Lee Merkhofer Consulting Priority Systems
Implementing project portfolio management

Best-Practice Project Portfolio Management

Although the specifics of project portfolio management (PPM) necessarily differ from organization to organization, the fundamentals of best practice are nearly universal. PPM is an ongoing activity, not just an annual event. It is driven by the fundamental objectives of the organization, and it demands and enables broad organizational involvement. The goal in all cases is to select and manage project portfolios so as to create the greatest possible value for the organization.

Organizations that have achieved best practice have a clear understanding of the value creation process. They have identified and structured their objectives and have established performance measures for forecasting and tracking the degree to which they achieve those objectives. They use a project-selection decision model to evaluate project proposals, and update and refine that model as their knowledge and understanding improves.

The model allows them to estimate the impact on the business of doing versus no doing individual projects as well as conducting various combinations of interdependent projects. The project consequences estimated include not only impacts on financial performance, such as future cost savings and increases in revenue, but also include non-financial impacts, such as improved customer service and organizational learning. Best-practice organizations translate these performance impacts into equivalent monetary value based on the worth of the project benefits to the organization. Risks are addressed, including both project risk and project deferral risk. Portfolio-level risks are likewise understood, quantified, and managed.

The PPM process is supported by a quality software tool with superior analytics, smart, template-driven data collection and flexible graphic and reporting capabilities. The tool has a project dashboard that quickly provides portfolio information with easy drill down to single-page project reports. Value maximizing project portfolios can be identified with capability for "what if" and sensitivity analysis. The tool serves as a useful and used aid within the decision making process. Project priorities and ultimate project decisions are conveyed to all stakeholders. The outcomes of project decisions are monitored, and there is a significant focus on mining experience and identifying opportunities for improvement.

Participants

The table below identifies the key players and responsibilities.


Business Unit/Sponsor Project Manager Project Portfolio Manager Executive Team
Any organizational component that requests or consumes a portion of the budget for the purpose of conducting projects. Individual with overall responsibility for successful planning and execution of a project. Manager with responsibility for the project portfolio. Usually supported by a team. Team may be composed of directors of the business areas. Select corporate officers who guide and provide inputs to the PPM process.
Each business unit Identifies projects, assists project managers in constructing business cases for justifying projects, and champions its projects and project portfolio. The business unit is responsible for providing quality assurance for data related to its projects. Project managers work closely with business units/sponsors to provide good data for the portfolio management process. Project managers are responsible for ensuring that approved projects perform according to plan. The project portfolio manager establishes the rules, and procedures for making portfolio decisions. The portfolio manager analyses projects and portfolios proposed by business units and recommends the overall project portfolio. The executive team provides policy inputs for the process, including weights for trading off different types of project benefits. The team sets targets, approves the budget and project portfolios, and ensures that portfolio decisions are enforced.


Phases

The three phases of the PPM cycle are preparation, execution, and performance management. Figure 51 shows a typical process timeline.


Project portfolio management process timeline

Figure 51:   Typical project portfolio management process timeline.



Figure 52 provides more detail on typical process flows.


Project portfolio management process flow diagram

Figure 52:   Process flow diagram for using project portfolio management in capital budgeting.


Preparation

A calendar is established and responsibilities are assigned. Corporate executives set high-level strategy. The executive team establishes financial and performance targets for each business unit and provides guidelines and a schedule for completing the budgeting process. With the assistance of the portfolio manager, the team establishes basic assumptions for analysis (including value weights, discount rates, and risk tolerance).

Execution

Within each business unit, projects are identified, classified, and appropriately grouped. Alternative project solutions are explored. Decision units for each project are defined (e.g., go vs. no-go, alternative project solutions, alternative funding levels and scopes for the preferred project solution). Project descriptions are documented, including timelines, resource needs, etc., and project proposal templates generated by the PPM software tool are completed. Technical analyses are conducted to estimate the impacts of each project or project grouping on the achievement of corporate and business unit objectives (using external models or the models incorporated into the tool). Financial analyses are similarly conducted. Risks are identified and described. With the aid of the tool, project and portfolio values are estimated and the projects within each business unit are prioritized. Based on the results, project plans are revised. Business unit priorities are established and used to feed corporate-level prioritizations and the allocation of resources across business units. A value prioritized budget is established and spending approvals are granted.

Performance Management

A performance management plan monitors and manages the success of the project portfolio. The plan specifies project performance indicators that allow comparing forecast and actual performance, plus monitoring and reporting schedules. Project shortfalls are analyzed, including causes, approaches for correcting variances, and decisions for ongoing investments. Lessons learned are derived and the PPM process is refined prior to the next budget cycle.

Iterative Nature

Although Figure 52 presents PPM as being conducted in a series of phases, the process is really better thought of as cyclical and iterative in nature. As shown by the arrows in the diagram, an outcome at one step in a phase can result in the re-execution of other steps in that phase. For example, in the Execution phase, an unexpected result from the PPM tool (e.g., unexpected priority) can prompt a review and subsequent correction of poor estimates or errors in project data. Also, outcomes in one phase can result in activities in previous phases to being repeated. For example, revisions to data might be made immediately based on learnings from the Implementation phase. External factors may also cause the process to iterate. For example, changes in the business environment might produce a change in organizational strategy, which would likely change weights or other assumptions important to the analysis. A key advantage of having a well-defined process supported by a quality PPM tool is the ability quickly adjust to internal and external events and to translate such understanding into portfolio decisions. Iteration is important for real-time information exchange and the dynamic management of the project portfolio.