Employing The standard for portfolio management to expand strategic throughput
This paper explores strategic throughput as a measure of how well an organization translates strategy into results. The Standard for Portfolio Management—Second Edition (Project Management Institute [PMI], 2008) provides a foundation upon which a strategic portfolio management model has been developed to expand strategic throughput and close the gap between strategy and results (Exhibit 1).
Exhibit 1: The Standard for Portfolio Management—Second Edition (PMI, 2008) provides a foundation for a strategic portfolio management model linking strategy to actual results.
High Performing Organizations
High performing organizations (Exhibit 2) as measured in terms of their (1) financial success, (2) customer satisfaction, and (3) shareholder satisfaction, have significantly better performance than average performers. This performance is measured in terms of how well projects are aligned to strategy and how well they are executed. Execution is a function of working on the right projects, optimally allocating resources, and bringing in the projects on schedule and on budget.
Research has identified eight categories of best practices: (1) governance, (2) strategy management, (3) portfolio management, (4) program and project management, (5) organization structure, (6) information technology, (7) people management, and (8) corporate culture. These best practices were distilled from a survey conducted in November 2005 from a broad spectrum of 87 leading companies (Cabanis-Berwin& Pennypacker, 2006).
Exhibit 2: On average, strategy is executed to plan only 56% of the time.
Another way of looking at this is that, on average, there is “throughput loss” of 44% in the metric strategy executed to plan (Exhibit 2).
The Missing Link
This paper suggests there is a missing link between the executive suite and the PMI standards as shown in Exhibit 2. That link is what we have titled The Executive Guide to Strategic Portfolio Management. This Executive Guide was first published for use at a Mega SeminarsWorld® workshop conducted in Orlando, Florida, in June 2009. This paper contains a number of exhibits from the guide.
Exhibit 3: Strategic portfolio management bridges the gap between existing PMI standards and C-level executives (also referred to as the executive suite, executive leadership team, and CXOs) (Garfein & Garfein, 2009, p. 12)
Strategic Portfolio Management Formula
The Standard for Portfolio Management—Second Edition (PMI, 2008, p.11) as shown in Exhibit 4, identified four roles: (1) executive management, (2) portfolio management, (3) project and program management, and (4) operations management.
Exhibit 4: Cross-company portfolio management relationships based on Figure 1.4 of The Standard for Portfolio Management—Second Edition, (PMI, 2008, p. 11).
Based on Exhibit 4, a formula was developed that states: strategic portfolio management is a function of the effectiveness of executive management, portfolio management, project and program management, and operations management. It is important to note that the factors on the right side of the equation are multiplied—as in a quality calculation. This calculation is discussed in detail later in this paper.
Strategic Portfolio Management Model
The strategic portfolio management model shown in Exhibit 5 has been designed to communicate with C-level executives. The model has four components: (1) strategic portfolio objectives, (2) portfolio venues, (3) portfolio management, and (4) best practices in portfolio management.
Exhibit 5: Strategic portfolio management model (See Garfein, 2009A through 2005G)
Strategic portfolio objectives vary between organizations. Those shown here are typical of a large, for-profit, global enterprise. These objectives are likely to vary significantly for non-profit organizations and for public agencies.
Portfolio venues are the channels used to carry out portfolio objectives. Some channels are obvious such as research and development, engineering, and operations. Other venues to achieve portfolio objectives may be less obvious such as dividends and stock repurchases. The specifics of these venues will vary widely depending on organizational specifics.
Portfolio management is the core of the strategic portfolio management model. This model depicts a closed loop, near-real-time, process based on PMI standards. Implicit in the near-real-time nature of this model is a responsive information management capability seamlessly providing front-line managers and senior executives with the information they need to manage the portfolio (timely metrics to assure the executive leadership team that strategy is being executed to plan). There is a matrix located at each corner of this closed-loop square. Each matrix assures the traceability of metrics from the overarching strategy to initiatives, to programs and projects, with the projects reporting on metrics that are traceable back to the originating strategy.
Best practices are employed to help assure the portfolio and its components' programs and projects align with the organizational strategy. Best practices are divided into eight domains shown in Exhibit 6 (these domains are based on a paper presented at the PMI® Global Congress 2006—North America, by Jeanette Cabanis-Berwin and James Pennypacker).
Exhibit 6: Eight domains of strategic throughput best practices.
Expanding Strategic Throughput with Best Practices over Time
Exhibit 7 illustrates that strategic throughput, from time 1 to time 2, is a function of the effectiveness of EM * PM * P&PM * OM as influenced by best practices. This exhibit also locates the strategic portfolio management formula variables within the organizational context of portfolio management as defined in The Standard for Portfolio Management—Second Edition (PMI, 2008). It is frequently the case that organizational resources are shared between operations management and project and program management, as shown at the bottom of the Exhibit 7. Scarcity and conflicting demands on these shared resources is often just a major factor in loss of strategic throughput.
Exhibit 7: An integrated approach to strategic throughput and the organization context of portfolio management.
(Based in part on Figure 1.3 of The Standard for Portfolio Management—Second Edition, p. 9)
Projects Aligned to Strategy and Strategy Executed to Plan
As shown at the bottom of Exhibit 8, the strategic throughput formula provides the foundation for estimating the effectiveness of strategic throughput by asking, “Are our projects aligned with our strategy?” Is the organization working on the right projects? Are our resources allocated optimally? Are projects on schedule and on budget? And finally, is strategy executed to plan? This last item requires the closed loop, near-real-time portfolio management system described earlier.
Exhibit 8: Elements of strategic throughput (Garfein & Garfein, 2009, p. 4)
Applying the throughput formula to a hypothetical high-performing organization with high scores (EM 94%, PM 97%, P&PM 96%, and OM 96%) results in an overall throughput score of 83%. Using the same formula, the low performer has an overall throughput score of 33%, although the organization scored high in PM and OM, again, in this hypothetical example (Exhibit 9).
Strategic throughput is similar to a quality calculation where the loss in quality at each operation is multiplicative. In the following example, the high performer has an EM loss of 6%, a PM loss of 3%, a P&PM loss of 4%, and a OM loss of 5%—a very high performance across the board, but still resulting in 83% overall throughput score.
Exhibit 9: Examples of strategic throughput scores for high- and low-performing organizations.
Strategic Throughput Assessment
The PMI® Global Congress 2006—North America paper, Best Practices for Aligning Projects to Corporate Strategy, was used as a basis for construction the Strategic Throughput Assessment instrument below. Exhibit 10 depicts the scoring for governance—one of the eight best practice categories. The shaded areas are calculated fields. Thus if the score in column A is 4 out a maximum of possible of 5, then the gap is -1 as shown in column B.
Exhibit 10: Governance—part one of the eight-part strategic throughput assessment instrument.
Exhibit 11 shows the assessment for a bank where the largest gaps are in program and project management, organizational structure and information technology.
Exhibit 11: Displaying gaps in strategic throughput. (Garfein & Garfein, 2009, p. 69)
Governance as the Key to Translating Strategy into Results
The Standard for Portfolio Management—Second Edition (PMI, 2008) described the link between portfolio management and organizational governance as follows:
Organizations have governance frameworks in place to guide the execution of organizational activities. Organizational governance establishes limits of power, rules of conduct, and protocols that organizations use to manage progress towards the achievement of their strategic goals. This is accomplished through controls intended to maximize the delivery of value while minimizing risk. For the purposes of this standard, organizational governance is the process by which an organization directs and controls its operations in strategic activities, and by which the organization responds to legitimate rights, expectations, and desires of its stakeholders. Project portfolio governance is a set of interrelated organizational processes by which an organization prioritizes, selects, and allocates limited internal resources to best accomplish organizational objectives.
Portfolio management is one discipline within organizational governance. Organizations that do not link portfolio management to governance increase the risk that misaligned or low priority initiatives will consume critical resources. (p.7)
The eight domains of strategic throughput best practices, discussed earlier are diagrammed in Exhibit 12, shows governance as central to all other domains. More than any other single factor governance will determine strategic outcomes. Organizational culture is largely determined by the other seven domains.
Exhibit 12. The eight domains of strategic throughput best practices with governance shown as the central driving force
Exhibit 13. The challenge is to communicate strategic intent to the actual resources will implement the strategy, and to do so with transparency traceability and accountability.
Strategic Portfolio Management Case Studies the Boeing 787 and Airbus A380 Programs
At the PMI® Global Congress 2005—North America held in Toronto, Ontario, Canada, the author first began including the A380 and the 787 in his paper on strategic portfolio management. Since that time, the status of these two major programs has been updated in subsequent Congress presentations (Seattle, Budapest, Sydney, Malta, Kuala Lumpur, and Amsterdam). For a more thorough review of these two programs, see the author's presentation at the PMI® Global Congress 2009—EMEA in Amsterdam, The Netherlands. Both the Boeing and Airbus programs are troubled programs but for quite different reasons. Exhibits 14 and 15 provide a brief overview of program status as of early August 2009.
Exhibit 14: Analysis of the Boeing 787 Program
The 787 is more than two years behind schedule. As of this writing the aircraft's most recent problem has been in the area of redesigning the interface where the wings attached to the fuselage (a risk area that was identified earlier but apparently not addressed sufficiently during the design phase).
Despite the numerous program delays -- repeatedly rescheduling first flight -- and assuming the aircraft performs as specified, the likely outcome is the 787 is the right aircraft at the right time and has the potential to garner at least 50% of the forecast market for this type of aircraft (again, assuming it performs as advertised).
As of June 2009, Boeing had 850 firm orders for this aircraft manufactured predominantly from composite material (carbon fiber). The primary appeal of this aircraft is its fuel efficiency as compared to other aircraft in its class, and the ability to fly to 450 new city pairs, which does not limited it to large the hub and spoke airports required for the A380.
Exhibit 15: Analysis of the Airbus A380 program
The A380, a double deck, 550 passenger aircraft is an engineering marvel. Because of its size, it only operates between large hubs and spoke airports. These airports have required significant upgrades to accommodate the A380.
The breakeven point for the A380 was initially forecast at 270 units. This was breakeven increased to 420 units after production delays were announced. In April 2007, the Airbus CEO said that breakeven had risen further, but declined to give the new figure. As of April 2009, there were only 200 orders for the A380.
Three decades ago when Lockheed was producing their L-1011 wide-body aircraft the author was told by a company executive that Lockheed lost $1 million a day every day that the aircraft was in production. It is highly likely that Airbus is losing a similar amount, but in $2009, every day the A380 is in production. If this is the case, these losses are likely to severely restrict the funds available for new product development at Airbus.
Summary—Ten Principles for Expanding Strategic Throughput
Develop, and continue to emphasize enterprise-wide best practices in organization governance. When throughput loss is analyzed, problems with governance are frequently the root cause. Make the painstaking effort to develop a highly articulated strategic master plan.
Consider all organization costs part of the strategic portfolio (R&D, overhead, direct, material, all expenses, dividends, etc.). Simply put, money spent in one area is unavailable elsewhere. That is why all costs are on the table when looking for opportunities to expand strategic throughput.
Minimize noise and leakage by eliminating actions not aligned with your strategy. This may include items such as lawsuits that distract the executive leadership team, working on the wrong projects, capacity constraints, organizational immaturity, and in some cases, lack of earned value visibility into what is actually being accomplished.
Gain the commitment of the executive leadership team to support the strategy, including, where appropriate, senior government and union officials.
Communicate your strategy throughout the organization to assure continuing commitment. Facilitate timely communications from the front lines of the organization to assure plans are being executed in accordance with strategy.
Develop the freedom to choose the best partners and workers. To illustrate, political considerations played a large role in the Airbus selection of their A380 team members, and according to one of their executives increased cost by 20%. Boeing, on the other hand, had more flexibility in choosing team members as illustrated by the five different states that bid to become the final assembly location for the 787. The cities and states were the following: Everett, WA; Harlington, TX; Mobil, AL; Savannah, GA; and Tulsa, OK. Interestingly, in late 2008, the Boeing machinist union went on strike for 60 days. Subsequent to that strike, Boeing was seriously looking at setting up another 787 production at a facility they just purchased in the south. This is an example of “choice” when politics are not the overarching factor.
Insist on seamless collaboration within the organization, with major subcontractors and suppliers, and with the customer when this is appropriate.
Implement a closed-loop feedback mechanism with both hard and soft metrics that measure not only functional organizations and projects, but also end-to-end effectiveness incorporating the customer in the process.
Monitor every gate in every series circuit in the organization to identify and address breakdowns. Insist on transparency, traceability, and accountability. Employ risk management and other proven tools to minimize surprises.
Intervene when necessary to remove roadblocks and obstacles. The key here is to have early visibility into potential roadblocks, and where appropriate develop contingency plans well in advance.
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© 2009, Stephen Garfein
Originally published as a part of 2009 PMI Global Congress Proceedings – Orlando, Florida