Project portfolio management techniques

1. Introduction

According to Gartner research, out of $1 to $2 trillion invested in IT deployments in North America annually 30% or $300 to $600 billion is wasted. A lot of the waste can be attributed to not “doing the right work”. Project and Portfolio Management (PPM) approach highlights which initiatives should be approved based on strategy alignment and not because their sponsors shout the loudest. PPM is a mechanism for allocating resources optimally toward an organisation's objectives, factoring in risk, desired returns, scarce resources and the inter-relationships between the investments.

“An improving climate for IT investments and the ongoing need for IT/business alignment continue to drive interest in IT Project and Portfolio Management (PPM), including heightened interest in application support for IT PPM. This is shown in Gartner's Executive Program survey, which found that three of CIOs' 10 priorities are tied to PPM” according to Matt Light, Research Director at Gartner, Inc.

This paper covers definitions of some of the commonly used terms in PPM context, discussion on PPM standard from PMI, PPM tools landscape and case study on two organisations - Tourism Australia and Fujitsu.

2. Definitions

Portfolio

A collection of projects or programs or other work grouped together to facilitate effective management of work to meet strategic business objectives. The projects or programs of the portfolio may not necessarily be interdependent or directly related.

Project Portfolio Management

Project Portfolio Management is the centralised management of one or more portfolios, and involves identifying, prioritising, authorising, managing, and controlling projects, programs, and other related work, to achieve specific strategic business objectives.

Capacity

The resources (human resources, financial, physical assets) an organisation puts at the disposal of portfolio management to select, fund, and execute its components.

Categorisation

The process of grouping potential components into categories to facilitate further decision-making.

Category

A predetermined key description used to group potential and authorised components to facilitate further decision-making. Categories usually link their components with a common set of strategic goals.

Component (Portfolio)

An activity or set of activities managed using the project portfolio management process, namely a business case, a project, a program, a portfolio, or other work that fits into the “component definition” used by an organisation.

Evaluation

The process of scoring specific potential components using key indicators and their related weighted criteria for comparison purpose for further decision-making.

Key Descriptors

A set of components used to categorise and document a component for further decision-making. It might include among others, specifics about scope, schedule, budget, actual performance (using key performance indicators), class, category, evaluation scores, priority, and approval status.

Key Performance Indicators

A set of parameters that permits measurement and reporting on the portfolio or one of its components performance for further decision-making.

Portfolio Balancing

The process of arranging the prioritised components into a component mix that has the greater potential to collectively support and achieve strategic goals.

Portfolio Management Life cycle

A life cycle of processes used to collect, identify, categorize, evaluate, select, prioritize, balance, authorize, and review components within the project portfolio to ensure that they are performing compared to the key indicators and the strategic plan.

Prioritisation

The process of ranking the selected components based on their evaluation scored and other senior management considerations.

SubPortfolio

A collection of components which includes programs, projects, portfolios, and other work grouped together within a larger portfolio.

Selection

The process of choosing the potential components based on their evaluation scores and including them in the portfolio for prioritisation.

Scoring Model

A set of weighted criteria and corresponding key indicators to measure and score specific (and potential) components for comparison and prioritisation purposes.

3. Project Portfolio Management Standard

The standard describes generally accepted processes associated with portfolio management. As in December 2005, the standard has been submitted to PMI for issue to the PMI Consensus Body for final review and acceptance. The standard is targeted for publication by spring 2006.

The portfolio management is an ongoing business process targeted at “C” level with a strategic focus. It helps an organisation to ensure that the decisions are aligned to the strategy. If a portfolio component is not aligned to its business strategy, an organisation can question as to why the work is being undertaken.

A portfolio can consist of several sub-portfolios, programs and projects (See Exhibit 1).

Domain Relationships

Exhibit 1 – Domain Relationships

The portfolio management is a three-phase continuous lifecycle (See Exhibit 2). The organisation must define the period which can be quarterly to annual depending upon the size and complexity of the business. A change in strategy may also trigger a review of the entire portfolio.

Three-Phase Continuous Portfolio Lifecycle

Exhibit 2 – Three-Phase Continuous Portfolio Lifecycle

The portfolio management consists of nine major processes and two process groups (See Exhibit 3). The portfolio management team is responsible for determining what processes are appropriate and degree of rigour applied to a portfolio.

Portfolio Management Processes

Exhibit 3 – Portfolio Management Processes

3.1 Aligning Process Group

The Aligning Process Group includes what will be managed in the portfolio, in which categories, and how components will be evaluated and chosen (or not chosen) for inclusion. This group ensures that there is current information regarding strategic goals that the portfolio is to support, as well as current operational rules for evaluating components and managing the portfolio. In addition, this group establishes a structured, agreed-upon method for introducing and classifying candidate components.

The Aligning Process Group is most active at the time the organisation refreshes its strategic goals and lays out near-term budgets and plans for the organisation. Traditionally, this is at the annual budgeting time, although some organisations have refresh cycles that are more frequent. Such occurrences may be scheduled quarterly, for example, or happen because of changes in the business climate. The seven processes within this group are defined below:

3.1.1 Identification

The purpose of this process is to create an up-to-date list, with sufficient information, of ongoing and new components that will be managed through portfolio management.

3.1.2 Categorisation

The purpose of this process is to group identified components into relevant business groups to which a common set of decision filters and criteria can be applied for evaluation, selection, prioritisation, and balancing. The categories are defined on the basis of the strategic plan. The components in a given group have a common goal and can be measured on the same basis, regardless of their origin in the organisation. The categorisation of the components allows the organisation to eventually balance its investment and its risks between all strategic categories and strategic goals.

3.1.3 Evaluation

This is the process necessary for gathering all pertinent information to evaluate components, with the purpose of comparing them to facilitate the selection process. Information is gathered and summarised for each component of the portfolio. The information can be qualitative or quantitative, and comes from a variety of sources across the organisation. The data collection is iterated several times, until reaching the required level of accuracy. Graphs, charts, documents, and recommendations are produced to support the selection process.

3.1.4 Selection

This is the process necessary to produce a short list of components based on the evaluation process recommendations and the organisation resource capacities. The evaluation determines the value of each component, and the organisation resource capacities determine the number of components that the organisation can eventually authorise. Organisational resources may include internal or external human resources, financial resources, equipment, and other assets. This process will produce a list of components that represent the best value for the organisation based on the available capacities.

3.1.5 Prioritisation

The purpose of this process is to rank components within each strategic or funding category (e.g., innovation, cost savings, growth, maintenance, and operations), investment time frame (e.g., short, medium, and long-term), risk versus return profile, and organisational focus (e.g., customer, supplier, and internal) according to established criteria. This step ranks the components to support subsequent analysis required to validate and balance the portfolio.

3.1.6 Portfolio Balancing

The purpose of this process is to include the portfolio component mix with the greatest potential, to collectively support the organisation's strategic initiatives and achieve strategic objectives. Portfolio balancing supports the primary benefits of portfolio management—the ability to plan and allocate resources (i.e., financial, physical assets, and human resources) according to strategic direction, and the ability to maximise portfolio return within the organisation's predefined desired risk profile.

3.1.7 Authorisation

The purpose of this process is to formally communicate portfolio-balancing decisions, and formally allocate financial and human resources required to either developing business cases or executing selected components.

3.2 Monitoring and Controlling Process Group

The Monitoring and Controlling Process Group consists of reviewing performance indicators periodically for alignment with strategic objectives. This group involves the activities necessary to ensure that the portfolio as a whole is performing to predefined metrics determined by the organisation. These metrics, such as total return on investment or net present value thresholds, may be monitored by category and aggregate performance. In some instances, individual components of the portfolio may be tracked. The two processes within this group are defined below:

3.2.1 Portfolio Periodic Reporting & Review

The purpose of this process is to gather performance indicators, provide periodic reporting on them, and review the portfolio at an appropriate predetermined frequency, to ensure both alignment with the business strategy and effective resource utilisation. The review cycle examines all components and is executed on a timeline that is specified by the organisation. Each cycle may contain several reviews with a different focus and depth of analysis applied in each.

Ultimately, the purpose of the reviews is to ensure that the portfolio contains only components that support achievement of the strategic goals. To ensure this, components must be periodically added, realigned, or extracted, based on their performance and ongoing alignment with the defined strategy, in order to ensure effective management of the portfolio.

3.2.2 Strategic Change

The purpose of this process is to enable the portfolio management process to respond to changes in strategy. Small changes to the strategic plan often do not require changes to the portfolio. However, significant strategy changes often result in a new strategic direction, thereby impacting the portfolio. A change in strategic direction impacts component categorisation, which requires the portfolio to be rebalanced.

4. PPM Tools Landscape

The Project Portfolio Management tools have matured and similar functionality is now available across several tools. For example, Portfolio Management capability which was offered by only a few vendors is becoming a standard in Enterprise Project Management tools marking a shift in Gartner's magic quadrant to be called Project and Portfolio Management in 2005 (See Exhibit 4). The market has rationalised with smaller niche players being bought by bigger players.

The Leaders quadrant is occupied either by niche players such as Niku (recently bought by Computer Associates), Primavera or PlanView or vendors who have acquired one such as IBM (Systemcorp), Mercury (Kintana) or Compuware (Changepoint). The ERP vendors such as SAP (xRPM) and Oracle (Peoplesoft) have added portfolio management capability to their project management suite and appear in the Challenger quadrant. Gartner's prediction is that by 2006 one and by 2007 at least two more will merge or be acquired.

Gartner's Magic Quadrant

Exhibit 4 – Gartner's Magic Quadrant

5. Case Study

Two organisations Tourism Australia and Fujitsu Australia have benefited from implementing Portfolio Management. The steps include conducting an inventory of projects, defining portfolios, defining criteria for evaluation, scoring all the projects against the evaluation criteria and allow management to prioritise projects for execution.

5.1 About Tourism Australia

Tourism Australia is the Federal Government statutory authority responsible for international and domestic tourism marketing as well as the delivery of research and forecasts for the sector. With a small staff of 270 people, it aims to become best National Tourism Organisation in the world by using technology effectively to deliver marketing strategies.

It took over two years to implement a project management methodology based on PMBOK integrated with Rational Unified Process (RUP) and IT Infrastructure Library (ITIL). The Portfolio Management was used primarily to assist in budgeting process using equivalent of Identification, Categorisation, Evaluation, Selection and Prioritisation processes of the current standard.

5.1.1 Objective

To assist Tourism Australia in preparing technology capital budget for 2005.

5.1.2 Process
  • img   Identification of four portfolios – Technology Portfolio (IT Infrastructure related), Business Central (CRM related), Finance and Human Resources
  • img   Identification and allocation of various requests to the four Portfolios
  • img   Conduct Risk Assessment for each request using following categories:
    • Schedule Risk
    • Organisation Risk
    • Technological Risk
    • Not doing Project Risk
    • Project Support Costs
  • img   Conduct Benefits Assessment for each request using following categories:
    • Potential Users
    • Cross Functional Improvement
    • Corporate Culture / Efficiency
    • Improving Customer Service
    • Benefit (over 5 years) / Cost Ratio (over 5 years)
  • img   Plot the Risk and Benefit scores on the Risk Benefit Graph
  • img   Budget the high benefit and low risk requests for execution in 2005
img

5.2 About Fujitsu

Fujitsu is a leading provider of customer-focused information technology and communications solutions for the global marketplace. With the revenues of 4,762 billion and 151,000 employees, Fujitsu is the world's third-largest IT Services provider and Japan's market leader. Pace-setting device technologies, highly reliable computing and communications products, and a worldwide corps of systems and services experts uniquely position Fujitsu to deliver comprehensive solutions that open up infinite possibilities for its customers' success.

Fujitsu has a mature project management and value management methodology – Macroscope which appears in Leaders quadrant in Gartners Methodware Magic Quadrant. Macroscope is one of the world's richest sets of integrated, standardised processes, supported by techniques and tools that help organisations manage change.

5.2.1 Objective

To assist Fujitsu Australia in preparing technology capital budget for 2006.

5.2.2 Process

The Portfolio Management process adapted was similar to the ones described at Tourism Australia. Considerable work is being undertaken currently in this area for internal Projects Office.

5.3 Lessons Learnt

img   Aim the processes at “C” level

img   Management acceptance for Portfolio Management processes is not immediate – allow time for acceptance and maturity and explain the benefits and assumptions to Management

img   Use the outcome as a guidance only – there are “other” factors which will also come into decision making process

img   Not all organisations are ready for Portfolio Management – if the Project Management processes are immature, the chances of Portfolio Management succeeding is low.

6. Conclusion

With the release of standard and associated publicity, the profile for Portfolio Management will increase. Whereas Project Management is tactical, the Portfolio Management is strategic and requires “C” level participation to make it work. PPM requires an organisation to be sufficiently mature so that Project Management Information Systems can provide data required for decision making. As per META Group, a Project Office is also essential in order to have an organisational wide perspective and to balance the often competing needs of departments.

For an organisational to be successful, PPM is not optional and this is confirmed by research from Cooper, Edgett, and Klienschmidt that, for R&D portfolios, the 20 percent of top-performing companies have an explicit, established method of project portfolio management, consistently applied across the organisation.

7. References

Cabanis-Brewin, Jeanette. (2005) Project Portfolio Management is your friend. Retrieved on 14/11/2005 from http://www.developer.com/mgmt/article.php/3099031

Dye, Lowell D and Pennypacker, James S. (1999) Project Portfolio Management – Selecting and Prioritising Projects for Competitive Advantage. West Chester, PA: Centre for Business Practices.

Harder, Paul. Portfolio Portfolio Management Starter Kit Briefing. Retrieved on 31/08/2004 from http://www.gantthead.com/article.cfm?ID=145549.

Light, Matt and Stang, Daniel B. (2005) Magic Quadrant for IT Project and Portfolio Management. Gartner Core Research Note G00129208.

McGaughy, Cameron. (2005) Proof in the Portfolio. Retrieved on 14/11/2005 from http://www.gantthead.com/article.cfm?ID=226860.

Project Management Institute. (2005) Portfolio Management Standard (Exposure Draft). Newtown Square, PA: Project Management Institute.

Project Management Institute. (2004) A Guide to the Project Management Body of Knowledge – Third Edition (PMBOK® Guide). Newtown Square, PA: Project Management Institute.

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 or any listed author.

© 2005, Sandeep Mathur
Originally published as a part of 2006 PMI Global Congress Proceedings – Bangkok, Thailand

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