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Do you have more projects than resources? Is your staff burdened by conflicting priorities from multiple initiatives? Do you have trouble ensuring that your company is investing in the right projects? If you answer yes to any of these questions, project portfolio management may be the solution to your problems.
Applicable to every type and size of company, project portfolio management is all about getting the biggest bang for the buck -- whether that buck is coming from the IT budget or a business area budget. Its primary goal is to produce the highest payback possible from each investment that a company makes. It also prevents companies from lavishing money on ill-conceived projects or diverting funds from highly deserving ones.
Project portfolio management is a necessity. Although some pundits view it as money-saving strategy for hard times, project portfolio management makes sound financial sense for any economic time. Just consider the results when organizations don't practice project portfolio management.
The scope of project portfolio management is far-reaching. Often discussed in terms of the IT organization, it is ideally practiced at every level of an enterprise. Although individual projects are conceived, championed and executed at the department or organization level, higher level oversight and objectivity is needed to make the hard decisions that cut across the entire portfolio. Rolling up the project portfolio at each level allows executives to prioritize competing projects, select those that offer the highest potential payback, and provide ongoing management to ensure that projects remain aligned with larger business goals.
This article discusses why it is essential to manage project investments in a proactive, disciplined manner, explores the notion of a "project," and provides an overview of what project portfolio management entails.
When an organization undertakes a project, it commits to an investment of money, labor and resources. Some of these investments are quite substantial. It is surprising, therefore, that many companies remain passive investors, leaving the success, failure and ultimate return of their investments to chance.
Most professional investors, such as stock traders, are not content to sit on the sidelines. They prefer to actively manage their investments to produce the largest pool of benefits over time. By optimizing, balancing and continually fine-tuning their portfolios, active investors try to maximize short and long-term returns and reduce overall risk, thereby achieving larger financial and/or business objectives.
Like the professional investor, companies and their IT organizations can actively manage their investment portfolios to extract greater returns. They can identify, evaluate and rank investment opportunities. They can direct resources to the highest-payback projects and cull marginal ones. They can target expenditures more effectively to the most worthwhile initiatives and optimize their performance and execution.
IT organizations manage many different types of tangible and intangible assets. Tangible assets include data center equipment, desktop computers and other hardware. Intangible assets include portfolios of projects and portfolios of applications.
The notions of project and application portfolio management are frequently confused in IT organizations. Although applications and projects may appear alike on the surface, they are fundamentally different, requiring separate approaches for portfolio management.
Whereas an application is a discrete software asset -- source code or routine -- a project is more abstract. Projects are not assets per se, and do not contribute business value in and of themselves. Instead, they implement or support other "things" like new business processes or even applications that, in turn, generate business value. It is true that projects and applications can overlap (a project's primary purpose may be to create a new application) but they differ more often than not. For example, a project to consolidate a company's pool of suppliers may indirectly affect a corporate application, but it is driven by a larger business purpose.
Perhaps the simplest way to define a project is as a set of activities. These activities, represented by the nebulous cloud in Figure 1, are affected by outside factors like goals, budgets and resources, and a range of considerations, issues and pressures.
Companies originally conceive and execute projects to achieve business objectives. Projects are generally accompanied by a business case or cost justification that sets forth these objectives and projected returns. A project's budget indicates the level of financial investment the company is willing to make to achieve anticipated returns. Projects also have associated human resources that will perform the activities comprising the project and create the deliverables. It is these final deliverables that the company will use to generate business benefits or value.
Figure 2: A Typical Project
Projects do not occur in isolation, and seldom execute perfectly according to plan. Many issues affect their performance and the quality and usefulness of their deliverables, including:
The purpose of a project is to advance one or more business objectives. Most projects start out closely aligned with these objectives, but gaps inevitably appear. Projects drift and business objectives change and evolve. Without re-direction, projects and deliverables wind up failing to meet expectations.
Late projects wreak havoc, delaying the time that a company can start reaping business benefits, thwarting precise payback/return period calculations and disrupting the schedules of downstream and dependent projects.
Most projects are inter-related, sharing people, equipment, resources and deliverables. These dependencies mean that a single project delay has a significant ripple effect on related projects, disrupting schedules, causing resource conflicts and even triggering expensive contingencies.
Strategic and tactical execution issues challenge every project, wasting resources and opportunities, diverting management attention and hindering corporate plans. Economic conditions may force budget cuts, key personnel may leave, specifications may change and technologies may fail to perform as advertised.
Overlapping projects are responsible for major inefficiencies and waste budget dollars, time and resources. At their worst, they undermine each other's progress and potential benefits. Redundant and duplicative projects are also unprofitable, increasing costs, prolonging schedules and diverting resources from more deserving projects.
Companies never have sufficient resources to staff all projects concurrently. As such, projects compete against each other for resources, and people are often assigned to several projects at the same time. Those with special expertise or scarce skills may be in high demand, causing bottlenecks.
A project is a means to an end. Ultimately, every project generates deliverables that the company uses to derive business value. When those deliverables are late or incomplete, the business loses opportunities -- whether to earn revenues, acquire customers, or perhaps fix a problem.
Many companies concentrate their management efforts on executing individual projects, but fail to give the same attention to the project portfolio itself. The result is sub-optimal performance and returns for the portfolio as a whole. Project portfolio management attempts to rectify this situation by ensuring that:
The project portfolio is comprised of projects that offer widely differing value. Projects vary by their short and long-term benefit, their synergy with corporate goals, and their level of investment and anticipated payback. Taking these factors into account, project portfolio management seeks to optimize the returns of the entire portfolio. It selects the most value-producing projects for execution, ensuring that funds are directed toward deserving initiatives. It also eliminates overlaps and redundancies between projects, saving time and costs.
Just as an investor attempts to minimize risk and maximize returns by diversifying portfolio holdings, companies should assess and balance the risks of the projects in their portfolios. A conservative portfolio, like an investment portfolio skewed towards bonds, may minimize risk and preserve principal but it also limits the potential returns of the portfolio. Conversely, an aggressive project portfolio may have greater odds of hitting a "big win," but at a substantially higher risk of failure or loss. Project portfolio management diversifies the company's project portfolio, balancing risks with potential returns.
With a limited number of people, all projects must compete for resources. Project portfolio management quantifies, compares and prioritizes projects to help companies identify and staff the most valuable ones instead of unwittingly wasting resources on other, less useful efforts. Through high-level executive oversight, it resolves resource conflicts between ongoing projects. It also incorporates formal sourcing strategies to determine the skill sets needed for each project and the best source of resources.
Project portfolio management cannot eliminate performance problems, but it can help address them early on before they fester. Swiftly recognizing, escalating and responding to execution issues keeps projects on track and avoids compromising dependent or downstream projects.
Project portfolio management provides continuous management oversight, regular communication and coordination, and constant course correction to minimize project drift, re-direct projects when business objectives change and maintain alignment.
By elevating the prioritization and oversight responsibilities to the executive level, project portfolio management ensures that projects receive the backing they need to succeed. Executives have the authority and business knowledge to ensure alignment between projects and business strategies; to fine tune the timing and order of projects to exploit synergies, avoid re-works and eliminate redundancies; to optimally assign resources; to direct funds to the most valuable initiatives; and to help resolve critical performance issues.
Project portfolio management is concerned with two fundamental things -- effectiveness and efficiency. Effectiveness revolves around doing the right things -- choosing the right projects, culling less valuable ones, eliminating redundancies, etc. -- to maximize benefits. Effective companies can re-capture dollars otherwise spent on marginal or low-value projects.
Project portfolio management is also concerned with efficiency. By providing support and direction to the selected projects, executives can help them proceed efficiently and successfully. By appropriately directing funds, optimally allocating resources and promptly responding to performance problems, executives can prevent unnecessary project delays.
These effectiveness and efficiency goals are pursued through these four steps.
To manage the project portfolio, executives need sufficient information to evaluate projects, make comparisons and selections, and provide ongoing support. To formalize project evaluation, prioritization and selection, a single source or repository of project information is required. To arm executives with information to monitor and review project performance, reporting capabilities are needed. To collect and populate the repository with meaningful information, standard processes are needed.
Companies have abundant project information, but it is often scattered among locations and organizations and is inconsistent in format, content and quality. To compare, prioritize and select projects, however, it is imperative to have a single source of common, consistent and accurate project data. A project repository can serve as the central source of information about projects across the enterprise. It serves as an inventory of projects, minimally including basic project management data such as requesting business area and description, and project metrics such as timelines, dependencies, resource assignments, milestones, deliverables and deadlines. It should also contain high-level information, such as a business case or cost justification, to enable value-based decisions about each project.
The repository ensures that information is complete. But the data must also be accurate, consistent and timely. The raw data contained in a project repository is often supplied daily from standard project management tools, like Microsoft Project. Tools and reporting capabilities will manipulate and provide visibility into this data. To allow executive-level decision-making, the data should be amenable to roll up, giving managers project information by different programs, organizations, corporate objectives, physical locations and other criteria. Summary data is often contained in "dashboards" to give executives a big picture view of the portfolio, with the ability to drill down into more detailed data if needed.
Various processes are needed to facilitate project portfolio management. The more formal and consistent the processes, the more reliably and diligently they are performed. Some aspects of project portfolio management, such as raw data collection, can be automated. Other facets depend on human effort, analysis, debate and decisions that defy automation. Processes will cover activities such as submission of projects for consideration, review and evaluation of projects, issue escalation, communications, roll-up and distribution of data and reports.
Companies never lack project requests and proposals. They do lack infinite resources to devote to projects. Even if limitless resources were available, some projects simply do not offer enough value to justify the investment. This duo of finite resources and varying project value puts a premium on choosing the "right" projects in the first place, and making sure they succeed. Choosing the right projects takes involves several tasks.
Determining a value for a given project is a crucial first step in the selection process. Usually, a business case or cost justification containing financial metrics will supply enough data to make an informed decision.
Although many companies expect at least a 50% ROI or payback within two years, there is no single definition of the "right" project. In a nutshell, for a project to be worthy of consideration, its value must be sufficiently high when compared to its costs and risks. Fo r a project to be ultimately selected, its value must be superior to that offered by other projects.
Figure 2 below provides a simplistic illustration of project value. If a new warehousing system will save a company $10 million per year, and the solution has an anticipated life of ten years, then the project has a potential value of $100 million. Offsetting this gross potential value are the initial costs of construction, and the operational costs to support, maintain and operate the processes, applications and components of the solution. When these offsetting costs are deducted from the potential value of the solution, the next business benefit is derived.
Figure 2: Project Value vs Costs
Every project has risks. Project portfolio management evaluates and realistically assesses these risks and identifies mitigating factors and contingencies. A project's risks are used to adjust its potential return, and give the execution team advance warning of problems that might arise. The risks in establishing a company intranet, for example, may be quite contained, while the risks in implementing a multi-year, multi-national project complete with major process re-design may be quite significant.
Correlating projects with a value and risk allows them to be categorized in a meaningful way, and enables executives to compare and prioritize competing proposals. Risk/return ratios also ease the selection process and result in a better balanced portfolio.
Project portfolio management chooses a set of projects that will generate the highest payback for the company for an acceptable level of risk, thus balancing the portfolio. High value projects are clearly the most sought after, but their risks, if too high, may dilute their attractiveness. Conservative projects may quell fears of losing an investment, but if the returns are too low, they may undermine the company's viability.
Optimizing the order and timing of the projects in the portfolio allows a company to lower its overall execution costs, avoid costly re-works, re-use deliverables and exploit synergies among projects. Tuning the order and timing of projects may entail accelerating projects with exceptional benefits and slowing down others with less compelling value.
Finding and allocating resources to perform a project is challenging. Sufficient personnel and expertise are needed to meet schedule commitments and produce satisfactory deliverables. Cost-effective labor is required to allow a project to achieve its anticipated rate of return. Where internal skills are lacking or in short supply, consultants may be used to bridge the gap. If costs are a sensitive issue, the company may engage in labor arbitrage, sourcing the project to a third party that uses less expensive resources.
Whether in goals, scope or resources, projects will inevitably conflict. Vesting portfolio management responsibility in high-level executives means that decision-makers have the objectivity and big picture view needed to resolve those conflicts. Projects with conflicting goals or scope must be re-designed. Projects with conflicting resource demands will require schedule adjustments, or else other sources of labor will be tapped to bridge the gap.
Projects that do not make the grade must be culled from the portfolio or altered to make them more attractive. To that end, executives will:
Executives initially select projects for execution because they advance business goals. With projects straying over time, and with business goals shifting and evolving too, even originally well-conceived projects can become misaligned.
Misalignment may be a natural and expected occurrence, however, it must be promptly identified and corrected to avoid serious problems. For example, a dramatic change in business priorities could completely eliminate the need for a project, requiring quick project termination to avoid wasting further money. Even a seemingly innocent extension of a project's due date might prevent a company from gaining seasonal or fleeting benefits.
Constant course corrections are key to maintaining alignment, as are decision-makers well versed in the company's latest goals and strategies. They must intimately understand how projects in the portfolio relate to different business goals, and the ramifications if either projects or business goals change.
With only a small percentage of projects selected for execution, it is crucial that they succeed. To allow companies to promptly realize the benefits of each project, project portfolio management provides executive-level support and oversight. While tactical, day-to-day execution issues are left to project managers, executives provide strategic management, taking proactive steps to resolve problems and keep projects on track by:
Whether a company is interested in wringing the next ounce of improvement, reducing wasteful spending on marginal projects, or targeting resources to areas with the highest payback, active project portfolio management is a critical part of the strategy. Without strong project portfolio management, companies are effectively rolling the dice. With it, they can proactively exploit the ripest and highest ROI opportunities and advance their larger business goals.
NOTE: Clarity Consulting offers a full range of research, metrics development and analysis and consulting services to help companies optimize the value of their project investments. We help companies identify and size project opportunities, calculate ROI potential, establish metrics to track project performance and optimize project portfolios to maximize business yield. For more information about Clarity Consulting and our offerings, please visit our home page.
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