From the balanced scorecard to the project portfolio
Roberto Toledo Rodríguez, MBA, PMP,
Managing Director, Alpha Consultoria, Mexico D.F., Mexico
One of the main issues when selecting the projects to be executed as part of the organization's portfolio is if the project is aligned to the organization's strategic objectives. If this is not the case, there is a good chance the organization and its stakeholders will not get a proper return on their investment. This paper presents two tools that will help the strategic purposes to be fulfilled, to choose the right projects to be executed, and to ensure that they are properly aligned to the organization's strategic objectives.
Does the following dialogue sound familiar?
Carlos: With what resources?
James: That does not matter. That's a different problem; what matters is to be in the list.
Carlos: What is my project's net present value(NPV)?
James: I don't know, but it doesn't matter. We'll figure it out later, what matters is to be on the list.
Carlos: But, how does the project impact the set of projects?
James: I don't know. I'll see it later, what really matters now is to be on the list.
Carlos: How do we prioritize?
James: I don't know, but mine comes first.
James: Because it is mine, I hold seniority, and I am the boss!
It does not matter if the idea is good or not, if the project is aligned to the strategic objectives, if someone else's project would add more value to the organization—what counts is being on the list. The “list,” as it is called, is the organization's project portfolio. The project portfolio is defined as a collection of projects and/or programs and other related work, grouped to facilitate effective management of that work to meet strategic business objectives. The portfolio components (projects, programs, and other works) may not necessarily be interdependent or directly related, the issue they all have in common is the use of organizational resources, and the organization has to look for the best possible use of those resources. It should not be a matter of hierarchy.
Most organizations have plenty of great ideas on how to accomplish the strategic goals set by senior management; nevertheless, many of these ideas get stuck on endless feasibility analysis and not always the best projects are funded.
Portfolio Management (PPM)
Within the organizational context, PPM establishes the proper actions to accomplish strategic goals and objectives; it has direct inputs from the strategic planning process, and provides guidance for managing all authorized programs and projects, increasing their value and production capability. Project Management Institute (PMI)® establishes two Portfolio Management Process Groups for the execution: the Aligning Process Group and the Monitoring and Controlling Process Group. These are properly described in The Standard for Portfolio Management (PMI, 2008a).
PPM establishes a dynamic balance between the processes of component prioritization, alignment and balance, with a constant input from the main stakeholders, and an involvement of risk assessment and response planning and execution. Constant communication with stakeholders is of paramount importance, because changes have to be fully understood in how they affect the whole portfolio; a single small change in one component may cause a gigantic change in other component if not properly evaluated and considered. PPM considers the effects of resource distribution as its main difference from program and project management, as well the importance of the strategic alignment, where the BSC provides the vital information for adequate performing of this process. Finally, PPM is most concerned with selecting the right work to be performed as opposed to performing the work right for every component (Soodek, 2008). Differences and coincidences among the three types of practices are shown in Exhibit 1, which is a modification of Table 1-1 in the Portfolio Standard (PMI, 2008a, p. 6; PMI, 2008b, p. 9).
Strategic planning is the process whereby the organization's vision and mission, plus the approach that will be adopted to achieving them during a certain period of time, are established by upper management.
This process continues with the establishment of strategic objectives and goals, which are the intended achievements of the organization in terms of business results, interpreted from various perspectives—financial, customer, infrastructures, products and services, or by cultural outcomes. The differences between both of them are mostly from the fact that objectives are only qualitatively evaluated, whereas goals are quantitatively measured; goals provide the measure by which the objectives are reached or not. All this information is set into a strategic document termed “Strategic Plan.”
Within the Strategic Plan, the mission gives meaning to the work of the organization's members; the vision depicts a desired position and strategic intent for the organization to be in the short, medium, and long term. It will also be of value if the organization's strengths, weaknesses, opportunities, and threats are shown, and a brief analysis shows how they can benefit or hamper the strategic objectives previously established. Other important features in this analysis are the resources available or required for the Strategic Plan to be fulfilled, the people linked to the proper and correct execution of these initiatives, and the values upon which the decision-making process is made so the people, the expectations, and the actions to be executed are all congruent with each other.
In order to place all the initiatives proposed during the Strategic Planning process, there exists a widely used tool that facilitates this process: The Balanced Scorecard (BSC). This is a strategic performance management tool, a sort of a semi-standard structured report, supported by proven design methods and automation tools, which can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions (The Balanced Scorecard, 2011).
As a model of performance, the BSC is effective in that “it articulates the links between leading inputs (human and physical), processes, and lagging outcomes and focuses on the importance of managing these components to achieve the organization's strategic priorities” (Abernethy, Horne, Lillis, Malina, & Selto, 2005).
What matters most from the perspective of project management is that the BSC provides a record of the strategic initiatives that are the strategic projects to be, and from there it is possible to start analyzing, evaluating, prioritizing, planning, and depending on the case, executing the projects that will make the mission and vision of the organization something tangible (Kaplan & Norton, 2008).
Exhibit 2 shows how this “strategic leap” happens. Processes and other sources affect the organization's mission and vision; they provide guidance in deciding the types of initiatives (strategic initiatives) that will likely succeed in accomplishing that mission and that vision for the organization. Those initiatives are translated into projects and programs, most likely embedded into a project portfolio where proper management for effective performance and results delivery is performed (Kaplan & Norton, 2000; Kaplan & Norton, 2008; PMI, 2008a, p. 8; PMI, 2008b, p. 10).
From its inception in the early 1990s, the BSC has very much improved (Kaplan & Norton, 1992; Kaplan & Norton, 1996). Today, its method of design is based on having a set of strategic objectives plotted on a strategic linkage model (the so-called “strategy map”) from which measures are selected. The strategic objectives are distributed across four measurement perspectives to form a visual presentation of strategy and measurements—financial, internal processes, customer, and learning and growth (Kaplan & Norton, 1993). In some instances, these measurement perspectives may vary in order to fit the organizational needs.
Upper management prioritizes and selects a few strategic objectives within each of the perspectives, defines the cause–effect chain among the selected objectives linking them, which provides the information needed to derive proper and justified measurements that are rather easy to work through by project managers.
The road an organization should follow to implement the BSC is not linear, but rather cyclic. Starting usually with a certain year's planning effort and refined through the following years. The first steps on this process should focus on developing and defining the strategic vision and mission of the organization. Followed immediately by the major strategic objectives needed to accomplish the desired vision and mission. It may then continue to the third step—the definitions of goals and performance indicators, whose outcomes, the key performance indicators (performance measurements), and the strategic goals, may go either onto the fourth step, the Initiative definition, or iterate with the previous step, the strategic objectives definition (Maisel, 1992; The Balanced Scorecard, 2011).
It is then when the real problem arises; the results of this process, the strategic initiatives, are not necessarily properly identified with the strategic objectives nor are they with those people that would eventually execute them. It is not clear then how those initiatives are translated; in other words, “landed” into projects, programs, and really form parts of the existing organizational project portfolio. However, a feature within this model is the fact that implementation starts from the very beginning; it should not be left until after the strategy is designed or the metrics are set. The portfolio is a dynamic entity that must never be static; its own dynamics is a sample of the organization's dynamics.
Bridging the Gap Between PPM and the BSC
As it has been shown, there has been a recurring problem with taking the strategic initiatives and translating them into a feasible endeavor; that is to say, a project that fulfills the expected objectives in the strategic initiative.
One situation that does not facilitate this process is the lack of communication that generally exists between upper management and project teams. It seems that both areas speak different languages and neither of them tries to bridge that gap; however, a good portfolio manager must have the proper tools to become the “bridge builder” to fulfill project and stakeholders expectations; one such tool is the strategic questionnaire.
The strategic questionnaire (SQ) is a tool that may be useful in each and every step toward defining the project portfolio content. Some of its characteristics are shown below:
- The easiest way to create alignment between the Strategic Plan and the Project Portfolio.
- Provides an objective selection mechanism using both objective and subjective criteria.
- Deals with difficult to evaluate subjects such as: Implementation complexity, Added value, Strategic consistency, Customer perspective, and Knowledge and growth.
One interesting feature of this questionnaire is that it comprises information from all levels: operational, tactical, and strategic; therefore, it has to be worked out by all three levels. The ideal situation would be that appropriate representatives of these levels involved in the project get together in a meeting and build the questionnaire; however, this is very unlikely, and alternative ways have to be found. The portfolio manager may choose a variation of the Nominal Group Technique, in which all parties receive the information necessary to issuing the questionnaire. The portfolio manager gathers the information from the different parties, makes a synthesis of the information gathered, and sends it back to the stakeholders involved, continuing the cycle until an adequate questionnaire, as judged by him or her and the PMO staff, is reached, which generally takes from two to three cycles.
A sample of a Strategic Questionnaire first mentioned by Toledo (2009) is shown in Exhibit 3. As observed in this case, two of the BSC dimensions are considered. A full questionnaire may also consider the internal business and the organizational capabilities perspectives.
If meaningful information regarding the portfolio project is required when the questionnaire is applied, portfolio components have to be divided into two groups: projects already running and those projects approved but not yet started. This is so, as the dynamics of these components are different; in one case, resources have already been allocated and probably some deliverables have already been finished, whereas in the other case these have not happened yet.
In the former case, the questionnaire would help redirect resources first to the components that are well aligned to the strategic objectives, and second, to those that provide the most value to the organization. In the latter case, the questionnaire would help prioritize those projects that from the beginning fulfill these two criteria, and avoid running the risk of starting a project not properly aligned to the strategic objectives and providing little value to the organization.
Developing an inventory of new projects is not a trivial process, especially in large organizations. A first step would be to determine the total portfolio budget for that fiscal period (typically a year) then it has to be compared with the organization's annual portfolio budget to determine which projects would be able to be started that year. Those projects already prioritized, and at the top of the list and within the budget, would be the ones to be executed.
These two steps are the basis for integrating a new portfolio. A second stage would involve seeking duplicated efforts; for example, if two areas and/or departments are running the same project, or if there are two equal projects under different names. These cases would imply adjustments that may be carried out expeditiously or rather slowly, postponing these components until the following budget.
When prioritizing or categorizing components, the criteria followed have to be the same in all cases, all components have to be measures with the same rule in order to fit all projects within the same framework. Some examples of these criteria would be: Impact on Business Processes, Technical Feasibility, Maturity of Solution, Resource Estimation, Impact on Constraints, Organizational Growth, Creation of Synergies, and Strategic Alignment (Kaplan & Norton, 2008).
The strategic questionnaire may be oriented as well to fit these criteria (Toledo, 2009). The portfolio manager would select the option that best qualifies in the questionnaire, according to these criteria and may provide:
- The solution recommended as a result of the analysis
- Justification to the reasons whereby the solution recommended is the best compared with other solutions
- A recommendation to the committee who will finally take the decision and accept it, reject it, leave it on stand-by, or require more information on the proposed solution.
A Case Example
A strategic questionnaire was applied to an international market research company, with a large project portfolio for the Mexican, Central America, and Caribbean subsidiaries. The organization has approximately 4,000 employees in the subsidiary and is a dominant player in its own market niche. Its main strategic objectives are: consolidation of operations, automation and optimization of internal processes for cost reduction (IT), product portfolio growth (new services), and an increase in the reported quality of client satisfaction (Toledo, 2009).
The criteria selected for developing the strategic questionnaire were based on: implementation complexity of components to be executed and added value of components to be executed. Exhibit 4 shows the specific Strategic Questionnaire developed for such a case.
The results of this questionnaire, which was applied to the new strategic initiatives defined by the company, are shown in Exhibit 5, and then plotted in an Investment Map (Exhibit 6), providing a graphic description of the components of the project portfolio, in which a combination of complexity, added value, and project budget (size of the bubble) would yield the appropriate elements for an aligned component selection. The investment map provides the information necessary for the decision-making process. Nevertheless, it has to be considered that a final decision may include some of the stakeholders’ bias and/or environmental factors not necessarily involved during this decision-making process. However, the information presented in the graphic mode grants a well-founded justification for the decision that upper management and the PMO have to take regarding the prioritization of the project portfolio (Toledo, 2009).
Once the results from the questionnaire and the auxiliary tools have been used, the component prioritization may be carried out. A list of recommendations follows to properly frame this process:
- Make a list of all official company projects.
- Make an organization-wide information-sharing campaign.
- Seek balance between goal accomplishment and available resources (more with less).
- In organizations where resources are limited, always focus the most resources on the main strategic objectives.
- This new portfolio is by no means static!
- Always use the same process for reviewing the portfolio.
In some cases, certain components may be confidential; therefore, some other criteria may apply to these cases. If, as expected, resources are limited, think of the Pareto Rule, and apply the budget to those projects that may yield larger and strategically aligned returns.
The Portfolio Monitoring and Control processes must be established once they have been authorized and execution begins. As previously indicated, the portfolio component mixture is not static; if by any means a component falls off the strategic alignment it ought to be removed from the portfolio. A periodic analysis of the Project Portfolio composition is necessary, at least annually or preferably quarterly, to decide which projects should remain, which projects are not to be included, and which ones are to be removed. Senior management is responsible for making adjustments, but it has to have accurate and reliable information from the Portfolio Manager and the PMO and they have to be based on benefit realization and the changes made to the Strategic Plan. To support this analysis, a periodic analysis of the components (projects and programs) has to be performed, be it quarterly at least, but preferably monthly or even weekly. The main points to consider are basically: scope, time, and cost. The PMO and program and project managers are responsible for making the required adjustments. This is also a key argument regarding the importance of a PMO, because it is a vital link for the information going from the operational to the strategic level (Gignac, 2010).
The process of reporting on the portfolio components as a whole must be done using key performance indicators and reviewing the performance of the component mix by comparing actual with anticipated evolution, value, risk level, spending, and strategic alignment. Software tools are available for this purpose (Arce & Bitran, 2009).
Risk Portfolio Management
Risk management is considered a key area in the development of a project portfolio. In its 2008 edition of The Standard for Portfolio Management, PMI seeks to establish the importance of managing risks at the strategic level as a key success factor for portfolio managing organizations. Although it is not the purpose of this paper to analyze in detail the effect of risk management at the portfolio level, a list of recommendations on how risk must be dealt with at are strategic level follows:
- Risk management ought to be included in the portfolio component analysis.
- Risk analysis is made on each one of the components at the project level.
- Risks that are common to several components are taken to the portfolio level.
- Risks that arise from the impact of components on strategic objectives are taken to the portfolio level.
- The portfolio manager must actively interact with the main stakeholders and program and project managers to deal with portfolio risks.
Strategic planning is of paramount importance today and cannot be in any way be disconnected from the tactical and operational planning phases. All of the processes must be aligned. In order to facilitate such a process, it is convenient to establish simple mechanisms for developing and joining the Strategic Planning and the Project Portfolio Management processes in a more efficient way.
Using simple tools such as the ones proposed, the Strategic Questionnaire and the Investment Map, may facilitate this process, as they require the participation of the three key organizational levels: strategic, tactical, and operational.
These tools will also help organizations to know at all times where their resources are being invested, and the likelihood of getting a high ROI on the projects performed.
Another key factor is the communication transfer, which does not necessarily mean having a new department, but it does mean assigning this responsibility to someone, preferably at the portfolio management or PMO level.
The method proposed here allows those ideas to flow into initiatives and finally into projects, adequately aligned to the strategic objectives, which will complete the virtuous cycle (strategic planning – tactical deployment – operational/project execution – overall feedback), and make more feasible for an organization to reach its strategic goals through the execution of a well-planned and well-designed collection of projects.
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© 2011, Roberto Toledo
Originally published as part of 2011 North America Congress Proceedings – Dallas/Ft. Worth, TX