Project Management Institute

Making the cut

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Companies are taking a hard look at their portfolios– and not all the projects will survive.

>MAKING THE CUT

BY MALCOLM WHEATLEY // PHOTO BY MARTIN BEDDALL

Paul Hodgkins, Siemens, Surrey, England

With the economy in a nose-dive, organizations are sharpening their knives, putting everything from employees to office supplies on the chopping block. And the project portfolio is no exception. Yet determining which projects should be slashed and which ones should be kept isn't always obvious.

Establishing the strategic value of projects is more art than science, and, given the magnitude of the current economic crisis, there are few precedents. One thing is for sure: Companies with project management processes already in place have the advantage.

“Different organizations approach the process in different ways, but there's little doubt that organizations with a good portfolio management process already in place are in a much better state to make efficient progress,” says Andrew Wicklander, PMP, chief executive of Ideal Project Group LLC, a project management consulting firm in Chicago, Illinois, USA.

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There's an economic downturn. A year ago, you might have been able to afford 10 projects, but now you can only afford five.

–Bob Tarne, PMP, Lombardi oftware Inc., Austin, Texas, USA

A basic starting point is to inventory what projects are actually under way, he says. But that's just the precursor to the main event—the process of deciding which projects will live on and which ones won't.

That's where things get tricky.

One common approach is to establish a cut-off, says Bob Tarne, PMP, senior business process management program manager at Lombardi Software Inc., Austin, Texas, USA.

“Rank the projects and then cancel those that you can't afford,” he says. “There's an economic downturn. A year ago, you might have been able to afford 10 projects, but now you can only afford five.”

Choosing which five make the final cut can get ugly, and portfolio leaders looking for a quick fix are out of luck. Rarely will a single measure provide adequate insight into the choices that must be made, Mr. Tarne says. In practice, it's often better to construct a combined measure, giving weight to both ROI and other factors such as regulatory compliance.

Simon Ardron suggests asking three questions:

  1. Which projects have a legal or strategic imperative?
  2. Which projects are luxuries?
  3. Which projects are likely to drive future revenues and growth?

“Once you understand that, you can move on to look at costing and budgets, and make prioritization decisions,” says Mr. Ardron, an East Finchley, England-based business analyst at fast food behemoth McDonald's.

Organizations should focus on the business value of the projects in question—and more importantly, the demand for the deliverables, says Vipin Arora, a New Delhi, India-based program director and change management lead for Tata Consultancy Services Ltd. To that end, Mr. Arora suggests adding another query to the list: “What are the potential risks to the business if you do not service these demands?”

Rather than shortchange the entire portfolio, we'd sooner make changes to selected projects, always aiming to get the most value out of every dollar. –Marisa Oldnall, PMP, Cancer Care Ontario, Toronto, Ontario, Canada

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Portfolio leaders gearing up for a lean patch should adopt a holistic approach that factors in risk analysis.

“Without a quantification of risk, you can't make an informed decision about risk and reward—and companies' tolerance for risk during a downturn can be very, very different from their tolerance when times are good,” says Gaylord Wahl, a project management office and project portfolio management practice leader at Point B, a consulting firm in Seattle, Washington, USA.

“Companies may have too many projects in the high-risk, low-reward category, or conversely, too many low-risk, low-reward projects, which are ‘safer,’ but can threaten long-term survival through not being innovative enough,” Mr. Wahl explains.

One project leader's interpretation of risk may be different from another's, though, so establishing a standardized approach can help.

At German industrial giant Siemens, every business unit in each of the 190 countries the company operates in relies on the same approach to categorizing projects. Dubbed PM@Siemens, the system uses a two-digit code for each project: a letter, ranging from A to F, indicating its significance to the company; and a number, ranging from 0 to 3, indicating its overall risk level.

“An ‘A’ project might be very large in terms of value and business volume, and could typically be a large infrastructure project. A ‘0’ could indicate a significant business risk or number of risks, perhaps through the potential for corruption,” explains Paul Hodgkins, a Surrey, England-based Siemens program executive. “While an A0 project would need approval by the Siemens main board in Germany, an F3 project could be approved by a local Siemens business unit without further reference.”

Ultimately the categorization's real value stems from the fact that it gives Siemens the ability to evaluate its portfolio and adapt it to ongoing or future conditions. For example, too many A0 projects in the portfolio could indicate mounting risks—especially in a downturn—while too many F3 projects may signal a lack of economic value when a recovery begins.

As the global economy has slid into a full-fledged recession, PM@Siemens has been tweaked to reflect the new realities the company faces. In late February, for example, the company introduced new stipulations to specify the project governance requirements applied to each category of project, Mr. Hodgkins says.

“A category A project will have different requirements than a category F project—for the first time making explicit what is acceptable practice in terms of risk management, contract management, and the roles and responsibilities of the people involved in the project during its lifetime,” he explains.

Rough economic times breed increased scrutiny on the end-result, but it's not always so clear-cut which projects will turn out to be the winners or losers. After all, assumptions made in good times may not hold true during tough stretches down the road.

“Be careful when looking at the ROI of projects where the stakeholder is a part of the business that's in trouble or where the sponsors may not be around when the project is completed. They might not survive the full five years over which the anticipated ROI that you're looking at has been calculated,” says Adam Nelson, director of IT consulting at Keane Inc., a global business and technology consulting firm in San Francisco, California, USA.

ROI projections can also be overtaken by more pressing requirements.

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Our job in
the program
management
office is to help
people in the
business arbitrate
between priorities
in terms of the
decision points
that they face.

—GORDON CLOKE, VOXEO CORP.,
ORLANDO, FLORIDA, USA

“If lowering corporate cost has now become an important strategic objective, then projects that achieve that goal might outrank projects that achieve some other objective—research and development, or a revenue enhancement—even if the ROI is similar,” he says.

These days, cash often trumps everything else.

“Organizations that might have previously ranked a project that delivered US$300,000 in 18 months ahead of one that delivered US$50,000 in six months are now deciding to give the US$50,000 project priority instead,” adds Mr. Wicklander. “It's the project with the fastest ROI that gets the money.”

Adjusting the portfolio for tough times doesn't always require killing off projects.

“We've been trying to have our cake and eat it, too,” says Gordon Cloke, director of program management at Voxeo Corp., a software developer in Orlando, Florida, USA.

The company is using a process driven by a set of three-layered road maps to make its determinations, he says. The top layer comprises the products and software releases that the business is committed to. Underpinning this is a second layer: the projects and programs that will bring products and software releases to fruition. Finally, a third layer consists of the priorities both among and within the various projects.

“Our job in the program management office is to help people in the business arbitrate between priorities in terms of the decision points that they face,” explains Mr. Cloke. “Do they put their resources into this project—or that one?”

Sometimes that means making a tradeoff, says Marisa Oldnall, PMP, project management office director at Cancer Care Ontario in Toronto, Ontario, Canada.

“If we've got a set of projects that all match our corporate strategy in terms of objectives, but we haven't got the funding to deliver all of them, we'll try to figure out which projects best match our skill sets and strengths, as well as those of the stakeholders and hospitals in the areas of the province involved,” says Ms. Oldnall, who is also vice president of professional development for the PMI IT & Telecom Specific Interest Group (SIG). “We're always asking ourselves, ‘What have we got the capability to deliver successfully?’ subject to a goal of whatever we do, we want to do well.”

That “do-it-well” mantra means that when funding is tight, carefully chosen projects will be selectively trimmed back to avoid making across-the-board cutbacks.

“Rather than short-change the entire project portfolio,” Ms. Oldnall explains, “we'd sooner make changes to selected projects, always aiming to get the most value out of every dollar spent.” PM

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM NETWORK JUNE 2009 WWW.PMI.ORG

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