All things considered
Marcin ŻMigrodzki, PhD, PMP, PgMP, EuroBank, Wroctaw, Poland.
It's time for executives
to break out of the ROI
stranglehold and look
beyond the bottom line
when picking projects.
by Sandra A. Swanson // photo by Bartek Durczewski
With most of the world economy on the rebound, many organizations are finally ramping up their project lineups—dusting off some long-dormant projects and checking out some promising new ones.
But the recovery remains tenuous for many companies, and executives face some tough choices as they reboot their project portfolios. What projects should be selected? How should they determine a project's rank within the company's portfolio? And how can they ensure project prioritization aligns with the organization's strategic objectives?
“The economic environment, recession or not, plays an important role toward the psychology of executives when selecting projects to include in the organization's project portfolio,” says Konstantinos Kirytopoulos, PhD, PMP, assistant professor in the financial and management engineering department at the University of the Aegean, Chios, Greece.
Executives feel there's a lot more at stake when deciding which projects to greenlight, says Dr. Kirytopolous, who is also a project and risk-management consultant. They fear their choices may result in job losses (including their own) or even crash the entire organization. Given the circumstances, executives seem to be focusing on low-risk projects aimed solely at sustaining the business.
What projects should be selected? How should executives determine a project's rank within the company's portfolio? And how can they ensure project prioritization aligns with the organization's strategic objectives?
the resource shuffle
Corporate strategies will inevitably shift from year to year, but retooling the project portfolio every time that happens can cause chaos.
“One of the biggest problems that companies encounter when prioritizing projects is in shuffling the active project priorities too frequently, which results in resource churn,” says Leslie Schultz, PMP, PgMP, Bridgepoint Education, San Diego, California, USA.
Problems can also arise when there's a lack of appreciation for how project rankings affect scheduling of resources. “Typically, organizations use the list of project priorities to allocate resources first to the highest-priority project and then work down the priority list,” Ms. Schultz says.
But certain lower-priority projects may get resourced before higher-ranked ones, based on the availability of resources with the required skill set.
This can cause stakeholder confusion and frustration, especially if the portfolio reporting does not adequately explain resourcing issues. “Careful capacity planning can help identify particular skill sets in demand to ensure appropriate staffing and cross-training to properly resource the prioritized projects,” she says.
Even with so much riding on their decisions, executives often fail to assess projects in a consistent, disciplined fashion. In most cases the process involves, at best, a brainstorming meeting. Yet while those attending may offer valuable experience, they also bring personal beliefs, aspirations or even strategies that aren't always to the benefit of the organization, he adds.
Instead, organizations should establish a documented assessment process across the enterprise. Having a standardized methodology helps ensure effective stewardship of resources and alignment with strategic goals.
It can also eliminate some of the bruising politics that come with people lobbying for pet projects.
“A consistent qualification process helps departments feel that projects are equitably measured for overall value to the organization. That can decrease some of the project jockeying that can occur, since everyone has to follow the same process,” says Leslie Schultz, PMP, PgMP, director of portfolio management at Bridgepoint Education, an education services holding company in San Diego, California, USA.
TAKE OFF THE BLINDERS
When deciding on the criteria for picking projects, it's natural to zero in on ROI—but that focus is myopic.
“It may cause an organization to overlook the value of projects in areas such as humans resources, customer satisfaction and reputation,” says Marcin Żmigrodzki, PhD, PMP, PgMP, projects and processes department director at EuroBank in Wrocław, Poland. “If an organization does not have a strategy, there is no easy way to evaluate such projects.”
Companies must also face the brutal reality that financial parameters can simply be wrong, notes Dr. Żmigrodzki, who's also head of the project management master's program at Wyzsza Szkola Bankowa, a banking college in Wrocław.
Decision-makers see ROI as having clear value—as in, “We will earn an additional €300,000 in the first year.” But they often don't examine the data with a critical eye. “Reliability measured as ratio of forecasted value to real value can be from 1 percent to 10,000 percent,” he says. “We have no means to assess the reliability of such figures.”
Challenging hard numbers is a tough sell these days, but project decisions can't always be strictly based on the bottom line.
“ROI is, in many instances, too narrow a criterion,” says R. Max Wide-man, PMI Fellow, a Vancouver, British Columbia, Canada-based engineer and project management consultant.
The real question is: What benefits will the organization realize from this project?
“Benefits realization is a much broader concept and encompasses not only financial gain but all those intangibles such as improved working conditions, ease of use, work force satisfaction and improvement in corporate morale generally,” says Mr. Wideman, author of A Management Framework for Project, Program and Portfolio Integration [Trafford, 2004].
We recognized that sticking to a single fact—RO I—was not helping if you have to make your decision based on limited resources.
—Ulrich Aigner, Austrian Airlines, Vienna, Austria
Austrian Airlines focused solely on ROI in prioritizing projects until a couple of years ago, when it began also considering how projects aligned with top strategic issues, says Ulrich Aigner, director of corporate project management at the Vienna, Austria-based company.
“We recognized that sticking to a single fact—ROI—was not helping if you have to make your decision based on limited resources,” he says.
TIP To look beyond ROI, companies may want to consider multi-criteria decision analysis, suggests Konstantinos kirytopoulos, phD, pmp, University of the Aegean, Chios, Greece. Organizations should follow four basic steps:
- alternatives definition (deciding which projects are options)
- criteria definition (considering such factors as time, cost, quality, human resources, sustainability, safety and ethics)
- comparisons (weighing the alternatives against the selected criteria)
- computation of the projects’ ranking (deciding which project you prefer more)
Using a combination of the two measurements, the company now ranks projects into one of four groups, ranging from a few given top status down to those of standard importance.
Projects that cannot prove ROI or strategic relevance must be driven by a need to:
- Meet regulatory standards, such as air-quality requirements
- Improve quality, such as having an onboard chef in business class
- Ensure business continuity, such as implementing a new software because the existing version is no longer sold or supported
RANK AND FILE
Many organizations don't give enough weight to strategic alignment, intangible benefits or even common sense when picking projects, Ms. Schultz says. “Some projects are foundational in nature and do not have significant ROI for that project itself but are required to support future, higher-ROI projects.”
At Bridgepoint Education, a portfolio manager first works with the business partner to gather high level of information about a project request and to complete a scorecard to help ensure the proposed project is in line with several strategic goals. Those might include enhancing the students’ experience or increasing operational efficiency.
“This information is presented to our project governance committee to validate that the opportunity merits moving to the solutions assessment phase, where additional information about potential risks, options, costs and expected benefits are gathered for inclusion in the business case,” Ms. Schultz says.
The solutions assessment phase also identifies potential dependencies to other projects, synergistic opportunities to bundle projects together, and larger initiatives that require additional strategic planning.
Whatever the details, the project selection and prioritization process must be tailored to the company at hand.
“It is important that the level of formality and complexity of the process be scaled to the maturity of the organization,” Ms. Schultz says, “and that it fits the company's culture so that it is adopted in practice and not just a pretty diagram that no one uses.” PM
PM NETWORK FEBRUARY 2011 WWW.PMI.ORG