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The case for project portfolio management

by • February 6, 2015 • PPMComments (0)2505

The Case for Project Portfolio Management

Project Portfolio Management (PPM) has gained widespread interest from many organisations over recent years. Having gained some level of maturity in the actual delivery of projects, they now focus their attention towards aligning projects with the organisation’s strategic aims. In considering a project portfolio management approach they seek answers to questions such as:

• How will this project support the strategic (or tactical) objectives?
• What is the return on investment (ROI) for this project and over what period?
• What resources (financial, human, and other) are required to deliver this project?
• What is the impact of this project to other projects and business-as-usual activities?
• What risks does the project introduce and how can these be managed?
• What is the relative priority of this project against others; whether pipeline or active?
• How will this project need to be sequenced with other projects to take into account factors such as availability of resources (including financial) and inter-project dependencies?

Whilst these are the basic questions that should be asked and answered before any new project is initiated, few organisations have the project portfolio management maturity and capability to do so with any level of confidence. There are exceptions to this of course. There will always be “must do” projects but even in these cases, it is still necessary to find answers to the questions listed above. More often than not, decisions about which projects to start are made without access to all of the relevant information. This leads to sub-optimum outcomes such as low priority or ‘pet’ projects taking priority over more critical projects. This ties up resources, delivers poor return on investment and increases organisational risk.

The challenge for project portfolio management does not simply end with the selection of projects. Once projects start, they have a tendency to act like runaway trains in that they are difficult to stop when needed. There are numerous reasons as to why projects may need to be prematurely cancelled, placed on hold or re-sequenced around other projects. However, these decisions cannot be taken without a clear picture of how all of the moving parts interact. Effective project portfolio management involves making these difficult investment decisions based on sound management information.

Project Portfolio Management therefore is an on-going process that addresses the challenges all organisations face. That is, where should they invest their finite discretionary resources to ensure that they are doing the right things at the right times for maximum return on investment at an acceptable risk?

The key roles of project portfolio management can be viewed as:

a) Selects the right projects (and programmes) for the organisation
b) Ensures initial and on-going alignment of programmes and projects with strategic business objectives and targets
a) Prioritises Demand balancing cost, benefit, risk, alignment & achievability
b) Assesses which requirements can be accommodated (Skills, Capacity etc)
c) Ensures on-going alignment of programmes and projects with strategic policies and frameworks such as Enterprise Architecture (IT), procurement etc.
d) Allocates right resources to right programmes and projects
e) Ensures scrutiny and challenges where needed
f) Identifies and manages dependencies between programmes and projects
g) Resolves conflicts and contentions for resources
h) Reports progress through accurate and timely reporting
i) Monitors progress against key objectives

Project Portfolio Governance

Portfolio Management Variables: Demand, Capability (inc Finance) & Risk

Project Portfolio Management is a governance driven process that requires both knowledge of the organisation’s strategic plans, and awareness of its capabilities and limitations. This balance of Demand versus Capability determines the pace or scope of change within the project portfolio. It is often the case that the organisation has more need for change than can be accommodated (capability), even where funding is not at issue. Project Portfolio Management is the means to determine what is achievable or to highlight what must change in order to make it so. Without effective project portfolio management, projects may be started with no little or no hope of succeeding; a fact which may not come to light until further down the project lifecycle. By this time it will be too late.

To add to the project portfolio management variables of Demand and Capability we could add a third variable. This is Risk. Even though an organisation may have the capability to deliver enormous change, it might be concluded that the level of change would be too much for the organisation to assimilate all at once. Whilst it could be argued that risk is simply an aspect of capability, the reality is that the sum of all project risks does not necessarily equate to the overall project portfolio risk. It may be that from a project perspective, all projects are running happily at low to medium level risks. However, at the portfolio level, you can get the risk-on-risk effect which acts as a kind of risk multiplier. This can only be seen at the portfolio level. It is therefore good practice to treat risk as a variable all of itself. The risk variable acts as a kind of damper preventing too much change all at once. The three variables of Demand, Capability (including funding) and Risk therefore are the key variables that project portfolio management has to play with.

Project Portfolio Governance Boards

Centralised Governance

For organisations to be effective in project portfolio management it is common for them to operate a portfolio management governance board. This board is made of representatives from the business as well as from the delivery areas such as IT, HR, Procurement, Manufacturing etc. The exact makeup of the board will depend based on local factors. The business representatives are there to articulate the Demand and to make priority decisions whereas the delivery areas are there to articulate Capability. The project portfolio management team would provide support in terms of scenario planning, portfolio risk assessment, resource impact assessment etc. Collectively, it is the project portfolio management governance board who make decisions on which projects the organisation will invest in and the sequencing of these. However, no decisions are possible without the relevant management information. Collating and presenting management information is therefore crucial to the portfolio governance board. This aspect is one of the most difficult to achieve in project portfolio management. We shall cover this in further detail later on.
Whereas for some organisations, it may make sense to operate a single portfolio board, it is also quite common to operate different governance boards that represent the various business areas. The advantage of this model is that it allows each business area to make decisions about their own area. The challenge is that they maybe reliant on shared services to deliver the projects e.g. IT. In this case they cannot in reality make fully independent decisions.

Federated Governance

One way to address this, which is common in large organisations such as Government, Financial Services and Banking, is the Federated model. In this case, each major business area would have their own IT resources which they can use as they wish. The Departmental IT would report to Central/Corporate IT in terms of IT policy, standards and architecture but would be free to deliver at the local level. In this scenario, Central IT would themselves operate as a business as they too would have projects which they themselves wish to undertake. Some of these central or corporate IT initiatives may have direct impacts on departmental projects. Therefore, most Federated models still recognise the need for over-arching governance.

Categorised Portfolios

Project portfolios, as well as projects are often categorised according to labels which are meaningful to the organisation. Typically these might include large capital projects and small changes. Every organisation has a seemingly never ending demand for small change. Many of these will have little perceived priority and so there is the danger that these small requests will be ignored. By having a portfolio of small change, this is avoided and enables the small changes to be scheduled alongside the larger projects. Categorisation also assists with managing and reporting against projects. For example, within a banking environment it may make sense to have portfolio categories such as Retail Banking, Business Banking, Mobile Banking, General Insurance, Infrastructure etc. Each category may equate to a portfolio although not necessarily. They may simply belong to one overall portfolio that can be filtered by category.

Account Board Approach

Yet another hybrid approach is with the use of account boards. In this scenario, the centralised Project portfolio management team liaise with the various business areas via account boards. These account boards are run by the business areas and are a forum for identifying and prioritising potential projects to portfolio management early on. This provides time for the projects to be assessed against agreed criteria so that they can be compared against other competing project proposals including other business areas. It provides a uniform approach for the identification, assessment and approval of new projects throughout the organisation, making comparisons and decisions easier further down the line.

Deciding Which Approach

How each organisation decides to address Project Portfolio Governance depends on their size, structure and to some extent their cultural norms. Those that have traditionally used devolved budgets to each department on an annual basis will be more likely to implement a portfolio management governance model based on some sort of Federated or hierarchical model. Others that have centrally held budgets may choose to implement a more flat model, probably with a single governance group. There are countless variations and a great deal of thought is needed in designing the optimum governance model for each organisation.

Strategic Project Portfolio Planning

Organisations typically have a strategic planning cycle. This may involve a 5 or 10 year plan whereby the key objectives are set at the highest level. These are then cascaded to all areas of the business so that each area can set their own departmental objectives which must underpin the overall strategic objectives. In order to meet the objectives, a strategic plan is created identifying key events and milestones.

In order to deliver the plan it will be necessary to initiate projects and programmes which are directly targeted towards one or more key objectives. Projects that can’t demonstrate a direct linkage to strategic objectives and plans should not be approved. Some exception may be allowed but these would typically be tactical or ‘enabling’ projects that contribute towards the overall direction of travel. Small Change is normally managed separately to project work.

Project Portfolio Management therefore needs to analyse demand (proposals/requests) for new project work from a strategic perspective. A typical demand management process would contain the following stages:
1. Strategic planning
2. Project identification
3. Project proposal
4. Project impact assessment
5. Project approval or rejection

The key aim here is to ensure that projects don’t simply come out of thin air. They need to be the product of careful strategic analysis and planning.

Project Prioritisation

One of the key roles of project portfolio management is to understand and act on the changing priorities across the overall portfolio. This should include the project pipeline i.e. projects that have been approved or likely to be approved but have not yet started. Producing and applying a framework for allowing work to be prioritised is essential if projects are to be compared on a like for like basis. There are many ways to go about this and each organisation will develop something that works for them. Often, a scorecard approach is used whereby a set of criteria (weighted if necessary) is applied for each project and used for comparison. Typical criteria used in this approach are:

a) Strategic Alignment
b) Benefits
c) Risk & Impact

Strategic Alignment

As stated previously, the project must align to the overall business strategy. The degree to which a project will help the organisation achieve its strategic aims and objectives is therefore a key criterion when assessing projects. It is useful to list the key strategic objectives and to state how the project will support each.

Benefits

Benefits refer to the financial return on investment of the project and the timescale for that return. Benefits can also be non-financial such as improving reputation etc. although in many cases there is often a hidden financial value and this should be identified where possible, as this is useful for comparison purposes.

Benefits are also accrued over time and it is important to understand when these benefits will be realised. A benefits realisation plan will do this and is also useful for comparing benefits across different projects.

Risk & Impact

This refers to any negative aspects to a project such as the ability of the project to deliver successfully. There may also be impact on other projects such as resources being taken from other projects.

Project Portfolio Balance

Previously I highlighted the three main variables associated with project portfolio management. These are Demand, Capability (including available funding) and Risk. Portfolio balance refers to the relative ratio of these variables and addresses the following questions:
a) Does the demand represent the requirements of the whole organisation?
b) Is the demand aligned to strategic objectives
c) Does the demand outweigh the capability? In other words, is there too much work to do for the resources we have? Conversely, is there too little work to do?
d) Are we maximising return on investment by having the right mix of projects?
e) Are we being too risk averse or conversely have we bitten off more than we can chew?

The portfolio balance is something the project portfolio governance board should be particularly interested in. They will need access to quality management information in order to make the right decisions and once again this management information stands out as a key requirement for successful portfolio management.

Project Portfolio Planning and Resource Management

Portfolio planning takes a holistic look at the whole portfolio of pipeline and active projects in order to sequence them in the most optimum manner. In order to do this effectively, information is required about all of the different projects. Some specialist project portfolio management tools exist to help in this entire area but are usually only found in organisations that have already ascended up the project management capability and maturity ladder. These organisations will have tools and processes already embedded into the day to day management of projects. Others further down the ladder will need to develop other ways of working which makes the required data easier to collate. We will look at this later but first, here is the key data that is needed in order to effectively plan and manage the portfolio:

Project Information

You will often need to refer to information about each project. This would include items such as project name, sponsor, project manager, objectives, milestones, budget, forecast, timeline etc. Having this Meta data to hand either in a system or on a page will help when trying to form the big picture. Over time, this information can be enriched so that it contains precisely what is needed to support the management of the project portfolio. It is also useful to understand the relative priority of projects taking into account return on investment and externally driven dates e.g. legislation driven dates, product launch etc.

Project Timelines and key Milestones

This information is key to creating and maintaining the project portfolio plan. This can quite easily be represented on a project planning tool such as Microsoft Project or even Excel. Use one task per project and represent key phases or milestones using sub tasks. Implement planning standards that define what level 1,2, and 3 milestones are. By making all projects adhere to this, you can then experiment with linking projects together to create an overall view. This takes time but is well worth the effort when no dedicated tools are already in place.

Project resources profiles

This is all about knowing who needs to be working on what and when? This includes people, suppliers and specialist resources (plant, tools etc). To achieve this requires access to a common resource database. Most project and portfolio planning tools allow resources to be selected from a common or shared resource pool. Without this, projects can wrongly assume that key resources will be available at certain times. By having a shared resource database, resource conflicts are highlighted and conversations can be had between project managers in order to resolve conflicts. Ideally, this can be done at the project level. Once again, Microsoft Project supports the use of shared resource pools. By rolling up all projects into a Master project (Portfolio) you can identify resource conflicts. This will go some way to resolving the issue of resource management but does require a large commitment from all project managers to work in a consistent way.

Project Inter-dependencies

This refers to products produced by one project that are required by another. Typically these are termed as “gives and gets” i.e. one project gives something and the other project gets it. Maintaining a dependency register is one way of managing this and is highly recommended in anything but the smallest portfolio. Resources can also be included in the dependency register if one project is waiting for key resources to be freed up by another.
Project Risks and Issues
The likelihood that an individual project schedule will need to change due to risks and issues is a key input into the project portfolio planning process. Contingency and Scenario planning is often used to provide best, likely and worst case. Once again, this requires a high level of sophistication and is difficult to achieve without specialist tools.

Conclusion on Project portfolio Planning

Project portfolio planning presents a number of challenges, due mainly to the fact that the required information is often not available in a format that can readily be used. Tools do exist but these require a huge commitment not only in terms of investment but in terms of organisational change. Generally speaking, these tools and the surrounding processed can’t be implemented overnight and inevitably there will need to be some interim (usually fairly long term) measure to provide at least some of the information needed, on a repeatable basis.

Project Portfolio Management Control

Project Portfolio Management Control refers to the monitoring, reporting, and intervention needed to ensure the right portfolio balance is maintained. It involves decisions from the portfolio governance group who in turn require information presented in a suitable format. Who prepares this information is usually the portfolio and resource management team with input from project managers and other stakeholders. The PMO usually plays a key role. Finding the right format and content of information needed to support these decisions will be specific to each organisation but typically would take the form of a pack that addresses the following:

a) Overall Portfolio Plan on a Page with key dependencies and colour coded to highlight where risks, issues and hot spots are located. This provides a good overview of the big picture, what events are approaching and where the key areas of concern are.
b) Top Risks and Issues together with a description, severity, mitigation actions, owner, residual value etc. It may be necessary to look into more detail about particular risks and therefore any items highlighted on the plan on a page will need corresponding back up information.
c) New Projects proposal for approval or rejection. The Sponsor presents the case for a new project for consideration. Supporting papers in the form of project brief and outline business case are presented together with a portfolio impact assessment. Alternatively, a short presentation of each is prepared which must have been reviewed and approved (with concerns) prior to the meeting.
d) Change Requests. These are presented where a project is expected to breach agreed tolerance and so will have an effect on the portfolio plan.
e) Projects that require consideration for premature termination. These are the ones which appear unlikely to succeed or for which there is no longer a strong business case
f) Prioritisation and Sequencing of projects within the portfolio
g) Confirming Funding and Governance arrangements for new projects. This is crucial as all projects must have a known and agreed source of funding an effective governance structure if they are to be successful.

Project Portfolio Benefits Management

The concept of a project business case is well documented. The business case determines whether a particular project is viable and worthwhile. Typically, they will describe the problem to be fixed or opportunity to be exploited. They will then document the various options that have been considered and make a recommendation. The preferred option will have a description of the benefits to be realised balanced against cost and risk. The benefits will be set out over time and may employ a net present value (npv) to allow for inflation. Benefits will be either financial or non financial e.g. threat to reputational damage.

From a portfolio perspective, projects need to be selected and sequenced based partly on their overall contribution. When projects exceed tolerances or are expected to exceed tolerances, it is the role of project portfolio management to assess whether that project should be given additional time or resources to complete it or establish whether those resources should be diverted towards another project. This would obviously have an impact on the project and may even mean it being prematurely terminated. Project portfolio management provides the opportunity to make that decision and not simply allow under-performing projects to continue unchecked.

Project Portfolio Financial Management

Projects are funded using ‘discretionary’ budgets i.e. money that is separate from that needed to run the day to day business operation. From this perspective, projects and changes are viewed as investments. The term portfolio management is borrowed from the world of finance and the analogue is a good one. When investing your discretionary funds you want the best return for the funds available. Organisations typically allow business areas to bid for allocation of funds from a central pot, or they are allocated an amount each year based on some other funding model. Either way, the justification for funding must come under the remit of the portfolio management governance group.

Conclusions

The case for project portfolio management is strong for organisations that have sizeable project portfolios. Without the controls that project portfolio management provides, it is highly likely that finance and other resources will be deployed in the wrong places. Without project portfolio management to apply rigour in the selection of projects, demand is allowed to rise and with it comes unrealistic expectations of what can be achieved. The three variables of demand, capability (including finance) and risk must be balanced and seen to be balanced. This then provides an opportunity to review demand in terms of what can realistically be achieved. It also highlights the possibility to increase capability through use of additional resources; either permanent or short term.

Project portfolio management is an advanced discipline in terms of the organisation’s project management capability and maturity. Organisations that have been through the pain of implementing and embedding project management best practice frameworks may not feel ready to attempt the next step. As with anything, small steps are the key. With a clear blue print in mind, a step by step approach can be taken that will reap rewards with minimum disruption. It may not be perfect but it will certainly be better than leaving things to chance with the status quo.

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