BY ROSS FOTI • PHOTOGRAPHY BY ALEX MCKNIGHT
Scott J. Edgett, left, and Robert G. Cooper of the Product Development Institute, Ancaster, Ontario, Canada serve as consultants to companies seeking to improve their new product processes and approaches to portfolio management.
Ten years ago, most businesspeople had never heard the words “portfolio management.” That's not to say that companies weren't practicing the strategy sporadically, but today, profit-minded firms are portfolio-wise—and they're noticing the benefits.
“Portfolio management means different things to different people,” says Scott J. Edgett, one of the authors of Portfolio Management for New Products, Second Edition [Perseus Books, 2001]. “At the 50,000-foot view, senior executives are looking at allocation of resources. At the 10,000-foot view, management is after project prioritization. At ground level, you have execution of individual projects, which is where project management takes over.”
No matter what level, a portfolio management system enables businesses to make the most of their resources, maximizing throughput while allowing a company to achieve strategic purpose.
“STRATEGY BECOMES REAL WHEN YOU START SPENDING MONEY.”
—ROBERT G. COOPER, PRODUCT DEVELOPMENT INSTITUTE CO-FOUNDER
Vive la Différence
Program management essentially involves coordinating a group of related projects. While program management focuses on execution, it doesn't fully address business goals and growth. “With programmatic work, you have people absorbed in process and not necessarily focused on getting there faster and better,” says Rick Bilbro, a principal with Raleigh, N.C., USA-based Innova Group. “When you start talking about portfolio management, rather than an ongoing system of programs, you have an overall business strategy that supports a project management office, which, in turn, leads to benchmarking and continuous improvement. Project management must be market-based—if you don't have a ‘better deal’ in your project portfolio, you're faced with entropy. You're not learning faster than the competition.”
If projects within a portfolio are initiated before needs are clear, the resulting deliverables may be misutilized, underutilized or not utilized at all. According to Bilbro, three major components must drive effective portfolio management:
- Organizational Platform. A business with a bureaucratic structure with many independent silos will have problems communicating goals and realizing project efficiencies. “If individual managers are not talking, the organization is just surviving instead of achieving,” Bilbro says. “A cross-functional interdependent organization works best.”
- Energetic Leadership. An effective portfolio management system can't have just one person providing input at the top. Everyone has to be competent and provide insight toward a strategic vision.
- Enabling Processes. The organization must be able to sustain the portfolio management system. “And without an eye for improvement, opportunities won't reach fruition or have value when they get to the market,” Bilbro says.
The Right Direction
Some projects with earnings potential simply aren't a good organizational fit. “A significant fraction of projects don't support corporate mission, vision or goals,” says Gregory D. Githens, PMP, Catalyst Management Consulting, Findlay, Ohio, USA. “Portfolio management puts a lens on the question, ‘What is strategic to our organization?’”
According to Githens, there are three types of project portfolios: compliance, operational and value-creating. Compliance portfolios contain projects that must be completed to meet regulatory responsibilities, environmental, health and safety initiatives, for instance. These portfolios are typically prioritized by the magnitude of penalty and cost: What does the business have to lose through noncompliance?
In operational portfolios, projects are functional, and may improve organizational performance or make processes more cost-efficient, such as technology implementations. These portfolios are prioritized in terms of organizational strategy and support. “Cost-reduction work generally is not strategic,” Githens says. “It is of operational interest to an executive, but not strategic interest.”
Last, projects in value-creating portfolios tend to improve the bottom line, with a focus on innovation, research and development. New product development projects fit this category. These programs are ranked by their potential for risk and reward.
Often, project work piles onto an organization's plate, but not enough comes off. Without an effective prioritization system, too many projects may soon drain a company's limited resources. “Strategy becomes real when you start spending money,” says Robert G. Cooper, who, along with Edgett, is a co-founder of the Product Development Institute, Ancaster, Ont., Canada. “And portfolio management is about making investment decisions in new products—about where you want to spend your money.”
WORKING IN CONCERT
“When portfolio management is working at its best, financial resources are put to the best use at the best time to gain more return,” says Bob Storeygard, PMP, advanced project management specialist with 3M's Traffic Control Materials Division.
With operations in more than 60 countries and 50,000 product lines from pharmaceutical goods to Post-It notes, 3M, headquartered in St. Paul, Minn., USA, exhibits many different operating styles across many organizational levels. Trying to standardize any business strategy and get it accepted throughout the organization is difficult. In addition, projects that share the same types of products, funding pool, resources, vision and mission typically are grouped into a portfolio. However, in a varied company like 3M, this strategy is more difficult. “3M serves so many diverse markets that if its different groups are pulled in as many different directions, they would pull the organization apart,” Storeygard says.
A decade ago, Storeygard was instrumental in standardizing project management methods at 3M. As the global organization's project management infrastructure evolved and matured, he realized that, although projects were benefiting from an organized approach, management was struggling with prioritizing and understanding project value. There were pockets of understanding, but no formalized system.
Portfolio management really began at 3M when managers got their hands around what is needed to run one project well. “We realized that we were working on many different projects that tapped the same financial resources—they were competing for funding and people. Even though managers didn't know what portfolio management was, they knew there was a need for something.”
Five years later, the portfolio framework was in place. At the front end is project selection, or screening. Next, the management team prioritizes based on urgency. Third is actually managing the portfolio—adding, removing and rearranging projects. Once projects are complete, the team determines if the firm actually garnered the benefits it expected to find in the first place.
During screening and prioritization, management uses a project viability chart to score projects. As people prepare profiles or charters, they're expected to address strategic project objectives and critical business issues affecting a specific group within a target market. When looking at urgency and importance, the team examines potential return on investment as well as how risky the project may be to execute and deploy. Every project that comes in has the same sort of assessment.
Even though 3M has a suggested framework for prioritization, each market group has its own methods. Small inconsistencies in the way an organization practices portfolio management are not necessarily a bad thing—flexibility is needed. “[At 3M] the superstructure is there, and management can dive in as shallow or deeply as they want,” Storeygard says. “As long as we're all using the same framework, then we're all using portfolio management reasonably consistently.”
WITHOUT A BIG-PICTURE VIEW OF PROJECTS IN THE PIPELINE, PROJECT WORKERS MAY THINK GO/NO-GO DECISIONS ARE RANDOM.
Portfolio management in itself doesn't make go/no-go decisions; the product development team should make informed decisions based on facts at any point along the path. Portfolio management characterizes the best of the best, while the product development process weeds out the weak projects.
“If you look at product development models, there are some that have stood the test of time,” Edgett says. “What we find with portfolio management is you have to know what you need. There is no cookie-cutter approach, even though you can learn from best practices.” He advocates an effective gating process, such as a Stage-Gate framework for driving projects from idea to launch (See sidebar, “Opening the Stage-Gate”). Portfolio management typically takes place at the second or third “gate,” when the team is expected to determine how resources should be allocated.
To keep emotion out of the decision-making process, projects in a portfolio must be judged objectively. Without a big-picture view of projects in the pipeline, project workers may think go/no-go decisions are random. “We'll all accept decisions that are good for the company, but we have to know why,” says Edgett. “You have problems in portfolios when decisions appear arbitrary and no justification is made. People know the qualification criteria and how their projects are scoring on the value chain. In addition, the innovation strategy is more clearly articulated because people know what is meant by growth.”
OPENING THE STAGE-GATE
In the Stage-Gate™ approach, new product development is divided into concurrent activities to ensure better decision-making and prioritization. This, in turn, aids portfolio management. The activities during a stage are parallel—not in sequence. In addition, stages are cross-functional, and each stage is preceded by a decision point, or gate, which serves as a quality-control checkpoint.
Senior managers from different functional areas serve as “gatekeepers.” Because there is a preset list of criteria, this team can't play favorites. During gate meetings, the group asks:
- Has the previous stage been executed in a quality fashion?
- Has the project team done its job well?
- Is the project attractive from an economic and business standpoint?
- Is the action plan sound?
Based on the answers, gatekeepers make go, kill, hold or recycle decisions.
SOURCE: ROBERT G. COOPER AND SCOTT J. EDGETT, PRODUCT DEVELOPMENT INSTITUTE INC., ANCASTER, ONT., CANADA.
Businesses use a number of methods to determine a project's value to the overall portfolio, including financial and strategic goals, bubble diagrams (which look at both strategy and financial indicators), scoring models and checklists. According to Research-Technology Management, a benchmarking study showed that companies that relied mostly on financial tools to prioritize projects yielded unbalanced portfolios and projects that aren't strategically oriented. The same study found that scoring models performed best for ranking projects based on value and balance. Cooper and Edgett detailed some of the scoring models used to rank project portfolios:
- Net present value (NPV), which requires project teams to determine their NPV as part of their business case, bases go/no-go decisions entirely on financials. However, projections are not always accurate. In addition, this prioritization type ignores strategic goals.
- Expected commercial value (ECV), based on market worth of a project portfolio, allows a team to examine budget constraints and risks and probabilities. While this method recognizes that a go/no-go decision is incremental, it depends on financial and quantitative data. Also, no thought is given to a balanced roster of projects.
- Productivity index is similar to ECV but works to maximize financial value for given resource constraints. In this model, the ECV is calculated as NPV that is adjusted for risks and probabilities.
Overall, Cooper recommends using more than one type of ranking system to gain a complete big-picture view. “Because most firms have economic goals, financial models such as EVA and NVP must be part of the project's evaluation,” he says. “But data integrity is a real problem—significant financial data errors occur, especially early in projects when the key go/kill decisions must be made. To prioritize projects within the portfolio, you can use financial methods such as sensitivity analysis and probabilistic methods, but don't bet the ranch on the basis of these financial calculations.”
Whatever the individual components, a portfolio management system must be, first, both easy-to-use and effective. “No one wants 100 charts when the same information can be shown in four,” Edgett says. In addition, it helps to have a solid project management methodology in place.
“Project management is an enabler of portfolio management, so an organization cannot do well at portfolio management until it has some basic capability in project management,” says Githens. “Organizations cannot improve their project management until they can focus scarce resources away from tasks and onto projects, and they cannot create sustainable portfolio management capability until they have at least a mediocre level of project management capability.”
Good project management practices lead to good execution, which, in turn, leads to good information entering the portfolio. “If I need data or facts and figures, it comes from doing the right things at the right time down in the trenches,” says Edgett. “If at the ground floor they're not doing a good job, then I can't do a good job at the portfolio level. You can never underestimate the value of good project leaders—they're worth their weight in gold.” PM
Is your company's portfolio management system equipped to deal with rapidly changing market conditions? A sluggish economy, heavy corporate debt levels and falling energy prices have led some companies to reassess plans for power plants. A number of energy firms have cut back in recent months, and, in the wake of Houston, Texas, USA-based Enron's troubles, it's easy to see how one company's “splash” can be felt globally. In December 2001, Mirant Corp., Atlanta, Ga., USA, reported it would complete about 5,700 megawatts of power projects in North America, including the Caribbean, but will either defer or cancel 8,300 megawatts. Calpine Corp., San Jose, Calif., USA, also announced it would reevaluate three projects due to less than expected earnings. And in January 2002, PPL Corp., headquartered in Allentown, Pa., USA, cancelled plans for six new power plants in Pennsylvania and Washington.
In fact, Platts Energy Insight, a Colorado, USA-based unit of McGraw-Hill Cos., reports that 91,139 megawatts of generating plants had been cancelled or delayed by the end of 2001 out of a total announced portfolio of 503,780 megawatts, according to The Wall Street Journal online. Further, about 18 percent of announced power projects are defunct, double the figure from last year.
Although companies are scaling back, the world economy could actually enable healthier growth. “To me, this is a wonderful time for electric utilities,” says Rick Bilbro of Innova Group, which primarily works with engineering and electric utility firms. “This is war. This is a time for creative destruction, a time to get rid of projects that are struggling.”
PM NETWORK | APRIL 2002 | www.pmi.org
APRIL 2002 | PM NETWORK