Mastering portfolio analysis with a project and portfolio management tool
Jeremy Cottino, PMP
Understanding the The Standard for Portfolio Management – Third Edition (Project Management Institute, 2013b) might help you to better comprehend the goals of a portfolio and the advantage in selecting the right one(s). When it comes to real life, you need to ensure that the leaders making the decisions make the right ones. They might require tools to support the process; and even if a spreadsheet might be sufficient, experience shows that the biggest benefit of portfolio management tools is the automatic calculation of portfolio components. Through these unbiased calculations, will come the missing objectivity when it comes to selecting the projects to run.
This paper aims at showing portfolio managers the added value of using a Project and Portfolio Management (PPM) tool when defining the portfolio that will be authorized. After an overview of some portfolio management principles, I will give a high level presentation of the PPM software marketplace and bring some insights to help you answer one key question: what is the best tool? The article will conclude with a concrete example of how one of the leading PPM softwares helps define a portfolio via weighted ranking and scoring techniques using a simple three step approach.
There is an interesting definition in The Standard for Portfolio Management – Third Edition, to help understand what the value of portfolio management is. “Where program and project managers focus on ‘doing work right,’ portfolio managers focus on ‘doing the right work’” (PMI, 2013b, p.14).
All processes described in this paper can be applied to all portfolio components, but to ease the understanding, we will focus only on projects. The project lifecycle from project ideation to its delivery might be depicted as follow:
Exhibit 1: Projects life cycle.
Project lifecycle starts with Demand management.
This is where projects are captured. At this stage, we might call them initiatives, opportunities, ideas, or placeholders instead of projects, as they are not projects as defined in A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Fifth Edition (PMI, 2013a, p.3); meaning objective might not be defined yet, or after our analysis, the ideas might become a program or an operation activity. Having an inventory of those initiatives helps the portfolio manager give better visibility to senior executives, providing detailed information such as business case, risk assessment with resource estimation, strategic alignment of projects, and benefits analysis.
Then Portfolio management is the process to select the right projects.
This article will focus on portfolio management, but is not devoted to present the sixteen processes of portfolio management as defined in The Standard for Portfolio Management – Third Edition (PMI, 2013b). The three following statements summarize the portfolio definition:
- “The portfolio components are quantifiable, that is, they can be measured, ranked, and prioritized.”
- “An organization may have more than one portfolio.”
- “Portfolio components are identified, evaluated, selected, and authorized.”
A portfolio analysis includes initiatives coming from both the demand management process and ongoing projects. The analysis is a complete review of all projects regardless of status and actions, such as, whether to start, continue, “kill,” or postpone projects. As the portfolio is alive, some new initiatives with higher strategic impact or priority might require other projects to be stopped or postponed.
It is around those elements that a PPM tool will bring the biggest added value, helping portfolio managers in the processes of project prioritization, cost/benefits analysis, risk management, and project selection. We will see how.
Finally project management techniques help ensure projects are successfully delivered.
The project is then authorized and handed over to a project manager who will plan it, manage resources (work, material, and cost), and help ensure the project is a success while balancing project constraints (i.e. scope, quality, schedule, budget, resources, and risks) and by realizing the planned business value.
Define a Portfolio in Practice Using a PPM Tool
Selecting the best PPM tool
There is a lot of documentation in the PPM marketplace. To find potential vendors, one might read some of the research companies’ papers about PPM tools. Companies such as Gartner, Inc., Forrester Research, Inc., Ygi Inc., and IDC Research, Inc. offer analysis and market overviews to guide you through a variety of tools, and identify market leaders, niche players, or visionaries. There is also an interesting article on Wikipedia, Comparison of Project Management Software (n.d.), that list no more than 158 different PPM tools.
The exercise of evaluating and selecting a portfolio management tool that is appropriate to your organization starts by defining your objectives and the scope of the tool. Experience shows that the main reason for implementing a PPM tool for portfolio management activities is having an up-to=date source of information to allow better prioritization of portfolio components and better usage of resources, such as work, material, or cost. When selecting a PPM tool, you might also take into consideration features the application will offer such as: demand management, management of projects, programmes, portfolios, planning, budgeting, resource and capacity management, and risks and issues. As many other IT domains, the delivery mode tends to go to Software as a Service (SaaS), as opposed to a more traditional model such as web application or on premise hosting.
Running a Request for Proposal (RFP) would help you to select a tool and an integrator to run your project. Risks might be mitigated by running a pilot on a limited number of users (or department/unit) of your company. The bottom line is well defined by Dr. Miley W. (Lee) Merkhofer in his blog article about PPM tools. The answer to the question, “what is the best tool?” does not have a single answer. The best tool depends on your business, your needs, and the maturity of your processes.
Albert Einstein once said, “Example isn't another way to teach, it is the only way to teach.” To highlight above principles, here is how one of the leading PPM software helps define a portfolio via weighted ranking and scoring techniques using a simple three steps approach.
First of All, Start with Portfolio Component Inventory
One of the first activities of the portfolio definition is to make the inventory of the portfolio components (the inventory of work). In the presented tool, the demand management consists of defining templates to input portfolio components properties in order to categorize those elements and create the business case. Properties that will help project identification and prioritization might include costs, resource requirements, or some financial metrics such as Return on Investment (ROI) or Net Present Value (NPV). The interesting point of doing this data collection using templates is the capacity of data collection standardization and governance. Another added value of PPM tools, compared to a simple list of projects, is the ability to define project sequencing or interdependencies. This will help ensure that when authorizing the portfolio, that prerequisites are done in the right order. During data collection, it is also important to state for each portfolio component how it is aligned with a strategic objective.
In this tool, the “resource plan” functionality is used at the early stages of project initiation as a forecasting tool for estimation. It is used to lay out any possible resources that may be required. By doing this, the portfolio analysis will take into consideration the resources needed (role or skillset) within a first version of the portfolio roadmap to highlight deficit or surplus.
Exhibit 2 shows an example of a resource plan for a given project, which requires four roles (architect, designer, developer, and project manager) in a timeframe of four weeks.
Exhibit 2: Building a resource plan.
Then Define Portfolio Using the Three Step Approach
In this tool, the portfolio definition including component prioritization and selection is made in three steps as described in Exhibit 3 below:
Exhibit 3: Portfolio analysis three steps process.
The first step of the portfolio analysis is to define and prioritize business drivers.
A business driver must be S.M.A.R.T. (i.e. Specific, Measurable, Attainable, Realistic, and Time-bound), unique, easily understandable, and should be a direct representation of an organization's business objectives. It must be owned by senior executives. Most organizations should define between five and 12 drivers for each portfolio.
A business driver is declined from higher-level business objectives. A company states, for example, a five-year plan with related objectives, such as increasing its gross profit (gross profit being the difference between net sales and cost of goods sold). They target an increase of 50% in five years (this is the business objective). In order to achieve it, they define the following drivers:
- Increase selling price of our key products (reaching premium segment)
- Increase sales volume by selling in new markets
- Reduce the cost of goods (finding lower price suppliers)
In this tool, portfolio managers have the possibility to define for each driver, the ownership of a department of the company. This is used for filtering purposes. Because some departments might have different priorities than other departments, it might be interesting to use this classification.
Once defined, business drivers should be prioritized. There are, within such a tool, two ways to prioritize business drivers:
- A “calculated” method where an automatic pair comparison of each driver generates relative priority scores
- And a “manual” method where users specify priority values for each driver directly
The calculated method is usually recommended when a company is not sure which method is most suitable or wants drivers to be compared with the same weight of importance. Occasionally, the manual method is used if the company already has a prioritized list for its business drivers, for example, extracted from another tool within the organisation.
To weigh the drivers and define priority, the Analytic Hierarchy Process (or AHP) can be used. Its principle is to first decompose decisional problems into a hierarchy of more easily comprehended sub-problems, each of which can be analysed independently.
There are seven levels of comparison:
- Is extremely more important than
- Is much more important than
- Is more important than
- Is as important as
- Is less important than
- Is much less important than
- Is extremely less important than
Using this method, drivers are compared two by two. As illustrated in Exhibit 4, the driver A: “Increase selling price of our key products (reaching premium segment),” is compared to the driver B: “Reduce the cost of goods (finding lower price suppliers).”
Exhibit 4: Analytical hierarchy process.
At the end of the exercise, the business drivers will be listed by priority order (using a percentage) and a consistency ratio is calculated. The consistency ratio algorithm reviews the pairwise matrix selections to confirm consistency levels. Basically, if you set that driver A is more important than driver B, which is more important than driver C, and then define driver C as being less important than driver A, this is an inconsistency. As a best practice, most organizations should strive for a consistency ratio of 80% or higher. If the ratio is below 80%, your prioritization must be reviewed and you might fix any mistakes maybe the drivers are misaligned or poorly defined and could cause misunderstandings).
This exercise of defining and prioritizing business drivers can only be successful if a consensus is attained. Several meetings might be needed and you might expect some politicking.
The second step of the portfolio analysis consists of aligning portfolio components and business drivers.
The goal is to rate the impact of each project on each business driver. The impact statement of a business driver (rated as: no rating, none, low, moderate, strong and extreme), is defined during the creation of the business driver. As an example, for a driver such as “expand revenue of the Bamsolcare product line,” low impact could be for a revenue increase of between US$10 thousand and US$50 thousand, where an extreme impact might be for an increase of revenue of greater than US$500 thousand. It is important that criteria are measurable (amount, quantity, evolution rate, etc.). Exhibit 5 details this example:
Exhibit 5: Project impact statements.
The last step is the portfolio analysis
The portfolio analysis by itself is divided into four stages as illustrated in Exhibit 6:
Exhibit 6: Making portfolio analysis in four steps.
The portfolio manager starts by defining the scope of the portfolio analysis, including the planning horizon (you can analyse on various periods, from months to years). As for drivers, the analysis might be owned by a department or the whole organisation. The prioritization type is used for the prioritization calculation. You can choose from automatic calculation based on the driver prioritization as defined above, or you can chose one of the project properties for a simple ranking (e.g. if you have the ROI calculated as part of the project definition, this could be used to define project priority). Project priorities are calculated and reviewed using the business driver/project matrix (a summary of previous steps). The application then calculates the priority of each project within the portfolio (using percentage). When the result of the project prioritization is displayed, you could have some surprises. At this stage, you can change the weightings, but it's recommended to stick to the proposed prioritization which is objective.
The first axis of portfolio analysis is the cost. A baseline is established. It contains all the projects of the portfolio and displays the total portfolio cost which corresponds to 100% of the strategic value. Projects are listed with their priority, the estimated cost, the status, and the type of portfolio component (or project type) as defined on the demand management templates.
The portfolio manager can now create “what-if” scenarios. A first example could be to limit the available budget under the full cost of the portfolio. In such a case, less prioritized projects are “moved-out” from the selection until the total cost goes beyond the defined limit. The new strategic value (lower) is calculated.
It may happen that some projects are mandatory (e.g. regulatory projects, compliance, or sustainability). In this case, the portfolio manager can include them manually. Vice versa, another set of projects might be removed to stick to cost constraint. Forcing-in or forcing-out a project is not more than overriding the application proposal. Of course, forcing-in a project does not mean that the project should be done right now.
Exhibit 7: “What-if” scenarios.
This tool also establishes the Efficient Frontier. The Efficient Frontier is a concept defined by the Nobel Prize winner Harry Markowitz as part of an article published in 1952 named Portfolio Selection (Markowitz, 1952). He stated that an optimal portfolio is the one that delivers the best possible return for a given level of risk or investment. Applied to our portfolio analysis, the Efficient Frontier is represented as a curve where strategic value (as a percentage) is plotted against Portfolio Cost.
Exhibit 8 shows the concept of the Efficient Frontier. Several “what if” scenarios to simulate various cost restrictions are saved by the portfolio manager. In this example, four scenarios have been created:
- The baseline with all projects selected and no cost constraint applied.
- US$ 600 thousand cost constraints but with automatic (made by the tool) project selection.
- US$300 thousand cost constraints but with automatic (made by the tool) project selection.
- And a last scenario with a US$300 thousand cost constraints and projects selected manually (badly selected, actually).
Exhibit 8: The efficient frontier.
We see that three scenarios “Baseline,” “US$600 thousand,” and “US$300 thousand” are plotted on the efficient frontier curve, meaning that for the given cost, each scenario brings the maximum strategic value. Those portfolios are optimal. Opposed to those, the scenario “US$300 thousand restricted” is plotted below the efficient frontier. This scenario does not give the maximum strategic value for the given cost constraint. This portfolio is not optimal.
The last report is the strategic alignment bar chart. To understand how it works, the application first calculates the total percentage of the portfolio cost allocated to a specific driver (simple rule of three). This is then compared to the original driver priority percentage. Analysing this, you can estimate which driver brings the biggest value with the lowest cost.
Exhibit 9: Strategic alignment bar chart.
The second axis of portfolio analysis is the resource (mainly work resources). Some projects might be excluded from the first version of the portfolio because of limited resource availability. A first report displays the list of portfolio projects in a Gantt chart; it is a version of the portfolio roadmap. The portfolio manager can display the resource analysis report that represents the requirement details. Each project is listed and details their needs in terms of resources split by skills or roles (e.g. project manager, developer, designer, etc.). Deficit of resources can be highlighted. The “deficit and surplus” report, as shown in Exhibit 10, can be displayed in a calendar view, and thus shows where there may be extra or missing resources by comparing resource availability versus resources requested.
Exhibit 10: Deficit and surplus report.
Continuing on the “what-if” analysis, the portfolio manager has the ability to simulate resource hiring. The application is easily capable of calculating whether swapping projects in and out of the portfolio will increase the strategic value. By adding this option, another report, “Hired resource report” will display the requested work (start/end date) per project and per resource role as well as the estimated cost of these extra resources (based on their profile).
Exhibit 11: Hired resource analysis.
All those “what-if” scenarios can be compared. The “compare portfolio selection” report, as shown in Exhibit 12, allows you to highlight each of the differences in the scenarios to help the decision process. This report highlights projects that are part of the portfolio scenario, summarizing their status, if they are resourced/not resourced, or forced in or out. In order to help ensure maximum business value is delivered, the portfolio roadmap is updated (moving the project might compensate resource over-allocation and then make it possible to run it).
Exhibit 12: Compare portfolio selection report.
When the best scenario is identified, the portfolio is authorized. The scenario is committed, which could trigger a workflow for approbation, depending on your governance.
As a best practice, it is recommended to create many portfolios and “what if” scenarios (based on risks, costs, etc.) to simulate various options. Each of them can be saved and compared later. Also, portfolio managers can baseline a portfolio that could represent the work to be completed in the coming period; this again can bring the possibility to compare this portfolio to several options to help in making decisions.
Portfolio management helps ensure the right projects (the ones that bring the biggest business value, balanced by the constraints such as cost and resources), are the ones selected and run.
PPM tools bring added value to companies. It becomes the source of all existing initiatives, classified and detailed, following your own tailor-made governance model. It provides visibility to senior executives, but also to resource managers and project managers. Such tools facilitate effective decision making through prioritization algorithms, taking into consideration human resources, costs, and risk management. Finally, it helps ensure, via an effective portfolio analysis process, that the organization is getting the best benefit from their spending.
As a takeaway, a PPM tool can bring the missing objectivity when selecting which projects to run. A friend of mine always says, “the goal is to objectify the subjective.” Rating projects from 1-10 is too subjective. Test this theory, collect a list of 10+ projects and ask each project's sponsor or customer to prioritize it. Everything will end up being a priority and you will have to deliver too many projects, or the most “powerful” person will decide for others. When priorities are defined, it is also important to understand that a portfolio is alive and priorities constantly change. It might also occur that a project is no longer worth doing and should be “killed.” Finally, priority will be objective, but should not be discussed. That's why executives must take ownership of the portfolio. They have the authority to decide what is important based on defined strategy.
Albert Einstein Quotes. Retrieved from http://www.alberteinsteinquotes.com/quote/e7c9f/example-isnt-another-way-to-teach-it
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Cottino, J. (2015, January 28). How Microsoft Project Server calculates Business drivers priorities. Jeremy Cottino. Retrieved from http://www.jeremycottino.com/2015/01/how-microsoft-project-server-calculate.html
Gross profit. (n.d.). In Wikipedia. Retrieved from http://en.wikipedia.org/wiki/Gross_profit
Levenfeld, E. (2014, June 14). Understanding the efficient frontier in project portfolio investment decision making. Eduardo Levenfeld. Retrieved from http://eduardolevenfeld.com/2014/06/14/understanding-the-efficient-frontier-in-project-portfolio-investment-decision-making/
Markowitz, H. (1952). Portfolio selection. Journal of Finance. 7, 77–91.
Project Management Institute. (2013a). A guide to the project management body of knowledge (PMBOK® guide) – Fifth Edition. Newtown Square, PA: Author.
Project Management Institute. (2013b). The standard for portfolio management – Third edition. Newtown Square, PA: Author.
© 2015, Jeremy Cottino, PMP
Originally published as a part of the 2015 PMI Global Congress Proceedings – London, UK