Building and managing a portfolio using PMI® standard for portfolio management and IBM Rational Portfolio Manager

Abstract

On May 8, 2006 at the PMI Global Congress 2006—EMEA in Madrid, Spain, the Project Management Institute (PMI®) released The Standard for Portfolio Management, which describes the processes applicable to portfolio management. This Standard provides a guide for portfolio managers to oversee portfolios, group them for the most effective management and ensure alignment with strategic goals and objectives of the organization. This paper will provide an overview of The Standard for Portfolio Management, and examine how it could be implemented in a real-life scenario and environment. Additionally, the paper will illustrate how the PMI Standard for Portfolio Management can be used with IBM's Rational Portfolio Manager (RPM), presenting a perfect Binomial in portfolio management, which allows executive management and board of directors to have transparent information on all enterprise investments made via projects and programs. Such transparent information is necessary to comply with regulatory and legislative corporate governance mandates, which are now driving businesses to adopt new rules and procedures in connection with internal controls, financial reporting, and auditing processes.

About Portfolio Management

Imagine this: a local toy manufacturing company has the vision to transform itself from a domestic manufacturer to a regional leader in Southeast Asia and China for soft toys and electronic games. To achieve this vision, the company's mission is to design and manufacture soft toys and electronic games that offer the best value for money in Asia, with the highest quality standards and the lowest price possible.

As part of its business strategies, the company runs several projects and programs, for example, “Implementing an ERP System”, “Setting Up a Manufacturing Plant in Guangzhou”, “Establishing Two Mega Retail Stalls, one in Beijing and one in Shanghai”, and “Creating a Network of Thirteen Representative Offices across Southeast Asia”. This is a good example of a portfolio, whereby you have a collection of projects or programs and other works that are grouped together to facilitate effective management of that work to meet strategic business objectives. These projects or programs of the portfolio may not necessarily be interdependent or directly related (PMI, 2006, p. 78).

The above example shows only one portfolio. In real life, you can have multiple portfolios within the same company, spanning across different functions and departments, including Human Resource, Marketing, Research & Development, Operations, IT, Engineering, Business Development, and the list goes on. The critical success factor for senior management of companies is to manage the multiple portfolios properly and efficiently, by centralizing them and identifying, prioritizing, authorizing, managing and controlling such projects, programs, and other related work, to achieve the organization's strategic business objectives (PMI, 2006, p. 78).

Portfolio Management is applied in the banking industry, telecommunication sectors, airline industry and so on. Today, executive managements are using portfolio management to propel the growth of their organizations. Portfolio management is a management trend of today's business world, transcending across industries.

Overview of Portfolio Management Processes

PMI has developed The Standard for Portfolio Management with the primary purpose of describing generally accepted processes associated with portfolio management. This Standard can be applied to all types of organizations, including profit, non-profit, and government (PMI, 2006, p. 4).

Before we look into the portfolio management processes, it is important to point out the concept of “component”, which is defined and used across the Standard. According to PMI, a “component” is 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 organization (PMI, 2006, p. 77).

The PMI Standard for Portfolio Management talks about two process groups – Aligning Process Group and Monitoring and Controlling Process Group. (Exhibit 1)

The Aligning Process Group determines how components will be categorized, evaluated and selected for inclusion, and managed in the portfolio (PMI, 2006, p. 24). Within the Aligning Process Group, there are seven processes as follows:

  1. Identification – The process of documenting and assembling, for further decision-making, the inventory of ongoing and proposed new components as potential components for categorization (PMI, 2006, p. 77).
  2. Categorization – The process of grouping potential components into categories to facilitate further decision-making (PMI, 2006, p. 77).
  3. Evaluation – The process of scoring specific potential components using key indicators and their related weighted criteria for comparison purpose for further decision-making (PMI, 2006, p. 77).
  4. Selection – The process of deciding on the components to be put forward from evaluation to prioritization based on their evaluation scores (PMI, 2006, p. 78).
  5. Prioritization – The process of ranking the selected components based on their evaluation scores and other management considerations (PMI, 2006, p. 78).
  6. Portfolio Balancing – The process of organizing the prioritized components into a component mix that has the best potential to collectively support and achieve strategic goals (PMI, 2006, p. 78).
  7. Authorization – The process of approving, funding, and communicating the authorization for initiating work on a component included in the “balanced portfolio” (PMI, 2006, p. 78).

The Monitoring and Controlling Process Group reviews performance indicators periodically for alignment with strategic objectives (PMI, 2006, p. 24). Within the Monitoring and Controlling Process Group, there are two processes as follows:

  1. Portfolio Periodic Reporting and Review – The process of reporting on the portfolio components as a whole using key indicators and reviewing the performance of the component mix by comparing actual with anticipated evolution, value, risk level, spending, and strategic alignment (PMI, 2006, p. 78).
  2. Strategic Change – Any change in the strategic intentions and plans of the organization that can impact the contents of component definition, categories, filters, key indicators, and other decision-making parameters used for portfolio management (PMI, 2006, p. 78).
Portfolio Management Processes – High Level Illustration

Exhibit 1 – Portfolio Management Processes – High Level Illustration

Sharing of Practical Experience in Implementing
The Standard for Portfolio Management

Now we understand the portfolio management processes described in the earlier section. The question that we ask ourselves is: how do we actually apply and implement these processes in real life program and portfolio environments?

The author's experiences attest that the best way to implement The Standard for Portfolio Management in real life scenario is to have in place the following four key elements, which effectively complement and support the portfolio management processes (ALDION, 2006):

  1. Portfolio Strategic Matrix – The Portfolio Strategic Matrix is used to draw up an inventory of components that are linked to the objectives and strategies of the organization, in order to support its vision and mission. The Portfolio Strategic Matrix is important to the portfolio manager as it gives an at-a-glance overview of which component is aligned to the organization's strategies and objectives. The Portfolio Strategic Matrix supports the “Identification”, “Categorization”, “Evaluation”, “Selection”, “Prioritization” and “Authorization” processes of portfolio management.
  2. Portfolio Models – According to the author, a Portfolio Model is a theoretical construct that is used to evaluate components of a portfolio in order to rank the corresponding projects or programs and other work for evaluation and selection purposes. An organization can develop its own Portfolio Model to help classify its portfolio components into different categories, and the result of such categorization will help the organization decide which component under which category should be carried out or dropped when evaluating investment costs and strategic necessity. The Portfolio Model supports the “Categorization” process of portfolio management.
  3. Project Scorecard – The author defines Project Scorecard as an approach to project performance measurement, by means of a defined metrics of weighted questions and answers that accord a score used to evaluate and measure the success rate of a project. The Project Scorecard is a simple technique to use for scoring components. The key is in developing the right set of weighted questions and answers and according the right score to each question and answer to produce the right performance measurement metrics. The Project Scorecard clearly supports the “Evaluation”, “Selection” and “Prioritization” processes of portfolio management.
  4. Portfolio Governance Structure – The author advocates that a well-defined Portfolio Governance Structure must be in place before a portfolio can be developed and effectively managed. Adapting from the PMI Standard for Program Management, the definition of a Portfolio Governance Structure can be coined as the process of developing, communicating, implementing, monitoring, and assuring the policies, procedures, organizational structures and practices associated with a given portfolio. Essentially, the Portfolio Governance Structure is the backbone of the entire implementation of the portfolio management processes.

It is good to have gained the knowledge of the PMI portfolio management processes and the understanding of the author's experiences with the four implementation key elements. However, this is just the beginning in implementing portfolio management processes.

Often, portfolio managers get frustrated with managing loads of critical information about projects, programs and other works, including finances, scope, resources, documents, scorecards etc. Immense pressure and anxiety builds on when the executive management and board of directors demand for precise and real-time status of each portfolio component and the portfolio manager is unable to retrieve such information on demand. The board of directors who usually have little time and no patience with technical data, would certainly appreciate better to see clear and effective graphical presentation that speaks in terms of investment dollars and time, rather than a million words and technical jargons which they do not bother to understand.

Gone is the age where we manage multi-million dollar project portfolios in a manual and archaic fashion, using spreadsheets and simple scheduling tool. It is necessary to have the right technological platform to implement portfolio management. In this paper, we will examine the state-of-the-art portfolio management technology from IBM, called “Rational Portfolio Manager (RPM)”, which is a matured and robust technology used to support and implement portfolio management processes, as described in the PMI Standard for Portfolio Management.

What is IBM Rational Portfolio Manager (RPM)

IBM Rational Portfolio Manager (RPM) is a world class Enterprise Project Portfolio Management solution, used to automate projects, people and priorities across organizations. It helps to gain competitive advantage and optimize financial values of the projects. Companies can organize all projects into portfolios, and instantly track all project deliverables, budgets, tasks, changes, risks, defects and issues from one central location. It also helps in measuring project success, which is key to maintaining business value and bringing business intelligence to the organization.

The capabilities of the RPM not only sufficiently meet the organization's internal demands for project assessment and investment reporting, but it also provides the organization with a 360-degree view of the way business is being run, so as to comply with external governmental mandates, which require businesses to practice corporate governance, surveillance and also transparent accountability.

Mapping the PMI Standard for Portfolio Management with IBM Rational Portfolio Manager

This section illustrates the mapping of The Standard for Portfolio Management with IBM Rational Portfolio Manager:

Identification – As part of the Identification process, it is important to use the Portfolio Strategic Matrix to align the inventory of ongoing and proposed new components with the objectives and strategies of the organization. Once clearly defined, the inventory of ongoing and proposed new components is captured into RPM at the Work Management Area, which includes the Work Breakdown Structure Area and the Data Area, as shown in Exhibit 2. The Work Management Area provides overall picture of entire list of components and portfolios within RPM. Information such as opportunity description, project/program description, project/program deliverables, tasks, financial information, resource information, and documents corresponding to each individual component are captured at the Work Management Area.

Inventory List of Components within RPM

Exhibit 2 – Inventory List of Components within RPM

Categorization – RPM Investment Maps are the perfect mechanism to categorize components. It is easy to see clearly how the components are grouped into “buckets” of similarly defined categories, by having Portfolio Models configured as Investment Maps. Setting options are used to configure Investment Maps, where the horizontal and vertical axis are defined using the “Dimensions” and “Health Color Indicators”.

Evaluation, Selection and Prioritization – Project Scorecard is used to evaluate ongoing and proposed new components. In Exhibit 3, components are being evaluated in RPM using the Scorecard. Once evaluated, the different components will be valued with a specific score and presented in different color indicators. The score and color tagged to each component indicates the health of that component. The threshold settings for different colors can be pre-defined within RPM, for instance: Red color can be defined as a low score indicator, Amber color as a moderate score indicator and Green color as a high score indicator. Typically, a component that shows the highest score and color indicator is selected and ranked in priority for execution.

Scorecards

Exhibit 3 – Scorecards

Portfolio Balancing and Authorization – RPM allows senior executives to visualize and balance their portfolio via dashboards as shown in Exhibit 4. The “What-If” Analysis function in RPM allows senior executives to select a portfolio of projects and change each project's priority and remaining assignments’ start dates to assess the impact on the overall schedule, cost and resource utilization (IBM, 2005). This helps the senior executive to identify the component mix that has the best potential to collectively support and achieve the organization's strategies and objectives. Once the portfolio has been balanced, the senior executive can authorize the execution of the components.

“What-If” Analysis

Exhibit 4 – “What-If” Analysis

Portfolio Reporting and Review – RPM has more than 70 pre-configured reports. These reports can also be customized according to requirements. Reports can be generated for a project or a portfolio of projects as well as for resources. Some examples of the reports include: Portfolio Financials, Portfolio Cost, Scope Elements Financials, and Resource Utilization and Resource Supply Demand etc. (IBM, 2005).

Conclusion

In today's world of cannibalistic business competition, portfolio management can make the difference between success and failure of a business. Portfolio management is indeed a powerful competitive business weapon, which can be used by organizations to identify, prioritize, authorize, manage and control projects, programs and other related work, to achieve specific strategic business objectives.

Exhibit 5 is a graphical view of the expression consisting of the sum of the PMI Standard for Portfolio Management and the IBM Rational Portfolio Manager, which represents the perfect Binomial in portfolio management, supported and complemented by the practical experience of the author, in using Portfolio Strategic Matrix, Portfolio Models, Project Scorecard, and Portfolio Governance Structure.

The Binomial

Exhibit 5 – The Binomial

References

ALDION. (2006). Consulting Engagements. Asia Pacific: ALDION Consulting Pte Ltd

PMI. (2006). The Standard for Portfolio Management. Newton Square, PA: Project Management Institute

IBM. (2005). IBM Rational Portfolio Manager Version 6.2 Electronic Help Guide Retrieved from http://www-306.ibm.com/software/support/rss/rational/2178.xml?rss=s2178&ca=rssrational

© 2007, Luis E. Alvarez Dionisi
Originally published as a part of 2007 PMI Global Congress Proceedings – Hong Kong

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