The bottom line
THE bottom line
by Sarah Fister Gale
Ward Peterson, Ph.D., Inspire
Pharmaceuticals, Durham, N.C., USA
photo by Tony pearce
building a profitable project portfolio comes down to more than obsessively tracking dollars, euros or yen. It entails a far more complex and careful evaluation of the myriad value and risk decisions associated with any project—and then an examination of how all of those factors affect the portfolio. Portfolio managers also have to balance the charisma of the champion pushing for a project against the true impact it will have on the bottom line as well as the overall strategic goals of the company.
Companies need a formal portfolio selection criteria that transcends gut instinct or any individual's goals, says Gerry Kendall, PMP, coauthor of Advanced Project Portfolio Management and the PMO [J. Ross Publishing, 2003] and a project leader consultant at Goldratt Group, Gatlinburg, Tenn., USA. “How companies choose projects determines their decisive competitive edge.”
That means reaching beyond attainable or even so-called aggressive targets, he says.
“If you set portfolio goals that are ‘aggressive,’ no one has to think outside of their paradigm,” Mr. Kendall says. “They may have to work harder or put in longer hours but they use the same strategies. By setting goals it can't currently achieve, the company is forced to look at the business in a different way.”
Establishing clear value-based objectives and linking them to every project in the portfolio is what makes portfolios profitable, he says.
Décor Cabinets, a custom cabinet maker in Morden, Manitoba, Canada, is putting that theory to the test. Over the past few years, Mr. Kendall has helped the company define its strategic goal of 100 percent on-time delivery of products. The idea is that by achieving this objective and marketing it to customers, Décor can win long-term loyalty and create added value that contributes significantly to profitability.
“It seems like a triviality but no one is doing it,” Mr. Kendall says. “Décor is now making portfolio decisions that all tie directly back to this due-date delivery goal, and that will give the company strategic advantage.”
Décor CEO Larry Dyck admits that although on-time delivery is an issue for the entire industry, it would not have been the first place he'd go digging for portfolio profitability. “If you just look at the financial aspect of this goal, you don't get a clear vision of its impact,” he says. “But if you link projects back to what adds value to the company, you see that it is the right choice.”
To meet the delivery-date goals, the company had to increase its employee headcount, which required a revamp of its human resources process. “We had to change our thinking about hiring because in a small town like Morden, there isn't a big enough pool of candidates,” Mr. Dyck says. So now Décor actively recruits workers from Germany and other European countries where unemployment among skilled laborers is high.
The company also added additional spray booths to the production line after identifying this stage as the biggest bottleneck in the manufacturing process.
The payoff? “Our on-time delivery is currently 97 percent,” Mr. Dyck says.
Tying the company's strategic long-term goals to portfolio decision-making can provide a clearer picture of the overall value impact of projects, Mr. Dyck says.
That often means taking a pass on projects that initially have obvious financial benefits. For example, Mr. Dyck has had to set aside seemingly profitable project ideas such as introducing new products and cabinet stains that customers requested because the concepts don't align to the company's core strategic goal. “Customers may want these products, but launching them can have a terribly negative impact on due-date delivery if sales take off faster than manufacturing capabilities. When that happens, we end up making a promise to the customer that we can't deliver,” he says.
“There can be so much pressure from different parts of the company to support these kinds of projects that you can easily lose focus,” Mr. Dyck says. He relies on a decision-tree process to assess which projects have “the tightest link to strategic goals and to help us say no to those that don't.”
Understanding the link between projects and profitability is often far more complicated than just identifying the ones with the greatest revenue potential, says Yuwan Effendi, CEO of KPI Insight Consulting, a project management consulting firm in Cambridge, England.
“Sometimes when ROI drives all decision-making you miss the bigger picture,” he says.
“A good project brings profitability, but that's more than just money. It's only a good project if the customer is satisfied.”
—Wei Ping Wu, Ph.D., PMP, SAP Germany, Walldorf, Germany
He points to the SarbanesOxley Act of 2002, created in response to corporate accounting scandals that resulted when the drive for financial gains caused companies to make fatal business decisions. “Regulatory compliance may not contribute to profits, but it's an important issue,” Mr. Effendi says. “If you ignore these kinds of issues, you put your company in danger.”
Identifying long-term benefits of elements such as visibility, publicity and customer relationships is another key part of effective portfolio management, says Wei Ping Wu, Ph.D., PMP, project manager at SAP Germany, Walldorf, Germany. “A good project brings profitability, but that's more than just money,” he says. “It's only a good project if the customer is satisfied.”
The Old Risk vs. Reward Conundrum
Along with quantifying benefits, portfolio managers need a system for weighing risks against potential profits, says Ward Peterson, Ph.D., vice president of research for pre-clinical development at Inspire Pharmaceuticals. The Durham, N.C., USA-based biopharmaceutical company is developing treatments for diseases in the ophthalmic and respiratory allergy areas.
Launched in 1995, the company is experiencing growing pains as it matures from a small company based on a single-focused technology, to one balancing several new product trials for multiple drug therapies. “It's a common problem that is a result of success,” Dr. Peterson says. “We were not equipped to handle complex portfolio decisions. The pile-on effect, along with potentially partnering on projects in various stages of research and development, made decision-making much harder.”
One of his most frequent challenges is making decisions about early-stage products versus late-stage products. The former typically are higher-risk and longer-term but less expensive and more innovative. The latter usually are late-stage opportunities that come to market sooner and are lower risk, but are expensive and must perform in a more competitive market. “We didn't have the ability to make apples-to-apples comparisons on these kinds of projects and we had no effective way to assess them in the framework of our portfolio,” he says.
Dr. Peterson implemented a series of decision-analysis tools designed to help quantify uncertainties, such as market size, development time and growth potential. The system then creates a value map to compare projects. He recently used these tools to help determine whether to pursue a license for a new respiratory medicine that Inspire management has been deadlocked on for nearly two years. Conversations had stalled over the ability to get a patent for the medicine and whether the company could move forward without it. The software helped him assess the value impact of not getting the patent, along with dozens of other factors. “The value map showed us how big the upside potential was of this drug, and that even in the most pessimistic scenario, the opportunity was still worth pursuing,” Dr. Peterson says. “Now that we know that, we can focus on getting the maximum value of the opportunity and minimizing potential risks.”
Quantify That Uncertainty
It's not always easy, but companies should be willing to incorporate ambiguity into their profitability equation.
The value map showed us how big the upside potential was of this drug, and that even in the most pessimistic scenario, the opportunity was still worth pursuing. —Ward Peterson
“That's not a conversation that project managers are good at, but you need robust ways to discuss uncertainties quantified in the language of probability,” says David Matheson, Ph.D., author of The Smart Organization [Harvard Business, 1998], and president and CEO at SmartOrg Inc., a project management software company in Menlo Park, Calif., USA.
In other words, a phrase such as, “This project is likely to succeed” has no meaning because everyone interprets it differently. “Vague terms lead to bad decisions,” he says. “You need to define success in quantifiable terms so that everyone is on the same page.”
Assigning monetary values to risks and balancing them against projected profitability gives project portfolio managers a quantifiable way to make decisions, Dr. Wu says. That includes assessing the costs of critical path uncertainties, such as the loss of team members who can't easily be replaced in high-tech projects, for example. “You can calculate a lot of things that impact profitability,” he says. “When you put them together, dollar by dollar, you get a sum of your risks and you can compare that to potential value. With that information, you can make the best decision.”
And you just might end up with a portfolio bringing in all those yen, euros or dollars. PM
Sarah Fister Gale is a freelance business writer based in Chicago, Ill., USA.
PM NETWORK | AUGUST 2007 | WWW.PMI.ORG