Implementing project portfolio management

Improve the Prioritization Process

The most challenging step in the above description of the project portfolio management office is choosing which projects to fund. In order to continually make the best use of limited organization resources, the portfolio office must decide which projects to initiate, which on-going projects to continue to fund, and which projects to terminate. As illustrated in Figure 17, the portfolio management office manages the "project pipeline."

Figure 17: The Portfolio Management Office manages the project pipeline.

For most organizations, making project selection decisions involves the forced-ranking of projects. By "forced ranking," I mean that managers get together and "force" each project into either a strict priority ordering or into to a few priority groups. Projects are added until the business runs out of resources. Below that point, projects are put on hold or killed outright. Considerations that apply at the portfolio level, such as project synergies and portfolio risk, may be used as final modifiers to the ranking. Needless to say, forced ranking, as well as the final choice of which projects to conduct, are difficult decisions. In the absence of a more formal approach, politics can play a major role in project selection.

In some instances, experienced, unbiased individuals who are well-informed about the needs to be served can do a good job of ranking projects. However, project ranking becomes more difficult and time consuming if there are:

Many project proposals. If there are more than twenty or so requests, decision makers may not be sufficiently informed about the projects or their underlying needs to make consistent choices. This is especially true when proposals come from different departments or jurisdictions.
Project complexities. If projects are technologically complex or involve difficult-to-judge considerations (such as risks or critical timing factors), most experienced individuals will be hard pressed to provide reliable priorities without reference to formal criteria.
Multiple decision makers. The more people involved in priority setting, the less likely it is that they will agree without first agreeing on the objectives, principles, and criteria to guide project prioritization.
A need to justify project choices. There may be stakeholders not involved in setting priorities, including those who provide project proposals, who require an explanation for funding choices that are made. If decision makers arrive at their choices intuitively, they may have trouble explaining priorities when questioned or challenged.

Although creating a portfolio management office and a project inventory helps, the key to reaping the true benefits of portfolio management is following through and implementing a formal, organized, and logical process for prioritizing proposals and optimizing the project portfolio.

Improve Project Data

Even the best project prioritization process will be worthless without adequate project data. As one manager put it, "A micrometer won't help you measure a cloud." Thus, steps must be taken to address the problems of poor project data that plague most organizations.

The first step to getting better data is to make sure that information requirements are well-defined. If project proponents are clear about what information is needed to enable their proposals to be considered, they are much more likely to supply that information. Thus, the templates for collecting data on project proposals must be complete and precise.

Second, there must be a culture and expectation that rigor is required to generate project proposals Estimates must be backed by reason and analysis. Project proponents need to do their homework before the project gets proposed up the management chain.

Third, the organization must be prepared to allocate increased resources to project planning. Skill, experience, and true cross-functional collaboration are often needed to generate solid project proposals. Inevitably, increasing the effort devoted to preparing project proposals detracts from the resources available for actually doing projects. However, as previously asserted, the tradeoff in improved decision making will be worth it.

Be Careful Using Scoring Models

Many organizations use scoring rules as aids to project prioritization, for example, with regard to a given criterion, 1 = unfavorable, 2 = neutral, and 3 = favorable. The scoring rules are meant to systematize the process used by the managers who collectively rank projects and to record their judgments. A score above a certain level is judged a "must do." Alternatively, projects may be grouped into priority categories. Projects in certain categories, for example, projects that address safety issues or projects related to regulatory requirements, are designated as mandatory.

Point scoring and priority categorization systems have significant limitations. Frequently, too many projects get labeled must do's. One reason is that the project proponents may designate as mandatory projects that have only a statistical influence on safety, as opposed to just projects that eliminate ongoing harm or prevent clear code violations.

Assigning a number to something doesn't necessarily make for a more accurate method of measurement. If scores are subjectively defined with out clear criteria, the process can be as arbitrary as a beauty contest. Different people will assign wildly different scores to the same project, and the same person may assign different scores on different occasions. Regardless, middle scores are common for most projects, especially when numerous scoring criteria are used. High scores on some criteria cancel out low scores on others. Most scoring models aren't sufficiently precise to trust small differences in total scores.

Furthermore, ranking projects by their project scores is generally incorrect anyway. Projects are undertaken to produce value for the organization. Thus, the proper ranking metric (for independent projects) is value added per unit of cost. Most scoring systems don't claim to measure value. Even when they do, they often fail to scale results to project cost and, therefore, don't estimate "bang for the buck." (Problems with scoring models are described in more detail in the next part of this paper.)

Estimate Cost, Value and Risk

Correctly prioritizing projects requires being able to estimate the costs, value, and risks of alternative project portfolios. However, each side of the equation is difficult. Project costs include not just the funding request, but also any funding provided from other sources plus the opportunity costs of using equipment, personnel, raw material and any other "non-costed" resources that will be employed by the project. Also, all future costs necessary to obtain project benefits, including future O&M costs, should be identified, estimated, and included in the calculation.

Some companies still do not track costs at the project level, relying instead on the general ledger system to impute approximate project costs. Tracking project costs is essential to encourage accurate estimating and provide budget data needed to make, monitor, and update project decisions.

Estimating value is even more difficult than estimating costs. Systems must be in place to help managers measure the benefits of projects as well as to determine the value of alternative project portfolios. This leads to the hard part—developing the metrics for measuring project and portfolio value. See the next part of this paper for information on how this can be accomplished.

References for Part 2

P. Belliveau, A. Griffin and S. Somermeyer (eds.), The PDMA ToolBook for New Product Development, Wiley, 2002.
"The TOC Multi-Project Management Method," The Product Development Institute, Inc., 628 Route 10, Suite 4, Whippany, NJ 07981, 1999.
S. Berinato, "Do the Math," CIO Magazine, October 1, 2001.

The Portfolio Management Office

Part 3. Lack of the Right Metrics