Lee Merkhofer Consulting Priority Systems
Implementing project portfolio management

Competing on Analytics

Though organizations have been slow to adopt the methods described in this paper, there are reasons to be optimistic. As early adopters have begun using formal methods to aid project selection decisions, hard evidence of value is accumulating. Data showing that organizations benefit from superior analytic methods provide compelling arguments for investing in best-practice, project portfolio management (PPM).

Outside the federal government, the first companies to apply decision analysis to projects were mostly in the oil & gas and pharmaceutical industries. Such industries were early adopters due to their familiarity and experience with analytics and because high project costs and risks make bad decisions particularly costly. Industry data demonstrate the effectiveness of the methods. For example, an article in the journal Oilfield Review reports a study of 20 oil exploration companies that "established a strong positive correlation between the degree of sophistication in the companies' use of decision and risk analysis and the success of their project decisions." The same article also described another oil company study that found that "Companies that integrated workflow and used decision and risk analysis saw their performance improve shortly after the introduction of this methodology" [16]. A study of pharmaceutical stock price performance over a seven-year period found that companies that use decision analysis outperformed the Dow Jones Pharma Index by nearly 200% [17].

Measuring PPM Benefits

With regard to PPM, three types of data are most often cited demonstrate the effectiveness of PPM: (1) project failure rates (the fraction of projects that fail to achieve their goals), (2) efficiency (the ability to complete projects efficiently with fewer people and less wasted time, effort, and other resources), and for companies that produce products, (3) speed to market (the amount of time required to complete projects and, consequently, get products to market). Published results for these measures vary, but in general, organizations that have successfully implemented PPM estimate:

  • 30-60% reductions in project failure rates
  • 10-40% improvements to efficiency
  • 10-20% reductions in time to market

For example, a 2009 survey [18] by the market intelligence provider IDC reports that organizations successfully implementing PPM saw project failure rates drop by 59%, spent 37% less per project, reduced the number of redundant projects by 78%, and increased resource productivity by 14%. It was estimated that, on average, the surveyed organizations were able to achieve a payback from their investment in PPM in just 7.4 months. Similarly, the Boston-based, business research organization Aberdeen Group reports that companies that achieve PPM excellence are 44% more likely to complete projects on time, 38% more likely to complete projects on budget, and 52% more likely to meet ROI goals [19]. For companies conducting new product projects, Aberdeen estimates that best-in-class PPM capability generate 25% more revenue from new products, see a 2.9 times greater increase in product profit margins, are 31% more likely to meet budget, achieve launch dates 25% more often, and are 44% more likely to hit expected revenues [20].

For organizations that have achieved the highest levels of PPM maturity, the greatest benefit is the ability to identify optimal project choices. SmithKline Beecham, for example, reports that finding the efficient frontier for a portfolio of 25 R&D projects increased expected return by $2.6 billion [21]. Focusing on value is key-Eastman Chemical reportedly doubled the worth of its R&D project portfolio as a result of making value creation the main metric for evaluating projects [22]. A survey by Forrester Research reported that PPM software users identified a reduction in the number of low-value projects as a key benefit, along with reductions in project failure rates, cost overruns, and project throughput times [23]. A study on R&D portfolio success found that all companies performing in the top 20 percent had previously installed an explicit, established method for PPM across the organization [24]. CIO Magazine reports a survey of PPM in product development applications that companies with the best capability experienced 50% faster revenue growth and on average achieve a 52% reduction in overall discretionary spending [25].

Like decision and risk analysis, the adoption of PPM has been skewed towards industries where projects are critical and the contribution of projects to business success is direct and easy to observe. According to a study on PPM benchmarking by Value Creation Associates, pharma, health care, and companies doing largely R&D are among the most advanced with regard to PPM, while organizations doing mostly IT projects are among the least advanced [26]. A cross-industry poll of project and portfolio management professionals and stakeholders indicated that two-thirds were either evaluating, implementing or have already deployed a PPM system [27].

A Strategy of Analytic Excellence

Beyond the above, something new is happening—a few highly successful companies are making no secret of the fact that they have adopted superior analysis as a competitive business strategy. Explaining better than expected 2009 3rd quarter earnings, Cisco's CFO said, "We have continued our emphasis on operational excellence, portfolio management, and customer focus, all of which we believe positions us for future success" [28]. John Wilder, CEO of the utility TXU, claims to have cut costs "by more than $1 billion" through a series of initiatives that included bringing "analytic rigor to our portfolio decisions" [29]. American Express reports that the company applies its "Investment Optimization" portfolio process to all discretionary investments, and that the analysis results in "tens of millions of dollars being reallocated annually" [30]. In a video detailing Chevron's use of decision analysis, Chevron Vice Chairman George Kirkland states, "Decision analysis is a part of how Chevron does business for a simple, but powerful, reason: it works" [31].

Competing on analytics

In an HBR article entitled, "Competing on Analytics," Thomas Davenport identifies eBay, Google, Amazon, and Dell, among others, as a new breed of companies that "are oriented to a much higher level of analytics: predictive modeling, optimization techniques—than we've been used to in the business world" [29], They hire employees for their analytic expertise, provide them with the best available information, and arm them with the best quantitative tools. "As a result, they make the best decisions: big and small, every day, over and over and over."

Beat the 60% Solution!

The introduction to this paper described the concept of the "60% solution," the belief held by many that organizations only obtain about 60% of the value that could be derived from their businesses. As I have explained, I believe that choosing the wrong portfolio of projects is a major reason for lost business value.

To illustrate the significance of the opportunity posed by beating the 60% solution, suppose a company executes projects with an annual cost of $20 million. In my experience developing many value-based, project priority systems, I've found that the average accepted project has a value-to-cost ratio of about 3. Thus, if the company with a $20 million project budget has a quality PPM system, its project portfolio should be generating something like $60 million in portfolio value. Suppose, however, that the company doesn't have a quality project priority system and its overall PPM maturity level is low. It hardly seems unreasonable to imagine that the loss in value is at least 10%, or $6 million per year. If the ideas recommended in this paper were applied and a quality PPM systm implemented, perhaps half the lost value, or $3M, could be recovered. If the total cost of implementing PPM was $0.5 million (a cost higher than it needs to be but not atypical), the ROI in just the first year of implementation would be 500%. The return is much higher the higher the project budget. For example, with an annual project budget of $200 million, and if the other assumptions are held the same, the ROI increases to nearly 6000%!

In summary, the 60% solution can be beaten by doing a better job of choosing and managing project portfolios. It may not be easy, but it can definitely be done. The fact that optimizing project decisions is hard to do (but doable) is why organizations that successfully address the problems identified in this paper can create for themselves a significant competitive business advantage.

References for Part 6

  1. Numerous organizational maturity models have been developed. Models similar to that described here include the Organizational Project Management Maturity Model (OPM3)) developed by the Project Management Institute, the Portfolio, Programme and Project Management Maturity Model (P3M3®) developed by the UK Government, and the Capability Maturity Model Integration (CMMI®) developed by a group from industry and government at Carnegie Mellon University.
  2. "The State of Project Portfolio Management (PPM)," Project Management Solutions Inc., Glen Mills, PA, 2013.
  3. J. Pfeffer and R. I. Sutton, "Evidence-Based Management," Harvard Business Review, p. 5, January 2006.
  4. R. Howard, "The Foundations of Decision Analysis Revisited," Chapter 3 in Advances in Decision Analysis, W. Edwards, R. Miles, and D. von Winterfeldt, eds., Cambridge University Press, 1999.
  5. L. Buchanan and A. O'Connel, "A Brief History of Decision Making," Harvard Business Review, January 2006.
  6. A. Hayashi, "When to Trust Your Gut," Harvard Business Review, February 2001.
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  11. R. M. Grant, "Toward a Knowledge-Based Theory of the Firm," in the Strategic Management Journal, Vol. 17, 1996.
  12. J. Wolfers and E. Zitzemwitz, "Predictive Markets," NBER Working Paper No. W10504, May 2004.
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  14. M. Einbinder, "Information Markets: Using Market Predictions to Make Administrative Decisions, Virginia Law Review, Vol. 92, p. 149, 2006.
  15. J. Nocera, "The Future Divined by the Crowd," The New York Times, March 11, 2006.
  16. W. Bailey, B. Couet, F. Lamb, and P. Rose, "Taking a Calculated Risk," Oilfield Review, Autumn 2000.
  17. M. Menke, C. Spetzler, and T. Keelin, "The Value of DA/DQ: Buildling a Compelling Case for Decision Makers," Society of Decision Professionals, Learning Exchange, Feb 2, 2011.
  18. IDC Podcast (sponsored by PPM vendor CA), "Measuring the ROI of PPM (Project and Portfolio Management)" March 20, 2009.
  19. The Aberdeen Group, "The Product Portfolio Management Benchmark Report," August 2006; "Project Portfolio Management for IT: How to Achieve the Greatest ROI on Projects," November 2010; "Project portfolio management: Selecting the Right Projects for Optimal Investment Opportunity," March 2011; "Project Portfolio Management for IT: Positioning IT as a Strategic Corporate Asset," September 19, 2011; "Managing the Project Portfolio to Improve Profits ," December 8, 2014.
  20. The Aberdeen Group, "Developing a Profitable Product Portfolio: Agile Tips for New Product Development," May 8, 2012.
  21. P. Sharpe and T. Keelin, "How SmithKline Beecham Makes Better Resource-Allocation Decisions," Harvard Business Review, Reprint 98210, 1998.
  22. J. D. Holmes and G. E, McGraw, "White Water Ahead: Eastman Prepares for Turbulent Times," Research Technology Management, p 22, September-October 1994
  23. C. Symons, "The ROI Of Project Portfolio Management Tools," Forrester, May 8, 2009.
  24. R. G. Cooper, S. J. Edgett, and E. J. Kleinschmidt, "Portfolio Management for New Product Development: Results of an Industry Practices Study," R&D Management, pp 381-389, October 2001.
  25. Pittiglio, Rabin, Todd & McGrath (PRTM), "Product Development Benchmarking Series, PRTM, Performance Measurement Group, 2000, as reported in L. Cosgrove, "Analyzing Product Development," CIO Magazine, March 1, 2002.
  26. M Menke, "Project Portfolio Management Best Practices, Summary of Results," Value Creation Associates, DAAG 2012, Chicago, May 10, 2012.
  27. "Recent Poll Results Show Strong Market Momentum Behind Enterprise Project Portfolio Management," PRWEB, Santa Clara, CA May 19, 2011.
  28. Cisco, "Cisco CFO Frank Calderoni Offers Commentary on the Quarter" (video), www.youtube.com/watch?v=gCNwGG2YKHM.
  29. "An Interview With TXU's CEO: C. John Wilder Describes How Economic Thinking Helped him Lead TXU Out of a Regulated Mind-Set Toward Competitive Success," The McKinsey Quarterly, Feb, 2007.
  30. D. A. J. Axson, "Deploying an Adaptive Forecasting Process at American Express," in Best Practices in Planning and Performance Management, 3rd Ed., Wiley, p 183-184, 2010.
  31. G. Kirkland, "How Chevron Makes Decisions," YouTube video uploaded by Chevron, December 10, 2010, http://www.youtube.com/watch?v=JRCxZA6ay3M
  32. T. Davenport, "Competing on Analytics," Harvard Business Review, January 2006.