Successfully implementing a portfolio management system in a medium/large corporation

Introduction

Organizations that adopt project management as a means to achieving change and delivering results often find it difficult to prioritise projects and to make best use of their resources. Portfolio management is a management approach that aims to align project efforts with the corporate strategy and optimise the efficient use of resources throughout the organization (Thiry, 2007). PMI® classifies portfolio management processes into two main categories: (a) the aligning processes and (b) the monitoring and controlling processes (PMI, 2006). Aligning processes comprises portfolio analysis, project selection and resource allocation, as well as portfolio realignment; aligning processes are mainly concerned with collecting and storing project data.

There are many good books and book chapters that describe in detail portfolio management processes; we have decided therefore not to delve into this area but rather to use our collective experience to report on the implementation of a portfolio management system in an organisation. Although we have decided to create a fictional organisation, the case study is based on our experience with numerous organisations over many years and, as Jerome K. Jerome so rightly put it regarding his well-known bestselling novel Three Men in a Boat, “Its pages form the record of events that really happened [which] will lend additional weight to the lesson that the story teaches” (2004:1889, vi). Based on long practical experience, the authors will demonstrate how to successfully set up an organisation-wide portfolio management (PfM) system using robust models and a step-by-step process.

Implementing PfM in an organisation may seem easy enough, but the actual process is a true organisational change that affects both the structure and the culture of the organisation. A strong framework is required to drive the change process; the team and organisation must be given “sense-making time” and the organisation must adopt a portfolio “approach” (framework), rather than a portfolio “methodology” (step-by-step process).

Portfolio Management

The concept of portfolio is used in many domains: finance, strategy and marketing, education and politics. To be able to understand the project portfolio management concept, it is essential to understand these different approaches, especially finance and strategy.

In finance, a portfolio is a collection of investments held by an institution or a private individual. Portfolio theories generally promote a risk-limiting strategy through diversification of investments. In strategic management and marketing, a portfolio is a collection of products, services or brands that are offered by a company. Typically, portfolio optimization is based on the use of analytical-rational tools where good portfolio balance is achieved by combining maximum profit with minimal risk. Recently a few authors have argued that organisations focus too much on facilitating the optimal utilization of existing productive resources and sharing of residual wealth but do not take into account processes by which resources are increased or transformed.

Value creation is an essential element of good portfolio management, privileging not only activities that limit risks but also those that maximise opportunities. In this regard, authors in the fields of marketing and strategic management have identified several issues with currently used portfolio models and techniques (Nagar & Rajan, 2005):

  • Often the selection criteria used are generic: capabilities that are usually linked to the business or organization but do not guarantee that the strategy will be successful, just more likely to be successful.
  • Rational decision models are usually static and linear and are not appropriate to assess turbulent environments and rapid change. The data they use cannot easily predict radical change.
  • Because these models typically analyse a situation at a specific point in time, these generic criteria do not take into account the influence emergent strategies can have on existing market characteristics.
  • These, usually financial, simplified models limit the range of factors that need to be taken into account to evaluate success and may miss important influences.
  • Portfolio models are generally market-driven and do not recognise goal-directed or mission-driven strategies. Markets are analysed independently of the mission of the organisation.

As the need to prioritize resources across the organisation becomes more and more urgent, project portfolio management has essentially become a selection process to choose which projects the organization should undertake and allocate limited resources to these projects. In order to achieve this, managers tend to use simple tools, such as NPV (net present value), IRR (internal rate of return), ROI (return on investment), or other pre-set financial measures, and then make decisions based upon intuitively perceived outcome and political clout. To create sustainable results, it is necessary to link the expenditure of resources to specific corporate and business strategy criteria, not solely generic selection criteria, applicable to most activities (Thiry, 2007).

In summary, taking into account most current definitions, Project Portfolio Management could be defined as “[t]he process of analysing and allocating organisational resources to programmes and projects across the organization on an ongoing basis to achieve corporate objectives and maximise value for the stakeholders” (Thiry, 2007).

Value Realisation

Value is often associated with economic factors; Value Management Standards recommends a wider view of value, based on the concepts developed in the field of value management (SAC, 2006; BSI, 2000). The concept of value is based on the assumption that the better stakeholders’ needs are satisfied, and the least resources are used to achieve this satisfaction, the higher the value. We have taken this concept a step further by introducing the notion of realised value developed by Thiry (1997). Whereas typically value is measured as the difference between expected benefits and the resources required to achieve them, called planned value, value will be realised only if the resources available are equal to or greater than the required resources and if the benefits offered are greater than or equal to the expected benefits. In business, the expected benefits are translated in agreed critical-success factors and the benefits in the options offered to the stakeholders; the ratio between available resources (supply) and required resources (demand) constitutes the achievability factor (Thiry, 2007). (See Exhibit 1.)

Benefits and Resources: A Value Perspective (adapted from Thiry, 1997)

Exhibit 1: Benefits and Resources: A Value Perspective (adapted from Thiry, 1997)

Implementing a Portfolio Management System at GTelecom

GTelecom (a fictional company) is a global telecommunications company based in the United Kingdom. It provides voice, data and mobile services to residential and corporate customers. GTelecom provides outsourcing services for medium to large corporations and runs separate businesses to meet the needs of its residential, mobile, corporate, broadband and outsourced clients. Due to its strategy of growth through acquisition, GTelecom owns telecommunications companies in Europe, Australia, and Asia. The IT Operations services for these businesses are consolidated and managed in GTelecom's data centre located in Northern England.

Recently, delays and overruns have perturbed some of GTelecom's significant strategic projects due to execution issues within its IT Operations Centre (ITOC). Increased demand for services and lack of sufficient resources have created a backlog of projects in the ITOC. One of the main issues is that work is not prioritised effectively, often wasting resources on non-essential activities. The situation is beginning to have a significant impact on the ability of the various businesses to service their customers.

The Managing Director (MD) of the ITOC has just returned from a CIO Conference where a panel of CIOs identified project prioritisation—and therefore Portfolio Management—as the only solution to deal with backlog. The MD has therefore decided to engage expert consultants to implement a Portfolio Management (PfM) capability with the following purposes:

  • Create a strong bond between strategic objectives and benefits realisation.
  • Enable best use of the organisation's resources.

We will present a tested implementation process that is aimed at achieving these objectives.

Analysis of Current Portfolio Management Practices

The first step was to conduct an analysis of the current PfM systems and tools to determine the scope and extent of the requirements. The analysis showed that five different tools were used to log and track project requests. Each tool was managed by different functions in ITOC, and three of the tools dealt with service (Business as Usual, or BAU) requests as well as project requests. In most cases, the following occurred:

  • Different processes and tools were used for each client group, and processes were not clearly defined for each requirement.
  • Relative priorities for each work request were not established, and work that should have been managed by services was being directed to projects.
  • No comprehensive governance system or framework existed, and the end to end (E2E) process leading from inception to realisation was not understood by any individual.
  • Data was inconsistently collected and often not controlled; therefore, management information was unavailable, unreliable or incomplete.
  • Commitments were being made to deliver projects without first confirming the capability to deliver, and many projects competed with each other for scarce resources, resulting in constrained resource supply.

From this analysis we concluded that it was essential to integrate the PfM process with other organisational systems, namely Demand Management, Service Management, Financial Management and Workforce Management. Each of these systems needed to be clarified within an overall governance system and supported by appropriate tools. We suggested to the MD that Portfolio Management, with governance, was to spearhead the transformation program and recommended that the development of PfM address two issues: Infrastructure Issues, through an investment prioritisation framework and policy, and Financial Issues, through the prioritisation of activities and resource allocation.

Scope of the Intervention

Following the analysis, we believed that the PfM system needed to be stabilised so that predictable results could be achieved. The following elements were deemed essential to the development of the PfM system:

  • Clearly define the PfM methodology.
  • Conduct an inventory and classification of all projects’ initiatives.
  • Record FTE (full-time equivalent) investment in BAU.
  • Define a consistent prioritisation process and significant prioritisation factors.
  • Prioritise and reprioritise projects and BAU initiatives with regard to strategic critical success factors (CSFs),

The first step in the improvement process was to define the operating model for managing and balancing demand and supply for ITOC services. The following categories of services were defined:

  • Business As Usual (BAU) – The day-to-day services required to run the IT systems of each business. These services do not involve project management but often use and compete with the same resources as projects and need to be well understood and harmonised with projects. Funding comes from operating budget.
  • Business Unit Improvement Projects (BUIP) - Projects run to maintain, enhance or extend current operations. The scope of these activities is beyond the scope of the BAU services. Funding for these projects is provided from the annual operating budget of each business unit.
  • Business Unit Strategic Projects (BUSP) – Projects run by each business unit to achieve the strategic objectives of GTelecom and the business. These projects are usually part of a program and require executive level approval. Funding for these projects is allocated from investment funding held corporately.

To establish an effective operating model, we needed to develop the following:

  • A defined E2E process in each of these categories, for managing and meeting demand, including prioritisation and ranking of activities as well as a real-time view of resource availability
  • Activities estimates for all categories of work, aligned and prioritised within the overall ITOC budget and a resource management system to identify interdependencies and possible constraints
  • An overall governance system encompassing business units and the ITOC at the strategic, management and operational levels, supported by a consistent reporting and management information system.

System Implementation

The results of the analysis and proposed model were presented to executive and operational stakeholders across the various businesses to create an understanding of the issues relating to effective portfolio management. Whilst highly motivated to resolve the problems and be able to see how the operating model would work, several stakeholders were unsure of the implementation process. To address this issue a series of workshops were conducted to support stakeholders through the implementation process. This included education in their roles in achieving effective portfolio management, particularly in managing the change process in their business.

Concurrently with this culture change process, we developed a strategy for the development of the portfolio system. A program was formulated to implement the operating model over a nine-month period. Five projects were defined as part of this program:

  • Elaborate an integrated governance model.
  • Improve and operationalise investment PfM capability.
  • Develop and test PfM categories and selection criteria for each category of work.
  • Identify BAU.
  • Identify BUIP.
  • Identify BUSP.
  • Develop and implement workforce management system.
  • Formulate, select and put in place reporting and decision tools.

The operating model and approach were agreed upon and endorsed by the key stakeholders from each area of the business, who were actively involved in the governance of this program. This ensured that all resulting issues were addressed in the context of the overall objectives of GTelecom.

Project 1: Governance

Although governance in itself is not part of portfolio management, the two are inextricably linked. De Wit and Meyer (2004) defined the three main functions of governance as follows: (a) the forming of the corporate mission; (b) improving the performance of the corporation, and (c) ensuring conformance to the stated mission and strategy. Many organisations still make the mistake of considering only the conformance aspect of governance. In the case of GTelecom, we emphasised that the first function should be the development of a sound strategy, which we have covered earlier, and the need for PfM to actively support this strategy. This is what we have called the “Portfolio Direction” aspect of PfM (see Exhibit 2), where project categories are identified and a share of the annual budget is allocated to each, in line with the corporate strategy. The PfM process would then occur within each category.

Two Tiered Portfolio Process

Exhibit 2: Two Tiered Portfolio Process

In order to achieve this, we conducted a number of workshops where we helped the MD and BU Managers to clearly identify their expected benefits prior to the development of the portfolio selection model. Those who participated in the strategy formulation and benefits identification process would then become the Portfolio Management Council (PfMC). The PfMC must have both the authority over the resources necessary to implement decisions and a willingness to take calculated risks. Issues and risks relating to the delivery of benefits can also be escalated to this PfMC.

Many writers in strategic management (Porter, 1985; De Wit & Meyer, 2004) have identified the lack of horizontal interrelationships as a key problem in portfolio decision-making, as little attention is given to business unit interdependencies. Unfortunately, project portfolio management often relies on computer tools that collect and collate financial and quantitative performance data from individual projects without taking into account organisational interdependencies.

There are basically two choices when implementing a PfM system: PfM covers only the programs and projects of the organisation, or PfM covers all organisational activities, including BAU. In the first case, programs and projects will be run independently from operations, which was the case with GTelecom. Although there may be interactions and interdependencies, these will be limited and formalised. In the second case, operations, programs and projects will all contribute to value realisation in a coherent and integrated manner. The PMI's Standard for Portfolio Management states: “Both the operational and project aspects of an organisation must be considered in portfolio management” (PMI, 2006, p. 6).

It was agreed that strategy management needed to encompass all three categories of services in a broad view of the business. The strategy would define the distribution of the effort across the three other areas. This view meant that a two-tiered system was put in place to allocate resources to the type of activity that best corresponded to the broader strategy first (Portfolio Direction) and then subsequently within each category of business (Portfolio Management). This allowed the organization to focus on a wider range of long-term organizational measures. To ensure that results were being delivered in line with GTelecom's overall objectives, we recommended that an overarching governance committee be established to resolve priority conflicts between business areas and service categories, and to adjust objectives and budgets in accordance with changing circumstances.

Two more levels of governance were established. The Benefits Management Council (BMC) was responsible for the overall delivery of benefits across the business and maintenance of service levels (BAU and BUIP). Their responsibility was to identify required benefits at business level and the management of their integration into the business. The Program/Project Management Council (PMC), sometimes called Change Management Council, was responsible for the conformance of individual programs and projects with the strategy and their responsible management. In both cases these Councils included sponsors, the program managers responsible for the delivery of the project or service and business unit representatives, responsible for the integration of change and BAU.

This method enabled the business decision-makers to synchronize the delivery of benefits with the stakeholders’ needs. Ultimately, activity prioritisation and selection not only entailed the decision to implement or not an activity but also to pace these activities in regard to both resource availability and business needs.

Project 2: Investment Portfolio Management Capability

The objective of this project was to build a decision-making capability to facilitate the effective investment of GTelecom's resources. GTelecom had a strong strategic planning capability and had clearly articulated its strategic objectives and critical success factors with targets across the business. This was important to enhance the PfM investment capability. Experience with a number of clients had shown us the importance of not focusing only on financial factors when selecting and prioritising projects. Non-financial factors, such as maintaining regulatory compliance or maintaining credibility with clients, are essential for staying in business. Other examples concern elements of the triple and quadruple bottom-line, such as environment, corporate citizenship and ethics.

In order to enable performance improvement and value maximisation, the portfolio selection criteria that support the strategy were based on both short-term and long-term value criteria. Selection criteria were derived from the strategy and could be revised at least once a year during the budget allocation period. They were to be supported by dynamic flexible decision models, considering the achievability of each project, as well as a capacity to realign the portfolio according to changes in the organisation's environment. This is part of the role of the BMC, because it requires an understanding of the impact that change will have on different parts of the organisation and determining that they are able to absorb the change.

We coordinated the development of the PfM system with the review of GTelecom's Business Case process. The introduction of a standardised business case process was a major change for the organisation. A series of seminars were run with business analysts and sponsoring executives to support them in producing effective business cases and to explain the rationale for the new templates. It was agreed to create a three-tiered business case process, from idea to concept to full business case. At each stage, we included portfolio selection criteria, which went from high-level qualitative assessment at the idea stage to detailed quantitative estimate at the full business case level. The proposer was also asked to identify the activity category based on the three categories identified in the activities classification. This allowed ideas and concepts to be assessed with minimal means before making the decision to invest significant resources in producing the business case or implementing the activity.

Based on this, it became possible to feed the resource usage estimates into the PfMIS so that the team could continually update and recycle the program and project resource usage data, as well as the BAU resource usage when it becomes available. The clear link between selection criteria and expected benefits also provided the business with an ongoing data analysis for decision-making.

Project 3: PfM Categories and Selection Criteria

The main role of the Councils is to analyse the portfolio of existing and potential projects on an ongoing basis and to endorse and fund the activities to be implemented as part of this portfolio. Within the PfMC, we developed a model of both the Portfolio Direction categories (see earlier) and the selection criteria in each of those categories, which were part of Project 2. Because selection criteria were derived from the corporate and business strategy, this model was both very robust and flexible and became the basis for conformance management.

The first step we undertook, following the establishment of the selection criteria, was to test the three service categories against existing projects and activities. We first consulted with all the project managers to ask them to group their projects in one of the three categories, which enabled us to test their validity. We then tested the selection criteria against 20 projects that had been completed. We assessed these projects against the criteria and compared our assessment to their actual results. This process enabled us to confirm that the selection criteria were generally valid.

Following this second step, the PfM team continued testing the selection process on existing and pipeline projects and coordinated this effort with the PfMIS team. (See Project 5.) They finalised coordination of Portfolio, Business Case and gates (Governance) with the organisation's project management process and set up a benefits review system. The stated goal, was to adjust the method in regards of actual results for a period of one year.

Project 4: Workforce Management System

The objective of this project was to understand and control the usage of FTE so that projects and BAU could reasonably guarantee the needed resources at the scheduled time. Our experience had shown that workforce management must be holistic. If this is not the case, programs, projects and other activities continually compete for the same resources.

This project also aligned the workforce management, project scheduling and time recording systems and, in doing so, was intimately linked with the reporting and decision tools project. In order to achieve this coordination, we met with the owners of the Project Management Information System (PMIS) and made sure they were able to provide the required data to ensure consistent and reliable predictability of resource usage. Typically, PMIS's have the capability to accurately monitor actual resource usage per team, forecast actual and pipeline work per team and reasonably predict resource usage from business case estimates. The challenge lies in developing a measurement and reporting culture, accurate resource usage forecasts and confidence in data to help management decision-making. The introduction of a workforce management system is a major organisational and cultural change requiring careful planning, testing and syndication with all stakeholders.

The ongoing evaluation that takes place in portfolio management requires that the data be measured both against a baseline (actual versus baseline) and against opportunities (achieved results versus stated and emergent objectives). As a result of this project and the introduction of the tiered Business Case process, the overall demand for resources and potential constraints were understood and managed on an ongoing basis. This provided the ability to continually adjust the scope and/or priority of activities with availability of resources and to procure, if required.

Project 5: Reporting and Decision Tools

The objective of this project was to provide a simple Portfolio Management Information System (PfMIS) to help decision-makers manage the portfolio on an ongoing basis. Many organisations buy Enterprise Project/Portfolio/Program Management (EPM) tools to support reporting and decision-making and, most of the time, do not achieve the desired result. In our experience, this results from three main factors:

  • Insufficient clarification of the business processes to be supported (PfM, PM, and BAU) prior to acquiring the tool
  • Failure to recognise that the EPM tool will interface with, or replace, existing tools and not considering the necessity to continue delivering existing functions
  • Not taking into account the needs of the different stakeholders when defining the PfMIS requirements, therefore underestimating the culture change necessary to effectively introduce the EPM tool.

Often organisations also find that the need to run the new and existing tools concurrently introduces data integrity and administrative overhead issues. The introduction of the tool must be accompanied by changes to the project management processes and tools, as projects provide most of the data required by portfolio management. For example, the rate at which projects consume FTE's influences the supply side of the resource portfolio and, therefore, the capability to respond to demand. After analysing its existing systems, GTelecom realised that it could provide the required data.

This approach offers a number of benefits. First, most of the required data already exists in one form or the other; adapting existing processes, tools and reports can provide most of the needed information in a relatively short time frame. Secondly, as GTelecom was new to PfM, it was likely that its needs would change substantially as it improved organisational PfM maturity, justifying the choice of a smaller initial investment. This approach provided quick wins at a low cost and left open opportunities for adapting the system in the future with extensive practical knowledge of the needs.

The data requirements were driven by the business case decision-making prerequisites. A template was developed with the information requirements for initial selection and prioritisation of activities. The accuracy of the data was reviewed over the life of the project or activity to feedback for future business cases. Additionally, it was verified in the context of the overall portfolio to support an iterative decision-making process, in line with the governance system, to stop or re-pace projects and other activities as required by the strategy or resource demand and supply.

Conclusions

Our experience shows us that the implementation of a successful PfM practice in an organisation that is currently running projects requires taking into account the impact of PfM on other organisational systems and culture. Some of the issues we identified follow:

  • The need for a full integration with governance system and processes, including the business case process
  • The set up of significant and achievable selection criteria, based on organisational strategies
  • The necessity for consistent and effective coordination with dynamic strategic objectives
  • The development of a strong team accountability culture and a willingness to measure results.

This last point is by far the hardest to achieve and the one that requires most time and commitment.

At GTelecom, this system delivered the following benefits:

  • Because they were able to prioritise demand, based both on strategic objectives and supply, the ITOC was able to plan workforce and resourcing activities to meet its stakeholders’ needs.
  • Conflicts between activities were identified before they occurred. The presence of governance mechanisms allowed these to be managed effectively.
  • The development of a robust and integrated business case process, based on contribution to benefits and achievability, resulted in improved risk and benefits management and optimised the use of resources.
  • Because of a better understanding of demand, resource profile and strategic objectives, budgets could be appropriately allocated and adjusted as business conditions changed.

References

BSI (2000). PD 6663: Guidelines to BS EN 12973: Value management: Practical guidance to its use and intent. Chiswick: British Standards Institution.

Jerome, J.K. (2004:1889) Three men in a boat and three men on a bummel. New York, NY: Penguin Books

Lewin, K. (1951). Field theory in social science. New York: Harper & Row.

Nagar, V., and Rajan, M.V. (2005). Measuring Customer Relationships: The case of the retail banking industry. Management Science 51 (6): 904–919.

Project Management Institute (2006) The Standard for Portfolio Management Newtown Square, PA: Project Management Institute

SAC (Standards Australia Committee OB-006). (2006).. Value management standard AS 4183-2006. Standards Australia, Canberra, ACT.

Thiry, M. (1997). Value management practice. Sylva NC: Project Management Institute.

Thiry, M. (2007). Managing portfolios of projects. Chapter 3. In R. Turner (Ed.), Gower management handbook (p. 47 – 64). Hampstead, UK: Gower, Hemel.

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.

© 2008, Michel Thirty and Rod Gozzard
Originally published as a part of 2008 PMI Global Congress Proceedings – Sydney, Australia

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