Research shows clearly that businesses that feature a systematic portfolio management process, regardless of the specific approach, out-perform the rest. Having some portfolio management approach in place seems to be even more important than the details of which tools and metrics one chooses.
However, businesses’ whose portfolios are selected by relying heavily on financial tools as the dominant portfolio selection model sometimes fare worse than those that rely heavily on other kinds of tools, because financial tools can yield an unbalanced portfolio of lower-value projects and projects that lack strategic alignment. By contrast, strategic methods, correctly applied, do produce a strategically aligned and balanced portfolio.
It is ironic that the most rigorous techniques—the various financial tools—yield the worst results, not so much because the methods are flawed but simply because reliable financial data are often missing at the very point in a project where the key project selection decisions are made. Often, reliable financial data (expected sales, pricing, margins, and costs) are difficult to estimate in many cases because the project team simply has not done its homework or makes highly optimistic projections in order to secure support for its project. (See References 1-3)
The portfolio management solution discussed here is an objective process that enforces a rational rather than emotional (or political) approach to portfolio selection, helping to ensure that the selected investments are aligned with the organization’s strategic priorities and will maximize return on investment.
This solution involves the use of tools such as Microsoft Project Portfolio Server 2007 to gain visibility, insight, and control across project, program, and application portfolios as well as analytic tools to improve decision making. My discussion will conclude with a brief discussion of actual face-to-face, teleconferenced, and virtual meetings, the latter two using Cisco TelePresence 3000 and Microsoft SharePoint 2007, respectively.
A popular term for the process of guiding the portfolio is governance. This is especially so in the information technology area, where the term IT governance is becoming synonymous with Project Portfolio Management.
Automate the Governance Process
Tools are needed to automate the governance processes across the organization to subject each project to the appropriate governance controls throughout its entire life cycle. That is, you need to measure and track portfolio performance to help ensure that the portfolios are managed effectively and realize the forecasted benefits.
Figure 1. Example of a configurable workflow
As shown in Figure 1, each workflow is composed of a series of life cycle steps (such as Propose Idea, Initial Review, Complete Request, Request Review, Portfolio Selection, and Selected) which in turn are mapped to governance phases. The governance phases are used as common denominators to aggregate and report on projects across various workflows.
The phases and workflows establish a blueprint for your organization’s governance framework and help ensure all projects complete the necessary deliverables and receive managerial sign-off before moving to the next life cycle step. This audit functionality keeps stakeholders aware and accountable as projects move from business case creation to consideration to implementation.
With potentially hundreds of projects, programs, and applications competing for the same limited budget and resources, formulating common scoring criteria is essential to effectively prioritize and evaluate the competing investment proposals.
Using the embedded best practice prioritization methodologies and tools described below, executives can derive common scoring criteria for projects, programs, and applications, enabling “apples-to-apples” comparisons among dozens or hundreds of competing investments.
One of the most critical tasks in the portfolio management process is to define and prioritize the organization’s business strategy (as opposed to prioritizing individual projects). A pair-wise comparison matrix—discussed below—can be used to help executives objectively prioritize business strategy for the upcoming planning horizon.
Build Consensus Among Executives
In most organizations, executives from distinct functional domains will have different perspectives on which business drivers are most important to the business. A vice president of sales might consider “increase market share” and “develop new products” the most important business drivers, while a CIO might consider “maximize systems uptime” and “modernize enterprise infrastructure” the most important. In organizations where executives will be competing for the same budget and resources, achieving consensus is critical.
In a facilitated business strategy prioritization workshop—conducted in face-to-face meeting or meetings that are distributed in space and time—the executives collaborate to complete the pair-wise comparison matrix and assess the importance of each business driver against the others for the upcoming planning period to help drive consensus and calculate the business driver priorities. For example, in Figure 2, is “Expand into new markets and segments” more important when compared to “Improve Customer Satisfaction”?
Figure 2. Business driver pair-wise comparison matrix
In Figure 3, you see the resulting consensus on relative business priorities for an organization. It is very important to note that these derived driver priorities are relative scorings and not simply ranked from number 1 to number 7.
Figure 3. Derived relative priority of business drivers
Calculate Scores for Strategic Value, Risk, and Financial Return
Make use of best practice techniques to automatically derive prioritization scores such as strategic value, financial value, risk, architectural fit, and operational performance in order to objectively assess projects, programs, and applications.
Project and Programs—Best practice prioritization scores include:
- Financial Value: Calculate a project’s financial value (ROI, net present value (NPV), internal rate of return (IRR)) based on the cost and benefit estimates captured in each business case.
- Strategic Value: Objectively derive a strategic value score for each project in Portfolio Optimizer based on the project’s impact on the business strategy (see Figures 4 and 5).
- Risk Assessment: Calculate a risk score for each project derived from the risk assessment questionnaire.
Figure 4. Example of project to driver impact assessment
One of the most important project assessment scores is the strategic value score, which calculates the project’s value to the business. Using the impact matrix shown in Figure 4, each project is evaluated against each business driver and rated on a 5-point scale (for example, “no impact,” “low impact,” “moderate impact,” “strong impact,” and “extreme impact”) depending on the project’s contribution to quantitative key performance indicators (KPIs) defined for each driver. This process derives a strategic value score for each project shown in Figure 5.
Figure 5. Example of a strategic value priority scores for projects
Applications—Best practice assessment attributes include:
- Business Importance: Objectively derive a business importance score for each application.
- Architectural Fit: Map each application against the organization’s architectural strategy and standards, and calculate an architectural fit score.
- Risk Assessment: Calculate an application’s risk using the Portfolio Builder risk questionnaire.
- Operational Performance: Automatically derive an operational performance score for each application based on a performance questionnaire in Portfolio Builder.
Of particular note, the business importance of an application is computed by using a three-step prioritization process. This prioritization technique uses the pair-wise comparison matrix to prioritize business drivers, and then uses two impact matrices to first assess each business process’s contribution to the success of each business driver, and second to assess the level that each application supports each business process. This three-step process results in a business importance score for each application in the portfolio. Application contributions to business processes are best rated as a percentage of the process that is automated by the application (see Figure 6). The sum of application contributions to one process must be equal to or less than 100 percent.
Figure 6. Example of an application-to-business process impact assessment
Optimize Budget and Align Investments with Business Strategy
When you select your project or program portfolio for the upcoming planning horizon, you want to optimize budgets and recommend portfolios that best align with your organization’s business strategy. In short, you want to determine the optimal portfolio under budgetary and business constraints.
Faced with limited budgets year after year, IT and business executives must thoughtfully and effectively allocate resources to the highest value portfolio of project and program investments. By using sophisticated algorithms and embedded best practices in the Portfolio Optimizer module, you quickly can determine the optimal project or program portfolio under varying budget and business constraints (for example, cost and inter-project dependencies) while helping to ensure that the selected portfolio aligns with your organization’s business strategy and delivers the maximum financial value.
- Run What-If Analyses: Apply varying cost and resource constraints, optimize and dynamically assess the impact on the proposed project or program portfolio. The intuitive interface in Portfolio Optimizer enables analysts to run multiple what-if analyses and compare the results in a side-by-side table (see Figure 7). The optimization algorithm identifies the optimal portfolio under the given constraints, selecting projects or programs that have the highest value/cost ratio.
- Consider Dependency Constraints: The Portfolio Optimizer optimization algorithm identifies the highest value portfolio while considering complex inter-project dependencies.
- Force in Compliance or Pet Projects: Portfolio Optimizer enables analysts to force in mandatory projects, or even “pet” projects, overriding the optimization algorithm to ensure these projects are included in the resulting portfolio. This analysis technique enables you to rapidly assess the impact on the portfolio’s business value and effectively communicate the tradeoffs of including these mandated projects within the portfolio.
Figure 7. An example of optimization what-if analysis
Break Portfolio Constraints with Efficient Frontier Analysis
Efficient Frontier modeling enables analysts to visually identify the project or program portfolio that will deliver the maximum strategic value under varying constraint thresholds (such as $5 million budget or $10 million budget). Each point on the Efficient Frontier represents a different bundle of projects (or programs) from the proposed portfolio. The Efficient Frontier represents the best value. For example, in Figure 8 you can see that with a $36 million budget you can achieve approximately 72 percent of the portfolio’s total potential strategic value, although the current portfolio solution is only achieving less than 60 percent. Organizations can use the Efficient Frontier in two ways:
- Identify the point of diminishing return: Find the point where the curve begins to flatten, indicating you are paying a lot more to achieve a disproportionate amount of strategic value.
- Benchmark the selected portfolio against the Efficient Frontier: Compare the position of the selected portfolio in relation to the efficient frontier.
In reality, due to varying constraints (for example, interdependencies, project alternatives, mandatory investments, and resource constraints), most portfolios are suboptimal and fall beneath the Efficient Frontier, as shown Figure 8. Analysts can use Portfolio Optimizer to identify and break these constraints, which will move the portfolio closer toward the Efficient Frontier and increase the total strategic value from the portfolio under the same budgetary constraints.
Figure 8. A chart indicating the original portfolio has fallen short of the Efficient Frontier
Dynamically Assess Your Portfolio’s Business Alignment
This portfolio optimizer business alignment framework methodology provides a rational approach for selecting project and program portfolios that best align with business strategy. Executives can dynamically assess the correlation between the business driver priorities and the investment from the selected project or program portfolio. This also means that organizations are able to react to fluctuations in the economy or changes in their industry.
This technique helps you quickly see if you are over or under investing in each of the prioritized business drivers. For example, Figure 9 shows the results of the Business Alignment Assessment generated before optimizing the portfolio. Executives quickly can see that this organization is under investing in the higher-priority drivers and over investing in the lower-priority drivers, suggesting the portfolio spending is not aligned with the organization’s business strategy.
Figure 9. Business Alignment Analysis (before optimization): Relative driver priority versus proposed investment
However, Figure 10 shows the results of the Business Alignment Assessment generated after optimizing the same portfolio. You can see there is a better correlation between the business driver priorities and the total investment in the selected portfolio, suggesting a stronger investment alignment with business strategy.
Figure 10. Business Alignment Analysis (after optimization): Relative driver priority versus proposed investment
Finalize Portfolio Selection by Using the Decision Dashboard
A portfolio optimizer decision dashboard (see Figure 11) enables portfolio analysts to publish key metrics and recommended portfolios (such as optimization results) into an intuitive view, to provide executives with the data to support project and program funding decisions (such as Approve, Suspend, Cancel). In real time, executives can model project and program funding decisions and automatically see the impact on the portfolio’s strategic value. The steering committee then can select the portfolio to be funded for the planning period.
Figure 11. The Decision Dashboard.
Figure 12. An example, end-to-end governance process.
There exist many ways beyond any suggested above to carry out the individual life cycle steps represented in Figures 1 and 12. For example, a committee could meet to select a portfolio in an actual conference room, via a video conference, or using a virtual meeting.
Video Conferencing Enhances Real-Time Collaboration
As companies disperse geographically, splitting across states, or even continents, it is still possible to foster open, rapid, spontaneous communications with videoconferencing, which allows interactive, real-time video and voice communications between two or more geographically distant people or locations.
Although Video conferencing products give organizations the tools they need to reduce travel expenses and build stronger relationships with remote staff (and customers), you should first perform a comparative economic analysis of the alternative systems to justify the high investment costs (see Reference 10).
Figure 13 shows the Cisco TelePresence 3000, a 12-person virtual conference table, seating up to six actual people in any one location. Three 65-inch HD plasmas make up one side of the table and are coupled with properly positioned speakers.
Figure 13. The Cisco TelePresence 3000.
Built on open standards, the 3000 integrates existing applications like enterprise groupware and unified communications systems. This enables scheduling meetings by sending out calendar invitations with information displayed on the meeting room phone. The call is launched with a single button push, eliminating the need for IT support.
Virtual Meetings—Distributed Spatially and Temporally
But, as you already know, scheduling meetings is usually an iterative (a.k.a. inefficient) process. So, to avoid the scheduling and other costs associated with either a physical conference room or an electronic teleconferenced meeting, many organizations opt for virtual meetings that can be conducted without concern for the location or exact time of availability of the participants.
Figure 14 shows the workspace for conducting a meeting called for the purpose of making one or more decisions on a portfolio of projects. After studying the information (for example, The Objectives, The Discussion Board, and other Web Parts displayed in this figure) needed to make a decision that will produce the Objectives, a business user enters his or her Decision in the lower right-hand of the Web-browser page.
Figure 14. Virtual decision meeting (SharePoint 2007)
There are advantages to be gained by using the latest methodologies and tools in project portfolio management. They can help make compliance easier, along with ensuring consistency, facilitating meetings and so on. Interactive processes such those described throughout this article need not be horizontal between units; they can also be vertical, drawing superiors and subordinates into frequent dialog, debate, and action planning. A major benefit from using any control system interactively is the ability to identify emerging changes in the business and its ecosystem—both positive and negative—that may require changing the business model or strategy.
But, when all is said and done, a successful project portfolio management system is not just about using the latest methodologies and tools. It’s also about getting all the participants involved and on board from the very beginning.
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About the Author
Marcia Gulesian is an IT strategist, hands-on practitioner, and advocate for business-driven architectures. Marcia has served as software developer, project manager, CTO, and CIO. She is author of well more than 100 feature articles on IT, its economics and its management. You can click on the author’s name at the top of the article to send her feedback.