Improving project success through effective project selection

the efficient frontier technique


Anyone with an interest in project management failure has access to plenty of case study material from which to choose. There have been enough examples of high-profile public and private sector project catastrophes to make the reader gasp, with the common theme being one of external shocks, cost overruns, delays, and poor quality end-products. The explanation in newspapers and journals is usually that the problem is one of poor execution, and that on time, on budget, and on scope delivery would have been assured if only management had adhered to a structured delivery method.

Contemporary literature, however, often neglects to focus on the other dimension of project failure: What if the organisation was executing the “wrong” set of projects in the first place? What if the alignment of these projects with the organisation's strategy was never measured? It is obvious that, in this case, even their successful delivery would still not help an organisation achieve its objectives.

The authors believe that for the modern enterprise, delivering the corporate strategy successfully will not be guaranteed only through an effective project management execution capability. Rather, senior managers – especially ClOs and COOs – must also ensure that corporate strategy is enshrined in the project portfolio mix by making sure that, from the outset, the portfolio is fully aligned with the organisation's strategic objectives. They must subsequently actively manage the portfolio to maximise the return on investment and ensure projects continue to deliver the expected benefits to support corporate goals.

This paper will explore the problems of waste, misalignment of project portfolios, and poor execution against strategic objectives. It will then cover the concept of the Efficient Frontier as a potential approach for addressing these issues, and propose a selection process that can help senior management ensure their portfolio is fully aligned with the organisation's strategic direction.

The Problem

Research shows that on average, 40% of capital investment in IT projects is wasted and fails to generate the expected return (The Standish Group, 2001). According to these findings, there are two main reasons for project waste and inefficiency:

  1. Project failures – failure to deliver a project on time, on budget, and on scope; in other words, not doing the projects right.
  2. Portfolio failures – failure of the project portfolio to deliver the agreed strategy; in other words, not doing the right projects.

The graph below (Exhibit 1) illustrates the two sources of waste in a theoretical project portfolio.

portfolio and project waste

Exhibit 1 – portfolio and project waste

The organisation owning this portfolio may actually deliver successfully and realise benefits on 80% of its projects. However, only 75% of these projects are aligned with corporate goals (the “right” projects) and so realises a portfolio efficiency of only 60% - 40% of the effort was wasted. When considering that in the United States the annual investment in projects is around $2.3 trillion (PMI, 2001); this implies that close to $1 trillion is wasted as a result of either execution failures or project selection failures.

The challenge for the organisation is, therefore, to reduce this waste and increase the strategic value and financial return delivered by its portfolio of projects, by finding a way of moving upwards and to the right on the graph. Exhibit 2 below extends this analysis by showing potential situations in which an organisation can find itself.

Portfolio Effectiveness Matrix

Exhibit 2 – Portfolio Effectiveness Matrix

The upper right quadrant is the only acceptable position; all other positions are sub-optimal to varying degrees. Again, this illustrates that a two-dimensional approach to the problem of project and portfolio failures is required to help organisations to deliver the right projects successfully.

Addressing the problem

Many reasons can explain project delivery failure: lack of business sponsorship, unclear objectives, a poor business case, and the list goes on. Indeed, to help the unwitting project manager avoid common pitfalls, different project management disciplines often provide a comprehensive list of common reasons for delivery failure. This subject is well known to project professionals and senior managers, and it is not this paper's objective to analyse methods to mitigate common execution problems within an organisation's project management capability.

This paper's hypothesis is that it is necessary for structured management methods such as Prince 2, CMM or Agile Development to be in place in order to successfully deliver projects. None of these methods, however, is sufficient to guarantee delivery of the corporate strategy and realise the desired benefits; delivering the wrong set of projects on time, on budget, and on scope has no value whatsoever to the organisation.

Why do project portfolios produce lower than expected returns? For similar reasons to financial portfolios: factors such as asset miss-allocation, volatility, and external risks. Since volatility and external risk can rarely be fully controlled, project portfolio management is the science of allocating the organisation's resources to the projects that will best deliver its strategy. Taking this top-down approach, rather than the bottom up project-by-project selection process, allows the organisation to better align its portfolio with its strategy, optimise its resource allocation, and eventually increase the probability of this strategy being delivered.

Creating a flexible framework for portfolios of projects also allows an organisation to quickly respond to any external shifts in the market and to dynamically adjust allocation of capital and resources to address these shifts. A portfolio that was once optimal can quickly become sub-optimal and misaligned if paradigm shift events such as 9/11 or the Dotcom crash occur.

One of the best examples of this flexible, top-down framework for dealing with project portfolios is the Efficient Frontier, which is described in the following section.

The Efficient Frontier

Efficient Frontier in Financial Portfolio Theory

Economic models and visual methods are frequently constructed in Economics to illustrate concepts such as supply and demand, consumer behaviour or exchange rate theory. These visual aids reduce the underlying model to its essential components, enhancing understanding of the theory and providing an effective means to illustrate the dynamics involved. Just as it is possible to illustrate how changes in supply and demand impact market prices and consumption patterns, there is a tool that we can use to help construct efficient project portfolios.

The tool to assist enterprises in addressing problems of portfolio failures is the Efficient Frontier. This is a mathematical construct rooted in the financial portfolio management theories of Nobel Prize winning Economist Harry Markowitz, who used the Efficient Frontier to illustrate the relationship between risk, reward, and asset allocation in financial portfolios. The Efficient Frontier visually summarises the portfolio selection and optimisation problem, and helps focus on the core issues of alignment, resource scarcity, capacity, waste, and diminishing returns.

Markowitz based his theory around risk-averse investors building their portfolios in order to optimise market risk for expected returns. The Efficient Frontier for project portfolios is based around rational enterprises building project portfolios to optimise returns subject to their operational constraints: cost, resources, risk, etc. Similarly, it is possible to refer to the measure of project portfolio returns as its total “financial value” (if measuring its total NPV or ROI) or “strategic value” (Linenberg, Stadler & Arbuthnot, 2003), which is a measure of how strongly a given project or set of projects supports the corporate strategy. In essence, this is the assessment of what are the “right projects” to execute.

Efficient Frontier in Project Portfolio Theory

The term “project portfolio” refers to a group of projects, regardless of their lifecycle stage (live, pipeline, business case etc.) that the organisation plans to execute in order to deliver its strategy. Portfolios can be constructed from the corporate level, in which case they will include all projects in the organisation; they can be at the divisional, business unit, or regional level; and they can also be at the programme level (e.g., CRM, ERP etc.). In real life, portfolios are usually defined and owned by the organisational unit that assigns budget and resources to them.

The Efficient Frontier

Exhibit 3 – The Efficient Frontier

The Efficient Frontier is used to illustrate the investment-to-strategic (or financial) value relations between different sub-sets of the same portfolio. It shows the expected strategic value for the whole portfolio at different levels of investment.

Each point on the curve represents a different project selection scenario within the same portfolio; the top right point in Exhibit 3 shows a portfolio that includes the whole “wish list”, and requires a $50 million investment in order to deliver a 100% alignment with the strategy, or 100% of the expected strategic value. The points to the left of this portfolio are sub-sets of the original portfolio, which will require a smaller investment, but will also deliver a smaller alignment and less strategic value. Stakeholders may then use this technique to examine investment options, optimise asset allocation, and ensure that projects are selected on the basis of genuine fit with strategic goals.

A point above the Efficient Frontier is not possible. The organisation can only select a portfolio of projects on or under the Efficient Frontier. Portfolios along the curve are said to be efficient because the organisation is achieving the maximum value from the available budget. Points under the Efficient Frontier curve represent inefficient portfolios.

The curve displays convexity; it slopes upwards but with a declining steepness as the level of investment rises. At relatively low levels of investment, an increase in investment levels results in a relatively large increase in the strategic value delivered, as projects with the highest value/cost ratios are selected. However, at higher levels of investment (for example $40m) an incremental increase in spending does not produce as large a return as before. The portfolio choices exhibit diminishing marginal returns as we move along the efficient frontier.

The well-managed enterprise will strive to implement processes to allow it to position itself on the Efficient Frontier. This is a fundamental step to ensure that it is selecting the “right” projects that it must then execute successfully. However, there are valid reasons to be below the curve. A sub-optimal solution can be justified due to:

  • Dependencies – some projects may need to be done together, even if when considered alone one project may not be selected on a value/cost analysis.
  • Mandatory projects – some low value projects may be forced in to the portfolio e.g. projects required by law.
  • Skill shortages – there may be insufficient resources to deliver the optimum solution.

Looking at Exhibit 3 above, the pink marker below the curve represents the real life, selected, sub-optimal solution for an investment of $17 million. The sensitivity analysis on the right details the reasons for the sub-optimisation, and allows decision makers to focus their discussion, and challenge the projects that contributed to this reduction.

The rule-of-thumb is not as simplistic as “be on the Efficient Frontier or face the consequences”. Organisations must have the ability to understand and challenge reasons for being below the curve. The Efficient Frontier is no black box; senior managers need to use it intelligently as a decision support tool to derive the end solution. It is acceptable not to be on the Efficient Frontier as long as the reasons behind that are understood.

Using the Efficient Frontier

How can senior managers use the Efficient Frontier in practice? In most organisations, this will require a few changes to be applied to the investment planning process in order to integrate the portfolio management approach. Described below is a five-step process for making the best usage of this concept.

1. Clarify the budget allocation hierarchy
Just as a fund manager will choose to allocate assets to equities, bonds or cash, the organisation must decide at what level to optimise its portfolio of projects. The primary decision is whether it should allocate its investments at the corporate or departmental/operating unit level, depending on the overall corporate structure. For example, are separate budgets allocated to IT and Operations and is control of these funds delegated to departmental management, or should corporate level management have total control over all investment decisions? Since there is no right or wrong answer to this question, the solution is not always simple, and has significant implications for the roles and responsibilities of different stakeholders within the decision making process.

2. Build your project “wish-list”
Once the decision-making chain for budget allocation has been defined, the organisation (or business unit, region, etc.) needs to produce a comprehensive list of the projects that are within the scope of its portfolio. These should include projects in all stages of the project lifecycle – live, pipeline, business case etc. – along with all relevant metrics such as cost, timescales, resource requirements, risk, etc.

In parallel, the organisation must ensure that the corporate strategy is clearly articulated and use this to assess how strongly the strategy will be served (or not) by the projects on the “wish-list”. This is where the “strategic value” indicator, referred to earlier, comes into play. This indicator, which provides an insight into the project's relative importance within the portfolio, is calculated by linking measurable project benefits (financial and non-financial) to the organisation's strategic KPIs (revenue targets, client retention measures, etc.). Once calculated, this normalised measure provides a better understanding for the importance of each project within the overall picture of the portfolio.

3. Select projects using the Efficient Frontier
Once the consolidated cost and strategic value for different portfolio scenarios have been calculated, an Efficient Frontier can be generated, which, in turn, is used to optimise the portfolio against to the typical array of constraints and dependencies that exist in the real world.

The most common challenge of optimisation is to maximise the strategic value in a portfolio given various cost constraints. The organisation will attempt to select the set of projects that delivers the most strategic value for a limited budget. Referring back to the Efficient Frontier shown above in Exhibit 3, if the solution is optimal, it will position the organisation on the curve. If there are dependencies, or mandatory projects, the solution will be under the curve, and although this is sub-optimal, at least decision makers have the transparency and understanding of why returns are lower for a given level of spend.

4. Scenario Analysis
But this is not necessarily the end solution. The example above optimised the portfolio using strategic value as the optimisation criteria. By using additional criteria in parallel – NPV, risk, etc. – the organisation can evaluate various portfolios which deliver towards individual criteria, or a combination of them.

The table below (Exhibit 4) illustrates a portfolio that is being optimised against a cost constraint, using three different criteria – Financial value (FV), strategic value (SV), and risk (C1).

Portfolio Selection Under Multiple Criteria

Exhibit 4 – Portfolio Selection Under Multiple Criteria

What is now apparent is that different optimisation scenarios result in different portfolios comprising different projects. However, the rule governing selection should be straightforward – if a project has been selected by all of the three criteria, then it should be implemented: it makes sense strategically; it has a good financial return; and the risk is acceptable. On the other hand, if a project has been excluded in all three criteria, then it should most likely be rejected. This leaves 10-15% of the projects that made it through one or two criteria, but failed the third one – and this “grey area” is where most attention should be focused.

By translating the concept of multi-criteria optimization, the basic efficient frontier analysis can now be extended to plot the financial value and risk measures of a strategic-value-optimised portfolio, for various cost scenarios. As before, the figures are plotted relative to cost to assess what percentage of value (or risk) can be realized in different portfolio options; for example, if 100% of budget is invested then 100% of the financial value and 100% of the potential risk inherent in the portfolio may be realised. All other portfolio options involve a trade-off between the three measures and this helps to show the position as the level of investment is increased or reduced. In the example below (Exhibit 5), the maximization criteria is the strategic value; however, an organization can maximize any of the three criteria, in which case the value of the other two will be derived (and therefore will not have the “diminishing return” shape).

The Efficient Frontier +

Exhibit 5 – The Efficient Frontier +

The challenge is to use this portfolio intelligence to decide on the final portfolio to be selected. Why should a specific project be selected? Is there some reason we have not factored into the analysis yet? Should NPV or risk considerations outweigh the suggested solution if strategic value is optimised? Answering these questions then facilitates the final kill / hold / go decision on whether to include or not.

5. Performance Management - the “Strategy Dashboard”
Successful project delivery is required in order to realise the benefits outlined in project business cases and to deliver the inherent strategic value of the portfolio. Structured project management methods need to be used to embed an effective delivery capability in an organisation. Individual project performance should then be tracked and managed via standard reporting methods such as status dashboards.

To the CIO and COO, however, individual project delivery status is useful – and necessary - but of limited interest. They will seldom have sufficient time or appetite to review relatively low-level project dashboards. A strategy level dashboard is much more valuable to this audience because it offers a portfolio view of how well the organisation is delivering strategic goals and achieving benefits via its projects. The chart below (Exhibit 6) illustrates the concept.

Strategic Dashboard Example

Exhibit 6 – Strategic Dashboard Example

The strategy level dashboard aggregates performance across projects and assesses overall portfolio performance against strategic goals. The strategic goals here are listed along the vertical axis and ranked in order of importance - the blue bar shows their relative importance. The yellow bar is a measure of benefits realisation at the portfolio level, as it aggregates the benefits from the project level and superimposes them on the expected strategic KPI's. The graph also shows a “RAG” assessment, highlighting strategic objectives that are unlikely to be delivered (shown in red) and therefore require additional attention and corrective action to get back on track.

This Efficient Frontier concept makes this type of analysis possible: an organisation using the Efficient Frontier technique will already have defined a strategy together with an estimated impact on the strategic KPIs for each project it plans to deliver. Incorporating the strategy dashboard and benefits management into a performance management framework – together with effective project delivery – is a way to ensure that senior managers have the necessary tools focused at the correct level to maximise the returns of their portfolio.


Given the huge amounts of time, effort and resources the modern organisation invests in projects, it is necessary to ensure that (1) these investments contribute to the organisation's overall strategy and (2) these investments are managed properly so their benefits are realised. The proposed approach – managing projects as a portfolio of investments, similar to the way a fund manager manages his financial portfolio – offers several advantages, and one of them is the use of financial portfolio analytical tools to evaluate the capability of a portfolio of projects to deliver the organisation's strategy.

The Efficient Frontier simplifies a complex portfolio management problem by highlighting and clarifying some basic questions all organisations are facing: scarcity of resources, efficiency of asset allocation, trade-offs between cost and value, opportunity cost, and the value of breaking the constraints. It offers a simple, visual way of analysing investment decisions, understanding their impact, discovering ways to increase the efficiency of portfolio investments, and avoiding investment in areas of diminishing returns.

Of course, the Efficient Frontier is just one critical part of a successful portfolio management program. It is important to remember that in order to derive the most value out of the Efficient Frontier, key prerequisites need to be followed, namely the ability to translate the business strategy into quantifiable, measurable, realistic business drivers; to rank and weigh the drivers; to identify the quantifiable impact that the projects will have on the business drivers KPI's; and to derive the potential strategic value created by the projects. Only at that point is it possible to use the Efficient Frontier framework to further understand and remove constraints and to optimise the organisation's asset allocation.

There is, of course, no absolute right or wrong answer implied by this technique – senior management always has the final decision on which portfolio scenario to execute. However, for an organisation wishing to select the “right” projects, it should avoid ad-hoc, unstructured methods, and leverage a transparent and robust process, based on facts and constructed from the bottom-up. Only this will ensure the right information is available in order to align projects with strategic objectives and to manage dependencies and external factors in an efficient manner.


Linenberg, Y. Stadler, Z. Arbuthnot, S. (2003, May). Optimising organisational performance by managing project benefits. PMI EMEA conference. Den Haag, The Netherlands.

PMI (2001). The PMI Project Management Fact Book. Second Edition, Newtown Square, PA: Project Management Institute

The Standish Group (2001). CHAOS Report. West Yarmouth, MA.

© 2005, Yorai Linenberg and David Rynn
Originally published as a part of 2005 PMI Global Congress Proceedings – Edinburgh, Scotland



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