align the portfolio, tune up the performance engine, and go!
Based on the 2007 book, Seven Steps to Strategy Execution, this paper will cover some of the basic implementation issues in establishing a coherent process for executing strategy via the project portfolio (Crawford, Cabanis-Brewin, & Pennypacker, 2007). These include establishing governance bodies; identifying factors/metrics used to determine project and program “fit”; techniques for optimizing resource utilization/portfolio alignment; measuring portfolio performance; and determining organizational value improvement.
Every organization wants to effectively execute strategies. But many struggle to implement a process for doing so. Ideally, organizations execute their strategies through the creation of “strategic initiatives” (Kaplan & Norton, 2006), comprising portfolios of programs and projects, which become the vehicles for executing the organization’s strategy.
In practice, however, most companies, far from having a coherent model for managing the projects as a portfolio, have at best a vague idea how many projects they have in the pipeline, how much they will cost, how they will be staffed, or who is qualified to run them, making strategic planning an exercise in fantasy. Companies who do not know their starting position build future corporate plans on shifting sand. Furthermore, their leadership often does not understand what needs to be fixed.
A glance at the impact that the balanced scorecard has had upon businesses gives us some clues. The BSC emphasizes the linkage of measurement to strategy. For the first time, the details of the project portfolio (what the balance scorecard creators call the “strategic initiatives”) become important to a company’s strategic thinkers. Companies that have implemented this model have seen measurable bottom line successes (Kaplan & Norton, 2006).
At the same time, alignment resolves thorny project management problems. Many studies have cited the lack of executive support as a key contributor to project failure. Project managers complain that their projects do not receive the resources they need. Projects completed “successfully” by project management standards (on time, on budget, to spec) have been considered failures because they did not address a business need. All these issues are alleviated in a company that ties strategic planning to portfolio selection and project execution.
The Strategic Portfolio
The challenge is in selecting and balancing the portfolio in such a way that it becomes the engine of strategic execution. One useful model addresses the fit and utility of each project, and then optimizes the portfolio via the selection process.
The Fit, Utility and Balance Model
Portfolio selection and prioritization is concerned with fit, utility, and balance (Exhibit 2).
The first major element of portfolio management is to identify opportunities and determine if those opportunities are in line with the corporate strategic direction. What is the project? Does the project fit within the business strategy and goals? Some recommended actions associated with determining fit are:
- Has a clear strategic direction and business goals been established? In an execution environment, strategic focus becomes the foundation for selecting projects.
- Develop a process to identify opportunities and make it part of the governance structure. Identify a team to review the opportunities and assess the fit within the strategic direction and business goals.
- Also as part of the governance structure, establish a template for project justification. The template may include things such as a description of the project, the sponsor, the link to strategy and business goals, and a high-level description of the project’s costs, benefit, and risks.
- Establish minimal acceptance criteria. There should be basic requirements a project must meet before they are considered for further analysis and funding. Such requirements may include the link to strategy, business threshold minimums (e.g., return on investment or cost/benefit ratio minimums), compliance with organizational constraints (e.g., existing technology architecture), and completion of the project justification template.
- Reward ideas and suggestions.
The utility of a project captures its usefulness and value, and is typically defined by costs, benefits, and risks. Why should this project be pursued? The following are items to consider:
- Establish criteria to support decision making. Multiple projects vie for resources and funding, and a decision has to be made on which ones to select. To help in the decision-making process, establish common decision criteria and measure each project against the criteria. Since most decisions are based upon multiple factors, weight each criterion to establish its relative importance. This will identify what is most significant to the organization, and allows you to calculate a score for each project using its value for each criterion and applying the relative weights. Make this process part of the governance structure.
Which projects should be selected? How does the project relate to the entire portfolio, and how can the project mix be optimized?
- Establish a process that will help optimize the portfolio, not just the individual projects. Industry approaches for developing portfolios range from simple ranking based on individual project financial returns to more complex methodologies that take into account the inter-relationships between projects. Regardless of the chosen method, the objective should be to optimize the portfolio, not necessarily the individual projects. The appropriate method depends upon an organization’s strategic direction, guiding principles, capabilities, limitations, and complexities.
- When selecting the portfolio, consider all types of projects—research, new product development, information technology, business improvement…and so on. Remember that relative comparisons are being made, not specific comparisons.
- Additionally, this is the time to judge the capacity of the organization and make resource trade-offs across the portfolio. A primary failing of strategic planning is to plan to do more than you have the human resources to carry out. This is where project portfolio planning tools with resource optimization features truly earn their keep.
Governance in the “Execution Environment”
Many people, at least in U.S.-based businesses, are more familiar with governance as an IT term: “assignment of decision rights and the accountability framework to encourage desirable behavior in the use of IT” (Gartner, 2003). But why stop in IT? Shouldn’t the entire organization—across all departments and projects—have a policy framework to encourage “desirable behavior”? And should it be the same framework—not one for IT, one for Finance, and another for HR? Defining the rules by which the enterprise operates should be done once, for the entire enterprise: not piecemeal, department by department.
Agreed-upon processes, described at a high level by the organization’s governance document, should flow from the top for consistency throughout the organization. Often, when seeking to set forth governance, companies do just the opposite, describing what already accepted practice in the departments is and attempting to roll it up to the enterprise level. In setting forth governance, take it from the top: defining first how strategy is made, and then how that results in the evaluation of ideas, their justification, approval and prioritization, the commissioning of projects and programs, the roles of the departments in those programs, and of the personnel on those projects.
Setting documented procedures in place for the selection of projects across the enterprise becomes the backbone of a governance structure, as these procedures involve processes from many departments. Project and program data flows upward into the portfolio selection and management process, ideally via a strategic project office (SPO); corporate finance is linked into the selection process, as is HR. IT provides the backbone, automating the data collection and facilitating communications among the departments. Ideally, the portfolio selection committee will consist of C-level or VP-level representatives from all these areas, along with the director of the SPO.
How Are We Doing? Performance Measurement
Even the most carefully selected portfolio of projects will not necessarily deliver the benefits envisioned. The changes in the business and organizational environment over the course of a portfolio reporting period, changing customer requirements, regulatory hits, the loss of key staff members—all these can and do create barriers to optimal portfolio performance. That’s why the environment for execution, within which our “seven steps” operate, is a “performance environment.”
How do you create a performance environment? By carefully designing a system of metrics that reflects the status of key activities linked to strategic goals. In order to build that environment, like any structure, you start with the foundation:
- Establishing an organizational baseline for performance measurement,
- Identifying metrics that communicate progress and value at the project, program, portfolio, and organizational level,
- Using collected metrics to tune up the portfolio, including killing those projects that are not meeting the criteria set forth in the governance structure, and
- Optimizing organizational performance by eliminating duplication or by identifying where additional resources are required.
Making strategy work requires feedback about organizational performance and then using that information to fine-tune strategy, objectives, and the execution process itself. There is an emergent aspect of strategy and execution as organizations learn and adapt to environmental changes over time. Because business unit strategies flow by design from enterprise strategies, the groundwork for performance management at the enterprise level must first be laid.
Performance management is accomplished through the application and integration of performance management processes:
- Planning: a process for understanding key success factors, identifying stakeholders and roles and responsibilities, identifying performance management goals, developing a program plan (a governance role);
- Measurement development: a process for identifying and selecting performance measures, developing measurement scorecards (high-level measures defined at the governance level; specific metrics that roll up into these identified at the departmental or program level);
- Performance measurement: a process for planning for data collection, including data source and information technology required; collecting data and ensuring data quality (a joint responsibility of IT and the SPO as owner of the portfolio processes);
- Data analysis: a process for converting data into performance information and knowledge; analyzing and validating results; performing benchmarking and comparative analysis (a joint responsibility of IT and the SPO);
- Performance reporting: a process for developing a communications plan and communicating performance results to stakeholders; and
- Continuous improvement: a process for assessing performance management practices, learning from feedback and lessons learned, and implementing improvements to those practices (a joint responsibility of the SPO as portfolio owner and executives responsible for governance).
Performance Reporting Integration
Strategy execution is a dynamic, adaptive process, leading to organizational learning. For learning and change to occur, performance feedback must be measured against strategic and short-term objectives. It must come from managers at all levels of the organization, measuring the performance of strategies, portfolios, programs, and projects. This information is part of the monitoring and control feedback in the strategy, portfolio, and program/project management processes. That feedback, in turn, will be analyzed in strategy reviews and used to reevaluate specific strategic initiatives and their contribution to meeting the organization’s strategic objectives.
For many organizations, the strategic plan has been a document that gathers dust, In order for strategic plans to be living documents; they must be linked to the ongoing activities of the organization. That link is performance data.
Performance data must be gathered from every strategic initiative, and from every area of the organization’s structure that is working on those initiatives…in other words, from almost everyone. At the level of strategy, these many measurements must be rolled up into a vigorously “pruned” list of those measures that best communicate to executives how well current structures and activities are serving the organization’s stated goals. In for-profit companies, it is often the case that these top metrics are financial ones, with other types of metrics having been decomposed into this type. For example, a customer service metric such as number of return visits to a store Web site, upon deeper analysis, may be rendered as additional revenue generated by customer loyalty.
While financial metrics are certainly useful, relying on money alone to tell the story of the organization’s enactment of strategy leaves a lot to be desired from a motivational point of view. For employees and customers, the “feel-good” metrics (percentage of reduction of the organization’s carbon footprint; numbers of children reached by a sponsored educational initiative; steps achieved in the progress towards some organizational restructuring like open book management, and so forth) inspire engagement. Shareholders and executives with stock options may want more than a financial view, also. It must be remembered that financial metrics represent a look backward: a snapshot of the performance of investments already made. Yet strategy is all about the future. More valuable will be measures that track the organization’s progress towards the vision.
Portfolio tracking is all about metrics. Make sure accurate data is available about all projects and programs within the portfolio so that strategic decision makers can decide where to invest more, or less, effort. In addition to developing a decision support model, ensure the data used to value each project is accurate and current. The organization should have a reliable accounting system that collects and accounts for resources (expenditures, revenues, and manpower). Information from the accounting system may be necessary to forecast project costs and benefits. The organization should have reliable, up-to-date market, technical, and manufacturing information. Since project portfolios are made up of both new projects and on-going projects, the organization should have a system to track the status of on-going project activity. Establish a process to analyze the project information. Establish a process that will validate project information and compare the information against the common decision criteria. The purpose of this process is to analyze the project information to ensure data validity and consistent application of the decision criteria. It is important to go through this process before selecting the portfolio to eliminate any controversy over the data and key assumptions while in the midst of developing the portfolio.
But portfolio metrics are not just about projects. They should also reflect the relationships among projects and programs within the portfolio, tracking, for example, the ratio of “horizon” projects to “lights-on” projects; the ratio of short-term goal-oriented projects to those that serve the long-term (sales initiatives of existing products vs. new or blue-sky product R&D, for example).
As the foundational materials for portfolio analysis and management, project and program performance metrics could not be more important. Yet, not all project management metrics are created equal. There are numerous ways to determine project progress and success, and the metrics necessary to one organization may be superfluous to another.
Role of the Strategic Project Office.
If any part of the organization could be said to be “metrics central,” it is the SPO, where the data tracked using IT tools is analyzed and organized for executive consumption. Within the SPO, project and program metrics are rolled up into a set of metrics useful for making portfolio decisions. But that is not the only role of this new organizational entity in promoting and facilitating an execution environment. Other measurable activities of the SPO would include the training of organization members in project management and in the SPM model; the adoption rates of methodologies; the baselining of organizational performance on strategic projects, and the subsequent re-assessment periodically to track improvement.
In addition, it is the role of the SPO to monitor the performance, not just of projects and programs, but of the program/project management process itself. Note that you will be selecting measures of project management value rather than measures of project performance. The key difference in performance measures versus value measures is the reason for doing the measuring. In measuring performance, you are trying to gather information to help you make management decisions to affect change that, hopefully, will improve that performance. For example, project performance measures are undertaken to provide information to managers in order to exert control over the project. Those measures must be appropriate to the organizational level that can immediately effect change based on information it learns in order to control the performance of the project at hand (measuring the earned value of the project will provide information on the performance of the project to allow managers to make critical decisions to bring the project to closure successfully). These measures must be collected fairly often, perhaps even weekly, depending on the duration of the project.
Cultural and Human Aspects of Metrics Selection.
When identifying performance metrics—and we cannot stress this strongly enough—it is crucial to think them through to their ultimate behavioral effects on the organizational culture. The inadvertent valuing of quantity over quality or maintenance over development or bricks over people will eventually take its toll.
Many organizations collect HR-related metrics that actually tell us very little about the value those individuals provide. We know headcount, and its cost, but rarely have good insight into the intellectual capital they provide. Some companies have worked to remedy this by, for example, establishing knowledge management “libraries” and rewarding people for populating these databases with useful history, tips, examples, and lessons learned.
Among other “people metrics” that pertain to developing an execution environment:
- Retention. A high rate of churn saps the organization of time, money, energy and intellectual capital. If turnover is high, this is probably a cultural issue and should be analyzed and addressed. Tip: Among technical and creative people, bad managers cause more turnover than monetary issues.
- Competency levels and progress against a development plan.
Since employee costs can exceed 40% of corporate expense, measuring the ROI in human capital is essential. Management needs a system of metrics that describe and predict the cost and productivity curves of its workforce. Quantitative measures (cost, capacity, time) are needed to tell us what happened, and qualitative measures (values, human reactions) are needed to tell us some idea of why it happened (Fitz-Enz, 2000).
Developing Performance Metrics
While there is general agreement that “you can’t manage what you can’t measure,” the actual measurements themselves usually prove to be a source of conflict. What are we measuring, and why? What should we be measuring? What’s the connection between the performance metrics we collect regarding individuals and their tasks and the ultimate performance of the company—if any? And what, in reality, does “performance” mean, on an organization-wide scale? Is it merely making money? And if so, how much? Knowing what you want to measure, and why, is the difficult part.
One problem is we continue to assess new economy businesses with old economy systems of measurement. Back in the 1700s, Lord Kelvin announced that the measurement of an activity is basic to its control—a statement that formed part of the foundation for scientific management. The trouble is, business has changed— even the laws of physics have changed. The weak link in our present ideas of metrics lies in the word “control.” Kelvin’s statement is true—if control is all you are trying to achieve. But in the context of dynamic, knowledge-based, information-economy business, control is a loser’s game. Control is static. Control is limiting. What is a more helpful goal? Balance is one idea that has received a good bit of attention since the introduction of the balanced scorecard concept in 1992. Seeking to balance, rather than control, a company’s assets and energies, brings a less punitive character to the collection of performance metrics. It allows companies to be more forward-looking, as opposed to merely relying on financial measures that represent a snapshot of the past.
In addition, following a structured process helps to develop less fuzzy project management metrics, while engaging a wide variety of the people who actually do the work in the process prevents the chosen measures from diverging too far from reality or ease-of-use.
There is no single set of measures that universally applies to all companies. The appropriate set of measures depends on the organization’s strategy, technology, and the particular industry and environment in which they compete. Like any aspect of any “living company,” metrics cannot be static: they cannot be chosen once and locked into place. Along with strategy, they evolve and are refined as the organization becomes more focused on and skilled at, meeting strategic goals via project portfolio management.
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