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Term
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Explanation
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source code
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The lines of code and algorithms as originally written by a computer programmer that determine how the software works. Source
code is typically written in human-readable form. In the case of most tools for project portfolio management that incorporate decision models, access to the source code is required to modify in any significant way the model or logic by which projects are evaluated and prioritized.
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SQL
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Stands for standard query language, a standardized computer language used to create, modify, retrieve and manipulate data from a relational database. SQL uses regular English words for many of its commands, which makes it easy to learn and understand. The original version, called
SEQUEL (structured English query language) was designed by an IBM research center in 1974 for use on mainframe computes. SQL was first introduced as a commercial database system
in 1979 by Oracle Corporation.
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standard deviation
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A measure of the spread or variability within a set of data. The standard deviation is usually calculated as the square root of the sum of the squares of the distance
of each data point from the mean divided by the number of data points minus 1:
In the equation, the xi are the various data values, n is the number of values, and xAvg is the average value of the
xi. The standard deviation is the square root of the variance, another measure of data variability. However, the standard
deviation is often preferred because it has the same units as the quantity being measured.
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stochastic
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Random or randomly determined. Typically applied to describe a model or method of analysis whose outputs account for uncertainties and their probabilities.
Probabilistic is another term used in this context with the same meaning. Compare with deterministic.
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stochastic programming
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A general category of mathematical solution techniques for problems involving uncertainty. In stochastic programming, probability distributions are typically used to quantify uncertainties. Stochastic programming is employed in some project portfolio management tools where the goal is to identify project decisions that maximize either the expected value or
certain equivalent of the project portfolio subject to budget constraints.
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strategic alignment
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The extent to which an organization's operational decisions are consistent with and implement its strategy. The concept is that organizations define strategies for
achieving their fundamental goals. Success then requires two things. First, the strategy must provide the organization with the right plan, one that will achieve its goals given the
realities of the organization's resources, strengths and weaknesses, and the business environment within which it operates. Second, the day-to-day decisions that are made within the
organization must successfully implement the strategy. Strategic alignment deals with the second issue. If the organization is not choosing projects
that are consistent with its strategy, the likelihood that its strategy will allow it to achieve its goals is reduced considerably.
Strategic alignment seems intuitively to be a good thing, and this, no doubt, is one of the reasons that it is so often talked about in the context of project portfolio management (PPM). However, as often happens with fuzzy concepts, the logic fails when we try to apply it in the real world. How do we measure
how well projects align with strategy? Even more importantly, why would having a portfolio of projects most highly aligned with strategy necessarily create the most value for the
organization? Projects should contribute to the implementation of effective strategy. However, just because a set of projects is highly consistent with strategy does not mean that those
specific projects will create the greatest value for the organization.
The approach most often used to quantify strategic alignment involves creating a scorecard composed of metrics linked to elements of the organization's stated strategy. For example, if policy makers have declared that one component of the strategy is to
"become the low-cost provider," projects would be scored on, among other things, the degree to which they would permit price reductions. If another
element of the firm's strategy is to "be acquired by a larger firm," projects would be scored based on whether they would make the firm appear more or less attractive to potential
acquirers. The scores indicate the scorer's sense of the degree to which proposed projects are consistent with the various elements of strategy.
By itself, the balanced scorecard doesn't provide an overall measure of strategic alignment, only numbers that reflect judged alignment with different elements of
strategy. Therefore, weights are assigned to the strategy elements to allow the scores to be aggregated. The weights typically reflect some judgment of the relative importance of the
various strategy elements, for example, how critical each element is to achieving the organization's stated vision. (See the description of the typical strategic alignment process.)
Although the above application of the balanced scorecard approach for strategic alignment might provide useful insights on projects and strategy, it would be of no use
for project prioritization. The main goal of PPM is to identify the portfolio of projects that creates maximum value. The value created per
dollar spent ("bang for the buck," see Mathematical Theory) is often a reasonable metric for ranking projects. Alignment scores have nothing to do with
bang for the buck. Just because a project achieves a high aggregate score because it reflects numerous elements of the corporate strategy does not mean it will create more value.
Strategic alignment is not a surrogate for value, so prioritizing projects based on strategic alignment does not make sense.
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strategic business unit (SBU)
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A company division, product line, single product, or company brand that has a mission separate from other company businesses and that can be planned independently from
the other businesses. The concept is that strategic business units can be managed autonomously. Organizing the enterprise into smaller business unit enhances flexibility, enabling a
large firm to react more quickly to changing market and economic conditions.
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swing weight
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A weight (scaling constant) indicating a decision maker's judgement about
how valuable it is to obtain a specified improvement in performance ("swing") against one criterion
relative to specified performance improvements against other criteria. Swing weights are tyically assessed using the
swing weight method.
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swing weight method
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One of the available methods for eliciting weights for the various criteria defined for multi-criteria analysis. The swing weight method requires specifying hypothetical changes (swings) in the level of performance against different objectives and
then obtaining judgments of the relative preferences for obtaining those swings, typically using a 0-to-100 scale. For example, if the most desirable swing is given a swing weight of
100 points, how many points would be assigned to obtaining the next most desirable swing? Although the swing weight method is not necessarily the most accurate method for eliciting
weights, it provides much more reliable results than assigning weights based on abstract "importance" of each criterion. A strength of the swing weight method is that most people find
it relatively quick and easy. Some project portfolio management tools include routines and aids for applying the swing weight method.
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SWOT analysis
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A decision aid wherein the strengths, weaknesses, opportunities, and threats associated with a proposed project or other business
decision are systematically identified and examined.
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T
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theory of constraints (TOC)
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A popular management approach originally developed in the 1980s in a series of books and articles by Eliyahu M. Goldratt . TOC promotes a "thinking process" and
various "solutions" based on the idea of identifying and relaxing the constraints that limit an organization's ability to achieve its goals. TOC advocates have argued that the approach
is applicable to project portfolio management. Although TOC does not dictate a specific model or logic for selecting projects, its perspective and
techniques are useful for project portfolio management in some situations.
According TOC, every organization has at least one factor that inhibits its ability to meet its objectives. The constraining
factors can be broadly classified as internal resource constraints, market constraints, and policy constraints. To better achieve its goals (e.g., profit maximization), the organization
must increase throughput at the process that is a bottleneck due to the constraining factor.
According to Goldratt and others, the steps are: (1) identify the active constraint, (2) decide how to exploit the active constraint (how to increase its throughput
utilization), (3) subordinate all other processes (manage all other processes to exploit the active constraint), (4) elevate the system's constraint (increase capacity, find
alternatives to the constraint, etc.) and (5) repeat for the next constraint that becomes active.
In addition to being useful for project planning, TOC's various "problem-solving tools" are relevant to project selection. The TOC thinking process is aimed at
answering three questions central to designing and choosing projects: What to change?, What to change to?, and How to cause the change? Project communication and management tools are
provided to promote agreement. The loosely affiliated consulting organizations dedicated to applying TOC market numerous application-specific "solutions" for areas such as production,
supply chain management, technology development, and sales and marketing.
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time preference
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A measure of the preference a decision maker has for obtaining desired outcomes (e.g., cash inflow) sooner rather than later. Time preference is captured
mathematically using a discount function, such as net present value, characterized by a discount rate that
reflects the degree to which near-term enjoyment is preferred.
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tornado diagram
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A type of chart used to display the results of a sensitivity analysis. It is bar chart showing the sensitivity of a
model output to each of several model inputs or parameters. A tornado diagram, also called a tornado chart, supports understanding by displaying the "drivers" of a quantity of
interest.
The figure below provides an example. In this case, the quantity of interest is the value of a proposed project. To construct the diagram, each of several inputs to the project decision model is individually varied over some range
(e.g., its range of uncertainty). The corresponding range over which the output then varies is displayed as a horizontal bar. The bars are sorted by the length of the bar and stacked
vertically, with the result that the shape of the diagram resembles that of a tornado.
A sample tornado diagram
By identifying variables that result in the widest swings, a tornado diagram helps identify specific areas where effort should be spent to reduce uncertainty or to
improve performance. Many decision analysis tools, including some tools for project and project portfolio management, provide capability to generate
tornado diagrams.
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total cost of ownership (TCO)
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All of the costs associated with a project, including those associated with deploying, managing, and ultimately disposing of any
assets produced by that project. For example, the total cost of ownership of a car is not just the purchase price, but also expenses incurred through its lifetime of use, such as
repairs, insurance, and fuel. Sometimes, TCO is expressed as an average annual cost figure.
TCO is a useful management tool for uncovering what might otherwise be overlooked costs. It's major disadvantage from the perspective of project prioritization is that it fails to address project benefits.
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total shareholder return (TSR)
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A measure of the growth in value that an organization creates for its shareholders. TSR combines the price appreciation of company stock with the dividends paid.
Maximizing TSR is a primary objective for many companies, and project portfolio management (PPM) is often argued to be an important means for increasing
TSR. The perspective calls for ppm tools and processes that quantify the contribution of project portfolios to shareholder value through consideration of the impacts of projects on
market expectations of the company's ability to generate, sustain, and grow future cash flows.
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tradeoffs
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The process of giving up or exchanging one benefit in order to obtain another. Tradeoffs (also called value tradeoffs) are
required in decision situations whenever there are multiple objectives and not all can be achieved together. A decision maker's preferences
regarding tradeoffs are a key input to project prioritization, as projects are typically proposed to
achieve different objectives or achieve different objectives to different degrees. Tradeoff preferences are typically expressed in a decision
model via weights. The swing-weight method is one technique for assessing willingness to make tradeoffs.
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U
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user interface
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See graphic user interface (GUI).
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utility function
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A mathematical function that assigns numbers to alternatives indicating a decision maker's preferences for those alternatives, including alternatives with uncertain
outcomes. A utility function is usually denoted U(x), where x may consist of multiple attributes x1,x2,...xN chosen to characterize
alternatives and the outcomes that would result from their selection, and U is the assigned preference number. Decision theory shows
that such a utility function exists provided that the decision maker accepts certain assumptions that define "rationality." The assumptions are easy for most people to accept (e.g., if
there are 3 possible outcomes A, B and C and you prefer A to B and B to C, you must then prefer A to C). Assessment methods are available for encoding (i.e., deriving) a person's
utility function. The utility function has the important property that the most preferred alternative will be that which produces the highest value for U, or, if there is uncertainty,
that which maximizes the expected value of U.
Among other things that affect preferences, the utility function accounts for the decision maker's willingness to accept risk. This
can be seen most clearly if the utility function is expressed in a form that relates utility to the monetary value of the decision outcome. Suppose, therefore, that V = V(x) is
the maximum amount of money a decision maker would be willing to pay to obtain the decision outcome x (V(x), then, is a value
function). What would the utility function look like? Since utility functions, by definition, are determined empirically, there is no obvious reason to expect that a particular
mathematical relationship would emerge. However, it has been shown that an exponential equation nearly always provides a good approximation:
This equation is often alternatively written with constants added so that U goes from zero to one when V goes from the minimum to maximum values assigned
to the decision outcomes.
It can be shown that if a condition known as the delta property holds, then the utility function must have either this exponential form (or a linear form). The
delta property applies if the following is true: whenever there is uncertainty over the outcome of some uncertain choice, if the value of every possible outcome were increased by the
same amount (same delta), then the value of the uncertainty (its certain equivalent) would be increased by the same amount (by delta).
The utility function scales the possible outcomes to a decision in a way that accounts for willingness to accept risk, and the coefficient R in the exponent determines
the amount of scaling. R is termed the risk tolerance, and the lower the risk tolerance the less desirable the utility function will show
outcomes that involve uncertainty to be. A method for assessing risk tolerance (and therefore, for deriving the utility function from a value function) is provided in the section of the
paper chapter on risk tolerance, where there is also an example illustrating how to use a utility function to value uncertain project
outcomes.
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V
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valuation
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The process of determining the value of something, such as a project or asset. In a business
context, valuations typically seek to determine monetary worth, and that is the meaning ascribed to the term throughout this website. However, in much of the literature on project portfolio management, valuation means assigning a number representing some concept of attractiveness. Regardless, various theories and techniques are
available for conducting valuations, and the methods typically involve both objective and subjective components.
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value
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As used on this website, value means monetary worth. The value of something to someone is the maximum amount that individual would be willing to pay to acquire it. The
value of an asset to an organization is the maximum amount that organization's decision makers would be willing to pay to obtain that asset. Likewise, the value of a project is the maximum amount the organization's decision makers would be willing to pay to obtain the consequences of conducting the project. The net
value of a project is the difference between the value of the project and what it costs to do the project.
The word value appears often in project portfolio management (PPM) literature because the concept is fundamental to determining which
projects should be selected and how they should be prioritized. Many authors, though, use the term without providing a definition or with a definition unrelated to the concept of worth
to the organization. Instead, the word value is used loosely to denote some measure intended to represent project attractiveness. This is especially true for PPM literature originating
from PPM software vendors. The reason for this is that most PPM software is neither sufficiently capable nor flexible to represent the customer-specific
model needed to estimate what the (likely uncertain) consequences of projects are worth to the organization that is considering that project. Therefore, a less rigorous concept of value
is employed based on the simpler mathematics that the vendor's software is capable of providing.
Compared to other definitions, defining the value of a project as its monetary worth to the organization has several advantages. Importantly, worth exactly maps to
organizational preferences—given two projects competing for the same resources, we know that the organization will prefer Project A to Project B if and only if it views the worth
of Project A's consequences to be greater than the worth of Project B's consequences. This critical mapping does not hold for more loosely defined concepts of value. Also, expressing
project value in monetary units allows project value to be directly compared with project cost. Finally, there are well-accepted methods for computing the monetary worth of a project.
In particular, decision theory and its subfield multi-attribute utility analysis (MUA) provide a method
for computing project value based on consideration of business objectives, what the project consequences might be and the uncertainties, and the willingness of the organization to
accept risks and make tradeoffs. A few PPM tools use MUA to compute project value, but most do not.
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value at risk (VaR)
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A metric that describes the potential for loss, typically the potential for loss from a portfolio of financial investments. The
term is sometimes similarly applied in the context of project portfolio management to describe the risk associated with a portfolio of projects. Typically, VaR is defined as the amount or percentage of available portfolio value such that there is a 95% (or 99%) probability of the portfolio
losing less than that amount over a specified time horizon.
VaR is popular because it addresses the concept of "maximum potential loss." A major weakness is that it is not additive; that is, the VaR for a set of portfolios is
not the sum of the VaR's of the individual portfolios.
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value function
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Similar to utility function, a method used in multi-attribute utility analysis (MUA) to
quantify value. A value function is a utility function for a decision problem where the outcomes are assumed to involve no uncertainty, so that
decision maker risk tolerance (aversion to risk) can be ignored. Value functions are also called measurable value functions and/or
value models.
When used to value projects, a value function, denoted V(x1,x2,...xN), assigns a number
V to a project based on attributes of the project, denoted x1,x2,...xN, typically chosen so as to
describe the outcomes that would result if the project were to be conducted. The number V indicates the relative value of the indicated outcomes. V is often expressed in
dollar units, so as to indicate equivalent monetary value, or it may scaled between zero and one so that higher values indicate more preferred outcomes. Regardless, V is interval
scaled, so that differences in the value of V indicate differences in the levels of preference (a definition of interval scale is provided under scale).
Because the goal of project selection is to choose projects that create maximum value, creating value/utility functions is the key step for designing formal methods to
prioritize projects. See additive utility function for a brief description of a popular method for constructing a value function.
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value of information (VoI)
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A term used in decision analysis to describe the maximum amount a decision maker should logically be willing to pay for
information prior to making a decision. The VoI is defined as the monetary amount that makes the value of the existing decision situation equal to the value of the decision situation
with information and with the added cost of paying VoI for the information. Decision trees are often used to compute VoI.
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vaporware
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An upcoming software product that has been announced but is not yet available. Software developers sometimes provide information about future products or upgrades
months or even years in advance. They may do so as a marketing ploy—if current customers believe the supplier will release a breakthrough product soon, those customers may be
willing to stick with the supplier's aging software products longer. Also, announcing a phantom product may cause potential customers to perceive the products currently offered by
competitors to be less attractive. The vaporware may or may not exist, and may not ever be available with the indicated capabilities and features. Regardless, spreading information
about possible future products helps the software provider.
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variance
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A discrepancy or deviation, as in schedule variance. Also, a measure of variability that indicates how much spread there is in a set of numbers. The variance is the
square of the standard deviation. It represents the average squared deviation of each number from its mean.
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W
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war gaming
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Also called business war gaming, a role-playing exercise involving simulating business moves and countermoves. Business war gaming applies in the business setting
techniques and concepts long found useful for military planning.
To conduct a business war game, teams are established to represent stakeholders, such as key customers, suppliers, partners, competitors, investors, and regulators.
Each team is provided a briefing containing relevant information and knowledge. The game is then conducted in a series of "rounds," with each round representing a time period (typically
several months to one or two years). The teams meet independently, in workshop sessions, and use the briefing information to plan what they would do during the first time period,
playing the role and adopting the objectives of the designated stakeholder. Team members are encouraged to anticipate the moves of the other players, develop counter strategies, and
determine the resources and funding that will be needed. Following the completion of the round, players then announce their selected strategies and plans. In some versions, a computer
model is used to simulate resulting outcomes such as market shares and financial results, which are used to score the performance of each team. During the second round the teams
consider the plans and strategies of the various players and modify their own strategies for the following period. This process continues for an agreed upon number of rounds. Following
the game period, the participants discuss the results and the lessons learned.
War gaming can help build understanding of the business situation, opportunities, threats and issues; crate recommendations and suggestions for future actions;
identify corporate blind-spots, missing intelligence on the market and business environment; foster improved teamwork; and crate awareness of how the market may change over the short
and medium terms.
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weighted average cost of capital (WACC)
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A calculation of a company's cost of capital in which each source of capital (e.g., common stock, preferred stock, bonds
and any other long-term debt) is weighted in proportion to the amount of capital that source contributes to the company. The WACC is the minimum return that a company must earn on to
satisfy its creditors, owners, and other providers of capital; otherwise they will invest elsewhere.
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weight
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A parameter in a decision model meant to indicate the importance or significance assigned to
a particular objective, criterion, attribute,
or other relevant decision consideration. Weights are commonly used in models based on multi-criteria analysis.
For example, a weighted, additive scoring model for evaluating projects has the form:
In this equation, Sj is the total score for the jth project, N is the number of criteria, wi is
the weight assigned to the ith criterion, and sij is the score of the jth project on the ith criterion.
Weights are often scaled to sum to one, expressed mathematically as:
In this case, each weight may be interpretted as indicating the proportional weight assigned to a particular criterion compared to that assigned to all criteria.
There are two main distinct types of weights, importance weights and swing weights.
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weighted scoring model
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See scoring model
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work breakdown structure (WBS)
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The tasks or activities required to complete a project, organized into a hierarchical structure. A WBS typically shows who is
responsible for each activity and identifies costs, resources and time required. The WBS is a useful aid for planning the work scope for a project and assists in cost estimating and
project monitoring and control. WBS capability is typically provided in project management tools and in some project portfolio management tools.
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working capital
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The money available and needed to fund the day-to-day operations of a company.
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X
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XML
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Stands for Extensible Markup Language, a set of rules for identifying and structuring data in a way that is readily interpretable by computers. Although it was
originally developed to support large-scale electronic publishing, XML has become the standard means for supporting data exchange between computer systems, applications, and databases.
Many project portfolio management (PPM) tools allow for data importing and exporting via the XML format, and this capability can facilitate the transfer
of data between the PPM tool and the organization's other computer systems.
Data exchange has long been an issue in information technology. Software applications typically contain data in incompatible formats. Consequently, exchanging data
between applications is often a significant challenge. To be exchanged, the data must be represented and formatted in a way that both systems can understand.
XML facilitates data exchange because it marks the data in a way that documents its content and structure. Like other markup languages, XML is applied to text files
and uses tags to delineate and describe the component elements of the file. However, XML is a kind of metalanguage in that it allows defining custom markup tags based on an
international standard for document markup. For example, if "Base Case" is the name assigned to a particular version of a project, this might be expressed using XML tags as:
The particular XML tag structure utilized for a given application is referred to as a schema. The XML schema makes the data "self-describing" in that the names of the
markup tags indicate the type of content that they hold. An application that receives data formatted according to its XML schema can easily map the data into its database.
Although different applications may use different XML schema, an XML-based language called XSLT (Extensible Stylesheet Language Transformations) may be used to
translate XML documents between XML schemas. Thus, if an application represents its data in an XML schema, that fact will make it much easier to conduct the other steps needed to share
the data between applications.
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Z
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zero-based budgeting
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A philosophy for capital budgeting wherein the funding for every activity or cost element must be specifically
justified, not just increments to previous funding levels. Without approval, the budget allowance is zero. In other words, zero-based budgeting makes no implicit commitment to sustain
past levels of funding.
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