Abstract
This paper presents a basic, no-nonsense approach to getting started with project portfolio management (PPM). You will learn how to align your initiatives with strategy and implement a proven process for prioritizing investment ideas—both newly proposed initiatives as well as steady-state, on-going projects.
A Cookbook for Jumpstarting Project Portfolio Management
Portfolio management is an integrated set of key business processes that when consistently applied enable you to plan and control investments that return optimum value. The investments can be in projects, products, software applications, vendors, customers, facilities, or something else. To manage these investment portfolios, we often hear goal statements that include strategic alignment, resource optimization, and maximum return on investment (ROI). However, we very seldom hear how to achieve such results. This paper takes a basic, cookbook approach to guide you through the essential, practical steps as well as the main ingredients for project portfolio management (PPM).
This paper will walk you through the details for each of the following essential steps to effectively manage project portfolios:
- Define and document strategic goals and objectives
- Assign relative rankings to goals and objectives
- Define range of values to measure support of each goal and objective
- Create comprehensive inventory of existing projects as well as new project ideas
- Assign values to each project’s support of strategic goals and objectives
- Calculate and analyze project scores, grouped by portfolio
- Perform what-if analysis to optimize portfolio
- Recommend and seek approval for optimal portfolio option(s)
- Initiate new approved projects and/or cancel unapproved existing projects in portfolio
- Establish time interval for periodic portfolio review and performance analysis
Then, at the designated intervals, repeat steps 1 through 10 to review and adjust course as necessary for optimum portfolio results. Now let’s look at each step in more detail.
Step 1: Define and Document Strategic Goals and Objectives
Every organization should have documented strategic goals and objectives. In some organizations, the strategic goals are explicitly spelled out for everyone to see, which makes it easier to align the entire organization toward the achievement of the stated goals. However, some organizations are more introverted about their strategy and objectives. Either way, effective PPM requires alignment with strategic goals, so it is imperative that strategic goals be extracted out of senior management and communicated to the project portfolio manager(s). Some examples of very high level strategic goals and objectives may be expressed as follows:
- Improve customer satisfaction (by x%, if known)
- Increase revenue (by $x or x% this year, if known)
- Increase shareholder value (by x%, if known)
- Reduce operating budget (by $x or x% this year, if known).
As much as possible, strategic goals should also be “decomposed” so they can be expressed at levels below the overall organization level. Let’s continue with the “increase revenue” example previously mentioned to clarify this point. In order to increase revenue by x% for the overall organization, each division within this organization has cascading goals to support revenue growth. The engineering division may have a goal to introduce the next generation product in time to impact revenue growth for the year, as well as a separate goal to expand their current product line into different target markets. The marketing division may have demand creation goals (among other goals) to drive higher revenue within the different target markets. Similarly, all other divisions within this organization should have set their divisional goals in support of the overall organization goals. The project portfolio manager needs to compile a comprehensive list of goals so that each portfolio, and the projects within it, can be evaluated based on their relative support of corporate as well as division strategy.
Step 2: Assign Relative Rankings to Goals and Objectives
Once the portfolio manager has compiled the list of goals and objectives, the next step is to rank them relative to each other. Within each grouping of goals, the easiest way to think about their relative rankings is to perform a pair-wise comparison. As an example, you may find that the corporate executives would agree that among the three corporate goals:
- Increasing shareholder value is more important than increasing revenue, and much more important than increasing customer satisfaction.
- Increasing revenue is less important than increasing shareholder value, but more important than increasing customer satisfaction.
- Increasing customer satisfaction is less important than increasing customer revenue and much less important than increasing shareholder value.
The project portfolio manager should also get consensus or agreement from the next level of the organization about the divisional goals and objectives. You can perform a similar pair-wise comparison of those goals. To use the examples cited in step 1, you will want to know:
Is introducing the next generation product this year more important or less important than expanding the current product line into different target markets?
And, moving on to the next level down:
Is target market A more important or less important than target market B? How about target market C?
Is target market B more important or less important than target market A? How about target market C?
Performing these pair-wise comparisons will surface the real priorities of the goals and objectives at all levels of the organization. Based on the relative rankings, you can assign weights to each of the goals and objectives. For example, you may give it a weighting of 10 to the most important corporate objective, and a weighting of 1 to the least important corporate objective. It is not recommended that you assign equal weighting to all the objectives, because it is highly unlikely the objectives would be viewed equally by the people who created them.
Step 3: Define Range of Values to Measure Support of Each Goal or Objective
Once the weightings for the strategic objectives have been set, you are ready to define the range of values that can be used to measure how well each project supports each goal or objective. The range of values can be different for each of goal or objective, and they can be objective and simple, or subjective and complex. For example, you can define the range be 0 to 100, or you can define the range to have three values such as: high=3, medium=2 or low=1. In this last example, note that even if you choose to qualify the range subjectively with words like high, medium, or low, it is still important to correlate these support measures with numeric values.
With the first three steps complete, you have now created the basic structure for project portfolio analysis.
Step 4: Create Comprehensive Inventory of Existing Projects as Well as New Project Ideas
PPM is as much about newly proposed initiatives as the steady-state, on-going projects. It is important to compile a comprehensive inventory of existing projects as well as new project ideas so that they can be evaluated fairly against each other. For this step, you must create a business case template to be completed for each project idea and existing project. As you may expect, the template must include information such as project name; brief and detailed description; proposed or current responsible party, start and finish dates, and required budgets; and the expected benefits of the project. The expected benefits typically include key performance indicators (KPIs) such as ROI, net present value (NPV), internal rate of return (IRR), and/or benefit cost ratio (BCR).
In addition to KPIs, the business case should also include information that will help you evaluate all proposed and existing projects against the strategic objectives. For example, if increasing customer satisfaction is a stated objective, the business case template should have questions about who the target customer is, what problem(s) this project may solve for that customer, or how much the completion of this project will delight that customer. Similarly, if expanding the company’s market share or expanding into additional markets is a stated objective, the business case template should include questions about the project’s target markets.
Once the business case template is available, use it to fill out as completely as possible the business case for each proposed and existing project. As you go through this exercise of completing business cases, you will find that not all projects have all the information requested on the template. This would be an important signal for the organization to revisit the project charters, sponsorships, and up-to-date performance metrics for existing projects.
Step 5: Assign Values to Each Project’s Support of Strategic Goals and Objectives
With steps 1 through 4 completed, it is now possible to review the project concepts and evaluate how well each of the proposed and existing projects will support the strategic goals and objectives at the various levels of the organizations. It is very important that this concept review and scoring in step 5 are done by the appropriate managers or executives based on their consensus, instead of by voting or averaging the values. The group of managers should participate in a facilitated meeting to review each project on the list, and assign values (such as high, medium, or low; or 0%, 50%, 75%, or 100%) consistent with the ranges decided in step 3.
Let’s suppose Project X is being proposed to improve production assembly lines so that the company’s next generation product can be accelerated to market this year. The business case document states that Project X is high risk but also has a high expected ROI, and it requires a big initial investment. The group of managers will most likely agree that this proposal highly supports the objective to introduce the next generation product this year. They will most likely also agree that this project has low or zero support for the strategic objective to reduce operating budget this year. It is important that the group reviews the business case for each project (existing or proposed) and then agree on an assigned value appropriate to the support for each of the strategic goals and objectives defined in step 1. Having the same group review the entire list from step 4 will help ensure the integrity of the assigned values.
Step 6: Calculate and Analyze Project Scores, Grouped by Portfolio
Once the support values have been assigned for each project, computer software can be used to calculate each project’s score. The formula used to calculate project and portfolio scores can range from very simplistic to extremely sophisticated. Because this paper aims to deliver a basic approach to PPM, we will describe a simplistic way for scoring.
A project’s score depends on decisions you made during steps 1, 2, 3, and 5. A project’s score for each strategic objective (from step 1) can simply be the product of its weight (from step 2) and support value (from steps 3 and 5). Each project’s overall score can simply be the sum of all its scores for all objectives from step 1.
You may sort the list of all projects (from step 4) by overall score, from highest to lowest. This way, the projects that are most aligned with strategy will rise to the top of the list. The lower you go down the list, the less strategic the projects will be. At this point it is advisable to group projects into possible “portfolios.” For example, you may have a portfolio by division or department of the company. You may have a portfolio of projects that support each strategic objective; for example, a portfolio of projects for increasing customer satisfaction. Keep in mind that typically the various portfolio options are analyzed and proposed by portfolio managers, but the approvals must be obtained from the highest level of management. The portfolio manager needs to make sure the senior managers understand the consequences of their decisions and must give them a chance to evaluate all the feasible options.
For most organizations, having these portfolio options in organized lists alone will represent a big increase in PPM maturity. Getting to this point in an objective way (using steps 1 through 6) is the beginning of PPM governance for most organizations. However, having these sorted lists of projects by portfolio is just the beginning. In order to make decisions about which new projects to initiate, or for which existing projects to continue funding, it often requires more than just the project’s overall alignment with strategy.
Step 7: Perform What-If Analysis to Optimize Portfolio
Most, if not all, organizations have limited funds and therefore are not in a position to take on every project ever proposed by their talented staff. This means that having a consistent way to analyze and optimize their project portfolios is critical to business success. Step 7 offers some sample what-if analyses that can be adopted for this purpose.
Budget-Based Analysis
If there is a pre-determined budget limit for your organization, you will need to evaluate the project budgets relative to their strategic alignment to optimize your portfolio of projects. This can be accomplished by adding up the proposed budgets for each of the top strategic projects, starting from top to bottom of portfolio lists from step 6, until you exceed your budget limit. This is also known as a waterline analysis—where the waterline represents your budget limit—such that only projects above the line on that list can be funded. If you have projects with larger budgets above the waterline, perform a what-if analysis to see if it makes sense to substitute it with multiple smaller projects falling close to (but just below) the waterline. For example, do you have two smaller projects can take the place of the larger project, that together will yield a higher strategic alignment score for the portfolio?
Resource Capacity-Based Analysis
It is possible that some combination of strategic projects will yield a portfolio that exceeds your resource capacity. You can perform what-if analysis similar to the budget-based analysis just described, substituting budget limit with resource capacity. If you have a restraint based on resource capacity, it may still be advisable to look at the budget-based analysis so you can make “buy versus build” trade-offs.
Risk-Based Analysis
If your organization has extra high or extra low risk tolerance, you may want to review the portfolio options based on riskiness of the projects. You can look at a combined risk-reward score for the projects to determine what risk tolerance level should be the “waterline” instead of using budget limit or resource capacity.
Redundancy Analysis
You may discover that your organization has funded multiple projects that are similar in nature and that are intended to support the same strategic objectives. You can redirect this type of wasteful spending to achieve immediate ROI by eliminating redundant or non-strategic investments.
There are many other analyses that can be performed based on all the information you have collected from steps 1 through 6. Be sure to evaluate the project portfolio options based on criteria that are most important to your organization. The initial time you perform this analysis, you will have an opportunity to assess how the current portfolio of projects being performed align with the overall strategy of the organization. You may find that your organization’s current portfolio has very low strategic alignment, so use this initial analysis as a catalyst for senior management to drive change in your organization.
Step 8: Recommend and Seek Approval for Optimal Portfolio Option(s)
Based on the analyses performed in step 7, you will most likely come up with alternative project portfolios from which to choose. If budget is the most important constraint, you may propose a portfolio of projects that support some strategic objectives without exceeding the budget. If budget is slightly flexible, you may propose a different portfolio that is even more aligned with strategic objectives albeit at a higher price.
This step is the precursor to the project initiation process in your organization. The portfolio approval decision should only be made at the highest level of the organization where all the strategic objectives are meaningful. If the portfolio approval is not done at a high enough level, you’ll run the risk of having an unbalanced portfolio based on one department’s or one manager’s objectives, for example.
Step 9: Initiate New Approved Projects and/or Cancel Unapproved Existing Projects in Portfolio
Once the project portfolio is approved, follow your organization’s project initiation processes to kick off new approved projects. For projects that fall below the waterline as a result of the newly approved portfolio, you will have to initiate the process for project cancellation and re-assignment of those project resources. Be sure the portfolio selection criteria are clearly articulated so that everyone understands and appreciates the business reasons behind these decisions. Your organization should also use the business cases collected during step 4 to justify decisions.
Step 10: Establish Time Interval for Periodic Portfolio Review and Performance Analysis
Some organizations perform project portfolio analysis once a year, for the purposes of establishing their fiscal year budget. It is recommended that organizations perform project portfolio analysis more often that once a year, so they can take corrective actions based on project and portfolio performance. For the approved portfolio(s) of projects, it is important to collect performance data throughout the entire life cycle of projects, to determine whether the projects delivered on their anticipated value. At each review internal, reexamine the data used for the original portfolio decisions to see if decisions need to be reconsidered as a result of changes to organization’s strategic objectives or project performance metrics.
Why should you make this 10-step process part of an on-going effort? Your organization will be rewarded with a transparent method for decision-making related to project investments. Your organization will be able to answer questions like: Which projects should be initiated? Which projects should be stopped and their resources redirected? Be sure to evaluate all new proposals with this new process periodically—whether it annually, quarterly, or at your designated time interval.
Summary
Just like in cooking, you will often find that different chefs have their own variations of the recipe for the same dish. The steps detailed in this paper may be presented differently by other practitioners, but it is our belief that you will find the same basic key ingredients for basic PPM:
- Business case development: Create and review business cases for existing and candidate projects and investments
- Inventory of existing projects and new project ideas for evaluation based on the value they are expected to create for the organization
- Strategic assessment methods for evaluating and prioritizing projects and investments
- Use of objective metrics for evaluating and tracking project and investment costs and payback: budgets, resource capacity, ROI, IRR, NPV
- Governance: Process conformance and consistent quality measures
These basic ingredients will help you establish a governance process for portfolio management and effectively manage project portfolios.