mapping techniques.
Heuristic models or mathematical programming techniques and tools are used to aid decisions that seek to maximize commercial or financial returns of the portfolio. The downside is the lack of focus on alignment with organizational strategy, especially those not stated in financial terms. Dickinson et al., noted that the models relied on only a single criterion, financial projection, which, with its high degree of uncertainty, reduces the credibility of this method; examples are Net Present Value (NPV), Profitability, and so forth; however, infrastructure projects are not often directly linked to revenue, profitability, NPV, or those common financial measures and often their financial indicator is simply the cost of the project.
Scoring techniques or classical tools make use of weighted scoring techniques to allocate score to projects with respect to different criteria like simplicity, ease of completion, and so forth. These scores are, in turn, used as the basis to maximizing the value for the portfolio; however, these methods do not only take a lot of time, but are also subjective, being somewhat qualitative. They cannot easily balance a portfolio. Examples are weighted score techniques, decision tree techniques, and so forth. For infrastructure projects, these techniques are even more subjective and susceptible to biases from project stakeholders (e.g., project sponsors).
Visual or mapping techniques use graphical and visual chart methods to represent a portfolio’s status against conflicting desired attributes. They are predominately two-axis graphs. Dickinson et al., observed that they can incorporate multiple portfolio criteria into a single diagram, but are not capable of prioritizing projects. However, for infrastructure projects, they tend to be capable of facilitating the balancing of project portfolios if properly adapted with lessons from their application in financial portfolio management. Examples include bubble diagrams, ellipses, 2 x 2 matrixes for risks versus profitability chart, marketplace fit versus product line coverage, and financial return versus probability of success.
Apart from the challenge of securing top-down acceptance of project portfolio management methodology, the entrenched pseudo-political process of making project decisions in most organizations does not easily lend itself to the application of a methodical, auditable, and repeatable project decision-making process. This makes the need for sound tools and techniques for project portfolio management imperative. The field of project portfolio management has attempted to treat project portfolios like financial investment portfolios, but Wikipedia (2010) noted that, other than using the word “portfolio,” few project portfolio tools and techniques have effectively applied financial portfolio optimization techniques.
Authors widely hold that there has not been enough application of financial portfolio management techniques beyond a mere throw around of the name “portfolio” attached to project management. Considering the success of financial portfolio management techniques like the BCG chart to financial portfolio selection and prioritization, opportunities may abound in the application of financial portfolio management techniques to project portfolio management, because not enough has been done to date. Critics of the current tools and techniques submit that apart from being based on financial objectives like increasing shareholder value, top line growth, and so forth, the tools and techniques should also evaluate things like risk in a thorough, quantitative, and statistical approach.
The BCG Chart
The Boston Consulting Group (BCG) chart was first developed in 1968 by Bruce Henderson, chairman of Boston Consulting Group, to effectively balance and manage the financial investment portfolio of Boston Consulting Group. It grew to become one of the most predominant business portfolio management tools and was further improved upon by the McKinnsey Consulting Group. Fundamentally, the chart tries to prioritize investment opportunities based on market share and market growth potential such that the company can put its focus on the rewarding investments and appropriately manage the less rewarding investments. It is a 2 x 2 graph with market share and market growth on either axis. Based on the level of each investment in terms of either factor, it is placed into a chart that visualizes the balance of the portfolio, and, based on the business objective, the chart is used to prioritize the portfolio and develop strategy to manage each of the investment opportunities. This way, the BCG chart achieved the purpose of visualizing the portfolio balance and facilitating portfolio prioritization and balancing.
The chart has four quadrants (1) Cash Cows, which have high market share but low growth rate; (2) Stars, which have high market and growth rates; (3) Dogs which have low market share and growth rates; and, (4) Question Marks, which have low market share but high growth rates, as show in Exhibit 1.
Exhibit 1 – The BCG Chart
Challenges with the BCG Chart
Silibeger (1999) described the drawbacks of BCG portfolio strategies to include a faulty generic assumption that businesses within a portfolio do not have significant linkages, difficulties with using them as the basis for resource allocation, as situations may change rapidly, and the subjective natures of the four categories. For commercial business portfolios, several other charts with more categories, like the McKinsey chart, were developed in an attempt to address some of these drawbacks.
The BCG chart has been adapted and used for new product development project portfolio management, especially in the pharmaceutical and other research and development industries. From a literature search, there are several interplays of axes, depending on the decision criterion. But most of these axes have to do with financial terms of measurement like NPV, profitability, and market share, which are quite remote to infrastructure and facilities development projects in industries like oil and gas, military, and public sectors. To use the BCG chart for these types of project portfolios, the axes have to reflect the relevant measure like project cost, project size, and importance in terms of project necessity, risk, complexity, and ease of completion. These challenges notwithstanding, the visual advantage and balance of perspectives in its two axes offer an opportunity for the BCG chart to be used in achieving an optimal balance between the conflicting determinants (project sponsors incentivized objectives versus organizational objectives) in project portfolio prioritization, resource allocation, and management.
Problem Definition, Research Question, and Methodology
Lock (2000), Meredith and Mantel (2000), as referenced by Laslo, observed that attempts to optimize resource allocations are confounded by differences in project activities, due dates, and the nature of penalties for the projects that fail to meet their objectives. The challenge is such that Brown (2008) observed that organizations that say “everything is top priority” end up playing the “yelling game” in which the best yellers, whiners, or politicians often get their work accomplished regardless of its real importance to the organization. As a result, most infrastructure project portfolio managers find it hard to prioritize and allocate resources efficiently because of sponsors’ influence. Assadourin (2009), as cited in Wikipedia, observed that each sponsor may be incentivized to meet specific goals that may not necessarily align with those of the entire organization. It is a dilemma to frame success when the objectives of the sponsor compete with the organizational objectives. The portfolio manager’s success is tied to the overall portfolio’s performance, not a sponsor’s particular pet project alone. Similarly, two project portfolio management scenarios can be painted from the available literature. The first scenario is one in which the sponsors and governance board have non-conflicting objectives, which provide support for a project portfolio manager to adequately handle and control the project portfolio. The second scenario is one in which the sponsors have more disproportionate and self-incentivized influence than the governance board or vice-versa. This last scenario leaves the project portfolio manager without an adequate handle or control on the project portfolio. With the dilemma of prioritization of projects, allocation of resources, and conflicting influence of sponsors and governance boards, project portfolio managers tend to be without a good handle and control over the portfolio of projects under their purview.
How does the infrastructure project portfolio manager strike the successful balance? Is there an effective methodology for a portfolio manager to convert either the organizational or respective project sponsor’s one-dimensional assessment of project priority based on importance into a two-dimensional assessment based on both importance and the relative percentage cost of each project to the total value of the portfolio or opportunities? Is there a methodology to do this two-dimensional assessment in a way that will permit reprioritization of a portfolio of projects assigned to a portfolio manager by more than one sponsor? This leads to the research question, can we identify a pattern or characteristics to aggregate the dynamics of organizational and sponsor’s incentivized objectives in order to develop a more effective strategy to appropriately prioritize and manage project portfolios?
Research Framework – Adapted BCG Chart for Infrastructure Project Portfolio Management
The framework of this research is mainly the adaptation of the BCG chart to infrastructure project portfolio management. In adapting the BCG chart to infrastructure project portfolio management, the drawbacks and peculiar constraints in project prioritization and portfolio management were comprehensively evaluated. Basically, the conflict in prioritization is often between project sponsor’s incentivized objectives and overall organizational objectives. This can be expressed in terms of two perspectives: the project from the sponsor’s perspective and the project from the organizational perspective. The interplay of these two perspectives should be the project portfolio manager’s winning perspective. The chart in Exhibit 2 shows how an infrastructure project portfolio manager can use the BCG chart to view a project from the organizational perspective and also from the project sponsor’s perspective. It uses the same four quadrants as in the BCG chart, but the axis for market share is translated to the project’s cost as a percentage of total project portfolio value, and the axis for market growth is translated to reflect the relative importance of the project. Based on this approach, we can arrive at four different quadrants of projects in the portfolio exclusively from either the sponsor’s or organizational perspective. The four quadrants are the Green quadrant (G) for high percentage cost and high importance; the Blue quadrant (B) for high percentage cost and low importance; the Yellow quadrant (Y) for low percentage cost and high importance, and the Red quadrant ® for low percentage cost and low importance. However, with the interplay of the sponsor and organizational perspectives, we can have 16 different categories of projects banded into the four quadrants, as shown in Exhibit 3.
Without a consistent tool like this adapted BCG chart, infrastructure project portfolio managers may inconsistently prioritize these projects in different ways, at different times, for the sake of resource allocation and management and without a balance between the divergent objectives of some sponsors and the organization. This adapted chart will provide a means to prioritize the projects in an auditable manner and, by so doing, give the portfolio manager a handle to manage a portfolio with consistent efficiency. This will be tested in this research and the non-standardized pattern of prioritization will be compared with the standardized pattern of prioritization using this adapted BCG chart. This standardized pattern is basically a two-step approach to using the adapted BCG chart for project prioritization and optimal project portfolio management.
Exhibit 2 –Adapted BCG Chart from Sponsor or Organizational perspective
Step 1 is to use the adapted BCG chart with importance as the y-axis and relative percentage cost of project as the x-axis, to categorize the projects into four categories from both the sponsors’ and the organizational overall perspectives as shown in Exhibit 2.
Step 2 is to come out with the adapted BCG chart with the sponsors’ perspective on the y-axis and the organizational perspective on the x-axis as shown in Exhibit 3. Exhibit 3 is a chart obtained from using the Red ®, Green (G), Blue (B), and Yellow (Y) quadrant descriptions for prioritization under each axis. Along the y-axis, is the quadrant ranking of the project from the sponsor’s perspective, whereas the x-axis is the quadrant ranking of the project from the organization’s perspective and was used to objectively rank and prioritize the portfolio. Because of the use of the adapted BCG chart, the positions along each axis were not arbitrarily assigned. Step 1, an objective and auditable approach was used to assign the quadrant category to these projects, which in turn, was fed into the Step 2 chart. In this way, the tool can take away the emotion, yelling, and politics from portfolio prioritization.
Exhibit 3 – Step 2-Adapted BCG chart for portfolio prioritization (Sponsor vs. Organization).
Research Methodology – Delphi Technique (two-rounds)
The research methodology was mainly by using the Delphi technique (two-rounds only) to answer the research question, and support the use of the adapted BCG chart developed in this study. Only two rounds of interviews with five respondents were conducted due to the time constraint. The Delphi questionnaire was based on a hypothetical organization, with a portfolio of 16 projects identified with the letters A to P. There were four different project sponsors within this hypothetical organization, each sponsoring four different projects from a unit of the organization.
For each sponsor, the respondent could rank his four projects into four quadrants based on a two-axis assessment of importance (y-axis) and relative percentage cost of each project to total cost of all projects from his unit (x-axis). The projects were constrained to be one on each quadrant for the sake of this research investigation as in Exhibit 2. Similarly, the organization could also rank these 16 projects into four quadrants based on a two-axis assessment of importance and relative percentage cost of each project to total projects for the entire organization as shown in the lower chart in Exhibit 2. The number of projects in each quadrant may be more than one depending on the number and characteristics of projects in the portfolio.
The same description in Exhibit 2 was given to all five respondents in the first round of the Delphi interview. They were not given the second step of the adapted BCG chart as shown in Exhibit 3. The respondents were asked to individually prioritize the 16 projects based on their experience, the tools, and the techniques they currently use for project prioritization. In the second round, the result of the first round was played back to the respondents and the step 2 chart in Exhibit 3 was also given to the respondents. They were asked to reprioritize the projects based on the latest information and the step 2 BCG chart. The differences in the extent of divergence between the ranking of projects by the respondents was used to reflect a pattern in the portfolio that can be applied via the use of the BCG chart to better prioritize infrastructure project portfolios.
Result and Data Analysis - Answer to the Research Question
The research question was answered using the results from the Delphi technique. Exhibit 4 shows a pattern of quadrants from using the two steps of the adapted BCG chart. It also showed less divergence amongst the ranking of the same 16 projects by the same set of project portfolio managers when the adapted BCG chart was applied as compared with when it was not applied. For example, the red quadrant projects were ranked toward the bottom by all respondents, unlike in the first round where they were ranked into varied positions. This validates the framework that using tools like the adapted BCG chart could make for a more objective, consistent, and effective project portfolio prioritization and management.
Inferences from the Results
Without a methodological two-dimensional tool like the adapted BCG chart developed in this study, infrastructure project prioritization and resource allocation will be inconsistently done as shown by the level of inconsistency in the Delphi technique, round 1 and contrasted by the better consistency from Delphi round 2 results, where the two-step adapted BCG chart was applied (Exhibit 4). The consistency is even more apparent in terms of prioritizing the projects into the four quadrants. The results showed that without the adapted BCG chart, each respondent was ranking the projects differently without a sense of relationship or some sort of common direction with other respondents, as can be seen from the ranking result from round 1. The quadrant colors were scattered over the table of round 1 result shown in Exhibit 4. But with the use of the two-step adapted BCG chart, the ranking became more consistent and showed a sense of relationship or common direction. All respondents in round 2 ranked the “reds” below and the “greens” on top, with the “blues” and “yellows” in between. This showed a sort of relationship and convergence of ranking from different respondents as shown in Exhibit 4. This tool and methodology showed some sense of objective basis for the overall prioritization and quadrant classification. It can, therefore, remove most of the basis for disputes, yelling, politics, unbalanced portfolio and by so doing make handling of portfolio management issues like resource allocation, and re-prioritization easy for infrastructure project portfolio managers.
Exhibit 4 - Delphi technique result: Rounds 1 and 2 prioritization from the five respondents
Lessons Learned
Project portfolio management is still evolving, but efficient tools and techniques could make project portfolio management more objective and result oriented. It requires a lot of regular re-planning to capture changes in the business environment.
Research Limitations and Future Study
The respondents were not categorized by organizations. It will be interesting to observe correlation amongst respondents, categorized by organizations to understand the effect of organizational culture in portfolio prioritization.
Recommendations and Conclusions
- Portfolio prioritization should be done using effective and objective tools and techniques. These tools and techniques should be explained to all stakeholders and their agreement to use them obtained before their application. This is to avoid disputes and decision making based on power play.
- Portfolio managers should use the adapted BCG chart in this research to prioritize and manage resource allocation for their portfolios. Reprioritization should be regularly done over the portfolio’s life cycle to adequately account for changes in the business environment and variables.
In conclusion, the study used Delphi technique and the adapted BCG chart to show that the use of an effective and objective tool can help portfolio managers to effectively and objectively prioritize a portfolio of projects from several sponsors. The findings provided the two-step adapted BCG chart developed in this research as an effective tool and methodology to do a two-dimensional assessment and effective prioritization of a portfolio of infrastructure projects assigned to a portfolio manager by more than one sponsor. It effectively converted the one-dimensional assessment of project priority done from the organization or individual sponsor’s perception of importance into a two-dimensional assessment, based on the respective organization and sponsor’s perspectives of both importance and the relative percentage cost of each project to the total value of the portfolio. It further translated this assessment into an objective, auditable and consistent two-dimensional assessment based on a category ranking; in this case, quadrant ranking, from both sponsors’ and organizational perspectives. It demonstrated how this methodology could be used to objectively re-prioritize the portfolio.