Choosing the Wrong Portfolio of Projects

This 6-part paper is an expanded version of a paper originally published as a

Guest Article on Max Wideman's Project Management website.

If you've attended recent business conferences, you may have heard business leaders and management consultants speak of the "60% solution." The phrase refers to the popular belief that organizations obtain only about 60% of the value that could be derived from their businesses. The remaining 40% of available value is lost, reportedly, due to errors in decision-making and weaknesses in business systems.

I believe 60% is an accurate characterization of the way most organizations select and manage their project portfolios. As demonstrated in Part 5 of this paper, it is possible to compare, using models, the value generated by an organization's current set of project choices with the value that would be generated under a value-maximizing set of choices. My comparisons (similar results have been obtained by others) show that organizations can typically increase value by 20-40% without increasing costs, or decrease costs by 20-40% without decreasing value, each budget cycle, by making better project decisions.

Yes, 40% is BIG, and you may not be convinced by a claim based solely on models. Therefore, this paper offers further evidence by explaining the 5 major reasons that organizations mismanage their project portfolios: 1) errors and biases in judgment, 2) failure to see the forest for the trees, 3) lack of the right metrics, 4) inattention to risk, and 5) inability to find the efficient frontier. As you will see, each of these reasons can by itself produce significant losses. It should not be surprising, therefore, that the combined effect could be a 40% loss of value.

As you read the 5 reasons, consider the degree to which each is a factor in your organization. Understanding organizational dysfunctions is useful even if you do not intend to invest in a state- of-the-art project priority system. By taking steps to mitigate problems that affect your organization, you may be able to reduce costs while obtaining more value from your projects. Given the importance of project decisions, obtaining even small improvements will be worth the effort.

Abstract

Part 1: Errors and Bias in Judgment