Technical Terms Used in Project Portfolio Management (Continued)

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

T

U

V

W

X

Y

Z

productivity index (PI)

Various metrics intended to represent the efficiency of a project, often used for project prioritization. The productivity index (PI) is the ratio of some quantity to be maximized and some quantity that is a constraining resource. For example, a construction company might select the project's "earned value" (as defined, for example, by earned value management) as the numerator for the PI. The denominator might be the number of labor hours needed to complete the project. Thus, a productivity index could be defined as:

The ratio expresses the dollar earnings available from the project per hour of labor required. Projects are ranked according to the productivity index and approved from the top down, until the constraining resource (in this case, labor) is exhausted. The approach is intended to maximize the productivity of the selected project portfolio, as defined by the measure used in the numerator, while staying within the constraints for the resource defined by the denominator.

As another example, if R&D budget is the presumed constraining resource, a productivity index might be defined as:

A form of the productivity index sometimes proposed for ranking new product-development projects is the development productivity index (DPI), defined as:

This, and related approaches that involve assigning probabilities to the achievement of the measure to be maximized, may alternatively be described as a probability-adjusted productivity index.

The recommended project ranking metric described in our paper on mathematical methods, project benefit divided by project cost (bang for the buck), is an example of a productivity index. In contrast, note that in the above two examples the cost in the denominator is subtracted within the numerator (since NPV is project value minus project costs). Thus, these PI's do not exactly express benefit-per-unit-of-cost (the ratio typically recommended for ranking projects). However, such a PI effectively expresses a ratio of benefit-to-cost and then subtracts one unit from it, which results in the same priority rankings.

Like other ranking metrics, at best, a PI is an approximation that may, in some cases, reasonably approximate the project portfolio that would be obtained based on constrained optimization (i.e., maximizing the measure in the numerator subject to the constraint represented by the denominator). However, errors are often made in formulating the productivity index, and the approach will not work if there are dependencies that cause a project's productivity index to change depending on what other projects are conducted.

profitability index (PI)

A specific type of productivity index used to measure the financial attractiveness of a project. The profitability index (PI) is normally defined as the ratio of the present value (PV) of the project's projected future cash flows divided its required initial investment:

(If the required investment takes place over several years, the denominator may be replaced by the PV of required investments.) The computed PI's are used to rank projects based on projected financial value created per dollar of required investment.

Since the project net present value (NPV) includes the cash flow deduction for the initial project costs,

A PI of 1.0 is logically the lowest value for an acceptable projects, which would correspond to an NPV = 0. Any value less than one would signal a project with a present value less than its costs.

Like other productivity indexes, the profitability index provides a simple way to rank projects that compete for limited capital. Its weakness is that it ignores project interdependencies. Also, the profitability index fails to account for project benefits other than future cash flows. The profitability index is also sometimes called the profit investment ratio or the value investment ratio.

program

A suite of related projects managed as a whole.

program management

The task of managing a program; that is, a suite of related projects. Analogous to project management, the program manager strives to achieve the triple constraints of schedule, cost, and quality, while meeting requirements on deliverables established by customers or sponsors. Typically, the program manager provides overall direction and coordination to teams responsible for the individual projects and serves as a central point of contact for the program's customer or sponsor.

project

A unique, temporary endeavor undertaken by an organization to produce some desired benefit (e.g., a project to enhance a product or service). Projects vary greatly in size and complexity, typically involve activities outside the routine operations of an organization, and often draw on resources from different parts of the organization for the duration of the project.

project based organization

An organization that executes much of its business through conducting projects. Project based organizations typically adopt an organizational structure that facilitates the formation and support of project teams, as well as the reassignment of individuals following the completion of projects. As argued throughout this website, project based organizations can benefit greatly from implementing project portfolio management. .

project deferral risk

The risks associated with the decision to defer (delay or decline) doing a project. Maintenance projects commonly involve deferral risks, since postponing maintenance often leads to a deterioration in asset performance and/or greater risk that the asset will fail in some way. Project deferral risk can also arise if there is a limited window of opportunity for successfully conducting a project. More generally, deferral risk occurs if project benefits would decline or project costs would increase if the project were to be conducted (or completed) at a later date. See this risk demo illustrating the importance of accounting for project deferral risk in project portfolio management.

project evaluation criteria

Criteria used to evaluate, prioritize, or select projects. There are many possible arguments for and against conducting projects. As such, it can be helpful to establish and enumerate the criteria that should be systematically addressed when considering a project proposal. The major challenge for using project evaluation criteria is determining how evaluations against each criterion should be mathematically aggregated to obtain a measure of the overall attractiveness of the project.

It is easy to find lists of criteria for evaluating projects. For example:

• Financial criteria, e.g., profitability, return on investment, impact on cash flows, payback period, size of initial investment required, upside economic potential.
• Health, safety, environmental criteria, e.g., impact on public health, impact on public safety, impact on worker health, impact on worker safety, air/water emissions, impacts on native plants/animals.
• Customer criteria, e.g., serving demand, impact on service quality, customer experience, customer acceptance.
• Marketing criteria, e.g., competitive need, market attractiveness, size of potential market to be served, likely market share attained, time until market share acquired, product/asset lifecycle duration.
• Production/operational criteria, e.g., ease of implementation, fit with available capabilities/resources, degree of understanding of required technology, managerial capability to direct and control, energy requirements, process safety, impact on waste generation, impact on suppliers, impact on IT systems.
• Work force criteria, e.g., availability of required labor skills, training requirements, opportunity for learning, level of resistance/acceptance from current work force, impact on working conditions.
• Regulatory/legal criteria, e.g., needed to meet standards or requirements, patent and trade secret protection, potential to create legal liabilities.
• Image/stakeholder relationship criteria, e.g., reaction of shareholders and other stakeholders, impact on corporate image.
• Strategic criteria, e.g., advancement of strategic goals, political significance, contribution to portfolio balance.
• Risk criteria, e.g., likelihood of missing schedule, potential for cost overrun, sensitivity to external uncertainties, probability of success.

Project evaluation criteria should be selected to reflect the specific objectives of the organization. Also, they should be expressed in terms of metrics and performance measures that are appropriate and familiar to the business. Thus, lists such as the above are best used as starting points for the development of project evaluation criteria that are specifically tailored to the organization and the types of projects to be evaluated.

Many project portfolio management tools allow users to specify project evaluation criteria. The tools use the criteria, typically in a scoring model, to compute an overall measure of project attractiveness, which is then used to rank projects. Scoring models typically weight and add the scores assigned to the various evaluation criteria. However, with criteria similar to the examples in the above list, this would most likely not be correct, and the result would be erroneous project rankings.

If evaluations against multiple criteria are to be combined, it is essential the criteria be defined and structured in such a way as to facilitate the determination of a logical aggregation equation. For example, care must be taken to ensure that criteria do not overlap or double count the same basic benefit. Also, if ratings against the criteria will be weighted and added, the criteria must be defined so as to be preferentially independent, and scaling functions may be needed to account for differences in the value of achieving different levels of performance against criteria. The paper section on Project-Selection Decision Models describes how this may be accomplished based on developing models for measuring project value.

project management

A set of principles and practices for successfully completing projects. A major focus of project management is maintaining project quality while adhering to time, scope, and budget constraints. Typical steps in project management include initiation, planning, executing, controlling, and closing. Project management is typically the responsibility of a project manager who is supported by a project team.

The era of modern project management began in the early 1960s as organizations began to see the benefit of organizing work around projects. The Project Management Institute (PMI) has created "A Guide to the Project Management Body of Knowledge" (PMBOK), which contains well-established standards and guidelines for project management.

In contrast with project portfolio management (PPM), which is aimed at simultaneously managing whole collections of projects, project management is focused on successfully completing individual projects. Loosely speaking, project management is sometimes described as "the collection of processes and practices required to do things right," while PPM emphasizes "the process and practices needed to do the right things."

project network diagram (PND)

Also called a project precedence diagram, a graphic representation of the activities that make up a project and their interdependencies. PNDs can aid project planning, and the capability is provided by many project management tools and by some tools for project portfolio management tools. The diagrams are similar to Gantt and Pert charts, but contain more detailed information about project activities.

To construct a PND, necessary project tasks are identified. These tasks may then be further broken down into more detailed activities, as in a work breakdown structure (WBS). Each activity is examined to determine which other activities need to be conducted before it can start (its predecessors). Likewise, other activities that must be delayed until the activity is completed are identified (its successors). Typically, the dependencies include "discretionary dependencies," based on industry best-practice or previous experience, as well as mandatory dependencies inherent in the nature of the work.

The project activities are represented by nodes in the diagram. Each node is typically displayed as a rectangular box containing information about the activity. The boxes are arranged according to activity order; left to right or top to bottom. Arrows are drawn to connect the boxes according to the successor/predecessor relationships

A project network diagram

PND software automatically computes the critical path and other project statistics, but you can manually construct the diagrams using paper stickies on a white board. Either way, the resulting diagram illustrates the entire project plan from a high-level view, and you can drill down to obtain more detailed information about each task, including how long it will take, the earliest and latest times it can start and end, and float; the time available to perform the activity less the time needed.

project planning

The process of creating a plan for conducting a project, recognized as a critical, initial step of project management. Like other types of business planning, project planning is aimed at obtaining the greatest benefit from the project while minimizing risk and making the wisest use of available resources.

Key steps in project planning include establishing project goals, defining project deliverables, creating a list of project tasks and a work break down structure (WBS), identifying the people and other resources needed to carry out each task, creating a project schedule, and identifying risks and developing a risk management plan. The amount of effort and detail appropriate to each step depends on the size and complexity of the project. Gantt charts and PERT charts are often used to plan and subsequently report progress with regard to project tasks. Inadequate project planning is often cited as the main reason that high percentages of projects fail.

project portfolio management (PPM)

A formal, tool-supported process intended to help organizations select projects and better manage project portfolios using techniques similar to those employed by financial managers to optimize investment portfolios. A project portfolio is a collection of projects (and, perhaps, other work) grouped together to facilitate the effective management of that work.

The goal of financial investing is to select the best portfolio of available stocks, bonds, and other financial investments. By analogy, the goal of a project based organization is to invest in the best possible set of projects. In both cases, the "best" portfolio is the one that is expected to return the most value, taking risk into account. Good financial portfolio management requires monitoring investment performance and periodically restructuring the portfolio. Poor-performing investments, for example, may be sold and the proceeds redirected to other investments that are expected to perform better. Similarly, with PPM, projects are monitored and those that are performing below expectations (e.g., because of cost overruns, benefit erosion, or changing needs) may be terminated so that the resources may be directed toward new or other existing projects. In the case of both financial investing and project investing, the key to success is making sound, high-quality decisions, and the best way to achieve that is through a disciplined, well-reasoned, decision-making logic. (Despite the similarities between financial portfolios and project portfolios, be aware that there are some important differences—see the discussion under modern portfolio theory).

The tools available to support PPM vary greatly in their capabilities. However, a common characteristic is that all PPM tools collect and organize into a central database pertinent information about proposed and ongoing projects (data such as project names, objectives, resource needs, timelines, etc.). The tool gives users (typically managers or senior executives) a bird's eye view of projects, making it easier to spot inefficiencies in the project portfolio (for example, redundant projects). Being able to quickly and easily access, review, and compare a large number of projects aids project funding decisions and other key financial and business choices that the organization must make.

Of course, financial portfolio management involves much more than simply putting the information sheets for candidate investments in front of the decision maker. Professional investors rely on sophisticated models to forecast the performance of individual investments. Many also use mathematical optimization techniques to construct investment portfolios that maximize expected risk-adjusted return, accounting for the risk tolerance of the investor.

Likewise, most PPM tools include models for estimating project performance and logic for recommending projects. However, very few PPM tools employ methods as rigorous as those routinely used for financial investing for valuing projects, assessing project and portfolio risk, or optimizing the project portfolio. Instead, many PPM tools use simplistic, unreliable methods for prioritizing projects. For example, one common approach, called strategic alignment, involves ranking projects based on the degree of judged alignment between the project and elements of corporate strategy. Strategic alignment, of course, has little if anything to do with project value or risk. PPM customers should take care to not be misguided by faulty recommendations provided by inadequate PPM tools.

project portfolio management office (PPMO)

One or more people in an organization assigned responsibility for project portfolio management (PPM). Activities include evaluating project proposals and making recommendations to senior management regarding what projects to conduct, recognizing the limitations on available resources. The PPMO is distinct from a project management office (PMO) in that the latter is focused on improving project management performance as it relates to individual projects. See the section of the of the paper on the project portfolio management office for more detail.

project selection criteria

See project evaluation criteria.

PROMETHEE

A multi-criteria analysis method that, like ELECTRE, is based on comparing potential actions while applying different criteria. A so-called outranking method characteristic of the "European school" of multi-criteria methods, PROMETHEE does not require a utility function for quantifying decision-maker preferences. Instead, it ranks options and determines which is most preferred by systematically analyzing the results of the individual comparisons.

PROMETHEE was originally developed in Belgium around 1984 and stands for Preference Ranking Organisation METHod for Enrichment Evaluations. Like ELECTRE, it comes in various "versions." PROMETHEE has been used for project prioritization and some project portfolio management tools are advertised as supporting the method.

proxy measure

See attribute.

Q

Q sort

A method for analyzing the opinions of a group based on a series of rankings (sorts) produced by the individual group members. The Q sort was originally developed within the field of psychology as a means for measuring correlations among the views expressed by different people. The letter Q was assigned to differentiate the method from another approach used in psychology, known as the R method, for analyzing correlations among various factors (e.g., height versus age). The Q sort, in contrast, is based on looking for correlations in the views of different subjects. A version of the Q sort is a popular collaborative approach for prioritizing projects.

The process for ranking projects via a Q sort involves a series of "rounds," with each round consisting of individual assessments followed by a group discussion. To prepare for a Q sort, a short description of each candidate project is written on a card. The resulting card deck is reproduced, and the copies are distributed to group members. A discussion is then held to improve the group's collective understanding of the projects.

Next, each member of the group individually ranks the projects by ordering his or her cards. Oftentimes, the ranking is done in steps. For example, initially, projects may be divided into two categories: higher priority and lower priority. Then the categories are decomposed to provide more discrimination, for example, sub dividing projects in each category into highest priority, medium priority, and lowest priority. The process continues until each individual has a complete, ordered ranking involving every project. A facilitator then tabulates the results and displays them to the group as a chart graph. Following the Delphi method for group assessments, results are reported anonymously, without associating people's names with their rankings. A period for discussion and debate follows, with participants arguing for various ranking positions for various projects. The process is then repeated in a second round, again with discussion following the anonymous reporting of individual priorities. By the third round, the facilitator usually attempts to lead the group to a consensus ranking of the projects.

The Q sort is popular, no doubt, because it is simple, easy to understand, and allows all participants equal influence in the decision-making process. Experience shows that it is a highly effective and efficient way of promoting consensus among participants. Its limitations are those associated with all methods that do not prioritize projects based on explicit criteria, analysis, and benefit-versus-cost logic. The process is not very transparent and does not generate documentation useful for explaining the reasoning underlying priorities—to outsiders, it may appear entirely political. Also, the Q sort depends on the participants having a complete and impartial understanding of each and every project, the needs the project serves, and the project's effectiveness. If there are a great many projects or if participants do not have an equally good understanding of all issues important to every project, basing priorities on the popular vote that underlies the Q sort is not likely to produce an optimal project portfolio.